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Management of Banking Operation
Management of Banking Operation
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Girisha M C
Government College( Autonomous) Mandya . karnataka
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CONTENTS
1. BANKING
Meaning and Definition, Role of Banks-Types Of Banks –
Banking Structure-Unit And Branch Banking- Pure And Mixed
Banking.
2. COMMERCIAL BANKS
Functions Including Modern Services And Hi-Tech
Banking-Internet Banking, ATM, DEBIT CARD,CREDIT
CARD.
3. CENTRAL BANKING
Evolution Of Central Bank-Function Of Central Bank-
Monetary Policy-Objectives-Credit Control Methods
6. CHEQUES
Definition-Essentials-Crossing Endorsement-paying Banker-
Payment of Customers Cheque precaution To Be Taken by the
Banker and Collecting Banker- Duties of Collecting Banker.
1
Unit -1: BANKING
ORIGIN OF BANK
MEANING
DEFINITIONS
Acceptance of deposits
4
According to section 5 (1) (c) of Indian Banking Regulation
Act of 1949
1. CAPITAL FORMATION
2. INNOVATIONS
Innovations are the essential requisites for the economic
development. In the developed country banks providing finance
to innovative business, but in under developed country people
worried about investment in new innovation because of risk
factor and lack of bank credit. Now a day in developing country
banks giving more preference to provide finance towards
innovative entrepreneurs.
4. MONETSATION
TYPES OF BANKS
1. Commercial Banks:
2. Industrial Banks:
3. Agricultural Banks:
4. Exchange banks:
5. Saving banks:
6. Central Banks:
UNIT BANKING
BRANCH BANKING
Merits-
MIXED BANKING
a) Primary function
b) Secondary function.
PRIMARY FUNCTIONS
Acceptance of deposits
Provide loans
Credit creation
Investments of funds on securities
1) ACCEPTANCE OF DEPOSITS
3) CREDIT CREATION
SECONDARY FUNCTIONS
1) GENERAL SERVICES
2) AGENCY SERVICES
The services rendered by a banker as an agent of his
customer (on behalf of customers) are called Agency Services.
Now day’s banks started giving various types of services
besides performing the basic functions.
MODERN SERVICES
HIGH-TECH BANKING
DEBIT CARD
Debit card is a substitute for cash cheque book. One can use
for cash withdrawal at the concerned bank’s ATMs, other bank
ATMs and at designated branches of the bank and other banks.
This card can also be used at merchant outlets for purchase and
availing services. This card is governed by the terms and
conditions applicable to respective bank concerned. The bank
will initially allocate a Personal Identification Number (PIN) to
the cardholder. The cardholder may select his own PIN (any
four digit number, usually), if he would like to change it.
Some banks may charge you extra fees. There could be monthly
service charges, over-limit fees, per transaction costs, or
penalties for dropping below a minimum required balance that
result from using a debit card.
CREDIT CARD:
ONLINE BANKING
RTGS
NEFT
2. Bankers bank: The central bank is the bank for all other
banks in the country. Every bank has to deposit a certain
percentage of its total deposits and cash reserve with the
central bank to fulfill the statutory requirement. It enables
the central bank to have a control over the banks and also to
maintain sufficient liquidity and stability in the economy. In
turn this requirement also helps the other banks they can get
the financial assistance from the central bank and further
they get loans from the central bank in the time of
emergency. Lastly these deposits help to clear the inter-
bank indebtedness.
MONETARY POLICY:
DEFINITIONS:
iii) The frequent ups and downs in the exchange rates may
lead to the loss of confidence in our economy and
international community may drawback the capital
from the country.
CONTROL OF CREDIT
Credit is an outcome of banking activities. Commercial
banks basic function is to lend money to the commercial
activities. In the process of lending they create credit in the
economy. In the developing economy the bank credit has very
significant influence on the level of economic activities. An
increase in the bank credit encourages the business activities
and decrease in the credit discourages the business activities.
Further increased credit enhances the purchasing power of the
money. So it becomes necessary to regulate the bank credit
which is the very important function of the central bank. The
central bank adjusts the bank credit in according to the needs of
the economy. When there is need for funds from various sectors
like trade, industry, agriculture, commerce etc. the central bank
encourages the commercial banks to create more bank credit
through various steps. On the other hand it tries to reduce the
volume of bank credit when the inflation increases in the
economy. Thus the central bank is responsible to regulate and
control the bank credit to encourage the development in the
various sectors and also to avoid the inflation and deflation
conditions so as to maintain the stability and growth in the
economy of the country.
1. Margin requirements
2. Regulation of consumer credit
3. Moral suasion
4. Rationing of credit
5. Control through directives
6. Direct action
1. Margin requirements: The banks are required by the law
to keep a safety margin against securities in which they
lend. While lending money against securities the banks do
not lend to the full amount of the value but lend less than
that. If the margin is set at 20% than the bank can lend only
80% of value of the security and keeps a margin of 20%.
Thus, the difference between the market value of the
security and loan lend against the security is called as the
margin. The central bank may direct the banks to raise or
reduce the margin. By raising the bank margin the central
bank could reduce the volume of credit which the
commercial bank can grant and a party can borrow. And by
reducing the margin the central bank could increase the
volume of credit the commercial bank can grant and a party
can borrow. This method was originated in the U.S.A
during 1934 and was developed later on. Margin
requirement is a good tool to reduce the degree and extent
of speculation in commodity market and stock exchange.
Questions:
1. What do you mean by Central Bank? Explain the main
functions of the central Bank.
2. What are the methods of credit control generally adopted
by the central bank? Explain in brief.
3. What is quantitative control? Explain the different methods
of quantitative credit controls.
4. Discuss the role of central bank.
5. How is central bank a banker’s bank?
6. Explain the various methods of qualitative credit control.
7. Evaluate the open market operation as method of credit
control.
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Unit 4: RELATIONSHIPS BETWEEN BANKER
AND CUSTOMER
NEW SERVICES
(f) The bank also agrees to pay the routine bills of the
depositor if given instructions.
(g)In case the depositor does not want to receive any bank
related correspondence at his registered address, the
bank at his request can hold his mail to be collected
personally by him.
CUSTOMER
OBLIGATIONS OF BANKER
2. Garnishee Order
In case a debtor fails to pay the money due to its creditor, the
latter may apply to the court to issue a Garnishee order, on the
debtor's banker. As a result of this order the debtor's account
with the bank is frozen and the banks donot make any payment
out of the account. The creditor, on whose request such an order
is issued is called the Judgment Creditor, whose account is
frozen is called the Judgment Debtor and the banker who has
the customer's account is called the Garnishee.
Below the last entries the word "Stop" will also be written in
pencil and carried down as further postings are made:
The drawer has also got the right to cancel his order of Stop
Payment. This must be done in writing ‘andbesigned by him. A
better course, however, would be to ask the drawer to issue a
fresh cheque rather than cancelling his order of "Stop Payment".
Banker's Lien and the Limitation Act The banker's right of lien
is not affected by the Law of Limitation since the Limitation
Act only bars the remedy but not the debts It. therefore, does
not affect the property over which the banker has lien.
(iii) The capacity of the account holder in all the accounts must
be the same. For example, a banker cannot set off any credit
balance of a partnership account against money due from one or
more of its partners their individual accounts. However, in case
of a sole trader the accounts in his personal name and that of the
firm's name are deemed to be in the same capacity.
The bank can deal with the balances and securities etc.
in the following manner:
The rule stated above will be clear with the help of the
following example.
If this would have been done the new account would have
appeared as follows:
In this case though the net amount due is Rs. 5.000 (i.e. Rs.
20.0. -Rs. 15.000) as in the first case, but in such a case for
this amount both Raj estate and Ram are liable.
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UNIT 5: CHEQUES
Printed Form
All banks follow more or less a common form. They supply
standard printed forms to their customers. The customer should
invariably make use of those cheque leaves and this is one of
the conditions laid down in the Pass Book supplied to the
customers. In England, some of the banks even today
honorcheques when they are drawn on an ordinary slip of paper.
But, Indian bankers do not follow this practice. The drawing of
a cheque on an ordinary piece of paper is not conducive to the
safety of the banker as well as the customer. In fact, the printed
cheque form enjoys more advantages than an ordinary form and
so, all banks supply printed forms to their customers. The
following are the advantages of a printed form.
(1) A printed cheque will naturally conform to the legal
requirements as given in Sec. 5 and Sec. 6 of the
Negotiable Instruments Act.
(2) It relieves the customer from the botheration of
preparing a cheque leaf. A cheque leaf must conform to
the specification laid down in the Act and if a customer
is to prepare the cheque leaf, he must cut the paper
accordingly. It is a time consuming and tedious job. A
printed form serves as a ready-made form.
(3) It minimizes the work of the customer. A customer is
expected to fill up only a few columns left blank in the
printed form.
(4) Forgery on a printed form can be easily detected.
Cheque books will be supplied only to established
customers and so, a prospective forger will have to
obtain a cheque form which is not easy. Even if he
manages to get one, he must know the specimen
signature and the serial number must agree. These will
discourage forgery/
(5) Any alteration on a printed form can be found out more
easily than on an ordinary piece of paper.
(6) If a cheque is drawn on a printed form supplied by a
banker, countermanding becomes easier because of the
serial number.
a) Facility
The current account and saving account holders get a
cheque facility.
b) Purpose
Cheques are used to make payments or to settle transactions.
There is no certainty of payment in the case of cheques as they
can be dishonoured or payment can be stopped.
c) Drawer
In case of cheque, the drawer is the customer of the bank.
In case of draft, the drawer is the bank itself.
d) Bank charges
The bank may not charge for issuing the cheque book.
e) Dishonour
Cheques can be dishonoured for various reasons.
f) Stopping of payment
In case of cheque, the drawer can ask the bank to stop
payment of the cheque even if it is delivered to the payee.
In case of draft, the purchaser of the draft can ask the bank
to stop payment before the draft is delivered to the payee.
g) Popularity
h) Clearance
Punishment
2002 Amendment
(iii) For offences under Sec. 138 of the N.I. Act., the
maximum period of imprisonment has been
enhanced to two years from one year.
(2) The banker who pays a post-dated cheque before its date,
disobeys customer's mandate, since, a cheque is nothing but
acustomer's mandate. Row, the banker is answerable to his
customer and he will have to bear any loss that result from his
action.
The law does not say anything about the way in which the
amount of a cheque should be indicated. However, the custom
is to indicate the amount both in words and figures — words in
the body of the cheque and figures at] the left hand bottom. It is
necessary that, the amount is very correctly and, legibly written.
If it is not done, either the cheque will be dishonored or a' delay
will be caused in the payment.
As a rule, the amount expressed both in words and figures
must agree, failing which, the banker may return it. The word
'ONLY' must be added after the amount in words (e.g. Rupees
five hundred only). The amount in figures should follow a
stroke and a dash (e.g., Rs. 500/-). They will always protect the
drawer. In fact, no blank space should be left before and after
the amount in figures, because, it gives an opportunity for an
unscrupulous: person to increase the 'amount'. If the amount is
expressed only in words, the cheque can be regarded as a valid
one. But, the banker may return such a' cheque, since, it does
not comply with the custom of drawing a cheque. In any case, a
banker should not honor the cheque, wherein the amount has
been expressed only in figures.
Local Payments
Thus, all cheques are bills of exchange but all bills are not
cheques.
Difference between Bill Of Exchange And Cheque
1. A bill of exchange is usually drawn on some person or
firm while a cheque is always drawn on a bank. In the
case of bill of exchange, drawee can be any one
including a bank. A cheque is generally used for inland
payments but a bill of exchange may be used both for
inland and foreign payments.
4. When the customer has informed the bank about the loss
of the cheque.
(iv) The Court, therefore, held that the payment of the cheque
was made under a mistaken belief that the instrument was
genuine.
(v) According to section 72 of the Indian Contract
Act.Aperson to whom any money has been paid or
anything delivered by a mistake must repay or return it.
However, this rule is governed by the Doctrine of Equity,
according to which no one should be enriched unjustly. It
means if the payee has been enriched unjustly, he should
pay the money back. However, in the absence of any
such enrichment, he will not be liable for repayment.
(vi) On the basis of the above principle, the court held that
Union Bank of India was not liable to pay the money
since it had passed on that money to M/s A.T., the payee.
Since M/s A.T. had delivered the goods to the person
who delivered the cheque the position had changed to
their prejudice after the payment was made by the paying
banker. They were, therefore, also not responsible to
repay the money to United Bank of India.
AS COLLECTING BANKER
However, the collecting banker will not be liable for any loss
to the customer in case it has not been negligent in performance
of its duties as was decided in the case of BoothlingamVs India
Commercial Bank Ltd.
(ii) Open bearer cheque for Rs. 1.000 issued in favour of Shri
K.S. Verma.
(i) The cheque can be accepted for collection. The banker runs
the risk of being charged with conversion in those cases
when the cheque is payable to the company and it is
collected for any of its principal officers. However, in this
case, the cheque has already been endorsed by another
authorised official of the company in favour of Shri S.O.
Nagarajan. The company is therefore in full knowledge of
the endorsement in favour of its manager. The banker thus
incurs no risk in collecting the cheque for the manager.
The Mumbai High Court held that the nature of the business
of collecting banker was such that it had to appoint another
person for the purpose of realization. Since, the collection of the
amount would have been facilitated by appointing the Gondia
Branch anagent, the collecting banker had an implied authority
to do so. The Gondia branch was a substituted agent and not a
sub-agent. In case of a properly appointed sub-agent, the
original agent is liable to the principal for acts of the sub-agent.
Neither the principal can sue the sub-agent, nor the sub-agent
can sue the principal. He works under the control of the agent.
While a substituted agent acts under the direct control of the
principal and the principal is responsible for his acts. In the
instant case, therefore the acts of Lakshmi Bank
Gondiawouldbe binding on the customer and Punjab National
would not be responsible to the customer unless the amount was
received and credited by it to the account of the customer.
Object of crossing
Crossing affords security and protection to the true owner,
since payment of such a cheque has to be made through a
banker. It can therefore, be easily detected to whose use the
money has been received. Cheques are crossed in order to avoid
losses arising from open cheques falling into the hands of
wrong persons.
Modes of crossing
Crossing may be general, special or restrictive
(i) General crossing. Where a cheque bears across its face
two transverse parallel lines with or without any words, it is
called 'general crossing". Words such as and company' or any
other .abbreviation, e.g., '& Co." may be written in between
these two transverse parallel lines, either with or without words
'not negotiable' (Sec. 123). Absence of these words would not
affect the validity of the crossing. In this case, the banker upon
whom the cheque is drawn will make the payment only to some
other banker.
The addition of the words "& Co. in a crossing does not have
any legal significance. But the addition of words not
negotiable" has significant legal effect. Of course, these words
do not take away the characteristics of transferability of the
instrument, but they very much restrict it. This is because a
transferee of a cheque bearing words 'not negotiable' will not
get a better title than that of the transferor. In other words, if the
transferor's title is defective, the title of the holder will also be
defective even if he happens to be a holder in due course.
Obliterating a crossing
Section 89 provides protection to a collecting banker of a
cheque whose crossing is obliterated or erased by dishonest
persons.
In case of such cheques the paying bank shall be discharged
from its liability if :
MARKING OF CHEQUE
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Skill Development:
Part A
Part B
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MANAGEMENT OF BANKING OPERATIONS
Part A
Part B
Part c
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