banking principles &practice - nitya...

Banking Principles &Practice - Nitya Prakash

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BANKING

Principles &

Practice

Nitya Prakash


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Copyright ® 2013 by Nitya Prakash All rights reserved. No portion of this book may be reproduced—mechanically, electronically, or by any other means, including photocopying—without written permission of the publisher. Printed and Typeset by: Creative Ecstasy 520, Tapowan Nagar Lucknow www.CreativeEcstasy.in


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To Shraddha, of Course.


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Acknowledgement It’s been an incredible journey (and not always an easy one). When I was a small boy, I never had any interest in what other boys of my age were into. No cars and no action man figures. It was all about the books for me. At the age of eleven I wrote my first article for The Times of India. After completing my formal education I started my career with MicroSave (A Bill & Melinda Gates foundation company) and then I worked for a couple of years in ICICI Bank as an International Trade Finance Manager. But, I never found myself in the medium; it was too scattered for me. My professional writing journey started with writing research papers on microfinance and banking. Since, I gathered wisdom to think about the way my life was moving, I was always fascinated with the belief that I have something worth sharing with the wider world around me. This book is a reflection of my leanings and everyone who has helped me so far. What a glorious piece of synchronicity. I would like to thank my wife, Shraddha Nitya Prakash, who commanded, “Write it down!” And last but not the least my family and friends who have helped me make this text book happen. I offer you all my heartfelt thanks. You are living proof that other people are our greatest resource.


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Contents

1. Banking: An Introduction

• Definition of Banking

• Principles of Banking

• Indian Banking System: Main types/groups

• Modern and Traditional functions of a Bank

• Recent trends in the Indian Banking System

2. Reserve Bank of India: Banking Regulation

• History of RBI

• Constitution and objectives of RBI

• Functions of RBI as the regulator of the Indian banking system

• Monetary tools of RBI

• Priority sector advances their composition and rationale

• Regulations on bank lending

3. Customer-Banker Relationship

• Definition of 'customer'

• Different forms of banker-customer relationships

• Banker's duties and rights

• Banking Ombudsman Scheme: Redressal of the customers' grievances

• Termination of banker-customer relationship

4. Types of Customer and their Accounts

• Basic requirements while opening an account

• Types of Customers and eligibility

• Non-resident accounts and their special requirements

5. Deposit Accounts

• Importance of Deposits

• Types of Deposits


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• Common principles and precautions involved in opening, closing and

operating the deposit accounts

6. Know Your Customer: Guidelines

• Initiatives of RBI

• KYC policy - origin

• RBI's approach and objectives

• Guidelines on KYC

7. Negotiable Instruments

• Meaning, features and kinds of negotiable instruments

• Other Instruments- Banker's drafts, traveler's cheques

• Crossing and endorsements

• Holder / payment in due course

8. Loans and Advances

• Importance of lending

• Tenets of lending- safety, profitability, liquidity, and risk diversification

• Main kinds of fund-based and non-fund based credit facilities

• Non Performing Assets classification, management and measures to

minimize

9. Fee Based Banking Services

• Varieties of funds remittance/ transfer by demand drafts, mail/ electronic

transfer, and collection of bills/ cheques

• Types of Letters of Credit and guarantees issued by banks

• Agency services like government business, sale of insurance/

• Mutual Fund products/ securities

• Safe custody of valuables and safe deposit lockers

10. Income in Banks

11. Electronic Banking

• Impact of information and telecommunication technologies on banking


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• Automated Teller Machines (ATMs)

• Tele-banking

• Internet Banking

• Mobile Banking

• Electronic Funds Transfer

• Electronic clearing system

12. Basics of Accounting

• The accounting concepts and standards

• The systems and methods of accounting

• The rules of double entry book-keeping

• The main kinds of books of accounts

• The meaning and composition of balance sheet and profit & loss statement

13. Banking Glossary


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Table of Contents 1. Banking: An Introduction .................................................. 10

2. Reserve Bank of India: Banking Regulation .................... 17

3. Customer-Banker Relationship ......................................... 26

4. Types of Customer and their Accounts ............................. 33

5. Deposit Accounts ................................................................ 56

6. Know Your Customer: Guidelines .................................... 60

7. Negotiable Instruments ...................................................... 93

8.Loans and Advances .......................................................... 104

9. Fee Based Banking Services ............................................. 129

10. Income in Banks ............................................................. 151

11. Electronic Banking ......................................................... 164

12. Basic of Accounting ........................................................ 173

13. Banking Glossary ............................................................ 178


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1. Banking: An Introduction

Bank is an institution that deals in money and its substitutes and provides other

money-related services. In its role as a financial intermediary, a bank accepts

deposits and makes loans. It derives a profit from the difference between the costs

(including interest payments) of attracting and servicing deposits and the income it

receives through interest charged to borrowers or earned through securities. Many

banks provide related services such as financial management and products such

as mutual funds and credit cards. Some bank liabilities also serve as money—that

is, as generally accepted means of payment and exchange.

As per Section 5(c) of Banking Regulation Act, 1949 a "Banking Company" means

any company which transacts the business of banking in India. Any company

which is engaged in the manufacture of goods or carries on any trade and which

accepts the deposits of money from public merely for the purpose of financing its

business as such manufacturer or trader shall not be deemed to transact the

business of banking within the meaning of this clause."

As per Section 5(b) of Banking Regulation Act, 1949, banking means the

accepting, for the purpose of lending or investment, of deposits of money from the

public, repayable on demand or otherwise, and withdrawable by cheque, draft,

order or otherwise.

As per Section 5(d) of Banking Regulation Act, 1949, company means any

company as defined in Section 3 of the Companies Act, 1956 and includes a

foreign company within the meaning of Section 591 of that Act.

The central practice of banking consists of borrowing and lending. As in other

businesses, operations must be based on capital, but banks employ comparatively

little of their own capital in relation to the total volume of their transactions.

Instead banks use the funds obtained through deposits and, as a precaution,

maintain capital and reserve accounts to protect against losses on their loans and

investments and to provide for unanticipated cash withdrawals. Genuine banks are

distinguished from other kinds of financial intermediaries by the readily

transferable or “spendable” nature of at least some of their liabilities (also known


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as IOUs), which allows those liabilities to serve as means of exchange—that is, as

money.

Banking in India:

It originated in the last decades first banks were The General Bank of India, which

started in 1786, and Bank of Hindustan, which started in 1770; both are now

defunct. The oldest bank in existence in India is the State Bank of India, which

originated in 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. For many years

the Presidency banks acted as quasi-central banks, as did their successors. 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.

Merchants in Calcutta established the Union Bank in 1839, but it failed in 1840 as

a consequence of the economic crisis of 1848-49. The Allahabad Bank, established

in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint

Stock Bank: A company that issues stock and requires shareholders to be held

liable for the company's debt) It was not the first though. That honor belongs to the

Bank of Upper India, which was established in 1863, and which survived until

1913, when it failed, with some of its assets and liabilities being transferred to the

Alliance Bank of Simla.

Foreign banks too started to app, particularly in Calcutta, in the 1860s. The

Comptoir d'Escompte de Paris opened a branch in Calcutta in 1860, and another in

Bombay in 1862; branches in Madras and Pondicherry, then a French colony,

followed. HSBC established itself in Bengal in 1869. Calcutta was the most active

trading port in India, mainly due to the trade of the British Empire, and so became

a banking center.

The first entirely Indian joint stock bank was the Oudh Commercial Bank,

established in 1881 in Faizabad. It failed in 1958. The next was the Punjab

National Bank, established in Lahore in 1895, which has survived to the present

and is now one of the largest banks in India.


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Around the turn of the 20th Century, the Indian economy was passing through a

relative period of stability. Around five decades had elapsed since the Indian

Mutiny, and the social, industrial and other infrastructure had improved. Indians

had established small banks, most of which served particular ethnic and religious

communities.

The presidency banks dominated banking in India but there were also some

exchange banks and a number of Indian joint stock banks. All these banks operated

in different segments of the economy. The exchange banks, mostly owned by

Europeans, concentrated on financing foreign trade. Indian joint stock banks were

generally undercapitalized and lacked the experience and maturity to compete with

the presidency and exchange banks. This segmentation let Lord Curzon to observe,

"In respect of banking it seems we are behind the times. We are like some old

fashioned sailing ship, divided by solid wooden bulkheads into separate and

cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the

Swadeshi movement. The Swadeshi movement inspired local businessmen and

political figures to found banks of and for the Indian community. A number of

banks established then have survived to the present such as Bank of India,

Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank

of India.

The fervor of Swadeshi movement lead to establishing of many private banks in

Dakshina Kannada and Udupi district which were unified earlier and known by the

name South Canara ( South Kanara ) district. Four nationalized banks started in

this district and also a leading private sector bank. Hence undivided Dakshina

Kannada district is known as "Cradle of Indian Banking".

During the First World War (1914–1918) through the end of the Second World

War (1939–1945), and two years thereafter until the independence of India were

challenging for Indian banking. The years of the First World War were turbulent,

and it took its toll with banks simply collapsing despite the Indian economy

gaining indirect boost due to war-related economic activities. At least 94 banks in

India failed between 1913 and 1918.

Post-Independence:


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The partition of India in 1947 adversely impacted the economies of Punjab and

West Bengal, paralyzing banking activities for months. India's independence

marked the end of a regime of the Laissez-faire for the Indian banking. The

Government of India initiated measures to play an active role in the economic life

of the nation, and the Industrial Policy Resolution adopted by the government in

1948 envisaged a mixed economy. This resulted into greater involvement of the

state in different segments of the economy including banking and finance. The

major steps to regulate banking included:

The Reserve Bank of India, India's central banking authority, was established in

April 1935, but was nationalized on January 1, 1949 under the terms of the

Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).

In 1949, the Banking Regulation Act was enacted which empowered the Reserve

Bank of India (RBI) "to regulate, control, and inspect the banks in India".

The Banking Regulation Act also provided that no new bank or branch of an

existing bank could be opened without a license from the RBI, and no two banks

could have common directors.

Nationalization:

Despite the provisions, control and regulations of Reserve Bank of India, banks in

India except the State Bank of India or SBI, continued to be owned and operated

by private persons. By the 1960s, the Indian banking industry had become an

important tool to facilitate the development of the Indian economy. At the same

time, it had emerged as a large employer, and a debate had ensued about the

nationalization of the banking industry. Indira Gandhi, then Prime Minister of

India, expressed the intention of the Government of India in the annual conference

of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank

Nationalisation." The meeting received the paper with enthusiasm.

Thereafter, her move was swift and sudden. The Government of India issued an

ordinance ('Banking Companies (Acquisition and Transfer of Undertakings)

Ordinance, 1969')) and nationalised the 14 largest commercial banks with effect

from the midnight of July 19, 1969. These banks contained 85 percent of bank

deposits in the country. Jayaprakash Narayan, a national leader of India, described


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the step as a "masterstroke of political sagacity." Within two weeks of the issue of

the ordinance, the Parliament passed the Banking Companies (Acquisition and

Transfer of Undertaking) Bill, and it received the presidential approval on 9

August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980.

The stated reason for the nationalization was to give the government more control

of credit delivery. With the second dose of nationalization, the Government of

India controlled around 91% of the banking business of India. Later on, in the year

1993, the government merged New Bank of India with Punjab National Bank. It

was the only merger between nationalized banks and resulted in the reduction of

the number of nationalised banks from 20 to 19. After this, until the 1990s, the

nationalised banks grew at a pace of around 4%, closer to the average growth rate

of the Indian economy.

Liberalization:

In the early 1990s, the then Narasimha Rao government embarked on a policy of

liberalization, licensing a small number of private banks. These came to be known

as New Generation tech-savvy banks, and included Global Trust Bank (the first of

such new generation banks to be set up), which later amalgamated with Oriental

Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC

Bank. This move, along with the rapid growth in the economy of India, revitalized

the banking sector in India, which has seen rapid growth with strong contribution

from all the three sectors of banks, namely, government banks, private banks and

foreign banks.

The next stage for the Indian banking has been set up with the proposed relaxation

in the norms for Foreign Direct Investment, where all Foreign Investors in banks

may be given voting rights which could exceed the present cap of 10%,at present it

has gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this

time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of

functioning. The new wave ushered in a modern outlook and tech-savvy methods

of working for traditional banks.All this led to the retail boom in India. People not

just demanded more from their banks but also received more.


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Currently (2010), banking in India is generally fairly mature in terms of supply,

product range and reach-even though reach in rural India still remains a challenge

for the private sector and foreign banks. In terms of quality of assets and capital

adequacy, Indian banks are considered to have clean, strong and transparent

balance sheets relative to other banks in comparable economies in its region. The

Reserve Bank of India is an autonomous body, with minimal pressure from the

government. The stated policy of the Bank on the Indian Rupee is to manage

volatility but without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail

banking, mortgages and investment services are expected to be strong. One may

also expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its

stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time

an investor has been allowed to hold more than 5% in a private sector bank since

the RBI announced norms in 2005 that any stake exceeding 5% in the private

sector banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are too

aggressive in their loan recovery efforts in connection with housing, vehicle and

personal loans. There are press reports that the banks' loan recovery efforts have

driven defaulting borrowers to suicide.

Adoption of banking technology: The IT revolution had a great impact in the

Indian banking system. The use of computers had led to introduction of online

banking in India. The use of the modern innovation and computerization of the

banking sector of India has increased many fold after the economic liberalization

of 1991 as the country's banking sector has been exposed to the world's market.

The Indian banks were finding it difficult to compete with the international banks

in terms of the customer service without the use of the information technology and

computers.

The RBI in 1984 formed Committee on Mechanization in the Banking Industry

(1984) whose chairman was Dr C Rangarajan, Deputy Governor, Reserve Bank of

India. The major recommendations of this committee was introducing MICR


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Technology in all the banks in the metropolis in India. This provided use of

standardized cheque forms and encoders.

In 1988, the RBI set up Committee on Computerisation in Banks (1988) headed by

Dr. C.R. Rangarajan which emphasized that settlement operation must be

computerized in the clearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur,

Patna and Thiruvananthapuram.It further stated that there should be National

Clearing of inter-city cheques at Kolkata,Mumbai,Delhi,Chennai and MICR should

be made Operational.It also focused on computerisation of branches and increasing

connectivity among branches through computers.It also suggested modalities for

implementing on-line banking.The committee submitted its reports in 1989 and

computerisation began form 1993 with the settlement between IBA and bank

employees' association.

In 1994, Committee on Technology Issues relating to Payments System, Cheque

Clearing and Securities Settlement in the Banking Industry (1994)[10] was set up

with chairman Shri WS Saraf, Executive Director, Reserve Bank of India. It

emphasized on Electronic Funds Transfer (EFT) system, with the BANKNET

communications network as its carrier. It also said that MICR clearing should be

set up in all branches of all banks with more than 100 branches.

Committee for proposing Legislation On Electronic Funds Transfer and other

Electronic Payments (1995) emphasized on EFT system. Electronic banking refers

to DOING BANKING by using technologies like computers, internet and

networking, MICR, EFT so as to increase efficiency, quick service, productivity

and transparency in the transaction.


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2. Reserve Bank of India: Banking Regulation

The Reserve Bank of India (RBI) is India's central banking institution, which

controls the monetary policy of the Indian rupee. It was established on 1 April

1935 during the British Raj in accordance with the provisions of the Reserve Bank

of India Act; 1934.The share capital was divided into shares of ₹100 each fully

paid which was entirely owned by private shareholders in the beginning. Following

India's independence in 1947, the RBI was nationalized in the year 1949.

The RBI plays an important part in the development strategy of the Government of

India. It is a member bank of the Asian Clearing Union. The general

superintendence and direction of the RBI is entrusted with the 21-member-strong

Central Board of Directors—the Governor (currently Duvvuri Subbarao), four

Deputy Governors, two Finance Ministry representative, ten Government-

nominated Directors to represent important elements from India's economy, and

four Directors to represent Local Boards headquartered at Mumbai, Kolkata,

Chennai and New Delhi. Each of these Local Boards consists of five members who

represent regional interests, as well as the interests of co-operative and indigenous

banks.

The bank is also active in promoting financial inclusion policy and is a leading

member of the Alliance for Financial Inclusion (AFI).

History of RBI:

1935–1950:

The Reserve Bank of India was founded on 1 April 1935 to respond to economic

troubles after the First World War. It came into picture according to the guidelines

laid down by Dr. Ambedkar. RBI was conceptualized as per the guidelines,

working style and outlook presented by Dr Ambedkar in front of the Hilton Young

Commission. When this commission came to India under the name of “Royal

Commission on Indian Currency & Finance”, each and every member of this

commission were holding Dr Ambedkar’s book named “The Problem of the Rupee


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– It’s origin and it’s solution.” The Bank was set up based on the recommendations

of the 1926 Royal Commission on Indian Currency and Finance, also known as the

Hilton–Young Commission. The original choice for the seal of RBI was The East

India Company Double Mohur, with the sketch of the Lion and Palm Tree.

However it was decided to replace the lion with the tiger, the national animal of

India. The Preamble of the RBI describes its basic functions to regulate the issue of

bank notes, keep reserves to secure monetary stability in India, and generally to

operate the currency and credit system in the best interests of the country. The

Central Office of the RBI was initially established in Calcutta (now Kolkata), but

was permanently moved to Bombay (now Mumbai) in 1937. The RBI also acted as

Burma's central bank, except during the years of the Japanese occupation of Burma

(1942–45), until April 1947, even though Burma seceded from the Indian Union in

1937. After the Partition of India in 1947, the Bank served as the central bank for

Pakistan until June 1948 when the State Bank of Pakistan commenced operations.

Though originally set up as a shareholders’ bank, the RBI has been fully owned by

the Government of India since its nationalization in 1949.

1950–1960:

In the 1950s, the Indian government, under its first Prime Minister Jawaharlal

Nehru, developed a centrally planned economic policy that focused on the

agricultural sector. The administration nationalized commercial banks and

established, based on the Banking Companies Act of 1949 (later called the

Banking Regulation Act), a central bank regulation as part of the RBI.

Furthermore, the central bank was ordered to support the economic plan with

loans.

1960–1969:

As a result of bank crashes, the RBI was requested to establish and monitor a

deposit insurance system. It should restore the trust in the national bank system and

was initialized on 7 December 1961. The Indian government founded funds to

promote the economy and used the slogan Developing Banking. The Government

of India restructured the national bank market and nationalized a lot of institutes.

As a result, the RBI had to play the central part of control and support of this

public banking sector.


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1969–1985:

In 1969, the Indira Gandhi-headed government nationalized 14 major commercial

banks. Upon Gandhi's return to power in 1980, a further six banks were

nationalized. The regulation of the economy and especially the financial sector was

reinforced by the Government of India in the 1970s and 1980s. The central bank

became the central player and increased its policies for a lot of tasks like interests,

reserve ratio and visible deposits. These measures aimed at better economic

development and had a huge effect on the company policy of the institutes. The

banks lent money in selected sectors, like agri-business and small trade companies.

The branch was forced to establish two new offices in the country for every newly

established office in a town. The oil crises in 1973 resulted in increasing inflation,

and the RBI restricted monetary policy to reduce the effects.

1985–1991:

A lot of committees analyzed the Indian economy between 1985 and 1991. Their

results had an effect on the RBI. The Board for Industrial and Financial

Reconstruction, the Indira Gandhi Institute of Development Research and the

Security & Exchange Board of India investigated the national economy as a whole,

and the security and exchange board proposed better methods for more effective

markets and the protection of investor interests. The Indian financial market was a

leading example for so-called "financial repression" (Mackinnon and Shaw). The

Discount and Finance House of India began its operations on the monetary market

in April 1988; the National Housing Bank, founded in July 1988, was forced to

invest in the property market and a new financial law improved the versatility of

direct deposit by more security measures and liberalization.

1991–2000:

The national economy came down in July 1991 and the Indian rupee was devalued.

The currency lost 18% relative to the US dollar, and the Narsimahmam Committee

advised restructuring the financial sector by a temporal reduced reserve ratio as

well as the statutory liquidity ratio. New guidelines were published in 1993 to

establish a private banking sector. This turning point should reinforce the market

and was often called neo-liberal. The central bank deregulated bank interests and


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some sectors of the financial market like the trust and property markets.[18] This

first phase was a success and the central government forced a diversity

liberalization to diversify owner structures in 1998.

The National Stock Exchange of India took the trade on in June 1994 and the RBI

allowed nationalized banks in July to interact with the capital market to reinforce

their capital base. The central bank founded a subsidiary company—the Bharatiya

Reserve Bank Note Mudran Limited—in February 1995 to produce banknotes.

Since 2000:

The Foreign Exchange Management Act from 1999 came into force in June 2000.

It should improve the foreign exchange market, international investments in India

and transactions. The RBI promoted the development of the financial market in the

last years, allowed online banking in 2001 and established a new payment system

in 2004–2005 (National Electronic Fund Transfer). The Security Printing &

Minting Corporation of India Ltd., a merger of nine institutions, was founded in

2006 and produces banknotes and coins.

The national economy's growth rate came down to 5.8% in the last quarter of

2008–2009 and the central bank promotes the economic development.

Structure:

The Central Board of Directors is the main committee of the central bank. The

Government of India appoints the directors for a four-year term. The Board

consists of a governor, four deputy governors, fifteen directors to represent the

regional boards, one from the Ministry of Finance and ten other directors from

various fields.

Supportive bodies:

The Reserve Bank of India has ten regional representations: North in New Delhi,

South in Chennai, East in Kolkata and West in Mumbai. The representations are

formed by five members, appointed for four years by the central government and

serve—beside the advice of the Central Board of Directors—as a forum for

regional banks and to deal with delegated tasks from the central board. The

institution has 22 regional offices.


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The Board of Financial Supervision (BFS), formed in November 1994, serves as a

CCBD committee to control the financial institutions. It has four members,

appointed for two years, and takes measures to strength the role of statutory

auditors in the financial sector, external monitoring and internal controlling

systems.

The Tarapore committee was set up by the Reserve Bank of India under the

chairmanship of former RBI deputy governor S. S. Tarapore to "lay the road map"

to capital account convertibility. The five-member committee recommended a

three-year time frame for complete convertibility by 1999–2000.

On 1 July 2007, in an attempt to enhance the quality of customer service and

strengthen the grievance redressal mechanism, the Reserve Bank of India created a

new customer service department.

Offices and branches: The Reserve Bank of India has 4 zonal offices.[28] It has 19

regional offices at most state capitals and at a few major cities in India. Few of

them are located in Ahmedabad, Bangalore, Bhopal, Bhubaneswar, Chandigarh,

Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow,

Mumbai, Nagpur, Patna, and Thiruvananthapuram. Besides it has 09 sub-offices at

Agartala, Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shillong, Shimla and

Srinagar.

The bank has also two training colleges for its officers, viz. Reserve Bank Staff

College at Chennai and College of Agricultural Banking at Pune. There are also

four Zonal Training Centres at Mumbai, Chennai, Kolkata and New Delhi.

Main functions of RBI:

Bank of Issue: Under Section 22 of the Reserve Bank of India Act, the Bank has

the sole right to issue bank notes of all denominations. The distribution of one

rupee notes and coins and small coins all over the country is undertaken by the

Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue

Department which is entrusted with the issue of currency notes. The assets and

liabilities of the Issue Department are kept separate from those of the Banking

Department. Originally, the assets of the Issue Department were to consist of not

less than two-fifths of gold coin, gold bullion or sterling securities provided the


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amount of gold was not less than Rs. 40 crore (Rs. 400 million) in value. The

remaining three-fifths of the assets might be held in rupee coins, Government of

India rupee securities, eligible bills of exchange and promissory notes payable in

India. Due to the exigencies of the Second World War and the post-war period,

these provisions were considerably modified. Since 1957, the Reserve Bank of

India is required to maintain gold and foreign exchange reserves of Rs.200 crore

(Rs.2 billion), of which at least Rs.115 crore (Rs.1.15 billion) should be in gold

and Rs.85 crore (Rs.850 million) in the form of Government Securities. The

system as it exists today is known as the minimum reserve system.

Monetary authority: The Reserve Bank of India is the main monetary authority of

the country and beside that the central bank acts as the bank of the national and

state governments. It formulates implements and monitors the monetary policy as

well as it has to ensure an adequate flow of credit to productive sectors. Objectives

are maintaining price stability and ensuring adequate flow of credit to productive

sectors. The national economy depends on the public sector and the central bank

promotes an expansive monetary policy to push the private sector since the

financial market reforms of the 1990s.

Regulator and supervisor of the financial system: The institution is also the

regulator and supervisor of the financial system and prescribes broad parameters of

banking operations within which the country's banking and financial system

functions. Its objectives are to maintain public confidence in the system, protect

depositors' interest and provide cost-effective banking services to the public. The

Banking Ombudsman Scheme has been formulated by the Reserve Bank of India

(RBI) for effective addressing of complaints by bank customers. The RBI controls

the monetary supply, monitors economic indicators like the gross domestic product

and has to decide the design of the rupee banknotes as well as coins.

Managerial of exchange control: The central bank manages to reach the goals of

the Foreign Exchange Management Act, 1999. Objectives to facilitate external

trade and payment and promote orderly development and maintenance of foreign

exchange market in India.

Issuer of currency: The bank issues and exchanges or destroys currency notes and

coins that are not fit for circulation. The objectives are giving the public adequate


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supply of currency of good quality and to provide loans to commercial banks to

maintain or improve the GDP. The basic objectives of RBI are to issue bank notes,

to maintain the currency and credit system of the country to utilize it in its best

advantage, and to maintain the reserves. RBI maintains the economic structure of

the country so that it can achieve the objective of price stability as well as

economic development, because both objectives are diverse in themselves.

Banker of Banks: RBI also works as a central bank where commercial banks are

account holders and can deposit money.RBI maintains banking accounts of all

scheduled banks. Commercial banks create credit. It is the duty of the RBI to

control the credit through the CRR, bank rate and open market operations. As

banker's bank, the RBI facilitates the clearing of checks between the commercial

banks and helps inter-bank transfer of funds. It can grant financial accommodation

to schedule banks. It acts as the lender of the last resort by providing emergency

advances to the banks. It supervises the functioning of the commercial banks and

take action against it if need arises.

Detection of Fake currency: In order to curb the fake currency menace, RBI has

launched a website to raise awareness among masses about fake notes in the

market.www.paisaboltahai.rbi.org.in provides information about identifying fake

currency.

Developmental role: The central bank has to perform a wide range of promotional

functions to support national objectives and industries. The RBI faces a lot of inter-

sectored and local inflation-related problems. Some of these problems are results

of the dominant part of the public sector.

Related functions: The RBI is also a banker to the government and performs

merchant banking function for the central and the state governments. It also acts as

their banker. The National Housing Bank (NHB) was established in 1988 to

promote private real estate acquisition. The institution maintains banking accounts

of all scheduled banks, too. RBI on 7 August 2012 said that Indian banking system

is resilient enough to face the stress caused by the drought like situation because of

poor monsoon this year.

Policy rates and reserve ratios:


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Policy rates, Reserve ratios, lending, and deposit rates as of 30, October, 2012

Bank Rate 9.00% Repo Rate 8.00% Reverse Repo Rate 7.00%

Cash Reserve Ratio (CRR) 4.25% Statutory Liquidity Ratio (SLR) 23.0% Base Rate 9.75%–10.50%

Reserve Bank Rate 4% Deposit Rate 8.50%–9.00%

Bank Rate: RBI lends to the commercial banks through its discount window to

help the banks meet depositor’s demands and reserve requirements for long term.

The interest rate the RBI charges the banks for this purpose is called bank rate. If

the RBI wants to increase the liquidity and money supply in the market, it will

decrease the bank rate and if RBI wants to reduce the liquidity and money supply

in the system, it will increase the bank rate. As of 25 June 2012 the bank rate was

9.0%.

Reserve requirement cash reserve ratio (CRR): Every commercial bank has to keep

certain minimum cash reserves with RBI. Consequent upon amendment to sub-

Section 42(1), the Reserve Bank, having regard to the needs of securing the

monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR) for

scheduled banks without any floor rate or ceiling rate, [Before the enactment of

this amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could

prescribe CRR for scheduled banks between 5% and 20% of total of their demand

and time liabilities]. RBI uses this tool to increase or decrease the reserve

requirement depending on whether it wants to affect a decrease or an increase in

the money supply. An increase in Cash Reserve Ratio (CRR) will make it

mandatory on the part of the banks to hold a large proportion of their deposits in

the form of deposits with the RBI. This will reduce the size of their deposits and

they will lend less. This will in turn decrease the money supply. The current rate is

4.75%. (As a Reduction in CRR by 0.25% as on Date- 17 September 2012). -25

basis points cut in Cash Reserve Ratio (CRR) on 17 September 2012, It will

release Rs 17,000 crore into the system/Market. The RBI lowered the CRR by 25

basis points to 4.25% on 30 October 2012, a move it said would inject about 175


25

billion rupees into the banking system in order to pre-empt potentially tightening

liquidity.

Statutory Liquidity ratio (SLR): Apart from the CRR, banks are required to

maintain liquid assets in the form of gold, cash and approved securities. Higher

liquidity ratio forces commercial banks to maintain a larger proportion of their

resources in liquid form and thus reduces their capacity to grant loans and

advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the

bank funds from loans and advances to investment in government and approved

securities.

In well-developed economies, central banks use open market operations—buying

and selling of eligible securities by central bank in the money market—to influence

the volume of cash reserves with commercial banks and thus influence the volume

of loans and advances they can make to the commercial and industrial sectors. In

the open money market, government securities are traded at market related rates of

interest. The RBI is resorting more to open market operations in the more recent

years.

Generally RBI uses three kinds of selective credit controls:

� Minimum margins for lending against specific securities.

� Ceiling on the amounts of credit for certain purposes.

� Discriminatory rate of interest charged on certain types of advances.

� Direct credit controls in India are of three types:

� Part of the interest rate structure i.e. on small savings and provident funds,

are administratively set.

� Banks are mandatory required to keep 23% of their deposits in the form of

government securities.

� Banks are required to lend to the priority sectors to the extent of 40% of their

advances.


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3. Customer-Banker Relationship

For a bank, a customer is a person who is utilizing one or more of the services

provided by the bank. A customer is a person through whom the bank gets an

opportunity to make an earning in return to the service they can provide the

customer with. For Ex: an individual who has a checking account with a bank or an

individual who has a mortgage or a loan with the bank or an individual who has a

fixed deposit with the bank are all customers of the bank. The banker-customer

relationship is that of a:

� Debtor and Creditor,

� Pledger and Pledgee,

� Licensor and Licensee,

� Bailor and Bailee,

� Hypothecator and Hypothecatee,

� Trustee and Beneficiary,

� Agent and Principal,

� Advisor and Client, and

� Other miscellaneous relationships.

� Discussed below are important banker-customer relationships.

1. Relationship of Debtor and Creditor: When a customer opens an account with a

bank and if the account has a credit balance, then the relationship is that of debtor

(banker / bank) and creditor (customer).

In case of savings / fixed deposit / current account (with credit balance), the banker

is the debtor, and the customer is the creditor. This is because the banker owes

money to the customer. The customer has the right to demand back his money

whenever he wants it from the banker, and the banker must repay the balance to

the customer.


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In case of loan / advance accounts, banker is the creditor, and the customer is the

debtor because the customer owes money to the banker. The banker can demand

the repayment of loan / advance on the due date, and the customer has to repay the

debt.

A customer remains a creditor until there is credit balance in his account with the

banker. A customer (creditor) does not get any charge over the assets of the banker

(debtor). The customer's status is that of an unsecured creditor of the banker.

The debtor-creditor relationship of banker and customer differs from other

commercial debts in the following ways:

The creditor (the customer) must demand payment. On his own, the debtor

(banker) will not repay the debt. However, in case of fixed deposits, the bank must

inform a customer about maturity.

The creditor must demand the payment at the right time and place. The depositor

or creditor must demand the payment at the branch of the bank, where he has

opened the account. However, today, some banks allow payment at all their

branches and ATM centres. The depositor must demand the payment at the right

time (during the working hours) and on the date of maturity in the case of fixed

deposits. Today, banks also allow pre-mature withdrawals.

The creditor must make the demand for payment in a proper manner. The demand

must be in form of cheques; withdrawal slips, or pay order. Now-a-days, banks

allow e-banking, ATM, mobile-banking, etc.

2. Relationship of Pledger and Pledgee: The relationship between customer and

banker can be that of Pledger and Pledgee. This happens when customer pledges

(promises) certain assets or security with the bank in order to get a loan. In this

case, the customer becomes the Pledger, and the bank becomes the Pledgee. Under

this agreement, the assets or security will remain with the bank until a customer

repays the loan.

3. Relationship of Licensor and Licensee: The relationship between banker and

customer can be that of a Licensor and Licensee. This happens when the banker

gives a sale deposit locker to the customer. So, the banker will become the

Licensor, and the customer will become the Licensee.


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4. Relationship of Bailor and Bailee: The relationship between banker and

customer can be that of Bailor and Bailee.

Bailment is a contract for delivering goods by one party to another to be held in

trust for a specific period and returned when the purpose is ended.

Bailor is the party that delivers property to another.

Bailee is the party to whom the property is delivered.

So, when a customer gives a sealed box to the bank for safe keeping, the customer

became the bailor, and the bank became the bailee.

5. Relationship of Hypothecator and Hypothecatee: The relationship between

customer and banker can be that of Hypothecator and Hypotheatee. This happens

when the customer hypothecates (pledges) certain movable or non-movable

property or assets with the banker in order to get a loan. In this case, the customer

became the Hypothecator, and the Banker became the Hypothecatee.

6. Relationship of Trustee and Beneficiary: A trustee holds property for the

beneficiary, and the profit earned from this property belongs to the beneficiary. If

the customer deposits securities or valuables with the banker for safe custody,

banker becomes a trustee of his customer. The customer is the beneficiary so the

ownership remains with the customer.

7. Relationship of Agent and Principal: The banker acts as an agent of the customer

(principal) by providing the following agency services:

Buying and selling securities on his behalf,

Collection of cheques, dividends, bills or promissory notes on his behalf, and

Acting as a trustee, attorney, executor, correspondent or representative of a

customer.

Banker as an agent performs many other functions such as payment of insurance

premium, electricity and gas bills, handling tax problems, etc.

8. Relationship of Advisor and Client: When a customer invests in securities, the

banker acts as an advisor. The advice can be given officially or unofficially. While


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giving advice the banker has to take maximum care and caution. Here, the banker

is an Advisor, and the customer is a Client.

9. Other Relationships: Other miscellaneous banker-customer relationships are as

follows:

Obligation to honor cheques: As long as there is sufficient balance in the account

of the customer, the banker must honour all his cheques. The cheques must be

complete and in proper order. They must be presented within six months from the

date of issue. However, the banker can refuse to honour the cheques only in certain

cases.

Secrecy of customer's account: When a customer opens an account in a bank, the

banker must not give information about the customer's account to others.

Banker's right to claim incidental charges: A banker has a right to charge a

commission, interest or other charges for the various services given by him to the

customer. For e.g. an overdraft facility.

Law of limitation on bank deposits: Under the law of limitation, generally, a

customer gives up the right to recover the amount due at a banker if he has not

operated his account since last 10 years.

Banking Ombudsman: Banking Ombudsman is a quasi judicial authority

functioning under India’s Banking Ombudsman Scheme 2006, and the authority

was created pursuant to the a decision by the Government of India to enable

resolution of complaints of customers of banks relating to certain services rendered

by the banks. The Banking Ombudsman Scheme was first introduced in India in

1995, and was revised in 2002. The current scheme became operative from 1

January 2006, and replaced and superseded the banking Ombudsman Scheme

2002. From 2002 until 2006, around 36,000 complaints have been dealt by the

Banking Ombudsmen.

Type of complaints: The type and scope of the complaints which may be

considered by a Banking Ombudsman is very comprehensive, and it has been

empowered to receive and consider complaints pertaining to the following:


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� Non-payment or inordinate delay in the payment or collection of cheques,

drafts, bills, etc.;

� Non-acceptance, without sufficient cause, of small denomination notes

tendered for any purpose, and for charging of commission for this service;

� Non-acceptance, without sufficient cause, of coins tendered and for charging

of commission for this service;

� Non-payment or delay in payment of inward remittances ;

� Failure to issue or delay in issue, of drafts, pay orders or bankers’ cheques;

� Non-adherence to prescribed working hours;

� Failure to honour guarantee or letter of credit commitments;

� Failure to provide or delay in providing a banking facility (other than loans

and advances) promised in writing by a bank or its direct selling agents;

� Delays, non-credit of proceeds to parties' accounts, non-payment of deposit

or non-observance of the Reserve Bank directives, if any, applicable to rate

of interest on deposits in any savings, current or other account maintained

with a bank ;

� Delays in receipt of export proceeds, handling of export bills, collection of

bills etc., for exporters provided the said complaints pertain to the bank's

operations in India;

� Refusal to open deposit accounts without any valid reason for refusal;

� Levying of charges without adequate prior notice to the customer;

� Non-adherence by the bank or its subsidiaries to the instructions of Reserve

Bank on ATM/debit card operations or credit card operations;

� Non-disbursement or delay in disbursement of pension to the extent the

grievance can be attributed to the action on the part of the bank concerned,

(but not with regard to its employees);

� Refusal to accept or delay in accepting payment towards taxes, as required

by Reserve Bank/Government;

� Refusal to issue or delay in issuing, or failure to service or delay in servicing

or redemption of Government securities;

� Forced closure of deposit accounts without due notice or without sufficient

reason;

� Refusal to close or delay in closing the accounts;

� Non-adherence to the fair practices code as adopted by the bank; and


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� Any other matter relating to the violation of the directives issued by the

Reserve Bank in relation to banking or other services.

� Complaints from Non-Resident Indians having accounts in India in relation

to their remittances from abroad, deposits and other bank-related matters.

The relationship between the banker and the customer is contractual. Both are bound by certain obligations. As and when one party frees himself from such obligations, and then the relationship between the two is terminated. The following are the circumstances under which the relationship between the two is terminated. (a) Termination of relationship by a customer: A customer can terminate the relationship with the bank on the following grounds:- (1) A customer, due to change of place, May like to close the account with the bank. (2) If the customer is not satisfied with the working of the bank, he may then close his account with the bank, (3) The account is also closed on the death of a customer. The outstanding balance is paid to the nominee of the customer. (b) Termination of Relationship by a banker: A banker can close the account of the customer on the following grounds:- (1) If a customer repeatedly presents cheques after the business hours, or does not have sufficient balances but draws cheques on the account, the banker may after giving due notice to him, close his account. (2) The banker shall close the account on receiving the intimation of the death of a customer. (3) If insanity of a customer is established, the bank will close his account. (4) On the receipt of notice of insolvency of a customer, the bank cannot honor the cheques drawn by the customer. (5) If a company is wound up by the Order of the Court, the banker then cannot honor the cheques of its customer. (6) When a customer assigns his total credit balance to a third party and this intimation is received and implemented by the bank, the relationship between the banker and the customer is then terminated. On transfer of the assigned account, the banker enters in a new relationship with his new customer. (7) Garnishee order for the whole account. If a bank receives garnishee order (court order) for the whole amount of a customer’s account the bank shall make whole payment to the party in favor of which the garnishee order has been received


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Under such circumstances, the relationship between the customer and the banker is automatically terminated. (8) Changes in the constitution of the firm. If the constitution of a firm company trust undergoes a change the customers of these institutions may also undergo a change. The relationship stands terminated until further instructions are received by the bank on behalf of the new authorized authorities.


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4. Types of Customer and their Accounts

Every commercial bank is anxious to increase its customers. However, every one

cannot be accepted as its customer. Only those persons who are competent in law

to enter into a contract can be considered as customers. The bank is and should be

very cautious in the selection of customers as it is to have a continued relationship

with them. The customers of a bank can mainly be divided into two categories (1)

Ordinary Customers and (2) Special Customers. Ordinary Customers are those who

are competent to enter into contract under the laws of land. An individual, a body

corporate, a firm can open an account with the bank.

Accounts of Minors: Who is a Minor? As per sec.4 of “The Guardian and Wards Act, 1890, “‘Minor’ means a person who, under the provisions of Indian Majority Act, 1875(9 of 1875) is to be deemed not to have attained his majority”. As per Sec3 of “Indian Majority Act, 1875,” every other person domiciled in India shall be deemed to have attained his majority when he shall have completed his age of eighteen years and not before”. Thus a ‘Minor’ is a person who has not completed the age of eighteen years. Where a legal guardian is appointed by a court of law the person attains majority on completion twenty-one years of age and not before (Sec3 of Indian Majority Act, 1875). According to the Indian Contract Act, 1872, a minor is not capable of entering into a valid contract and a contract entered into by a minor is void. A minor after attaining majority cannot ratify the contract made by him during his minority since agreement made by him as a minor is void. However, section 26 of NI Act provides that a Minor may draw, endorse, deliver and negotiate a cheque so as to bind all parties except himself. Of Course the minor is not bound by the terms and conditions of Bank Account. A question may obviously arise that in spite of above-mentioned disabilities, why banks are allowing opening an account in the name of Minor. The main reason for this is that in this age of cutthroat competition for deposit mobilization. Who is a Guardian? As per Sec.4 of “The Guardians and Wards Act, 1890” "guardian" means a person having the care of the person of a minor or of his property or of both his person


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and property. Guardians may be categorized into following three types:

(i) Natural guardian, (ii) Testamentary Guardian: -Guardian appointed by the will of the minor's

father or mother,

(iii) Guardian appointed by a court under the Guardians and Wards Act, 1890. Natural Guardians in Different Religions: a) Hindu According to Sec.6 of Guardians and Wards Act, 1890,the natural guardian of a Hindu minor, in respect of the minor’s person as well as in respect of the minor’s property (excluding his or her undivided interest in joint family property), are- (a) In the case of a boy or unmarried girl- the father, and after him, the mother, provided that the custody of a minor who has not completed the age of five years shall ordinarily be with the mother; (b) In the case of illegitimate boy or an illegitimate unmarried girl- the mother, and after her, the father; (c) In the case of married girl -the husband: (Note: The expression “father” and “mother” do not include a step- father and a stepmother.) b) Muslim: Under the Mohammedan Law, father is the natural guardian of the property of a minor. A mother of a Muslim minor is not a natural guardian of her child. A Muslim minors natural guardian in the order of preference is as under:

• Father

• Executor appointed by father’s will

• Grandfather

• Executor appointed by grandfather’s will

• If there is no guardian from any of the four categories mentioned above, then guardian will have to be appointed by the court.

c)Christians & Parsis: The natural guardian of a minor child is father during his lifetime and after him, the mother. In respect of child born out of wedlock registered under “The Special Marriage Act, 1954” the Guardian and Wards Act, 1890, govern guardianship.


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Opening of Minor’s Account: Generally, banks are reluctant to open deposit account in the name of minor, with mother as a guardian. Probably it may be due to the provisions of Sec. 6 of the Hindu Minority and Guardianship Act, 1956. According to which mother is not a guardian when the father is alive. During his lifetime, father alone is the natural guardian of a Hindu minor. After examining the legal and practical aspects of problem, the Reserve Bank of India has permitted banks to open fixed, recurring deposit and savings banks accounts, mother as a guardian. Although there is no legal protection provided to the accounts opened in the name of minor with mother as guardian banks have been permitted to open accounts in the names of minors with mother as guardian. RBI has advised banks to take adequate safeguards in allowing operations in the accounts by ensuring that minors' account opened with mothers as guardians are not allowed to be overdrawn and that they always remain in credit. By not allowing the account to be overdrawn the minor's capacity to enter into contract would not be a subject matter of dispute. RBI has also advised banks that in cases where the amount involved are large, and if the minor is old enough to understand the nature of the transaction, the banks could take his acceptance also for paying out money from such account. The account of minor can be opened in any one of the following modes.

i) By a natural guardian, i.e., father or mother on behalf of the minor. ii) By a natural guardian, i.e., father or mother in the joint names of

himself/herself and the minor, payable to either or survivor; iii) By a person in the name of any minor of whom he or she is the guardian

appointed by a competent Court under any enactment for the time being in force;

iv) By a minor of age 10 and above in his/her single name to be operated upon by himself/herself, provided he/she can put uniform signatures.

Funds for opening Account: Guardian can open accounts from own funds. If guardian’s intention is to utilize the money for the benefit of the minor and to eventually make the money lying to the credit of the account available to minor or his/her attaining majority, in that case from the date of the minor attaining majority the account is to converted as a joint account (either or survivor) and can be operated upon by the minor. In a case where the funds with which the account in the name of the minor is to be opened devolve upon him/her by gift, inheritance etc., or where the bank, at its discretion, to consider it necessary, the account in the name of the minor will be


36

permitted to be opened only by a guardian appointed by a Court and the guardianship certificate must embody an express authority to open and operate an account with the Bank. On attaining majority, the erstwhile minor has to confirm the balance in his/her account and if the account is operated by the natural guardian / guardian, fresh specimen signature of erstwhile minor duly verified by the natural guardian are obtained and kept on record for all operational purposes. According to age accounts of minor can be classified in to three categories. 1. Below 10 years of age. 2. Between 10 to 14 years of age 3. 14 years of age and above A legal guardian appointed by a Court to deal with the property of a minor can open an account in the name of the minor. Legal guardian cannot join as an accountholder in his individual capacity with the minor. All operations in such an account have to be for and on behalf of the minor in the capacity of a legal guardian. Banks do not open accounts in the names of two or more minors either jointly between themselves or with the natural guardian/s or with any other person/s. Third party cheques are not collected for the credit of any type of account in the name of a minor either solely in his/her name or jointly with his/her guardian/s or other person/s. Essential requirements for opening Minor’s Account: For opening the account of a minor bank requires:

• Minor’s date of birth. The birth date of is ascertained and verified from the Municipal Birth Certificate or Birth Certificate issued by the School Authority where the minor is studying.

• Recording the date of birth and date of maturity in the Account opening form, specimen signature card and the ledger folio. Since banks have computerized their operations the date of birth should be recorded in the records maintained on computer.

• Date of birth to be recorded in the passbook and in all types of account such as Current, Savings Bank, Term Deposit Receipt in case of Term Deposit Accounts or Recurring Deposit maintained by the minor. On the minor attaining majority necessary steps are taken to ensure that the account is properly reconstituted if the account of a minor is held jointly with guardian/s or other person/s.

(1) Minors below 10 years of age: Savings bank account can be opened in the name of a minor below 10 years of age in his own name, but the minor cannot


37

operate the account. The account is to be operated by father as natural guardian or mother as guardian or by both of them. For all practical purposes, such accounts are treated as a single account. The date of birth of minor is recorded on the application form. Signatures of the guardian obtained even though he/she is not a joint accountholder. In such cases, the account is styled as: "Master ABC (Minor) through his Father and Natural Guardian Mr.XYZ." The mode of signatures in such account is as under: For Master ABC XYZ Father and Natural Guardian and/or Mother and Natural Guardian Signatures of the natural guardian are obtained even though he/she is not a joint accountholder. On attaining majority, the erstwhile minor is required to confirm the balance in his/her account and if the account is operated by the natural guardian / guardian, fresh specimen signature of erstwhile minor duly verified by the natural guardian/ guardian is obtained and kept on record for all operational purposes. (2) Minor between the age of 10 to 14 years: A minor of the age of 10 years and above can open Savings Bank and all types of term deposit accounts in his sole name and can also operate the account. Many banks have fixed a limit of maximum balance in accounts of minors, between the ages of 10-14 years. 3) Minor of 14 years of age and above: There is no limit to maximum balance for savings bank accounts of minors’ above-14-years. A minor of 14 years of age and above can also open current account in his sole name, subject to following terms and conditions:

• The minor should be able to read and write and in the opinion of the bank officials is capable of understanding what he/she does.

• The account opening form, the application form, specimen signature card etc., to be signed by the minor in the presence of a branch official and the minor should be properly introduced by the guardian.

Joint Accounts of Minors: Joint account in the names of two or more minors either jointly between themselves or with the natural guardian/s or with any other person/s is not opened. Account of Minor by legal guardian: A legal guardian authorized by an order from the Court to specifically deal with the property of a minor, can open an account in the name of the minor. All operations on such an account by the legal guardian has necessarily to be for and on behalf of the minor in the capacity of a


38

legal guardian. A legal guardian cannot open account jointly with the minor in his personal capacity. Accounts of Hindu minors where persons other than the guardians place deposits: Deposits in the name of a Hindu minor placed by any person other than the natural guardian, as guardian, is accepted only on the condition that the deposit would be payable to the minor on attaining majority. Bank exercises proper care in such accounts. On minor’s attaining the age of majority i.e. 18 years: On attaining the majority the old Savings Bank account is closed and a new account is opened wherein the name of the person who has attained majority is included as one of the joint Account Holders and fresh operational instructions, specimen signatures etc., are obtained. 2. Accounts of Married Women: Marriage of woman does not affect any right of her separate property (Streedhan). Section 14 of the Hindu Succession Act, 1956 provides that property of a Hindu female shall be her absolute property. A Married woman has a legal entity of her own, which is separate from her husband. According to the Hindu Marriage Act 1956,Hindu married women can have separate property in her own name. A married woman can open accounts in her own name, operate freely and enjoy overdraft limit as long as the liabilities are met out from her own property. At the time of opening the account in the name of a married woman the name and occupation of her husband, details of his employer is obtained and recorded. Some banks also obtain the maiden name of the married women. A married woman can make her husband liable for the overdraft enjoyed by her

• If she borrows money for the necessities of her life,

• If she borrows for the necessaries of her house hold,

• If she acts as agent of the husband. The status of the married women is governed by the following Acts:- (a) Hindu Succession Act, 1956 (b) Married Women's Property Act, 1874 (c) Indian Succession Act, 1925 3. Account of Pardanasheen Women: A pardanasheen women is a women who puts a veil and does not show her face to people /outsiders and observes complete seclusion. Even they do not pose for photographs. Contract entered into by a Pardanasheen Woman is not a contract free from all defects. Banks generally refuse to open accounts in the name of Pardanasheen Women, because identity of Pardanasheen Women cannot be ascertained as she observes complete seclusion.


39

However, if under special circumstances, such an account is opened, two respectable persons known to the branch invariably attest the signatures on the account opening form and on the withdrawals by withdrawal slips. 4.Accounts of the disabled persons with autism, cerebral palsy, mental retardation and multiple disabilities: Banks can open account by the legal guardian and permit them to operate the account as long as he remains the legal guardian appointed by the Local Level Committees set up under the “Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999”. Vide circular No. RBI /2009-10/142 DBOD.No.Leg.BC. 37 /09.07.005/2009-10 dated September 2, 2009 Reserve Bank has advised banks to rely upon the Guardianship Certificate issued either by the District Court under Mental Health Act or by the Local Level Committees under the above Act for the purposes of opening / operating bank accounts. Banks have also been advised to give proper guidance so that the parents / relatives of the disabled persons do not face any difficulty in this regard. Appointment of guardian: As per the Act, “a parent or relative of a person with disability may apply to the Local Level Committee for appointment of a guardian/or a person with disability. A registered organization can also make such an application with consent of the natural guardian of the disabled person. The Local Level Committee will examine whether the person with disability needs a guardian and for what purpose and also lay down the duties of the guardian. The guardian will be responsible for the maintenance of the person with disability.” 5. Accounts opened by Illiterates: Those who are unable to sign but use thumb impression are illiterates for banks. Illiteracy does not make a person incompetent to contract. Therefore an illiterate person can open and operate a bank account. However, banks do not open current account of illiterate person. For opening an account the person has to come to bank personally along with a witness who is known both to the depositor and to the bank. While opening an account banks obtain left hand thumb impression of illiterate men and right hand thumb impression of illiterate female. The thumb impression is obtained in the presence of a person known to the bank and the depositor. The thumb impression is to be witnessed by a customer of the bank and noting to this effect is done (left/right thumb impression of Mr./Ms. affixed in my presence). Photograph of the account holder is obtained which is affixed on the ledger folio, account opening form and pass book.


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Normally, no chequebook is issued to the account holder. The account holder has to come to the bank for operating the account. After proper identification banks pay the amount to the account holder. All other terms and conditions applicable for opening an account also apply in this case. Banks are required to explain the terms and conditions governing the account to the illiterate. 6. Opening of accounts by a person who cannot sign due to loss of both hands: A handicapped person is not barred from opening an account. Bank branches entertain the requests from handicapped persons for opening their accounts. After observing all account opening norms and obtaining the photograph of the handicapped person, bank opens account. IBA has advised banks “In terms of the General Clauses Act, the term “Sign” with its grammatical variations and cognate expressions, shall with reference to a person who is unable to write his name, include “mark” with its grammatical variations and cognate expressions. The Supreme Court has held in AIR 1950 – Supreme Court, 265 that there must be physical contact between the person who is to sign and the signature can be by means of a mark. This mark can be placed by the person in any manner. It could be the toe impression, as suggested. It can be by means of mark which anybody can put on behalf of the person who has to sign, the mark being put by an instrument which has had a physical contact with the person who has to sign”. In case the person has lost both hands bank obtains his/her toe impression (either right or left) on the relevant forms in presence of bank officials and a witness. As an alternative, the person is also advised to give a suitable power of attorney to a person of his/her confidence. 7. Opening of Accounts by visually impaired (blind) person: A blind person is legally competent to enter into a contract or to open and operate an account. The risks in case of such an account arises due to the physical inability of the person to see. For opening an account, the person has to personally come to the bank along with a witness known to both the depositor and the bank. While there is no legal provision for the appointment of a guardian of a blind person, banks prefer a properly constituted attorney to operate the account on behalf of the accountholder. Attested copies of the photograph of the blind person are obtained (attested by someone well known to the branch) and a copy of each is affixed on the account opening form/specimen signature card, ledger folio and pass book. Both the signature and thumb impression of the blind person are obtained on the specimen signature card along with the signatures of witnesses known to the bank. A rubber stamp indicating that the accountholder is a blind customer, is affixed on the account opening form, specimen signature card, ledger folio, pass book, paying- in-slip, withdrawal form, chequebook etc. This enables bank


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officials in exercising caution in the transactions with the blind customers. Bank is required to explain the terms and conditions governing the account to the blind person. In general the blind customers are given special attention whenever they come to the bank. Precautions:

• While opening an account the blind person has personally to come to bank.

• He can open all types of accounts either singly or jointly with any other person, which he considers to be reliable.

• While opening the account, rules, regulations, terms and conditions are read out and explained to him in the presence of a witness and the signature of the witness of having done this is obtained on the account opening form.

Operations in accounts by blind persons:

• Banks allow the next of kin of a blind customer to operate his account as a guardian or a representative of the blind person.

• Generally no chequebook is issued. Where chequebooks are issued, the blind person is advised to issue only crossed and order cheques and not to issue bearer cheques so that payees could always be traced.

• Cash payments to blind person are made in person in the presence of a witness (preferably an account holder) who signs the cheque/withdrawal form/voucher etc., as witness. Branch official, other than paying cashier, also signs as a witness.

• Cash deposited by the blind customer is accepted in the presence of a witness (an account holder or an officer of the branch other than the receiving cashier) and the amount deposited is informed orally to him. This fact is noted on the pay- in -slip/voucher and under signature of a witness.

• The blind account holder is required to bring passbook for withdrawal and the entries and balance are read out to him in confidence.

RBI guidelines for providing banking facilities to Visually Impaired Persons: RBI has advised banks to offer banking facilities including cheque book facility / operation of ATM, Net banking facility, locker facility, retail loans, credit cards etc. to the visually challenged without any discrimination as they are legally competent to contract. In the Case No. 2791/2003, the Honourable Court of Chief Commissioner for Persons with Disabilities had passed Orders dated 05.09.2005 that banks should offer all the banking facilities including cheque book facility, ATM facility and locker facility to the visually challenged and also assist them in withdrawal of


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cash. In the above Order, the Honorable Court has observed that visually impaired persons cannot be denied the facility of cheque book, locker and ATM on the possibility of risk in operating / using the said facility, as the element of risk is involved in case of other customers as well. 8. Accounts by Old & Incapacitated Persons: It is possible that with aging or due to sickness or a person becoming is incapacitated he /she is unable to operate account and is not willing to open and operate joint accounts. RBI has advised banks to extend the facility offered to sick/old/incapacitated pension account holders to non-pension account holders also. Types of sick / old / incapacitated account holders: Sick / old / incapacitated account holders fall into following categories:

(a) An account holder who is too ill to sign a cheque / cannot be physically present in the bank to withdraw money from his bank account but can put his/her thumb impression on the cheque/withdrawal form

(b) An account holder who is not only unable to be physically present in the bank but is also not even able to put his/her thumb impression on the cheque/withdrawal form due to certain physical incapacity.

(c) Operational Procedure: With a view to enabling the old / sick account holders operate their bank accounts, banks may follow the procedure as under: - (a)Wherever thumb or toe impression of the sick/old/incapacitated account holder is obtained, it should be identified by two independent witnesses known to the bank, one of whom should be a responsible bank official. (b)Where the customer cannot even put his / her thumb impression and also would not be able to be physically present in the bank, a mark can be obtained on the cheque / withdrawal form which should be identified by two independent witnesses, one of whom should be a responsible bank official. (c)The customer may also be asked to indicate to the bank as to who would withdraw the amount from the bank on the basis of cheque / withdrawal form as obtained above and that person should be identified by two independent witnesses. The


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person who would be actually drawing the money from the bank should be asked to furnish his signature to the bank.

9.Accounts of Lunatics: As per Contract Act, a person of unsound mind is not capable of entering into a valid contract. Banks therefore, do not knowingly open an account in the name of a person of an unsound mind. In case of an existing account, as soon as the information about insanity of the accountholder’s is received, banks suspend / stop operations in the account and do not pass cheques. When the proof of customer's sanity is received, operations in the account are resumed. An account in the name of a lunatic person can be opened or operated only by a guardian appointed by a competent Court and the balance of such accounts is paid to the person appointed by the competent court. 10.Accounts of Insolvents: A person when fails to pay his debts is declared insolvent by the court. As soon as a person is declared insolvent, operations in his existing account is stopped forthwith and balance of such accounts are disposed as per the instructions of the Official Receiver. Insolvency of an accountholder revokes the bank's authority to pay the cheques drawn by him and the balance at credit of the account and the entire estate of the insolvent vests in the official receiver appointed by the court. Declaration of insolvency renders invalid all the transactions entered into subsequently and already entered into within six months. Banks do not open insolvent’s account nor advance money to an un-discharged insolvent. During the pendency of insolvency proceedings, no creditor can have any remedy against the property of the insolvent in respect of his debts or commence any suit or legal proceedings against the property without the leave of the Court. Insolvency of an agent does not affect the relationship of the principal and agent. 11. Accounts of Drunkards: Intoxicated person cannot take a rational judgment about his interest. State of intoxication renders a person incapable of understanding the nature of his action. Therefore, the law provides that all the contracts made by a person in a drunken state are void. When a drunkard approaches the branch of a bank for opening an account, the branch if satisfied that the person is incapable of entering into a contract refuses to open the account as a precautionary measure. In case of an existing account, payment of a cheque to a drunkard is done after taking proper witness.


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12. Accounts of Hindu Undivided Families (HUF): The Hindu Succession Act 1956 governs HUF. The HUF carries out ancestral business and possesses ancestral properties. As per Hindu Law two schools of thought, Dayabhaga and Mitakshara govern Hindu undivided family. In west Bengal Dayabhaga is followed and in the rest of the country Mitakshara is followed. In Dayabhaga the father acquires absolute right and sons do not acquire any right by birth in Mitakshara a male member acquires the right by birth. Female members are not co-parceners except in Tamil Nadu and Andhra Pradesh. The eldest male member is called as a Karta and all other male members are called as co-parceners. The right to manage HUF property vests in the 'Karta' of the family. Karta is either the father or the senior most male member of the family. All other male members are called coparceners. In the interest of the family and family business, only the Karta can create a charge over the ancestral property. However, he cannot make a contract, which binds the other member personally. Other members are responsible to the extent of their share in the ancestral property. HUF is not dissolved In the event of death of one of the members of the joint Hindu family. It differs from the partnership firm as on the death of one of the partners, the firm is dissolved. On the death of karta the senior most co-parcener becomes karta. A coparcener continues to be a member of HUF, even after his migration outside India and acquiring status of NRI or taking citizenship of another country. If the Karta himself migrates, an alternative Karta of the HUF is appointed by the HUF with consent from all coparceners. Opening of Account of HUF: The account is opened in the name of the Karta and family business. The Karta and all the adult members of the HUF are required to sign the account opening form. Banks do not open Savings Bank account of HUF engaged in trading and business activities. Operations in account: The operations in the account are normally restricted to Karta of the family. The Karta can appoint any of the adult coparceners to operate the bank account as 'Manager' if HUF carries out business at various places through its branches. HUF accounts can also be operated by coparcener and /or other adult members of HUF also, against a letter of authority and against a stamped letter of indemnity cum undertaking give by the Karta. Since female members in an HUF are not coparceners, they cannot be authorised to operate bank account. If there is no adult coparcener, a mother is allowed to manage the property of HUF and operate the


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account. 13. Account of Sole Proprietary Concerns: Banks do not open savings bank account in the name of a proprietorship firm but open current account in the name of the sole proprietary concerns. Accounts in the name of a sole proprietary concern are treated like individual accounts. The account can be operated either by the proprietor himself or by a person duly authorised to operate the account on his behalf. Banks exercise caution while accepting cheques drawn in favour of the sole proprietary concern and deposited in personal account of the proprietor. When the sole proprietor of the firm deposits cheque payable to the firm for credit of his personal account bank obtains a declaration from him to the effect that he is the sole proprietor of the firm. 14. Accounts of Unincorporated Associations: Banks open accounts of unincorporated associations and clubs started for purposes of sports, recreation, promotion of fine arts, education etc. Accounts are opened for reliable ad reputed parties. These unincorporated associations have no legal entity. While opening the account in the name of the association, bank makes detailed inquiry into the existing rules, regulations and byelaws governing such associations. All usual formalities for opening the account are adhered by the bank viz. obtaining account-opening form, specimen signature card etc. Bank also obtains certified copy of the resolution passed by the Governing Body or the Managing Committee of the club/ association for opening of the account in the bank and names of the office bearers authorised to open and to operate the account on behalf of the club/ association duly certified by the Chairman are obtained. Banks generally do not permit account to go into debit, even for temporary period. Bank does not collect cheques in the personal accounts of the office- bearers, payable to associations. 15. Accounts of registered societies, clubs and Associations: A club or a society gets legal entity only when it is incorporation under Company’s Act, 1956 or under Cooperative Societies Act, 1860.Byelaws of the society, clubs, and association contain rules, regulations or conduct and activities of the association. While opening account banks obtain:

• Copy of the byelaws;

• Copy of resolution passed by the managing committee regarding opening and conduct of account,

• Certificate of registration in original,

• A list of the Managing Committee members


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• Copies of resolutions electing them as Committee members duly certified by the Chairman Bank keeps a copy of the above-mentioned document for its record.

16. Account of Partnership Firms: According to Section 4 of the Indian Partnership Act, a partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The Supreme Court has held that the word "persons" in Section-4 contemplates only natural or artificial persons i.e., legal persons. Since a firm is not a person, is not entitled to enter into partnership with another firm or Hindu undivided family or individual. Therefore, banks do not open account where a firm is a partner in another firm. As Joint stock companies and statutory bodies constitute "artificial or legal persons" therefore, they can be partners in a partnership firm. As per the Indian Partnership Act, minimum number of partners can be two and maximum twenty. The number of partners is restricted to 10, if the partnership firm carries out business of banking. Minors can be admitted as partner only to the benefits of the partnership. Registration of partnership firm: A partnership firm can be registered with Registrar of Firms. However, as per law, it is not compulsory to register a partnership firm. Non-registered partnership firm have certain disabilities. Such firms cannot sue others to enforce a right arising out of a contract. A suit filed by an unregistered partnership firm is not maintainable, even after its subsequent registration. Even partners of an unregistered firm cannot sue other partners or his firm, for their rights. Opening of Account: A partnership firm can open all types of accounts except savings bank account. Bank opens account of a partnership firm in the name of the firm and not in the names of partners individually or jointly. The account opening form is signed by all the partners in their individual capacity as well as in the capacity of a partner to ensure joint and several liabilities. While opening the account banks verify the partnership deed to examine whether any clause of the deed is detrimental to the interest of bank. Since bank would not like to be bound by the terms of the partnership deed, banks do not accept the partnership deed even if offered. In case of registered firm, banks obtain registration certificate. The account is opened in the name of the firm and all the partners are required to sign account opening form. Operations in account: Bank obtains operational instructions i.e. who will operate


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the account and how it is to be operated. In case a minor is also a partner in the firm his birth certificate is obtained to ascertain the date of birth, which is recorded in the account opening form. Who can operate?

• All partners jointly

• One of the named partners

• Two / three of the named partners

• A third party under a mandate letter or a power of attorney signed by all the partners.

A partner authorized to operate the firm's account cannot delegate his authority to another person unless all other partners agree. The authority given to operate the account can be withdrawn by any of the other partners including dormant or sleeping partner by giving notice to the bank. Each partner, whether he/she is operating the account or not, has powers to countermand payment of the cheques drawn by another partner or by an attorney on behalf of the firm. Partnership firms with illiterate partners: Current accounts of partnership firms, where a partner is illiterate and affixes thumb impression, can be opened provided a Magistrate attests the thumb impression affixed on the account opening form. Implied authority: A partner acts as an agent of the firm for the purpose of the business of the firm. He binds the firm and also other partners by his acts. An authority to bind the firm by his acts is called the implied authority of a partner. Operations in the accounts: Without proper inquiry with the other partners, bank does not accept cheque drawn in favour of the firm for credit to the personal account of a partner. Failure to make proper inquiries would deprive the bank of the protection afforded under Section-131 of the Negotiable Instruments Act on grounds of negligence. Cheques payable to a partner are not be credited to the firm’s account without proper inquiry being made with the other partners. Retirement of a partner: On notice of retirement of a partner, the bank closes the existing account and opens a new account of the firm with the remaining partners or along with the new partner if admitted to the new firm. Death of a partner: Death of a partner dissolves the partnership. However, for the purpose of winding up of the firm, the bank may allow the surviving partner(s) to operate the firm's account, if the account is in credit. Cheques drawn by a


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partner before his death and presented for payment are honoured after obtaining confirmation of the surviving partners. Dissolution of a partnership firm: Dissolution of a firm amounts to the breaking up of relation of partnership between all the partners. In the event of dissolution banks do not permit operations in the account. A partnership firm may be dissolved by any of the following modes

(a) By mutual agreement between all the partners. (b) By notice of dissolution in case of partnership at will. (c) By operation of law or compulsory dissolution of the firm. (d) By happening of certain contingencies such as death or insolvency of a partner. (e) Dissolution by Court of Law in cases like insanity, permanent incapacity, misconduct of a partner affecting business etc.

17.Accounts of Co-Operative Societies & Co-Operative Banks: Co-operative institutions are authorised to open accounts under the Cooperative Societies Act only with banks, which are recognised for the purpose. Our Bank has been recognised for accepting funds of co-operative societies. It is, however, for the co-operative society or the co-operative bank to obtain permission from the Registrar of Co-operative Societies in the State concerned to invest their funds in the Bank. The bank is not affected by the omission on the part of the society or the co-operative bank to obtain the Registrar's permission to open the account or even to observe the limits imposed on it by the Registrar on the amount and period of the deposit lodged with the Bank. These are matters of internal routine of the co-operative institution, whose compliance can be presumed by the Bank. While opening the account, the branch should call for the following documents: (i) Certificate of registration of the society or the Bank; (ii) Certified copy of the byelaws of the society or the Bank; (iii) Resolution of the managing committee appointing the Bank as its banker and stipulating the conditions for the conduct of the account. (iv)List of members of the managing committee with the copy of the resolution electing them to the committee. In case of accounts of co-operative banks, bank obtains a copy of the licence issued by RBI. 18. Accounts of Joint Stock Companies: A joint stock company is constituted under company Act 1956. Company is an Artificial person’ with perpetual succession. It is a voluntary association of persons formed for some common purpose with capital divisible into parts known as share. It has separate legal entity


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and corporate personality. It is separate from the shareholders constituting it. The company can own assets; contract debts and can sue and be sued in its own name. The property of the company is not the personal property of its shareholders nor the company's liability is the liability of its shareholders/directors, unless they consent to be personally liable for the company's debts. Company can be classified into three categories: 1. Public Ltd. Co.: It can issue shares to public. Minimum number of shareholders required is 7. There is no restriction in the maximum number of shareholders. Shares can be freely transferred. Minimum number of directors required is 3. Requires certificate of commencement of business. 2. Private Ltd.Co.: It cannot issues shares to public. Shares are not freely transferable. Minimum number of shareholder required 2 and maximum number of share holders can be 50. Minimum number of directors required 2. It does not require certificate of commencement of business. 3. Government Co.: A company where not less 51% of the share capital is held by the government. Depending upon the liability of shareholders the Company it may be limited or unlimited. Documents required for opening an account: 1. Account opening form 2. Certified copies of memo of association and articles of association 3. Copy of certificate of incorporation 4. Certificate of commencement of Business 5. Up-to-date list of directors with name and address 6. Certificated copy of a resolution of the Board of directors for opening and conducting the account. Documents obtained by bank: For opening an account of a joint stock company bank obtains following documents: (i) Certificate of incorporation: The Registrar of Joint Stock Companies issue this certificate. It is a conclusive proof that all the requirements under the Companies Act have been complied with. (ii) Certificate of commencement of business: This certificate is essential in the case of public limited companies. A public limited company cannot borrow until this certificate is obtained. (iii) Memorandum and Articles of Association: The bank obtains a certified copy of the Memorandum and Articles of Association of the company to satisfy that the conduct of the account is in conformity with the provisions. Certificates signed by


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the Chairman or one of the authorised directors of the company stating that the Memorandum and Articles of Association are true and up-to date. (iv) Board Resolution: A copy of the resolution of the Board of Directors of the company, certified as true by the Chairman of the meeting, requesting the Bank to open an account in its name and specifying the instructions regarding the conduct thereof, is obtained. Instructions in the resolution regarding conduct of the account have to be in strict conformity with the provisions of company’s Articles of Association. The resolution is to be countersigned either by the company's secretary or any of the other directors. (v) List of the present directors: A list of the present directors of the company is obtained under the signature of the Chairman, accompanied by a certified copy of the resolution of the general body of the shareholders appointing them as directors. (vi) Reference to the company's previous bankers: Banks also ascertain the names and addresses of the company’s previous bankers, if any, and get a report on the company and its directors and keep it along with the account opening form. Memorandum of Association: The memorandum of association contains name and address of the registered office of the company, name and addresses of the directors, objectives and powers of the company. Any act done or contract entered into by the company, which is outside the scope of these objectives becomes ultra vires (i.e. beyond the powers of the company) and, therefore, is not binding on it. The Memorandum and Articles of Association of the company is studied to find out the extent of the powers of its directors, its powers to borrow and mortgage property or to give guarantees and the provisions relating to the conduct of its bank accounts Articles of Association: The Articles of Association contain the rules regulations regarding company's internal affairs. Conversion of cheques payable to companies: Cheques payable to or endorsed by limited companies should not be collected for the personal accounts of their directors, managers and other employees. Ordinarily, cheques payable to limited companies are to be credited to company’s account. Insolvency of a director: In case one of the directors becomes insolvent or an un-discharged bankrupt, he cannot act as a director of a limited company. The bank does not permit operations in the account by the insolvent director.


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Winding up of a company: Winding up of a joint stock company is deemed to have commenced from the date on which petition for such winding up is presented, or in the case of voluntary winding up from the date on which an extra ordinary resolution to this effect is passed. With commencement of winding up of a joint stock company, the Directors cease to have powers to operate on the account and the authority stands vested with the liquidator appointed for the purpose. Therefore banks do not pay cheques signed by the directors after the commencement of the winding up proceedings. Liquidator should furnish evidence of his appointment by sending a certified copy of the Court Order, or a certified copy of the resolution of the general body in case of a voluntary winding up. If required, he may be furnished with details of the company's accounts, securities etc., and should be allowed to operate upon the accounts of the company only for the purpose of winding up of its affairs. 19. Accounts of Private Companies: A private limited company is a company, which have a minimum 2 and maximum 50 shareholders. Shares of these companies are not sold in the public and cannot be transferred. Banks are cautious while opening accounts of Pvt. Ltd.Co. Bank obtains all documents as required while opening accounts of a joint stock company. 20. Accounts of Trusts: As per Sec.3 of Indian Contract Act, 1882 “A trust is an obligation annexed to the ownership of property, and arising out of a confidence in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.” Bank opens trust accounts for good parties. A trust can be public or private. All public trusts are required to be registered with the Charity Commissioner under Public Trust Act of the respective state. Before registering a public trust, the office of the Charity Commissioner makes necessary enquiries regarding the trust, its trustees, the mode of succession of trusteeship etc., and after proper enquiries makes entries in the register, which are final, conclusive and are binding on all concerned. Banks open trust accounts after taking all precautions. While opening account of a trust bank obtains

• Copy of constitution of the trust

• Trust deed if available,

• Certificate of registration and/or a certified copy of the entry of the public trusts register

• Public Trust Register No

• A list of the current trustees and the authority appointing them as trustees.

• The necessary resolution passed by the trustees for opening the account with the bank.


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• Certified copy of the resolution signed by all the trustees in regard to the conduct of the account.

Trusts which have no constitution, instruments of trust or scheme: While opening accounts of such trusts bank obtains following documents: • A certificate of registration issued by the office of the Deputy/Assistant Charity Commissioner (Where it is so possible, under the relative law). • A certified copy of the latest entry in the public trusts register (Public Trust Registration), which shows the name of the trust, the Public Trust register No of the Trust, at which it is registered and name/s of the trustee/s. • A declaration and an indemnity from are obtained all the trustees. • A resolution passed by the trustees relating to the opening of the account Operations: Trust accounts must be opened and conducted strictly in accordance with the terms of the trust deed. All the trustees are required to act jointly by the persons so authorised by the registered trust deed. Trustees have no powers to delegate their authority to one or more unless the power of delegation is authorised by the trust deed or is in accordance with the directions of the court on an application made by the trustees. Trustees have no implied authority to borrow or pledge trust property, unless so provided for in the trust deed. Death of a trustee: On the death of one of the trustees, the trust property passes to the other trustees as per the provisions of the trust deed. If the deceased is the sole trustee, his executor has no right to recover the trust money. The executor, however, has the right to appoint a new trustee, provided the deceased trustee has in his will specifically authorised such an appointment. 21. Accounts of Religious and Charitable Trusts: To regulate public religious and charitable trusts some States have passed Acts. These charitable trusts are registered with the Charity Commissioner or the Assistant Charity Commissioner of the region concerned. A Certificate of registration is issued to these trust by the authorities. Mostly these trusts do not have a properly written trust deed. Bank opens account of religious and charitable trusts on merits and on being satisfied as to the integrity of the trustees and their status. Opening and operations of account: While opening account bank obtains following documents in addition to account opening form duly signed by the trustees. • A resolution specifying the name of the bank passed in a proper meeting held by all the trustees.


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• Indemnity signed by all the trustees, indemnifying the bank for having allowed operations on the trust account. • Banks do not permit operations in the account by one person. • Reasonable number of members is required for opening and operating the account. • If the number of trustees is larger, then the number of person operating the account has to be large. • Bank periodically obtains confirmation of balance in the account, signed by all the trustees. • Wherever possible, order or direction from the Charity Commissioner is obtained, permitting the bank to allow operations on the trust account in the manner approved by the trustees. 22. Provident fund Accounts: Provident fund accounts are treated as trust accounts. In case a provident fund is recognised by the income tax authorities, a certificate to that effect issued by the concerned Commissioner of Income Tax, should be obtained for registration with the Bank. It should be recorded in the Power of Attorney Register. This certificate is to be obtained in addition to all other credentials mentioned earlier. 23. Accounts of Executors and Administrators: Executors and administrators are persons appointed by a person through a will to manage the affairs of his estate after his death. The person appointing an executor in his will is known as testator. There can be more than one executors or administrators. Sec.311 of Indian Succession Act, 1925 deals with the powers of several executors or administrators exercisable by one. If the person has not appointed any one to manage the affairs of his estate after his death court appoints administrator for the purpose. An administrator drives power to deal with the estate of the deceased from the letters of administration issued by the Court. The estate of the deceased vests in the executor from that date of letters of administration. Banks generally do not permit an executor to deal with the moneys or securities of the deceased until he produces the probate as the evidence for his title. In law, executors and administrators constitute a single person. In the absence of any mandate to the contrary, either or any one of the two or more executors or administrators can open and operate the account and deal with the estate of the deceased without a written authority from the others. Opening of Account of Executors and Administrators:• Bank obtains account opening form duly signed by all the executors or administrators and obtains clear instructions as to the manner in which the account will be operated.


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• Bank also obtains copy of probate or letters of administration in original for scrutiny and registration in their books. • Bank ascertains identity of executors or administrators for their satisfaction. (KYC norms) An executor or administrator has no right to delegate his authority to an outside party, not being co-executor or administrator. Any one of the executors or administrators can countermand the actions of the others. Cheques drawn or payable to the executor or administrator's account are not collected for credit of their personal accounts without inquiry. 24. Accounts of Liquidators: A company can go into liquidation either voluntary or by the orders of court. In case a company goes in to liquidation by the orders of court, it appoints a liquidator Under Section 552 of the Companies Act, 1956. The liquidator so appointed by courts is known as official liquidator. When a company goes into voluntary liquidation, it appoints liquidators at its extraordinary general meeting convened for the purpose. Official liquidators have to deposit the moneys only into the public account of the Government of India with the Reserve Bank of India. Official liquidator cannot open accounts with scheduled banks. In case of voluntary winding up, authority to operate account by the liquidator is passed in the general meeting. Opening of account: While opening account of liquidators bank requires:

• True copy of the resolution passed in the extraordinary general meeting.

• The resolution has to be certified by the Chairman of the extraordinary general meeting

• Signature of the liquidator is required to be verified by one of the authorised officials of the company concerned.

• Liquidators cannot delegate their powers to third parties

• The account is styled as "The Liquidation Account of ........"(name of the company).

26. Accounts of local bodies: Banks open accounts of local bodies include Municipal Corporation, Panchayat, Board etc., created by special act of the parliament or legislative Assembly. a) Accounts of Village Panchayats: Banks open accounts of village panchayats/district/taluka after getting a copy of the resolution passed by the Panchayat of the Village or Taluka of the District concerned. In various states the village panchayat are governed by the Panchayat Raj Acts passed by the respective state governments.While opening such accounts banks


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refer to the Act for ascertaining the nature of transactions permitted by the Act. The accounts of village panchayats are operated only bythe President or Sarpanch. The Vice-President (Vice Sarpanch) of thePanchayat can operate the account only in the absence of the President (Sarpanch) only after the written authority of the sarpanch. Accounts of village panchayats/district/taluka are opened and styled as "President (or Sarpanch).........Gram/Panchayat". b) Accounts of Local Authorities/bodies: Banks open accounts of local authorities like municipalities, district boards, port trust, state financial corporations and such bodies created by statute. These are considered as local bodies or quasi- government institutions. While opening accounts of such authorities banks go through the municipal enactments and regulations. Transactions in account are permitted strictly in accordance with the statutory provision. Accounts with Similar Names: Where there are two accounts either in the same name/s or with great similarity in their titles, caution should be noted on both the ledger headings with the word "CARE" : Similar account in the name ........ Page... " Giving cross-references. If it comes to the notice of the branch that the client is maintaining an account with another branch of the Bank, the fact should be noted in the ledger heading with a view to enable the branch or branches to exchange any useful information, which may come to its notice about the client.


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5. Deposit Accounts

Traditionally banks in India have four types of deposit accounts, namely Current

Accounts, Saving Banking Accounts, Recurring Deposits and, Fixed Deposits.

However, in recent years, due to ever increasing competition, some banks have

introduced new products, which combine the features of above two or more types

of deposit accounts. These are known by different names in different banks, e.g 2-

in-1 deposits, Smart Deposits, Power Saving Deposits, and Automatic Sweep

Deposits etc. However, these have not been very popular among the public.

Current Accounts: Current Accounts are basically meant for businessmen and are

never used for the purpose of investment or savings. These deposits are the most

liquid deposits and there are no limits for number of transactions or the amount of

transactions in a day. Most of the current account are opened in the names of firm

/ company accounts. Cheque book facility is provided and the account holder can

deposit all types of the cheques and drafts in their name or endorsed in their favour

by third parties. No interest is paid by banks on these accounts. On the other

hand, banks charges certain service charges, on such accounts.

Features of Current Accounts:

(a) The main objective of Current Account holders in opening these account is to

enable them (mostly businessmen) to conduct their business transactions smoothly.

(b) There are no restrictions on the number of times deposit in cash / cheque can be

made or the amount of such deposits;

(c) Usually banks do not have any interest on such current accounts. However, in

recent times some banks have introduced special current accounts where interest

(as per banks' own guidelines) is paid

(d) The current accounts do not have any fixed maturity as these are on continuous

basis accounts


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Savings Accounts: These deposits accounts are one of the most popular deposits

for individual accounts. These accounts not only provide cheque facility but also

have lot of flexibility for deposits and withdrawal of funds from the account. Most

of the banks have rules for the maximum number of withdrawals in a period and

the maximum amount of withdrawal, but hardly any bank enforces these.

However, banks have every right to enforce such restrictions if it is felt that the

account is being misused as a current account. Till 24/10/2011, the interest on

Saving Bank Accounts was regulared by RBI and it was fixed at 4.00% on daily

balance basis. However, wef 25th October, 2011, RBI has deregulated Saving

Fund account interest rates and now banks are free to decide the same within

certain conditions imposed by RBI. Under directions of RBI, now banks are also

required to open no frill accounts (this term is used for accounts which do not have

any minimum balance requirements). Although Public Sector Banks still pay only

4% rate of interest, some private banks like Kotak Bank and Yes Bank pay

between 6% and 7% on such deposits. From the FY 2012-13, interest earned upto

Rs 10,000 in a financial year on Saving Bank accounts is exempted from tax.

Recurring Deposits: These are popularly known as RD accounts and are special

kind of Term Deposits and are suitable for people who do not have lump sum

amount of savings, but are ready to save a small amount every month. Normally,

such deposits earn interest on the amount already deposited (through monthly

installments) at the same rates as are applicable for Fixed Deposits / Term

Deposits. These are best if you wish to create a fund for your child's education or

marriage of your daughter or buy a car without loans or save for the future.

Under these type of deposits, the person has to usually deposit a fixed amount of

money every month (usually a minimum of Rs,100/- p.m.). Any default in

payment within the month attracts a small penalty. However, some Banks

besides offering a fixed installment RD, have also introduced a flexible / variable

RD. Under these flexible RDs the person is allowed to deposit even higher amount

of installments, with an upper limit fixed for the same e.g. 10 times of the

minimum amount agreed upon.

These accounts can be funded by giving Standing Instructions by which bank

withdraws a fixed amount on a fixed date of the month from the saving bank of the

customer (as per his mandate), and the same is credited to RD account.


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Recurring Deposit accounts are normally allowed for maturities ranging from 6

months to 120 months. A Pass book is usually issued wherein the person can

get the entries for all the deposits made by him / her and the interest earned.

Banks also indicate the maturity value of the RD assuming that the monthly

instalents will be paid regularly on due dates. In case instalment is delayed, the

interest payable in the account will be reduced and some nominal penalty charged

for default in regular payments. Premature withdrawal of accumulated amount

permitted is usually allowed (however, penalty may be imposed for early

withdrawals). These accounts can be opened in single or joint names.

Nomination facility is also available.

The RD interest rates paid by banks in India are usually the same as payable on

Fixed Deposits, except when specific rates on FDs are paid for particular number

of days e.g. 500 days, 555 days, 1111 days etc i.e. these are not ending in a quarter.

Fixed Deposits: All Banks in India (including SBI, PNB, BoB, BoI, Canara Bank,

ICICI Bank, Yes Bank etc.) offer fixed deposits schemes with a wide range of

tenures for periods from 7 days to 10 years. These are also popularly known as

FD accounts. However, in some other countries these are known as "Term

Deposits" or even called "Bond". The term "fixed" in Fixed Deposits (FD)

denotes the period of maturity or tenor. Therefore, the depositors are supposed to

continue such Fixed Deposits for the length of time for which the depositor

decides to keep the money with the bank. However, in case of need, the depositor

can ask for closing (or breaking) the fixed deposit prematurely by paying paying a

penalty (usually of 1%, but some banks either charge less or no penalty). (Some

banks introduced variable interest fixed deposits. The rate of interest on such

deposits keeps on varying with the prevalent market rates i.e. it will go up if

market interest rates goes and it will come down if the market rates fall. However,

such type of fixed deposits have not been popular till date).

The rate of interest for Fixed Deposits differs from bank to bank (unlike earlier

when the same were regulated by RBI and all banks used to have the same interest

rate structure. The present trends indicate that private sector and foreign banks

offer higher rate of interest.


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The earlier trend that private sector and foreign banks offer higher rate of interest

is no more valid these days. However, now a days small banks are forced to offer

higher rate of interest to attract more deposits. Usually a bank FD is paid in lump

sum on the date of maturity. However, most of the banks have also facility to pay/

credit interest in saving account at the end of every quarter. If one desires to get

interest paid every month, then the interest paid will be at a marginal discounted

rate. In the changed computerized environment, now the Interest payable on Fixed

Deposit can also be easily transferred on due dates to Savings Bank or Current

Account of the customer.


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6. Know Your Customer: Guidelines

The objective of KYC/AML/CFT guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently.

Definition of Customer

For the purpose of KYC policy, a ‘Customer’ is defined as:

• a person or entity that maintains an account and/or has a business relationship with the bank;

• one on whose behalf the account is maintained (i.e. the beneficial owner). • beneficiaries of transactions conducted by professional intermediaries, such

as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and

• any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

Guidelines

General

i. Banks should keep in mind that the information collected from the customer for the purpose of opening of account is to be treated as confidential and details thereof are not to be divulged for cross selling or any other like purposes. Banks should, therefore, ensure that information sought from the customer is relevant to the perceived risk, is not intrusive, and is in conformity with the guidelines issued in this regard. Any other information from the customer should be sought separately with his/her consent and after opening the account

ii. Banks should ensure that any remittance of funds by way of demand draft, mail/telegraphic transfer or any other mode and issue of travellers’ cheques for value of Rupees fifty thousand and above is effected by debit to the customer’s account or against cheques and not against cash payment


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iii. with effect from April 1, 2012, banks should not make payment of cheques/drafts/pay orders/banker’s cheques bearing that date or any subsequent date, if they are presented beyond the period of three months from the date of such instrument.

iv. Banks should ensure that the provisions of Foreign Contribution (Regulation) Act, 2010, wherever applicable, are strictly adhered to.

KYC Policy

Banks should frame their KYC policies incorporating the following four key elements:

a. Customer Acceptance Policy; b. Customer Identification Procedures; c. Monitoring of Transactions; and d. Risk Management.

Customer Acceptance Policy (CAP)

a) Every bank should develop a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers. The Customer Acceptance Policy must ensure that explicit guidelines are in place on the following aspects of customer relationship in the bank.

i. No account is opened in anonymous or fictitious/benami name. ii. Parameters of risk perception are clearly defined in terms of the nature of

business activity, location of customer and his clients, mode of payments, volume of turnover, social and financial status etc. to enable categorisation of customers into low, medium and high risk (banks may choose any suitable nomenclature viz. level I, level II and level III). Customers requiring very high level of monitoring, e.g. Politically Exposed Persons (PEPs) may, if considered necessary, be categorised even higher;

iii. Documentation requirements and other information to be collected in respect of different categories of customers depending on perceived risk and keeping in mind the requirements of PML Act, 2002 and instructions/guidelines issued by Reserve Bank from time to time;

iv. Not to open an account or close an existing account where the bank is unable to apply appropriate customer due diligence measures, i.e., bank is unable to verify the identity and /or obtain documents required as per the risk


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categorisation due to non cooperation of the customer or non reliability of the data/information furnished to the bank. It is, however, necessary to have suitable built in safeguards to avoid harassment of the customer. For example, decision by a bank to close an account should be taken at a reasonably high level after giving due notice to the customer explaining the reasons for such a decision.

v. Circumstances, in which a customer is permitted to act on behalf of another person/entity, should be clearly spelt out in conformity with the established law and practice of banking as there could be occasions when an account is operated by a mandate holder or where an account is opened by an intermediary in fiduciary capacity and

vi. Necessary checks before opening a new account so as to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organisations etc.

b) Banks should prepare a profile for each new customer based on risk categorisation. The customer profile may contain information relating to customer’s identity, social/financial status, nature of business activity, information about his clients’ business and their location etc. The nature and extent of due diligence will depend on the risk perceived by the bank. However, while preparing customer profile banks should take care to seek only such information from the customer, which is relevant to the risk category and is not intrusive. The customer profile is a confidential document and details contained therein should not be divulged for cross selling or any other purposes.

c) For the purpose of risk categorisation, individuals (other than High Net Worth) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile, may be categorised as low risk. Illustrative examples of low risk customers could be salaried employees whose salary structures are well defined, people belonging to lower economic strata of the society whose accounts show small balances and low turnover, Government Departments and Government owned companies, regulators and statutory bodies etc. In such cases, the policy may require that only the basic requirements of verifying the identity and location of the customer are to be met. Customers that are likely to pose a higher than average risk to the bank should be categorised as medium or high risk depending on customer's background, nature and location of activity, country of origin, sources of funds and his client profile, etc. Banks should apply enhanced due diligence measures based on the risk assessment, thereby requiring intensive ‘due diligence’ for higher risk customers,


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especially those for whom the sources of funds are not clear. In view of the risks involved in cash intensive businesses, accounts of bullion dealers (including sub-dealers) & jewelers should also be categorized by banks as 'high risk' requiring enhanced due diligence. Other examples of customers requiring higher due diligence include (a) nonresident customers; (b) high net worth individuals; (c) trusts, charities, NGOs and organizations receiving donations; (d) companies having close family shareholding or beneficial ownership; (e) firms with 'sleeping partners'; (f) politically exposed persons (PEPs) of foreign origin, customers who are close relatives of PEPs and accounts of which a PEP is the ultimate beneficial owner; (g) non-face to face customers and (h) those with dubious reputation as per public information available etc. However,only NPOs/NGOs promoted by United Nations or its agencies may be classified as low risk customers.

d) In addition to what has been indicated above, banks/FIs should take steps to identify and assess their ML/TF risk for customers, countries and geographical areas as also for products/ services/ transactions/delivery channels, Banks/FIs should have policies, controls and procedures, duly approved by their boards, in place to effectively manage and mitigate their risk adopting a risk-based approach. As a corollary, banks would be required to adopt enhanced measures for products, services and customers with a medium or high risk rating. In this regard, banks may use for guidance in their own risk assessment, a Report on Parameters for Risk-Based Transaction Monitoring (RBTM) dated March 30, 2011 issued by Indian Banks' Association on May 18, 2011 as a supplement to their guidance note on Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards issued in July 2009. The IBA guidance also provides an indicative list of high risk customers, products, services and geographies.

e) It is important to bear in mind that the adoption of customer acceptance policy and its implementation should not become too restrictive and must not result in denial of banking services to general public, especially to those, who are financially or socially disadvantaged.

Customer Identification Procedure (CIP)

a) The policy approved by the Board of banks should clearly spell out the Customer Identification Procedure to be carried out at different stages, i.e., while establishing a banking relationship; carrying out a financial transaction or when the bank has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data. Customer identification means identifying


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the customer and verifying his/her identity by using reliable, independent source documents, data or information. Banks need to obtain sufficient information necessary to establish, to their satisfaction, the identity of each new customer, whether regular or occasional, and the purpose of the intended nature of banking relationship. Being satisfied means that the bank must be able to satisfy the competent authorities that due diligence was observed based on the risk profile of the customer in compliance with the extant guidelines in place. Such risk-based approach is considered necessary to avoid disproportionate cost to banks and a burdensome regime for the customers. Besides risk perception, the nature of information/documents required would also depend on the type of customer (individual, corporate etc.). For customers that are natural persons, the banks should obtain sufficient identification data to verify the identity of the customer, his address/location, and also his recent photograph. For customers that are legal persons or entities, the bank should (i) verify the legal status of the legal person/entity through proper and relevant documents; (ii) verify that any person purporting to act on behalf of the legal person/entity is so authorised and identify and verify the identity of that person; (iii) understand the ownership and control structure of the customer and determine who are the natural persons who ultimately control the legal person. Customer identification requirements in respect of a few typical cases, especially, legal persons requiring an extra element of caution are given in paragraph 2.5 below for guidance of banks. Banks may, however, frame their own internal guidelines based on their experience of dealing with such persons/entities, normal bankers’ prudence and the legal requirements as per established practices. If the bank decides to accept such accounts in terms of the Customer Acceptance Policy, the bank should take reasonable measures to identify the beneficial owner(s) and verify his/her/their identity in a manner so that it is satisfied that it knows who the beneficial owner(s) is/are [Ref: Government of India Notification dated June 16, 2010 - Rule 9 sub-rule (1A) of PML Rules].

b) The increasing complexity and volume of financial transactions necessitate that customers do not have multiple identities within a bank, across the banking system and across the financial system. This can be achieved by introducing a unique identification code for each customer. The Unique Customer Identification Code (UCIC) will help banks to identify customers, track the facilities availed, monitor financial transactions in a holistic manner and enable banks to have a better approach to risk profiling of customers. It would also smoothen banking operations for the customers. While some banks already use UCIC for their customers by providing them a relationship number, etc., other banks have not adopted this practice. Banks are, therefore, advised to initiate steps for allotting UCIC to all their customers while entering into any new relationships for individual customers


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to begin with. Similarly, existing individual customers may also be allotted UCIC by end-May 2013.

c) Whenever there is suspicion of money laundering or terrorist financing or when other factors give rise to a belief that the customer does not, in fact, pose a low risk, banks should carry out full scale customer due diligence (CDD) before opening an account

d) When there are suspicions of money laundering or financing of the activities relating to terrorism or where there are doubts about the adequacy or veracity of previously obtained customer identification data, banks should review the due diligence measures including verifying again the identity of the client and obtaining information on the purpose and intended nature of the business relationship. [Ref: Government of India Notification dated June 16, 2010- Rule 9 sub-rule (1D) of PML Rules].

e) It has been observed that some close relatives, e.g. wife, son, daughter and parents, etc. who live with their husband, father/mother and son, as the case may be, are finding it difficult to open account in some banks as the utility bills required for address verification are not in their name. It is clarified, that in such cases, banks can obtain an identity document and a utility bill of the relative with whom the prospective customer is living along with a declaration from the relative that the said person (prospective customer) wanting to open an account is a relative and is staying with him/her. Banks can use any supplementary evidence such as a letter received through post for further verification of the address. While issuing operational instructions to the branches on the subject, banks should keep in mind the spirit of instructions issued by the Reserve Bank and avoid undue hardships to individuals who are, otherwise, classified as low risk customers.

f) Some banks insist on opening of fresh accounts by customers when customers approach them for transferring their account from one branch of the bank to another branch of the same bank. Banks are advised that KYC once done by one branch of the bank should be valid for transfer of the account within the bank as long as full KYC has been done for the concerned account. The customer should be allowed to transfer his account from one branch to another branch without restrictions. In order to comply with KYC requirements of correct address of the person, fresh address proof may be obtained from him/her upon such transfer by the transferee branch.


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g) Banks should introduce a system of periodical updation of customer identification data (including photograph/s) after the account is opened. The periodicity of such updation should not be less than once in five years in case of low risk category customers and not less than once in two years in case of high and medium risk categories. Such verification should be done irrespective of whether the account has been transferred from one branch to another and banks are required to also maintain records of transactions as prescribed.

h) An indicative list of the nature and type of documents/information that may be may be relied upon for customer identification is given in Annex-I to this Master Circular. It is clarified that permanent correct address, as referred to in Annex-I, means the address at which a person usually resides and can be taken as the address as mentioned in a utility bill or any other document accepted by the bank for verification of the address of the customer.

i) It has been brought to our notice that the said indicative list furnished in Annex - I, is being treated by some banks as an exhaustive list as a result of which a section of public is being denied access to banking services. Banks are, therefore, advised to take a review of their extant internal instructions in this regard.

Customer Identification Requirements – Indicative Guidelines

i) Walk-in Customers

In case of transactions carried out by a non-account based customer, that is a walk-in customer, where the amount of transaction is equal to or exceeds rupees fifty thousand, whether conducted as a single transaction or several transactions that appear to be connected, the customer's identity and address should be verified. if a bank has reason to believe that a customer is intentionally structuring a transaction into a series of transactions below the threshold of Rs.50,000/- the bank should verify the identity and address of the customer and also consider filing a suspicious transaction report (STR) to FIU-IND.

NOTE: In terms of Clause (b) (ii) of sub-Rule (1) of Rule 9 of the PML Rules,

2005 banks and financial institutions are required to verify the identity of the customers for all international money transfer operations

ii) Salaried Employees


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In case of salaried employees, it is clarified that with a view to containing the risk of fraud, banks should rely on certificate/letter of identity and/or address issued only from corporate and other entities of repute and should be aware of the competent authority designated by the concerned employer to issue such certificate/letter. Further, in addition to the certificate/letter issued by the employer, banks should insist on at least one of the officially valid documents as provided in the Prevention of Money Laundering Rules (viz. passport, driving licence, PAN Card, Voter’s Identity card, etc.) or utility bills for KYC purposes for opening bank accounts of salaried employees of corporate and other entities

iii) Trust/Nominee or Fiduciary Accounts

There exists the possibility that trust/nominee or fiduciary accounts can be used to circumvent the customer identification procedures. Banks should determine whether the customer is acting on behalf of another person as trustee/nominee or any other intermediary. If so, banks should insist on receipt of satisfactory evidence of the identity of the intermediaries and of the persons on whose behalf they are acting, as also obtain details of the nature of the trust or other arrangements in place. While opening an account for a trust, banks should take reasonable precautions to verify the identity of the trustees and the settlors of trust (including any person settling assets into the trust), grantors, protectors, beneficiaries and signatories. Beneficiaries should be identified when they are defined. In the case of a 'foundation', steps should be taken to verify the founder managers/ directors and the beneficiaries, if defined.

iv) Accounts of companies and firms

Banks need to be vigilant against business entities being used by individuals as a ‘front’ for maintaining accounts with banks. Banks should examine the control structure of the entity, determine the source of funds and identify the natural persons who have a controlling interest and who comprise the management. These requirements may be moderated according to the risk perception e.g. in the case of a public company it will not be necessary to identify all the shareholders.

v) Client accounts opened by professional intermediaries

a) When the bank has knowledge or reason to believe that the client account opened by a professional intermediary is on behalf of a single client, that client must be identified. Banks may hold 'pooled' accounts managed by professional intermediaries on behalf of entities like mutual funds, pension funds or other types of funds. Banks also maintain 'pooled' accounts managed by lawyers/chartered


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accountants or stockbrokers for funds held 'on deposit' or 'in escrow' for a range of clients. Where funds held by the intermediaries are not co-mingled at the bank and there are 'sub-accounts', each of them attributable to a beneficial owner, all the beneficial owners must be identified. Where such funds are co-mingled at the bank, the bank should still look through to the beneficial owners. Where the banks rely on the 'customer due diligence' (CDD) done by an intermediary, they should satisfy themselves that the intermediary is regulated and supervised and has adequate systems in place to comply with the KYC requirements. It should be understood that the ultimate responsibility for knowing the customer lies with the bank.

b) Under the extant AML/CFT framework, therefore, it is not possible for professional intermediaries like Lawyers and Chartered Accountants, etc. who are bound by any client confidentiality that prohibits disclosure of the client details, to hold an account on behalf of their clients. It is reiterated that banks should not allow opening and/or holding of an account on behalf of a client/s by professional intermediaries, like Lawyers and Chartered Accountants, etc., who are unable to disclose true identity of the owner of the account/funds due to any professional obligation of customer confidentiality. Further, any professional intermediary who is under any obligation that inhibits bank's ability to know and verify the true identity of the client on whose behalf the account is held or beneficial ownership of the account or understand true nature and purpose of transaction/s, should not be allowed to open an account on behalf of a client.

vi) Accounts of Politically Exposed Persons (PEPs) resident outside India

a) Politically exposed persons are individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior government/judicial/military officers, senior executives of state-owned corporations, important political party officials, etc. Banks should gather sufficient information on any person/customer of this category intending to establish a relationship and check all the information available on the person in the public domain. Banks should verify the identity of the person and seek information about the sources of funds before accepting the PEP as a customer. The decision to open an account for a PEP should be taken at a senior level which should be clearly spelt out in Customer Acceptance Policy. Banks should also subject such accounts to enhanced monitoring on an ongoing basis. The above norms may also be applied to the accounts of the family members or close relatives of PEPs.


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b) In the event of an existing customer or the beneficial owner of an existing account, subsequently becoming a PEP, banks should obtain senior management approval to continue the business relationship and subject the account to the CDD measures as applicable to the customers of PEP category including enhanced monitoring on an ongoing basis. These instructions are also applicable to accounts where a PEP is the ultimate beneficial owner.

c) Further, banks should have appropriate ongoing risk management procedures for identifying and applying enhanced CDD to PEPs, customers who are close relatives of PEPs, and accounts of which a PEP is the ultimate beneficial owner.

vii) Accounts of non-face-to-face customers

With the introduction of telephone and electronic banking, increasingly accounts are being opened by banks for customers without the need for the customer to visit the bank branch. In the case of non-face-to-face customers, apart from applying the usual customer identification procedures, there must be specific and adequate procedures to mitigate the higher risk involved. Certification of all the documents presented should be insisted upon and, if necessary, additional documents may be called for. In such cases, banks may also require the first payment to be effected through the customer's account with another bank which, in turn, adheres to similar KYC standards. In the case of cross-border customers, there is the additional difficulty of matching the customer with the documentation and the bank may have to rely on third party certification/introduction. In such cases, it must be ensured that the third party is a regulated and supervised entity and has adequate KYC systems in place.

viii) Accounts of proprietary concerns

Apart from following the extant guidelines on customer identification procedure as applicable to the proprietor, banks should call for and verify the following documents before opening of accounts in the name of a proprietary concern:

Proof of the name, address and activity of the concern, like registration certificate (in the case of a registered concern), certificate/licence issued by the Municipal authorities under Shop & Establishment Act, sales and income tax returns, CST/VAT certificate, certificate/registration document issued by Sales Tax/Service Tax/Professional Tax authorities, Licence issued by the Registering authority like Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical Council, Food and Drug Control Authorities, registration/licensing


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document issued in the name of the proprietary concern by the Central Government or State Government Authority/Department. Banks may also accept IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT, the complete Income Tax Return (not just the acknowledgement) in the name of the sole proprietor where the firm's income is reflected, duly authenticated/acknowledged by the Income Tax authorities and utility bills such as electricity, water, and landline telephone bills in the name of the proprietary concern as required documents for opening of bank accounts of proprietary concerns. .

Any two of the above documents would suffice. These documents should be in the name of the proprietary concern.

Accounts with Introduction

i. Although flexibility in the requirements of documents of identity and proof of address has been provided in the above mentioned KYC guidelines, it has been observed that a large number of persons, especially, those belonging to low income group both in urban and rural areas are not able to produce such documents to satisfy the bank about their identity and address. This would lead to their inability to access the banking services and result in their financial exclusion. Accordingly, the KYC procedure also provides for opening accounts for those persons who intend to keep balances not exceeding Rupees Fifty Thousand (Rs. 50,000/-) in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed Rupees One Lakh (Rs. 1,00,000/-) in a year. In such cases, if a person who wants to open an account and is not able to produce documents mentioned in Annex I of this master circular, banks should open an account for him, subject to: Introduction from another account holder who has been subjected to full KYC procedure. The introducer’s account with the bank should be at least six months old and should show satisfactory transactions. Photograph of the customer who proposes to open the account as also his address need to be certified by the introducer. or any other evidence as to the identity and address of the customer to the satisfaction of the bank.

ii. While opening accounts as described above, the customer should be made aware that if at any point of time, the balances in all his/her accounts with the bank (taken together) exceeds Rupees Fifty Thousand (Rs. 50,000/-) or total credit in the account exceeds Rupees One Lakh (Rs. 1,00,000/-) in a


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year, no further transactions will be permitted until the full KYC procedure is completed. In order not to inconvenience the customer, the bank must notify the customer when the balance reaches Rupees Forty Thousand (Rs. 40,000/-) or the total credit in a year reaches Rupees Eighty thousand (Rs. 80,000/-) that appropriate documents for conducting the KYC must be submitted otherwise operations in the account will be stopped.

Small Accounts

In terms of Government of India, Notification No. 14/2010/F.No.6/2/2007-E.S dated December 16, 2010, the Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005 has been amended. The notification is reproduced at Annexe - IV of this circular.

A. Small Accounts

a) In terms of Rule 2 clause (fb) of the Notification 'small account' means a savings account in a banking company where-

(i) the aggregate of all credits in a financial year does not exceed rupees one lakh;

(ii) the aggregate of all withdrawals and transfers in a month does not exceed rupees ten thousand; and

(iii) the balance at any point of time does not exceed rupees fifty thousand .

b) Rule (2A) of the Notification lays down the detailed procedure for opening 'small accounts'. Banks are advised to ensure adherence to the procedure provided in the Rules for opening of small accounts.

B. Officially Valid Documents

a. The Notification has also expanded the definition of 'officially valid document' as contained in clause (d) of Rule 2(1)of the PML Rules to include job card issued by NREGA duly signed by an officer of the State Government and the letters issued by the Unique Identification Authority of India containing details of name, address and Aadhaar number.


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b. It is further advised that where a bank has relied exclusively on the NREGA job card as complete KYC document for opening of an account (ref. paragraph 2.4 (H) of this Master circular) the bank account so opened will also be subjected to all conditions and limitations prescribed for small account in the Notification.

c. Accordingly, all accounts opened in terms of procedure prescribed in Rule 2A of the Notification dated December 16, 2010 referred to above and all other accounts opened only on the basis of NREGA card should be treated as ';small accounts'; and be subject to the conditions stipulated in clause (i) to (v) of the sub-rule (2A) of Rule 9.

d. It is reiterated that while opening accounts based on Aadhaar also, banks must satisfy themselves about the correct address of the customer by obtaining required proof of the same as per extant instructions.

Operation of Bank Accounts & Money Mules

a) It has been brought to our notice that “Money Mules” can be used to launder the proceeds of fraud schemes (e.g., phishing and identity theft) by criminals who gain illegal access to deposit accounts by recruiting third parties to act as “money mules.” In some cases these third parties may be innocent while in others they may be having complicity with the criminals.

b) In a money mule transaction, an individual with a bank account is recruited to receive cheque deposits or wire transfers and then transfer these funds to accounts held on behalf of another person or to other individuals, minus a certain commission payment. Money mules may be recruited by a variety of methods, including spam e-mails, advertisements on genuine recruitment web sites, social networking sites, instant messaging and advertisements in newspapers. When caught, these money mules often have their bank accounts suspended, causing inconvenience and potential financial loss, apart from facing likely legal action for being part of a fraud. Many a times the address and contact details of such mules are found to be fake or not up to date, making it difficult for enforcement agencies to locate the account holder.

c) The operations of such mule accounts can be minimised if banks follow the guidelines on opening of accounts and monitoring of transactions contained in this Master Circular. Banks are, therefore, advised to strictly adhere to the guidelines on KYC/AML/CFT issued from time to time and to those relating to periodical updation of customer identification data after the account is opened and also to


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monitoring of transactions in order to protect themselves and their customers from misuse by such fraudsters.

Bank No Longer Knows the True Identity

In the circumstances when a bank believes that it would no longer be satisfied that it knows the true identity of the account holder, the bank should also file an STR with FIU-IND.

Monitoring of Transactions

a) Ongoing monitoring is an essential element of effective KYC procedures. Banks can effectively control and reduce their risk only if they have an understanding of the normal and reasonable activity of the customer so that they have the means of identifying transactions that fall outside the regular pattern of activity. However, the extent of monitoring will depend on the risk sensitivity of the account. Banks should pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. Banks may prescribe threshold limits for a particular category of accounts and pay particular attention to the transactions which exceed these limits. Transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer should particularly attract the attention of the bank. Very high account turnover inconsistent with the size of the balance maintained may indicate that funds are being 'washed' through the account. High-risk accounts have to be subjected to intensified monitoring. Every bank should set key indicators for such accounts, taking note of the background of the customer, such as the country of origin, sources of funds, the type of transactions involved and other risk factors. High risk associated with accounts of bullion dealers (including sub-dealers) & jewelers should be taken into account by banks to identify suspicious transactions for filing Suspicious Transaction Reports (STRs) to Financial Intelligence Unit- India (FIU-IND) Banks should put in place a system of periodical review of risk categorization of accounts and the need for applying enhanced due diligence measures. Such review of risk categorisation of customers should be carried out at a periodicity of not less than once in six months.

b) It has come to our notice that accounts of Multi-level Marketing (MLM) Companies were misused for defrauding public by luring them into depositing their money with the MLM company by promising a high return. Such depositors are assured of high returns and issued post-dated cheques for interest and repayment of principal. So long as money keeps coming into the MLM company’s account from


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new depositors, the cheques are honoured but once the chain breaks, all such post-dated instruments are dishonoured. This results in fraud on the public and is a reputational risk for banks concerned. Further, banks should closely monitor the transactions in accounts of marketing firms. In cases where a large number of cheque books are sought by the company, there are multiple small deposits (generally in cash) across the country in one bank account and where a large number of cheques are issued bearing similar amounts/dates, the bank should carefully analyse such data and in case they find such unusual operations in accounts, the matter should be immediately reported to Reserve Bank and other appropriate authorities such as Financial Intelligence Unit India (FIU-Ind) under Department of Revenue, Ministry of Finance.

c) Banks should exercise ongoing due diligence with respect to the business relationship with every client and closely examine the transactions in order to ensure that they are consistent with their knowledge of the client, his business and risk profile and where necessary, the source of funds [Ref: Government of India Notification dated June 16, 2010 -Rule 9, sub-rule (1B)]

d) The risk categorization of customers as also compilation and periodic updation of customer profiles and monitoring and closure of alerts in accounts by banks are extremely important for effective implementation of KYC/AML/CFT measures. It is, however, observed that there are laxities in effective implementation of the Reserve Bank’s guidelines in this area, leaving banks vulnerable to operational risk. Banks should, therefore, ensure compliance with the regulatory guidelines on KYC/AML/CFT both in letter and spirit. Accordingly, banks are advised to complete the process of risk categorization and compiling/updating profiles of all of their existing customers in a time-bound manner, and in any case not later than end-March 2013.

Closure of accounts

Where the bank is unable to apply appropriate KYC measures due to non-furnishing of information and /or non-cooperation by the customer, the bank should consider closing the account or terminating the banking/business relationship after issuing due notice to the customer explaining the reasons for taking such a decision. Such decisions need to be taken at a reasonably senior level.

Risk Management


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a) The Board of Directors of the bank should ensure that an effective KYC programme is put in place by establishing appropriate procedures and ensuring their effective implementation. It should cover proper management oversight, systems and controls, segregation of duties, training and other related matters. Responsibility should be explicitly allocated within the bank for ensuring that the bank’s policies and procedures are implemented effectively. Banks should, in consultation with their boards, devise procedures for creating risk profiles of their existing and new customers, assess risk in dealing with various countries, geographical areas and also the risk of various products, services, transactions, delivery channels, etc. Banks’ policies should address effectively managing and mitigating these risks adopting a risk-based approach as discussed in Para 2.3 (d) above.

b) Banks’ internal audit and compliance functions have an important role in evaluating and ensuring adherence to the KYC policies and procedures. As a general rule, the compliance function should provide an independent evaluation of the bank’s own policies and procedures, including legal and regulatory requirements. Banks should ensure that their audit machinery is staffed adequately with individuals who are well-versed in such policies and procedures. Concurrent/ Internal Auditors should specifically check and verify the application of KYC procedures at the branches and comment on the lapses observed in this regard. The compliance in this regard should be put up before the Audit Committee of the Board on quarterly intervals.

Introduction of New Technologies – Credit Cards/Debit Cards/Smart Cards/Gift Cards

Banks should pay special attention to any money laundering threats that may arise from new or developing technologies including internet banking that might favour anonymity, and take measures, if needed, to prevent their use in money laundering schemes. Many banks are engaged in the business of issuing a variety of Electronic Cards that are used by customers for buying goods and services, drawing cash from ATMs, and can be used for electronic transfer of funds. Banks are required to ensure full compliance with all KYC/AML/CFT guidelines issued from time to time, in respect of add-on/ supplementary cardholders also. Further, marketing of credit cards is generally done through the services of agents. Banks should ensure that appropriate KYC procedures are duly applied before issuing the cards to the customers. It is also desirable that agents are also subjected to KYC measures.

Combating Financing of Terrorism


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a) In terms of PMLA Rules, suspicious transaction should include, inter

alia, transactions, which give rise to a reasonable ground of suspicion that these may involve financing of the activities relating to terrorism. Banks are, therefore, advised to develop suitable mechanism through appropriate policy framework for enhanced monitoring of accounts suspected of having terrorist links and swift identification of the transactions and making suitable reports to FIU-Ind on priority.

b) As and when list of individuals and entities, approved by Security Council Committee established pursuant to various United Nations' Security Council Resolutions (UNSCRs), are received from Government of India, Reserve Bank circulates these to all banks and financial institutions. Banks/Financial Institutions should ensure to update the lists of individuals and entities as circulated by Reserve Bank. The UN Security Council has adopted Resolutions 1988 (2011) and 1989 (2011) which have resulted in splitting of the 1267 Committee's Consolidated List into two separate lists, namely:

(i) “Al-Qaida Sanctions List”, which is maintained by the 1267 / 1989 Committee. This list shall include only the names of those individuals, groups, undertakings and entities associated with Al-Qaida. The Updated Al-Qaida Sanctions List is available at

http://www.un.org/sc/committees/1267/aq_sanctions_list.shtml

(ii) “1988 Sanctions List”, which is maintained by the 1988 Committee. This list consists of names previously included in Sections A (“Individuals associated with the Taliban”) and B (“Entities and other groups and undertakings associated with the Taliban”) of the Consolidated List. The Updated 1988 Sanctions list is available at http://www.un.org/sc/committees/ 1988/list.shtml

It may be noted that both “Al-Qaida Sanctions List” and “1988 Sanctions List” are to be taken into account for the purpose of implementation of Section 51A of the Unlawful Activities (Prevention) Act, 1967.

Banks are advised that before opening any new account it should be ensured that the name/s of the proposed customer does not appear in the lists. Further, banks should scan all existing accounts to ensure that no account is held by or linked to any of the entities or individuals included in the list. Full details of accounts bearing resemblance with any of the individuals/entities in the list should immediately be intimated to RBI and FIU-IND.


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Freezing of Assets under Section 51A of Unlawful Activities (Prevention) Act, 1967

i. The Unlawful Activities (Prevention) Act, 1967 (UAPA) has been amended by the Unlawful Activities (Prevention) Amendment Act, 2008. Government has issued an Order dated August 27, 2009 detailing the procedure for implementation of Section 51A of the Unlawful Activities (Prevention) Act, 1967 relating to the purposes of prevention of, and for coping with terrorist activities. In terms of Section 51A, the Central Government is empowered to freeze, seize or attach funds and other financial assets or economic resources held by, on behalf of or at the direction of the individuals or entities Listed in the Schedule to the Order, or any other person engaged in or suspected to be engaged in terrorism and prohibit any individual or entity from making any funds, financial assets or economic resources or related services available for the benefit of the individuals or entities Listed in the Schedule to the Order or any other person engaged in or suspected to be engaged in terrorism.

ii. Banks are required to strictly follow the procedure laid down in the UAPA Order dated August 27, 2009 (Annex III) and ensure meticulous compliance to the Order issued by the Government.

iii. On receipt of the list of individuals and entities subject to UN sanctions (referred to as designated lists) from RBI, banks should ensure expeditious and effective implementation of the procedure prescribed under Section 51A of UAPA in regard to freezing/unfreezing of financial assets of the designated individuals/entities enlisted in the UNSCRs and especially, in regard to funds, financial assets or economic resources or related services held in the form of bank accounts.

iv. In terms of Para 4 of the Order, in regard to funds, financial assets or

economic resources or related services held in the form of bank accounts, the RBI would forward the designated lists to the banks requiring them to:

a) Maintain updated designated lists in electronic form and run a check on the given parameters on a regular basis to verify whether individuals or entities listed in the schedule to the Order (referred to as designated individuals/entities) are holding any funds, financial assets or economic resources or related services held in the form of bank accounts with them. b) In case, the particulars of any of their customers match with the particulars of designated individuals/entities, the banks shall immediately,


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not later than 24 hours from the time of finding out such customer, inform full particulars of the funds, financial assets or economic resources or related services held in the form of bank accounts, held by such customer on their books to the Joint Secretary (IS.I), Ministry of Home Affairs, at Fax No.011-23092569 and also convey over telephone on 011-23092736.

c) Banks shall also send by post a copy of the communication mentioned in (b) above to the UAPA nodal officer of RBI, Chief General Manager, Department of Banking Operations and Development, Central Office, Reserve Bank of India, Anti Money Laundering Division, Central Office Building, 13th Floor, Shahid Bhagat Singh Marg, Fort, Mumbai - 400 001 and also by fax at No.022-22701239.

d) Banks shall also send a copy of the communication mentioned in (b) above to the UAPA nodal officer of the state/UT where the account is held as the case may be and to FIU-India. e) In case, the match of any of the customers with the particulars of designated individuals/entities is beyond doubt, the banks would prevent designated persons from conducting financial transactions, under intimation to Joint Secretary (IS.I), Ministry of Home Affairs, at Fax No. 011-23092569 and also convey over telephone on 011-23092736. f) Banks shall also file a Suspicious Transaction Report (STR) with FIU-IND covering all transactions in the accounts covered by paragraph (b) above, carried through or attempted, as per the prescribed format.

v. Freezing of financial assets

a) On receipt of the particulars as mentioned in paragraph iv(b) above, IS-I Division of MHA would cause a verification to be conducted by the State Police and /or the Central Agencies so as to ensure that the individuals/ entities identified by the banks are the ones listed as designated individuals/entities and the funds, financial assets or economic resources or related services , reported by banks are held by the designated individuals/entities. This verification would be completed within a period not exceeding 5 working days from the date of receipt of such particulars. b) In case, the results of the verification indicate that the properties are owned by or held for the benefit of the designated individuals/entities, an


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order to freeze these assets under section 51A of the UAPA would be issued within 24 hours of such verification and conveyed electronically to the concerned bank branch under intimation to Reserve Bank of India and FIU-IND. c) The order shall take place without prior notice to the designated individuals/entities.

vi. Implementation of requests received from foreign countries under U.N. Security Council Resolution 1373 of 2001.

a) U.N. Security Council Resolution 1373 obligates countries to freeze without delay the funds or other assets of persons who commit, or attempt to commit, terrorist acts or participate in or facilitate the commission of terrorist acts; of entities or controlled directly or indirectly by such persons; and of persons and entities acting on behalf of, or at the direction of such persons and entities, including funds or other assets derived or generated from property owned or controlled, directly or indirectly, by such persons and associated persons and entities.

b) To give effect to the requests of foreign countries under U.N. Security Council Resolution 1373, the Ministry of External Affairs shall examine the requests made by the foreign countries and forward it electronically, with their comments, to the UAPA nodal officer for IS-I Division for freezing of funds or other assets.

c) The UAPA nodal officer of IS-I Division of MHA, shall cause the request to be examined, within five working days so as to satisfy itself that on the basis of applicable legal principles, the requested designation is supported by reasonable grounds, or a reasonable basis, to suspect or believe that the proposed designee is a terrorist, one who finances terrorism or a terrorist organization, and upon his satisfaction, request would be electronically forwarded to the nodal officers in RBI. The proposed designee, as mentioned above would be treated as designated individuals/entities. d) Upon receipt of the requests from the UAPA nodal officer of IS-I Division, the list would be forwarded to banks and the procedure as enumerated at paragraphs 2.13[(iii), (iv) and (v)] shall be followed.


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e) The freezing orders shall take place without prior notice to the designated persons involved.

vii. Procedure for unfreezing of funds, financial assets or economic resources or related services of individuals/entities inadvertently affected by the freezing mechanism upon verification that the person or entity is not a designated person

Any individual or entity, if it has evidence to prove that the freezing of funds, financial assets or economic resources or related services, owned/held by them has been inadvertently frozen, they shall move an application giving the requisite evidence, in writing, to the concerned bank. The banks shall inform and forward a copy of the application together with full details of the asset frozen given by any individual or entity informing of the funds, financial assets or economic resources or related services have been frozen inadvertently, to the nodal officer of IS-I Division of MHA as per the contact details given in paragraph (iv)(b) above within two working days. The Joint Secretary (IS-I), MHA, being the nodal officer for (IS-I) Division of MHA, shall cause such verification as may be required on the basis of the evidence furnished by the individual/entity and if he is satisfied, he shall pass an order, within fifteen working days, unfreezing the funds, financial assets or economic resources or related services, owned/held by such applicant under intimation to the concerned bank. However, if it is not possible for any reason to pass an order unfreezing the assets within fifteen working days, the nodal officer of IS-I Division shall inform the applicant.

viii. Communication of Orders under section 51A of Unlawful Activities (Prevention) Act. All Orders under section 51A of Unlawful Activities (Prevention) Act, relating to funds, financial assets or economic resources or related services, would be communicated to all banks through RBI.

Jurisdictions that do not or insufficiently apply the FATF Recommendations

a) Banks are required to take into account risks arising from the deficiencies in AML/CFT regime of the jurisdictions included in the FATF Statement. In addition to FATF Statements circulated by Reserve Bank of India from time to time, (latest as on July 1, 2012, being circular DBOD. AML.No.13738 /14.01.001/2011-12 dated March 14, 2012) banks should also consider publicly available information


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for identifying countries, which do not or insufficiently apply the FATF Recommendations. It is clarified that banks should also give special attention to business relationships and transactions with persons (including legal persons and other financial institutions) from or in countries that do not or insufficiently apply the FATF Recommendations and jurisdictions included in FATF Statements.

b) Banks should examine the background and purpose of transactions with persons (including legal persons and other financial institutions) from jurisdictions included in FATF Statements and countries that do not or insufficiently apply the FATF Recommendations. Further, if the transactions have no apparent economic or visible lawful purpose, the background and purpose of such transactions should, as far as possible be examined, and written findings together with all documents should be retained and made available to Reserve Bank/other relevant authorities, on request.

Correspondent Banking

Correspondent banking is the provision of banking services by one bank (the “correspondent bank”) to another bank (the “respondent bank”). These services may include cash/funds management, international wire transfers, drawing arrangements for demand drafts and mail transfers, payable-through-accounts, cheques clearing etc. Banks should gather sufficient information to understand fully the nature of the business of the correspondent/respondent bank. Information on the other bank’s management, major business activities, level of AML/CFT compliance, purpose of opening the account, identity of any third party entities that will use the correspondent banking services, and regulatory/supervisory framework in the correspondent's/respondent’s country may be of special relevance. Similarly, banks should try to ascertain from publicly available information whether the other bank has been subject to any money laundering or terrorist financing investigation or regulatory action. While it is desirable that such relationships should be established only with the approval of the Board, in case the Boards of some banks wish to delegate the power to an administrative authority, they may delegate the power to a committee headed by the Chairman/CEO of the bank while laying down clear parameters for approving such relationships. Proposals approved by the Committee should invariably be put up to the Board at its next meeting for post facto approval. The responsibilities of each bank with whom correspondent banking relationship is established should be clearly documented. In the case of payable-through-accounts, the correspondent bank should be satisfied that the respondent bank has verified the identity of the customers having direct access to the accounts and is undertaking ongoing 'due diligence' on them. The


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correspondent bank should also ensure that the respondent bank is able to provide the relevant customer identification data immediately on request.

b) Correspondent relationship with a “Shell Bank”

Banks should refuse to enter into a correspondent relationship with a “shell bank” (i.e. a bank which is incorporated in a country where it has no physical presence and is unaffiliated to any regulated financial group). Shell banks are not permitted to operate in India. Banks should not enter into relationship with shell banks and before establishing correspondent relationship with any foreign institution, banks should take appropriate measures to satisfy themselves that the foreign respondent institution does not permit its accounts to be used by shell banks. Banks should be extremely cautious while continuing relationships with correspondent banks located in countries with poor KYC standards and countries identified as 'non-cooperative' in the fight against money laundering and terrorist financing. Banks should ensure that their respondent banks have anti money laundering policies and procedures in place and apply enhanced 'due diligence' procedures for transactions carried out through the correspondent accounts.

Applicability to branches and subsidiaries outside India

The guidelines contained in this master circular shall apply to the branches and majority owned subsidiaries located abroad, especially, in countries which do not or insufficiently apply the FATF Recommendations, to the extent local laws permit. When local applicable laws and regulations prohibit implementation of these guidelines, the same should be brought to the notice of Reserve Bank. In case there is a variance in KYC/AML standards prescribed by the Reserve Bank and the host country regulators, branches/overseas subsidiaries of banks are required to adopt the more stringent regulation of the two.

Wire Transfer

Banks use wire transfers as an expeditious method for transferring funds between bank accounts. Wire transfers include transactions occurring within the national boundaries of a country or from one country to another. As wire transfers do not involve actual movement of currency, they are considered as a rapid and secure method for transferring value from one location to another.

i) The salient features of a wire transfer transaction are as under:


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a. Wire transfer is a transaction carried out on behalf of an originator person (both natural and legal) through a bank by electronic means with a view to making an amount of money available to a beneficiary person at a bank. The originator and the beneficiary may be the same person.

b. Cross-border transfer means any wire transfer where the originator and the beneficiary bank or financial institutions are located in different countries. It may include any chain of wire transfers that has at least one cross-border element.

c. Domestic wire transfer means any wire transfer where the originator and receiver are located in the same country. It may also include a chain of wire transfers that takes place entirely within the borders of a single country even though the system used to effect the wire transfer may be located in another country.

d. The originator is the account holder, or where there is no account, the person (natural or legal) that places the order with the bank to perform the wire transfer.

ii) Wire transfer is an instantaneous and most preferred route for transfer of funds across the globe and hence, there is a need for preventing terrorists and other criminals from having unfettered access to wire transfers for moving their funds and for detecting any misuse when it occurs. This can be achieved if basic information on the originator of wire transfers is immediately available to appropriate law enforcement and/or prosecutorial authorities in order to assist them in detecting, investigating, prosecuting terrorists or other criminals and tracing their assets. The information can be used by Financial Intelligence Unit - India (FIU-IND) for analysing suspicious or unusual activity and disseminating it as necessary. The originator information can also be put to use by the beneficiary bank to facilitate identification and reporting of suspicious transactions to FIU-IND. Owing to the potential terrorist financing threat posed by small wire transfers, the objective is to be in a position to trace all wire transfers with minimum threshold limits. Accordingly, banks must ensure that all wire transfers are accompanied by the following information:

(A) Cross-border wire transfers

i) All cross-border wire transfers must be accompanied by accurate and meaningful originator information.

ii) Information accompanying cross-border wire transfers must contain the name and address of the originator and where an account exists, the number of that


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account. In the absence of an account, a unique reference number, as prevalent in the country concerned, must be included.

iii) Where several individual transfers from a single originator are bundled in a batch file for transmission to beneficiaries in another country, they may be exempted from including full originator information, provided they include the originator’s account number or unique reference number as at (ii) above.

(B) Domestic wire transfers

i. Information accompanying all domestic wire transfers of Rs.50000/- (Rupees Fifty Thousand) and above must include complete originator information i.e. name, address and account number etc., unless full originator information can be made available to the beneficiary bank by other means.

ii. If a bank has reason to believe that a customer is intentionally structuring wire transfer to below Rs. 50000/- (Rupees Fifty Thousand) to several beneficiaries in order to avoid reporting or monitoring, the bank must insist on complete customer identification before effecting the transfer. In case of non-cooperation from the customer, efforts should be made to establish his identity and Suspicious Transaction Report (STR) should be made to FIU-IND.

iii. When a credit or debit card is used to effect money transfer, necessary information as (i) above should be included in the message.

iii) Exemptions

Interbank transfers and settlements where both the originator and beneficiary are banks or financial institutions would be exempted from the above requirements.

(iv) Role of Ordering, Intermediary and Beneficiary banks

(a) Ordering Bank

An ordering bank is the one that originates a wire transfer as per the order placed by its customer. The ordering bank must ensure that qualifying wire transfers contain complete originator information. The bank must also verify and preserve the information at least for a period of ten years.

(b) Intermediary bank


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For both cross-border and domestic wire transfers, a bank processing an intermediary element of a chain of wire transfers must ensure that all originator information accompanying a wire transfer is retained with the transfer. Where technical limitations prevent full originator information accompanying a cross-border wire transfer from remaining with a related domestic wire transfer, a record must be kept at least for ten years (as required under Prevention of Money Laundering Act, 2002) by the receiving intermediary bank of all the information received from the ordering bank.

(c) Beneficiary bank

A beneficiary bank should have effective risk-based procedures in place to identify wire transfers lacking complete originator information. The lack of complete originator information may be considered as a factor in assessing whether a wire transfer or related transactions are suspicious and whether they should be reported to the Financial Intelligence Unit-India. The beneficiary bank should also take up the matter with the ordering bank if a transaction is not accompanied by detailed information of the fund remitter. If the ordering bank fails to furnish information on the remitter, the beneficiary bank should consider restricting or even terminating its business relationship with the ordering bank.

Principal Officer

a) Banks should appoint a senior management officer to be designated as Principal Officer. Banks should ensure that the Principal Officer is able to act independently and report directly to the senior management or to the Board of Directors. Principal Officer shall be located at the head/corporate office of the bank and shall be responsible for monitoring and reporting of all transactions and sharing of information as required under the law. He will maintain close liaison with enforcement agencies, banks and any other institution which are involved in the fight against money laundering and combating financing of terrorism

b) Further, the role and responsibilities of the Principal Officer should include overseeing and ensuring overall compliance with regulatory guidelines on KYC/AML/CFT issued from time to time and obligations under the Prevention of Money Laundering Act, 2002, rules and regulations made thereunder, as amended form time to time. The Principal Officer will also be responsible for timely submission of CTR, STR and reporting of counterfeit notes and all transactions involving receipts by non-profit organisations of value more than Rupees Ten Lakh or its equivalent in foreign currency to FIU-IND.


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c) With a view to enabling the Principal Officer to discharge his responsibilities effectively, the Principal Officer and other appropriate staff should have timely access to customer identification data and other CDD information, transaction records and other relevant information.

Maintenance of records of transactions/Information to be preserved/Maintenance and preservation of records/Cash and Suspicious transactions reporting to Financial Intelligence Unit- India (FIU-IND)

Government of India, Ministry of Finance, Department of Revenue, vide its notification dated July 1, 2005 in the Gazette of India, has notified the Rules under the Prevention of Money Laundering Act (PMLA), 2002. In terms of the said Rules, the provisions of PMLA, 2002 came into effect from July 1, 2005. Section 12 of the PMLA, 2002 casts certain obligations on the banking companies in regard to preservation and reporting of customer account information. Banks are, therefore, advised to go through the provisions of PMLA, 2002 and the Rules notified there under and take all steps considered necessary to ensure compliance with the requirements of Section 12 of the Act ibid.

(i) Maintenance of records of transactions

Banks should introduce a system of maintaining proper record of transactions prescribed under Rule 3 of PML Rules, 2005, as mentioned below:

a. all cash transactions of the value of more than Rupees Ten Lakh or its equivalent in foreign currency;

b. all series of cash transactions integrally connected to each other which have been valued below Rupees Ten Lakh or its equivalent in foreign currency where such series of transactions have taken place within a month and the aggregate value of such transactions exceeds Rupees Ten Lakh;

c. all transactions involving receipts by non-profit organisations of value more than rupees ten lakh or its equivalent in foreign currency [Ref: Government of India Notification dated November 12, 2009- Rule 3,sub-rule (1) clause (BA) of PML Rules]

d. all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security or a document has taken place facilitating the transaction and

e. All suspicious transactions whether or not made in cash and by way of as mentioned in the Rules.

Explanation - Integrally connected cash transactions referred to at (b) above


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The following transactions have taken place in a branch during the month of April 2008:

Date Mode Dr (in Rs.) Cr (in Rs.) Balance (in Rs.) BF - 8,00,000.00

8,00,000.00

02/04/2008 Cash 5,00,000.00 3,00,000.00 6,00,000.00

07/04/2008 Cash 40,000.00 2,00,000.00 7,60,000.00

08/04/2008 Cash 4,70,000.00 1,00,000.00 3,90,000.00

Monthly summation

10,10,000.00 6,00,000.00

f) As per above clarification, the debit transactions in the above example are integrally connected cash transactions because total cash debits during the calendar month exceeds Rs.10 lakhs. However, the bank should report only the debit transaction taken place on 02/04 & 08/04/2008. The debit transaction dated 07/04/2008 should not be separately reported by the bank, which is less than Rs.50,000/-.

g) All the credit transactions in the above example would not be treated as integrally connected, as the sum total of the credit transactions during the month does not exceed Rs.10 lakh and hence credit transaction dated 02, 07 & 08/04/2008 should not be reported by banks.

(ii) Information to be preserved

Banks are required to maintain all necessary information in respect of transactions referred to in Rule 3 to permit reconstruction of individual transaction, including the following information:

a. the nature of the transactions; b. the amount of the transaction and the currency in which it was denominated; c. the date on which the transaction was conducted; and d. the parties to the transaction

(iii) Maintenance and Preservation of Records

a) Banks are required to maintain the records containing information of all transactions including the records of transactions detailed in Rule 3 above. Banks should take appropriate steps to evolve a system for proper maintenance and


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preservation of account information in a manner that allows data to be retrieved easily and quickly whenever required or when requested by the competent authorities. Further, banks should maintain for at least ten years from the date of transaction between the bank and the client, all necessary records of transactions, both domestic or international, which will permit reconstruction of individual transactions (including the amounts and types of currency involved if any) so as to provide, if necessary, evidence for prosecution of persons involved in criminal activity.

b) Banks should ensure that records pertaining to the identification of the customer and his address (e.g. copies of documents like passports, identity cards, driving licenses, PAN card, utility bills etc.) obtained while opening the account and during the course of business relationship, are properly preserved for at least ten years after the business relationship is ended as required under Rule 10 of the Rules ibid. The identification records and transaction data should be made available to the competent authorities upon request.

c) In paragraph 2.10 of this Master Circular, banks have been advised to pay special attention to all complex, unusual large transactions and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose. It is further clarified that the background including all documents/office records/memorandums pertaining to such transactions and purpose thereof should, as far as possible, be examined and the findings at branch as well as Principal Officer level should be properly recorded. Such records and related documents should be made available to help auditors in their day-to-day work relating to scrutiny of transactions and also to Reserve Bank/other relevant authorities. These records are required to be preserved for ten years as is required under PMLA, 2002.

(iv) Reporting to Financial Intelligence Unit - India

a) In terms of the PMLA Rules, banks are required to report information relating to cash and suspicious transactions and all transactions involving receipts by non-profit organisations of value more than rupees ten lakh or its equivalent in foreign currency to the Director, Financial Intelligence Unit-India (FIU-IND) in respect of transactions referred to in Rule 3. Website - http://fiuindia.gov.in/

Explanation: Government of India Notification dated November 12, 2009- Rule 2 sub-rule (1) clause (ca) defines Non-Profit Organization (NPO). NPO means any entity or organisation that is registered as a trust or a society under the Societies


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Registration Act, 1860 or any similar State legislation or a company registered under section 25 of the Companies Act, 1956.

b) Banks should carefully go through all the reporting formats. There are altogether eight reporting formats, as detailed in Annex II, viz. i) Cash Transactions Report (CTR); ii) Summary of CTR iii) Electronic File Structure-CTR; iv) Suspicious Transactions Report (STR); v) Electronic File Structure-STR; vi) Counterfeit Currency Report (CCR); vii) Summary of CCR and viii) Electronic File Structure-CCR. The reporting formats contain detailed guidelines on the compilation and manner/procedure of submission of the reports to FIU-IND. It would be necessary for banks to initiate urgent steps to ensure electronic filing of all types of reports to FIU-IND. The related hardware and technical requirement for preparing reports in an electronic format, the related data files and data structures thereof are furnished in the instructions part of the concerned formats.

c) FIU-IND have placed on their website editable electronic utilities to enable banks to file electronic CTR/STR who are yet to install/adopt suitable technological tools for extracting CTR/STR from their live transaction data base. It is, therefore, advised that in cases of banks, where all the branches are not fully computerized, the Principal Officer of the bank should cull out the transaction details from branches which are not yet computerized and suitably arrange to feed the data into an electronic file with the help of the editable electronic utilities of CTR/STR as have been made available by FIU-IND in their websitehttp://fiuindia.gov.in.

In terms of instructions contained in paragraph 2.3(b) of this Master Circular, banks are required to prepare a profile for each customer based on risk categorisation. Further, vide paragraph 2.10(d), the need for periodical review of risk categorisation has been emphasized. It is, therefore, reiterated that banks, as a part of transaction monitoring mechanism, are required to put in place an appropriate software application to throw alerts when the transactions are inconsistent with risk categorization and updated profile of customers. It is needless to add that a robust software throwing alerts is essential for effective identification and reporting of suspicious transaction.

Cash and Suspicious Transaction Reports

a) Cash Transaction Report (CTR)


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While detailed instructions for filing all types of reports are given in the instructions part of the related formats, banks should scrupulously adhere to the following:

i) The Cash Transaction Report (CTR) for each month should be submitted to FIU-IND by 15th of the succeeding month. Cash transaction reporting by branches to their controlling offices should, therefore, invariably be submitted on monthly basis (not on fortnightly basis) and banks should ensure to submit CTR for every month to FIU-IND within the prescribed time schedule.

ii) All cash transactions, where forged or counterfeit Indian currency notes have been used as genuine should be reported by the Principal Officer to FIU-IND in the specified format not later than seven working days from the date of occurrence of such transactions (Counterfeit Currency Report – CCR). These cash transactions should also include transactions where forgery of valuable security or documents has taken place and may be reported to FIU-IND in plain text form.

iii) While filing CTR, details of individual transactions below Rupees Fifty thousand need not be furnished.

iv) CTR should contain only the transactions carried out by the bank on behalf of their clients/customers excluding transactions between the internal accounts of the bank.

v) A summary of cash transaction report for the bank as a whole should be compiled by the Principal Officer of the bank every month in physical form as per the format specified. The summary should be signed by the Principal Officer and submitted to FIU-India.

vi) In case of Cash Transaction Reports (CTR) compiled centrally by banks for the branches having Core Banking Solution (CBS) at their central data centre level, banks may generate centralised Cash Transaction Reports (CTR) in respect of branches under core banking solution at one point for onward transmission to FIU-IND, provided:

a) The CTR is generated in the format prescribed by Reserve Bank in Para 2.21(iv)(b) of this Master Circular;

b) A copy of the monthly CTR submitted on its behalf to FIU-India is available at the concerned branch for production to auditors/inspectors, when asked for; and


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c) The instruction on ‘Maintenance of records of transactions’; ‘Information to be preserved’ and ‘Maintenance and Preservation of records’ as contained above in this Master Circular at Para 2.21 (i), (ii) and (iii) respectively are scrupulously followed by the branch.

However, in respect of branches not under CBS, the monthly CTR should continue to be compiled and forwarded by the branch to the Principal Officer for onward transmission to FIU-IND.

b) Suspicious Transaction Reports (STR)

i) While determining suspicious transactions, banks should be guided by definition of suspicious transaction contained in PMLA Rules as amended from time to time.

ii) It is likely that in some cases transactions are abandoned/aborted by customers on being asked to give some details or to provide documents. It is clarified that banks should report all such attempted transactions in STRs, even if not completed by customers, irrespective of the amount of the transaction.

iii) Banks should make STRs if they have reasonable ground to believe that the transaction involve proceeds of crime generally irrespective of the amount of transaction and/or the threshold limit envisaged for predicate offences in part B of Schedule of PMLA, 2002.

iv) The Suspicious Transaction Report (STR) should be furnished within 7 days of arriving at a conclusion that any transaction, whether cash or non-cash, or a series of transactions integrally connected are of suspicious nature. The Principal Officer should record his reasons for treating any transaction or a series of transactions as suspicious. It should be ensured that there is no undue delay in arriving at such a conclusion once a suspicious transaction report is received from a branch or any other office. Such report should be made available to the competent authorities on request.

v) In the context of creating KYC/AML awareness among the staff and for generating alerts for suspicious transactions, banks may consider the indicative list of suspicious activities contained in Annex-E of the 'IBA's Guidance Note for Banks, January 2012'.

vi) Banks should not put any restrictions on operations in the accounts where an STR has been made. Banks and their employees should keep the fact of furnishing


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of STR strictly confidential, as required under PML Rules. It should be ensured that there is no tipping off to the customer at any level.

(C) Non-Profit Organisation

The report of all transactions involving receipts by non- profit organizations of value more than rupees ten lakh or its equivalent in foreign currency should be submitted every month to the Director, FIU-IND by 15th of the succeeding month in the prescribed format.

Customer Education/Employee's Training/Employee's Hiring

a) Customer Education

Implementation of KYC procedures requires banks to demand certain information from customers which may be of personal nature or which has hitherto never been called for. This can sometimes lead to a lot of questioning by the customer as to the motive and purpose of collecting such information. There is, therefore, a need for banks to prepare specific literature/ pamphlets etc. so as to educate the customer of the objectives of the KYC programme. The front desk staff needs to be specially trained to handle such situations while dealing with customers.

b) Employees’ Training

Banks must have an ongoing employee training programme so that the members of the staff are adequately trained in KYC procedures. Training requirements should have different focuses for frontline staff, compliance staff and staff dealing with new customers. It is crucial that all those concerned fully understand the rationale behind the KYC policies and implement them consistently.

c) Hiring of Employees

It may be appreciated that KYC norms/AML standards/CFT measures have been prescribed to ensure that criminals are not allowed to misuse the banking channels. It would, therefore, be necessary that adequate screening mechanism is put in place by banks as an integral part of their recruitment/hiring process of personnel.


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7. Negotiable Instruments

Exchange of goods and services is the basis of every business activity. Goods are bought and sold for cash as well as on credit. All these transactions require flow of cash either immediately or after a certain time. In modern business, large number of transactions involving huge sums of money take place every day. It is quite inconvenient as well as risky for either party to make and receive payments in cash. Therefore, it is a common practice for businessmen to make use of certain documents as means of making payment. Some of these documents are called negotiable instruments. In this lesson let us learn about these documents. After studying this chapter, you will be able to:

• explain the meaning of negotiable instruments;

• identify the various features of negotiable instruments;

• describe the various types of negotiable instruments; and

• differentiate between bills of exchange, promissory notes, and cheques. Meaning of Negotiable Instruments To understand the meaning of negotiable instruments let us take a few examples of day-to-day business transactions. Suppose Pitamber, a book publisher has sold books to Prashant for Rs 10,000/- on three months credit. To be sure that Prashant will pay the money after three months, Pitamber may write an order addressed to Prashant that he is to pay after three months, for value of goods received by him, Rs.10,000/- to Pitamber or anyone holding the order and presenting it before him (Prashant) for payment. This written document has to be signed by Prashant to show his acceptance of the order. Now, Pitamber can hold the document with him for three months and on the due date can collect the money from Prashant. He can also use it for meeting different business transactions. For instance, after a month, if required, he can borrow money from Sunil for a period of two months and pass on this document to Sunil. He has to write on the back of the document an instruction to Prashant to pay money to Sunil, and sign it. Now Sunil becomes the owner of this document and he can claim money from Prashant on the due date. Sunil, if required, can further pass on the document to Amit after instructing and signing on the back of the document. This passing on process may continue further till the final payment is made.


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In the above example, Prashant who has bought books worth Rs. 10,000/- can also give an undertaking stating that after three month he will pay the amount to Pitamber. Now Pitamber can retain that document with himself till the end of three months or pass it on to others for meeting certain business obligation (like with sunil, as discussed above) before the expiry of that three months time period. You must have heard about a cheque. What is it? It is a document issued to a bank that entitles the person whose name it bears to claim the amount mentioned in the cheque. If he wants, he can transfer it in favour of another person. For example, if Akash issues a cheque worth Rs. 5,000/ - in favour of Bidhan, then Bidhan can claim Rs. 5,000/- from the bank, or he can transfer it to Chander to meet any business obligation, like paying back a loan that he might have taken from Chander. Once he does it, Chander gets a right to Rs. 5,000/- and he can transfer it to Dayanand, if required. Such transfers may continue till the payment is finally made to somebody. In the above examples, we find that there are certain documents used for payment in business transactions and are transferred freely from one person to another. Such documents are called Negotiable Instruments. Thus, we can say negotiable instrument is a transferable document, where negotiable means transferable and instrument means document. To elaborate it further, an instrument, as mentioned here, is a document used as a means for making some payment and it is negotiable i.e., its ownership can be easily transferred. Thus, negotiable instruments are documents meant for making payments, the ownership of which can be transferred from one person to another many times before the final payment is made. Definition of Negotiable Instrument According to section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means “promissory note, bill of exchange, or cheque, payable either to order or to bearer”. Types of Negotiable Instruments According to the Negotiable Instruments Act, 1881 there are just three types of negotiable instruments i.e., promissory note, bill of exchange and cheque. However many other documents are also recognized as negotiable instruments on the basis of custom and usage, like hundis, treasury bills, share warrants, etc., provided they possess the features of negotiability. In the following sections, we shall study about Promissory Notes (popularly called pronotes), Bills of Exchange (popularly called bills), Cheques and Hundis (a popular indigenous document prevalent in India), in detail.


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i. Promissory Note Suppose you take a loan of Rupeess Five Thousand from your friend Ramesh. You can make a document stating that you will pay the money to Ramesh or the bearer on demand. Or you can mention in the document that you would like to pay the amount after three months. This document, once signed by you, duly stamped and handed over to Ramesh, becomes a negotiable instrument. Now Ramesh can personally present it before you for payment or give this document to some other person to collect money on his behalf. He can endorse it in somebody else’s name who in turn can endorse it further till the final payment is made by you to whosoever presents it before you. This type of a document is called a Promissory Note. Section 4 of the Negotiable Instruments Act, 1881 defines a promissory note as ‘an instrument in writing (Not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument’.

Specimen of a Promissory Note Rs. 10,000/- New Delhi September 25, 2002 On demand, I promise to pay Ramesh, s/o RamLal of Meerut or order a sum of Rs 10,000/- (Rupees Ten Thousand only), for value received. To , Ramesh Sd/ Sanjeev Address…….. Stamp Parties to a Promissory Note There are primarily two parties involved in a promissory note. They are:

The Maker or Drawer – the person who makes the note and promises to pay the amount stated therein. In the above specimen, Sanjeev is the maker or drawer. ii. The Payee – the person to whom the amount is payable. In the above specimen it is Ramesh. In course of transfer of a promissory note by payee and others, the parties involved may be - a. The Endorser – the person who endorses the note in favour of another person. In the above specimen if Ramesh endorses it in favour of Ranjan and Ranjan also endorses it in favour of Puneet, then Ramesh and Ranjan both are endorsers.


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b. The Endorsee – the person in whose favour the note is negotiated by endorsement. In the above, it is Ranjan and then Puneet.

Features of a promissory note Let us know the features of a promissory note. i. A promissory note must be in writing, duly signed by its maker and properly stamped as per Indian Stamp Act. ii. It must contain an undertaking or promise to pay. Mere acknowledgement of indebtedness is not enough. For example, if someone writes ‘I owe Rs. 5000/- to Satya Prakash’, it is not a promissory note. iii. The promise to pay must not be conditional. For example, if it is written ‘I promise to pay Suresh Rs 5,000/- after my sister’s marriage’, is not a promissory note. iv. It must contain a promise to pay money only. For example, if someone writes ‘I promise to give Suresh a Maruti car’ it is not a promissory note. v. The parties to a promissory note, i.e. the maker and the payee must be certain. vi. A promissory note may be payable on demand or after a certain date. For example, if it is written ‘three months after date I promise to pay Satinder or order a sum of rupees Five Thousand only’ it is a promissory note. vii. The sum payable mentioned must be certain or capable of being made certain. It means that the sum payable may be in figures or may be such that it can be calculated. (See specimen below). Rs. 10,000/- New Delhi November 14, 2002 I, Ramesh , s/o Sadanand of Surat, Gujarat promise to pay Sashikant, s/o Sunil Kumar of Ahmedabad, Gujarat or order, on demand, the sum of Rs 10,000/- (Rupees Ten Thousand only) with interest at the rate of 10 percent per annum, for value received. Sd/- Ramesh Stamp To Sashikant Ahmedabad, Gujarat

ii. Bill of Exchange Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which Sameer has to return. Now, Rajiv also has to give some money to Tarun. In this case, Rajiv can make a document directing Sameer to make payment up to Rupees Ten


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Thousand to Tarun on demand or after expiry of a specified period. This document is called a Bill of Exchange, which can be transferred to some other person’s name by Tarun. Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as ‘an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument’. Specimen of a Bill of Exchange Rs. 10,000/- New Delhi May 2, 2001 Five months after date pay Tarun or (to his) order the sum of Rupees Ten Thousand only for value received. To Accepted Stamp Sameer Sameer S/d Address Rajiv

Parties to a Bill of Exchange There are three parties involved in a bill of exchange. They are i. The Drawer – The person who makes the order for making payment. In the above specimen, Rajiv is the drawer. ii. The Drawee – The person to whom the order to pay is made. He is generally a debtor of the drawer. It is Sameer in this case. iii. The Payee – The person to whom the payment is to be made. In this case it is Tarun.The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the words in the bill would be Pay to us or order. In a bill where a time period is mentioned, just like the above specimen, is called a Time

Bill. But a bill may be made payable on demand also. This is called a Demand Bill. Features of a bill of exchange Let us know the various features of a bill of exchange. i. A bill must be in writing, duly signed by its drawer, accepted by its drawee and properly stamped as per Indian Stamp Act. ii. It must contain an order to pay. Words like ‘please pay Rs 5,000/- on demand and oblige’ are not used. iii. The order must be unconditional. iv. The order must be to pay money and money alone. v. The sum payable mentioned must be certain or capable of being made certain.


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vi. The parties to a bill must be certain.

iii. Cheques Cheque is a very common form of negotiable instrument. If you have a savings bank account or current account in a bank, you can issue a cheque in your own name or in favour of others, thereby directing the bank to pay the specified amount to the person named in the cheque. Therefore, a cheque may be regarded as a bill of exchange; the only difference is that the bank is always the drawee in case of a cheque. The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Actually, a cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.

Specimen of a Cheque ………......20....... Pay…….............................................................................................................. ……....................................................................................................... or Bearer Rupees……………………………………………… …………………………………………………… STATE BANK OF INDIA Jawaharlal Nehru University, New Delhi – 110067 MSBL/97 6 5 3 0 0 3 1 1 0 0 0 2 0 5 6 1 0 Features of a cheque Let us look into some important features of a cheque. i. A cheque must be in writing and duly signed by the drawer. ii. It contains an unconditional order. iii. It is issued on a specified banker only. iv. The amount specified is always certain and must be clearly mentioned both in figures and words. v. The payee is always certain. vi. It is always payable on demand. vii. The cheque must bear a date otherwise it is invalid and shall not be honoured by the bank. Types of Cheque Broadly speaking, cheques are of four types.


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a) Open cheque, and b) Crossed cheque. c) Bearer cheque d) Order cheque Let us know details about these cheques.

a) Open cheque: A cheque is called ‘Open’ when it is possible to get cash over the counter at the bank. The holder of an open cheque can do the following: i. Receive its payment over the counter at the bank, ii. Deposit the cheque in his own account iii. Pass it to someone else by signing on the back of a cheque. b) Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to issue such cheques. This risk can be avoided by issuing another types of cheque called ‘Crossed cheque’. The payment of such cheque is not made over the counter at the bank. It is only credited to the bank account of the payee. A cheque can be crossed by drawing two transverse parallel lines across the cheque, with or without the writing ‘Account payee’ or ‘Not Negotiable’. c) Bearer cheque: A cheque which is payable to any person who presents it for payment at the bank counter is called ‘Bearer cheque’. A bearer cheque can be transferred by mere delivery and requires no endorsement. d) Order cheque: An order cheque is one which is payable to a particular person. In such a cheque the word ‘bearer’ may be cut out or cancelled and the word ‘order’ may be written. The payee can transfer an order cheque to someone else by signing his or her name on the back of it. There is another categorization of cheques which is discussed below: Ante-dated cheques:- Cheque in which the drawer mentions the date earlier to the date of presenting if for payment. For example, a cheque issued on 20th May 2003 may bear a date 5th May 2003. Stale Cheque:- A cheque which is issued today must be presented before at bank for payment within a stipulated period. After expiry of that period, no payment will be made and it is then called ‘stale cheque’. Find out from your nearest bank about the validity period of a cheque.


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Mutilated Cheque:- In case a cheque is torn into two or more pieces and presented for payment, such a cheque is called a mutilated cheque. The bank will not make payment against such a cheque without getting confirmation of the drawer. But if a cheque is torn at the corners and no material fact is erased or cancelled, the bank may make payment against such a cheque. Post-dated Cheque:- Cheque on which drawer mentions a date which is subsequent to the date on which it is presented, is called post-dated cheque. For example, if a cheque presented on 8th May 2003 bears a date of 25th May 2003, it is a post-dated cheque. The bank will make payment only on or after 25th May 2003. iv. Hundis A Hundi is a negotiable instrument by usage. It is often in the form of a bill of exchange drawn in any local language in accordance with the custom of the place. Some times it can also be in the form of a promissory note. A hundi is the oldest known instrument used for the purpose of transfer of money without its actual physical movement. The provisions of the Negotiable Instruments Act shall apply to hundis only when there is no customary rule known to the people. Types of Hundis There are a variety of hundis used in our country. Let us discuss some of the most common ones. Shah-jog Hundi: This is drawn by one merchant on another, asking the latter to pay the amount to a Shah. Shah is a respectable and responsible person, a man of worth and known in the bazaar. A shah-jog hundi passes from one hand to another till it reaches a Shah, who, after reasonable enquiries, presents it to the drawee for acceptance of the payment. Darshani Hundi: This is a hundi payable at sight. It must be presented for payment within a reasonable time after its receipt by the holder. Thus, it is similar to a demand bill. Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time. This is similar to a time bill. There are few other varieties like Nam-jog hundi, Dhani-jog hundi, Jawabee hundi, Jokhami hundi, Firman-jog hundi, etc. Features of Negotiable Instruments After discussing the various types of negotiable instruments let us sum up their features as under. A negotiable instrument is freely transferable. Usually, when we transfer any property to somebody, we are required to make a transfer deed, get it registered, pay stamp duty, etc. But, such formalities are not required while transferring a negotiable instrument. The ownership is changed by mere delivery


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(when payable to the bearer) or by valid endorsement and delivery (when payable to order). Further, while transferring it is also not required to give a notice to the previous holder. ii. Negotiability confers absolute and good title on the transferee. It means that a person who receives a negotiable instrument has a clear and undisputable title to the instrument. However, the title of the receiver will be absolute, only if he has got the instrument in good faith and for a consideration. Also the receiver should have no knowledge of the previous holder having any defect in his title. Such a person is known as holder in due course. For example, suppose Rajiv issued a bearer cheque payable to Sanjay. It was stolen from Sanjay by a person, who passed it on to Girish. If Girish received it in good faith and for value and without knowledge of cheque having been stolen, he will be entitled to receive the amount of the cheque. Here Girish will be regarded as ‘holder in due course’. iii. A negotiable instrument must be in writing. This includes handwriting, typing, computer print out and engraving, etc. iv. In every negotiable instrument there must be an unconditional order or promise for payment. v. The instrument must involve payment of a certain sum of money only and nothing else. For example, one cannot make a promissory note on assets, securities, or goods. vi. The time of payment must be certain. It means that the instrument must be payable at a time which is certain to arrive. If the time is mentioned as ‘when convenient’ it is not a negotiable instrument. However, if the time of payment is linked to the death of a person, it is nevertheless a negotiable instrument as death is certain, though the time thereof is not. vii. The payee must be a certain person. It means that the person in whose favour the instrument is made must be named or described with reasonable certainty. The term ‘person’ includes individual, body corporate, trade unions, even secretary, director or chairman of an institution. The payee can also be more than one person. viii. A negotiable instrument must bear the signature of its maker. Without the signature of the drawer or the maker, the instrument shall not be a valid one. ix. Delivery of the instrument is essential. Any negotiable instrument like a cheque or a promissory note is not complete till it is delivered to its payee. For example, you may issue a cheque in your brother’s name but it is not a negotiable instrument till it is given to your brother. x. Stamping of Bills of Exchange and Promissory Notes is mandatory. This is required as per the Indian Stamp Act, 1899. The value of stamp depends upon the value of the pronote or bill and the time of their payment.


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• �Negotiable instruments are particular type of documents used for making payment in business transactions, the ownership of which can be freely transferred from one person to another.

Types of Negotiable Instruments - Promissory note - Bill of exchange - Cheque - Hundi

• Promissory note - An instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

• Bill of exchange - An instrument in writing containing an unconditional order, signed by the maker, directing a certian person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

• Cheque - It is an order by the account holder of the bank directing his banker to pay on demand the specified amount, to or to the order of the person named therein or to the bearer.

• Hundi - It is form a of bill of exchange drawn in any local language in accordance with the custom of the place.

Features of negotiable instruments are-free transferability, good title, always in written form, unconditional order or promise, certainty of payment, payee, time, etc. Distinction between a Promissory Note and a Bill of Exchange

Promissory Note Bill of Exchange

1.It contains an unconditional 1. It contains an unconditional promise. order. 2.There are two parties – the maker 2. There are three parties – the and the payee. drawer, the drawee and the payee. 3. It is made by the debtor. 3. It is made by the creditor. 4. Acceptance is not required. 4. Acceptance by the drawee is a must. 5. The liability of the maker/drawer 5. The liability of the maker/drawer is primary and absolute. Is secondary and conditional upon non-payment by the drawee.

Distinction between a Cheque and a Bill of Exchange

Cheque Bill of Exchange


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1.It is drawn only on a banker. 1. It can be drawn on anybody including a banker.

2.The amount is always payable 2. The amount is payable on demand on demand. or after a specified period. 3.It can be crossed to end its 3. It cannot be crossed. negotiability. 4.Acceptance is not required. 4. Acceptance is a must.


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8.LOANS AND ADVAVCES

There are few general principles of good lending which every banker follows when appraising an advance proposal. These general principles of good lending are explained in this chapter. Principles of lending: 1. Safety "Safety first" is the most important principle of good lending. When a banker lends, he must feel certain that the advance is safe; that is, the money will definitely come back. If, for example, the borrower invests the money in an unproductive or speculative venture, or if the borrower himself is dishonest, the advance would be in jeopardy. Similarly, if the borrower suffers losses in his business due to his incompetence, the recovery of the money may become difficult. The banker ensures that the money advanced by him goes to the right type of borrower and is utilized in such a way that it will not only be safe at the time of lending but will remain so throughout, and after serving a useful purpose in the trade or industry where it is employed, is repaid with interest. 2. Liquidity It is not enough that the money will come back; it is also necessary that it must come back on demand or in accordance with agreed terms of repayment. The borrower must be in a position to repay within a reasonable time after a demand for repayment is made. This can be possible only if the money is employed by the borrower for short-term requirements and not locked up in acquiring fixed assets, or in schemes which take a long time to pay their way. The source of repayment must also be definite. The reason why bankers attach as much importance to 'liquidity' as to safety' of their funds, is that a bulk of their deposits is repayable on demand or at short notice. If the banker lends a large portion of his funds to borrowers from whom repayment would be coming in but slowly, the ability of the banker to meet the demands made on him would be seriously affected in spite of the safety of the advances. For example, an advance of Rs.50 lakhs (approx.


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$111,354.60 USD) on the security of a legal mortgage of a bungalow of the market value of Rs. 100 lakhs (approx. $222,716.82 USD), will be very safe. If, however, the recovery of the mortgage money has to be made through a court process, it may take a few years to do so. The loan is safe but not liquid. 3. Purpose The purpose should be productive so that the money not only remain safe but also provides a definite source of repayment. The purpose should also be short termed so that it ensures liquidity. Banks discourage advances for hoarding stocks or for speculative activities. There are obvious risks involved therein apart from the anti-social nature of such transactions. The banker must closely scrutinize the purpose for which the money is required, and ensure, as far as he can, that the money borrowed for a particular purpose is applied by the borrower accordingly. Purpose has assumed a special significance in the present day concept of banking. 4. Profitability Equally important is the principle of 'profitability' in bank advance like other commercial institutions, banks must make profits. Firstly, they have to pay interest on the deposits received by them. They have to incur expenses on establishment, rent, stationery, etc. They have to make provision for depreciation of their fixed assets and also for any possible bad or doubtful debts. After meeting all these items of expenditure which enter the running cost of banks, a reasonable profit must be made; otherwise, it will not be possible to carry anything to the reserve or pay dividend to the shareholders. It is after considering all these factors that a bank decides upon its lending rate. It is sometimes possible that a particular transaction may not appear profitable in itself, but there may be some ancillary business available, such as deposits from the borrower's other concerns or his foreign exchange business, which may be highly remunerative. In this way, the transaction may on the whole be profitable for the bank. It should, however, be noted that lending rates are affected by the Bank Rate, inter-bank competition and the Federal / Central Bank's directives (e.g Directives of Reserve Bank of India, RBI), if any. The rates may also differ depending on the borrower's credit, nature of security, mode of charge, and form and type of advance, whether it is a cash credit, loan preshipment finance or a consumer loan, etc. 5. Security


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It has been the practice of banks not to lend as far as possible except against security. Security is considered as insurance or a cushion to fall back upon in case of an emergency. The banker carefully scrutinizes all the different aspects of an advance before granting it. At the same time, he provides for an unexpected change in circumstances which may affect the safety and liquidity of the advance. It is only to provide against such contingencies that he takes security so that he may realize it and reimburse himself if the well-calculated and almost certain source of repayment unexpectedly fails. It is incorrect to consider an advance proposal from the point of view of security alone. An advance is granted by a good banker on its own merits, that is to say with due regard to its safety, likely purpose etc., and after looking into the character, capacity and capital of the borrower and not only because the security is good. Apart from the fact that taking of security reserves as a safety valve for an unexpected emergency it also renders very difficult, if not impossible, for the borrower to raise a secured advance from another source against the very security. 6. Spread Another important principle of good lending is the diversification of advances. An element of risk is always present in every advance, however secure it might appear to be. In fact, the entire banking business is one of taking calculated risks and a successful hanker is an expert in assessing such risks. He is keen on spreading the risks involved in lending, over a large number of borrowers, over a large number of industries and areas, and over different types of securities. For example, if he has advanced too large a proportion of his funds against only one type of security, he will run a big risk if that class of security steeply depreciates. If the bank has numerous branches spread over the country, it gets a wide assortment of securities against the advances. Slump does not normally affect all industries and business centres simultaneously. 7. National Interest, Suitability, etc. Even when an advance satisfies all the aforesaid principles, it may still not be suitable. The advance may run counter to national interest. The Federal / Central Bank (e.g Reserve Bank of India, RBI) may have issued a directive prohibiting banks to allow the particular type of advance. The law and order situation at the place where the borrower carries on his business may not be satisfactory. There may be other reasons of a like nature for which it may not be suitable for the bank to grant the advance.


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In the changing concept of banking, factors such as purpose of the advance, viability of the proposal and national interest are assuming a greater importance than security, especially in advances to agriculture, small industries, small borrowers, and export-oriented industries. Ideal Advance L.C. Mather describes an ideal advance as "one which is granted to a reliable customer for an approved purpose in which the customer has adequate experience, safe in the knowledge that the money will be used to advantage and repayment will be made within a reasonable period from trading receipts or known maturities due on or about given dates." In finance, a loan is a debt evidenced by a note which specifies, among other things, the principal amount, interest rate, and date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount. The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Although this article focuses on monetary loans, in practice any material object might be lent. Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding. Types of loans Secured See also: Loan guarantee A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral.


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A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer. Unsecured Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages:

• credit card debt

• personal loans

• bank overdrafts

• credit facilities or lines of credit

• corporate bonds (may be secured or unsecured) The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974. Interest rates on unsecured loans are nearly always higher than for secured loans, because an unsecured lender's options for recourse against the borrower in the event of default are severely limited. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the


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borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible. Demand Demand loans are short term loans that are atypical in that they do not have fixed dates for repayment and carry a floating interest rate which varies according to the prime rate. They can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured. Subsidized A subsidized loan is a loan on which the interest is reduced by an explicit or hidden subsidy. In the context of college loans in the United States, it refers to a loan on which no interest is accrued while a student remains enrolled in education. Otherwise, it may refer to a loan on which an artificially low rate of interest (or none at all) is charged to the borrower. An unsubsidized loan is a loan that gains interest at a market rate from the date of disbursement Target markets Personal or commercial See also: Credit_(finance)#Consumer_credit Loans can also be subcategorized according to whether the debtor is an individual person (consumer) or a business. Common personal loans include mortgage loans, car loans, home equity lines of credit, credit cards, installment loans and payday loans. The credit score of the borrower is a major component in and underwriting and interest rates (APR) of these loans. The monthly payments of personal loans can be decreased by selecting longer payment terms, but overall interest paid increases as well. For car loans in the U.S., the average term was about 60 months in 2009. Loans to businesses are similar to the above, but also include commercial mortgages and corporate bonds. Underwriting is not based upon credit score but rather credit rating. Loan payment The most typical loan payment type is the fully amortizing payment in which each monthly rate has the same value over time.


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The fixed monthly payment P for a loan of L for n months and a monthly interest rate c is: P = L \cdot \frac{c\,(1 + c)^n}{(1 + c)^n - 1} Abuses in lending Predatory lending is one form of abuse in the granting of loans. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over him or her. Where the moneylender is not authorized, they could be considered a loan shark. Usury is a different form of abuse, where the lender charges excessive interest. In different time periods and cultures the acceptable interest rate has varied, from no interest at all to unlimited interest rates. Credit card companies in some countries have been accused by consumer organizations of lending at usurious interest rates and making money out of frivolous "extra charges". Abuses can also take place in the form of the customer abusing the lender by not repaying the loan or with intent to defraud the lender. Advances by commercial banks are made in different forms such as demand loan, term loan, cash credit, overdraft etc. These forms of advances are explained below. Forms of advances by commercial banks 1. Demand Loan In a demand loan account, the entire amount is paid to the debtor at one time, either in cash or by transfer to his savings bank or current account. No subsequent debit is ordinarily allowed except by way of interest, incidental charges, insurance premiums, expenses incurred for the protection of the security etc. Repayment is provided for by installment without allowing the demand character of the loan to be affected in any way. There is usually a stipulation that in the event of any installment, remaining unpaid, the entire amount of the loan will become due. Interest is charged on the debit balance, usually with monthly rests unless there is an arrangement to the contrary. No cheque book is issued. The security may be personal or in the form of shares, Govt. paper, fixed deposit receipt, life insurance policies, goods, etc.


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2. Term Loan When a loan is granted for a fixed period exceeding three years and is repayable according to the schedule of repayment, it is known as a term loan. The period of term loan may extend up to 10 years and in some cases up to 20 years. A term loan is generally granted for fixed capital requirements, e.g. investment in plant and equipment, land and building etc. These may be required for setting up new projects or expansion or modernization of the plant and equipment. Advances granted for purchasing land / building / flat (Apartment house) are term loans. 3. Overdraft An overdraft is a fluctuating account wherein the balance sometimes may be in credit and at other times in debit. Overdraft facilities are allowed in current accounts only. Opening of an overdraft account requires that a current account will have to be formally opened, and the usual account opening form completed. Whereas in a current account cheques are honoured if the balance is in credit, the overdraft arrangement enables a customer to draw over and above his own balance up to the extent of the limit stipulated. For example, if there is a credit balance of Rs.40,000/- (approx. $890 USD) in a customer's current account and an overdraft limit of Rs. 50,000/- (approx. $1,113 USD) is sanctioned to the party, he can draw cheques up to Rs. 90,000/- (approx. $2,003 USD). There is no restriction, unlike in the case of loans, on drawing more than once. In fact, as many drawings and repayments are permitted as the customer would desire, provided the total amount overdrawn, i.e. the debit balance at any time does not exceed the agreed limit. This is a satisfactory arrangement from the customer's point of view. He need not hesitate to pay into the account any moneys for fear that an amount once paid in cannot be drawn out or borrowed again, unlike in a loan account. As in the case of a demand loan account, the security in an overdraft account may be either personal or tangible. The tangible security may be in the form of shares, government paper, life insurance policies, fixed deposit receipts etc. i.e. paper securities. A cheque book is issued in an overdraft account. 4. Cash Credit A cash credit is essentially a drawing account against credit granted by the bank and is operated in the same way as a current account in which an overdraft limit has been sanctioned. The principal advantages of a cash credit account to a borrower are that, unlike the party borrowing on a fixed loan basis, he may operate the account within the stipulated limit as and when required and can save interest


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by reducing the debit balance whenever he is in a position to do so. The borrower can also provide alternative securities from time to time in conformity with the terms of the advance and according to his own requirements. Cash credits are normally granted against the security of goods e.g. raw materials, stock in process, finished goods. It is also granted against the security of book-debts. If there is good turnover both in the account and in the goods, and there are no adverse factors, a cash credit limit is allowed to continue for years together. Of course a periodical review would be necessary. 5. Bills Purchased Bills, clean or documentary, are sometimes purchased from approved customers in whose favour regular limits are sanctioned. In the case of documentary bills, the drafts are accompanied by documents of title to goods such as railway receipts or bills of lading (BOL). Before granting a limit, the creditworthiness of the drawer is to be ascertained. Sometimes the financial standing of the drawees of the bills are verified, particularly when the bills are drawn from time to time on the same drawees and/or the amounts are large. Although the term "Bills Purchased" seems to imply that the bank becomes the purchaser / owner of such bills, it will be observed that in almost all cases, the bank holds the bills (even if they are indorsed in its favour) only as security for the advance. In addition to any rights the banker may have against the parties liable on the hills, he can also fully exercise a pledgee's right over the goods covered by the documents. 6. Bills Discounted Usance bills, maturing within 90 days or so after date or sight, are discounted by banks for approved parties. In case a bill, say for Rs. 10,000/- (approx. $223 USD) due 90 days hence, is discounted today at 20% per annum, the borrower is paid Rs. 9,500/- (approx. $211 USD), its present worth. However the full amount is collected from the drawee on maturity. The difference between the present worth and the amount of the bill represents earning of the banker for the period for which the bill is to run. In banking terminology this item of income is called "discount".

Statutory and other restrictions on Loans and Advances Advances against bank's own shares:


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A bank cannot grant any loans and advances on the security of its own shares.( Section 20(1) of the Banking Regulation Act, 1949) Advances to bank's Directors : Banks are prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors, or any company/firm in which any of its directors is interested as partner, manager, employee or guarantor (B.R Act (Section 20(1). ‘Loans & advances’ shall not include:-

• Loans or advances against Govt. securities, life insurance policies or fixed deposit.

• Loans or advances to the Agricultural Finance Corporation Ltd.

• Loans or advances to any of its directors in his capacity as an employee prior to becoming as director loans or advances granted to its Chairman and Chief Executive Officer or to its whole time director (purchasing a car, personal computer, furniture or constructing/ acquiring a house for his personal use and Festival Advance), with the prior approval and subject to terms and conditions stipulated by RBI.

• �Call loans.

• Bills purchased/discounted, purchase of cheques, other non-fund based facilities like acceptance/co-acceptance of bills, opening of L/Cs and issue of guarantees, purchase of debentures from third parties, etc.

• Line of credit/overdraft facility extended by settlement bankers to National Securities Clearing Corporation Ltd.(NSCCL) / Clearing Corporation of India Ltd. (CCIL) to facilitate smooth settlement; and

• A credit limit granted under credit card facility provided to its directors. ‘Loans & advances’ include, among others:-

• Purchase of or discount of bills from directors and their concerns.

• Issuance of guarantees and opening of L/Cs on behalf of the bank’s directors.

Restrictions on Power to Remit Debts A banking company shall not, except with the prior approval of the Reserve Bank, remit in whole or in part any debt due to it by any of its directors or any firm or company in which the directors are having interest or partner or guarantor. (Sec. 20A of BR Act)


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Restrictions on Holding Shares in Companies Banks should not hold shares in any company except as provided in sub-section (1) whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30 percent of the paid-up share capital of that company or 30 percent of its own paid-up share capital and reserves, whichever is less. (Section 19(2) of the Act) (2) The banks should not hold shares whether as pledgee, mortgagee or absolute owner, in any company in the management of which any managing director or manager of the bank is in any manner concerned or interested. (Section 19(3)) Restrictions on Credit to Companies for Buy-back of their Securities Banks shall not provide loans to companies for buy-back of their shares/ securities. However, companies are permitted (Sec. 77A (1) of ICA 1956) to purchase their own shares or other specified securities from their free reserves, or securities premium account or proceeds of any shares of other specified securities. Regulatory Restrictions: a) Granting loans and advances to relatives of Directors

• Without prior approval of the Board or without the knowledge of the Board, no loans and advances aggregating to Rs. 25 Lakh and above should be granted to relatives of the bank's Chairman/Managing Director or other Directors or other bank’s Directors (including Chairman/Managing Director) and their relatives, including lending to directors and their relatives on reciprocal basis (Sec. 20 of B.R. Act). Term relative is explained in RBI Master Circular dt. July 2, 2012.

• Loans & advances of less than Rs.25 Lakh to these borrowers can be sanctioned at appropriate level as per delegation with suitable reporting to the Board.

• The term ‘loans and advances’ will not include loans or advances against Government securities, Life insurance policies, Fixed or other deposits, Stocks and shares, Temporary overdrafts for small amounts, i.e. upto Rs. 25,000/-,Casual purchase of cheques up to Rs. 5,000 at a time, Housing loans, car advances, etc. granted to an employee of the bank

The guidelines are applicable while granting loans/ advances or awarding contracts to directors of scheduled co-operative banks or their relatives and to directors of Subsidiaries/trustees of mutual funds/venture capital funds set up by them as also other banks. b) Grant of Loans & Advances to Officers and Relatives of Senior Officers of Banks


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��No officer or any Committee comprising, inter alia, an officer as member shall sanction any credit facility to his/her relative but only by the next higher sanctioning authority. Credit facilities sanctioned to senior officers shall be reported to the Board. ��Credit facilities to the relatives of senior officers of the bank sanctioned by the appropriate authority should be reported to the Board. c) Financial Assistance to Industries Producing/Consuming Ozone Depleting Substances (ODS) Banks should not extend finance for setting up of new units consuming/producing the Ozone Producing Substances (ODS) as under:- Sector Type of substance Foam products Chlorofluorocarbon - 11 (CFC - 11) Refrigerators and Air-conditioners CFC – 12 Aerosol products Mixtures of CFC - 11 and CFC – 12 Solvents in cleaning applications CFC - 113 Carbon Tetrachloride, Methyl Chloroform Fire extinguishers Halons - 1211, 1301, 2402 ��No financial assistance should be extended to small/medium scale units engaged in the manufacture of the aerosol units using CFC and no refinance would be extended to any project assisted in this sector. (FI/12/96-97 2nd Feb 1996-IDBI). d) Advances against Sensitive Commodities under Selective Credit Control (SCC) ��RBI, (Section 21 & 35A of the Act), issues, from time to time, directives to all commercial banks, stipulating specific restrictions on bank advances against specified sensitive commodities viz. food grains i.e. cereals and pulses, oil seeds indigenously grown viz. groundnut, rapeseed/mustard, cottonseed, linseed and castorseed, oils thereof, vanaspati and all imported oils and vegetable oils, raw cotton and kapas, sugar/gur/khandsari, cotton textiles which include cotton yarn, man-made fibres and yarn and fabrics made out of man-made fibres and partly out of cotton yarn and partly out of man-made fibres. Presently, the following commodities are covered under stipulations of Selective Credit Control: a) Buffer stock of sugar with Sugar Mills b) Unreleased stocks of sugar with Sugar Mills representing • levy sugar, and • free sale sugar.


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��Banks are free to fix prudential margins on advances against these sensitive commodities. Banks have the freedom to fix lending rates for the commodities coming within the purview of SCC at or above Base Rate. ��Obtaining prior approval from RBI for credit proposals above Rs. 1 crore relating to sensitive commodities coming under SCC is discontinued. e) Restriction on payment of commission to staff members including officers Banks should not pay commission to staff members and officers for recovery of loans.( Sec 10(1)b(ii) of BR Act). f) Restrictions on offering incentives on any banking products Banks should not offer any banking products, including online remittance schemes etc., with prizes / lottery/free trips (in India and/or abroad), etc. or any other incentives having an element of chance, except inexpensive gifts costing not more than Rs. 250/-. g) Other loans and advances

i) Advances to Individuals: Banks may grant advances against the security of shares, debentures or bonds to individuals for meeting contingencies and personal needs or for subscribing to new or rights issues of shares / debentures / bonds or for purchase in the secondary market. ��The limit per individual should not exceed Rs. 10 lakh and Rs. 20 lakh if the securities are held in physical and dematerialized form respectively. ��A minimum margin of 50% of the market value of equity shares / convertible debentures held in physical form and 25% of the market value in case held in dematerialized form. ��Each bank should formulate with the approval of their Board of Directors a Loan Policy for grant of advances to individuals against shares / debentures / bonds keeping in view the RBI guidelines. ii) Advances to Share and Stock Brokers/ Commodity Brokers ��Share and stock brokers/commodity brokers registered with SEBI and who comply with capital adequacy norms prescribed by SEBI / Stock Exchanges may be provided need based overdraft facilities / line of credit against shares and debentures held by them as stock-in-trade to meet the cash flow gap between delivery and payment for DVP transactions undertaken on behalf of institutional clients viz. FIs, Flls, mutual funds and banks.


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��The ceiling of Rs. 10 lakh / Rs. 20 lakh is not applicable for finance to these types of borrowers. ��A uniform margin of 50 per cent shall be applied on all advances / financing of IPOs / issue of guarantees on behalf of share and stockbrokers. A minimum cash margin of 25 per cent (within the margin of 50%) shall be maintained in respect of guarantees issued by banks for capital market operations. ��Banks may issue guarantees in favour of stock exchanges in lieu of security deposit to the extent it is acceptable and may also issue guarantees in lieu of margin requirements as per stock exchange regulations. ��The transfer of shares in bank's name in respect of shares held in physical form shall not apply provided such shares are held as security for a period not exceeding nine months. ��Banks and their subsidiaries should not undertake financing of 'Badla' transactions. iii) Bank finance for Market Makers ��Banks may provide need based finance to approved Market Makers subject to the various conditions, among others:- a) Market makers approved by Stock Exchanges are only eligible for finance from commercial banks; b) Market making may not only for equity but also for debt securities including State & Central Govt. securities; c) Need based working capital can be provided based on commercial judgment; d) Uniform margin of 50% shall be applied for all advances and a minimum cash margin of 25% (within the margin of 50%) shall be maintained in respect of guarantees issued by banks for capital market operations; e) Collateral security may be accepted by scripts other than scripts in which market making operations are undertaken; f) Banks should ensure that the funds are not diverted for investment in shares other than scripts earmarked for market making purpose; g) Ceiling of Rs. 10 Lakh/Rs. 20 Lakh for advances against shares is not applicable in the case. ��Bank may lay down a detailed loan policy for granting advances and issuance of guarantees to Stock Brokers and Market Makers in line with the RBI guidelines. iv) Bank Loan for financing Promoter’s contribution ��Banks are permitted to extend loans to corporate against the security of shares (as far as possible in dematerialized form) held by them to meet the promoters’ contribution to the equity of new companies in anticipation of raising resources subject to the terms and conditions, in respect of margin, period of repayment, etc.


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and it should be treated as a bank’s investment in shares which would thus come under the ceiling of 40 percent of the bank's net worth as on March 31 of the previous year prescribed for the bank’s total exposure including both fund based and non-fund based to capital market in all forms. ��With the approval of the Board of Directors, the banks may formulate internal guidelines with appropriate safeguards for this purpose. General guidelines applicable to advances against shares / debentures / Bonds ��Statutory provisions regarding the grant of advances against shares contained in the B.R. Act 1949 (Sec. 19(2), (3), and 20(1) a) should be strictly observed. ��Banks should be concerned with what the advances are for, rather than what the advances are against (end use). While considering grant of advances against shares / debentures banks must follow the normal procedures for the sanction, appraisal and post sanction follow-up. ��Advances against the primary security of shares / debentures / bonds should be kept distinct and separate and not combined with any other advance. ��Banks may satisfy themselves about the marketability of the shares / debentures and the net worth and working of the company whose shares / debentures / bonds are offered as security. ��Shares / debentures / bonds should be valued at prevailing market prices when they are lodged as security for advances. ��Banks should exercise particular care when advances are sought against large blocks of shares by a borrower or a group of borrowers and it should be ensured that advances against shares are not used to enable the borrower to acquire or retain a controlling interest in the company / companies or to facilitate or retain inter-corporate investments. ��No advance against partly paid shares shall be granted. ��No loans to be granted to partnership / proprietorship concerns against the primary security of shares and debentures. ��Shares/debentures/bonds for limit above Rs. 10 Lakh should be transferred in the bank's name and that the bank has exclusive and unconditional voting rights in respect of such shares. ��Banks may take their own decision in regard to exercise of voting rights and may prescribe procedures for this purpose. ��Banks should ensure that the scrips lodged with them as security are not stolen / duplicate / fake / benami. Any irregularities coming to their notice should be immediately reported to RBI. ��The Board of Directors may decide the appropriate level of authority for sanction of advances against shares / debentures.


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h) Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks The banks may desist from sanctioning advances against FDRs, or other term deposits of other banks.

i) Advances to Agents/Intermediaries based on Consideration of Deposit Mobilization Banks may desist from entertaining advances to existing/prospective borrowers, agents/ intermediaries based on the consideration of deposit mobilization. j) Loans against Certificate of Deposits (CDs) Banks may not grant loans against CDs nor permitted to buy back their own CDs before maturity except lending and buy back of CDs held by mutual funds. Such finance if extended to equityoriented mutual funds will form part of banks’ capital market exposure, as hitherto. k) Finance for and Loans/Advances against Indian Depository Receipts (IDRs) No bank shall grant any loan / advance for subscription to Indian Depository Receipts (IDRs) and shall not grant any loan / advance against security / collateral of IDRs issued in India. l) Revised Guidelines for Financing of Infrastructure Projects Any credit facility in whatever form extended by lenders (i.e. banks, FIs or NBFCs) to an infrastructure facility falls within the definition of "infrastructure lending” viz. developing or operating and maintaining, or developing, operating and maintaining any infrastructure facility that is a project in any of the following sectors, or any infrastructure facility of a similar nature as detailed in the RBI Circular.

Criteria for Financing a) The project should both technically and financially viable and bankable and undertaken by both public sector and private sector undertakings; b) The quantum of finance should be within the overall ceiling of the prudential exposure norms prescribed by RBI for infrastructure financing. c) Banks/ FIs should have the requisite expertise for appraising technical feasibility, financial viability and bankability of projects, with particular reference to the risk analysis and sensitivity analysis. d) In respect of projects undertaken by public sector units, term loans may be sanctioned only for corporate entities (i.e. public sector undertakings registered


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under Companies Act or a Corporation established under the relevant statute) including Special Purpose Vehicles (SPVs). e) Such term loans should not be in lieu of or to substitute budgetary resources envisaged for the project, but, they could supplement the budgetary resources if such supplementing was contemplated in the project design and it should be ensured by banks and financial institutions that these loans/investments are not used for financing the budget of the State Governments. f) Banks may also lend to SPVs in the private sector, registered under the Companies Act for directly undertaking infrastructure projects which are financially viable and not for acting as mere financial intermediaries. Types of Financing by Banks a) Banks may extend credit facility by way of working capital finance, term loan, project loan, subscription to bonds and debentures/ preference shares/ equity shares acquired as a part of the project finance package which is treated as "deemed advance” and any other form of funded or non-funded facility. b) Take-out Financing : i) Under the arrangement, banks financing the infrastructure projects will have an arrangement with IDFC or any other financial institution for transferring to the latter the outstanding in their books on a pre-determined basis. The arrangement would enable banks to avoid asset-liability maturity mismatches that may arise out of extending long tenor loans to infrastructure projects. (ii) Liquidity support from IDFC -- As an alternative to take-out financing structure, IDFC and SBI have devised a product, providing liquidity support to banks. Under the scheme, IDFC would commit, at the point of sanction, to refinance the entire outstanding loan (principal+ unrecovered interest) or part of the loan, to the bank after an period, say, five years. The credit risk on the project will be taken by the bank concerned and not by IDFC. c) Inter-institutional Guarantees: Banks are permitted to issue guarantees favouring other lending institutions in respect of infrastructure projects, provided the bank issuing the guarantee takes a funded share in the project at least to the extent of 5 per cent of the project cost and undertakes normal credit appraisal, monitoring and follow-up of the project. d) Financing promoter's equity:Finance can be considered subject to:- ��The bank finance would be only for acquisition of shares of existing companies providing infrastructure facilities. Further acquisition of such shares should be in respect of companies where the existing foreign promoters (and/ or domestic joint promoters) voluntarily propose to disinvest their majority shares in compliance with SEBI guidelines, where applicable.


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��The companies to which loans are extended should, inter alia, have a satisfactory net worth. ��The company financed and the promoters/ directors of such companies should not be a defaulter to banks/ FIs. ��Bank finance should be restricted to 50% of the finance required for acquiring the promoter's stake in the company being acquired. ��Finance extended should be against the security of the assets of the borrowing company or the assets of the company acquired and not against the shares of that company or the company being acquired, but the shares may be accepted as additional security and not as primary security. The security charged to the banks should be marketable. ��Banks should ensure maintenance of stipulated margins at all times. ��The tenor of the bank loans may not normally be longer than seven years. ��This financing would be subject to compliance with the statutory requirements of the B.R. Act, 1949 (Sec. 19(2)). ��The banks financing acquisition of equity shares by promoters should be within the regulatory ceiling of 40 per cent of their net worth as on March 31 of the previous year for the aggregate exposure of the banks to the capital markets in all forms (both fund based and non-fund based). ��The proposal for bank finance should have the approval of the Board. Appraisal In respect of financing of infrastructure projects undertaken by Government owned entities, banks/Financial Institutions should undertake due diligence on the viability of the projects. Prudential requirements ��Banks are required to comply with the Prudential Credit Exposure fixed by RBI from time to time. ��Assignment of risk weight for capital adequacy purposes Banks are required to be guided by the Prudential Guidelines on Capital Adequacy and Market Discipline- Implementation of the New Capital Adequacy Framework, as amended from time to time in the matter of capital adequacy. ��Asset-Liability Management. The long-term financing of infrastructure projects may lead to asset – liability mismatches, particularly when such financing is not in conformity with the maturity profile of a bank’s liabilities. Banks would, therefore, need to exercise due vigil on their asset liability position to ensure that they do not run into liquidity mismatches on account of lending to such projects. ��Administrative arrangements - Multiplicity of appraisals by every institution involved in financing, leading to delays, has to be avoided and banks should be


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prepared to broadly accept technical parameters laid down by leading public financial institutions so as to ensure timely and adequate availability of credit. Issue of Bank Guarantees in favour of Financial Institutions Banks may issue guarantees favouring other banks/FIs/other lending agencies for the loans extended by the latter subject to:- a) A laid down policy approved by the Board addressing the prudential limits linked to the Tier 1 capital of the bank, nature and extent of security and margins, delegation of powers, reporting/ review system etc. should be in place; b) Guarantees shall be extended only in respect of borrower customers to enable them to avail of additional credit facility from other banks/FIs/Lending agencies; c) The guaranteeing banks shall assume a funded exposure of at least 10% of the exposure guaranteed. d) Banks shall not extend guarantees or letter of comfort in favour of overseas lenders except provided under FEMA; e) The guarantee is an exposure on the borrowing entity and attracts appropriate risk weight as per extant guidelines, etc. Lending banks: Banks extending credit facilities against the guarantees issued by other banks/FIs are required to ensure strict compliance of the various conditions listed out in the RBI Circular with some exceptions to finance to infrastructure projects. However, banks should not grant co-acceptance/guarantee facilities under Buyers Lines of Credit Schemes introduced by IDBI, SIDBI, Exim Bank, Power Finance Corporation (PFC) or any other financial institution, unless specifically permitted by the RBI. m) Discounting/Rediscounting of Bills by Banks: Guidelines ��Banks should evolve clearly a bills discounting policy approved by their Board of Directors, which should be consistent with their policy of sanctioning of working capital limits. ��Banks can open LCs and purchase/discount/negotiate bills under LC only in respect of genuine commercial and trade transactions of their borrower constituents who have been sanctioned regular credit facilities by the banks. ��In cases where negotiation of bills drawn under LC is restricted to a particular bank, and the beneficiary of the LC is not a constituent of that bank, the bank concerned may negotiate such an LC, subject to the condition that the proceeds will be remitted to the regular banker of the beneficiary. Negotiation of unrestricted LCs of non-constituents is prohibited.


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��LC issuing bank may discount bills drawn by beneficiary only if the bank has sanctioned regular fund-based credit facilities to the beneficiary. ��The exposure is to be treated as an exposure on the LC issuing bank and not on the borrower ��Banks should ensure that blank LC forms are kept in safe custody as in case of security and verified / balanced on daily basis. LCs should be issued under joint signatures of the bank’s authorized officials only. ��The practice of drawing bills of exchange clause ‘without recourse’ and issuing letters of credit bearing the legend ‘without recourse’ should be discouraged. ��Accommodation bills should not be purchased / discounted / negotiated by banks. ��Banks should be circumspect while discounting bills drawn by front finance companies set up by large industrial groups on other group companies. ��Banks may exercise their commercial judgment in discounting of bills of the services sector, etc. n) Advances against Bullion/Primary gold Banks should not grant any advance against bullion/ Primary gold except specially minted gold coins sold by banks and desist from granting advances to the silver bullion dealers which are likely to be utilized for speculative purposes. o) Advances against Gold Ornaments & Jewellery Banks can finance against hallmarked gold jewellery which ensures the quality of gold, caratage, fineness and purity. p) Gold (Metal) Loans Banks nominated to import gold may extend Gold (Metal) Loans to domestic jewellery Manufacturers, who are not exporters of jewellery subject to:- a) The tenor of the loan not to exceed 180 days b) Interest to be charged should be linked to international gold interest rates c) Normal reserve and capital adequacy requirements d) Adherence to KYC norms, etc. q) Loans and advances to Real Estate Sector Banks can entertain loan proposals involving real estate borrowers who have obtained prior permission from government / local governments / other statutory authorities for the project. r) Loans and advances to Micro & Small Enterprises (MSEs)


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MSE units having working capital limits of up to Rupees five crore from the banking system are to be provided working capital finance computed on the basis of 20 percent of their projected annual turnover.

s) Loan system for delivery of bank credit ��Borrowers enjoying working capital limits of Rs. 10 crore and above, the loan component may be 80% and the balance 20%with banks having freedom to change the composition. ��Borrowers under the category may be persuaded to move to the ‘Loan System’ by offering incentive such as lower rate of interest on the loan component as compared to cash credit component. ��Business activities having cyclical and seasonal in nature may be exempted from the ‘Loan System’ to mitigate difficulties. t) Lending under Consortium Arrangement/Multiple Banking Arrangement Banks are required to strengthen their information back-up about the borrowers enjoying credit facilities from multiple banks by:- a) Obtaining a declaration from the borrowers availing sanctioned limits of Rs. 5 crore and above about the credit facilities already enjoyed by them from other banks in the prescribed format. b) Banks may exchange information about the conduct of the borrowers' accounts with other banks in the format given by RBI at least at quarterly intervals. c) Obtain regular certification by a professional, preferably a Company Secretary, Chartered Accountant or Cost Accountant, regarding compliance of various statutory prescriptions that are in vogue. d) Make greater use of credit reports available from CIBIL, etc. u) Working Capital Finance to Information Technology and Software Industry ��Borrowers with working capital limits of up to Rs 2 crore, assessment may be made at 20 percent of the projected turnover and in other cases, the banks may consider assessment of MPBF on the basis of the monthly cash budget system and above Rs. 10 crore, guidelines regarding ‘Loan System’ may be made applicable. ��Banks can stipulate reasonable amount as promoters’ contribution towards margin. ��Banks may obtain collateral security wherever available. First/ second charge on current assets, if available, may be obtained. ��The rate of interest as prescribed for general category of borrowers may be levied. Concessional rate of interest as applicable to pre-shipment/post-shipment credit may be considered.


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��Banks may evolve tailor-made follow up/monitoring system for such advances. v) Bank finance for PSU disinvestments of Government of India ��Banks’ proposals for financing the successful bidders in the PSU disinvestment programme should be approved by their Board of Directors. ��Bank finance should be for acquisition of shares of PSU under a disinvestment programme approved by Government of India, including the secondary stage mandatory open offer. ��The companies, including the promoters to which bank finance is to be extended, should have adequate net worth and an excellent track record of servicing loans availed from the banking system. ��The amount of bank finance thus provided should be reasonable with reference to the banks' size, its net worth and business and risk profile. ��In case the advance is secured by the shares of the disinvested PSUs or any other shares, banks should follow RBI's extant guidelines on capital market/overall exposures, etc. ��Banks may extend finance to the successful bidders even though the shares of the disinvested company acquired/ to be acquired by the successful bidder are subjected to a lock-in period, etc. w) Loans for acquisition of Kisan Vikas Patras (KVPs) Banks should ensure that no loans are sanctioned for acquisition of /investing in Small Savings Instruments including Kisan Vikas Patras.

x) Loans against 7% Savings Bonds 2002, 6.5% Savings Bonds 2003 (Non-taxable) & 8% Savings (Taxable) Bonds 2003-Collateral facility Banks are permitted to accept bonds issued by GOI as collateral by way of pledge, hypothecation or lien for loans being extended to holders and the facility is not available in respect of the loans extended to third parties.

y) Guidelines on Settlement of Non Performing Assets- Obtaining Consent Decree from Court Banks are to invariably ensure that once a case is filed before a Court / DRT / BIFR, any settlement arrived at with the borrower is subject to obtaining a consent decree from the Court /DRT / BIFR concerned. z) Project Finance Portfolio of Banks In order to contain/minimize the equity funding risk, banks are advised in their own interest to have a clear policy regarding the Debt Equity Ratio (DER) and to ensure that the infusion of equity/fund by promoters should be such that the


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stipulated level of DER is maintained at all times. Banks may adopt funding sequences so that possibility of equity funding by banks is obviated. Bridge Loans against receivables from Government ��Banks may avoid extending bridge loans against amounts receivable from Central/State Governments by way of subsidies, refunds, reimbursements, capital contributions, etc. with the exception of financing against subsidy receivable under the normal Retention Price Scheme (RPS) for periods upto 60 days in case of fertilizer industry. ��Banks may grant finance against receivables from Government by exporters (viz. Duty Draw Back and IPRS) to the extent covered by the existing instructions. Guidelines on Fair Practices Code for Lenders Banks/ all India Financial Institutions are required to adopt the broad guidelines and frame the Fair Practices Code duly approved by their Board of Directors. Applications for loans and their processing ��Loan application forms should be comprehensive containing all information about fees / charges payable for processing the loan application, the amount of fees refundable if loan amount is not sanctioned / disbursed, pre-payment options and charges, if any, penalty for delayed repayments if any, conversion charges for switching loan from fixed to floating rates or vice versa, etc. ��Banks and financial institutions should acknowledge for receipt of all loan applications. Time frame for loan applications up to Rs.2 lakh will be disposed of should also be indicated in acknowledgement of such applications ��Expedite processing of the loan application within a reasonable time. If additional details / documents are required, they should intimate the borrowers immediately. ��Reason for rejection of any applications should be conveyed in writing in case of all within stipulated time. Loan appraisal and terms/conditions ��Lenders should ensure that there is proper assessment of credit application by borrowers. ��The lender should convey to the borrower the credit limit along with the terms and conditions thereof and keep the borrower's acceptance of these terms and conditions given with his full knowledge on record. ��Terms and conditions and other caveats governing credit facilities given by banks/ financial institutions arrived at after negotiation by lending institution and the borrower should be advised in writing and duly certified by the authorized official.


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��A copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement should be furnished to the borrower at the time of sanction / disbursement of loans. ��As far as possible, the loan agreement should clearly stipulate credit facilities that are solely at the discretion of lenders. ��For lending under consortium arrangement, the participating lenders should evolve procedures to complete appraisal of proposals in the time bound manner to the extent feasible, and communicate their decisions on financing or otherwise within a reasonable time. Disbursement of loans including changes in terms and conditions Lenders should ensure timely disbursement of loans sanctioned in conformity with the terms and conditions governing such sanction. Post disbursement supervision ��Post disbursement supervision by lenders, particularly in respect of loans up to Rs.2 lakh, should be constructive with a view to taking care of any" lender related" genuine difficulty that the borrower may face. ��Due notice should be given prior to taking decision to recall / accelerate payment or seeking additional securities, etc. ��Lenders should release all securities on receiving payment of loan or realization of loan subject to any legitimate right or lien for any other claim lenders may have against borrowers. General ��Lenders should restrain from interference in the affairs of the borrowers except for what is provided in the terms and conditions of the loan sanction documents and they should not discriminate on grounds of sex, caste and religion in the matter of lending. ��Decision on request for transfers either from the borrower or from a bank/financial institution, which proposes to take- over the account, should be conveyed within 21 days from the date of receipt of request. Engaging Recovery Agents by banks ��Banks should have a due diligence process in place for engagement of recovery agents. ��Banks should inform the borrower the full details of the Recovery Agency Firm/companies while forwarding cases to the recovery agency. ��The notice and the authorization letter should, among other details, also include the telephone numbers of the relevant recovery agency. ��The up to date details of the recovery agency firms / companies engaged by banks may also be posted on the bank’s website.


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��Each bank should have a mechanism whereby the borrowers' grievances with regard to the recovery process can be addressed. Training for Recovery Agents ��RBI has requested the IBA to formulate, in consultation with Indian Institute of Banking and Finance (IIBF), a certificate course for Direct Recovery Agents with minimum 100 hours of training. Banks are required to ensure that over a period of one year all their Recovery Agents undergo the above training and obtain the certificate from the above institute. ��The service providers engaged by banks should also employ only such personnel who have undergone the above training and obtained the certificate from the IIBF. Other institutes/ bank’s own training colleges are also permitted to provide the training to the recovery agents by having a tie-up arrangement with IIBF and every agent will have to pass the examination conducted by IIBF all over India. Complaints against the bank / its recovery agents ��Banks, as principals, are responsible for the actions of their agents. Hence, they should ensure that their agents engaged for recovery of their dues should strictly adhere to the RBI guidelines and instructions, including the BCSBI Code, while engaged in the process of recovery of dues. ��RBI may impose penalty including imposing ban on banks in engaging Recovery Agents in case of any complaints received regarding violation of the above guidelines and adoption of abusive practices followed by banks’ recovery agents. Use of forum of Lok Adalats ��Banks are encouraged to use the forum of Lok Adalats for recovery of personal loans, credit card loans or housing loans with less than Rs.10 lakh as suggested by the Honorable Supreme Court. Utilization of credit counselors ��Banks are encouraged to put in place an appropriate mechanism to utilize the services of the credit counselors for providing suitable counseling to the borrowers where it becomes aware that the case of a particular borrower deserves sympathetic consideration.


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9. Fee Based Banking Services

Remittance Business

Apart from accepting deposits and lending money, Banks also carry out, on behalf of their customers the act of transfer of money - both domestic and foreign.- from one place to another. This activity is known as "remittance business" . Banks issue Demand Drafts, Banker's Cheques, Money Orders etc. for transferring the money. Banks also have the facility of quick transfer of money also know as Telegraphic Transfer or Tele Cash Orders.

In Remittance business, Bank 'A' at a place 'a' accepts money from customer 'C' and makes arrangement for payment of the same amount of money to either the customer 'C' or his "order" i.e. a person or entity, designated by 'C' as the recipient, through either a Branch of Bank 'A' or any other entity at place 'b'. In return for having rendered this service, the Banks charge a pre-decided sum known as exchange or commission or service charge. This sum can differ from bank to bank. This also differs depending upon the mode of transfer and the time available for effecting the transfer of money. Faster the mode of transfer, higher the charges.

Demand Draft: A demand draft or "DD" is an instrument most banks in India use for effecting transfer of money. It is a Negotiable Instrument. To buy a "DD" from a Bank, you are required to fill an application form which asks the following information :

Type of instrument needed

Name of the recipient

Name of the sender

Amount to be transferred

Place where the transferred money is to be paid

Mode in which money is to be paid i.e. in cash or through a Bank Account


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Mode in which you will pay money to the Bank i.e. in cash or by debit to your account

The application form along with the cheque on your account or cash is deposited with the counter clerk who gives you a Demand Draft (which looks like a cheque) for the amount.

Negotiable instruments distinguished from other types of contracts:

A negotiable instrument can serve to convey value constituting at least part of the performance of a contract, albeit perhaps not obvious in contract formation, in terms inherent in and arising from the requisite offer and acceptance and conveyance of consideration. The underlying contract contemplates the right to hold the instrument as, and to negotiate the instrument to, a holder in due course, the payment on which is at least part of the performance of the contract to which the negotiable instrument is linked. The instrument, memorializing (1) the power to demand payment; and, (2) the right to be paid, can move, for example, in the instance of a 'bearer instrument', wherein the possession of the document itself attributes and ascribes the right to payment. Certain exceptions exist, such as instances of loss or theft of the instrument, wherein the possessor of the note may be a holder, but not necessarily a holder in due course. Negotiation requires a valid endorsement of the negotiable instrument. The consideration constituted by a negotiable instrument is cognizable as the value given up to acquire it (benefit) and the consequent loss of value (detriment) to the prior holder; thus, no separate consideration is required to support an accompanying contract assignment. The instrument itself is understood as memorializing the right for, and power to demand, payment, and an obligation for payment evidenced by the instrument itself with possession as a holder in due course being the touchstone for the right to, and power to demand, payment. In some instances, the negotiable instrument can serve as the writing memorializing a contract, thus satisfying any applicable Statute of Frauds as to that contract.

The holder in due course:

The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts:


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The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque)

No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument "counts" as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on.

Transfer free of equities—the holder in due course can hold better title than the party he obtains it from (as in the instance of negotiation of the instrument from a mere holder to a holder in due course)

Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided for explicitly or by operation of law) and to enforce the contract in the transferee-assignee’s own name. Negotiation can be effected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments).

History

Common prototypes of bills of exchanges and promissory notes originated in China. Here, in the 8th century during the reign of the Tang Dynasty they used special instruments called feitsyan for the safe transfer of money over long distances. Later such document for money transfer used by Arab merchants, who had used the prototypes of bills of exchange – suftadja and hawala in 10–13th centuries, then such prototypes had used by Italian merchants in the 12th century. In Italy in 13–15th centuries bill of exchange and promissory note obtain their main features and further phases of its development have been associated with France (16–18th centuries, where the endorsement had appeared) and Germany (19th century, formalization of Exchange Law). In England (and later in the U.S.) Exchange Law was different from continental Europe because of different legal systems.

Classes:

Promissory notes and bills of exchange are two primary types of negotiable


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instruments.

Promissory note:

A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand to the payee, or at fixed or determinable future time, certain in money, to order or to bearer. (see Sec.194) Bank note is frequently referred to as a promissory note, a promissory note made by a bank and payable to bearer on demand.

Bill of exchange:

A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque (check in American English), defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today.

Bill of exchange, 1933:

A bill of exchange is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three parties—the drawer, the drawee, and the payee. The person who draws the bill is called the drawer. He gives the order to pay money to the third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order.

A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable.


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In some cases a bill is marked "not negotiable" – see crossing of cheques. In that case it can still be transferred to a third party, but the third party can have no better right than the transferor.

A letter of credit is a document issued by a financial institution, or a similar party, assuring payment to a seller of goods and/or services. The seller then seeks reimbursement from the buyer or from the buyer's bank. The document serves essentially as a guarantee to the seller that it will be paid by the issuer of the letter of credit regardless of whether the buyer ultimately fails to pay. In this way, the risk that the buyer will fail to pay is transferred from the seller to the letter of credit's issuer. The letter of credit also insures that all the agreed upon standards and quality of goods are met by the supplier.

Letters of credit are used primarily in international trade for large transactions between a supplier in one country and a customer in another. In such cases, the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits applies (UCP 600 being the latest version). They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are the supplier, usually called the beneficiary, the issuing bank, of whom the buyer is a client, and sometimes an advising bank, of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without the consent of the beneficiary, issuing bank, and confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and traveler's cheques.

Terminology

Origin of the term:

The English name “letter of credit” derives from the French word “accréditation,” a power to do something, which in turn derives from the Latin “accreditivus,” meaning trust. This applies to any defense relating to the underlying contract of sale. This is as long as the seller performs their duties to an extent that meets the requirements contained in the letter of credit.[citation needed]

Types and related terms:


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Letters of credit (LC) deal in documents, not goods. An LC can be irrevocable or revocable. An irrevocable LC cannot be changed unless both buyer and seller agree. With a revocable LC, changes can be made without the consent of the beneficiary.

A sight LC means that payment is made immediately to the beneficiary/seller/exporter upon presentation of the correct documents in the required time frame. A time or date LC will specify when payment will be made at a future date and upon presentation of the required documents.

Negotiation means the giving of value for draft(s) and/or document(s) by the bank authorized to negotiate, viz the nominated bank. Mere examination of the documents and forwarding the same to the letter of credit issuing bank for reimbursement, without giving of value / agreed to give, does not constitute a negotiation.

Documents that can be presented for payment:

To receive payment, an exporter or shipper must present the documents required by the letter of credit. Typically, the payee presents a document proving the goods were sent instead of showing the actual goods. The Original Bill of Lading (OBL) is normally the document accepted by banks as proof that goods have been shipped. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin or place. Typical types of documents in such contracts might include:

• Financial Documents

• Bill of Exchange, Co-accepted Draft

• Commercial Documents

• Invoice, Packing list

• Shipping Documents

• Transport Document, Insurance Certificate, Commercial, Official or Legal Documents

• Official Documents

• License, Embassy legalization, Origin Certificate, Inspection Certificate, Phytosanitary certificate

• Transport Documents

• Bill of lading (ocean or multi-modal or Charter party), Airway bill,


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Lorry/truck receipt, railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt, Deliver Challan...etc

• Insurance documents

• Insurance policy, or Certificate but not a cover note.

Legal principles governing documentary credits:

One of the primary peculiarities of the documentary credit is that the payment obligation is abstract and independent from the underlying contract of sale or any other contract in the transaction. Thus the bank’s obligation is defined by the terms of the credit alone, and the sale contract is irrelevant. The defenses available to the buyer arising out of the sale contract do not concern the bank and in no way affect its liability. Article 4(a) UCP states this principle clearly. Article 5 the UCP further states that banks deal with documents only, they are not concerned with the goods (facts). Accordingly, if the documents tendered by the beneficiary, or his or her agent, appear to be in order, then in general the bank is obliged to pay without further qualifications.

Policies behind adopting the abstraction principle are purely commercial, and reflect a party’s expectations: first, if the responsibility for the validity of documents was thrown onto banks, they would be burdened with investigating the underlying facts of each transaction, and would thus be less inclined to issue documentary credits as the transaction would involve great risk and inconvenience. Second, documents required under the credit could in certain circumstances be different from those required under the sale transaction. This would place banks in a dilemma in deciding which terms to follow if required to look behind the credit agreement. Third, the fact that the basic function of the credit is to provide a seller with the certainty of payment for documentary duties suggests that banks should honor their obligation notwithstanding allegations of misfeasance by the buyer. Finally, courts have emphasize that buyers always have a remedy for an action upon the contract of sale, and that it would be a calamity for the business world if, for every breach of contract between the seller and buyer, a bank were required to investigate said breach.

The “principle of strict compliance” also aims to make the bank’s duty of effecting payment against documents easy, efficient and quick. Hence, if the documents tendered under the credit deviate from the language of the credit the bank is entitled to withhold payment even if the deviation is purely


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terminological. The general legal maxim de minimis non curat lex has no place in the field of documentary credits.

Letter of credit also refers to FIATA documents. More strictly, in practice freight forwarders usual present FIATA documents and the question is does FIATA documents can use like a document for activating letter of credit. In theory, the question is not very clear, because of the weakness in UCP 600.

Definitions of Related Terms:

Advising bank: The Bank which advises a Letter of Credit to the Beneficiary at the request of the issuing Bank is known as the Advising Bank

Applicant: Applicant is the party on whose request the issuing bank issues a credit.

Banking day: The day on which a bank is regularly open at the place at which an act to be performed.

Beneficiary: Beneficiary is the party who is to receive the benefit (payment) of the LC. The consignee of an LC and the beneficiary may not be the same. The credit is issued in his favor.

Presentation: Presentation is either delivery of documents against an LC or the document itself.

Complying presentation : A presentation is said to be complying presentation when it is

i. in accordance with the terms and conditions of the credit,

ii. the applicable provisions of UCP and

iii. international standard banking practice.

Confirmation: Confirmation is a definite undertaking from the confirming bank to honor or negotiate a complying presentation in addition to that of the issuing bank.

Confirming bank: The Bank which adds confirmation to an LC is termed as


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Confirming Bank. It does so at the request of the issuing bank and taking authorization from the issuing bank.

Letter of Credit/ Credit: Credit is a definite undertaking of the issuing bank to honor a complying presentation. According to UCP all credit must be Irrevocable.

Honour: Honour means act according to commitment of the LC. Presentations are honored in different ways depending on the type of credit like.

i. Making payment at sight for sight LC ii. By incurring a deferred payment undertaking and paying at maturity

deferred payment LC. iii. By accepting a Draft drawn by the beneficiary and paying at maturity

for Deferred Acceptance LC.

Issuing bank: The Bank which issues a credit is known as issuing bank.

Nominated Bank: The Bank with which credit is available is termed as Nominated Bank of that Credit. If no Bank is mentioned in the credit as nominated bank, all banks are nominated bank.

Negotiation: A bank (Nominated Bank) is said to negotiate a document if it purchases a draft and/or documents under a complying presentation either by making advance or agreeing to advance funds to the beneficiary on or before the date on which reimbursement is due to the nominated bank . A draft drawn on a nominated bank cannot be purchased by itself.

Different Types of Letter of Credit:

Import/export Letter of Credit:

The same credit can be termed as import and export LC depending on whose perspective it is being looked upon. For the importer it is termed as Import LC and for the Exporter of goods, Export LC.

Revocable Letter of Credit:

In this type of credit buyer and the bank which has established the LC, are able to manipulate the letter of credits or make any kinds of corrections


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without informing the seller and getting permissions from him. According to UCP 600, all LCs are Irrevocable, hence this type of LC used no more.

Irrevocable LC:

In this type of LC, Any change (amendment) or cancellation of the LC (except it is expired) done by the Applicant through the issuing Bank must be authenticated by the Beneficiary of the LC. Whether to accept or reject the changes depends on the beneficiary.

Confirmed LC:

An LC is said to be confirmed when another bank adds its additional confirmation (or guarantee) to honor a complying presentation at the request or authorization of the issuing bank.

Unconfirmed LC:

This type of letter of credit, does not acquire the other bank's confirmation.

Transferrable LC:

A Transferable Credit is one under which the exporter has the right to make the credit available to one or more subsequent beneficiaries. Credits are made transferable when the original beneficiary is a middleman and does not supply the merchandise himself but but procures goods from the suppliers and arrange them to be sent to the buyer and does not want the buyer and supplier know each other. The middleman is entitled to substitute its own invoice for the one of the supplier and acquire the difference as his profit in transferable letter of credit mechanism.

Important Points of Consideration:

A letter of credit can be transferred to the second beneficiary at the request of the first beneficiary only if it expressly states that the letter of credit is "transferable". A bank is not obligated to transfer a credit.

A transferable letter of credit can be transferred to more than one second beneficiary as long as credit allows partial shipments.

The terms and conditions of the original credit must be indicated exactly in


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the transferred credit. However, in order to keep the workability of the transferable letter of credit below figures can be reduced or curtailed.

• Letter of credit amount

• any unit price of the merchandise (if stated)

• the expiry date

• the presentation period or

• the latest shipment date or given period for shipment.

The first beneficiary may demand from the transferring bank to substitute his name for that of the applicant. However, if a document other than invoice required in the transferable credit must be issued in a way to show the applicant's name, in such a case that requirement must be indicated in the transferred credit.

Transferred credit cannot be transferred once again to any third beneficiary according to the request of the second beneficiary.

Untransferable LC:

It is said to the credit that seller cannot give a part or completely right of assigned credit to somebody or to the persons he wants. In international commerce, it is required that the credit will be untransferable.

Usance LC:

It is kind of credit that won't be paid and assigned immediately after checking the valid documents but paying and assigning it requires an indicated duration which is accepted by both of the buyer and seller. In reality, buyer will give an opportunity to the seller to pay the required money after taking the related goods and selling them.

At Sight LC:

It is a kind of credit that the announcer bank after observing the carriage documents from the seller and checking all the documents immediately pays


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the required money.

Red Clause LC:

In this kind of credit assignment seller before sending the products can take the pre-paid and parts of the money from the bank. The first part of the credit is to attract the attention acceptor bank. The reason why it named so, is that the first time this credit is established by the assigner bank, to take the attention of the offered bank, the terms and conditions were written by red ink, from that time it became famous with that name.

Back to Back LC:

In this type of LC consisted of two separated and different types of LC. First one is established in the benefit of the seller that is not able to provide the corresponding goods for any reasons. Because of that reason according to the credit which is opened for him, neither credit will be opened for another seller to provide the desired goods and sends it.

Back-to-back L/C is a type of L/C issued in case of intermediary trade. Intermediate companies such as trading houses are sometimes required to open L/Cs by supplier and receive Export L/Cs from buyer. SMBC will issue a L/C for the intermediary company which is secured by the Export L/C (Master L/C). This L/C is called "Back-to-back L/C".

The price of letters of credit:

All the charges for issuance of Letter of Credit, negotiation of documents, reimbursements and other charges like courier are to the account of applicant or as per the terms and conditions of the Letter of credit. If the letter of credit is silent on charges, then they are to the account of the Applicant. The description of charges and who would be bearing them would be indicated in the field 71B in the Letter of Credit.

Legal basis:

Legal writers have failed to satisfactorily reconcile the bank’s undertaking with any contractual analysis. The theories include: the implied promise, assignment theory, the novation theory, reliance theory, agency theories, estoppels and trust theories, anticipatory theory, and the guarantee theory. Davis, Treitel, Goode, Finkelstein and Ellinger have all accepted the view


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that documentary credits should be analyzed outside the legal framework of contractual principles, which require the presence of consideration. Accordingly, whether the documentary credit is referred to as a promise, an undertaking, a chose in action, an engagement or a contract, it is acceptable in English jurisprudence to treat it as contractual in nature, despite the fact that it possesses distinctive features, which make it sui generis.

Although documentary credits are enforceable once communicated to the beneficiary, it is difficult to show any consideration given by the beneficiary to the banker prior to the tender of documents. In such transactions the undertaking by the beneficiary to deliver the goods to the applicant is not sufficient consideration for the bank’s promise because the contract of sale is made before the issuance of the credit, thus consideration in these circumstances is past. In addition, the performance of an existing duty under a contract cannot be a valid consideration for a new promise made by the bank: the delivery of the goods is consideration for enforcing the underlying contract of sale and cannot be used, as it were, a second time to establish the enforceability of the bank-beneficiary relation.[citation needed]

A theory sustains that is feasible to typify letter of credit as contracts for a third-party beneficiary because there are in fact three different entities participating in the letter of credit transaction the seller, the buyer, and the banker. Because letters of credit are prompted by the buyer’s necessity and in application of the theory of Jean Domat the cause of a Letter of Credit is to release the buyer of his obligation to pay directly to the seller with legal tender. Therefore, Letter of Credit theoretically fits as a collateral contract accepted by conduct or in other words, an Implied-in-fact contract under the framework for third party beneficiary where the buyer participate as the third party beneficiary with the bank acting as the stipulator and the seller as the promisor. The term "beneficiary" is not used properly in the scheme of a letter of credit because a beneficiary (also, in trust law, cestui que use) in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. Note that under the scheme of letters of credit, banks are neither benefactors of sellers nor benefactors of the buyers, and the seller doesn’t receive money in gratuity mode. Thus is possible that “letter of credit” was one of those contracts that needed to be masked to disguise the “consideration or Privity requrement”, as a result this kind of arrangement, would make letter of credit to be enforceable under the action assumpsit because of its promissory connotation.


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A few countries including the United States (see Article 5 of the Uniform Commercial Code) have created statutes in relation to the operation of letters of credit. These statutes are designed to work with the rules of practice including the UCP and the ISP98. These rules of practice are incorporated into the transaction by agreement of the parties. The latest version of the UCP is the UCP600 effective July 1, 2007. The previous revision was the UCP500 and became effective on 1 January 1994. Since the UCP are not laws, parties have to include them into their arrangements as normal contractual provisions. .

International Trade Payment methods:

International Trade Payment method can be done in the following ways.

• Advance payment (most secure for seller)

• Where the buyer parts with money first and waits for the seller to forward the goods

• Documentary Credit (more secure for seller as well as buyer)

Subject to ICC's UCP 600, where the bank gives an undertaking (on behalf of buyer and at the request of applicant) to pay the shipper (beneficiary) the value of the goods shipped if certain documents are submitted and if the stipulated terms and conditions are strictly complied with.

Here the buyer can be confident that the goods he is expecting only will be received since it will be evidenced in the form of certain documents called for meeting the specified terms and conditions while the supplier can be confident that if he meets the stipulations his payment for the shipment is guaranteed by bank, who is independent of the parties to the contract.

Documentary collection (more secure for buyer and to a certain extent to seller)

Also called "Cash Against Documents". Subject to ICC's URC 525, sight and usance, for delivery of shipping documents against payment or acceptances of draft, where shipment happens first, then the title documents are sent to the [collecting bank] buyer's bank by seller's bank [remitting bank], for delivering documents against collection of payment/acceptance

Direct payment (most secure for buyer)


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Where the supplier ships the goods and waits for the buyer to remit the bill proceeds, on open account terms.

Risk situations in letter-of-credit transactions:

• Fraud Risks

• The payment will be obtained for nonexistent or worthless merchandise against presentation by the beneficiary of forged or falsified documents.

• Credit itself may be forged.

• Sovereign and Regulatory Risks

• Performance of the Documentary Credit may be prevented by government action outside the control of the parties.

• Legal Risks

• Possibility that performance of a Documentary Credit may be disturbed by legal action relating directly to the parties and their rights and obligations under the Documentary Credit

• Force Majeure and Frustration of Contract

• Performance of a contract – including an obligation under a Documentary Credit relationship – is prevented by external factors such as natural disasters or armed conflicts

• Risks to the Applicant

• Non-delivery of Goods

• Short shipment

• Inferior Quality

• Early /Late Shipment

• Damaged in transit

• Foreign exchange

• Failure of Bank viz Issuing bank / Collecting Bank

• Risks to the Issuing Bank

• Insolvency of the Applicant

• Fraud Risk, Sovereign and Regulatory Risk and Legal Risks

• Risks to the Reimbursing Bank

• no obligation to reimburse the Claiming Bank unless it has issued a reimbursement undertaking.

• Risks to the Beneficiary

• Failure to Comply with Credit Conditions


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• Failure of, or Delays in Payment from, the Issuing Bank

Bank Guarantees:

A bank guarantee is a one-way contract between a bank as the guarantor and a beneficiary as the party to whom a guarantee is made.

Banks offers local and foreign currency bank guarantees issued on your behalf against specified collateral for your business needs. We offer various types of guarantees - performance, financial, bid bond, tenders, customs etc.

Our guarantees are well accepted by all government agencies including Customs, Excise, Insurance Companies, Shipping Companies, all Capital Market Agencies such as NSE, BSE, ASE, CSE etc. and all major Corporate’.

We issue guarantees in both foreign as well as local currencies against specified collateral to help your business grow with ease.

Insurance:

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.


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Mutual Fund:

A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities. While there is no legal definition of mutual fund, the term is most commonly applied only to those collective investment vehicles that are regulated, available to the general public and open-ended in nature. Hedge funds are not considered a type of mutual fund.

Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. They have a long history in the United States. Today they play an important role in household finances.

There are 3 types of mutual funds: open-end, unit investment trust, and closed-end. The most common type, the open-end mutual fund, must be willing to buy back its shares from its investors at the end of every business day. Exchange-traded funds are open-end funds or unit investment trusts that trade on an exchange. Open-end funds are most common, but exchange-traded funds have been gaining in popularity.

Mutual funds are classified by their principal investments. The four largest categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds may also be categorized as index or actively managed.

Investors in a mutual fund pay the fund’s expenses. There is controversy about the level of these expenses. A single mutual fund may give investors a choice of different combinations of expenses by offering several different types of share classes.

Securities:

The term security was originally used to describe financial instruments secured by physical assets, but in North America, its meaning evolved to include all instruments irrespective of whether they offer security or not. Other English speaking countries have adopted the term as a synonym for the term financial instrument. Securities are broadly categorized into:

• debt securities (such as banknotes, bonds and debentures),

• equity securities, e.g., common stocks; and,


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• derivative contracts, such as forwards, futures, options and swaps.

The company or other entity issuing the security is called the issuer. A country's regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions.

Securities may be represented by a certificate or, more typically, "non-certificated", that is in electronic or "book entry" only form. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.

Allotment of Lockers

Linking of Allotment of Lockers to placement of Fixed Deposits:

The Committee on Procedures and Performance Audit of Public Services (CPPAPS) observed that linking the lockers facility with placement of fixed or any other deposit beyond what is specifically permitted is a restrictive practice and should be prohibited forthwith. We concur with the Committee's observations and advise banks to refrain from such restrictive practices.

Fixed Deposit as Security for Lockers:

Banks may face situations where the locker-hirer neither operates the locker nor pays rent. To ensure prompt payment of locker rent, banks may at the time of allotment, obtain a Fixed Deposit which would cover 3 years rent and the charges for breaking open the locker in case of an eventuality. However, banks should not insist on such Fixed Deposit from the existing locker-hirers.

Wait List of Lockers:

Branches should maintain a wait list for the purpose of allotment of lockers and ensure transparency in allotment of lockers. All applications received for


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allotment of locker should be acknowledged and given a wait list number.

Banks are also advised to give a copy of the agreement regarding operation of the locker to the locker-hirer at the time of allotment of the locker.

Security aspects relating to Safe Deposit Lockers

Operations of Safe Deposit Vaults/Lockers:

Banks should exercise due care and necessary precaution for the protection of the lockers provided to the customer. Banks should review the systems in force for operation of safe deposit vaults / locker at their branches on an on-going basis and take necessary steps. The security procedures should be well-documented and the concerned staff should be properly trained in the procedure. The internal auditors should ensure that the procedures are strictly adhered to.

Customer due diligence for allotment of lockers / Measures relating to lockers which have remained unoperated

In a recent incident, explosives and weapons were found in a locker in a bank branch. This emphasizes that banks should be aware of the risks involved in renting safe deposit lockers. In this connection, banks should take following measures:

(i) Banks should carry out customer due diligence for both new and existing customers at least to the levels prescribed for customers classified as medium risk. If the customer is classified in a higher risk category, customer due diligence as per KYC norms applicable to such higher risk category should be carried out.

(ii) Where the lockers have remained unoperated for more than three years for medium risk category or one year for a higher risk category, banks should immediately contact the locker-hirer and advise him to either operate the locker or surrender it. This exercise should be carried out even if the locker hirer is paying the rent regularly. Further, banks should ask the locker hirer to give in writing, the reasons why he / she did not operate the locker. In case the locker-hirer has some genuine reasons as in the case of NRIs or persons who are out of town due to a transferable job etc., banks may allow the locker hirer to continue with the locker. In case the locker-hirer does not respond nor operate the locker, banks should consider opening the lockers after giving due notice to him. In this context, banks should incorporate a clause in the locker agreement that in case the locker remains unoperated for more than one year, the bank would have the right to cancel the


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allotment of the locker and open the locker, even if the rent is paid regularly.

(iii) Banks should have clear procedure drawn up in consultation with their legal advisers for breaking open the lockers and taking stock of inventory.

Access to the safe deposit lockers / return of safe custody articles to Survivor(s) / Nominee(s) / Legal heir(s):

We invite a reference to our Circular DBOD.No.Leg. BC.95/2004-05 dated June 9, 2005 wherein we had advised banks to deal with the issue of handing over the proceeds of deposit accounts. A similar procedure should be adopted for return of contents of lockers / safe custody articles to Survivor / Nominee / Legal Heirs.

Access to the safe deposit lockers / return of safe custody articles (with survivor/nominee clause):

If the sole locker hirer nominates a person banks should give to such nominee access of the locker and liberty to remove the contents of the locker in the event of the death of the sole locker hirer. In case the locker was hired jointly with the instructions to operate it under joint signatures, and the locker hirer(s) nominates person(s), in the event of death of any of the locker hirers, the bank should give access of the locker and the liberty to remove the contents jointly to the survivor(s) and the nominee(s). In case the locker was hired jointly with survivorship clause and the hirers instructed that the access of the locker should be given over to 'either or survivor', 'anyone or survivor' or 'former or survivor' or according to any other survivorship clause, banks should follow the mandate in the event of the death of one or more of the locker-hirers. However, banks should take the following precautions before handing over the contents:

(a) Bank should exercise due care and caution in establishing the identity of the survivor(s) / nominee(s) and the fact of death of the locker hirer by obtaining appropriate documentary evidence;

(b) Banks should make diligent effort to find out if there is any order from a competent court restraining the bank from giving access to the locker of the deceased; and

(c) Banks should make it clear to the survivor(s) / nominee(s) that access to locker / safe custody articles is given to them only as a trustee of the legal heirs of the deceased locker hirer i.e., such access given to him shall not affect the right or claim which any person may have against the survivor(s) / nominee(s) to whom


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the access is given.

Similar procedure should be followed for return of articles placed in the safe custody of the bank. Banks should note that the facility of nomination is not available in case of deposit of safe custody articles by more than one person.

Banks should note that since the access given to the survivor(s) / nominee(s), subject to the foregoing conditions, would constitute a full discharge of the bank's liability, insistence on production of legal representation is superfluous and unwarranted and only serves to cause entirely avoidable inconvenience to the survivor(s) / nominee(s) and would, therefore, invite serious supervisory disapproval. In such case, therefore, while giving access to the survivor(s) / nominee(s) of the deceased locker hirer / depositor of the safe custody articles, the banks should desist from insisting on production of succession certificate, letter of administration or probate, etc., or obtain any bond of indemnity or surety from the survivor(s)/nominee(s).

Access to the safe deposit lockers / return of safe custody articles (without survivor/nominee clause):

There is an imperative need to avoid inconvenience and undue hardship to legal heir(s) of the locker hirer(s). In case where the deceased locker hirer had not made any nomination or where the joint hirers had not given any mandate that the access may be given to one or more of the survivors by a clear survivorship clause, banks are advised to adopt a customer-friendly procedure drawn up in consultation with their legal advisers for giving access to legal heir(s) / legal representative of the deceased locker hirer. Similar procedure should be followed for the articles under safe custody of the bank.

Banks are advised to be guided also by the provisions of Sections 45 ZC to 45 ZF of the Banking Regulation Act, 1949 and the Banking Companies (Nomination) Rules, 1985 and the relevant provisions of Indian Contract Act and Indian Succession Act.

Banks should prepare an inventory before returning articles left in safe custody / before permitting removal of the contents of a safe deposit locker. The inventory shall be in the appropriate Forms set out as enclosed to the above Notification or as near thereto as circumstances require:

Further, in case the nominee(s) / survivor(s) / legal heir(s) wishes to continue with the locker, banks may enter into a fresh contract with nominee(s) / survivor(s) /


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legal heir(s) and also adhere to KYC norms in respect of the nominee(s) / legal heir(s). Banks are not required to open sealed/closed packets left with them for safe custody or found in locker while releasing them to the nominee(s) and surviving locker hirers / depositor of safe custody article.

Simplified operational systems / procedures:

The Indian Banks' Association (IBA) has already formulated a Model Operational Procedure (MOP) for settlement of claims of the deceased depositors, under various circumstances. We have advised IBA to formulate a similar Model Operational Procedure for giving access to lockers / return of safe custody articles under various circumstances. We also advise banks to undertake a comprehensive review of their extant systems and procedures relating to settlement of claims of their deceased constituents (locker-hirers / depositors of safe-custody articles) with a view to evolving a simplified policy / procedures for the purpose. The review should be made with the approval of their Board and take into account the applicable statutory provisions, foregoing instructions as also the MOP to be formulated by the IBA.

Customer Guidance and Publicity

Benefits of nomination / survivorship clause:

Banks should give wide publicity and provide guidance to locker-hirers / depositors of safe custody articles on the benefits of the nomination facility and the survivorship clause. Illustratively, it should be highlighted in the publicity material that in the event of the death of one of the joint locker-hirer / depositor of safe custody articles, the right to the contents of the locker or the articles under safe custody does not automatically devolve on the surviving joint locker-hirer / depositor of safe custody articles, unless there is a survivorship clause.

Banks should place on their websites the instructions alongwith the policies / procedures put in place for giving access of the locker / safe custody articles to the nominee(s) / survivor(s) / Legal Heir(s) of the deceased locker hirer / depositor of the safe custody articles. Further, a printed copy of the same should also be given to the nominee(s) / survivor(s) / Legal Heir(s) whenever a claim is received from them.


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10. INCOME in Banks

Banks can differ markedly in their sources of income. Some focus on business lending, some on household lending and some on fee-earning activities. Increasingly, however most banks are diversifying into fee-earning activities. Diversification across various sources of earning is welcomed for, it is claimed diversification reduce risk, whether it does not course depends on how independent of each other the various earnings sources are. During the 1990s, the Indian banking sector witnessed more reforms than most other Indian economy. In the face of declining net interest margin depository institutions have entered new product areas over the past two decades, moving from traditional lending to areas that generate non-interest revenues. The change is of importance for financial stability. The more unstable is a bank’s earnings stream, the more risky the institution is. The conventional wisdom in the banking industry is that earnings from fee-based products are more stable than loan fee-based activities reduce bank risk via diversification. As compared to the development world, the Indian banking sector apart from the relaying on traditional sources of revenue like, loan making are also focusing on the activities that generate fee income service changes, trading revenue and other types of non-interest income. Now-a-days non-interest income plays an important role in banking revenue in the development world.

CONCEPT OF INCOME Edmond Wilson’s good quotation about income. “There is nothing more demoralizing than a small but adequate income.” Generally the income refers with the financial gain accruing over a given period of time. Some definitions of income areas under. 1. “Money earned through employment and investment.” In Simple Word. 2. “Income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received... in a given period of time. 3. “Regular payments derived from an investment. This can be interest from cash, dividends from shares or rent from property.” In Simple Word. 4. “Income refers to consumption opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms.” By- Wikipedia 5. “Income is the flow of revenues accruing to a person or nation from labor services and from ownership of land and capital.”


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According to an Economic Aspect 6. “Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of aspects of decreases of liabilities that results in increases in equity, other than that relation to contributions from equity participants.” International Accounting Standards Board 7. “ Income means (A) Money earned during an accounting period those results in an increase in total assets. (B) Items such as rents, interests, gifts and commission. (C) Revenues arising from sales of goods and services. (D) Excess of revenues over expenses and losses for an accounting period. Accounting Dictionary 8. “The amount of money received during a period of time in exchange for labor or services from the sale of goods or property or as a profit from financial investments” 9. “Money received by a person or organization because of efforts or from return on Investments.” Investment Dictionary TYPES OF BANK INCOME There are two broad sources of bank income or revenues. One is Interest Income or Fund Based Income and second is, Non-Interest Income or Non-fund Based Income. INTEREST INCOME/ FUND BASED INCOME Banks sometimes keep their cash in short term deposit investment such as certificates of deposits with maturities up to twelve month, saving account and money market funds. The cash placed in these accounts earn interest for the business, which is recorded on the income statement as interest income. For others such as an insurance company and financial institutions that generates profit by investing the money it holds for policyholders into interest paying bonds, it is a crucial part of the business. MEANING 1.“Interest income is generated over the life of loans that have been securitized in structures requiring financing treatment (as opposed to sale treatment) for accounting purposes; loans held for investment; loans held for sale; and loans held for securitization.


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COMPONENTS OF INTEREST/FUND BASED INCOME Main components of Interest/ Fund Based Income are as under. INCOME FROM LENDING OF MONEY Generally lending of money refers with disposing of the money or property with the expectation that the same thing will be returned. In other word lending of money is the transfer of securities to a borrower (usually so the borrower can pay back a short term liability), in return for a fee. The borrower agrees to replace them in due course with identical securities and the lender risks/returns of the securities in the meantime. INCOME FROM INVESTMENT (SLR) Every bank is required to maintain at the close of business every day, a minimum proportion of their net demand and time liabilities as liquid assets in the form of cash gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). An increase in SLR also restricts the bank’s leverage position to pump more money into the economy. NON-INTEREST INCOME/NON-FUND BASED INCOME In the face of declining net interest margins, depository institutions have entered new product areas over the past two decades, moving from traditional lending to Areas that generate Non-fund Based Income. The change is of importance for financial stability. The more unstable is a bank’s earning stream, the more risky the institution is. The conventional wisdom in the banking industry is that earnings from fee-based products are more stable than loan-based earnings and those fee-based activities reduce bank risk via diversifications. MEANING 1. “Non-Fund Based Income is earned by providing a variety of services, such as trading of securities, assisting companies to issue new equity financing, securities commissions and wealth management, sale of land, building, profit and loss on revaluation of assets etc.” 2. “Bank and creditor income derived primarily from fees. Examples of noninterest income include deposit and transaction fees, insufficient funds (NSF) fees, annual fees, monthly account service charges; inactivity fees, check and deposit slip fees, etc. Institutions charge fees that provide non-interest income as a way of generating revenue and ensuring liquidity in the event of increased default rates” COMPONENTS OF NON- INTEREST/NON- FUND BASED INCOME


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Main components of Non-Interest/Non-Fund Based Income are as under. INCOME ON REMITTANCE OF BUSINESS Apart from accepting deposits and lending money, Banks also carry out, on behalf of their customers the act of transfer of money - both domestic and foreign. From one place to another. This activity is known as "remittance business”. Banks issue Demand Drafts, Banker's Cheques, and Money Orders Etc. for transferring the money. Banks also have the facility of quick transfer of money also know as Telegraphic Transfer. For Example, In Remittance business, Bank 'A' at a place 'a' accepts money from customer 'C' and makes arrangement for payment of the same amount of money to either the customer 'C' or his "order" i.e. a person or entity, designated by 'C' as the recipient, through either a Branch of Bank 'A' or any other entity at place 'b'. In return for having rendered this service, the Banks charge a pre-decided sum known as exchange or commission or service charge. This sum can differ from bank to bank. This also differs depending upon the mode of transfer and the time available for affecting the transfer of money. Faster the mode of transfer, higher the charges. CHEQUE A cheque, also spelled check, is a negotiable instrument, instructing a financial institution to pay a specific amount of a specific currency from a specified demand account held in the maker/depositor's name with that institution. Both the maker and payee may be natural persons or legal entities.Technically, a cheque is a negotiable instrument 6 instructing a financial institution to pay a specific amount of a specific currency from a specified demand account held in the drawer/depositor's name with that institution. Both the drawer and payee may be natural persons or legal entities. Specifically, cheques are order instruments, as reflected in the formula "Pay to the order of..."—they are not in general payable simply to the bearer (as bearer instruments are), but rather the payee must endorse the cheque, possibly specifying by order to whom it should be paid. In 1881, the Negotiable Instruments Act (NI Act) was enacted in India, formalizing the usage and characteristics of instruments like the cheque, the bill of exchange and promissory note. The NI Act provided a legal framework for non-cash paper payment instruments in India. TRAVELER`S CHEQUE A Traveler`s Cheque is a printed piece of paper that you sign and use as money when are travelling. It can be replaced if it is lost or stolen. The Traveler`s Cheque issued by a financial institution which functions as cash but is protected against loss or theft. Traveller’s cheques are useful when travelling, especially in case of


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overseas travel when not all credit and scurried by a person will be accepted. A charge or commission is usually incurred when a person exchanges cash for traveller’s cheque though some issuers provide them free of charge. DEMAND DRAFT A demand draft, also known as a remotely created check or a tele-check, is a check created by a seller with a buyer' checking account number on it, but without the buyer's signature. Instead and in place of the signature, the check has verbiage such as "authorized by depositor (the buyer), lack of endorsement guaranteed by XYZ Bank. The seller deposits the check into his or her Bank Account and the check then clears out of the buyer's account.A demand draft or "DD" is an instrument most banks in India use for effecting transfer of money. It is a Negotiable Instrument. A method used by individuals to make transfer payments from one bank account to another. Demand drafts are marketed as a relatively secure method for cashing checks. The major difference between demand drafts and normal checks is that demand drafts do not require a signature in order to be cashed.9 MAIL TRANSFER/ MAIL ORDERS 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. RTGS Real time gross settlement systems (RTGS) are a funds transfer mechanism where transfer of money takes place from one bank to another on a "real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. "Gross settlement" means the transaction is settled on one to one basis without bunching with any other transaction. Once processed, payments are final and irrevocable. NEFT National Electronic Fund Transfer (NEFT) is a nation-wide system that facilitates individuals to electronically transfer funds from any bank branch to any other bank branch in the country. NEFT is an application development to facilitate


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customers to transfer funds from one bank account to another bank account. It is an efficient, secure, economical, and reliable and expenditure system of fund transfer between banks. SWIFT The Society for Worldwide Interbank Financial Telecommunication ("SWIFT") operates a worldwide financial messaging network which exchanges messages between banks and other financial institutions. SWIFT also markets software and services to financial institutions, much of it for use on the SWIFT Net Network The majority of international interbank messages use the SWIFT network. As of September 2010, SWIFT linked more than 9,000 financial institutions in 209 countries and territories, who were exchanging an average of over 15 million messages per day. SWIFT transports financial messages in a highly secure way, but does not hold accounts for its members and does not perform any form of clearing or settlement. SWIFT does not facilitate funds transfer, rather, it sends payment orders, which must be settled via correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy that particular business features. INCOME FROM THIRD PARTY PRODUCT Commission or income earned on selling other companies' products (or third party distribution business) is emerging as a new revenue source for many banks. Although the fee amounts are still small, they are a valuable contribution to diversifying revenue streams, increasing the mix of non-interest income and also improve profits. MUTUAL FUNDS In simple word Mutual Fund means an investment company that pools the money of a large group of investors and purchases a variety of securities to achieve a specific investment objective. In other word Mutual Fund means a diversified portfolio of securities invested on behalf of a group of investors and professionally managed. Individual investors own a percentage of the value of the fund represented by the number of units they purchased and thus share in any gains or losses of the fund. Individual investors own a percentage of the value of the fund represented by the number of units they purchased and thus share in any gains or losses of the fund. LIFE INSURANCE PRODUCTS


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Here bank earned revenue through the selling of life insurance product on behalf of insurance company. The participation by the bank's customers shall be purely on a voluntary basis. The contract of insurance is between the insurer and the insured and not between the bank and the insured. NON-LIFE INSURANCE PRODUCTS Non-life insurance means 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. The contract of insurance is between the insurer and the insured and not between the bank and the insured. ISSUED THE CREDIT CARD TO THE CUSTOMER A credit card is part of a system of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. Credit cards are issued after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card. INWARD MONEY REMITTANCE BY UAE EXCHANGE & FINANCIAL SERVICES LTD As the name indicates we are in to financial services. Our core areas of strength include Inward Remittance and Money Changing. We also provide Travel & Ticketing, Insurance and Package Tour Services and have an IT & Engineering Division. INCOME ON CONTINGENT LIABILITY A contingent liability is a liability which may or may not arise in the future depending on the happening or non happening of an event. A contingent liability is a potential liability…it depends on a future event occurring or not occurring. For example, if a parent guarantees a daughter’s first car loan, the parent has a contingent liability. If the daughter makes her car payments and pays off the loan, the parent will have no liability. If the daughter fails to make the payments, the parent will have a liability. LETTER OF CREDIT A Letter of credit means a document issued by a bank that guarantees the payment of a customer's draft; substitutes the bank's credit for the customer's credit A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make


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payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. A standard, commercial letter of credit (LC) is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking. BANK GUARANTEE A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer (debtor) to acquire goods, buy equipment, or draw down loans, and thereby expand business activity.13 INCOME ON GOVERNMENT BUSINESS In present age apart from rendering all other Personal banking services to its customers/public, every bank in India also works as Agency Bank for undertaking various types of Govt. Business viz.

• Pension Payment

• Collection of PPF and Payment of PPF

• Collection of Government Bonds

• Collection of Senior Citizen Deposits

• Collection of Various Taxes, like CBDT, Indirect tax Excise and VAT

• Receipts/payments work of Postal/Railways

• Treasury/Sub-Treasury business

• Franking of Stamps of various documents

• Collection of Stamp Duty INCOME ON WEALTH MANAGEMENT Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services. High net worth individuals, small business owners and families who desire the assistance of a credentialed financial advisory specialist call upon wealth managers to coordinate retail banking, estate planning, legal resources, tax professionals and investment management. Wealth management can be provided by large corporate entities, independent financial advisers or multi-licensed portfolio managers whose services are designed to focus on high-net worth customers. Large banks and large brokerage houses create segmentation marketing-strategies to sell both proprietary and nonproprietary products and services to investors designated as potential high net-worth customers. Independent wealth managers use their experience in estate planning, risk management, and their affiliations with tax and legal specialists, to manage the diverse holdings of


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high net worth clients. Banks and brokerage firms use advisory talent pools to aggregate these same services. INCOME FROM THIRD PARTY PRODUCT Commission or income earned on selling other companies' products (or third party distribution business) is emerging as a new revenue source for many banks. Although the fee amounts are still small, they are a valuable contribution to diversifying revenue streams, increasing the mix of non-interest income and also improve profits. Third party products like... 1. Mutual Funds 2. Life Insurance Products 3. Non-Life Insurance Products STOCKS & STOCKS TRADING Income from stocks and stocks trading are the component of wealth management. Now-a-days banks are offering Stock broker & commodity brokers engaged in offering, share broking services, commodity trading services, online commodity trading services, e-commodity trading services and share trading services. EQUITY LINKED INVESTMENT Equity linked products are structured investment tools which enable you to generate yields through investing in stock options. Therefore, the return is based on the performance of a single stock, or in some case, a basket of stocks, or a stock index. Since the products are closely related to the performance of listed stocks, the risks involved resemble investment in the underlying stocks. By investing in an equity linked product, you agree to purchase or sell listed stocks at a future date for an agreed price. The number of shares or the financial gain and loss customers will receive at maturity depends on the price performance of the stocks selected.

STRUCTURED SAVING PRODUCTS Structured products are synthetic investment instruments specially created to meet specific needs that cannot be met from the standardized financial instruments available in the markets. Structured products can be used: as an alternative to a direct investment; as part of the asset allocation process to reduce risk exposure of a portfolio; or to utilize the current market trend. Interest in these investments has been growing in recent years and high net worth investors now use structured products as way of portfolio diversification. Structured products are also available at the mass retail level - particularly in Europe, where national post offices, and even supermarkets, sell investments on these to their customers.


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1. Flow through share limited partnership 2. Funds of income Trusts 3. Funds of Hedge Funds 4. Highly yield bond portfolios 5. Covered call writing 6. Split share corporations STRUCTURED INVESTMENT PRODUCTS & DERIVATIVES A structured investment product combines two products into one, offering return potential on one or both of the products involved. One product is generally a money market account that pays a fixed rate periodically and the other is put into an option that offers a variable rate of return. This allows the structured investment product to produce a return even when the markets fall. Uncertain economic times, a structured investment product protects your capital investment and provides you with earning opportunity. In fact, structured investment products are fixed-term investments, meaning you get to decide the minimum and maximum earning potential of the product you choose. In some cases, the rate is linked to an underlying benchmark, such as interest rates, commodities or foreign exchange markets. FOREIGN EXCHANGE Banks generated the revenue from foreign exchange transaction. Here difference between forward exchange contract transaction and actual Transaction. Foreign exchange refers with the system by which the type of money used in one country is exchanged for another country's money, making international trade easier. INCOME FROM ALTERNATIVE INVESTMENT PRODUCTS Alternatives are typically investments that aim to generate alpha, driven by manager skill through the use of a wide range of unconventional instruments, not available in traditional markets. They provide diversification and may enhance portfolios by improving returns and lowering risk. In addition, their low correlation with traditional asset classes (such as equities and bonds) means that alternative investments may help preserve capital when traditional markets fall in value. Product like…. 1. Hedge Funds 2. Private Equity 3. Real Estate SOLD OF PRECIOUS METALS


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Banks are also generated the income from selling of precious metals like silver and gold coins. INCOME FROM OTHER SOURCES

DEMAT ACCOUNT Demat account is a safe and convenient means of holding securities just like a bank account is for funds. Today, practically 99.9% settlement (of shares) takes place on demat mode only. Thus, it is advisable to have a Beneficiary Owner (BO) account to trade at the exchanges. The term Demat, in India, refers to a dematerialized account for individual Indian citizens to trade in listed stocks or debentures, required for investors by The Securities Exchange Board of India (SEBI). In a demat account, shares and securities are held electronically instead of the investor taking physical possession of certificates. A Demat Account is opened by the investor while registering with an investment broker (or sub broker). The Demat account number is quoted for all transactions to enable electronic settlements of trades to take place. Access to the Demat account requires an internet password and a transaction password as well as initiating and confirming transfers or purchases of securities. Purchases and sales of securities on the Demat account are automatically made once transactions are executed and completed. DIPOSITORY PARTICIPANTS ACCOUNT DP means Depository Participant of CDSL (Central Depository Services (India) Limited). A DP account is necessary if you intend to hold your securities and/or trade in the electronic form. The DP account must be opened by you with a Depository Participant, which may or may not be your broker. In India, a Depository Participant (DP) is described as an agent of the depository. They are the intermediaries between the depository and the investors. The Relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act. In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the subsecton 1A of Section 12 of the SEBI Act. As per the provisions of this Act, a DP can offer depository-related services only after obtaining a certificate of registration from SEBI. SEBI (D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for stockbrokers, R&T agents and non-banking finance companies (NBFC), for granting them a certificate of registration to act as DPs. If a stockbroker seeks to act as a DP in more than one depository, he should comply with the specified net worth criterion separately for each such depository. No minimum net worth


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criterion has been prescribed for other categories of DPs; however, depositories can fix a higher net worth criterion for their DPs. OTHER SOURCES Banks are generated income from other sources like, Incidental Charges, profit on sale of investment and recovery in prudential Wright off Account. FOUR COMPONENT OF NON-FUND BASED INCOME Name of Non-Fund Based Income Example Fiduciary Income - Administering Investment for others - Gross Income from services rendered by the bank`s trust Service charges on Deposit Account - Maintenance of Deposits Account - Failure to meet minimum balance - excess check writing - Withdrawals from non transaction Account - Early withdraw or closure fee - Dormant Account - Extensive activity - ATM Usage - Bounced Check Charges and other fee Trading Revenue - Net gain or loss from trading cash instrument - Off balance sheet derivatives contracts - Sales of assets and other financial instruments - Revaluation to carrying value of assets and reliabilities due to marking to market - Revaluation of interest rate - Foreign Exchange - Equity Derivatives - Commodity and other contract due to marking to Market - Incidental Income related to purchase and sale of assets and liabilities Fee and Other Income - Service Charges - Commission - Safe Deposit Boxes - Insurance Sales - Bank Draft - Money Order - Bill Collection - Saving bond Redemption - Execution of acceptances and letters of credit


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- Mortgage Servicing Fees - Notary - Consulting and Advisory Services - Credit Card Fees - Merchant Credit and Charges - Rental Fees - Loan Commitment Fees - Net Gain on Sales of Real Estate - Foreign Transaction CONCLUSION Non-interest income` is derived from the execution/processing business, the advisory business and any principal business that does not appear on the balance sheet. Financial institutions that wish to maximize execution/processing income depend on volume and efficiency for profits. To be successful, the trade center and the back office must be well coordinated and function in an efficient manner. In the face of declining net interest margins, depository institutions have entered new product areas moving from traditional lending to areas that generate non-interest revenues.


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11. Electronic Banking

Online banking (or Internet banking or E-banking) allows customers of a financial institution to conduct financial transactions on a secure website operated by the institution, which can be a retail or virtual bank, credit union or building society. It may include of any transactions related to online usage To access a financial institution's online banking facility, a customer having personal Internet access must register with the institution for the service, and set up some password (under various names) for customer verification. The password for online banking is normally not the same as for telephone banking. Financial institutions now routinely allocate customer numbers (also under various names), whether or not customers intend to access their online banking facility. Customer numbers are normally not the same as account numbers, because a number of accounts can be linked to the one customer number. The customer will link to the customer number any of those accounts which the customer controls, which may be cheque, savings, loan, credit card and other accounts. To access online banking, the customer would go to the financial institution's website, and enter the online banking facility using the customer number and password. Some financial institutions have set up additional security steps for access, but there is no consistency to the approach adopted. Features Online banking facilities offered by various financial institutions have many features and capabilities in common, but also have some that are application specific. The common features fall broadly into several categories: A bank customer can perform some non-transactional tasks through online banking, including -

• viewing account balances

• viewing recent transactions

• downloading bank statements, for example in PDF format

• viewing images of paid cheques

• ordering cheque books


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• download periodic account statements

• Downloading applications for M-banking, E-banking etc. Bank customers can transact banking tasks through online banking, including -

• Funds transfers between the customer's linked accounts

• Paying third parties, including bill payments (see, e.g., BPAY) and telegraphic/wire transfers

• Investment purchase or sale

• Loan applications and transactions, such as repayments of enrollments

• Register utility billers and make bill payments

• Financial institution administration

• Management of multiple users having varying levels of authority

• Transaction approval process Some financial institutions offer unique Internet banking services, for example: Personal financial management support, such as importing data into personal accounting software. Some online banking platforms support account aggregation to allow the customers to monitor all of their accounts in one place whether they are with their main bank or with other institutions. History: The precursor for the modern home online banking services were the distance banking services over electronic media from the early 1980s. The term online became popular in the late '80s and referred to the use of a terminal, keyboard and TV (or monitor) to access the banking system using a phone line. ‘Home banking’ can also refer to the use of a numeric keypad to send tones down a phone line with instructions to the bank. Online services started in New York in 1981 when four of the city’s major banks (Citibank, Chase Manhattan, Chemical and Manufacturers Hanover) offered home banking servicesusing the videotex system. Because of the commercial failure of videotex these banking services never became popular except in France where the use of videotex (Minitel) was subsidised by the telecom provider and the UK, where the Prestel system was used. The UK's first home online banking services were set up by Bank of Scotland for customers of the Nottingham Building Society (NBS) in 1983. The system used was based on the UK's Prestel system and used a computer, such as the BBC Micro, or keyboard (Tandata Td1400) connected to the telephone system and television set. The system (known as 'Homelink') allowed on-line viewing of


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statements, bank transfers and bill payments. In order to make bank transfers and bill payments, a written instruction giving details of the intended recipient had to be sent to the NBS who set the details up on the Homelink system. Typical recipients were gas, electricity and telephone companies and accounts with other banks. Details of payments to be made were input into the NBS system by the account holder via Prestel. A cheque was then sent by NBS to the payee and an advice giving details of the payment was sent to the account holder. BACS was later used to transfer the payment directly. Stanford Federal Credit Union was the first financial institution to offer online internet banking services to all of its members in October 1994. Today, many banks are internet only banks. Unlike their predecessors, these internet only banks do not maintain brick and mortar bank branches. Instead, they typically differentiate themselves by offering better interest rates and more extensive online banking features.

• Security

• Security token device for online banking. Security of a customer's financial information is very important, without which online banking could not operate. Financial institutions have set up various security processes to reduce the risk of unauthorised online access to a customer's records, but there is no consistency to the various approaches adopted. The use of a secure website has become almost universally adopted. Though single password authentication is still in use, it by itself is not considered secure enough for online banking in some countries. Basically there are two different security methods in use for online banking. The PIN/TAN system where the PIN represents a password, used for the login and TANs representing one-time passwords to authenticate transactions. TANs can be distributed in different ways, the most popular one is to send a list of TANs to the online banking user by postal letter. The most secure way of using TANs is to generate them by need using a security token.[citation needed] These token generated TANs depend on the time and a unique secret, stored in the security token (two-factor authentication or 2FA). Usually online banking with PIN/TAN is done via a web browser using SSL secured connections, so that there is no additional encryption needed.


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Another way to provide TANs to an online banking user is to send the TAN of the current bank transaction to the user's (GSM) mobile phone via SMS. The SMS text usually quotes the transaction amount and details, the TAN is only valid for a short period of time. Especially in Germany, Austria and The Netherlands, many banks have adopted this "SMS TAN" service as it is considered very secure. Signature based online banking where all transactions are signed and encrypted digitally. The Keys for the signature generation and encryption can be stored on smartcards or any memory medium, depending on the concrete implementation. ATM: An automated teller machine or automatic teller machine (ATM) (American, Australian and Indian English), also known as an automated banking machine (ABM) in Canadian English, and a cash machine, cashpoint, cashline or sometimes a hole in the wall in British English and Hiberno-English, is a computerized telecommunications device that enables the clients of a financial institution to perform financial transactions without the need for a cashier, human clerk or bank teller. ATMs are known by various other names including ATM machine, automated banking machine, "cash dispenser" (Germany) and various regional variants derived from trademarks on ATM systems held by particular banks. On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic smart card with a chip that contains a unique card number and some security information such as an expiration date or CVVC (CVV). Authentication is provided by the customer entering a personal identification number (PIN). The newest ATM at Royal Bank of Scotland operates without a card to withdraw cash up to £100. Using an ATM, customers can access their bank accounts in order to make cash withdrawals, debit card cash advances, and check their account balances as well as purchase pre-paid mobile phone credit. If the currency being withdrawn from the ATM is different from that which the bank account is denominated in (e.g.: Withdrawing Japanese Yen from a bank account containing US Dollars), the money will be converted at an official wholesale exchange rate. Thus, ATMs often provide one of the best possible official exchange rates for foreign travellers, and are also widely used for this purpose. Telephone banking: Telephone banking is a service provided by a financial institution that enables customers of the financial institution to perform financial transactions over the telephone, without the need to visit a bank branch or automated teller machine. Telephone banking times can be longer than branch opening times, and some


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financial institutions offer the service on a 24 hour basis. From the bank's point of view, telephone banking reduces the cost of handling transactions by reducing the need for customers to visit a bank branch for non-cash withdrawal and deposit transactions. To use a financial institution's telephone banking facility, a customer must first register with the institution for the service, and set up some password (under various names) for customer verification. The password for telephone banking is normally not the same as for online banking. Financial institutions now routinely allocate customer numbers (also under various names), whether or not customers intend to access their telephone or online banking facility. Customer numbers are normally not the same as account numbers, because a number of accounts can be linked to the one customer number. The customer will link to the customer number any of those accounts which the customer controls, which may be cheque, savings, loan, credit card and other accounts. Some financial institutions have restrictions on which accounts may be access via telephone banking. To access telephone banking, the customer would call the special phone number set up by the financial institution, and enter on the keypad the customer number and password. Some financial institutions have set up additional security steps for access, but there is no consistency to the approach adopted. Most telephone banking services use an automated phone answering system with phone keypad response or voice recognition capability. To ensure security, the customer must first authenticate through a numeric or verbal password or through security questions asked by a live representative. The types of financial transactions which a customer may transact through telephone banking include obtaining account balances and list of latest transactions, electronic bill payments, and funds transfers between a customer's or another's accounts. Cash withdrawals and deposits requires the customer to visit an automated teller machine or bank branch. A customer may not be able to use telephone banking on particular bank accounts with a financial institution, such as loan accounts, but bank rules vary in this respect. Mobile banking: Mobile banking (also known as M-Banking, mbanking) is a term used for performing balance checks, account transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant (PDA). Mobile banking and Mobile payments are often, incorrectly, used interchangeably. The two terms are differentiated by their service provider-to-consumer relationship; financial institution-to-consumer versus commercial institution-to-


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consumer for mobile banking and payments, respectively. Mobile Banking involves using mobile devices gain to access financial services. Mobile payments on the other hand may be defined as the use of mobile devices to pay for goods or services either at the point of purchase or remotely. Bill payment is not considered a form of mobile payment because it does not occur in real time. The earliest mobile banking services were offered over SMS, a service known as SMS banking. With the introduction of the first primitive smart phones with WAP support enabling the use of the mobile web in 1999, the first European banks started to offer mobile banking on this platform to their customers. Mobile banking has until recently (2010) most often been performed via SMS or the mobile web. Apple's initial success with iPhone and the rapid growth of phones based on Google's Android (operating system) have led to increasing use of special client programs, called apps, downloaded to the mobile device. With that said, advancements in web technologies such as HTML5, CSS3 and JavaScript have seen more banks launching mobile web based services to complement native applications. A recent study (May 2012) by Mapa Research suggests that over a third of banks have mobile device detection upon visiting the banks' main website. A number of things can happen on mobile detection such as redirecting to an app store, redirection to a mobile banking specific website or providing a menu of mobile banking options for the user to choose from of which visiting the main homepage is one. Electronic funds transfer Electronic funds transfer (EFT) is the electronic exchange, transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems. The term covers a number of different concepts:

• Wire transfer via an international banking network

• Cardholder-initiated transactions, using a payment card such as a credit or debit card

• Direct deposit payment initiated by the payer

• Direct debit payments, sometimes called electronic checks, for which a business debits the consumer's bank accounts for payment for goods or services

• Electronic bill payment in online banking, which may be delivered by EFT or paper check

• Transactions involving stored value of electronic money, possibly in a private currency

• Electronic Benefit Transfer


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India has two main electronic funds settlement systems for one to one transactions: the Real Time Gross Settlement (RTGS) and the National Electronic Funds Transfer (NEFT) systems. Transactions which are bulk and repetitive in nature are routed through electronic clearing service (ECS) which is further of two categories viz ECS-Credit (one debit and multiple credits e.g. Salary, Dividends) and ECS- debit (one credit and multiple debits e.g. bill payments, SIPs etc.). ECS is currently provided in around 75 centres in India. Real-time gross settlement: The acronym 'RTGS' stands for real time gross settlement. The Reserve Bank of India (India's Central Bank) maintains this payment network. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system through the banking channel. Settlement in 'real time' means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. 'Gross settlement' means the transaction is settled on one to one basis without bunching with any other transaction. Considering that money transfer takes place in the books of the Reserve Bank of India, the payment is taken as final and irrevocable. Fees for RTGS vary from bank to bank.RBI has prescribed upper limit for the fees which can be charged by all banks both for NEFT and RTGS. Both the remitting and receiving must have core banking in place to enter into RTGS transactions. Core Banking enabled banks and branches are assigned an Indian Financial System Code (IFSC) for RTGS and NEFT purposes. This is an eleven digit alphanumeric code and unique to each branch of bank. The first four letters indicate the identity of the bank and remaining seven numerals indicate a single branch. This code is provided on the cheque books, which are required for transactions along with recipient's account number. RTGS is a large value (minimum value of transaction should be 2,00,000) funds transfer system whereby financial intermediaries can settle interbank transfers for their own account as well as for their customers. The system effects final settlement of interbank funds transfers on a continuous, transaction-by-transaction basis throughout the processing day. Customers can access the RTGS facility between 9 am to 4:30 pm on weekdays and 9 am to 1:30 pm on Saturdays. However, the timings that the banks follow may vary depending on the bank branch. Time Varying Charges has been introduced w.e.f. 1 October 2011 by RBI. Banks could use balances maintained under the cash reserve ratio (CRR) and the intra-day liquidity (IDL) to be supplied by the central bank, for meeting any


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eventuality arising out of the real time gross settlement (RTGS). The RBI fixed the IDL limit for banks to three times their net owned fund (NOF). The IDL will be charged at 25 per transaction entered into by the bank on the RTGS platform. The marketable securities and treasury bills will have to be placed as collateral with a margin of five per cent. However, the apex bank will also impose severe penalties if the IDL is not paid back at the end of the day. National electronic fund transfer: The national electronic fund transfer (NEFT) system is a nation-wide system that facilitates individuals, firms and corporates to electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country. For being part of the NEFT funds transfer network, a bank branch has to be NEFT-enabled. As at end-January 2011, 74,680 branches / offices of 101 banks in the country (out of around 82,400 bank branches) are NEFT-enabled. Steps are being taken to further widen the coverage both in terms of banks and branches / offices.[1] IFSC or Indian financial system code is required to perform a transaction using NEFT or RTGS. IFSC code identifies a specific branch of a bank. IFSC code can be found out on RBI website. These codes are also known from your bank branch, and it is best to confirm the IFSC code, before going for any transaction. Indo-Nepal Remittance Facility Scheme: Indo-Nepal Remittance Facility is a cross-border remittance scheme to transfer funds from India to Nepal, enabled under the NEFT Scheme. The scheme was launched to provide a safe and cost-efficient avenue to migrant Nepalese workers in India to remit money back to their families in Nepal. A remitter can transfer funds up to 50,000 (maximum permissible amount) from any of the NEFT-enabled branches in India.The beneficiary would receive funds in Nepalese Rupees. Service Charge for RTGS: a) Inward transactions – Free, no charge to be levied. b) Outward transactions – - For transactions of 2 lakh to 5 lakh - 25 per transactions plus applicable Time varying Charges (1/- to 5/) total not exceeding 30 per transaction. - Above 5 lakh - 50 per transaction plus applicable Time varying Charges (1/- to 5/-) total charges not exceeding 55 per transactions. No time varying charges are applicable for RTGS transactions settled up to 12:30 hrs. Service Charges for NEFT:


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The structure of charges that can be levied on the customer for NEFT is given below: a) Inward transactions at destination bank branches (for credit to beneficiary accounts) – Free, no charges to be levied from beneficiaries b) Outward transactions at originating bank branches (charges for the remitter) - For transactions up to 1 lakh – not exceeding 5 (+ Service Tax) - For transactions above 1 lakh and up to 2 lakhs – not exceeding 15 (+ Service Tax) - For transactions above 2 lakhs – not exceeding 25 (+ Service Tax) Settlement Timings: Currently, NEFT operates in hourly batches - there are eleven settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays. Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time RTGS transactions are processed continuously throughout the The RTGS service window for customer's transactions is available from 9:00 hours to 16:30 hours on week days and from 9:00 hours to 13:30 hours on Saturdays for settlement at the RBI end. No Transaction on weekly holidays and public holidays.


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12. Basic of Accounting

Basic Accounting Concepts

As we saw in the previous chapter, accounting is based on 5 basic account types: Assets, Liabilities, Equity, Income and Expenses. We will now expand on our understanding of these account types, and show how they are represented in GnuCash. But first, let’s divide them into 2 groups, the balance sheet accounts and the income and expense accounts.

Let’s have a quick look at the Accounting Equation (Assets - Liabilities = Equity + (Income - Expenses)) again as a reminder, before we go deeper into each account type.

A graphical view of the relationship between the 5 basic accounts. Net worth (equity) increases through income and decreases through expenses. The arrows represent the movement of value.

Balance Sheet Accounts

The three so-called Balance Sheet Accounts are Assets, Liabilities, and Equity.

Balance Sheet Accounts are used to track the changes in value of things you own or owe.

Assets is the group of things that you own. Your assets could include a car, cash, a house, stocks, or anything else that has convertible value. Convertible value means that theoretically you could sell the item for cash.


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Liabilities is the group of things on which you owe money. Your liabilities could include a car loan, a student loan, a mortgage, your investment margin account, or anything else which you must pay back at some time.

Equity is the same as "net worth." It represents what is left over after you subtract your liabilities from your assets. It can be thought of as the portion of your assets that you own outright, without any debt.

Income and Expense Accounts

The two Income and Expense Accounts are used to increase or decrease the value of your accounts. Thus, while the balance sheet accounts simply track the value of the things you own or owe, income and expense accounts allow you to change the value of these accounts.

Income is the payment you receive for your time, services you provide, or the use of your money. When you receive a paycheck, for example, that check is a payment for labor you provided to an employer. Other examples of income include commissions, tips, dividend income from stocks, and interest income from bank accounts. Income will always increase the value of your Assets and thus your Equity.

Expenses refer to money you spend to purchase goods or services provided by someone else. Examples of expenses are a meal at a restaurant, rent, groceries, gas for your car, or tickets to see a play. Expenses will always decrease your Equity. If you pay for the expense immediately, you will decrease your Assets, whereas if you pay for the expense on credit you increase your Liabilities.

GnuCash Accounts

This section will show how the GnuCash definition of an account fits into the view of the 5 basic accounting types.

But first, let’s begin with a definition of an account in GnuCash. A GnuCash account is an entity which contains other sub-accounts, or that contains transactions. Since an account can contain other accounts, you often see account trees in GnuCash, in which logically associated accounts reside within a common parent account.

A GnuCash account must have a unique name (that you assign) and one of the predefined GnuCash “account types”. There are a total of 12 account types


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in GnuCash. These 12 account types are based on the 5 basic accounting types; the reason there are more GnuCash account types than basic accounting types is that this allows GnuCash to perform specialized tracking and handling of certain accounts. There are 6 asset accounts (Cash, Bank, Stock, Mutual

Fund, Accounts Receivable, and Other Assets), 3 liability accounts (Credit Card, Accounts Payable, and Liability), 1 equity account (Equity), 1 income account (Income), and 1 expense account (Expense).

These GnuCash account types are presented in more detail below.

Balance Sheet Accounts

The first balance sheet account we will examine is Assets, which, as you remember from the previous section, refers to things you own.

To help you organize your asset accounts and to simplify transaction entry, GnuCash supports several types of asset accounts:

1. Cash Use this account to track the money you have on hand, in your wallet, in your piggy bank, under your mattress, or wherever you choose to keep it handy. This is the most liquid, or easily traded, type of asset.

2. Bank This account is used to track your cash balance that you keep in institutions such as banks, credit unions, savings and loan, or brokerage firms - wherever someone else safeguards your money. This is the second most liquid type of account, because you can easily convert it to cash on hand.

3. Stock Track your individual stocks and bonds using this type of account. The stock account’s register provides extra columns for entering number of shares and price of your investment. With these types of assets, you may not be able to easily convert them to cash unless you can find a buyer, and you are not guaranteed to get the same amount of cash you paid for them.

4. Mutual Fund This is similar to the stock account, except that it is used to track funds. Its account register provides the same extra columns for entering share and price information. Funds represent ownership shares of a variety of investments, and like stocks they do not offer any guaranteed cash value.

5. Accounts Receivable (A/Receivable) This is typically a business use only account in which you place outstanding debts owed to you. It is considered an asset because you should be able to count on these funds arriving.


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6. Other Assets No matter how diverse they are, GnuCash handles many other situations easily. The group category, “Other Assets”, covers all assets not listed above.

Accounts are repositories of information used to track or record the kinds of actions that occur related to the purpose for which the account is established.

For businesses, activities being tracked and reported are frequently subdivided more finely than what has been considered thus far.

For personal finances a person can follow the business groupings or not, as they seem useful to the activities the person is tracking and to the kind of reporting that person needs to have to manage his financial assets.

The second balance sheet account is Liabilities, which as you recall, refers to what you owe, money you have borrowed and are obligated to pay back some day. These represent the rights of your lenders to obtain repayment from you. Tracking the liability balances lets you know how much debt you have at a given point in time.

GnuCash offers three liability account types:

1. Credit Card Use this to track your credit card receipts and reconcile your credit card statements. Credit cards represent a short-term loan that you are obligated to repay to the credit card company. This type of account can also be used for other short-term loans such as a line of credit from your bank.

2. Accounts Payable (A/Payable) This is typically a business use only account in which you place bills you have yet to pay.

3. Liability Use this type of account for all other loans, generally larger long-term loans such as a mortgage or vehicle loan. This account can help you keep track of how much you owe and how much you have already repaid.

Liabilities in accounting act in an opposite manner from assets: credits (right-column value entries) increase liability account balances and debits (left-column value entries) decrease them. (See note later in this chapter)

The final balance sheet account is Equity, which is synonymous with “net worth”. It represents what is left over after you subtract your liabilities from your assets, so it is the portion of your assets that you own outright, without any debt.


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In GnuCash, use this type of account as the source of your opening bank balances, because these balances represent your beginning net worth.

There is only a single GnuCash equity account, called naturally enough, Equity.

In equity accounts, credits increase account balances and debits decrease them. (See note later in this chapter)

The accounting equation that links balance-sheet accounts is Assets = Liabilities + Equity or rearranged Assets - Liabilities = Equity. So, in common terms, the things you own minus the things you owe equals your net worth.

Income and Expense Accounts

Income is the payment you receive for your time, services you provide, or the use of your money. In GnuCash, use an Income type account to track these.

Credits increase income account balances and debits decrease them. Credits represent money transferred from an account. So in these special income accounts, when you transfer money from (credit) the income account to another account, the balance of the income account increases. For example, when you deposit a paycheck and record the transaction as a transfer from an income account to a bank account, the balances of both accounts increase.

Expenses refer to money you spend to purchase goods or services provided by someone else. In GnuCash, use an Expense type account to track your expenses.

Debits increase expense account balances and credits decrease them. (See note later in this chapter.)

When you subtract total expenses from total income for a time period, you get net income. This net income is then added to the balance sheet as retained earnings, which is a type of Equity account.


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13. Banking Glossary

Act of God : ‘Force Majeure’ , Any event or a natural calamity which might lead

to non-fulfilment or non-performance of any obligation under a contract. Inclusion

of this clause in a contract will protect the parties concerned from such non-

performance.

Accounting : A System of maintaining record of financial transactions.

Account Payee: When a cheque is crossed (two parallel lines drawn across the left

top corner) with these terms, it means that the banker who is collecting proceeds of

the cheque is obliged to ensure collection only to the payee’s account.

Acceleration clause : A provision in a loan agreement which enables a lender to

recall the entire amount of loan in case there is a default in even a single instalment

payment by the borrower.

Accrued interest / income : Income / interest earned but yet to be received /

accounted.

Acceptance : An unqualified consent to honor or pay a bill of exchange by signing

under the word ‘accepted’.

Accommodation bill: A Bill of exchange endorsed or guaranteed by a third party

which can be discounted by banks (A bill usually drawn without an underlying

actual trade or transaction)

Accounts payable: Money due to be paid to suppliers / services (classified as short

term liabilities in a balance sheet)

Accounts receivable: Moneys due to be received for sales made or services

rendered (classified as short term assets in a balance sheet)


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Acid test ratio : Measure of a firm/company’s liquidity. Ratio of highly liquid

assets to its current liabilities. Used by banks for financing short term loans.

Accumulation : Building up of reserves from profits earned

Acquisition: Acquiring / Taking control of a company by purchasing 51% of its

shares

ACU: Asian Currency Unit ::Foreign Currency Deposits (in a bank) in an Asian

Country.

Advance(s) : Cash loans or loans generally for short term

Advised credit : A letter of credit issued by a buyer (importer)’s bank may be

‘advised’ to the exporter by another bank (in the seller – exporter’s country).

Advising bank: A bank, (A correspondent bank in the exporter’s country) on behalf

of another bank (in the importer’s country) informs (‘advises’) the exporter that an

LC has been opened by the importer favoring the exporter.

Ad Valorem: Tax, duty or levy charged according to the value of goods.

Adjusting entries: Accounting entries posted on the balance sheet date to

appropriate expenses incurred (but not paid) and income due (but not received) for

that period.

Adjusted book-value : Valuation of a running business by adjusting all its assets &

liabilities to fair market value.

Administrator : An individual appointed by a Court to wind up the estate of a

deceased person where there is no Will, or no executor named in the Will or if the

named executor is unable or unwilling to act.


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Adventure Capitalist : An Investor who dares to finance a highly risky business

and who also actively participates in management of such a business.

Affidavit :Declaration of facts made under oath before a court or a notary.

Affiliate : A company / business which has the power to control another.

After sight : Term to indicate a specified period (number of days) after which a bill

becomes payable.

At sight : Term to indicate that a bill is payable immediately (‘at sight’) on

presentation

Agency : Fiduciary relationship between two parties in which one (‘agent’) is

under the control of another (‘principal’).

Agreement : A record of a negotiated settlement.

Airway bill : A bill or a receipt acknowledging receipt of goods(for

transportation)by an Airline.

Alienation: Voluntary transfer of a property or an asset from one party to another.

Amalgamation: Merging of two or more business units into single entity.

Amendment: Valid change,addition, deletion, alteration made in a document by

common consent of all parties concerned.

American option: An ‘option’ that can be exercised any time before or on expiry

date.

Amortization: Spreading over or gradual reduction of a liability.

Annuity : Amounts periodically paid for an agreed length of time or for life of an

individual (depending on the investment contract) which includes both principal &

interest. Similar to pension.

Appraisal: A professional method of assessment of a business or value of an asset.


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Appropriation : Funds set aside for specific purpose. For example, debenture

redemption reserve is created for which funds are periodically set aside to facilitate

repayment of the debenture at a pre-determined date.

APR :Annual Percentage Rate. The yearly cost of a loan, including interest,

insurance, etc, expressed as a percentage.

Articles of Association: A document containing the rights & obligations of the

Directors and shareholders among themselves and also the bye-laws, internal rules

etc. of a company.

Arbitration: Settlement of a trade dispute by a neutral third party (Arbitrator).

Asset: Any item of economic value. Can be tangible like cash, real estate, gold or

shares etc., or intangible like, Trademarks, copyright, Goodwill,etc.,

Asset liability Management: Management of Bank’s Deposits and advances to

maximize profits and minimize risks and evolving optimum rates of interest for

both.

At par :Anything sold at Market rate / face value

ATM : Acronym for automated teller machine, a machine at a bank branch or

other location which enables a customer to perform basic banking activities

(checking one's balance, withdrawing or transferring funds) even when the bank is

closed.

Auction : Type of sale where the price is decided by competitive bidding.

Authentication : Verification that a legal document is genuine or valid, such as

through a seal from an authorized public official.

Authorised Share Capital : Capital that can be raised by a Company authorized in

its Memorandum of Association approved by shareholders

Autonomy: High level of freedom or discretionary powers.


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Audit: A System of checking/verifying books of accounts and records in

conformity with any given standards / norms.

Bank: An institution / organization licensed to accept deposits for lending.

Bailment :Transfer of possession (not ownership) of any movable property for a

specific purpose.(as security for a loan or for safe keeping). One who is the real

owner is ‘bailor’ and one who has such possession is ‘bailee’.

Back to back :A pair of linked transaction or agreement mutually dependent.

Barter: A form of trading or exchanging goods for goods or services.

Backup credit: Arrangement of a Standby line of credit in case the first line fails

Backward Integration: A manufacturing unit, may like to have its own set up for

supply of raw materials & so might acquire an existing unit or start a new one.

Back-end load : A sales charge or commission paid when an individual sells an

investment, such as a mutual fund. It is Intended to discourage selling.

Bad-debt : A loan with limited or no chance of recovery.

Balance sheet: A statement of the financial position of a business enterprise as on a

particular date.

Balanced fund: A Mutual fund which, by investing in both Stocks & Bonds, may

provide regular income as well as capital appreciation.

Balloon payment :A large, lump-sum payment scheduled at the end of a series of

considerably smaller periodic payments. A balloon payment may be included in

the payment schedule for a loan, lease, or other stream of payments.

Banker’s lien: A special right enjoyed by Bankers to possess, appropriate the

proceeds by sale, the property that come to him in the normal course of business.

Bancassurance :Sale of Insurance products through Banks.


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Bank Guarantee: Guarantee issued by a bank to pay the liabilities of a debtor in

case of his default

Bank rate :the rate at which RBI lends to member banks.

BCSBI :Banking Codes & Standards Board of India :Set up jointly by RBI and

members of IBA(Indian Banks’ Association) in 2006 to set standards of fair

banking practices for financial institutions

BIS (Bank for International Settlements, Hqrs:BASEL,Switzerland, Estt.:1930) A

representative body of Central Banks of member countries. Lays down guidelines

for effective management & supervision of International financial System. Basel I

accord laid down (in 1988) certain standards & regulations for banks including a

minimum capital base of 8% of a bank’s risk-weighted assets. Basel II document

of 2004 made more detailed recommendations on risks, market discipline &

supervision for banks.

Bar-code: Computer generated symbols used to identify / track anything.

Below par: Any Security, share or bond if sold at a discount or below its face

value, is known to be sold below par.

Bid: The max. price a prospective buyer would be willing to pay.

Bill : a. An Invoice or a receipt

b. A Negotiable Instrument creating a loan obligation.

c. A Treasury bill is an instrument (a Promisory Note) issued by the Central

Govt. to raise short term loans; Also used for controlling / regulating money

supply.

Bill of exchange: An unconditional written order issued by the maker / drawer

directing the drawee to pay a certain sum of money to a third party on a future

date.


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Bill of lading: A receipt for cargo received on board (of a ship) for transportation,

issued by the Master of the ship.

Blue chip Company: Any enterprise with solid record of performance & earnings,

dividend payments and stable with long term growth potential.

Blank endorsement : An endorsement consisting only of a signature on the back

of a cheque or a bill of exchange. This endorsement enables subsequent holder of

the cheque/bill of exchange to be the bonafide holder.

BOLERO : (Bill of Lading Electronic Registry Organisation) : A voluntary body

created by some of the leading banks, Trading houses and Shipping Companies to

encourage paperless transactions in international trade.

Bottom line: Profits of any organization after tax.

Bourse: Other word for Stock exchange (French)

Bond :A long-term debt instrument usually issued by Govt./ Quasi Govt. bodies.

Bona fide : Sincere, authentic, genuine.

Bonus: A gift or an extra-compensation given as reward for any achievement.

Book-building :A ‘book’ that contains the indicated prices offered by investors for

a Initial Public Offer. The issue price will be finalized after an anlysis of these

offers.

Book value : Present Value of an asset after deducting depreciation book profit

:Profit which has been made but not yet realized through a transaction. For

instance equity which has risen in value but is still being held. Also called

unrealized gain or unrealized profit or paper gain or paper profit.

Break-even :A position of no loss or gain

Breakup value :Valuation of assets on ‘forced sale’ on liquidation of a business


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Bridge-loan :Bridge financing :Finance extended to a person, company, or other

entity, using existing assets as collateral in order to acquire new assets. Bridge

financing is usually short-term and interim loan extended during the period leading

upto the disbursement of the sanctioned loan.

Broker : A licensed professional dealing in shares & securities

Bullion : Precious metals in the form of Ingots or Bars.

Credit: a.Borrowing capacity of an individual or an enterprise.

b.An agreement in which a borrower receives a value now and repay

later

Creditor: A person to whom you owe. A person who has extended credit to you.

Credit card: A Plastic card issued by Banks with a limited provision to borrow or

to make credit purchases.

Credit rating: Evaluation of credit worthiness or timely repayment capacity of a

company based on its past record, present financials and future potential.

Credit(rating)agency : Is a company which collects information about the

creditworthiness of individuals and corporations and provides it for a fee to

interested parties.

Credit risk : Risk arising out of possibility of a borrower’s default. Also known as

default risk

4 C's of credit :The four key elements a borrower should have to obtain credit:

character (integrity), capacity (sufficient cash flow to service the obligation),

capital (net worth or owned funds), & collateral (assets to secure the debt).

Confirmed credit :A ‘confirmed’ letter of credit . Confirmation is made by another

bank nominated as confirming bank.


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Coupon rate : Interest rate quoted / offered on a fixed income security

Correspondent bank : A bank acting as an agent of another bank in another city or

country.

Call money market : Market in which banks and dealers borrow money to satisfy

their credit needs or their short term needs of liquidity to cover their reserve ratio

requirements. The money is returnable on call.

CAMELS : It is an assessment of member banks by RBI to ascertain the ‘capital

adequacy, asset quality, management, earnings appraisal, liquidity, systems and

controls’. It is an assessment of the intrinsic strength of banks.

Capital expenditure : Business Expenses towards acquiring long term assets like

land & building, Plant & machinery etc.,(capital goods)

Capital Market : Market exclusively for sale & purchase of Shares & securities.

Capital gain: Profits made by disposal of any capital asset.

Capital adequacy: A measure of a bank’s financial strength & stability indicated by

percentage ratio of capital to its assets. (Note: ‘Assets’ for banks, are their loans &

investments)

Capitalisation: Conversion of accumulated profits (reserves) of an enterprise into

capital through fresh issue of shares.

Cash credit : A kind of loan granted for day to day activities of an enterprise

against a floating charge on movable assets.

Cash flow statement :A summary of a company's cash flow over a given period of

time. It gives the net position of inflows and outflows of funds during the course of

business.

Cash reserves :Cash, money market instruments, and Treasury Bills.


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Central bank :The generic name given to a country's primary monetary authority,

such as the RESERVE BANK OF INDIA . Usually has responsibility for issuing

currency, administering monetary policy, holding member banks' deposits, and

facilitating the nation's banking industry.

Certificate of deposit : It is an usance promissory note issued by bank enabling the

investor to negotiate it. It is short term surplus kept with the bank . It can be

negotiated 30 days after issue.

Certificate of incorporation : Certificate issued by R O C that brings a company

into existence.

Clayton’s rule : The first item on debit side is discharged by first item on credit

side and so on chronologically. This arises in case of default in payment or

business. The rule is based upon the simple notion of first-in, first-out to

determine the effect of payments from an account, and will normally apply in the

absence of evidence of any other intention. For the banker it is important to

reconstitute the defaulter to avoid complete loss because the liability is thus

crystallized and future credits are not adjusted against old liabilities/dues.

Clearing house : cheques drawn on all banks are collected here, their respective

balances debited/credited, and returned to the banks on whom they are drawn.

Closed-end fund : A fund with a fixed number of shares outstanding, and one

which does not redeem shares the way a typical mutual fund does. Closed-end

funds behave more like equity than open-end funds:

Cheque :An instrument in writing, containing an unconditional order, directing the

bank on whom it is drawn, to pay on demand, a certain sum of money to or to the

order of a certain person.

Collateral :Assets pledged by a borrower to secure a loan or other credit, and

subject to seizure in the event of default. Also called security.


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Collecting bank : The bank which collects the proceeds of cheques, bills and such

other instruments of value, to the customers’ accpounts.

Clean bill : A bill of exchange not supported by document of title to goods.

Commercial Paper ::An unsecured obligation issued by a corporation or bank to

finance its short-term credit needs, such as accounts receivable and inventory.

Commercial paper is usually issued by companies with high credit ratings,

meaning that the investment is almost always relatively low risk. These papers are

bought by organizations or even high networth individuals on short term basis to

provide liquidity to otherwise sound companies.

Commission :A fee charged by a broker or agent for his/her service in facilitating

a transaction, such as the buying or selling of securities or real estate. In the case of

securities trading, brokers can be split into two broad categories depending on the

commissions they charge. Some brokers charge higher commissions, but provide

research and investment advisory services.

Commitment fee / charges :A charge by a lender for holding credit available for a

borrower. Simply put , the penalty charged for not availing credit sanctioned.

Compound interest :Interest which is calculated not only on the initial principal

but also the accumulated interest of prior periods. Compound interest differs from

simple interest in that simple interest is calculated solely as a percentage of the

principal sum.

Consideration :Something of value, such as money or personal services, given by

one party to another in exchange for an act or promise.

Conversion : If there is a happening, that is inconsistent with owner’s right of

possession, which may be unlawful then conversion is said to take place. An


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example is of a third party cheque by fraudulent endorsement transferred into the

customer’s account. For this a banker needs protection u/s 131 as provided by a

formal introduction, of the customer, to the bank.

Consumer loan: loans to individuals to acquire household goods or for personal

consumption.

Contingent liability: An obligation that might arise on occurrence of an event or a

possible default.

Contra account : An account that is offset by a matching associated account.

Control account: A General ledger account which represents the total balances of

related subsidiary ledger accounts, serving as a crosscheck of the arithmetical

accuracy of records.

Convertible currency: Any currency that is freely accepted / exchanged in any

other country.

Convertible loan : A debt / loan raised by issuing an interest bearing security with a

promise of conversion of that loan as equity or capital after a given term.

Core activity :Basic / fundamental activities of an organisation that define its

purpose.(For ex., core activity of a bank is to borrow from savers and lend to

users.)

Corporate banking: Also known as Wholesale banking : Banking services tailor-

made to large corporates / business units.

Corporate Governance: Set of rules & practices of any Corporate body ensuring

fairness and transperancy in their relationship with all its stakeholders.

Cost-benefit analysis: Quantifying the costs & benefits of any proposed / existing

activity

to arrive at a decision as to continuation / discontinue the practice.


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CIF (Cost, Insurance, Freight): Term of sale indicating that the price quoted

includes Insurance & carriage charges paid upto destination.

Covenant: A Written and binding agreement.

Crossing : Two parallel lines drawn diagonally on the top left corner of a cheque or

a similar instrument which indicates to the paying bank that such an instrument is

not to be paid across the counter.

Cumulative : successive periodical additions to the principal.

Current ratio: A ratio of current assets (immediately convertible to cash)to current

liabilities (immediately payable) indicative of a company’s capacity to meet its

short term obligations.

Currency risk : Uncertainty or risk inherent in dealing with other

(foreign)currencies that have no fixed exchange rate with our currency.

Customs duty : Tax levied mostly on imports (and sometimes on exports) generally

as a protection to domestic industries.

Custodian : An individual or an organization, which holds in custody and

safekeeping the securities and other assets of another organization or individual.

DA bills : are bills which have a usance period and require acceptance by the

drawee.

DP bills : are bills where delivery of goods is against payment by the drawee.

Debenture: An instrument to raise debt by a company offering regular

predetermined rate of interest.

Debt : amount of money borrowed usually for a longer term.

Debt instrument : A document evidencing a debt.


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Debt restructuring : Re-scheduling or converting repayment obligations under a

debt to borrowers who are in financial trouble.

Debt service : Capacity to repay principal and interest due on a debt.

Debt instrument :A written promise to repay a debt. Examples include bills,

bonds, notes, CDs, commercial paper, and bankers acceptances/ L/Cs.

Debt market :The market for trading debt instruments.

Debt equity ratio: Ratio of Total loans to own capital indicating the leveraging

capacity of a company’s capital.

Debit: An accounting entry which could result in increase in assets or decrease in

liabilities.

Debit card :A card which allows customers to access their funds immediately,

electronically. Unlike a credit card, a debit card does not have any float.

Debtor: An individual who owes you or whom you have lent.

Deed: A document in writing, signed in presence of witnesses, and delivered to the

beneficiary. Usually made for transfer of title or ownership.

Day-loan : A Bank loan (repayable at the end of day)to a stock-broker for purchase

of securities pending delivery

Dealer: Bankers or Professionals who(are authorized to) deal in foreign exchange.

Deep discount bond: A loan instrument or a bond trading at a discounting of more

than 20% of its par value.

De facto: A condition or situation treated as fact or official.

Default risk: Risk of non-payment by a borrower. Also known as credit risk.

Deferred credit: Advance or payment received before delivery of goods or

services.


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Deflation: A slow-down in economic cycle indicated by decreasing employment &

wages, high interest rates and falling prices. Also known as Depression.

Del Credere agent:An agent who guarantees creditworthiness of a buyer and

undertakes to compensate the seller in case of default.

Delinquency ratio : A tool employed by banks in sanctioning / pricing retail loans.

Ratio of overdue loans to current loans indicating the quality of loans.

Demand draft: An instrument (like a cheque) drawn by a bank, made payable on

demand at another branch of its own to the payee beneficiary named therein.

Demand deposit :An account balance which can be drawn upon on demand, i.e.

without prior notice. Savings deposit is an example.

Demand loan : A loan that is repayable on demand.

Dematerialisation or DEMAT: Conversion of Shares / Securities from physical

form to Electronic form

Demurrage : Penal charges for delay in taking delivery of goods that have arrived

and stored in a Transporter’s warehouse.

Deposit account : A Bank account which limits withdrawals to the amount

existing in the account. Usually interest earning accounts.

Depository : An institution established for safe-keeping of securities (in electronic

form).

Depreciation : Accounting the cost of natural wear & tear of a tangible asset for the

purposes of charging it to P & L account as an expenditure. Replacement cost of an

asset over its normal life.

Derivatives: Financial Instruments involving future transactions related to

Securities and whose characteristics & value depend upon the underlying security.


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Devaluation : A deliberate and planned reduction in exchange value of a country’s

currency.

Development Bank or DFI : Financial institutions dedicated to finance specific &

long-term needs like infrastructure development or core industries.

Discharge : To satisfy or dismiss the obligation of a debt. Simply put, it is the full

repayment of a debt or an obligation.

Disclosure : The release of relevant information.

Dishonor :To not pay, such as for a bounced cheque. It is also failure to meet/pay

legitimate demand raised by a bill of exchange made in normal trade

Dividend:Share of profit of a Public company distributed pro rata among its

shareholders

Divestiture : Reduction of debt burden, by a company, by disposing off some of its

assets

Dissolution: End of an enterprise (by creditors or Govt., or Sharfeholders)

Dormant account: A bank account, generally a savings account, not operated by

the holder for a long time.

Doubtful account: A loan account whose recovery appears doubtful

Domestic bond: A loan instrument issued in the currency of the country

Domestic credit: loans involving goods that are neither exported nor imported.

Domiciled credit :A letter of credit containing a stipulation that payment will be

made by a designated bank in the country of the exporter.

Drawer :Maker or Writer of a cheque or such an instrument who directs the bank

(drawee) to pay the amount of the instrument as stated therein.

Drawee : The bank or the institution on whom an instrument is drawn with

instructions to honour as stated therein.


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Dun & Bradstreet: A US based firm which collates & publishes financial data

/business information of MNCs for a fee.

Due date :Date on which an obligation must be paid.

DBOM Contract (Design,Build,Operate & Maintain) contracts offered to Private

Sector participation for development of Public utility services and infrastructure

like Airports, Highways, etc.,

E-commerce: Commercial transactions on electronic media.

Earnest money: A token money usually paid by a contractor to an organization to

bind them to a contract.

Earned income: Income earned from labour, sale, or services and not interest or

dividend

EPS : Earning per share: ( Total revenue – Total expenses ) divided by No. of

outstanding shares.

EDI : Electronic Data Interchange :A Computer Network System like Internet used

by European banks which facilitates computer to computer exchange of electronic

documents.

EFT : Electronic Funds Transfer :Transfer of funds between accounts of the same

bank or different banks without use of paper documents (electronically)

EMI :Equated Monthly Instalments :Monthly instalment -obligation of repayment

of loan including part of principal & interest

ERM Exchange Rate Mechanism: or the currency grid, is a system that limits

currency fluctuations to a range of 15 percent in either direction.

ERP : Enterprise Resource Planning :A multi-module integrated software system

for planning the resource need of an enterprise.


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ESOP (Employee Stock Ownership Plan) : An incentive offered by Blue chip

companies to existing as well as potential employees by enabling them to purchase

shares funded by a loan or at its face value or below its market value.

Effective rate of interest: Actual interest paid on a loan or on a deposit depending

on periodicity of compounding.

Elasticity of demand: The tendency of demand going up or coming down

depending on the price of an item.

Empirical knowledge : Knowledge derived after thorough observation,

experimentation and experience

Encumbered asset : An asset or property on which there could be legal claims.

Endorsement :Signature in a legal capacity on a legal document. The endorser

guarantees that he is the lawful owner of the instrument and is legally capable of

transferring the title to another person. (endorsee)

Entity : A business unit which has a legal existence.

Equitable mortgage : A mortgage created by mere deposit of title deeds and related

documents with the bank and recording a recital of such deposit.

Equity : : Ownership interest in a corporation in the form of equity capital, say. It

also refers to total assets minus total liabilities, in which case it is also referred to

as shareholder's equity or net worth or book value. Simply put it is the money

brought in by the owners/shareholders and over time could also include

accumulated profits.

Escrow account :A trust account held in the borrower's name to repay obligations

such as borrowing. Credits to the account are first appropriated to discharge the

borrower’s liability


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Exchange :Any organization, association or group which provides or maintains a

marketplace where securities, options, futures, or commodities can be traded.

Executor :An individual or institution nominated in a will and appointed by a

court to settle the estate of a deceased.

Export-import Bank :An independent bank, which encourages exports by

providing credit and insurance. Also called Eximbank.

External Financing :Financing projects through new issues of securities; debt

and/or equity.

European Option :A type of option that may be exercised only on its expiry date.

Face value :The nominal amount assigned to a security by the issuer. For an

equity security, face value is usually a very small amount that bears no relationship

to its market price. For a debt security, face value is the amount repaid to the

investor when the bond matures . In the secondary market, a bond's price fluctuates

with interest rates. If interest rates are higher than the coupon rate on a bond, the

bond will be sold below face value (at a "discount"). If interest rates have fallen,

the price will be sold above face value.

Factor : A firm engaged in the business of financing accounts receivable, an

activity known as factoring. The firm so buying the receivables become the

creditors to the receivables. This helps the liquidity of the selling entity.

Factoring : The selling of a company's accounts receivable, at a discount, to a

factor, who then assumes the credit risk of the account debtors and receives cash as

the debtors settle their accounts. Also called accounts receivable financing.

FEMA:Foreign Exchange Management Act – 1999 (Earlier FERA) Laws relating

to Foreign exchange to facilitate external trade.


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FEDAI :Foreign Exchange Dealers Association of India – set up in 1958 with an

objective to frame rules governing conduct of inter-bank forex business & liaison

with RBI

Financial Intermediaries :Financial institutions that assist the transfer of savings

from economic agents with excess savings to those that need capital for

investments.

Financial Investment :Investment in financial assets.

Financial Engineering :The design of financial portfolios to achieve specified

goals.

Firm : A business organization run either as a proprietary or as a partnership

Fixed assets: Land,building, Plant & machinery, etc., of an organization

Floating charge : A charge on current or floating assets like cash,Accounts

receivable,inventory,etc.,

Forex reserves : Valuable foreign currency reserves maintained by a country.

Full value: Value of exports declared to the customs dept., without discount or

commission.

Financial institution :Institution which collects funds from the public and places

them in financial assets, such as deposits, loans, and bonds, rather than tangible

property.

Floating rate :Any interest rate that changes on a periodic basis. The change is

usually tied to movement of an outside indicator, such as the prime interest rate.

Movement above or below certain levels is often prevented by a predetermined

floor and ceiling for a given rate. For an individual taking out a loan when rates are

low, a fixed rate loan would allow him or her to "lock in" the low rates and not be

concerned with fluctuations. On the other hand, if interest rates were historically


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high at the time of the loan, he or she would benefit from a floating rate loan,

because as the prime rate falls to historically normal levels, the rate on the loan

would decrease.

Floating charge: Charge or right on goods & movables which undergo change ,

like from raw materials to semis-finished & finished goods.

Forfeiture : A loss of money, property, or privileges due to a breach of legal

obligation, which serves as compensation for resulting losses. An example is of

equity shares issued on part payment basis. When calls for payment of the balance

is not heeded then the amount initially paid is forfeited or lost by the prospective

investor and the shares are said to be forfeited.

Futures :An agreement to execute a transaction at some time in the future.

Futures contract : This is an agreement that allows an investor to buy or sell a

commodity, like gold or wheat, or a financial instrument, like a currency, at some

time in future. A future is part of a class of securities called derivatives, so named

because such securities derive their value from the worth of an underlying asset.

These contracts trade on organized futures exchanges.

Futures Exchange:Traded contracts specifying a future date of delivery or receipt

of a specific product or asset. The assets include agricultural products like, pork

bellies and oranges; metal; and financial instruments and indices. They are used by

firms to hedge against potentially unfavorable price changes, and by speculators

who hope to benefit from betting on the direction or magnitude of change.

Futures Market:Where futures contracts are traded.

Garnishee order : Monetary judgement by the court against defendant by ordering

3rd party(garnishee) to pay, money owed to the defendant(judgement debtor), to


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the plaintiff(judgement creditor). This is so when there is default in debt

repayment.

General lien :A lien applied to all goods, not just the goods giving rise to the debt,

owned by the lienee.

Goodwill : Brand value :Advantage of market reputation a company or a product

has which can be valued in terms of money.

Golden Parachute. :A plan devised by existing management stipulating that an

acquiring company has to pay executives of the acquired company a substantial

sum of money in the event of removing the former.

Green clause : A clause in an LC (letter of credit) which permits the exporter to

avail preshipment advance as well as storage facility for the goods to be exported.

Gross profit: Total value of goods sold – Total cost of production

government securities :Securities issued by a government to raise the funds

necessary to pay for meet expenses/investments.

Guarantee : To accept responsibility for an obligation if the entity with primary

responsibility for the obligation does not meet it. That is the guarantor pays when

the debtor fails to do so.

Guarantor : One who guarantees an obligation and has a legal duty to fulfill it.

Hedging : Protecting assets from currency fluctuations. This can be done by taking

positions or doing things which will offset the adverse effects on the original

investment. For instance a weak rupee leads to purchase of shares of export

oriented companies, who will benefit from falling rupee. This will provide a hedge

against fall in value of other assets, if at all.


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Hire purchase: A purchase contract under which payment for the goods is made in

instalments after completing which the ownership passes on to the buyer.

Holder in due course : Is a person who is in possession of an instrument for

which consideration has been paid and who believes that there is no defect in the

title..

Hundi: An indigenous Bill of exchange, a negotiable instrument, usually governed

by local customs and drawn in local language.

Hybrid instrument / debt : Instruments which are similar to equity , which absorb

losses without forcing/causing liquidation.

Hypothecation :The mode of creating a charge on securities or other assets as

collateral to secure a loan. This is without transfer of possession or ownership of

goods or assets hypothecated. Horizontal merger: Merger between two companies

that produce similar products. Also referred to as horizontal integration.

Hostile take-over :A merger or acquisition in which management resists the group

initiating the transaction.

Hurdle rate:The minimum required return on a project.

Inactive account: A bank account in which there have been no transactions for an

extended period of time.

Inalienable : A right that is not assignable, not transferable.

Incentive : A reward designed to encourage a productive activity

Indemnity :Expressed or implied contract to compensate for loss or damange. Ex.,

Insurance

Indenture:The legal agreement between the firm issuing the bond and the

bondholders, providing the specific terms of the loan agreement.


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Index :A yardstick to measure change from a base year.

Index Funds: Mutual funds whose objective is to replicate the performance of an

index. The most popular equity index is the BSE Sensex.

Inflation :A general increase in prices of goods and services.

Injunction: An order of a Court of law, directing a person/company to refrain from

doing or continuing to do any act complained of.

Inside market:The highest bid and the lowest offer prices among all competing

dealers in a Nasdaq security, i.e., the best bid and offer prices.

Insiders :These are directors and senior officers of a corporation -- in effect those

who have access to inside information about a company. An insider also is a

shareholer who owns more than 10 percent of the voting shares of a company.

Interest rate cap :A derivative instrument which is linked to interest rates.

Interest rate floor :A derivative instrument which is linked to interest rates.

Interest rate parity:A relationship which must hold between the interest rates of

two countries.

Internal financing :Financing projects through retained earnings.

International banking: Extending banking services globally, including dealing in

forex, managing overseas branches,financing foreign trade & projects,overseas

loan syndication

In-the-money option :An option that would be worth exercising if it expired

immediately. Also see out-of-the-money options.

Intrinsic value::A component of the market value of an option.

Inverse floater : A type of fixed income instrument.

Investment banks : are firms that assist companies in initial sale of securities in

primary market.


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Investment company:A company that uses its capital to invest in other companies.

IMF ; International Monetary Fund : A Global organization (Hqrs.: USA)

providing financial assistance to its member countries to finance their

deficits,maintain external value of their currency,etc.,

IPO: Initial Public Offer :Securities are offered for the first time to the public.

Inactive account :A bank account in which there have not been any transactions

for an extended period of time. Accounts are often charged a fee if there is not

enough activity.

Initial public offering : IPO. The first sale of shares by a company to the public.

Insolvent :Unable to meet debt obligations. Opposite of solvent.

Interest cover : A company's pretax operating income (or occasionally, cash flow)

divided by its interest obligations, for a given period. Mathematically it is the ratio

of earnings before interest, tax, and depreciation divided by the amount of interest

payable. A ratio of 1.5 to 2% is considered ideal by lending institutions.

Interest rate :A rate which is charged or paid for the use of money. An interest

rate is expressed as an annual percentage of the principal.

Internal Rate of Return :IRR. The rate of return that would make the present value

of future cash flows of an investment or business opportunity plus the terminal

value of the business equal the current market price of the investment or

opportunity. Simply put, it is the discount rate which makes the current investment

in a business equal to the present value of, future cash flows arising out of the

business plus the terminal value of the business. i.e. the NPV of the business

equals zero.

Introduction : Introduction of a potential customer to a bank by an account

holder, employee, or a well known person. It is necessary for a bank seeking


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protection under sec. 131 of the N.I. act. This formality is necessary for opening of

accounts.

Irrevocable : Not able to be undone. There are certain terms in a negotiable

instrument or a legal document or a document whose tenor cannot be

overlooked/avoided/bypassed and have to be adhered to.

Joint account :Any account owned by two or more people.

Joint and several liability :An obligation for which multiple individuals are liable

for payment as in case of obligations of a partnership concern.

Judgement creditor : Under garnishee order the creditor or person to receive its

benefit is called so.

Judgement debtor : Under garnishee order the debtor or the person liable to the

creditor is called so.

Junk bond: A bond which pays a high yield due to significant credit risk.

Kai Zen : Japanese concept of maintenance / improvement of work place using

simple techniques

Key factor :A risk factor which is used in estimating value at risk.

Knock-In Option :A type of path-dependent option.

KnockOut Option :A type of path-dependent option.

Law of limitation : Law that sets out a period after which a legal document cannot

be enforced unless revalidated before the said date.

Lease : A contractual arrangement whereby the lessor grants the lessee the right

to use his asset for a fixed period in return for periodic (lease) rentals.


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Ledger : A book/folder/file of accounting entries where transactions are listed in

separate accounts.

Legal risk:Risk relating to legal uncertainties

Lender of last resort :A function of a central bank, such as the Reserve bank, in

which it lends money to a bank which is facing unusually heavy withdrawals.

Lessee : A person who obtains a property on lease from its owner.

Lessor : An owner of property who rents it to another party.

Letter of credit :L/C. A binding document that a buyer can request from his bank

in order to guarantee that the payment for goods will be tranferred to the seller.

Basically, a letter of credit gives the seller reassurance that he will receive the

payment for the goods. In order for the payment to occur, the seller has to present

the bank with the necessary documents .

Leverage : Is the amount of long term debt relative to equity with a higher ratio

meaning a greater amount of leverage. A business entity’s funding pattern

generally is a judicious mix of equity and debt. Loosely speaking, it represents the

influence one financial variable has over some other related financial variable.

Liability : It is a claim on the assets of a business. It is the amount owed by the

business to the shareholders, both preferential and equity, creditors both long

term(banks and institutions), and short term.

LIBOR : It is the London inter bank offered rate. It is the standard for

international transactions by Indian entities.

Lien :A legal claim against an asset which is used to secure a loan and which

must be paid when the asset is sold. Liens can be structured in many different

ways. In some cases, the creditor will have legal claim against an asset, while not

actually hold it in possession, and in other cases the creditor will actually hold on

to the asset until the debt is paid of.


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Lien, bankers : bankers lien gives it a right of sale on possession of goods in the

event of failure of the debtor to meet the obligation.

Lien, negative : In which borrowers assets are free from any charge and no charge

will be created without bankers prior consent. The first right of charge lies with

bank.

Liquidate : To convert an asset to cash. Or : to sell off an

entity to meet legal obligation.

Liquidity ratio :Total value of cash and marketable assets(receivables easily

realizable) divided by current liabilities. For a bank this is the cash held by the

bank as a proportion of deposits in the bank. The liquidity ratio measures the extent

to which a corporation or other entity can quickly liquidate assets and cover short-

term liabilities, and therefore is of interest/concern to short-term creditors.

Listing :When a company's stock trades on an official exchange.

Long-term debt : Loans and obligations with a maturity of longer than one year;

accompanied by interest payments.

Long-term Gain :A gain on the sale of a capital asset where the holding period was

six months or more and the profit was subject to the long-term capital gains tax.

Mandate : Power given to a person or group of persons for carrying out certain

jobs/activities/obligations.

Margin : Margin refers to an amount required to be brought in by a borrower, as

specified by the lender, as his own contribution(equity) to the business.

Market value : A security's last reported sale price on an exchange.


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OR : The market price of an entire company, calculated by

multiplying the number of shares outstanding by the price per share. Here also

called market cap or market capitalization.

Marketable security :Security that probably could be converted into cash quickly

and easily.

Marked-to-Market :An arrangement whereby the profits or losses on a futures

contract are settled up each day.

Material alteration : Any alteration that changes the tenor of an instrument . To

validate a material alteration the drawer must authenticate .

Maturity date :The date on which a debt becomes due for payment.

Memorandum of association : Document which governs the association of a

company with the outside world ; gives details of the type of company, objects of

the company(activities the company may carry out), capital structure, etc.

Moratorium : A period of time during which a certain activity is not allowed or

required. For instance when repayment on a loan starts only after a lapse of a

certain period after its disbursement, then that period is called the moratorium on

the loan.

Mortgage : A loan to finance the purchase of real estate, or plant and machinery,

usually with specified payment periods and interest rates. The borrower

(mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the

loan.

Mortgage Backed Security :A security interest in a pool of mortgages.


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NAV : Net Asset Value. The rupee value of a single mutual fund share, based on

the value of the underlying assets of the fund minus its liabilities/expenses, divided

by the number of shares outstanding. Calculated at the end of each business day.

Negligence : Failure to act during the normal course of business in an usually

accepted manner.

Negotiable instrument : A transferable, signed document that promises to pay the

bearer a sum of money at a future date or on demand. Examples include cheques,

bills of exchange, and promissory notes.

Net present value ; NPV: A method of evaluating investment proposals. It is

present value of future cash flows less the sunk costs(initial investment). When

evaluating 2 proposals it is assumed that the one with higher NPV is the better of

the two. Sometimes comparative ratios of the NPVs to the initial investment is

also used for the purpose.

Net worth : For a company, it is total assets minus total outside liabilities. Net

worth is an important determinant of the value of a company, considering it is

composed primarily of all the money that has been invested since its inception, as

well as the retained earnings for the duration of its operation. Net worth can be

used to determine creditworthiness because it gives a snapshot of the company's

investment history. Also called owner's equity, shareholders' equity, or net assets.

Non-performing asset :A loan that is not meeting its stated principal and interest

payments. More generally, an asset which is not producing income.

Non-recourse debt :Debt for which the borrower is not personally liable.

Nostro account : A banking term to describe an account one bank holds with a

bank in a foreign country, usually in the currency of that foreign country.

Notary public : A person authorized by the state to notarize certain documents.


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Online banking :A system allowing individuals to perform banking activities at

home, via the internet

Operating cycle : The average time between purchasing or acquiring inventory

and receiving cash proceeds from its sale in finished goods form. Also called

working capital cycle in which the period covers the time from purchase of raw

materials , its conversion to final goods, subsequent sale and realization of the

proceeds.

Opportunity cost : It is the rate of return that can be earned on the best alternative

investment.

Open-End Fund : A mutual fund that stands ready to redeem stocks and issue new

stock. Also see closed-end funds.

Option : A type of derivative instrument.

Option :The choice to take a specific action in the future. The action considered in

finance are the purchase (call option) or sale (put option) of an asset.

Order nisi : To freeze all transactions in debtors’ account and use the amount to

pay off the judgement debit.

Overdraft :The amount by which withdrawals exceed deposits, or the extension of

credit by a lending institution to allow for such a situation.

Passbook :Book issued by a bank to record deposits, withdrawals, and interest

earned in a deposit account.

Payee : One who receives a payment, such as through cash, cheque, money

order, bill of exchange etc.

Paying banker : Bank on whom the negotiable instrument is drawn and which is

sent for collection.


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Payout Ratio :Percent of earnings that is paid out as dividends.

Pension Fund :Assets held in trust to cover the costs of pension benefits to

participants.

Personal guarantee :Promise made by an entrepreneur which obligates him/her to

personally repay debts his/her corporation defaults on.

Personal identification number :PIN. Code used by an individual so that he/she

can access his/her bank account at an ATM machine, but others can't.

Pledging :Offering assets to a lender as collateral for a loan. Though the asset will

be pledged and may be in the custody of the lender, it is still owned by the

borrower unless he/she defaults on the loan.

Post-date :To put a future date on a document or cheque, postponing the effective

or negotiable date.

Power of Attorney :A legal document that enables an individual to designate

another person, called the attorney, in fact, to act on his/her behalf as long as the

individual does not become disabled or incapacitated.

Preamble : It is an introductory statement, a preliminary explanation. It tells

about the rules governing a body which form the basis for their existence and

future action.

Preferential shares : shares on which a specific dividend is paid before any

dividends are paid to equity shareholders, and which takes precedence over equity

in the event of a liquidation. Preferential shareholders do not enjoy any of the

voting rights of equity shareholders.

Primary Market is where firms sell new financial assets typically with the

assistance of an investment banker.


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Prime rate :The interest rate that commercial banks charge their most

creditworthy borrowers, such as large corporations. The prime rate is a lagging

indicator. Also called prime.

Probate : The review or testing of a will before a court of law to ensure that the

will is authentic.

Profit and loss statement : An official quarterly or annual financial document

published by a public company, showing earnings, expenses, and net profit. Net

income is determined from this financial report by subtracting total expenses from

total revenue. The profit and loss statement and the balance sheet are the two major

financial reports that every company publishes. The difference between this

statement and the balance sheet deals with the periods of time that each one

represents. The profit and loss statement shows transactions over a given period of

time (usually quarterly or annually), whereas the balance sheet gives holdings on a

specific date.

Promissory note : a promise by the drawer of the note to pay a certain sum of

money on certain date to the drawee.

Prospectus : Description of a company, raising funds from the capital market , to

the prospective investors.

Prudential limits : limits of sector wise credit exposure set by RBI on commercial

banks. These limits helps control among other things too much exposure to a

particular sector vis-à-vis others as also the effects of artificial prices, demand-

supply mismatches, default situations and so on.

P/E Ratio :Price to earnings ratio. The price of a share of stock divided by earnings

per share of stock for a twelve-month period.

Quote : The highest bid to buy and the lowest offer to sell a security at a given time


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Real Assets :Tangible assets include: plant and equipment; intangible include:

technical expertise, trademarks & patents.

Reconciliation :Adjusting one's cheque/cash book balance to match a bank

statement.

Red Herring :A preliminary prospectus.

Redemption : The return of an investor's principal amount in a security, such as a

bond, debenture or mutual fund shares, at or prior to maturity.

Remit :To make a payment by transfer. Examples of remittance include cash,

cheque/draft and electronic transfer.

Repo (Repurchase Agreement) :Purchase of Treasury securities from a securities

dealer with an agreement that the dealer will repurchase them at a specified price.

Reverse Repo : An agreement to purchase and resell an asset.

Reserve ratio :Amount of money and liquid assets that the Reserve Bank’s

member banks must hold in gilt securities or cash with the RBI, usually a

specified percentage of their demand deposits and time deposits. Also called

reserve requirement.

Resolution :An official document representing an action on the part of the board

of directors of a corporation. For instance a board may resolve to borrow funds

from or place deposits in a bank and may appoint certain directors or officials to

operate the bank account.

Retail banking : Banking services for individual customers.

Retained earnings : Earnings not paid out as dividends but instead reinvested in

the core business or used to pay off debt.


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Revaluation reserves : reserves that are created after revaluation of assets that are

under valued in the books of accounts. An example is of an asset which commands

a market price well above the book value(after depreciation) such as land, and

therefore the company decides to increase its value in the books and create a

reserve(notional).

Revolving line of credit : An agreement by a bank to lend a specific amount to a

borrower, and to allow that amount to be borrowed again once it has been repaid.

Also called revolving credit.

Right of recourse :The right to recover a bad debt.

Round Lot :The purchase or sale of a quantity of stocks that is in multiples of 100,

such as 200, 1,000, etc.

Sans recourse : without liability to the endorser. The liability is solely that of the

drawee/acceptor.

Savings deposits :Accounts that pay interest and can be withdrawn on upon

demand. Offered by banks.

Secondary market : A market in which an investor purchases a security from

another investor rather than the issuer, subsequent to the original issuance in the

primary market. It is a place where buyers and sellers of a security meet to

deal/operate.

Secured debt : Backed by a pledge of collateral/assets. Opposite of unsecured.

Secured loan :A loan which is backed by assets belonging to the borrower in

order to decrease the risk assumed by the lender. The assets may be forfeited to the

lender if the borrower fails to make the necessary payments.


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Securitization : The process of aggregating similar instruments, such as loans or

mortgages, into a negotiable/tradable security.

Set off : adjusting debit in one account of a borrower with credit in another.

Short Sale Sale of an asset that the investor does not own or any sale that is

completed by the delivery of a security borrowed by the seller. Short selling is a

legitimate trading strategy. Short sellers assume the risk that they will be able to

buy the stock at a more favorable price than the price at which they sold short.

Simple interest :The interest calculated on a principal sum, not compounded on

earned interest.

Sinking fund :A fund into which a company sets aside money over time, in order

to retire its preferential shares, bonds or debentures.

Spin-Off :A newly created company that used to be part of a parent company.

Parent company shareholders receive a pro rata ownership in the new company.

Spot :For immediate delivery.

Statutory : Something which is enacted by legislation. As law perhaps.

Stop payment : An order to a bank not to honor the payment of a cheque after it

has been delivered but before it has been cashed.

Subordinated debt : Debt that is either unsecured or has a lower priority than that

of another debt claim on the same asset or property. Also called junior debt.

Surety : A pledge, guarantee or bond, usually to back the performance of an

individual or company.

Swap : An exchange of streams of payments over time according to specified

terms. Also exchange of loan portfolio by banks

Systemic Risk :Risk which threatens an entire financial system.


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Tangible asset : Assets having a physical existence, such as cash, equipment, and

real estate; accounts receivable are also usually considered tangible assets for

accounting purposes. Opposite of intangible asset.

Tenor : instructions appearing on the face of a negotiable instrument such as

date, amount , name of payee and so on.

Terminal value : it is the value of an asset at some point in time in future. It is a

notional value assigned while estimating the future cash flows of a business but is

essential nevertheless.

Third party : Someone other than the principals directly involved in a transaction

or agreement

Time deposit : money kept as deposit in a financial institution, usually a bank, for

a fixed term or with the understanding that the customer can withdraw only by

giving advanced notice.

Transfer :A movement of funds from one account to another

Traveller's cheque : cheque issued by a financial institution which functions as

cash but is protected against loss or theft. Traveller's checks are useful when

traveling, especially in case of overseas travel when not all credit and debit cards

carried by a person will be accepted. A charge or commission is usually incurred

when a person exchanges cash for traveller's checks, though some issuers provide

them free of charge.

Treasury Bill :A negotiable debt obligation issued by the government and backed

by its full faith and credit, having a short maturity. Also called T-Bill . These

instruments, liquid in nature, are a source for meeting the Central Bank’s(RBI)

reserve ratios.

Trust : A legal arrangement in which an individual gives fiduciary control of

property to a person or institution (the trustee) for the benefit of beneficiaries.


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Tangible asset : Assets having a physical existence, such as cash, equipment, and

real estate; accounts receivable are also usually considered tangible assets for

accounting purposes. Opposite of intangible asset.

Tenor : instructions appearing on the face of a negotiable instrument such as

date, amount , name of payee and so on.

Terminal value : it is the value of an asset at some point in time in future. It is a

notional value assigned while estimating the future cash flows of a business but is

essential nevertheless.

Third party : Someone other than the principals directly involved in a transaction

or agreement.

Time deposit : money kept as deposit in a financial institution, usually a bank, for

a fixed term or with the understanding that the customer can withdraw only by

giving advanced notice.

Transfer :A movement of funds from one account to another.

Underwrite :To assume risk, as when offering an policy or bringing a

corporation's new securities issue to the public; in the latter case, the term

originally applied only to firm commitment offerings, but is now used for all

offerings. To put it simply if the IPO is undersubscribed the underwriter subscribes

to the extent of his commitment for a fee/commission which is payable in all

situations.

Usance : the length of time allowed on the payment of a bill of exchange

Variable rate :Any interest rate or dividend that changes on a periodic basis.

Variable rates are often used for convertibles, mortgages, and certain other kinds of


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loans. The change is usually tied to movement of an outside indicator, such as the

prime interest rate. Movement above or below certain levels is often prevented by

a predetermined floor and ceiling for a given rate. Also called adjustable rate..

Venture Capital :Capital supplied to particularly high-risk projects, such as start-

ups or to companies denied conventional financing.

Vertical Integration :Merger between a supplier and its customers. An example

would be when an oil-refining firm acquires a firm that owns oil fields.

Vicarious liability : Liability that arises out of the responsibility of a superior for

the acts of his subordinate. As in case of a bank which is liable to the acts of its

employees in the natural discharge of duties.

Waiver : The act of voluntarily giving up a right or covenant. Convenants are

certain clauses in an agreement.

Warrant :A certificate, usually issued by a corporation along with a bond or

debenture, entitling the holder to buy a specific amount of securities of that

corporation at a specific price, usually above the prevailing market price at the

time of issuance. In case the price of the security rises to above that of the

warrant's exercise(entitled) price, then the investor can buy the security at the

warrant's exercise price and resell it for a profit. Otherwise, the warrant may

simply expire or remain unused.

White Knight: A firm that comes to the rescue of a corporation that is being taken

over.

Wholesale banking : Banking services for institutions.

Wire transfer :An electronic transfer of funds.

Withdrawal : A removal of funds from an account.


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Working capital : Is current assets minus current liabilities . Working capital

measures how much liquid assets a company has available, to build its business.

The number can be positive or negative, depending on how much debt the

company is carrying. In general, companies that have a lot of working capital will

be more successful since they can expand and improve their operations.

Companies with negative working capital may lack the funds necessary for growth.

Working capital loan :A short-term loan which provides money to buy earning

assets.

Write-off : To charge an asset amount to expense or loss, in order to reduce the

value of that asset and one's earnings. An example, is of receivables not

recoverable being charged to the profit and loss account in order to offset the

income that has already accrued to the account.

Written down value method : It is a method of calculation by which depreciation

is charged as a percentage of the net asset value(written down value) in the books

year after year.

Yield :A measure of a bond's potential return.

Yield to Maturity (YTM): The rate of return the investor will earn if the bond is

held to maturity.

Zero Coupon Bond :A bond that has no coupon payments. It pays only a single

cash flow at maturity.

Glossary Of Information Technology Terms


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Algorithm - : A step-by-step method of accomplishing a task. A series of

mathematical commands that cipher and de-cipher.

Batch - : A group of commands that are executed one at a time.

Batch File - : A file in a DOS/Windows environment with the .bat extension.

This file type is executable in DOS or at a Windows command prompt. Batch

programs are written in a batch programming language that utilizes a superset of

standard DOS commands.

Buffer - : A temporary location to store or group information in hardware or

software. Buffers are used whenever data is received in sizes that may be different

than the ideal size for the hardware or software that uses the buffer.

Buffered memory - : Memory modules that have extra chips on them to support

Error Checking and Correcting (ECC) functionality.

Bug - : This is commonly an error in design or programming in a hardware

device or piece of software.

Bus Topology - : This network topology has computers connected to a strand of

network cabling that is connected to network repeaters at one end and terminated at

the other.

Cable Modem - : The device that you attach a coaxial cable from your cable

company directly into that can provide you with high speed Internet access.

Channel – : It consists of controller card , interface cable & power supply.

Cheque truncation – : It stops the flow of cheques thru’ the banking system &

converts into electronic processing system.


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Coaxial cable -. : It consists of a single copper wire, surrounded by a copper

braid or foil that acts as a ground. The entire wire is then coated with an insulation.

The cable carries digital signals at high speeds.

Data - Information. : Any series of bits, characters, or objects that has meaning.

Data is stored and transmitted by computers.

Data Compression - : Takes something large and makes it smaller.

Data Encryption Standard (DES) - : An encryption method developed by IBM in

1977. It uses a private 56-bit key that is applied to each 64- bit block of data.

Data Mining - : The act of analyzing a database or data warehouse and searching

for new facts based on the data.

Database - : An ordered set of data.

Data Compression (Compression) - : Takes something large and makes it

smaller.

Digital signature - : A form of electronic signature that works with a public and

private key encryption system and a certificate authority.

Disk Mirroring -. : Disk mirroring involves two hard drives that are on the same

drive controller. The same data is written to both drives over same channel.

Disk Duplexing . : Disk duplexing is much like disk mirroring, but each drive is

on a separate controller.

Dumb Terminal - : These are hooked up to mainframes, and are little more than a

monitor attached to a keyboard. All they are good for is running programs using

the mainframe's hard drive and memory, thus the "dumb" in the name.

Dynamic signature verification – : it finds out whether a signature is genuine or

not.


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E-mail - : This stands for electronic mail. It is a service provided over the

Internet that allows you to send information to another person or list of people.

Electronic purse – : the space in a card is used to store different types of

accounts of a user.

Electronic signature - : Any form of electronic identifier, including a digital

signature.

Encryption - : The act of altering data to make it unreadable unless you know

how to decrypt it.

Ethernet - : A network topology that is able to send data at 10 Mbits/second.

Workstations can exist on the same cable, but only one can communicate at a time.

To get by these limitations, switched Ethernet and Fast Ethernet were invented,

and were also combined. Nowadays, most networking devices you would purchase

are switched fast Ethernet.

FTP (File Transfer Protocol) - : A common method of moving files from system

to system using TCP/IP. To work properly, it requires an FTP client to contact an

FTP server in order to transmit data back and forth.

Fault Tolerant Computer system - : . The ability of a system to continue

operations following failure in one or more components.

Full Duplex - : Originally this referred to a communication between a modem

and a remote system, where characters were sent both ways over the phone line so

that they could be accurately displayed on a terminal.

Gopher - : This is often said to be the first incarnation of the World Wide Web. It

is an information source based on textual links, now outdated and superceded by

the Web.


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Graphical User Interface (GUI) - : Any system that uses graphics to represent

the functions of a program. All Windows operating systems are GUIs.

Host - : A generic term used to describe a computer or program that makes a

resource available, usually over a network.

Half Duplex - : Originally a modem communications term, half duplex now

mainly refers to network communications that transmit in one direction at a time.

Also see duplex and full duplex.

Internet – : global network of networks. It is system that allows user computers

to exchange data, messages etc.

LAN - : A small isolated network at one office or physical location. Most office

computers are connected to a LAN, but may also be connected to the Internet or a

WAN.

Management Information Systems/Services (MIS) - : The department at most

companies that provides real- time information to the management.

MODEM (Modulator/Demodulator) - : A device that serves as a bridge between

your digital computer and some form of analog line used to transmit data, such as a

phone line (standard modem) or analog cable connection (cable modem).

Multiplexer (Mux) - : A logic circuit that sends one of several inputs out over a

single output channel.

Node - : One computer/machine or address on a network. If you managed a

network with 10 printers, 50 servers, and 150 client machines, you could say you

managed a network with 210 nodes.


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Online - This term refers to anything that's on the Internet and electronically

transmitted.

Optical fibre – : provides high quality transmission at very high speeds.

Packet - : A collection of information. This term is most often used to refer to

the chunks of information sent over computer networks.

Peripheral - : Any device that is not part of the motherboard, aside from memory

and the CPU. For example, video cards, sound cards, modems, and hard drives are

peripherals.

Point to Point Protocol (PPP) - : The mode of transport used to connect a

computer to the Internet via a dial-up adapter (a modem).

Protocol - : A general behavior that computers and network devices must follow

to understand one another.

Real-time - : Tasks that are time-critical and must happen in our time (as

opposed to the much faster computer). The user interface should always be real-

time. If you move the mouse, your pointer should move on screen immediately.

Unfortunately, Windows can bog down enough so that this doesn't happen

Ring topology - : A network that is connected on both ends to one source, with

client machines hanging off of the ring. If you break the ring, all computers in the

ring lose connectivity

RTGS – : Real time gross settlement system. Instant credit thru the RBI clearing

system.


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Safe Mode - : An operating mode used in Microsoft operating systems. It was

first introduced in Windows 95 and was loaded automatically if Windows 95

crashed during boot up. You can access Safe Mode if you press the "F8" key when

new Windows operating systems are booting--this will bring you to a menu that

allows you to boot into safe mode. Safe Mode boots the operating system with

minimal driver support. The purpose of it is to help resolve boot problems.

Server - : A machine whose sole purpose is to supply data so that other machines

can use that data.

Simplex transmission – : it transmits data in one direction only.

Smart card – : A plastic card with an Integrated chip installed.

Standalone - : A hardware device or piece of software that works with nothing

else required.

Star topology - : A network topology that has network hubs at the center, with

all connected computers linked back to the hub by a single cable. Thus, if one

cable goes down, the rest of the computers can still communicate.

SWIFT – : Society for worldwide inter-bank financial telecommunication, is an

instant transfer of messages internationally.

Token Ring - : A network topology pioneered by IBM and eventually made into

the IEEE 802.5 standard.. Token ring networks are wired in a ring topology, and

nodes on the network pass a token around. Whichever node has the token is

allowed to use the network.

Usenet Newsgroups - : Also referred to simply as "newsgroups," Usenet

newsgroups are a huge bunch of Internet discussion groups that replicate across the

Internet every so often.

Vein recognition – : uses unique vein structure of the human body to to identify

individuals.


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Visual recognition – : digitizing a picture of a person ,storing in a smart card

then using it for identification.

Voice recognition system – : it compares voicres with original recorded.

VSAT - . : an outdoor small dish antenna interfacing with a satellite.

WAN (Wide Area Network) - : Any network that spans more than one location.

Typically at least one of the locations is fairly remote..

WAP (Wireless Application Protocol) - : A proposed standard that allows for

transfer of data securely between wireless devices, such as PDAs, cellphones,

pagers, or other combinations of those devices. WAP supports many different

wireless networks.

World Wide Web (WWW or Web) - : This is basically a means of

communicating text, graphics, and other multimedia objects over the Internet.


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