Bank Management

BANK MANAGEMNT MBA-IIISEM-2009
MODULE-1 ORIGIN AND KINDS OF BANKS
The word BANK seems to derived from the Italian word Banco. -accumulation of money . Three ancestors of present day banker

Merchant The money lender The goldsmith

banking in the modern sense was practiced in England since the establishment of the Bank of England in 1694
TYPESOF BANKS
CENTERAL BANKS
COMMERCIAL BANKS
DEVLOPMENT BANKS
CO-OPERATIVE BANKS
SPECIALISED BANKS
1PUBLISECTOR
2PRIVATESECTOR
3FOREGEN
4REGONAL RURAL
1PRIMERY 2DISTRICT 3STATE
1EXIM 2SIDB 3NABARDI
Classification of Banks-1
Regional Rural Banks
Central Bank RBI
Co-operative
Banks
Public Sector Banks
Foreign Banks
New Private Sector Banks
Old Private Sector
TYPES OF BANKING

BRANCHING UNIT BANKING GROUP BANKING CHAIN BANKING MIXED BANKING UNIVERSAL BANKING. Services related to savings and loans as well as investments.-wide range of financial services
ADVANTAGES OF BRANCH BANKING
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Economies of large scale operation Managing with lower cash reserves Geographical spreading of risk Safety of loans Easy remittance of funds Unification of rate of interest Better services to the community Wider scope for the selection of securities Efficient management Mobilization of resources Easy collection of cheques and bills
DIS ADVANTAGES OF BRANCH BANKING

1.
2.
3. 4. 5.
6. 7.
8.
Lack consideration for individual needs Drain of financial resources from small areas Red- Tapism and delay Lack of sympathy for local needs Failure branches will continue with the expense of other solvent branches. Lack of effective control Huge expense Concentration of economic power
ADVANTAGES OF UNIT BANKING
1. 2. 3.
Easy to manage and control More initiative in local problems No diseconomies of scale
DISADVATAGES
1. 2. 3. 4.
5.
Division of labour and specialization is not possible Cannot face crisis Inadequate resources Lack of efficient management Small area of operation
BANKING SYSTEM IN INDIA
Organized sector
Central banks
Commercial banks
Scheduled banks
SBI & Associates, Nationalized banks, Regional rural banks, foreign banks, private sector scheduled banks non scheduled banks
Not included in the Second schedule of RBI
BANKING SYSTEM IN INDIA
Co-operative banks Development banks
Un Organized sector
Money lenders Indigenous banks
Central Bank
Objectives 1. To maintain the internal value of the nations currency. 2. To preserve external value the currency. 3. To secure reasonable price stability 4. To promote economic growth.
The first central bank of the world- Risk Bank of Sweden The Bank of England- England The Bank of France- France The Federal Reserve Bank of USA- USA
Central Bank- functions
Implementation of monetary policy Issuing currency notes Banker to the government Bankers Bank Controller of credit Custodian of foreign currency. Lender of the last resort Clearing function.
MONETARY POLICY
Economic policy of the government in the monetary field. It operates through rate of interest and availability of credit. Money consists of both currency and credit money
Credit Control- to control the credit creation power of

commercial banks
1.Quantitative methods:
Bank rate policy or discount rate policy Open market operations Variable reserve ratio 2. Qualitative or Selective: Margin requirements Rationing of credit Direct action Moral suasion publicity
Role of RBI
Established in 1935 with a share capital of Rs.5 crore. The RBI was nationalized in 1949 Organization: Governor-1, Dy. Governors- 4 , Govt. official -1 Directors nominated by govt.-10 Directors nominated from 4 local boards-4 Central Board of Directors-20,
Departments of RBI
1.Banking department
Public Accounts Department Public Debt Office Deposit Accounts Department Securities Department
2.Issue Department
3. Central office Department

Legal division, inspection division, industrial finance dept. etc.
Role of RBI
Assisting the government in establishing specialized financial institution-IFCI, SFCs, IDBI,ICIC, NABAD, IDFC Expanding the banking systemRelationship with the Government.Regulating and supervising Managing the money market Developing the payment system-RTGS, MICR
Co-operative banks
Enactment Co-operative Credit Societies Act of 1904

C0-OPERATIVE
URBAN
RURAL
PRIMARY
CENTRAL
STATE
PRIMARY
STATE
Differences co-operative& commercial banks
Commercial

Joint-stock Banking Regulation Act Under direct control of RBI Both public and private sector Borrowers are only account holders and no influence on policy maters
Co- operative Co-operative Co-operatives societies Act of 1904 Under direct control Registrar of co-operative societies Private sector Borrowers are membershareholders and have voting power
merits
Familiar to local conditions Lower administrative costs Mobilization of small savings Banking procedures are less complicated Financially security to the members
Major problems

Weak capital base NPAs increased sharply Poor asset quality Increased competition with commercial banks Poor management Lack of transparency Limited branch network Wrong commercial decisions Political interference
Regional Rural banks( RRBs)
In 1975 , a working group-chairman- M. Narasimhan to review the flow of institutional credit to the rural people. An alternative agency to provide institutional credit to the rural people. A combined form of co-operatives and commercial banks.
Resources of RRBs

Share capital, Deposits from public, Borrowing from sponsor banks, Refinance from NABARD

Major objectives To provide low cost banking facilities to the poor to develop rural economy by providing credit & other facilities to Small and marginal farmers , agricultural labours, artisans and small entrepreneurs socio- economic upliftment and improvements in the living standards of the clientele
problems
The principal problem is low recovery rates and loan over dues due tointernal factors
Weak monitoring and supervision Apathy towards recovery Failure to link lending with development Ensuring end use of the loan External factors political interference Willful default Draught and floods Under development Lack of legal and administrative support from the state govt. in the matter of recovery
Recommendations
Kelkar Committee- 1986

Enhancement of authorized capital from Rs 1 crore to Rs 5 crore and paid up share capital from Rs 25 lakh to Rs.1 crore. Appointment of Chairman of RRBs by concerned sponsor bank in consultation with NABAD. Training RRB staff and giving financial assistance to them in the first five years of their existence sponsor banks Provision of amalgamation of RRBs Empowering the sponsor banks to monitor the progress of RRBs
Development banks-objectives

Serve as an agent of development- agriculture, industry, and international trade. Accelerate the growth of the economy Allocate resources to the high priority areas Rapid industrialization and employment generation Develop entrepreneurial skills Promote the development of rural areas Finance housing, SSIs, infrastructure, social utilities Technical assistance Refinance Women developement
Major devlp. Banks of India

Industrial Development Bank of IndiaIDBI---1964 Industrial Finance Corporation of IndiaIFCI--1948 Industrial Credit and Investment Corporation of India-ICICI-1955 Small Industries Development Banks of India- SIDBI1990 Industrial Investment Bank Of India- IIBI
SPEECILISED FINANSIAL INISTITUTIONS
Risk Capital and Technology Finance Corporation Limited-RCTC Technology Development and Information Company Of India TDICI Tourism Finance Corporation of India Ltd.TFCI Investment Institutions Unit Trust of India-UTI-1963 Life Insurance Corporation of India-LIC General Insurance Corporation India- GIC State Financial Corporations -SFCs State Industrial Development Corporations
Non Banking Finance Companies NBFCs

These are financial intermediaries engaged primarily in the business of accepting deposit and advancing loans. It is mandatory that every NBFCs should be registered with RBI to commence or carry on any business of NBFCs Certain categories of NBFCs which are regulated by other regulators like SEBI, IRDA, National Housing Bank
Major categories Equipment leasing Hire purchase Loan companies Investment companies Chit fund company
Un organized sector

Money lenders Indigenous bankers Land lords Traders Money lenders and indigenous banking was in existence in India from very early times It had been organized in the form of family or personal business They are broadly classified as Those whose principal business is banking Those who combine their banking business with other trading functions Those who are principally traders but employ their surplus funds in banking.
BANKING COMMISSION RECOMMENDATIONS REGARDING INDIGENOS BANKS
Should be made model central uniform legislation They should be controlled through their contacts with commercial banks. Internal & external auditing Should regulate interest rates charged by these banks. A code of conduct should be evolved for the operation of these bank Defects of indigenous banking The have mixed banking & non banking business The could not maintain secrecy of their accounts They used to charge high rates of interest They face the shortage of capital also.
Nationalization of banks
On July 19, 1969 - 14 commercial banks with deposits worth Rs.50 crores or more were nationalized. On 15th April 1980, 6 more banks were nationalized. Major objectives removal of control by a few Provision of adequate credit for agriculture, small scale industry and export. Giving a professional bent to management Encouragement of a new class of entrepreneurs The provision of adequate training as well as terms of service for bank staff.
Reasons for nationalization

Concentration of wealth and economic power. Abuse of power by directors Denial of credit for agricultural operations. Discriminatory policy against small borrowers Credit for socially un desirable activities Violation of the priorities laid down in the plans Absence of balanced banking development
Achievements
Branch expansion Coverage of rural areas Deposit mobilization Growth in volume of credit Sect oral development of credit Advances to priority sectors Defects Increased trade unionism Politically influenced unviable lending Un mindful expansion Over staffing Poor services Lack of young blood in the top management
Social banking
Social banking has three distinct components. Interest rate are kept below the average interest rate in rural areas. Identified priority sectors with specific targets & Lead Bank Scheme- LBS Banking development on the basis of population served per bank office. NABARD--- An apex institution looking after the planning and operation in the field of credit for agriculture and other economic activities in rural areas. Now social banking institutions are competing with the commercial banks for getting more profit
Privatization-infusion of financial efficiency

A committee was appointed on financial system-1991- M.Narashimhan Suggestions to keep inflation and BOP position under control. Removal of license and permit system Remove protection and promote competition in foreign trade sector. Integration with world economy to attract capital and modern technology. Major changes. Reduction in SLR and CRR Freedom for fixing lending rates Modern system of payment-ATMs, RTGS Entry of private sector banks Securitization Act to recover NPAS RESULTS Number of commercial banks increased Number of total branches increased The population per bank office went up The aggregate deposits went up Bank advances increased The credit deposit ratio increased The income of the banks increased Operating profit went up The total assets went up
Module-2
Commercial banks- functions- credit creation limitation of credit creation- practice of banking-banker-customer relationship-special relationship- law of limitation banker as a trusty and agent- appropriation of payment- right of lien and setoff- obligation to maintain secrecy-garneshee order
Functions of commercial banks
Primary Functions
Secondary Functions
Accepting deposits
Lending money
Agency functions
General utility functions
1.Demand deposits 2.savings deposit 3.fixed deposits 4.recurring deposits
1.Overdrafts , 2. Cash credits
3.Loans &advances
4 .Discounting of bills of exchange
1Collection of cheques 2Dealing in foreign ex.
3Acting as trustees
4Payment of rent, insu.
1 safe depo 2.Issue of trv 3ATM-4 Cre 5.Issuing
functions of a commercial banks

The functions of a commercial banks are divided into two categories: A) Primary functions, and B) Secondary functions including agency functions. A) Primary functions: The primary functions of a commercial bank include: a) accepting deposits; and b) granting loans and advances;
Primary functions: functions of a commercial banks
a) Accepting deposits The most important activity of a commercial bank is to mobilize deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.
Primary functions: functions of a commercial

banks
Different modes of Acceptance of Deposits Banks receive money from the public by way of deposits. The following types of deposits are usually received by banks: i) Current deposit ii) Saving deposit iii) Fixed deposit iv) Recurring deposit v) Miscellaneous deposits
Commercial Banks DEPOSIT PRODUCTS

CURRENT
CERTIFICATE
SAVINGS
DEPOSITS
FLEXI
FIXED
RECURRING

banks
i) Current Deposit
Also called demand deposit, current deposit can be withdrawn by the depositor at any time by cheques. Businessmen generally open current accounts with banks. Current accounts do not carry any interest as the amount deposited in these accounts is repayable on demand without any restriction.

banks
ii)Savings deposit/Savings Bank Accounts
Savings deposit account is meant for individuals who wish to deposit small amounts out of their current income. It helps in safe guarding their future and also earning interest on the savings. A saving account can be opened with or without cheques book facility. There are restrictions on the withdrawals from this account. Savings account holders are also allowed to deposit cheques, drafts, dividend warrants, etc. drawn in their favor for collection by the bank. To open a savings account, it is necessary for the depositor to be introduced by a person having a current or savings account with the same bank.

banks
iii) Fixed deposit The term Fixed deposit means deposit repayable after the expiry of a specified period. Since it is repayable only after a fixed period of time, which is to be determined at the time of opening of the account, it is also known as time deposit.
Primary functions:
iV )Recurring Deposits
Recurring Deposits are gaining wide popularity these days. Under this type of deposit, the depositor is required to deposit a fixed amount of money every month for a specific period of time. Each installment may vary from Rs.5/- to Rs.500/- or more per month and the period of account may vary from 12 months to 10 years. After the completion of the specified period, the customer gets back all his deposits along with the cumulative interest accrued on the deposits.

. b) Grant of loans and advances The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts.
The rate of interest charged on loans and advances varies depending upon the purpose, period and the mode of repayment. The difference between the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a banks income. ,
i)Loans
A loan is granted for a specific time period. Generally, commercial banks grant short-term loans. But term loans that is, loan for more than a year, may also be granted. The borrower may withdraw the entire amount in lump sum or in installments. However, interest is charged on the full amount of loan. Loans are generally granted against the security of certain assets. A loan may be repaid either in lump sum or in installments.

banks
ii) Advances An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day to day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.
Different methods of Granting Loans by Bank
i) Cash credit ii) Loans iii) Bank overdraft, and iv) Discounting of Bills
1. Cash Credit
A cash credit is an arrangement whereby the bank agrees to lend money to the borrower up to a certain limit. The bank puts this amount of money to the credit of the borrower The borrower draws the moneys and when he needs. Interest is charged only on the amount actually drawn and not on the amount placed to the credit of borrowers account.
2) Loans : A specified amount sanctioned by a bank to the customer is called a loan. It is granted for a fixed period, say six months, or a year. The specified amount is put on the credit of the borrowers account. He can withdraw this amount in lump sum or can draw cheques against this sum for any amount. Interest is charged on the full amount even if the borrower does not utilise it. The rate of interest is lower on loans in comparison to cash credit. A loan is generally granted against the security of property or personal security.
3) Overdraft Overdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit is allowed either on the security of assets, or on personal security, or both.
4) Discounting of Bills
Banks provide short-term finance by discounting bills, that making payment of the amount before the due date of the bill after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. Incase any bill is dishonored on the due date, the bank can recover the amount from the customer.
Discounting of Bills Apart from granting cash credit, loans and overdraft, banks also grant financial assistance to customers by discounting bills of exchange. Banks purchase the bills at face value minus interest at current rate of interest for the period of the bill. This is known as discounting of bills. Bills of exchange are negotiable instruments and enable the debtors to discharge their obligations towards their creditors. Such bills of exchange arise out of commercial transactions both in internal trade and external trade. By discounting these bills before they are due for a nominal amount, the banks help the business community. Of course, the banks recover the full amount of these bills from the persons liable to make payment.
B) Secondary functions
i) Agency services, and ii) General utility services. i) Agency Services
Agency services are those services which are rendered by commercial banks as agents of their customers. They include

a) Collection and payment of cheques and bills on behalf of the customers; b) Collection of dividends, interest and rent, etc. on behalf of
Agency Services
customers, if so instructed by them; c) Purchase and sale of shares and securities on behalf of customers; d) Payment of rent, interest, insurance premium, subscriptions etc. on behalf of customers, if so instructed; e) Acting as a trustee or executor; f) Acting as agents or correspondents on behalf of customers for other banks and financial institutions at home and abroad.
ii) General utility services

General utility services are those services which are rendered by commercial banks not only to the customers but also to the general public. These are available to the public on payment of a fee or charge. They include : a) Issuing letters of credit and travelers cheques; b) Underwriting of shares, debentures, etc.; c) Safe-keeping of valuables in safe deposit locker; d) Underwriting loans floated by government and public bodies. e) Supplying trade information and statistical data useful to customers; f) Acting as a referee regarding the financial status of customers; g) Undertaking foreign exchange business.

The commercial banks are the second most important sources of money supply. The money that commercial banks supply is called credit money The process of 'Credit Creation' begins with banks lending money out of primary deposits. After maintaining the required reserves, the bank can lend the remaining portion of primary deposits

Instead of giving loan amount to the borrower , bank generally open a deposit account in his name .It is termed as secondary or derivative deposits, that acts as the basis of credit creation. Credit multiplier- reciprocal of the CRR (k) It indicates the number of times primary deposit multiplies D= D X k D Total value of derivative deposit, D primary deposit k credit multiplier ( k =1/r), r= CRR EXAMPLE ; r=20%, k=1/20=5, D=Rs.20,000 D=20,000/20%= 100000
ii) General utility services- credit creation

Bank A B C D E -N Total D 20,000 16,000 12,800 10,240 8,192 -----------100,000 CRR- 20% D 4000 16,000 3200 12,800 2560 10,240 2048 8192 1638 6554 -----------------------------20,000 80,000
ii) General utility serv
1. 2. 3. 4. 5. 6.
7.
8.
Volume of currency Cash reserve ratio Liquidity preference of the customers Economic recession Well- developed banking habits Variation in the credit policy among banks Availability of qualified collateral securities Monitory policy of the central bank
Commercial Banking
Banker & Customer Relationship
Who is Banker?

A Banker is a dealer in capital or more properly a dealer in money. Banker is an intermediate party between the borrower and the lender. He borrow from a party and lend to another party. the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawals by cheques, draft, order or otherwise.
Banking has been define as accepting for
Customer
Person who maintain a regular account with the bank without taking into consideration the duration and frequency of operation of his account. One should have an account. One should deal with the bank in its nature of regular banking business. One should deal with the bank without consideration of the duration and frequency of operation of his account. Customer brings the bread and butter of the banker. No banking is without a customer. Customer act in various status and categories whereas the banker provide financial services in different ways.
Relationship between Banker and Customer
i) General relation
1 Debtor and creditor 2 Agent and principal 3) Bailer & Bailee 4) Mortgager & Mortgagee 5) Relation of trustee
ii) Special relation

a) Obligations- duties
1 To honour cheques 2 TO maintain secrecy b) Customer Right & Duties
c) Rights of banker General lien Right to combine account Right to appropriation Right to get interest, commission & charges
Debtor & Creditor
Customer deposit money with the bank then bank become debtor and creditor is the customer. The customer expect from the banker that the money deposited, remain safe at the bank and with the banker. The money placed at the bank should have increase. The position is reversed if the customer is advanced then the banker become the creditor and customer is the debtor
Principal & Agent
The customer is Principal when it deposit cash, cheques or draft for collection with the bank. The bank act as an agent and get the funds credited to customers account by getting the proceeds against the instrument. The bank as an agent of the customer purchase securities, paying insurance premium, installment of loans etc.
Bailer & Bailee
Bailment is delivery of goods by one person to another for some purpose on contract. The banker provides safe custody facilities to their customer. Bank accept valuables such as bonds documents or securities for safe custody on behalf of customer. In all cases banks act as Bailee to customer on charging nominal fee for providing safe custody facilities
Mortgager & Mortgagee
Mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advance or to be advance by way of loan. When customer offer his property for mortgage to avail financial assistance the customer become the mortgager and banker act as mortgagee.
Executor- Attorney- Guarantor
The bank acts as an executor, attorney for its customers. The bank executes the standing instruction of its customers for making various periodic payments
Banker is the Trustee
Banker keep the customers valuables including the documents and other items without physically seeing and in trust between the two. The banker act as the trustee and the customer remain the owner to the
valuables.
Banker Customer Relationshipobligations (honour cheques)
Conditions
The customer must have a credit balance sufficient to honour the cheques-or over draft agreement The cheque must have been presented within a reasonable time after the date of issue. There should not be any prohibitory order of the court garnishee order
WHEN A CUSTOMER DEPOSITS A CHEQUE IN HIS ACCOUNT WHICH IS DRAWN ON ANOTHER BANK, THEN IT NEEDS TO CLEARED BEFORE CREDITING THE AMOUNT TO THE ACCOUNT OF THE CUSTOMER.
INWARD CLEARING AND OUTWARD CLEARING
Banker Customer RelationshipTO maintain secrecy

Duty of Confidentiality A bank owes an implied duty to its customer not to reveal information about its customers to third parties There are 4 exceptions
1. Disclosure under Compulsion of Law

a) Court Order b) Request from an official c) Bank liable to prosecution is information not revealed d) Where the law compels the bank to disclose information and it is an offence not to do so
2. Duty to the Public to Disclose 3. Disclosure in the Banks Interest 4. Disclosure with the Customers Consent
Customer Right & Duties

Customer can deposit and withdrew funds without any restrictions. Customer avail financing facilities to the satisfaction of the banker. Customer has the right to receive all the documents pertain to the activities of his account. Customer has the right to sue the bank for compensation for a wrongful dishonor of his cheques
Customer Right & Duties..
Customer has a right to go to court and demand compensation if the bank fails to maintain the secrecy of his account. Customer has the right to check his documents pertain to conduct of the account and all those document that signed for facilities. Customer has the right to withdraw his amount during the banking hours and can see his banker during the time of banking
Banker Customer Relationship
Duties of the Bank Duty to collect cheques Duty to honour cheques Duty not to pay a cheque without authority Duty to obey customer's countermands of cheques Duty to tell customer of forgeries Duty to inform customers of the state of the account Duty to act on notice of death
Rights of The Bank
Interest Charges Repayment on Demand Limitation Appropriation of Payment Combination of Accounts/Equitable Right of Set Off Set Off following Insolvency
Appropriation of Payment
Appropriation of payment it is the application of a particular payment for the purpose of paying a particular de The limitations on the rule are: a) The rule only applies to running accounts; b) The Rule in Hallett's Case (1880) applies where personal funds are in the same account with trust funds and it is deemed that the personal funds are withdrawn first
Combination of Accounts
Where a customer has two accounts with same bank the bank has a common law right to combine them A bank's right to combine accounts is limited: a) Where the debit balance is not yet due, b) There is an implied agreement to keep accounts separately c) An express agreement not to combine accounts will negate the banks right to do so.
d) A trust fund cannot be combined with personal funds.
Set Off following Insolvency
Where bank or the customer is insolvent a) A statutory set off may be applied to accounts on insolvency under S.323 Insolvency Act 1986 (individuals) or the Insolvency Rules 1986 (companies). b) The statutory set off is automatic and inexcusable c) Any right to extend set off is void. d) Debts become due and payable as soon as the customer or bank are insolvent and are subject to statutory set off. e) Debits on a customers account after the bank had notice will not be subject to set off and credits on a customers account after the customer has had notice of the banks insolvency will not be subject to set off. f) Where the customer has 3 or more accounts the statutory set off will combine all of them but note preferential accounts (wages)
Banker's Lien
Banker's Lien A lien right to retain property belonging to another pending satisfaction of a debt owed by the owner of the property A pledge is security, which carries the right to retain the property until the debt is paid or if unpaid after a certain time, carries the
right to sell the property to satisfy the debt.
A banker's lien is a special kind of lien that is the equivalent of the pledge in other words the bank may retain the property until the debt is paid however if it becomes apparent that the debt will not be paid then the property may be sold to satisfy the debt e.g. securities
The limitations on the Bankers Lien

:
1. The bank does not have a lien on cheques paid into the bank for collection. The bank may have a lien on a cheque it collects for a customer who has an overdrawn account one of which is overdrawn but the payment is to an account in credit the bank may appropriate the cheque and pay it in to the overdrawn account. 2. The lien does not apply to securities kept in safe custody. 3. The lien does not apply to securities, which are held by the customer as a trustee 4. The lien does not arise if there is an agreement to the contrary between the bank and the customer
TERMINATION OF RELATIONSHIP
i) VOLUNTARY ii) BY PROCESS OF LAW 1) DEATH OF CUSTOMER 2) BANKRUPTCY 3) INSANITY OF CUSTOMER 4) GARNISHEE ORDER
BANKING REGULATION ACT
GOVERNMENT OF INDIA PASSED A COMPREHENSIVE BANKING REGULATION ACT IN 1949 FOR SAFEGUARDING THE BUSINESS OF BANKING COMPANIES. SECTION 5 C OF THIS ACT DEFINES A BANKING COMPANYAS A COMPANY WHICH CARRIES ON THE BUSINESS OF BANKING
SECTION 5 B DEFINES BUSINESS OF BANKING AS ACCEPTING, FOR THE PURPOSE OF LENDING OR INVESTMENT, DEPOSITS OF MONEY FROM THE PUBLIC, REPAYABLE ON DEMAND OR OTHERWISE AND WITHDRAWABLE BY CHEQUES, DRAFTS OR OTHERWISE.
Garnishee order
The garnishee order is a court order instructing a bank that funds held on behalf of debtor should not be released until directed by the court The order may also instruct the bank to pay a given sum to the
creditor from these funds.
Assignment ( questions)
Briefly explain the major functions of a commercial bank. What you meant by credit creation of commercial banks ? What are the limitations of credit creation? What types of relationships exist between a banker and a customer?
Module-3
When we walk into a real world store we basically have three ways to pay for an item. These are:

Cash (most common form of payment) Cheques Payment card (i.e. debit cards, credit cards, smart cards or automated teller machine (ATM) cards)
These account for more than 85% of consumer transactions worldwide
Cash has some important properties:
It is convenient since it is easy to use, to carry and easy to handle in small quantities It is widely accepted It provides anonymity It does not have associated processing fees It has no audit trail (maintains privacy
There are several problems associated with the use of cash, however which include:

It is easy to lose It is difficult to trace (e.g. when used in criminal activities) It introduces a security risk when being transported It is time-consuming to count, organise and manage
A Cheque, on the other hand is a written order by an account holder to his banker to pay a specified sum of money to the bearer or named recipient. Clearly one of the problems associated with cheques is the clearing time A payment system which is increasing in popularity in the US is electronic transfer There are two tests that should be considered when transferring money. These are: The ACID Test The ICES Test
The Acid Test The ACID test has four properties:
Atomicity: The complete transaction must occur (e.g. a payment of $50 means that the intended recipient(s) will receive the $50) Consistency: All parties in the transaction must agree to the exchange Isolation: The given transaction must be independent of all other transactions Durability: The exchange must be reversible
The ICES Test The ICES test also has four properties:
Interoperability: Money from a given system must be able to move back and forth between other systems (e.g. moving money from system X to cash) Conservation: Does the money hold its value over time (temporal consistency); how easy is it to store and access (temporal durability) Economy: Transaction processing should be cheap Scalability: How many users can be handled at the same time?
Atomicity Cash Cheque Credit Card Yes Yes No
Consistency Yes Yes Yes
Isolation Yes No No
Durability Yes Yes Yes
InterConservation operability
Economy
Scalability
Cash
Yes
No
Yes
Yes
Cheque
Credit Card
No
No
Yes
N/A
No
No
Yes
Yes
Electronic Payments
Electronic Payments An e-commerce payment environment requires a more complex design which includes:

Payment security Transaction privacy System integrity Customer authentication The purchasers promise to pay
Electronic Payments Contd

Electronic Payments Contd Electronic payments are financial transactions that do not require paper Electronic payments are far cheaper than mailing paper checks Cost of billing a person by mail ranges from US$1 to US$1.50 Billing a person electronically cost about US$0.50 Replacing paper bills also saves on trees Four properties (in addition to the ACID and ICES Tests) should also be considered:

Acceptability: Must be widely accepted, by customers and merchants alike Ease of Integration: Effective Web interface Customer base: It should be financially viable Ease of use and access
Electronic Payments Contd

Payment Cards Contd The main categories of payment cards are:

Credit cards (e.g. Visa) Debit cards Charge Cards
To be able to accept payments via credit cards: The seller must open a merchant account With this account the seller can accept and process credit cards
During processing only the card numbers and transactions are known (normally authorisation is provided through a customer signing a payment slip To be able to accept payments via credit cards:
A secure and encrypted line is required to accept payments
The most popular solution used is Secure Socket Layer (SSL) which is built into Netscape Navigator and Microsofts Internet Explore browser
The shopping cart connects to a payment processing system, calculates costs and taxes and generates a bill
A shopping cart is also required to allow users to collect their purchase
The processing of credit cards
Payment Cards Contd 1. The customer places the order on the merchants Web site (shipping and payment information is included) 2. The customer verifies the order 3. The encrypted order is sent to the payment server by the merchant 4. The payment server receives the payment information, takes it behind a firewall, reformats it and forwards to to the merchant bank over a secure, dedicated line 5. The merchant bank forwards an authorisation request to the issuing bank for approval or denial and the decision is sent back to the payment server 6. The approval or denial is communicated back to the merchant and delivered to the customer
Payment Cards Contd

Payment Cards Contd Some of the issues associated with credit cards are:

They leave a complete audit trail They are insecure
A signature does not get verified which makes it difficult to assure the identity of a person
The banks review financial records and business history
Merchant accounts are difficulty to get from banks
Credit cards are not economical for small payments
Debit cards
The sale amount is removed from users account and transferred to the sellers account Limited by funds in account plus overdraft (if present) Has no spending limit The amount due on the card is due at the end of the billing period They do not accumulate interest payments
Charge cards (e.g. American Express)

Smart Cards
About the size of a credit card, a smart card is a plastic card with an embedded microchip that can be loaded with data, used for telephone calling, electronic cash payments, and other applications, and then periodically "recharged" for additional use. smart card contains more information than a magnetic stripe card and it can be programmed for different applications. Some cards can contain programming and data to support multiple applications and some can be updated to add new applications after they are issued Benefit of smart cards:

enhanced security off line transaction programmable card
loyalty
customer information
automated teller machine (ATM)

An automated teller machine (ATM) or the automatic banking machine (ABM) is a computerized telecommunications device that provides the clients of a financial institution with access to financial transactions in a public space without the need for a cashier, human clerk or bank teller. ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic smartcard with a chip, that contains a unique card number and some security information features 1. Cash anywhere / anytime 2. Carry less cash 3. Less Queuing 4. Job losses 5. Fewer mistakes are made by a computer than by a person
automated teller machine (ATM)
A personal identification number (PIN; pronounced "pin") is a secret numeric password shared between a user and a system that can be used to authenticate the user to the system Financial PINs are often 4-digit numbers in the range 00009999, Many PIN verification systems allow three attempts,
Cheques
Who the cheque is payable to
Date
Amount in words
000123 000123 30..9557.: 0123456 02
Amount in numbers
Signature here
Cheque Number
Sort Code
Account Number
Transaction code
EFTPOS
Electronic Funds Transfer at the Point Of Sale
Debit card (same for a Credit Card)

Chip
Card Number
Expiry date
Sort Code
Account number
Anytime, anywhere banking
Telephone Banking Internet Banking Mobile Banking Television banking Next
home banking
Facility to securely access funds, account information, and other banking services through a PC over a wide area network or internet. Also called electronic banking conducting of bank business at home by means of electronic communications, such as a telephone or computer
home banking
A reputed bank will never send you an e-mail asking you to submit personal or financial information such as your username, password, PIN number or credit card number. Any e-mail which asks for such information is fraudulent and should be deleted immediately. Do not be lured if you receive an e-mail promising you a reward for providing your personal information and do not be afraid if the email warns of an impending penalty for non compliance. Any attempt to steal personal information by sending fraudulent emails is technically known as Phishing. More about Phishing.
' it is a common form of Internet piracy. It is deployed to steal users personal and confidential information like bank account numbers, net banking passwords, credit card numbers, personal identity details etc Phishing attacks use both social engineering and technical subterfuge to steal customers' personal identity data and financial account credentials.
Customer receives a fraudulent e-mail seemingly from a legitimate Internet address.
The email invites the customer to click on a hyperlink provided in the mail. Click on the hyperlink directs the customer to a fake web site that looks similar to the genuine site. Usually the email will either promise a reward on compliance or warn of an impending penalty on a non compliance. Customer is asked to update his personal information, such as passwords and credit card and bank account numbers etc. Customer provides personal details in good faith. Clicks on 'submit' button. He gets an error page. Customer falls prey to the phishing attempt
Dont's
Do not click on any link which has come through e-mail from an unexpected source. It may contain malicious code or could be an attempt to 'Phish'. Do not provide any information on a page which might have come up as a pop-up window. Never provide your password over the phone or in response to an unsolicited request over e-mail. Always remember that information like password, PIN, TIN, etc are strictly confidential and are not known even to employees/service personnel of the Bank. You should therefore, never divulge such information even if asked for
Do's:

Always logon to a site by typing the proper URL in the address bar. Give your user id and password only at the authenticated login page. Before providing your user id and password please ensure that the URL of the login page starts with the text https:// and is not http:// .The 's' stands for 'secured' and indicates that the Web page uses encryption. Please also look for the lock sign ( ) at the right bottom of the browser and the verisign certificate. Provide your personal details over phone/Internet only if you have initiated a call or session and the counterpart has been duly authenticated by you. Please remember that the bank would never ask you to verify your account information through an e-mail
What to do if you have accidentally revealed password/PIN/TIN etc
If you feel that you have been phished or you have provided your personal information at a place you should not have, please carry out the following immediately as a damage mitigation measure.

Change your password immediately. Report to the bank by clicking on the link Report Phishing Check your account statement and ensure that it is correct in every respect. Report any erroneous entries to the bank. Use the other compensatory controls provided by the bank like setting the limits for demand draft and trusted third parties to zero, enabling high security, etc to minimize the risk
Business Rules Governing Mobile Banking Services:

Your Mobile Your Bank Away from home, bills can be paid or money sent to the loved ones or balance enquiries done anytime 24x7!!! The Mobile Banking Service will be available to all the customers having a satisfactory running account (Current/ Savings). The customers will have to register for the services. Daily transaction limits for fund transfer and bill/ merchant payment will be Rs.5000.00and Rs.10,000.00 respectively per customer with an overall calendar month limit of Rs.30,000.00 The service will be carrier-agnostic i.e. all customers can avail the mobile banking service with the Bank irrespective of the service provider for their mobiles. The service is free of charge. However, the cost of SMS / GPRS connectivity will have to be borne by the customer.
What is Internet Banking?
Internet banking involves consumers using the Internet to access their bank account and to undertake banking transactions. At the basic level, Internet banking can mean the setting up of a Web page by a bank to give information about its product and services. At an advance level, it involves provision of facilities such as accessing accounts, funds transfer, and buying financial products or services online. This is called ``transactional'' online banking
What is Internet Banking?
There are two ways to offer Internet banking. First, an existing bank with physical offices can establish a web site and offer Internet banking in addition to its traditional delivery channels. Second, a bank may be established as a "branch less, Internet only, or virtual bank" without any physical branch
Banking services through Internet
Broadly, the levels of banking services offered through INTERNET can be categorized in three types: (i) The Basic Level Services use the banks' websites which disseminate information on different products and services offered to customers and members of public in general. It may receive and reply to customers' queries through e-mail,
Banking services through Internet
(ii) In the next level are Simple Transactional Websites which allow customers to submit their instructions, applications for different services, queries on their account balances, etc, but do not permit any fund-based transactions on their accounts, (iii) The third level of Internet banking services are offered by Fully Transactional Websites which allow the customers to operate on their accounts for transfer of funds, payment of different bills, subscribing to other products of the bank and to transact purchase and sale of securities, etc
(B). Structure of Banking services
In general, Internet banking products are offered in a two-tiered structure. * A basic tier of Internet banking products includes customer account inquiry, funds transfer and electronic bill payment. * A second or premium tier includes basic services plus one or more additional services such as 1) Brokerage. 2) Cash management. 3) Credit applications. 4) Credit and debit cards. 5) Customer correspondence. 6) Demat holdings. 7) Financial advice 8) Foreign exchange trading. 9) Insurance. 10) Online trading. 11) Opening accounts 12) Requests and intimations. 13) Tax services. 14) E-shopping. 15) Standing instructions. 16) Investments. 17) Asset management services etc.
Traditional Banking Vs. Internet Banking

In traditional banking, the customer has to visit the branch of the bank in person to perform the basic banking operations viz., account enquiry, funds transfer, cash withdrawing etc., On the other hand, E-banking enables the customers to perform the basic banking transactions by sitting at their homes or at offices through a desktop or laptop round the clock globally through electronic media. This is called any time, any where banking. The customers can access the banks' website for viewing their account details and perform the transactions as per their requirements. Customers can make use of these services with no restricted banking hours, no queues, no tellers and no waiting.
The following are some of the basic functions in Internet Banking: Account Enquiry Fund Transfer Payment of Electricity, Water and Telephone bills Online payment for transactions actually performed through Internet Request for issuance of cheque books, demand drafts etc., Statement of accounts Access to latest schemes Access to rates of interest and other service charges
Advantages of Internet Banking
(i) Round the clock banking
E-banking facilitates performing basic banking transactions by customers round the clock globally. In fact there is no restricted office hours for E-banking.
(ii) Convenient Banking Customers can perform basic banking transactions by simply sitting at their office or at home through PC or LAPTOP. No personal visit to the branch is required for routine basic transactions. (iii) Low Cost Banking The operational costs have come down due to technology adoption. The cost of transactions through internet banking is much less than any other traditional mode
Advantages of Internet Banking
(iv) Profitable Banking The increased speed of response to customer requirements, can enhance customer satisfaction and consequently can lead to higher profits as a result of handling more number of customer accounts. (v) Quality Banking Internet banking allows the possibility of improved quality and an enlarged range of services being made available to customers. (vi) Speed Banking The increased speed of response to customer requirements will lead to greater customer satisfaction and handling a large number of transactions at a lesser time. (vii) Service Banking Banks can also offer many cash management products. Instant credit, one day credit, immediate payment of utility bills, instant transfer of funds etc., is possible under E-banking
Electronic signature

A signature is a stylized script associated with a person An electronic signature is any legally recognized electronic means that indicates that a person adopts the contents of an electronic message An electronic signature is "a signature that consists of one or more letters, characters, numbers or other symbols in digital form incorporated in, attached to or associated with an electronic document
Electronic signature
Before sign an electronic communication, a sender must first create a public- private key pair. The private key is used for creating digital signatures. The public key is disclosed generally and the recipient can access it at anywhere else.
When a recipient gets a DS message, the programmed computer will decrypts the DS using the senders public key. If the program is able decrypt the DS , the message came from the original sender.
MICR-cheques
Magnetic Ink Character Recognition, or MICR is a character recognition system that uses special ink and characters, a technology adopted mainly by the banking industry to facilitate the processing of checks. When a document that contains this ink is to be read it is passed through a machine with a magnetic field that recognizes the characters The process was demonstrated to the American Bankers Association in July 1956, and it was almost universally employed by 1963 it is mostly used by banks to facilitate processing of cheques. the main purpose is to enhance security and avoid losses caused by fraudulent cheques or coloured photocopied cheques
Electronic Funds Transfer (EFT)
Electronic Funds Transfer (EFT) is a system of transferring money from one bank account directly to another without any paper money changing. The computer-based systems used to perform financial transactions electronically.. It is a fast mode of transfer of fund It is customer- savvy No requirement for the customer to go to the bank In- built security systems & safe mode of transfer
STRUCTURED FINANCIAL MEASSAGE SYSTEMSFMS
SFMS is a modularized web enabled software for financial massage communication. It is a secured messaging and routing based on store and forward principles. Electronic Data Interchange (EDI) system for banks
SFMS- Entities
1.
2.
3. 4.
Hub system: it is a server located at Hyderabad (IDBRT) and switches inter bank messages from sending banks gateway to the receiving banks gateway. Bank gateway: receives inter bank messages from other branches& sent to the branch server . Switches the messages to other banks received from its own branch. Branch server: by using it, branches can create, verify and authorize outgoing messages and view and process incoming messages. Online terminals (thin): PCs use a standard browser to connect to the branch server- internet Explorer 5.5- no SFMS offline terminals (thick): PCs that are provided with SFMS
SWIFT
SWIFT stands for Society for Worldwide Inter bank Financial Telecommunications. This is a cooperative society, owned by member banks and financial institutions, providing secured telecommunication and one point contact with 8000 member financial institutions covering over 125000 users, spread over 205 countries. It is a computerized telecommunication system, which allows rapid, economical, secure and accurate transmission system for essential financial data.
SWIFT
SWIFT services enables the retail as well as cooperate customers to transfer funds around the world Swift headquarters are located in La Hulpe , near Brussels. It was founded in 1973 Currently,90%of all banks world wide use the SWIFT network
CHIPS

CHIPS- stands for Clearing House Inter bank Payment System . The participating banks use the system through out the day for sending and receiving electronic payment instructions, and at the end of the day the net position is debited or credited to each bank s account with the Central bank. It is operating only in New York, and is mainly used for foreign exchange inter bank settlements and Euro Dollar settlements. CHAPS-Clearing House Automated Payment System. It is a British equivalent to CHIPS ,handling receipts and payments in London .It offers same day sterling and Euro fund transfers
Fed wire
It is a US payment system operated by Federal Reserve Bank, operated all over the US states, since 1918 and handles majority of domestic payments. It is an automated computer based messaging and payment system working on gross settlement basis
CHAPS
CHAPS-Clearing House Automated Payment System. It is a British equivalent to CHIPS ,handling receipts and payments in London .It offers same day sterling and euro fund transfers RTGS : (Real time gross settlement) It is a European oriented real time gross settlement and payment system . It is a German hybrid clearing system
Types of Inter bank funds transfer systems
Types of Inter bank funds transfer systems Net settlement system In this system, the settlement of funds transfers occurs on a net basis , which can be a net credit or debit position at the settlement time Gross settlement system In the system , the settlement of funds occurs on transaction by transaction basis, without netting debits against credits Deferred system or designated time In which final settlement occurs at one or more prespecified settlement times during the processing day real time system or continuous in which final settlement takes place only once, at the end of the processing
RTGS
RTGS : (Real time gross settlement) It is a European oriented real time gross settlement and payment system . It is a German hybrid clearing system A gross settlement system in which both processing and settlement of fund transfer instructions can take place continuously. It is for large value transactions. Minimum amount is Rs.1 lakh It using telecommunications networks, which transmit and process information in real time. As it is a gross settlement system , transfers are settled individually- without netting debits against credits. RTGS- Real time gross settlement- belong to Central bank DNS Designated-time net settlement belong to private sector bank ---EFT & NEFT-Settlements at batches
Internet Banking Security

to keep your password and pin number a secret install antivirus software and software to remove spy ware, and also install firewalls to protect your computer from crackers , Checking your bank statements regularly to be more vigilant while accessing the Internet from someone's computer or from an Internet cafe. always remember to completely log off, after completing the banking session
Internet Banking Security

Secure Log-in ID and Password or PIN Dot not disclose Log-in and Password or PIN. Do not store Log-in and Password or Pin on the computer. Regularly change password or PIN and avoid using easy-toguess passwords such as names or birthdays. Password should be a combination of characters (uppercase and lowercase) and numbers and should be at least 6 digits in length.
Committee on Mechanisation in the Banking Industry (1984
Chairman : Dr.C.Rangarajan, Deputy Governor, Reserve Bank of India. Recommendations :
** Banks should set up service branches at centres where they have more than 10 branches. The service branch so set up would exclusively be devoted to clearing operations of the bank at that particular centre. ** Banks to be in readiness for the introduction of MICR Clearing at the four metropolitan cities by assessing their requirements for encoders, adopting standardised cheque forms and reorganising work procedures where necessary, and training staff down to the branch level
Committees on Communication Network for Banks and SWIFT implementation (1987)
Chairman : Shri T.N.A.Iyer Recommendations : ** Setting up of X.25 based packet switching network called 'BANKNET' to be jointly owned by the Reserve Bank and the public sector banks. It suggested that the computer system resources of the four IBM Mainframes (installed at the four metros for cheque processing operations) could be made use of during the day time by BANKNET for data communication with additional equipment
BANKNET to be implemented in two phases. In Phase I the computer systems available in the Head Offices of the Public Sector Banks in the four metropolitan cities would be connected to the four IBM Mainframe servers. In the second phase connectivity could be gradually extended to eight to ten banking intensive centres, and to a hundred centres over a three year period. The applications that were identified were:
inter-bank fund transfers on banks' own account and on customers' account; inter-branch funds transfers on banks' own account and on customers' account; currency chest transactions; government transactions; improvements in payment systems by facilitating automated clearing services (similar to BACS); any branch banking, etc.
** India should join the SWIFT (Society for Worldwide Interbank Financial Telecommunication) Network for the transmission and reception of international financial messages. ** BANKNET should strive to emulate SWIFT in matters of data security, encryption, and authentication and SWIFT message standards which are internationally accepted should be adopted by BANKNET.
Rangarajan committee report

Having gained experience in the earlier mode of computerisation, the second Rangarajan Committee constituted in 1988 drew up a detailed perspective plan for computerisation of in Banks and for extension of automation to other areas like funds transfer, electronic mail, BANKNET, SWIFT, ATMs etc. The Committee recommended the the following road map for computerisation over the next five years
rangarajan committee report
Around 2000 to 2500 large branches located at high activity (urban and metropolitan) centres to be fully computerised Regional Offices / Zonal Offices/Head Offices Inter- and intra bank transactions using the BANKNET set up by the RBI; and Installation of a network of cash dispensers / ATMs at strategic locations such as airports/railway stations etc., on a shared basis by banks
The Committee also made studied recommendations on the 'Single Window Concept; 'all bank credit cards', credit clearing/GIRO system, office automation, etc Computerisation of the settlement operations in the clearing houses managed by Reserve Bank of India at Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram. Operationalisation of MICR technology and the National Clearing of inter-city cheques at the four metropolitan cities. Introduction of one-way collection of cheques drawn on the 4 metros received from Ahmedabad, Bangalore, Nagpur and Hyderabad. ** Framing of Uniform Regulations and Rules of Clearing Houses.
Branch level computerisation and the establishment of connectivity between branches. ** Improvements in customer service - introduction of on-line banking. ** Standardisation and rigorous security features to ensure an efficient and risk free transfer of funds electronically. ** Setting up a network of Automated Teller Machines (ATMs) in Mumbai. ATMs to be strategically located at airports, railway stations, hospitals, important commercial centres, as well as bank branches, to be used by the customers to perform a variety of functions such as deposits, withdrawals, balance enquiries, statement of accounts etc., at any point of time during the day. ** Introduction of a single 'All Bank' credit card and advocated the need for its widespread acceptance by merchant establishments and usage by customers to reduce the load on cash and cheque
relating to Payments System, Cheque Clearing and Securities Settlement in the Banking Industry
Committee on Technology Issues
Chairman : Shri W.S.Saraf

, : Recommendations
** Establishment of an Electronic Funds Transfer (EFT) system, with the BANKNET communications network as its carrier. The message transfers would be in a batch mode with high value institutional funds transfers being batched every one hour and the transactions of retail customers being batched at the end of the day. Starting with the 4 metropolitan cities, the scheme to be extended in a phased manner to all important centers
Enactment of suitable legislation on the lines of the Electronic Funds Transfer Act 1978, USA and Data Protection Act 1984, UK ** MICR clearing be introduced at all centers with more than 100 bank branches. Priority should be given to centers such as Ahmedabad, Bangalore, Hyderabad, Pune and Surat which have relatively large volumes. ** Introduction of a Delivery versus Payment (DvP) system for SGL transactions, with settlement on gross basis both for securities transactions in PDO and funds transactions in current accounts at DAD.
.
Chairman : Shri W.S.Saraf Introduction of Electronic Clearing Service Credit for low value repetitive transactions such as interest, dividend, salary, pension payments and an Electronic Debit Clearing for payments to utility companies. A uniform size for MICR instrument
Geographical expansion of the BANKNET network with nodes in all important branches of banks and modifications in COMET software to enable dial-up connectivity, file transfer facility, encryption etc Switch over to on-line inter-bank clearing on a gross basis. Introduction of 'Clearing Bank' concept for decentralized cheques processing. Truncation of cheques up to the value of Rs.5,000/-
** Large scale induction of computers and communication technology in service branches ** Optimal usage of SWIFT. ** NICNET, to be used for the reporting of currency chest transactions by the chest branches to their Link Offices and Issue Departments of the RBI. ** Promotion of a card culture, as well as enhanced training facilities.
Committee for proposing Legislation On Electronic Funds Transfer and
other Electronic Payments (1995)
Chairperson : Smt.K.S.Shere EFT system could be introduced immediately by framing regulations under Section 58 of the RBI Act. A Model Customer Contract agreement to govern the banker-customer relationship with regard to EFT should be adopted by all banks participating in the system
** As a long term measure, a new legislation needed for regulating, defining and determining the rights and obligations of the system providers and users.
Module -5
International banking-exchange rate-documentary letter of creditfacilities for export & import-correspondence banking-NRI bank account-EXIM banks-ECGS banks-role of FEDAI.-Evaluating bank performance- ROE model-CAMELS ratings-traditional GAAP based performance-profitability analysis-balance score red merges and acquisitions in banks-value creation through merging motive behind merges- valuation financial and non financial considerations in merges and acquisitions.
Exchange rate
Denotes the price or the ratio or the value at which one currency is exchanged for another Exchange rate is very dynamic The foreign exchange market is round-the-clock market due to different time zones Major participants- central banks, commercial banks, forex brokers, corporations, individuals Major banks that act as market-makers always give two-way quotes; gives depth and volume to the market Fundamental reasons Technical reasons Speculation
Reasons of exchange rate variations

Fundamental reasons

Balance of payments-surplus->appreciation Growth rate of the economy- higher growth->depreciation of currency Fiscal policy- financing of fiscal deficit influences exchange rate Monetary policy-loose monetary policy-> depreciation of exchange rate Interest rates- high interest more overseas capital- appreciation Political issues- political stability-steady currency
Technical reasons
Freedom or restrictions on capital movements can affect exchange rates to a large extent Among other factors there are:

Huge trade surpluses of oil exporting countries Capital moving from low-yielding currencies to high yielding currencies (interest differential)
Speculation
Self-fulfilling prophecies
Anticipation of depreciation of a currency can cause dealers to sell that currency
Speculation serves to provide depth and liquidity to the forex market Acts as a cushion as well- contrarian traders exist in the market
Types of exchange rate

Ready/cash- Settlement of funds on the same day (date of the deal). Tom- Settlement of funds takes place on the next working day of the date of the deal Spot- Settlement of funds takes place on the second working day following the date of the deal Forward- Delivery takes place on any day after the date of the deal

In the forex market all rates that are quoted are generally spot rates When delivery takes place beyond the spot date then it is a forward transaction and the forward rate is applicable
Forward rate = Spot rate + Premium (- discount)

If the forward value of a currency is higher than the spot value the currency is said to be at a premium If the above is reversed the currency is said to be at a discount
Forward rate
If the forward value of a currency is higher than the spot value the currency is said to be at a premium If the above is reversed the currency is said to be at a discount Only a small fraction of daily transactions in foreign exchange involve trading of currency Most foreign exchange transactions involve transfer of bank deposits
Letter of credit
An undertaking issued by the bank , on behalf of the importer or the buyer, in favor of the exporter or seller, that if the specified documents, showing that a shipment has been place, or a service has been supplied, are presented to that bank ,within the stipulated time, he (exporter) will be paid.
Major elements of a LC
The applicant The beneficiary The opening bank- buyers bank The advising /negotiating bank-bank in sellers country Reimbursing bank
UCPDC-(Uniform Customs and Practice for Documentary Credits) are universally recognized set of rules framed by ICC to gives guidance and assistance to all parties to LC transaction- UCPDC-600 is the latest version.
Types of LC
Revocable-can be amended or cancelled at any moment by the issuing bank with out the consent of any other party. Irrevocable- cannot be amended or cancelled with out the consent of all parties concerned. Irrevocable confirmed- a LC, which has been confirmed by a bank, other than the issuing bank
Types of LC
Transferable- a LC available for transfer in full or in part, in favor of any party other than the beneficiary, by the advising bank at the request of the issuing bank. Read clause such an LC enables the beneficiary to avail pre shipment credit from the nominated bank. Sight/ Acceptance/ Deferred payment/ Negotiation LC.
Issuing bank
Advising bank
applicant
beneficiary
Some of the Documents Called for under a LC

Financial Documents
Bill of Exchange, Co-accepted Draft

Invoice, Packing list Transport Document, Insurance Certificate, Commercial, Official or Legal Documents License, Embassy legalization, Origin Certificate, Inspection Cert , Phyto-sanitary Certificate Bill of Lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt, railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt, Deliver Challan...etc Insurance policy, or Certificate but not a cover note.
Commercial Documents
Shipping Documents
Official Documents
Transport Documents
Insurance documents
pre shipment packing list
International Trade Payment methods
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 docs are submitted and if the stipulated terms and conditions are strictly complied Documentary collection (more secure for buyer and to a certain extent to seller) 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) Where the supplier ships the goods and waits for the buyer to remit the bill proceeds, on open account terms
Risk situations in LC transaction

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
Risk situations in LC transaction
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 Failure of, or Delays in Payment from, the Issuing Bank Credit Issued by Party other than Bank
Correspondent banking and NRI accounts
It is a relation ship between two banks which have mutual accounts with each other, or on of them having account with the other. This system allows the bank to take advantage of the business opportunities in other countries, without a branch network of its own and with minimum operational costs.
Functions offers by the correspondent banks
A. account services- (require having account relation with foreign bank)

Clearing house functions Collections Payments Overdrafts& loan facility Investment service B. Other services-:LC advising, LC confirmation , for.exchange services, fund raising services.
NRI Banking NRI:- is an Indian citizen who has migrated to another country, a person of Indian origin who is born outside India, or a person of Indian origin who resides outside India Types of account facilities for NRI 1.NRE-Rupee Account remittances from abroad by TT, Checks, drafts. etc. it can be opened as Savings/ Current/ RD/TD

Joint account with a person resident in India is not possible Nomination facility is permitted- resident or non resident Income by way of interest on balance held in NRE account is exempted from income tax.
Types of account facilities for NRI
2.NRO-(Ordinary rupee Account)

Any person resident outside India and also by foreign tourists can open the account. Can be opened only in Indian Rupee (Savings/ Current/ RD/TD) Joint account with a person resident in India is possible Foreign tourists accounts will maintain for six months When a resident become NRI , the existing account should be converted to NRO Nomination also available.
3.FCNR(B)- Foreign Currency (Non-Resident) Account (Banks) These are foreign currency accounts, can be opened by NRIs- {$, EURO, and Yen} Only in the form of Term deposits. Joint accounts can be opened in the name of two or more NRIs Income earn by way of interest is exempted from income tax
4.NRNR-Non-resident Non-Repatriable#1 Term Deposit Account The scheme is open to all non-residents including foreign citizens of non-Indian origin (except Pakistani and Bangladeshi Nationals) and Overseas Corporate Bodies owned by them. no new NRSR account opened after 1st April, 2002 by way of renewal or as a fresh deposit. #the process of converting a foreign currency into the currency of one's own country.
Facilities for exporters& importers
Export- Import Code Number-ECN
Any company wish to export/import need to obtain a Import Export code (IEC) number which is issued by Regional licensing authority of DGFT(Director General of Foreign Trade. For communication with any office in regard to for export and import needs IEC number.

2.Export Declaration forms All exports of goods from India have to be declared in the prescribed forms.. GR form, PP form, SOFTEX form, SDF forms 3. Prescribed time limits Export documents- GR, PP, SDFFrom within 21 days from the date of shipment Realization of export bill six months from the date of shipment ..

4.Prescribed method of payment Should be received through authorized dealers (Ads) In the form of DD, Pay Order, travelers cheques, FCNR, NRE, INR, GOLD/SILVE 5. Foreign currency accounts RBI permits exporters to open foreign currency account in foreign countries or in India Diamond Dollar Account Exchange Earners Foreign Currency Account-EEFC
EXIM BANK
SET UP BY AN ACT OF PARLIAMENT IN SEPTEMBER 1981 WHOLLY OWNED BY GOVERNMENT OF INDIA COMMENCED OPERATIONS IN MARCH 1982 APEX FINANCIAL INSTITUTION OBJECTIVES: for providing financial assistance to exporters and importers, and for functioning as the principal financial institution for coordinating the working of institutions engaged in financing export and import of goods andservices with a view to promoting the countrys international trade shall act on business principles with due regard to public interest
EXIM BANK- OBJECTIVES
to make exports internationally competitive by offering finance at competitive rates To develop alternate financing solutions To provide information and advice for new export opportunities to exporters. To provide selective production, marketing and financing services for Indian products to make them inter nationally competitive
EXIM BANK-SERVICES
A. Financing programs
To exporters & importers extending suppliers credit to Indian exporters Provide consultancy and technology services to exporters Providing import finance to export-related goods and services Providing finance to export oriented units Providing finance to Indian companies for equity participation in joint ventures abroad To commercial banks Rediscounting of exports bills to commercial banks for short term- not exceeding 180 days Refinancing export credit and term loans given to eligible export oriented units Rediscounting export bills of small scale industries. Issuing guarantees for advance payment and for borrowing abroad executing of export contracts
Exim Bank plays a pivotal role in promoting and financing project exports. Exports of projects and services, broadly categorised into: Civil engineering construction projects Turnkey projects Consultancy services Capital goods and transport vehicles. Over the past two decades, increasing number of contracts have been secured by Indian companies in West Asia, North Africa, Sub Saharan Africa,South & South East Asia, CIS and Latin America. Such projects have supplemented the efforts of the host country governments in achieving their developmental objectives.Pioneering Role
Promotional Activities
Setting up an Exim Bank in Malaysia Establishing an Export Credit Guarantee Company in Zimbabwe Blueprint for establishing Exim Bank in Zimbabwe Feasibility study for setting up theAfreximBank Designing of Export Financing Programmes Turkey, South Africa Export Development Project : Ukraine, Vietnam, Armenia Mauritius Study on Projecting Mauritius as an Investment Hub for Indian Firms Feasibility study for establishment of an export credit and guarantee facility for Gulf Cooperation Council countries
Research Studies on products, sectors, countries, macro economic issues relevant to international trade and investment Sector Studies assessing export potential. Bilateral Trade and Investment Studies. International Trade Related Studies. Exim Newsletters Export Advantage (bilingual) Agri Export Advantage (in English, Hindi and 10 regional languages) Indo-China Newsletter (bilingual) Indo-Africa, Indo-Latin America and Indo-CIS Magazines (all bilingual) Contribution to Public Policy formulation through inputs on WTO aspects, impact of exchange rates on exports, transaction costs, etc.
Exim Bank: Promoting Indias integration into the global economy
First institution to finance & promote computer software exports(1986) Infosys was one such company supported by Exim Bank Set up Global Trade Finance Ltd. as a joint venture with IFC and West LB (now acquired by FIM Bank of Malta) in 2001 for providing export factoring facility as an alternate trade financing instrument for SME sector.
Set up Global Procurement Consultants Ltd. in 1996 as a joint venture with 10 Indian private and public sector enterprises to take up overseas assignments in procurement advisory services (has done World Bank funded assignments in 25 countries in Africa, CIS, Latin America). Launched the Asian Exim Banks Forum in 1996 and brought together8 Exim Banks operating in Asia to promote intra-regional trade and reduce transaction cost. Bank signed Multilateral L/C confirmation facility with other Exim Banks.
The Export Credit Guarantee Corporation of India Limited
ECGC is a company wholly owned by the Government of India. It provides export credit insurance support to Indian exporters and is controlled by the Ministry of Commerce. Government of India had initially set up Export Risks Insurance Corporation (ERIC) in July 1957. It was transformed into Export Credit and Guarantee Corporation Limited (ECGC) in 1964 and to Export Credit Guarantee of India in 1983 the primary objective to provide export credit insurance and trade related services to exporters. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance and exporting community ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. The present paid-up capital of the company is Rs.900 crores and authorized capital Rs.1000 crores
The Export Credit Guarantee Corporation of India Limited
functions Offers insurance protection to exporters against payment risks Provides guidance in export-related activities Makes available information on different countries with its own credit ratings Makes it easy to obtain export finance from banks/financial institutions Assists exporters in recovering bad debts Provides information on credit-worthiness of overseas buyers
FEDAI
Established in 1958, FEDAI (Foreign Exchange Dealers' Association of India) is a group of banks that deals in foreign exchange in India as a self regulatory body under the Section 25 of the Indian Company Act (1956). The role and responsibilities of FEDAI are as follows: Formulations of FEDAI guidelines and FEDAI rules for Forex business. Training of bank personnel in the areas of Foreign Exchange Business. Accreditation of Forex Brokers. Advising/Assisting member banks in settling issues/matters in their dealings. Represent member banks on Government/Reserve Bank of India and other bodies. Rules of FEDAI also include announcement of daily and periodical rates to its member banks. FEDAI guidelines play an important role in the functioning of the markets and work in close coordination with Reserve Bank of India (RBI),
Evaluating Bank Performance
Outline A1.A Framework for Evaluating Bank Performance

Internal Performance External Performance Presentation of Bank Financial Statements
A2.Analyzing Bank Performance with Financial Ratios

Profit Ratios Risk Ratios
A Framework for Evaluating Bank Performance
A1A.Internal Performance Bank planning (policy formulation) Goals, budgets, strategic planning Technology Computers, communications, payments Personnel development Challenges (personal selling and geographic expansion) Job satisfaction (training and compensation)
A1B.External Performance Market share Earnings effects Role of technology Regulatory compliance Capital Lending Securities Other Public confidence Deposit insurance Public image
. Presentation of Bank Financial Statements Balance sheet (Report of Condition) Assets: cash assets, loans, and securities Liabilities: deposit funds and non deposit funds Capital: equity capital, subordinated notes and debentures, loan loss reserves Income Statement (Report of Income) Interest income Non interest income Interest expenses Non interest expenses (including provision for loan losses) Net profit
Analyzing Bank Performance with Financial Ratios
A2A.Profit ratios Rate of return on equity ROE = NI/TE (net income after taxes/total equity) Rate of return on assets ROA = NI/TA (net income after taxes/total assets)
Other profit measures Net interest margin NIM = (Total interest income - Total interest expense)/Total assets
Analyzing Bank Performance with Financial Ratios
A2B.Risk ratios
Capitalization Leverage ratio= Total equity/Total assets
Total capital ratio= (Total equity + Long-term debt + Reserve for loan losses)/Total assets
Loan ratio = Net loans/Total assets
Nonperforming ratio = Nonperforming assets (non accrual loans and restructure loans)/Total loans and leases
Operating efficiency (cost control)=

Wages and salaries/Total expenses Fixed occupancy expenses/Total expenses
CAMELS ratings
The CAMELS ratings or Camels rating is a US supervisory rating of the bank's overall condition used to classify the nations 8,500 banks. The components of a bank's condition that are assessed: (C) Capital adequacy, (A) Asset quality, (M) Management, (E) Earnings, (L) Liquidity and (S) Sensitivity to market risk C--- Banks ability to maintain capital matching with its risk portfolio associated with its advances and investments A--- Amount of credit risk associated with its advances and investment portfolio M---Quality of BODs, internal and external auditors and others E---Quantity and quality of earnings L---Adequacy and availability of sources of liquidity and fund management S The degree to which the banks performance is affected by the fluctuation of exchange and market rates of interest and commodity prices of its components.
GAAP-General Accepted Accounting Principles

GAAP is a collection of methods used to process, prepare, and present public accounting information. GAAP is overall very general in its methods, as it needs to be somewhat applicable to many different types of industries basic principles are consistency, relevance, reliability, and comparability GAAP based profitability ratios ROE,----net income/ total equity Return on average net worth,----net income/ Tangible net worth
Tangible net worth is computed by deducting intangible asset from the total equity

Pre-tax ROE,----profit before taxes/ Tangible net worth ROA, ---- net income/ total assets Pre-tax ROA,---- profit before taxes / total assets Asset Turnover ----sales/ total assets Profit margin-PM----net income/sales
Motives behind merges

To achieve diversification of presence and services. To gain economies of scale Revenue growth from large customer base Efficiency in operations Ability to spread fixed costs over a large customer base Diversification of income from both products and geographic area Search for higher value for equity shares To achieve the good effects of technical superiority
Merges and Acquisitions of Banks.

Motives behind merges Merger is defined as the combination of two relatively comparable organizations joint stock companies; acquisition is the take-over of a smaller company (joint stock company) by a larger one.
The main reason, which is common for mergers and acquisitions, is the effort to improve the financial situation of the bank concerned and to gain a better position on the market. the unprecedented growth in competition, the continued liberalization of capital flows, the integration of national and regional financial systems, financial innovations,
For proper utilization of under utilized capital, human ,technology, managerial resources.
To maintain long term profitability
Procedures for merges/ Valuation methods

Net assets or assets backing method finding out the value of banks involved in mergers on the basis of net assets of banks. Yield method possible return that an investor gets out of his holdings dividend ,bonus shares and right issue. Earning capacity valuation method valuation depends on the comparison of the banks earning capacity and the normal rate of return on capital employed. Fair value/ Dual method this method ascertained on the basis of two basic factors- net assets backed by the shares and profits earned by the bank Exchange ratio method equivalency in terms of number of shares of one bank with another bank is established (exchange ratio) Simultaneous equation method to develop two simultaneous equations to calculate the intrinsic values of both banks
Financial and Non financial consideration

Earning capacity-spread-EPS-ROI.. Tendencies in deposits Tendencies in profitability Tendencies in NPAs Tendencies in credit deposit ratio Tendencies in turnover of working capital management. Present BEP---margin of safety Branch network Customer base Quality of assets Inter bank practices Technical know-how and abilities.
questions
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Describe the various types of banking systems. Explain the major functions of RBI Critically evaluate the role of the RBI Discuss the functions and performance of cooperative banks in India. Explain the strengths and weaknesses of NBFCs. Critically evaluate the nationalization of Banks in India Discuss the impact of financial sector reforms on the banking industry in India Discuss the major functions of commercial banks Explain with an example, What you meant by credit creation? and state the limitations of credit creation Describe the general and special relationship between a banker and a customer.
questions
11 Discuss the role of IT in banking 12 Discuss the significance of ATMs ,Explain the significance and precautions of the use of PIN . 13 Explain the functions and the services provided by EFTS. 14 What is meant by Fedwire? Explain its operations. 15 State the recommendations of various committees appointed to study technological issues of Indian banking. 16 Discuss the various methods of evaluation of the performance of banks 17 Explain the motives behind mergers and acquisitions of banks and describe the different valuation procedures in merges and acquisitions

Bank Management

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BANK MANAGEMNT MBA-IIISEM-2009

MODULE-1 ORIGIN AND KINDS OF BANKS

Merchant The money lender The goldsmith

1PRIMERY 2DISTRICT 3STATE

1EXIM 2SIDB 3NABARDI

Central Bank RBI

Public Sector Banks

New Private Sector Banks

Old Private Sector

ADVANTAGES OF BRANCH BANKING

DIS ADVANTAGES OF BRANCH BANKING

ADVANTAGES OF UNIT BANKING

BANKING SYSTEM IN INDIA

Not included in the Second schedule of RBI

BANKING SYSTEM IN INDIA

Co-operative banks Development banks

Central Bank- functions

Credit Control- to control the credit creation power of

3. Central office Department

Enactment Co-operative Credit Societies Act of 1904

Differences co-operative& commercial banks

Regional Rural banks( RRBs)

Major devlp. Banks of India

Non Banking Finance Companies NBFCs

BANKING COMMISSION RECOMMENDATIONS REGARDING INDIGENOS BANKS

Reasons for nationalization

Privatization-infusion of financial efficiency

Functions of commercial banks

General utility functions

1.Demand deposits 2.savings deposit 3.fixed deposits 4.recurring deposits

1.Overdrafts , 2. Cash credits

1Collection of cheques 2Dealing in foreign ex.

1 safe depo 2.Issue of trv 3ATM-4 Cre 5.Issuing

functions of a commercial banks

Primary functions: functions of a commercial banks

Primary functions: functions of a commercial

Commercial Banks DEPOSIT PRODUCTS

Primary functions: functions of a commercial

Primary functions: functions of a commercial

ii)Savings deposit/Savings Bank Accounts

Primary functions: functions of a commercial

Primary functions: functions of a commercial banks

Primary functions: functions of a commercial banks

Primary functions: functions of a commercial

Different methods of Granting Loans by Bank

Different methods of Granting Loans by Bank

Primary functions: functions of a commercial banks

Primary functions: functions of a commercial banks

Different methods of Granting Loans by Bank

ii) General utility services

ii) General utility services

ii) General utility services

ii) General utility services- credit creation

ii) General utility serv

Banking has been define as accepting for

Relationship between Banker and Customer

ii) Special relation

Debtor & Creditor

Principal & Agent

Bailer & Bailee

Mortgager & Mortgagee

Executor- Attorney- Guarantor

Banker is the Trustee