Unit 1 Overview of Banking

1. Banking system of the economy is the lifeline of the economy of the country. -It plays an important role in
the financial and economic growth of the country.
2. In ancient time farmers and traders used to take loans from the merchants. This credit practice was
presented in 2000 BC in ancient civilizations on India, Samaria and Assyria.
3. In Ancient Greece especially in Roman Empire temples used to give loans. Temples used to be the safest
place for rich merchants and traders to keep gold. Hence, we can say that ancient temples were the first
banks to provide locker services.
4. Before 1600 the money lending services were slowly transforming into banking but not in an organized
manner. -That time was known as the un regulatory era of banking
5. Many business families in Italy, Germany and many countries had started banking services. Families
became powerful -Profitable business

1. in Vedic age the loan deeds called mapatra or malekhya -The Vedic word Kusidin refers to an usurer.
2. during the Ramayana and Mahabharata eras, banking had become full fledged business activity
-during the Manu Smriti period which followed the Vedic and epic age, the business of banking was
carried on by the Vaish Community.
during the Moghul period, metallic money was issued and indigenous bankers added one more line of
money changing to their already profitable business.
3. The English traders, who came to India in the 17th century, established some contacts with the
indigenous bankers by borrowing funds from them.
4. The first bank in India was established in 1786 and the journey can be classified into three distinct
phases;

Dawn of modern banking: 17th century banks had started all operations such as accepting deposits,
money lending, money changing and transferring funds
a. They helped in the growth of industrialization
b. banks became a safe and reliable source of credit and deposit money.
c. banks were playing an important role in the European economy
d. it was decided to formulate the banks by putting government regulations on it
e. it decided to open a central bank. That is how the modern banking started.
Today, our banking system is mainly divided into commercial banks (Both Public and Private Banks),
Regional Rural Banks, Cooperative Banks etc. The advancement in the Indian banking system is
classified into 3 distinct phases:

1. The Pre-Independence Phase i.e. before 1947

This phase is characterized by the presence of a large number of banks (more than 600). Banking system
commenced in India with the foundation of Bank of Hindustan in Calcutta (now Kolkata) in 1770 which
ceased to operate in 1832. (2) Oudh Commercial Bank (1881-1958) – the first commercial bank of India.
The largest and the oldest, still in existence, is the State Bank of India (SBI).
Whereas some are successful and continue to lead even now like:
(1) Allahabad Bank (est. 1865)
(2) Punjab National Bank (est. 1894, with HQ in Lahore (that time))
(3) Bank of India (est. 1906)
(4) Bank of Baroda (est. 1908)
(5) Central Bank of India (est. 1911)

While some others like Bank of Bengal (est. 1806), Bank of Bombay (est. 1840), Bank of Madras (est.
1843) merged into a single entity in 1921 which came to be known as Imperial Bank of India. Imperial
Bank of India was later renamed in 1955 as the State Bank of India.(SBI)
In April 1935, Reserve Bank of India was formed based on the recommendation of Hilton Young
Commission (set up in 1926).
In this time period, most of the bank were small in size and suffered from a high rate of failures. As a
result, public confidence is low in these banks and deposit mobilization was also very slow. People
continued to rely on the unorganized sector (moneylenders and indigenous bankers).

2. The second phase from 1947 to 1991

Broadly the main characteristic feature of this phase is the Nationalization of the bank. With the view of
economic planning, nationalization emerged as an effective measure. Need for nationalization in India:
(a) The banks mostly catered to the needs of large industries, big business houses.
(b) Sectors such as agriculture, small-scale industries and exports were lagging behind.
(c) The poor masses continued to be exploited by the moneylenders.

Following this, in the year 1949, 1st January the Reserve Bank of India was nationalized. Fourteen
commercial banks were nationalized on 19th July 1969. Smt. Indira Gandhi was the Prime Minister of
India,
1. Central Bank of India 2. Bank of India 3. Punjab National Bank 4. Bank of Baroda 5. United
Commercial Bank 6. Canara Bank 7. Dena Bank 8. United Bank 9. Syndicate Bank 10. Allahabad
Bank 11. Indian Bank 12. Union Bank of India 13. Bank of Maharashtra 14. Indian Overseas Bank.
Six more commercial banks were nationalized in April 1980. These are mentioned below: 1. Andhra Bank
2. Corporation Bank 3. New Bank of India 4. Oriental Bank of Commerce 5. Punjab & Sindh Bank
6.Vijaya Bank.
Meanwhile, on the recommendation of the Narasimham committee, Regional Rural Banks (RRBs) were
formed on Oct 2, 1975. The objective behind the formation of RRBs was to serve the large unserved
population of rural areas and promoting financial inclusion.
With a view to meet the specific requirement from the different sector (i.e. agriculture, housing, foreign
trade, industry) some apex level banking institutions were also set up like:(a) NABARD (est. 1982) (b)
EXIM (est. 1982) (c) NHB (est. 1988) (d) SIDBI (est. 1990)

3. Third phase 1991 and beyond

This period saw remarkable growth in the process of development of banks with the liberalization of
economic policies.
Even after nationalization and the subsequent regulations that followed, a large portion of masses is
untouched by the banking services.
Considering this, in 1991, the Narasimham committee gave its recommendation i.e. to allow the entry of
private sector players into the banking system. Following this, RBI gave license to 10 private entities, out
of which few survived the market demands, which are- ICICI, HDFC, Axis Bank, IndusInd Bank, DCB.
In 1998, the Narsimham committee again recommended the entry of more private players. As a result,
RBI gave a license to the following newbies: (a) Kotak Mahindra Bank (2001) (b)Yes Bank (2004)
 RBI is the Central Bank of our country. Controls the MONETARY POLICY of Indian Rupee. RBI was
Established on the basis of Hilton Young commission recommendation in April, 1935, with the enactment
of RBI Act 1934. RBI was nationalised in 1949 after the Independence
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
1. to regulate the issue of Bank notes
2. to maintain reserves with a view to securing monetary stability in India
3. to operate the currency and credit system of the country to its advantage
4. to have a modern monetary policy framework to meet the challenge of an increasingly complex economy
5. to maintain price stability while keeping in mind the objective of growth

1. First Indian Governor of CD Deshmukh Sir Chintaman Dwarakanath Deshmukh, CIE, ICS was an Indian
civil servant and the first Indian to be appointed as the Governor of the Reserve Bank of India in 1943 by
the British Raj authorities.

2. Mumbai: Central Office Building, New Delhi Chennai Kolkata - It has 19 regional offices and 11 sub-
offices. There are support bodies

3. Functions:
a. Formulate, implement and monitor monetary policies
b. Issue and exchange/destroy currency/coins unfit for circulation
c. Act as merchant bank for central and state govt
d. Maintain banking accounts of all scheduled banks
e. Facilitate external trade and payment
f. Maintenance of foreign exchange in India
RBI DOES NOT regulate Foreign Direct Investment in India. Rupee notes are signed by RBI governor.
Current RBI governor is shaktikanta das.

Commercial banks
1. profit-based financial institution that grants loans, accepts deposits, and offers other financial services,
such as overdraft facilities and electronic transfer of funds.
2. accept demand deposits from the general public, transfer funds from the bank to another, and earn profit.
3. play a significant role in fulfilling the short-term and medium- term financial requirements of industries.
4. while providing loans to businesses, consider various factors, such as nature and size of business,
financial status and profitability of the business, and its ability to repay loans.
Cooperative Banks
Governed by Cooperative Societies Act of 1904. Private sector banks usually catering to needs of usually
agriculturists. Offer slightly higher rates of interest to depositors.
 Development Banks
Financial institution concerned with providing all types of financial assistance (medium as well as long-
term) to business units, in the form of loans, underwriting, investment and guarantee operations and
promotional activities economic development in general, and industrial development in particular.
As a multipurpose financial institution, they do term lending, investment in securities and other activities
with a broad development outlook.
Industrial Finance Corporation of India, first development bank, setup in 1948. Later examples are IDBI,
IFCI, SIDBI
Funtions:
1. To Promote and Develop Small-Scale Industries (SSI).
2. To Finance the Development of Housing Sector.
3. To Develop the Large-Scale Industries (LSI).
4. To help in Agricultural and Rural Development.
5. To enhance the Foreign Trade of India.
6. To help to Review (Cure) Sick Industrial Units.
7. To Encourage Development of Indian Entrepreneurs.
8. To Promote Economic Activities in Backward Regions.
9. To Assist in the Growth of Capital Markets.
10. Provide promotional services
11. Infrastructure development
12. Fulfill socio-economic objectives

NEED FOR Nationalisation of banks

1. There were numerous problems related to the reach and flow of credit to many priority sectors within the
economy. For example, the number of banks was decreased from 566 banks in 1951 to 91 in 1967.

2. The government had tried to address the economic problems through “social control”. This was to ensure
a wider spread of credit and an increase in the credit flow to emerging priority sectors. However, despite
these measures, the banks were failing mainly due to speculative financial act.

3. Post-1967, during Mrs. Indira Gandhi’s tenure, the banks were not giving credit to agriculture and the
industries. Due to this, agriculture and industries were facing a crisis during this time. They were more
focused on extending credit for trade. The crisis in the banking sector had resulted in wide-ranging
consequences leading to distress among the people.

Objectives Behind Nationalisation of Banks in India:

1. Social Welfare: It was the need of the hour to direct the funds for the needy and required sectors of the
Indian economy. Sector such as agriculture, small and village industries were in need of funds for their
expansion and further economic development.

2. Controlling Private Monopolies: Prior to nationalisation many banks were controlled by private business
houses and corporate families. It was necessary to check these monopolies in order to ensure a smooth
supply of credit to socially desirable sections.

3. Expansion of Banking: In a large country like India the numbers of banks existing those days were
certainly inadequate. It was necessary to spread banking across the country. It could be done through
expanding banking network (by opening new bank branches) in the un-banked areas.
4. Reducing Regional Imbalance: In a country like India where we have a urban-rural divide; it was
necessary for banks to go in the rural areas where the banking facilities were not available. In order to
reduce this regional imbalance nationalisation was justified:

5. Priority Sector Lending: In India, the agriculture sector and its allied activities were the largest contributor
to the national income. Thus, these were labeled as the priority sectors. But unfortunately, they were
deprived of their due share in the credit. Nationalisation was urgently needed for catering funds to them.

6. Developing Banking Habits: In India more than 70% population used to stay in rural areas. It was
necessary to develop the banking habit among such a large population.

7. Monetization issue: Commercial banks accumulate deposits from public. Thus, public sector should have
power over money supply not private sector.

8. Integration issue: Profit motive of commercial banks and nonprofit motive of central bank contradictory.
Thus, to ease out implementing policies without opposition from commercial banks.

Merits
1. Removal of barriers: Reduced social economic political barriers.
2. Widen Growth of banks: Increased customer base and employment especially rural
3. Expansion of branch network: During last 28 years, branches rose from 7219 to 57000. Dposits rose
9000% and advances rose 11000%
4. Reorientation of bank lending: more focus on sectors not previously focused on by banking
5. Improved efficiency in the Banking system – since the public ‘s confidence got boosted.
6. Sectors such as Agriculture, small and medium industries started getting funds which led to economic
growth.

Demerits, Limitations
1. Inadequate banking facilities : Especially in the backward states such as the Uttar Pradesh, Madhya
Pradesh, Chhattisgarh and north-eastern states of India.

2. Limited resources mobilized and allocated : Some times the deposits mobilized are enough but the
resource allocation is not as per the expansions.

3. Lowered efficiency and profits : Banking was not done on a professional and ethical grounds. Due to the
nationalisation of banks, there was a bureaucratic attitude in the banking sector. There was no
responsibility, accountability or incentive for it to progress within the public sector banks.

4. Increased expenditure : Due to huge expansion in a branch network, large staff administrative
expenditure, trade union struggle, etc. banks expenditure increased to a dangerous levels.

5. Political and Administrative Inference: It ultimately resulted in huge non-performing assets (NPA) of these
banks and inefficiency. PA Crisis of 2012

6. Reduced competition within the banking sector: Banking is a highly competitive sector. However, the
nationalisation of banks had reduced the competition between the public banks and private banks.

7. Long-term risks: Now facing the problems of overdue loans to agriculture and small-scale industries has
proven to be a risky endeavour with low returns.and establishment of economically unviable branches.

8. Complicated interest rates: There were different rates of interest for different types of loans. Eventually,
the Indian central bank had to manage hundreds of rates of interest. Due to these complicated
procedures and interests, the loans were not given to those who are need of it.
 Implementation Of Nationalisation: The Government nationalized 14 banks with deposits of over Rs.50
crore by promulgating the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance,
1969.

1. Making banking facilities available in the then unbanked areas. i. by designing a specific branch license
policy ii. by initiating specific schemes like the Lead Bank Scheme (LBS)

2. Lead Bank- responsible for taking lead role in surveying the credit needs of the population, development
of banking and of credit facilities in the district allotted to it.

3. Allotment Of Districts- all the districts of the country allotted to 22 public sector banks (SBI and its 7
associates banks and 14 nationalized banks) and three private sector banks (Andhra Bank Ltd., Bank of
Rajasthan Ltd. and Punjab and Sind Bank Ltd).

4. Branch Licensing Policy- In 1977, banks were given the incentive of a license to open one branch in
metropolitan and one in urban areas, as an incentive for opening four branches in rural areas.

5. Credit-Deposit Ratio- each rural and semi-urban bank should maintain a credit-deposit ratio of at least 60
per cent.

6. Credit Planning- A broad credit plan tuned to the overall plan and monetary requirements was drawn up,
taking into account the national priorities, the anticipated pace of deposits accretion, general economic
situation and likely developments in the different economic sectors.

7. Estimates For Key Sectors- Separate estimates made for the busy and slack seasons, particularly in
respect of sectors susceptible to seasonal changes. Consequently, individual credit plan of each bank
was framed.

8. Deposit Mobilization- after the nationalization, confidence in the banking sector increased, reflected by the
sharp increase in the share of bank deposits in household savings and financial savings of households in
their total saving.

UNIT 2,4,5 Types of customer, accounts, KYC - AML

Types of Customers
A person is a customer of bank if and only if s/he has an account (debit or credit) in the bank in his/her
own name or whose name the deposits are maintained.
Types of Customers on the basis of banking nature –
1. Depositors
2. Borrowers
3. Third party providers (TPP): Authorized online service provider
4. Non-resident Indians (NRIs): To repatriate (move funds from abroad back to India)
5. Walk in – Retail bank customer who makes deposits, withdraws money drafts or asks questions. May not
not have an account-based relationship with the RE, but undertakes transactions with the RE. Walk-in
customers are usually people that don't feel secure using online or mobile banking applications. In recent
years, it has become more of a nuisance to enter a branch location, because many of the national banks
find this as an opportunity to market their schemes and offers to their customers in person.

DIFFERENT TYPES OF CUSTOMERS

A married woman can enter into contract and bind her personal (separate) estate.
Joint account: of more than one individuals is opened for operational convenience or to avoid legal
complications upon death of one of the joint account holders.
 d. Drunkard : A drunkard is a person who is so toxicities to be incapable of understanding the nature and
effect of a contract upon his interest
e. A minor: His accounts should be opened and operated upon by the natural guardian, by mother or legal
guardian appointed by the court or testamentary guardian .
f. Illiterate person: is a person who cannot read or write. Such persons are competent to enter in to a valid
contract using thumb impression for entering into an agreement
g. Blind Persons: can operate the account in bank through the Thumb impression
h Pardanashin woman is a lady who remains in complete seclusion & does not transact any business with
people other than her own family members. Normally no current account is opened.
i.Lunatic person As per Indian Contract Act (S. 11) a person of unsound mind is not capable of entering
into a valid contract.
j. Insolvent person is not able to discharge his liabilities in full or fails to pay his debts Insolvents account
should not be opened nor money should be advanced to them .
2.HINDU UNDIVIDED FAMILY (HUF) known as ‘Joint Hindu Family’ property, business or estate is
ancestral and its common possession, enjoyment ownership is the basis of formation of HUF. HUF
property is managed by senior most major male member called ‘Manager’ or ‘Karta’. Karta has authority
to borrow money for the family necessities & for ancestral family business.

3. PROPRIETORY FIRMS Business wholly owned by an individual. In law, there is no difference
between proprietor & the firm. 
4. PARTNERSHIP FIRMS Partners sign on behalf of firm & also in their individual capacity. Cheques
favouring firm can not be deposited in the individual accounts of partners.
5. LIMITED LIABILITY PARTNERSHIP (LLP)A limited liability partnership (LLP) is a partnership in which
some or all partners have limited liabilities. Liability is limited to the extent of his contribution in the LLP.

6. COMPANY ACCOUNTS Company Act 2013, recognise Company is a legal person with perpetual
entity & is distinct from it’s members. Companies as per the Companies Act 1956 are required to
registered under act.

7. CLUBS & SOCIETIES  Society & Clubs are non profit making organisations and represents a group
of persons.  These are normally incorporated under Cooperative Society Act. Clubs can be registered
under Society Act 1860, or Company Act 1956. 
8. TRUSTEES-Trusts are created by the settler through executing a Trust Deed. A trust account can be
opened after obtaining and scrutinising the trust deed. The trustee is the person in whom the confidence
is responded. The person for whose benefit the trust is formed is called beneficiary.

DEMAND DEPOSITS – The deposits which are payable on demand

1. Owner may deposit or withdraw money
2. Interest is paid by bank (only in case of savings account)
3. Bank allows to make out a cheque for a specific amount
4. Demand deposit owners may have joint accounts
5. Financial institutions may set a minimum amount to be maintained
Importance:
1. Saving and investment method – Helps in movement of money and makes investment possible
2. Money creation through demand deposits – Banks make their profits through interests. Banks make
money to increase the money supply in the economy.
3. Federal funds rate – Rate at which banks lend money to each other. If the FFR rises the banks generally
raise their supply of reserves to control the flow of money in the open market.
 Advantages:
1. Withdrawals – Allows customers to withdraw the available funds on demand. Increases liquidity.
2. Electronic transfers – Facility offered by the bank to avail cash in case you have deposited money in your
current or savings account.
3. No fee or charges – Customers can withdraw funds from current or savings account and the bank does
not levy any extra fee on the withdrawals.

Two types of Demand Deposit

CURRENT ACCOUNT
1. Mainly for business persons, firms, companies, public enterprises
2. Not used for the purpose of investment or savings
3. Deposits are the most liquid deposits
4. There is no limit for number of transactions or the amount of transactions in a day
5. No interest paid on amount held in the account
6. Banks charges certain service charges.
7. Has lower restrictions than a saving account
8. Allows overdraft
9. No minimum amount required to be maintained
10. Disadvantage – Banks do not pay any interest and the service charges are too high.
SAVINGS ACCOUNT
1. Receives modest interest
2. Doesn’t give funds through cheques
3. The most liquid investment outside demand account and cash
4. Can be opened with a bank or financial institution to earn interest on the balance maintained.
5. Should be opened with the objective to storing money
6. Can be used to pay bills, quick transaction, easy credit etc.
7. Limits to promote digital payments
8. Interest rate slightly higher than inflation so not very optimal for investment
9. Interest provided by public sector bank is only 4% but certain private banks offers 6-7%
10. Special savings account for various section like women, senior citizen, children etc.
 Opening of Accounts
Know your customer: check is the mandatory process of identifying and verifying the identity of the
client when opening an account and periodically over time. This process helps to ensure that banks’
services are not misused. Completed by the banks while opening accounts and also periodically update
the same.
Officially valid KYC documents:
1. Voter’s Identity card
2. Aadhaar card (letter issued by UIDAI)
3. PAN card (Only identity proof)
4. Passport (within validity)
5. Driving License (within validity)
6. Job Card issued by NREGA (National rural employment guarantee act)
Officially valid Proof of Address documents:
1. Utility bill not more than 2 months old (electricity, telephone, postpaid mobile, piped gas, water bill)
2. Property or municipal tax receipt
3. Bank or post office savings bank a/c statement
4. PPOs preferred providers organization
5. Letter of allotment of accommodation from employer by Govt. dept., PSU, bank, regulatory body etc.
6. Documents issued by govt. dept. of foreign jurisdiction and by foreign embassy or mission
Objective of KYC is to prevent bank from being used by criminal elements for money laundering
activities and enables banks to understand its customer and their financial dealings to serve them better
and manage its risks prudently.
STEPS TO EFFECTIVE KYC COMPLIANCE:
1. Establish customer identity
2. Understand the nature of customer’s activities (primary goal is to satisfy that the source of the customer’s
funds is legitimate)
3. Assess money laundering risks associated with that customer for purposes of monitoring the customer’s
activities

To create and run an effective KYC program,

1. Customer Identification Program (CIP) – CIP mandates that any individual conducting financial
transaction needs to have their identity verified. CIP is designed to limit money laundering, terrorism
funding, corruption and other illegal activities. Over 190 jurisdictions around the world have committed to
recommendations from the Financial Action Task Force (FATF), a pan-government organization designed
to fight money laundering. These recommendations include identity verification procedures. Procedures
 for identity verification include documents and non-documentary methods (these may include comparing
the information provided by the customer with consumer reporting agencies, public databases, among
other due diligence measure), or a combination of both.
The minimum requirements to open an individual financial account are clearly delimited in the CIP: Name,
Date of birth, Address, Identification number

All institutions should determine the exact risk and give policy to deal with that risk.The exact policies
depend on the risk-based approach of the institution and may consider factors such as:
1. Types of accounts offered by the bank
2. Bank’s method of opening accounts
3. Types of identifying information available
4. Bank’s size, location, customer base, products and services used by the customer in different
geographical locations

CUSTOMER IDENTIFICATION PROCEDURE

1. Making every reasonable effort to determine the true identity and beneficial ownership of
accounts
2. Knowing source of funds
3. Knowing the current location, address and nature of customer’s business
4. Knowing who are your customer’s customer

2. Customer Due Diligence –

1. Simplified Due Diligence (SDD) are situations where the risk for money laundering or terrorist funding
is low and a full CDD is not necessary. For example, low value accounts

2. Basic Customer Due Diligence (CDD) is information obtained to verify the identity of a customer and
assess the risks associated with that customer.

3. Enhanced Due Diligence (EDD) is additional information collected for higher-risk customers to
provide a deeper understanding of customer activity to mitigate associated risks. Factors to consider
in determining the need to conduct EDD are:
I. Location of the person
II. Occupation of the person
III. Type of transactions
IV. Expected pattern of activity in terms of transaction types, currency value and frequency
V. Expected method of payment
VI. Keeping records of all the CDD and EDD performed on each customer or potential customer
is necessary in case of a regulatory audit

4. Ascertain the identity and location of the potential customer and gain a good understanding of their
business activities. When authenticating or verifying a potential customer, classify their risk category
and define what type of customer they are. Beyond basic CDD, it’s important that you carry out the
correct processes to ascertain whether EDD is necessary.

3. Ongoing Monitoring – This function includes oversight of financial transactions and accounts based on
thresholds developed as part of a customer’s risk profile. Depending on the customer and your risk
mitigation strategy, some other factors to monitor may include:
1. Spikes in activities
2. Out of area or unusual cross-border activities
3. Inclusion of people on sanction lists
4. Adverse media mentions
5. There may be a requirement to file a suspicious activity report (SAR) if the account activity is deemed
unusual.
 Corporate KYC aka Know Your Business (KYB): steps to implement an effective program:
1. Retrieve Company Vitals – Identify and verify accurate company records such as information regarding
register number, company name, address, status and key management personnel
2. Analyze Ownership Structure and Percentages – Determine the entities or natural-persons who have an
ownership stake, whether through direct ownership or through another party.
3. Identify Ultimate Beneficial Owners (UBOs) – Calculate the total ownership stake or management control
of any natural-person and determine if it crosses the threshold for UBO reporting.

E-KYC : There are numerous reasons why e-KYC will prevail

1. Speed – Faster e-KYC processes improves speed and avoid delays
2. Accuracy – e-KYC can automatically check for errors and more quickly fix any mistakes.
3. Cost – While e-KYC systems do have costs, their speed, accuracy and better utilization of compliance
resources provide better bang for the buck and improve scalability.
4. Adaptability – e-KYC workflows can change almost on the fly; in many cases, simply update a ruleset and
you’re done
5. Integration – e-KYC is about using APIs to easily add functionality. With new APIs being added all the
time, new capabilities are a simple integration away.
6. Tracking/Reporting – Digital data can seamlessly be transferred in its native form to analytics, auditing,
tracking and reporting systems creating opportunities for optimization and strategic analysis.
7. Customer experience – The entire process is often mobile or internet-only thus delivering a smooth,
convenient experience to its customers
8. Efficiency – enables a better work environment resulting in a more engaged work force.

Money Laundering
Financial intermediaries are used to change the money acquired from illegal businesses in acceptable
and transferable units, running illicit gain in legal course. “Any act or attempted act to conceal or disguise
the identity of illegally obtained proceeds so that they appear to have originated from legitimate source.”
Prevention of money laundering Act (PMLA), “whosoever directly or indirectly attempts to indulged or
knowingly assist or knowingly is a party or is actually involved in any process or activity connected with
the proceeds of crime and projecting it as untainted property shall be guilty of the offence of money-
laundering” 2%-5% of Global GDP is laundered every year $800 billion to $2 trillion.
KYC COMPLIANCE AND AML RULES: The prevention of money laundering Act (PMLA), 2002 is an Act
of the parliament of India enacted in January, 2003. The Act has come into force w.e.f. 1st July, 2005.
PUNISHMENT FOR MONEY-LAUNDERING
Punishment for non-adherence of the act would be rigorous imprisonment for not less than 3 years but up
to 7 years. But in case of offence done under Narcotic Drugs and Psychotropic Substance Act 1985, the
maximum punishment may extend to 10 years.
1. For the “average” criminal: money-laundering is the process by which the proceeds of criminal activity are
made to appear legitimate.
2. For the “average” terrorist: money-laundering is the process by which money used to fund terrorist activity
is moved without revealing its true source, destination or purpose.
3. For “average” tax evader: money-laundering is the process of spending money without leaving a trail
shoeing who owns it
OBJECTIVE OF ANTI MONEY-LAUNDERING POLICY
1. To prevent banks from being used, intentionally or unintentionally, by criminals for money-laundering
activities or terrorist activities.
2. To enable banks to know/understand their customer and their financial dealings better.
3. To put in place a proper control mechanism for detecting and reporting suspicious transaction. It also
enhances fraud prevention.
4. To ensure compliance with guidelines issued by regulators including FIU-IND (Financial Intelligence Unit
– India) & RBI.

OBLIGATIONS UNDER PMLA

1. Appointment of Principal Officers and designated director
2. Maintaining record of prescribed transactions
3. Furnishing information of transaction to the specified authority
4. Verifying and maintain record of the identity of its clients
5. Preserving records for 5 years from the date of each transactions between bank and client or for 5 years
after business relationship ends.

MONEY LAUNDERING RISKS

1. Reputational Risk
2. Compliance Risk
3. Operational Risk – Direct or indirect loss due to failed process of the bank.
4. Legal Risk – Loss due to any legal action

STEPS TO LAUNDER MONEY:

1. Placement – Entry of funds in to the system at this stage, the launderer inserts the dirty money into a
legitimate financial institution. Physically the elimination of species from illegal activities. Funds are placed
near the underlying activity in the countries where the funds come from.

2. Layering –Layering involves sending money through various financial transactions to change its form or
currency and make it difficult to know. These layers are designed to impede the audit trial, disguise the
origin of funds and provide anonymity. For example, false invoices for the goods exported, ready against
a deposit abroad, the purchase of properties etc.

3. Integration – The money re-enters the mainstream economy in legitimate-looking form of money. At this
stage, the criminal can use of the money without be taken. It is difficult to catch a launderer during this
phase as there is no documentation during the previous steps. Banks abroad money launderers often
send money through various offshore accounts in the countries like Bahrain, Bahamas, and Singapore
etc. which have laws protecting the banking secrecy allowing anonymous transactions.
Indicators of money laundering
1. Turnover in dormant account
2. Receipt/payment of large sums of cash
3. Reluctance to provide normal information
4. Depositing high value third party cheques
5. Large credit from abroad
6. Employees leading lavish life style
7. Hawala transaction – Informal transform of money without actual movement of money. based on trust.

UNIT 3
Banker Customer Relationship
Banker: is a dealer in money i.e. capital. He is an intermediate party between the borrower and the
lender. He borrows from one party and lends to another. A Banker acts as an agent of his customer and
performs a number of agency functions for the convenience of his customers.10. For example, he buys or
sells. securities on behalf of his customer collects a cheque on his behalf and makes payment of the
various dues of his customer, e.g., Insurance premium etc.
 Customer: any one conducting banking transactions with a bank is a customer. A person who has an
account in a bank is said to be a customer of the bank. According to current banking practices only those
persons are said to be customers who maintain a regular bank account. A person whose money has been
accepted by a bank on the footing that they undertake to honor cheques up to the amount standing to his
credit.
General relationship: The general relationship between banker and customer is of a debtor and a creditor.
Creditor is a person from whom deposits have been received on the basis of participation in the profit &
loss. Customer deposits money in the bank which act as funds for bank’s operations. Debtor is a person
to whom finance has been provided. Bank provides loans to customers.
Special relationships of Banker and customer: Debtor-Creditor, Creditor-Debtor, Bank as a trustee, Bailee
bailor, Agent and Principal

Qualification of a customer
1. Nature of relationship is purely contractual.
2. Anyone who is capable of entering into a contract can be a customer.
3. He must not be a minor. He must have attained the age of majority. A person is deemed to have attained
majority when he has completed his age of 18 years.
4. He should be a person of sound mind. If not, he is incompetent to contract. Section 12 of the contract act
says that a person is said to be of sound mind for the purpose of making a contract if at the time when he
makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his
interests.

Rights of a customer towards the banker

1. To draw cheques against his credit balance.
2. To receive a statement containing a copy of his account with the banker. Customer has the right to get
corrected any errors he finds.
3. To sue the bank for the cost, loss and damages when the cheque is wrongfully dishonored.
4. To sue when the banker has not maintained the secrecy of his account.
5. To claim for and receive the profit / return on his deposits as promised by the bank.

Duties of a customer towards the banker

1. Customer must present the cheques for payment and collection within the business hours of his banker.
2. The customer should see that the cheques and other instruments are presented for payment within a
reasonable time from the date of their issue.
3. Customer should keep his cheque book under lock and key so that no unauthorized person gets access
to it.
4. He should draw cheques very carefully and in such a way that there is no room left for any fraudulent
alterations and additions.
5. To pay charges to the bank. Bankers have the right to charge for the services they provide to their
customers.

Q.3. Which type of bank account can be opened by an NRI in India? What are the guidelines provided by
the RBI?
(i) Non-Resident (External) Rupee Account (NRE Account) : citizens of India but reside outside India and
also foreign citizens with Indian origin also known as Persons of Indian Origin (PIO). The account type
can be savings, current, fixed or recurring deposit account.

(ii) Foreign Currency (Non-resident) Account (Banks) (FCNR (B) Account): NRIs and PIOs are allowed to
open and maintain FCNR (B) account with any bank in India. However, this account can be held only as a
fixed deposit account in freely convertible foreign currency.
(iii) Non-Resident Ordinary Rupee Account (NRO Account): can be opened by any non-resident including
foreign nationals unlike NRE account and FCNR (B) account that can be opened by NRI and PIO only.
This is meant for carrying out bonafide rupee transactions. Thus, any foreign national coming to India for
employment purpose or as a tourist can open an NRO account. Funds remitted from outside India or
exchange brought to India can be used to open an account. Type of account can be current, savings,
fixed or recurring deposit account.

(iv) Special Non-resident Rupee Account (SNRR Account): NRI having any business interest in India may
open an SNRR Account for conducting bonafide transactions in rupees. While the funds in SNRR account
can be withdrawn fully, there is no interest in SNRR account and it can opted for a period of maximum 7
years.

UNIT 6
What is Cash Management or Treasury Management? It refers to a broad area of finance:
1. Collection of cash
2. Handling of cash
3. Usage of cash
It involves assessing
1. Market Liquidity
2. Cash Flow
3. Investments
It is a marketing term for certain services related to cash flow offered primarily to
1. Larger business customers
2. Private banking customers
It may be used to describe all bank accounts (such as checking accounts) provided to businesses of a
certain size.
It offers specific services such as
1. Cash concentration
2. Zero balance accounting
3. Automated clearing house facilities

Account Reconciliation
1. It can take a lot of human monitoring to understand which cheques have not cleared and therefore what
the company's true balance is.
2. For this, banks have developed a system which allows companies to upload a list of all the cheques that
they issue on a daily basis, so that at the end of the month the bank statement will show not only which
cheques have cleared, but also which have not.
3. More recently, banks have used this system to prevent cheques from being fraudulently cashed if they
are not on the list, a process known as positive pay.
 Advanced web services
1. Most banks have an Internet- based system which is more advanced than the one available to
consumers.
2. This enables managers to create and authorize special internal log on credentials, allowing employees to
send wires and access other cash management features normally not found on the consumer web site.

Armoured car services/cash collection Large retailers who collect a great deal of cash may have the
bank pick this cash up via an armoured car company, instead of asking its employees to deposit the cash.

Automated clearing house

1. The automated clearing house is an electronic system used to transfer funds between banks.
2. Companies use this to pay others, especially employees (this is how direct deposit works).
3. Certain companies also use it to collect funds from customers (this is generally how automatic payment
plans work).

Balance reporting
1. Corporate clients who actively manage their cash balances usually subscribe to secure web-based
reporting of their account and transaction information at their lead bank.
2. These sophisticated compilations of banking activity may include balances in foreign currencies, as well
as those at other banks.
3. They include information on cash positions as well as 'float' (e.g., cheques in the process of collection).
4. Finally, they offer transaction-specific details on all forms of payment activity, including deposits, checks
and wire transfers in and out.

Cash Concentration Services

1. Large or national chain retailers often are in areas where their primary bank does not have branches.
2. Therefore, they open bank accounts at various local banks in the area.
3. To prevent funds in these accounts from being idle and not earning sufficient interest, many of these
companies have an agreement set with their primary bank, whereby their primary bank uses the
automated clearing house to electronically "pull" the money from these banks into a single interest-
bearing bank account.

Controlled disbursement
1. The bank provides a daily report, typically early in the day, that provides the amount of disbursements
that will be charged to the customer's account.
2. This early knowledge of daily funds requirement allows the customer to invest any surplus in intraday
investment opportunities, typically money market investments.
3. This is different from delayed disbursements, where payments are issued through a remote branch of a
bank and customer is able to delay the payment due to increased float time.

Wholesale Services
Wholesale banking refers to the complete banking solution provided by the merchant banks to the large
scale business organizations and the government agencies or institutions. To avail the facility of
wholesale banking, the companies need to possess a strong financial statement and operate on a large
scale. Usually, multinational companies are the clients of wholesale banking. Wholesale banking is an
opportunity to expand the business even for those companies which lack sufficient capital for the purpose.
Features of Wholesale Banking:
1. Large Scale Operations: To meets the enormous financial requirements of the large-scale companies and
the government.
2. Low Operational Cost: due to a limited customer base and few numbers of transactions.
3. High Risk Involved: The failure of the borrower company can lead to the collapse of all the parties
associated with it.
4. Control Over Financial Transaction Monitoring and Recovery: Due to limited customers, it becomes
convenient for the banks to monitor the financial transactions and recover the loans and advances.
 5. Huge Impact on Non-Performing Asset: If there is delay or default in the repayment of loans and
advances provided under wholesale banking, the non-performing assets of the bank increases.
6. The interest rates paid by the banks on the deposits made by the substantial business entities is high.
7. Facilitates Large Trade Transactions: It supports the high-value transactions of the companies operating
on a large scale.
8. Fulfils Huge Working Capital Requirements: Large business associations require a considerable amount
of funds to carry out day to day operations.
9. Lending to Government: for carrying out various long-term projects.
10. Provides Cash Management Solution: i.e. acquisition and investment of cash into the right opportunity.

Functions of Wholesale Banking

1. Primary Functions
i. Making Advances: The principal purpose of wholesale banks is to provide loans and advances of high
value to the large scale business entities.
ii. Accepting Deposits: These banks also receive deposits from the big companies and provides high
interest on the deposited funds.
iii. Credit Creation: The wholesale banks increase the flow of funds in the economy by initiating loans and
deposits by the government and large scale companies.

2. Secondary Functions
i. Underwriting: The wholesale bank raises capital for the projects of large business organizations by
issuing debt or equity shares to the investors on behalf of the respective companies.
ii. Mergers and Acquisitions: Through operations like currency conversion, these banks facilitate the merger
of two or more companies across the globe and also the acquisition of one business unit by the other is
organization.
iii. Trust and Consultancy Services: The merchant banks provide various other services like investment
advice and trust-building to the client companies.
iv. Fund Management: The merchant banks continuously function towards managing and handling of the
funds deposited by the clients wisely.

Retail services

Positive pay
1. Positive pay is a service whereby the company electronically shares its cheques register of all written
cheques with the bank.
2. The bank therefore will only pay cheques listed in that register, with exactly the same specifications as
listed in the register (amount, payee, serial number, etc.). This system dramatically reduces check fraud.

Reverse positive pay

1. In reverse positive pay, the bank sends that file to the company, where the company compares the
information to its internal records.
2. The company lets the bank know which cheques match its internal information, and the bank pays those
items.
3. The bank then researches the cheques that do not match, corrects any misreads or encoding errors, and
determines if any items are fraudulent.

Sweep accounts
1. Under this system, excess funds from a company's bank accounts are automatically moved into a money
market mutual fund overnight, and then moved back the next morning.
2. This allows them to earn interest overnight.
3. This is the primary use of money market mutual funds.

Zero balance account

1. Traditionally, it would be impossible to know which deposits were from which stores of an MNC without
seeking to view images of those deposits.
2. To help correct this problem, banks developed a system where each store is given their own bank
account, but all the money deposited into the individual store accounts are automatically moved or swept
into the company's main bank account.
3. This allows the company to look at individual statements for each store.
4. Zero balance accounting is being used less frequently.

Wire transfer
1. Wire transfers can be done by
i. bank account transfer
ii. transfer of cash at a cash office.
2. A bank wire transfer is a message to the receiving bank requesting them to effect payment in accordance
with the instructions given. The message also includes settlement instructions.
3. The actual wire transfer itself is virtually instantaneous, requiring no longer for transmission than a
telephone call since it’s an electronic transfer of funds.

UNIT 6: BANKING ACCOUNTS OPERATIONS:

Primary Activity 1: Acceptance of Deposits
1. Deposits are the basis of the loan operations since banks are both borrowers and lenders of money.
2. As borrowers they pay interest and as lenders, they grant loans and get interest.
3. These deposits are generally taken through current account, savings account and fixed deposits.

Primary Activity 2: Lending of Funds:

1. Second major activity of banks is to provide loans and advances out of the money received through
deposits.
2. These advances can be made in the form of overdrafts, cash credits, discounting trade bills, term loans,
consumer credits and other miscellaneous advances.
3. The funds lent out by banks contribute a great deal to trade, industry, transport and other business
activities.

Supporting 1: Clearing of Cheques

1. Cheques books are issued to the holders of accounts in banks.
2. Cheque is a negotiable instrument and most convenient and widely used credit instrument used to
facilitate trade and business by endorsements and withdrawal of deposits.
3. Banks render a very important service to their customers by collecting their cheques drawn on other
banks.
4. Mainly, two types of cheques are often used bearer and crossed: Bearer cheques can be encashed
immediately at bank counters whereas crossed cheques can only be deposited in the payees’ account.

Supporting 2: Remittance of Funds

1. Banks also facilitate fund transfer from one place to another, leveraging the vast network of branches that
are interconnected to each other.
2. Bank earns nominal commission by way of bank charges on some of the transfers.
3. The bank issues a draft for the amount at its own branch which can be credited to another account which
might be with different branch or different bank.
4. Banks collect the amount on behalf of the depositor which is known as clearing process.

Supporting 3: Lockers & Safe Deposits

1. Bank safe deposit lockers are a good option for safeguarding valuables and important documents.
2. Each locker is operated by combination of two sets of keys, one for the customer, and the other with the
bank.
3. The locker can only be operated if both the keys are used. Banks charge nominal fees to provide the
locker facility.

Supporting 4: Bill Payment Services

1. Banks also provide services related to bill payments, payment of insurance premium, collection of
dividends etc.
2. Recurring payments can be automated for payment using the facilities extended by modern banks.
3. Account holders can directly pay from their account or using credit/debit cards for their electricity, gas,
landline and mobile phone billers and many more.

Supporting 5: Online Banking

1. The growth of Internet and e-commerce has transformed banking industry and customers are fast moving
from branch banking to virtual banking.
2. Users with internet on PC or Mobile can get connected to the banks website and avail a variety of banking
services and functions.
3. These services lower the transaction costs and add to the ease and speed of the transaction flow.

Supporting 6: Credit & Debit Cards

1. Credit cards issued by banks are another form of lending, and they are not only good business for the
bank, they help the economy.
2. Offering Credit Card is a profitable form of lending for banks that has greatly expanded in the last few
years.
3. People buy things with credit, and keep merchandise moving and manufacturing producing at a more
rapid rate than if transactions had to take place in cash.
4. Although there is risk in the unwise use of credit cards by consumers, the judicious use of credit
stimulates the economy.

Supporting 7: Overseas Banking Services

1. These foreign clients can be individuals and companies, though every international bank has its own
policies, most of them offer various products and services to cater to the needs of their international
clientele.
2. Banking products for this sector includes offshore banking, savings, investments, and mortgages clubbed
with a broad range of FX services including forward and spot transactions.

Supporting 8: Wealth Management

1. Wealth management services offered by banks include a full range of financial services and products
clubbed with advisory services from expert professionals.
2. The purpose of these services is to grow the wealth of the client, secure the financial position and make
most of the money over the long term.
3. Various investment avenues could be mutual funds, international global trading, time deposits, foreign
exchange solutions or dual currency placement etc.

Supporting 9: Fulfilment of Social Objectives

1. There has been a major shift in the banking policy to support more and more financial inclusion.
2. Some trends in the recent past has been a shift from urban orientation to rural orientation by opening
more rural branches, from class banking to mass banking by allowing zero balance account for poorer
sections of society using innovative practices.

Supporting 10: Investment Banking

1. include assessment of investment needs, evaluation of asset structure and the liability-management
requirements, managing portfolios of financial assets, trading in securities, fixed income, commodity and
currency, corporate advisory services for mergers and acquisitions, corporate finance, and debt and
equity underwriting.
2. services related to cash-flow analysis, development of investment policy, portfolio-construction, custody
services, and portfolio rebalancing, fundraising and philanthropic services.

What is a garnishee order?

It is an Order of the court to attach money or Goods belonging to the judgment debtor in the hands of a
third person. The third party is known as 'Garnishee' and the court's order is known as Garnishee Order.
The purpose of the Order is to protect the interest of the Decree holder.

A garnishee order is typically issued when a creditor you owe money to has obtained a default judgement
from a court or other authority against you. The judgement then allows the creditor to issue a court order
that instructs a third party such as your employer, bank or financial institution to redirect your wages or
holdings to the creditor you owe money to. If a garnishee order is made against you, then your bank,
financial institution, or employer will likely be notified rather than you.
Once a garnishee order has been issued, your employer, bank or financial institution is legally obligated
to comply with it.

How a garnishee order works

The process of recovering sums of money owed to you can be a long one. It starts with a letter of demand
and hopefully ends with payment. A garnishee order can often result in payment within 7 days of
obtaining a judgment debt.

Another example is where a creditor issues a garnishee order to an employer and a weekly amount is
‘garnished’ from the debtor’s salary every week and paid to the creditor until the debt is paid off.

There are also minimum amounts that need to be left for the debtor (in their account or weekly
paycheque). So, if the debtor only has $500 in their account or earns minimum wage, you will not be paid
much if anything at all.

What do you need in order to obtain a garnishee order?

1. A judgment debt. Meaning the process of issuing a letter of demand, through to judgment is
complete.
2. You need to know the identity of the proposed garnishee. For instance, the debtor’s employer or
whom they bank with.
3. An application, along with an affidavit which complies with the civil procedure rules.

Cheque Truncation System (CTS) was pioneered by the Reserve Bank of India – RBI, for faster
clearing of cheques.
 1. System of cheque clearing and settlement between banks based on electronic data/images or
both without any physical exchange of instruments.
2. CTS is designed to enable banks to handle more cheques electronically, which should make
cheque processing faster and more efficient.
3. In the earlier system you presented the cheque to the bank which sent the cheque to the clearing
house, after which money would be credited to your account.
4. It usually takes 3-4 days for the physical transfer of cheques and amount to transfer. Now it on
average takes 1 day to clear and transfer the amount.

Benefits of CTS
Business Opportunities -Banks
1. Improved handling of post-dated cheques deposited by the customer, as the images can be scanned and
stored and the system can automatically process the scanned images on the due date.
2. Introduction of new payment system products like e-cheques
3. Better funds management
4. Reduction in Transaction cost
5. Better management of space and manpower
6. Improved regulatory compliance.
7. Improved Management Information Systems which will facilitate better decision making.Improved
business intelligence systems can be put in place.

Business Opportunities -Vendors

1. Upgrade of Technology opens up new business opportunities for vendors and solution providers
2. Can improve the Brand image of their products by providing improved functionalities for image capture,
storage and retrieval.
3. Scope for improvement in processing capabilities, especially scanners and servers.

LEGAL ISSUES INVOLVED

1. Amendments made in Negotiable Instrument Act, Information Technology Act - Onus of verifying the
Genuineness of the Cheque will shift to the stage at which it is presented
2. KYC norms are to be meticulously complied by the Banks, as circulated by RBI
3. Drawee Bank will continue to verify the signature and availability of funds
4. Drawee Bank will have the right to seek further information on the veracity/ genuineness of the cheque.
5. Drawee Bank can also seek the physical instrument for verification

Payment Systems and INTER BANK CLEARING HOUSES: Retail payment systems in India to handle
transactions, comprise both paper and electronic based systems
1. low in value
2. very large in number,
3. relating to individuals firms and corporates.
4. Mainly to settlement of obligations arising from purchase of goods and services.
In India there are about 1050 cheques clearing houses. These clearing houses clear and settle
transactions relating to various types of paper based instruments. In 40 of these clearing houses, cheque
processing centres (CPCs) using Magnetic ink character recognition code (MICR) technology have been
set up.
Proposal: At 14 more clearing houses, MICR cheque processing systems are to be set up. The clearing
houses at 16 places including the 4 metros are managed by the Reserve Bank - functions as the
 settlement banker at these places. In other places the clearing houses are managed by the State Bank of
India. The clearing houses are voluntary bodies

The Reserve Bank has issued the Uniform Regulations and Rules for Bankers’ Clearing Houses
(URRBCH) that relate to
1. criteria for membership /sub-membership,
2. withdrawal / removal / suspension from membership
3. procedures for conducting of clearing
4. settlement of claims between members.

There are various types of electronic clearing systems functioning in the retail payments area in the
country, all of them settle on deferred net settlement basis.
1. Electronic Clearing System (ECS), both for Credit and Debit operations, functions from 46 places (15
managed by Reserve Bank and the rest by the State Bank of India and one by State Bank of Indore). The
ECS is the Indian version of the Automated Clearing Houses (ACH) for catering to bulk payments.
2. The Electronic Funds Transfer (EFT) System is operated by the Reserve Bank at 15 places. This is
typically for individual / single payments. These systems are governed by their own respective rules.
3. A variant of the EFT, called the Special Electronic Funds Transfer (SEFT) System is also operated by
the Reserve Bank to provide nation-wide coverage for EFT.

There are a few large value payment systems functioning in the country. These are
1. the Inter-Bank Cheques Clearing Systems (the Inter-bank Clearing),
2. the High Value Cheques Clearing System (the High Value Clearing),
3. the Government Securities Clearing System (the G-Sec Clearing),
4. the Foreign Exchange Clearing System (the Forex Clearing) and
5. the Real Time Gross Settlement (RTGS) System.
All these systems except the High Value Clearings are electronic based systems. All these are
Systemically Important Payment Systems (SIPS) and therefore the Reserve Bank has, in line with the
international best practices in this regard, moved them (except the Inter-bank Clearings at places other
than Mumbai and the High Value Clearings) to either secure and guaranteed systems or the RTGS
System.

CURRENCY CHEST MECHANISM

Currency chests are nothing but strong rooms at the appointed branches of the banks. In these strong
rooms, stocks of fresh, reusables and also soiled bank notes are stored. In other words, the currency
chests are extensions of Issue Office. The bank notes and Rupee coins held in currency chest are,
therefore, the property of Issue Department. 4 mints: Mumbai, Alipore@Kolkata, Saifabad@Hyderabad,
Noida@UP.
The minimum reserve system requires the RBI to keep a minimum reserve of Rs 200 crores comprising
foreign currencies, gold coin and gold bullion.

Purposes for opening the currency chests:

1. To meet the currency requirements of the public
2. To maintain the quality of currency in circulation by withdrawing unfit notes
3. To afford exchange facilities of one denomination into another.
4. To meet the payments of Governments/banks/public.
5. To operate remittance facilities conveniently
6. To arrange for exchange of mutilated and other notes as per Note Refund Rules
7. To obviate the necessity of physical transfer of cash from one place to another at frequent intervals and
8. To enable the banks to work with minimum cash balance of their own.

Currency Management

1. The Government, on the advice of the Reserve Bank, decides on the various denominations.
2. The RBI also co-ordinates with the Government in the designing of bank notes, including the security
features.
3. Indian Statistical Institute studies to refine the demand estimation model then helps RBI forecasts
demand for currency notes.

4. The notes received from the presses are issued and a reserve stock maintained.

5. RBI distributes notes and coins through bank branches called chests. Currency chests and coins depots
are managed by commercial, operative and regional rural banks. SBI manages the highest number of
currency chests – 1965. Chests distribute currencies to branches depending on specific demand.
Branches demand currencies based on business volume. Specially built trucks for short distance (journey
completed during the day), railways for long distance Guarded by police, remittance accompanied by
officials of RBI to chests. Further movement from chest to a branch done by the bank concerned. The
notes and coins are put into circulation through:20 Issue Offices of RBI(including One sub-office at
Lucknow and one currency chest of RBI at Kochi) 4221 currency chests

6. Banks replenish cash into ATM based on daily withdrawal propensity. Many banks outsource tasks of
replenishing off site ATMS.

7. Currency flows like this: Printing presses, RBI offices, currency chests, bank branches and public.

8. Notes fit for circulation are reissued and the others (soiled and mutilated) are destroyed so as to maintain
the quality of notes in circulation. While a soiled bank note can be exchanged for full value, a mutilated
note can be exchanged for full value or half, depending on the degree of mutilation.

9. Coins do not come back from circulation, except those which are withdrawn. Small Coin Depots property
of central govt so withdrawal has to be offset by affording credit to govt and deposit offset by debit to govt
acc

UNIT 9 - Remittance refers to money that is sent or transferred to another party. Remittances can be
sent via a wire transfer, electronic payment system, mail, draft, or check. Remittances can be used for
any type of payment including invoices or other obligations. But the term is typically used to refer to
money sent to family members back in a person's home country.
The most common way of making a remittance is by using an electronic payment system through a bank
or money transfer service. People who use these options are generally charged a fee, but transfers can
take as little as ten minutes to reach the recipient.
They are also seen as an important part of disaster relief and often exceed official development
assistance (ODA).
Remittances are often used as a way to help raise the standard of living for people abroad and help
combat global poverty. In fact, remittances have exceeded development aid, and in some cases make up
a significant portion of a country's gross domestic product (GDP).
1. Foreign Remittance: Remittance of foreign currencies from one place/person to another place/person. In
broad sense, foreign remittances include all sale and purchase of foreign currencies on account of Import,
Export, Travel and other purpose.
2. Inward Remittance means funds received into your bank account. This could be either from another
account within India or from an account abroad.

3. Outward Remittance is transfer of funds in the form of foreign exchange by a person from India, for any
bonafide purposes as permissible under Foreign Exchange Management Act (FEMA), 1999.

List of Documents
1. Know Your Customer (KYC) documents
2. Application form
3. Document required as per the purpose code

Bill : instrument in writing containing an unconditional order, signed by marker, directing a certain person
to pay a certain sum of money only to, or order of a certain person, or to the bearer of instrument.”
Features of a Bill
1. It must be in writing.
2. It must contain an order to pay.
3. Unconditional order.
4. It must be signed by drawer.
5. Parties to bill: drawer, drawee & payee.
6. Sum payable must be certain.
7. Payment must be in money.
8. It must be payable on demand or otherwise.
9. Requires acceptance.
10. Must be stamped.
11. Self-liquidating instrument.
12. Drawn for short period.

Types of Bills
a) Commercial Bills: a bill of exchange issued by a commercial organization to raise money for short-term
needs.
b) Treasury Bills: these bills are issued by central government for short period loans and are sold by
Reserve Bank of India on behalf of the govt.

A. According to time
1. Demand Bill or Sight Bill: a bill of exchange which is payable on demand or at sight.
2. Time Bill or Usance Bill: a bill of exchange payable after the expiry of a fixed period is called a time bill or
usance bill.
B. According to place
(a) Inland Bill: A bill of exchange which is drawn and payable in same country.
(b) Foreign Bill: A bill of exchange which is drawn in a foreign country and is payable in a foreign country.
Foreign bills are generally drawn in sets of two or three in order to avoid the risk of loss in transit.
C. According to Objective or Usage
(a) Trade Bill: A bill of exchange drawn in respect of trade transaction drawn by seller on buyer in respect of
payment of price of goods sold.
(b) Accommodation Bill: A bill which is drawn or endorsed without receiving any value thereof. These bills are
drawn to raise loans. They are drawn to accommodate another person and are not genuine bills.
D. From viewpoint of payment or according to receiver
(a) Bearer Bill: A bill of exchange which is payable to any person who presents it for payment.
(b) Order Bill: A bill which is payable to a certain person named in the bill or his order. Not payable to bearer.

IMPORTANCE / ADVANTAGES OF COMMERCIAL BILL MARKET

Commercial bill market is an important source of short-term funds for trade and industry. It provides
liquidity and activates the money market. Bill market is essential for the development of money market:
1. Written verification of Debt.
2. Negotiable instrument
3. Exact date of payment
4. Discounting facility
5. Easy transfer of money
6. Credit facility
7. Facilitates foreign trade
8. Financial help
9. Liquidity
10. Easy control of the central bank

TREASURY BILL MARKET: Treasury bills market refers to the market where treasury bills are bought
and sold.

Features of treasury Bill

1. short term borrowing instruments of the Central govt. through the RBI to raise funds (less than a year)
2. safest money market instruments. zero risk instruments, the returns on these instruments is not very
attractive. No fixed rate of interest is payable
3. different from commercial bills.
4. purely finance bills and do not arise out of any trade transactions.
5. available both in primary as well as secondary market.
6. sold through a process of Bidding at auctions.
7. issued at discount. The govt. pays the specific amount (face value) on maturity of the bill.

Types of treasury bills In India, treasury bills are basically of two types :
(a) Ordinary or Regular treasury bills.
1. These are issued to the public or other financial institutions through a process of auction or bidding for
meeting the short-term financial requirements of the Central Govt.
2. The bids are invited for 91 days, 182 days, 364 days, treasury bills.
3. These bills are easily marketable and can be bought and sold from the secondary market also.
4. The ordinary treasury bills can also be discounted with RBI.

(b)Adhocs treasury bills.

1. These are always issued in favour of RBI with a view to replenish Govt’s cash balances by employing
temporary surpluses of state govt. and semi-state govt.
2. These bills are not sold through tender or auction.
3. They are purchased by the RBI who is authorized to issue currency notes against them.
5. The bids are invited for 91 days, 182 days, 364 days

Participants in the Treasury Bills Market :

1. Reserve Bank of India.
2. State Bank of India and other Commercial Banks.
3. State Govts.
4. Financial institutions such as LIC, UTI, NABARD etc.
5. Discount and Finance House of India (DFHI).
6. Public.
7. Provident funds.
8. Dealers.

UNIT 10

The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the provision of the
English Negotiable Instrument Act were applicable in India, and the present Act is also based on the
English Act with certain modifications. It extends to the whole of India except the State of Jammu and
Kashmir.

Section 31 further provides that no one except the RBI or the Central Government can make or issue a
promissory note expressed to be payable or demand or after a certain time.

Section 32 of the Reserve Bank of India Act makes issue of such bills or notes punishable with fine which
may extend to the amount of the instrument.

The effect or the consequences of these provisions are:

1. A promissory note cannot be made payable to the bearer, no matter whether it is payable on demand or
after a certain time. EXPIRES AFTER MAX 3 MONTHS
2. A bill of exchange cannot be made payable to the bearer on demand though it can be made payable to
the bearer after a certain time. Since entire point of bill of exchange is to provide person who is
supposed to pay (drawee) EXTRA TIME/CREDIT. Which is why it cannot be called on demand. It
becomes "active" only after a certain time
3. But a cheque {special bill of exchange} payable to bearer or demand can be drawn on a person’s
account with a banker. Unconditional order that expires in 3 months, unlike a promissory note

MEANING OF NEGOTIABLE INSTRUMENTS: Negotiable instrument means a promissory note, bill of

exchange or cheque payable either to order or to bearer, whether the word “order” or “bearer” appear on
the instrument or not.” Thus, the term, negotiable instrument means a written document which creates a
right in favors of some person and which is freely transferable. Satisfies the following two conditions of
negotiability:
1. instrument should be freely transferable (by delivery or by endorsement. and delivery) by the
custom of the trade;
2. person who obtains it in good faith and for value should get it free from all defects, and be entitled
to recover the money of the instrument in his own name.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

1. Property: The processor of the negotiable instrument is presumed to be the owner of the property
contained therein. The property in a negotiable instrument can be transferred without any formality. In the
case of bearer instrument, the property passes by mere delivery to the transferee. In the case of an order
instrument, endorsement and delivery are required for the transfer of property.

2. Title: The transferee of a negotiable instrument is known as ‘holder in due course.’ A bona fide
transferee for value is not affected by any defect of title on the part of the transferor or of any of the
previous holders of the instrument.
3. Rights: The transferee of the negotiable instrument can sue in his own name, in case of dishonour. A
negotiable instrument can be transferred any number of times till it is at maturity. The holder of the
instrument need not give notice of transfer to the party liable on the instrument to pay.

4. Presumptions: Certain presumptions apply to all negotiable instruments e.g., a presumption that
consideration has been paid under it. It is not necessary to write in a promissory note the words ‘for value
received’ or similar expressions because the payment of consideration is presumed. The words are
usually included to create additional evidence of consideration.

5. Prompt payment: A negotiable instrument enables the holder to expect prompt payment because a
dishonour means the ruin of the credit of all persons who are parties to the instrument.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT : These presumptions need not be proved as

they are presumed to exist in every negotiable instrument. Until the contrary is proved the following
presumptions shall be made in case of all negotiable instruments:

1. Consideration: It shall be presumed that every negotiable instrument was made drawn, accepted or
endorsed for consideration. It is presumed that, consideration is present in every negotiable instrument
until the contrary is presumed. The presumption of consideration, however may be rebutted by proof that
the instrument had been obtained from, its lawful owner by means of fraud or undue influence.

2. Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn on
such date, unless the contrary is proved.

3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is presumed to
have been accepted within a reasonable time after its issue and before its maturity. This presumption only
applies when the acceptance is not dated; if the acceptance bears a date, it will prima facie be taken as
evidence of the date on which it was made.

4. Time of transfer: Unless the contrary is presumed it shall be presumed that every transfer of a
negotiable instrument was made before its maturity.

5. Order of endorsement: Until the contrary is proved it shall be presumed that the endorsements
appearing upon a negotiable instrument were made in the order in which they appear thereon.

6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of exchange
or cheque was duly stamped.

7. Holder in due course: Until the contrary is proved, it shall be presumed that the holder of a negotiable
instrument is the holder in due course. Every holder of a negotiable instrument is presumed to have paid
consideration for it and to have taken it in good faith. But if the instrument was obtained from its lawful
owner by means of an offence or fraud, the holder has to prove that he is a holder in due course.

8. Proof of protest: Section 119 lays down that in a suit upon an instrument which has been
dishonoured, the court shall on proof of the protest, presume the fact of dishonour, unless and until such
fact is disproved.

TYPES OF NEGOTIABLE INSTRUMENT : (i) Promissory notes (ii) Bills of exchange (iii) Cheques.
Negotiable instruments recognised by usage or custom are: (i) Hundis (ii) Share warrants (iii) Dividend
warrants (iv) Bankers draft (v) Circular notes (vi) Bearer debentures (vii) Debentures of Bombay Port
Trust (viii) Railway receipts (ix) Delivery orders.
 Promissory notes : Section 4 of the Act defines, “A promissory note is an instrument in writing (note
being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to
pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments.”

Essential elements of a promisory note

1. It must be in writing

2. It must certainly an express promise or clear understanding to pay: There must be an express
undertaking to pay. A mere acknowledgment is not enough. The following are not promissory notes as
there is no promise to pay. Eg. If A writes:
a. “Mr. B, I.O.U. (I owe you) Rs. 500”
b. “I am liable to pay you Rs. 500”.
c. “I have taken from you Rs. 100, whenever you ask for it have to pay” .
d. The following will be taken as promissory notes because there is an express promise to pay:
If A writes:
e. “I promise to pay B or order Rs. 500”
f. “I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand, for the value received”.

3. Promise to pay must be unconditional: A conditional undertaking destroys the negotiable character of
an otherwise negotiable instrument. Therefore, the promise to pay must not depend upon the happening
of some outside contingency or event. It must be payable absolutely.

4. It should be signed by the maker: The pro note can be signed by the authorised agent of the maker,
but the agent must expressly state as to on whose behalf he is signing, otherwise he himself may be held
liable as a maker.

5. The maker must be certain: The note self must show clearly who is the person agreeing to undertake
the liability to pay the amount. In case a person signs in an assumed name, he is liable as a maker
because a maker is taken as certain if from his description sufficient indication follows about his identity.
In case two or more persons promise to pay, they may bind themselves jointly or jointly and severally, but
their liability cannot be in the alternative.

6. The payee must be certain: The instrument must point out with certainty the person to whom the
promise has been made. The payee may be ascertained by name or by designation. A note payable to
the maker himself is not pronate unless it is indorsed by him. In case, there is a mistake in the name of
the payee or his designation; the note is valid, if the payee can be ascertained by evidence. Even where
the name of a dead person is entered as payee in ignorance of his death, his legal representative can
enforce payment.

7. The promise should be to pay money and money only: Money means legal tender money and not old
and rare coins. A promise to deliver paddy either in the alternative or in addition to money does not
constitute a promissory note.

8. The amount should be certain: One of the important characteristics of a promissory note is certainty—
not only regarding the person to whom or by whom payment is to be made but also regarding the amount.
However, paragraph 3 of Section 5 provides that the sum does not become indefinite merely because
(a) there is a promise to pay amount with interest at a specified rate. (b)
the amount is to be paid at an indicated rate of exchange. (c)
the amount is payable by instalments with a condition that the whole balance shall fall due for payment on
a default being committed in the payment of anyone instalment
9. Other formalities: The other formalities regarding number, place, date, consideration etc. though usually
found given in the promissory notes but are not essential in law. The date of instrument is not material
unless the amount is made payable at a certain time after date. Even in such a case, omission of date
does not invalidate the instrument and the date of execution can be independently ascertained and
proved. On demand (or six month after date) I promise to pay Peter or order the sum of rupees one
thousand with interest at 8 per cent per annum until payment.

Bill of exchange: “A bill of exchange is an instrument in writing containing an unconditional order,

signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a
certain person or to the bearer of the instrument”. A bill of exchange, therefore, is a written
acknowledgement of the debt, written by the creditor and accepted by the debtor. There are usually three
parties to a bill of exchange drawer, acceptor or drawee and payee. Drawer himself may be the payee.

Essential conditions of a bill of exchange

1.It must be in writing
2.It must be signed by the drawer
3.The drawer, drawee and payee must be certain.
4.The sum payable must also be certain
5.It should be properly stamped
6.The order must be unconditional.

7.It must contain an express order to pay money and money alone. For example, In the following cases,
there is no order to pay, but only a request to pay. Therefore, none can be considered as a bill of
exchange: (a) “I shall be highly obliged if you make it convenient to pay Rs. 1000 to Suresh”. (b) “Mr.
Ramesh, please let the bearer have one thousand rupees, and place it to my account and oblige”
However, there is an order to pay, though it is politely made, in the following examples: (a)“Please pay
Rs. 500 to the order of ‘A’.(b) ‘Mr. A will oblige Mr. C, by paying to the order of’ P

Distinction Between Bill of Exchange and Promissory Note

1. Number of parties: In a promissory note there are only two parties – the maker (debtor) and the payee
(creditor). In a bill of exchange, there are three parties; drawer, drawee and payee; although any two out
of the three may be filled by one and the same person.
2. Payment to the maker: A promissory note cannot be made payable the maker himself, while in a bill of
exchange to the drawer and payee or drawee and payee may be same person.
3. Unconditional promise: A promissory note contains an unconditional promise by the maker to pay to the
payee or his order, whereas in a bill of exchange, there is an unconditional order to the drawee to pay
according to the direction of the drawer.
4. Prior acceptance: A note is presented for payment without any prior acceptance by the maker. A bill of
exchange is payable after sight must be accepted by the drawee or someone else on his behalf, before it
can be presented for payment.
5. Primary or absolute liability: The liability of the maker of a promissory note is primary and absolute, but
the liability of the drawer of a bill of exchange is secondary and conditional.
6. Relation: The maker of the promissory note stands in immediate relation with the payee, while the maker
or drawer of an accepted bill stands in immediate relations with the acceptor and not the payee.
7. Protest for dishonour: Foreign bill of exchange must be protested for dishonour when such protest is
required to be made by the law of the country where they are drawn, but no such protest is needed in the
case of a promissory note.

Cheques : “A cheque is a bill of exchange (i) it is always drawn on a specified banker, and (ii) it is always
payable on demand. Consequently, all cheque are bill of exchange, but all bills are not cheque. A cheque
 must satisfy all the requirements of a bill of exchange; that is, it must be signed by the drawer, and must
contain an unconditional order on a specified banker to pay a certain sum of money to or to the order of a
certain person or to the bearer of the cheque. It does not require acceptance.

Distinction Between Bills of Exchange and Cheque

1. A bill of exchange is usually drawn on some person or firm, while a cheque is always drawn on a bank.
2. It is essential that a bill of exchange must be accepted before its payment can be claimed A cheque does
not require any such acceptance.
3. A cheque can only be drawn payable on demand, a bill may be also drawn payable on demand, or on the
expiry of a certain period after date or sight.
4. A grace of three days is allowed in the case of time bills while no grace is given in the case of a cheque.
5. The drawer of the bill is discharged from his liability, if it is not presented for payment, but the drawer of a
cheque is discharged only if he suffers any damage by delay in presenting the cheque for payment.
6. Notice of dishonour of a bill is necessary, but no such notice is necessary in the case of cheque.
7. A cheque may be crossed, but not needed in the case of bill.
8. A bill of exchange must be properly stamped, while a cheque does not require any stamp.
9. A cheque drawn to bearer payable on demand shall be valid but a bill payable on demand can never be
drawn to bearer.
10. Unlike cheques, the payment of a bill cannot be countermanded by the drawer.

Parties to Bill of Exchange

1. Drawer: The maker of a bill of exchange is called the ‘drawer’. “Creditor”. Party that issues BOE.

2. Drawee: The person directed to pay the money by the drawer is called the ‘drawee’, “Debtor”

3. Acceptor: After a drawee of a bill has signed his assent upon the bill, or if there are more parts than one,
upon one of such pares and delivered the same, or given notice of such signing to the holder or to some
person on his behalf, he is called the ‘ acceptor’.

4. Payee: The person named in the instrument, to whom or to whose order the money is directed to be paid
by the instrument is called the ‘payee’. He is the real beneficiary under the instrument. Where he signs his
name and makes the instrument payable to some other person, that other person does not become the
payee. The drawer and the payee are the same entity unless the drawer transfers the bill of exchange to
a third-party payee.

5. Indorser: When the holder transfers or indorses the instrument to anyone else, the holder becomes the
‘indorser’.

6. Indorsee: The person to whom the bill is indorsed is called an ‘indorsee’.

7. Holder: A person who is legally entitled to the possession of the negotiable instrument in his own name
and to receive the amount thereof, is called a ‘holder’. He is either the original payee, or the indorsee. In
case the bill is payable to the bearer, the person in possession of the negotiable instrument is called the
‘holder’.

8. Drawee in case of need: When in the bill or in any endorsement, the name of any person is given, in
addition to the drawee, to be resorted to in case of need, such a person is called ‘drawee in case of need’.
In such a case it is obligatory on the part of the holder to present the bill to such a drawee in case the
original drawee refuses to accept the bill. The bill is taken to be dishonoured by non-acceptance or for
nonpayment, only when such a drawee refuses to accept or pay the bill.
9. Acceptor for honour: In case the original drawee refuses to accept the bill or to furnish better security
when demanded by the notary, any person who is not liable on the bill, may accept it with the consent of
the holder, for the honour of any party liable on the bill. Such an acceptor is called ‘acceptor for honour’.

Parties to a Promissory Note

1. Maker/Drawer. He is the person who promises to pay the amount stated in the note. He is the debtor.
2. Payee. He is the person to whom the amount is payable i.e. the creditor.
3. Holder. He is the payee or the person to whom the note might have been indorsed.
4. The indorser and indorsee (the same as in the case of a bill).

Parties to a Cheque

1. Drawer. He is the person who draws the cheque, i.e., the depositor of money in the bank.
2. Drawee. It is the drawer’s banker on whom the cheque has been drawn.
3. Payee. He is the person who is entitled to receive the payment of the cheque.
4. The holder, indorser and indorsee (the same as in the case of a bill or note).

Hundis : Negotiable instrument written in an oriental language. includes all indigenous negotiable
instrument whether they be in the form of notes or bills. The word ‘hundi’ is said to be derived from the
Sanskrit word ‘hundi’, which means “to collect”. Hundis are governed by the custom and usage of the
locality in which they are intended to be used and not by the provision of the Negotiable Instruments Act.
In case there is no customary rule known as to a certain point, the court may apply the provisions of the
Negotiable Instruments Act. It is also open to the parties to expressly exclude the applicability of any
custom relating to hundis by agreement

Code of Conduct in Banking

BCSBI(The Banking Codes and Standards Board of India) :This is a Code of Customer Rights, which
sets minimum standards of banking practices to follow as a member of BCSBI while dealing with
individual customers. It provides protection to customers and explains how a member bank is required to
deal with customers in its day-to-day operations.

OBJECTIVES:
1. Promote fair banking practices
2. Increase transparency
3. Achieve higher operating standards
4. Promote a fair and cordial relationship
5. Foster confidence in the banking system
6. Promote safe and fair customer dealing
7. Increase awareness of customers

CODE OF BANK’S COMMITMENT TO CUSTOMERS: This is a Code of Customer Rights, which sets
minimum standards of banking practices, to follow as a member of BCSBI, while dealing with individual
customers. It provides protection to customers and explains how a member bank is required to deal with
customers in its day-to-day operations.

1. RIGHT TO FAIR TREATMENT

i. Minimum banking facilities of receipt and payment.
ii. Meeting the standards and commitment for the product and services
iii. Relevant laws
 iv. Ethical principles
v. Offering digital banking
vi. Training staff
vii. No discrimination

2. RIGHT TO FAIR DEALING,TRANSPARENCY AND HONESTY

i. Timely and adequate information
ii. Advertising and Promotional literature is clear and not misleading.
iii. Do Not Call service and Interest rate
iv. Tariff schedule
v. Complete information through SMS, print media etc.
vi. Displaying information in our branch and website our policies
vii. Create awareness of the code among customers

3. RIGHT TO SUITABILITY
We will offer you product appropriate to your needs and based on an assessment of your financial
circumstances.

4. RIGHT TO PRIVACY AND CONFIDENTIALITY

i. Personal information as private and confidential Exceptions:
ii. CICs (Credit Information companies in India )- Loans, unsecured loans, credit
card etc.
iii. Information required by law or regulator.
iv. Banker’s reference
v. To prevent fraud
vi. Marketing purpose
vii. Information collected other than KYC

5. RIGHT TO GRIEVANCE REDRESSAL AND FORUM

i. Correcting our mistakes promptly
ii. Handling complaints
iii. Guidance
iv. Problem arising out of technological failures

NEED FOR CORPORATE GOVERNANCE

1. Rights and equitable treatment of share holders
2. Role and responsibilities of the board
3. Integrity and ethical behavior
4. Corporate Scams or Scandals
5. Globalization
CORPORATE GOVERNANCE PILLARS : Accountability, Transparency, Fairness, Independence

Objectives of Code
1. To give a positive thrust
2. To promote good and fair banking practices
3. To increase transparency
4. To improve our understanding of your business through effective communication.
5. To encourage market forces, through competition, to achieve higher operating standards.
6. To ensure timely and quick response to your banking needs.
7. To foster confidence in the banking system.

THE BANKERS' BOOKS EVIDENCE ACT, 1891

 (1) "company" means a company registered under any of the enactments relating to companies for the
time being in force in any part of His Majesty's dominions or incorporated by an Act of Parliament or by an
Indian law
(2) "bank" and "banker" mean--
(a) any company carrying on the business of bankers,
(b) any partnership by an individual to whose books the provisions of this Act shall have been extended
as hereinafter provided,
(c) any post office savings bank or money order office
(3) "bankers' books" include ledgers, day-books, cash-books, account-books and all other books used in
the ordinary business of a bank:
(4) "legal proceeding" means any proceeding or inquiry in which evidence is or may be given, and
includes an arbitration:
(5) "the Court" means the person or persons before whom a legal proceeding is held or taken:
(6) "Judge" means a Judge of a High Court:
(7) "trial" means any hearing before the Court at which evidence is taken: and
(8) "certified copy" means a copy of any entry in the books of a bank together with a certificate written at
the foot of such copy that it is a true copy of such entry, that such entry is contained in one of the ordinary
books of the bank and was made in the usual and ordinary books of the bank and was made in the usual
and ordinary course of business, and that such book is still in the custody of the bank, such certificate
being dated and subscribed by the principal accountant or manager of the bank with his name and official
title.
3.Power to extend provisions of Act
.- The State Government may, from time to time, by notification in the Official Gazette, extend the
provisions of this Act to the books of any partnership or individual carrying on the business of bankers
within the territories under its administration, and keeping a set of not less than three ordinary account-
books, namely, a cash-book, a day-book or journal, and a ledger, and may in like manner rescind any
such notification.
4.Mode of proof of entries in bankers books
.- Subject to the provisions of this Act, a certified copy of any entry in a banker's book shall in all legal
proceedings be received as prima facie evidence of the matters, transactions and accounts therein
recorded in every case where, and to the same extent as, the original entry itself is now by law
admissible, but not further or otherwise.
5.Case in which officer of bank not compellable to produce books
.- No officer of a bank shall in any legal proceeding to which the bank in not a party be compellable to
produce any banker's book the contents of which can be proved under this Act, or to appear as a witness
to prove the matters, transactions and accounts therein recorded, unless by order of the Court or a judge
made for special cause.
6.Inspection of books by order of Court or Judge
.- (1) On the application of any party to a legal proceeding the Court or a Judge may order that such party
be at liberty to inspect and take copies of any entries in a banker's book for any of the purposes of such
proceeding, or may order the bank to prepare and produce, within a time to be specified in the order,
certified copies of all such entries, accompanied by a further certificate that no other entries are to be
found in the books of the bank relevant to the matters in issue in such proceeding, and such further
certificate shall be dated and subscribed in manner hereinbefore directed in reference to certified copies.
(2) An order under this or the proceeding section maybe made either with or without summoning the
bank, and shall be served on the bank three clear days (exclusive of bank holidays) before the same is to
be obeyed, unless the Court or Judge shall otherwise direct.
(3) The bank may at any time before the time limited for obedience to any such order as aforesaid either
offer to produce their books at the trial or give notice of their intention to show cause against such order,
and thereupon the same not be enforced without further order.

Bankers Book of Evidence 1891

1. Bankers keep their accounts & its various details by maintaining various ledgers & journals
2. When any claim on the bank needs to be established or proved in court these books need to be produced
in court.
3. As it is difficult to do so & to give the account statements & extracts evidentiary value this act was
enacted.
4. The Bill was passed by the legislature on 1st October 1891.
5. The object of the bill was to apply to India the provisions of The English Bankers‟ Books Evidence Act ,
1879, under which copies of entries in bankers‟ books are made receivable in evidence under certain
conditions.

Significance
1. The Bankers Book evidence is the real guidelines for any banking institutions that will get the clear idea
about the legal proceedings which relates to banking records.
2. Any discrepancy in the records will amount to violation of the act.
3. In India the Act has a strong impact on the banking institutions and they are bound by the act in
production of records in litigation.
4. “Banker‟s books” include ledgers daybooks, cash-books, account-books and all other records used in the
ordinary business of a bank. These records may be kept in written form or in an electronic data retrieval
mechanism. Records are kept On Site & Off site along with a backup or recovery mechanism.

Prevention and vigilance in banking: Banks act as an intermediary between depositors and lenders
They are duty bound to observe the highest standards of safeguards to ensure that money accepted from
depositors are not mis-utilized and are put to gainful use or are available with them to be paid on demand.
Types of Vigilance in banks:

1. Preventive Vigilance: Preventive Vigilance sets up procedure and systems to restrain the acts of wrong
doing and misconduct in the various areas of the functioning of department.

2. Detective Vigilance: Effective use and scan of Complaints, Inspection Reports, Audit Reports etc.
Detection of Corrupt Practices, Malpractices, Negligence, Misconduct and better surveillance of public
contact points. Close watch on officers at sensitive posts of doubtful integrity and detect fraud and
scrutiny of decision taken by officials having discretionary powers.
3. Punitive Vigilance: It includes investigation and collection of evidence and speedy departmental
inquiries. Swift and deterrent action against the real culprit.

Aim of Vigilance in Banks:

1. Preventive vigilance is aimed at reducing the occurrence of a lapse (violation of a law, a norm, or, broadly
speaking, a governance requirement).
2. Detective vigilance is aimed at identifying and verifying the occurrence of a lapse. Punitive vigilance is
aimed at deterring the occurrence of a lapse.
3. Detective and punitive vigilance are strategic complements.
4. The greater the punishment, the more useful it is to detect. Conversely, having a high penalty is
ineffective when the quality of detection is poor.
5. Preventive vigilance takes a central role in vigilance organized at the Reserve Bank of India (RBI).
6. The overall responsibility for vigilance work at the RBI vests with the Central Vigilance Cell (C.V.Cell or
Cell), which exercises its jurisdiction over all employees of the Bank and co-ordinates the activities of the
various vigilance units.
7. The Cell maintains liaison with the Central Vigilance Commission (CVC) and the Central Bureau of
Investigation (CBI). CVC Commissioner = Sanjay Kothari
8. Vigilance guidelines issued by the CVC are aimed at greater transparency, promoting a culture of honesty
and probity in public life, and improving the overall vigilance administration in the organizations within its
purview.

Objective of Preventive Vigilance:

1. Exercising watchfulness and diligence by all employees so as to prevent happening of any untoward
incidents that may adversely affect financial or reputational implications for the organization.
2. To ensure strict adherence to integrity by all employees and bank’s laid down policies, systems and
procedures so that bank’s interest is protected.
3. Preventive vigilance sets up procedures and systems to restrain the acts of wrongdoing.

PREVENTIVE VIGILANCE IN ELECTRONIC BANKING

Phishing Attack: Type of social engineering attack often used to steal user data, including login
credentials and credit card numbers. It occurs when an attacker, masquerading /disguised as a trusted
entity, dupes a victim into opening an email, instant message, or text message. The recipient is then
tricked into clicking a malicious link, which can lead to the installation of malware, the freezing of the
system as part of a ransomware attack or the revealing of sensitive information.
Phishing Attack Example:
1. A spoofed email ostensibly from myuniversity.edu is mass-distributed to as many faculty members as
possible.
2. The email claims that the user’s password is about to expire. Instructions are given to go
to myuniversity.edu/renewal to renew their password within 24 hours.
3. The user is redirected to myuniversity.edurenewal.com, a bogus page appearing exactly like the real
renewal page, where both new and existing passwords are requested.
4. The attacker, monitoring the page, hijacks the original password to gain access to secured areas on the
university network.
5. The user is sent to the actual password renewal page.
6. However, while being redirected, a malicious script activates in the background to hijack the user’s
session cookie.

WHAT ARE THE MAJOR RISKS FOR BANKS?

Why Do the Risks for Banks Matter: Due to the large size of some banks, overexposure to risk can cause
bank failure and impact millions of people? By understanding the risks posed to banks, governments can
set better regulations to encourage prudent management and decision-making. The ability of a bank to
manage risk also affects investors’ decisions. Even if a bank can generate large revenues, lack of risk
management can lower profits due to losses on loans. Value investors are more likely to invest in a bank
that is able to provide profits and is not at an excessive risk of losing money. Prudent risk management
can help banks improve profits as they sustain fewer losses on loans and investments. Ways to decrease
risks include diversifying assets, using prudent practices when underwriting, and improving operating
systems.

Credit Risk
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual
obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults
can occur on mortgages , credit cards, and fixed income securities. Failure to meet obligational contracts
can also occur in areas such as derivatives and guarantees provided.
While banks cannot be fully protected from credit risk due to the nature of their business model, they can
lower their exposure in several ways. Since deterioration in an industry or issuer is often unpredictable,
banks lower their exposure through diversification.
By doing so, during a credit downturn, banks are less likely to be overexposed to a category with large
losses. To lower their risk exposure, they can loan money to people with good credit histories, transact
with high-quality counterparties, or own collateral to back up the loans.
 Operational Risk
Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or
processes. The operational type of risk is low for simple business operations such as retail banking
and asset management, and higher for operations such as sales and trading. Losses that occur due to
human error include internal fraud or mistakes made during transactions. An example is when a teller
accidentally gives an extra $50 bill to a customer.
On a larger scale, fraud can occur through the breaching a bank’s cybersecurity. It allows hackers to steal
customer information and money from the bank, and blackmail the institutions for additional money. In
such a situation, banks lose capital and trust from customers. Damage to the bank’s reputation can make
it more difficult to attract deposits or business in the future.

Market Risk
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of
equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are
heavily involved in investing in capital markets or sales and trading.
Commodity prices also play a role because a bank may be invested in companies that produce
commodities. As the value of the commodity changes, so does the value of the company and the value of
the investment. Changes in commodity prices are caused by supply and demand shifts that are often hard
to predict. So, to decrease market risk, diversification of investments is important. Other ways banks
reduce their investment include hedging their investments with other, inversely related investments.

Liquidity Risk
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include
allowing customers to take out their deposits. The inability to provide cash in a timely manner to
customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a
day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further
lowers the bank’s ability to provide funds and leads to a bank run.
Reasons that banks face liquidity problems include over-reliance on short-term sources of funds, having
a balance sheet concentrated in illiquid assets, and loss of confidence in the bank on the part of
customers. Mismanagement of asset-liability duration can also cause funding difficulties. This occurs
when a bank has many short term liabilities and not enough short-term assets.
Short-term liabilities are customer deposits or short-term guaranteed investment contracts (GICs) that the
bank needs to pay out to customers. If all or most of a bank’s assets are tied up in long-term loans or
investments, the bank may face a mismatch in asset-liability duration.
Regulations exist to lessen liquidity problems. They include a requirement for banks to hold enough liquid
assets to survive for a period of time even without the inflow of outside funds.

PLASTIC MONEY

Plastic money or polymer money, made out of plastic A new and easier way of paying for goods and
services Introduced in the 1950s and is now an essential form of ready money It includes credit cards,
debits cards, ATMs, smart cards, etc.

Advantages Of Plastic Money

1. Convenience: Plastic money provides an easy way to make financial transactions without carrying cash. It
also provides the benefits of anywhere and anytime banking.
2. Check Counterfeiting: The proposed plastic currency notes will reduce the chances of counterfeiting.
3. Long life of Plastic Currency Notes: The proposed plastic currency notes will have the life of five years as
against one-year life of paper currency notes.
4. Check on Black Money: It is possible to trace the financial transactions done through cards. Developing a
culture of plastic money will make it easy for the government to trace black suspected black money
sources.
5. Supports Growth of E-commerce: The use of cards has supported the growth of e-commerce. Growth of e-
commerce enhances cost-effectiveness and alternative channels to improve economic growth.
6. Power of Purchasing: Debit or Credit cards made it easier to buy things. Now we do not have any need to
carry money in a large amount. Plastic money is accepted at any time and everywhere.
7. Time-Saving: one can purchase anything from any place through a credit card or debit card without
spending money on fare or cash transaction. You have to provide your card details to seller store or
corporations and settle your order. It saves time in the transaction by debit and credit card.
8. Safety: In case, if an individual loses the cards, then he/she may contact the bank or financial institution,
which provide the cards. The financial institution or bank will block the account and no-one can draw a
single penny without your permission.

Disadvantages Of Plastic Money

1. Shops using other Vendors: Numerous shops accept credit cards of a specific company only. In this
situation, money is the only mode of payment for those who use a credit card of another company.
2. Less Availability: There are several cases where the firms do not let their cards to be utilized in specific
areas wherever they have a regional dispute.
3. An issue with Magnetic Strip: The Credit card consists of the magnetic strip that can get worn out due to
extensive use of it. If it happens while travelling, and credit card is the only form of money with the person,
then he/she must wait till the time they receive a new card. The new card may take a minimum of forty-
eight hours to get active.
4. Increased Debt and rates of high-interest: Credit Card from Corporations and financial institutions charge
high-interest rate on more money if the person fails to pay off till the fixed date of the particular month.
These interests are the earnings, for which they provide the additional shopping for limits then the money.
It is not a good idea to owe loan on high-interest rates and spend it in necessary things or purchasing.
5. Fraud: In the case of stolen credit cards, the thief may use it directly to get the information. In today’s
world, it is possible to get a clone of any debit or credit card, which works like original and can be a
substantial loss. Thus be aware of the frauds of credit cards.

Types Of Plastic Money

Credit Card : A Credit Card issued by a financial institution allows us to borrow the pre approved money
to make our purchases. It has a decided amount or the credit limit which can be borrowed during a given
period. The amount or the credit limit is pre agreed as per the terms & conditions by the card issuer
financial institution and the card holder based on the credit rating and the history.
A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant
for goods and services based on the cardholder's promise to the card issuer to pay them for the amounts
plus the other agreed charges. The card issuer (usually a bank) creates a revolving account and grants a
line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or
as a cash advance. In other words, credit cards combine payment services with extensions of credit. A
credit card is the plastic money that is used to pay for products and services, just have toproduce the card
and sign a charge slip to pay for your purchases. The institution which issuethe card makes the payment
to the outlet on your behalf; you will pay this ‘loan’ back to theinstitution at a later date. Generally, a limit is
set to the amount of money a card holder canspend

Debit Cards: A debit card is issued by the banks that basically work directly from your account where we
have to be ensured that the running balance should not go below the minimum amount. For the security
reasons we need a PIN to use it at the stores as well as ATM’s. The card can also be swiped without PIN
where the receipt has to be duly signed by the card holder. But for the extended security reasons issuer
companies provide modernized cards with PIN verification.
The debit card is an encoded plastic card which is issued by banks and has replaced with the cheques. It
allows the customers to pay in exchange for goods and services without carrying cash. It is a
multipurpose card, as it can be used as an ATM to withdraw the money and check the balance of the
bank account. It is issued by bank free of cost with the savings or current account. It is one of the best
online-payment tools where the amount of purchase is immediately subtracted from the account of the
customer and credited to the merchant’s account. It has overcome the delay in the payment process. A
debit card (also known as a bank card, plastic card or check card) is a plastic payment card that can be
used instead of cash when making purchases. It is similar to a credit card, but unlike a credit card, the
money is immediately transferred directly from the cardholder's bank account when performing a
transaction. Debit Card The bank issues debit card only if the person has an account in the bank.When a
debit card is used to make a payment, the total amount charged is instantly reducedfrom your bank
balance

Charge Card: A charge card has similar features of credit cards. However, after using a charge card, it is
necessary to pay the whole amount of bill till the due date. If the person defaults to pay the amount of the
charge card, then he has to pay the late payment charges. Charge Card A charge card is a card that
provides a payment method enabling the cardholder to makepurchases which are paid for by the card
issuer, to whom the cardholder becomes indebted.The cardholder is obligated to repay the debt to the
card issuer in full by the due date, usuallyon a monthly basis, or be subject to late fees and restrictions on
further card use. It can also bea smart card. A charge card carries all the features of the features of credit
cards. But, after using the chargecard, the entire payment of the bills has to be made by the due date. If
you fail to do so, you arelikely to be considered a defaulter and will usually have to pay up a steep late
payment charge.AMEX (American Express) and Diner Club card are well known and tie ups and do not
dependon the network of Master Card or Visa. These cards are typically meant for the high incomegroup
categories and companies
Visa & MasterCard: Visa & MasterCard are international non-profit organizations. They are dedicated to
promoting the growth of the business of cards across the globe. They have designed a wide network of
merchant institutions by keeping in mind that the customers might use their credit cards to make several
transactions worldwide.
ATM Cards: These cards are typically used at ATMs to withdraw money, transfer funds and make
deposits. ATM cards are used by inserting the card into a machine and enter a PIN or personal number
for security purpose. The system checks the account for sufficient funds before allowing any transaction.
Business Credit Card A business credit card is a credit card intended for use by a business rather than
for an individual's personal use. Business credit cards are available to businesses of all sizes. They can
help businesses build a credit profile to improve future credit borrowing terms..
.In-Store CardIt is issued by retailers or companies. It has currency only at the issuer’s outlet for
purchasing products of the issuer company. The payment can be on monthly or extended credit basis and
for extended credit facility, interest is charged.
Smart Card A smart card contains an electronic chip which is used to store cash. This is most useful to
pay for small purchases for example infairs, coffee shops, and the like. When a transaction is made using
the card, the value is debited and the balance comes down automatically. Smart cards serve as credit or
ATM cards, fuel cards mobile phone SIMs, authorization cards for pay television, household utility pre-
paymentcards, high-security identification and access-control cards, and public transport and publicphone
payment cards. Smart cards may also be used as electronic wallets. The smart card chip can be “loaded”
withfunds to pay parking meters, vending machines or merchants. Cryptographic protocols protectthe
exchange of money between the smart card and the machine. No connection to a bank isneeded.Smart
cards can provide identity documentation, authentication, data storage, and applicationprocessing. Smart
cards may provide strong security authentication for single sign-on (SSO)within large organizations.
Petro Card Some petroleum companies allow customers to pay for the fuel through electronic medium.
Itoffers a scheme of gifting points to the customers when they pay for fuel using the petro card

HOW TO USE PLASTIC MONEY?

Whenever the card is swiped by the card holder, the individual actually authorizes the card issuer
company to pay the merchant on its behalf. The borrowed money has to be repaid the within the ‘grace
period’ of 25-30 days otherwise the borrowed amount and certain agreed charges has to be paid. It is
also safe to carry the card instead carrying cash or a cheque book to make payments and other
transactions. As credit cards offers insurance on purchases and other facilities it is little easier to request
a refund. It allows the consumer to continue with the debts, subject to the basic amount being paid. It
involves a third party operational body that pays to the seller and the amount is being reimbursed by the
buyer on a later date.
According to laws the merchant has to verify the identity of the card holder and the rightful user by
obtaining proper identification through PIN (Personal Identification No) or any other valid Govt. issued
 document. Payments by Credit Card are easily accepted by the merchants as the payments are received
at the same time despite the seller has to pay the card processing fee for every transaction made.

THE COST INVOLVED IN USING CREDIT CARDS

1. The card holder has to pay the used amount on a monthly basis to the full. In case of nonpayment of the
complete amount the interest is added by the issuer on the balance amount and the interest is
compounded as long as the balance is outstanding.

2. Several methods are used by the card issuers to calculate the rate of interest. As the cards have pre
defined credit limit it also affects the rate of interest paid by the card holder. It also influences the credit
rating as well as the credit history of the card holder. Interest rates can also be raised in some cases
without maintaining any federal limit by the issuer. Certain extra charges like going over Credit Card, late
payment, cash advances or foreign – currency conversion are being charged by some credit card issuers.

3. Interest rates on Credit cards as compared to other loans are higher which at times lead to
underestimated time and money to pay off the outstanding balance especially when the minimum amount
to be paid is low and interest is high.

4. It is not only important to use the credit card with a restraint or self control but also take preventive
measures to assure the privacy and identity against the identity thieves. It allows the card holders to avoid
carrying cash as well as accumulating “rewards” which can be used worldwide.

HOW DOES THE PLASTIC MONEY LOOKS

To differ from the debit cards, cash cards or the charge cards credit cards have Bank Card Number
embossed on it. The card number or the Bank Identification Number is prefixed with the series of
numbers that determines the Bank (first 6 digits of the Visa or the Master card), next nine digits and the
final digit represents the individual account number and the validity check code respectively. Credit Card
or we can say the modernized cards have a magnetic stripe or the chip embedded as a security feature.
Along with the card number it also carries the issuance and the expiry dates as well as the security codes.
All credit cards differ as they do not use the same set of codes or the same series of digits.

POINTS TO BE NOTED
1. Using a debit card is always a positive approach that prevents from the trap call of credit cards. Using a
card directly connected to your account is a better decision financially.
Credit cards same as debit cards allows us to avoid carrying huge sheaf of notes or the pile of cheque
books. It offer us to make a huge amount transactions at one go whether it’s paying a hefty bill for the
bash or a down payment for the brand new car

2. The Card statement helps us to maintain the budgeting easier. Maintaining the repayment of the
outstanding amount and the deadline dates improves the credit score which in later helps a lot for
securing a good amount in an unwanted situation. Credit cards allows to rotate money in a smarter way
but only precautionary measure is to be kept in mind is the repayment of the amount on time to avoid the
clinch of the compounded interest.

3. Certain Banks or Financial Institutions club their cards to increase the credibility of the brand and provide
additional benefits to the customers. In a bid to capture a target customer FI’s tie ups with many corporate
organizations, e commerce entities, airport lounges FI’s try to expand their customer base in a fairly
competitive market. Banks or FI’s keep a track of the customer’s spending pattern and accordingly offer
them the cards according to their needs.
There are cards such as American Express & Diners that are issued by them. Their issuance and
processing of payments works on their own network. This gives a benefit of saving from any legal issues
or any dispute handling. This leads to higher transaction charges paid by the merchants keeping it as a
primary source of income. These days Amex & Diners are incorporated with banks to issue co-branded
cards to increase the number of its customers. At times, an offer also gets indulged with restaurants
 globally. Benefits of such cards include higher reward points & cash backs, airport lounges access,
buyers protection and yes last but not the least it serves as a Status Symbol as it is generally HNI clients
with income more than 8L.

HOW TO PROTECT YOUR PLASTIC MONEY

1. To be preventive make sure the information should not be compromised else the issuer has to be
contacted to control the frauds.
2. Monthly statements have to be monitored regularly to identify the charges.
3. Issuers restrict the time limit to report the fraudulent charges on the account.
4. In case of unauthorized transactions or the theft of the card the issuer freezes the account and issue a
new card to the card holder. If the card is lost, immediately inform the banker.
5. Change the PIN immediately the card is received from bank.
6. Don't write down your PIN number anywhere. Memorize it
7. Preferably use an ATM which is within bank premises or manned 24 hrs by a security guard
8. While using the online settlement, use the virtual keyboard
9. Register yourself for SMS alert whenever your account is accessed
10.Change your PIN numbers as often as convenient.