SHAHZADA HILAL

AHMADHILAL850@GMAIL.COM
+919906837425

BASICS OF BANKING AND INSURANCE

Banking: Meaning and definition
Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector acts
as the backbone of modern business. Development of any country mainly depends upon the
banking system. A bank is a financial institution which deals with deposits and advances
and other related services. It receives money from those who want to save in the form of
deposits and it lends money to those who need it. It deals with deposits and advances and
other related services like lending money to grow the economy. Banks act as bridge
between the people who save and people who want to borrow i.e., It receives money from
those people who want to save as deposits and it lends money to those who want to borrow
it. The money you deposited in bank will not be idle. It will grow by means of interest to
your bank account they will earn interest in return for lending out the same money to
borrowers. This would ensure smooth money flow to develop our economy.
Definition of a Bank
Chambers Twentieth century Dictionary defines a bank as, an institution for the keeping,
lending and exchanging etc. of money.
According to Banking Regulation Act, Banking means the accepting for the purpose of
lending or investment of deposits of money from the public, repayable on demand or
otherwise and withdrawable by cheque, draft, and an order or otherwise.
Oxford Dictionary defines a bank as "an establishment for custody of money, which it pays
out on customer's order."
Prof. Kent defines a bank as, an organization whose principal operations are concerned
with the accumulation of the temporarily idle money of the general public for the purpose
of advancing to others for expenditure
Indian Banking Structure
The structure of banking in India consists of following components:
1. Central Bank Reserve Bank of India (RBI)
2. Commercial Banks
a. Public sector Banks
b. Private Banks
c. Foreign Banks
3. Co-operative Banks
a. Primary Credit Societies
b. Central Co-operative Banks
c. State Co-operative Banks
4. Regional Rural Banks
5. Development Banks
6. Specialized Banks
a. Export Import Bank of India
b. Small Industries Development Bank of India
c. National Bank for Agricultural and Rural Development
7. Microfinance institutions

8. Development financial institutions

Indian Banking system Reserve bank of India, commercial banks, co-operative banks and
regional rural banks broadly make up the banking system in India. There are two more
types of banks, namely development banks and specialized banks for some particular
purposes.
Central Bank Reserve Bank of India (RBI)
The Reserve Bank of India (RBI), the central bank of India, which was established in 1935,
has been fully owned by the government of India since nationalization in 1949. Like the
central bank in most countries, Reserve Bank of India is entrusted with the functions of
guiding and regulating the banking system of a country.
Commercial Banks
There are three types of commercial banks in India
1. Public sector banks
2. Private Banks
3. Foreign banks
Currently, there are 88 scheduled commercial banks, including 28 public sector banks, 29
private banks and 31 foreign banks.
Public sector banks
these are banks where majority stake is held by the Government of India or Reserve Bank
of India. In 2012, the largest public sector bank is the State Bank of India. This consists of
14 banks which are nationalized in the year 1969 and 6 banks which are nationalized in the
year 1980. Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of
Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank
Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank
Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United
Bank of India Vijaya Bank State bank and its associates
Private Banks
Private Banks are banks that the majority of share capital is held by private individuals. In
Private sector small scheduled commercial banks and newly established banks with a
network of 8,965 branches are operating. To encourage competitive efficiency, the setting
up of new private bank is now encouraged. Examples of old private sector banks are:
Bank of Rajasthan Catholic Syrian Bank Dhanalakshmi Bank Federal Bank
ING Vysya Bank Karnataka Bank Karur Vysya Bank Lakshmi Vilas Bank Lord
Krishna Bank South Indian Bank Tamilnad Mercantile Bank Examples on new
generation private sector banks are: Bank of Punjab Centurion Bank HDFC Bank
ICICI Bank IDBI Bank Ltd. IndusInd Bank Kotak Mahindra Bank UTI Bank Yes
Bank
Foreign Banks
Foreign banks are registered and have their headquarters in a foreign country but operate
their branches in India. Apart from financing of foreign trade, these banks have performed
all functions of commercial banks and they have an advantage over Indian banks because
of their vast resources and superior management. At the end of September, 2010, 34

foreign banks were operating in India.

Co-operative banks
Co-operative banks are banks incorporated in the legal form of cooperatives. Any
cooperative society has to obtain a license from the Reserve Bank of India before starting
banking business and has to follow the guidelines set and issued by the Reserve Bank of
India. Currently, there are 68 co-operatives banks in India. There are three types of cooperatives banks with different functions:
Primary Credit Societies:
Primary Credit Societies are formed at the village or town level with borrower and nonborrower members residing in one locality. The operations of each society are restricted to
a small area so that the members know each other and are able to watch over the activities
of all members to prevent frauds.
Central Co-operative Banks:
Central co-operative banks operate at the district level having some of the primary credit
societies belonging to the same district as their members. These banks provide loans to
their members (i.e., primary credit societies) and function as a link between the primary
credit societies and state co-operative banks.
State Co-operative Banks:
These are the highest level co-operative banks in all the states of the country. They mobilize
funds and help in its proper channelization among various sectors. The money reaches the
individual borrowers from the state co-operative banks through the central cooperative
banks and the primary credit societies.
Regional rural Banks
The regional rural banks are banks set up to increase the flow of credit to smaller
borrowers in the rural areas. These banks were established on realizing that the benefits of
the co-operative banking system were not reaching all the farmers in rural areas.
Currently, there are 196 regional rural banks in India.
Regional rural banks perform the following two functions:
1. Granting of loans and advances to small and marginal farmers, agricultural workers,
cooperative societies including agricultural marketing societies and primary agricultural
credit societies for agricultural purposes or agricultural operations or related purposes.
2. Granting of loans and advances to artisans small entrepreneurs engaged in trade,
commerce or industry or other productive activities.
Development Banks
Development Banks are banks that provide financial assistance to business that requires
medium and long-term capital for purchase of machinery and equipment, for using latest
technology, or for expansion and modernization. A development bank is a multipurpose
institution which shares entrepreneurial risk, changes its approach in tune with industrial
climate and encourages new industrial projects to bring about speedier economic growth.
These banks also undertake other development measures like subscribing to the shares and
debentures issued by companies, in case of under subscription of the issue by the public.
There are three important national level development banks. They are;
Industrial Development Bank of India (IDBI)

The IDBI was established on July 1, 1964 under an Act of Parliament. It was set up as the
central coordinating agency, leader of development banks and principal financing
institution for industrial finance in the country. Originally, IDBI was a wholly owned
subsidiary of RBI. But it was delinked from RBI w.e.f. Feb. 16, 1976. IDBI is an apex
institution to co-ordinate, supplement and integrate the activities of all existing specialised
financial institutions. It is a refinancing and re-discounting institution operating in the
capital market to refinance term loans and export credits. It is in charge of conducting
technoeconomic studies. It was expected to fulfil the needs of rapid industrialization. The
IDBI is empowered to finance all types of concerns engaged or to be engaged in the
manufacture or processing of goods, mining, transport, generation and distribution of
power etc., both in the public and private sectors.
Industrial finance Corporation of India (IFCI)
The IFCI is the first Development Financial Institution in India. It is a pioneer in
development banking in India. It was established in 1948 under an Act of Parliament. The
main objective of IFCI is to render financial assistance to large scale industrial units,
particularly at a time when the ordinary banks are not forth coming to assist these
concerns. Its activities include project financing, financial services, merchant banking and
investment. Till 1993, IFCI continued to be Developmental Financial Institution. After
1993, it was changed from a statutory corporation to a company under the Indian
Companies Act, 1956 and was named as IFCI Ltd with effect from October 1999.
Industrial Credit and Investment Corporation of India (ICICI)
ICICI was set up in 1955 as a public limited company. It was to be a private sector
development bank in so far as there was no participation by the Government in its share
capital. It is a diversified long term financial institution and provides a comprehensive
range of financial products and services including project and equipment financing,
underwriting and direct subscription to capital issues, leasing, deferred credit, trusteeship
and custodial services, advisory services and business consultancy. The main objective of
the ICICI was to meet the needs of the industry for long term funds in the private sector.
Specialized Banks
In India, there are some specialized banks, which cater to the requirements and provide
overall support for setting up business in specific areas of activity. They engage themselves
in some specific area or activity and thus, are called specialized banks. There are three
important types of specialized banks with different functions:
Export Import Bank of India (EXIM Bank):
The Export-Import (EXIM) Bank of India is the principal financial institution in India for
coordinating the working of institutions engaged in financing export and import trade. It is
a statutory corporation wholly owned by the Government of India. It was established on
January 1, 1982 for the purpose of financing, facilitating and promoting foreign trade of
India. This specialized bank grants loans to exporters and importers and also provides
information about the international market. It also gives guidance about the opportunities
for export or import, the risks involved in it and the competition to be faced, etc. Role and
importance of banks in economic development A proper financial sector is of special
importance for the economic growth of developing and underdeveloped countries. The

commercial banking sector which forms one of the backbones of the financial sector should
be well organized and efficient for the growth dynamics of a growing economy. No
underdeveloped country can progress without first setting up a sound system of
commercial banking. The importance of a sound system of banking for a developing
country may be depicted as follows :
1. Capital Formation
The rate of saving is generally low in an underdeveloped economy due to the existence of
deep-rooted poverty among the people. Even the potential savings of the country cannot be
realized due to lack of adequate banking facilities in the country. To mobilize dormant
savings and to make them available to the entrepreneurs for productive purposes, the
development of a sound system of commercial banking is essential for a developing
economy.
2. Monetization
An underdeveloped economy is characterized by the existence of a large non monetized
sector, particularly, in the backward and inaccessible areas of the country. The existence of
this non monetized sector is a hindrance in the economic development of the country. The
banks, by opening branches in rural and backward areas, can promote the process of
monetization in the economy.
3. Innovations Innovations are an essential prerequisite for economic progress. These
innovations are mostly financed by bank credit in the developed countries. But the
entrepreneurs in underdeveloped countries cannot bring about these innovations for lack
of bank credit in an adequate measure. The banks should, therefore, pay special attention
to the financing of business innovations by providing adequate and cheap credit to
entrepreneurs.
4. Finance for Priority Sectors
The commercial banks in underdeveloped countries generally hesitate in extending
financial accommodation to such sectors as agriculture and small scale industries, on
account of the risks involved there in. They mostly extend credit to trade and commerce
where the risk involved is far less. But for the development of these countries it is essential
that the banks take risk in
extending credit facilities to the priority sectors, such as agriculture and small scale
industries.
5. Provision for Medium and Long term Finance
The commercial banks in under developed countries invariably give loans and advances for
a short period of time. They generally hesitate to extend medium and long term loans to
businessmen. As is well known, the new business need medium and long term loans for
their proper establishment. The commercial banks should, therefore, change their policies
in favour of granting medium and long term accommodation to business and industry.
Role of Banks in Indian Economy
In India, as in many developing countries, the commercial banking sector has been the
dominant element in the countrys financial system. The sector has performed the key
functions of providing liquidity and payment services to the real sector and has accounted
for the Bulk of the financial intermediation process. Besides institutionalizing savings, the

banking sector has contributed to the process of economic development by serving as a

major source of credit to households, government, and business and to weaker sectors of
the economy like village and small scale industries and agriculture. Over the years, over 3040% of gross household savings have been in the form of bank deposits and around 60% of
the assets of all financial institutions accounted for by commercial banks. An important
landmark in the development of banking sector in recent years has been the initiation if
reforms following the recommendations of the first Narasimham Committee on Financial
System. In reviewing the strengths and weaknesses of these banks, the Committee
suggested several measures to transform the Indian banking sector from a highly regulated
to amore market oriented system and to enable it to compete effectively in an increasingly
globalized environment. Many of the recommendations of the Committee especially those
pertaining to Interest rate, an institution of prudential regulation and transparent
accounting norms were in line with banking policy reforms implemented by a host of
developing countries since 1970s.
Commercial Banks
A bank is a financial institution engaged in banking business. A bank is a financial
intermediary. It deals in money and credit. It deals with other people's money. It collects
the savings of some people and gives the money to those who are in need of it. Thus a
bank is a reservoir of money. It is a manufacturer of money. It manufactures credit and
sells it. That is why a bank is called as a "factory of credit". Commercial banks are profit
making organizations that accept deposits and use these funds to make loans. They are
playing the most important role in modern economic organization. It performs an
important economic organization. They perform an important economic function by
mobilizing the savings of the community and channelize the savings to productive
purposes.
The tiny streams of capital flowing into the bank vaults become rives and these in turn fall
into ocean of National Finance to drive the wheels of industry and to float the vessels of
commerce. There are mainly two types of commercial banking institutions in India such
as public sector banks and private sector banks. The commercial banking group consists of
27 Public sector banks, 29 private sector banks, 36 Foreign Banks operating in India, 196
Regional Rural Banks and 4 Local Area Banks.
Functions of Commercial Banks
Commercial banks perform a variety of functions. All functions of commercial banks may
be broadly classified into two - primary functions and secondary functions.
Primary Functions
Primary functions consist of accepting deposits, lending money and investment of funds.
1. Accepting deposits: Bank receives idle savings of people in the form of deposits. It
borrows money in the form of deposits. These deposits may be of any of the following
types:
(a) Current or demand deposit: In the case of current deposits money can be deposited and
withdrawn at any time. Money can be withdrawn only by means of cheques. Usually a
bank does not allow any interest on this kind of deposit because, bank cannot
utilize these short term deposits. This type of deposits is generally opened by business

people for their convenience. Current account holders should keep a minimum balance of
Rs. 2000, to keep the account running.
(b) Fixed or time deposits: These deposits are made for a fixed period. These can be
withdrawn only after the expiry of the fixed period for which the deposits have been made.
The bank gives higher rate of interest on this deposit. The rate of interest depends upon the
duration of deposit. The longer the period the higher will be the rate of interest. For the
evidence of the deposit, the banker issues a Fixed Deposit Receipt.
(c) Savings Deposits: As the name suggests, this deposit is meant for promotion of savings
and thrift among the people. In the case of savings deposits there are certain restrictions on
the number of withdrawals or on the amount that can be withdrawn per week. A minimum
balance of Rs. 100 should be maintained and if cheque book facility is allowed, the
minimum balance should be Rs. 1000. On the savings deposit, the rate of interest is less
than that on the fixed deposit.
(d) Recurring deposits: This is one form of savings deposit. In this type of deposit, at the
end of every week or month, a fixed amount is deposited regularly. The amount can be
withdrawn only after the expiry of the specified period. This deposit works on the maxim
little drops of water make a big ocean. It may be opened for monthly installments in sums
of Rs. 100 or in multiples of Rs. 100 with a maximum of Rs. 1000.
2. Lending Money: Lending constitutes the second function f a commercial bank. Out of
the deposits received, a bank lends money to the traders and businessmen. Money is lent
usually for short periods only. A commercial bank lends in any one of the following ways:
(a) Loans: In case of loan, the banker advances a lump sum for a certain period at an
agreed rate of interest. The amount granted as loan is first credited in the borrowers
account. He can withdraw this amount at any time. The interest is charged for the full
amount sanctioned whether he withdraws the money from this account or not. Loan is
granted with or without security.
(b) Cash credit: Cash credit is an arrangement by which the customer is allowed to borrow
money up to a certain limit. The customer can withdraw the amount as and when required.
Interest is charged only for the amount withdrawn and not for the whole amount as in the
case of loan.
(c) Overdraft: overdraft is an arrangement between a banker and his customer by which
the customer is allowed to withdraw over and above the credit balance in the current
account up to an agreed limit. The interest is charged only for the amount sanctioned. This
is a temporary financial assistance. It is given either on personal security or on the security
of assets.
(d) Discounting of bills: Bank grants advances to their customers by discounting bills of
exchange or pronote. In other words, money is lent on the security of bill of exchange or
pronote. The amount after deducting the interest (discount) from the amount of the bill is
credited in the account of the customer. Thus in this form of lending, the interest is
received by the banker in advance. Bank, sometimes, purchases the bills instead of
discounting them.
3. Investment of funds: Another function is investing the funds in some securities. While
making investment a bank is required

to observe three principles, namely liquidity, profitability and safety. A bank invests its
funds in government securities issued by central government as well as state government. It
also invests in other approved securities like the units of UTI, shares of GIC and LIC,
securities of State Electricity Board etc.
4. Credit Creation: -It is a unique function of Commercial Banks. When a bank advances
loan to its customer if doesnt lend cash but opens an account in the borrowers name and
credits the amount of loan to that account. Thus, whenever a bank grants loan, it creates an
equal amount of bank deposits. Creation of deposits is called Credit Creation. In simple
words we can define Credit creation as multiple expansions of deposits. Creation of such
deposits will results an increase in the stock deposits. Creation of such deposits will results
an increase in the stock of money in an economy.
Secondary Functions
Secondary functions include agency services and general utility services
Agency Services: Modern commercial banks render a number of services to its customers.
It acts as an agent to its customers.
The following are the important agency services rendered by a commercial bank:
1. It collects the cheques, bills and pronotes for and on behalf of its customers
2. It collects certain incomes like dividend on shares, interest on securities etc., on behalf of
its customers.
3. It undertakes to purchase or sell securities for its customers.
4. It accepts bill of exchange on behalf of its customers.
5. It acts as a referee by supplying information regarding the financial position of its
customers when inquiries made by other business people and vice versa. It supplies this
information confidently.
6. It acts as an executor, administrator and trustee. Modern Functions of a Commercial
Bank
1. Changing cash for bank deposits and bank deposits for cash.
2. Transferring bank deposits between individuals and/or companies.
3. Exchanging deposits for bills of exchange, government bonds, secured and unsecured
promises of trade and industrial units.
4. Underwriting capital issues.
5. Providing 24 hours facility of payments through ATMs.
6. It issues credit cards, smart cards etc.
Central Bank - meaning
A modern central bank performs so many functions of different nature that it is very
difficult to give any brief but accurate definition of a central bank. Any definition of a
central bank is derived from its functions and these functions have varied from
time to time and from country to country. In other words, the functions of central banks
have grown over time making it more difficult to give any brief and unchanging definition
of a central bank. We may say that a central bank is one which acts as the banker to the
governments and the commercial banks, has the monopoly of note issue, operates the
currency and credit system of the country and does not perform the ordinary commercial
banking function. Economists have defined central bank differently, emphasizing its one

function or the other.

According to Vera Smith, the primary definition of Central banking is a banking system
in which a single bank has either complete or a residuary monopoly of note issue. In the
statutes of the Bank for International Settlements, a central bank is the bank in any
country to which has been entrusted the duty of regulating the volume of currency and
credit in the country. The fact that several banks have been named reserve banks appears
to show that in the opinion of some authorities the custody of bank reserves is the
characteristic function of a central bank.
Reserve Bank of India (RBI)
The RBI is the Central Bank of our country. It is the open Institution of India Financial
and monetary system. RBI came into existence on 1st April, 1935 as per the RBI act 1935.
But the bank was nationalized by the government after Independence. It became the public
sector bank from 1st January, 1949. Thus, RBI was established as per the Act 1935 and
empowerment took place in banking regulation Act 1949. RBI has 4 local boards basically
in North, South, East and West Delhi, Chennai, Calcutta, and Mumbai.
Functions of Reserve Bank of India (RBI)
I. Traditional Functions
Traditional functions are those functions which every central bank of each nation performs
all over the world. Basically these functions are in line with the objectives with which the
bank is set up. It includes fundamental functions of the Central Bank. They comprise the
following tasks.
1. Issue of Currency Notes: The RBI has the sole right or authority or monopoly of issuing
currency notes except one rupee note and coins of smaller denomination. These currency
notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 5, 10, 20,
50, 100, 500, and 1,000. The RBI has powers not only to issue and withdraw but even to
exchange these currency notes for other denominations. It issues these notes against the
security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes
and government of India bonds.
2. Banker to other Banks: The RBI being an apex monitory institution has obligatory
powers to guide, help and direct other commercial banks in the country. The RBI can
control the volumes of banks reserves and allow other banks to create credit in
that proportion. Every commercial bank has to maintain a part of their reserves with its
parent's viz. the RBI. Similarly in need or in urgency these banks approach the RBI for
fund. Thus it is called as the lender of the last resort.
3. Banker to the Government: The RBI being the apex monitory body has to work as an
agent of the central and state governments. It performs various banking function such as to
accept deposits, taxes and make payments on behalf of the government. It works as a
representative of the government even at the international level. It maintains government
accounts, provides financial advice to the government. It manages government public debts
and maintains foreign exchange reserves on behalf of the government. It provides
overdraft facility to the government when it faces financial crunch.
4. Exchange Rate Management: It is an essential function of the RBI. In order to maintain
stability in the external value of rupee, it has to prepare domestic policies in that direction.

Also it needs to prepare and implement the foreign exchange rate policy which will help in
attaining the exchange rate stability. In order to maintain the exchange rate stability it has
to bring demand and supply of the foreign currency (U.S Dollar) close to each other.
5. Credit Control Function: Commercial bank in the country creates credit according to
the demand in the economy. But if this credit creation is unchecked or unregulated then it
leads the economy into inflationary cycles. On the other credit creation is below the
required limit then it harms the growth of the economy. As a central bank of the nation the
RBI has to look for growth with price stability. Thus it regulates the credit creation
capacity of commercial banks by using various credit control tools.
6. Supervisory Function: The RBI has been endowed with vast powers for supervising the
banking system in the country. It has powers to issue license for setting up new banks, to
open new branches, to decide minimum reserves, to inspect functioning of commercial
banks in India and abroad, and to guide and direct the commercial banks in India. It can
have periodical inspections an audit of the commercial banks in India.
II. Developmental / Promotional Functions of RBI Along with the routine traditional
functions, central banks especially in the developing country like India have to perform
numerous functions. These functions are country specific functions and can change
according to the requirements of that country. Some of the major development functions of
the RBI are given below.
1. Development of the Financial System: The financial system comprises the financial
institutions, financial markets and financial instruments. The sound and efficient financial
system is a precondition of the rapid economic development of the nation. The RBI has
encouraged establishment of main banking and non-banking institutions to cater to the
credit requirements of diverse sectors of the economy.
2. Development of Agriculture: In an agrarian economy like ours, the RBI has to provide
special attention for the credit need of agriculture and allied activities. It has successfully
rendered service in this direction by increasing the flow of credit to this sector. It has
earlier the Agriculture Refinance and Development Corporation (ARDC) to look after the
credit, National Bank for Agriculture and Rural Development (NABARD) and Regional
Rural Banks (RRBs).
3. Provision of Industrial Finance: Rapid industrial growth is the key to faster economic
development. In this regard, the adequate and timely availability of credit to small,
medium and large industry is very significant. In this regard the RBI has always been
instrumental in setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI and
EXIM BANK etc.
4. Provisions of Training: The RBI has always tried to provide essential training to the staff
of the banking industry. The RBI has set up the bankers' training colleges at several places.
National Institute of Bank Management i.e NIBM, Bankers Staff College i.e BSC and
College of Agriculture Banking i.e CAB are few to mention.
5. Collection of Data: Being the apex monetary authority of the country, the RBI collects
process and disseminates statistical data on several topics. It includes interest rate,
inflation, savings and investments etc. This data proves to be quite useful for researchers
and policy makers.

6. Publication of the Reports: The Reserve Bank has its separate publication division. This
division collects and publishes data on several sectors of the economy. The reports and
bulletins are regularly published by the RBI. It includes RBI weekly reports,
RBI Annual Report, Report on Trend and Progress of Commercial Banks India., etc. This
information is made available to the public also at cheaper rates.
7. Promotion of Banking Habits: As an apex organization, the RBI always tries to promote
the banking habits in the country. It institutionalizes savings and takes measures for an
expansion of the banking network. It has set up many institutions such as the
Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD- 1982, NHB-1988,
etc. These organizations develop and promote banking habits among the people. During
economic reforms it has taken many initiatives for encouraging and promoting banking in
India.
8. Promotion of Export through Refinance: The RBI always tries to encourage the facilities
for providing finance for foreign trade especially exports from India. The Export-Import
Bank of India (EXIM Bank India) and the Export Credit Guarantee Corporation of India
(ECGC) are supported by refinancing their lending for export purpose.

INNOVATIONS OF BANKING
ONLINE BANKING
Online banking is an electronic payment system that enables customers of a financial
institution to conduct financial transactions on a website operated by the institution, such
as a retail bank, virtual bank, credit union or building society.
Banking online or by phone allows you to make banking transactions such as transferring
money, paying a bill, checking your balance or setting up a regular payment on your bank
or building societys secure website. Online banking is accessible via a computer or a
mobile phone. Also known as internet banking.
What would I use this for?
You can make a range of payments: such as paying utility, tax and credit cards; bills; make
one-off payments to other individuals, small businesses or tradesmen; and make transfers
to other bank accounts or savings accounts.
How do I use it?
You will need to speak to your bank to get set up to use their phone or internet banking
service.
You will need the name, sort code and account details of the company/or person you want
to pay. You will also be asked to provide a reference so that the person or company
receiving the number knows what the payment is for.
Internet banking online payments
You will need to log on to your bank or building societys internet banking service.
Although different banks will structure their websites in different ways when making a
payment you are likely to be asked to select the recipient from a list of previous payees (or
recipients) or to input a new payees details (and there may be additional security checks

before you can add a new recipient). Youll then be asked to enter the amount you want to
pay, and to re-verify that the amount is correct. Your payment will be confirmed.
Telephone banking Phone payments
Work in a similar way to internet banking and you will need to have registered to use the
service. Your bank will have a designated phone banking number, and you will need to
answer some security questions before you can check your balance or set up or make a
payment.
How long does it take to process?
One-off online or phone payments are processed using one of two systems:
Faster Payments or Bacs.
The Faster Payments service is the default service for phone and internet banking
payments and the vast majority will be processed through this system. Faster Payments
enables a payment to be processed 24 hours a day, seven days a week and once youve
made the payment it should be with the recipient within a couple of hours, often almost
instantaneously.
Some banks set value limits for the amount you can send via Faster Payments and the
maximum amount that can be sent through the Faster Payments system is 100,000. Also
some accounts, such as savings and deposit accounts wont enable you to send Faster
Payments or accept them. For these reasons, if speed of a payment is critical you should
check with your bank before sending it. Any payment that cannot be processed as a Faster Payment
will be processed via Bacs. If it goes through this system it will take three days for the payment to
reach the recipients account. However Bacs continues to be used for processing all Direct Debits and
salary payments where the speed of the payment is not an issue. Faster Payments was introduced in
May 2008 to speed up internet, phone and standing order payments within the UK.
Security
It is vital that you ensure that you give the correct sort code and account number and name
of the person/business you want to pay. If you give incorrect details your money may end
up in someone elses account and it may be difficult to get it back. Some banks use hand-held Chip
and PIN card reading devices to add an extra layer of security. You can find more information on how
to stay safe online here.
Useful information
Whether a person can make or receive Faster Payments will always depend on whether the
payment is within a banks limits for sending faster payments and whether both accounts
involved are set up to send or receive them. If speed of your payment is important you
should check with your bank.
In addition, some accounts such as credit cards and utility bills may not be able to receive
Faster Payments, and some savings accounts may not be able to send or receive them.
Phone and online payments will be processed via Backs if they cant be processed as Faster
Payments. This Sort Code Checker shows you whether the account youre sending money to can
receive the funds through Faster Payments.

PHONE BANKING
Telephone banking is a service provided by a bank or other financial institution that
enables customers to perform a range of financial transactions over the telephone, without
the need to visit a bank branch or automated teller machine.

Telephone banking is a service provided by a bank or other financial institution, that enables
customers to perform a range of financial transactions over the telephone, without the need to visit a
bank branch or automated teller machine. Telephone banking times are usually longer than branch
opening times, and some financial institutions offer the service on a 24-hour basis. Most financial
institutions have restrictions on which accounts may be accessed through telephone banking, as well
as a limit on the amount that can be transacted. The types of financial transactions which a customer
may transact through telephone banking include obtaining account balances and list of latest
transactions, electronic bill payments, and funds transfers between a customer's or another's
accounts. From the bank's point of view, telephone banking minimizes the cost of handling
transactions by reducing the need for customers to visit a bank branch for non-cash withdrawal and
deposit transactions. Transactions involving cash or documents (such as cheques) are not able to be
handled using telephone banking, and a customer needs to visit an ATM or bank branch for cash
withdrawals and cash or cheque deposits. Customer verification and authentication is of special
concern with telephone banking. After the customer would call the special phone number set up by
the financial institution, they would enter on the keypad the customer number and password. Some
financial institutions have set up additional security steps for access, but there is no consistency to
the approach adopted. Most telephone banking services use an automated phone answering system
with phone keypad response or voice recognition capability. To ensure security, the customer must
first authenticate through a numeric or verbal password or through security questions asked by a live
representative.

Mobile Banking
Mobile banking refers to the use of a smartphone or other cellular device to perform online
banking tasks while away from your home computer, such as monitoring account balances,
transferring funds between accounts, bill payment and locating an ATM.
How it works/Example:
Mobile banking typically operates across all major mobile providers in the U.S. through
one of three ways: SMS messaging; mobile web; or applications developed for iPhone,
Android or Blackberry devices.
Mobile text and alert is the simplest, allowing the user to transfer funds or access account
information via text message. Texting terminology varies from bank to bank, but the
overall function is generally the same. For example, texting "Bal" will obtain the account
balance while "Tra" will allow inter-account transfers. Users need to first register and
verify their phone numbers with their bank, but once that's completed, they can also set up
alerts to let them know about negative balances or deposit confirmations.
Mobile web is the second mobile banking option. Similar to online account access from a
home-based computer, this option allows for checking balances, bill payment and account
transfers simply by logging into the user's account via a mobile web browser.
Mobile banking applications for Android, iPhone and Blackberry, connect the user directly
to the bank server for complete banking functionality without having to navigate a mobile
web browser. These applications can be downloaded either through the bank's website or
through the iTunes store.
Some banks are taking the technology one step further with account rewards
confirmation, person-to-person payments (P2P) and, more importantly, remote deposit
capture (RDC) capability.

Simply put, RDC is a service allowing users to scan checks and transmit the scanned
images to a bank for posting and clearing. In the case of mobile banking, a customer takes
pictures of both sides of a check and forwards the photos to the bank, which
then deposits the funds in the same way as if the deposit was made through a teller. RDC
capability means customers have faster access to their money, while automating yet
another deposit feature.
Why it Matters:
For consumers, mobile banking is a terrific way to efficiently manage the occasional
administrative task on the go. For small and mid-size business owners, mobile banking
gives the precious gift of time. Closing a sale, meeting new customers or smoothing back
office shipping glitches are important revenue producers. Waiting in line at the bank
to deposit a wad of checks is not.
For banks, mobile banking is a brilliant opportunity to simultaneously woo new customers
while paring operational costs. By responding to the innovations in mobile technology,
banks are effectively saying they're paying attention to the needs of their customers, while
at the same time streamlining a number of processes to meet the fast-paced demands of the
21st century.
Consumers should also be aware that mobile banking poses certain identity theft concerns.
While the transmission of data is encrypted across a secure network, hackers are always on
the lookout for ways of accessing this information. Due diligence should be employed when
relying on mobile banking, including close monitoring of your bank accounts, along with
ensuring proper protection in the event that your mobile phone is lost or stolen.
Mobile banking services
Account information
1. Mini-statements and checking of account history
2. Alerts on account activity or passing of set thresholds
3. Monitoring of term deposits
4. Access to loan statements
5. Access to card statements
6. Mutual funds / equity statements
7. Insurance policy management
Transaction
1. Funds transfers between the customer's linked accounts
2. Paying third parties, including bill payments and third party fund transfers(see,
e.g., FAST)
3. Check Remote Deposit
Investments
1. Portfolio management services
2. Real-time stock quotes
3. Personalized alerts and notifications on security prices
Support
1. Status of requests for credit, including mortgage approval, and insurance coverage
2. Check (cheque) book and card requests
3. Exchange of data messages and email, including complaint submission and tracking

4. ATM Location
Content services
1. General information such as weather updates, news
2. Loyalty-related offers
3. Location-based services
A report by the US Federal Reserve (March 2012) found that 21 percent of mobile phone
owners had used mobile banking in the past 12 months.[5] Based on a survey conducted by
Forrester, mobile banking will be attractive mainly to the younger, more "tech-savvy"
customer segment. A third of mobile phone users say that they may consider performing
some kind of financial transaction through their mobile phone. But most of the users are
interested in performing basic transactions such as querying for account balance and
making bill payment.

Future functionalities in mobile banking

Based on the 'International Review of Business Research Papers' from World business
Institute, Australia, following are the key functional trends possible in world of Mobile
Banking.
With the advent of technology and increasing use of smartphone and tablet based devices,
the use of Mobile Banking functionality would enable customer connect across entire
customer life cycle much comprehensively than before. With this scenario, current mobile
banking objectives of say building relationships, reducing cost, achieving new revenue
stream will transform to enable new objectives targeting higher level goals such as building
brand of the banking organization. Emerging technology and functionalities would enable
to create new ways of lead generation, prospecting as well as developing deep customer
relationship and mobile banking world would achieve superior customer experience with
bi-directional communications. Among digital channels, mobile banking is a clear IT
investment priority in 2013 as retail banks attempt to capitalise on the features unique to
mobile, such as location-based services.

Challenges for a mobile banking solution

Key challenges in developing a sophisticated mobile banking application are :
Handset operability There are a large number of different mobile phone devices and it is a big
challenge for banks to offer mobile banking solution on any type of device. Some of these devices
support Java ME and others support SIM Application Toolkit, a WAP browser, or only SMS.
Initial interoperability issues however have been localized, with countries like India using
portals like "R-World" to enable the limitations of low end java based phones, while focus
on areas such as South Africa have defaulted to the USSD as a basis of communication
achievable with any phone.
The desire for interoperability is largely dependent on the banks themselves, where
installed applications(Java based or native) provide better security, are easier to use and
allow development of more complex capabilities similar to those of internet banking while
SMS can provide the basics but becomes difficult to operate with more complex
transactions.
There is a myth that there is a challenge of interoperability between mobile banking
applications due to perceived lack of common technology standards for mobile banking. In
practice it is too early in the service lifecycle for interoperability to be addressed within an

individual country, as very few countries have more than one mobile banking service
provider. In practice, banking interfaces are well defined and money movements between
banks follow the IS0-8583 standard. As mobile banking matures, money movements
between service providers will naturally adopt the same standards as in the banking world.
On January 2009, Mobile Marketing Association (MMA) Banking Sub-Committee, chaired
by Cell Trust and VeriSign Inc., published the Mobile Banking Overview for financial
institutions in which it discussed the advantages and disadvantages of Mobile Channel
Platforms such as Short Message Services (SMS), Mobile Web, Mobile Client Applications,
SMS with Mobile Web and Secure SMS.
Security
As with most internet-connected devices, as well as mobile-telephony
devices, cybercrime rates are escalating year-on-year. The types of cybercrimes which may
affect mobile-banking might range from unauthorized use while the owner is using the
toilet, to remote-hacking, or even jamming or interference via the internet or telephone
network data streams. In the banking world, currency rates may change by the
millisecond.
Mobile security
Security of financial transactions, being executed from some remote location and
transmission of financial information over the air, are the most complicated challenges that
need to be addressed jointly by mobile application developers, wireless network service
providers and the banks' IT departments.
The following aspects need to be addressed to offer a secure infrastructure for financial
transaction over wireless network:
1. Physical part of the hand-held device. If the bank is offering smart-card based
security, the physical security of the device is more important.
2. Security of any thick-client application running on the device. In case the device is
stolen, the hacker should require at least an ID/Password to access the application.
3. Authentication of the device with service provider before initiating a transaction.
This would ensure that unauthorized devices are not connected to perform financial
transactions.
4. User ID / Password authentication of banks customer.
5. Encryption of the data being transmitted over the air.
6. Encryption of the data that will be stored in device for later / off-line analysis by the
customer.
One-time password (OTPs) are the latest tool used by financial and banking service
providers in the fight against cyber fraud.[8] Instead of relying on traditional memorized
passwords, OTPs are requested by consumers each time they want to perform transactions
using the online or mobile banking interface. When the request is received the password is
sent to the consumers phone via SMS. The password is expired once it has been used or
once its scheduled life-cycle has expired.
Because of the concerns made explicit above, it is extremely important that SMS
gateway providers can provide a decent quality of service for banks and financial
institutions in regards to SMS services. Therefore, the provision of service level
agreements (SLAs) is a requirement for this industry; it is necessary to give the bank

customer delivery guarantees of all messages, as well as measurements on the speed of

delivery, throughput, etc. SLAs give the service parameters in which a messaging solution
is guaranteed to perform.
Scalability and reliability
Another challenge for the CIOs and CTOs of the banks is to scale-up the mobile banking
infrastructure to handle exponential growth of the customer base. With mobile banking,
the customer may be sitting in any part of the world (true anytime, anywhere banking) and
hence banks need to ensure that the systems are up and running in a true 24 x 7 fashion. As
customers will find mobile banking more and more useful, their expectations from the
solution will increase. Banks unable to meet the performance and reliability expectations
may lose customer confidence. There are systems such as Mobile Transaction
Platform which allow quick and secure mobile enabling of various banking services.
Recently in India there has been a phenomenal growth in the use of Mobile Banking
applications, with leading banks adopting Mobile Transaction Platform and the Central
Bank publishing guidelines for mobile banking operations.
Application distribution
Due to the nature of the connectivity between bank and its customers, it would be
impractical to expect customers to regularly visit banks or connect to a web site for regular
upgrade of their mobile banking application. It will be expected that the mobile application
itself check the upgrades and updates and download necessary patches (so called "Over
The Air" updates). However, there could be many issues to implement this approach such
as upgrade / synchronization of other dependent components.
Personalization
It would be expected from the mobile application to support personalization such as :
1. Preferred Language
2. Date / Time format
3. Amount format
4. Default transactions
5. Standard Beneficiary list
6. Alerts

WHOLWSALE BANKING
Wholesale banking is the provision of services by banks to organizations such as Mortgage
Brokers, large corporate clients, mid-sized companies, real estate developers andinvestors,
international trade finance businesses, institutional customers (such as pension funds and
government entities/agencies), and services offered to other banks or other financial
institutions.
Wholesale finance refers to financial services conducted between financial services
companies and institutions such as banks, insurers, fund managers, and stockbrokers.

Universal Banking
DEFINITION OF 'UNIVERSAL BANKING'
A banking system in which banks provide a wide variety of financial services, including
both commercial and investment services. Universal banking is common in some European

countries, including Switzerland. In the United States, however, banks are required to
separate their commercial and investment banking services. Proponents of universal
banking argue that it helps banks better diversify risk. Detractors think dividing up banks'
operations is a less risky strategy.
Universal banking is a combination of Commercial banking, Investment banking,
Development banking, Insurance and many other financial activities. It is a place where all
financial products are available under one roof. So, a universal bank is a bank which offers
commercial bank functions plus other functions such as Merchant Banking, Mutual Funds,
Factoring, Credit cards, Housing Finance, Auto loans, Retail loans, Insurance, etc.
Universal banking is done by very large banks. These banks provide a lot of finance to
many companies. So, they take part in the Corporate Governance (management) of these
companies. These banks have a large network of branches all over the country and all over
the world. They provide many different financial services to their clients.
ln India, two reports in 1998 mentioned the concept of universal banking. They are, the
Narasimham Committee Report and the S.H. Khan Committee Report. Both these reports
advised to consolidate (bring together) the banking industry through mergers and
integration of financial activities. That is, they advised a combination of all banking and
financial activities. That is, they suggested a Universal banking.
In 2000, ICICI asked permission from RBI to become a universal bank. RBI wants some
big domestic financial institutions to become universal banks.
Advantages of Universal Banking
The benefits or advantages of universal banking are:Investors' Trust: Universal banks hold stakes (equity shares) of many companies. These
companies can easily get other investors to invest in their business. This is because other
investors have full confidence and faith in the Universal banks. They know that the
Universal banks will closely watch all the activities of the companies in which they hold a
stake.
Economics of Scale: Universal banking results in economic efficiency. That is, it results in
lower costs, higher output and better products and services. In India, RBI is in favour of
universal banking because it results in economies of scale.
Resource Utilization: Universal banks use their client's resources as per the client's ability
to take a risk. If the client has a high risk taking capacity then the universal bank will
advise him to make risky investments and not safe investments. Similarly, clients with a low
risk taking capacity are advised to make safe investments. Today, universal banks invest
their client's money in different types of Mutual funds and also directly into the share
market. They also do equity research. So, they can also manage their client's portfolios
(different investments) profitably.
Profitable Diversification: Universal banks diversify their activities. So, they can use the
same financial experts to provide different financial services. This saves cost for the
universal bank. Even the day-to-day expenses will be saved because all financial services
are provided under one roof, i.e. in the same office.
Easy Marketing: The universal banks can easily market (sell) all their financial products
and services through their many branches. They can ask their existing clients to buy their
other products and services. This requires less marketing efforts because of their wellestablished

brand name. For e.g. ICICI may ask their existing bank account holders in all
their branches, to take house loans, insurance, to buy their Mutual funds, etc. This is done
very easily because they use one brand name (ICICI) for all their financial products and
services.
One-stop Shopping: Universal banking offers all financial products and services under one
roof. One-stop shopping saves a lot of time and transaction costs. It also increases the speed
or flow of work. So, one-stop shopping gives benefits to both banks and their clients.
Disadvantages of Universal Banking
The limitations or disadvantages of universal banking are:Different Rules and Regulations: Universal banking offers all financial products and
services under one roof. However, all these products and services have to follow different
rules and regulations. This creates many problems. For e.g. Mutual Funds, Insurance,
Home Loans, etc. have to follow different sets of rules and regulations, but they are
provided by the same bank.
Effect of failure on Banking System: Universal banking is done by very large banks. If
these huge banks fail, then it will have a very big and bad effect on the banking system and
the confidence of the public. For e.g. Recently, Lehman Brothers a very large universal
bank failed. It had very bad effects in the USA, Europe and even in India.
Monopoly: Universal banks are very large. So, they can easily get monopoly power in the
market. This will have many harmful effects on the other banks and the public. This is also
harmful to economic development of the country.
Conflict of Interest: Combining commercial and investment banking can result in conflict
of interest. That is, Commercial banking versus Investment banking. Some banks may give
more importance to one type of banking and give less importance to the other type of
banking. However, this does not make commercial sense.

NARROW BANKNG
Narrow banking is a proposed type of bank called a narrow bank also called a safe bank.
Narrow banking would restrict banks to holding liquid and safe government bonds. Loans
would be made by other financial intermediaries. That is, the deposit taking and payment
activities would be separated from financial intermediation activities. Purported attributes
of narrow banking include 1. No lending of deposits
2. Extremely high liquidity
3. Extremely high asset security
4. Lower interest rates paid to depositors
5. Regulatory framework with higher level of scrutiny and operational and investing
restrictions
Additional criteria applied to safe banks include 1. No derivatives
2. No off balance sheet assets
3. High degree of institutional transparency (e.g. continuous real-time disclosure of
financial records)
4. Capped executive salaries

5. Low risk jurisdictions

Offshore bank
An offshore bank is a bank located outside the country of residence of the depositor,
typically in a low-tax jurisdiction (or tax haven) that provides financial and legal
advantages.

Definition of Social Banking

We acknowledge that a generally accepted definition of Social Banking does not exist, and
given the variety of its historic origins and underlying values arguably cannot exist. But we
believe that there is a common denominator of many organizations that can be subsumed
under this notion of social banking, which we define as follows:
Social Banking describes the provision of banking and financial services that consequently pursue,
as their main objective, a positive contribution to the potential of all human beings to develop, today
and in the future. In Social Banking, the focus is on satisfying existing needs in the real economy and
the society whilst simultaneously taking into account their social, cultural, ecological and
economic sustainability. Furthering the common good by generating multiple returns with
respect to these aspects is at its core. Generating a monetary profit is not an end but a
frequent prerequisite to guaranteeing the necessary flexibility for pursuing its objective in
a continuously changing environment. Social Banking is always conscious of its responsibility in
dealing with money as a formative medium. It understands money, banking and finance as means
that are conceived and that can be further developed by humans to achieve its objective.
Social Banking describes a process, not a steady state. It is about jointly identifying and
testing creative new ways to come close to the above-described objective. This involves
multiple aspects and demands, which are sometimes conflicting and often necessitate
compromise. Therefore, Social Banking depends on an on-going and constructive dialogue
of the people involved in and affected by its activities, as well as on a continuous reflection
of their respective motives (why?), actions (what?) and approaches (how?). This requires
the willingness and capacity to develop on both an individual and an institutional level.
Common characteristics
Characteristics of many such understood Social Banking organizations are (in alphabetic
order) for instance
Catalogue of socially, culturally, ecologically and ethically oriented negative criteria to
prevent unsustainable ways of living and doing business that do not foster the common
good,
Catalogue of socially, culturally, ecologically and ethically oriented positive criteria to
support sustainable ways of living and doing business that do foster the common good,
Contestation of the values underlying its activities,
Dialogue with a wider group of stakeholders,
Emphasis on human rights and solidarity,
Equal treatment of genders,
Organizational structures based on participation,
Ownership structures preventing dependency of dominant individual interest,
Pro-active contributions to the public discussion of perceived problem areas.

INSURANCE
Basic terms used in insurance
Different terms are used in the insurance. Important among them are given below Insured
The party or the individual who seeks protection against a specified task and entitled to
receive payment from the insurer in the event of happening of stated event is known as
insured. An insured is normally in insurance policy holder.
Insurer
The party who promises to pay indemnity the insured on the happening of contingency is
known as insurer. The insurer is an insurance company.
Beneficiaries
The person or the party to whom the policy proceeds will be paid in the event of the death
or happening of any contingency is called beneficiary.
Contract
An agreement binding at law between two or more parties is called contract. Premium The
amount which is paid to the insurer by the insured in consideration to insurance contract is
known as premium. It may be paid on monthly, quarterly, half yearly, yearly or as agreed
upon it is the price for an insurance policy.
Insured sum
The sum for which the risk is insured is called the insured sum, or the policy money or the
face value of the policy. This is the maximum liability of the insurer towards the insured.
Nature and Characteristics of Insurance
Insurance follows important characteristics These are follows
1. Sharing of risk
Insurance is a co-operative device to share the burden of risk, which may fall on happening
of some unforeseen events, such as the death of head of family or on happening of marine
perils or loss of by fire.
2. co-operative device
Insurance is a co-operative form of distributing a certain risk over a group of persons who
are exposed to it. A large number of persons share the losses arising from a particular risk.
3. Large number of insured persons - The success of insurance business depends on the
large number of persons Insured against similar risk. This will enable the insurer to spread
the losses of risk among large number of persons, thus keeping the premium rate at the
minimum.
4. Evaluation of risk For the purpose of ascertaining the insurance premium, the volume of
risk is evaluated, which forms the basis of insurance contract.
5. Payment of happening of specified event On happening of specified event, the insurance
company is bound to make payment to the insured. Happening of specified event is certain

in life insurance, but in the case of fire, marine of accidental insurance, it is not necessary.
In such cases, the insurer is not liable for payment of indemnity
6. Transfer of risk Insurance is a plan in which the insured transfers his risk on the
insurer. This may be the reason that may person observes, that insurance is a device to
transfer some economic losses would have been borne by the insured themselves.
7. Spreading of risk Insurance is a plan which spread the risk & losses of few people among
a large number of people. John Magee writes, Insurance is a plan by which large number
of people associates themselves and transfers to the shoulders of all, risk attached to
Individuals.
8. Protection against risks
Insurance provides protection against risk involved in life, materials and property. It is a
device to avoid or reduce risks.
9. Insurance is not charity Charity pays without consideration but in the case of insurance,
premium is paid by the insured to the insurer in consideration of future payment.
10. Insurance is not a gambling Insurance is not a gambling. Gambling is illegal, which
gives gain to one party and loss to other. Insurance is a valid contact to indemnity against
losses. Moreover, Insurable interest is present in insurance contracts it has the element of
investment also.
11. A contract
Insurance is a legal contract between the insurer and insured under which the Insurer
promises to compensate the insured financially within the scope of insurance Policy, the
insured promises to pay a fixed rate of premium to the insurer.
12. Social device Insurance is a plan of social welfare and protection of interest of the
people. Rieged and miller observe insurance is of social nature
Function of insurance
Insurance becomes very useful in todays life. It plays significant role in this competitive
era. According to Sir William Beveridge the functions of insurance can be divided into
three categories.
1) Primary functions
2) Secondary functions
3) Indirect functions
Primary function
1. To provide protection
The most important function of insurance is to provide protection against risk of loss. It is
one check the reality of the misfortune happening, and pays the cost of damages of losses.
2. To provide certainty
The future is totally uncertain. Any misfortune happening may occur at any stage of life.
The amount of loss and time of losses both are uncertain. Insurance provides certainly
towards the losses. The policy holders pay the premium to get certainty
3. Distribution of risk It is a co-operative effort where the risk is distributed among the
group of People. Thus, no one have to bear the losses occurred due to uncertainty.
Secondary function
1. Helps in economic progress

Insurance plays an important role in economic progress. It gives fully certainty to the
industrialists towards the risks. The entrepreneurs can more concentrate on Innovative
and profitable techniques of the production. They should not require Thinking over the
risks. The industrialists can establish new industries in environment. Thus, industries have
got development in economic and commerce of the nation.
2. Insurance prevents losses Insurance plays vital role in preventing the losses. The amount
of premium is minimized by using such appliances like the fire extinguisher. If one uses
interior Machinery which may be caused for misfortune, the amount of premium will be
high. Thus, indirectly, insurance provides help to minimize the chances of risks.
Indirect function
1. A forced savings Life insurance is also a method of savings in India. Income tax act gives
relief in payment of income tax because government wants to habituate general public to
save money. It encourages the habit of thrift and savings among the people. Thus, it
becomes compulsory savings to people of nation.
2. Promote foreign trade
It is compulsory to take marine insurance policy in foreign trade in India. Foreigners cant
issue the foreign trade bill unless the cargo is fully insured. Thus Foreign trade is totally
depends upon the insurance sector of the nation. It gives relief to entrepreneurs from the
uncertainty of foreign trade.
3. Others Insurance provides certainties towards risks in entrepreneurship. It gives
Confidence in general public. It is one of the important source of investment which
develops the trade and commerce of the nation.
Advantages/benefits/uses of insurance
a. Risk transfer- individual or businessman can easily and conveniently transfer the risk of
loss
b. Protection- insurance give protection to the property of insured and life insurance
provides financial protection
c. Assured profit- a policy holders can enjoy a normal expected profit say up to 15 to 20%
on their investment
d. Effect on prices (benefit to consumers)-Manufacturers passes on the consumer, the cost
of insurance along with other Production cost. Still it is beneficial to the consumers because
without insurance the Cost would have been much more.
e. Basis of credit- policies act as valuable assets and the policy holders can avail credit or
emergency loan against it
f. Investment- a life insurance contract provides not only protection but also investment, or
a pension in old age
g. Capital formation- insurance companies as institutional investors can mobilise small
national savings in the form of premium and ensure capital for productive sectors.
h. Insurance encourage saving- life insurance is like a compulsory saving. For people have
limited means of income there is no other better alternative than LIC.
i. Invisible export- Providing insurance service overseas is our invisible export, like export
of material goods and the profit brought in is contribution to the favourable balance of
Trade.

j. Reducing cost of social services- No victim or heirs of a deceased victim of motor

accidents now a days goes Without compensation from insurance funds built out of
compulsory insurance of Motor vehicles. Limitations of Insurance.In spite of number of
advantages of insurance, it has certain limitations. On account of such limitations, the
benefits of insurance could not be availed in full.
a. All the risks cannot be insured. Only pure risks can be insured and speculative risks are
not insurable.
b. Insurable interest (financial interest) en the subject matter of insurance either at the
time of insurance or at the time of loss, or at both the times must be present, in the absence
of which the contract of insurance becomes void.
c. In case the loss arises from the happening of the event cannot be valued in terms of
money, such risks are not insurable.
d. Insurance against the risk of a single individual or a small group of persons are not
advisable, since it is not practicable due to higher cost involved.
e. Another important limitation is that the premium rates are higher in our country & as
such, certain category of people cannot avail the advantage of insurance. The main reason
for the higher rate of premiums is the higher operating cost.
f. It becomes difficult to control moral hazards in insurance. There are certain people who
may utilize the insurance plans for their self-interest by claiming false claims from
insurance companies.
Classification of Insurance
We can classify the insurance as following:
I. On the basis of Risk
a. Personal insurance
b. Property insurance
c. Liability insurance
d. Fidelity guarantee
II. Insurance On the basis of nature of business
a. Life insurance
b. General insurance - 1. Fire insurance
2. Marine insurance
3. Social insurance
4. Miscellaneous insurance
III. Miscellaneous insurance may include
a) Vehicle insurance
b) Accident insurance
c) Burglary insurance
d) Crop insurance
e) Cattle insurance
f) engineering insurance etc.
For our sake, we can classify insurance into 2 groups i.e. life insurance and nonlife
(general) insurance.
I. Life Insurance

It is governed by the LIC act 1956. It is contract in which the insurer, inconsideration of
payment of premium compensate to a person on death or on the expiry of certain period
whichever is earlier. (Life insurance details given in the following module)
II. General Insurance
General Insurance covers a wide range of services. Section 6(b) of the insurance act 1938
defines General Insurance. It includes all the risks except life. Its classification is:
A. Marine Insurance :- Marine insurance is the oldest insurance which was introduced long
back to compensate on sea and to compensate the loss due to various sea perils or loss of
the ship etc. In todays context, marine insurance is an important part of trade and
commerce and is a significant part of global insurance business. Marine play a key role in
international trade. Law relating to Marine Insurance Act 1963. According to section 3 of
marine insurance act, 1963 defines marine insurance as, a contract where by an insurer
undertakes to indemnify the assured against marine losses that is to say the losses
incidental to marine adventure.
Features of marine insurance contract:
1. Features of a valid contract: marine insurance is a contract; therefore it should possess
the features of a valid contract, according to Indian contract act. They are; The proposal
forms called slips are the offer from the merchant. The original slip is submitted along with
the other material information. This is proposal from the merchant or the ship owner is the
offer. The master and crew of the ship have an insurable interest in respect of their
wages. Premium is consideration to contract. The policy is prepared, stamped and
signed and it will be the legal evidence of the contract When slip is presented to the
insurer, he checks it and satisfied he puts initial. Now the proposal is accepted. Once the
slip is accepted the offer of the proposer is accepted by the insurer
2. Insurable interest in marine policy: Owner of the goods has insurable interest to the
extent of total value of the goods. Owner of the ship can insure the ship to its full price
Buyer of the goods who insured them has insurable interest even he rejects the goods.
Insurer has an insurable interest in his risk and may reinsure in respect of it. The
receiver freight can insure up to the amount of freight to be received by him. The policy
holder has an insurable interest in the charges of any insurance which he may affect. If
the subject matter insured is mortgaged, the mortgager has an insurable interest
3. Disclosure by agent (utmost good faith):
When insurance policy is taken through an agent, he must disclose to the insurer every
fact. The agent is deemed to know all the details of material information. If the information
is false, the insurer can avoid the policy. If negligence can be held against the broker, he
may be liable for breach of contract4. Principle of Indemnity: Marine insurance is a
contract of indemnity. It implies that the policy holder cannot make profit out of a claim.
In the absence of principle of indemnity, the policy holder may make profit out of claim.
The insurance contract implies that the indemnifies only to the extent agreed upon. The
basis of indemnity is always a cash basis.
5. Principle of subrogation:
This principle specifies that the policy holder should not get more than the actual loss. The

insurer has a right to pay the amount of loss after reducing the money received by the
policy holder from the third party. After indemnification the insurer gets all the rights of
insured on the third parties. But he cannot file suit in his name. There fore he has to take
the support of the support of the policy holder.
6. Average clause:
A marine policy is invariably subject to average clause.
7. Express and implied Warranties:
All marine insurance contracts are subject to certain express and implied warranties.
8. Principle of contribution:
Principle of contribution also applicable in the case of marine insurance contracts.
Maritime perils-Maritime perils are also called as Perils of the sea. It means the perils
consequent on, or incidental to the navigation of the sea, that is to say, war perils, rovers,
thieves, captures, seizures, restraints and detainment etc. Following losses have been held
to be perils of the sea:
a. Loss caused because of collisions against a sunken rock.
b. Loss caused because of collision with another ship
c. Loss caused because of heating due to the closure of ventilators to prevent the immersion
of sea water.
d. Loss caused because rats made a hole in the bottom of a ship and sea water entered into
ship through that hole and damaged the cargo. Marine Policy The instrument in which the
contract of insurance is affected is known as marine policy or sea policy. It is a document
which incorporates the details of terms and conditions of marine insurance.
Contents of marine policies are:
1. Name of the insured
2. Policy number
3. Sum insured
4. Premium
5. Stamp duty
6. Steamer or other conveyance
7. Voyage or journey.
8. Number and date of bill of lading and other similar document related.
9. Interest to be insured.
10. Subject matter insured and the risk insured.
11. Place where claims are payable
12. Place and date of issue of policy.
13. Authorised signatures.
The coverage under marine insurance policy includes the following:
a) The ship (hull and machinery).
b) The insurable goods and property exposed to maritime perils.
c) Other incidental earnings like freight, commission etc. which will be lost along with the
property due to the maritime perils.
d) The third party liabilities incurred by the insurer or other person responsible for or
interested in the property.

e) Expenses incurred to prevent and minimise loss

B. Fire Insurance:
Fire insurance is a recent developed concept in insurance sector. It is covered under the
insurance act 1938.
Definition: Fire insurance is a cover against the risk of loss of property due to fire
accident. Fire Insurance is a contract where by the insurer undertakes in consideration of
the premium paid to make good any loss cause by the fire during a specific period. The
specific amount to be assured or claimed in case of loss should be mentioned or specified
in the contract. Subject matter of Fire insurance
As per fire insurance, the following are the examples of insurable property:
1. Building
2. Electrical installation in building
3. Contents of building such as machinery, plant and equipment, accessories etc.
4. Goods (finished/WIP) and raw materials in factories and godowns
5. Contents of dwelling, shops, hotels etc.
6. Furniture, fixtures, fitting etc.
Features of Fire Insurance: (fundamental principles of fire insurance)
1. It is a General Contract: It is one of the important features of fire insurance; It contains
all the features of a valid contract. This is accepted by the insurer for the consideration of
the premium. The insurer issues the policy with all terms and conditions of the contract.
2. Contact of Indemnity: Fire insurance is a contract of indemnity, in the event of loss the
insured can recover actual amount of loss. Insured is allowed to gain excess amount out of
the loss caused due to fire.
3. Contract of Uberimae fidei: a fire insurance contract is based on absolute good faith and
therefore insured must make full and adequate disclosure of all material facts of subject
matter of insurance.
4. Principles of Insurable interest : insurable interest must exist at the time of effecting the
policy as well as the time of loss.
5. Principles of mitigation of loss and subrogation etc. are applicable in fire insurance.
4. Period of the policy: Fire insurance policy is issued for one year. Therefore they are
popular as Annual insurance
C. Miscellaneous insurance:
Health, Motor, property and others come under this category.
Health insurance provides for the payment of benefits to cover the loss due to sickness.
Motor Insurance provides the benefits in case of, damage or loss due to accident.
Deposit insurance provides Insurance against bank deposit. This scheme was introduced by
our government in 1962.
Postal insurance was introduced in 2006 by postal department of India. This scheme
provides insurance to postal saving account holders for accidental death.
Accident insurance policies offered by insurer are personal accident insurance; crackle
core insurance, passenger flight capon insurance, suhana safer policy, kidnap & ransom
insurance, Bhagya shri policy etc.
Life insurance- concept

Life insurance is a contract under which the insurer (Insurance Company) inconsideration
of a premium paid undertakes to pay a fixed sum of money on the death of the insured or
on the expiry of a specified period of time whichever is earlier. In case of life insurance, the
payment for life insurance policy is certain. The event insured against is sure to happen
only the time of its happening is not known. So life insurance is known as Life Assurance.
The subject matter of insurance is life of human being. Life insurance provides risk
coverage to the life of a person. On death of the person insurance offers protection against
loss of income and compensate the titleholders of the policy.
Basic Principles of Life Insurance Contract.
1. Insurable interest
The insured must have insurable interest in the life assured. In absence of insurable
interest, Contract of insurance is void. Insurable interest must be present at the time of
entering into contract with insurance company for life insurance. It is not
necessary that the assured should have insurable interest at the time of maturity also.
2. Utmost good faith
The contract of life insurance is a contract of utmost good faith. The insured should be
open and truthful and should not conceal any material fact in giving information to the
insurance company, while entering into a contract with insurance company.
Misrepresentation or concealment of any fact will entitle the insurer to repudiate the
contract if he wishes to do so.
3. Not a contract of indemnity
The life insurance contract is not a contract of indemnity. A Contract of life insurance is
not a contract of indemnity. The loss of life cannot be compensated and only a fixed sum of
money is paid in the event of death of the insured. So, the life insurance contract is not a
contract of indemnity. The loss resulting from the death of life assured cannot be calculated
in terms of money.
Features of life insurance
Following are the important features of valid contract of life insurance
1. Elements of a valid contract
2. Insurable interest
3. Utmost good faith
4. Warranties
5. Assignment and Nomination
6. Cause is certain
7. Premium (consideration)
8. Term of policy
9. Return of premium (surrender)
Importance of Life Insurance.
Life Insurance is of great importance to individuals, groups, business community and
general public. Some of the main benefits of life insurance are given below.
i) Protection against untimely death Life insurance provides protection to the dependents
of the life insured and the family of the assured in case of his untimely death. The
dependents or family members get a fixed sum of money in case of death of the assured.

ii) Saving for old age. After retirement the earning capacity of a person reduces. Life
insurance enables a person to enjoy peace of mind and a sense of security in his/her old age.
iii) Promotion of savings. Life insurance encourages people to save money compulsorily.
When a life policy is taken, the assured is to pay premiums regularly to keep the policy in
force and he cannot get back the premiums, only surrender value can be returned to him.
In case of surrender of policy, the policyholder gets the surrendered value only after the
expiry of duration of the policy.
iv) Initiates investments Life Insurance Corporation encourages and mobilizes the public
savings and channelizes the same in various investments for the economic development of
the country. Life insurance is an important tool for the mobilization and investment of
small savings.
v) Credit worthiness Life insurance policy can be used as a security to raise loans. It
improves the credit worthiness of business.
vi) Social Security Life insurance is important for the society as a whole also. Life
insurance enables a person to
provide for education and marriage of children and for construction of house. It helps a
person to make financial base for future.
vii) vii) Tax Benefit Under the Income Tax Act, premium paid is allowed as a deduction
from the total income under section 80C
Life insurance Policies
Life insurance policies can be grouped into the following categories:
1. Term Policy
In case of Term assurance plans, insurance company promises the insured for a nominal
premium to pay the face value mentioned in the policy in case he is no longer alive during
the term of the policy.
Term assurance policy has the following features:
It provides a risk cover only for a prescribed period. Usually these policies are short-term
plans and the term ranges from one year onwards. If the policyholder survives till the end
of this period, the risk cover lapses and no insurance benefit payment is made to him.
The amount of premium to be paid for these policies is lower than all other life insurance
policies. As savings and reserves are not accumulated under this policy, it has no surrender
value and loan or paid-up values are not allowed on these policies.
This plan is most suitable for those who are initially unable to pay high premium
when income is low as required for Whole Life or Endowment policies, but requires life
cover for a high amount.
2. Whole Life Policy
This policy runs for the whole life of the assured. The sum assured becomes payable to the
legal heir only after the death of the assured. The whole life policy can be of three types.
(1) Ordinary whole life policy In this case premium is payable periodically throughout
the life of the assured
(2) Limited payment whole life policy In this case premium is payable for a specified
period (Say 20 Years or 25 Years) Only.
(3) Single Premium whole life policy In this type of policy the entire premium is payable

in one single payment.

3. Endowment Life Policy
In this policy the insurer agrees to pay the assured or his nominees a specified sum of
money on his death or on the maturity of the policy whichever is earlier. The premium for
endowment policy is comparatively higher than that of the whole life policy. The premium
is payable till the maturity of the policy or until the death of the assured whichever is
earlier. It provides protection to the family against the untimely death of the assured.
4. Health insurance schemes An individual is subject to uncertainty regarding his health.
He may suffer from ailments, diseases, disability caused by stroke or accident, etc. For
serious cases the person may have to be hospitalized and intensive medical care has to be
provided which can be very expensive. It is here that medical insurance is helpful in
reducing the financial burden. These days the vulnerability to lifestyle diseases such as
heart, cancer, neurotic, and pollution based, etc are on the increase. So it makes sense for
an individual to go for medical insurance cover.
5. Joint Life Policy This policy is taken on the lives of two or more persons simultaneously.
Under this policy the sum assured becomes payable on the death of any one of those who
have taken the joint life policy. The sum assured will be paid to the survivor(s). For
example, a joint life policy may be taken on the lives of husband and wife, sum assured will
be payable to the survivor on the death of the spouse.
6. With Profit And Without Profit Policy
Under with profit policy the assured is paid, in addition to the sum assured, a share in the
profits of the insurer in the form of bonus. Without profit policy is a policy under which
the assured does not get any share in the profits earned by the insurer and gets only the
sum assured on the maturity of the policy. With profit and without profit policies are also
known as participating and nonparticipating policies respectively.
7. Double Accident Benefit Policy
This policy provides that if the insured person dies of any accident, his beneficiaries will get
double the amount of the sum assured.
8. Annuity Policy Under this policy, the sum assured is payable not in one lump sum
payment but in monthly, quarterly and half-yearly or yearly instalments after the assured
attains a certain age. This policy is useful to those who want to have a regular income after
the expiry of a certain period e.g. after retirement. Annuity is paid so long as the assured
survives. In annuity policy medical check-up is not required. Annuity is paid so long as the
assured survives.
9. Policies For Women Women, now a days are free to take life assurance policies.
However, some specially designed policies suit their needs in a unique manner; important
policies for women are
A. Jeevan Sathi is also known a Life Partner plan where the husband and wife are covered
under this endowment policy
B. Jeevan Sukanya
10. Group Insurance
Group life insurance is a plan of insurance under which the lives of many persons are
covered under one life insurance policy. However, the insurance on each life is independent

of that on the other lives. Usually, in group insurance, the employer secures a group policy
for the benefit of his employees. Insurer provides coverage for many people under single
contract.
11.Policies For Children
Policies for children are meant for the various needs of the children such as education,
marriage, security of life etc. Some of the major children policies are:
(1) Childrens deferred assurances
(2) Marriage endowment and educational annuity plans
(3) Children endowment policy
12. Money Back Policy
In this case policy money is paid to the insured in a number of separate cash payments.
Insurer gives periodic payments of survival benefit at fixed intervals during the term of
policy as long as the policyholder is alive The contract for the life insurance starts with the
proposal made by the proposer in standard application form available with insurance
company and then various other documents are prepared.
SAVING & INVESTMENT POLICIES OF INSURANCE
TYPES OF LIFE INSURANCE POLICIES
1. LIFE INSURANCE POLICIES ISSUED BY LIC.
2. LIFE INSURANCE POLICIES ISSUED BY BIRLA SUN LIFE INSURANCE
COMPANY LIMIITES.
3. LIFE INSURANCE POLICIES ISSUED BY SBI LIFE INSURANCE CO LTD
1. LIFE INSURANCE POLICIES ISSUED BY LIC :I. WHOLE LIFE POLICIES- Whole life policies are issued for life period of insured. It
means that the policy amount will be paid only at the death of the life insured. Under these
types of policies, the insured cannot get the policy amount during his life period. Only the
dependents of life insured will get the advantages of this policy.
Whole life policies are:a) Whole life policy with profit- This is a policy at lower rates of premium. The premiums
are payable throughout the life time of insured and the sum assured becomes payable on
the death of the insured or attaining the age of 80 years whichever is earlier.
b) Whole life limited premium- Under this type of whole life policy the payment of
premium is limited to certain fixed period. The sum assured is payable on the death of the
policy holders.
c) Whole life single premium policy- It is not very common policy. Single premium is paid
at the beginning of the policy in one instalment. The policy is available with and without
profits.
II. Term life insurance policy- life insurance policy which provides only risk cover during a
specified period without any survival benefit, is called term life insurance policy. Term
insurance policies are for a short period of years ranging from 3 months to 7 years. In case
of a term life insurance, the sum assured is payable only in the event of death during the
term. In case of survival the life insurance contract comes to an end at the end of the term.
There is no refund of premium. These policies are usually non-participating. Since only
death risk is covered, the premium is low.

III. Endowment type policies:a) Pure endowment policy- the sum assured is payable only on the surviving of life assured
in endowment term. In case of death within the term, premium may be returned or not.
The pure endowment policy is opposite of the term policy because the insured is paid only
if he survives in pure endowment policy and if he dies within the term policy he gets
nothing. Actually these two policies that is pure endowment and term policy are the base of
all other policies. Pure endowment is for the benefit of policy holder whereas term policy is
for the benefit of others.
b) Ordinary endowment policy- it is the most popular and common policy of LIC. The
premiums under the policy are paid for a fixed term. In case the death takes place during
the term, the sum assured along with accumulated bonus is paid to the family of policy
holder.
c) Double endowment policy. Under this policy if the life insured dies during the
endowment period, the basic sum assured is payable and if he survives to the end of the
term, double of sum assured is paid.
d) Joint life endowment plan. Under this policy, two lives can be insured under one life
insurance contract.
e) Marriage endowment policy- this policy has the special condition that the sum assured is
only payable after the expiry of the endowment term even if death of the life insured takes
place earlier. This policy is designed to meet the needs of a policyholder who wants to make
arrangement of certain sum for the marriage of a female dependent.
f) Education annuity policy- this policy is also taken out on the life of father or guardian for
the benefits of their childs education.
g) Triple benefit policy- this policy is a combination of a whole life limited payment and a
pure endowment with a guaranteed annual bonus payable during the endowment term.
This policy is guaranteed for a fixed terms of 15, 20, or 25 years. Premium are payable
throughout the term or till pre mature death of policy holder.
2. Policies according to premium payment- the life insurance policies are of following types
according to the payment of premium:
a) Single premium policy- the whole premium is paid at the beginning of the policy in this
type of policies. This type of policy is only useful to those persons who got a windfall
income and are expected not to continue to receive such returns in subsequent years.
b) Level premium policies- the regular and equal premiums are paid at a definite interval
under level premium policy. The premium is lesser than the single premium policy.
3. Policies according to participation of profits- life insurance policies according to
participation may be without profit policies & with profit policies.
a) Without profit policies- the policyholders of this type of policies are not entitled to share
the profits of the insurer. These policy holders get only the sum assured and no bonus is
given to them.
b) With profit policies- the policyholders of this type of policies are entitled to share the
profit of the insurance company. The policy holder only share the profits, not the loss. If
there is loss, the policy holder cannot get the bonus. The amount of bonus depends on the
profit after providing provision for taxes, contingency etc. in this type of policy there is no

guarantee that the insured will get something by way of profit every year.
2. LIFE INSURANCE POLICIES ISSUED BY BIRLA SUN LIFE INSURANCE
COMPANY LIMIITES.
a) Birla flexi sano plus endowment- Birla flexi sano plus endowment policy offers you the
dual benefit of insurance cover as well as an investment opportunity by investing a part of
the premium that one pay regularly in an investment fund, which will provide market
linked returns. This policy is best suited for people who want to maximize their savings to
realize their long term goals and protect their families with an insurance policy.
b) Birla flexi life line whole policy- Birla flexi life line whole policy is a policy in which the
policy holder keeps enjoys life insurance for the whole life until death or up to 100 years of
age whichever is earlier and pays premium for the same period or shorter period and
enjoys the benefits of savings along with the insurance.
3. LIFE INSURANCE POLICIES ISSUED BY SBI LIFE INSURANCE CO LTD
SBI LIFE SUKHJEEVAN- sukhjeevan is a life insurance policy issued by SBI life. It is a
single premium endowment assurance policy with a built in accidental death benefit and
permanent benefit cover. This policy is best suited for the individuals seeking a short term
investment plan at the same time have an insurance cover.
Proposal Forms
The proposal form is a standardized form. The proposal form is a type of an application
form, which a proposer has to fill all the relevant details about the life to be assured. The
agent has the proposal form with him provided by the insurer. There are different types of
policies and so the different types of proposal forms are there. It has the entire details
regarding the duration of the policy, type of plan, mode of payment, etc. A proposal form is
to be to be completed by the proposer in his own handwriting and signed in the presence of
the agent. The proposal form contains a declaration at the end, to ensure the authenticity of
the information given. Usually the proposal form contains the following information to be
filled by the prospective insured:
1. Name of life assured
2. Address
3. Date of Birth
4. Occupation
5. Age
6. Name of the employer (if any)
7. Sum assured of the proposed policy
8. Number and age of the family members
9. Family medical history
10. Proposers Medical history
Besides these there are other related forms regarding health, occupation, the agents
confidential report and many others. In addition there is a consent letter which shows the
consent of the life assured to the imposition of some clause or extra premium, duly signed
by the life assured
First Premium Receipt

The agent provides the proposal form and other related documents and the underwriter
examines the form and other documents and then determines the terms on which to accept
the risk or reject the same. The consent of the person assured is obtained in the form of
payment of premium. After receiving the payment, the insurance company issues the First
Premium Receipt, which acknowledges the proposal of the life-assured. It contains all
particulars of the policy. It has the details of the next premium to be paid. The policy bond
is sent within 45-50 days from the date of first premium receipt to the life assured. The
First Premium Receipt is an important and powerful document on the basis of which the
lifeassured can ask the insurer to issue the policy bond, which is treated as Evidence of the
Contract of Life assurance. Policy Bond After issuing the First Premium Receipt, the next
step is that of the insurer of sending the policy bond to the life-assured and this document is
also known as Policy Contract, which is the ultimate evidence of the life-assured. The
Policy Contract contains all the terms and conditions of the contract between insurance
company and the life assured, duly stamped as per the Indian Stamp Act. The policy is sent
to the life assured by the insurer. The policy contract contains the details of the
insurance such as duration of the policy, the type of policy, sum assured, premium amount
and the date of maturity, extra premium, nominee, assignee etc.
Assignment and Nomination
The Policyholder should be advised for nomination, if no nomination was effected. When
nomination or assignment is effected by a policyholder, it should be scrutinized thoroughly
to see whether it was in order or not. If there is any material omission or mistake, it may be
returned to the policyholder or the assignee with a covering letter giving instructions as to
the corrections to be made in the assignment or nomination. When a document is sent for
correction, reminders should be sent every fortnight until the requirements are complied
with. The policyholder should follow the instructions printed on the back of assignment or
nomination.
Nomination
Nomination is the process of identifying a person to receive the policy money in the event of
the death of the Policyholder. Nomination can be done at the beginning of the Policy by
giving details of nominee in the proposal form. However, if the nomination is not given at
the beginning, the policyholder can give it at a later date. For that purpose a prescribed
form is to be filled up and nomination can be endorsed on Policy Bond.
Change in Nomination. Change of nomination can be done by the policy holder any time
during the term of the policy and any number of times he wants to. Procedure of
nomination is same every time.
Withdrawal of nomination Nomination can be withdrawn by the policy holder without
giving prior notice to the nominee. Nomination can be done only by a policyholder who has
attained majority and on a policy on his life. Under Nomination, the Nominee gets only the
right to receive the policy money in the event of the death of the Policyholder.
Death of the Nominee
If the nominee dies and the policyholder is still surviving then the nomination would be
ineffective. If Nominee dies after the death of the Policyholder but before receiving policy
money, then also Nomination becomes ineffective and only the legal heirs of the

policyholder can claim money.

Nomination at a later date
After the policy is prepared and issued and if no Nomination has been given the assured
can give the nomination only by an endorsement on the policy itself. A nomination is not
required to be stamped. Nomination in favour of a stranger cannot be given as there is no
insurable interest involved in that case. For nomination in favour of wife and children,
specific names of wife and children should be given.
Successive nominee
Where it is mentioned in nomination that the policy money should be paid to Nominee A
failing him to Nominee B whom failing to Nominee C, etc., such nomination is called
successive nomination. Such nomination would be in favour of one individual in the order
mentioned. All such Nomination would mean that if Nominee A were dead at the time in
question the Nominee B would take the whole amount and that if both Nominees A and B
were then dead then Nominee C would take the whole amount and so on.
A Minor Nominee
In view of the Insurance (Amendment Act) 1950, the Life Assured has the right, where a
nominee is a minor, to appoint any person as the Appointee to receive the moneys secured
by the policy in the event of the assureds death during minority of the nominee. The
person so appointed will not be a guardian of the minor Nominees power will be limited to
the right to receive the policy money in the event of the assureds death during the minority
of the Nominee. The appointment must be a major. The appointment of Appointee must be
communicated to the insurance company. So his name can be registered with the company.
The appointment can be cancelled or changed by the life assured any time before the
maturity of the policy.
Differences between Assurance (life insurance) and
Insurance (general insurance / non-life insurances)
1. Scope the term Assurance is used only in life insurance and therefore the scope is
comparatively limited. The term insurance is used for all other types of risk coverage and
therefore, the scope is wider.
2. Renewal of Policy -The life insurance contract is a continuing contract and it will not
lapse unless the premium is regularly paid. It is not certain that the event insured against
may happen or not. Most of the general insurance policies are annual policies, so renewal
of policy is required.
3. Element of investment- the element of investment is present in assurance since there is
certainly of receiving payment either on death or on maturity of the policy. General
insurance lacks the element of investment since there is no certainty of receiving payment.
4. Assurance in life insurance, the insurer gives assurance to the insured to pay the claim
in any case, either on maturity or death. In general insurance, the insurer only promises to
secure the property in case of actual loss.
5. Amount of Claim- In LI, the policy amount is paid to the assured in full on the maturity
or on death along with bonus, etc. announced by the insurance company from time to time.
In GI, The payment of claim is subjected to the element of actual loss but not more than the
insured sum.

6. Insurable Interest- In a life policy, the insurable interest is one that required by law and
such interest is not measurable in terms of money. In GIs, the insured is required to have
an insurable interest in terms of money
7. Principle of indemnity- Principle of indemnity does not apply in life assurance. The sum
assured is payable unrespectable of any profit or loss and the full extent of the amount
insured. Principle of indemnity is the basis of general insurance
contracts.
8. Certainty of event in LIs, the event (death or reaching maturity) is bounded to happen
sooner or later. It is not certain that the event insured against may happen or not in the
case of GIs.
9. Insured Sum -Insurance policy for any amount or any number of policies can be taken in
LIs. In general insurance, the policy amount is restricted to market value of assets; not
more than that. This is because that indemnity cannot be more than the value of asset.
10. Certainly of payment of claim- in LIs, Payment of claim either on maturity of the policy
or on death of the assured is certain. There is no certainly to receive payment since it is
paid only in case of loss of the property insured in GIs.
11. Insurable interest on the date of the policy or the policy falls due-In life insurance
insurable interest is to be proved at the date of the contract and it is not necessarily be
present at the time, when the policy falls due for claim. In marine insurance, the insured
must be having insurable interest on the subject matter at the time of loss, but not
necessarily be present at the time of affecting the policy.
12. Subject matter- Human life is subject matter of life insurance. Goods and properties
are subject matter of general insurance.
13. Principle of subrogation This is not applicable in life insurance. This principle is
applicable in general insurance.
14. Surrender of policy-in life insurance, the policy can surrender before maturity period.
In the case of fire and marine insurance, policy cannot be surrendered before maturity.
Legal Frameworks of Insurance (Law relating to insurance)
There are mainly four laws are concerned with the insurance business of India are as
follows.
A. Insurance Act, 1938
B. Life Insurance Corporation Act, 1956
C. General Insurance Business (Nationalization) Act, 1972
D. Insurance Regularity and Development Authority Act, 1999 (IRDA)
A. INSURANCE ACT, 1938
The insurance act originally passed in the year 1938. however It amended for several times,
It latest amendment of the insurance act was the, the IRDA itself when it became the
authority to perform many tasks required to be done under the insurance act such as
issuing licenses, issuing registration certificates, monitoring compliance with the provisions
of the Act, issuing directives, laying down norms. The all above said functions were
performed by the controller of Insurance earlier as per the Insurance Act, 1938. The
provisions of the Act may be briefly described as follows. a. Registration To obtain the
certificate of registration is compulsory to the every insurance company. The Registration

should be renewed annually. The paid up capital must be of Rs. 100 crores for life
insurance or general and Rs. 200 crores for re-insurance business. Every insurer has to
deposit in cash or approved securities, a sum equivalent to 1 % in life insurance or 3% in
general insurance of the total gross premium in-any financial year commencing after 31st
March, 2000 with the Reserve Bank of India. The amount is not being exceeding Rs. 10
crores. The deposit amount is Rs. 20 crores for reinsurance businesses. Every insurance
company must keep the accounts separately of all receipts and payment in respect of each
class of insurance business such as the marine or miscellaneous insurance. Insurers must
invest his assets only in those investments which approved under the provisions of the Act.
Every insurance company has to do a minimum insurance business in the rural or social
sector, as may be specified in the order. The authority can be investigated the affair of the
insurer at any time. b. Licensing of agents License is the pre requirement for becoming the
agent. Person cant work as an insurance agent unless he has obtained a license from the
authority. There is some disqualification as per the act for a person to be an agent, as
follows:
1. Being unsound mind.
2. Being convicted of criminal misappropriation or criminal breach of trust or cheating or
forgery or Abetment or Attempt to commit any such offence.
3. Being found to have been guilty of or connived at any fraud, Dishonesty or
misappropriation against any insured on insurer. c. Licensing of surveyors and loss
assessors No insurer can settle any claim equal to or exceeding Rs. 20000/- without the
report on the loss from a licensed surveyor. The person can act as a surveyor or loss
assessor only after obtaining license from the authority. The authority cant issue the
license without get satisfaction about the applicant.
d. Solvency margin The authority for the insurer also decides the solvency margin. The act
clarifies how the assets and liabilities have to be determined and the extent to which the
assets are to exceed the liabilities. These provisions exist to ensure the adequacy of
insurers solvency
e. Payment of premium before assumption of risk A risk can be assumed by the, insurance
company after receiving the premium or a guarantee that the premium will be paid within
the prescribe time. Sometimes agents collect the premium amount and dispatch or
deposited to the insurance company. They have to deposit the money within the 24 hours
except the bank and postal holiday. The agent has to deposit the premium in full without
deducting his commission. If any refund of, the premium will be due, the insurer directly
shall paid the amount to the insured by crossed or order cheque or by postal money order.
B. Life Insurance Corporation Act,1956
Life Insurance Business in India was nationalized with effect from January 19, 1956. On
the date, the Indian business of 16 non-Indian insurers operating in India and 75 Provident
Societies were taken over by Government of India. Life Insurance Corporation of India,
Act was passed by the Parliament on June 18, 1956 and came into effect from July 1,
1956. Life Insurance Corporation of India commenced its functioning as a corporate
bodyfrom September 1, 1956. Its working is governed by the LIC Act. The LIC is a

corporate having perpetual succession and a common seal with a power to acquire hold
and dispose of property and can by its name sue and be sued.
Important Provisions of Life Insurance Corporation Act, 1956
1. Constitution
2. Capital
3. Functions of the Corporation
4. Transfer of Services
5. Set-up of the Corporation
6. Committee of the Corporation
7. Authorities
8. Finance, Accounts and Audit
9. Miscellaneous Life Insurance Corporation of India (LIC)
The LIC of India was set up under the LIC Act, 1956 under which the life insurance was
nationalized. As a result, business of 243 insurance companies was taken over by LIC on 19- 1956.
It is basically an investment institution, in as much as the funds of policy holders are
invested and dispersed over different classes of securities, industries and regions, to
safeguard their maximum interest on long term basis. LIC is required to invest not less
than 75% of its funds in Central and State Government securities, the government
guaranteed marketable securities and in the socially-oriented sectors. At present, it is the
largest institutional investor. It provides long term finance to industries. Besides, it extends
resource support to other term lending institutions by way of subscription to their shares
and bonds and also by way of term loans. LIC which has entered into its 57th year has
emerged as the worlds largest insurance co. in terms of number of policies covered. The
LICs total coverage of policies including individual, group and social schemes has crossed
the 11 crore.
C. GIBNA (The General Insurance Business Nationalization Act- 1972)
The General Insurance Business Nationalization Act was passed in 1972 to set up the
general insurance business. It was the nationalization of 107 insurance companies into one
main company called General Insurance Corporation of India and its four subsidiary
companies with exclusive privilege for transacting general insurance business. This act has
been amended and the exclusive privilege ceased on and from the commencement of the
insurance regulatory and development authority act 1999. General Insurance Corporation
has been working as a reinsurer in India. Their subsidiaries are working as a separate
entity and plays significant role in the public sector of general insurance.
General Insurance Corporation of India (GIC) General insurance industry in India was
nationalized and a government company known as General Insurance Corporation of
India was formed by the central government in November, 1972. General insurance
companies have willingly catered to these increasing demands and have offered a
plethora of insurance covers that almost cover anything under the sun. Objective of the
GIC are:
1. To carry on the general insurance business other than life, such as accident, fire etc.
2. To aid and achieve the subsidiaries to conduct the insurance business and,

3. To help the conduct of investment strategies of the subsidiaries in an efficient and

productive manner.

Liberalization of Insurance Industry

While no aspect of the reform process in India has gone smoothly since its inception in 1991, no
individual initiative has stirred the proverbial hornets' nest as much as the proposal to liberalize the
country's insurance industry. However, the political debate that followed the submission of the report
by the Malhotra Committee has presumably come to an end with the ratification of the Insurance
Regulatory Authority (IRA) Bill both by the central Cabinet and the standing committee on finance.
This section traces the evolution of the life insurance companies in the US from firms underwriting
plain vanilla insurance contracts to those selling sophisticated investment contracts bundled with
insurance products. In this context, it brings into focus the importance of portfolio management in the
insurance business and the nature and impact of portfolio related regulations on the asset quality of
the insurance companies. It also provides a rationale for the increased autornatisation of insurance
companies, and the increased emphasis on agent independent marketing strategies for their products.
If politicized, regulations have potential to adversely affect the pricing of risks, especially in the nonlife industry, and hence the viability of the insurance companies. Finally, the backdrop of US
experience provides some pointers for Indian policymakers.

Introduction
The insurance sector continues to defy and stall the course of financial reforms in India. It continues to
be dominated by the two giants, Life Insurance Corporation of India (LIC) and the General Insurance
Corporation of India (GIC), and is marked by the absence of a credible regulatory authority. The first
sign of government concern about the state of the insurance industry was revealed in the early
nineties, when an expert committee was set up under the chairmanship of late R.N.Malhotra.
The Malhotra Committee, which submitted its report in January 1994, made some farreaching
recommendations, which, if implemented, could change the structures of the insurance industry. The
Committee urged the insurance companies to abstain from indiscriminate recruitment of agents, and
stressed on the desirability of better training facilities, and a closer link between the emolument of
the agents and the management and the quantity and quality of business growth. It also emphasized
the need for a more dynamic management of the portfolios of these companies, and proposed that a
greater fraction of the funds available with the insurance companies be invested in non-government
securities. But, most importantly, the Committee recommended that the insurance industry be
opened up to private firms, subject to the conditions that a private insurer should have a minimum
paid up capital of Rs. 100 crore, and that the promoter's stake in the otherwise widely held company
should not be less than 26 per cent and not more than 40 per cent. Finally, the Committee proposed
that the liberalized insurance industry be regulated by an autonomous and financially independent
regulatory authority like the Securities and Exchange Board of India (SEBI). Subsequent to the
submission of its report by the Malhotra Committee, there were several abortive attempts to
introduce the Insurance Regulatory Authority (IRA) Bill in the Parliament. It is evident that there was
broad support in favour of liberalization of the industry, and that the bone of contention was
essentially the stake that foreign entities were to be allowed in the Indian insurance companies. In
November 1998, the central Cabinet approved the Bill which envisaged a ceiling of 40 per cent for
non-Indian stakeholders: 26 per cent for foreign collaborators of Indian promoters, and 14 per cent for

nonresident Indians (NRIs), overseas corporate bodies (OCBs) and foreign institutional investors
(FIIs). However, in view of the widespread resentment about the 40 per cent ceiling among political
parties, the Bill was referred to he standing committee on finance. The committee has since
recommended at each private company be allowed to enter only one of the three areas of business
life insurance, general or non-life insurance, and reinsurance that the overall ceiling for foreign
stakeholders in these companies be reduced to 26 per cent from the proposed 40 per cent. The
committee has also recommended that the minimum paid up share capital of the new insurance
companies be raised to Rs. 200 crore, double the amount proposed by the Malhotra Committee.
Economic Rationale-- The insurance industry is a key component of the financial infrastructure of an
economy, and its viability and strengths have far reaching consequences for not only its money and
capital markets,' but also for its real sector. For example, if households are unable to hedge their
potential losses of wealth, assets and labor and non-labor endowments with insurance
contracts, many or all of them will have to save much more to provide for events that might occur in
the future, events that would be inimical to their interests. If a significant proportion of the
households behave in such a fashion, the growth of demand for industrial products would be
adversely affected. Similarly, if firms are unable to hedge against "bad" events like fire and the job
injury of a large number of laborers, the expected payoffs from a number of their projects, after
factoring in the expected losses on account such "bad" events, might be negative. In such
an event, the private investment would be adversely affected, and certain potentially hazardous
activities like mining and freight transfers might not attract any private investment. It is not
surprising, therefore, that economists have long argued that insurance facility is necessary to ensure
the completeness of a market.

Malhotra Committee Report

In the backdrop of new industrial policy, the Government of India set up in 1993 a highpowered
committee headed by Mr. R. N. Malhotra to examine the structure of the insurance industry, to assess
its strength and weaknesses in terms of the objective of providing high quality services to the public
and serving as an effective instrument for mobilization of financial resources for development, to
review the then existing structure of regulation and supervision of insurance sector and to suggest
reforms for strengthening and modernizing regulatory system in tune with the changing economic
environment. The Malhotra Committee submitted its report in 1994. Some of the major
recommendations made by it were as under:(a) The establishment of an independent regulatory authority (akin to Securities and Exchange Board
of India);
(b) Allowing private sector to enter the insurance field;
(c) Improvement of the commission structure for agents to make it effective instrument for procuring
business specially rural, personal and non-obligatory lines of business;
(d) Insurance plans for economically backward sections, appointment of institutional agents;
(e) Setting up of an institution of professional surveyors/loss assessors;
(f) Functioning of Tariff Advisory Committee (TAC) as a separate statutory body;
(g) Investment on the pattern laid down in s.27;
(h) Marketing of life insurance to relatively weaker sections of the society and specified proportion of
business in rural areas;
(i) Provisions for co-operative societies for transacting life insurance business in states;

(j) The requirement of specified proportion of the general business as rural nontraditional business to
be undertaken by the new entrants;
(k) Welfare oriented schemes of general insurance;
(l) Technology driven operation of General Insurance Corporation of India (GICI); GIC to exclusively
function as a reinsurer and to cease to be the holding company;
(m) Introduction of unlinked pension plans by the insurance companies; and
(n) Restructuring of insurance industry
THE COMMITTEE ON REFORMS IN THE INSURANCE SECTOR
THE GOVERNMENT appointed the committee on reforms in the insurance sector (1994) in April 1993
headed R.N.MALHOTRA, the former Governor of the Reserve Bank of India. The terms of reference of
the said Committee were:
(1) to examine the structure of the insurance industry as it has evolved within the existing framework
and to assess its strength and weaknesses in terms of the objective of creative an efficient and viable
insurance industry providing a wide reach of insurance services and a variety of insurance products
with a high quality of service to the public and serving as an effective instrument for mobilization of
financial resources for development.
(2) To make recommendations for changes in the structure of the insurance industry, as
well as the general framework of policy, as may be appropriate for the pursuit of the above
objectives keeping in mind the structural changes currently underway in other parts of the
financial system and in the economy.
(3) to make specific suggestions regarding the LIC and the GIC, which would help to
improve the functioning of these organizations in the changing economic environment
(4) to review the present structure of regulation and supervision of the insurance sector and
to make recommendations for strengthening and modernizing the regulatory system in the
tune with changing requirements.
(5) To review and make recommendations on the role and functioning of the surveyors,
intermediaries and other ancillaries of the insurance sector.
(6) To make recommendations o such other matters as the Committee considers relevant
for the health and long-term development of the insurance sector. In under a year. The Committee
submitted its Report, which was approved in principle by the government. The major thrust of the
recommendations was towards the opening up of the insurance sector, for which initiative had to
come from the government.

SOME IMPORTANT QUESTIONS

Q.1: Define Bank / Commercial Bank and Discuss the functions of Commercial Banks.
Ans. A) MEANING AND DEFINATION OF COMMERCIAL BANK:
In modern economy commercial Banks Play an important role in the financial sector. A
Bank is an institution dealing in money and credit. Credit money is the major component
of money supply in a modern economy. Commercial banks are the creators of credit. The
strength of economy of any country basically depends on a sound and solvent banking
system. A Commercial bank is a profit seeking business firms dealing in money or rather

claims to money. It safeguards the savings of the public and give loans and advances.
The Banking Companies Act of 1949, defines banking company as accepting for the
purpose of lending or investment of deposit money from the public, repayable on demand
or otherwise and withdrawals by cheque, drafts, order or otherwise.
B) FUNCTIONS OF COMMERCIAL BANKS :
Modern commercial banks perform a variety of functions. They keep the wheels of
commerce, trade
and industry always revolving. Major functions of a commercial bank are: Primary or
Banking functions
and Secondary or Nonbanking functions.
FUNCTIONS OF COMMERCIAL BANKS.
Commercial banks have two important banking functions. One is accepting deposits and
other is advancing loans.
1) Deposits :
One of the main function of a bank is to accept deposits from the public. Deposits are
accepted by the banks in various forms.
a) Current Account Deposits :
Current Accounts are usually opened by businessmen who have a number of regular
transactions with the bank, both deposits and withdrawls. There is no restriction on
number and amount of deposits. There is also no restriction on withdrawls. No interest is
paid on current deposits. Banks may even charge interest for providing this facility. These
accounts are also known as demand deposits as amount can be withdrawn on demand.
b) Saving Account Deposits :
Saving Accounts are opened by salaried and other less income people. There is no
restriction on number and amount of deposits. withdrawls are subject to certain
restrictions. It earns Interest but less than fixed deposits. It encourages saving habit among
salary earners and others. Saving deposits are an important source of funds for banks.
c) Fixed Account Deposits :
Deposits in fixed account are time deposits. Money under this account is deposited for a
certain fixed period of time varying from 15 days to several years. A high rate of interest is
paid. If money is withdrawn before expiry date, the depositor receives lower rate of
interest. Deposits can be renewed for further period. Many banks sanction loans against
security of fixed deposits.
d) Recurring Account Deposits :
In Recurring deposit, a specified amount is regularly deposited by account holder, at an
internal of usually a month. This is to form the habit of small savings among the people. At
the end of maturity period, the account holder gets a substantial amount. Interest on this
type of deposit is almost equal to fixed deposits. Thus by creating variety of deposits, banks
motivate people in a variety of ways and encourage savings in the economy.
2) Loans And Advances :
Banks not only mobilize money but also lend to its credit worthy customers for maximizing
profits. Loans and Advances are granted To :
a) Business And Trade :
Commercial banks grant shortterm loans to business and trade activities in following

forms:
i) Overdraft :
Commercial banks grant overdraft facility to current account holders Under this system a
borrower is allowed to draw more than what is deposited in his account. The borrower is
granted to a fixed additional amount against collateral security. Interest is charged for
actual amount drawn.
ii) Cash Credit :
Cash credit is given by the bank to any businessman to meet regular working capital needs,
against the security of goods or personal security. Interest is charged on actual amount
drawn by the customer.
iii) Discounting Of Bills :
When the holder of the bill is not in a position to wait till the maturity of the bill and
requires cash urgently, he sells the bill of exchange to bank. Bank advance credit by
discounting bills of exchange, government securities or any other approved financial
instruments. The bank purchases the instruments at a discount.
iv) Money At Call :
Banks also grant loans for a very short period, generally not exceeding 7 days. Such
advances are repayable immediately at a short notice hence they are called as Money at
Call or Call money. These loans are given to dealers or brokers in stock market against
Collateral Securities.
v) Direct Loans :
Loans are given to customers against the security of moveable properties. Their maturity
varies from 1 to 10 years. Interest has to be paid on entire loan amount sanctioned. Loans
are of many types like : personal loans, term loans, call loans, participative loans, collateral
loans etc.
b) Loans to Agriculture :
Banks grant shortterm credit to agriculture at a lower rate of interest. Loans are granted
for irrigation, purchase of equipments, inputs, cattle etc.
c) Loans To Industries :
Banks grant secured loans to small and medium scale industries to meet their working
capital needs. The time period may be from one to five years. It may be in the form of
Overdraft, cash credit or direct loan.
d) Loans To Foreign Trade :
Loans are granted to export and import in the form of direct loans, discounting of bills,
guarantee for deferred payments etc. Here the rate of interest is low.
e) Consumer Credit / Personal loans :
Banks also grant credit to household in a limited amount to buy some durable consumer
goods like television sets, refrigerators, washing machine etc. Such consumer credit is
repayable in installments. Under 20point programme, the scope of consumer credit has
been extended to cover expenses on marriage, funeral etc., as well.
f) Miscellaneous Advances :
Banks also gives advances like packing credits to exporters, export bill purchased or
discounted, import finance, finance to self-employed, credit to weaker sections of society at
concessional rates etc.

II. Secondary / Nonbanking Functions:

Banks gives various forms of services to public. Such services are termed as non banking or
secondary functions :
1. Agency Services:
Banks perform certain functions on behalf of their customers. While performing these
services, banks act as agents to their customers, hence these are called as agency services.
Important agency functions are :
a) Collection :
Commercial banks collect cheques, drafts, bills, promissory notes, dividends, subscriptions,
rents and any other receipts which are to be received by the customer. For these services
banks charge a nominal amount.
b) payment :
Banks also makes payments on behalf of their customers like paying insurance premium,
rent, taxes, electricity and telephone bills etc for such services commission is charged.
c) Income Tax Consultant :
Commercial banks acts as incometax consultants. They prepare and finalise the income tax
returns of their clients.
d) Sale And Purchase Of Financial Assets :
As per the customers instruction banks undertake sale and purchase of securities, shares
and any other financial assets. Nominal charges are charged by a bank.
e) Trustee, Executor And Attorney :
As a trustee, banks becomes the custodian and manager of customer funds. Bank also acts
as executor of deceased customers will. As an Attorney the banks sign the documents on
behalf of customer.
f) E Banking :
Through Electronic Banking, a customer can operate his bank account through internet.
He can make payments of various bills. He can even transfer money from one place to
another.
2. Utility Services :
Modern Commercial banks also performs certain general utility services for the
community, such as :
a) Letter Of Credit :
Banks also deal in foreign trade. They issue letter of credit and provide guarantee to
foreign traders for the soundness of their customers.
b) Transfer Of Funds :
Banks arrange transfer of funds cheaply and safely from one place to another. Transfer
can be in the form of Demand draft, Mail transfer Travellers cheques etc.
c) Guarantor :
Banks offer a guarantee of payment on behalf of importer to facilitate imports with
deferred payments.
d) Underwriting :
This facility is provided to Joint Stock Companies and to government to enable them to
raise funds. Banks guarantee the purchase of certain proportion of shares, if not sold in the
market.

e) Locker Facility :
Safe Lockers are provided to the customers. So that they can deposit their valuables like
Jewellary, Securities, Shares and otherdocuments.
f) Referee :
Banks may act as referee with respect to financial standing, business reputation and
respectability of customers.
g) Credit Cards :
Credit card facility have been introduced by commercial banks. It enables the holder to
minimize the use of hard cash. Credit card is a convenient medium of exchange which
enables its holder to buy goods and services from member establishment without using
money.
III. Subsidiary Activities :
Many commercial banks also undertakes subsidiary activities such as :
1) Housing Finance :
Housing finance is provided against the security of immoveable property of land and
buildings. Many banks such as SBI, Bank of India etc. have set up housing finance
subsidiaries.
2) Mutual Funds :
A Mutual fund is a financial intermediary that pools the savings of investors for collective
investment in diversified portfolio securities Many banks like SBI, Indian Bank etc. have
set up mutual fund subsidiaries.
3) Merchant Banking :
A variety of services are offered by merchant banking like :
Management, Marketing and Underwriting of new issues, project promotion, corporate
advisory services, investment advisory services etc.
4) Venture Capital Fund :
Venture capital fund provides startup share capital to new ventures of little known,
unregistered, risky, young and small private business, especially in technology oriented and
knowledge intensive business. Many commercial banks like SBI, Canara Bank etc. have set
up venture Capital Fund Subsidiaries.
5) Factoring :
Factoring is a continuing arrangement between a financial intermediary (factor) and a
business concern (client) where by the factor purchases the clients accounts recieveable.
Banks like SBI and Canara Bank have established subsidiaries to provide factoring
services. Thus various services are provided by commercial Banks.

Q.2: Explain the process of multiple credit creation of commercial banks.

OR
Write note on multiple credit creation by commercial banks. Every loan
creates a
Deposit. Discuss.
Ans. A) MULTIPLE CREDIT CREATION BY COMMERCIAL BANKS:
Creation of credit is an important function of a commercial bank. Prof. Sayers said Banks
are not merely purveyors of money but, also in an important sense manufacturers of

money. In a modern economy Banks deposits form a major proportion of total money
supply. A banks demand deposits arise mainly from : Cash deposits by customers and
Bank Loans and Investments.
1. Cash Deposits By Customers :
These are termed as primary deposits as they arise from the actual deposits of cash in a
bank made by its customers. In receiving such deposits, the bank plays a passive role. The
creation of primary deposits, however is nothing but transforming the currency money in
to deposit money.
2. Bank Loans And Investments :
These are termed as derivative or active deposits. The derivative deposits are lent in the
form of loans or advances, discounting of bills or used for purchasing securities or other
assets. Deposit account in the name of the customer or seller, credits him with the amount
of loan granted or value of security purchased, subject to withdrawl by cheque, as
required. Hence loans advanced or purchases of securities creates deposits.
Thus every loan creates a deposit. They increase the quantity of bank money. The size of
derivative demand deposits is determined by the banks lending and investment activities.
There will be a constant inflow and outflow of cash with the banks. For the sake of liquidity
and safety some proportion of total deposit must be maintained in cash, for e.g. : 10% to
20% to meet the demand for cash at the counter. This is known as Cash Reserve Ratio.
Primary deposits serve as a basis for creating derivative deposits, that is credit creation,
and for increasing money supply. Commercial banks are profit seeking institutions and
when they find that large volume of cash received lies Idle, they use these resources for
advancing loans or for making investment in securities, shares etc. there by earning high
rate of interest. The creation of credit also depends on excess cash reserves or cash reserve
ratio. The derivative deposits are used as working capital.
When the borrower withdraws money from his loan account by cheque it is deposited by
the payee in some other bank. Those banks again create deposit on the basis of fresh
deposits received after keeping required reserves. Ultimately, the total volume of credit or
derivative deposits or bank money created by all banks would be a multiple of the original
amount of new cash reserves in the system. Thus multiple expansion of credit takes place.

Q.4: Explain in details the Items included in Asset Side of Commercial

Bank Balance Sheet. OR
Explain the Assets and Liabilities of Commercial Banks. OR
Write notes on: Assets and Liabilities of Commercial Banks. OR
Explain the Balance Sheet of Commercial Banks.
Ans. A) BALANCE SHEET OF COMMERCIAL BANKS :
Banks are the most important financial intermediary in an economy. Banks performance
can be analysed by its balance sheet and profit and loss account. Bank publish balance
sheet in their annual accounts. The balance sheet of a commercial Bank is a statement of its
liabilities and Assets at a particular time. Liabilities show the sources of funds through
which bank raises funds for its business. Assets represents uses of funds to generate income
for bank. Thus, the balance sheet indicates the manner in which bank has raised funds and
invested them in various types of assets. It is customary to state liabilities on left and assets

on right side.
B. LIABILITIES OF A COMMERCIAL BANK (LIABILITIES PORTFOLIO) :
The liabilities of a commercial bank shos how the bank raises funds for its business.
1) Share Capital (Paidup) :
It is the contribution made by the shareholders of the bank. This indicates the banks
liabilities to its shareholders.
2) Reserves And Surplus :
It is the amount accumulated over the years out of undistributed profits to meet
contingencies. Reserves and surplus are liabilities of the bank, as they belong to its
shareholders.
3) Deposits :
Deposits from the public constitute the biggest proportion of banks working funds. The
deposits accepted by bank in current, fixed and savings account are liabilities of bank to
their customers. They are categorized as demand, time and saving deposits. These funds
are liabilities of bank to their customers, which have to be returned to them. But at the
same time, these funds are also assets to bank since the banker can make use of them to get
certain interest yielding assets.
4) Borrowings :
When a bank borrows from other banks liability is created. It consist of borrowing /
refinance obtained from RBI, commercial banks and other financial institutions. It also
includes overseas borrowings.
5) Other Liabilities :
In course of its business, miscellaneous liabilities are incurred by bank. They include bills
payable like drafts, travelers cheques, pay slips etc. It also includes income tax provision.
C. ASSETS OF A COMMERCIAL BANK (ASSETS PORTFOLIO):
The assets portfolio shows how the bank uses the funds entrusted to it:
1) Cash Balances :
A bank holds cash to meet the daytoday withdrawls of deposits by its customer. This is
known as cash reserve. Bank hold cash balances with itself, with other banks and with RBI.
In India, Commercial Banks are obliged to keep a certain proportion of total deposits in
the form of cash reserve requirement with RBI. Cash has perfect liquidity, but yields no
profit.
2) MONEY AT CALL AND SHORT NOTICE :
It refers to short term loans made in money market. Such loans are borrowed by
speculators in stock exchange market. Their maturity vary between one day to 15 days.
These loans are repayable on demand and at the option of either lender or borrower. Thus,
these forms of assets are highly liquid and are interest earning too, though at a
comparatively low rate.
3) Bills Discounted :
Banks funds are invested in commercial bills which are shortdated, usually three months.
Banks also invest in treasury bills. These assets are selfliquidating in nature.
4) Investments :
Investment in various kinds of securities is a major part of assets of a bank. Mainly
commercial banks invest in government securities, shares etc. Securities and bonds are

known as banks secondary reserves because they are shiftable and Interest yielding.
Usually banks prefer medium and short term securities. This secondary reserve fails to
convert securities in to cash at the same time.
5) Loans And Advances :
The most important asset item in the Balance sheet of a bank is loans advances. The
profitability of a bank depends upon the extent to which it grants loans advances to
customers. The various types of loans advances provided by banks are : Cash Credit,
Overdraft, Loans, Installments, purchase and discounting of Bills. Banks mostly grant
short term working capital loans only so that they can have fair liquidity with
high profitability.
6) Other Assets : It includes fixed assets, furniture and fixtures etc. It will also include the
net position of interoffice account. From above assets and liabilities, banks will have to
balance their revenues against expenses in such a way to generate income to sustain
profitability from business.

Q.5:Explain the trade off between banks objectives of liquidity

and profitability. OR
Write note on trade off between liquidity and profitability
objectives of bank. OR
Explain commercial banks objectives of liquidity and profitability.
How do the
banks reconcile these two conflicting objectives?
Ans. A) OBJECTIVES OF PORTFOLIO MANAGEMENT (TRADEOFF BETWEEN
LIQUIDITY AND PROFITABILITY) :
A commercial bank has to manage its assets and liabilities with three objectives in mind,
namely : Liquidity, profitability and solvency. Liquidity means the capacity of the bank to
give cash on demand in exchange for deposits. But a commercial bank is a profit seeking
institution. It has to arrange its assets in such a way that it makes maximum profits. The
bank should also maintain the confidence of public by making cash available on demand.
Liquidity and profitability are, therefore, conflicting considerations for bankers. Cash has
perfect liquidity but yields no return at all, while other incomeyielding assets such as
loans are profitable but have no liquidity. The bank should strike a balance between
liquidity andprofitability. Another consideration of the bank is its own solvency and
security. This refers to liquidity and shiftability. Liquidity is the capacity to produce cash
on demand. Shiftability means the assets acquired by bank should be easily shiftable to
other banks or central bank. Those securities would be preferred by a bank which can be
shifted easily without any loss to the bank than the risky and more profitable ones.
A bank which is solvent may not be liquid. Its assets may exceed its liabilities, but the assets
may not be in such a form that they are readily convertible in to cash. Thus, the two
motives of a banks liquidity and profitability are contradictory, but have to be reconciled.
A good banker is one who follows a wise investment policy and distributes the assets in
such a way that both the requirements of liquidity and profitability are satisfied. The assets
should bring in maximum profits and should provide maximum security to the depositors.

The secret of success of a bank lies in striking a sound balance between liquidity and
profitability.
B. RECONCILING TWIN OBJECTIVES :
A good banker is one who follows a wise investment policy and distributes the assets in
such a way that both the requirements of liquidity and profitability are satisfied. The secret
of success of a bank lies in striking a balance between liquidity and profitability. The
commercial bank arranges its assets in an ascending order of profitability and descending
order of liquidity. As we move down the balance sheet the assets become less and less liquid
and more and more profitable. The more liquid the assets, the less profitable it is. Let us
Explain :
1) Cash :
Cash balance have perfect liquidity, but no profitability. Cash is held to meet the
withdrawl needs of depositors.
2) Money At Call :
Surplus cash of commercial banks is lend to each other. This earns some interest and is also
very liquid
3) Investment In Securities :
Statutorily banks have to invest a part of their assets in government securities. These
securities have low rate of interest but banks can borrow from RBI against these securities.
Thus investment in securities provide returns as well as liquidity to bank.
4) Loans And Advances :
Here liquidity is low but profitability is high. Thus banks hold various assets in such a way
that the requirements of liquidity and profitability are balanced

Q.6: Explain / what are the factors affecting Liquidity and

profitability of Banks?
OR
Write note on factors determining Liquidity and profitability of a
bank.
Ans. A. FACTORS AFFECTING LIQUIDITY OF BANKS :
The amount of liquid assets held by bank, depends upon the following factors :
1) Statutory Requirements :
Every commercial bank has to keep a minimum cash balance by law. The extent of reserves
held by bank depends upon the statutory requirements like CRR and SLR. These limits are
fixed by central bank. Commercial banks also have to maintain liquid assets in the form of
gold and approved securities.
2) Nature Of Money Market :
It will be easy for banks to buy and sell securities if the money marketis fully developed. In
such case need for cash will be less.
3) Banking Habits :
Banking habits of customers have a direct bearing on banks cash balance and liquidity
position. In developed countries for making payments cheques are used hence, the use of
cash is less. On other hand, in developing countries banking habits are not fully developed,

so banks have to maintain large cash reserves.

4) Structure Of Banks :
Under unit banking, every bank is an independent unit and they have to keep a high degree
of liquidity. Under branch banking, the cash reserves can be centralized in head office and
branches can have smaller liquid reserves.
5) Business Conditions :
In Industrialised countries, business in brisk and speculative activities are undertaken so,
the demand for money is large. In agricultural countries, during off season, demand is less
so, the banks can manage with small cash balances.
6) Monetary Transactions :
During busy season such as festival times, harvest season, beginning of month etc. banks
will have to keep large percentage of cash. Thus, the size of liquid reserves also depend on
the number and magnitude of monetary transactions.
7) Number And Size Of Deposits :
When the number and size of deposits rise, banks have to keep more liquidity and vice
versa.
8) Nature Of Deposits :
The nature of deposits also determines the liquidity requirements of a bank. Deposits are
various types such as time deposits, demand deposits etc. Larger the demand and short
term deposits, larger will be liquidity.
9) Clearing House Facility :
When clearing house facilities are available, then large transactions can be made through
book adjustments. This will reduce cash requirements of commercial banks.
10) Liquidity Policy Of Other Banks :
A Bank which decides to hold large cash balances will have more customers due to
goodwill. Hence other bank will also try to improve their liquidity position to attract
customers. Thus, the liquidity position of one bank depends on the liquidity policy of other
banks. On the whole, we can say by looking in to past experience, each bank has to take its
own decision on liquidity requirement.
B) FACTORS AFFECTING PROFITABILITY OF BANKS :
1) Cost Of Funds :
Share capital, reserves, deposits, borrowing and other liabilities are the sources of funds for
bank. The cost of funds refers to interest expenses.
2) Yield On Funds :
Banks fund are used for different sources like CRR, SLR requirement, loans and Advances
etc. Many of these give rise to yields mainly in terms of interest income. This depends on
the portfolio management of banks.
3) Spread : The difference between interest income and interest expenses in defined as
spread. High interest spreads shows the level of efficiency and a relatively less competitive
market.
4) NonInterest Income :
NonInterest income is income derived from nonfinancial asset and services and includes
commission and brokerage on remittance facilities, guarantees underwriting, contracts etc,
locker rentals and other service charges.

5) Amount Of Working Capital :

Profitability is directly related to the amount of working funds deployed by banks.
Working funds are funds deployed by a bank in its business.
6) Non performing Assets :
Profitability also depends on NPAs. Larger the NPAs lower will be the profitability and
vice versa.
7) Competition :
When the level of Competition increases, there is fall in margins and hence it results in
lower profitability.
8) Operating cost :
If operating cost are higher, profitability of banks will be lower and vice versa. Operating
cost includes : Salaries, bonus, gratuity, expenses on stationery, printing, rent, depreciation
etc.
9) Risk Cost :
Risk cost is the cost which is likely to be incurred on annual loss on assets. For e.g.:
provisions for bad and doubtful debts is included under this head. Thus risk cost also
affects the profitability of banks.
10) Burden :
The total noninterest expenses representing the transaction cost will generally be more
than miscellaneous income. The difference between the two is known as Burden. Higher the
burden, lesser will be the profitability of banks. Thus from above we can say that the
objectives of liquidity and profitability have to be reconciled. A successful banker will
adopt a prudent investment policy keeping the requirements of liquidity and profitability.