Central Banking:
• The control of banking industry in any country is
done by the central bank.
• Its were under the control of private sector. But
th
since the beginning of 20 century, almost in all the countries
throughout the world, they have been owned by the
Government.
• Even though the central bank is owned by the
Government, it is an independent body exercising its own power
& authority to regulate the monetary policy of the country.
• Monetary policy consists of those aspects which
deals with the supply of money through which certain specific
objects such as price stability, full employment, economic
growth could be achieved.
• The monetary policy of the central bank & the
fiscal policy of the Government will go hand-in-hand so that
both Government & the Central bank are to take care of the
welfare of the people.
Features of Central Bank:
Central bank in any country has the following features
 It has more service-motive than profit-motive
 Its owned by government & managed by
persons appointed by the government.
 It controls the complete banking industry in the
country & thereby controls the commercial banks.
 Its responsible for maintaining the value of the
currency which it alone issues.
 It also undertakes activities in consultation with
the Government.
 It helps the government in fulfilling their
economic policies such as raising funds for 5 year plans &
development of priority sector.
Diff Bet Central bank & Commercial bank
Functions of Central Bank:
 Issue of currency
 Acts as banker to the Government
 Acts as banker’s bank
 Lender of last resort
 Controller of credit
 Arranges clearing house facilities develpomant
 Custodian of foreign exchange reserve custodian of the commercial banks.
Issue of currency:
between the Central bank & Commercial banks.
The Central bank is entrusted with the responsibility of issuing
currency. For issuing currency, the Central bank has to maintain Only
certain
amt of reserves in the form of GOLD & Foreign exchange.the commercial banks. Instead of compelling the commercial banks,
Two major Principles the Central bank can give friendly advice with regard to banking
activities.
Currency Principle Banking Principle
Currency Principle :
Under the currency principle, the Central bank is
supposed to back up with the reserve for the issue of currenc
with an equal amt of gold & foreign currency.
Banking Principle :
In banking principle , like the commercial banks,
the Central bank will keep a certain percentage of gold &
foreign currency for backing the entire note issue.
Diff types of note issue :
1. Maximum fiduciary system –
Maximum amt of currency will be issued without the
backing of gold & foreign currency. This system gives
maximum powers to Central bank & this was adopted by
France till 1928.
2. Fixed fiduciary system – Under this
system, only a fixed amt of notes can be issued without
any backing of gold & foreign currency. England was
adopting this system under the Bank Charter Act of 1844
3. Proportional reserve system – The
notes issue on a percentage basis will be backed by 40%
gold & other securities such as foreign currency 60%.
India adopted this in 1956.
4. Minimum reserve system – Under this system, a
minimum amt of gold & foreign currency will be
maintained & the rest of the currency will be backed by
government securities.
 Acts as Banker to the Government :
The Central bank acts as a banker to the
government by maintaining the accounts of the
government.
All the government revenues are
received by the Central bank & similarly, the payments
are also made through the Central bank.
Sometimes, the expenditure of the
government will also exceed its revenue & the Central
bank has to come to the rescue of the government.
Acts as banker’s bank :
The Central bank is responsible for the
of banking industry in the country. It should also act as a
There should be a cordial relationship existing
then the instructions of the Central bank will be obeyed by
 The money market in the country could be
strengthened when there is healthy relationship bet the commercial
banks & Central banks.
 Lender of last resort :
A Central bank is said to be the lender of
last resort when the commercial banks approach it during a financial
crisis. Normally, a commercial bank will have various options to meet
its requirements. A kind of panic is created & during such a situation,
the Central bank must step in & save the commercial banks by
discounting their bills. This acts of the Central bank is called lender of
last resort.
 Controller of Credit :
When commercial banks undertake
lending activity, it creates in the economy an increase in the money
supply. When there is too much of credit extended, it will result in an
inflationary trend.
The foreign trade of the country will also be
affected as the domestic product will lose its demand from foreign
buyers. When the foreign products become cheaper than the domestic
products, imports will increase. Thus , the industry in the country will
suffer when uncontrolled inflation is allowed to be continued.
Central bank steps in by restricting the credit
extended by commercial banks. It adopts 2 methods.
1. Quantity of the credit.
2. Quality of the credit.
There are two types of credit control exercised by the Central bank.
They are :
(a) Quantitative credit control or Traditional weapons
of credit control
(b) Qualitative credit control or Modern weapons of
credit control.
Second type of credit is also called selective credit control.
 In quantitative credit control the quantum of money
supply with the commercial banks is reduced
during inflation and increased during depression.
 In qualititative credit control the central bank
without disturbing the quantum of money supply
will shift the use of credit from one purpose to
another.
 Arranges Clearing house facilities :
With more no of banks in
operation, cheques of diff banks are received. This
kind of operation is called clearing house
operation.
A clearing house is one
which arranges the clearance of cheques drawn on
diff banks. The Central bank has its branch in all
important cities & these branches undertake clearing
house operations.
Every commercial bank is a member of
the clearing house & they take the cheques
received by them belonging to diff banks everyday
to the clearing house.
 Custodian of foreign Exchange Reserve :
Every Central bank has
responsibility to maintain not only the domestic
value of the currency but also its foreign value. The
Central bank receives foreign currency not only
from the Govt but also from other commercial
banks.
When the domestic value of
the currency falls in relation to foreign currency,
it’s the duty of the Central bank to step in. By
increasing the supply of foreign currency it
prevents the fall in the value of domestic currency.
The Central bank is the
backbone of the economy & all the various
economic activities revolve around the Central
bank. Its functioning almost as the heart of
economy
Objectives of the central bank:
 Maintain internal value of currency.
 Promote financial institutions.
 Preserve the external value of rupee.
 Ensure price stability.
 Promote Economic growth.
Functions of the central bank:
o Issuing of notes and regulating the volume of
currency
o Act as banker to the government
o Act as banker to the bank
o Act as custodian of nation’s reserves
o Act as the lender of last resort
o Functions as National Clearing House
o Act as controller of credit
o Publishes economic statistics and other information
o Development functions
o Supervises the activities of financial institutions
COMMERCIAL BANKING
Definition of a bank
According to Walter leaf “a bank is a person or
corporation which holds it out to receive from the
public, deposits payable on demand by cheque.”
 According to Horace white has defined a bank,' as a
manufacture of credit and a machine for facilitating
exchange.”
According to prof.kinley,” a bank is an establishment
which makes to individuals such advances of money
as may be required and safely made, and to which
individuals entrust money when not required by them
for use.”
Meaning of commercial bank
A commercial bank is a profit -seeking business
firm, dealing in money and credit
It is a financial institution dealing in money in the
sense that it accepts deposits of money from the
public to keep them in its custody for safety.
So also, it deals in credit.
i.e., it creates credit by making advances out of the
funds received as deposits to needy people.
it thus, functions as a mobilize of saving in the
economy.
A bank is, therefore like a reservoir into which flow
the savings, the idle surplus money of households
and from which loans are given on interest to
businessmen and others who need them for
investment or productive uses.
TYPES OF COMMERCIAL BANKS
Types of banks.
*banks can be classified into commercial
banks and central bank.
*commercial banks are those which provide
banking services for profit.
*The central bank has the function of
controlling commercial banks and various other
economic activities
* there are many types of commercial banks
such as deposit banks. Industrial banks. Savings
banks. Agricultural banks. Exchange banks, and
miscellaneous banks.
Types of banks
1.deposit banks
2.industrial banks
3.savings banks
4.agricultural banks
5.exchange banks
6.miscellaneous banks.
1. Deposit banks.
The most important type of deposit banks is the
commercial banks. They have connection with the
commercial class of people. These banks accept deposits
from the public and lend them to needy parties. Since their
deposits are for short period only, these banks extend
loans only for a short period. Ordinarily these banks lend
money for a period between 3 to 6 months.They do not
like to lend money for long periods or to invest their funds
in any way in ling term securities.
 2. Industrial banks
industries require a huge capital for a long
period to buy machinery and equipment.
Industrial banks help such industrialist.
They provide long term loans to industries.
Besides, they buy shares and debentures of
companies, and enable them to have fixed capital.
Sometimes, they even underwrite the
debentures and shares of big industrial concerns.
The important functions of industrial banks are:
• They accept long term deposits.
• They meet the credit requirements of industries
by extending long term loans.
• These banks advise the industrial firms
regarding the sale and purchase of shares and
debentures.
The industrial banks play a vital role in accelerating
industrial development. In India, after attainment of
independence, several industrial banks were started with
large paid up capital. They are, the industrial finance
corporation (I.F.C), the state financial corporation’s
(S.F.C), industrial credit and investment corporations of
India (ICICI) and industrial development bank of India
(IDBI) etc.
savings banks
These banks were specially established to
encourage thrift among small savers and therefore,
they were willing to accept small sums as deposits.
They encourage savings of the poor and middle class
people. In India we do not have such special
institutions, but post offices perform such functions.
After nationalization most of the nationalized banks
accept the saving deposits.
agricultural banks
Agriculture has its own problems and hence there
are separate banks to finance it. These banks are
organized on co-operative lines and therefore do not
work on the principle of maximum profit for the
shareholders. These banks meet the credit
requirements of the farmers through term loans, viz.,
short, medium and long term loans. There are two
types of agricultural banks,
• Agricultural co-operative banks, and
• Land mortgage banks.co-operative banks. Both
these types of banks are performing useful
functions in India.
 Exchange banks
These banks finance mostly for the foreign
trade of a country. Their main function is to discount,
accept and collect foreign bills of exchange. They
buy and sell foreign currency and thus help
businessmen in their transactions .they also carry on
the ordinary banking business.
In India, there are some commercial banks
which are branches of foreign banks. These banks
 facilitate for the conversion of Indian currency into
foreign currency to make payments’ to foreign
exporters.
They purchase bills from exporters and sell
their proceeds to importers. They purchase and sell
“forward exchange” too and thus minimize the
difference in exchange rates between different
periods. And also protect these merchants from losses who receive and make large payments through banks. The
arising out of exchange fluctuations by bearing the
risk. The industrial and commercial development of a
country depends these days, largely upon the
efficiency of these institutions.
Miscellaneous banks:
These are certain kinds of banks which have
arisen in due course to meet the specialized needs of
the people.
In England and America, there are investment banks
whose object is to controlthe distribution of capital
into several uses.
American trade unions have got labour banks,
where the savings of the laborers’ are pooled
together.
In Landon, there is the London discount house
whose business is “to go about the city seeking for
bills to discount”.
There are numerous types of different banks in
the world, carrying on one or the other banking
business.
FUNCTION OF COMMERCIAL BANKS
Functions of commercial banks
Commercial banks have to perform a variety of
functions which are common to both developed and
developing countries. These are known as ‘general
banking’ functions of the commercial banks. The
modern banks perform a variety of functions.
These can be broadly divided into two categories.
A. primary functions
B. secondary functions
A. primary functions
Primary banking functions of the commercial banks
include:
1. Acceptance of deposits
2. Advancing loans
3. Creation of credit
4. Clearing of cheques
5. Financing foreign trade
6. Remittance of funds
1. Acceptance of deposits:
Accepting deposits is the primary functions of
a commercial bank mobilize savings of the household
sector. Banks generally accept three types of deposits
viz.
a)current deposits
These deposits are also known as demand deposits. These
deposits can be withdrawn at any time. Generally, no
interest is allowed on current deposits, and in case, the
customer is required to leaf a minimum balance undrawn
with the bank.
A cheque is used to withdraw the amount.
These deposits are kept by businessmen and industrialists
bank levies certain incidental charges in the customer for
the services rendered by it.
b) Savings deposits
This is meant mainly for professional men
and middle class people to help them deposit their
small savings. It can be opened without any
introduction. Money can be deposited at any time but
the maximum cannot go beyond a certain limit.
There is a restriction on the amount that can be
withdrawn at a particular time or during a week.
If the customer wishes to withdraw more than
the specified amount at any one time, he has to give
prior notice. Interest is allowed on the credit balance
of this account.
The rate of interest is greater than the rate of interest
on the current deposits and less than that on fixed deposit.
This system greatly encourages the habit of thrift or
savings.
c) Fixed deposits
These deposits are known as time deposits. These
deposits cannot be withdrawn before the expiry of the
period for which they are deposited or without giving a
prior notice for withdrawal.
If the depositor is in need of money, he has to
borrow on the security of this s account and pay a
slightly higher rate of interest to the bank.
They are attracted by the payment of interest
which is usually higher for longer period. Fixed
depositors both for their safety and as well as for
their interest. In India, they are accepted between
three months and ten years
2. Advancing loans
The second primary function of a
commercial bank is to make loans and advances to all
types of persons, particularly to businessman and
entrepreneurs. Loans are made against personal
security, gold and silver, stocks of goods and other
assets. The most common way of lending is by:
a)overdraft facilities:
In this case, the depositor in a current
account is allowed to draw over and above his
account up to a previously agreed limit. Suppose a
businessman has only rs.30, 000/- in his current
account in a bank but requires rs.60, 000/-to meet his
expenses. He may approach his bank and borrow the
additional amount of rs.30,000/-.the bank allows the
customer to overdraw his account through cheques.
 The bank, however, charges interest only on the
amount overdrawn from the account. This type of
loan is very popular with the Indian businessmen.
b) Cash credit:
Under his account, the bank gives loans to the
borrowers against certain security. But the entire loan is
given at once particular time; instead the amount is
credited into his account in the blank. But under
emergency cash will be given. The borrower is required to
pay interest only on the amount of credit availed to him.
He will be allowed to withdraw small sums of money
according to his requirements through cheques, but he
cannot exceed the credit limit allowed to him. Besides, the
bank can also give specified loan to a person, for a firm
against some collateral security. The bank can recall such
loans at its option.
c) Discounting bills of exchange:
This is another type of lending which is very
popular with the modern banks. The holder of a bill can
get it discounted by the bank, when he is in need of
money. After deducting its commission, the bank pays the
present price of the bill to the holder. Such bills form good
investment for a bank. They provide a very liquid asset
which can be quickly turned into cash. The commercial
banks can rediscount the discounted bills with the central
banks when they are in need of money. These bills are
safe and secured bills. When the bill matures the bank can
secure its payment from the party which had accepted the
bill.
d) Money at call:
Bank also grant loans for a very short period,
generally not exceeding 7 days to the borrowers,
usually dealers or brokers in stock exchange markets
against collateral securities like stock or equity shares
,debentures, etc., offered by them. Such advances are
repayable immediately at short notice hence; they are
described as money at call or call money.
e) Term loans:
Banks give term loan to traders, industrialists and discounting of exchange bills. Sometimes, the bank gibes
now to agriculturists also against some collateral
securities. Term loans are so-called because their
maturity period varies between 1 to 10 years.
Term loans; as such provide intermediate or
working capital funds to the borrowers. Sometimes, 6. Remittance of funds:
two or more banks may jointly provide large term
loans to the borrower against a common security.
Such loans are called participation loans or
consortium finance.
f) Consumer credit:
Banks also grant credit to households in a limited
amount to buy some durable consumer goods such as
television sets, refrigerators, etc. ,or to meet some
personal needs like payment of hospital bills etc,
such consumer credit is made in a lump sum and is
repayable in installments in a short time.
Under the20-point programme, the scope of
consumer credit has been extended to cover expenses
on marriage, funeral etc, as well.
g) Miscellaneous advances:
Among other forms of bank advances there are
packing credits given to exporters’ for a short
duration, export bills purchased/discounted ,import
finance-advance against import bills, finance to the
self employed, credit to the public sector, credit to the
cooperative sector and above all, credit to the weaker
sections of the community at concessional rates.
3. Creation of credit:
A unique function of the bank is to create credit.
Banks supply money to traders and manufacturers.
They also create or manufacture money. Bank
deposits are regarded as money. They are as good as
cash.
The reason is they can be used for the purchase of
goods and services and also in payment of debts.
When a bank grants a loan to its customer. It does
not pay cash .it simply credits the account of the
borrower. He can withdraw the amount whenever he
wants by a cheque.
In this case, and has created a deposit without
receiving cash. That is, banks are said to have created
credit. Sayers says “banks are not merely purveyors
of money, but also in an important sense,
manufacturers of money.”
4. Promote the use of cheques:
The commercial banks render an important service
by providing to their customers a cheap medium of
exchange like cheques. it is found much more
convenient to settle debts through cheques rather than
through the use of cash.
The cheque is the most developed type of credit
instrument in the money market.
5. Financing internal and foreign trade:
The bank finances internal and foreign take through
short-term loans to traders on the security of commercial
papers.
This discounting business greatly facilitates the
movement of internal and external trade
Commercial banks, on account of their network
of branches throughout the country, also provide
facilities to remit funds from one place to another for
their customers by issuing bank drafts, mail transfers
or telegraphic transfers on nominal.
As compared to the postal money orders or other
instruments, bank drafts have proved to be a much
cheaper mode of transferring money and have helped
the business community considerably.
B)secondary functions:
 Secondary banking functions of the commercial
banks include;
1. Agency services
2. General utility services
These are discussed below:
1. Agency services:
Banks also perform certain agency functions for
and on behalf of their customers. The agency
services are of immense value to the people at large.
The various agency services rendered b banks are as
follows:
a) Collection and payment of credit instruments:
Banks collect and pay various credit instruments
like cheques, bills of exchange, promissory notes
etc., on behalf of their customers.
b) Purchase and sale of securities:
Banks purchase and sell various securities like
shares, stocks, bonds, debentures on behalf of their
customers.
c)Collection of dividends on share:
Banks collect dividends and interest on shares
and debentures of their customers and credit them to
their accounts.
d) Acts as correspondent:
Sometimes banks act as representative and
correspondents of their customers. They get
passports, traveler’s tickets and even secure air and
sea passages for their customers.
• e) income-tax consultancy:
Banks may also employ income tax experts to
prepare income tax returns for their customers and to
help them to get refund of income tax.
F)Execution of standing orders:
Banks execute the standing instructions of their
customers for making various periodic payments.
They pay subscriptions, rents, insurance premia etc.,
on behalf of their customers.
g) Act as trustee and executor:
Banks preserve the’ wills’ of their customers and
execute them after their death.
2. General utility services:
In addition to agency services, the modern banks
provide many general utility services for the
community as given.
a)locker facility:
Bank provides locker facility to their customers.
The customers can keep their valuables, such as gold
and silver ornaments, important documents, shares
and debentures in these lockers for safe custody.
• b) Traveler’s cheques and credit cards:
Banks issue traveler’s cheques to help their
customers to travel without the fear of theft or loss of •
money. With this facility, the customers need not take
the risk of carrying cash with them during their
travels.
c) Letter of credit:
Letters of credit are issued by the banks to their
customers certifying their credit worthiness. Letters
of credit are very useful in foreign trade.
d) Collection of statistics:
Banks collect statistics giving important
information relating to trade, commerce, industries,
money and banking.
They also publish valuable journals and bulletins
containing articles on economic and financial
matters.
e) Acting referee:
Banks may act as referees with respect to the
financial standing, business reputation and
respectability of customers.
f) Underwriting securities:
Banks underwrite the shares and debentures
issued by the government, public or private
companies.
• g) Gift cheques:
Some banks issue cheques of various
denominations to be used on auspicious occasions.
• h) Accepting bills of exchange on behalf of
customers:
Sometimes, banks accept bills of exchange,
internal as well as foreign, on behalf of their
customers. It enables customers to import goods.
• i) Merchant banking;
Some commercial banks have opened merchant
banking divisions to provide merchant banking
services.
• c)fulfillment of socio-economic objectives:
• In recent years, commercial banks, particularly in
developing countries, have been called upon to help a
chi eve certain socio-economic objectives laid down
by the state.
• For example, the nationalized banks in India
have framed special innovative schemes of
credit to help small agriculturists, village
and industries, retailers, artisans, the self
employed persons through loans and
advances at concessional rates of interest.
• under the differential interest scheme (D.I.S) the
nationalized banks in India advance loans to persons
belonging to scheduled tribes, tailors, rickshaw- walas
, shoe-makers at the concessional rate of 4 percent per
annum.
• This does not cover even the cost of the funds made
available to these priority sectors.
Banking is, thus, being used to sub serve the national
policy objectives of reducing inequalities of income
 and wealth, removal of poverty and elimination of
unemployment in the country.
• It is clear from the above that banks help
development of trade and industry in the country.
• They encourage habits of thrift and saving. They
help capital formation in the country.
• They lend money to traders and manufacturer.
• In the modern world, banks are to be considered not
merely as dealers in money bit also the leaders in
economic development.
Sources of bank’s income
A bank is a business organization engaged in the
business of borrowing and lending money. Bank can •
earn income only if it borrows at a lower rate and
lends at a higher rate.
• The difference between the two rates will represent
the costs incurred by the bank and the profit. Bank
also provides number of services to its customers for
which it charges commission
• This is also an important source of income. The
following are the various sources of a bank’s profit:
1. Interest on loans:
• The main function of a commercial bank is to borrow
money for the purpose of lending at a higher rate of
interest.
• Bank grants various types of loans to the industrialists
and traders.
• The yields from loan constitute the major portion of
the income of a bank. He banks grant loans generally
for short periods.
• But now the banks also advance call loans which can
be called at a very short notice.
• Such loans are granted to share brokers and other
banks. These assets are highly liquid because they can
be called at any time.
• Moreover, they are source of income to the bank.
 2. Interest on investments:
• Banks also invest an important portion of their
resources in government and other first class
industries securities.
• The interest and dividend received from time to
time on these investments is sources of income
for the banks.
• Bank also earns some income when the market
prices of these securities rise.
• 3. Discounts:
• Commercial banks invest a part of their
funds in bills of exchange by discounting
them.
• Banks discount either foreign and inland bills of
exchange, or in other words, they purchase the bills at
discount and receive the full amount at the date of
maturity.
• For instance, if a bill of Rs.1000 is discounted for
Rs.975.the bank earns a discount of Rs.25 because
ban pays Rs.975 today, but will get Rs.1000 on the
due date.
• Discount, as a matter of fact, is the interest on the
amount paid for the remaining period of the bill.
• The rate of discount on bills of exchange is slightly
lower than the interest rate charged on loans and
advance because bills are considered to be highly
liquid assets.
4. Commission, brokerage, etc:
• Banks perform numerous services to their customers
and charge commission, etc., for such services.
A bank collect cheques, rents, dividends, etc.,
accepts bills of exchange, issue drafts and letters of
credit and collect pensions and salaries on behalf of
their customers.
• For all these services banks charge their commission.
They also earn locker rents for providing safety vaults
to their customers.
• Recently the banks have also started underwriting
the shares and debentures issued but the joint stock
companies for which they receive underwriting
commission.
• Commercial banks also deal in foreign exchange.
• They sell demand s draft, issue letters of credit and
help remittance of funds in foreign countries.
• They also act as brokers in foreign exchange .banks
earn income out of these operations.
DISCOUNT AND FINANCE HOUSE OF INDIA
(DFHI)
The Discount and Finance House of
India(DFHI) was set up in April 1988 in pursuance of the
recommendations of the working group on money market
under the chairmanship of N.Vaghul. The DFHI was set
up jointly by the Reserve Bank of India, public sector
banks, and financial institutions to deal in short-term
money market instruments. The paid-Up capital of
Rs.100crores was contributed jointly by the RBI
(Rs.51crores), public sector banks (Rs.33crores), and
financial institutions (Rs.16crores ). The main objective of
DFHI are to:
 Provide liquidity to money market instruments.
 Provide safe and risk free short-term investment
avenues to institutions.
 Facilitate money market transactions of small and
medium sized institutions that are not regular
participants in the market.
The main functions of DFHI are as follows:
 1. To discount, rediscount, purchase and sell
treasury bills, trade bills, bills of exchange,
commercial bills and commercial papers.
2. To play an important role as a lender, borrower,
or broker in the inter-bank call money market.
3. To promote and support company funds, trusts
and other organizations for the development of
short-term money market.
4. To advise governments, banks and financial
institutions in evolving schemes for growth and
development of money market.
The DFHI participates in the call, notice
and term markets as a borrower and as a lender.
NATIONAL HOUSING BANK
 NHB is a lean, officer oriented, professionally
managed institution with its headquarters in Delhi
and offices in Mumbai, Hyderabad, Bangalore,
Chennai, Kolkata, Luck now and Ahmadabad. It
has 84 professionals at different levels. NHB is
committed to pursuit of excellence through
innovation, doer work culture and contemporary
work practices with technology intervention. .
 It has the following Departments,
Apart from NHB RESIDEX Cell for
handling residential index activities –
 Regulation & Supervision
 Refinancing Operations
 Direct Finance Operations
 Enabling Processes
 Information Technology
 Resource Mobilization and
Management
 Development and Risk
Management
 Board and CMD Secretariat
NHB has been established to achieve, inter alia, the
following objectives:
 To promote a sound, healthy, viable and cost
effective housing finance system to cater to all
segments of the population and to integrate the
housing finance system with the overall financial
system.
 To promote a network of dedicated housing
finance institutions to adequately serve various
regions and different income groups.
 To augment resources for the sector and
channelize them for housing.
 To make housing credit more affordable.
 To regulate the activities of housing finance
companies based on regulatory and supervisory
authority derived under the Act.
 To encourage augmentation of supply of buildable
land and also building materials for housing and
to upgrade the housing stock in the country.
 To encourage public agencies to emerge as
facilitators and suppliers of serviced land, for
housing.
STATE FINANCE CORPORATION (SFC)
 IFCI – Deals with – Large public limited
companies and co-operative societies which are
engaged in manufacturing, mining, guiding
generation and distribution of electricity
 SFCs – Assist small and medium enterprises
 SFCs Act of 1951
 Authorized capital Rs.50Lakhs toRs.5Cr.
Contributed by
• State Government
• Reserve Bank of India (RBI)
• Scheduled Banks
• Co-op. Banks
• Insurance Companies
FUNCTIONS OF SFCs
 Guarantees loan – repayable in 20 yrs
 Underwriting
 Grants loans and advances
 Maximum 20 yrs repayment
 Subscribes debentures floated by
industrial concerns
BANKER AS LENDER
LOANS:A loan is a kind of advance made with or
without security. In the case of a loan the bank makes a
lump sum payment to the borrower or credits his deposit
account with the money advanced. It is given for a fixed
period at an agreed rate of interest. Repayments may be
made in instalments or at the expiry of a certain periods.
The customer has to pay interest on the total amounts
advanced whether he withdraws the money from his
account (credited with the loan) or not. A loan once repaid
in full or in part cannot be drawn again by the borrower
unless the banker sanctions a fresh loan.
The rate of interest charged by a bank in
the case of loans is usually lower than the in case of cash
credits and overdrafts on account of the following reasons:
I. It involves lower cost of maintenance on
account of not frequent operation of the
account
 II. The bank gets interest on the total amount
sanctioned whether the customer
withdraws the whole money or not.
Loan may be a ‘term loan’ or a ‘demand
loan’. Term loan’s payment is spread over a long period.
It includes a medium term loan (repayable within 3 to 5
years) and a long (repayable after 5 years). Demand loan
is payable on demand. Thus, it is for a short period.
Advantages of the loan system:
1. Observance of the financial discipline by the
borrower: In case of loan system, the time and
amount of repayment of instalments is fixed in
advance. The system therefore encourages a
greater degree of financial discipline on the
borrower.
2. Periodic review of loan account: the banker gets
an opportunity to review the loan account as and
when a loan is granted or renewed. The banker
may discontinue or refuse unsatisfactory loan
account.
3. Simple and profitable: The banker charges
interest on the total amount sanctioned as a loan
to the borrower irrespective of the withdrawals by
the borrower. Thus, there is no loss of interest to
the banker. Moreover the operation of the system
is comparatively simple as compared to a cash-
credit system.
Limitations of the loan system:
1. Inflexibility: The system is inflexible in the sense Limitations of the cash credit system
that every time a loan is required the banker has to 1. Mis-utilisation of the system: Cash credit limits
negotiable with the borrower. In order to avoid
this difficulty, the borrower may get a larger loan
sanctioned to him as compared to his
requirements.
2. More formalities: Sanctioning of the loan
requires more documentation as compared to a
cash-credit system.
3. Frequent renewals: Though the loan is
sanctioned only for a fixed period but in practice
they are continuously renewed period after period.
The review of the loan accounts generally
becomes a casually in this process.
CASH CREDITS
A cash credit is an arrangement by which a
banker allows his customer to borrow money up to a
certain limit. Cash credit arrangements are usually made
against the security of commodities hypothecated or
pledged with the bank.Hypothecation: In case of
hypothecation, possession of goods is not given to the
bank. The goods remain at the disposal and in the
godowns of the borrower. The bank is given access to
good whenever it so desires. The borrower furnishes
periodical return of stock with him to the bank. Such an
advance is granted by the bank only to a person in whose
integrity it has full confidence.
Pledge: In the case of the pledge, the
goods are placed in custody of the bank with its name on
the godown where they are stored. The borrower has no
right to deal with them.Customers favour hypothecation to
pledge because the latter is considered to lower his
prestige.
Advantages of cash credit system
Flexibility: In case of a cash credit system, the customer
need not borrow at once the whole of the amount he is
likely to require but draw such amounts as and when
required. He can put back any surplus amount which he
may find with him for the time being. Interest has to be
paid by the customer on the amount actually drawn at any
time and not on the full amount of the credit allowed.
1. Convenience: Banks have to maintain only on
account for all transactions of the customer and
hence repititive documentation can be avoided.
Thus, the system is quite convenient to operate.
are fixed once a year. Hence, it gives rise to the
tendency of fixing a higher limit than the amount
of funds required by the customer throughout the
year. In times of credit shortage the customer may
misutilise the normally unntilised credit gap.
2. No verification of end-use of funds: In case of
this system the banker lays greater emphasis on
the security offered rather the end-use of funds.
As a result the funds are diverted to other
purposes without banker’s knowledge.
3. Lack of proper management: In case of this
system it is not the banker but the borrower who
decides when and how much he will borrow. In
other words utilization of credit limits depends
upon the discretion of the borrower. This may
result in sufficient idle funds with the banker. Of
course this limitation to certain extent is
 overcome by the bankers by insertion of a This charge shall also not be levied on the limits
minimum interest clause. The clause requires the of working capital sanctioned to sick/weak units, export
customer to pay interest to the banker on certain credit, inland bill limits, credit limits granted to
proportion of the amount arranged for say 1/3rd or commercial banks, financial institutions and cooperative
¼ th, even though he may not have drawn to that banks including land development banks.
extent.
BILL DISCOUNTED AND PURCHASEDThe
bank also gives advances to their customers by
OVERDRAFTSThe customer may be allowed to discounting their bills. The net amount after deducting the
overdraw his current account, with or without security if amount of discount is credited to the account of the
he requires temporary accommodation. This arrangement, customer. The bank may discount the bills with or without
like the cash credit, is advantageous from the customer’s any security from the debtor in addition to the personal
point of view as he is required to pay interest on the actual security of one or more persons already liable on the bill.
amount used by him. A cash credit differs from an INDUSTRIAL FINANCE CORPORATION OF INDIA
overdraft in the sense that the former is used for long-term LIMITED (IFCI).
by commercial and industrial concerns doing regular
business, while the latter is supposed to be a form of bank  It was the first all India development bank
credit to be made use of occasionally and for shorter  It was set up in 1948 with the object of providing
durations. Commitment charge: In case of cash credit medium and long term credit to industry.
and overdrafts, the interest is charged by the banks not on  From July1 ,1993,IFCI has been converted into a
the limit sanctioned, but on the actual amount drawn by public limited company.
the borrower. In order to impose financial discipline on  Now its known as INDUSTRIAL FINANCE
the borrower and provide for rational allocation of credit CORPORATION OF INDIA Ltd.
in February 1991, the Reserve Bank advised all scheduled FUNCTIONS OF IFCI
commercial banks to levy a minimum commitment charge The IFCI grants financial assistance in the following
of one per cent per annum on the unutilised portion of the forms.
working capital limit of Rs. One crore or above sanctioned 1. Granting loan and advances both in rupees and
to the borrowers. foreign currencies repayable within 25yrs.
2. Guaranteeing rupees loans floated in the open
The measure has been introduced by the RBI with the market by industrial concern.
twin objective of bringing about discipline in the 3. Underwriting of shares and debentures of the
availability of bank finance to the borrowers and to industrial concerns.
encourage better management of funds. The charge shall 4. Guaranteeing …
be levied only in respect of the unutilised portion of the a) Deferred payments in respect of imports
working capital limits involving outlay of funds to a of machinery.
tolerance level of 15 percent of the quarterly operating b) Foreign currency loans raised from
limit. In respect of advances on consortium, the foreign institution, and
RBI’s guidelines require the lead bank and the bank c) Rupee loans raised from scheduled bank
having the next largest share to fix operative limits/shares or state banks or state cooperative banks
of individual banks for the next quarter. The quantum of by industrial concerns.
charge will be determined by each member bank with 5. The IFCI was expected to extend financial
reference to the operatives/sanctioned limited allocated to assistance only to industrial concerns in the
it. In multiple banking arrangements, the charge should be private and cooperative sectors.
determined by each bank based on the limits sanctioned 6. Both public sector and joint sectors projects are
by it. eligible for financial assistance from the IFCI.
7. It may include purchase of plant and machinery
,construction of factory building and purchase of
land for the factory.
 8. It does not provided finance for the repayment of
existing liabilities.
9. Its funds are also not available for raising working
capital which include the purchase of raw
material.
FINANCIAL RESOURCES OF IFCI
Financial resources of the IFCI are constituted of
the following three components:
i. Share capital
ii. Bonds and debentures,
and
iii. Other borrowings.
 The paid up capital of the IFCI was
initially Rs.5crores.
 since, then it has been increased several
times and as on march 31,2000 stood at
Rs.1,046crores,IDBI,commercial banks,
the LIC and the cooperative banks
account for the share capital of the IFCI.
 The IFCI has also built-up sizeable
reserves.
 On March 31,2000 its reserve stood at
Rs.907cr.
 The major financial resources of the IFCI
are issue of bonds and debentures,
borrowing from the government the
Reserve Bank of India and IDBI and
foreign loans.
 The bonds and debentures are guaranteed
by the Government of India in respect of
repayment of principal and the payment
of interest.
LENDING OPERATIONS OF IFCI
 It started its lending operations in 1948,
 In recent years there has been a spectacular rise in
the amount of assistance provided to the industrial
establishments.
 While in 1970-71, assistance sanctioned was of
Rs.32.2 Cr. In 1999-2000 it touched the level of
Rs.2,376Cr. At the end of March 2000 stood at
Rs.49,621Cr. Distributed by IFCI.
 Although IFCI provides assistance to all the
private sector ,cooperative sector, and public
sector.
 For instance ,in 1997-98,theprivate sector
accounted for as much as 97.5 per cent of
assistance sanctioned followed by joint sector as
2.2 per cent.
 IFCI has participated actively in the financing of
industrial co-operatives
 IFCI has set of merchant banking and allied
services department with the head office in Delhi
and Bureau in Mumbai.
 MBAD has taken up assignments for capital
restructuring, merger and amalgamations, loan
syndication with other financial institutions, and
trusteeship assignment.
 It guides entrepreneurs in project formulation and
raising resources for meeting project cost etc..
APPRAISAL OF IFCI’s PERFORMANCE
 The IFCI ’s working over the past five decades.
 The growth of the IFCI ’s capital financial
assistance sanctioned and disbursed and steadily
raising profits, Its performance seems to be quite
impressive
 The important criticism are as follows:
• As pointed out by the Mahalanobis
Committee long ago, the IFCI’s lending
operations have encouraged concentration
of wealth and capital.
• For a considerable period of time the IFCI
did little too remove regional imbalance.
however, lately IFCI has provided
considerable assistance to units
established in backward areas.
• The IFCI has failed to exercise necessary
control over the defaulting borrowers.
The performance of IFCI has been extremely
unsatisfactory during recent years. the capital adequacy
ratio (CAR) fell to 8.80 per cent in 1999-2000 against the
minimum stipulated limit of 9 per cent. The ratio of non
_performing assets (NPA s) to net assets in 1999-2000
was high as 20.70 per cent. As a result, profitability has
been affected very adversely.
Regional rural banks:
 In spite of the rapid expansion programmes
undertaken by the commercial banks in recent
year, a large segment of the rural economy was
still beyond the reach of the organized
commercial banks.
 To fill this gap it was thought necessary to create
a new agency which could combine the advantage
of having adequate resources but operating
relatively with lower cost at the village level.
  After the declaration of emergency, the then
prime minister, smt. Indira Gandhi announced on
july 1,1975 the 20 point economic programme of
government of India.
 one of the points of this programme was the
liquidation of rural indebtedness by stage and
provide institutional credit to farmer and artisans
in rural areas.
 The government India promulgated on September
26,1975,the regional rural bank ordinance, to set
regional rural banks throughout the country ; the
ordinance, was replaced by the regional rural
banks act,1976.
 The main objective of the regional rural banks is
to provide credit and other facilities particularly
to the small and marginal farmers,agricultural
labour, artisans and small entrepreneurs so as to
develop agriculture, trade,commerce,industry
other productive activities in rural areas.
OBJECTIVES OF REGIONAL RURAL BANKS:
 To provide credit and other facilities particularly
to the small and marginal farmer agriculture
laborers, artisans, small entrepreneur and other
weaker sections.
 To develop agriculture,trade,commmerce,industry
and other productive activities the rural areas.
 To provide easy, cheap and sufficient credit to the
rural poor and backward and save them from the
clutches of money lenders.
 To encourage entrepreneurship.
 To increase employment opportunities.
 To reconcile rural business aims and social
responsibilities.
 CAPITAL STRUCTURE:
The authorized capital of regional rural
banks is Rs.5 crores,and the issued capital is Rs. 1crores
50% of the issued capital is to be subscribed by the central
government,15% by the concerned state government, and
35% by the sponsoring commercial banks. The share of
regional rural banks to be treated as “approved securities”.
FEATURES OF REGIONAL RURAL BANK:
 The regional rural bank ,like a commercial bank,
is a scheduled bank.
 The RRB is a sponsored bank. It is sponsored by a
scheduled commercial bank.
 It is deemed to be co-operative society for the
purposes of income tax act,1961.
 the area of operations of the RRB is limited to a
specified regional relating to one or more districts
in the concerned state.
 The RRB charges interest rates as adopted by the
co-operative societies in the state.
 The interest paid by the RRB on its term deposits
may be 1% or 2% more than that is paid by the
commercial banks.
 The regional rural bank enjoys many concessions
and privileges.
FUNCTION OF RRB:
 Granting of loans and advances to small and
marginal farmers and agricultural labourers, either
individually or in groups.
 Granting of loans and advances to co-operative
societies, agriculture processing societies and co-
operative farming societies primarily for
agricultural purposes or for agriculture operative
and other related purposes.
 Granting of loans and advances to artisans, small
entrepreneurs and persons of small means
engaged in trade, commerce and industry or other
productive activities within a specified region.
 Accepting various types of deposits.
PROGRESS ACHIEVED BY RRB:
 Number of banks:
The first, five regional rural banks were started at
moradabad and gorakhpur in uttar pradesh, bhiwani in
haryana, jaipur in rajasthan and malda in weat bengal.
There are now (june 2001) 196 regional rural banks,
covering over 400 districts in the country with 14,550
branches. The largest number of offices are started in
uttar pradesh.
 Deposits:
the deposits of RRB increased
substantially over the years. The total deposits were only
Rs.20 lakhs in 1975. they increased
 Advances:
Total advances granted by all regional banks
amounted to Rs.10 lakhs in 1975. the total advances
granted increased to Rs.11,020 crores in 2000. over 90%
of the advances of RRB are direct advances to small and
marginal farmer, landless labourers and rural artisans.
Problems:
 Self- employment schemes:
the Regional rural banks are making notable
effort to encourage self- employment schemes.
 Creation of local employment opportunities:
 Regional rural banks have been
taking active steps to create employment for local people
and achieved good success.
 Participation in various programmes:
During the last 22year Regional rural banks
have been active participation in programmes designed to
provide credit assistance to weaker sections.
 Assistance to physically handicapped persons:
Physically handicapped persons are
provided finance for purchase of artificial limbs, hearing
aids, wheel chairs etc.
 Farmers societies:
Regional rural banks have also sponsored
and financed about 90 farmer societies.
 Integrated rural development programme:
Regional rural banks have been taking active
part in the integrated rural development programme.
 Existence of over dues: the most serious problem
faced by the regional rural banks is the existence
of heavy over dues. Over dues are rising due
continuously. It is estimated that about 30% of the
loans sanctioned still remain due from the
borrowers. This has caused innumerable financial
problem besides limiting the capacity of regional
rural banks to lend and operated as viable units.
 Losses: most of the regional rural banks are not
economically viable. They have been
continuously incurring losses for years together.
The accumulated losses are estimated to be Rs.
1200 crores up to march 2000.
 Limited channels of investment: since the
regional rural banks have to lend small and
marginal farmers and other weaker section of
society, the channels of investment are limited.
 Difficulties in deposit mobilization: regional
rural banks have been facing a number of
practical difficulties in deposit mobilisation.richer
sections of the village society show least interest
in depositing their money in these bank because
they are served by these banks.
 procedural rigidities: regional rural banks
follow the procedures of the commercial banks in
the Matter of deposits and advancing loans. Such
procedures are highly complicated and time –
consuming from the villagers point of views
 Multi-agency system of control: regional rural
banks are controlled by many agencies. The
present multi-agency control of regional rural
banks involves sponsored banks, NABARD,
reserve bank, state governments and the central
government this is not conducive to high
operational efficiency and viability. So the present
multi-agency system of control should be replaced
by single agency control.
 Slow progress in lending activity : the growth in
loan business of regional rural banks is low. For
this the following reasons may be given:
a) There has been limited scope for direct lending by
regional rural banks in their field of operation.
b) It is always difficult to identify the potential small
borrowers.
c) Most of the small borrowers do not like the bank
formalities and prefer to borrow from the money –
lenders.
d) There is lack of co-ordination between officials of
district credit
Planning committee and the regional rural
banks.
 Inefficient staff: as the salary structure of
regional rural bank is not attractive when
compared to other banks, efficient persons have a
tendency to shift to commercial banks to improve
their salary and career. Beside, many employees
are not willing to work in villages. There is no
true local involvement of the bank staff in the
villages they serve.
Despite these problems, the regional rural
bank have been trying their level best to achieve
their social objectives. they have succeeded in
projecting their image of “small man’s bank.’’
they are in fact, development banks of the rural
poor. They have been trying to fill regional and
function gaps in rural finance in our country.
SUGGESTION FOR REORGANISATION
AND IMPROVEMENT
 These bank should continue to work as rural
banks of the rural poor.
 The state governments should also take keen
interest in the growth of regional rural banks.
 Participation of local people in the equity share
capital of the regional rural banks should be
allowed and encouraged.
 The regional rural banks should be linked with
primary agriculture co-operative societies and
farmer’s service societies.
 The regional rural banks should be strongly
linked with the sponsoring commercial banks and
the RBI.
 A uniform pattern of interest rate structure should
be devised for the rural financial agencies.
 The regional rural banks must strengthen effective
credit administration by way of credit
apprasisal,monitoring the progress of loan and
their efficient recovery.
 The regional rural banks should increase their
consumption loan to the villager and weaker
sections. They should be allowed to increase their
loan to richer sections of the society.
 The regional rural banks should be permitted to
provide full range of banking services, such as
,remittance and other agency servicees,which
would help a lot in developing banking habits
among the villager
 The regional rural banks should diversify their
loan.
 The present multi-agency system of control of the
regional rural banks should be replaced by single
agency control.
 As far as possible ,natives should be appoint to
work in them. The employees should be given
suitable training.
 Effective steps should be taken to prevent the
misuse of funds by borrowers and willful
defaulters.
 Lending procedures should be made easy in order
to avoid undue delays.
 The image of regional rural banks should be
improved. They should not be identified as
“second class” banks or an extension of the urban-
oriented commercial banks.
Nabard:
 The National Bank for Agriculture and Rural
Development(NABARD) was set-up on 12th
july,1928 under an act of parliament. It has been
established by merging the Agricultural Credit
Department, and Rural Planning and Credit Cell
of the Reserve Bank and the entire undertaking of
Agricultural Refinance and Development
Corporation. Hence, the National Bank has to
perform a dual function:
a) The function of the Reserve Bank as an apex
institution, and
b) The function of Agricultural Refinance and
Development Corporation as a refinance
institution.
OBJECTIVES:
 To give financial assistance for increasing the
agricultural production.
 To supply the long-term needs of the rural areas.
 To supply loans by way of refinance.
 To help small industries, cottage industries and
also artisans.
 To achieve overall rural development.
NABARD’s Financial Resources:
The authorized capital of
NABARD is Rs.500 crores and the paid up capital
is Rs.100 crores. The paid-up capital is
contributed by the Central Government and the
Reserve Bank in equal proportions. At the time of
its establishment, loans and advances granted by
the Reserve Bank and outstanding against state
co-operative banks and regional rural banks were
transferred to NABARD. Besides , the Reserve
Bank has also sanctioned a credit of Rs.1200
crores to NABARD. credit are also received from
the U.K., the U.S.A., the Netherlands, Switzerland
and west germany.besides these, NABARD has
been raising funds from the market through the
issue of debentures. To meet the loan
requirements NABARD draws funds from the
government of india,the world bank and other
agencies. NABARD had raised resources to the
extent of Rs.11,000 crores between 1983 and
1999. NABARD has thus sufficient financial
resources for financing all agricultural and rural
development programmes. At present its paid up
capital is Rs.2000 crores.
Function of NABARD:
 Apex institution for rural finance: NABARD
performs all the function which were previously
performed by the reserve bank of India. It directs
the policy, planning and operations in the field of
credit for agriculture and other economic
activities in rural areas. It, thus acts as an apex
bank in the country for supporting and promoting
agriculture and rural development. it is described
as “ rural reserve banks”.
 Refinance institution : it serves as an apex
refinancing agency for the institutions providing
production and investment credit for promoting
various developmental activities in rural areas.
These activities are related to agriculture, small
scale industries, village and cottage industries,
handicrafts, small artisans etc.NABARD has
taken over the function of refinancing form the
Agricultural Refinance Development Corporation.
It provides refinance facilities to state co-
operative banks, regional rural banks, commercial
banks and other financial institution approved by
RBI . Commercial banks lead in availing of
refinance form NABARD.
 Credit functions: NABARD is empowered to
given short term, medium term and long term
loans in a composite form. It look after the credit
requirements of all types of agriculture and rural
development activities.
a) it provides short term, medium term and long
term credit to state co- operative banks, land
development banks regional rural banks and other
financial institution approved by the RBI.
b) It grant long-term loan, up to 520 years, to state
governments to enable them to subscribe to the
share capital of co- operative credit societies.
c) It provides medium term loan to state co-
operative banks and regional rural banks for
agricultural and rural development.
d) It gives long-term loan to any institution
approved by the central government.
e) Contribution of share capital: NABARD
contributes to the share capital of any institution
concerned with agriculture and rural development.
f) Investment in securities: NABARD can invest in
securities of any institution concerned with
agriculture and rural development. For promoting
innovative investments, NABARD has started
“Venture capital fund.”
g) Conversion and Rescheduling Facilities:
NABARD provides refinance to eligible
institutions for conversion and rescheduling of
loans, under conditions of drought, famine or
other natural calamities, operations etc.
h) Financial help to non-agricultural sector:
Besides providing credit to agricultural and allied
activities, the NABARD also renders financial
help to the non-agricultural sector with the aim of
promoting integrated rural development. It
provides financial assistance to small scale
industries, cottage and village industries and
industrial co-operative societies for meeting their
working capital and fixed capital needs.
i) Co-ordination of Activities: NABARD co-
ordinates the activities of central and state
governments, planning commission and other
institutions concerned with the development of
small-scale industries, village and cottage
industries, rural crafts and industries in the
decentralised sector.
j) Regulatory Function: NABARD has the
responsibility to inspect regional rural banks, and
central and state co-operative banks.
 Maintenance of Research and Development
Fund: NABARD maintains research and
development fund:
a) To promote research in agriculture and
ruradevelopment.
b) To formulate programmes to suit the requirements
of different areas, and to cover special activities.
 Training Programmes: NABARD has to
provide comprehensive training programmes to its
own staff as well as to the staff of state co-
operative banks, regional rural banks etc. the
training is to be meant for upgrading the technical
skill and competence of the staff.
 Evaluation of Projects: NABARD undertakes
monitoring and evaluation of projects refinanced
by it. It is responsible for the development, policy,
planning operational matters, co-ordination,
monitoring, training , consultancy etc.,
Achievements of NABARD:
 Short-term Assistance: NABARD sanctioned
short- term credit limits worth Rs.6230 crores
during 1997-98 to state co-operative banks for
financing seasonal agricultural operations. The
credit facility is available at a concessional rate of
3% below the bank rate.
 Medium-term Assistance: NABARD has
continued to follow the policy earlier laid down
by the reserve bank in regard to sanctioning
medium-term credit limits for approved
agricultural purposes. A major portion of
medium-term credit of NABARD went to state
co-operative banks and central co-operative banks
 to convert short-term loans granted to farmers into
medium-term loans.
 Long-term Assistance: NABARD grants long-
term credit to State Governments for contribution
to the share capital of co-operative institutions.
During 1997-98,it extended long-term credit
worth Rs.210 crores.
 Schematic Lending: During 1997-98 NABARD
sanctioned 6,810 schemes involving its own
commitments of Rs.3930 crores. Largest number
of schemes sanctioned were related to minor
irrigation followed by those related to farm
mechanisation. Sheep-breeding, piggery, dairy,
fisheries etc., are other important schemes which
are financed by NABARD.
 Assistance to less Developed States: NABARD
like ARDC has continued the policy of promoting
agricultural investment in the less developed and
unbanked states. Uttar Pradesh, Bihar, Madhya
Pradesh, Rajasthan and Orissa have been
receiving the largest share of financial benefits
from NABARD.
 Assistance to non-farm Sector: NABARD has
also provided financial help to non farm activities
with a view to promote integrated rural
development. Finance has been provided for
production and marketing activities of co-
operative sugar mills, handloom weaver’s
societies, industrial co- operatives, rural artisans
etc.
 Rehabilitation programme : NABARD has
been playing an energetic role in strengthening
and reorganizing the co- operative structure in the
country. It has initiated are habilitation
programme for financially and administratively
weak central and sate co- operative banks. It has
also been providing help in the rehabilitation
work of state land development banks and
primary land development banks. state
government have been asked to take effective
steps to ensure functional co- ordination between
short –term and long term credit by co-
operatives. It has also created a “cell” to monitor
the implementation of this directive.
 Assistance to research and development
projects: every year NABARD has been
providing financial help to a number of banks its
research and development fund for setting up or
strengthening their “technical monitoring and
evaluation cell.” it has been sanctioning fund for
organizing research, conferences and seminars on
subject having relevance to NABARD.
 Credit plans under the new strategy: under the
“service area approach”, the annual credit plans
are prepared by the bank branches. The district
level offices of the NABARD would help to
improve the quality of credit plans prepared by
banks branches and also co- ordination and
effectively monitor the credit plans.
 Integrated rural development pregramme:
NABARD has helped the implementation of the
“Integrated rural development pregramme” under
the 20 point economic programme, the NABARD
has taken steps to provide adequate financial
facilities to the weaker section of society.
 Regional rural banks: after the establishment of
NABARD, all the refinance facilities earlier
available to regional banks have been provided by
NABARD.
Thus, NABARD have given a tremendous
push to agricultural credit and thus promoted
agricultural and rural development.
SMALL INDUSTRIES DEVELOPMENT
BANK OF INDIA
 With a view to ensuring larger flow of financial
assistance to the small scale sector , the
government of India announced on the budget for
1988-89,its decision to establish small industries
development bank of India (SIDBI) as a
subsidiary of IDBI. The SIDBI act was passed by
the parliament on October 1989 and the bank
commenced its operations from april2,1990.to
equip SIDBI to play its apex role in SSI credit
provisions more effectively , the union budget
1998-1999 passed the delinking of SIDBI from
IDBI and transferring of IDBI shareholding in
SFCs to SIDBI.
 With a view to ensuring large flow of assistance to
the small-scale units , the immediate thrust of
SIDBI was on (a) initiating steps for technological
up gradation and modernization of existing units;
(b) expanding the channels for marketing the
products of the small-scale sector; and (c)
promotion of employment –oriented industries
especially in semi-urban areas to create more
employment opportunities and thereby checking
 migration of population to urban areas. SIDBI
provides assistance to the small-scale units through
the existing credit delivery system comprising state
finance corporation ICICI were moderate compare
with its present massive resources.
 Total liabilities and assets of ICICI were
Rs.149cr.in 1971 which rose substantially to
Rs.65,389cr in 1999-2000.
 Additional loans from the govt and the IDBI have
helped the ICICI in augmenting its resources.
 The most important sources of rupee fund of the
ICICI is the issue of bonds and debentures to the
public.
 , State Industrial Development Corporation ,
Commercial Banks , Co-operative Banks and
Regional Rural Banks. The major activities of
SIDBI are : (1)refinance of loans and advances ; (2)
discounting and re-discounting of bills;(3)
extension of speed capital/soft loans ; (4) granting
direct assistance and refinancing of loans ;
(5)providing services like factoring ,leasing etc.;
and (6) extending financial support of State Small
Industries Development Corporation . During
1999-2000 , SIDBI sanctioned assistance worth
Rs. 10,265crores of which assistance worth
Rs.6,964crores was disbursed.
THE INDUSTRIAL CREDIT AND
INVESTMENT CORPORATION OF INDIA Ltd.,
(ICICI):
 ICICI was the second all India development bank
to be established in the country
 It was set up in January 1955, and it commenced
business in march of the same year.
 ICICI differ from to all India development banks
viz.. IFCI and IDBI, in respect of ownership,
management and lending operations.
 IFCI and IDBI are public sector development bank,
ICICI is a private sector development bank.
 ICICI provides underwriting facilities which are
generally neglected by other institutions.
 On 1 April 1996, SCICI ltd., was merge with ICICI
ltd.,
 ICICI provides assistance in various forms, the
important ones:
 Long or medium term loans
 Guaranteeing loans to other private
investment sources
 Subscriptions to ordinary or preference
capital and underwriting of new issues or
securities
 Rendering consultancy services to Indian
industries in the form of managerial and
technical devices
LENDING OPERATIONS OF ICICI:
In terms of sheer amount of
financial assistance provided by the ICICI.
 Its performance has been quite impressive.
 The ICICI has provided financial
assistance in the form of
 rupee loans including guarantees
 Foreign currency loans
 Underwriting of shares and
debentures
 Direct subscription of shares and
debentures
 Financial services
 ICICI was originally set up to provide finance to
industrial concern in private sector, the bulk of
loans by this institutions.
 The scope of this operations has been enlarged in
recent years by including the projects in the joint,
public and co-operative sectors.
As far as industry wise assistance
is concerned the major recipients of the
financial assistance from the ICICI are
non-traditional growth oriented industries
such as chemicals, petrochemicals, heavy
engineering, metal products.
 ICICI has joined the consortium of the IDBI, IFCI
and the other institutions for providing the loans to
a number of industries for modernization.
 In 1983, ICICI commenced leasing operations
 It provides leasing assistance for computerization,
modernization, equipment for energy conservation,
export orientation, pollution control, balancing and
expansion.
 In this country, quite a large number of enterprises
in some traditional industry, particularly cotton
textile, jute, sugar, and cement have been facing
serious problems for a long time due to
obsolescences.
 Among the new industries some engineering units
urgently need modernization, they all require
financial assistance on soft term to carry out their
 plans in respect of replacing the outdated plants It denotes performing banking thorough the
and machinery. world or internationally . It is banking which borrows
 The consortium of all India development banks lends the long term funds to all the countries in the world.
now extends assistance to such industrial units for In this banking the countries can deposit and borrow their
the purpose of modernization. financial resources in the view of development of
APPRAISAL OF ICICI PERFORMANCE: economy, trade ,banking and other key areas of the nation.
 The ICICI in four and a half decades of its The World Bank, international monetary fund,
existence has play an important role in providing international financial corporation, and Asian
financial assistance to industrial enterprises in the development bank are international banks and they
private sector. undertake international banking business.
 The provisions for a foreign currency loans
 A large number of growth oriented industry such as
FUNCTIONS OF IMF:
chemical, petro chemical, heavy engineering and
 To promote the international monetary
metal products industries are primarily interested in
co-operation through a permanent institution
such currency loan for importing capital equipment
which provide the machinery for consultation and
and it is here that ICICI gives them a helping hand
collaboration in the international monetary
 The ICICI has been rightly criticized for assisting
problems
mainly the large units.
 To promote exchange stability, to
 ICICI has increased its assistance to backward
maintain orderly exchange arrangements among
areas in the recent years
members and to avoid competitive exchange,
 The ICICI has also participated in setting up
depreciation,
technical consultancy organizations in a number of
 To give confidence to members by
backward states.
making the general resources of the fund
INTERNATIONAL BANKING
temporarily available to them.
INTRODUCTION:
 Role of IMF: proper conduct of
The International Bank is an international
international monetary system, source of liquidity
standard for identifying bank accounts across national
for countries.
borders with a minimal of risk of propagating
transcription errors. It was originally adopted by the
FUNCTIONS OF WORLDBANK:
European Committee for Banking Standards (ECBS), and
 Promoting the private investment by
was later adopted as an international standard under ISO
means of guarantees of participation.
13616:1997 and now as ISO 13616-1:2007.
 Long range growth of international trade
The INTERNATIONAL BANKING, IBAN
and the maintenance equilibrium in the BOP of
(international bank account number) was originally
member countries.
developed to facilitate payments within the European
Union but the format is flexible enough to be applied
FUNCTIONS OF INTERNATIONAL FINACIAL
globally. The BBAN includes the domestic bank account
CORPORATIONS:
number and potentially routing information. The national
 Investigating in private enterprises in
banking communities decide individually on a fixed
member countries.
length for all BBAN in their country.
 Provide opportunities for private capital,
The fundamental basis of international trade
domestic origin and experienced
lies in the fact that all countries cannot produce all things
management.
equally well or cheaply due to the unequal distribution of
 Development of project identification
natural resources among them. Here, banks play an
and promotion
important role in international trade .
 Encouraging the growth of capital
MEANING:
markets.

Online IBAN validation
 There is a large number of IBAN validates on
the internet. Some are specific to a particular
country, others to a particular bank.
 All general purpose validators perform the
validations described above, though a few do
check certain country-specific information,
e.g., that the IBAN bank code and the sort code
are consistent.
List of valid IBANs by country:
This table summarises the IBAN formats of
various countries. The data is taken from the August 2010
version of the IBAN registry,
The BBAN format column shows the
format of the BBAN part of an IBAN in terms of upper
case alpha characters (A-Z), numeric characters (0-9) and
mixed case alphanumeric characters (a-z, A-Z, 0-9). For
example, the Bulgarian BBAN (4a, 6n, 8c) consists of 4
alpha characters, followed by 6 numeric characters, then
by 8 mixed-case alpha-numeric characters.
Conclusion:
The international banking also involves,
 Exchange rates (iii)Dealing with credit:
 Risk management and basics of derivatives
 Documentary letters of credit
 Facilities for exporters and importers
 Correspondent banking and NRI accounts
 RBI and exchange control in India, EXIM Bank,
ECGC
Introduction of banking system:
INTRODUCTION:
The word ‘Bank’ is said to have
dervied from the french word ‘Banco’ or ‘Bancus’ lending ,bank posses the character of an agent , because
or ‘Banc’ or ’Banque’ which means a ‘Bench’.
In due course, it was Italianised into Banks system and structure in India:
“banco” , frenchised into “bank’s” finally ? into
‘bank’. This view is most prevalent even today.
Definition:
According to Dr.L.Hart , A banker is
“One who , in the ordinary course of his business,
honours credit drawn upon him by persons from
and for whom he receives money on current
accounts”
Sec5(b) of the Banks Regulation Act development banks etc,.
1949, defines as “ accepting , for the purpose of
lending and invest of deposit of money from the
public , repayable on demand order or otherwise
and withdrawable by cheque , draft, order or
otherwise “.
i.e, banker receives deposit , lending or investing
these deposit and repaying these deposit on demand
by cheque or otherwise.
Crowther defines bank as ,” one that collects
money from those who have it to spare or who are
saving it out of their invest and lends the money so
collected to those who require it”.
Features of banks:
(i)Dealing in money:
The banks accept deposit from
the public and advancing them as loans to the
needy people. The deposit may be of different
types current, fixed ,saving etc, accounts accepted
on various terms and conditions.
(ii)Deposits must be withdrawable:
The deposit made by the public can be
withdrawable by cheque , draft or otherwise ie, the bank
issue and pay cheque .The deposit are usually withdrawable
on demand.
The banks are the institution that can
create credit i.e., creation of additional money for lending.
Thus , “creation of credit” is the unique feature of banks.
(iv)Commercial in nature:
Since all of the banks are carried on with
the aim of making profit, it is regarded as a company
institution.
(v)Nature of agent:
Besides accepting deposit and
of its various agency service.
Indian bank system comprises of both
organized and unorganized banks.
Unorganized banks includes indigenous
bankers and village money lenders.
Organized banks includes RBI, company
banks(including foreign banks), development banks,
EXIM, Co-operative banks, Regional rural banks, National
bank for agricultural and Rural development, Land
Indigenous banks:
 Indigenous bankers are individuals or put Most of the indigenous bankers carry on their
firms which receive deposit and give loans and there by non-banking business along with the banks activities. They
operate as banks. generally have their detail trading business. They are
Since their activities are not regulated they participate in speculative activities.
belong to the unorganized request of the money market. Sometimes they act as agents to big
They may be classified under four main commercial firms and earn commission.
sub-groups: Defects of indigenous bankers:
(a)Gujarati shroffs
(b)Multani or shikapuri shroffs 1.Mixing banks and non-banks business:
(c)Chettiars (south) Most of them undertake speculation
(d)Marwari kayas activities.
TYPES: Their business is risky as they combine
(a)Those whose do main business in banks. both trading and business.
(b)Those who combine their banks business with trading 2.Unorganised banks system:
commission business Different indigenous banks operate
(c)Those who are mainly traders and commission agents separately and independently. They have no
but who do a little bank business also. co-ordinate with each other.
FUNCTIONS: They have no regular contact with the
1.Accepting deposit: commercial banks.
They accept deposit from the public. These The transfer of funds is not possible in
deposit are of two types, such a system.
(a)The deposit which are repayable on demand. 3.Insufficient capital:
(b)The deposit which are repayable after a fixed period. The indigenous banks largely depend upon
The indigenous banks pay higher rate of with that paid their
by the
own capital.
commercial banks. 5.Defective leading:
2.Advancing loans: The indigenous bankers, generally do not
They provide loans to their customer follow the sound banks ? While grating loans.
against all types of securities such as land, houses, crops, They provide loans against insufficient
gold and silver. securities or even against personal securities.
They also give credit against personal They also give loans against immovable
security. properties.
They finance inland trade , including the They do not distinguish between short term
movement of agriculture commodities like sugar , oil seeds and long term loans.
etc,. 6.Unproductive loans:
They do not pay attention to the purpose for
But they do not grant direct loans to farmers. which the loan is used.
They provide loans to small industry. They also give money for unproductive and
3.Business in hundies: speculative activities or for paying off demand dedts.
They deal hundies , buy and sell hundies. They
also use hundies and there by meet the fix needs of the As a request their financial resources are
interval traders. They also transfer funds from one place to insufficient to meet the demand of borrowers.
another through hundies. 4.Meagre deposit business:
4.Acceptance of valuables for safe custody: The main business of the indigenous banks is
They accept valuables of their clients for safe to give loans and deals in hundies. Their deposit business is
custody. Some indigenous bankers provide cheque and meager or very small.
remittance facilities also. They failed to ? And mobilize rural savings
5.Non-banking functions: effectively.
7.Higher interest rate:
 They charge very higher interest rate for the (b)The non-professional money lenders.
loans than commercial banks. (a)Professional money lenders are those persons whose
8.Exploration of customer: business is only lending of money.
They indigenous banks adopt all types of E.g.: The maharaja , sahukars and Baniars are
malpractices and exploit their customer in many ways. E.g.: professional money lenders.
they make unauthorized deduction from loan. They usually hold licenses for money lending.
9.Discouragement to bill market: (b)Non-professional money lenders are those persons who
They also stand in the way of deposit a proper combine money lending with other activities.
bill market in the country. Bulk of their business based on They do not depend entirely on money lending business.
case transactions rather than on hundies. They mainly engaged in other types of activities.
10.Secrecy of accounts : They consist of landlords , agriculturalist, traders,
They adopt traditional accounts of system. pensioners etc,.
They keep secrecy about their accounts and They have no license to carry on money lending
activities. business.
They neither get their accounts audited are They give loans to known people within their circle.
publish annual balance sheet. FEATURES:
This raises suspicion in the minds of the people. The methods and areas of operations vary from
11.No control of reserve bank: money lender to money lender. However they have
The indigenous banks business is unregulated. common features are as follows:
The RBI has no control over these banks and cannot (a)Money lenders mostly lend their own funds illiterate and
regulate their activities. economically weaker sections of the society.
SUGGESTIONS FOR REFORM: (b)The borrowers from money lenders are mainly illiterate
To improve the function of indigenous banks, and economically weaker sections of the society.
1.They should be directly linked with the reserve bank. (c)The loans of the money lenders are highly expectative in
2.They should separate their non-banks business from nature.
banks business. (d)The credit provided by money lenders may be secured or
3.They should re-organise their banks business on modern unsecured.
lives. (e)The lending operations of money lenders are prompt,
4.They should maintain proper accounts and get them informal and flexible.
audited regularly. DIFFERENT BETWEEN MONEY LENDERS AND
5.The competition between the indigenous banks and INDIGENOUS BANKERS:
commercial banks should be ended. 1.The primary business of the money lenders is money
6.They should stop various malpractices in their business. lending. But the primary business of indigenous bankers is
7.The benefit of the bankers book Evidence Act should be not banks.
extended to the indigenous bankers also. 2.The money lenders do not accept deposit from the
8.They should be members of an association. people . But indigenous bankers accept deposit from the
9.The RBI should supervise and inspect the conduct of public.
indigenous bankers. 3.The indigenous bankers deal in hundies. But money
10.The Banking Commission ,1972 in its report suggested lenders do not deal in hundies.
that the best way to control the business of indigenous 4.The indigenous bankers generally lend for trade or
bankers should be through commercial banks. productive purposes. But the money lenders lend for
MONEY LENDERS: consumptions purposes.
Money lenders are those persons whose 5.Money lenders operate in a limited area. So the scope of
primary business is money lending. They lend money from their business is limited. But indigenous bankers have a
their own funds. wider area of operation. So they have a large scale for
Broadly , the money lenders may be classified operations.
into two categories: 6.The indigenous bankers are largely urban based, where as
(a)The professional money lenders , and money lenders carry their business on rural areas.
DEFECTS:
1.The money lenders have inadequate resources to meet the
needs of rural people.
2.They charge very high interest rates.
3.They adopt all types of malpractices in their business.
e.g. : (a)? Interest in advance.
(b)? Gifts
(c)manipulating accounts etc,.
4.The loans are mostly provided for consumptions and
unproductive purposes.
5.The money lenders give loans against standing crops. In
this way they compel the cultivators to sell their produce at
low prices to them.
6.They have no uniformity in the matter of rate of unit.
Government has taken many steps to regulate the activities
of money lenders.
CO-OPERATIVE BANKS:
Under the Act of 1904 ,a number of co-
operative credit societies were started. Owing to increase
demand of co-operative credit, a new Act was passed in
1912 which provided for the establishment of co-operative
central banks by a union of primary credit societies.
Like other banks , the co-operative bank
collect funds through share.
They accept deposit and grant loans.
They are generally concerned with the rural
credit and provide finance assistance for agriculture and
rural activities.
(a)Primary Agriculture credit societies:(PACS)
→ A co-operative credit society commonly
known as PACS.
→It can be started with ten or more persons.
→The members generally belong to a village.
→The membership is open to all the residents
of the locality or village.
→Each member contributes to the share
Capital of the society.
→The value of each share is nominal because
even the poorest farmers to become a member.
→ The members have unlimited liability, i.e.,
each member is fully responsible for the entire loss of the
society in the event of failure.
→ The management is honorary , only paid
members normally being “secretary measure”.
→ Loans are given for short-period.
→ Normally for one harvest season, rate of
interest is fixed about 6%.
→ Dividend are not declared and profits are
generally used for the welfare and improvement of the
village.
(b)CENTRAL CO-OPERATIVE BANKS:
→These banks have a few private individuals
as share holder who provide both finance and management.
→The central co-operative banks have three
source of fund.
*Own share capital and recourses
*Deposit from the public
*Loans from the state co-operative banks
FUNCTIONS:
1.They finance for the primary credit societies.
2.They accept deposit from the public.
3.They grant credit to their customer on the security of first
class guilt edged securities , gold etc,.
4.They provide remittance facilities.
5.To take up non-credit activities like the ? Of seeds,
fertilizers, and consumer goods necessary to the farmers.
6.To prepare proposals for better utilization of the finance
resources of PACS.
DEFECTS:
1.They ? The private co-operative by working on the lines
of commercial banks.
2.They do not appoint experts to examine the credit
worthiness of primary societies.
3.They combine financing and supervisory work together.
As a result supervisory work has been a failure in many
cases.
4.Some CCBS have been utilizing their reserve funds as
working capital . This is not a very sound paradise.
5.It charge very high interest rates to meet their high
administration cost.
6.Many CCBS are financially and organizationally weak.
(C)STATE CO-OPERATIVE BANKS:
→ It is also known as apex(main) banks.
→ They obtain their funds mainly from the
general public by way of deposit, loans and advance from
the RBI and their own share capital and resource.
→ 50-90% of the working capital of SCBS are
contributed by RBI.
FUNCTIONS:
1.The SCB acts as a banker to CCBS.
2.They have no power to supervise or control the activities money, the rural people tend to deposit their savings in the
of the affiliated CCBS. co-operative or commercial banks.
3.It co-ordinates the policy of the government with the co-
operative ?. 6.They have undertaken several welfare activities. They
4.It also brings about co-ordinate between RBI, money improve morals, education etc,.
market and co-operative credit societies. 7.They have played an important part in changing the old
5.It gives a number of subsidies to District co-operative customs and traditions of the people which are an obstacle
bank society(DCBS) for improving co-operative credit to progress and economic betterment.
societies. 8.They have greatly helped in the introduction of better
6.It simplifies loan distribution system to enable its agriculture methods. Co-operative credit is available for
member to get loans very easily. purchase improved seeds , chemical fertilizers and modern
7.It helps the government in framing the schemes for the implements cheaply and sell their products at good prices.
development of co-operative in the state. PROBLEMS AND WEAKNESS OF
FUNCTIONS: CO-OPERATIVE BANKS:
1.EXCESSIVE OVERDUES:
1.The SCB acts as a banker to CCBS. The borrowers from the co-operative banks
2.They have no power to supervise or control the activities are not repaying the loans promptly and regularly.
of the affiliated CCBS. There are heavy over dues.
3.It co-ordinates the policy of the government with the co- Lack of audit discipline among the farmers to
operative ?. repay loans.
4.It also brings about co-ordinate between RBI, money Large amount of over dues restrict the
market and co-operative credit societies. recycling of the funds and adversely affect the leading and
5.It gives a number of subsidies to District co-operative borrowing capacity of the co-operative societies.
bank society(DCBS) for improving co-operative credit
societies. 2.INEFFICIENT SOCIETIES:
6.It simplifies loan distribution system to enable its The co-operative credit societies are
member to get loans very easily. managed by people who have no knowledge of co-
7.It helps the government in framing the schemes for the operative. They do not have necessary experiences and
development of co-operative in the state. training. As a result most of the societies are inefficient.
DEFECTS: 3.REGIONAL DISPARITIES:
1.They mix up commercial banks activities with co- Co-operative benefit are not evenly
operative banks. distributed as between different states.
2.They have insufficient share capital. The loans advanced per member varies
3.They utilize their reserve funds as working capital. widely.
4.Some SCBS are not pure federations as they permit The farmers of Gujarat, Punjab, Haryana
individual membership along with affiliation to the CCBS. and Tamilnadu are getting much more than those in Orissa ,
BENEFITS: Bihar and West Bengal .
1.Co-operative movement has become a powerful 4.BENEFITS TO BIG LAND OWNERS:
instrument for rapid economic growth. Most of the benefits from co-operative have
2.They discouraged unproductive borrowing. been cornered by the big land owners because of their
3.They have reduced the important of money lenders. More strong socio-economic position. Small farmers are
than 60% of the credit needs of agriculture are now meet by neglected by co-operative societies. Poor farmers are not
co-operative banks. able to get enough credit.
4.The small and marginal farmers are being assisted to 5.DEPENDENCE ON OUTSIDE RESOURCES:
increase their ?. Co-operative societies depend heavily on
5.They have promoted saving and bank habit among the outside resources. State government and NABARD are the
people , especially the rural people. Instead of boarding main sources of funds to co-operative societies. This heavy
dependence on outside resources will be a great problem in 8.Co-operative training facilities should be expanded and it
future. should be managed by well trained personally.
6.POLITICAL INTERFERENCE: 9.People should be made to realize the benefits of co-
The co-operative societies are dominated by operative.
political parties and politicians. 10.They should be made agents of commercial banks
7.INADEQUATE COVERAGE: wherever possible.
Co-operative covered almost rural areas of the 11.Steps must be taken for effective audit and inspections.
country. But it covered only 45% of the rural families, 55% 12.Political interference in the affairs of co-operative must
of rural families are not still covered under the co-operativebe put to an end.
credit system. LAND DEVELOPMENT BANKS
8.LACK OF OTHER FACILITIES: In order to provide long-term credit needs of the
The farmers also need other facilities in the farmers, with moderate rate of interest and with convenient
form of system of better seeds, fertilizers, pesticides etc., methods of repayment. The government started the land
very little attentions is paid on the provision of such mortgage banks for this purpose , these banks have now
facilities. come to be called the land development banks.
9.Dual control: It was setup during 1920’s but the progress is quite
On one side , NABARD and on the other side by slow.
the state government under the co-operative societies Act. After independence it progressed in few states like
10.Competition from private agencies: Tamilnadu , Andhrapardesh , Maharashtra , Gujarat and
Co-operative banks are facing stiff competition Karnataka.
from money lenders and traders. Because of this , co- Two types of land deposit banks in the country:
operative could not make much progress. (a)State level
11.CREDIT LINKED TO ASSETS: (b)Central land deposit banks
The credit given to a member is based on his Sources of funds:
assets. Those who do not have assets or those who have Three important sources
small assets do not get enough credit. (a)Their own share capital and accumulated
reserves.
SUGGESTIONS FOR THE IMPROVEMENT OF (b)Deposit from general public
CO-OPERATIVE CREDIT STRUCTURE: (c)Issue of bonds or debenture
1.The resources of the co-operative banks should be They largely depend upon third source they
improved . Their dependence on outside resources must be are issued by central Land Development Banks and they
reduced considerably. carry a fixed rate of interest.
2.The primary societies should be made more ? and Period of debenture varies from 20-25years.
economic strong units. The debenture are granted by state
3.The liability of the members of the primary co-operative government regarding payment of price and interest.
should be made limited. DEFECTS:
4.Loans should be given not on the basis of the member but 1.They charge very high rate of interest .
on the basis of the estimated value of product. Although 2.On accounts of red-tapism, there are the usual delays upto
this method is introduced , it is not follow properly. more than a year in granting loans.
5.Loans given should be enough to meet agriculture and 3.No second loan is given until the first one is repaid.
other expenses to that the members need not approach the 4.They give loans only upto 50% of the value of the land
money lenders. mortgaged. Thus , a very high margin is kept.
6.Agriculture inputs like fertilizers , seeds etc., should be 5.Quite often , loans are granted to discharge prior debts
sold by the co-operative. rather than for land improvement.
7.The co-operative should be give freedom to adopt SUGGESTIONS FOR IMPROVEMENT:
management practices, dues and registered to suit the local 1.RBI has made practical suggestions to tone up the
needs and conditions. working of LDB.
2.LDB should be set up in large numbers, one for a small necessitated the evolution of investment banking in
group of villages. Germany. The banks did varied services like granting
3.The purpose is that they are located as near the farmers as short and long term loans, describing to shares and
possible , so as to induce better to approach the debentures, drawing and accepting bills etc...
development bank easily. The banks established during 1848-1879
4.LDB should charge low rate of interest may be 4%, to were mainly trust companies and they continued with their
enable the small and marginal farmers to approach them for own funds, capital and reserves. During 1877-1914 they
assistance. began to accept deposits from public and began to supply
5.NABARD short term and long term finance. When the function of
6.RRB deposit banking and investment banking was performed
7.Commercial bank by the same banks, it was called Mixed Banking. After
8.CREDIT CARDS: World War, the banks became mainly, deposit banks but
The systems of issuing credit card is originated provided long term finance also.
in the U.S.A. U.S.A credit cards have become very popular
in U.S.A , credit cards are issued in the name of coy’s To It was popular in Germany suffered due to the scarcity of
be used by designated executives. capital. When it wanted to industrialised rapidly. So there
They are also issued in the name of individuals was a need for the banking system which would provide
to be charged to the coy’s accounts or to the personal loan for Indutrialisation. So, after 1853, no. of banks were
accounts. started in Germany their main aim is to promote
The credit card system is utilized by big coy’s , industrialisation So, those banks provide long term loans
super rich and highly paid excutives in our country. All to the industry. So, in Germany there was a rapid
hotels , airlines , shop accept credit cards. industrialisation,. German banks begin to receive large
ADVANTAGE: amt from the public. Thus German bank combined deposit
Credit card holders enjoy certain privileges banking with investment Banking. So, mixed banking
1.Credit card enable persons to purchase or sell on credit in came in to existence in course of time.
establishments which accept them. They enjoy credit
facility without paying interest above four to six weeks. MEANING:
2.Carrying a credit card is more convenient and safer than  An investment bank is a financial institution that assists
carrying cash or cheque book. individuals, corporations and governments in raising
capital by underwriting and/
3.Credit card gives the traveller peace of mind as it takes or acting as the client's agent in the issuance of securities.
care of all his needs.  An investment bank may also assist companies involved
4.Credit card is safer and convenient method of payment. in mergers and acquisitions,
5.A credit card holder will be recognized as a man of sound and provides ancillary services such as
financial standing. market making,
6.The issuing bank will debit the credit card holder or trading of derivatives,
customer accounts once in method after receiving details fixed income instruments,
about purchase. foreign exchange,
INVESTMENT BANKING commodities, and
INTRODUCion The industrialisation of Germany the equity securities.
second half of the 19th century was made possible only by There are two main lines of business in
the investment banks. When Germany wanted to investment banking.
industrialize the country, it did not have adequate funds,  Trading securities for cash or for other securities (i.e.,
and the moneyed people were unwilling to finance facilitating transactions, market-making), or

industries or to industries own. There was imperative need the promotion of securities (i.e., underwriting, research,
for an agency which would pool the resources and divert etc.) is the "sell side", while dealing with pension funds,
to the promotion and development of industries. This mutual funds, hedge funds, and the investing public (who
 consume the products and services of the sell-side in order large full-service investment banks offer all of the lines
to maximize their return on investment) constitutes the of businesses,
"buy side". both sell side and buy side,
 Many firms have buy and sell side components.  Investment banks offer services to both
DEFINITION: corporations issuing securities and investors buying
Investopedia explains Investment Bank securities.
– IB “The role of the investment bank begins with pre-
underwriting counselling and continues after the For corporations, investment bankers offer information
distribution of securities in the form of advice.” on when and how to place their securities in the market.
“Investment banking is a particular form of For investors, investment bankers offer protection against
banking which finances capital requirements of unsafe securities.
 The offering of a few bad issues can cause serious
enterprises. Investment banking assists as it performs
damage to an investment bank's reputation, and hence loss
IPOs, private placement and bond offerings, acts as broker of business. Therefore, investment bankers play a very
important role in issuing new security offerings.
and carries through mergers and acquisitions.”

Core investment banking activities

Functions of Investment Banking: Front office:
Investment banking (corporate finance) is the
Investment banks have multilateral functions to traditional aspect of investment banks which also involves
perform. Some of the most important functions of  helping customers raise funds in capital markets and
 giving advice on mergers and acquisitions (M&A).
investment banking can be jot down as follows:
The investment banking division (IBD) is generally
 It helps public and private corporations in issuing divided into
 industry coverage and
securities in the primary market, guarantee by standby
 product coverage groups.
underwriting.  Industry coverage groups focus on a
specific industry, such as
 Other services include acting as intermediaries in
healthcare,
trading for clients. industrials, or
technology, and
 Investment banking provides financial advice to investors
maintain relationships with corporations within the
and serves them by assisting in purchasing securities, industry to bring in business for a bank.

managing financial assets and trading securities.

 Product coverage groups focus on
 Investment banking differs from commercial banking in financial products, such as
the sense that they don't accept deposits and grant retail mergers and acquisitions,
loans. leveraged finance,
project finance,
 Organizational structure: asset finance and leasing,
structured finance,
Main activities:
restructuring,
 An investment bank is split into the so-called front
equity, and
office, middle office, and back office.
Front Office
Middle Office
Back Office Sales and trading:
  A large investment bank's primary function is
buying and selling products. In market making, traders
will buy and sell financial products with the goal of
making an incremental amount of money on each trade.
 Banks also undertake risk through proprietary trading,
performed by a special set of traders who do not interface
with clients and through "principal risk"—risk
undertaken by a trader after he buys or sells a product to a
client and does not hedge his total exposure.
 Banks seek to maximize profitability for a given amount
of risk on their balance sheet.
 Research is the division which reviews companies and
writes reports about their prospects, often with "buy" or
"sell" ratings.
Other businesses that an investment bank may the last of the largest bulge-bracket US investment banks
be involved in,
 Global transaction banking is the division which
provides cash management, custody services, lending, and companies" which are eligible for emergency government
securities brokerage services to institutions.
 Investment management is the professional management ADVANTAGES:
of various securities (shares, bonds, etc.) and other assets Investment banks provide medium and long term finance
(e.g., real estate), to meet specified investment goals for to industries, to meet their fixed capital requirements.
the benefit of investors.
 Investors may be institutions (insurance companies,
pension funds, corporations etc.) or private investors
(both directly via investment contracts and more
commonly via collective investment schemes e.g., mutual
funds).
 The investment management division of an investment
bank is generally divided into separate groups, often
known as
a) Private Wealth Management and
b) Private Client Services.
Middle office:
 Middle Office role is to ensure that the economic
risks are captured accurately (as per agreement of
commercial terms with the counterparty), correctly (as per
standardized booking models in the most appropriate
systems) and on time (typically within 30 minutes of trade
execution). In recent years the risk of errors has become
known as "operational risk" and the assurance
 Middle Offices provide now includes measures to address
this risk. When this assurance is not in place, market and
credit risk analysis can be unreliable and open to
deliberate manipulation.
Corporate treasury is responsible for an investment bank's
funding, capital structure management, and liquidity risk
monitoring.
Back office:
An operation involves data-checking trades
that have been conducted, ensuring that they are not
erroneous, and transacting the required transfers. many
banks have outsourced operations.
Size of industry:
Investment banking is one of the most global industries
and is hence continuously challenged to respond to new
developments and innovation in the global financial
markets.
2008 Financial Crisis:The financial crisis of 2008 saw
which had not gone bankrupt or been acquired in a
bankrupt-like state convert over to "bank holding
assistance.
For existing industries, they lend funds for expansion,
modernisation of industries
They help to promote new industries by underwriting the
issue of securities.
Thy secure industrial banks secure funds through capital
and debentures.
They receive deposits from the public long term period.
DISADVANTAGES:
 Investment banks encourage speculation and
artificially push up the value of the securities to earn
profits.
 They support the formulation of
industrial cartels and syndicates. This
combination is harmful.
 They exercise considerable influence
over the industries in which they acquire
securities through their representatives on
the boards.
 During, depression they sustain heavy
losses due to the fall in the value of
security.
THE RESERVE BANK OF INDIA ACT , 1934
2(e) Scheduled bank means a bank whose name is  
included in the 2nd schedule of RBI Act,1934. 48 Exemption to RBI from paying income tax
  or super tax.
17 Defines various types of business acceptance of  49 Announcement /publication of bank rate
deposit without interest from
i.e the standard rate at which the RBI is
central/state government , any other
prepared to buy or rediscount bills of
person/institution, purchase /sale of foreign
exchange, securities, rediscounting of bills/promissory exchange or other eligible
notes, government loans, etc. commercial papers.
  Meaning & Types of Banks.
19 Business which RBI may not transact. SWATI GUPTA BUSINESS STUDIES
 
Meaning & Types of Banks.
20 As a banker to government, RBI transacts
government business and manages public debt Banks are regarded as the nerve centre of the trade, industry and
commerce of a country. They provide finance to all the sectors and as
of the central government. such are regarded as the backbone of the business units. The word
  "Bank" has been derived from the German word "Bank" and the Italian
22 Sole right to issue bank notes. word "Banco". These word denotes a joint stock fund. The word
banking denotes a certain kind of trading operation in money. The
  trading operation in money and of exchange of money, the lending of
24 Denomination of notes 2, 5, 10, 50, 100, 500, money, transmitting of money and depositing of money. The banking
system of the country is governed by an Act called the banking
1000, 5000, 10000, any denomination may be regulation Act, 1949. Banks are regarded as a type of institutions who
discontinued. debts (usually called as bank deposits) are commonly accepted in the
  final settlement of other people. According to Crowther, "A banker is a
dealer in debts, his own and of others". According to Horace White, "A
26 Bank notes issued by RBI shall be legal tender bank is a manufacturer of credit and a machine for facilitating
and guaranteed by central government. exchanges." In brief we may conclude that a bank is a financial
institution who deals in money and credit.
 
29 Bank note shall be exempted from stamp duty The followings are some of the board kinds of banks in our country:
under Indian Stamp Act.
33 Assets of issue department of RBI shall consists Commercial Banks: Commercial banks refer to a type of
bank which provide financial assistance to the trader of a country. They
of gold coins, gold bullion and foreign provide short-term financial assistance for the business. They accept
securities and at any time be less than Rs 200 deposit from the investors and extend loans in the form of loan, cash
crores, of which gold coin and gold bullion notcredit, overdraft and discounting of bills. There are two types of
commercial banks found in India. These are scheduled and non-scheduled
less than Rs 115 crores. banks. The banks which have a paid-up capital of Rs. 5 Lakhs regarded as
42 Cash reserves ratio(CRR) of scheduled bank toscheduled banks. The banks which have a paid-up capital of less than 5
Lakhs are called non-scheduled banks.
be kept with RBI as prescribed.
Industrial Banks: Industrial units cannot function with the
help of short-term financial assistance. They need long-term loans. It
  necessitates the growth of industrial banks in India whose primary
42c RBI can be add or delete the name of any bankobjective is to extend long-term loans to industrial sectors. In addition to
providing of long-term financial assistance, they guide industrial units on
in 2nd schedule. technical and managerial problems. The Industrial Development Bank of
  India and the Industrial Finance Corporation of India are the pioneers in
the industrial banking system of the country.
43 Publication of fortnightly consolidated
Agricultural Banks: Agricultural banks are a type of banks
statements showing aggregate liabilities which provide short-term as well as long-term finance to the agricultural
and asset of SCBs. sector. co-operative banks are a type of agricultural banks which provide
short-term financial assistance to the people engaged in agriculture. Long-
 45 Power of RBI to collect credit term agricultural loans are given by the Land Mortgage Banks. The
information. National Bank for agriculture and Rural Development (NABARD) was
established in 1982 to promote integrated rural development and to
  provide all sorts of credit to agriculture.
45H Regulations relating to non -bank Exchange Banks: Exchange banks denote a type of
commercial banks which finance foreign trade in the country. besides
finance companies. financing foreign trade, they provide the following services for the
 development of foreign trade: (a) They facilitate foreign remittances. (b)  Accounts & Expenditure dept
They discount foreign bills of exchanges. (c) They help in buying and  Premises dept
selling of gold and silver.  Industrial dept
 Indigenous Banks: Before establishment of commercial  Agricultural dept
 Industrial dept
banks, private money lenders and country bankers played an important
role as an important sources of finance. These establishments were known  Agricultural credit dept
Industrial Finance dept
as Indigenous Bankers. They used to charge a high rate of interest and 
exploited the people who took financial assistance. These banks have lost  Legal dept
Non-banking dept
their monopoly with the development of commercial banks in India. Now- 
a-days even though a large number of commercial banks act in the  Exchange control dept
 Banking operations & Development dept
banking system, the indigenous bankers have played a significant role
becuase some people depend on indigenous bankers for financial  Inspection dept
 Service board
assistance.
 Research dept
 Post Office Savings Bank: Post offices extend banking Traditional Functions
facilities by post office savings bank. Post offices accept deposits from the  Promotional Functions
people but do not grant loans like other commercial banks. They usually  Supervisory Functions
accept deposits in the form of savings deposit. They usually pay a high  Traditional Functions
rate of interest as compared to other commercial banks.  Promotional Functions
 Regional Rural Banks: Regional Rural Banks are a type of  Supervisory Functions
bank who provide credit and other facilities to small farmers, agricultural Traditional Functions
labourers, small entrepreneurs and artisans of the rural areas. These banks  Promotional Functions
accept deposits and give loans. They pay 1/2 percent more interest on  Supervisory Functions
fixed deposits as compared to commercial banks. These banks are Traditional Functions
established with an authorized capital of Rs. 1 Crore and issued capital of  Issue of Currency
Rs. 2 Lakhs.  Banker to government
 Banker’s Bank
 EXIM Bank: The Export Import Bank of India was  Credit control measures
established in 1982.  RBI acts as lender of last resort
 office savings bank. Post offices accept deposits from the  Exchange control
people but do not grant loans like other commercial banks. They usually  Clearing house
accept deposits in the form of savings deposit. They usually pay a high Supervisory Functions
rate of interest as compared to other commercial banks.  It supervises the commercial banks and also guides them
periodically.
 Regional Rural Banks: Regional Rural Banks are a type of  After the nationalization of commercial banks, there has
bank who provide credit and other facilities to small farmers, been more loans to the weaker sections as well as to agriculture, but the
agricultural labourers, small entrepreneurs and artisans of the rural performance of the banks were not to the satisfaction of RBI.
areas. These banks accept deposits and give loans. They pay 1/2 percent  The accounting policy of commercial banks has undergone a
more interest on fixed deposits as compared to commercial banks. These change in conformity with the international banking standard.
banks are established with an authorized capital of Rs. 1 Crore and  Accordingly, the balance sheet of commercial banks have
issued capital of Rs. 2 Lakhs. undergone a change since 1994.
 EXIM Bank: The Export Import Bank of India was  The assets of the commercial banks have been classified as
established in 1982. 1. Standard assets- which has liquidity and reasonable return.
Management Of RBI 2. Sub-standard assets- Liquidity with a low rate of return.
3. Doubtful assets- Low liquidity without any return.
4. Bad asset- Neither liquidity nor any return.
 RBI has a board of directors consisting of 20 members.
On the above basis, the commercial banks have been asked
to make provisions out of their profits.
 The head of RBI is called the governor and he is assisted by
 All the doubtful and bad debts must have 100% provisions.
4 deputy governors.
Monetary policy of RBI
 The governor and deputy governors are appointed by
a) Exchange rate of stability
government for a period of 5 years.
b) Price stability
 It has got 4 local boards representing in New Delhi,
c) Encouraging employment growth
Mumbai, Kolkatta and Chennai.
d) Assisting for rapid economic growth
 From each of the local board, one person is nominated to the
 This policy of RBI may not be very effective and successful.
central board.
But when we take into consideration the various difficulties under which
 Apart from this, there are 10 directors representing various
RBI performs its functions, it has certainly achieved considerable
fields such as agriculture, trade, commerce, industry, banking, etc.
success.
 One official from the ministry of finance will also be
 The monetary policy which is regulating and controlling
represented in the board.
money supply for a specific purpose requires the cooperation of the
Departments Of RBI
government.
 Banking dept
 When the fiscal policy of the government goes contrary to
 Issue dept
the monetary policy, then RBI will not be able to achieve its
 Planning and Reorganization dept
governments and the central government restoring to deficit financing
 Administration personnel dept
for meeting their expenditure.
 Statistics dept
 This leads to more money supply and the price control
 Secretary dept
measure of RBI becomes ineffective.
Unit-2
LOANS AND ADVANCES
The secret of successful banking is to distribute the
resources between various forms of assets in such a way as
to get a sound balance between liquidity and profitability.
Thus bearing in mind two principles profitability and
liquidity the banker, invests his funds mainly in the
following schemes of assets:
(a) Liquid assets
1. Cash on hand
2. Cash with other banks
3. Cash with RBI
(b)Semi-liquid assets
1. Money at call and short notice
2. Bills discounted
(c) Earning assets
1. Investments
2. Loans and advances
The main functions of bankers is to receive deposits and
lend the same, but while lending money bankers will think
of the assets which will yield maximum return.
GENERAL PRINCIPLES OF SOUND LENDING
1. SAFETY
Safety means that the borrowers should be in a position to
repay the loan along with interest.
The repayment of the loans depends upon the borrower’s:
(i) Capacity to repay
(ii) Willingness to pay
2. LIQUIDITY
Liquidity means a bank’s ability to meet the claims of its
customers, for cash on demand.
Depositors develop faith in a bank on the basis of its
liquidity. Therefore, the principle of the liquidity is as
important as that of safety.
3. PROFITABILITY
A bank should always ensure that funds that are lent
bringing in a reasonably good return. At the same time,
they should also possess liquidity.
The sound principle of lending is not to sacrifice safety or
liquidity for the sake of the higher profitability.
4. THE PURPOSE OF THE LOAN
Loans advanced for productive purpose would increase the
earnings and hence repayments are guaranteed.therefore,
changes of recovery are better.
Suppose loans are given unproductive purposes there is lot
of uncertainty about recovering such loans.
5. THE PRINCIPLES OF DIVERSIFICATION OF
RISK
The banker follows the principle of diversification of risks
based on the principle
of “do not keep all the eggs in one basket”
6. SECURITY
Any valuable given to support a loan or advance is known
as a security. A large variety of securities may be offered
against the loans and ranging from gold or silver to
immovable property.
7. BORROWER’S FINANCIAL STANDING
The banker cannot ignore the repaying capacity of the
borrowers. This in turn depends upon the character,
capacity, financial standing and the arrears of the
borrowers a borrower may have sound financial position.
8. PROPER BALANCE OF ADVANCE
It is preferable to invest moderate sums of money in a
large number of small advances than big sums of money in
few big loans.
9. MARGIN
The security offered to cover the advance must be judged
from the aspect of economic value and legal aspect.
10. NATIONAL POLICIES
Commercial banks play pivotal role in developing an
economy especially in a country like India security and
return alone cannot influence the lending policy of bank.
CLASSIFICATION OF LOANS AND ADVANCES
The loans and advances classified into two types
1. Secured advances
2. Unsecured advances
1. Secured advances
A secured advance or loan means an advance or loan
made on the security of assets and the market value of such
asset has to be more than the amount of loan at any time
till the loan is repaid.
2. Unsecured advances
An unsecured loan is one in which the banker grants a
loan without any security.
Unsecured advance must be granted by the banker only
after analyzing the credit worthiness of the borrower it is
granted for a short period and with nominal account.
Among these advances the following are the important.
a. Cash credit
b. Overdraft
c. Loans
d. Discounting of bill of exchange
Cash credit:
The cash credit account is thus an active and running
account to which deposits and withdrawals may be made
frequently.
Cash credit is the main method of lending by banks in
India and accounts for about 70% of the total credit.
In recent years, banks have started charging a minimum
interest of one percent on the amount unused.
Overdraft
When a current account holder is permitted by the banker
to draw more than what stands to his credit, such an
advance is called an overdraft.
Interest is charged on the exact amount overdrawn and
for the exact period of its actual utilization.
Overdraft is not granted as regularly as cash credit. It is
granted only occasionally and for shorter periods.
Loans
Sanctioning of a specified lump sum amount by the
banker to a customer is called a loan. Once a loan is
sanctioned and transferred to the customer ‘s current
account.
The commercial banks mainly provide short term loans
for meeting the capital requirements of trade and industry.
Types of loans
1. Short term loans
2. Term loans
3. Bridge loans
4. Composite loans
5. Consumption loans
Discounting of bill of exchange
Advances are given also by discounting of bills of
exchange. Under the scheme of bills of exchange the
holder of the bill will receive payment mentioned therein
on the maturity of the bill(i.e.), not exceeding three
months.
Suppose the holder of the bill is not able to wait till the
date of maturity and requires cash urgently, he can sell a
discount.
NEW FORMS OF ADVANCES
In recent years, new forms of advances have come into
existence they are;
1. Consortium advances
2. Participation certificates
 Consortium advances
Many banks joining together and providing loans to one
single project according to their capacities is called
consortium advances.
 Particification certificate
A particification certificates is an instrument through
which a banker which has granted credit to its borrowers,
can share with other institutions having surplus funds, a
part of the credit given to its borrowers.
CREDIT INFORMATION
Before sanctioning loans and advances, the banker is
required to assess the credit worthiness of the borrowers, a
banker has to collect necessary information about the
borrower.
In advanced countries there are specialized institutions
engaged in the collection of credit information.
Apart form this there are other sources form which credit
information may be collected they are:
1. Information from the borrower himself.
2. Exchange of information among banks.
3. Market reports.
4. Tax returns.
5. Profit and loss account and balance sheet.
6. Records of the registrar of Companies.
LEVEL OF ADVANCE
The capacity to lend money is limited the level or size of
advances sanctioned by a banker depends upon the
following factors:
1. The size and maturity pattern of deposits
2. Credit control policy of RBI
3. Seasonal variations in bank credit
4. The demand for credit
5. Government’s policy
6. General business condition.
PLEDGE
MEANING:
Pledge is the bailment of goods as security for payment of
a debt or performance of a promise. When a borrower
secures a loan through a pledge he is called a PAWNER or
PLEDGER, and the bank is called the PAWNEE or
PLEDGEE.
FEATURES:
1. The goods can be pledged by the owner, a joint
owner with consent of other joint owners, a mercantile
agent or in some cases by an unpaid seller.
2. The banker can retain the goods for the payment
of the debt, for any interest that has accrued on it as well as
any expenses incurred by him for keeping the goods safe
and secure.
3. Goods can be retained for any subsequent
advances.
4. This right neither is nor limited by the law of
limitation.
5. Banker must take good care of goods and return
them after the payment is made along with accretion.
 MORTGAGE 5. Mortgage by deposit of the title deeds
MEANING: This type of mortgage is called equitable mortgage.
When a customer secures an advance on the security of This mortgage is affected by deposits of title deeds of the
specific immovable property the charge created thereon is property by the debtor in favor of the creditor to create
called a mortgaged. security thereo
DEFINITION: 6. Anomalous mortgage
Section 58, the transfer of property act, 1882, defines a A mortgage which is not simple mortgage, mortgage by
mortgage as, the transfer of an interest on a specific conditional sale, usufructuary mortgage, English mortgage
immovable property for the purpose of securing the and mortgage by deposit of title deeds is called an
payment of money advanced or to be advanced by way of anomalous mortgage.
loan, an existing or future debt, or the performance of an RIGHTS OF MORTGAGEES
engagement which may give rise to pecuniary liability. 1. Right of redemption
The customer is called the mortgagor and the bank is 2. Accession to mortgaged property
called mortgagee. 3. Right to get mortgage transferred to third party
The payment so secured which includes both the principal 4. Right to inspection and production of documents
money and the interest thereon is called the mortgage RIGHTS OT THE MORTGAGEE
money. 1. Right to sue for mortgage money
TYPES OF MORTGAGE 2. Right of sale
1. Simple mortgage 3. Right of foreclosure
2. Mortgage by conditional sale 4. Right of possession in certain cases
3. Usufructuary mortgage 5. Accession to mortgaged property
4. English mortgage
5. Mortgage by deposit of the title deeds DIFFERENCE BETWEEN MORTGAGE AND
6. Anomalous mortgage PLEDGE:
1. Simple mortgage No PLEDGE MORTGAGE
The mortgagor does not given possession of the 1. Relates to movable Relates to immovable prope
property,but binds himself personally to pay the mortgage property
money. 2. The borrower does not Ownership is transferred to
transfer the ownership to lender.
The mortgagee himself cannot sell the property,but has to
the lender.
seek intervention of the court.
2. Mortgage by conditional sale
3. Delivery of the Except usufractuary
On default of the payment of mortgage money, the sale property is mortgage, possession
shall become absolute. necessary. property is not
On payment being made on a certain date, the sale shall transferred.
become void. 4. The property can be In equitable mortgage
When the payment is made,the buyer shall transfer the sold without court property cannot be sol
property to the seller. order. without court order.
3. Usufructuary mortgage
5. The pledge does not The mortgagee has go
Usufructuary mortgage delivers possession of the
Home banking the right of foreclosur
mortgaged property.
The mortgagee is also entitled to receive rents and profits services date to the
accruing from the property and appropriate the same in lieu early 1980s, and
of the interest or in payment of the mortgaged money or since then have
both. grown enormously
4. English mortgage as home computers
There is transfer of ownership of the condition that the become more
mortgagee will re-transfer the same on the payment of affordable and easier
mortgage money.
 to use. The ability to the claim absolute. The assignor informs in writing
transact banking the assignee’s name and address at the debtor.
2. Equitable assignment
accurately and in the
The assignee also serves on the debtor of the
privacy of the home assignment and seeks conformation of the balance
any time of the day so assigned. If all these requirements are not
has made home fulfilled, the assignment is called an equitable
banking an attractive assignment.
alternative to BANKING TECHNOLOGY
visiting local A Wharton School study pegs the cost of a
financial transaction at a bank branch at around UD$1 (Rs
institutions. In the 45). At an automated teller machine, it goes down
to about $0.40.
1990s, financial
And done through business correspondents, the
institutions cost drops even lower to $0.10. This is why the
broadened their business correspondent model finds a resonance in
home banking India's thrust towards financial inclusion. Besides,
services by giving of course, the reach they offer to remote, largely
consumers direct unbanked populations. A business correspondent
access to banking can be an individual or a local grocery shop doing
information via the financial transactions with banks on behalf of
Internet enabling people. For banks, they ensure significant savings
many to do their in terms of not having to
open and run
banking from branches in far-flung areas while
anywhere in the allowing a wide reach. For the
United States or unbanked, they offer a degree of
around the world. comfort and trust in how their finances are
have the right of handled. A lot of the trust a business correspondent
commands is due to technology. Business
foreclosure.
correspondents are adopting a range of
6. Less safe when More safe when technologies, which includes biometric smart cards
compared to compared to pledge. to ensure secure financial transactions in the
mortgage. absence of bank branches
ASSIGNMENT HOME BANKING
MEANING: Self-service banking for consumers and small
Assignment means transfer of an existing or business owners, enabling users to perform many
future right over property or money by one person routine functions at home by telephone, or cable
to another. modem connection. Home banking, also called on-
The person transferring the right is called the line banking or PC banking, gives consumers an
assignor and the person to whom the right is array of convenient services: they can move money
assigned is called the assignee. between accounts, pay bills, check balances, and
TYPES OF ASSIGNMENT buy and sell mutual funds and securities. They can
1. Legal assignment also look up loan rates and see if they qualify for a
2. Equitable assignment credit card or mortgage.
1. Legal assignment: ATM
Legal assignment relates to the execution of deed An automated teller machine (ATM), also
in writing duly signed by the assignor which makes
known as a automated banking machine (ABM)
or Cash Machine and by several other names (see
below), is a computerised telecommunications
device that provides the clients of a financial
institution with access to financial transactions in a
public space without the need for a cashier, human
clerk or bank teller.
ATMs are known by various other names
including automatic banking
machine (or automated banking
machine particularly in the United States)
(ABM),automated transaction machine, cash
point (particularly in the United Kingdom), money
machine, bank machine, cash machine, hole-in-the-
wall, auto teller(after the Bank of Scotland's
usage), cash line machine (after the Royal Bank of
Scotland's usage), MAC Machine (in
the Pittsburgh and
Philadelphia areas),Bankomat (in various countries
particularly in Europe and
including Russia), Multibanco (after a registered
trade mark, in Portugal), Minibank in Norway,
Geld Automaat in Belgium and the Netherlands,
and All Time Money in India
MOBILE BANKING
Mobile banking (also known as M-Banking,
mbanking, SMS Banking etc.) is a term used for
performing balance checks, account transactions,
payments, credit applications etc. via a mobile
device such as a mobile phone
 or Personal Digital Assistant (PDA). The earliest
mobile banking services was offered via SMS.
With the introduction of the first primitive smart
phones with WAP support enabling the use of
the mobile web in 1999, the first European banks
started to offer mobile banking on this platform to
their customers. Mobile banking has until recently
(2010) most often been performed via SMS or the
Mobile Web. Apple's initial success
with iPhone and the rapid growth of phones based
on Google's Android (operating system) has led to
increasing use of special client programs, called
apps, downloaded to the mobile device.
Mobile Banking refers to provision and availment
of banking- and financial services with the help of
mobile telecommunication devices. The scope of
offered services may include facilities to conduct
bank and stock market transactions, to administer
accounts and to access customized information."
According to this model Mobile Banking can be
said to consist of three inter-related concepts:
• Mobile Accounting
• Mobile Brokerage
• Mobile Financial Information Services
Most services in the categories
designated Accounting and Brokerage are
transaction-based. The non-transaction-based
services of an informational nature are however
essential for conducting transactions - for instance,
balance inquiries might be needed before
committing a money remittance. The accounting
and brokerage services are therefore offered
invariably in combination with information
services. Information services, on the other hand,
may be offered as an independent module.
Mobile phone banking may also be used to help
in business situations
CORE BANKING
Core Banking is normally defined as the business
conducted by a banking institution with its retail
and small business customers. Many banks treat the
retail customers as their core banking customers,
and have a separate line of business to manage
small businesses. Larger businesses are managed
via the Corporate Banking division of the
institution. Core banking basically is depositing
and lending of money.
Nowadays, most banks use core banking
applications to support their operations where
CORE stands for "Centralized Online Real-time
Exchange". This basically means that all the bank's
branches access applications from centralized data
centers. This means that the deposits made are
reflected immediately on the bank's servers and the
customer can withdraw the deposited money from
any of the bank's branches throughout the world.
These applications now also have the capability to
address the needs of corporate customers,
providing a comprehensive banking solution.
A few decades ago it used to take at least a day
for a transaction to reflect in the account because
each branch had their local servers, and the data
from the server in each branch was sent in a batch
to the servers in the datacenter only at the end of
the day (EoD).
Normal core banking functions will include
deposit accounts, loans, mortgages and payments.
Banks make these services available across
multiple channels like ATMs, Internet banking, and
branches.
UNIT3
INTRODUCTION TO INSURANCE
The essence of insurance is the elimination of risk
&substitution of certainty for uncertainty. It helps
in replacing risks with known cost.The cost of
buying & maintain insurance polices.
The term insurance has been defined in both
financial & legal sense ,
In Financial sense:
A Social device providing financial
compensation for the consequences of difficulty.
The payments being made from the
accumulated contribution of all parties in the
agreement.
Insurances is collective bearing of risks
as it involves pooling of risks
In Legal Sense
It make good the loss suffered by the
insured against a specific risk or,
To pay a prefixed amount to the insured
or his/her beneficiaries on the happening of a
specified event.
insurance is a contract between the insurer
and the insured requiring all the essentials of a
valid contract according to the law of contracts.
The instruments containing the contract of
insurance is called policy
PURPOSE & NEED
The purpose & need of insurance lies in
the services it provides to the society &
organization.
REDUCTION IN WORRIES:
Efficiencies are improved when
the tensions and fears involving the risks are
shifted to the insurer.
REIMBURSEMENT OF LOSSES:
The financial status of
individuals and business organizations remains
unaffected by the losses caused by the risks insured
for.
Opportunity for investment:
Life insurance contracts provide
double benefit of – protection and investment
because the event insured against if, sure to
happen.
CREDIT ENHANCEMENT:
Businessmen enjoy better credit standing as the
risks are transferred to the insurance company.
OPPORTUNITY FOR EMPOLYMENT:
The problem of unemployment
in the country by offering employment opportunity.
Large number of people working
as insurance agents professionals etc.
Temporary needs/threats:
Life insurance policies provide for
replacement of income on death, personal accident,
etc….,
Regular savings:
People seeking financial independence
for their family, go for their life insurance schemes
offering attractive returns on savings.
Investment:
Building up of savings while
sefeguarding it from the ravages of inflation .
Retirement:
Provision for later yrs becomes
increasingly necessary, especially in a changing
cultural & social environment.
Benefits of insurance:
Shifting of risks:
Insurance is a social devices whereby
individuals & businessmen shift specific risks to
the insurer under a contract of insurance.
Providing financial security:
In the event of loss or damage to the
insured property, he is indemnified to the extent of
the actual loss & his financial condition remains
unaffected by the loss/damage.
Assuring expected profits:
An insured policyholder can enjoy
expected profits as he would not be required to
make provisions.
Safeguarding interest of consumers:
As the businessmen is duly insured
against the risk that can cause losses.
Improving credit standing :
Insurance has the effect of improving
credit standing of businessmen as the assets which
are insured easily accepted as security for loans by
banks & financial institutions.
Providing investment opportunity:
 A life insurance contract provides not
only protection but also investment opportunity
such as pension in old age. It is a contingent
contract & not a contract of indemnity.
Encouraging savings:
The policyholder must regularly save
out of his current income an amount equal to the
premium to be paid. The policy gets elapsed if the
premium is not paid on time.
Capital formation:
It mobilize the savings of community
through collection of premiums & invest these
savings in productive channels.
Generating employment opportunities:
With the growth of insurance
business, the insurance co’s are creating more &
more employment opportunities.
Promoting social welfare:
Policies like old-age pension
scheme; policies in respect of education of children
or marriage children provide a sense of good
policyholder.
Helps controlling inflation:
The money in supply through
collection of premium amounts from all the
policyholders. It provided for production narrow
down the inflationary gap.
FUNCTIONS OF INSURANCE:
Diffusion of risks:
It may not be able to avoid uncertainties
associated with life, in general & business in
particular, but it is able to diffuse the impact of the
occurrence of the loss over large number of
policyholders
Providing protection:
It covers the risks of loss. The insured
persons is indemnified for the actual loss suffered
by him.
Encouraging of savings:
It helps a number of other incentives which
encourage people to insure.
Promotion of efficiency & motivation:
The elimination of worries &
uncertainty of risks businessmen feel motivated &
encouraged to take risks enhance their profit-
earning.
Prevention of losses:
The insurance co’s help in prevention
of losses as they join hands with those institutions
which are engaged in loss-prevention measures.
Providing funds for investment:
The vast economic pool built up by
the insurer sector, furnishes a good means of
capital formation in the country.
Solution to social problems:
It is the great service to the society as a
whole & act as a good means of solving many
social problems.
IMPORTANCE OF INSURANCE
Insurance provides protection against the
possible occurrence of uncertain events likes losses
due to fire, floods, Lighting, etc……..
Insurance is a device for eliminating risks &
sharing the losses. The loss suffered by a persons is
spread over the whole of insured community.
Insurance cannot prevent occurrence of
contingencies that are insured.
It makes for uninterrupted business operation
& facilitates international trade.
it serves as an agency of capital formation.
PRINCIPLES OF INSURANCE
PRINCIPLE OF INSURABLE INTEREST :
The person opting for insurance
must have financial interest in the property he is
going to get insured , will suffer financial loss on
the occurrence of the insured event.
PRINCIPLE OF ULMOST GOOD FAITH:
The insurance contract must be based
on good faith. If the insurance contract is obtained
by way of fraud, concealment of facts or
misrepresentation, it is void.
PRINCIPLE OF INDEMNITY:
The insurance contract should such
that in case of loss due to the eventualities
mentioned in the contract, the insured should be
neither better-off nor worse-off after receiving the
insured amount.
PRINCIPLE OF SUBROGATION:
The legal right of one person having
indemnified the other in a contractual obligation to
do so; to stand in the place of another & avail all
the rights & remedies of the other, whether
enforced or not.
PRINCIPLE OF CONTRIBUTION:
 The same subject-matter is insured
under different policies.
 The policies are in force at the time of
loss.
 The policies cover the same period
during which the loss occurred.
PRINCIPLE OF CAUSA PROXIMA:
The insurer is liable only for those
losses which have been most closely & directly
caused by the risk insured against
PRINCIPLE OF MITIGATION OF LOSS:
On the occurrence of the event
covered by the insurance policy, it is the duty of the
insured to take all the possible steps to lessen or
minimize the loss to the subject matter of
insurance.
What is Human Life Value?
• The concept of Human Life Value
(HLV) is something that we all hear about
(especially from the insurance agent!) but do not
really know how to calculate. The reason being
there is no definitive source of information on the
subject.
• The fact that there is more than one
methodology to calculate the HLV makes the
subject even more challenging to understand.
• The most common definition of HLV is
the expected life time earnings of an individual, i.e.
what is the total income that the individual is
expected to earn over the remainder of his working
life, expressed in present Rupee term.
PURPOSE OF HLV
• You should calculate your Human Life
Value so you can accordingly invest in insurance
plans that provide your family with adequate
finances and hence security even in your absence.
• How do you determine your Human
Life Value?
• Your Human Life Value is determined
by 3 factors:
1. Your age
2. Current and future expenses
3. Current and future income
as a thumb rule, if you are 30 years of age, you
should insure yourself for an amount
approximately 8 times your annual income.
• At 35, your investment should be close
to 6 times your income.
• Of course, the exact amount of your
investment should be determined by the number of
people who depend on you, your existing
investments and your life stage.
• For example, if you are 30 years of age
and have two children and parents to provide for,
the amount you invest should be reflective of your
requirements.
COMPUTATION OF HLV
• Computation of Human Life value
requires a detailed analysis of many factors. Some
of them are -
• 1. Annual Income of the life
• 2. Balance of active earning period till
retirement
• 3. Personal Expenses
• 4. Inflation
• 5. Future increase in salary, etc.
STEPS TO CALCULATE HLV
• There is a 2 step process to calculate
HLV through this method.
• Step 1: The first step is to calculate the
total future income the person will be able to earn
during his remaining working years.
• Step 2: Then the second step is to
calculate the present value of this amount (arrived
at in step 1) as on today.
• In case untimely death happens, this
method captures the future income potential of the
person, which he/she would have earned had he/she
survived till retirement. In one sentence as per this
method simply put, Human Life Value is the
present value of your future earnings.
• Concept of Human Life Value
• Like any other asset (real estate, equities,
commodities etc) human beings are also assets and
have potential to generate income.
• When any asset is put up for sale, the
value of the asset is determined based on factors
like present condition of the asset, remaining life of
the asset, future income generation potential, other
features of the asset etc.
• In a similar way if a person were to be
put up for sale, his/her value will also be
determined on the above mentioned factors.
• Present condition of the asset: 
• If the human being is not fit and fine or if
the person is totally disabled/handicapped he will
definitely not command significant value.
• Remaining life of the asset: If the
average life expectancy of a person is 80 years and
the person whom we are evaluating is 75 years old,
then again he will not command significant value.
• Future income generation potential:
 If the person is young and earning well and
is in a sunrise industry with very good future
prospects, then he certainly will command
premium valuation as compared to other people.
So taking into consideration the above 3
factors and other factors, the value so arrived at is
termed human life value.
In insurance parlance this human life
value is used as a yardstick to determine how much
amount of life insurance cover a person should
have.
This is done so that if the person dies
today, there shouldn’t be any economic loss. Off
course emotional loss cannot be compensated for.
If the person dies today, the lump sum
amount that the person’s family will get from the
insurance company should compensate for the
future income of the life insured, which he/she
would have earned had he/she survived.
Determining the Economic Value of Human
Life
• The need to evaluate the economic value
of human life is important in various areas of
public policy, and arises in the determination of
damages in wrongful death and personal injury
cases. Here are some highlights of the issues to be
considered in determining the economic value of
human life.
• The economic value of human life
involves the length of life, and the net economic
contribution that a person could be expected to
make during his or her lifetime. Both of these areas
involve issues that can be established through
expert testimony.
• Total net economic value involves the
life expectancy, the value of the person's earnings
and other economic contributions, and the
valuation of the present value of a stream of future
uncertain monetary amounts.
Human life value approach (economic value of
an individual life) (EVOIL)
• quantitative measure to determine the
amount of life insurance required to replace lost
future earnings of a wage earner. Three steps are
used in arriving at the needed sum:
• Determine average yearly earned income
devoted to a family in the future by the wage earner
(AEIDF).
• Determine future number of years wage
earner is planning to work (n).
• Determine the interest rate (i) (discount
factor) to be used in calculating the present value of
the average yearly earned income devoted to
family.
• Even though it is difficult for people to
digest that they need to put a price tag/value on
their life, the reality is that to buy insurance you
have to put a price to your life to know your human
life value.
• If a person still feels that he/she is
priceless and hence can’t put a value to their life,
then we believe the person is living in fool’s
paradise.
• If a person’s argument for not buying life
insurance is that he/she cant put a price tag to their
life, then we believe that person is worthless
because once the person is gone (dies) his/her
income earning capacity is also gone with them.
• So we suggest calculate your human life
value today and buy life insurance, if not for
yourself then at least for the well being of your
family.
• It is best to go for a term insurance
policy because it can give you a higher amount life
cover and at the same time it is light on the pocket.
• Term insurance policies are the cheapest
insurance policies available in the market.
•  
PLAYERS IN LIFE AND NON-LIFE
INSURANCE SECTOR
Life insurance is a contract between the policy
owner and the insurer, where the insurer agrees to
pay a designated beneficiary a sum of money upon
the occurrence of the insured individual's or
individuals' death or other event, such as terminal
illness or critical illness.
The value for the policyholder is derived, not
from an actual claim event, rather it is the value
derived from the 'peace of mind' experienced by
 the policyholder, due to the negating of adverse
financial consequences caused by the death of the
Life Assured.
THE AGENT
 The life insurance agent is looked at by many
people as the boss. Their role as a player is too make sure
you have the right policy.
 The agent also needs to look at what is best for
the company by assessing your risk to them. When you
deal with the agent you are dealing with an expert who
knows all the policies and what they can do. They are also
the person who will handle your application for life
insurance.
 Any questions about this insurance must be
directed at the insurance agent. They are the representative
from the life insurance company that you have chosen.
 The one thing you must make sure of is that the
agent is always working to meet your needs first. Working
together with the agent is the best way to get things done.
 THE POLICY HOLDER
 The policy holder is the person who has their
name on the life insurance. They are the insured
individual.
 The policy holder on life insurance varies from
other insurance though in one important way.
 The life insurance policy holder is not the person
who benefits from the life insurance. As policy
holder you can make all the decisions on
coverage amount and premiums, based on the
options set before you.
 You can also improve your life insurance
whenever you feel the need to do so.
 Even though you will not see the benefit, you are
still the one who has to make the decision to
insure yourself.
 As a policy holder, it is best if you consult with
your family before making any life insurance
decision that could affect them.
 THE BENEFICIARY
 The last major player in life insurance is the
beneficiary.
 The beneficiary is the person, or persons, who
will receive the death benefit.
 A beneficiary can be one person, two or more
people, a business, or even a charity.
 A contingent beneficiary takes the role as main
beneficiary is the primary cannot be found.
 In order to fulfill your role in this process you
 must know how you can properly file a death
claim.
 You also need to make sure you are familiar with
the policy the policy holder has picked out.
 A contingent beneficiary takes the role as main
beneficiary is the primary cannot be found.
 In order to fulfill your role in this process you
must know how you can properly file a death
claim.
 You also need to make sure you are familiar with
the policy the policy holder has picked out.
 A contingent beneficiary takes the role as main
beneficiary is the primary cannot be found.
 In order to fulfill your role in this process you
must know how you can properly file a death
claim.
 You also need to make sure you are familiar with
the policy the policy holder has picked out.
 Investment policy in the Indian insurance
market
 A policy known by the name of 'Health plus Life
Product', offering life cover along with health
insurance has been granted permission by the
IRDA act and insurance companies are allowed
to provide it now.
 The FDI limit in the insurance sector has been
capped at 26% for the foreign marketers but the
government is thinking to increase it to 49% and
a bill of this offer is pending at the Rajya Sabha
 A low cost pension scheme is supposed to be
formed by the Pension Fund Regulatory and
Developmental Authority (PFRDA) on 1st April,
2010 to provide social security to the poorer
class.
 The compulsory ceding by every General
Insurance Corporation (GIC), would go on to
stay at 10% under current regulations as specified
by IRDA.
 •Legislative changes
REGULATORY AND LEGAL
FRAMEWORK GOVERNING THE
INSURANCE BUSINESS
 The Need for Regulation
 Better distribution of social benefits.
•To shape and monitor the market.
•To check mismanagement, dishonesty, fraud etc.
•To ensure that the insurance company has
adequate professional capability, is financially
sound, holds adequate reserves and invests its
funds adequately.
 •To check reckless rate wars, undercutting,
unhealthy links with industrial houses and
disregard for prudential norms.
 Objectives of Regulation:
 Regulations are general set of principles covering
minimal requirements for best practices in the
areas of
 licensing,
 prudential regulations and requirements,
 Supervisory powers,
 managing asset quality and loss provisioning and
 most importantly,
 enhancing corporate governance in insurance
organizations.

Reasons for failure of insurance companies
 Internal factors
•Inadequate pricing
•Improper method of reserving
•Poor/inappropriate investment strategy
•Failure to maintain adequate solvency
margin
•Poor underwriting and claims control
•Uncontrolled growth of the company’s business
•Inadequate control system and efficiency.
 External factors
•Bad claims experience
•High inflation in claims and expenses
•Business losses and lapses in policies
•Failure of third parties such as reinsurers,
brokers/agents.
•Adverse movements in asset values
•Catastrophes
•Adverse market situations
•Taxation policies
Regulation in India
•Introduced with Indian Life Assurance
Companies Act,1912
•The Insurance Act,1938 created a strong and
powerful regulatory authority- Controller of
Insurance.
•Nationalization of the life insurance business
and creation of LIC in 1956 and nationalization
 of the general insurance business and creation of
GIC and its subsidiaries in 1973.
•The powers of Controller of Insurance were
diluted on the belief that the nationalized industry
does not require any supervision and that its
accountability to the government through the
Insurance Division of the Finance Ministry
would be adequate.
Insurance Regulatory and
Development Authority Act,
(IRDA) 1999
•To open the insurance sector in India to private
and foreign players
•To grant statutory status to the interim Insurance
Regulatory Authority and amend the 1938
Insurance Act, the 1956 Life Insurance
Corporation Act and the 1972 General Insurance
Business (Nationalization) Act to end the public
sector monopoly.
• To regulate, promote and ensure orderly growth
of the insurance industry and provides for
solvency norms and specifies that the funds of
policyholders would be retained within the
country.
•The minimum capital requirement for life and
general insurance
retained at Rs 100 crores and for reinsurance
firms at Rs 200 crores
•It has been stipulated that the aggregate foreign
holding in an Indian insurance company shall not
exceed 26 per cent of the paid-up equity.
Moreover, to provide a level playing
field, It has been proposed that the Indian
promoters would also be required to bring down
their equity holding to 26 percent after a period
of 10 years from the commencement of business.
Amendments to
the Insurance Act, 1938
•Amendments provided for-
–Requirements as to paid-up equity capital for
both insurers and
reinsurers,
–Manner of divesting of excess shareholding by
promoters
–Manner and conditions of investment,
–Maintenance of required solvency margin at all
times by the insurers;
–Issue of license to insurance agents,
intermediary or insurance intermediary and
surveyors by the Authority as also suspension
and cancellation thereof;
–Obligations of insurers to compulsorily
undertake specified percentage of insurance
business in rural and social sector;
–Enhanced penalties for contravention of and
failure to comply with, the provisions of the Act
and offences by companies;
Functions and Duties of Regulator:
•Issue, withdraw, modify, suspend or cancel
certificate of registration to applicants.
•Protection of interests of policyholders
•Specifying requisite qualifications, code of
conduct and practical training for intermediaries
and agents.
•Regulating investment of funds
•Regulating maintenance of margin of solvency
•Adjudication of disputes
•Supervising the functioning of Tariff Advisory
Committee
•Specifying the percentage of business to be
taken up in rural and social sector.
Limits of Regulation
•Regulation is not a guarantee of the
solvency and financial strength of
insurance companies.
• It only reduces the risk of failure and
mismanagement to the minimum.
•Effectiveness of information in periodical
returns.
•Time lag in analysis of periodical returns.
Introduction to Insurance Economics
The Geneva Association, or the International
Association for the Study of Insurance
Economics, promotes research studies that
demonstrate the inter-connectedness of insurance
and economics. 
Insurance companies need to understand
risk in all its forms. These companies take in
premiums from personal and commercial policy
holders. Premium income creates investment
capital, and cash flow from investments must be
reinvested.
For example, "reinvestment risk"--or the
opportunity to reinvest money at attractive rates--
concerns insurers and policyholders in 2010.
 The Geneva Association and Insurance
Economics
 The Geneva Association targets basic trends and
focus issues in which insurance and insurance
products play a substantial part.
 Safeguarding capital from risk constantly
concerns the readers of the Insurance Economics
newsletter.
 Insurance Economics relies upon the input of
approximately 80 CEOs of global
insurance/reinsurance concerns.
Kinds of Risk
Most investors understand usual market risks like
interest rates and event risks.
Many other risks form topics of
exploration for
Insurance Economics, including
inflation, opportunity, liquidity, prepayment,
credit, call, counterparty, purchasing-power,
currency and country risk. Specific market
conditions also create risk.
Global Recession and Long-Term Care Insurance
Most financial planners include the purchase of
long-term care insurance for their clients.
Unfortunately, the global recession beginning in
2007 caused many financially-aware consumers
to put off the purchase of this valuable insurance.
Why Professional Investors Like Insurance
Companies
Insurance Economics members and investors
want to understand risk. Celebrated investors like
Berkshire Hathaway Chairman Warren Buffett
have explained how insurance created a "fountain
of funds" to invest in other portfolio companies
through premiums paid for by insurance
customers.
Unit-4
Insurance companies
Life insurance
General insurance
Unit linked plans
Insurance is a contract between two parties
whereby one party called insurer undertakes in
exchange for a fixed sum called premium, to pay
the other party called insured a fixed amount of
money on the happening of certain event.
Insurance indemnifies assets and income. Every
asset (living and non-living) has a value and it
generates income to its owner.
The income has been created through the
expenditure of effort, time and money.
Every asset has expected lifetime during which it
may depreciate and at the end of life period it
may not be useful, till then it is expected to
function.
Some times it may cease to exist or may not be
able to function partially or fully before the
expected life period due to accidental
occurrences like crime, collisions, earthquakes,
fire, flood, theft, etc.
These types of possible occurrences are “risks”.
Future is uncertain, no body knows what is
going to happen? It may or may not? Insurance is
the concept of risk management – the need to
manage uncertainty on account of above stated
risks.
Insurance is a way of financing these risks either
fully of partially.
Insurance industry has both economic and
social purpose and relevance
Insurance business in India can be broadly
divided into two categories such as Life
Insurance and General Insurance of Non-life
insurance.
ESSENTIAL FEATURES OF LIFE
INSURANCE
 Elements of a valid contract:
Since life insurance establishes a
contractual relationship between the insured and
the insurer, the contract of insurance must
contain the essential elements of a valid contract
in accordance with the provision of the Indian
Contract Act, 1872.
 Insurable interest:
A person cannot insure the life
of any other unless he has an insurable interest on
it. The insurable interest must exist at the time of
the contract of the insurance. The risk against this
policy is the death of the insured.
Insurable interest exists in the following cases:
• A person has unlimited insurable interest in his
own life.
• A husband is presumed to have insurable interest
in his wife’s live and vice versa.
• A surety has insurable interest in the life of the
principal debtor to the extent of his claim.
• A creditor has insurable interest in the life of the
debtor, to the extent of the debt.
• A father/mother has insurable interest in the life
of his/her son/daughter on whom he/she is
dependent. Similarly, a son has insurable interest
in the life of his parents.
• A partner has insurable interest in the life of his
co-partner(s).
 Utmost good faith:
The doctrine of disclosing all
the material fact is embodied in this important
principle which applies to all the forms of
insurance. At the time of taking a policy ,
policyholder should ensure that all questions in
the proposal form are correctly answered. Any
misrepresentation, non-disclosure or fraud in any
document leading to the acceptance of the risk
would render the insurance contract null.
 Warranties:
Warranties are an important
feature of life insurance contract, and are the
basis of the contract. In case of an untrue
statement, whether regarding material or non-
material facts and figures, the contract shall
become null and void and the insurer would be
entitled to forfeit the premium paid by him.
 Assignment and nomination:
Assignment of a life policy
means transferring the rights of the assured in
respect of the policy to the assignee. In case of
the nomination, a person is merely named to
collect the amount to be paid by the insurer on
the death of the assured, but the rights of the
assured are not transferred.
 Certainty of the event:
In life assurance policy, the
insurer has to pay the insured amount one day or
other because the death of the assured or his
reaching a particular age is certain to happen.
 Premium:
The premium is the price paid by
the insured for the risk of loss undertaken by the
insurer. In the case of the insurance, premium is
usually required to be paid in cash and advance
payment of the premium is a precondition to a
binding contract of insurance. In life insurance,
the premium is calculated on the average rate of
mortality, and the premium is payable till the
maturity of the policy.
 Terms of policy:
An insurance policy specifies the
nature of risk insurred for, the terms and
conditions of insurance as also the time-period it
covers. A life insurance policy may cover a
specified number of years or the balance of the
insured life.
LIC OF INDIA
Life Insurance Corporation of India (LIC) was
formed in September 1956 by an Act of
Parliament, LIC Act 1956 with a contribution of
Rs. 50 million.
The then Finance Minister Mr. C. D. Deshmukh
while piloting the bill for nationalization outlined
the objectives of LIC thus: “To conduct the
business with utmost economy with the spirit of
trusteeship; to charge premium no higher than
warranted by strict actuarial considerations; to
invest the funds for obtaining maximum yield for
the policy holders consistent with safety of
capital; to render prompt and efficient service to
policy holders thereby making Insurance widely
popular”.
Presently the LIC has a network of seven zones;
100 divisions and 2,048 branches, personnel
exceed seven lakhs employees and over six lakhs
agents.
Vision: A trans-nationally competitive financial
corporation of significance to societies and Pride
of India.
Mission: To explore and enhance the quality of
the life of people through financial security by
providing products and services of aspired
attributes with competitive returns and by
rendering resources for economic development.
Values: Caring and Courtesy, Initiatives and
Innovation, Integrity and Transparency, Quality
and Returns, Participation and Relationship, and
Trustworthiness and Reliability
Culture: Agility (quickness), Adaptability,
Collaboration, Commitment, Discipline,
Empowerment, Sensitivity, and Excellence.
Objectives
• Spread Life Insurance widely and in particular to
 the rural areas.
• Maximise mobilization of people’s savings by
making insurance-linked savings adequately
attractive.
• Use of funds to the best of advantage of the
investors as well as the community as whole,
keeping in view national priorities and
obligations of attractive return.
• Conduct of business at most economy and with
the full realisation that the money belongs to the
policyholders.
• Act as trustee of the insured public in their
individual and collective capacities.
Objectives contd….
• Meet the various life insurance needs of the
community that would arise in the changing
social and economic environment.
• Involve all people working in the Corporation to
the best of their capability in furthering the
interests of public by providing efficient service
with courtesy.
• Promote amongst all agents and employees of the
Corporation a sense of participation, pride and
job satisfaction through discharge of their duties
with dedication towards achievement of
Corporate Objectives.
ADVANTAGES OF LIFE INSURANCE..
Contract of Insurance: A contract of insurance
is a contract of utmost good faith technically
known as uberrima fides. The doctrine of
disclosing all material facts is embodied in this
important principle, which applies to all forms of
insurance.
At the time of taking a policy, policyholder
should ensure that all questions in the proposal
form are correctly answered. Any
misrepresentation, non-disclosure or fraud in any
document leading to the acceptance of the risk
would render the insurance contract null and
void.
Protection: Savings through life insurance
guarantee full protection against risk of death of
the saver. Also, in case of end, life insurance
assures payment of the entire amount assured
(with bonuses wherever applicable) whereas in
other savings schemes, only the amount saved
(with interest) is payable.
Aid To Thrift (economy): Life insurance
encourages 'thrift'. It allows long-term savings
since payments can be made effortlessly because
of the 'easy instalment' facility built into the
scheme. (Premium payment for insurance is
either monthly, quarterly, half yearly or yearly).
For example: The Salary Saving Scheme
popularly known as SSS, provides a convenient
method of paying premium each month by
deduction from one's salary.
In this case the employer directly pays the
deducted premium to LIC. The Salary Saving
Scheme is ideal for any institution or
establishment subject to specified terms and
conditions.
Liquidity: In case of insurance, it is easy to
acquire loans on the sole security of any policy
that has acquired loan value. Besides, a life
insurance policy is also generally accepted as
security, even for a commercial loan.
Tax Relief: Life Insurance is the best way to
enjoy tax deductions on income tax and wealth
tax. This is available for amounts paid by way of
premium for life insurance subject to income tax
rates in force. Assesses can also avail of
provisions in the law for tax relief. In such cases
the assured in effect pays a lower premium for
insurance than otherwise.
Money When You Need It: A policy that has a
suitable insurance plan or a combination of
different plans can be effectively used to meet
certain monetary needs that may arise from time-
to-time.
Children's education, start-in-life or marriage
provision or even periodical needs for cash
over a stretch of time can be less stressful with
the help of these policies.
Alternatively, policy money can be made
available at the time of one's retirement from
service and used for any specific purpose, such
as, purchase of a house or for other investments.
Also, loans are granted to policyholders for
house building or for purchase of flats (subject to
certain conditions).
TYPES OF INSURANCE POLICIES
I. Basic Life Insurance Plans
E Whole Life Assurance Plan -low cost
insurance plan where the Sum assured is payable
on the death of the life assured whenever it
 occurs. Money Back Plans
 Endowment Assurance Plan –Under this plan the  Jeevan Surabhi E
Sum assured is payable on maturity or on death Jeevan Rekha
of the life assured, if earlier.  Jeevan Samriddhi E
E Jeevan Anand –this plan combines the features Jeevan Saathi
of the Endowment and Whole life plans. The  Jeevan Mitra E
basic Sum assured plus accrued bonus is payable LIC’s Jeveen Shree-I
to the policyholders on his survival till the end of  Asha Deep-II E
the premium paying term. An additional sum Jeevan Asha-II
assured is payable to the nominee on death of the  Jeevan Bharathi E Bima
policyholder after expiry of premium paying NIvesh Triple Cover
term.  Varishtha Pension Bima Yojana
II. Term Assurance Plans  Fixed Term (Marriage) Endowment /
 Anmol Jeevan-I: Pure term assurance policy for Educational Annuity
term varying 5 to 25 years and provides for VII. Unit Linked Plans
payment of Sum assured on death of the Equity funds,
policyholder during the term of the policy. Balanced funds
 Convertible Term Assurance Plan: It provides for Debt funds
term assurance for 5 to 7 years with an option to VIII. Group Schemes
convert to a Limited Payment Whole Life Policy  Group Term Insurance Scheme
or an Endowment Assurance Policy without  Group Superannuation Scheme
having to undergo fresh medical examination.  Group Gratuity Scheme
The option of converting may be exercised at any  Group Leave Encashment Scheme
time during the specified term except during the GENERAL INSURANCE CORPORATION
last 2 years provided the policy is in full force. (GIC)
 New Bhima Kiran: In addition to return on • Prior nationalization there were 68 Indian
premiums paid, this plan provides for Loyalty insurers (including LIC) and 45 non-Indian
addition, if any, in-built accident cover and a insurers did the business.
term Cover is in full force. • In Nov. 1972, the general insurance business was
III. Specific Plans for Children nationalized by the General Insurance Business
 Childern’s Deferred Endowment (Nationalized), Act 1972 (GIBNA) and vested in
Assurance the hand of the GIC and its four subsidiaries viz.
 Jeevan Balya E 1. National Insurance Co. Ltd.,
Komal Jeevan 2. New India Assurance Co. Ltd.,
 Jeevan Kishore E Jeevan Chaya 3. Oriental Fire and General Insurance
 Jeevan Sukaya (for female children) Co. Ltd., and
IV. Pension Plans 4. United India Insurance Co. Ltd.
 New Jeevan Akshay-I E Varishtha • GIC was incorporated as a holding company in
Pension BIma Yojana 1992.
 New Jeevan Dhara-I E New Jeevan • General Insurance Business is completely owned
Suraksha by the government.
V. Plans for Handicapped Dependents • The paid up capital of GIC was fully subscribed
 Jeevan Adhar Jeevan Viswas by the Government and of four subsidiaries.
• It was controlled by a single organization with
VI. Other Plans four subsidiaries.
 Mortage Redemption E • GIC’s four subsidiaries:
Bhavishya Jeevan 1. National Insurance Co. Ltd.,
 New Jana Raksha E 2. New India Assurance Co. Ltd.,
 3. Oriental Fire and General Insurance
Co. Ltd., and
4. United India Insurance Co. Ltd.
• The Govt on India took over Control,
supervision, and policy making is with GIC.
Classification of General Insurance Business
1. Marine, (relatively less importance to
India)
2. Fire, (Major business but its share is
coming down) and
3. Miscellaneous (grown substantially)
theft, loss, damage, etc.
Other Policies (non-traditional schemes)
- Manages Comprehensive Crop Insurance
Scheme introduced by the Central Govt.
in 1985.
What are Unit Linked Insurance Plans
Unit linked insurance plan (ULIP) is life
insurance solution that provides for the
benefits of risk protection and flexibility in
investment. The investment is denoted as units
and is represented by the value that it has
attained called as Net Asset Value (NAV). In a
ULIP, the invested amount of the premiums
after deducting for all the charges and
premium for risk cover are pooled together to
form a Unit fund. A Unit is the component of
the fund
in a Unit Linked Insurance Policy.
The returns in a ULIP depend upon the
performance of the fund in the capital market.
ULIP investors have the option of investing
across various schemes :
Equity funds,
Balanced funds
Debt funds etc
It is important to remember that in a ULIP,
the investment risk is generally borne by the
Investor.
Flexibility :
 Sum Assured and Premium amount
can be customized.
 The flexibility to change asset
allocation by switching between funds
with ease.
Transparency :
 All the charges are transparent and
known to the investor through Sales
Illustration, Policy brochure & by the
advisor.
 Day to day tracking of performance of
the fund so that customer can decide
to stay invested or switching to
different fund.
Liquidity :
 An investor has an option to withdraw
partially after locking period for any
contingencies.
 Policy can be also be surrendered
subject to surrender charges in case of
unforeseen events.
Fund Options :
 A ULIP will offer you a wide choice of
funds, ranging through equity, debt,
cash, or a combination of the three.
 The customer is also afforded the
option of choosing your fund mix
based on your desired asset allocation
Goal Based Savings :
 ULIP offers saving through different
goal based plan.
 In absence of such a focused approach,
there is a high possibility of savings
towards one objective getting utilized
for an immediate short term
requirement.
Tax Benefit:
 The Tax benefit available is : a) Life
Insurance Premiums are eligible for
deduction under Sec 80 C. b) Pension
Plans are eligible for a deduction
under Sec 80CCC. C) The maturity
proceeds are exempt under section 10
(10D).
When will a ULIP work best
Appropriate life cover :
 Cover to be chosen basis the desired
Goal.
 Cover should be decided to secure the
family with adequate finances.
Right fund option :
 As per the future plan, age and other
prospects, an investor should choose
the aggressive fund or conservative
fund.
 A wise choice of fund option will
 ensure that your ULIP guarantees the
important life goals –be it retirement
planning, planning for children’s
education or wealth creation.
Long-term investment :
 ULIPs are meant to guarantee your
financial goals over the long term as
they are less affected by temporary
market fluctuations
 To get the best of your ULIP, an
investor should remain invested for
the long-term of at least 8-10 years.
Know the features :
 To know the feature is very important
according to the investor’s future plan.
 Basic features: Top up, switch between
funds, increase & decrease the
protection level, cover continuance
option, surrender option & range of
riders.
Know the charges :
 Sales Illustration :
A sales illustration illustrates various
charges, year by year, for the term of the plan
so that you know exactly how much money is
deducted as charges and what is getting
invested.
 Brochure :
A brochure informs you about the
various charges and their purpose applicable
on your policy.
 Advisor :
You should enquire your advisor
about all the charges applicable on your
policy.
Charges Involved in ULIPs
Unlike conventional traditional
products charges are segregated in ULIP &
thus made known to the customer. Following
are the type of charges generally involved in
ULIPs:
Policy Administration Charges :
 These charges are deducted on a
monthly basis to recover the expenses
incurred by the insurer on servicing
and maintaining the life insurance
policy like paperwork etc.
Premium Allocation charges :
 A percentage of the premium is
appropriated towards charges initial
and renewal expenses apart from
commission expenses before allocating
the units under the policy.
Mortality Charges :
 These are charges for the cost of
insurance coverage and depend on
number of factors such as age, amount
of coverage, state of health etc.
Fund Switching Charges :
 Usually a limited number of fund
switches are allowed each year without
charge, with subsequent switches,
subject to a charge.
Fund Management Charges :
 Fees levied for management of the
fund and is deducted before arriving
at the NAV.
Surrender Charges :
 Deducted for premature partial or full
encashment of units.
Service Tax Deductions :
 Service tax is deducted from the risk
portion of the premium.
Understand the concept of ULIPs thoroughly :
 Do your homework well and read as
much as you can about ULIPs before
investing. This will help you know the
benefits and structure of ULIPs.
Focus on your requirements and risk profile:
 Identify a plan that is best suited by
keeping in mind the requirements &
risk appetite.
Understand the charges levied in the product :
 Understand all the charges levied on
the product over its tenure.
Examine the performance of the plan :
 Compare the performance of the plan
with benchmark indices like BSE
Sensex or Nifty in the past two or
three years to get a better idea about
the performance.
1. Definitions:
In these regulations, unless the context
otherwise requires:
a) ‘Act’ means the Insurance Regulatory and
Development Authority Act 1999 (41 of 1999);
b) ‘Authority’ means the Insurance Regulatory
and Development Authority established under
sub-section (1) of Section 3 of the Act;
c) ‘cession’ means the unit of insurance
passed to a reinsurer by the insurer which
issued a policy to the original insured and,
accordingly, a cession may be the whole or a
portion of single risks, defined policies or
defined divisions of business, as agreed in the
reinsurance contract;
d) ‘facultative’ means the reinsurance of a part
or all of a single policy in which cession is
negotiated separately and that the reinsurer and
the insurer have the option of accepting or
declining each individual submission;
e) ‘Indian re-insurer’ means an insurer who
carries on exclusively reinsurance business and is
approved in this behalf by the Central
Government;
f) ‘pool’ means any joint underwriting
operation of insurance or reinsurance in which the
participants assume a predetermined and fixed
interest in all business written.
g) ‘retrocession’ means the transaction whereby
a reinsurer cedes to another insurer or reinsurer all
or part of the reinsurance it has previously
assumed;
h) ‘retention’ means the amount which an
insurer assumes for his own account. In
proportionate contracts, the retention may be a
percentage of the policy limit. In excess of loss
contracts, the retention is an amount of loss;
i)‘treaty’ means a reinsurance arrangement between
the insurer and the reinsurer, usually for one year
or longer, which stipulates the technical
particulars and financial terms applicable to the
reinsurance of some class or classes of business;
j)Words and expressions used and not defined in
these regulations but defined in the Insurance Act,
1938 (4 of 1938) or the General Insurance
Business Nationalisation Act, 1972 (57 of 1972)
or Insurance Regulatory and Development
Authority Act, 1999 (41 of 1999), rules made
thereunder shall have the meanings respectively
assigned to them in those Acts or rules as the case
may be.
3. PROCEDURE TO BE FOLLOWED
FOR REINSURANCE ARRANGEMENTS
(1) The Reinsurance Programme shall continue to
be guided by the following objectives to:
a) maximise retention within the country;
b) develop adequate capacity;
c) secure the best possible protection for the
reinsurance costs incurred;
d) simplify the administration of business.
(2) Every insurer shall maintain the maximum
possible retention commensurate with its financial
strength and volume of business. The Authority
may require an insurer to justify its retention
policy and may give such directions as considered
necessary in order to ensure that the Indian insurer
is not merely fronting for a foreign insurer.
(3) Every insurer shall cede such percentage of
the sum assured on each policy for different
classes of insurance written in India to the
Indian reinsurer as may be specified by the
Authority in accordance with the provisions of
Part IVA of the Insurance Act, 1938.
(4) The reinsurance programme of every
insurer shall commence from the beginning of
every financial year and every insurer shall
submit to the Authority, his reinsurance
programmes for the forthcoming year, 45 days
before the commencement of the financial
year;
(5) Within 30 days of the commencement of
the financial year, every insurer shall file with
the Authority a photocopy of every
reinsurance treaty slip and excess of loss
cover covernote in respect of that year
together with the list of reinsurers and their
shares in the reinsurance arrangement;
(6) The Authority may call for further
information or explanations in respect of the
reinsurance programme of an insurer and may
issue such direction, as it considers necessary;
(7) Insurers shall place their reinsurance
business outside India with only those reinsurers
who have over a period of the past five years
counting from the year preceding for which the
business has to be placed, enjoyed a rating of at
least BBB (with Standard & Poor) or equivalent
rating of any other international rating agency.
Placements with other reinsurers shall require the
approval of the Authority. Insurers may also
place reinsurances with Lloyd’s syndicates taking
care to limit placements with individual
syndicates to such shares as are commensurate
with the capacity of the syndicate.
(8) The Indian Reinsurer shall organise
domestic pools for reinsurance surpluses in
fire, marine hull and other classes in
consultation with all insurers on basis, limits
and terms which are fair to all insurers and
assist in maintaining the retention of business
within India as close to the level achieved for
the year 1999-2000 as possible. The
arrangements so made shall be submitted to
the Authority within three months of these
regulations coming into force, for approval.
(9) Surplus over and above the domestic
reinsurance arrangements class wise can be
placed by the insurer independently with any
of the reinsurers complying with sub-
regulation (7) subject to a limit of 10% of the
total reinsurance premium ceded outside India
being placed with any one reinsurer. Where it
is necessary in respect of specialised insurance
to cede a share exceeding such limit to any
particular reinsurer, the insurer may seek the
specific approval of the Authority giving
reasons for such cession.
(12) Every insurer shall be required to submit to
the Authority statistics relating to its reinsurance
transactions in such forms as the Authority may
specify, together with its annual accounts.
4. Inward Reinsurance Business
Every insurer wanting to write inward reinsurance
business shall have a well-defined underwriting
policy for underwriting inward reinsurance
business. The insurer shall ensure that decisions
on acceptance of reinsurance business are made
by persons with necessary knowledge and
experience. The insurer shall file with the
Authority a note on its underwriting policy stating
the classes of business, geographical scope,
underwriting limits and profit objective. The
insurer shall also file any changes to the note as
and when a change in underwriting policy is
made.
Outstanding Loss Provisioning
(1) Every insurer shall make outstanding claims
provisions for every reinsurance arrangement accepted on
the basis of loss information advices received from
Brokers/ Cedants and where such advices are not
received, on an actuarial estimation basis.
(2) In addition, every insurer shall make an
appropriate provision for incurred but not reported
(IBNR) claims on its reinsurance accepted portfolio on
actuarial estimation basis.
Unit-5

(10) Every insurer shall offer an opportunity to

other Indian insurers including the Indian
Reinsurer to participate in its facultative and treaty
surpluses before placement of such cessions
outside India.

(11) The Indian Reinsurer shall retrocede at least

50% of the obligatory cessions received by it to
the ceding insurers after protecting the portfolio
by suitable excess of loss covers. Such
retrocession shall be at original terms plus an
over-riding commission to the Indian Reinsurer
not exceeding 2.5%. The retrocession to each
ceding insurer shall be in proportion to its
cessions to the Indian Reinsurer.