CHAPTER FIVE

BANK SERVICE
 Non-depository Institutions

• There are five categories of non-depository

institutions:
– Insurance companies;
– Pension funds;
– Securities firms, including brokers, mutual-fund
companies, and investment banks;
– Finance companies, and
– Government-sponsored enterprises.

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 Depository Institutions
• Types
– Commercial Banks
– Savings and Loans
– Savings Banks
– Credit Units
Types of Deposits and Opening an Account

 TYPES OSF ACCOUNT

 CURRENT /CHECKING ACCOUNT
 SAVING
 FIXED
 Con’t
• Standard Formats to be filled while Opening
Current Account
1. Opening Application Form:
2. Specimen Signature Cards
4. Check Requisition Form
3. Deposit Slip:
 Current Account Operations

A. Issuance of Checkbooks
B. Identification of Payees
C. Signature Verification
D. Check Payment
E. Payment by Written Orders
F. Blocking
G. Insufficient Fund Checks
H. Stop Payment Order
I. Change of Current Account Holder Address
J. Change of Signature
K. Dispatch of Bank Statement
L. Closing Customer’s Current Account
 Savings Account Banking
• Saving – the earning less consumption
• The reason for saving:
 theft
 fire, robbery and other unforeseen hazards.
 Investment/future is uncertain
• It can opened by salaried ,lower and middle income
person
• The aim to encourage the habit of saving
• It have own interest and can’t easily with draw at any time
 Fixed Deposit Account

• It deposit for the fixed time at fixed interest rate

• Can not withdraw before the expired date
• The longer the periods of time deposited will
have higher interest rate
• Most of the time it suitable to those who have
higher income person
• They are not negotiable
• Interest is calculate monthly
 The Paying Banker

• This the bank that issue the check to their customer

• The banker who is liable to pay the value of a
cheque of a customer as per the contract, when the
amount is due from him to the customer is called
“Paying Banker” or “Drawee Bank.”
• Honoring of cheques drawn by his customer is a
very important obligation of a banker. He should
not dishonour his customer’s cheques without
adequate ground.
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 Dishonors of Cheques
• In the following issue the paying bank can dishonor the cheque
• When the Customer Countermands the Payment
• Notice of the Customer’s Death
• Notice of Customer’s Insanity
• Notice of the Customer’s Insolvency
• Receipt of the Garnishee Order
• Notice of Assignment
• Trust Accounts
• Suspicion about the Title over the Cheque
 Con’t
•A banker may dishonor a cheque with out liability
•Post-dated Cheques
•Insufficiency of Funds
•Presentation of Cheque
•Joint Accounts
•Material Alterations
•Stale Cheques
•Drawer’s Signature
•Difference between Words and Figures
•Endorsement
•Proper Form of the Cheque
 Con’t
• Remarks on Dishonored Check
 R.D. (Refer to Drawer): This remark is used only when
there is reasonable ground to suspect the veracity of the
check.
 N.S. (Not sufficient), N.E. (No. Effects): These are used
where the drawer’s balance is inadequate to meet the check.
 E.I. (Endorsement Irregular)
 E.N.C. (Effect is not cleared): This is used when check
deposited are not yet collected and not available for
withdrawal.
 Collecting Banker
 Bank that perform different activities on the behalf of their
customer.
 bank collects check and bills on behalf of his customers in
order to provide a facility or service to them.
 In performing this function, he acts as an agent of his
customer, and is bound to use reasonable skill, care and
diligence.
 Collecting banker means the banker who collects the check
and bills on behalf of the customers. While collecting the
check of a customer, the banker may act in the capacity of
either(a) as a holder for value, or (b) as an agent of the
customer.
 Collecting Banker as Holder for Value

 A collecting banker is holder for value if he gives the value of the check in
any form to its customer before collecting the proceeds of the check
deposited by the latter
• In this case doesn't act as an agent
• Bank act as owner because it pay the full amount of the check
 According to Paget, a banker becomes a holder for value in the following
ways:
 by lending further on the strength of the check
 by paying the amount of the check or part of it in cash or in account
before it is cleared;
 by agreeing that the customer may draw before the check is cleared;
 by accepting the check in avowed reduction of an existing overdraft;
 by giving cash over the counter for the check at the time it is deposited in
for collection
Collecting Banker as an Agent of the Customer

• When a collecting banker acts as an agent of the

customer, he credits the Customer account with the
amount of the check after proceeds of the check are
actually collected from the drawee banker.
• The customer can collect from the account
• Bank act as an agent
• If the check collected by the banker does not belong to
his customer, the banker will be liable for ‘conversion
of money’ or in other words, for illegally interfering
with the rights of the true owner of the check.
 Conversion

• Conversion is a legal term signifying wrongful

interference with another person’s property
inconsistent with another’s right of
possession.”
• Conversion applies only to tangible property
and not to debts.
• The banker is liable for conversion to the true
owner of the instrument:
Statutory Protection to Collecting Banker
• A collecting banker can claim protection against
conversion if the following conditions are fulfilled.
1. Good Faith and Without Negligence: Statutory
protection is available to a collecting banker when he
receives payment in good faith and without
negligence.
• in “good faith” means honestly and without notice or
interest of deceit or fraud and does necessarily
require carefulness. Negligence means failure to
exercise reasonable care.
 CON’T
2. Collection for a Customer: Statutory protection is
available to a collecting banker if he collects on behalf of
his customer only.
3. Acts as an Agent: A collecting banker must act as an
agent of the customer in order to get protection. He must
receive the payment as an agent of the customer and not as
a holder under independent title.
4. Crossed Checks: Statutory protection is available only in
case of crossed check. It is not available in case uncrossed
or open check because there is no need to collect them
through a banker.
Duties and Responsibilities of a Collecting Banker

1. Due Care and Diligence in the Collection of

Cheques
2. Serving Notice of Dishonor
3. Agent for Collection
4. Remittance of Proceeds to the Customer
5. Collection of Bills of Exchange
 Marking of Cheque

• The marking of cheque means “a cheque

which is marked or certified by the drawee
banker, to the effect, that it is good for
payment.”
• The drawee bank certifies that the drawer of
the cheque has sufficient balance in his
account and the cheque will not be
dishonoumred due to lack of funds.
 5 Loan and Advances
 loan : is given for more than a year
 The borrower may withdraw the entire amount in lump sum
or in installments. However, interest is charged on the full
amount of loan. Loans are generally granted against the
security of certain assets. A loan may be repaid either in lump
sum or in installments.
 It so economical to the bank
 Advance: It differs from loan in the sense that loans may be
granted for longer period, but advances are normally granted
for a short period of time.
 The purpose of granting advances is to meet the day to day
requirements of business. Interest is charged only on the
amount withdrawn and not on the sanctioned amount.
 Cont’d
• Actions must be consider when bank give loan and advance:
1. Safety
2. Liquidity
3. Return or Profitability
4. Diversification
5. Object of Loan
6. Security
7. Margin Money
8. National Interest
9. Character of the Borrower
 Types of Loans and Advances

A. On the Basis of Object or Purpose

– Commercial Loans: is taken to meet short term
requirement of capital e.g., working capital.
– Consumer Loan: This loan is taken to finance household
goods like fridge, T.V., scooter etc.
– Agricultural Loan: Such a loan is taken by the farmers to
meet their short term requirements like buying seeds,
fertilizers, insecticides etc.
B. On the Basis of Time
– Short Term Loan: given to less than a year.
– Medium Term Loan: ranging from 1 year to 3 years.
– Long Term Loan: Such a loan is taken to meet long-term
requirements from 3 years or more.
 Con’t
C. On the Basis of Security
– Secured Loan: loan is made on the security of assets, the
market value of which is not at any time less than the amount
of such loan or advance.
– Unsecured Loans: Such a loan is granted without any security.
D. On the Basis of Form
• Loan,
• Cash credit, and
• Overdraft.
• Purchase & discounting of bills of exchange
 Letter of Credit
 It is an agreement between the buyer and seller in the international trade.
 to give confidence to both exporter and importer through an impartial
mechanism that commercial banks with international banking experience
have developed.
 it assures the exporter that a bank will make payment for goods shipped.
 It assures the importer that the exporter will not be paid unless the
documentation submitted by the exporter conforms to the terms and
conditions of the letter of credit.
 A L/C issued by a commercial bank with worldwide banking facilities
solves the financing problem. In addition it assures banks involved in that
transaction will control the document. The issuing and paying commercial
banks perform various services for which they receive fees.
 Steps of letter of credit
Step 1 Buyer and seller agree terms, including means of transport, period of
credit offered, latest date of shipment and other relevant terms to be
used.
Step 2 Then the buyer applies to the bank for a letter of credit to be issued.
Step 3 The bank evaluates the buyer’s credit rating, and may require a cash
cover and/or a reduction of other lending limits.
Step 4 The issuing bank will issue a letter of credit. This will be sent to the
advising bank by airmail, telex or SWIFT.
Step 5 The advising bank will establish authenticity of the letter of credit
using signature books or test codes, then informs the seller (beneficiary).
Step 6 The advising bank may confirm the letter of credit, i.e., add its own
payment undertaking.
• Step 7 The seller should check that the letter of credit matches the
commercial agreement, and that the terms and conditions can be satisfied
in good time.
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Step 6 The advising bank may confirm the letter of credit, i.e., add its own
payment undertaking.
Step 7 The seller should check that the letter of credit matches the commercial
agreement, and that the terms and conditions can be satisfied in good time.

Step 8 If there is anything that may cause a problem, an amendment should

be requested.
Step 9 The seller ships the goods and gathers together all the documents
asked for in the letter of credit, such as the invoice and transport document.
Step 10 Before presenting the documents to the bank, the seller should check
them for discrepancies against the letter of credit, and correct the
documents where necessary.
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Step 11 The documents are presented to a bank, often the
advising bank.
Step 12 The advising bank checks the documents against the
letter of credit. If the documents are compliant, the bank pays
the seller and forwards the documents to the issuing bank.
Step 13 The issuing bank will also check the documents. If they
are in order the issuing bank will reimburse the seller’s bank
immediately.
Step 14 The issuing bank debits the buyer and releases the
documents (including transport document), so that the buyer
can claim the goods from the carrier.
 Types of Letters of Credit

1. Confirmed Irrevocable Letter of Credit

2. Unconfirmed Irrevocable Letter of Credit
3. Revocable Letter of Credit
4. Revolving Letter of Credit
5. Transferable/Assignable Letter of Credit
6. Standby Letter of Credit:
7. Import Letter of Credit
8. Export Letter of Credit
 CON’T
1.Confirmed Irrevocable Letter of Credit: The importer’s bank Issues this
type of L/C, and a bank in the exporter’s country confirms the L/C.
 The importers bank commits itself irrevocably to pay against the
exporter’s draft, and the confirming bank (usually the advising bank)
adds its commitment and assumes the responsibility to pay the exporter’s
draft if the presentation of the required documents is in good order.
 It gives the exporter the greatest protection.
 Unconfirmed Irrevocable Letter of Credit:
 the advising bank (the exporter's bank) is under no obligation to pay
such a draft.
 Payment is the sole responsibility of the opening bank (the importer’s
bank).
 Con’t
2.Revocable Letter of Credit
 Can amend by the issuing bank
 No protection to the seller