Modern Banking Unit 1

MODERN BANKING
SEMESTER – III
SEC-I B.Com. 2022 – 2023 onwards
Course Code:
MODERN BANKING
M22UCMS301
UNIT – I: Banker and Customer Relationship

Introduction to banking - Meaning and Definition of Banking– Structure of Indian
Banks - Classification of Banks -Functions of Commercial Banks - Meaning and Definition of
Banker and Customer – General and Special Relationship between the Banker and the
Customer– Obligations of a Banker -Rights of a Banker - Know your Customer (KYC)
guidelines.
UNIT – II: Customer’s Accounts with the Banker

Customer’s Accounts with the Banker – Fixed deposit Accounts – Savings bank
accounts – Recurring deposit accounts – Current accounts – Special types of Banker’s
customers.
UNIT – III: Reserve Bank of India

Reserve Bank of India - Origin of RBI – Structure of RBI – Preamble of RBI -
Functions of RBI - Credit control -Need for Credit Control – Methods of Credit Control -
Qualitative and Quantitative - CRR, Bank Rate, SLR, Repo Rate, Reverse Repo Rate and Other
Credit Control Methods.
UNIT – IV: Negotiable Instruments Act, 1881

Negotiable Instruments Act, 1881 – Definition, features and types of negotiable
instruments –Endorsements – Meaning, Definition, Legal Provisions and kinds of
endorsements – crossing of cheques – Types of crossing and their significance.
UNIT – V: E-Banking Services
E-Banking-Meaning- Various E-Banking Services- ATM, Debit Card, Credit Card,
RTGS, IMPS, EFT, NEFT, EFTPOs, Mobile Banking, Tele Banking, Home Banking, Internet
Banking-Gold Banking- Advantages and Disadvantages of E-Banking- Digital only Banks -
Unified Payment Interface (UPI)- Demat account – E-Cheque.
TEXT BOOKS:
S. Year of
Title of the Book Author Publisher
No. Publication
Banking Law and
1. P. N. Varshney Sultan Chand & Sons 2019
Practice
2. Banking Theory, Law Prof. E. Gordon Himalaya Publishing 2015
& Dr. K.
and Practice House, Mumbai
Natarajan
REFERENCE BOOKS:
S. Year of
Title of the Book Author Publisher
No. Publication
Banking and
1. S. Sankaran Margham Publication 2018
International trade
Himalaya Publishing
2. Indian Banking Ashok Desai 2016
House
INTRODUCTION
Commercial banks are the oldest banking institutions in the organised sector. They constitute
the
predominant segment of the banking system in India. They cater to the needs of trade,
commerce,
industries, agriculture, small business, transport and other activities with a wide network of
branches
throughout the country. Commercial banks command a major share in the total banking
operations.
MEANING AND DEFINITIONS

Meaning
Commercial banks are joint stock companies dealing in money and credit. A commercial bank
is
nothing but a financial institution that accepts chequeable deposits of money from the public
and also
uses the money with it for lending. The most distinctive function of a commercial bank is that it
accepts deposits called demand deposits from the public which are chequeable, i.e.,
withdrawable by
means of cheques. Acceptance of deposits alone, however, does not give it the status of a bank.
Its
another essential function is to make use of these deposits for lending to others.
Commercial banks usually give short-term loans and advances. They occupy a dominant place
in
the money market. They form the biggest component in the banking structure of any country.
The
commercial banks are governed by the Indian Banking Regulation Act, 1949 with up-to-date
amendments.
Under the law, commercial banks are not supposed to do any other business except banking. In
modern
times, they undertake a number of subsidiary functions in order to satisfy the requirements of
millions
of their customers.
Definitions
According to R.S. Sayers, a bank is defined as “an institution whose debts (bank deposits) are
widely accepted in settlement of other peoples’ debts to each other”.
In the words of Crowther, “The banker’s business is then, to take debts of other people, to offer
his own in exchange and thereby to create money”. He further says that a bank “collects money
from
those who have it to spare or who are saving it out of their incomes and it lends this money to
those
who require it”.
Structure of the Indian Banking System

Scheduled, Non-Scheduled Banks and Development Banks
Reserve Bank of India is the central bank of the country and regulates the banking system of
India. The structure of the banking system of India can be broadly divided into scheduled
banks, non-scheduled banks and development banks.
Banks that are included in the second schedule of the Reserve Bank of India Act, 1934 are
considered to be scheduled banks.
All scheduled banks enjoy the following facilities:
 Such a bank becomes eligible for debts/loans on bank rate from the RBI
 Such a bank automatically acquires the membership of a clearing house.
All banks which are not included in the second section of the Reserve Bank of India Act, 1934
are Non-scheduled Banks. They are not eligible to borrow from the RBI for normal banking
purposes except for emergencies.
Scheduled banks are further divided into commercial and cooperative banks.
Commercial Banks
The institutions that accept deposits from the general public and advance loans with the
purpose of earning profits are known as Commercial Banks.
Commercial banks can be broadly divided into public sector, private sector, foreign banks and
RRBs.
 In Public Sector Banks the majority stake is held by the government. After the recent
amalgamation of smaller banks with larger banks, there are 12 public sector banks in
India as of now. An example of Public Sector Bank is State Bank of India.
 Private Sector Banks are banks where the major stakes in the equity are owned by
private stakeholders or business houses. A few major private sector banks in India are
HDFC Bank, Kotak Mahindra Bank, ICICI Bank etc.
 A Foreign Bank is a bank that has its headquarters outside the country but runs its
offices as a private entity at any other location outside the country. Such banks are
under an obligation to operate under the regulations provided by the central bank of the
country as well as the rule prescribed by the parent organization located outside India.
An example of Foreign Bank in India is Citi Bank.
 Regional Rural Banks were established under the Regional Rural Banks Ordinance,
1975 with the aim of ensuring sufficient institutional credit for agriculture and other
rural sectors. The area of operation of RRBs is limited to the area notified by the
Government. RRBs are owned jointly by the Government of India, the State
Government and Sponsor Banks. An example of RRB in India is Arunachal Pradesh
Rural Bank.
Cooperative Banks
A Cooperative Bank is a financial entity that belongs to its members, who are also the owners
as well as the customers of their bank. They provide their members with numerous banking and
financial services. Cooperative banks are the primary supporters of agricultural activities, some
small-scale industries and self-employed workers. An example of a Cooperative Bank in India
is Mehsana Urban Co-operative Bank.
At the ground level, individuals come together to form a Credit Co-operative Society. The
individuals in the society include an association of borrowers and non-borrowers residing in a
particular locality and taking interest in the business affairs of one another. As membership is
practically open to all inhabitants of a locality, people of different status are brought together
into the common organization. All the societies in an area come together to form a Central Co-
operative Banks.
Cooperative banks are further divided into two categories - urban and rural.
 Rural cooperative Banks are either short-term or long-term.
o Short-term cooperative banks can be subdivided into State Co-operative Banks,
District Central Co-operative Banks, Primary Agricultural Credit Societies.
o Long-term banks are either State Cooperative Agriculture and Rural
Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural
Development Banks (PCARDBs).
 Urban Co-operative Banks (UCBs) refer to primary cooperative banks located in urban
and semi-urban areas.
Development Banks
Financial institutions that provide long-term credit in order to support capital-intensive
investments spread over a long period and yielding low rates of return with considerable social
benefits are known as Development Banks. The major development banks in India are;
Industrial Finance Corporation of India (IFCI Ltd), 1948, Industrial Development Bank of
India' (IDBI) 1964, Export-Import Banks of India (EXIM) 1982, Small Industries Development
Bank Of India (SIDBI) 1989, National Bank for Agriculture and Rural Development
(NABARD) 1982.
The banking system of a country has the capability to heavily influence the development of a
country’s economy. It is also instrumental in the development of rural and suburban regions of
a country as it provides capital for small businesses and helps them to grow their business. The
organized financial system comprises Commercial Banks, Regional Rural Banks (RRBs),
Urban Co-operative Banks (UCBs), Primary Agricultural Credit Societies (PACS) etc. caters to
the financial service requirement of the people. The initiatives taken by the Reserve Bank and
the Government of India in order to promote financial inclusion have considerably improved
the access to the formal financial institutions. Thus, the banking system of a country is very
significant not only for economic growth but also for promoting economic equality
Types of Banks in India

A bank can be defined as a financial institution that receives deposits and grants loans. The
three most common types of Banks in India include Retail banks, investment banks, and
corporate banks. The types of banks in India can be divided into the following categories –
Central, Commercial, Specialized, Local Area, Regional Rural Banks, Payments, Small
Finance, and Cooperative.
Types of Banks UPSC Notes
Although the primary function of banks remains the same, each type provides some specialized
features and additional functions that help us manage finances. The classification of banks in
India is demonstrated below:
 Payment banks
 Small Finance banks
 Specialized banks
 Local Area banks
 Regional Rural banks
 Commercial banks
 Cooperative banks
 Central banks
Classification of Banks
In India, all banks (be it RRB, Cooperative, or Commercial) are classified into the following
two types based on the Banking Regulation Act of 1949:
 Scheduled Banks – All the banks listed in the 2nd schedule of the RBI Act of 1934 are
Scheduled Banks. Such banks have passed the eligibility criteria for getting loans on
Bank rates from RB.
 Non-Scheduled Banks – The banks that are not listed in the 2nd schedule of the RBI
Act of 1934 are non-Scheduled Banks.
An elaborative difference Between Scheduled and Non Scheduled Banks can be analyzed
based on their loan, Cash Reserve Ratio, refinancing facility, currency storage facility, and so
on.
Functions of Banks in India
The functions of banking in India are almost the same. However, it differs in the types of deals
or the group of people in each type of bank. The common functions of the banks in India are
given as follows:
 It deals with the foreign exchange market;
 Provides locker facilities to the customers;
 Issues the draft;
 Fund transfer;
 Lending facility;
 Demand withdrawal facility;
 Accepts public deposits.
Need for Banking System in India
The role of different types of banks in India is to provide protection and faith to the country’s
economy. This system works in sequence with handling the movement of capital between
individuals and industries. The requirement of banks in India is for the following objectives:
 Withdrawals and deposits of money
 Providing Customer support
 Offer debit and credit cards
 Internet banking segments
 Payment of Bills
 Remittance of budgets
 Supplying loans
 Proposing various types of accounts.
Different Types of Banks in India
Banks deal with financial services like providing lockers, currency exchange, wealth
management, etc. Banking comprises mixed activities that can be performed through monetary
organizations that will take deposits from people and other entities. These institutions use these
funds to provide loans and invest them for profit.
Banking provides assistance to corporations and customers, such as offering loans, reviewing
statements, and important other services. Learn more details about the types of banks and their
importance in the banking system of India.
Central Bank in India
The central bank of India is the Reserve Bank of India (RBI). Central banks are the regulatory
body in a country that operates the country’s other banks. It acts as a bank of the government
that regulates and guides other banks in the country.
The central bank of a country can be considered the banker’s bank because it is responsible for
providing functioning assistance to all the other banks under the government’s supervision.
The major functions performed by this type of bank in India are as follows:
 It supervises the financial system of the country;
 It is responsible for implementing monetary policies;
 Central Bank of India issues currency;
 It guides other types of banks in India.
Commercial Banks in India
A commercial bank is a financial institution that performs the functions of accepting deposits
from the general public and giving loans for investment to earn profit. This type of bank in
India offers other financial services like ATM, Demand Draft, Certificates of Deposits, etc. as
well.
In India, commercial Banks are those scheduled and non-scheduled commercial banks that are
regulated under the Banking Regulation Act, of 1949. The Commercial Banks in India are
further segmented into three:
Public Banks in India
 The type of bank wherein Government or the central bank owns most of the stakes is
called a public sector bank.
 Nirmala Sitaraman, the Union Finance Minister of India announced the merger of 10
public sector banks (PSBs) with four better-performing anchor banks on 30th August
2019.
 Hence, with effect from 1st April 2020, India has 12 Public Sector banks.
Private Banks in India
 The banks in which a private organization/ individual/ bunch of people own a majority
of stakes are called private sector banks.
 India has a total of 21 private or commercial banks as of November 2020.
 Lakshmi Vilas Bank was an Indian private sector bank established in 1926 in
Karur, Tamil Nadu.
 On 27 November 2020, the bank was merged into the Indian subsidiary of DBS Bank.
Foreign Banks in India
 All those banks whose headquarters are present in foreign nations but have branches in
India are called foreign banks.
 The list of foreign banks in India comprises those banks that have their headquarters in
foreign countries and their branches in our country.
 At present, there are 45 foreign banks in India.
 Foreign banks are governed by the regulations of the RBI.
Cooperative Banks in India
Cooperative Banks in India are regulated by the state government’s actions. These banks allow
loans in the short term to the agricultural sector and for other similar activities.
These types of banks are responsible for providing concessional loans to promote social
welfare. There are three tiers of Cooperative banks in India:
 State level – Tier 1: It involves State Cooperative Banks owned by top management of
elected members of the state government. These banks are regulated and funded by
NABARD, the State Govt., and the Reserve Bank of India. The funded money is
distributed to the public as loans. There is a concessional CRR of 3% and an SLR of
25% applied to such banks.
 District level – Tier 2: It involves District/Central cooperative banks.
 Village level – Tier 3: It comprises the Primary Agriculture Cooperative banks.
Small Finance Banks in India
The Small Finance Banks provide financial assistance and loans to small farmers, micro
industries, and the unorganized sector of society. The central bank of India governs the
working of this type of bank. At present, there are 10 small finance banks in India.
Payments Banks in India
Payment banks in India are a newly introduced type of bank, conceptualized by the RBI. In
payment banks, an individual can deposit up to Rs.1,00,000/- in his account. However, the
individual is not allowed to apply for credit cards or loans under this account.
These types of banking allow debit cards, ATM cards, mobile banking, and online banking
options. Its functions are similar to any other bank, but without involving any credit risk. The
list of Payment banks in India is as follows.
Regional Rural Banks in India (RRB)
The Regional Rural Banks (RRB) was established in 1975, under the registration of the
Regional Rural Bank Act of 1976. This type of bank is a special commercial bank. It accounts
for providing concessional credit to the rural and agricultural sectors. The Regional Rural
banks in India are the joint ventures of the Commercial Bank (accounts for 35%), the State
government (accounts for 15%), and the central government (accounts for 50%).
RRBs are located in every state of the country. At present, there are 56 RRBs in India. Each
RRB is sponsored by a public sector bank.
Local Area Banks in India (LAB)
Local Area Banks in India were introduced in 1966 and are registered under the Companies
Act, of 1956. The LAB is organized by the Private sector banks. These banks focus on earning
profit. In India, there is only 4 LAB, located in South India.
Specialized Banks in India
The banks which are established to cater banking services to a distinctive type of financial
activity are referred to as specialized banks. Specialized types of banks in India are of three
types:
 SIDBI: The Small Industries Development Bank of India grants loans to small-scale
businesses or industries. It is responsible for financing loans to small-scale industries to
get modern technology and new equipment.
 EXIM Bank: EXIM or Export and Import Bank are used to get loans or other financial
assistance with exporting or importing goods from foreign countries.
 NABARD: National Bank for Agricultural and Rural Development is the bank used to
get any kind of financial assistance for agricultural development, village, handicraft,
and rural people can turn to NABARD.
FUNCTIONS OF COMMERCIAL BANKS
In the modern world, commercial banks perform such a variety of crucial functions that it is
very
difficult to make an all-inclusive list of their functions. However, the several crucial functions
performed
by them can be classified into two broad heads namely:
(a) Primary functions and
(b) Secondary functions/Subsidiary functions.
(i) Agency functions.
(ii) Miscellaneous functions or General Utility functions.
PRIMARY FUNCTIONS OF COMMERCIAL BANKS
The primary functions of commercial banks are called traditional functions or core functions.
They are the following:
(i) Acceptance of deposits from the public.
(ii) Creation of credit.
(iii) Lending of funds.
(iv) Use of cheque system.
(v) Remittance of funds.
4 Banking Theory and Practice
(i) Acceptance of Deposits – Source of Funds
Accepting deposits is one of the primary functions of a commercial bank. Banks receive
deposits
from individuals, households and corporate and non-corporate customers, government and
other
agencies, and thus, they mobilise the savings in the country for productive purposes.
Commercial
banks offer different varieties of deposits to suit to the requirements of different categories of
customers.
Deposits serve as the major source of supply of funds to the commercial banks. The different
sources
of supply of funds to the commercial banks are:
(a) Deposits of various kinds.
(b) Borrowings from the Reserve Bank of India.
(c) Borrowings from other financial institutions.
(d) Borrowings from the fellow bankers.
(e) Borrowings from abroad.
Types of Deposits
The popular types of deposits are the following:
(a) Current Deposit Account (Current or Running Account): A current account is an account
which is generally opened by businesspeople for their convenience. Money can be deposited
and
withdrawn at any time. Money can be withdrawn only by means of cheques. Usually, a banker
does not
allow any interest on this account. Even then, people come forward to deposit money on
current
account because of two important privileges which they can enjoy in a current account, namely
(1) Overdraft facility, and (2) Other facilities like collection of cheques, transfer of money and
rendering
agency and general utility services.
That is why current account holders do not mind a banker charging some commission for
services
rendered and incidental charges for maintaining the account–whether it is in debit or in credit.
Even
though a banker does not allow any interest, he charges interest on overdraft on a day-to-day
basis. In
Bank of Maharashtra vs. United Constructions Co. & Others, it was held that when a customer
overdraws the account with or without express consent, it amounts to a loan and the customer
is
bound to make good the payment with a reasonable interest. Current account holders should
keep a
minimum balance of ` 500 to keep the account running. In a mechanised branch, a minimum
balance
of ` 5,000 has to be maintained. If this minimum is not kept, a minimum charge of Re. 1 per
operation
will be debited to the account. The bank sends a ‘Statement of Account’ to the customers every
month.
As these deposits are repayable on demand, the banker should keep a large cash reserve. This
may be
one of the reasons why a banker does not pay any interest on current deposit.
(b) Fixed Deposit Account: A fixed deposit is one which is repayable after the expiry of a
predetermined period fixed by the customer himself. The period varies from 15 days to 3 years.
A deposit account can be opened for a period of more than 3 years and in that case, the rate of
interest
remains at the same level. In England, these deposits are not repayable on demand but they are
withdrawable subject to a period of notice. Hence, it is popularly known as ‘Time Deposit’ or
‘Time
Liabilities.’ In India also, the banks have begun to call it ‘Term Deposit’. Normally, the money
on a
fixed deposit is not repayable before the expiry of a fixed period.
Functions and Role of Commercial Banks 5
(c) Savings Deposit: This deposit is intended primarily for small-scale savers. The main object
of
this account is promotion of thrift. Hence, there is restriction on withdrawals in a month. Heavy
withdrawals are permitted only against prior notice. Generally, the number of withdrawals
permitted is
50 per half year.
This account can be opened with a minimum amount which differs from bank to bank. The
smallest amount that can be deposited or withdrawn is Re. 1. A minimum balance should be
maintained
and if cheque book facility is allowed, the minimum balance should be ` 250. In the case of a
mechanised
branch, this minimum balance has been fixed at ` 1,000. If the minimum balance is not
maintained,
incidental charges is levied by the bank.
It carries an interest rate as decided by banks since the interest rate is deregulated at present.
Interest is allowed on minimum monthly balances in steps of ` 10 and multiples thereof
between the
10th and the last day of each calendar month. But now, interest has to be calculated on a daily
product
basis from 1st April 2010 onwards.
Generally, overdraft facility is not available in the Savings Bank Account. However, instant
credit
facility upto ` 2,500 only is available to Savings Bank customers for their outstanding cheques
provided
such cheques do not arise out of trade transactions. It is indeed a privilege given to savings
bank
account holders who are non-traders. Again, occasional overdrawings upto ` 2,500 are
permitted only
to those who have satisfactory dealings.
The depositor is supplied with a pass book. Generally, no withdrawals are allowed without the
presentation of the pass book along with the withdrawal slip. Nowadays, savings account
holders are
given cheque facilities and money can be withdrawn by means of cheques also. Cheques are
also
collected on this account. The nomination facility is also available in Savings Bank Accounts.
Now, bankers demand a letter of introduction for opening a savings deposit account also
because
cheque book facility has been extended to this account. In India, Post Offices also offer savings
bank
facility. Since they combine two conveniences namely postal and savings bank, they have
registered a
phenomenal growth.
A savings bank account can be closed after one year. If closed earlier, a nominal service charge
of
` 10 would be levied.
Insurance-linked Savings Bank Deposit: In recent times, some of the banks have been
offering
the additional benefit of life insurance protection along with the usual benefits of a savings
deposit
account. This insurance benefit is a free service and entails no formalities like medical
examination.
The depositor has to maintain a balance of ` 500 if the branch is in a rural area or ` 1,000 if it is
situated
in other centres. In case the deposit holder dies, he is entitled to get an insurance benefit of
double the
average balance in the account if he is between 18 and 40 years. It is subject to a maximum of
` 10,000. If he is between 41 and 49 years, the amount of insurance benefit is the same as the
average
balance subject to a maximum of ` 5,000. Thereafter, the insurance benefit ceases. This type of
deposit is a real boon to a person who dies prematurely.
(d) Recurring Deposit: It is one form of savings deposit. Depositors save and deposit regularly
every month a fixed instalment so that they are assured of a sizeable amount at a later period.
This will
enable the depositors to meet contingent expenses. Banks have found these deposits popular.
Many
people would not have saved if these deposits had not been introduced. This deposit works on
the
maxim ‘little drops of water make a big ocean.’
Any person can open this deposit account. He can even have more than one account at a time.
This account can be opened in joint names also.
It may be opened for monthly installments in sums of ` 5 or in multiples of ` 5 with a maximum
of ` 1,000. The number of monthly installments may vary from 12 months to 72. The total
amount is
repayable 30 days after the last installment has been paid.
For deposits of higher installments, the maturity amounts can be calculated as multiples of the
maturity amount for an installment of ` 5.
Every depositor should pay the monthly installment within 30 days from the due date. If he
fails to
do so, interest will be charged on the installments in arrears at the rate of 4 paise for every ` 5
per
month.
A recurring deposit holder can get a loan on the security of a recurring deposit. The banker may
grant 75% of the total amount paid as loan and an interest of 2% over the recurring deposit rate
is
charged. These accounts are transferable from one branch to another. A recurring deposit
holder is
given the recurring deposit pass book for his verification. The rate of interest is similar to the
rate
offered on fixed deposit but it is compounded.
(e) Other Deposits: In addition to the above, a mushroom growth of deposits has come into
practice. In fact, for most of the above deposits, Recurring Deposit Scheme forms the basis. By
identifying a package of schemes suitable to different target group of customers, the banks
have come
forward to really cater to the requirements of different customers. To be successful in the ever
increasing
competitive market, all efforts should be taken to increase the number of ‘satisfied’ customers
by
offering them attractive and innovative deposit schemes so as to meet their requirements.
(ii) Creation of Credit
Credit creation is an important function of commercial banks. They create credit for the
purpose
of lending to all types of customers. When a commercial bank advances a loan to its customer,
liquid
cash will not be lent. Instead, it opens an account in the borrower’s name and credits his
account with
the amount of the loan. Such a deposit is indeed credit creation and this deposit is called
‘secondary’ or
‘derivative deposit’. On the other hand, a deposit opened by a customer with liquid cash is
called
‘primary deposit’. Banks have the ability to create credit many times more than their primary
deposits.
Thus, credit creation helps to increase the money supply so as to promote economic
development in
the country.
(iii) Lending of Funds – Uses of Funds
The basis purpose of commercial banking is to do the business of lending. Money received by
way
of deposits should not be kept idle. Hence, banks earn income in the form of interest through
granting
loans and advances of various kinds.
Unsecured and Secured Advances: Loans and advances may be made either on the personal
security of the borrower or on the security of some tangible assets. The former is called
unsecured or
clean or personal advances and the latter is called secured advances.
Unsecured Advance
Section 5(i)(n) of the Banking Regulation Act defines unsecured loan as “unsecured loan or
advance
means a loan or advance not so secured.”
The distinguishing feature of this type of loan, according to the definition is that no tangible
security is offered to the bank. In view of its importance, it has been discussed is a separate
chapter
entitled ‘Loans and Advances’.
(iv) Use of Cheque System
Commercial banks have introduced an inexpensive medium of exchange, which is as good as
money, called ‘cheque’. In the modern business world, the use of cheques to settle debts is
found to be
more convenient than the use of liquid cash. Commercial banks perform the unique function of
issuing
and collecting cheques. Deposits can be withdrawn with the help of a cheque which is a
negotiable
instrument. As such, it can be transferred easily from one person to another, and thus, it has
become
the most developed credit instrument.
(v) Remittance of Funds
Banks help their customers in transferring funds from one place to another by issuing bank
drafts,
mail transfers, telegraphic transfers and electronic transfers on nominal commission charges.
Commercial
banks are able to carry out this important function at lesser cost since they have their network
of
branches in every nook and corner of the country.
Banks remit funds from one place to another through the network of their branches. The main
instruments for transfer of funds are bank drafts, mail transfer, telegraphic transfers and
travellers’
cheques.
Bank Drafts
A bank draft is an order from one branch to another branch of the same bank to pay a specified
sum of money to the person named therein or to his order.
A person who wants to send money can buy a draft by paying the required amount from a bank
and send to another who can encash it in his place. Banks issue drafts for a nominal
commission. The
commission depends upon the amount to be remitted. This service is extended to public in
general. The
purchaser of the draft need not be a customer or account holder of the bank.
Legal Status of a Draft
According to Section 13 of the Negotiable Instruments Act, bank draft is not a negotiable
instrument.
But a draft has all the attributes of a bill of exchange, such as an instrument in writing,
containing an
unconditional order, signed by the banker, etc. Hence, a bank draft is treated on par with a bill
of
exchange. Sections 85-A and 131 of the Negotiable Instruments Act specifically treat a bank
draft as a
bill of exchange or a cheque, Section 85-A provides protection to bank against forged or
unauthorised
endorsement on drafts and Section 131 gives protection to collecting banker in respect of
crossed
draft.
The Calcutta High Court in Shukla vs. The Punjab National Bank Ltd. (1960) has observed
that,
“a bank draft, which is an order by branch of a bank to its another branch, fulfils all the
attributes of a
bill of exchange.” The above view was upheld by the Calcutta High Court in a subsequent case,
State
Bank of India and Another vs. Jyothi Ranjan Mazumdar. Hence, a bank draft can be treated as a
negotiable instrument.
Stopping Payment of Bank Draft
A bank draft is a commitment on the part of the issuing bank to pay a certain amount of money
to
a third party. The purchaser of the bank draft is not deemed to be a party to the instrument.
Therefore,
the banker should not comply with ‘stop payment order’ of the purchaser of a draft. If the draft
is
passed on to the payee, he acquires a right in the instrument which cannot be set aside by the
‘stop
payment order’ of the purchaser. If the draft has been negotiated by the payee to a holder in due
course, the latter would have enforceable right against the banker.
Cancellation of Draft
Sometimes the purchaser of the bank draft may return it to the issuing bank with a request to
cancel it and refund the amount to him. In such a case, the banker is justified in complying with
such
request of the purchaser provided the draft has not been delivered to the payee. The contract
entered
into between the bank and the payee of the draft is incomplete and revocable until and unless it
is
delivered to the payee. The purchaser, therefore, is competent to get the draft cancelled so long
as it is
not delivered to the payee. The moment the draft is sent to the payee the purchaser loses this
right.
Loss of Draft
In case the draft is lost and it is reported to the issuing bank, it should promptly advice the loss
to
the drawee branch which will make note of the loss in the record to guard itself against the
fraudulent
use of the lost draft. If the purchaser reports that the draft has been lost without any
endorsement
thereon, the issuing bank may safely refuse payment of the same because any endorsement
thereon
would be deemed to be a forged endorsement and the holder of the draft cannot get good title.
Where the draft is lost by the purchaser, he is entitled to get a duplicate one from the issuing
bank.
The banker, before issuing a duplicate draft, should take the following steps:
1. The banker should be satisfied with the genuineness of the request by the purchaser for the
issue of a duplicate.
2. A confirmation as regards non-payment of the draft should be obtained from the drawee
bank.
3. An indemnity bond must be obtained from the purchaser. If the draft has reached the hands
of
the payee, he should also sign the indemnity bond.
4. When a duplicate draft is issued, the drawee bank must be advised of it.
The period of validity of the draft is six months from the date of issue.
Mail Transfer
The facility of transforming money by mail is available to customers having some sort of an
account with the bank. The remitter deposits the amount to be transferred with a small
commission
with the remitting branch. After receiving the money, the bank sends instructions by mail to its
drawee
branch to credit the account of the payee with the specified amount and informs the payee
about it.
Remittance of money by mail transfer is relatively cheaper, safer and more convenient. Mail
transfers
are effected not only for remittances within the country but also for international remittances.
Telegraphic Transfer
Telegraphic transfers are effected by telegram, telephone or telex as desired by the remitter.
Transfer
of funds by telegraphic transfer is the most rapid and convenient but expensive method. In
these days
of electronic age, MT and TT have lost their place.
Electronic Remittances
Nowadays, almost all banks have computerised their operations. Besides, all banks in different
countries are interlinked with each other through internet. This mechanisation has facilitated
easy
remittance of money not only inside the country but also to any part of the world through the
press of
a button. Money can be transferred from one account in one branch to another account in
another
branch of the same bank or a different bank.
After the introduction of computers, MT and TT have lost their significance. It is so because
computers have facilitated speedy remittance of funds from one end to another in a moment’s
notice.
Thus, it minimises the loss of interest since money is transferred instantly from one end to
another.
Moreover, it facilitates transfer of money from one branch of a bank to another branch of a
different
bank also which is not possible in the case of MT or TT.
SECONDARY FUNCTIONS OF COMMERCIAL BANKS
Modern commercial banks, besides performing the main functions, viz., accepting deposits and
lending money, cover a wide range of financial and non-financial services to customers and
general
public. The bank services are steadily increasing to meet the growing needs of the community.
The secondary functions of a modern banker may be classified into two as:
(i) Agency Functions.
(ii) Miscellaneous Services or General Utility Functions.
(i) Agency Functions
The banker acts as the agent of his customer in performing the following functions:
1. Payment and collection of subscriptions, dividends, salaries, pension, etc.
2. Purchase and sale of securities.
3. Acting as Executor, Administrator and Trustee.
4. Acting as Attorney.
1. Payment and Collection
Bankers make payments and receive money on behalf of their customers in the following ways:
(i) Payment of insurance premia.
(ii) Payment of membership subscription to clubs, libraries and professional associations.
(iii) Payment of rent and salaries.
(iv) Collection of dividends on behalf of customers.
(v) Collection of pension, rent, etc.
(vi) Transfer of funds from one account to another.
The banks charge only a nominal amount for this service. Tannan considers this service as an
indirect asset that promotes the business of the bank.
For doing this service, the banker should get a clear instruction in writing from the customer.
The
instructions of the customer should be clear and unambiguous. It should not be in uncertain
terms
which give rise to controversial meaning. If the banker goes wrong due to equivocal
instruction, he
cannot be held liable on the ground of negligence, if he acted in good faith.
The banker may not accept instructions which are difficult to comply with, but once accepted,
it
is the duty of the banker to carry out instructions carefully and promptly. Once the instructions
are
accepted, the customer should ensure that necessary funds are in his credit on the specified
date. The
banker is under no obligation to make payment unless the account is in credit or operating with
an
agreed overdraft.
Having accepted standing instructions, a banker would be deemed to be negligent if he fails to
carry them out, unless it can be proved that non-compliance has resulted from circumstances
beyond
his control. In order to ensure timely compliance, the standing instructions must be recorded in
a
register designated as “Standing Instruction Register” and noted in the ledger folio of the
account
holder concerned.
2. Purchase and Sale of Securities
Banks undertake to purchase and sell shares and debentures of joint stock company on behalf
of
its customers only. Whenever the customers delegate the work, the bankers should get clear
and
precise instruction in a special form used for this purpose. The form should contain the
following
particulars:
1. Particulars of securities to be sold or purchased.
2. The minimum and maximum price at which the securities are to be sold or purchased.
3. The period within which they are to be sold or purchased.
4. The names, addresses of the persons in whose name they are to be registered.
In executing the sale or purchase order, the banker acts as an agent of the customer. Only
members
of the stock exchange can do the function of purchase and sale of securities. As the banks are
not the
members of the stock exchange, they appoint brokers who act as sub-agents of the banks to
carry out
the bank’s instructions. The recent amendment in the Stock Exchange Regulation Act permits
the
banks to become members in the local stock exchange. The banker should strictly follow the
customer’s
instructions and use skill and care in execution of sale and purchase order.
In case of an order from the customer for purchase of securities, the banker should ensure that
sufficient funds are available in the account of the customer. The banker should ensure that this
position continues till the order is executed. While delivering the shares to the customer, he
should be
advised to have them transferred to his name as early as possible.
No action for execution of sale order should be taken until the securities come into the
possession
of the bank and they are found good for immediate delivery in the market. Relative transfer
deeds duly
signed by the seller and witnessed must accompany the shares. On receipt of the sale proceeds,
the
amount has to be credited to the customer’s account under advice to him.
The banks today undertake to purchase and sell government securities, bonds of public
undertakings,
National Saving Certificates and units of Units Trust of India.
3. Banker as Executor, Administrator and Trustee
Executor
A person may make a will expressing his intention regarding disposal of his properties after his
death. A will has to be in writing signed by the person making the will who is called testator
and attested
by two witnesses. A will becomes effective only after it is approved by a court of competent
jurisdiction
by the issuance of a probate. A probate is a copy of the will duly certified under the seal of the
court
together with a grant of administration to the estate of the testator. The probate is conclusive as
to the
appointment of executor and the validity and content of the will. The person appointed by the
will to
administer the estate of the deceased is known as the executor.
Administrator
In case a person dies without making a valid will, the property of the person will devolve
according
to the law which he is subject to. The person claiming the property of the deceased may apply
to the
court for the administration of the estate. The person in whose favour the court grants letter of
administration is known as the administrator.
The administrator and the executor perform similar functions except that the administrator
administers the property of the deceased according to the law and that the executor follows the
instructions contained in the will of the deceased.
Trustee
A person may desire that after his death, a part or whole of his estate be held in a trust for the
benefit of certain beneficiaries named in the will. In such a case, he may create a trust under his
will
directing certain person to hold the property on a trust and hand over the income from the
property to
such persons after a specified time or upon the happening of a specified event. The person who
holds
the property for the beneficiaries is known as trustee. In some cases, the owner of the property
may
divest himself of the property in part or whole, in favour of person or persons known as trustees
who
have to administer the property.
Banker as Executor, Administrator and Trustee
Commercial banks undertake the function of executors, administrators and trustees. Many
banks
have set up at their respective head offices. Executor and Trustee Department which
administers the
trust and will of the customers. Banks are better fitted to do the service because:
1. The bank being a corporate body has a continuous existence. An individual may not be able
to
act due to his incapacity or death.
2. Banks have staff having specialised knowledge and rich experience and so the management
of
the trust/property will be efficient.
3. The management of the trust/property is economical as the overhead charges are spread over
a number of trusts.
4. Banks act honestly and promptly which may not be expected from an individual trustee.
5. The affairs relating to the estate are kept confidential as in case of other business of
customers.
The banks also act as trustees for debenture holders as companies finance their projects through
the issue of debentures. Banks are in a better position to act as such trustees as they have
knowledge
of the working of the industry and can safeguard the interest of the debenture holders.
4. Attorney
Power of attorney may be given by a customer to his banker. Legal effect of acting under a
power
of attorney is as valid as if customer had done it himself. By granting power of attorney, the
customer
authorises the banker to receive dividend and interest on securities belonging to him and give a
valid
discharge thereof. The banker may also be empowered to sign transfer forms in respect of
purchase
and sale of stock exchange securities and government securities.
(ii) Miscellaneous or General Utility Functions
The bankers perform the following general utility functions to satisfy their customers:
1. Safe custody of valuables,
2. Letters of credit,
3. Merchant banking,
4. Dealing in foreign exchange business,
5. Lease financing,
6. Factoring,
7. Housing finance,
8. Underwriting of securities,
9. Tax consultancy,
10. Credit cards,
11. Gift cheques,
12. Consultancy service,
13. Teller System
1. Safe Custody of Valuables
Banks accept shares, debentures, bonds, fixed deposit receipts, deeds of property, life insurance
policies and sealed boxes and packets containing will or valuables such as jewellery from their
customers
for safe custody. Banks are equipped with strong, fireproof and theft proof rooms for safe
maintenance
of the articles. There are two ways through which a banker ensures safety of its customers’
valuables.
(i) By accepting valuable for safe custody.
(ii) By hiring out safe deposit vaults or lockers to the customers.
(i) Safe Custody: Safe custody accounts are normally opened only for those customers who
maintain satisfactory accounts or who are properly introduced to the bank.
The articles for safe custody may be handed over to the banker either openly or in a sealed box
or
envelope. While accepting sealed boxes, the banker should see that they are sealed properly.
The words
‘contents unknown’ should be prominently written on such boxes to indicate that the bank has
no
knowledge of the content of the package.
The bank issues a safe custody receipt which contains the name and address of the customer
and
particulars about the articles lodged for safe custody. The customer is asked to preserve the safe
custody receipt and surrender the same while taking delivery of the articles. In case the receipt
is lost
by the customer, the articles may be delivered against a letter of indemnity signed by the
account
holder.
A customer may take delivery of all securities lodged for safe custody or only a part of them. In
the former case, he has to surrender the safe custody receipt duly discharged. Where the
customer
desires a part delivery, he has to write a delivery order and hand it over to the bank along with
the
relative safe custody deposit receipt.
Ordinarily, the securities are returned to the customer himself and not to a third party. In case,
the
articles are to be delivered to a third party, the banker should ensure that:
1. the safe custody receipt is duly discharged by the customer,
2. delivery of securities is permitted to a third party by a separate letter of authority signed by
the
customer.
Safe custody accounts can be opened in single or joint names, partnership firms, companies,
trust, etc.
Liability of the Banker
The liability of the banker in respect of safe custody is the same as that of a bailee under the
contract of bailment.
The banker should take as much care of the articles accepted for safe custody as a man of
ordinary prudence would take in case of his own goods. If he does so and thereafter there is
loss or
destruction of valuables, he shall not be liable for the loss in the absence of any contract to the
contrary.
However, the customer may hold the banker liable in the following cases:
1. For Negligence: The banker shall be held liable for negligence, e.g., the safe deposit vaults
are
not strong and thus thefts are possible, the banker leaves the vault unlocked and entry to the
safe vault
is not restricted that enables anyone to remove the articles.
In Chandra Trikha vs. Punjab National Bank case, it was decided that where a bailee bank
failed
to deliver the box in the same condition as it was entrusted and items of ornaments found
missing, the
bank has failed in its duty as bailee to take care of goods and hence liable to compensate the
bailor for
the loss suffered.
2. For Conversion: If the property held for safe custody is delivered to a wrong person, the
banker will be held for conversion.
3. For Fraud by His Own Employees: The bank shall be held liable for any fraud committed
by
any of its employees dealing with the articles given for safe custody.
(ii) Safe Deposit Vault: Banks provide safe deposit locker facility to its customers in
metropolitan
cities and large towns to keep articles and valuables. Lockers which are convenient repositories
for
personal jewellery, official documents and securities are hired out to customers. Locker
cabinets are
usually installed in strong rooms which have security arrangements like grill doors and a fire
resistant
strong door. The doors can be opened by the use of separate keys held by the bank officers for
dual
control. The customer is allowed access to the vault during the prescribed business hours. Some
private banks have cameras monitoring those using lockers. Further, accessed guards are
employed in
the premises.
Each locker has only one key for use by the renter and there is no duplicate of it. For opening
the
locker, two keys are to be used, i.e., the renters’ key and another key which is common for all
lockers
in the cabinet known as the ‘custodian key’ or ‘master key.’ Usually, one master key is kept by
the
officer for the use inside the vault and another master key is kept in the safe custody of another
branch
of the same bank or another bank. Once a locker is opened with the help of the master key and
renter’s
key, it can be locked by the renter’s key alone. The banker has neither knowledge nor takes
cognizance
of the contents of the locker.
Opening of Locker Account: As a general rule, the renter should be introduced. They are
required
to open a savings or current account and file an authority to the bank to debit rental charges to
the
respective account.
Lease Agreement: The hirer is required to execute a Lease Agreement which contains all the
terms
and conditions under which the locker is hired out.
Rent: The rent for the locker depends on its size and is collected in advance from the renter. In
case a locker is surrendered before the expiry of the term, no refund of rent for the unexpired
period is
usually allowed. Lockers are usually let out for one year although they may also be let out for
two or
three years.
Nomination: The hirer of a locker is allowed to nominate a person to whom, in case of death of
the hirer, the bank may give access to the locker and liberty to remove the contents of the
locker.
In Rama Chakravarthy vs. Punjab National Bank case, the wife of a deceased customer
claimed
the content of the safety locker as the nominee of the deceased customer. But the banker
demanded a
succession certificate from her. It was held that the banker has no business to ask the nominee
to
produce a succession certificate where there is a nominee.
Loss of Key: If the key of the locker is lost, note should be made of the loss on the declaration
card, specimen signature book and the safe custody register. The bank should call upon the
renter in
writing to deposit an amount sufficient to cover the cost of breaking open the locker and fitting
a new
one. The drilling open should be done in the presence of renter/renters. If the renter is unable to
be
present, he must sign a letter authorising the bank to break open the door in the presence of a
specified
person and to deliver the contents to him after the locker is opened.
Surrender of Locker: A locker may be surrendered at any time. While surrendering the locker,
the
renter should open the locker, remove all contents and handover the key to the custodian of the
vault.
The banker should obtain the signature of the renter to a declaration on the relative card that the
renter
has removed the contents of the locker and the banker is relieved from liability.
Death of Renter: In case of death of a renter, the contents of the locker shall be delivered to the
legal representative of the deceased only after getting a valid succession certificate from the
court.
Prohibitory Orders: A banker may receive an order from a court or a Government department
asking him to seal a particular locker and stop operations. The locker should be promptly
sealed with
the bank’s seal under intimation to the renter.
Joint Names: A locker may be hired in the joint names of two or more persons. In such a case,
the
banker must get clear instructions in regard to operation of the locker account. The instructions
cannot
be varied by any one of the joint renters. Subsequent modifications can be made by the consent
of all
of them.
2. Letters of Credit
Letters of credit assume great importance in international trade. The problem in the foreign
trade
is that the exporters and importers are separated by distance and are unfamiliar with each other.
The
exporter will send the goods only if he is satisfied with the creditworthiness of the importer.
Moreover,
if the exporter is to be paid immediately after shipment of the goods, the importer will have to
make
payment before he actually receives them. On the other hand if payment is to be made by the
importer
after receipt of the goods, the exporter will have to wait for a long time to get payment for the
goods.
The problem of payment in foreign trade is overcome by banks which issues what is known as
a letter
of credit. The letter of credit assures payment to exporters soon after he parts with the goods
and
enables the importer to make payment only after he receives the goods or the document of title
to
goods. Thus, letters of credit facilitate foreign trade.
Definition: A letter of credit is defined as, “letter issued by the importer’s bank in favour of the
exporter authorising him to draw bills up to an amount specified in it and assuring him of
payment
against the delivery of the prescribed documents in his own country.”
The letter of credit is a sort of a guarantee to the exporter that his draft will be honoured by a
specified bank upto a certain amount as per the specified terms.
The importer who wishes to import goods approaches his banker and requests him to open a
letter
of credit in favour of the overseas supplier. The importer is called the Opener or Accountee and
his
bank is known as opening bank. The letter of credit is sent to the foreign branch of the bank or
to its
correspondent bank, which is called the negotiating bank. After satisfying itself about the
authenticity
of the credit, the bank forwards it to the exporter who is called the beneficiary.
The exporter ships the goods, prepares the documents and draws a bill on his importer. The
negotiating bank receives the bill and pays the amount if it is in accordance with the letter of
credit. The
opening bank receives the bill and documents and presents them for acceptance if they are D/A
bills
and for payment if D/P bills. Documents are delivered on payment or acceptance, as the case
may be,
to the importer who takes delivery of the goods from the ship.
A letter of credit has four principal parties:
1. Applicant (Opener): Normally, applicant is the buyer of goods on whose behalf the LC is
opened on the basis of his instructions.
2. Issuing Bank (Opening Bank): The bank which issues the LC and undertakes to make
payment to the beneficiary on surrender of documents as per terms of the LC.
3. Beneficiary: Beneficiary is normally the seller of goods who has to get payment from buyer,
in whose favour the LC is opened.
4. Advising Bank: The bank through whom the LC is advised to the beneficiary thereby
assuring
genuineness of the credit. Advising bank is normally situated in the country/place of
beneficiary.
The other parties involved in a letter of credit are:
1. Confirming Bank: This is a bank normally in the exporter’s country which adds its
confirmation to the LC, thereby undertaking the responsibility of payment/negotiation/
acceptance/under credit, in addition to that of the issuing bank.
2. Negotiating Bank: The bank which negotiates the documents received under the LC.
3. Paying Bank or Nominated Bank: The bank nominated and authorised by the issuing bank
to make payment under credit.
4. Reimbursing Bank: The bank authorised to honour the reimbursement claim of settlement
to negotiation/acceptance/payment. It is normally the bank with which the issuing bank
maintains
an account, from where payment will be made.
Types of Letters of Credit
The various types of letters of credit are as follows:
(i) Documentary and Clean Letter of Credit: A documentary or secured letter of credit is one
which the issuing bank undertakes to honour the bills drawn under it only when it receives with
it
certain documents such as bill of lading, insurance policy, invoice, certificate of origin, etc.
The
documents are held by the issuing bank as security for advance made by it.
A clean or open letter of credit is one where no documents are involved. The issuing bank
undertakes
to honour the bills without production of any documents. Such a letter of credit is issued for
customers
of high financial standing.
(ii) Revocable and Irrevocable Letter of Credit: A revocable letter of credit is one where the
issuing bank reserves the right to cancel or modify the credit at any time without giving notice
of
cancellation to the beneficiary. A revocable letter of credit, therefore, does not constitute a
legally
binding undertaking between the banker and the exporter. It is mere intimation or advice to the
beneficiary
to draw bills under the credit. Such credit provides no real security to the exporter. But, if there
is a
specific provision in the letter of credit that notice of cancellation should be given, the banker
must
abide by it.
An irrevocable letter of credit is one which cannot be cancelled or modified without the
consent of
the beneficiary. Banks in India, generally, open only irrevocable credits.
(iii) Fixed and Revolving Letter of Credit: A fixed letter of credit is opened for a specific
amount
or for a specific period. The exporter may draw one or more bills up to the amount specified.
The
credit would exhaust as soon as the total amount has been withdrawn. If the period is fixed, it
expires
after the lapse of the prescribed time.
In case of revolving letter of credit, the amount of credit remains constant during the period of
validity. When a bill is drawn, the amount gets reduced and when the bill is duly honoured, the
credit
amount is automatically renewed. For example, a revolving letter of credit is opened for a sum
of
` 70,000. The exporter draws a bill for ` 20,000. Now, the credit amount will get reduced to `
50,000.
When the bill for ` 20,000 is paid by the importer, the original sum of ` 70,000 will be available
to the
beneficiary. The revolving credit obviates the need to establish a fresh credit each time.
(iv) Confirmed and Unconfirmed Letter of Credit: The purpose of letter of credit to the
exporter
is that he can undertake shipment of goods without ascertaining the creditworthiness of the
importer.
However, to what extent can the exporter rely on the undertaking given by a bank in a foreign
country?
To overcome this, the exporter may ask the importer to open a confirmed letter of credit.
In such a case, the importer has to request his bank to open a confirmed letter of credit. The
opening bank then would request the negotiating bank to add confirmation to the credit and the
latter
does so, it is called confirmed letter of credit. The negotiating banker here becomes the
confirming
bank.
The confirming bank becomes independently liable to make payments to the beneficiary. A
confirmed
letter of credit can neither be modified nor cancelled without the consent of all parties. So, it is
essentially
an irrevocable letter of credit.
An unconfirmed letter of credit is one which does not carry the confirmation of the negotiating
bank.
(v) With or Without Recourse Letter of Credit: In case of a letter of credit with recourse, the
beneficiary of the letter of credit holds himself liable to the holder of the bill, in the event of
dishonour.
Where the beneficiary does not hold himself liable, such a letter of credit is known as without
recourse
letter of credit.
(vi) Transferable and Non-transferable Letter of Credit: Under an ordinary letter of credit, the
beneficiary alone has the right to draw bills of exchange and get them negotiated. He cannot
transfer his
right to another person. In case, a transferable credit is issued, the beneficiary has the right to
transfer
the credit in whole or in part to one or more third parties. Such letters of credit are issued in
cases
where beneficiary may be an intermediary in the trade transaction and not a supplier himself.
(vii) Back-to-back Letter of Credit: If an intermediary in a trade transaction has received a
nontransferable
letter of credit, he cannot transfer it to the supplier. In such a case, he can request the
banker to open a new credit in favour of the supplier on the security of the letter of credit
issued in his
favour. Such a letter of credit is called back-to-back letter of credit.
(viii) Red Clause Letter of Credit: A red clause letter of credit is one which contains a clause
which gives to the negotiating bank to grant advance for short period to the beneficiary upto a
specified
amount at the responsibility of the issuing bank. The particular clause in the letter of credit
used to be
generally printed in red ink and so is known as red clause and the credit is known as red clause
letter of
credit.
(ix) Green Clause Letter of Credit: In addition to the credit facilities available under Red
clause
for purchase, processing and packing, the exporter gets finance for warehousing and insurance
charges
at the port where the goods are stored pending availability of the ship.
3. Merchant Banking
Merchant banking is a British concept brought into India by Grindlays Bank in 1969. State
Bank of
India, Bank of Baroda, Bank of India, Canara Bank, Indian Bank, Indian Overseas Bank and
Syndicate
Bank have organised merchant banking divisions.
Merchant banking divisions offer under one roof a wide range of services — financial,
technical,
managerial, etc. which are ordinarily available through a widely spread non-banking agencies
and
professionals.
The main services of a merchant banking division of a commercial bank are the following:
(i) All aspects of project counselling such as, pre-investment and feasibility studies to identify a
project.
(ii) Liaison work to help the entrepreneurs obtain various government consent including letter
of
intent and industrial licences and other permissions from government and semi-government
bodies.
(iii) Preparation of project reports after examining means and sources of finance.
(iv) Assisting in formulation of financial plan and preparation and filing of application for
loans.
(v) Management of public issue including preparation and issue of prospectus, finalisation of
issue agencies and completion of the issue.
(vi) Assisting companies in matters relating to corporate restructuring, amalgamations, mergers
and takeovers, etc.
(vii) Assistance to widen and strengthen the capital base of small-scale industries which are
planning
to enter medium-scale sector by undertaking expansion/diversification of their activities and
involving change in the type of organisation.
(viii) Help to locate and evaluate new market in foreign countries and assist in finding out
foreign
collaboration.
The amount of fee charged for the service by the bank depends upon the type and nature of
service as well as time required for completing the assignment.
4. Dealing in Foreign Exchange Business
Banks offer varied services in respect of foreign exchange business.
(i) Deferred payments: Banks execute deferred payment guarantee on behalf of their
constituents
to enable them to acquire plant and machinery from overseas suppliers on deferred payment
terms. In suitable cases, even foreign currency loans are arranged for this purpose.
(ii) Import packing facility: Import packing facilities are extended to first class customers
whereby the imported goods are released against trust receipts. Outstandings under such
facility are to be liquidated within a stipulated period.
(iii) Export Finance: Banks grant export finance both at pre- and post-shipment at
concessional
rates of interest. Under post-shipment credit, facilities like discounting of bills, etc. are made
available. Pre-shipment advances are granted for a maximum period of 90 days.
(iv) Forward Contracts: Some banks enter into forward contracts with importers or exporters
for sale or purchase of foreign exchange at fixed rate to safeguard them against fluctuations
in the rates of foreign exchange.
(v) Issue of solvency certificates, freight certificates, introduction letter for various
purposes
relating to foreign exchange business is another significant service.
(vi) Banks get trade information and disseminate it and pass on the enquiries to the importers
and
exporters. They also initiate trade enquiries on behalf of customers to locate suitable buyers
for their products abroad.
5. Leasing Finance
Lease is a method of financing equipment and machinery. It is a mechanism by which a person
acquires the use of an asset by paying a predetermined amount called ‘rental’ periodically over
a period
of time. In countries like USA, UK and Japan, approximately 25% of plant and equipment is
being
financed by leasing companies.
The Banking Regulation Act, 1949 did not permit banks to directly transact leasing business.
The
Banking Laws (Amendment) Act, 1983 enables commercial banks to carry on equipment
leasing business
and set up subsidiaries for carrying on such business. A subsidiary company promoted by a
bank may
undertake equipment leasing business and such other activities incidental thereto.
6. Factoring
Factoring is a “continuing arrangement between a financial institution (the ‘factor’) and a
business
concern (the ‘client’) selling goods or services to trade customers (the ‘customers’) whereby
the
factor purchases the client’s book debts (accounts receivables) either with or without recourse
to the
client and in relation thereto controls the credit extended to the customers and administers the
sales
ledger.”
The purchase of book debts or receivables is central to the functioning of factoring, permitting,
the factor to provide basic services such as: (i) administration of the seller’s sales ledger, (ii)
provision
of pre-payment against the debts purchased, (iii) collection of the debts purchased and (iv)
covering
the credit risk involved. Besides the above four basic services, factors could also provide
certain
advisory services by virtue of their experience in credit and financial dealings and access to
extensive
credit information. Thus, as a financial system combining all the related services, factoring
offers a
distinct solution to the problems posed by working capital tied up in trade debts.
To ease the working capital problems arising from delays in payment of bills, introduction of
factoring service was recommended by Vaghul Committee. Later, Kalyanasundaram
Committee was
specifically appointed to examine the feasibility of introduction of factoring service in India.
The
committee’s recommendation that there is need and scope for factoring was accepted by the
Reserve
Bank of India. Banking Regulation Act was amended in July 1990 for the purpose and RBI
directed that
factoring activities could be undertaken by banks through the medium of separate subsidiaries.
Following
this, the State Bank of India has set up Factors and Commercial Service Private Limited for
providing
factoring service to industries.
7. Housing Finance
Banks played insignificant role in providing housing finance till the early seventies. The
Reserve
Bank of India appointed a ‘ Working Group’ to examine the role of banking system in
providing finance
to housing schemes. The recommendations of the Group were examined by the Reserve Bank
which
issued guidelines to banks in 1979. Accordingly, the banks could advance housing loans
directly to the
parties concerned or indirectly to State Housing Boards or Housing and Urban Development
Corporations
in the form of subscription to their bonds or debentures.
State Bank of India, Canara Bank and Punjab National Bank have formed housing subsidiaries
to
provide housing finance. In tune with the new housing policy of the government, the Reserve
Bank of
India has liberalised credit for housing finance. According to the new guidelines, the maximum
period
of repayment is 15 years, the maximum margin is 35% and the rate of interest is 12.5%, 13.5%,
14%
and 14.5% to 16% per annum according to the size of the loan. The rate of interest for
scheduled caste
and tribes on housing loan upto ` 5,000 will remain at 4% per annum.
8. Underwriting of Securities
Commercial banks underwrite a portion of the public issue of shares, bonds and debentures of
joint stock companies. Such underwriting provides an indirect form of insurance to the
companies on
the event of public subscriptions falling short of expectations. Nowadays, banks act as bankers
to a
particular issue of shares or debentures. They receive applications for share and application
money
from the public. They also undertake to receive subsequent installments from those who are
allotted
shares.
9. Tax Consultancy
Tax consultancy service is of recent origin. This service is intended to help tax payers who may
not be able to afford a consultant of their own. The banks’ income tax department offers
complete tax
service which consists of advice on income tax and other personal taxes, preparing customer’s
annual
statement, claiming allowances, file appeals, etc. The consultancy service is also provided to
nonresident
Indians. A survey reveals that quite a few people utilise this service.
10. Credit Cards
Banks have recently introduced the credit card system. Credit cards are issued to good
customers,
having current or saving accounts, free of charge. The credit card enables a customer to
purchase
goods or services from certain retail and service establishments upto a certain limit without
making
immediate payment. The establishments get paid by the bank operating the plan. The bank
assumes the
risk and responsibility of collecting the dues from the customers.
Each credit card bears the specimen signature of the holder and is embossed by the issuing
banker
with the holders’ name and address. The establishments, on presentation of the card, delivers
the
goods or provides the services. The supplier places the credit card in a special imprinter
machine to
record the holder’s name and number on a sales voucher to which are added the particulars of
the
transaction. The holder signs the voucher and the signature is compared by the supplier with
that on
the card. The voucher is then sent to the bank which pays it after deducting its service charges.
Once
in a month, the bank sends a statement of all the credit purchase in the previous month to the
credit
card holder and the latter has to remit the amount either by cash or by cheque.
The facilities provided to credit card holders are fast expanding. Central Bank and Canara Bank
permit their credit card holders to withdraw cash from any branch of the bank upto a certain
limit.
Central Bank got tied up with Mastercard of USA, the largest card-issuing organisation in the
world.
More than three million establishments spread over 140 countries honour Mastercard.
(For details, refer to chapter ‘Banking Innovations’.)
11. Gift Cheques
Banks in India sell gift cheques against payment in cash or by debit to an account. Gift cheques
are
issued in fixed denominations. As the name indicates, these cheques are intended to be given as
gifts on
occasions such as wedding, birthdays, etc. The purchaser of the cheque need not be an account
holder
with that bank. The payee can encash them at any time. The gift cheque is payable on par at all
branches of the issuing bank. It has no negotiability and its payment is made only to the payee.
12. Consultancy Service
State Bank of India and Indian Bank have set up consultancy cell to provide consultancy
service to
small-scale industries. The consultancy service covers technical, financial, managerial and
economic
aspects. This service is offered not only at the project stage but also at every stage of
implementation
of the project.
13. Teller System
The object of the teller system is to expedite payment of cheques for small amounts. Under this
system, the teller is authorised to receive cash and make payment upto limited amounts without
reference
to the ledger balance or the specimen signatures. He is expected to be conversant with the type
of
accounts allotted to him and the specimen signatures of relative customers. Only in case of
doubt, the
teller gets the balance or signature verified. This system is adopted at certain selected centres
and not
all the branches of a bank.
BANKER AND CUSTOMER
MEANING OF BANKING
Banking includes a wide variety of financial institutions that store the money of individuals,
businesses and other entities. Banks provide financial services that help people save, manage
and invest their money.
DEFINITION - BANKING
“Banking is the business of accepting for the purpose of lending or investment, of deposits
of money from the public repayable on demand or otherwise and withdraw-able by cheque,
draft, and order or otherwise.” Indian Banking Regulation Act, 1949.
The term “bank” can refer to many different types of financial institutions — including bank
and trust companies, savings and loan associations, credit unions or any other type of
institution that accepts deposits.
BANKER AND CUSTOMER RELATIONSHIP
General Relationship
Debtor and creditor relationship: When the banker accepts deposits from the customer
then the bank becomes the debtor and the customer is the creditor. If a customer takes loans
from a bank then the customer becomes a debtor and the banks becomes a creditor.
Pledger and Pledgee relationship: 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.
Licensor (Lessor) and Licensee (Lessee) relationship: The relationship between banker
and customer can be that of a Licensor and Licensee. This happens when the banker gives a
sale deposit locker to the customer. So, the banker will become the Licensor, and the
customer will become the Licensee.
Relationship of Trustee and Beneficiary:-
A trustee holds property for the beneficiary, and the profit earned from this property
belongs to the beneficiary. If the customer deposits securities or valuables with the banker
for safe custody, the banker becomes a trustee of his customer. The customer is the
beneficiary so the ownership remains with the customer.
Relationship of Bailor and Bailee: The relationship between banker and customer can be that
of Bailor and Bailee. A bailment is a contract for delivering goods by one party to another to
be held in trust for a specific period and returned when the purpose is ended. Bailor is the
party that delivers property to another. Bailee is the party to whom the property is delivered.
So, when a customer gives a sealed box to the bank for safekeeping, the customer became the
bailor, and the bank became the bailee.
Relationship of Advisor and Client:-
When a customer invests in securities, the banker acts as an advisor. The advice can be
given officially or unofficially. While giving advice the banker has to take maximum care and
caution. Here, the banker is an Advisor, and the customer is a Client.
Relationship of Agent and Principal:-
The banker acts as an agent of the customer (principal) by providing the following agency
services: Buying and selling securities on his behalf, Collection of cheques, dividends, bills or
promissory notes on his behalf.
Special Relationships
Statutory Obligation to honour cheques:
When a customer opens an account there arises a contractual relationship between the banker
and the customer. As long as there is sufficient balance in the account of the customer, the
banker must honour all his cheques. However, the banker can refuse to honour the cheques
only in certain cases like wrong details.
Secrecy of customer’s account:
When a customer opens an account in a bank, the banker must not give information about the
customer’s account to others. It is one of the principal duties of the banker. There are certain
circumstances in which the banker is entitled to or required to make disclosures about a
customer’s account.
Banker’s right to claim incidental charges:
A banker has a right to charge a commission, interest or other charges for the various services
given by him to the customer. For e.g. an overdraft facility.
Law of limitation on bank deposits:
Under the law of limitation, generally, a customer gives up the right to recover the amount due
at a banker if he has not operated his account for the last 10 years. When a customer opens an
account there arises a contractual relationship between the banker and the customer.
RIGHTS OF A BANKER
Right to charge interest
Every bank in India has the right to charge interest on the loans and advances sanctioned to
customers. Interest is usually charged monthly, quarterly, semi-annually or annually.
Right to levy commission and service charges
Along with interest, banks also have the right to levy a commission and service charges for the
services rendered. The service rendered by the bank might be SMS notification service, retail
banking and so on. Banks can also debit these charges from the customer's bank account.
Right of Lien
Another important right enjoyed by banks is the Right of Lien. Banks have the right to keep
goods and securities belonging to the debtor as a security, until the loan is repaid by the
debtor. Banks have only the right to maintain the security of the debtor and not to sell.
The Right of Set-off
The banker has the right to set off customer accounts. Banks can merge a couple of accounts
which are in the name of the customer and set off the debit balance in one account with the
credit balance in the other, provided the funds belong to the customer.
Right of Appropriation
Let us consider that a customer has taken many loans from the bank and he deposits some
money in the bank without any instructions. If that amount is not sufficient to discharge all
loans, the bank has the right to appropriate the amount deposited to any loan, even to a time-
barred debt. But the customer should be informed on the same.
Right to Close the Account
If the customer’s account is not properly maintained, banks have all the right to close the
account by sending a notice to the customer. Bankers have no right to close the account,
without sending a written notice.
What is KYC
1. What is KYC? Why is it required?
KYC means “Know Your Customer”. It is a process by which banks obtain information about
the identity and address of the customers. This process helps to ensure that banks’ services are
not misused. The KYC procedure is to be completed by the banks while opening accounts and
also periodically update the same.
2. What are the KYC requirements for opening a bank account?
To open a bank account, one needs to submit a Aadhaar/enrolment number and PAN as ‘proof of
identity and proof of address’ together with a recent photograph.
3. If I refuse to provide requested documents for KYC to my bank for opening an account,
what may be the result?
If you do not provide the required documents for KYC, the bank may not be able to open your
account.
4. Do I have to furnish KYC documents for each account I open in a bank even though I
have furnished the documents of proof of identity and address?
No, if you have opened an account with a bank, which is KYC compliant, then for opening
another account with the same bank, furnishing of documents is not necessary.
5. Whether KYC is applicable for Credit/Debit/Smart/Gift cards?
Yes. Full KYC exercise is necessary for Credit/Debit/Smart/for purchaser of Gift Cards and also
in respect of add-on/ supplementary cards.
6. I do not have a bank account. But I need to make a remittance. Is KYC applicable to
me?
Yes. KYC exercise needs to be done for all those who want to make domestic remittances of Rs.
50,000 and above and all foreign remittances.
7. Can I purchase a Demand Draft/Payment Order/Travellers Cheque against cash without
KYC?
Demand Draft/Payment Order/Travellers Cheques for Rs.50,000/- and above can be issued only
by way of debiting the customer's account or against cheques.
8. Do I need to submit KYC documents to the bank while purchasing third party products
(like insurance or mutual fund products) from banks?
Yes, all customers who do not have accounts with the banks (known as walk-in customers) have
to produce proof of identity and address while purchasing third party products from banks if the
transaction is for Rs.50,000 and above. KYC exercise may not be necessary for bank’s own
customers for purchasing third party products. However, instructions to make payment by debit
to customers’ accounts or against cheques for remittance of funds/issue of travellers’ cheques,
sale of gold/silver/platinum and the requirement of quoting PAN number for transactions of
Rs.50,000 and above would be applicable to purchase of third party products from banks by
bank’s customers as also to walk-in customers.
9. My KYC was completed when I opened the account. Why does my bank insist on doing
KYC again?
Banks are required to periodically update KYC records. This is a part of their ongoing due
diligence on bank accounts. The periodicity of such updation would vary from account to
account or categories of accounts depending on the bank’s perception of risk. Periodical updation
of records also helps prevent frauds in customer accounts.
10. Are banks required to categorise their customers based on risk assessment?
Yes, banks are required to classify the customers into ‘low’, ‘medium’ and ‘high’ categories
depending on their AML risk assessment.
11. Do banks inform customers about this risk categorisation?
No
12. What are the rules regarding periodical updation of KYC?
 Different periodicities have been prescribed for updation of KYC records depending on
the risk perception of the bank. KYC is required to be done once in every two years for
high risk customers, once in every eight years for medium risk customers and once in
every ten years for low risk customers. This exercise would involve all formalities
normally taken at the time of opening the account.
 During the process, the following are carried out.
o PAN verification from the verification facility available with the issuing authority
and
o Authentication, of Aadhaar Number already available with the RE with the
explicit consent of the customer in applicable cases.
o In case identification information available with Aadhaar does not contain current
address an Officially Valid Documents (OVDs) containing current address may
be obtained.
o Certified copy of OVD containing identity and address shall be obtained at the
time of periodic updation from individuals not eligible to obtain Aadhaar, except
from individuals who are categorised as ‘low risk’. In case of low risk customers
when there is no change in status with respect to their identities and addresses, a
self-certification to that effect shall be obtained.
 Customers who are minors have to submit fresh photograph on becoming major.
 REs may not insist on the physical presence of the customer for the purpose of furnishing
OVD or furnishing consent for Aadhaar authentication/Offline Verification unless there
are sufficient reasons that physical presence of the account holder/holders is required to
establish their bona-fides. Normally, OVD/Consent forwarded by the customer through
mail/post, etc., shall be acceptable.
Proof of Identity and Proof of address
1. What are the documents to be given as ‘proof of identity’ and ‘proof of address’?
 For an individual who is eligible for enrolment of Aadhaar, the Aadhaar number; the
Permanent Account Number (PAN) or Form No. 60 as defined in Income-tax Rules,
1962, as amended from time to time is required.
 Where an Aadhaar number has not been assigned to an individual, proof of application of
enrolment for Aadhaar shall be obtained wherein the enrolment is not older than 6
months and in case PAN is not submitted, certified copy of an Officially Valid Document
(OVD) containing details of identity and address and one recent photograph shall be
obtained.
 For residents of the State of Jammu and Kashmir or Assam or Meghalaya, and who does
not submit Aadhaar or proof of application of enrolment for Aadhaar, the following shall
be obtained:
1. certified copy of an OVD containing details of identity and address and
2. one recent photograph
The Government of India has notified following documents as ‘Officially Valid Documents
(OVDs)'.
 Passport,
 Driving Licence,
 Voters’ Identity Card
 PAN Card
 Aadhaar Card issued by UIDAI and
 Job card issued by NREGA duly signed by an officer of the State Government
 Letter issued by the National Population Register containing details of name and address
In case the identity information relating to the Aadhaar number or Permanent Account Number
submitted by the customer does not have current address, any of the following documents is to
be submitted.
1. utility bill which is not more than two months old of any service provider (electricity,
telephone, post-paid mobile phone, piped gas, water bill);
2. property or Municipal tax receipt;
3. pension or family pension payment orders (PPOs) issued to retired employees by
Government Departments or Public Sector Undertakings, if they contain the address;
4. letter of allotment of accommodation from employer issued by State Government or
Central Government Departments, statutory or regulatory bodies, public sector
undertakings, scheduled commercial banks, financial institutions and listed companies
and leave and licence agreements with such employers allotting official accommodation;
Provided further that the customer shall submit Aadhaar or OVD updated with current address
within a period of three months of submitting the above documents.
2. If I do not have any of the documents (Aadhaar/enrolment number and PAN) to show
my ‘proof of identity’, can I still open a bank account?
Yes. You can still open a bank account known as ‘Small Account’ by submitting your recent
photograph and putting your signature or thumb impression in the presence of the bank official.
The Small Account entails the following limitations:
 the aggregate of all credits in a financial year does not exceed rupees one lakh;
 the aggregate of all withdrawals and transfers in a month does not exceed rupees ten
thousand; and
 the balance at any point of time does not exceed rupees fifty thousand.
The account shall remain operational initially for a period of twelve months which can be
extended for a further period of twelve months, provided the account holder applies and
furnishes evidence of having applied for any of the OVDs during the first twelve months of the
opening of the said account.
3. If I am staying in Chennai but if my address proof shows my address of New Delhi, can I
still open an account in Chennai?
Yes. You can open a bank account in Chennai even if your permanent address is in New Delhi
and you do not have a proof of address for your Chennai address. In that case, you can submit an
officially valid document (proof of address document) of your New Delhi address together with a
declaration about your Chennai address, for communication purposes. However, you need to
submit Aadhaar or OVD updated with current address within a period of three months of
submitting the above documents.
4. Can I transfer my existing bank account from one place to another? Do I need to
undergo full KYC again?
Yes, it is possible to transfer an account from one branch to another branch of the same bank.
There is no need for KYC exercise again to transfer a bank account from one branch to another
branch of the same bank. However, if there is a change of address, then you would have to
submit a declaration about the current address. If the address in the ‘officially valid documents’/
‘proof of address’ is neither permanent nor current address, a new proof of address would be
required within three months.
In case of opening an account in another bank, however, you would have to undergo KYC
exercise afresh.
5. Is there any difference between such ‘small accounts’ and other accounts
Yes. The ‘Small Accounts’ have certain limitations such as:
 Balance in such accounts at any point of time should not exceed Rs 50,000
 Total credits in one year should not exceed Rs.1,00,000
 Total withdrawal and transfers should not exceed Rs.10,000 in a month.
 Foreign remittance shall not be allowed to be credited into the account
Such accounts remain operational initially for a period of twelve months and thereafter, for a
further period of twelve months, if the holder of such an account provides evidence to the bank
of having applied for any of the officially valid documents within twelve months of the opening
of such account. The bank will review such account after twenty four months to see if it requires
such relaxation.
6. Is introduction necessary while opening a bank account?
No, introduction is not required.
7. For which banking transactions do I need to quote my PAN number?
PAN number needs to be quoted for transactions, such as, account opening, transactions above
Rs.50,000 (whether in cash or non-cash), etc. A full list of transaction where PAN number needs
to be quoted can be accessed from website of Income Tax Department at the following
URL: Click here
8. What is the validity of cheques/drafts/pay orders/banker’s cheques ?
Payment of cheques/drafts/pay orders/banker’s cheques, if they are presented beyond the period
of three months from the date of such instruments, shall not be made.
What is e-KYC
What is e-KYC? How does e-KYC work?
e-KYC refers to electronic KYC. e-KYC is possible only for those who have Aadhaar numbers.
While using e-KYC service, you have to authorise the Unique Identification Authority of India
(UIDAI), by explicit consent, to release your identity/address through biometric authentication to
the bank branches/business correspondent (BC). The UIDAI then transfers your data comprising
name, age, gender, and photograph of the individual, electronically to the bank/BC. Information
thus provided through e-KYC process is permitted to be treated as an ‘Officially Valid
Document’ under PML Rules and is a valid process for KYC verification.
Accounts opened using OTP based e-KYC, in non-face-to-face mode are subject to the following
conditions:
1. There must be a specific consent from the customer for authentication through OTP.
2. the aggregate balance of all the deposit accounts of the customer shall not exceed rupees
one lakh. In case, the balance exceeds the threshold, the account shall cease to be
operational, till CDD as mentioned at (v) below is complete.
3. the aggregate of all credits in a financial year, in all the deposit accounts taken together,
shall not exceed rupees two lakh.
4. As regards borrowal accounts, only term loans shall be sanctioned. The aggregate amount
of term loans sanctioned shall not exceed rupees sixty thousand in a year.
5. Accounts, both deposit and borrowal, opened using OTP based e-KYC shall not be
allowed for more than one year within which identification as per Section 16 is to be
carried out.
6. If the CDD procedure as mentioned above is not completed within a year, in respect of
deposit accounts, the same shall be closed immediately. In respect of borrowal accounts
no further debits shall be allowed.
7. A declaration shall be obtained from the customer to the effect that no other account has
been opened nor will be opened using OTP based KYC in non-face-to-face mode with
any other RE. Further, while uploading KYC information to CKYCR, REs shall clearly
indicate that such accounts are opened using OTP based e-KYC and other REs shall not
open accounts based on the KYC information of accounts opened with OTP based e-
KYC procedure in non-face-to-face mode.
8. REs shall have strict monitoring procedures including systems to generate alerts in case
of any non-compliance/violation, to ensure compliance with the above mentioned
conditions.

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MODERN BANKING

UNIT – I: Banker and Customer Relationship

UNIT – II: Customer’s Accounts with the Banker

UNIT – III: Reserve Bank of India

UNIT – IV: Negotiable Instruments Act, 1881

MEANING AND DEFINITIONS

Structure of the Indian Banking System

Types of Banks in India

BANKER AND CUSTOMER

Relationship of Trustee and Beneficiary:-

Relationship of Advisor and Client:-

Relationship of Agent and Principal:-

Statutory Obligation to honour cheques:

Secrecy of customer’s account:

Banker’s right to claim incidental charges:

Right to charge interest

Right to levy commission and service charges

The Right of Set-off

Right to Close the Account

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