Lending Principles and

Balance Sheet of A Bank

Banking and Finance
By Prof. Swati Bhalerao
31/03/2020
 Syllabus
• Lending principles, Credit Creation and Balance Sheet of a bank
• 5.1 Safety, Liquidity, Profitability, Diversification of risks, other lending
principles
• Customer assessment through CIBIL and other similar agencies.
• 5.3 Balance sheet of a commercial bank.
 Lending Principles of Bank
• 1. Liquidity
• Liquidity refers to convertibility into Cash. Liquidity is an important principle of bank
lending.
• The major portion of bank deposits is repayable on demand or at a short notice. Therefore
the bank must see it that advances are not locked up but come back immediately.
• It is essential because if the bank needs cash to meet the urgent requirements of its
customers, it should be in a position to sell some of the securities at a very short notice
without disturbing their market prices much.
• There are certain securities such as central, state and local government bonds which are
easily saleable without affecting their market prices.
 2. Safety:

• The safety of funds lent is another principle of lending.

• Safety means that the borrower should be able to repay the loan and interest in time
at regular intervals without default. The repayment of the loan depends upon the
nature of security, the character of the borrower, his capacity to repay and his
financial standing.
 Diversification of Risk
• Diversification aims at minimising risk of the investment portfolio of a bank.
• In choosing its investment portfolio, a commercial bank should follow the principle
of diversity. It should not invest its surplus funds in a particular type of security but
in different types of securities. It should choose the shares and debentures of
different types of industries situated in different regions of the country.
• The principle of diversity also applies to the advancing of loans to varied types of
firms, industries, businesses and trades. A bank should follow the maxim: “Do not
keep all eggs in one basket.” It should spread it risks by giving loans to various
trades and industries in different parts of the country.
 Profitability:
• This is the cardinal principle for making investment by a bank. It must earn
sufficient profits. It should, therefore, invest in such securities which was
sure a fair and stable return on the funds invested. The earning capacity of
securities and shares depends upon the interest rate and the dividend rate
and the tax benefits they carry.
 Other Principles of Lending
1. Object of Loan – Loans should be extended for the productive purpose only, either for meeting
working capital requirement (Working Capital Finance) or for acquisition of plants and machinery
(term Loan). Bank credit is considered as a scarce commodity and needs to be deployed carefully.

2. Security – Bank loan should be granted only after obtaining a proper security. So that in case of
failure on the part of a borrower to reply the loan, the banker may, dispose it off the available
security and recover the bank funds.
3. Margin Money – The difference between the amount of loan and the value of securities available
to cover the same is termed as Margin Money. In order to ensure that the value of security is more
than the amount of money lent, a banker needs to properly scrutinize and evaluate the security.
4. National Interest – Government as well as the banking regulator has been taking initiatives to
achieve the objectives of social justice – Lending to the priority sectors - Priority Sector
Lending is an important role given by the (RBI) to the banks for providing a specified portion of
the bank lending to few specific sectors like agriculture and allied activities, (Dairy, fishery, animal
husbandry, poultry) micro and small enterprises, poor people for housing, students for education
and other low income groups and weaker sections.
• Video - https://www.youtube.com/watch?v=5Lum5oW3fQs
 Non-Performing Assets
• A nonperforming asset (NPA) refers to a classification for loans or advances that are in default or in
arrears. A loan is in arrears when principal or interest payments are late or missed.
• A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained
overdue for a period of 90 days.
• NPAs can be classified as a substandard asset, doubtful asset, or loss asset, depending on the length of
time overdue and probability of repayment.
• Banks are required to classify nonperforming assets into one of three categories according non-
performing:
• 1. Sub-standard assets - Assets which has remained NPA for a period less than or equal to 12 months.
• 2. doubtful assets - An asset would be classified as doubtful if it has remained in the substandard category
for a period of 12 months.
• 3. loss assets - Loss asset is considered uncollectible
 Credit rating agency In India
• A credit rating agency is equipped with all the required information to rate an entity (maybe
an individual or an organization) based on its creditworthiness.
• These agencies provide highly essential risk assessment reports and analytical solutions and
assign a definitive credit score to both individuals as well as organizations.
• CIBIL – Credit Information Bureau India Limited
• CRISIL – Credit Rating Information Services of India (Limited)
• ICRA – Investment Information and Credit Rating Agency of India
• CARE – Credit Analysis & Research Limited
• ONICRA – Onida Individual Credit Rating Agency of India
 CIBIL – Credit Information Bureau India
Limited
Year of Establishment 2000

Headquarters Mumbai, India

The main function of CIBIL is to track the credit history of an individual or a company
Main Objective
and rate their creditworthiness.

The CIBIL scores are used by lending organizations to sanction loans quickly and for the
Benefit
approval of credit cards too.

Ratings vary between 350 and 900. Generally, a rating of above 700 is considered
Rating scale favourable. A high credit score allows consumers to avail all types of loans easily and at
good interest rates.
 CIBIL – Credit Information Bureau India Limited
• There are 17 crore consumer and more than 65 lacs company records, recorded in CIBIL’s
database with their 500 members.
• Significance of the CIBIL score
• A CIBIL score is important because,
• It makes loan approval simple and fast.
• The interest rates for the loans are also determined based on the credit score of the
individual availing the loan.
• With the ISO 27001 security certificate, the CIBIL score is highly dependable.
• CIBIL scores are also used by employers to test the trust factor of potential employees.
• https://www.bajajfinserv.in/insights/what-is-cibil-and-what-does-it-have-to-do-with-your-
credit-score
• What factors influence the CIBIL score?
• The most important factor that influences the credit score is the repayment
history of the consumer (constitutes almost 35% of the credit score).
Other factors that interfere with the credit score are the credit balance of the
consumer, number of loans, number of credit cards held by the consumer,
the balance between secured (housing loans, business loans and so on)and
unsecured loans (personal loan) and so on.
 CRISIL – Credit Rating Information
Services of India (Limited)
Year of Establishment 1987

Headquarters Gurgaon, India

The main function of CRISIL is to establish the creditworthiness of companies based on the business strengths,
Main Objective the board, the market share, and reputation of the company and so on. CRISIL rates organization like public
limited companies, banks and financial organizations and not individuals.

Benefit Allows investors to obtain a clear idea about an organization before investing in their debentures and bonds.

CRISIL offers 8 different grades credit scoring. They are,

1. CRISIL AAA, CRISIL AA, CRISIL A – The three grades offer maximum safety for timely servicing of the
Rating scale loans.
2. CRISIL BBB, CRISIL BB – Offer moderate safety.
3. CRISIL B, CRISIL C, CRISIL D – High-risk individuals
 ICRA – Investment Information and Credit
Rating Agency of India
Year of Establishment 1991

Headquarters Mumbai, India

ICRA offers 12 types of ratings which include, Corporate debt rating, Financial sector
rating, Issuer rating, Bank loan credit rating, Public finance rating, Corporate governance
Main Objective
rating, Structured finance rating, SME rating, Mutual fund rating, Infrastructure sector
rating, Project finance rating and Insurance sector rating,

Benefit Comprehensive ratings offered through a transparent rating system.

The ICRA rating system includes symbols that represent the ability of a corporate entity to
Rating scale service its debt obligations in a timely manner. The rating symbols vary with the financial
instruments considered.
 CARE – Credit Analysis & Research Limited
Year of
1993
Establishment
Headquarters Mumbai, India

Offers a complete range of credit rating services that helps investors to make informed decisions and
companies to raise capital. The company offers its credit rating and grading services in the following areas:
Main Objective
Debt ratings, Bank loan ratings, Issuer ratings, Corporate governance, Recovery ratings, Financial sector,
and Infrastructure ratings.

Benefit All services adhere to international quality standards thus ensuring maximum reliability.

CARE offers two different categories of bank loan ratings, one for long-term debt instruments and the
other for short-term debt instruments.
1. The short-term debt ratings are as follows and mentioned in the descending order of safety level for
servicing loans appropriately.
Rating scale
CARE AAA, CARE AA, CARE A, CARE BBB, CARE BB, CARE B, CARE C, CARE D.
2. The long-term debt ratings are as follows and mentioned in the descending order of safety level for
servicing loans appropriately.
CARE A1, CARE A2, CARE A3, CARE A4 and CARE D.
 ONICRA – Onida Individual Credit Rating
Agency of India
Year of Establishment 1993

Headquarters Mumbai, India

ONICRA credit assessment and scoring services for both individuals and businesses and is also a
reliable employee background screening company. ONICRA also offers risk assessment reports and
Main Objective analytical solutions for individuals, MSME’s as well as for well-established corporate
organizations. ONICRA grades the players in the education, healthcare and solar industries and
provides a detailed assessment of each of the APMC.

Offers a holistic view of an individual or an entity and thus allows lenders and service providers to
Benefit
make value-based decisions.

Ratings Credit ratings for MSME’s are based on two factors: financial strength and performance capability.
 5 C’s of Credit

• https:/www.investopedia.com/terms/f/five-c-credit.asp
 Assessment of Creditworthiness of a
Propective Customer/Borrower
• Creditworthiness is a measure of how deserving a loan applicant is to get a loan sanctioned
in his favor.
• In other words, it is an assessment of the likelihood that a borrower will default on their
debt obligations.
• It is based upon factors, such as for their history of repayment and their credit score.
• The C’s of Creditworthiness indicates the characteristic or features of creditworthiness.
• C of Creditworthiness is;
• Character
 C of Creditworthiness
1. Character –
Responsibility, truthfulness, serious purpose, and serious intention to repay the loan amount.
The loan officer must determine that the borrower has a responsible attitude toward using
borrowed funds, is truthful in answering questions, and will make every effort to repay what is
owed.
2. Capacity -
The loan officer must be sure that the customer has the authority to request a loan and the
legal standing to sign a binding loan agreement, this customer characteristic is known as the
capacity to borrow money.
• Capital
• Capital represents the general financial position of the potential borrower’s
firm with special emphasis on tangible net worth and profitability, which
indicates the ability to generate funds continuously over time.
• The net worth figure in the business enterprise is the key factor that governs
the amount of credit that would be made available to the borrower.
• Collateral
• In assessing the collateral aspect of a loan request, the loan officer must ask, Does
the borrower possess adequate net worth or own enough quality assets to provide
adequate support for the loan.
• The loan officer is particularly sensitive to such features as the age, condition, and
degree of specialization of the borrower’s assets.
• Technology plays an important role here as well. If the borrower’s assets are
technologically obsolete, they will have limited value as collateral because of the
difficulty of finding a buyer for those assets should the borrower’s income falter.
• Conditions
• The loan officer and credit analyst must be aware of recent trends in the borrower’s line of
work or industry’ and how changing economic conditions might affect the loan.
• A loan look very good on paper, only to have its value eroded by declining sales or income
in a recession or by high-interest rates occasioned by inflation.
• Control
• The last factor in assessing a borrower’s creditworthiness status is control.
• This factor centers on such questions as to whether changes in law and regulation could
adversely affect the borrower and whether the loan request meets the lender’s and the
regulatory authorities’ standards for loan quality.
 Balance Sheet of a Bank
• Balance sheet of a bank, records the assets, liabilities and net worth for a particular period of time.
• The properties or products which are owned by the bank are known as the Assets.
• The obligations which are to be obliged by the Bank in upcoming years are known as the
Liabilities.
• The difference of assets and liabilities is known as the Bank’s Net Worth.
• According to section 29 of the Banking Regulation Act, 1949, every banking company is required
to prepare with reference to that year, a balance sheet and a profit and loss account as on last
working day of the year in the Form A and Form B respectively.
• In complete the balance sheet is categorised into 3 sections are 1. Capital and Liabilities 2. Assets 3.
Contingent Liabilities
 Liabilities Side
• Liabilities are both the bank’s borrowings and Deposits made by the customers.
• Capital –
• Authorized Capital – The highest amount of Capital which can be acquired by the bank as
per acceptable terms of Memorandum of Association is called Authorized Capital. This
Capital is not issued but a part of it is issued for subscription to the Public.
• Issued Capital – The issued part of authorized capital presented to the Public for
subscription is known as Issued Capital
• Subscribed Capital – The Part of issued capital applied by Public is known as the Subscribed
Capital
• Called –up Capital – When shareholders actually pay the needed amount for
that part of capital for its subscription, such capital is known as Called-up
Capital.
• Paid -Up Capital – The actual amount of money received by Bank from their
shareholder is known as the Paid up Capital.
 Reserves and Surplus
• Bank is bound to reply the customer's deposit on their demand; hence for
meeting such necessity bank needs to maintain reserves.
• As per the Banking Regulation Act, 1949 of India, Section 17, every bank is
bound to transfer 20% of the net profit in the reserves fund.
 Balances with Banks and Money at Call and
Short Notice
• This appears as the second component of the assets in balance sheet.
• Money at Call – it is redeemed at the notice of 24 hours
• Short Notice – it is redeemed at the notice of 7 Days
Unit 2. Negotiable
Instrument
Banking & Finance
By
Prof. Swati Bhalerao
• Negotiable Instruments
• 1 Definition, meaning and characteristics of Promissory note, Bill of
Exchange and Cheque .
• 2 Types of Cheques- Bearer, Order and Crossed .
• 3 Types of Crossing- General and Special.
• 4. Dishonour of cheque
 Introduction
• Negotiable Instrument Is that document which contains a promise by one person
to pay a specific amount to another certain person.
• In simple word, It is a written promise to pay a certain amount by the borrower to
the lender of money or services.
• When the seller sold goods on credit to another person, he has a fear of non-
payment of his due, in this case, negotiable instruments provide the guarantee to
the seller for receipt of payment.
• Negotiable Instruments (Amendment) Bill, 2017 - Aims to amend the Negotiable
Instruments Act, 1881
 Characteristics of Negotiable Instruments

1. It must be a written document

2. It must be an unconditional promise to pay a stated fixed amount of
money
3. It must be payable to order or to bearer
4. It must be payable on demand or at a definite time
5. It must be signed by the maker or the drawer
6. It must be freely transferable from one party to another party
 Type of Negotiable Instrument: –
• There are following three type of Negotiable Instruments
• Promissory Note
• Bill of Exchange
• Cheque
 Promissory Note: –
• A promissory note is an instrument that contains the written and signed
promise by the maker(debtor) to pay a certain amount to the creditor on the
specific date or on demand.
• “A Promissory Note is an writing (not being a bank note or currency note),
containing an unconditional undertaking, signed by the maker to pay a
certain sum of money only to or to the order of a certain person or the
bearer of the instrument”.
• -Section 4 of India’s Negotiable Instruments Act, 1881
 The feature of the Promissory Note
• :–
• It is in writing.
• An unconditional promise to pay a certain sum of an amount.
• An amount should be described in it.
• It must be signed by the maker or issuer.
• The document must be dated and properly stamped.
• The amount must be payable to either a certain person or on his/her behalf.
• It clearly mentions the date of payment.
• Promissory notes are negotiable instruments that involve two main parties:
the Drawer (also called the maker, debtor or payor) and the Drawee (bearer,
Creditor or Payee). The drawer makes the promissory note and promises to
pay unconditionally to the drawee a certain sum of money on a specific date.
The drawee is the person in whose favour the promissory note is drawn.
• In a promissory note, the payor is the one who makes the instrument.
A customer for example can draw a note and direct it to a supplier,
promising to pay him a certain sum of money on a specific date. Even if
promissory notes are often issued as result of a business transaction, this
must not be the case. In certain countries, individuals draw promissory notes
on special occasions like weddings.
• Promissory notes are not presented for acceptation, since they are promises
to pay issued by payors. They are just presented for payment at due date.
• Two parties involved in a promissory note
 Bills of Exchange
• A bill of exchange is an instrument that contains a promise to pay some amount of money
to a certain person after a certain period of time. It is generally drawn by the creditor(maker
or drawer) on his debtor(acceptor or drawee) and debtor gives the acceptance to that he will
pay the money to the maker(drawer) after some certain period or specific date. It should be
accepted by the person to whom it is created or by another person on his/her behalf.
Without acceptance, this document doesn’t have any value.
• Definition: –
• “A bill of exchange is an instrument in writing containing an unconditional order, signed by
the maker, directing a certain person to pay a certain sum of money only to, or to the order
of, a certain person, or to the bearer of the instrument.”
-Section 5 of India’s Negotiable Instruments Act, 1881
• Bills of exchange originated as a method of settling transactions in international trade. They
are negotiable instruments that involve three parties:
• The Drawer: The person who makes the bill and gives the order to pay a certain sum of
money
• The Drawee: The person who accepts the bill of exchange, or who is directed to pay a
certain sum.
• The Payee: The person receiving payment is called the payee. He can be a designated
person or the drawer himself.
• The drawer is the party that obliges the drawee to pay the payee. The drawer and the payee
are generally the same entity, unless the drawer transfers the bill of exchange to a third-party
payee.

• Contrary to promissory notes that are made by debtors, Bills of exchange are issued by the
creditors. Bills of exchange must therefore be presented for acceptation. Only accepted bills
of exchange are valid and the maturity date is determined after acceptation.
• Main parties involved in a bill of exchange
 The feature of the Bill of Exchange
1. It should be in writing.
2. An order to make payment on the specific date or after a certain period.
3. An unconditional order of payment, it does not contain any condition of payment.
4. A certain amount should be described in it.
5. It must be signed by both parties Drawer (maker) and Drawee.
6. The amount must be payable to either a certain person or on his/her behalf.
7. It should be paid on the date of maturity or on demand or on mutual understanding.
 Cheque
• The cheque is an instrument in writing which contains an unconditional instruction to a
banker (by a person who has already deposit the amount with a banker), to pay a specific
amount to a certain person or to the order of the certain person or to the bearer of the
instrument only on the demand.
• The cheque is the most used type of negotiable instrument. It is simple and easy to use. It is
the piece of paper on which the same of the payer is already mention and he will write the
name of the receiver of the payment and amount to be paid and signed it. The receiver will
receive cash from the cheque by encashing it from the bank.
• “A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a
cheque in the electronic form.”
-Section 6 of India’s Negotiable Instruments Act, 1881
• The account holder requests his bank to debit his account and draw
the cheque on his behalf. The bank issues the cheque and hands it over to
his customer, the real drawer. The drawer delivers the cheque to the payee.
And finally the payee presents the cheque to the bank for payment.
• Contrary to promissory notes and bills of exchange that are paid in the
future, cheques are paid on demand when they are presented. Therefore
cheques cannot be used as credit instruments. Cheques serve only as
payment instruments.
• Parties involved in a cheque
 Bearer cheques
• It is also known as open cheque or uncrossed cheque. This cheque can be transferred by
mere delivery and needs no endorsement.

• The cheque is negotiable from the date of issue up to three months. It turns stale after the
completion of three months and needs to be revalidated before presenting to the bank.
• However, these types of cheques are very risky and once misplaced can lead to the loss of
amount stated in the cheque.
 Self-Cheques

• It comes under bearer cheque where instead of writing the name, the account holder
writes “self ” to receive money physically from the branch where he holds the
account.
 Account Payee Cheques
• A bearer cheque becomes an account payee cheque by writing “Account Payee” or
crossing it twice with two parallel lines on the left-hand side top corner.

• The amount will be transferred to the account of the person specified on the
cheque.
• It is considered the safest types of cheques and is also known as a crossed cheque.
 Post dated cheque
• It is a type of a crossed or accounts payee cheque but it is post-dated to meet
the obligation at a future date. It is valid from the date of the issue up to
three months.
 Crossing of Cheques

• Crossing a cheque refers to drawing two parallel transverse lines on the cheque with or
without additional words like “& CO.” or “Account Payee” or “Not Negotiable” between the lines.
• By using a crossed cheque, one can make sure that the amount specified cannot be en-cashed but can
only be credited to the payee’s bank account.
• Crossing of Cheque is recognized under The Negotiable Instruments Act, 1881.
• The crossing of cheque had developed gradually as a means of protection against misusing of cheques.
• Crossing of cheque provides instruction to the paying banker to pay the amount through
banker only, and not directly to the payee or holder presenting it at the counter. This ensures that
payment is made to the actual payee.
• Video - https://www.youtube.com/watch?v=hotkHSggsng
• https://www.youtube.com/watch?v=3oyryG22H4I - Hindi
 Types of Crossing of Cheques
• Crossing of Cheques can be done in two ways: 1. General Crossing 2. Special Crossing
• General Crossing
• Section 123 of The Negotiable Instruments Act, 1881 defines General Crossing as:
• “Where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof,
between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the
words “not negotiable”, that addition shall be deemed a crossing, and the cheque shall be deemed to be
crossed generally”.
• Two parallel transverse lines are drawn on the face of the cheque, generally, on the top left corner of the
cheque
• Holder or payee cannot get the payment at the counter but through the bank only
• Including the name of the banker is not essential, hence, the amount can be encashed by any banker
• The words, “& Company”, “Not Negotiable”, “A/C. Payee” may or may not be written
• It can be converted into Special Crossing
• Special Crossing
• Section 124 of The Negotiable Instruments Act, 1881 defines Special Crossing as:
• “Where a cheque bears across its face an addition of the name of a banker, either with or
without the words “not negotiable”, that in addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed specially and to be crossed to that banker.”
• Also known as Restricted Crossing
• Two transverse lines are not necessary to be drawn
• Name of the banker is added across the face of the cheque
• The Name of the Banker may or may not carry the abbreviated word, ‘& Co.’, ‘Account
payee’ or ‘Not Negotiable’
• Payment can be made only through the bank mentioned in the Crossing. The Banker,
mentioned in the Crossing, may appoint another banker as his agent to collect such cheques.
thus, making it safer than ‘generally’ crossed cheques
• Specially Crossed Cheques can never be converted to General Crossing.
 Dishonour of cheque
• This article on “Dishonour of Cheque – Section 138 of the Negotiable
instruments Act” gives a comprehensive overview about all aspects of
cheque bouncing and Cheque Dishonour as per laws in India
• A person suffers a lot if a cheque issued in his favour is dishonoured due to
the insufficiency of funds in the account of the drawer of the cheque.
Unit 3. Endorsement
Banking and Finance
By
Prof. Swati Bhalerao
 Syllabus
• Endorsement 08
• 1 Definition and meaning of endorsement
• 2 Types of endorsement- Blank, Full or Special, Restrictive, Partial,
Conditional, Sans Recourse, Facultative.
• 3 Effects of endorsement.
 What is Endorsement?
• A signature authorizing the legal transfer of a negotiable instrument between parties
is an endorsement.
• The act of a person who is holder of a negotiable instrument in signing his or her
name on the back of that instrument, thereby transferring title or ownership. An
endorsement may be made if favour of another individual or legal entity, resulting
in a transfer of the property to that other individual o legal entity.
• Endorsement means signing at the back of the instrument for the purpose of
negotiation. The act of the signing a cheque, for the purpose of transferring to the
someone else, is called the endorsement of Cheque. Section 15 of the Negotiable
Instrument Act 1881 defines endorsement.
 Definition
• Section 15 of the Negotiable Instrument Act 1881 defines endorsement -

• “when the maker or holder of a negotiable instrument signs the same, otherwise
than as such maker, for the purpose of negotiation, on the back or face thereof or
on a slip of paper ..... annexed thereto, or so signs for the same purpose a stamped
paper intended to be completed as a negotiable instrument ..... , he is said to
endorse the same, and is called the 'endorser’”
• Video - https://www.youtube.com/watch?v=MpIAbm8hY7E
 Types of endorsement

1. Blank endorsement,
2. Full or Special endorsement,
3. Restrictive endorsement,
4. Partial endorsement,
5. Conditional endorsement,
6. Sans Recourse endorsement

• Video - https://www.youtube.com/watch?v=9ACbabKwAG0 Explanation in Hindi

• Blank Endorsement (Section 16(1) of NI Act): If the endorser sign his
name only without adding any words or direction, the endorsement is said to
be blank. This makes the instrument payable to bearer as per section 54 of
NI Act.
• Full Endorsement: Where the endorser signs his name and adds the name
of endorsee specifically, the endorsement is called full. Paying bank gets valid
discharge if the endorsement is regular. Example: “Pay to Mr. Bahubali or
Order”
• Restrictive Endorsement (Section 50 of NI Act): When the endorser
add words like ‘Pay the Contents to Kattappa only’. The endorsee cannot endorse
the instrument further.

• Partial Endorsement (Section 56 of NI Act.): When an endorser transfers

only a part of the amount of the negotiable instrument to the endorsee. Its
not a valid endorsement for the purpose of negotiation and such instrument
should not be paid.
• Conditional Endorsement: An endorsement which stipulates some condition is
called conditional endorsement. Example – ‘Pay to Mr Mahendra Bahubali when he visits
Mahishmati ‘. The fulfillment of condition is binding between endorser and endorsee
only. The paying bank is not bound to verify the fulfillment of such conditions.

• Sans Recourse Endorsement: By adding the words like “Pay Bhallaladeva or order
without recourse to me” the endorser excludes his liability. It is caution to endorsee.
• Video - https://www.youtube.com/watch?v=tvjMqX2s6h8
 Effects of Endorsement
• The property in instrument is transferred from endorser to endorsee.

• The endorsee gets right to negotiate the instrument further.

• The endorsee get the right to sue in his own name to all other parties.
Technology In Banking
BANKING AND Finance
By
Prof. Swati Bhalerao
 Syllabus
• Technology in Banking
• Role and Uses of Technology in Banking
• 1 Need and importance of technology in banking
• 2 ATM, Cash Deposit Machine, Cheque Deposit machine, Passbook printing machine, Note
and counting Device, Fake Currency Detector, Credit card, Debit card – Personal
Identification Number (PIN) – Use and safety, Mobile Banking Applications, BHIM(Bharat
Interface for Money)/ UPI (Unified Payments Interface), Tele Banking- Net banking.
• SWIFT (Society for Worldwide Inter- bank Financial Telecommunication),
• Concept of Core Banking Solution
• Online enquiry and update facility, Home Banking – Corporate and personal.
• Precautions in using Technology in Banking
• Current Trends in Banking Technology
 Role and Uses of Technology in Banking
• Increase in Efficiency
• Handling of Information
• Cost Reduction
• Accuracy
• Customer Service
• Easy Communication
• 24/7 digital support
• Video -https://www.youtube.com/watch?v=TJyaMN0-jzY
• The technology is of great use in banking sector, it have changed the banking industry from
paper and branch based banks to digitized and network services.
• Means it has played a very big role in reducing fraud in banks which protects it’s clients.
• It improved various services like online trading, online bill payment, shop online …etc.
• Customers benefits: ATM cards, cash deposit machines, online banking, mobile banking
…etc.
• With the help of technology banks are able to reach out to more customers and provide
better services to them.
• It helps banks function in an organized way, that means it,s used in all the banks systems.
• Technology in the banking sector has always existed and this is because banks have
enormously relied on computers to record transactions. It has also helped in gaining quick
and easy access to confidential information. The Importance of technology in banking
sector can be seen with the launch of internet banking, ATM’s, mobile banking, debit and
credit cards.
Impact of Technology on Banking Sector
• Fewer Bank Visits:
A few years ago when an individual wanted to find out as to how much money was still
available in their bank accounts, they had to spend a lot of time driving to their
respective banks. Upon reaching there they had to request one of the staff of the bank
to check the ledger and give them detailed information about the available balance in
their accounts.
However, with the use of technology in banking it has become so easy that without
paying a visit to the bank; an individual can track their account details from any place
and anytime, too hassle-free.
 Quick Transactions:
• Money transactions have become so quick and easy that any type of bills can be
paid without fuss, unlike the earlier days when a cheque had to be presented in order
to make a purchase and there would be a long period of wait before receiving the
product because the bank had to first clear the cheque.
• But with the introduction of credit and debit cards, online banking has become so
easy to purchase products and pay bills.
• It almost processes instantly and without any delay the amount debited is
immediately reflected on the online bank statement. There is also another amazing
feature provided for online banking to pay bills, and that is by giving a standing
instruction to the bank for the payments that need to go out every month. So, the
bank will automatically transfer funds from your debit account without being
notified every month.
 Customer Service:
• Chatbots are another great service that has made a great impact in the revolution of the
banking and finance industry.
• Chatbots are automated chat programs that use artificial intelligence to provide efficient
customer service 24/7.
• Through chatbots, customers are now able to get their complete transaction details online
without having to interact with a human.
• With the help of the chatbots, banks are able to understand each customer’s requirements
and then offer customers with additional services that they are eligible for, or reward their
loyal customers.
• Erica, by Bank of America. ...
• Amex bot, by American Express. ...
• EVA, by HDFC Bank. ...
 Most Interesting Chatbots in Banking
• With consumer expectations increasing, the use of artificial intelligence, machine
learning and chatbots in banking is also increasing. Banks and credit unions
worldwide are testing new applications and deploying new solutions to improve the
overall digital customer experience.
• Cost savings.
• Ease of use.
• Financial advice.
• 24/7 digital support.
 Detecting Fraud:
• Prior to the introduction of technology in the banking sector, it was very difficult to
detect fraudulent transactions.
• Then years later when technology was used, the system would help in detecting the
fraud transaction, however, the staff at the bank would have the full authority to
confirm if there were any fraudulent activity or not.
• But now with invention of AI or Artificial intelligence in the banking and finance
industry, it has become very easy to detect any fraudulent transactions, and this is
because AI has an enormous ability to detect and minimize any fraud transactions.
 Automated Teller Machine (ATM):
• ATM is an electronic machine, which is operated by the customer himself to make
deposits, withdrawals and other financial transactions. ATM is a step in
improvement in customer service. ATM facility is available to the customer 24 hours
a day.
• A computerized machine that provides the customers of banks the facility of
accessing their account for dispensing cash and to carry out other financial & non-
financial transactions Biometric ATMs: a secure transaction through an ATM with
the PIN being the finger prints of the card holder or his eye retina scan etc. Mobile
ATMs: the extension of banking facilities through an ATM enclosed in a well
protected van.
• The customer is issued an ATM card. This is a plastic card, which bears the
customer’s name. This card is magnetically coded and can be read by this machine.
Each cardholder is provided with a secret personal identification number (PIN).
• When the customer wants to use the card, he has to insert his plastic card in the slot
of the machine. After the card is a recognized by the machine, the customer enters
his personal identification number. After establishing the authentication of the
customers, the ATM follows the customer to enter the amount to be withdrawn by
him. After processing that transaction and finding sufficient balances in his account,
the output slot of ATM give the required cash to him. When the transaction is
completed, the ATM ejects the customer’s card
• almost all ATMs allow you
• to withdraw money, and
• many allow you to make deposits. At some ATMs,
• you can print a statement (a record of your account activity or transactions);
• check your account balances (the amount of money in your accounts right
now);
• transfer money between your accounts; and even purchase stamps.
 Cash Deposit Machine
• The Cash Deposit Machine, better known as CDM is an ATM like machine that allows you
to deposit cash directly into your account using the ATM cum debit card. You can use this
machine to instantly credit your account without visiting the branch. The transaction receipt
also gives you your updated account balance. Some of the salient features of this product
are:
• Instant credit of cash deposit into your own account
• Quick and convenient way to deposit cash
• Paperless transaction
• The per transaction limit is Rs.49,900/- for Card less deposit and through Debit Cards Rs.
2.00 lacs (subject to account has PAN number).
• You can also deposit cash in your PPF, RD and Loan accounts
• Up to 200 currency notes can be deposited in a single transaction
• The CDM only accepts denominations of Rs.100/-, Rs.500/- & Rs.2000/-
• How to Deposit Cash in Cash Deposit Machine?
• Insert debit card and enter PIN for validation.
• Select account type (Saving or Current).
• Place the money in the cash deposit slot and click “Continue”.
• Machine will sort the cash and will show denomination-wise amount to be
deposited.
• If correct, click “Deposit”.
• Amount will be deposited.
• Receipt will be generated.
 Cheque Deposit Machine
• To increase banking automation and provide more comfort to customers, Bank has installed
CDMs at selected branch. The CDMs are self operated without intervention of bank staff.
The machines accept the cheques and also provides additional facility of account name
/number verification for credit to the correct account. CDMs have gained popularity as
cheques can be deposited even after bank working hours.
• Features & Benefits
• Deposit your cheque through the simple and fast CDM installed in the branch
• Immediate receipt
• No need to fill cheque deposit slips
• No need to stand in long queues
 Passbook printing machine
• Simply open the passbook to the printing page and insert it into the printer.
With the page turning option, the Passbook Entry Machine will
automatically find the page and last line that was printed.
 Note and Coin Counting Device
• A currency-counting machine is a machine that counts money—either
stacks of banknotes or loose collections of coins. Counters may be purely
mechanical or use electronic components. The machines typically provide a
total count of all money, or count off specific batch sizes for wrapping and
storage.
• Currency counters are commonly used in vending machines to determine
what amount of money has been deposited by customers.
 Fake Currency Detector
• Designed high sensitive microprocessor and latest software, this machine is highly
efficient to detect the fake currency notes of any dominations and of any country.
• As we know, in India, Ministry Of Finance and RBI(Reserve Bank Of India are
authorized to issue currency notes and coins. But corrupt people take the advantage
of high printing and scanning technologies to print fake notes by using latest
hardware tools and techniques.
• Fake currency detection means finding the fake currency from the original one.
• Generally, currency recognition system is mostly used in banks, business firms,
shopping malls, railway stations, government sector, organizations etc
 Credit Card
• a small plastic card issued by a bank, allowing the holder to purchase goods
or services on credit.
• A credit card is a card which allows people to buy items without cash. ...
Payment using a credit card is one of the most common methods of
electronic payment. Credit cards are usually small plastic cards with a
unique number attached to an account.
 Debit Card
• a card allowing the holder to transfer money electronically from their bank
account when making a purchase.
• A debit card (also known as a bank card, plastic card or check card) is
a plastic payment card that can be used instead of cash when making
purchases. It is similar to a credit card, but unlike a credit card, the money is
immediately transferred directly from the cardholder's bank account when
performing any transaction.
 Electronic Fund Transfer
• Electronic funds transfer (EFT) are electronic transfer of money from one
bank account to another, either within a single financial institution or across
multiple institutions, via computer-based systems, without the direct intervention of
bank staff.
• EFT is a system whereby anyone who wants to make payment to another person /
company etc. can approach his bank and make cash payment or give instructions /
authorization to transfer funds directly from his own account to the bank account
of the receiver / beneficiary. Electronic Fund Transfer at Point Of Sale (EFTPOS)
is a payment system for making purchases through debit card at merchant
establishments.
 Society for Worldwide Inter-bank Financial
Telecommunications (SWIFT)
• SWIFT, as a co-operative society was formed in May 1973 with 239
participating banks from 15 countries with its headquarters at Brussels.
It started functioning in May 1977. RBI and 27 other public sector
banks as well as 8 foreign banks in India have obtained the membership
of the SWIFT. SWIFT provides have rapid, secure, reliable and cost
effective mode of transmitting the financial messages worldwide. At
present more than 3000 banks are the members of the network. To
cater to the growth in messages, SWIFT was upgrade in the 80s and
this version is called SWIFT-II. Banks in India are hooked to SWIFT-II
system.
• SWIFT is a method of the sophisticated message transmission of international
repute. This is highly cost effective, reliable and safe means of fund transfer.
• This network also facilitates the transfer of messages relating to fixed deposit,
interest payment, debit-credit statements, foreign exchange etc.
• This service is available throughout the year, 24 hours a day.
• This system ensure against any loss of mutilation against transmission.
• It serves almost all financial institution and selected range of other users.
• It is clear from the above benefit of SWIFT that it is very beneficial in effective
customer service. SWIFT has extended its range to users like brokers, trust and other
agents.
 Mobile Banking Applications
• Mobile banking is a service provided by a bank or other financial institution that
allows its customers to conduct financial transactions remotely using a mobile
device such as a smartphone or tablet.
• Unlike the related internet banking it uses software, usually called an app, provided
by the financial institution for the purpose
• Mobile banking is usually available on a 24-hour basis.
• Transactions through mobile banking depend on the features of the mobile banking
app provided and typically includes obtaining account balances and lists of latest
transactions, electronic bill payments, remote check deposits, P2P payments,
and funds transfers between a customer's or another's accounts
 BHIM (Bharat Interface for Money)
• BHIM (Bharat Interface for Money) is a mobile payment App developed by the National
Payments Corporation of India (NPCI), based on the Unified Payments Interface (UPI).
Named after B. R. Ambedkar and launched on 30 December 2016,[4] it is intended to
facilitate e-payments directly through banks as part of the 2016 Indian banknote
demonetisation and drive towards cashless transactions.
• BHIM (Bharat Interface for Money) is a UPI enabled initiative to facilitate safe, easy &
instant digital payments through your mobile phone.
• Unified Payments Interface (UPI) is an instant real-time payment system developed
by National Payments Corporation of India facilitating inter-bank transactions. The
interface is regulated by the Reserve Bank of India and works by instantly transferring funds
between two bank accounts on a mobile platform.
• The app supports all Indian banks which use UPI, which is built over the Immediate
Payment Service (IMPS) infrastructure and allows the user to instantly transfer
money between bank accounts of any two parties. It can be used on all mobile
devices.
• Before you register on the app, please ensure the following:
• You have linked your Mobile Number with your Bank Account and the same is used
for accessing BHIM.
• Your phone should have an active SIM linked to your Bank Account.
In case of Dual SIM, kindly ensure that you’ve selected the SIM card linked to your
Bank Account.

You have a valid Debit Card for your Bank Account. This is required to generate
UPI PIN.
• More about BHIM:-

• Transaction limit is Rs. 40,000 per transaction and per day

(Please note that your Bank’s Transaction Limit may vary from BHIM’s
limit.)
 Virtual products
• e-cash/ e-money: Payment for goods or services by transmitting a signal
between computers. e-Wallet: Software storing information (passwords,
payment details) necessary for e-commerce transactions.
 Electronic Clearing System (ECS)
• Under ECS (Credit) one entity / company would make payments from its
bank account to a number of recipients by direct credit to their bank
accounts ECS (Debit): is mostly used by utility companies like telephone
companies, electricity companies etc. to receive the bill payments directly
from the bank account of their customers
 Core Banking Solution

• Today Banking as a business has grown tremendously and transformed itself from only a deposits taking
and loan providing system to an institution which provides an entire gamut of products and services
under a wide umbrella. All such activities commenced by a bank is called Core Banking.
• As per pure definition Core banking refers to a centralized system established by a bank which allows its
customers to conduct their business irrespective of the bank’s branch.
• CORE is an acronym for "Centralized Online Real-time Exchange", thus the bank’s branches can access
applications from centralized data centers.

• Video - https://www.youtube.com/watch?v=Q118wAXkelM
• https://www.youtube.com/watch?v=akYn80uYtdw
• https://www.forbes.com/sites/bernardmarr/2019/11/08/the-7-biggest-technology-trends-to-disrupt-
banking--financial-services-in-2020/#2e165e3b2c42