Module-3

A) Explain the origin of banking in India List the reforms of 1991 in the banking industry.

>Origin of banking in India:-

In ancient India, temples have been the storehouse of wealth and have acted as bankers. Wealthy
merchants

and moneylenders used to carry out the function of lending. Banking in India originated in the later
years of

18th century.

>Bank of Hindustan was the earliest banks in India and was established in 1770 and went into liquidation
in 1832.

>Pre-Independence Era

In the early 19th Century, the East India Company promoted three banks at port centers to finance
trade. These

banks were:

1)Bank of Bengal in 1809 - which was earlier set up as Bank of Calcutta in 1806

2)Bank of Bombay in 1840 and

3 Bank of Madras in 1843

These banks together came to be known as Presidency Banks.

The Reserve Bank of India (RBI) was established as the central bank of the country in 1935 and Imperial

Bank ceased to be banker to the Government of India and instead became an agent of the Reserve Bank
for

the transaction of government business at centers at which the central bank was not established.

>Post-Independence Era

The Government initiated steps to streamline the functioning of banks and to safeguard the interests

of the depositors and enacted Banking Regulations Act, 1949.

1) Reserve Bank of India was granted powers of supervising the functioning of banks.

2) RBI, which was originally a shareholder’s bank, which was nationalized in 1948.

3)After independence, a need was felt to develop a suitable banking structure for meeting the credit

requirements of both agriculture and industry.

4)Towards the end, Reserve Bank concentrated on regulating and developing mechanisms for institution

building.

B) Define Bank Customers

-One who has an account with any branch of a bank is said to be that bank’s customer.

- Anyone can open an account with a bank provided he or she is sound of mind and can provide KYC

documents.

-KYC stands for ‘KNOW YOUR CUSTOMER’.

C) Explain Bank-Customer Relationship Explain account and cash operations in a bank branch

>The banker customer relationship depends upon the services availed by the customer

» When a person opens an account with a banker by deposit of money and becomes a customer, he

becomes creditor and the banker becomes a debtor.

The legal relationship between a banker and a customer varies with the nature of service rendered by
the bank.

Bankers customer relationship :-

1)Debtor – Creditor
»Debtor is the borrower and Creditor is the lender.

»A deposit customer is a creditor of the bank, while the bank is debtor. When a loan is given by the

bank, the customer becomes the debtor and the bank becomes the creditor.

2)Pledgee – Pledgor

»When a customer takes loan from a bank against the security of bonds, shares, fixed deposits, gold

ewellery, goods, etc., he has to give possession of the security to the bank while retaining the

ownership rights. This is called “pledge”.

»The bank here is called the “Pledgee” while the borrower / customer is called “Pledgor”.

»While a pledgee has the right to sell the pledged property and recover the loan, in case of default, he
has an obligation to take care of the property as if ot was his own. If he does not, the pledgee will be

liable for negligence and has to compensate the pledgor.

3)Agent of third parties

»When a bank sells units of Mutual Funds, insurance policies, bonds, etc., it acts only as an

intermediary or an Agent.

»The relationship is between the Mutual Fund, Insurance Co., Bond Issuer, etc., and the customer.

Bank is only a seller of the product.

4)Agent – Principal

»When a bank collects a cheque or a bill the position of the bank is that of an agent of the customer. It

is the customer who is entitled to claim payment against the instrument.

»The bank does so on his behalf and thus becomes his agent.

»The agency relationship ends on completion of the transaction or on the death, insolvency or

bankruptcy of the customer.

Lessor – Lessee

• When a customer hires a safe deposit locker in a bank, his relationship with the bank is that of a

5)“Lessee” and “Lessor”

»Lessor is the owner of the property, while Lessee has a right to use it for

payment of rent.

6)Advisor – Advisee

»Bank provides investment advisory services to its customers to help them choose the right kind of

investments.

»Banks act as Advisors and are not responsible for the sucess of the investment. Such relationship is
based on Investment Management Agreement.

1)Account Operations

• Current, Savings and Cash Credit / Working Capital accounts are the main running or operative

accounts in a bank that witness largest number of transactions.

• These accounts are maintained by the customers to receive and make payments of funds on daily

basis.

>Credits

• Cash deposits

• Deposit of cheques drawn on same bank or other

banks, local or outstation

• Electronic funds transfer into the accounts

>Debits

• Payment of cheques in cash

• Payment of cheques through Clearing House or credit to other accounts, within the bank or other
banks, local or outstation

• Electronic funds transfer to accounts within the bank or other banks, local or outstation

>Cash Credit Account

• Short term loan provided to companies for working capital requirement.

• The facility is provided to pledge or hypothecation of stock i.e. raw materials, work in progress,
finished goods, etc. or other collateral security as per banking company norms.

2)Cash Operation

Cash management is a broad area of banking and finance which involves the collection, concentration,
and

disbursement of cash.

OBJECTIVE

1)Improve revenue

2) Maximizing profits

3)Minimizing costs

4)Efficient management systems

5)Accelerate growth.

A. Collection Services

Cash collection systems aim to reduce the time taken to collect cash owed to a firm

>Local Cheque Clearing

>Upcountry Cheque Collection

B. Payment Services

>Printing of Cheques or pay order or demand draft

>Printing covering letters with addresses

C. PRICING

>Service charge and interest factor.

>Number of instruments, average value per instruments

>Number of print location,Dispach requirement

D. ORGANIZATION AND SYSTEM

>A central control room or Hub

>A centralized application system

D)Explain Interbank Clearing House and Cheque Truncation System

>INTER BANK CLEARING HOUSE

• Let’s assume you received a Cheque (and you are the beneficiary) from a Person for an Amount X.

• You receive the cheque from the person. The cheque may be from Bank ABC. After assuring with the
person who gave you the cheque that you can go ahead and deposit, you visit your Bank which is
probably same or a different bank XYZ. You

deposit the cheque with a challan filled in. The challan should contain your account number, the cheque
details and signature.

• The Bank then sends the cheque for clearance to the parent bank ABC. In CTS cases, the clearance
happens electronically as well and the

cheque is stored merely for documentation purposes. The person who gave you the cheque gets
debited to his account for X. You receive credit in your account for X.

>Cheque Truncation System:-

»CTS stands for Cheque truncation system, it was started by RBI to reduce the clearing time by
eliminating

physical flow of cheques from branches to clearing house. In CTS system image of the cheque along with
the MICR data is captured at the collecting branch and sent electronically. If A deposits the cheque
issued to him by B in his account. The physical copy of the cheque stays with A's bank which is the
collecting bank.

»Cheque Truncation is settlement of clearing transactions on the basis of images and electronic data
without the

physical movement of the instruments. The Clearing Cheque is truncated at the Presenting bank itself.

Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point
by the

presenting bank en-route to the paying bank branch.

E)Explain collection, remittances and fund transfer

>1] Collection :

a) Collection of Commercial Bills:

Banks facilitate trade transactions. When a trader sells goods to another outstation trader or consumer,
he is not sure if he would be paid by the buyer on receipt of goods. Similarly the buyer avoids advance
payment as he is not sure that the seller would send the goods at all or of adequate quality and quantity
to the buyer. Banks, therefore, play the role of intermediaries.

b) Outward Bill for Collection - OBC

A bill submitted by the seller to his bank, sent for collection to the buyer’s bank is called OBC. The
process is as follows.

1. The seller dispatches’ the goods by railways or road transport to the place of the buyer but the name
of the consignee is the seller himself.

2. The seller gives the following documents to his bank.

a. Covering letter containing necessary instructions to his bank.

i. The bank through which the bill has to be collected (buyer’s bank).

ii. Bank charges to be recovered from the buyer or to be deducted from the proceeds of the bill.

iii. Rate of interest to be recovered if the payment is delayed.

iv. If the payment of the bill is delayed for more than a reasonable period, what should be done?

b. Bill of Exchange drawn in favor of the bank or drawn in favor of the seller and endorsed in favor of the
bank.

c. RR / LR in favor of the seller and endorsed to the bank.

d. Invoice signed by the seller.

e. Any other document the seller may include.

3. After checking that the seller is a customer of the bank, instructions of the seller are clear and the bill
and the transport documents are endorsed in favour of the bank

a. The bill is entered in the system and an OBC number is generated.

b. All the documents will be stamped with bank’s rubber stamp and OBC no. will be written.

c. The documents will be endorsed in favor of the bank to which it is being sent for collection. If it is
being sent to another branch of the same bank, then endorsement is not necessary.

d. Prepare Collection Schedule containing clear instructions to the collecting bank.

e. Dispatch the collection schedule and all the documents to the collecting bank / branch.

4. On receiving payment it would be checked for correctness, bank’s commission will be collected and
the net amount will be credited to the seller’s account and the bill will be marked as paid.

5. Pending bills have to be followed up rigorously.

c) Inward Bill for Collection – IBC

The bill received at the collecting bank is called IBC. The following process is followed.

1. It is entered in the system and an IBC number is generated.

2. All the documents mentioned in the Collection Schedule are carefully checked and instructions are
checked for their clarity.

3. All documents are stamped with bank’s rubber stamp and IBC number is entered.

4. An advice containing details of the documents is sent to the buyer (drawee) and he is asked to make
payment and take delivery of the documents.

5. The documents are kept in a secure place as RRs /LRs are valuable documents and if they are lost the
bank will have to compensate the seller.

6. When the buyer makes the payment of the bill with charges, if any, the RR / LR will be endorsed in his
favor and “Received Payment” stamp will be put on the bill and documents will be delivered to the
buyer.

7. In case the buyer delays payment beyond what is mentioned in the collection schedule, instructions
of

the seller’s bank should be complied with.

F)Identify Frauds in the banking sector

>1)The fraud cases in Indian banks have been on the rise. Fraud is regarded as a danger to the banks.

2)There were various types of frauds occurred in the last few years .Some of them are advances
frauds, internet frauds, cheque frauds, etc.

3) Even various fraud cases have been reported in last three years like types of frauds occurred
were money laundering, manipulation of accounts, loan fraud, manipulation of vouchers and fake
documents. Manipulation of accounts was the main type of fraud being done by the fraudsters in
cases like Submission of fake documents was reported in fraud cases like Rotomac Global Private
Limited fraud case in Bank of India, Bhushan Power and Steel fraud case in Punjab National Bank, R P
Info Systems fraud case in Canara Bank, Kanishk Gold Private Limited Case in State Bank of India,
Sterling Biotech fraud case in Andhra Bank, Ram Dev International Rice Mill fraud in SBI and many
more

4)Bank frauds have now become such a routine feature today that many banks are fast losing the
confidence of the people as the most secure way of storing money. YES BANK case, PNB case or Nirav
Modi Case, Vijay Mallya case are some of the glittering examples. And the case which has as recently as
in August 2021 rocked our economy yet again is another plus 1000 crore embezzlement of funds by
VMC Systems Limited and Punjab National Bank [PNB] is again at the central stage. The situation is day
by day becoming gloomier and we do wonder whether there is any light at the end of a long drawn-out
tunnel.

5) Case study

The case study of PNB scam

a) The Punjab National Bank scam relates to fraudulent letter of undertaking worth Rs 10,000 crore
issued by the bank.

The key accused in the case were jeweller and designer Nirav Modi, his maternal uncle Mehul Choksi,
and other relatives and some PNB employees. Nirav Modi and his relatives escaped India in early 2018,
days before the news of the scam became public. PNB scam has been dubbed as the biggest fraud in
India's banking history.

b)Bankers used fake Letters of Undertakings (LoUs) at PNB's Brady House branch in Fort, Mumbai. The
LoUs were opened in favour of branches of Indian banks for import of pearls for a period of one year, for
which Reserve Bank of India guidelines lay out a total time period of 90 days from the date of shipment.

This guideline was ignored by overseas branches of Indian banks. They failed to share any
document/information with PNB, which were made available to them by the firms at the time of availing
credit from them.
Nirav Modi got his first fraudulent guarantee from PNB on March 10, 2011 and managed to get 1,212
more such guarantees over the next 74 months.

The Enforcement Directorate (ED) recovered bank token devices of the foreign dummy companies used
by the fugitive diamond trader to transfer the fraudulent funds.

The probe agency found that Nehal Modi, brother of Nirav Modi had destroyed the devices and had
even secured a server located at United Arab Emirates (UAE) soon after the scam broke out. These
dummy firms had been receiving the fraudulent PNB LoUs and were based out in British Virgin Island
and other tax havens.

The enforcement agency has so far seized movable and immovable properties to the tune of Rs 2362
crore in the PNB fraud case.

c) PNB employees misused the SWIFT network to transmit messages to Allahabad Bank and Axis Bank on
fund requirement. While all this was done using SWIFT passwords, the transactions were never recorded
in the bank’s core system — thereby keeping the PNB management in the dark for years.

G) EXPLAIN banking codes and standards

>1)The Banking Codes and Standards Board of India (BCSB) was set up in February 2006 to evolve Codes
and Standards for fair treatment of customers by banks. Banks which are members of BCSBI voluntarily
adopt the Codes for implementation.

2)BCSBI has in collaboration with the Indian Banks' Association (IBA),Reserve Bank of India(RBI) and
member banks, evolved two codes - Code of Bank's Commitment to Customers and the Code of Bank's
Commitment to Micro and Small Enterprises - which set minimum standards of banking practices for
member banks to follow when they are dealing with individual customers and Micro and Small
Enterprises.

3)The central objective of the Codes is promoting good banking practices, setting minimum standards,
increasing transparency, achieving higher operating standards and above all, promoting a cordial
banker-customer relationship which would foster confidence of the common man in the banking
system.

4)The Codes lay great emphasis on transparency and providing full information to the customer before a
product or service is sold to him. The Codes are not only commitments of banks to their customers but
also in a sense a Charter of Rights for the common person.

5)Key Commitments under the Code are as under-

a) To act fairly and reasonably in all dealings with the customers.

b) To help the customers to understand how the financial products and services work.

c) To help the customers by providing regular appropriate updates and keeping they informed about

changes in the interest rates, charges or terms and conditions.

d) To deal quickly and sympathetically with things that go wrong.

e) To treat all personal information of the customers as private and confidential.

f) To publicise the code.

g) To adopt and practice a Non-Discriminatory Policy.