Banker Customer

Relationship

Bank Functions
Basic Functions accepting deposits from
the public, and deploying the same by way
of loans and investments.
Other Functions Locker facility, Safe
Custody of Articles, Collecting Bills, Cheques
and so on.
The various functions create different types
of relationships.

Banking essentials of
definition
Accepting of deposits for the purpose of
lending
Should be accepted from the public (nidhis,
multi-benefit societies, cooperative societies
are outside the purview)
Acceptance of deposits in cash
Depositors have no control over the
management
Safeguard the interest of the depositors
Primary and important

Banking Important
Aspects
Only a firm or a Company and not an
individual are permitted to act as a Bank.
Firm with not more than 10 partners / or
a Company as per Companies Act 1956.
Other than a banking company they
can not use the words Banker, Banking
and Banking Company.
Prohibits Individuals / or group of
individuals or a firm to use such words.

Banking Important
Aspects
Money lenders are not bankers.
Indigenous bankers included by RBI for credit
control and applying banking regulations.
A company lending to public but not accepting
deposits from the public not considered as a
banking company.
Lending and investment should be the purpose.
Deposits repayable on demand or otherwise.
Withdrawals by cheque, draft, order or
otherwise.

Banking Important
Functions

Discounting of bills
Collection of cheques / bills
Remittances
Safe Custody Articles
Safe deposit lockers
Foreign Exchange transactions
Government Transactions
Letter of Credit / Guarantee

Customer deposits money

Banker Customer Relationship
Debtor Creditor
Bank is free to use the deposit, as it wants.
Payable only on demand concerned branch
Demand in proper manner cheque, withdrawal
form, draft, working day / hours etc.
No security called for by the depositor from the
bank.
Law of limitations runs from the date of demand
for payment or production of FD receipt .

Bank lends money

Banker Customer Relationship
Creditor and Debtor.
Customer is the borrower and bank
is the lender.

Bank as a Trustee
When a customer keeps certain valuables or securities
or deposits some money for a specific purpose,
Banker not only becomes a bailee, but also a Trustee.
While the customer is a beneficiary.
Two relationships are established between Banker and
the customer.
One is bailee (receiver of the item) and the other is
bailor (giver of the item)
The other relationship is Trustee (Bank) and
Beneficiary (customer) where the bailor is entitled to
get the benefit of preference in case of failing of the
bank.

Bailee Bailor relationship

Some securities are delivered by the
customer to the Bank (Bailee), who becomes
the custodian of the security.
Bailee is responsible for any loss caused to
the bailor due to the negligence of the bailee.
Finder of lost goods (bailee) should return any
increase / addition in the goods / animals.
Finder of such goods to take care of such
goods as an ordinary prudent man.

Agent -- Principal
Bank is an agent and Customer is a Principal,
Where there are ancillary services like remittance,
collection of cheques, bills etc.
Where banks undertake to pay regularly, electricity
bills, telephone bills, insurance premium, club fees
etc.
Relationship terminates on the death, insolvency,
insanity of the agent or when the assignment period
comes to an end.
However, in a case of a High Court judgement, the
relationship in a remittance was held as Debtor
(bank) and creditor (customer).

Lessor and Lessee

Lessor (Bank) and Lessee (customer).
Pertaining to transactions of Safe Deposit
Lockers.
In certain banks, the relationship is termed
as licensor and licensee.
Here, the bank leases out space for the use
of clients.
Bank is liable for any loss to the lessee only
in case of any negligence on the part of the
bank.

Indemnifier and Indemnified

Indemnifier (customer) and Indemnified or
indemnity holder (banker).
Transaction related to issue of duplicate deposit
receipt or duplicate DD.
The indemnifier (customer) promises to make
good the loss to the indemnified (bank), which
may arise due to his own action or any third
person.
The indemnity is to compensate any loss due to
wrong or excess payment to the indemnified
(banker).

Anti-Money Laundering
Money Laundering is a process by
which the origin of funds generated
through illegal means is concealed.
For eg, drug trafficking, gun
smuggling, corruption etc.
Defined in Prevention of Money
Laundering Act, 2002 (PMLA)

Stages of Money Laundering

Placement First stage Physical
disposal of proceeds of criminal activity.
Layering second stage Separates
illicit proceeds from the source, creates
complex layers, conceals audit trails
and provides anonymity.
Integration third stage Placing the
laundered proceeds in to legitimate
economy as normal funds.

PMLA -- OBJECTIVES
To prevent criminal elements using the
banking system for wring purpose.
To know, understand the customers and
manage the risk involved.
Control, detection and reporting as per
applicable laws.
To comply with laws and regulatory
guidelines.
To ensure that the staffs are adequately
trained.

Money Laundering and

Risks
Risks involved in Money
Laundering ::
Operational Risk
Reputational Risk
Compliance Risk
Legal Risk

Know Your Customer (KYC)

Customer for the purpose of this
policy ::
A person or entity maintaining account
with the bank.
Beneficiary owner (accountant opened
on behalf another)
Beneficiary of transactions conducted by
professional intermediaries (stock
brokers, CAs. Solicitors etc.)

KYC Key Elements

Customer Acceptance Policy
Customer Identification Procedure
Monitoring of Transactions
Risk Management

Customer Acceptance Policy

Various risk categories and based on
risk perception (Low, Medium, High).
Acceptance criteria for each
category.
To follow Customer Identification
Procedure.
Not to open in the name of
anonymous / fictitious / benami
persons.
Not to inconvenience the general

Customer Identification
Procedure
Verification of customer identity.
Using reliable, independent source
documents, data or information.
To verify not only during opening, but
also on an ongoing basis for
transactions or when there are any
doubts and update the profiles.
Risk categorization will be reviewed
periodically.

Individuals ID Proof
Indicative List
Passport
PAN Card
Voter ID Card
Driving Licence
ID Card to Banks satisfaction
Letter from public authority / public
servant

Address Proof
Indicative List ::
Telephone Bill
Bank Account Statement
Letter from recognised public authority
Electricity Bill
Ration Card
Letter from employer

Verificatrion for Companies

Certificate of Incorporation
Memorandum of Association
Articles of Association
Principal place of business, address,
resolution, Power of Attorney granted
to officials, PAN allotment, Telephone
number.

Verification Partnership
firms
Registration certificate, if registeredAddress
Partnership Deeds
Power of Attorney granted to any
partner / official
Any officially valid document
Telephone Bill

Verification for Trust

accounts
To verify the names of trustees,
settlers, beneficiaries and
signatories.
Certificate of Registration, if
registered
Power of Attorney granted to
transact business
Any officially valid document
Resolution of the managing body
Telephone Bill

Relaxation for small

customers
Relaxation applicable to ::
Balance not exceeding Rs.50000/= in all their
accounts taken together
Total credit all accounts together not to exceed
Rs. 100000/= in a year
Can obtain introduction from another customer
(with 6 months old a/c holder, satisfactory
dealings and KYC norms)
RBI suggests Stopping of transactions when
balance reaches Rs.40000/= and credits reach
Rs.80000/= in such accounts.

Monitoring of Transactions
Based on risk profile, transactions
especially huge cash transactions
should be monitored.
All suspicious transactions
preserved/reported
Appropriate framework for Risk
management
Compliance of internal audit /
concurrent audit system on KYC /
AML procedures

Principal Officer KYC / AML

A principal officer (Money Laundering
Reporting Officer) designated by the
Bank.
Monitoring and implementing the
Banks KYC / AML policy.
Reporting of transactions / sharing of
information.
Liaison with Law enforcement
authorities.
Submission of periodical reports.

Cash Transaction Report

(CTR)
Reporting obligation for Banking Companies.
All transactions for more than Rs. 10 Lakhs
or its equivalent in foreign currency.
Aggregate of serial of transactions in a
month, for total amount exceeding Rs. 10
Lakhs.
Transactions related to forged or counterfeit
currency notes / bank notes.
Individual transaction below Rs.50000/= not
to be included in CTR.

Suspicious Transactions Report

(STR)
Any transactions of suspicious nature
to be reported.
To prevent the money launderers
from using banking channels for
money laundering purposes by strict
adherence of KYC / AML norms.

Demand Deposits
Payable on demand ; Low or no interest.
Includes Current, savings, overdue,
unclaimed deposits.
SB interest paid on half-yearly basis.
Minimum balance, cheque book,
permissible number of transactions,
purpose of the account (business /
personal), penalty for non-maintenance of
minimum balance are the various aspects.

Term Deposits

Repaid after expiry of the term .

Higher Rate of Interest.
From 7 days to 120 months maturity period.
Quarterly interest and cumulative quarterly.
Individuals / corporates / partnerships /
designated institutions can deposit.
ROI is fixed by respective Banks.
Before maturity closure permitted.
Applicability of TDS for interest, as per IT
rules.

Term Deposit (contd.)

Payment of interest on TD maturing
on Sundays, Public Holidays.
Restriction on cash payment of TD /
Interest for amount exceeding Rs.
20000/=.
Different types of TDs by different
Banks, including RD.
TDS is not applicable to RD.

Merchant Banking
Merchant Bankers are financial intermediaries
Obtaining regulatory clearances from RBI, SEBI,
MOF, Stock Exchanges, ROC.
Planning and timing of IPO
Underwriting of IPO
Selection and appointment of Principal / Sub
brokers.
Registrar of the issue and their remuneration.
Matters relating to prospectus, listing in stock
exchanges, monitoring and reporting to the
progress to regulatory bodies.

Lease Financing
Means Leasing out the capital purchase of
assets to another company against monthly rent
for assets consumption or use.
Finance is arranged by the institution is called
lessor.
Lessee is not required to invest in capital cost.
Lease expenses are treated as revenue
expenditure.
Existing free leasehold property or long leasehold
property can be leased out to leasing company.
Either on mortgage or at market price.

Lease Financing (contd.)

In turn, the leasing companies, the lessee can lease
it back to seller of the asset and both are benefitted.
In lease, hirer of an equipment will not become a
owner thereof.
Advantages to lessee No capital cost, revenue
expenditure, not a liability, credit worthiness in tact.
Disadvantages to lessee No ownership, no
leverage for using for alternative purposes,
Repossession of asset by lessor, possibility of
insolvency of the lessor.

Charge Card
Transactions of a card holder are
accumulated over a period, say one
month and total amount is charged /
debited to the account.
If the balance is not sufficient, time is
given for about 25 50 days for
crediting the amount.
As the transactions are accumulated
and charged, it is called charge
card.

Credit Card
In Credit Card, the bill for the transactions is
sent to the card holder.
The card holder has the option to pay on the
due date or pay one portion immediately and
the balance in installments.
The card holder gets the credit facility to
repay in installments.
No fee, if full amount is paid on the due date.
Fee and interest are applicable, if credit is
extended.

Credit Card (contd.)

Credit card holder need not maintain
an account with the card issuing
bank.
Credit card involves credit risk due to
default in payment.
Selection for issuing cards and
collection process require adequate
procedures to be followed.

Credit Card Various Parties

Card holder Name of the person in the card.
Card Issuing Bank Card Issued / Bill Raised
Merchant who accepted payment through credit
card.
Merchant / Acquiring Bank Merchants bank,
who reimburses the merchant.
Collecting Bank merchant bank claiming the
payment from the card issuing bank.
VISA / Master Card companies which run the
credit card operations. Capture details and settle
the dues among the different intermediaries.

Debit Cards
Account is debited on each transaction
takes place, like a pass book withdrawal.
No credit loss to bank. It operates only on
the available balance. No paper money /
cheque.
Payees / MEs are sure of payment.
No transaction cost / fees / interest.
Zero-risk weightage for debit cards while
125 % risk weightage for credit cards.
ATM-cum Debit cards are issued by banks.

Advantages of Credit Card

system
To card - holders
Convenience
Financial discipline
Proof of purchase through banking
channels
Spending power to add-on members
Additional facilities like insurance /
discount etc.

Advantages of Credit Card

system
To the Member Establishments (MEs)
Increase in sales
Purchase at preferred locations
Avoids direct credit to consumers
Systematic accounting, as dealings through banking
channel
Advertising & promotional on national scale
Prestigious clientele base
Immediate settlement / payment
Avoids cost and security aspects related to cash
holding

Advantages of Credit Card

system
To Banks
Better profitability through share in traders
turnover
Banking relationship with new customers
Additional customer service for existing clients
Better network spread, popularity and image
Cost effective savings in expenses on cash
holdings, stationery, manpower.