FAB I.pdf

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BBAE0402 : FUNCTIONAL
ASPECTS OF BANKING
Prashant Tiwari
Assistant Professor
Institute of Business Management
GLA University, Mathura
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Syllabus: Module 1
• Banker & Customer:
• Banking in India, Definition & Roles of Banks,
Banking Services & Products.
• Operational Aspect of commercial banks in India,
• Organisation of Banking Business –
– Types of Banks,
– Relationship of Banker & Customer as Debtor–Creditors,
– Know Your Customer (KYC) guidelines.
– Pledgee–Pledgor,Agent-Principles & Lessor-Lessee.
Syllabus: Module 1
• Customers’ Accounts:
• Opening & Operations of Different Kinds of Bank
Accounts & their Special Features –
– Saving Account, Current Account, Fixed Deposit Account,
Recurring Deposit Account and other Accounts
– Closing of Bank Account.
• RBI & its role.
• Recovery of loan- legal process and RBI guidelines.
• Types of cheques-
– drawing-alteration-marking and crossing of cheques.
• How to apply for loan, documents required,
eligibility, calculation of EMI, concept of credit score
Introduction to Bank
• What is Bank?
• Concept of Bank
• Banking
• Banker
• Customer
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HISTORY OF ‘BANK’
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HISTORY OF ‘BANK’
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• The word bank was taken
– Middle English from Middle French banque, from
Spanish banca,
– from Old Italian banca, meaning "table",
– from Old High German banc, bank "bench,
counter".
– Another German word, “ Bankon”- a joint stock
fund.
– Also a heap ( or mountain) and it indicates
towards a joint fund collected by many persons.
BANK
• A bank is a company where money can be saved
or borrowed from.
• Banks also invest money to build up their reserve of money.
• What they do is regulated by laws. Those laws differ in
different countries.
• The people who run a bank are called bankers.
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BANK
• Other banks deal with investments and
international currency trading.
• Customers' money may be placed in the bank for safe
keeping.
• Banks may give loans to customers for an agreement
to pay the bank back at a later time, with interest.
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BANKER
• A person employed by a bank, especially as an
executive or other official.
• An individual who is engaged in the business of
banking
• A banker is one engaged in the business of receiving
other persons money in deposit, to be returned
on demand discounting other persons' notes, and issu
ing his own for circulation.
• One who performs the business usually
transacted by a bank.
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Customer of the bank
• For a bank, a customer is a person who is
utilizing one or more of the services provided by
the bank.
• A customer is a person through whom the bank
gets an opportunity to make an earning in
return to the service they can provide the
customer with.
– For Ex: an individual who has a checking account
with a bank or an individual who has a mortgage or a
loan with the bank or an individual who has a fixed
deposit with the bank are all customers of the bank.
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Meaning & Concept
• A bank is a financial intermediary that
– accepts deposits and channels those deposits into
lending activities,
– either directly by loaning or indirectly through
capital markets.
• A banker is a person or company carrying on
the financial business like
– receiving of money from public for the purpose of
lending or investment and
– repay when it is demanded by them.
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Meaning & Concept
• A place for the deposit of money.
• An institution, generally incorporated,
authorized to receive deposits of money, to
lend money, and to issue promissory notes,
usually known by the name of bank notes.
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Definition- Banking
• "banking" means the accepting, for the
purpose of lending or investment, of deposits
of money from the public, repayable on
demand or otherwise, and withdrawal by
cheque, draft, order or other wise;
-Banking Regulation Act, 1949.
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Definition- Banking
• "banking" means
– the accepting ,
– for the purpose of lending or investment,
– of deposits of money from the public,
– repayable on demand or otherwise,
– and withdrawal by cheque, draft, order or other
wise.
– Banking Regulation Act, 1949.
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Ingredients of Banker
On the basis of banking regulation act 1949,any
institution that fulfill the following condition must
be treated as banker or bank, these are as
follows:-
1.Two mandatory functions must be performed
• Acceptance of deposits
• Lending and investment of such deposits
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Ingredients of Banker
2.Deposits of money payable on demand
3.Withdrawl of money through cheque Draft,
order or otherwise.
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Banking in India
• Banking in India in the modern sense originated
in the last decades of the 18th century.
• Among the first banks were the
– Bank of Hindustan, which was established in 1770 and
liquidated in 1829-32;
– and the General Bank of India, established 1786 but
failed in 1791
• The largest bank, and the oldest still in existence,
is the State Bank of India
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Banking in India
• It originated as the Bank of Calcutta in June 1806.
• In 1809, it was renamed as the Bank of Bengal.
• This was one of the three banks funded by a
presidency government, the other two were the
Bank of Bombay and the Bank of Madras.
• The three banks were merged in 1921 to form
the Imperial Bank of India,
• which upon India's independence, became the
State Bank of India in 1955
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Banking in India
• In 1960, the State Banks of India was given
control of state-associated banks under the State
Bank of India (Subsidiary Banks) Act, 1959.
• These are now called its associate banks
– State Bank of Bikaner & Jaipur
– State Bank of Hyderabad
– State Bank of Mysore
– State Bank of Patiala
– State Bank of Travancore
–Now these banks have been merged into
SBI (dated – 1 April, 2017) 19 20

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Banking in India
• In 1969 the Indian government nationalized
14 major private banks.
• In 1980, 6 more private banks were
nationalized.
• These nationalized banks are the majority of
lenders in the Indian economy.
• They dominate the banking sector because of
their large size and widespread networks
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Indian Banking System- at
Glance
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Role of Banks
• Mobilizing Saving for Capital Formation
• Financing Industry
• Financing Trade
• Financing Agriculture
• Financing Consumer Activities
• Financing Employment Generating Activities
• Help in Monetary Policy
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Mobilizing Saving for Capital Formation
• The commercial banks help in mobilising
savings through network of branch banking.
• People in developing countries have low
incomes but the banks induce them to save by
introducing variety of deposit schemes to suit
the needs of individual depositors.
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Financing Industry
• The commercial banks finance the industrial
sector in a number of ways.
• They provide short-term, medium-term and
long-term loans to industry.
• In India they provide short-term loans.
• In India, the commercial banks undertake
short-term and medium-term financing of
small scale industries, and also provide hire-
purchase finance.
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Financing Trade
• The commercial banks help in financing both
internal and external trade.
• The banks provide loans to retailers and
wholesalers to stock goods in which they deal.
• They also help in the movement of goods from
one place to another by providing all types of
facilities such as
– discounting and accepting bills of exchange,
– providing overdraft facilities,
– issuing drafts, etc.
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Financing Agriculture
• The commercial banks help the large agricultural sector
in developing countries in a number of ways.
• They provide loans to traders in agricultural
commodities.
• They open a network of branches in rural areas to
provide agricultural credit.
• They provide finance directly to agriculturists for the
– marketing of their produce,
– for the modernization and
– mechanization of their farms,
– for providing irrigation facilities,
– for developing land, etc.
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Financing Consumer Activities
• People in underdeveloped countries being poor
and having low incomes do not possess sufficient
financial resources to buy durable consumer
goods.
• The commercial banks advance loans to
consumers for the purchase of such items as
houses, scooters, fans, refrigerators, etc
• In this way, they also help in raising the standard
of living of the people in developing countries by
providing loans for consumptive activities.
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Financing Employment
Generating Activities
• The commercial banks finance employment
generating activities in developing countries.
• They provide loans for the education of young
person’s studying in engineering, medical and
other vocational institutes of higher learning.
• They advance loans to young entrepreneurs,
medical and engineering graduates, and other
technically trained persons in establishing
their own business
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Help in Monetary Policy
• The commercial banks help the economic
development of a country by faithfully
following the monetary policy of the central
bank.
• In fact, the central bank depends upon the
commercial banks for the success of its policy
of monetary management in keeping with
requirements of a developing economy.
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Conclusion
• Thus, the commercial banks contribute much to the
growth of a developing economy by
• granting loans to agriculture,
• trade and industry,
• by helping in physical and
• human capital formation and
• by following the monetary policy of the country.
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FUNCTIONS OF
COMMERCIAL BANK
• Primary Functions : These functions are
mandatory on the parts of commercial banks to be
performed :
– Accepting deposits (Demand & Time deposits)
• Savings & Current Accounts ( Demand Deposits )
• FDs & RDs (Time deposits ) etc
– Lending and investments( loans and advances)
• Home loans, Auto Loans, Personal Loans etc (Loans)
• Cash Credit, OD account, Discounting of bills
etc.(Advances)
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FUNCTIONS OF
COMMERCIAL BANK
• Secondary Functions : These functions are not
mandatory , but may go for offering these
services to their customers.
– General or Utility functions: in order to provide
several other kinds of services
• Safe keeping of valuables( Locker facility)
• Arranging foreign exchange
• Issuing of credit instruments
• Discounting of bills and exchange of Hundis.
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FUNCTIONS OF
COMMERCIAL BANK
• Secondary Functions : These functions are not
mandatory , but may go for offering these
services to their customers.
– Agency functions : when bankers are acting on
behalf of their customers.
• Collecting and receiving payments
• Buying and selling of securities on customers’ behalf.
• Acting as trustees( also Trustee functions )
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FUNCTIONS OF
COMMERCIAL BANK
• Other ancillary services :
– Providing informative services such as advising ,
issuing credit instruments.
– Standing as a guarantor.
– Issuing credit instruments such as credit cards,
letters of credit etc
– Issuing gift cheque and cards.
– Underwriting of shares and debentures.
– Clearing house services etc

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Difference between Primary
and Secondary Functions
Primary Functions Secondary Functions
• These are the main Secondary Activities of the
activities of the bank bank
• Main sources of income Not the main source of
income
• These are obligatory on These are not obligatory
part of bank to perform on the part of bank
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Organization-Types of Banks
• There are various types of banks in India that
attempt
– to meet the financial requirements of different people
belonging to different categories.
• These categories can be differentiated on the basis
of
– industries ,demographic characteristics of people,
– occupation or professions of people, etc.
• Banks in India can be
– Scheduled Banks and
– Unscheduled Banks as shown in the picture below:
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Indian Banking System- at
Glance
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RBI-Introduction
• The Reserve Bank of India is India's central
banking institution,
– which controls the monetary policy of the Indian rupee.
• It commenced its operations on 1 April 1935 during the
British Rule in accordance with the provisions of the
Reserve Bank of India Act 1934.
• The RBI plays an important part in the Development
Strategy of the Government of India.
• It is a member bank of the Asian Clearing Union.
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RBI-Introduction
• The general superintendence and direction of the
RBI is entrusted with the 21-member Central
Board of Directors:
– The Governor ,
– 4 Deputy Governors,
– 2 Finance Ministry representatives,
– 10 government-nominateddirectors to represent
important elements from India's economy,
– 4 directors to represent local boards headquartered
at Mumbai, Kolkata, Chennai and New Delhi.
• Each of these local boards consists of 5 members
who represent regional interests, and the
interests of co-operative and indigenous banks.
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SCHEDULED BANKS
• The Scheduled Banks are defined as “banks
included in the second schedule of Reserve
Bank of India (RBI) act, 1934 that consists on
criteria laid down vide section 42 (6) (a) of the
act –
• Paid-up capital and reserves of at least Rs 5
lakh (Rs 0.5 million)
• Affairs not conducted in a prejudicial manner
to the interests of its depositors”
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Scheduled Commercial Banks
• Scheduled Commercial Banks (SCBs) as the
term states are financial institutions or banks
that cater to commercial needs of their
customers.
• There are four types of SCBs –
– Public sector banks,
– Private sector banks,
– Foreign banks and
– Regional Rural Banks (RRBs).
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• Public sector banks
– have majority of stake (share capital) held by the
Government or RBI,
• Private sector banks
– have majority of their stake held by private individuals and
are registered as companies with limited liability, whereas
• Foreign banks
– are registered banks with headquarters in a foreign country
but operate through their branches in India
• Regional Rural Banks
– Are Government owned scheduled banks of India that
operate at regional level in different states of the country
– Are under the ownership of Ministry of Finance, GOI.
– Were created to serve rural areas with basic banking and
financial services. 48

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• Public sector banks
– SBI, Bank of Baroda, Canara Bank, Dena Bank, etc
• Private sector banks
– HDFC Bank, ICICI Bank , Yes bank, Kotak Mahindra Bank,
etc
• Foreign Banks
– Standard & Chartered Bank, Hong Kong and Shanghai
Banking Corporation (HSBC) Citibank, Bank of America, etc
• Regional Rural Banks (RRBs)
– Chaitanya Godavari Grameen Bank (sponsor Andhra Bank),
Maharashtra Grameen Bank (sponsor Bank of
Maharashtra), Haryana Grameen Bank (sponsor Punjab
National Bank), etc. 49
Organization of Banks
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Cooperative Banks
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• Cooperative banks are scheduled banks that are registered
under the Cooperative Societies Act and are regulated by
RBI’s Banking Regulation Act of 1949.
• These are mostly credit-based institutions in rural and
urban areas that mostly cater to different types of
businesses and conduct most of the secondary functions of
SCBs.
• Cooperative banks have unique ownership structure which
is based on cooperative systems where like-minded
individuals or companies representing a particular sector or
industry invest their money in a bank for providing credit to
small medium or large businesses
Cooperative Banks
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• Cooperative banks supply credit to large
number of industries or sectors in rural areas
such as farming, cattle-rearing, milk
production, personal finance, hatchery, etc.
• They provide credit in urban areas to
businesses in various industries for
distribution or marketing, housing,
warehousing, textiles, dairy, sugar, etc

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Are cooperative banks
government banks?
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• The cooperative bank is also regulated by the
RBI. They are governed by the Banking
Regulations Act 1949 and Banking Laws (Co-
operative Societies) Act, 1965.
• These banks provide most services such as
savings and current accounts, safe deposit
lockers, loan or mortgages to private and
business customers
How does a cooperative bank
work?
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• These banks are traditionally centered around
communities, localities and work place groups
and they essentially lend to small borrowers
and businesses. ... They are governed by the
Banking Regulations Act 1949 and Banking
Laws (Co-operative Societies) Act, 1965
Structure of co-operative
banking
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• The co-operative banking structure in India is
divided into following main 5 categories:
• Primary Urban Co-op Banks
• Primary Agricultural Credit Societies
• District Central Co-op Banks
• State Co-operative Banks
• Land Development Banks
We may distinguish between co-operative
banks and commercial banks on the
following counts:
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• Commercial banks are joint-stock banks. Co-
operatives banks, on the other hand, are co-
operative organizations.
• Commercial banks are subject to the control
of the Reserve Bank of India directly. Co-
operative banks are subject to the rules laid
down by the Registrar of Co-operative
Societies.

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following counts:
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• Co-operative banks have lesser scope in offering a
variety of banking services than commercial
banks.Commercial banks in India are on a larger
scale. They have adopted the system of branch
banking, so they have countrywide operations.
• Co-operative banks are relatively on a much
smaller scale. Many co-operative banks follow
only unit-bank system, though there are
cooperative banks with a number of branches
but their coverage is not countrywide.
following counts:
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• Commercial banks in India are of two types: (i)
public sector banks and (ii) private sector
banks.Co-operative banks are private sector
banks.
• Commercial banks mostly provide short-term
finance to industry, trade and commerce,
including priority sectors like exports, etc.
• Co-operative banks usually cater to the credit
needs of agriculturists.
following counts:
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• Co-operative banks offer a slightly higher rate of
interest to their depositors than commercial banks.
• In co-operative banks, borrowers are member
shareholders, so they have some influence on the
lending policy of the banks, on account of their voting
power.
• Borrowers of commercial banks are only account-
holders and have no voting power as such, so they
cannot have any influence on the lending policy of
these banks.
• Co-operative banks have not much scope of flexibility
on account of the rigidities of the bye-laws of the Co-
operative Societies. Commercial banks, on the other
hand, are free from such rigidities.
NON-SCHEDULED BANKS
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• Non-Scheduled banks are banks not included in the second
schedule of RBI act and have paid-up capital and reserves
less than Rs 5 lakh.
• These banks are the opposite of Scheduled Banks and act
like private limited companies with limited benefits (or
protection) from RBI.
• Non-scheduled banks comprise Local Area Banks (LABs)
that provide credit to individuals or businesses locally.
• For example, Coastal Area Bank or Coastal bank is a private
bank established under the Companies Act and approved
by RBI as a LAB, headquartered in Vijaywada, Andhra
Pradesh.

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BANKER CUSTOMER
RELATIONSHIP
• The general relationship of the Banker –
Customer can be divided into
– Debtor & Creditor
– Agent & Principal
– Pledgee & Pledger
– Lessor & Lessee
– Advisor & Client
– Other Relationships
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Debtor and Creditor
• In case of loan / advance accounts,
– banker is the creditor, and the customer is the debtor
• because the customer owes money to the banker.
• The banker can demand the repayment of loan /
advance on the due date, and the customer has to repay
the debt.
• A customer remains a creditor until there is credit
balance in his account with the banker.
• A customer (creditor) does not get any charge over the
assets of the banker (debtor).
• The customer's status is that of an unsecured creditor
of the banker.
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• When a customer opens an account with a bank and if
the account has a credit balance, then the relationship is
that of
– debtor (banker / bank) and creditor (customer).
• In case of savings / fixed deposit / current account (with
credit balance), the banker is the debtor, and the
customer is the creditor.
• This is because the banker owes money to the customer.
• The customer has the right to demand back his money
whenever he wants it from the banker, and the banker
must repay the balance to the customer.
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Debtor and Creditor
The debtor-creditor relationship of banker and
customer differs from other commercial debts in
the following ways:
1. The creditor (the customer) must demand payment.
On his own, the debtor (banker) will not repay the
debt. However, in case of fixed deposits, the bank
must inform a customer about maturity.
2. The creditor must demand the payment at the right
time and place.
– The depositor or creditor must demand the payment at the
branch of the bank, where he has opened the account.
– However,today, some banks allow payment at all their
branches and ATM .
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– The depositor must demand the payment at the right time
(during the working hours) and on the date of maturity in the
case of fixed deposits.
– Today, banks also allow pre-mature withdrawals.
3. The creditor must make the demand for payment in a
proper manner.
– The demand must be in form of cheque, withdrawal slips,
or pay order.
– Now-a-days,banks allow e-banking, ATM, mobile-banking,
etc.
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The debtor-creditor relationship of banker and
customer differs from other commercial debts in
the following ways:
Pledgee– Pledger
• The relationship between customer and banker can be
that of Pledger and Pledgee.
• This happens when customer pledges (promises)
certain assets or security with the bank in order to get
a loan.
• In this case, the customer becomes the Pledger, and
the bank becomes the Pledgee.
• Under this agreement, the assets or security will
remain with the bank until a customer repays the loan.
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Rights of Banker as Pledgee
• Right to retain the pledged goods.
• Right to recover extraordinary expenses
incurred by banker during pledge.
• Right of sale in case of default by pledgor
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• Duty not to use the pledged goods.
• Duty to return the goods after fulfillment of
purpose.
• Duty to proper care of goods.
• Duty not mix goods with other goods.
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Duties of Banker as Pledgee
Agent-Principal
(Agency Functions )
• The banker acts as an agent of the customer (principal)
by providing the following agency services:
– Buying and selling securities on his behalf,
– Collection of cheques, dividends, bills or promissory notes
on his behalf, and
– Acting as a trustee, attorney, executor, correspondent or
representative of a customer.
• Banker as an agent performs many other functions
such as payment of insurance premium, electricity and
gas bills, handling tax problems, etc.
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Lease - Contract
• A lease is a contractual arrangement calling for
the lessee (user) to pay the lessor (owner) for use of an
asset.
• Broadly put, a lease agreement is a contract between
two parties, the lessor and the lessee.
• The lessor is the legal owner of the asset, the lessee
obtains the right to use the asset in return for rental
payments
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Lessor-Lessee
• The narrower term rental agreement can be used to
describe a lease in which the asset is tangible property
• Language used is that the user rents the land or
goods let or rented out by the owner.
• In case of locker operation, the relationship between
the banker and customer is lessor-lessee.
• Here the banker is Lessor and customer is Lessee.
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KYC- Concept
• KYC means Know Your Customer
• KYC or KYC check
– is the mandatory process of identifying and verifying the
identity of the client when opening an account and
periodically over time.
• In other words, banks must make sure that their
clients are genuinely who they claim to be.
• Banks may refuse to open an account or halt
business relationship
– if the client fails to meet minimum KYC requirements.
KYC- Concept
• KYC documents
– KYC checks are done through an independent and
reliable source of documents, data, or information.
– Each client is required to provide credentials to
prove identity and address.
• What is eKYC?
– In India, Electronic Know Your Customer or eKYC is a
process, wherein the customer's identity and address
are verified electronically through Aadhaar
authentication.
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KYC-Importance
• KYC procedures defined by banks involve all
the necessary actions to make sure
– their customers are real, assess, and monitor risks.
• These processes help prevent and identify
– money laundering,
– financing terrorism, and other illegal corruption
schemes.
• Based on RBI guidelines,
– Bank may ask for Re-KYC at specific intervals to
keep the records of the Bank updated.

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• The objective of KYC guidelines is to prevent
banks from being used, intentionally or
unintentionally by criminal elements for
money laundering activities.
• Therefore key elements :
– Customer acceptance policy
– Customer Identification Process
– Monitoring of transactions
– Risk management
KYC- Know Your Customer Customer Acceptance Policy
• No account is opened in anonymous or
fictitious/benami name(s)
• Banks should clearly define the parameters of risk
associated with the customer profile
– Low , medium or high risk customers
• Documents and other information should be collected
of customers as per profile.
• Not to open or close an existing account if the bank is
unable to apply appropriate customer due diligence.
• Necessary checks should be carried on to ensure that
the identity of the customer does not match with any
person with known criminal background or with
banned entities such as terrorists etc.
Customer Identification
Process
• Identifying and verifying customers identity
– By using reliable , independent source documents
data or info
• For customers that are legal persons /entities
bank should verify the
– Legal status ( through documents )
– Authorized party if so (authorized or not)
– Understanding the ownership and control
structure of entity
Monitoring of Transactions
• Identifying the abnormal and suspicious
transactions
• Special attention to all complex usually large
transactions accounts.
• Large cash transactions inconsistent with the
normal activity of the customer
• LTR ( large transactions reporting ) to be
maintained in separate registers so that data
can be maintained by the head fortnightly.

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Risk Management
• Creation of risk profiles of the customers.
• Application of anti-money laundering
measures
• Audit machinery should be staffed adequately
with individuals as per banks policies and
procedures.
• Concurrent / internal auditors should
specifically check and verify the application of
KYC procedures.
Procedure and precaution for
opening an account- 7 steps
1. Decide the Type of BankAccount you want to Open
• There are several types of bank accounts such as Saving Account,
Recurring Account, Fixed Deposit Account and Current Account.
• So a decision regarding the type of account to be opened must be taken.
2. Approach any Bank of choice & meet its Bank Officer
• Once the type of account is decided, the person should approach a
convenient bank.
• He has to meet the bank officer regarding the opening of the account. The
bank officer will provide a proposal form (Account Opening Form) to
open bank account.
3.Fill up BankAccount Opening Form - Proposal Form
• The proposal form must be duly filled in all respects. Necessary details
regarding name, address, occupation and other details must be filled in
wherever required.
• Two or three specimen signatures are required on the specimen
signature card. If the account is opened in joint names, then the
form must be signed jointly.
• Now a days the banks ask the applicant to submit copies of his
latest photograph for the purpose of his identification.
4. Give References for Opening your Bank
Account
• The bank normally required references or introduction of the
prospective account holder by any of the existing account holders
for that type of account.
• The introducer introduces by signing his specimen signature in the
column meant for the purpose
• The reference or introduction is required to safeguard the interest
of the bank.
5.Submit Bank Account Opening Form and Documents
• The duly filled in proposal form must be submitted to the bank along
with necessary documents.
• For e.g. in case of a joint stock company, the application form must
accompany with the Board's resolution to open the account.
• Also certified copies of articles and memorandum of association must
be produced.
6.Officer will verify your Bank Account Opening Form
• The bank officer verifies the proposal form. He checks whether the
form is complete in all respects or not.
• The accompanying documents are verified.
• If the officer is satisfied, then he clears the proposal form.
Click here to see the AOF
......banking books &forms(FD, RD, Savings , RTGS
NEFT)Final_Aof_revised.pdf

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7.Deposit initial amount in newly opened
Bank Account
• After getting the proposal form cleared, the necessary
amount is deposited in the bank.
• After depositing the initial money, the bank provides a
pass book, a cheque book and pay in slip book in the
case of savings account. In the case of fixed deposits, a
fixed deposit receipt is issued.
• In the case of current account, a cheque book and a pay
in slip book is issued.
• For recurring account, the pass book and a pay in slip
book is issued.
Operations-Savings Deposit
Account
• These deposits accounts are one of the most
popular deposits for individual accounts.
• These accounts not only provide cheque facility
but also have lot of flexibility for deposits and
withdrawal of funds from the account.
• Most of the banks have rules for the maximum
number of withdrawals in a period and the
maximum amount of withdrawal, but hardly any
bank enforces these.
Account
• However, banks have every right to enforce such
restrictions if it is felt that the account is being
misused as a current account.
• Till 24/10/2011, the interest on Saving Bank
Accounts was regulated by RBI and it was fixed
at 4.00% on daily balance basis.
• However, wef 25th October, 2011, RBI has
deregulated Saving Fund account interest rates
and now banks are free to decide the same within
certain conditions imposed by RBI.
Account
• Under directions of RBI, now banks are also
required to open no frill accounts
– (this term is used for accounts which do not have any
minimum balance requirements).
• Although Public Sector Banks still pay only 4%
rate of interest, some private banks like Kotak
Bank and Yes Bank pay between 6% and 7% on
such deposits.
• From the FY 2012-13, interest earned upto Rs
10,000 in a financial year on Saving Bank
accounts is exempted from tax.

23
Account
• Restrictions on withdrawal
– At max 5 transactions in a month are allowed or 60
per year.
– Rest charges will be levied by the banks.
– Rs.1 Or in multiples of 1.
• Restrictions of deposits
– Amount subject to a minimum of Rs. 5
– banks has to ensure that account should not be
used as a current account.
Account
• Restriction on opening savings account
– Government departments
– Municipal corporations/ committees
– Panchayat samities
– State housing boards
– State/ district level housing cooperative societies etc.
• AMB( Average Monthly Balance)
– Customer needs to maintain minimum amount in
account
– To avoid AMB in the account
Account
 The amount can be deposited in cash or cheques can be
deposited for collection through clearing with the help of
deposit slips.
 To see deposit slip click here
 ......banking books &forms(FD, RD, Savings , RTGS
NEFT)HDFC_Slip_12611020000753.pdf
• No frills bank account
– This account aims at providing normal banking
services to all citizens of the country.
– The basic savings account replaces the earlier “no-
frills”account, which came with nil or minimum
charges and was meant for the low-income group.
Savings Bank Accounts
Rules & Regulations
• As per the extant Reserve Bank of India (RBI)
guidelines, which are mandatory, photographs of
all applicant(s) / Power of Attorney holders (i.e.
who are authorized to operate the account(s))
should be furnished to the bank
• As per extant Government of India (GOI)
guidelines, PAN / Form No.60/61 (Where PAN is
not available) is required to be furnished.
• Click here for FORM 61
• ......banking books &forms(FD, RD, Savings ,
RTGS NEFT)form 61.docx

24
Rules & Regulations
• The balance in the special type of account
must adhere to the minimum monthly /
quarterly average balance stipulation laid
down by the Bank and communicated to you at
the time of opening of the account.
• Non-maintenance of such monthly/quarterly
average balance (QAB/AMB) will attract
applicable penalty on a monthly / quarterly
basis and on a date determined by the bank.
Rules & Regulations
• If there is no transaction by the account holder
in the account continuously for 24 months, the
account automatically gets classified as a
‘dormant / inoperative account’ whereupon
further debit / credit transactions are not
permitted in the ordinary course.
• A request for activation of the account has to
be made by the customer and the customer is
subject afresh to KYC Compliance.
Rules & Regulations
• When a customer wants his / her operative
account at one branch to be transferred to another
branch, he / she has to give his / her request in
writing along with unused cheque books. The
bank will transfer the account to other branch and
will issue new cheque book.
• The bank has the authority to debit the accounts
to recover any amount credited erroneously.
• Interest will be credited every six months on or
about 1st September and 1st March calculated
on daily product basis.
10-year-olds can open and
operate bank account alone:
RBI
• Children older than 10 years will no longer need the
help of their parents or guardians to open and operate a
savings bank account.
• To boost financial inclusion, the Reserve Bank of India
(RBI) on Tuesday said that banks were at liberty to
allow minors above 10 years to independently open and
operate savings bank accounts.
• As of now, banks allow minors to operate bank
accounts only along with a parent or a guardian.
• All children and teenagers below the age of 18 are
considered minors under current rules.

25
10-year-olds can open and
operate bank account alone:
RBI
• RBI also allowed banks to offer additional
facilities like internet banking, ATM, debit
card and cheque book to a minor.
• However, the central bank said that such
facilities should be within the overall norms
that banks will not allow a minor's account to
be overdrawn and that these accounts should
always remain in credit.
Operations-Current Deposit
Account
• Current Accounts are basically meant for businessmen
and are never used for the purpose of investment or
savings.
• These deposits are the most liquid deposits and there
are no limits for number of transactions or the amount
of transactions in a day.
• Most of the current account are opened in the names of
firm / company accounts.
• Cheque book facility is provided and the account
holder can deposit all types of the cheques and drafts in
their name or endorsed in their favour by third parties.
Account
• No interest is paid by banks on these
accounts.
• On the other hand, banks charges
certain service charges, on such accounts.
• an account with a bank from which money
may be withdrawn without notice,
– typically an active account catering for frequent
deposits and withdrawals by cheque.
Account
• The main objective of Current Account holders
in opening these account is to enable them
(mostly businessmen) to conduct their business
transactions smoothly.
• There are no restrictions on the number of
times deposit in cash / cheque can be made or
the amount of such deposits;

26
Account
• Usually banks do not have any interest on
such current accounts. However, in recent
times some banks have introduced special
current accounts where interest (as per banks'
own guidelines) is paid
• The current accounts do not have any fixed
maturity as these are on continuous basis
accounts
Operations- WHO CAN OPEN A
CURRENT ACCOUNT
• Different banks have different criteria for opening a
current account.
• Generally, banks would only consider the application if
the applicant is: -
– 18 years old or above –
– not a bankrupt –
– of sound mind and has the mental and physical capacity to
operate the account properly
• For business owners and professional entities, they
must ensure that they are properly registered with the
relevant authorities.
• However, a bank has the discretion to accept or decline
an application to open the account.
REQUIREMENTS TO OPEN A
CURRENTACCOUNT
• You must be physically present at the bank –
• You need an introducer acceptable to the bank.
• This is to enable the bank to obtain references
on you.
• You need to provide certain identification
documents such as your identity card or
driving licence to substantiate your identity –
• You need to put an initial deposit as specified
by your bank
REQUIREMENTS TO OPEN A
CURRENTACCOUNT
• In addition, for a business / society / club / association
/ professional registered with professional bodies
(ICAI, Indian Medical Association etc),
• you need to provide the
– business registration,
– board resolution, memorandum and articles of association,
– share allotment form and list of directors and secretary (for
company account) or
– list of current board/committee members (for society
account).

27
Introduction-Fixed Deposit
Account
• A fixed deposit (FD) is a financial instrument
provided by banks which provides investors
with a higher rate of interest than a regular
savings account, until the given maturity date.
• It may or may not require the creation of a
separate account.
• It is known by different terms such as term
deposit or time deposit in different countries.
Account
• A Fixed Deposit (FD) involves depositing a fixed
amount with a bank for a fixed period of time and
for a fixed rate of interest.
• The depositor receives interest on a monthly,
quarterly or annual basis for the fixed tenure.
• Post that, the principal amount is returned to the
customer.
• Some banks may offer additional services to FD
holders such as loans against FD certificates (OD
against FD) at competitive interest rates
Account
• Fixed deposits are a high-interest -yielding Term
deposit which are offered by banks in India.
• The most popular form of Term deposits are
Fixed Deposits, while other form of term
Deposits is Recurring Deposit(RD).
• The interest rate varies between 3.5 and 11
percent.
– Senior citizens are given 0.5 % higher rate of return
• The tenure of an FD can vary from 7, 15 or 45
days to 1.5 years and can be as high as 10 years.
Operations-Fixed Deposit
Account
• The longest permissible term for FDs is 10 years
• Generally, the longer the term of deposit, higher
is the rate of interest but a bank may offer lower
rate of interest for a longer period.
• Usually in India the interest on FDs is paid every
three months from the date of the deposit.
– if FD was opened on 15th Feb.,
– first interest installment would be paid on 15 May

28
Account
Click here to see the latest Interest Rates :
https://www.hdfcbank.com/personal/interest-rates?accordname=accordian2
Account
• The interest is credited to the customers' Savings bank
account or sent to them by cheque.
This is a Simple FD .
• The customer may choose to have the interest
reinvested in the FD account.
This deposit is called the Cumulative FD or compound
interest FD or reinvestment FD.
• For such deposits, the interest is paid with the invested
amount on maturity of the deposit at the end of the
term.
• For calculation of FD interest click here :
https://www.hdfcbank.com/personal/fixed-deposit-
calculator
Account
• FDs are booked for fixed tenure but customers
can liquidate the FDs before maturity. This is
known as a premature withdrawal of FDs.
• In such cases, interest is paid at the rate
applicable at the time of withdrawal minus 1 %
as penalty.
– For example, a deposit is made for 5 years at 8%,
– but is withdrawn after 2 years.
– If the rate applicable on the date of deposit for 2 years
is 5 per cent, the interest will be paid at 4 per cent.
• Banks charge a penalty for premature
withdrawal
Account
• Banks issue a separate receipt for every FD
because each deposit is treated as a distinct
contract.
• This receipt is known as the Fixed Deposit
Receipt (FDR), that has to be surrendered to
the bank at the time of renewal or encashment.
• Many banks offer the facility of automatic
renewal of FDs where the customers do give
new instructions for the matured deposit.

29
Account
• On the date of maturity, such deposits are
renewed for a similar term as that of the original
deposit at the rate prevailing on the date of
renewal.
• Income tax regulations require that FD maturity
proceeds exceeding Rs 20,000 not to be paid in
cash.
• Repayment of such and larger deposits has to be
either by " A/c payee " crossed cheque in the
name of the customer or by credit to the saving
bank a/c or current a/c of the customer.
Account
• Nowadays, banks gives the facility of Flexi or
sweep in FD, where in you can withdraw your
money through ATM, through cheque or through
funds transfer from your FD account.
• Here the account holder decides the minimum
amount to be kept in his/her savings account.
• Any excess over it automatically gets transferred
to a fixed deposit account.
• Whenever cash is needed, the bank can just
transfer or 'sweep' in funds to the savings
account.
Account
• In such case, whatever interest is accrued on
the amount you have withdrawn will be
• credited to your savings account (the account
that has been linked to your FD) and the
balance amount will automatically be
converted in your new FD.
• This system helps you in getting your funds
from your FD account at the times of
emergency without wasting your time.
Account
• Customers can avail loans against FDs up to 80
to 90 per cent of the value of deposits.
• The rate of interest on the loan could be 1% to 2
% over the rate offered on the deposit and.
• Tax is deducted by the banks on FDs if interest
paid to a customer at any bank exceeds Rs.
10,000 in a financial year.
• This is applicable to both interest payable or
reinvested per customer.
• This is called Tax deducted at Source and is
presently fixed at 10% of the interest if PAN is
updated in the account otherwise rate is 20%.

30
Account
• With CBS banks can tally FD holding of a customer
across various branches and TDS is applied if interest
exceeds Rs 10,000
• Banks issue Form 16 A every quarter to the customer,
as a receipt for Tax Deducted at Source.
• If the total income for a year does not fall within the
overall taxable limits, then customers can submit a
– Form 15 G (below 60 years of age) or
– Form 15 H (above 60 years of age) to the bank
• when starting the FD and at the start of every financial
year to avoid TDS.
Operations-Recurring Deposit
Account
• Recurring Deposit is a special kind of Term
Deposit offered by banks in India
• which help people with regular incomes
to deposit a fixed amount every month into
their Recurring Deposit account and
• earn interest at the rate applicable to Fixed
Deposits.
• Another variant for investment
• Also knows as RD or cumulative deposit.
Account
• It is similar to making FDs of a certain amount in
monthly installments,
– for example Rs 1000 every month.
• This deposit matures on a specific date in the future
along with all the deposits made every month.
• Thus, Recurring Deposit schemes allow customers with
an opportunity to build up their savings
through regular monthly deposits of fixed sum over a
fixed period of time.
• Minimum Period of RD is 6 months and maximum is
10 years
Account
• The Recurring Deposit can be funded by
[Standing order (banking)|Standing
instructions] which are the instructions by the
customer to the bank to withdraw a certain sum of
money from his Savings/ Current account and
credit to the Recurring Deposit every month.
• When the RD account is opened, the maturity
value is indicated to the customer assuming that
the monthly installments will be paid regularly on
due dates

31
Account
• If any installment is delayed, the interest
payable in the account will be reduced and will
not be sufficient to reach the maturity value.
• Therefore, the difference in interest will be
deducted from the maturity value as a penalty.
• The rate of penalty will be fixed upfront.
• Interest is compounded on quarterly basis in
recurring deposits.
Account
• One can avail loans against the collateral of
Recurring deposit up to 80 to 90% of the
deposit value
• Rate of Interest offered is similar to that
in Fixed Deposits
• Earlier it seemed to be one of the best method
to save the amount yield after years of deposit.
• But effective from June 1, 2015 TDS is
applicable on RDs.
Account
• Tax Deducted at Source ( TDS ) is applicable on RDs.
If interest earned on recurring deposits exceeds Rs.
10,000 a year, TDS at the rate of 10 per cent would be
deducted by the bank.
• Income tax is to be paid on interest earned from a
Recurring Deposit at the rate of tax slab of the RD
holder.
• Investors with no taxable income will have to submit
Form 15G to avoid TDS on both recurring deposits and
fixed deposits.
• For senior citizens, the requisite form for avoiding TDS
is 15H.
Bank Deposits- A Snap Shot
124

32
RBI-Introduction
• The Reserve Bank of India is India's central
banking institution,
– which controls the monetary policy of the Indian rupee.
• It commenced its operations on 1 April 1935 during the
British Rule in accordance with the provisions of the
Reserve Bank of India Act 1934.
• The RBI plays an important part in the Development
Strategy of the Government of India.
• It is a member bank of the Asian Clearing Union.
125
RBI-Introduction
• The general superintendence and direction of the
RBI is entrusted with the 21-member Central
Board of Directors:
– The Governor ,
– 4 Deputy Governors,
– 2 Finance Ministry representatives,
– 10 government-nominateddirectors to represent
important elements from India's economy,
– 4 directors to represent local boards headquartered
at Mumbai, Kolkata, Chennai and New Delhi.
• Each of these local boards consists of 5 members
who represent regional interests, and the
interests of co-operative and indigenous banks.
126
RBI
Functions
Issueof Bank
Notes
Banker’s
Bank
Banker to
Government
Lender of Last
Resort
Central
Clearance and
Accounts
Settlement
Controller of
Credit
Custodian of
Country’s
Foreign
Currency
Reserves
Custodian of
Cash Reserves
of Commercial
Banks
127
Issue of
Bank Notes
• TheReserve Bank of India has the sole right to issue currency
notes except one rupee notes which are issued by the Ministry of
Finance.
• Currency notes issued by the Reserve Bank are declared
unlimited legal tender throughout the country.
Banker to
Government
• As banker to the government the Reserve Bank manages the banking
needs of the government.
• It has to-maintain and operate the government’s deposit accounts.
• It collects receipts of funds and makes payments on behalf of the
government.
• It representsthe Government of India as the member of the IMF and
the World Bank.
128
RBI-Functions

33
Lender of Last
Resort
• Thecommercial banks approach the Reserve Bank in times of
emergencyto tide over financial difficulties,
• and the Reserve bank comes to their rescue though it might
chargea higher rate of interest.
Central Clearance
and Accounts
Settlement
• Sincecommercial banks have their surplus cash reserves
deposited in the Reserve Bank, it is easier to deal with each
other and settle the claim of each on the other through book
keepingentries in the books of the Reserve Bank.
• Theclearing of accounts has now become an essential function
of the Reserve Bank.
129
RBI-Functions
Controller of
Credit
• Since credit money forms the most important part of supply of money,
and since the supply of money has important implications for economic
stability, the importance of control of credit becomes obvious.
• Credit is controlled by the Reserve Bank in accordance with the
economic priorities of the government.
Banker’s
Bank
• RBI is the Banker to all the banks- that is, to all the Commercial Banks ,
Cooperative Banks and Regional Rural Banks(RRBs).
• RBI holds their cash reserves, lends them short -term funds and
provides them the central clearing and remittances facilities.
130
RBI-Functions
Custodian of Cash
Reserves of
Commercial Banks
• The commercial banks hold deposits in the Reserve
Bank and the latter has the custody of the cash
reserves of the commercial banks.
Custodian
of Country’s Foreign
Currency Reserves
• The Reserve Bank has the custody of the country’s
reserves of international currency, and
• this enables the Reserve Bank to deal with crisis
connected with adverse balance of payments
position.
131
RBI-Functions RBI -Developmental and
Promotional Functions
• Development of the Financial System
• Development of Agriculture
• Provision of Industrial Finance
• Provisions of Training
• Collection of Data
• Publication of the Reports
• Promotion of Banking Habits
• Promotion of Export through Refinance
132

34
Roles of RBI -Developmental
and Promotional
• Development of the Financial System
– The financial system comprises the
• financial institutions,
• financial markets and financial instruments.
– The sound and efficient financial system is a precondition
of the rapid economic development of the nation.
• Development of Agriculture
– In an agrarian economy like ours, the RBI has to provide special
attention for the credit need of agriculture and allied activities.
– It has earlier the Agriculture Refinance and Development
Corporation (ARDC) to look after the credit,
– National Bank for Agriculture and Rural Development
(NABARD) and Regional Rural Banks (RRBs).
133
and Promotional
• Provision of Industrial Finance
– Rapid industrial growth is the key to faster economic development.
– In this regard, the adequate and timely availability of credit to small,
mediumand large industry is very significant.
– In this regard the RBI has always been instrumental in setting up special
financial institutions such as
• ICICI Ltd.
• IDBI,
• SIDBI and EXIM BANK etc.
• Provisionsof Training
– The RBI has always tried to provide essential training to the staff of the
banking industry.
– The RBI has set up the Bankers' Training Colleges at several places.
• National Institute of Bank Management i.e NIBM,
• Bankers Staff College i.e BSC and
• College of Agriculture Banking i.e CAB are few to mention.
134
and Promotional
• Collection of Data
– Being the apex monetary authority of the country, the RBI
collects process and disseminates statistical data on several
topics.
– It includes interest rate, inflation, savings and investments etc.
– This data proves to be quite useful for researchers and policy
makers.
• Publication of the Reports
– The Reserve Bank has its separate publication division. This
division collects and publishes data on several sectors of the
economy.
– The reports and bulletins are regularly published by the RBI.
– It includes RBI weekly reports, RBI Annual Report, Report on
Trend and Progress of Commercial Banks India etc.
135
and Promotional
• Promotion of Banking Habits
– As an apex organization, RBI always tries to promote the
banking habits in the country.
– It institutionalizes savings and takes measures for an
expansion of the banking network.
– It has set up many institutions such as the Deposit
Insurance Corporation-1962, UTI-1964, IDBI-1964,
NABARD-1982, NHB-1988, etc
• Promotion of Export through Refinance
– The RBI always tries to encourage the facilities for
providing finance for foreign trade especially exports from
India.
• The Export-Import Bank of India (EXIM Bank India) and
• The Export Credit Guarantee Corporation of India (ECGC)
– are supported by refinancing their lending for export
purpose. 136

35
CHEQUE
PAYMENT AND COLLECTION
Prashant Tiwari
Assistant Professor
Institute of Business Management
GLA University, Mathura
137
Cheque- Meaning
• Cheque is a very common form of negotiable
instrument.
• If you have a savings bank account or current
account in a bank, you can issue a cheque in your
own name or in favor of others, thereby directing
the bank to pay the specified amount to the
person named in the cheque.
• Therefore, a cheque may be regarded as a bill of
exchange; the only difference is that the bank is
always the drawee in case of a cheque.
• The Negotiable Instruments Act, 1881 defines
a cheque as a bill of exchange drawn on a
specified banker and not expressed to be
payable otherwise than on demand.
• Actually, a cheque is an order by the account
holder of the bank directing his banker to pay
on demand, the specified amount, to or to the
order of the person named therein or to the
bearer.
Cheque- Meaning Cheque- Features
• A cheque must be in writing and duly signed by
the drawer.
• It contains an unconditional order.
• It is issued on a specified banker only.
• The amount specified is always certain and must
be clearly mentioned both in figures and words.
• The payee is always certain.
• It is always payable on demand.
• The cheque must bear a date otherwise it is
invalid and shall not be honoured by the bank.

36
Cheque- Types
• Open cheque, and
• Crossed cheque.
• Bearer cheque
• Order cheque
Cheque- Types
• Open cheque:
– A cheque is called ‘Open’ when it is possible to
get cash over the counter at the bank. The holder
of an open cheque can do the following:
– i. Receive its payment over the counter at the
bank,
– ii. Deposit the cheque in his own account
– iii. Pass it to some one else by signing on the
back of a cheque
Cheque- Types
• Crossed cheque:
– Since open cheque is subject to risk of theft, it is
dangerousto issue such cheques.
– This risk can be avoided by issuing another types of
cheque called ‘Crossed cheque’.
– The payment of such cheque is not made over the
counter at the bank.
– It is only credited to the bank account of the payee.
– A cheque can be crossed by drawing two transverse
parallel lines across the cheque, with or without the
writing ‘Account payee’ or ‘Not Negotiable’.
Cheque- Types
• Bearer cheque:
– A cheque which is payable to any person who
presents it for payment at the bank counter is
called ‘Bearer cheque’.
– A bearer cheque can be transferred by mere
delivery and requires no endorsement.

37
Cheque- Types
• Order cheque:
– An order cheque is one which is payable to a
particular person.
– In such a cheque the word ‘bearer’ may be cut
out or cancelled and the word ‘order’ may be
written.
– The payee can transfer an order cheque to
someone else by signing his or her name on the
back of it.
There is another categorization of
cheques which is discussed below
• Ante-dated cheques:-
– Cheque in which the drawer mentions the date
earlier to the date of presenting it for payment.
– For example, a cheque issued on 20th May 2003 may
bear a date 5th May 2003.
• Stale Cheque:-
– A cheque which is issued today must be presented
before at bank for payment within a stipulated
period.
– After expiry of that period, no payment will be made
and it is then called ‘stale cheque’. Find out from your
nearest bank about the validity period of a cheque.
There is another categorization of
cheque which is discussed below
• Mutilated Cheque:-
– In case a cheque is torn into two or more pieces and
presented for payment ,such a cheque is called a mutilated
cheque.
– The bank will not make payment against such a cheque
without getting confirmation of the drawer. But if a cheque is
torn at the corners and no material fact is erased or
cancelled, the bank may make payment against such a
cheque.
• Post-dated Cheque:-
– Cheque on which drawer mentions a date which is
subsequent to the date on which it is presented, is called
post-dated cheque. For example, if a cheque presented on
8th May 2003 bears a date of 25th May 2003, it is a post-
dated cheque. The bank will make payment only on or after
25th May 2003.
Specimen of a Crossed Cheque:

38
Crossing of the cheque
• The Crossing of a cheque is the instruction to
the paying banker to transfer the specified
amount to the payee account from the payer
account and not over the counter.
• The crossing of the cheque is used as a means
of protection against misusing cheques.
149
Types of Crossing
• General Crossing Cheque
• Special Crossing Cheque
• Restricted Crossing
150
General Crossing Cheque
• In general crossing, the cheque bears across
its face an addition of two parallel transverse
lines and/or the addition of words ‘and Co.’ or
‘not negotiable’ between them.
• In the case of general crossing on the cheque,
the paying banker will pay money to
any banker.
151
General Crossing Cheque
• For the purpose of general crossing
two transverse parallel lines at the corner of
the cheque are necessary.
152

39
Special Crossing Cheque
• In special crossing, the cheque bears across its
face an addition of the banker’s name,
– with or without the words ‘not negotiable’.
• In this case, the paying banker will pay the
amount of cheque only to the banker
– whose name appears in the crossing or to his
collecting agent.
153
Special Crossing Cheque
• Thus, the paying banker will honor the cheque only
when it is ordered through the bank mentioned in
the crossing or its agent bank.
• However, in special crossing two parallel transverse
lines are not essential but the name of the banker is
most important.
154
Restricted Crossing
• This type of crossing restricts the negotiability
of the cheque.
• It directs the collecting banker that he needs
to credit the amount of cheque only to the
account of the payee, or the party named or
his agent.
155

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