Reading Material by

Union Bank of India

Staff College, Bengaluru
 INDEX
S No. Topics Page No
1 BANKING SYSTEM IN INDIA 02
2 BANKING REGULATIONS AND LAWS 11
3 ECONOMICS AND BANKING 22
4 STRUCTURE OF A BANK 25
5 BASICS OF BRANCH OPERATIONS 26
7 BANKER CUSTOMER RELATIONSHIP 31
8 TYPES OF CUSTOMERS 38
9 TYPES OF LIABILITY PRODUCTS 45
10 OPERATIONAL GUIDELINES- LOW COST DEPOSIT 50
11 NOMINATION RULES 59
12 KNOW YOUR CUSTOMER / ANTI MONEY LAUNDERING 62
GUIDELINES
13 OPERATIONAL GUIDELINES- TERM DEPOSIT 81
14 PAYMENT AND SETTLEMENT 89
15 CUSTOMER SERVICE, BCSBI AND COMPLIANCE 101
16 SAFE DEPOSIT VAULT 116
17 DEMAT 119
18 LIFE INSURANCE 120
19 GENERAL INSURANCE 128
20 MUTUAL FUNDS 132
21 DIGITAL BANKING 136
22 TYPES OF CREDIT FACILITIES 144
23 SCRUTINY OF FINANCIAL STATEMENTS, BREAK-UP OF 149
BALANCE SHEET, FORMATTING OF P & L ACCOUNT
24 ASSET QUALITY MANAGEMENT 162

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 BANKING SYSTEM IN INDIA
Objectives
 Evolution of Banking in India
 Major Banking Reforms till date
 Functions of RBI
 Functions of a Bank
 Importance of Banks in Economy
 Stake Holders
 Challenges

A. 18th Century till Pre- Nationalization

In 1860, an Act was passed permitting the setting up of joint-stock banking
companies in India on the principle of limited liability. This gave a tremendous boost
to the development and expansion of commercial banking in the country. The
following points give glance on evolution of Banking in India:
o Banking in India goes back to the 18th Century
o The first two Banks were established in 1786
o The oldest Bank in the country is SBI ….origin goes back to June 1806
o Later incorporated under the SBI Act in 1955
o Most of the present day leading Commercial Banks established in early 20th
Century
o Informal banking/money lending dominant
o Urban oriented & weak financial system
o Nationalization of RBI in1949
o Banking Regulation Act 1949
o Introduction of 5 Year Plans & Banks’ role in it
o Union Bank was established in the year 1919
B. Nationalization and after - 1969 to 1990
o Nationalization of major 14 Banks (including our Bank) in July 1969
o Shift from Class Banking to Mass Banking
o Beginning Social Banking era
o Massive branch expansion – rural areas
o Nationalization of 6 more banks in April 1980
o Mechanization & Computerization introduced
C. Reforms 1991 to 2015
The state of Indian Banking prior to 1991 was different from today. Banks made no
mention of profits or losses; they did not fix deposit or lending rates. There were no
capital adequacy norms, nor rules for bad loans. To open a branch, or sanction a
high-value loan, a bank had to wait for months for Reserve Bank of India permission.
The major reforms of Banks were undertaken based on the recommendations of the
Narasimham Committee Report of 1991 and 1998.

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These Reforms were aimed at improving
o Efficiency
o Productivity
o Profitability
o Functional autonomy to PSBs
To Inject Competition
o New banks licensed in private sector
o FDI & FII up to 74% allowed in Private Sector Banks
o Listing of PSBs on stock exchanges and allowing them to access capital markets
for augmenting their equity, subject to maintaining Government shareholding at
a minimum of 51%. Private shareholders represented on the Board of PSBs.
o Progressive reduction in statutory pre-emption (Statutory Liquidity Ratio and
Cash Reserve Ratio) to improve the resource base of banks so as to expand credit
available to private sector. SLR currently at 19.00% (38.5% in 1991) and CRR at
4% (15% in 1991).
o Adoption of international best practices in banking regulation. Introduction of
prudential norms on capital adequacy, IRAC (Income Recognition, Asset
Classification, Provisioning), exposure norms etc.
o Phased liberalisation of branch licensing. Banks can now open branches in Tier 2
to Tier 6 centres without prior approval from the Reserve Bank. For Information,
Tier 1 comprises of Metro and Urban centres; Tier 2, 3 and 4 comprise of semi
urban centres and 5 and 6 comprise rural areas.
o Deregulation of a complex structure of deposit and lending interest rates to
strengthen competitive impulses, improve efficiency and strengthen the
transmission of monetary policy.
o Use of information technology to improve the efficiency and productivity,
enhance the payment and settlement systems and deepen Financial Inclusion
o Strengthening of Know Your Customer (KYC) and Anti-money Laundering (AML)
norms; making banking less prone to financial abuse.
o Improvements in the risk management culture of banks
D. Recent Developments – Differentiated Banks
The regulator has been trying to bring in new types of lenders into the Banking
System in an effort to introduce new ideas and develop niches to ensure that more
segments are covered.
RBI has granted licenses for payments banks and Small-Finance Banks.
A payments bank is like any other bank, but operating on a smaller scale without
involving any credit risk. In simple words, it can carry out most banking operations
but can't advance loans or issue credit cards. It can accept demand deposits (up to
Rs 1 lakh), offer remittance services, mobile payments/transfers/purchases and
other banking services like ATM/debit cards, net banking and third party fund
transfers.

In September 2013, the Reserve Bank of India constituted a committee headed by Dr

Nachiket Mor to study “Comprehensive Financial Services for Small Businesses and

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Low Income Households”. The objective of the committee was to propose measures
for achieving financial inclusion and increased access to financial services.
The committee submitted its report to RBI in January 2014. One of the key
suggestions of the committee was to introduce specialized banks or 'payments bank'
to cater to the lower income groups and small businesses so that by January 1, 2016
each Indian resident can have a global bank account.

The main objective of payments bank is to widen the spread of payment and
financial services to small business, low-income households, migrant labour
workforce etc. in secured technology-driven environment. With payments banks, RBI
seeks to increase the penetration level of financial services to the remote areas of
the country.

Small Finance Banks are a type of niche banks in India. They were set up with the
twin objectives of providing an institutional mechanism for promoting rural and semi
urban savings and for providing credit for viable economic activities in the local
areas. It will be for furthering financial inclusion by (i) provision of savings vehicles
primarily to unserved and underserved sections of the population, and (ii) supply of
credit to small business units; small and marginal farmers; micro and small
industries; and other unorganised sector entities, through high technology-low cost
operations
Banks with a Small Finance Banks license can provide basic banking service of
acceptance of deposits and lending.
It can also undertake other non-risk sharing simple financial services activities, not
requiring any commitment of own fund, such as distribution of mutual fund units,
insurance products, pension products, etc. with the prior approval of the RBI and
after complying with the requirements of the sectoral regulator for such products.
The small finance bank can also become a Category II Authorised Dealer in foreign
exchange business for its clients’ requirements.
The small finance bank will be required to use the words “Small Finance Bank” in its
name in order to differentiate it from other banks.·
They are promoted either by individuals, corporate, trusts or societies. The Reserve
Bank of India (RBI) has in April 2017 released a discussion paper seeking comments
on a new category of banks—wholesale and long-term finance banks that will fund
large projects.
According to the discussion paper, these wholesale and long-term finance banks will
focus primarily on lending to the infrastructure sector and small, medium and
corporate businesses. They will also securitize assets for banks and financial
institutions which do priority-sector lending.

The digital payments system in India has evolved the most among 25 countries with
India’s immediate Payment Service (IMPS) being the only system at level 5 in the
Faster Payment Innovation Index (FPII).

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Presently the Banking Industry is passing through tough time in the form of rising
NPA / Stressed Assets. A landmark development relating to resolution of stressed
assets is the Insolvency and Bankruptcy Code (IBC) 2016. From the Reserve Bank's
point of view, a great enabler in this context has been the Banking Regulation
(Amendment) Ordinance promulgated in May and subsequently enacted in August
2016. By the authority it conferred on the Reserve Bank to issue directions to
banks to initiate resolution processes, it scales up the ability of the Reserve Bank
to deal decisively with stress in banks' balance sheets and unclog the flow of
credit to grease the wheels of growth. In the year ahead, it will help to overcome
the debilitating problem of corporate loan delinquency and get our banks back
into the mainstream of financial intermediation.
The government of India (GoI) has announced for merging of banks in 2019, in-
order to revive them from the 6 year low economy due to sudden slowed
economic growth.The finance minister Smt. Nirmala Sitharaman announced for
merger of 10 public sector banks into 4 and it was effective from 01 April 2020.
After the mergers the country will have only 12 public sector banks. The anchor
banks for this merger are the Punjab National Bank, Canara Bank, Union Bank of
India and the Indian Bank. Prior to this announcement, in April 2019, Vijaya Bank
and Dena Bank (amalgamating banks) were merged into Bank of Baroda.
Rank of banks after the above amalgamation
Rank Bank
1 State Bank of India
2 Punjab National Bank
3 Bank of Baroda
4 Canara Bank
5 Union Bank of India
6 Bank of India
7 Indian Bank
8 Central Bank of India
9 Indian Overseas Bank
10 UCO bank
11 Bank of Maharashtra
12 Punjab and Sind Bank

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 BANKING SYSTEM IN INDIA

The formal Banking system in India comprises of the Reserve Bank of India (central
Bank), Commercial Banks, Private Banks, Regional Rural Banks and the Cooperative
Banks. The apex institution in the Banking System in India is the Reserve Bank of
India which is a regulator of banking system in our country.

The Indian banking system consists of 18 public sector banks, private sector banks,
foreign banks, Regional Rural Banks, urban Cooperative banks and rural cooperative
banks, in addition to cooperative credit institutions. Public Sector Banks control
more than 70 percent of the banking system assets, thereby leaving a comparatively
smaller share for its private peers. Banks are also encouraging their customers to
manage their finances using mobile phones.
Reserve Bank of India: The Reserve Bank of India was established on April 1 1935 in
accordance with the provisions of the Reserve Bank of India Act, 1934. RBI is fully
owned by Government of India. The Preamble of the RBI describes the basic
functions of the Reserve Banks as:
“… to regulate the issue of Bank Notes and keeping of reserves with a view to
securing monetary stability in India and generally to operate the currency and credit
system of the country to its advantage.”

Scheduled Bank: Those Banks which have been included in the Second Schedule of
Reserve Bank of India Act, 1934 are referred as Scheduled Banks. Only those banks

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which satisfy the criteria laid down vide Sec 42(6) of the RBI, Act 1934 like (a) must
satisfy the RBI regarding its functioning being conducted in the interest of the
general public – Depositors. The bank is not indulging into any speculative activities.
(b) Paid-up capital and reserves should not be less than Rs. 5 lakhs (c) The financial
company must be a bank notified by the Central Government, are included in the
list. The Banks that are not in this Schedule are called Non-Scheduled Banks. The
Scheduled Banks comprise both Commercial and Cooperative Banks. Scheduled
Commercial banks can be further classified as Public Sector, private sector Indian
Banks, Private Sector foreign banks, Regional Rural Banks and the differentiated
banks like Payment Banks and Small Finance Banks. Some examples of Non-
Scheduled Banks are Local Area Banks and some State and Urban Cooperative Banks.

Every scheduled Bank enjoys two principal facilities

o It becomes eligible for debts/loans at the bank rate from RBI
o Automatically acquires membership of clearing house
E. Functions of RBI
1. Monetary Authority
o Formulates implements and monitors the monetary policy with the objective
of maintaining price stability and ensuring adequate flow of credit to
productive sectors.
2. Regulator and supervisor of the financial system
o Prescribes broad parameters of banking operations within which the country’s
banking and financial system functions with the objective to maintain public
confidence in the system protect depositors’ interest and provide cost-
effective banking service to the public.
3. Manager of Foreign Exchange
o Manages the Foreign Exchange Management Act, 1999 with the objective to
facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.
4. Issuer of Currency
o Issues and exchanges or destroys currency and coins (not fit for circulation)
with the objective to give the public adequate quantity of supplies of
currency notes and coins and in good quality.
5. Developmental Role
o Performs wide range of promotional functions to support national objectives
6. Related Functions
o Banker to the Government
o Performs merchant banking function for the Central and the State
Governments; also acts as their banker.
o Banker to Banks
o Maintains banking accounts of all scheduled Banks

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F. Functions of a Bank

The function of a Bank can be classified as Primary and Secondary. The primary
functions include Accepting Deposits and Granting of Loans and Advances and the
secondary functions include Agency functions and Utility functions. Under Utility
functions banks also undertake CSR (Corporate Social Responsibility) Activities.
Banks also provide Financial and Advisory services.
G. Importance of Banks in Economy
The main objective of any commercial organization is to earn profit and banks too
are not an exception and therefore it accepts deposits at lower cost and advance
loans for higher cost. Although these functions are the basic function of commercial
banks, there are a lot more functions which enhance the importance of banks today.
o Acceptance of deposits, by opening different kinds of bank accounts
o Advancing loans to needy persons through different methods and requirements
o Provisions of agency and general utility services to his customers
o Helps in making new investments in different organizations and increasing the
productive capacity of the country.
o Helps promote capital formation in the country by mobilizing and collection of
savings for the purpose of investments.
o Helps development of industries in the country according to the requirements of
the country.
o Helps in a balanced development of the country’s economy by lending to all
sectors uniformly.
o By mobilization of domestic savings banks help in reducing reliance of foreign
funds
o Help in the implementation of the monetary policy of the Central Bank- RBI.
o The power of the banks to expand deposits through loans, advances and
investments in known as credit creation. The Banking system as a whole can

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 create credit which is several times more than the original increase in the
deposits of the bank.
o Banks are the custodian and distributor of liquid capital of the country, which is
the life blood of all commercial and economic activities of a country.
H. Stake Holders
o Customers
o Investors
o Govt. of India
o Regulators
o Vendors/Service Providers
o Employees
I. Challenges before the Banks
The Challenges faced by Banks in India are
o Asset Quality
o Capital
o Risk Management
o Digitalization
o Financial Inclusion (Rural & Social Banking)

However the biggest challenge facing banks according to Mr. Moorad Choudhry, the
author of “The Principles of Banking” is “to stay engaged with the customer”.

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 Test- Banking System in India

1. A scheduled bank is one which is

a. Included in 2nd schedule of RBI Act
b. Included in 1st schedule of RBI Act
c. Having capital of Rs. 5.00 crore & above
d. None of these
2. The apex institution in Banking System in India is
a. RBI
b. SEBI
c. NABARD
d. IRDA

3. Name of the regulator of Money Market

a. SEBI
b. RBI
c. FIMMDA
d. GOI

4. Total number of Public sector banks in India are

a. 20
b. 12
c. 21
d. 23

Q 1 2 3 4
Ans a a b b

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 BANKING REGULATIONS AND LAWS
Bank regulation is a form of government regulation which subjects banks to certain
requirements, restrictions and guidelines, designed to create market
transparency between banking institutions and the individuals and corporations with
whom they conduct business, among other things. As regulation focusing on key
actors in the financial markets, it forms one of the three components of financial
law, the other two being case law and self-regulating market practices.

Given the interconnectedness of the banking industry and the reliance that the
national (and global) economy hold on banks, it is important for regulatory agencies
to maintain control over the standardized practices of these institutions. Supporters
of such regulation often base their arguments on the "too big to fail" notion. This
holds that many financial institutions (particularly investment banks with
a commercial arm) hold too much control over the economy to fail without
enormous consequences. This is the premise for government bailouts, in which
government financial assistance is provided to banks or other financial institutions
who appear to be on the brink of collapse. The belief is that without this aid, the
crippled banks would not only become bankrupt, but would create rippling effects
throughout the economy leading to systemic failure. Compliance with bank
regulations is verified by personnel known as bank examiners.
The objectives of bank regulation, and the emphasis, vary between jurisdictions.
The most common objectives are:

 Prudential—to reduce the level of risk to which bank creditors are exposed
(i.e. to protect depositors)
 Systemic risk reduction—to reduce the risk of disruption resulting from
adverse trading conditions for banks causing multiple or major bank failures
 To avoid misuse of banks—to reduce the risk of banks being used for criminal
purposes, e.g. laundering the proceeds of crime
 To protect banking confidentiality
 Credit allocation—to direct credit to favored sectors
 It may also include rules about treating customers fairly and having corporate
social responsibility.

Licensing and supervision

Bank regulation is a complex process and generally consists of two components:

 licensing, and
 Supervision.

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The first component, licensing, sets certain requirements for starting a new bank.
Licensing provides the licence holders the right to own and to operate a bank. The
licensing process is specific to the regulatory environment of the country and/or the
state where the bank is located. Licensing involves an evaluation of the entity's
intent and the ability to meet the regulatory guidelines governing the bank's
operations, financial soundness, and managerial actions. The regulator supervises
licensed banks for compliance with the requirements and responds to breaches of
the requirements by obtaining undertakings, giving directions, imposing penalties or
(ultimately) revoking the bank's license.

The second component, supervision, is an extension of the licence-granting process

and consists of supervision of the bank's activities by a government regulatory body
(usually the central bank or another independent governmental agency). Supervision
ensures that the functioning of the bank complies with the regulatory guidelines and
monitors for possible deviations from regulatory standards. Supervisory activities
involve on-site inspection of the bank's records, operations and processes or
evaluation of the reports submitted by the bank.
Minimum requirements

A national bank regulator imposes requirements on banks in order to promote the

objectives of the regulator. Often, these requirements are closely tied to the level
of risk exposure for a certain sector of the bank. The most important minimum
requirement in banking regulation is maintaining minimum capital ratios. To some
extent, U.S. banks have some leeway in determining who will supervise and regulate
them.
Market discipline

The regulator requires banks to publicly disclose financial and other information and
depositors and other creditors are able to use this information to assess the level of
risk and to make investment decisions. As a result of this, the bank is subject to
market discipline and the regulator can also use market pricing information as an
indicator of the bank's financial health.
Capital requirement

The capital requirement sets a framework on how banks must handle their capital in
relation to their assets. Internationally, the Bank for International
Settlements' Basel Committee on Banking Supervision influences each country's
capital requirements. In 1988, the Committee decided to introduce a capital
measurement system commonly referred to as the Basel Capital Accords. The latest
capital adequacy framework is commonly known as Basel III. This updated

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framework is intended to be more risk sensitive than the original one, but is also a
lot more complex.
Reserve requirement

The reserve requirement sets the minimum reserves each bank must hold to demand
deposits and banknotes. This type of regulation has lost the role it once had, as the
emphasis has moved toward capital adequacy, and in many countries there is no
minimum reserve ratio. The purpose of minimum reserve ratios is liquidity rather
than safety. An example of a country with a contemporary minimum reserve ratio
is Hong Kong, where banks are required to maintain 25% of their liabilities that are
due on demand or within 1 month as qualifying liquefiable assets.

Reserve requirements have also been used in the past to control the stock
of banknotes and/or bank deposits. Required reserves have at times been gold,
central bank banknotes or deposits, and foreign currency.

Corporate governance

Corporate governance requirements are intended to encourage the bank to be well

managed, and is an indirect way of achieving other objectives. As many banks are
relatively large, and with many divisions, it is important for management to
maintain a close watch on all operations. Investors and clients will often hold higher
management accountable for missteps, as these individuals are expected to be
aware of all activities of the institution. Some of these requirements may include:

 To be a body corporate (i.e. not an individual, a partnership, trust or other

unincorporated entity)
 To be incorporated locally, and/or to be incorporated under as a particular
type of body corporate, rather than being incorporated in a foreign jurisdiction
 To have a minimum number of directors
 To have an organizational structure that includes various offices and officers,
e.g. corporate secretary, treasurer/CFO, auditor, Asset Liability Management
Committee, Privacy Officer, Compliance Officer etc. Also the officers for those
offices may need to be approved persons, or from an approved class of persons
 To have a constitution or articles of association that is approved, or contains
or does not contain particular clauses, e.g. clauses that enable directors to act
other than in the best interests of the company (e.g. in the interests of a parent
company) may not be allowed.

Financial reporting and disclosure requirements

Among the most important regulations that are placed on banking institutions is the
requirement for disclosure of the bank's finances. Particularly for banks that trade
on the public market, requires management to prepare annual financial statements
according to a financial reporting standard, have them audited, and to register or

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publish them. Often, these banks are even required to prepare more frequent
financial disclosures, such as Quarterly Disclosure Statements.

In addition to preparing these statements, directors of the bank must attest to the
accuracy of such financial disclosures. Thus, included in their annual reports must
be a report of management on the company's internal control over financial
reporting. The internal control report must include: a statement of management's
responsibility for establishing and maintaining adequate internal control over
financial reporting for the company; management's assessment of the effectiveness
of the company's internal control over financial reporting as of the end of the
company's most recent fiscal year; a statement identifying the framework used by
management to evaluate the effectiveness of the company's internal control over
financial reporting; and a statement that the registered public accounting firm that
audited the company's financial statements included in the annual report has issued
an attestation report on management's assessment of the company's internal control
over financial reporting. Under the new rules, a company is required to file the
registered public accounting firm's attestation report as part of the annual report.
Furthermore, management evaluate any change in the company's internal control
over financial reporting that occurred during a fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the company's internal control
over financial reporting.

Credit rating requirement

Banks may be required to obtain and maintain a current credit rating from an
approved credit rating agency, and to disclose it to investors and prospective
investors. Also, banks may be required to maintain a minimum credit rating. These
ratings are designed to provide color for prospective clients or investors regarding
the relative risk that one assumes when engaging in business with the bank. The
ratings reflect the tendencies of the bank to take on high risk endeavors, in addition
to the likelihood of succeeding in such deals or initiatives. The rating agencies that
banks are most strictly governed by, referred to as the "Big Three" are the Fitch
Group, Standard and Poor's and Moody's. These agencies hold the most influence
over how banks (and all public companies) are viewed by those engaged in the
public market. In recent years, following the Great Recession, many economists
have argued that these agencies face a serious conflict of interest in their core
business model. Clients pay these agencies to rate their company based on their
relative riskiness in the market. The question then is to whom is the agency
providing its service: the company or the market?

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Large exposures restrictions

Banks may be restricted from having imprudently large exposures to

individual counterparties or groups of connected counterparties. Such limitation
may be expressed as a proportion of the bank's assets or equity, and different limits
may apply based on the security held and/or the credit rating of the counterparty.
Restricting disproportionate exposure to high-risk investment prevents financial
institutions from placing equity holders' (as well as the firm's) capital at an
unnecessary risk.

The key regulations that govern the banking industry in India are:
 Reserve Bank of India Act, 1934
 Banking Regulation Act, 1949
 Negotiable Instruments Act, 1881

Reserve Bank of India Act, 1934

Reserve Bank of India Act, 1934 is the legislative act under which the Reserve Bank
of India was formed. This act along with the Companies Act, which was amended in
1936, were meant to provide a framework for the supervision of banking firms
in India.
The Act contains the definition of the so-called scheduled banks, as they are
mentioned in the 2nd Schedule of the Act. These are banks which were to have paid
up capital and reserves above 5 lakh.
There are various section in the RBI Act but the most controversial and confusing
section is Section 7. Although this section has never been used by the central govt,
it puts a restriction on the autonomy of the RBI. Section 7 states that central
government can legislate the functioning of the RBI through the RBI board, and the
RBI is not an autonomous body.
Section 17 of the Act defines the manner in which the RBI can conduct business. The
RBI can accept deposits from the central and state governments without interest. It
can purchase and discount bills of exchange from commercial banks. It can
purchase foreign exchange from banks and sell it to them. It can provide loans to
banks and state financial corporations. It can provide advances to the central
government and state governments. It can buy or sell government securities. It can
deal in derivative, repo and reverse repo.
Section 18 deals with emergency loans to banks. Section 21 states that the RBI must
conduct banking affairs for the central government and manage public debt. Section
22 states that only the RBI has the exclusive rights to issue currency notes in India.
Section 24 states that the maximum denomination a note can be
is ₹10,000 (US$140).
Section 26 of Act describes the legal tender character of Indian bank notes.
Section 28 allows the RBI to form rules regarding the exchange of damaged and
imperfect notes.

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Section 31 states that in India, only the RBI or the central government can issue and
accept promissory notes that are payable on demand. However, cheques, that are
payable on demand, can be issued by anyone.
Section 42(1) says that every scheduled bank must have an average daily balance
with the RBI. The amount of the deposit shall be more that a certain percentage of
its net time and demand liabilities in India.

Banking Regulation Act, 1949

The Banking Regulation Act, 1949 is a legislation in India that regulates all banking
firms in India. Passed as the Banking Companies Act 1949, it came into force from 16
March 1949 and changed to Banking Regulation Act 1949 from 1 March 1966. It is
applicable in jammu and Kashmir from 1956. Initially, the law was applicable only to
banking companies. But, 1965 it was amended to make it applicable to cooperative
banks and to introduce other changes.

The Act provides a framework under which commercial banking in India is supervised
and regulated. The Act supplements the Companies Act, 1956. Primary Agricultural
Credit Societyand cooperative land mortgage banks are excluded from the Act.

The Act gives the Reserve Bank of India (RBI) the power to license banks, have
regulation over shareholding and voting rights of shareholders; supervise the
appointment of the boards and management; regulate the operations of banks; lay
down instructions for audits; control moratorium, mergers and liquidation; issue
directives in the interests of public good and on banking policy, and impose
penalties.

In 1965, the Act was amended to include cooperative banks under its purview by
adding the Section 56. Cooperative banks, which operate only in one state, are
formed and run by the state government. But, RBI controls the licensing and
regulates the business operations. The Banking Act was a supplement to the
previous acts related to banking.

Negotiable Instruments Act, 1881

Negotiable Instruments Act, 1881 is an act in India dating from the British colonial
rule that is still in force largely unchanged.

The history of the present Act is a long one. The Act was originally drafted in 1866
by the 3rd Indian Law Commission and introduced in December 1867 in the Council
and it was referred to a Select Committee. Objections were raised by the
mercantile community to the numerous deviations from the English Law in which it
contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient
period for criticism by the Local Governments, the High Courts and the chambers of
commerce, the Bill was revised by a Select Committee. In spite of this Bill could not
reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to
be referred to a new Law Commission. On the recommendation of the new Law
Commission, the Bill was re-drafted and again it was sent to a Select Committee
which adopted most of the additions recommended by the new Law Commission.

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The draft thus prepared for the fourth time was introduced in the Council and was
passed into law in 1881 being the Negotiable Instruments Act, 1881 (Act No.26 of
1881)

The most important class of Credit Instruments that evolved in India were
termed Hundi. Their use was most widespread in the twelfth century and has
continued till today. In a sense, they represent the oldest surviving form of credit
instrument. These were used in trade and credit transactions; they were used as
remittance instruments for the purpose of transfer of funds from one place to
another. In Modern era Hundi served as traveller's cheques.

According to Section 13 of the Negotiable Instruments Act, "A negotiable

instrument means a promissory note, bill of exchange or cheque payable either to
order or to bearer. But in Section 1, it is also described that Local extent, Saving of
usage relating to hundis, etc., Commencement. -It extends to the whole of India but
nothing herein contained affects the Indian Paper Currency Act, 1871, Section 2, or
affects any local usage relating to any instrument in an oriental language. Provided
that such usages may be excluded by any words in the body of the instrument,
which indicate an intention that the legal relations of the parties thereto shall be
governed by this Act; and it shall come

Main Types of Negotiable Instruments are:

1. Inland Instruments
2. Foreign Instruments
3. Bank
4. Finance companies(listed) Draft

We prefer to carry a small piece of paper known as Cheque rather than carrying the
currency worth the value of the Cheque. Before 1988 there being no provision to
restrain the person issuing the Cheque without having sufficient funds in his
account. Of course on Dishonoured cheque there is a civil liability accrued. In order
to ensure promptitude and remedy against the defaulters of the Negotiable
Instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act,
1881 by amending it with Negotiable Instruments Act, 1988.

With the insertion of these provisions in the Act the situation certainly improved and
the instances of dishonour have relatively come down but on account of application
of different interpretative techniques by different High Courts on different
provisions of the Act it further compounded and complicated the situation although
on dishonour of cheques the trends of the verdicts of the Supreme Court of India

Parliament enacted the Negotiable Instruments (Amendment and Miscellaneous

Provisions) Act, 2002 (55 of 2002), which is intended to plug the loopholes. This
amendment Act inserts five new sections from 143 to 147 touching various limbs of
the parent Act and Cheque truncation through digitally were also included and the
amendment Act has been recently brought into force on Feb. 6, 2003.

Statutory definitions
Some of the important definitions of the Act are:

17
Section 4 - Promissory note
A "promissory note" is an instrument in writing (not being a bank-note or a currency-
note) containing an unconditional undertaking, signed by the maker, to pay a
certain sum of money only to, or to the order of, a certain person, or to the bearer
of the instrument.

Section 5 - 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 promise or order to pay is not "conditional", within the meaning of this section and
section 4, by reason of the time for payment of the amount or any instalment
thereof being expressed to be on the lapse of a certain period after the occurrence
of a specified event which, according to the ordinary expectation of mankind, is
certain to happen, although the time of its happening may be uncertain.
The sum payable may be "certain", within the meaning of this section and section 4,
although it includes future interest or is payable at an indicated rate of exchange,
or is according to the course of exchange, and although the instrument provides
that, on default of payment of an instalment, the balance unpaid shall become due.
The person to whom it is clear that the direction is given or that payment is to be
made may be a "certain person", within the meaning of this section and section 4,
although he is mis-named or designated by description only.

Section 6 - Cheque
A cheque is bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the electronic image of a
truncated cheque and a cheque in the electronic form.
Explanation: I. - For the purposes of this section, the expressions-
(a) a cheque in the electronic form means a cheque which contains the exact
mirror image of a paper cheque, and is generated, written and signed in a secure
system ensuring the minimum safety standards with the use of digital signature
(with or without biometrics signature) and asymmetric crypto system;
(b) a truncated cheque means a cheque which is truncated during the course of a
clearing cycle, either by the clearing house or by the bank whether paying or
receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in writing.
Explanation II - For the purposes of this section, the expression clearing house
means the clearing house managed by the Reserve Bank of India or a clearing house
recognised as such by the Reserve Bank of India.

Section 13 - Negotiable Instruments

(1) Negotiable instrument. A Negotiable Instrument means a promissory note, bill
of exchange or cheque payable either to order or to bearer.
Explanation (i).-A promissory note, bill of exchange or cheque is payable to order
which is expressed to be so payable or which is expressed to be payable to a
particular person, and does not contain words prohibiting transfer or indicating an
intention that it shall not be transferable.

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Explanation (ii).-A promissory note, bill of exchange or cheque is payable to bearer
which is expressed to be so payable or on which the only or last endorsement is an
endorsement in blank.
Explanation (iii).-Where a promissory note, bill of exchange or cheque, either
originally or by endorsement, is expressed to be payable to the order of a specified
person, and not to him or his order, it is nevertheless payable to him or his order at
his option.
(2) A negotiable instrument may be made payable to two or more payees jointly, or
it may be made payable in the alternative to one of two, or one or -some of several
payees.

Section 123 - Cheque Crossed Generally

Where a cheque bears across its face an addition of the words and company or any
abbreviation thereof, between two parallel transverse lines, or of two parallel
transverse lines simply, either with or without the words, not negotiable, that
addition shall be deemed a crossing, and the cheque shall be deemed to be crossed
generally.

Section 124 - Cheque crossed specially

Where a cheque bears across its face an addition of the name of a banker, either
with or without the words not negotiable, that addition shall be deemed a crossing,
and the cheque shall be deemed to be crossed specially, and to be crossed to that
banker.

Section 126 Cheque crossed specially

Where a cheque is crossed generally, the banker, on whom it is drawn shall not pay
it otherwise than to a banker.
Payment of cheque crossed specially. - Where a cheque is crossed specially, the
banker on whom it is drawn shall not pay it otherwise than to the banker to whom it
is crossed, or his agent, for collection.

Section 130 Cheque bearing Not Negotiable

A person taking a cheque crossed generally or specially, bearing in either case the
words not negotiable, shall not have, and shall not be capable of giving, a better
title to the cheque than that which the person from whom he took it had.

Dishonour of certain cheques for insufficiency of funds

Provided that nothing contained in this section shall apply unless-

(a) The cheque has been presented to the bank within a period of three months
from the date on which it is drawn or within the period of its validity, whichever is
earlier;
(b) the payee or the holder in due course of the cheque, as the case may be, makes
a demand for the payment of the said amount of money by giving a notice in
writing, to the drawer of the cheque within thirty days of the receipt of information
by him from the bank regarding the return of the cheque as unpaid; and

19
(c) The drawer of such cheque fails to make the payment of the said amount of
money to the payee or as the case may be, to the holder in due course of the
cheque within 15 days of the receipt of the said notice.
Explanation - For the purposes of this section, debt or other liability means a legally
enforceable debt or other liability.
Another very important section is presumptions as to Negotiable Instruments under
Section 118 of the Act.

Section 118 - Presumptions as to Negotiable Instruments

Until the contrary is proved, the following presumptions shall be made:
(a) of consideration. - that every negotiable instrument was made or drawn for
consideration, and that every such instrument, when it has been accepted,
indorsed, negotiated or transferred, was accepted, indorsed, negotiated or
transferred for consideration;
(b) as to date. - that every negotiable instrument bearing a date was made or drawn
on such date;
(c) as to time of acceptance. - that every accepted bill of exchange was accepted
within a reasonable time after its date and before its maturity;
(d) as to time of transfer. - that every transfer of a negotiable instrument was made
before its maturity;
(e) as to order of indorsements. - that the indorsements appearing upon a
negotiable instrument were made in the order in which they appear thereon;
(f) as to stamp. - that a lost promissory note, bill of exchange or cheque was duly
stamped;
(g) that holder is a holder in due course. - that the holder of a negotiable
instrument is a holder in due course;
Provided that, where the instrument has been obtained from its lawful owner, or
from any person in lawful custody thereof, by means of an offence or fraud, or has
been obtained from the maker or acceptor thereof by means of an offence or fraud,
or for unlawful consideration, the burden of proving that the holder is a holder in
due course lies upon him.
By change in N.I. act from April 1st 2016 cheque once dishonor due to insufficient
funds can not be presented again.(citation needed).

Six of the offence under Section 138

It is manifest that to constitute an offence under Section 138 of the Act; the
following ingredients are required to be fulfilled:

1. A must have drawn a cheque on an account maintained by him in a bank for

payment of a certain amount of money to another person from out of that
account
2. The cheque should have been issued for the discharge, in whole or in part, of
any debt or other liability;
3. That cheque has been presented to bank within a period of three months
from the date on which it is drawn or within the period of its validity
whichever is earlier.

20
4. That cheque is returned by the bank unpaid, either because of the amount of
money standing to the credit of the account is insufficient to honour the
cheque or that it exceeds the amount arranged to be paid from that account
by an agreement made with the bank;
5. The payee or the holder in due course of the cheque makes a demand for the
payment of the said amount of money by giving a notice in writing, to the
drawer of the cheque, within 30 days of the receipt of information by him
from the bank regarding the return of the cheque as unpaid;
6. The drawer of such cheque fails to make payment of the said amount of
money to the payee or the holder in due course of the cheque within 15 days
of the receipt of the said notice.

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 ECONOMICS AND BANKING

In Banking context there are few important rates which play a vital role in the
economy of the country. The Key Rates are as follows:

Repo rate
Repo rate also known as the benchmark interest rate is the rate at which the RBI
lends money to the banks for a short term. When the repo rate increases, borrowing
from RBI becomes more expensive. If RBI wants to make it more expensive for the
banks to borrow money, it increases the repo rate similarly, if it wants to make it
cheaper for banks to borrow money it reduces the repo rate.

Reverse Repo rate

Reverse Repo rate is the short term borrowing rate at which RBI borrows money
from banks. The Reserve bank uses this tool when it feels there is too much money
floating in the banking system. An increase in the reverse repo rate means that the
banks will get a higher rate of interest from RBI. As a result, banks prefer to lend
their money to RBI which is always safe instead of lending it others (people,
companies etc) which is always risky.

Repo Rate signifies the rate at which liquidity is injected in the banking system by
RBI, whereas Reverse Repo rate signifies the rate at which the central bank absorbs
liquidity from the banks.

CRR - Cash Reserve Ratio

Banks in India are required to hold a certain proportion of their deposits in the form
of cash. However Banks don't hold these as cash with themselves, they deposit such
cash (currency chests) with Reserve Bank of India, which is considered as equivalent
to holding cash with themselves. This minimum ratio (that is the part of the total
deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash
Reserve Ratio.

When a bank's deposits increase by Rs100, and if the cash reserve ratio is 9%, the
banks will have to hold Rs. 9 with RBI and the bank will be able to use only Rs 91 for
investments and lending, credit purpose. Therefore, higher the ratio, the lower is
the amount that banks will be able to use for lending and investment. This power of
Reserve bank of India to reduce the lendable amount by increasing the CRR, makes
it an instrument in the hands of a central bank through which it can control the
amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the
banking system.

SLR - Statutory Liquidity Ratio

Every bank is required to maintain at the close of business every day, a minimum
proportion of their Net Demand and Time Liabilities as liquid assets in the form of
cash, gold and un-encumbered approved securities. The ratio of liquid assets to
demand and time liabilities is known as Statutory Liquidity Ratio (SLR). RBI is
empowered to increase this ratio up to 40%. An increase in SLR also restricts the
bank's leverage position to pump more money into the economy.

Call Rate - Inter bank borrowing rate

22
Interest Rate paid by the banks for lending and borrowing funds with maturity
period ranging from one day to 14 days. Call money market deals with extremely
short term lending between banks themselves. After Lehman Brothers went
bankrupt Call Rate sky rocketed to such an insane level that banks stopped lending
to other banks.

MSF - Marginal Standing facility

It is a special window for banks to borrow from RBI against approved government
securities in an emergency situation like an acute cash shortage. MSF rate is higher
than Repo rate.

Bank Rate
This is the long term rate (Repo rate is for short term) at which central bank (RBI)
lends money to other banks or financial institutions. Bank rate is not used by RBI for
monetary management now. It is now same as the MSF rate.

Monetary Policy Statement, 2020-21:

On the basis of an assessment of the current and evolving macroeconomic situation,

the Monetary Policy Committee (MPC) at its meeting on May 22, 2020 it was decided
to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 40
bps to 4.0 per cent from 4.40 per cent with immediate effect; accordingly, the
marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.25 per
cent from 4.65 per cent; and the reverse repo rate under the LAF stands reduced to
3.35 per cent from 3.75 per cent. The MPC also decided to continue with the
accommodative stance as long as it is necessary to revive growth and mitigate the
impact of COVID-19 on the economy, while ensuring that inflation remains within
the target.

The decisions are in consonance with the objective of achieving the medium-term
target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2
per cent, while supporting growth.

MONETARY AND LIQUIDITY MEASURES:

On the basis of an assessment of the current and evolving macroeconomic situation,
the key rates are:

1. REPO RATE: reduce the policy repo rate under the liquidity adjustment facility
(LAF) by 40 bps to 4.0 per cent from 4.40 per cent with immediate effect;

2. Accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand
reduced to 4.25 per cent from 4.65 per cent; and MARGINAL STANDING
FACILITY: The MSF rate (an emergency funding window) with a spread of 25 bps
above the repo rate reduced to 4.25%.

3. The reverse repo rate under the LAF stands reduced to 3.35 per cent from 3.75
per cent.
BANK RATE: The MSF rate and the Bank Rate are calibrated to 25 basis above the
repo rate. The Bank Rate thus reduced to 4.25 per cent.

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CASH RESERVE RATIO (CRR): CRR of scheduled banks unchanged at 3% of their
NDTL. Effective from the fortnight beginning April 16, 2016, the minimum daily
maintenance of the CRR of 90% remains unchanged.

STATUTORY LIQUIDITY RATIO (SLR): In order to align the SLR with the LCR
requirement, the MPC in its fifth bi-monthly policy decided to reduce the SLR by 25
bps every calendar quarter until the SLR reaches 18% of NDTL. The first reduction of
25 bps took effect in the quarter commencing 5th Jan, 2019. The SLR of scheduled
commercial banks currently is 18.00%.

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 STRUCTURE OF A BANK
SAMPLE ORGANISATIONAL STRUCTURE

Courtesy : Union Bank of India

Banks may for functional efficiency may have Zonal/Regional offices for Audit,
Marketing and also specialized Branches viz. Clearing Operations, Loan Points,
Processing Centers etc.

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 BASICS OF BRANCH OPERATIONS

1. BANKING
Banking is defined in section 5(b) of the BR Act as the acceptance of deposits of
money from the public for the purpose of lending or investment and repayable on
demand or otherwise and withdrawable by cheque, draft, and order or otherwise.

2. BRANCH AND ITS ACTIVITIES

A branch is a center or location through which a bank offers a wide array of face to
face and automated services to its customers.

Cash : Accepting of Cash which is termed as Cash Receipts and Payment of Cash is
known as Cash Payments. Cash Management is also an important function to improve
efficiency and profitability. Since ATMs are primarily Cash dispensing Machines,
maintenance of ATM is also integral part of the Cash Department of the branch.

3. SAFETY MEASURES:
The following safety measures are essential while handling Cash:

o All cash counters & cabin should have proper locking arrangements.
o Dual control on cash to be ensured.
o Deployment of armed guard
o Absolute minimum cash balance with in cash limits should be maintained on the
counter during banking hours.
o Safety measures at counters.
o No outsider or non-cash staff is allowed in the cash cabin with in working hours.
o Timely cash remittances no excess cash holding- it is strain on profitability and
security.
o Proper vigil by watch & ward staff.
o Gun & ammunition should be in safe custody.
o Working of alarm system should be checked regularly.
o Staff to know the technique of the use of the fire extinguisher.
o Never keep receipt of duplicate keys with other Bank/Branch in the safe. Preserve
the same in a separate file and keep the same under lock and key.

26
o Display of important telephone numbers from security angle as per list provided by
the security officer/department.
o Tallying of cash at ATM through JP log and admin slip.
o Metal chain should be tied to the collapsible gate so that only one person enters at a
time.
o Whenever cash safe is open the main gate should be closed as this occasion is
vulnerable for robbery etc.
o Alarm system should be in working condition and various accessible points should be
known to the staff.
o Proper control over security items like ATM cards, Cheque book, Deposit receipts,
DD, cash seals etc.
o Acceptance of Soiled/cut notes
A. Resource mobilization:
For Banking business the prime resource for doing its business is Deposits i.e
Savings, Current and Term Deposits. For a Bank, Branches are centres of RESOURCE
MOBILIZATION. Resources are mobilized through existing as well as new customers.
B. Credit or Advances:
To earn income, resources mobilized needs to be deployed. In other words the
demands of customers needing financial assistance are met by providing credit to
them. Credit or Advances department is an important department as it plays major
role in deployment of funds and increasing the profitability of Branch and Bank.
C. Remittances:
Remittances are transfer of funds across the branches of the bank as well as across
the banks. NEFT, RTGS, IMPS, Demand Drafts, are ways and instruments through
which remittances are carried out. Remittances of Cash to and fro branches, other
banks and currency chests are also part of branch’s day to day activity.
D. Marketing :
To provide one stop shop for customers in their financial requirements banks
Market Insurance products, Mutual Funds etc. This activity provides opportunity to
increase our non-interest income and thereby contributes to profitability of the
bank.
E. Government Business:
Branches also Maintain Pension Accounts (Civil and Defence), Public Provident Fund
Accounts, Accounts of New/National Pension Scheme, helps Pensioners and
Customers have their requirement fulfilled. Bank is also benefited by getting
commissions on these services provided.
F. Lockers:
Bank provides Safe deposit locker facility to Customers for safe keeping of valuables
at a nominal rent.

27
4. DOUBLE ENTRY SYSTEM
Each entry is reflected at two places in the books of accounts. For example, if
customer deposits cash, Cash on hand is debited and customer's account is credited.

All deposits are liabilities and advances are assets.

5. ACCOUNTS
Two main categories of account are Personal account & Impersonal Account.

Personal Account: The accounts which are in the name of customers e.g. M/s
ABC Ltd, Mohan, etc..

Impersonal Accounts: The Office accounts like Suspense account, Sundry

Account, POB (Payment on Behalf of Branches) Account etc. are used when the
amounts are not accounted for in a customer's account.

Few Impersonal Accounts are explained below:

Suspense Account: It is a temporary account which is debited or credited for a

limited period where the income or expenditure is not yet ascertained.
Suspense account Advance against TE bill: - Suppose a staff has been nominated
for a training programme and applied for TE advance. After submission of TE Bill,
amount incurred on the tour will be claimed as TE bill. This account will be
nullified by debiting expenditure account and crediting the advance amount.
POB cash remittance: If a branch remits excess cash to currency chest. Debit: POB
cash remittance and Credit: Cash in Hand.
Income Account: Interest collected every month in a loan account will be credited
into Income account interest on loans.
Expenditure account: Suppose you have completed your training programme and
submitted your TE bill within 7 days. On approval of your TE bill, expenditure
account will be debited and suspense account adv. against TE bill will be
credited.
Sundry deposit- Sundry debtors- savings
Ex. In case of name and account number mismatch in cash slip (SB account)
In case mistakes could not be found, it will be kept in sundry deposit- sundry
debtors- savings.
But the same requires immediate corrective action.
Entries in impersonal accounts should be adjusted within reasonable time else it’s
a constraint on capital or may lead to misappropriations and fraud.
6. TYPES OF TRANSACTIONS: CASH/CLEARING/TRANSFER
All transactions which happen in a branch are either through Cash, Clearing or
Transfer.
After implementation of Core Banking facilities branches are now called as
Service out Lets (SOL)

28
 Customers are now having the facility of operating through at any of the branches of
our Bank. It is therefore Branches are also known as a Service out let (SOL). Each
and every branch is having a unique SOL ID. which is formed by removing the first &
last digit of IBR Code (having 6 digit) allocated by RBI and suffixing it by 0 e.g. for
IBR Code 530531, SOL ID is 30530.
Inter-sol transactions: Transactions between two branches are called Inter-sol
transactions. Other than the base branch within Bank is called Inter-SOL (Non-Base
Branch)
Cash Transaction: Transaction either payment or receipt in the form of cash is
known as cash transaction.
Transfer Transaction: Transactions other than cash transaction within the bank
between two or more account are known as transfer transaction. Example: Mr. ‘A’
having account with your branch, transfers certain amount from his account to his
father’s account in your branch or with some other branch. For transfer /clearing
cheques, up to Rs.2.00 lacs, it is signed by single Officer.
Clearing Transaction: Clearing is a process for exchange of interbank cheques/DDs
and settlement is the actual exchange of money, or some other value for the
securities. Clearing of cheques/ instruments is an arrangement through which banks
exchange cheques, DDs, etc. drawn on one another to save time and expenses
besides providing service to their customers.
Collection: While all instruments such as cheques/DDs drawn locally are exchanged
and settled through clearing, instruments which are sent outstation by
branches/banks is known as Collection of cheques. Collecting branch realizes the
cheque on collection and credit customer’s account.
Drop Box: Cheque drop box is kept in the branch, where cheques (local and
outstation) are dropped by customers. If any customer asks for acknowledgement,
it is issued separately.
7. CUSTOMER SERVICE
In the present scenario of competitive banking, excellence in customer service is
the real differentiator for sustained business growth.

Who said “The biggest challenge facing banks is “to stay engaged with the
customer”

29
 TEST- BASICS OF BRANCH OPERATIONS

01. The transaction between one branch to another branch may be by way of
a. Cash
b. Transfer
c. Clearing
d. All of these
02. The IBR Code of the branch is 547641. What will be the SOL ID for this branch?
a. 30530
b. 43530
c. 47640
d. As decided by Central Office
03. Suspense Account is a type of office account which is known as
a. Personal Account
b. Non-Personal Account
c. Impersonal Account
d. None of these
04. The core functions of a Bank are
a. Accepting Deposits
b. Lending & Investment
c. Remittances
d. Both a & b
05. Intersol transaction is one where
a. Transactions are done within the branch
b. Transactions happens between two banks
c. Transactions happens between two branches of the same bank
d. Cash Remittance taken place to Currency Chest

Ans:

1 2 3 4 5
d c c d c

30
 BANKER CUSTOMER RELATIONSHIP

Objectives
 Functions of Bank
 Definition of Customer
 Primary Duties of a Banker
 Primary Rights of a Banker
 Garnishee Order & Attachment Order
 Different Relationships
 Role of Banks in different relationship

1. Functions of a Bank
The Banker Customer relationships are determined based on the nature of
transactions done between the Bank and the Customer. Therefore it is necessary for
us know the functions of Banks to understand what sort of contractual relationship it
creates with its customers in different transactions with them.
Banking is defined in section 5(b) of the BR Act as the acceptance of deposits of
money from the public for the purpose of lending or investment and repayable on
demand or otherwise and withdrawable by cheque, draft, and order or otherwise.
Two essential functions are (a) acceptance of deposits (b) lending or investment
Ancillary functions are
(a) Discounting bills and cheque
(b) Collection of bills and cheques
(c) Remittances by way of drafts, NEFT, RTGS etc
(d) Safe deposit lockers
(e) Safe custody of articles
(f) Issue of LCs & LGs
(g) Opening and operating Demat Accounts for securities and shares transactions
(h) Sale of Units of Mutual Funds
(i) Portfolio Management services
(j) Merchant Banking Services
(k) Bancassurance - Sale of Insurance Products [life as well as non-life]
(l) Setting up of subsidiary to carry out insurance business
(m) Credit Cards, Tax collections
(n) Utility payment services
(o) Providing facility of purchase of Railway /Airway – tickets
(p) Stamp Vending ----etc.
Under sec 49A of BR Act, no person other than a Bank is authorized to accept
deposits withdrawable by cheque

Under Sec.7 of BR Act, every Banking company to use the word ‘Bank’ as part of the
name and no company other than a Banking company can use the words ‘bank’
‘banker’ ‘banking’ as part of its name.

31
Section 8 of BR Act prohibits a Banking company from engaging directly or indirectly
in trading activity and undertaking trading risks except realization of securities held
by it.
2. Customer
Anyone conducting banking transaction with a bank is a bank customer.
Customer can be an individual, a firm, a company, legal incorporation or any
institution. However KYC Guidelines issued by Reserve Bank of India, defines the
customer as a person or entity that maintains an account and/or has a business
relationship with bank, one on whose behalf the account is maintained (i.e. the
beneficial owner) beneficiaries of transactions conducted by professional
intermediaries, such as stock brokers, Chartered Accountants, Solicitors etc, any
person or entity connected with a financial transaction which can pose significant
reputational or other risks to the bank say a wire transfer or issue of high value
demand draft as a single transaction.
3. Duties of a Banker towards its customer
o Duty of secrecy
o Duty to honor Cheques
o Duty to submit periodical statements
o Duty to collect Cheques / bills
1. Duty of secrecy
o A bank is legally obliged to keep the affairs of its customer’s secret.
o There is no need to have separate agreement for it; it is implied in banker
customer relationships.
o This is also mandatory as per section 13 of Banking Companies (Acquisition
and Transfer of Undertaking) Act 1970.
(A) Circumstances where disclosure is authorized by law:-
o Order of the court.
o Disclosure as per Income tax Act –1961and Gift Tax Act 1958.
o Criminal Procedure Code 1973.
o Other Acts giving similar power to authorities like 1) CBI 2) Custom
Authorities 3) Central Excise Authorities. 4) Sales tax Authorities.
o Foreign Exchange Management Act
o Companies Act -1956 / Companies Act 2013
o Reserve Bank of India Act –1934 etc.
(B) Circumstances where disclosure is permitted as per banking practices:--
o Disclosure to another bank to supply credit information / opinion on
Customers when requested by another bank ----to be supplied on IBA `s
format, in general terms, without fixing bank’s signatures and in coded words
as circulated by IBA among banks.
o Disclosure as per express or implied consent of the customer.
(C) Disclosure in public interest.
The obligation to maintain secrecy continues even if the account is closed or
customer expires. In case of unauthorized disclosure, the customer can sue the bank

32
for damages and any third party who relies on such information and suffered loss
can sue the bank if the information turns out to be false.
2. Duty to honor Cheques:
As per Section 31 of NI Act, a bank is bound to honour its customer’s Cheques if the
following three conditions are fulfilled.
o There must be sufficient balance in the account
o The balance must be properly applicable for the payment of the cheque.
o The bank must be duly required to pay the amount
However this obligation to honor cheques stands extinguished upon receipt of
a) Garnishee order
b) Income Tax Attachment Order

4. Rights of a Banker
A. Right of general lien
It gives the right to the creditor to retain the possession till all amounts due from
debtor are paid or discharged. It can be exercised on the goods and securities of
the debtor, which are received in the capacity of a creditor. A banker can sell
goods/securities after giving the debtor a reasonable notice. In case of time
barred jewel loan, bank has got a right to sell the jewels and appropriate the
amount to loan account and other dues of the borrower.
B. Right of set- off
When a customer has credit balance in one account and debit balance in another
account, the banker has a right to combine both the accounts to arrive at net
sum; it is called right to set-off. For exercising this right Debit balance should be
due to the bank. Term deposits which are yet to mature are not available for
set-off. Both the balances should be held in same capacity of the customer. Prior
notice to customer to exercise right must be given.
C. Right of Appropriation
When a debtor owing several debts makes a payment, the creditor should
appropriate it as per the rules of appropriation.

D. Right to act as per the mandate of the customer

A mandate is letter given by an account holder to the bank to allow operations in
the account. A mandate is given for allowing somebody to operate the account;
to make, draw, accept or otherwise sign bills of exchange or other negotiable
instruments or to overdraw the account whenever required.
The Joint Account opened by more than one individual can be operated by single
individual or by more than one individual jointly. The mandate for operating the
account can be modified with the consent of all account holders.

5. Garnishee Order
o A garnishee order is issued by a competent court under section 60 of civil
procedure code at the request of a creditor to attach his debtor’s funds in the
hands of a Banker.

33
o A garnishee order is issued in two stages, first order Nisi and then an order
Absolute
o Banker – Garnishee; Person approached the court - judgment creditor and person
whose funds are to be attached - Judgment Debtor.

i. Order Nisi
o Through an order Nisi, court seeks the bank to advise as to why the funds in the
account of judgment debtor should not be attached for meeting the obligation
towards the judgment creditor.
o On receipt of order Nisi the bank stops honouring customer’s cheque.
o Bank must immediately inform the customer about the receipt of the order so
that he may make the necessary arrangements for payment of the debts due by
him and avoid dishonoring of cheques issued by him.

ii. Order Absolute

o After receipt of the explanation from the bank the court may issue order
Absolute.
o On receipt of an order Absolute the bank has to pay the amount to the court.
o Production of pass Book/ Deposit receipt not necessary for making such payment
o Amount of the Garnishee Orders: A Garnishee order usually does not mention the
amount. In case, no amount is mentioned, the entire balance to be attached. If
issued for specific amount only that amount to be attached and the banker may
mark a lien for the amount, and the customer may be permitted to operate the
account with the remaining balance.

Accounts to be attached
o Garnishee order extends only to those accounts, which are held in the same
capacity in which the order is issued.
o If garnishee order is in the name of ‘A’, joint account of A, B and C cannot be
attached.
o But if the garnishee order is in the joint names of A, B and C, it will not only
attach the joint account but also accounts in their individual names.
o If the order is in the name of A and the account is in the name of a partnership
firm where A is a partner the firm account cannot be attached.
o If the order is in the name of a partnership firm, not only the firm account but
also the balance in the individual partner’s account can be attached.
o If the order is in the name of individual it would extend any account maintained
by him in the name of a firm as sole proprietor
o Accounts held by a person as a trustee (Trust Accounts) are not attached by a
Garnishee order issued in individual name

Accounts not attached

o Insolvent person’s account

Types of deposits attached

o All deposits due and accruing due are attached

34
 o Deposit due means SB CD and overdue time deposits
o Deposits accruing due are term deposits, which will mature for payment in future.
Hence Garnishee order attaches the term deposits, but the amount is payable only
on their maturity.
o Where amount is passed for payment, debit entry made and token issued but the
actual payment is not made by the cashier, the Garnishee order attaches such
amount.
o Clearing Cheques passed can be attached till the time prescribed for clearing
returns.

Types of Assets not attached

o Funds held in safe custody, safe custody locker
o Undrawn balance of cash – credit account
o Unclear balance in SB/CD account
o Credits/Deposits given after receipt of the order
o Bank is entitled to exercise its right of set off for all debt due from the customer
before complying with the order.

iii. Income – Tax Attachment Order

o As per 226(3) of IT Act, 1961, it can attach SB, CD term deposit (payable on
maturity), proceeds of collection items to be credited to account
o Even though the order is received in a single name, it attaches balance (pro rata)
in any joint account maintained by such person
o Even the amount deposited after the receipt of order, it is attachable
o No need to insist upon presentation of Deposit Receipt to make payment
Procedure for attaching joint account
o IT attachment order attaches the funds held on account of a deceased or
insolvent depositor
o The order attaches the money held or that may be subsequently held.
o The Bank is entitled to first exercise its right of set off before acting on the
order.
o On receipt of the order the customer must be given notice.
o Permission from higher office is to be obtained before remitting the funds to ITO
o If Bank fails to attach the amount it would be deemed to be an assessee in
default.

iv. Garnishee Order Vs Attachment Order

Sl. No. Garnishee order Attachment order
01 Issued by court Issued by IT Dept/Govt
Dept
02 Usually amount not mentioned Amount mentioned
03 Deposits held at the time of receipt of order same and future credits
04 Proceeds of instruments on collection not Attached
attached
05 If issued in single name joint a/c not Attached pro-rata

35
 attached
06 Issued in joint names, balance in individual Same
attached
07 A/c of deceased/ insolvent cannot be Are attachable
attached
Garnishee /Attachment order
o Acknowledge receipt of the order by writing the exact time and date
o Verify the order and ensure that it is against your customer
o Ascertain the attachable funds
o Mark caution
o Report to the court within a period of time
o Inform the customer
If garnishee order and IT attachment order are received at the same time, income
tax order should be preferred.
6. Banker-customer relationship
7.
Sl.no. Transaction BANK CUSTOMER
01 Deposit Debtor Creditor
02 Loan/Advances Creditor Debtor
03 Locker Lessor Lessee
04 Safe Custody Bailee Bailor
05 Purchase of Draft Agent Principal
06 Payee of Demand Draft Trustee Beneficiary
07 Collection of Cheque/Bill Agent Principal
08 Standing Instruction Agent Principal
09 Pledge Pledgee Pledger
10 Assignment Assignee Assignor
11 Articles left by mistake Trustee Beneficiary
12 Money deposited but no instruction for its Trustee Beneficiary
disposal
Bailee requires taking care of the goods bailed as a man of prudence. Bailee is
entitled for charges.
Termination of Banker Customer Relationship
The banker customer relationship stands terminated on:
o Death of customer
o Lunacy of the customer
o Insolvency of the customer
On happening of any of the above three events, the bank must stop the operation of
the account and stop payment of the cheque.
However, the banker –customer relationship is not affected by reason of:
o Arrest of the customer
o Imprisonment of the customer.
o Migration of the customer to any foreign country.

36
 Test- BANKER CUSTOMER RELATIONSHIP

1. The word customer is defined in

(a) N.I.ACT (b)Banking regulation act (c)KYC Guidelines issued by
RBI
(d)PMLA (e)RBI act
2. The Term Banking is defined in
(a) Sec. 5(b) of RBI act (b)Sec 5(b) of BR Act (c)Sec 13 of N.I.
act
(d)Sec 31 of Banking regulation act (e) None Of Above

3. The banker customer relationship stands terminated upon the

(a) Death of customer (b)Lunacy of customer (c)Insolvency of
customer
(d)A or B or C (e)A & B only

4. Given below certain transactions and the banker customer relationship in that
case. Find out the wrong combination
(a) Locker-agent principal (b) Safe custody-bailee-bailor (c)Issue of DD- agent
&principal (d)Pledge- Pledgee Pledger (e)None of the these
5. B gives a cheque for collection to his banker. Bank collects the cheque but
before credit of the amount to B’s account, the bank fails. Relationship between
B and the bank is
(a) Creditor-debtor (b)Principal-agent (c)Beneficiary & trustee
(d)Bailer-bailee (e)None of the above
6. The money deposited by the customer but there is no instruction for its disposal,
what is the relation between Banker & Customer?
(a) Principal and agent (b)Licensor and licensee (c)Trustee &
Beneficiary
(d) Bailor and Bailee (e)None of the above
7. An amount is credit by mistake to the current account of a company. Before the
mistake could be located the company went into liquidation. The relationship
between the company and the bank is that of a
(a) Debtor- creditor (b)Creditor-debtor (c)Trustee - Beneficiary
(d) Beneficiary – Trustee (e)None of the above
8. The banker customer relationship comes to an end when the customer is
(a) Arrested by the police for a criminal offence
(b) Imprisoned for criminal offence
(c) Imprisoned for civil offence
(d) B or C
(e) None of the above

Q 1 2 3 4 5 6 7 8
Ans c b d a c c c e

37
 TYPES OF CUSTOMERS
1. NATURAL PERSON:
Individual
Person who has attained the age of 18 years (major).
Joint Individual:
More than one individual joining together to open an account
Mandate like Either or Survivor / Former or Survivor / or Jointly etc. for operation in
the account is obtained at the time of opening of the account. Mandate can be
changed with the consent of all the account holders anytime and any number of
times.
2. SPECIAL INDIVIDUAL
A. Minor:
According to Section 3 of Indian Majority Act 1875, Minor is a natural person who
has not completed the age of 18 years. Where, however a legal guardian of the
person or property of a minor has been appointed by a Court of Law before he has
attained the age of 18 years, he attains majority on completion of 21years.
A major is a person who has attained the age of 18 years.
o Legal protection and disabilities
So long as a Person is a minor, he suffers certain disabilities and enjoys certain
protections under law. According to Section 11 to 14 Indian Contract Act, a minor is
incompetent to enter into a valid contract. A Contract by a minor is void ab-initio
i.e. from the very beginning. Again a contract made by a minor during his minority
cannot be ratified by him even after his attaining majority since agreement made by
a minor is void.
However, section 26 of NI Act provides that a Minor may draw, endorse, deliver and
negotiate a cheque so as to bind all parties except himself/herself. Of course the
minor is not bound by the terms and conditions of Bank Account.
o Procedure and precautions for opening of minors account
An account of minor can be opened in the following manner
a) Account in the name of minor under guardianship.
b) In the name of minor only.
o Account in the sole name of minor only
a. A minor whose age is 10 years or more and one who can read and write is eligible
to open Bank account in his own sole name.
b. He should be competent to transact business.
c. No account should be opened in the name of a minor who is blind (even if he is
more than 10 years old) to be operated by himself.
d. Minor should come personally to withdraw the amount from his account.
e. In ordinary course no chequebook should be issued. However, if it is issued, it
should be affixed with a rubber stamp “encashable by self at counter only”
f.Date of birth of minor should be noted on the account opening form and should be
verified by the bank.
g. In case of term deposit, the maturity date of the deposit should not be earlier
than the date on which the minor attains majority. In such cases, relaxation has

38
 been allowed for accepting deposits beyond 10 years. Further, no loan or
premature payment should be allowed till the minor attains majority.
h. In the event of death of a minor during his/her minority, the balance in the
account can be paid to natural guardian, as it is generally believed that the
natural guardian could have provided money for opening account to the minor.
o Account in the name of minor under guardianship
Date of birth of the minor should be noted on account opening form and should be
verified by the branch
The account opening form will be signed by the guardian on behalf of the minor as
under:
for minor ‘X’
Sd/-Guardian
A guardian means a lawful guardian and includes natural guardian by court of law
under sec 7 (1) of the Guardian and wards Act 1890. Natural Guardian of a minor
differs from community to community and is governed by a personal law(s) to which
the minor is subject as under.
Hindu:
As per sec 6 of the Hindu minority and Guardianship Act, 1956, Hindu minor’s
natural guardian is always her/his father so long as the father is alive. After the
death of the father, the mother can also act as natural guardian(step mother/step
father cannot act as natural guardian)

Muslims:
Under the Muslim law, Muslim minor’s natural guardian in the order of preference is
as follows: Father, Executor appointed by father’s Will, Grandfather, Executor
appointed by Grandfather Will.
A mother of a Muslim minor is not a natural guardian of her child. If there is no
guardian in any of the four categories above, then guardian will have to be
appointed by the court.
Roman, Christians & Parsis
Roman Catholic and Parsis the natural guardian of a minor child is father during his
lifetime and after him, the mother

Opening of accounts in the minor’s name with mother as guardian

RBI in consultation with Govt. of India has advised that there is no objection in
opening Bank Accounts. Only cash transactions are to be allowed and cheques /
dividend warrants etc drawn in the name of minors should not be accepted. This is
because when mother is not a natural or legal guardian she has no legal right to deal
with such Cheques or other property of the minor which the natural / legal guardian
can alone handle.
Testamentary Guardian:
Guardian appointed by the will of minor’s father is called testamentary guardian.
Such guardian acts only after the death of father & mother of the minor child.
Legal guardian:

39
 Where there is no natural guardian or testamentary guardian, court can appoint a
guardian, such a guardian appointed by the court is called a legal guardian.

B. Illiterate:
Illiterates are eligible to open Bank Accounts. Since illiterate are persons who
cannot read and write and are unable to sign, Bank obtains their thumb impression
as record and consider the thumb impression as an instrument for operations with
consent. Latest Photograph must be held on record. To protect the interest of such
customers, customer should personally visit the branch and affix the thumb
impression in the presence of bank officials As and when he(she) wishes to
withdraw money.

C. Married Women:
A married woman is as independent as other individuals and can enter into a valid
agreement in her own name. Banks can open account in her name and can also give
loans against documents executed by her.
D. Purdanashin:
A purdanashin lady is a woman who remains in complete seclusion and does not
transact with people other than her family members.
E. Visually Challenged Person:
Blind persons who are also called Visually Challenged Persons (VCPs) are fully
competent to contract. The branch should provide all types of banking facilities to
the visually challenged without any discrimination.
F. Mentally Retarded Person:
In case of lunatics and persons who are mentally unsound, the Mental Health Act,
1987 allows appointment of guardian by the District Courts. These legal guardians
have power to open and operate the account as permitted in the order.
G. Incapacitated Person:
Where a person is too ill to sign a cheque or to come in person to Bank to draw
money, he can put his thumb or toe impression. Wherever thumb or toe impression
of the sick / old / incapacitated account holder is obtained, it should be identified by
two independent witnesses, known to the bank, one of whom should be a responsible
bank official.
H. Politically Exposed Person (PEP):
Politically exposed persons are individual who are or have been entrusted with
prominent public functions in a foreign country e.g. Heads of State or of
Governments, Senior Politicians, Senior Government/Judicial/Military Officers,
Senior Executives of State Owned Corporations, important Political Party Official,
etc
The above norms may also be applied to accounts of the family members or close
relatives of PEPs.

3. LEGAL PERSON
i. Proprietorship:

40
 Proprietary accounts are individual accounts except for the fact that it is opened
and operated in a name chosen by that individual. When a firm is owned by a single
person it is known as proprietorship firm.
ii. Partnership:
A partnership is the relation between persons who have agreed to share the profits
of the business carried on by all of them acting for all.
o Indian partnership act 1932
o It is the relationship between persons agreed to share profits of the business carried
on by all or any one of them acting for all
o Number of partners: Minimum 2 and Maximum 100
o Minors can be admitted to the benefits of the partnership
o Registration is not necessary. Unregistered partnership firms cannot sue others
o Account should be in the name of the firm
o Account opening form/Any liability/document certifying such liability (Like a loan)
should be signed by all the partners if otherwise not expressly agreed by partners
through a power of attorney.
o Partnership deed should be examined and there should not be any clause
detrimental to the Bank’s interest.
o If registered, Registration certificate should be obtained
o Number of partners should be well within the statutory limits
o If number of partners exceeds the statutory limit it will be an illegal association.
o Obtain instructions regarding who will operate and how it is to be operated
o If minor, obtain birth certificate
o In case of retirement, entry of new partner, death of partner or insolvency of
partner if firm’s a/c shows debit balance operation must be stopped immediately to
crystallize the liability of each partner and to avoid the application of Clayton’s
rule. We should close the account and open a new one in the name of a
reconstituted firm.
CLAYTON'S RULE:
The first item on the debit side will be the item to be discharged or reduced by the
subsequent item on the credit side. The credit entries in the account adjust or set
off the debit entries in the chronological order.
iii. Hindu Undivided Family:
A Hindu Undivided Family may possess ancestral properties and carry on ancestral
business and all the members of the family are descendants of a common ancestor.
Ownership of the assets passes on to the members of the family. The family business
and assets are managed by the eldest member who is called Karta. Also known as
Hindu Undivided Family and is governed by Hindu law. Registration is not required
for HUF.
iv. Joint Stock Company:
Limited Companies are legal entities under the law. They are viewed as persons and
are entitled to enter into contracts, own property, sue in their own name and do all
acts that an individual may do. Companies limited by shares can be classified into
three categories:

41
 o PRIVATE LIMITED COMPANY: is a company which, by its articles restricts
transfer of its shares, prohibits itself from inviting subscription of
shares/debentures from public.
o PUBLIC LIMITED COMPANY: Company whose shares can easily be transferred
and does not have such restrictions.
o GOVERNMENT Undertaking: Government owned enterprise/undertaking (Like
us) where not less than 51% of the share capital is held by government.

v. Limited Liability Partnership:

o Limited Liability Partnership is a business organization that combines the limited
liability features of a company and the operational flexibility of a partnership
firm. The LLP being a separate legal entity is liable to the full extent for its
assets. The partners will be liable only to the extent of their agreed contribution
in the LLP.
o LLP is a corporate body and a legal entity separate from its partners. It has a
perpetual succession. Indian Partnership Act shall not be applicable to LLP and
the minimum number of partners of a LLP is two and there is no upper limit.
o Every LLP should have two “Designated Partners” at least one of whom should be
resident Indian satisfying the conditions stipulated by the Central Government.
They should apply and obtain Designated Partner Identification Number (DPIN)
and digital signature certificate from the designated authority.
vi. Trust:
A trust is said to be created when the ownership of a property is transferred, to
somebody with an obligation to hold and manage the same for the benefit of
another. Usually there are three parties to a Trust viz.
o The person who transfers the property and reposes confidence known as Author
or Creator or Donor of the trust.
o The transferee of the property on whom confidence or trust is reposed is called
the trustee.
o The person for whose benefit the trust is formed known as beneficiary.
o Trust Deed is an important document which contains all the information
regarding formation, governance, purpose and conditions of the trust.
vii. Society/Association/Club:
A co-operative society is an association registered under the provisions of the Co-
operative Societies Act of the State concerned. Therefore, all formalities required
under the act, for opening the account of a registered association must be complied
with by the bank. Generally co-operative societies are not permitted to open
accounts in banks other than co-operative banks unless otherwise specifically
permitted by Registrar of Co-operative Societies.
Clubs can be registered or unregistered. A Club can be registered under (i) The
Societies Registration Act, 1860 or (ii) Companies Act, 1956
viii. Local Authorities/ Government Departments:
These authorities are established under separate statutes of state/central
legislature. These authorities have a managing committee with a president, vice-

42
 president and treasurer and the treasurer is given power to open and operate bank
account.
ix. Executors and Administrators:
o Executors and Administrators are persons who are appointed to administer assets
of a deceased.
o An executor is appointed by a will and can open account only if he holds a
probate issued by the Court on the basis of will.
o When the deceased has not left any Will, the Court appoints Administrator
through Letter of Administration.
o Before opening an account of Executors or Administrators relative Probates or
Letter of Administration, in original, should be called for. The Account Opening
Form should be signed by all the Executors/Administrators with clear instructions
as to the manner in which the account will be operated.
x. Official Liquidator:
For opening account of the Official Liquidator of a Company a certified copy of the
Resolution of the Company in Extraordinary General Meeting should be obtained
and signature of the Liquidator should be got verified by one of the authorized
officers of the Company concerned. Liquidators cannot delegate powers to third
party.
xi. Mandate and Power of Attorney:
Both mandate and power of attorney are instruments through which one person
(called principal) appoints another (called agent) to act on his behalf. A mandate is
just a simple letter of authority given by an account holder to the bank to allow a
certain named person to operate his account on his behalf. A power of attorney is a
general document used to convey powers of many other purposes besides the
operation of account. Power of attorney could be General Power of Attorney or a
Special Power of Attorney. Usually Banks like us prefers Special Power of Attorney.
As far as possible, we should obtain registered, irrevocable and Special Power of
Attorney only by a customer/borrower for banking transactions.
As per KYC guidelines, details of power of attorney holders and others acting in
fiduciary capacity should also be obtained in addition to beneficial account holder.

43
 TEST- TYPES OF CUSTOMERS
i. A minor is a person:
a. Less than 18 years of age
b. Less than 21 years of age having a legal guardian
c. Not capable to enter into any agreement as per Indian Contract Act
d. All of the above
e. Only (a) and (c)
ii. An illiterate person is distinguished as:
a. Not able to read and write independently
b. Can plead ignorance and charge the counter party with ‘coercion’
c. Identified with legible thumb impressions
d. None of the above
e. a,b,c
iii. HUF account is operated by
a. Any major person of the family
b. Karta
c. Minor person
d. Female members only
iv. A sole proprietor is identified as:
a. A major individual engaged in business/commercial activities
b. His/her business unit is a separate entity from personal affairs
c. A single child managing the huge family business
d. Only (b) and (c)
e. Only (a) and (b)

Answers
1 2 3 4
d e b e

44
 TYPES OF LIABILITY (DEPOSIT) PRODUCTS

Deposits constitute the bulk of bank’s total liabilities and the other liabilities are
capital & reserves, borrowings and provisions. Therefore deposits are the main
source of funds for a bank’s operations and determine the size of its balance sheets
as well as its strength and market share.
Deposits of banks are classified into three categories:
i. Demand Deposits: Deposits received by the bank which are repayable on
customer’s demand. These comprise the following:

 Savings Bank Deposits

 Current Deposits

 Call Deposits

Term Deposits: Deposits which are repayable on maturity dates as agreed between
the customers and the bank. These comprise the following: Fixed Deposits

Cumulative/Recurring Deposits

Hybrid Deposits or Flexi Deposits: Deposits which are having combined features of
demand and term deposits

Savings Deposit Account

Savings Deposit means a form of demand deposit which is subject to restrictions as

to the number of withdrawals as also the amount of withdrawals permitted by the
bank during any specified period. Any time the money can be accessed, withdrawn
and utilized by the depositor.
Savings bank accounts are meant for individuals and small businesses to keep their
savings for meeting for their future monetary needs. Banks give interest on these
accounts with a view to encourage saving habits.

Features:

The main features of Savings Bank Deposits are:

Withdrawals: Withdrawals are permitted to the account holder on demand, on
presentment of cheques. At present savings bank deposits are subject to the
restrictions regarding the number and amount of withdrawals within a specified
period.
The saving bank accounts are of two types:
1. Chequebook facility accounts:
In these accounts withdrawals at drawee Bank branch are permitted by cheques
drawn in favour of self or other parties. The payees of cheques can receive payment
in cash at the drawee bank branch or through their bank account via clearing or

45
collection. The account holder may also withdraw cash by submitting a withdrawal
form.

2. Non-Chequebook facility accounts:

In these accounts withdrawals at the drawee bank branch are permitted by
submitting a withdrawal form or a letter accompanied with the account passbook
requesting permission for withdrawal. In such accounts third parties cannot receive
payments.

Minimum Balance
Minimum average quarterly balance should be maintained by the customers in SB
accounts as per the facility and location of the base branch except in case of special
schemes like BSBDA,BSBDS, Zero Balance account, etc.

As a part of Financial Inclusion the following is also a variant of different types of

Savings Bank account available in India.

Basic Savings Bank Deposit Account (BSBDA)

Banks offer a 'Basic Savings Bank Deposit Account' which will offer following
minimum common facilities to all their customers :

i. The 'Basic Savings Bank Deposit Account' should be considered a normal banking
service available to all.
ii. This account shall not have the requirement of any minimum balance.

iii. The services available in the account will include deposit and withdrawal of cash
at bank branch as well as ATMs; receipt / credit of money through electronic
payment channels or by means of deposit / collection of cheques drawn by Central /
State Government agencies and departments.

iv. While there will be no limit on the number of deposits that can be made in a
month, account holders will be allowed a maximum of four withdrawals in a month,
including ATM withdrawals.

v. Facility of ATM card or ATM-cum-Debit Card.

vi. The above facilities will be provided without any charges. Further, no charge will
be levied for non-operation / activation of in-operative 'Basic Savings Bank Deposit
Account'.

vii. Banks would be free to evolve other requirements including pricing structure for
additional value-added services beyond the stipulated basic minimum services
on reasonable and transparent basis and applied in a nondiscriminatory
manner.

viii. The 'Basic Savings Bank Deposit Account' would be subject to RBI
instructions on Know Your Customer (KYC) / Anti-Money Laundering (AML) for

46
opening of bank accounts issued from time to time. If such account is opened on the
basis of simplified KYC norms, the account would additionally be treated as a 'Small
Account' and would be subject to conditions stipulated for such accounts as
indicated in paragraph 3.2.2(I)(A)(vi) of Master Circular dated July 01, 2015 on 'KYC
norms / AML standards / Combating of Financing of Terrorism (CFT) /
Obligation of banks under PMLA, 2002'.

ix. Holders of 'Basic Savings Bank Deposit Account' will not be eligible for
opening any other savings bank deposit account in that bank. If a customer has any
other existing savings bank deposit account in that bank, he / she will be required
to close it within 30 days from the date of opening a 'Basic Savings Bank Deposit
Account'.

x. The existing basic banking 'no-frills' accounts should be converted to 'Basic Savings
Bank Deposit Account' .

Current Deposit

Current Deposit" means a form of demand deposit wherefrom withdrawals are

allowed any number of times depending upon the balance in the account or up to a
particular agreed amount and will also include other deposit accounts which are
neither Savings Deposit nor Term Deposit.
Current Accounts can be opened by individual/s, proprietorship, Partnership &
Limited Liability Partnership firms, Private and Public Limited Companies, HUFs,
Specified Associates, Societies, Trusts, Executors and Administrators, Provident
Funds, Liquidators, Other Banks, State Financial Corporations, Departments of
Authority created by the Government (Central or State), etc. Account opened by
individual/s can be opened by an individual in his own name (known as account in
single name) or by more than one individual in their own names (known as Joint
Account). The Joint Account opened can be operated by single individual or by more
than one individual jointly as per mandate given. The mandate for operating the
account can be modified with the consent of all account holders.
At the request of the depositor, the Bank will register mandate/Power of Attorney
given by him authorizing another person to operate the account on his behalf.

Features:
The main features of current accounts are as below:

i. There are no restrictions on the number and amount of withdrawals/deposits.

Hence this account is generally maintained for business purposes.
ii. Cheque book facility is provided to each current account holder and bank
undertakes to honour all cheques drawn correctly so long as there is sufficient
balance to the credit of the account. Withdrawals are permitted by cheques in

47
favour of self as also to other parties. The payee of the cheques can endorse the
cheques in favour of third parties who can receive payment in cash at the drawee
bank/branch or through their bank account via clearing or collection.
iii. Current accounts are non-interest bearing and banks are not allowed to pay any
interest or brokerage to the account holders.
iv. Overdrafts – ad hoc for very short period or on a regular basis up to specified
limits – are permitted in current accounts. Regular overdraft facility is granted as
per arrangement made by the account holder with the bank. In such cases the bank
would honourcheques drawn in excess of the credit balance but not exceeding the
overdraft limit. Interest is levied by the bank on the overdraft portion of drawings.
v. Cheques/bills collection and purchase facilities are granted to the current
account holders as per mutually agreed arrangements and charges.
vi. Third party/endorsed cheques can be accepted for collection in the current
accounts provided such transactions are prime facie in order.
vii. Statements of accounts are to be issued periodically as requested by customer.
The statement shows all the debit and credit transactions and balances, date-wise,
as recorded in the bank’s ledger account of the customer.
viii. Other facilities like
a. Debit Card
b. Internet Banking
c. Mobile Banking

Benefits for Banks

i. Float funds to the bank: Banks are having the float funds for a short period as the
account is meant for business purposes and can be utilized by the customer as and
when they desire.
ii. No cost involved by way of interest: No interest is paid on the deposits hence the
cost of fund is zero.
iii. Cost of other deposits gets compensated (product mix): The cost of term
deposits are high and by mobilizing the current deposit the same is compensated as
no interest is paid on current deposits.
iv. Improves the spread:As there is no interest expenditure it results in higher
interest spread. (Spread is the difference between interests earned and interest
expenditure).
v. Helps in improving profitability: Less cost of deposits results into high profits.
vi. Leverage on interest on loans – More the CASA, more advantageous for Bank in
fixing a competitive interest rate on advances, thus increasing potentiality to
increase credit.

48
 TERM DEPOSIT
TIME LIABILITIES means Term Deposits which are also known as Fixed Deposits. The
word “Fixed Deposits” are nowhere mentioned in the Banking Regulation Act,
1949(10 of 1949). The term in vogue is “Time Liabilities”. However for convenient
understanding we shall use the term “Term Deposit”.
Term Deposit means a deposit received by the bank for a fixed period withdrawable
normally after the expiry of the fixed period and includes deposits such as:
a. Recurring Deposit
b. Short Deposit
c. Fixed Deposit
d. Monthly Income Scheme
e. Quarterly Income Scheme
f. Deposit Reinvestment Certificate etc.

Features
i. Each Term Deposit Receipt is a separate contract. .
ii. A Term Deposit is accepted for a period 7 days and above only.
iii. The bank will not accept Deposits for period longer than 10 years. However,
exceptions may be made in terms of orders of Competent Court or in case of minors
where interest of minors is involved.
iv. No Change in the terms and conditions permissible, except under statutory
obligations or as per RBI directives, till the deposit matures for payment.
v. Term Deposit Receipts are not negotiable instruments.
vi. Loan against Term Deposits are allowed except in cases of Tax Saver Schemes.
vii. Term Deposits are accepted as collateral for other loans.
viii. Branches should ensure that unknown parties/brokers/agents approaching
branches with assurance to mobilize deposit/business are not entertained.

Eligibility

3.1 Term deposit accounts can be opened by,

a) A person in his/her own name

b) Two or more persons in their joint names payable to:

a. both or all of them or to the survivor(S)

b. either or any one or more of them or to the survivor(s)

49
 LOW COST DEPOSIT – OPERATIONAL GUIDELINES

Objectives
 Low Cost Deposits
 Benefits for the Bank & Customers
 Who can open account?
 Who cannot open Account?
 Documents required to open the Account
 Precautions at the time of opening of account
 Nomination
 Operation of Account
 Dormant Account
 Mandate
 Average Quarterly Balance
 Interest payment in Savings Bank deposits
 Interest rate on Savings Bank deposits

Low Cost Deposit – Savings Bank

There are two types of deposits Demand deposits and Term Deposits. Savings and
Current Deposits are payable on demand hence are known also as Demand deposits.
Term Deposits are those which are payable after a specified period.
Both Savings and Current deposit accounts are a source of low cost funds for the
bank hence termed as Low Cost Deposits – LCD. We shall in this chapter deal with
operational guidelines for Savings Bank accounts.
A. Benefits for the Bank
o Low Cost Deposit: The Interest paid on Savings Bank accounts are comparatively
low which results in less expenditure. Less Expenditure leads to more profit.
o Enlarge Customer Base: Savings Bank accounts helps bank increase its customer
base.
o Cross Selling: Having an enlarged customer base helps bank in cross-selling its
various financial products..
o Easy Operation: New Generation banking facilities like Anywhere / Any Time
Banking through Branch Banking / ATM Banking / Net Banking / Phone Banking
makes operations easy and convenient.
o Reduced Cost of Operations: Enabling operations through Digital Banking
Channels viz; ATMs, E-banking, SMS Banking, Mobile banking (U-mobile), Call
Centre, etc. reduces the transaction cost for the bank.
B. Benefits for Customer
The benefits for a customer are many like:
o Easy Liquidity
o Banking Anytime anywhere

50
 o Having facilities like Debit Card, Cheque book
o Sweep facility
o Giving Standing Instructions
o Making Fund Transfers, Bill payments
o Use of Alternate Delivery Channels (ADC)/Digital Banking Channels
o Auto credit of Salary/Wage/Scholarship/Pension
o Receipt of Interest on Daily Balance

C. Who can open an account?

Savings Bank Deposit account can be opened by:
o Individual: Individual who is having the contractual capacity can open the
account for the purpose of saving, wage, salary, scholarship, pension, etc.
o Minor under the guardianship. Minor at the age of 10 years or more can open and
operate the account independently with prescribed limits. One time undertaking
from guardians while opening of account is required.
o “Non-Profit Organisation” – any entity or organization that is registered as a
Trust or a Society under Societies Registration Act 1860 or similar State
legislation or a Company registered under Sec 8 of Companies Act, 2013
o Primary Co-operative Credit Society which is being financed by bank
o Khadi and Village Industries Boards
o Agriculture Product Market Committees
o Government Departments/bodies/agencies in respect of grants / subsidies
released for implementation of various programmes/schemes sponsored by
Central Govt. subject to production of an authorization from the respective
Government Departments to open savings accounts
o Any trust or institution whose entire income is exempt from payment of income
tax
o HUF not engaged in business activity: The HUF which is not engaged in any
business activity and only for the purpose of saving are eligible to open the SB
accounts
o Development of Women and Children in Rural Areas (DWCRA)
o SHGs, Farmer’s Club: Self Help Group and Farmer’s Club can open the SB account
in which the contribution from members, interest, donation, etc can be
deposited

D. Who cannot open SB account?

Any trading or business concern, (e.g. firms of Chartered Accountants, Lawyers,
etc) whether such concern is proprietorship, Partnership, Company or
Association.

Government depts. /bodies depending upon budgetary allocations for

performance of their functions.
Govt. Department, Municipal Corp., Panchayat Samitis, State Housing Board,
State Electricity Board, Industrial Development Authority, Water / Sewerages /

51
 Drainage Board, State Text Book Publishing Corporation, Metropolitan
Development Authority, Housing Co-operative Society, etc

Regional Rural Banks, Cooperative Banks and Land Development Bank.

Any political party

E. Documents required
ID Proof: Copy of ID proof should be verified from the original. Determine and
document the true identity of the customer who establishes business relationship
with us through his accounts.
Address Proof: If utility bills are used, those should not older than two months.
Photograph: Recent photograph
Form-60 or Copy of PAN Card: If the customer is not having PAN card, the branch
should take the Form-60(new) separately from all the joint account holders.
FATCA Declaration

F. Precautions at the time of opening of Account

o Use only new set of forms which ensures customer Due Diligence requirements
o Ensure proper filling of account opening forms in all respects with relevant
details like Occupation, Source of Income etc.
o Customers should be guided/educated while filling the forms/providing the
information for account opening purpose
o Customers’ signature should be obtained in presence of the branch official
o Branches should ensure certification by putting a rubber stamp with the words
“Signature of the account holder has been obtained in the presence of branch
official” at the bottom under ‘Bank use only’ in last page of AOF-1/AOF-2.
o Introduction is not mandatory for individual accounts now.
o Wherever introduction is obtained, introducers' identity and address proof along
with satisfactory operations of the introducers' account is to be verified
o Obtain Identity proof, Residence proof and relevant documents as per the type
of accounts
o Passport/Driving License/ Proof of possession of Aadhar number /Voter card
/NREGA job card/letter issued by the National Population Regiter can be taken
for both identity and residence proof.
o Obtain PAN card/Form 60 /15H/15G etc. as per Income tax Rules/Regulations in
force and verify genuineness of PAN details from Income Tax site
o All the photocopies of the supporting documents should be verified with the
originals under seal & signature of the branch official with the remark 'Verified
with the original documents'
o Create single Customer-ID for the same customer for multiple accounts
o Get contact details like Mobile/Telephone No. and Email IDs wherever available
o Nomination should be insisted upon in the best interests of the customer
o Letter of Thanks to Customer/Introducer should invariably be sent to account
holders and introducers (if any)

52
o Wherever ‘Letter of Thanks’ are returned undelivered, cheque books should not
be issued/delivered till the addresses are verified/confirmed to the satisfaction
of the bank.
o The purpose and reason for opening the account is to be ascertained. The
anticipated level and nature of activity to be undertaken by the proposed customer
are obtained.

G. Introduction:
o RBI has reiterated that INTRODUCTION IS NOT NECESSARY FOR OPENING OF
ACCOUNTS UNDER PML Act and rules or Reserve bank’s extant KYC guidelines,
bank should not insist on introduction for opening bank accounts of customers.
o Acceptability: The introducer should be acceptable to the bank. The bank should
verify the signature and operation in the account of introducer and after being
satisfied with genuineness it can be accepted. KYC complied customer can be
introducer.
o Liability of introducer: To identify the person who is opening the account. He may
have to give the details of the account holder at a later date also. However there is
no legal liability on the part of the introducer.
o Forged introduction: If the signature of introducer is forged it is construed that the
account is not introduced ab-initio.

H. Who can introduce?

o An existing account holder maintaining a satisfactorily conducted account of 6
months
o A respectable member of public such as Chairman of municipality, Mayor, BDO,
Village development officer etc
o Any permanent member of staff

I. Nomination
As per RBI directives every account should have nomination and if the customer is
unwilling to have nomination the same should be recorded.

J. Operation
o Letter of Thanks (Customer & Introducer): The letter of thanks to be sent to both
customers who has opened the account as well as to introducer which also serve the
purpose of address verification.
o Debit Card: It is strictly handed over to the account holder after taking proper
acknowledgement.
o Cheque book: Cheque book is issued to the account holder who has agreed to
maintain minimum balance in the account and personalized cheque is issued after
placing the indent in the Finacle.
o E-banking: Customer can use the E-banking facility after the ATM card gets
activated. The customer can be informed about the unique feature of self user
creation.

53
o Passbook/Statement: Banks must offer passbook facility to all its customers. In case
statements are offered and the customer chooses statements, then statements must
be issued monthly.

K. Dormant account
An account will be classified as dormant, if there are no customer induced transactions
in the accounts for a period of 2 years (24 months). As per the procedure outlined,
accounts where there are no operations for 21 months a notice has to be sent to the
account holder informing them that in the event of account remaining inoperative for
the next three months, it will be classified as dormant and no further transactions will
be allowed. If the bank does not receive any reply, then the account will be classified
by the system as dormant. At the end of 21st month, suitably letter will be generated
by the system at the time of Day end process. Similarly, at the end of 24 months, also,
the system will similarly generate the letter on account being classified as dormant.

Maximum permissible cash transaction a day

Cash Transaction more than Rs.10.00 lacs in a day:
If the cash transaction in any of the account whether credit or debit exceeds Rs.10.00
lacs in a day permission should be taken from RO.

L. Mandate
The Joint Account opened by more than one individual can be operated by an individual
or jointly. The mandate for operating the account can be modified with the consent of
all account holders.
The joint account holders can give any of the following mandates for the operation of
the account:
o Either or Survivor: If the account is in the name of two individuals say, A & B, the
balance along with interest, if applicable, will be paid to either of account holders
i.e. A or B, on date of maturity or to the survivor on death of any one of the account
holders.
o Former or Survivor: If the account is in the name of two individuals say, A & B, the
balance along with interest, if applicable, will be paid to the former i.e. A on date of
maturity and to the survivor on death of any one of the account holders.
o Latter or Survivor: If the account is in the name of two individuals say, A & B, the
balance along with interest, if applicable, will be paid to the latter i.e. B on date of
maturity and to the survivor on death of any one of the account holders.
o Jointly: The account will be operated by all the account holders jointly.
o Anyone or Survivor: If the account is in the name of two or more individuals say, A,
B & C, the final balance along with interest if applicable, will be paid to any of
account holders i.e. A or B or C, on the date of maturity. The account will be
operated by any one. On the death of any one of account holder say A, the final
balance along with interest if applicable, will be paid to any two of the surviving
account holders i.e. B or C. On the death of any two of account holder say A and B,

54
 the final balance along with interest if applicable, will be paid to the surviving
account holder i.e. C.

M. Average Quarterly Balance (For Savings Accounts Minimum Balance

Requirement)
Average Quarterly Balance varies from Bank to Bank

Interest Payment in Saving Bank Deposit: Interest Payment on Saving Bank on

Quarterly Intervals As per RBI directives, it is decided to pay interest on SB Deposit at
quarterly interval and will be paid in the month of April, July, October and January
every year.

Revision in Interest Rate on Savings Bank Deposits: The interest rate applicable to
savings bank deposits is decided by the Banks, and it varies from Bank to bank

55
 TEST: LOW COST DEPOSIT – SB OPERATIONAL GUIDELINES

1. SB account can be opened in the name of

a. Proprietorship firm
b. HUF
c. Partnership firm
d. None of the above

2. A SB account is to be classified as DORMANT in case there is no operation in

the account for the last ________ months.
a. 6
b. 12
c. 24
d. 60

3. Saving Bank account cannot be opened in the name of which of the following:
a. DWCRA
b. Municipal Committee
c. SHGs
d. Farmer’s Club

4. Deposit account which have not been operated for more than 10 years are to
be classified as:
a. Inoperative account
b. Dormant account
c. Stagnant account
d. Unclaimed account

5. The minimum age requirement of a minor to open a self-operated SB account

is __ years.
a. 12 years
b. 14 years
c. 10 years
d. 16 years

6. What is the interest payment frequency in Saving Bank Deposits?

a. Monthly
b. Quarterly
c. Half Yearly
d. Yearly

7. Which among the following is a type of demand deposit?

a. Saving Bank
b. Current Deposit

56
 c. Both
d. None of the above

8. Minimum balance for SB account without cheque book facility in Rural area is
a. 100
b. 500
c. 200
d. None of the above

9. We cannot open SB account in the name of

a. Club
b. Trust
c. Partnership Firm
d. Minor
e. HUF

10. Interest on SB account is calculated on the basis of

a. Daily product
b. Monthly minimum balance
c. Average monthly balance
d. Monthly minimum balance between 10th and last day
e. None of these

Answer:
1 2 3 4 5 6 7 8 9 10
b c b d c b c a c a

57
 NOMINATION RULES
The Banking Regulation Act, 1949 was amended by Banking Laws (Amendment) Act,
1983 by introducing new Sections 45ZA to 45ZF, which provide, inter alia, for the
following matters:
a. To enable a banking company to make payment to the nominee of a deceased
depositor, the amount standing to the credit of the depositor.
b. To enable a banking company to return the articles left by a deceased person in
its safe custody to his nominee, after making an inventory of the articles in the
manner directed by the Reserve Bank.
c. To enable a banking company to release the contents of a safety locker to the
nominee of the hirer of such locker, in the event of the death of the hirer, after
making an inventory of the contents of the safety locker in the manner directed by
the Reserve Bank.
The Banking Companies (Nomination) Rules, 1985
Since such nomination has to be made in the prescribed manner, the Central
Government framed, in consultation with the Reserve Bank of India, the Banking
Companies (Nomination) Rules, 1985. These Rules, together with the provision of
new Sections 45ZA to 45ZF of the Banking Regulation Act, 1949 regarding nomination
facilities were brought into force with effect from 1985.
The Banking Companies (Nomination) Rules, 1985 which are self-explanatory,
provide
for:-
(i) Nomination Forms for deposit accounts, articles kept in safe custody and
contents of safety lockers.
(ii) Forms for cancellation and variation of the nominations.
(iii) Registration of Nominations and cancellation and variation of
nominations, and
(iv) matters related to the above.

Nomination facilities in respect of safe deposit locker / safe custody

articles
Sections 45ZC to 45ZF of the Banking Regulation Act, 1949 provide for nomination
and
release of contents of safety lockers / safe custody article to the nominee and
protection against notice of claims of other persons. Banks should be guided by the
provisions of Sections 45 ZC to 45 ZF of the Banking Regulation Act, 1949 and the
Banking Companies (Nomination) Rules, 1985 and the relevant provisions of Indian
Contract Act and Indian Succession Act.
In the matter of returning articles left in safe custody by the deceased depositor to
the nominee or allowing the nominee/s to have access to the locker and permitting
him/them to remove the contents of the locker, the Reserve Bank of India, in
pursuance of Sections 45ZC (3) and 45ZE (4) of the Banking Regulation Act, 1949 has
specified the formats for the purpose.
In order to ensure that the amount of deposits, articles left in safe custody and
contents of lockers are returned to the genuine nominee, as also to verify the proof
of death, banks may devise their own claim formats or follow the procedure, if any,
suggested by the Indian Banks' Association for the purpose.

58
Nomination Facility - Sole Proprietary Concern
Banks may extend the nomination facility also in respect of deposits held in the
name of a sole proprietary concern.
Nomination Facility in Single Deposit Accounts
Banks should give wide publicity and provide guidance to deposit account holders on
the benefits of nomination facility and the survivorship clause. Despite the best
efforts in this regard, banks might still be opening single deposit accounts without
nomination.
In a case which came up before the Allahabad High Court, the Honourable Court has
observed that "it will be most appropriate that the Reserve Bank of India issues
guidelines to the effect that no Savings Account or Fixed Deposit in single name be
accepted unless name of the nominee is given by the depositors. It will go a long
way to serve the purpose of the innocent widows and children, who are dragged on
long drawn proceedings in the Court for claiming the amount, which lawfully
belongs to them".
Keeping in view the above, banks should generally insist that the person opening a
deposit account makes a nomination. In case the person opening an account declines
to fill in nomination, the bank should explain the advantages of nomination facility.
If the person opening the account still does not want to nominate, the bank should
ask him to give a specific letter to the effect that he does not want to make a
nomination. In case the person opening the account declines to give such a letter,
the bank should record the fact on the account opening form and proceed with
opening of the account if otherwise found eligible. Under no circumstances, a bank
should refuse to open an account solely on the ground that the person opening the
account refused to nominate.

Acknowledgement of Nomination
In terms of Rules 2 (9), 3 (8) and 4 (9) of the Banking Companies Nomination
(Rules),1985, they are required to acknowledge in writing to the depositor(s)/
locker hirers (s) the filing of the relevant duly completed Form of nomination,
cancellation and / or variation of the nomination.
Banks should therefore strictly comply with the provisions of Banking Regulation
Act, 1949 and Banking Companies (Nomination) Rules, 1985 and devise a proper
system of acknowledging the receipt of the duly completed form of nomination,
cancellation and / or variation of the nomination. Such acknowledgement should be
given to all the customers irrespective of whether the same is demanded by the
customers.
Registering the nomination
In terms of Rules 2 (10), 3 (9) and 4 (10) of the Banking Companies (Nomination)
Rules, 1985 banks are required to register in its books the nomination, cancellation
and / or variation of the nomination. The banks should accordingly take action to
register nominations or changes therein, if any, made by their depositor(s) / hirers.
Incorporation of the legend “Nomination Registered” in pass book, deposit receipt
etc. and indicating the Name of the Nominee in Pass Books / Fixed Deposit Receipts
When a bank account holder has availed himself of nomination facility, the same
may be indicated on the passbook so that, in case of death of the account holder,
his relatives can know from the pass book that the nomination facility has been
availed of by the deceased depositor and take suitable action. Banks may,
therefore, introduce the practice of recording on the face of the passbook the
position regarding availment of nomination facility with the legend "Nomination
Registered". This may be done in the case of term deposit receipts also.

59
Further, banks are advised that in addition to the legend “Nomination Registered”,
they should also indicate the name of the Nominee in the Pass Books / Statement of
Accounts / FDRs, in case the customer is agreeable to the same.
Separate nomination for savings bank account and pension account
Nomination facility is available for Savings Bank Account opened for credit of
pension. Banking Companies (Nomination) Rules, 1985 are distinct from the Arrears
of Pension (Nomination) Rules, 1983 and nomination exercised by the pensioner
under the latter rules for receipt of arrears of pension will not be valid for the
purpose of deposit accounts held by the pensioners with banks for which a separate
nomination is necessary in terms of the Banking Companies (Nomination) Rules, 1985
in case a pensioner desires to avail of nomination facility.
Nomination facility in respect of deposits
(i) Nomination facility is intended for individuals including a sole proprietary
concern.
(ii) Rules stipulate that nomination shall be made only in favour of individuals. As
such, a nominee cannot be an Association, Trust, Society or any other Organisation
or any office-bearer thereof in his official capacity. In view thereof any nomination
other than in favour of an individual will not be valid.
(iii)There cannot be more than one nominee in respect of a joint deposit account.
(iv) Banks may allow variation/cancellation of a subsisting nomination by all the
surviving depositor(s) acting together. This is also applicable to deposits
having operating instructions "either or survivor".
(v) In the case of a joint deposit account the nominee's right arises only after the
death of all the depositors.
(vi) Witness in Nomination Forms: The Banking Companies (Nomination) Rules,
1985 have been framed in exercise of powers conferred by Section 52 read with
Sections 45ZA, 45ZC and 45ZE of the Banking Regulation Act, 1949. In this
connection, we clarify that for the various Forms (DA1, DA2 and DA3 for Bank
Deposits, Forms SC1, SC2 and SC3 for Articles left in Safe Custody, Forms SL1, SL1A,
SL2, SL3 and SL3A for Safety Lockers) prescribed under Banking Companies
(Nomination) Rules, 1985 only Thumb-impression(s) shall be attested by two
witnesses. Signatures of the account holders need not be attested by witnesses.
(vii) Nomination in case of Joint Deposit Accounts: It is understood that sometimes
the customers opening joint accounts with or without "Either or Survivor" mandate,
are dissuaded from exercising the nomination facility. It is clarified that nomination
facility is available for joint deposit accounts also. Banks are, therefore, advised to
ensure that their branches offer nomination facility to all deposit accounts including
joint accounts opened by the customers.
Nomination in Safe Deposit Lockers / Safe Custody Articles
(i) Nomination facilities are available only in the case of individual depositors and
not in respect of persons jointly depositing articles for safe custody.
(ii) Section 45ZE of the Banking Regulation Act, 1949 does not preclude a minor
from being a nominee for obtaining delivery of the contents of a locker. However,
the
responsibility of the banks in such cases is to ensure that when the contents of a
locker
were sought to be removed on behalf of the minor nominee, the articles were
handed
over to a person who, in law, was competent to receive the articles on behalf of the
minor.

60
(iii) As regards lockers hired jointly, on the death of any one of the joint hirers, the
contents of the locker are only allowed to be removed jointly by the nominees and
the survivor(s) after an inventory was taken in the prescribed manner. In such a
case, after such removal preceded by an inventory, the nominee and surviving
hirer(s) may still keep the entire contents with the same bank, if they so desire, by
entering into a fresh contract of hiring a locker.
Customer Guidance and Publicity Educating Customers on the Benefits of
nomination / survivorship clause
(i) The nomination facility is intended to facilitate expeditious settlement of claims
in the accounts of deceased depositors and to minimise hardship caused to the
family members on the death of the depositors. The banks should endeavour to
drive home to their constituents the benefit of nomination facilities and ensure that
the message reaches all the constituents by taking all necessary measures for
popularising the nomination facility among their constituents.
(ii) Banks should give wide publicity and provide guidance to deposit account holders
on the benefits of the nomination facility and the survivorship clause. Illustratively,
it should be highlighted in the publicity material that in the event of the death of
one of the joint account holders, the right to the deposit proceeds does not
automatically devolve on the surviving joint deposit account holder, unless there is
a survivorship clause.
(iii) In addition to obtaining nomination forms, banks should ensure that account
opening form should contain space for nomination also so that the customers could
be educated about availability of such facilities.
(iv) Unless the customers prefer not to nominate (this may be recorded without
giving scope for conjecture of non-compliance), nomination should be a rule, to
cover all other existing and new accounts.

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 KNOW YOUR CUSTOMER / ANTI MONEY LAUNDERING
GUIDELINES

Objectives
 What is KYC
 Objective of KYC
 Money Laundering
 Obligations under Prevention of Money Laundering (PML) Act 2002
 Key Elements of KYC Policy
 Enhanced Due Diligence
 Cash Transaction & Suspicious Transaction
 Reports
 Maintenance and Preservation of Records
 E – KYC
 Important Do’s and Don’ts for Branches
 Illustrative List of Risk categorization of Customers
 Illustrative list of acceptable documents for different types of customers

WHAT IS KYC ?
Due diligence done by bank regarding identification of customers, types & extent of
their transactions depending upon their profession / business and in monitoring
them so that illegal transactions are checked
OBJECTIVES OF KYC
o Prevent banks being used, intentionally or unintentionally by criminal elements for
money laundering.
o To be aware of the identity of the customer
o To be aware of the location of the customer
o To manage the risks associated with the customer in a prudent manner
When does KYC apply?
o Opening of a new Deposit / borrowal account
o Opening of a subsequent account where documents as per current KYC compliance
not submitted while opening the initial account
o Opening a locker facility where documents are not available with the bank for all
locker facility holders
o When bank feels it is necessary to obtain additional information from existing
customers based on the conduct of account
o Periodic intervals based on instructions received from RBI
o Where there are changes to signatories, mandate holders, beneficial owners, etc
o Any other product introduced by the Bank from time to time requiring customer
identification.

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 Establishing Identity
Identity generally means a set of attributes which together uniquely identify a
natural or legal person. Identity comprises the following:
o Name
o Date of Birth
o Residence/Address
o Occupation
o Photograph

General Guidelines
o The information collected from the customer for the purpose of opening an account
is to be treated as confidential and details thereof are not to be divulged for cross
selling or any other purposes.
o The branches, therefore, to ensure that information sought from the customer is
relevant to the perceived risk, is not intrusive, and is in conformity with the
guidelines issued in this regard.
o Any other information from the customer shall be sought separately with his/her
consent.
o The Branch, at the time of commencement of an account-based relationship, shall
identify its clients; verify their identity and other information on the purpose and
intended nature of the business relationship.
o Any remittance of funds by way of demand draft, mail/telegraphic transfer or any
other mode and issue of travelers’ cheques for value of Rs. 50,000 and above is to
be effected by debit to the customer’s account or against crossed cheques and not
against cash payment.
o In case of transactions carried out by a non-account based customer/ walk-in
customer, where the amount of transaction is equal to or exceeds Rs. 50,000,
whether conducted as a single transaction or several transactions that appear to be
connected, the customer's identity and address shall be verified.
o However, if a branch has reason to believe that a customer is intentionally
structuring a transaction into a series of transactions below the threshold of
Rs.50,000/- the branch shall verify identity and address of the customer and also
consider reporting such transactions through Regional Office to Principal Officer,
KYC-AML Division for considering filing a Suspicious Transaction Report (STR) to FIU-
IND.
o The Branches shall verify identity of the customer for all outgoing international
money transfer operations.
o The Branches shall ensure that the provisions of Foreign Contribution (Regulation)
Act, 2010, as amended from time to time, wherever applicable are strictly adhered
to.

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 MONEY LAUNDERING
Section 3 of the Prevention of Money Laundering (PML) Act 2002 has defined the
“offence of money laundering” as “whosoever directly or indirectly attempts to
indulge or knowingly assists 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 offence of money laundering.”
Process of Money Laundering
The entire process of money laundering involves three stages;
o Placement: In this stage large amount of cash generated through criminal activities
is sought to be introduced into the legitimate financial channels in small quantities
through transactions of small value often through Benami means.
o Layering: In this stage the funds introduced into the financial channels are
moved/rotated through a number of accounts in order to mask the origins of the
funds.
o Integration: In this stage the layered funds are brought together in an account
directly or indirectly controlled by the owners of the tainted funds. Very often at
this stage shell companies purportedly dealing in exports/imports, real estate,
casinos etc are used.
OBLIGATIONS UNDER PREVENTION OF MONEY LAUNDERING (PML) ACT
2002
Section 12 of PML Act 2002 places certain obligations on every Banking company,
financial institution and intermediary, which include:-
o Maintaining a record of prescribed transactions
o Furnishing information of prescribed transactions to the specified authority
o Verifying and maintaining records of the identity of its clients
o Preserving records
DEFINITION OF CUSTOMER
As per Prevention of Money Laundering Act, 2002, a ‘Customer’ is defined as:
o A person or entity that maintains an account and/or has a business relationship with
the Branch;
o One on whose behalf the account is maintained (i.e. the beneficial owner);
o Beneficiaries of transactions conducted by professional intermediaries, such as Stock
Brokers, Chartered Accountants, Solicitors etc. as permitted under the law
o Any person or entity concerned with a financial transaction which can pose
significant reputational or other risks to the bank, say a wire transfer or issue of
high value demand draft as a single transaction.
BENEFICIAL OWNER
Beneficial Owners shall mean the natural person who ultimately owns or controls a
client and/or the person on whose behalf a transaction is being conducted, and
includes a person who exercises ultimate effective control over a juridical person.
It is mandatory to create Cust IDs of all beneficial owners (BOs) like Proprietor,
Partners, Directors, Authorised signatories in case of Clubs, Associations etc.,
Trustees, Karta and Co-Parceners.

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 KEY ELEMENTS OF KYC POLICY
KYC policy is framed incorporating the following four key elements:
o Customer Acceptance Policy;
o Customer Identification Procedures;
o Monitoring of Transactions; and
o Risk Management.

Customer Acceptance Policy (CAP)

o No account shall be opened in anonymous or fictitious/ benami name(s)
o Categorization of customers in to low, medium & high risk on the basis of following:
o Nature of business activity
o Location of the customer and his clients
o Mode of payments
o Volume of turnover
o Social and financial status
o Annual income
o Documents for proof of identification & address shall be collected
o Not to open an account or close an existing account where the Branch is unable to
apply appropriate customer due diligence measures i.e. the Branch is unable to
verify the identity and / or obtain documents required as per the risk categorization
due to non- cooperation of the customer or non-reliability of the data/information
furnished to the Branch.
o Necessary checks shall be performed before opening a new account so as to ensure
that the identity of the customer does not match with any person with known
criminal background or with banned entities such as individual terrorists or terrorist
organizations etc.
o A profile for each new customer based on risk categorization is to be prepared while
opening the account which will contain information relating to customer’s identity,
social/financial status, nature of business activity, information about his clients’
business and their location etc.
o The Branches shall apply enhanced due diligence measures based on the risk
assessment, thereby requiring intensive ‘due diligence’ for medium and higher risk.
Risk Classification
o Low Risk Customers: - For the purpose of risk categorization, individuals (other
than High Net Worth) and entities whose identities and sources of wealth can be
easily identified and transactions in whose accounts by and large conform to the
known profile, shall be categorized as low risk.
o Medium Risk Customers:-Customers that are likely to pose a higher than average
risk to the Branch or which are neither low risk nor High Risk shall be categorized as
medium risk customers.
o High risk customers:- Customers, especially those for whom the sources of funds

65
 are not clear or are in cash intensive business, such as accounts of bullion dealers
(including sub-dealers), jewellers, dealers in wild life articles, Arms and Ammunition
dealers, etc will be categorized as ‘high risk’ requiring enhanced due diligence.

ENHANCED DUE DILIGENCE

Enhanced due diligence should be carried out before opening an account of
customer falling under High Risk /Medium Risk Category by following the procedure
as under:
o Gathering further details of the customer profile including beneficial owners and the
sources of income/ funds, by making personal visits to the customer’s location and
interviewing him/her.
o Review and reconfirmation of the completeness and accuracy of KYC documents
submitted by the customer by the Branch Head by signing on the form and
indicating his / her views.
o Developing specific alerts for transaction monitoring.

Customer Accounts Requiring Enhanced Due Diligence:

o Accounts of Non-Face-to-Face Customers
o Accounts of Politically Exposed Persons (PEPs) resident outside India
o Client accounts opened by Professional Intermediaries
o Accounts of Multi-Level Marketing (MLM) Agencies

Customer Identification Procedure (CIP)

Customer Identification means identifying the customer and verifying his/her
identity by using reliable, independent source documents, data or information.
Customer Identification Procedure (CIP) shall be carried out at different stages, i.e.,
while establishing a Banking relationship, carrying out a financial transaction or
when there is a doubt about the authenticity/veracity or the adequacy of the
previously obtained Customer Identification Data.
Information collected at the outset for Customer Identification purpose shall
generally include:
o The purpose and reason for opening the account or establishing the relationship
o The anticipated level and nature of the activity to be undertaken
o The expected origin of the funds to be used within the relationship
o Details of occupation/employment and sources of wealth or income
Introduction in Opening Account
o Introduction is not necessary for opening of accounts under PML Act and rules or
Reserve bank’s extant KYC guidelines, bank should not insist on introduction for
opening bank accounts of customers.
o Branches should open accounts (without third party introduction) provided KYC
norms/documents are obtained, scrutinized and followed scrupulously.

66
 Permanent Account Number (PAN) or FORM 60
Following banking transactions have been specified under the Income Tax Rules for
which PAN should be quoted:
o A Term Deposit exceeding Rs. 50,000/-
o Opening an account with amount exceeding Rs.50000/-
o Payment in cash for purchase of bank drafts or pay orders or bankers cheques for an
amount exceeding Rs.50000/- during one day.
o Deposit in cash exceeding Rs.50000/- during anyone day.
o Making an application for issue of a credit card
When the customer quotes his PAN, a copy of the PAN card issued by the Income Tax
department should be obtained and kept on record.

As per Government of India recent guidelines, it is mandatory to obtain and link PAN
or Form 60 to all existing bank accounts. This directive is not applicable to BSBDS
(Basic Savings Bank Deposit Small Accounts which are basically no frill accounts.
Verification of PAN
Any officer of a Bank who has received any document relating to any transaction
mentioned above should ensure after verification that PAN has been duly and
correctly quoted in the document. It is the legal obligation of the bank officials
authorized to verify correctness of PAN.
Where Pan is not quoted, declaration in Form No. 60 should be obtained with proof
of address while accepting declaration.
Precautions to be taken while opening accounts:
o No accounts should be opened without the personal presence and photograph of
the customer
o Customer’s signature should be obtained in presence of the branch official
o Branches should ensure certification by putting a rubber stamp with the words
“Signature of the account holder has been obtained in the presence of branch
official” at the bottom under ‘Bank use only’
o True identity of a person and his credentials to be ascertained
o Identification of documents and verification with originals
o Telephone calls/visits can be made to ascertain the genuineness.
o In case of current account opening- unannounced visit by one of the officers
o Technology support like Ministry of Corporate Affairs (MCA), Know Your PAN,
OFAC/UNSCAN available in UBINET can be utilized for cross verification. NRIs are
exempted from producing PAN and Form 60
Single document for proof of identity and proof of address
o There is now no requirement of submitting two separate documents for proof of
identity and proof of address. If the officially valid document submitted for opening
a bank account has both, identity and address of the person, there is no need for
submitting any other documentary proof.
“Officially Valid Document” (OVD) means the passport, the driving license, proof of

67
 possession of Aadhaar number, the Voter’s Identity Card issued by Election
Commission of India, job card issued by NREGA duly signed by an officer of the State
Government and the letter issued by the National Population Register containing
details of name and address or any document as notified by the Central Government
in consultation with the regulator.
Provided that where the Customer submits his/her proof of possession of Aadhaar
number as officially valid document, he/she may submit it in such form as are issued
by the Unique Identification Authority of India.
Relaxation regarding officially valid documents (OVDs) for Small Account
If an individual customer does not possess PAN and Officially Valid Documents (OVD)
and desires to open a bank account, Bank shall open ‘Small Accounts’ subject to
following:
Customer may be allowed to open such an account, subject to compliance of
operational guidelines issued on this subject matter, on production of a self-
attested photograph and fixation of signature or thumb print, as the case may be,
on the account opening form.
While opening accounts as described above, the customer shall be made aware that
if at any point of time, the balance in all his/her accounts with the bank (taken
together) exceeds Rs.50,000/-or the aggregate of all credits in a financial year
exceeds Rs.1,00,000/- in a year or the aggregate of all withdrawals and transfers in
a month exceeds Rs.10,000/-, no further transactions will be permitted until full
KYC procedure is completed. In order not to inconvenience the customer, the
branch shall notify the customer when the balance reaches Rs. 40,000/- or the total
credit in a year reaches Rs.80,000/- that appropriate documents for conducting the
KYC must be submitted otherwise operations in the account will be stopped on
crossing the limit.
Monitoring of Transactions
Ongoing monitoring is an essential element of effective KYC procedures. Banks can
significantly reduce the risk of money laundering if they have an understanding of
the normal and reasonable activity of the customer. Banks must pay special
attention to all complex, unusually large transactions and all unusual patterns which
have no apparent economic or visible lawful purpose. Very high account turnover
inconsistent with the size of the balance maintained may indicate that funds are
being ‘washed’ through the account.
o At least for first six months, the account should be monitored in all respects.
o Transactions with amount over Rs.1.00 lac, should be authorized by
accountant/Assistant Branch manager or Branch manager
o Care should be taken in collection of cheques in newly opened account
o Cash deposit aggregating Rs.50000/- or more in a day- PAN number of account
holder is a ‘must’, if it not provided at the time of account opening.
o Branches should also have a close watch on ‘Money Mule’ transactions. In ‘Money
Mule’ transactions, others’ accounts are used by terror outfits and individuals for

68
 transferring funds or making transactions for a commission or rent

Updation of Customer Identification Data/Customer Profile (KYC Updation)

o For Low risk customers once in 10 years
o For medium Risk customers once in 8 years
o For High Risk customers once in 2 years
o Fresh photographs will be required to be obtained from minor customer on
becoming major
CASH TRANSACTION
The maximum permissible cash transaction in an account in a day is Rs.10 lac (both
receipts & withdrawals). In case, a customer desires higher cash transaction levels,
the same will have to be approved for each account by the concerned Regional
Office. For this purpose, the branch will submit supporting evidences viz. Income
tax returns, GST returns or GST assessment orders or any other documents justifying
higher levels of deposit/withdrawal of cash.
In respect of Bullion dealers, the maximum permissible daily cash level has been
fixed at Rs.50 lacs. This will be available for the bullion dealers buying bullion
directly from our bank. Transactions beyond this limit needs to get approved by IBD,
CO.
SUSPICIOUS TRANSACTION
Suspicious transaction means a transaction whether or not made in cash which a
person acting in good faith
o Gives rise to a reasonable ground of suspicion that it may involve the proceeds of
crime or
o Appears to be made in circumstances of unusual or unjustified complexity or
o Appears to have no economic rationale or bonafide purpose
Certain transactions not in line with the profile of the customer
Certain behavior displayed by the customer during interactions
Analysis of exceptional transaction reports etc.

REPORTS
o Suspicious Transaction Report (STR) has to be submitted by branch to Regional
Office within seven working days on being satisfied that the transaction is
suspicious.
o Cash Transaction Report (CTR)
All cash transactions of more than Rs.10 lakh or its equivalent in foreign
currency
All series of integrally connected cash transactions exceeding Rs.10 lakh or its
equivalent in foreign currency in a month
CTR has to be submitted by Central Office to FIU-IND by 15th day of
succeeding month
o NPO Transaction Report (NTR)

69
 All transactions involving receipt by non-profit organizations exceeding Rs. 10 lakh
or its equivalent in foreign currency
o Counterfeit Currency Report (CCR)
All cash transactions using forged currency notes or valuable security or document.
CCR has to be submitted by the Branch to Nodal Currency Chest Officer.
Simultaneously the branches/currency chests have to report detection of fake notes
to KYC AML Division, Mumbai in the single page prescribed format. Delay and/or
non-reporting may attract financial penalty by FIU India Ministry of Finance,
recoverable from erring officials as personal liability.
o Cross Border Wire Transfer Reporting (CBWTR)
Every reporting entity is required to maintain the record of all transactions including
the record of all cross border wire transfers of more than Rs.5.00 laks or its
equivalent in foreign currency, where either the origin or destination of the fund is
in India. Bank shall ensure that the information of all such transactions shall be
furnished to Director, FIU-IND by 15th of the succeeding month.
Tipping Off
The Bank shall ensure that the customers are not to be informed (‘tipped off’) at
any level that the account is under monitoring for suspicious activities and a
disclosure has been made to the appropriate statutory authorities.

Maintenance and Preservation of Records

The Branch shall maintain the records containing information in respect of
transactions referred to in Rule 3 of the Prevention of Money-Laundering
(Maintenance of Records, etc.) Rules, 2005.
The Branch shall maintain for at least five (5) years from the date of transaction
between the Bank and the client, all necessary records of transactions, both
domestic or international, which will permit reconstruction of individual
transactions (including the amounts and types of currency involved, if any) so as to
provide, if necessary, evidence for prosecution of persons involved in criminal
activity.
The Branch shall ensure that records pertaining to the identification of the customer
and his address (e.g. copies of documents like passports, identity cards, driving
licenses, PAN card, utility bills, etc.) obtained while opening the account and during
the course of business relationship, are properly preserved for at least five (5) years
after the business relationship is ended.
The Branch shall maintain under Rule 3 of Prevention of Money-Laundering
(Maintenance of Records, etc.) Rules, 2005 the following information in respect of
transactions
o Nature of the transactions;
o Amount of the transaction and the currency in which it was denominated;
o Date on which the transaction was conducted; and
o Parties to the transaction.

70
 Risk Management
The Bank is exposed to the following risks, which arise out of Money Laundering
activities:
o Reputation Risk
It is the risk of loss due to severe impact on Bank’s reputation. This may be of
particular concern given the nature of the Bank’s business, which requires
maintaining the confidence of depositors, creditors and the general market place.
o Compliance Risk
It is the risk of loss due to failure of compliance with key regulations governing
the
Bank’s operations.
o Operational Risk It is the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events.
o Legal Risk
It is the risk of loss due to any legal action the Bank/Branch may face due to failure
to comply with law.
Foreign Account Tax Compliance Act (FATCA)
Foreign Account Tax Compliance Act (FATCA) was enacted in the United States in
2010 to combat tax evasion by U.S person holding investments in off shore accounts.
Under FATCA U.S taxpayer holding financial assets outside the United States must
report those assets to the US Internal Revenue System (IRS). In addition, the act also
requires Foreign Financial Institutions across the globe to report directly to the IRS
requisite information about financial accounts held by US taxpayers, or by foreign
entities in which US taxpayers hold substantial ownership interest.
Further Taxpayers increasingly operating on a global basis, tax authorities are
moving from bilateral to multilateral cooperation and from exchange of information
on request to other forms of co-operation. India had signed the Inter Government
Agreement (IGA) with United States on 09.07.2015 for reporting under FATCA.
Accordingly Income Tax Rules 1962 was amended to facilitate reporting under
FATCA and Common Reporting Standards (CRS). To comply with the above Act, we
are required to obtain and capture the following details in Customer information file
(CIF) for all the accounts of individuals and joint individuals.
o Details wherever the customers Country of Birth / Nationality / Tax Residency is
other than India.
o If customers Country of Birth / Nationality / Tax Residency are other than India, we
should collect documentary evidence of TIN or its functional equivalent.
o FATCA / Other Reportable Account Declaration, which has been incorporated in the
account opening form.
E – KYC
E-KYC or electronic KYC could be defined as a procedure that would enable a
customer to walk in to the bank with an Aadhaar number and open an account by
only by getting his fingerprint scanned. With the help of UIDAI (Unique Identification
Authority of India), bank’s system will put out all data of the customer that is stored

71
 online which includes name, address, age and other relevant data necessary and it
will also save a copy of the KYC document that remain stored in UIDAI servers.
Aadhaar card is one of the Officially Valid documents stipulated by RBI for
completing the norms stipulated to know the customer since it contains necessary
details for identification of an individual along with biometric identification.
Therefore this process of e-KYC benefits both the bank for easy account opening.

IMPORTANT DO’S AND DON’TS FOR BRANCHES

DO’s:-
When New Accounts are opened
o The relevant account opening forms should be filled completely including details
like source of income/occupation, turnover, date of birth/date of incorporation etc.
o Obtain officially valid identification and address proof and any other document
required for verification of the above.
o Verify Xerox copies with the original and certify under seal and signature.
o Ask for PAN and in case customer declares having no PAN, then take form 60,
However PAN should be preferred.
o Wherever an account has been opened based on form 60 branch must insist for PAN
card when there are cash transactions beyond the threshold limit of 50,000/- in a
day or in lieu of PAN card, Form 60 should be obtained.
o Letter of thanks with acknowledgement due should invariably be sent to a/c holders
and introducer (if any). Proof of delivery to be kept with the account opening form.
o In case of Current accounts and accounts of high risk customers like Trust,
Associations, PEPsN (Politically Exposed Persons, their relatives & aides)
Wildlife/Arms/ Bullion/ Gems/Jewellery/Real Estate Dealers, High Net worth
Individuals(HNI), Pooled Accounts etc., enhanced due diligence like visit to
customer’s place, obtaining IT/GST return, Balance sheet is compulsory.
o Customer ID for all joint account holders, partners, directors, co-parceners should
be created and attached to accounts.
o Nomination should be insisted in the best interests of the customer where
ever applicable.

Transaction Monitoring
o Monitor accounts with high value of transactions & match with their declared
profile. Ensure enhanced due diligence (EDD) in case of high value/high volume
transactions.
o Monitor accounts with variance in declared occupation/profession & its transactions.
o Monitor accounts with high cash deposits & withdrawals, inconsistent with the line
of activity.
o Permission from RO should be sought in deserving cases for all cash deposits and
withdrawals exceeding Rs.10.00 lacs (in case of bullion dealers the limit is Rs.50.00
lacs per day)
o Accounts with Deposits, withdrawals structured below threshold limit e.g. 49500,
49900,999000 etc should be monitored closely and reported.

72
o Small amount deposit from different SOLs should be checked for Multi-Level
Marketing (MLM) accounts and reported.
o High value, round figure, U-turn, Circular transactions, not related to declared
activities should be monitored and reported.
o Accounts/transactions posing suspicion as explained herein and concluded as
suspicious transaction should be promptly reported to Principal Officer through
Regional Office, not later than 7 days of the conclusion.
o Extend full help and guidance to customers to comply with the requirements of KYC-
AML.
Don’ts:-
 Do not open accounts without personal presence of the customer & Verification.
 Do not admit signatures unless signed before authorized bank officials.
 Do not endorse certification on photo copies of ID and residence proof unless
originals are seen and verified. Do not create multiple Customer Ids for the same
customer.
 Do not open accounts on partial submission of documents (e.g. Accounts of
Partnership firms, companies, Trusts, Clubs, Associations etc.)
 Do not suggest/advise customers, splitting of high value cash deposits into smaller
lots.
 Do not return counterfeit currency in exchange of other notes.
 Do not ignore transaction alerts & related letters sent by KYC-AML division on
Suspicious/Unusual transactions.
 Don't close KYC non-compliant accounts, unless the customer is identified with
satisfactory documentary proof.
 Do not treat KYC as a hurdle for business development especially while dealing with
poor & financially/socially deprived category of the population.
 Do not seek fresh proof of identity/address proof at the time of periodic updations
from 'low risk' customers in case of no change in status.
 Don't accept utility bills of more than two months old as address proof for limited
purpose of address.

RISK CATEGORIZATION OF CUSTOMERS

For the purpose of risk categorization, individuals (other than High Net Worth) and
entities whose identities and sources of wealth can be easily identified and
transactions in whose accounts by and large conform to the known profile, shall be
categorized as low risk. Illustrative example of low risk customers will be salaried
employees whose salary structure are well defined, people belonging to lower
economic strata of the society whose accounts show small balances and low
turnover, Government Departments and Government owned companies, regulators
and statutory bodies etc. In such cases, only the basic requirements of verifying
the identity and location of the customer are to be met. Customers that are likely
to pose a higher than average risk to the Bank shall be categorized as medium or
high risk depending on customer's background, nature and location of activity,

73
country of origin, sources of funds and his client profile etc. The Bank shall apply
enhanced due diligence measures based on the risk assessment, thereby requiring
intensive ‘due diligence’ for higher risk customers, especially those for whom the
sources of funds are not clear. In view of the risks involved in cash intensive
business, accounts of bullion dealers (including sub-dealers) & jewelers will be
categorized as ‘high risk’ requiring enhanced due diligence. Other examples of
customers requiring higher due diligence include (a) non-resident customers; (b)
high net worth individuals; (c) trusts, charities, NGOs, NPOs and organizations
receiving donations; (d) companies having close family shareholding or beneficial
ownership; (e) firms with 'sleeping partners'; (f) Multi Level Marketing (MLM)
Agencies; (g) ‘pooled accounts’ maintained by professional intermediaries (h)
accounts of agents/ sub-agents of cross border money transfer service providers (i)
politically exposed persons (PEPs) (j) non-face to face customers and (k) those with
dubious reputation as per public information available etc. However, Non-Profit
Organizations (NPOs)/ Non-Governmental Organizations (NGOs) promoted by the
United Nations (UN) or its agencies will be classified as low risk customers.

ILLUSTRATIVE LIST OF ACCEPTABLE DOCUMENTS FOR DIFFERENT

TYPES OF CUSTOMERS

Type of customers Documents to be obtained

Individuals
For Identification as well as for
address (provided it bears the
present address mentioned in
AOF).
1. Aadhaar Number, where he/she is desirous of
receiving any benefit or subsidy under any scheme
with declaration Annexure III of KYC-AML Policy. E-
KYC shall mandatorily be done.
Or

Individuals who are not beneficiaries of the

aforesaid welfare scheme or who do not give
declaration as mentioned above, branches shall
accept physical Aadhaar card/E-Aadhaar /Masked
Aadhaar/Offline Electronic Aadhaar xml (if offered
voluntarily by the Customer) or in such form as are
issued by the Unique Identification Authority of
India.
Or
the passport, the driving license, the Voter’s
Identity Card issued by Election Commission of
India, job card issued by NREGA duly signed by an
officer of the State Government and the letter
issued by the National Population Register
containing details of name and address.
And
2. Permanent Account Number (PAN) or Form No. 60,

74
 Type of customers Documents to be obtained
and
3. One recent photograph, and
4. Such other documents pertaining to the nature of
business or financial status specified by the Bank
from time to time.
Provided where Customer submits his/her Aadhaar
number, Branches shall ensure that such customer to
redact or blackout his/her Aadhaar number through
appropriate means where the authentication of
Aadhaar number is not required.
For Address It is implied that proof of address also follows from the
(Only Full Address shall be above documents only. If OVD furnished by the
accepted. Post Box / Bag customer does not contain updated address, then
Numbers shall not be accepted) Deemed OVDs for limited purpose of address:-
i. Utility bill which is not more than two months old
of any service provider (electricity, telephone,
postpaid mobile phone, piped gas ,water bill);

ii. Property or Municipal Tax Receipt;

iii. Pension or Family pension payment orders (PPOs)

issued to retired employees by Government
Departments or Public sector undertakings, if they
contain the address;

iv. Letter of allotment of accommodation from

employer issued by State or Central Government
departments, statutory or regulatory bodies,
public sector undertakings, scheduled commercial
banks, financial institutions and listed companies.
Similarly, leave and license agreements with such
employers allotting official accommodation; and

Provided that the customer shall submit updated OVD

with current address within a period of three months
of submitting the above documents.
Joint Individuals As mentioned above for individuals for each of the
joint individuals.

Non Resident Indians – Copies of Passport and Residence Visa, a valid

Individuals document indicating foreign residential address and
passport size photographs of the applicant. The
applicant is to be duly introduced by Banker/ Notary
Public/ Indian Embassy/ Local customer who have

75
 Type of customers
Proprietary concern
For Identity of the concern, its
activities, address.
For identity of the proprietor
and his addresses (For creation
of Proprietor’s Customer ID
which is to be attached to the
Proprietary Concern’s Account)
Documents to be obtained
been subjected to full KYC Procedure.
If OVD submitted by a Foreign national does not
contain the details of address, in such case the
documents issued by the Government department of
foreign jurisdictions and letter issued by the Foreign
Embassy or Mission in India shall be accepted as proof
of address.
 Recent Passport size photograph
Apart from Customer Identification Procedure as
applicable to the proprietor any two of the following
documents in the name of the proprietary concern
would suffice.
i. Registration Certificate (in the case of a registered
concern)
ii. Certificate / License issued by the Municipal
Authorities under Shop & Establishment Act,
iii. Sales Tax and Income Tax Returns
iv. CST/VAT/GST Certificate (provisional / final)
v. Certificate/ Registration document issued by Sale
Tax/ Service Tax/ Professional Tax
authorities/GST.
vi. IEC (Importer Exporter Code) issued to the
proprietary concern by the office of DGFT/
License/Certificate of practice issued in the name
of the proprietary concern by any professional
body incorporated under a statute.
vii. License (Certificate of Practice) issued in the
name of proprietary concern by any professional
body incorporated under a statute -
 Institute of Chartered Accountants of India,
 Institute of Cost Accountants of India,
 Institute of Company Secretaries of India,
 Indian Medical Council,
 Food and Drug Control Authorities, etc.
 or any other professional body incorporated under
a statue
viii. Complete set of Income Tax Return (not just the
acknowledgement) in the name of the sole
proprietor where the firm’s income is reflected,
duly authenticated / acknowledged by the
Income Tax Authorities.
ix. Utility bills such as electricity, water, and
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 Type of customers Documents to be obtained
landline telephone bills not older than two
months.
In cases where the branches are satisfied that it is
not possible to furnish two such documents, they
would have the discretion to accept only one of those
documents as activity proof. In such cases, the
branches, however, would have to undertake contact
point verification, collect such information as would
be required to establish the existence of such firm,
confirm, clarify and satisfy itself that the business
activity has been verified from the address of the
proprietary concern.

x. Identity and Address proof of individual as

mentioned above in respect of the person
authorized/holding an attorney to transact on its
behalf.
It is implied that proof of address also follows from the
above documents only.
xi. Recent passport size Photographs of the proprietor
Hindu Undivided family Prescribed Joint Hindu Family Letter signed by all the
For Identity of the HUF, its major Co-parceners. Declaration form from the Karta.
activities, address and (i) Identity & Address proof of individual as
authority for opening and mentioned above of the Karta and each of the major
operation of its account(s) co-parceners as applicable to individuals.
For identity of the Karta and (ii) Recent Passport size Photographs of Karta & all
major co-parceners of the HUF major co-parceners.
who are authorized to operate
the account(s) and their
addresses.
Partnership Firms For Identity Proof of the Partnership Firm
For Identity of the Firm, its o Registration Certificate; and
activities, address and o Partnership Deed; and
authority delegated for opening o Permanent Account Number (PAN) of the
and operation of its account(s). Partnership Firm; and
For identity of the each
partners (For creation of For Identification of the Firm’s Partners/Power of
Partner’s Customer ID which is Attorney Holder and their Address
to be attached to the (i) One copy of OVD containing details of Identity and
Partnership Firm’s Account) address, and

(ii) Permanent Account Number (PAN) or Form No. 60 of

all the partners/person holding an attorney to

77
 Type of customers
Companies / Corporations
For identity of the Company /
Corporation, its activities,
address and authority
delegated for opening and
operation of its account(s).
For identity of the directors/
officials of the
company/corporation who are
authorized to operate the
account and their addresses.
Trusts
For Identity of the Trust, its
activities, address and
authority delegated for opening
and operation of its account(s).
For identity of the trustees who
are authorized to operate the
accounts of the Trust and their
addresses.
Local Bodies/Government
Departments
/Societies/Universities etc.,
For Identity of the applicant,
its activities, address and
(ii) Documents showing name of the person authorized
authority delegated for opening
and operation of its account(s).
Documents to be obtained
transact on its behalf.
(iii) Recent passport size Photographs of all the
partners/person holding an attorney to transact on
the its behalf.
Companies / Corporations
(i) Certificate of Incorporation; and
(ii) Memorandum and Articles of Association; and
(iii) Permanent Account Number (PAN) of the
Company/Corporations; and
(iv) Current list of directors with their bio-data & a
Resolution from the Board of Directors and Power
of Attorney granted to its managers, officers or
employees, as the case may be, to transact on its
behalf; and
(v) One copy of an OVD containing details of identity
and address, One recent Photograph and
Permanent Account Number (PAN) or Form No. 60
in respect of managers, officers or employees, as
the case may be, holding an attorney to transact
on its behalf.
Trusts
(i) Registration Certificate; and
(ii) Trust Deed; and
(iii) Permanent Account Number or Form No. 60 of the
Trust; and
(iv) One copy of and OVD containing details of identity
and address, one recent photograph and Permanent
Account Number or Form No. 60 of the person
holding an attorney to transact on its behalf.
Local Bodies like village Panchayats /Government
Departments / Societies / Universities etc.,
(i) Notification/Resolution/Letter of Permission for
opening and delegation of authority to operate the
account.
to act on behalf of the entity.
(iii) PAN/OVD for proof of identity and address in
respect of the person holding a power of attorney
to transact on its behalf and
(iv) Recent Passport size photograph of all such
78
 Type of customers Documents to be obtained
authorized officials.

Unincorporated association or Information as may be required by the bank to

body of individuals including collectively establish the legal existence of such an
societies association or body of individuals
(i) Resolution of the managing body of such association
For Identity of the applicant, or body of individuals; and
its activities, address and (ii) Permanent Account Number (PAN) or Form No. 60 of
authority delegated for opening the Unincorporated Association or a Body of
and operation of its account(s). Individuals; and
(iii) Power of Attorney granted to person to transact on
its behalf; and
(iv) One copy of identity and address, one recent
photograph and Permanent Account Numbers (PAN)
or Form No. 60 of the person holding an attorney to
transact on its behalf.
Explanation: Unregistered trusts/partnership firms
shall be included under the term ‘unincorporated
association’ or ‘a body of individual includes Societies.

79
 Test- KNOW YOUR CUSTOMER / ANTI MONEY LAUNDERING GUIDELINES

1. Money Laundering refers to

A) Transfer of assets/cash from one account to another
B) Conversion of illegal money into legal through banking channels
C) Conversion of cash into gold for hoarding
D) Conversion of assets into cash to avoid income tax

2. Updation of Customer Identification data/Customer Profile of High Risk

Customers is to be done
A) Once in 10 years
B) Once in 3 years
C) Once in 2 years
D) Once in 1 year

3. Updation of Customer Identification data/Customer Profile of Low Risk

Customers is to be done
A) Once in 10 years
B) Once in 3 years
C) Once in 2 years
D) Once in 1 year

4. Under which of the following schemes SB account can be opened for Migratory
labours?
A) No-frill accounts
B) Basic Savings Bank Deposit Account Small
C) General Savings scheme (SBGEN)
D) Union Super Salary Account
5. Which of the following customer does not fall under low risk category as per
KYC guidelines?
A) Salaried employee
B) Persons from lower strata of the society
C) Govt. departments
D) Trusts

Answers:

1 2 3 4 5
B C A B D

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 TERM DEPOSIT: OPERATIONAL GUIDELINES

Objectives
 Introduction
 Features of Term Deposit
 Addition / Deletion / Substitution of Names
 Interest Rates
 Payment
 FORM 60
 Tax Deduction at Source (TDS)
 FORM 15G / 15H
 Precautions
 Premature Closure / Withdrawal
 Renewal of Term Deposit
 Renewal before Maturity
 Overdue Deposit
 Advance against Deposit
 Issue of Duplicate Deposit Receipts

INTRODUCTION:
TIME LIABILITIES means Term Deposits which are also known as Fixed Deposits. The
word “Fixed Deposits” are nowhere mentioned in the Banking Regulation Act,
1949(10 of 1949). The term in vogue is “Time Liabilities”. However for convenient
understanding we shall use the term “Term Deposit”.
Term Deposit means a deposit received by the bank for a fixed period withdrawable
normally after the expiry of the fixed period.
1) Features of Term Deposit
o Each Term Deposit Receipts is a separate contract.
o A Term Deposit is accepted for a period 7 days and above only.
o The bank will not accept Deposits for period longer than 10 years. However,
exceptions may be made in terms of orders of Competent Courts or in case of
minors where interest of minors is involved.
o It is not repayable on demand i.e. which is repayable at a fixed date or after a
period of notice.
o No Change in the terms and conditions permissible, except under statutory
obligations or as per RBI directives, till the deposit matures for payment.
o Term Deposit Receipts are not negotiable instruments.
o Loan against Term Deposits are allowed except in cases of Tax Saver Schemes and
Flexi Deposit
o Term Deposits are accepted as collateral for other loans.

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 2) Addition / Deletion / Substitution of Names
A. Addition/Deletion in the deposit accounts of individuals is permitted as
follows:
o Single depositor - Addition is permitted at the written request of the sole
depositor
o Deposit in the joint names of two or more persons (including Either or Survivor ,
Any one or Survivor), addition/deletion in the deposit account would be
permitted at the written request of all the depositors
o If the request for addition/deletion of a name is received from the survivor(s),
after the demise of one or more of the joint depositors, the legal heirs of the
deceased depositor(s) and the survivor(s) should give the consent letter.
o In case of Deletion of name in Deposits of joint names at least one of the original
depositors should continue in the account.
o After any change fresh nomination is to be obtained
B. Addition/Deletion in deposit account of individual is NOT permitted
o In the case of a “Former or Survivor” account, no deletion of the “Former” is
permitted
o In the case of accounts in the names of minors.
o Change is not permitted if encumbered (Attachment order/ Garnishee order)
3) Interest Rates
o Interest will be paid on Term deposits only if had run for a minimum tenor of 7
days.
o Senior Citizens will be eligible to get additional 0.50% for “1 year and above”
maturity buckets and principal amount less than 1 crore.
o Staff and eligible ex-staff members will continue to get the benefit of additional
1% over and above the card rate for deposit amount of less than 1 crore.
o Eligible ex-staff members, who are senior citizens, will get the benefit of
additional 0.50% over and above the card rate plus 1% p.a. in all maturity
buckets of “1 year and above” and principal amount less than 1 crore.
o Interest will be calculated at quarterly rests and paid quarterly except where
mentioned otherwise in specified schemes.
o Interest paid in cash to the depositor should be noted on the reverse of the
receipt.
o Interest payable will be rounded off to the nearest Rupee.
o The rate of interest allowed for renewed deposit will be the appropriate rate
applicable to the period for which the Deposit is renewed, as on the ruling on
the date of maturity of the Deposit.
i. Deposits Maturing on Holiday
In case of reinvestment deposits and recurring deposits, bank shall pay interest for
the intervening Sunday/holiday/non-business working day (as also Saturday in case
of NRE deposits) on the maturity value. However, in the case of ordinary term
deposits, the interest for the intervening Sunday/holiday/non-business working day
(as also Saturday in case of NRE deposits) shall be paid on the original principal
amount.

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4) Payment
As per Section 269 T of the Income Tax Act 1961(43 of 1961) repayment of deposits
together with interest aggregating Rs.20000/- (wef 1.4.1989) or more should be paid
by an account payee cheque or bank draft or by crediting the amount to the
account, if any, of the depositor with the Banking Company or Cooperative Bank.
5) FORM 60
Form 60 must be produced by an individual who does not have a PAN Card.
o In absence of PAN, Declaration in Form 60 can be accepted.
o In case of account in the name of minor who does not have any income
chargeable to income tax is opened, the PAN of his/her father or mother or
guardian, as the case may be is to be provided.
o The data collected through Form 60 during the financial year in respect of term
deposits exceeding Rs.50,000/- received in cash shall be transmitted
electronically to the concerned Director of Income Tax (Investigation) in two
installments i.e. the forms received up to 30th Sept shall be forwarded by the
31st October of that year and the declaration till the 31st March shall be
furnished latest by the 30th April of the same year.
6) Tax Deduction at Source (TDS)
o U/s 194A of Income Tax Act 1961 Bank is required to deduct tax at source either
at the time of payment or credit of interest or at annual rest, whichever is
earlier, on term deposit as well as recurring deposits in case the aggregate
interest held by the depositor exceeds or is likely to exceed Rs.40000/- in a
branch in a financial year. Interest on Savings Bank account is not to be taken
into account while determining the threshold of Rs.40000/- interest.
o Such TDS is to be deducted at the applicable rates in force.
o In case the depositor’s tax liability calculated on total income is nil and the total
of the aggregate of the income does not exceed the basic exemption limit as the
Bank can obtain Form 15G/H with the PAN Number (mandatory).
o In terms of the changes U/S 194A of Income Tax Act and introduction of
Section 80TTB, the threshold limit on interest on Term Deposit for TDS has
been increased from 10,000 to 50,000 for SENIOR CITIZEN RESIDENT IN INDIA,
w.e.f. 01/04/2018
Two New Tax Slab Codes have been introduced as under:
1. TDSSC for Senior Citizen with PAN CARD
2. NOPSC- Senior Citizen without PAN CARD

o Tax on interest paid need not be deducted in respect of the following categories
of deposits :
Any banking company to which the Banking Regulation Act, 1949 applies, or
any cooperative society engaged in carrying on the business of banking
(including a cooperative land mortgage bank)
Any financial corporation established by or under a Central, State or
Provincial Act.
The Life Insurance Corporation of India.

83
 The Unit Trust of India.
Any Company or Cooperative Society carrying on the business of Insurance.
Such other institution, association or body or class of institutions, associations
or bodies which Central Government may for reasons to be recorded in
writing, notify in this behalf in the Official Gazette.
Wherever any Central/State Government undertaking company approaches
the bank stating that they are exempt from deduction of tax and produces
copy of the Government Notification explicitly citing the name of the
institution in the notification, then tax need not be deducted at source.
As per Section 196 of the IT Act, no tax need to be deducted in respect of
interest payable to the Government or Reserve Bank of India or A Corporation
established by or under a Central Act, which is under any law for the time
being in force, exempt from income tax on its income or a Mutual Fund
Specified under Sec 10 (23D).
The income of a local authority viz. Panchayat, Municipality, Municipal
Committee, District Board or Cantonment Board which is chargeable under
the head income from house property or income from other sources in
exempt from income tax under Sec 10(20).
List of institutions which are notified under Section 194A (3)(iii)(f) of IT Act
for the purpose of non-deduction of tax at source from interest credit
credited or paid thereto. The list is furnished by CBDT.
o Interests earned on the following types of deposits are liable for TDS under Sec
194A of IT Act.
1. Capital Gains Deposit Account Scheme 1988 which is in the form of Term
Deposit attracts TDS.
2. Accounts by Official Liquidator in the style Official Liquidator account are
also liable for TDS.
7) FORM 15G / 15H
o TDS is not required to be deducted in respect of persons who submit declaration
in Form 15G or Form 15H as per the provisions of Income Tax Act.
o Form 15G may be submitted by an individual (other than Senior Citizen), HUF,
Association of persons, body of individuals, Trust or any other category of
depositor (other than firm & Company) whose total estimated income for the
Financial Year is less than the taxable limit.
o Form15H can be submitted by an individual, who is a senior Citizen, provided
he/she declares in Form 15H that the tax on his/her estimated total income
during the financial year will be NIL.
o Quoting of PAN number is made mandatory for acceptance of Form 15G or15H.
o Non residents are not eligible to submit Form 15G or 15H.
o If the limit of interest credit (paid or to be paid) as given below, in the current
financial is exceeding, branches are advised to delete 15G/H from Customer
Master under intimation to customer
Form Age Limit Interest limit for exemption
of TDS

84
 15G Below 60 years Up to Rs.2.50 lacs
15H 60 years and above below 80 years Up to RS. 3.00 lacs
15H 80 years and above Up to Rs.5.00 lacs

Procedure :
o Branches should generate the Form 15G/H preferably from finacle
menu”FORM15”. Whereas in accepting of manual form, it should be filled up
properly
o UIN – Unique Identification Number is introduced by Income Tax Department
which is to be issued after acceptance of 15G/H
o Branches can generate receipt from finacle menu “ACK15H”after verification of
15G/H entry in finacle. This receipt will comprise of Unique Identification
Number
o In place of submission of physical form 15G/H to Income Tax Department, they
have introduced new filing system through Income Tax e-filing site-
incometaxindiaefiling.gov.in

Centralization of filing of 15G/H and reporting of 15G/H transaction:

o Filing of 15G/H return done centrally by Central Office Branches not to file
15G/H return and also not to report any 15G/H transaction with regular TDS
return

Certificate from the Assessing Officer for lower/nil tax deduction:

o In cases of assesses like Educational Institutions, Hospitals, Charitable
institutions etc. whose income is exempt from Income Tax, an application in
Form No.13 has to be made to the ITO (TDS) who after satisfying himself that the
income of the applicant is exempt will issue a certificate under Section 197.
o If such certificate is produced, the branch can act accordingly and note the same
in CBS.
o Non deduction certificates u/s 197 are issued for prospective period and not
applicable for the period prior to the date of the issue of the Certificate.
o The date up to which the Certificate is valid should be diarized manually for
removal of exemption in CBS system. (Exempt up to date in Finacle – validation
check)
8) Precautions
o PAN is required to be quoted in TDS certificate issued in Form 16A and in all the
e-TDS return submitted to the Income Tax Department and correction
statements.
o Pan is required to be quoted to avoid higher deduction of TDS under Section
206AA of IT Act. As and when a customer quotes the PAN number, the same has
to be verified by the branch.
o Invalid and incorrect PAN quoted in e-TDS return/TDS certificates will lead to
levy of penalty on the bank.
o Any wrong or invalid PAN quoted may lead to non-credit of TDS to customer.

85
 o Xerox copy of PAN Card of the customer is to be obtained, verified and
preserved.

9) Premature Closure / Withdrawal

i. Premature withdrawal of term deposit
o Unless expressly prohibited under a deposit scheme, premature withdrawal of
deposit will be allowed, irrespective of the period, it has run.
o Premature withdrawal norms are governed by norms of mandate/s.
o No interest will be paid on term deposit, which remains with the bank for less
than 7 days.
o For deposits which have run for 7 days and above, interest will be paid at the
rate applicable on date of deposit for the period for which it has actually
remained with the bank or the contracted rate whichever is lower without
charging any penalty for premature withdrawal.
o Penal interest is applicable for premature closure of term deposits.
ii. Premature withdrawal of deposit in the name of minor
In guardian operated minor account
o In case of death of the minor, the amount will be withdrawn by guardian and
account will be closed.
o Premature withdrawal can be allowed provided the amount is to be utilized
for the benefit and in the interest of the minor
o If guardian has died (minor alive) the balance is to be paid to the minor when
he attains majority. Alternatively, the next guardian can operate the
account.
iii. Renewal of Term Deposit
o Renewal instruction by depositors can be at the time of opening the account or
any time before the maturity of the deposit for the period of their choice.
o In the absence of any instructions from customer, the bank will renew the
deposit on due date for the same period for which the matured deposit was
placed.
o However the deposit will have an option to change the auto renewal period
within 14 days from the date of maturity with value dated effect for such period.
o Request for change of the auto renewal period received after 14 days from the
date of maturity will be treated as premature renewal of deposit.
iv. Renewal before Maturity
o In case the depositor desires to renew the deposit by seeking premature closure
of an existing term deposit account, the renewal at the applicable rate on the
date of renewal will be permitted, provided the deposit is renewed for a period
longer than the balance period of the original deposit.
o While prematurely closing a deposit for the purpose of renewal, interest on the
deposit for the period it has remained with the bank will be paid at the rate
applicable on the date of deposit to the period for which the deposit remained
with the bank and not at the contracted rate.

86
10) Issue of Duplicate Deposit Receipts
o If a term deposit receipt is lost, stolen, destroyed, mutilated or defaced, the
person entitled thereto may apply for the issue of a duplicate receipt to the
branch from where the receipt was issued.
o Every such application shall be accompanied by a statement showing particulars,
such as number, amount and date of receipt, and the circumstances leading to
such loss, theft, destruction, mutilation or defacement.
o Wherever applicable a Consent letter of legal heirs of the deceased depositor is
to be obtained
o Officer shall verify the signature/s of the depositor/s on the application.
o Loss, theft, destruction, mutilation or defacement of the certification to be
recorded in the system
o If the concerned Branch Manager is satisfied of the loss, theft, destruction,
mutilation or defacement of the certificate, he shall issue a duplicate receipt on
the applicant furnishing an indemnity bond in the prescribed form with one or
more approved sureties or with a bank guarantee; Provided that where such
application is made with respect to a deposit receipt mutilated or defaced, of
whatever face value, a duplicate receipt may be issued without any such
indemnity bond, surety or guarantee, if the receipt mutilated or defaced is
surrendered and the receipt is capable of being identified as the one originally
issued.
o The duplicate receipt is to be printed from the system and labeled “DUPLICATE –
ISSUED IN LIEU OF ORIGINAL” and the same to be handed over to the depositor/s
against acknowledgement.

Back dated opening

A depositor can, in case of auto renewed account, change the tenor and scheme of
the deposit within 14 days of such renewal.

87
 Test- Term Deposit: Operational Guidelines
1. Interest on term deposits is provided in the books by the Bank on
…………………….basis
(a) Monthly (b) Quarterly (c) Half Yearly (d) Yearly
2. Interest for a term deposit is paid as per ………………….
(a) Period of the deposit
(b) Deposit scheme
(c) Amount of the deposit
(d) All these
3. Penalty for pre-mature closure of deposit is charged at……………………
(a) 1% less of contracted rate
(b) 2% less of Run period int
(c) 1% less of run period int
(d) No Premature Penalty
4. In case of auto-renewal of deposit by the system, renewal is done for the period
as per…………..
(a) Original period
(b) Last renewed period
(c) As desired by customer
(d) All of these
5. TDS on interest earned above a threshold limit is deducted when the interest in a
FY is...
(a) Paid (b) Payable (c) Accrued (d) All of these
6. Deposits of customers up to Rs. 1.00 lac is insured with…………………..
(a) IBA (b) New India Assurance Co (c) RBI (d) DICGC
7. Additional interest of 0.50% is paid to senior citizens for the deposit period more
than…
(a) 6 months (b) 12 months (c) 3 months (d) No such condition
8. For an auto-renewed deposit, change of period from date of renewal without
penalty can be done provided, customer requests within ……………………
(a) 7 days (b) 15 days (c) 3 days (d) 14 days
9. For a customer who wishes to declare that his income is not taxable and TDS not
to be deducted, he has to submit…..
(a) Form 60 (b) Form 61 (c) Form 15G/H (d) Application on a plain paper
10. Deposit along with interest can be paid in cash provided the total amount is less
than
(a) 15000 (b) 20000 (c) 25000 (d) 50000
Ans:
1 2 3 4 5 6 7 8 9 10
b a a d d d b d c b

88
 CHEQUE: PAYMENT AND COLLECTION

Objectives
 A brief on Payment & Settlement Act
 Importance of Cheques
 Bearer, Order, Crossed Cheques
 Payment in due course
 Obligation on honouring the cheque
 Precautions while payment of cheques
 Standard reasons for return of cheque
 Collection of cheques- as an agent or as holder for value, Conversion,
Payment through NEFT & RTGS
 Cheque Truncation System
 Clearing of Cheques mechanism
 NACH, MMS

1) Payment & Settlement Act

Government passed Payment & Settlement Systems Act 2007 which came into effect
on 12.08.2008, mainly to regulate and supervise the payment and settlement
systems.
To promote cashless transaction, the present Finance Minister has proposed a
separate Payment Regulatory Board under RBI. This Board will replace the existing
Board for Regulation and Supervision of Payment and Settlements Systems. The
same will require changes in Payment and Settlement System Act, 2007. Now let’s
understand the present one and look forward to the future………….

o What is Payment Obligation?

What is owed by one participant in a payment system to another which results from
clearing or settlement or payment instructions relating to funds, securities, foreign
exchange, derivatives or other transactions, is what is known as Payment Obligation.

o What are Payment instructions?

Payment Instructions are all Instructions, authorization or order in any form
including electronic mode to effect payment by a person to a participant in a
payment system or from one participant in such a system to another participant in
that system. Payment instructions can be communicated either manually i.e.
through instruments like cheque, draft or through electronic mode.

o What is settlement?
It is conclusion or fulfillment of contractual obligation of payment instructions
received and these include settlement of securities, foreign exchange, derivatives
or other transactions. It can take place either on net or gross basis.

89
Payment Options
o CHEQUES
o DDs
o DEBIT/CREDIT CARD, ECS
o Electronic-fund transfer – RTGS/NEFT

A. What is a Cheque ?
Cheque is an instrument which helps in Payment and Settlement process.
Cheque is defined under Section 6 of NI Act as “a bill of exchange drawn on a
specified banker and payable on demand”
Sec.5 of NI Act defines bill of exchange as
“It is an instrument in writing signed by the maker containing an unconditional order
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.”
o Indian Stamp Act exempts cheques from payment of stamp duty
o NI Act does not provide any standard format for cheque
o Since it is not a legal tender, no one can be compelled to accept payment by
cheque
o Definition of cheque broadened by amendment to NI Act – now it includes
cheques in electronic form and electronic image of a truncated cheque also

i. Parties to a Cheques
Drawee: A person on whom the instrument/s is/are drawn i.e. the person who has
to pay the amount. In case of cheque, drawee is a Bank.
Drawer: A person or account holder or an entity who draws the instrument or issue
the cheque.
Payee: Beneficiary or recipient of the cheque amount.

ii. Bearer or Order

o A cheque can be drawn without mentioning the words order or bearer. In the
absence of such words the cheque is treated as order cheque
o A cheque drawn payable to “A” will mean payable to A or order
o If a cheque is drawn payable to A only, it cannot be payable to anyone other
than A.
o If the words “or bearer” are not struck off, the cheque is treated as bearer
cheque the payment of which may be made to the named payee or any
bearer of the cheque

iii. Crossing of Cheque

o Crossing is applicable in case of cheques only [does not cover Bill of exchange
and Promissory Note]
o Crossing is either general crossing [123] or special crossing [124]
o General Crossing: Two parallel transverse lines on the face with or without
words, such as ‘& Co’, ‘not negotiable’, ‘payees account only’ etc. These

90
 words without lines will not constitute crossing. [Lines are important and not
the words] These cheques are payable to a banker
o Special Crossing: Cheque bears across its face, an addition of the name of the
banker, either with or without the words not-negotiable. These cheques are
payable to the specific banker whose name appears on the face of the
cheque. [Name of the bank is important and not the words/lines]
o Not Negotiable Crossing:[130] – A person taking a cheque crossed generally or
specially bearing in either case the words ‘not negotiable’ shall not have and
shall not be capable of giving a better title to the cheque than that of the
person from whom he took it ‘had’. Such crossing does not restrict further
transfers but the endorsees do not get better title than the endorsers.
o Account payee crossing [direction to collecting bank] – NI act does not define
it. It is result of custom, use and practice and legal decision. Law does not
prohibit but cheques with such crossings cannot be endorsed.
iv. Material Alteration
o Material alteration is an alteration of an negotiable instrument which brings
basic change in the operation/characteristic of the instrument [i.e. mandate]
and liabilities of the parties thereof, whether the change be beneficial or
detrimental.
o Alterations would be taken as material when it relates to date, sum payable,
time of payment, place of payment, rate of interest, addition of new party,
tearing material part of NI, date of endorsement.
o Alterations which are not material: such as crossing an uncrossed cheque,
filling the date, converting a general crossing into a special crossing etc.
o Only the drawer of a cheque can correct material alterations.
o Protection: Payment of a material altered cheque is not considered a
payment in due course and bank will have to make good the loss if any. Sec
89 protects a banker only if the material alteration is not apparent i.e. it is
done in such a way that it cannot be detected with reasonable care,
prudence and scrutiny.
v. Endorsements
o Endorsing means signing on the face or backside of an instrument or even on
a piece of paper called Along for the purpose of negotiating an instrument.
o Person who signs and transfers the instrument is called – endorser
o Person in whose favour the endorsement is done is called – endorsee.
o Holder of an instrument, payee of a cheque or promissory note and drawer of
an accepted bill can endorse an NI
vi. Types of Endorsements
o Blank Endorsement: Endorser only signs without adding any words, directions.
This makes the instrument payable to bearer as per Sec 54.
o Endorsement in Full: Endorser signs his name and adds the name of endorsee
specifically.
o Restrictive Endorsement: Endorser adds along with sign such as Pay to A only

91
 o Partial Endorsement: When endorser transfers part of amount mentioned in
Negotiable instrument.
vii. Date of Cheque
o A cheque which bears no date should be returned
o The holder of the cheque has authority to fill up the date
o A cheque bearing a date prior to the date of issue of cheque book or the date
of opening of the account can be paid, as there is a contractual relationship
on the date of presentation of cheque.
o A cheque signed by an agent bearing a date prior to the date of issue of
power of attorney can be paid.
o A cheque dated on Sunday /holiday can be paid.
o A cheque with date as per National Saka Calendar/Local Calendar if in order
should be paid.
viii. Validity of Cheque
o Normally the cheque is valid for three months after the date of issue of
cheque
o The validity can be increased or reduced by the drawer of the cheque
o The cheque can be revalidated with the authentication by the drawer
ix. Payment of Cheque
A banker is statutorily obliged to honour his customer’s cheque provided
o The customer has sufficient and clear balance in his account
o The balance available in the account should not be for any other purpose i.e.
should be properly applicable
o The banker should be duly required to pay the cheque
The cases when a bank is not duly required to pay the cheque may be
o Cheque is not properly drawn
o Payment is not demanded within banking hours
o Payment is countermanded by the drawer
o Bank is informed about the death, insolvency, or insanity of the drawer
x. Payment in due course
Payment in due course means, payment
o In accordance with the apparent tenor of the instrument
o In good faith and without negligence
o To any person in possession of the instrument
o Under circumstances that do not afford a reasonable ground to believe that a
defect exists in the title of the person obtaining payment
o Good faith means not having any mala-fide or fraudulent intention
o Without negligence means with reasonable care must raise a doubt if the
circumstances so Warrant
xi. Payments not in Due Course
o Payment in contradiction to apparent intention of parties
o Payment after receipt of Stop Payment Order
o Payment after Banking Hours
o Payment of a cheque bearing forged signatures

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 o Payment under suspicious circumstances
xii. Precautions in payment of a cheque
General Precautions
o If the payee is an un-discharged insolvent, and it is known to the bank, cheque
should not be paid
o If the payee is a company, corporation, govt. department, cheque should not be
paid in cash. It should not be paid if it is endorsed in favour of director or
employee of the company.
o If the drawee bank is marked as payee, a clear instruction for disposal of amount
should be obtained
o If payee’s name is not written, cheque should be returned with reason “payee’s
name required”
o The cheque may be paid even where the drawer is arrested, imprisoned, or
convicted
o Where the cheque is forged, the paying banker has no right to debit customer’s
account even if the forgery cannot be detected with reasonable care and
ordinary prudence
o A cheque torn into two or more pieces is called mutilated cheque. Even if
properly pasted, such cheque should not be paid unless mutilation is confirmed
by the drawer / collecting banker
o A cheque with material alteration (alteration with regard to date, payee’s name,
amount, order to bearer, etc.) without authentication by the drawer should not
be paid. In case of CTS clearing, altered cheques (except alteration in date) are
not honoured.
o Paying banker enjoys protection if such alteration cannot be detected with
reasonable care and ordinary prudence, provided the payment was made in due
course
o If cheque is endorsed by the payee in favour of a third party, such SB cheques
will not be entertained. In case the cheque is drawn on a CD account, such
cheque may be accepted for collection and sent with the endorsement that “first
payee’s endorsement confirmed, second payee’s account will be credited on
realization.”
xiii. Payment of Cash Cheques
Before posting a cheque in the account the concerned staff should carefully
scrutinize the cheque and satisfy himself, that:
o It is signed by the drawer
o It is from the cheque book issued to the drawer
o Payment of the cheque has not been stopped by the drawer
o There is no legal bar such as Garnishee Order restricting the Bank to allow
operations in the account
o No notice of death, insanity or insolvency of the customer has been received
It is neither stale, i.e., more than three months old nor post dated

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o There are no alterations/corrections (other than date) in the body of the
cheque. For any change in the payee's name, amount in figures or words
etc customers should be advised to use fresh cheque leaves.
o It is uncrossed, if it is presented for cash payment and the presenter (payee) has
signed on the back of the cheque drawn to order.
o Passing Officer will verify drawer's signature, will satisfy himself that the cheque
is in order and put his signature on the cheque.
o Cash cheques above Rs.50,000/- are to be cancelled by two authorised
signatories.
o Specimen signatures of the authorised officials of the branch should be available
with the cash department of the branch
o The paying cashier will ensure that the cash cheque is passed/cancelled by
authorised official/s.
o All cash payment instruments of Rs.10,000/- and above will be verified by the
paying cashier under UV Light Machine before payment. It is however clarified
that the above cut-off has been stipulated only to ensure essential scrutiny of
instruments under UV light. It will be the responsibility of the branches to
scrutinize all instruments carefully to detect any fraudulent alteration of
apparent nature or any fraudulent instrument tendered for payment. In case of
doubt such instruments irrespective of value should be verified under UV light.
o Instruments verified under UV light will be stamped on the reverse "UVV" and
initialed by the cashier. Rubber stamp will be put carefully in a suitable corner
on the reverse of the cheque so as not to obstruct readability of narration on the
face of the cheque.
o All branches will ensure that the UV light machines are made available at cash
counters. These machines are to be maintained in working condition with proper
AMC arrangement. Regional Offices will verify the same during their visits and
record it in the visit observations.
o New cheque books printed under CTS 2010 standards have an additional security
feature of "VOID PENTOGRAPHY" i.e. when Xeroxed the word "VOID" will appear
prominently at a suitable place on the face of the cheque. This will help to
detect the colour xerox of the cheques.
o In case, account holder himself/herself presents cheque for cash withdrawal at
non-base branch, cash withdrawal up to Rs. 1.00 lac should be permitted
after establishing proper identification of the drawer. For proper identification
of the drawer, branches may ask for any one document of identity proof from
the drawer as required for opening of account, verify the same from original and
keep a Xerox copy with the paid instrument. The verifying official must put his
signature and mention verified from the original on the copy of identity proof
document.
o Cash withdrawal can be allowed to third parties at non-base branch subject to
the limit of Rs.10,000/- per transaction in Savings Bank Account and Rs. 25,000/-
per transaction in Current/Overdraft Account.

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 o In case of third party cash withdrawals (at base/non-base branch) branch must
be satisfied that the presenter of the cheque payable to a named payee is in fact
that person but, if the appearance and behaviour of the person presenting the
cheque suggest that he might not have title to the cheque, it may be paid only
after getting proper identification of the person.
o For all third party cash withdrawals of Rs.1.00 lac & above branches should
remain alert & take utmost precaution to ascertain genuineness of the amount
and the payee. It is however clarified that the above cut-off is stipulated only to
ensure genuineness of transaction. It will be the responsibility of the branches to
put through all third party cash withdrawals very carefully so as to avoid
any unauthorised payment.
o An uncrossed cheque payable to a limited company may also be paid in cash at
the counter, provided the cheque is duly endorsed and is accompanied by a
letter identifying the presenter of the cheque as authorised to receive payment.
o Cheques on which the crossing has been subsequently opened shall not be paid
over the counter, unless the cancellation of crossing and instructions to pay cash
are authenticated by the drawer's full signature and the cheque opened is
presented by the drawer himself and nobody else. The paying cashier will ensure
that the identity of the drawer is established and authenticated by the full
signature of the Branch Manager.
o Close watch should be kept on cash withdrawals in newly opened accounts and
payment thereof should be made with the approval of the branch
manager/assistant branch manager/ accountant who should make enquiries
about the genuineness of the account/transaction.
o "CASHCONF" menu is introduced in Finacle to enable cashiers to use Finacle for
confirmation of cash payments. This will ensure that cash payments are entered
and posted in Finacle and prevent frauds.
o Passing of cheques of Rs.2 lakhs and above presented in intersol transaction at
third center shall be done after making enquiry with the drawer of cheque either
directly or his/her branch
xiv. Dishonour of Cheques
Drawer of cheque, which is returned unpaid because of insufficiency of funds or
stopping the payment of cheques, is deemed to have committed criminal offence
under section138.
An offence is punishable with imprisonment for a term which may extend to 2 year
or with fine which extend to twice the amount of cheque or both.
xv. Collection of cheques
As an agent: When the cheque is collected on behalf of customer and the bank has
no interest on the cheque. The Bank first collects the amount and then gives credit
to customer.
As a holder for value: When the Bank has purchased or discounted the cheque
o Accepts cheque against OD
o Has already allowed withdrawal against cheque

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 xvi. Conversion
o Wrongful interference in the property of another
o When a bank collects a cheque for a person who has no title or defective title ,
he can be held guilty of conversion
o Section 131 provides protection to a banker against CONVERSION in following
circumstances
 acting as an agent and not as a holder for value
 must receive payment for a customer
 acting in good faith
 cheque must be a crossed cheque
xvii. Examples of negligence
o Collecting cheque in an a/c not properly introduced
o Collecting a cheque payable to a customer in his official capacity to his personal
account
o Collecting a cheque specially crossed to another bank
o Collecting cheques with forged endorsements
o Collecting account payee cheque to a/c of someone other than payee
o Collecting large value cheques to new a/cs or a/cs with small transactions
B.Demand Draft
It is a negotiable instrument and has all the features of a bill of exchange and is
always payable on demand.
o An order to pay money drawn by one branch on any branch of the same bank for
a sum of money payable to order on demand. (Sec 85 NI act)
o Issue of DD involves the (purchaser) of DD the beneficiary (Payee) and the issuing
banker and the paying banker.
o For non customers DD less than Rs.50000/- can be issued against cash.
i. Issuance of Duplicate DD:
Before issuing duplicate DD in case of loss of original, ensure DD is still outstanding
and not paid, hot list the original instrument, and identify the person who
purchased the instrument, take indemnity bond from purchaser. Collect and affix
proper stamp as per applicable duty of the State
ii. Cancellation of DD:
o The applicant can cancel the DD at any time before he parts with the same
o Identify the purchaser and record in Finacle (tear off the signature part of the
original DD and hold destroyed original DD with voucher)
iii. Revalidation of DD:
o Revalidation of DD drawn favoring an individual: Request from purchaser only is
considered
C. NEFT:
o Nationwide funds transfer system to facilitate transfer of funds from any bank
branch to any other bank branch
o No restriction of centers or of any geographical area inside the country
o The individual branches participating in NEFT could be located anywhere across
the country

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 NEFT Vs RTGS:
o NEFT works on Net settlement, unlike RTGS that works on gross settlement.
o NEFT for retail customer payments & RTGS for SIPS (Systemically Important
Payment System - High value, Interbank etc)
o Different applications for NEFT & RTGS
 IFS Code (IFSC) & MICR Code
o Indian Financial System Code (IFSC) is an alpha numeric code designed to
uniquely identify the bank-branches in India. This is 11 digit code with first 4
characters representing the banks code, the next character reserved as control
character (Presently 0 appears in the fifth position) and remaining 6 characters
to identify the branch [IBR Code (Inter Branch Code allocated by RBI)].
o The Magnetic Ink Character Recognition (MICR) code has 9 digits to identify the
bank-branch – Used only for MICR clearing & ECS
o First three digit represents the City Code, middle three digits represent the Bank
Code and last three digits represent the Branch Code
RBI had advised all the banks to print IFSC on cheque leaves issued to their
customers. Also IFSC code is displayed at bank-branch for the benefit of customers.
2) Clearing
Clearing is the process of collection of proceeds of instruments of different banks by
a collecting bank through some systematic procedures with the involvement of
Central Bank.
a) Cheque Truncation System
o Cheque Truncation is the process of stopping the flow of the physical instruments
across branches. The physical instrument is truncated and an electronic image of
the cheque is sent to the drawee branch along with the relevant information like
the MICR fields, date of presentation, presenting bank etc.
o There is no need to move the physical instruments to the drawee branch
except in exceptional circumstances.
o This reduces the time required for payment of cheques, cost of collection of
cheques, the scope for clearing related frauds, delay in processing and
reconciliation problems, etc.
o With the elimination of logistics problems and scope for instrument getting lost
in transit or manipulated during clearing cycle; it speeds up the process of
collection or realization of the cheques and enhances customer service.
o The images captured at the presenting bank level is transmitted to the Clearing
House and then to the drawee branches with digital signatures of the presenting
bank.
o Each image carries the digital signature, apart from the physical endorsement of
the presenting bank, in a prescribed manner.
o In order to ensure only images of requisite quality reach the drawee branches;
there is a quality check process at the level of the Capture Systems (presenting
Bank) and the Clearing House Interface (CHI).
o This ensures images of requisite quality secured with the digital signatures of the
presenting banks reach the drawee branches.

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o The drawee bank can ask for the physical instrument if it is not satisfied that the
image quality is not good enough for payment processing.
b) National Automated Clearing House
The National Payments Corporation of India (NPCI) offers to banks, financial
institutions, Corporates and Government/s a service termed as "National Automated
Clearing House (NACH)" which includes both Debit and Credit. It shall be referred to
as NACH. NACH (Debit) & NACH (Credit) aims at facilitating interbank high volume,
low value debit/credit transactions, which are repetitive in nature, electronically
using the NPCI service.
c) Mandate Management System
Mandate Management System is a service of NACH Debit which facilitates the
process of Mandate Creation, Mandate Amendment, Mandate Cancellation and offers
all MIS related to the Mandate.
Under this system, the mandates will be scanned by the sponsor bank. The scanned
image of the ECS mandate along with the data captured from the image will be
sent to the destination Bank through NPCI for verification.

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 Test- CHEQUE: PAYMENT AND COLLECTION
01. Apart from Cash, payments to any person/merchant can be made through
a. Cheque
b. Demand Draft
c. NEFT/RTGS
d. Plastic Cards
e. All of these

02. A cheque is defined under

a. Negotiable Instruments (NI) Act
b. RBI Act
c. Indian Contract Act
d. UBI Act
e. None of these

03. As per NI Act Cheque (A) should have a standardised format (B) is a legal tender
just like a rupee note which no one can refuse to accept.
a. Statement(A) is true & statement(B) is False
b. Statement(A) is False & statement(B)is true
c. Both A & B are true
d. Both A & B are false

04. Mr. Vijay kumar has issued a cheque to Ms Sangeeta Gokhale and he wants that
only Ms. Sangeeta Gokhale receives the payment. You as an officer have to guide
him for this. Would you like to ask him to:-
a. Issue an order cheque i.e. strike off words “Bearer”
b. Issue a bearer cheque but put two transverse parallel lines on left hand
corner of the cheque with words “Payee’s a/c Only”
c. Any of the above
d. None of the above

05. The person who signs on the face of a cheque is known as

a. Drawee
b. Beneficiary
c. Payee
d. Drawer
e. Endorser

06. While issuing a cheque to someone, Riya has put the date which She realized that
date written is as of yesterday. What she should do:-
a. She should change the date to today’s date under her full signature
b. Tell the payee to change the date to today’s and ask him to sign
c. No need to change the date as a cheque is valid for three months
d. Better destroy the cheque and issue a new cheque.

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07. Alterations in date, amount, payee’s name is known as
a. Amendments
b. Material Alterations
c. Corrections
d. All

08. A draws a cheque favouring B for Rs.1000/- B alters the amount to Rs.10000/-
with a chemical which is not visible. The cheque is presented for payment. The
banker pays the cheque in due course despite the alteration, as it is not visible.
Whether banker can claim protection under NI Act?
a. No (u/s 89 of NI Act)
b. Yes (u/s 89 of NI Act)

09. Which of the following modes cannot be used to remit funds of Rs.5.00 lac by our
customer to a customer of SBI?
a. NEFT
b. RTGS
c. Demand draft
d. Cheque
e. None of the above

10. IFSC is the 11 digit code to be used for payments through

a. NEFT/RTGS
b. Demand draft
c. Cheque
d. All of these

11. A truncated cheque is one which is

a. Torn
b. photocopied
c. Post dated
d. Scanned (CTS)
e. Unsigned
Q. 1 2 3 4 5 6 7 8 9 10 11
Ans. e a d c d c b a e a d

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 CUSTOMER SERVICE

Customer service has great significance in the banking industry. The banking system
in India today has perhaps the largest outreach for delivery of financial services and
is also serving as an important conduit for delivery of financial services. While the
coverage has been expanding day by day, the quality and content of dispensation of
customer service has come under tremendous pressure mainly owing to the failure
to handle the soaring demands and expectations of the customers.
The vast network of branches spread over the entire country with millions of
customers, a complex variety of products and services offered, the varied
institutional framework - all these add to the enormity and complexity of banking
operations in India giving rise to complaints for deficiencies in services. This is
evidenced by a series of studies conducted by various committees such as the
Talwar Committee, Goiporia Committee, Tarapore Committee, etc., to bring in
improvement in performance and procedure involved in the dispensation of hassle-
free customer service.
Reserve Bank, as the regulator of the banking sector, has been actively engaged
from
the very beginning in the review, examination and evaluation of customer service in
banks. It has constantly brought into sharp focus the inadequacy in banking services
available to the common person and the need to benchmark the current level of
service,
review the progress periodically, enhance the timeliness and quality, rationalize the
processes taking into account technological developments, and suggest appropriate
incentives to facilitate change on an ongoing basis through instructions/guidelines.
Depositors' interest forms the focal point of the regulatory framework for banking in
India. There is a widespread feeling that the customer does not get satisfactory
service even after demanding it and there has been a total disenfranchisement of
the depositor. There is, therefore, a need to reverse this trend and start a process
of empowering the depositor.

Broadly, a customer can be defined as a user or a potential user of bank services. So

defined, a ‘Customer’ may include:
 a person or entity that maintains an account and/or has a business relationship
with the bank;
 one on whose behalf the account is maintained (i.e. the beneficial owner);
beneficiaries of transactions conducted by professional intermediaries, such as
Stock Brokers, Chartered Accountants, Solicitors, etc., as permitted under the
law, and
 any person or entity connected with a financial transaction which can pose
significant reputational or other risks to the bank, say, a wire transfer or issue
of a high value demand draft as a single transaction.

Banks' systems should be oriented towards providing better customer service and
they should periodically study their systems and their impact on customer service.
Banks should have a Board approved policy for general management of the branches
which may include the following aspects:-
(a) providing infrastructure facilities by branches by bestowing particular
attention to providing adequate space, proper furniture, drinking water

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facilities, with specific emphasis on pensioners, senior citizens, disabled persons,
etc.
(b) providing entirely separate enquiry counters at their large / bigger branches
in addition to a regular reception counter.
(c) displaying indicator boards at all the counters in English, Hindi as well as in
the concerned regional language. Business posters at semi-urban and rural branches
of banks should also be in the concerned regional languages.
(d) posting roving officials to ensure employees' response to customers and for
helping out customers in putting in their transactions.
(e) providing customers with booklets consisting of all details of service and
facilities available at the bank in Hindi, English and the concerned regional
languages.
(f) use of Hindi and regional languages in transacting business by banks with
customers, including communications to customers.
(g) reviewing and improving upon the existing security system in branches so as
to instil confidence amongst the employees and the public.
(h) wearing on person an identification badge displaying photo and name thereon
bythe employees.
(i) Periodic change of desk and entrustment of elementary supervisory jobs.
(j) Training of staff in line with customer service orientation. Training in
Technicalareas of banking to the staff at delivery points..
(k) visit by senior officials from Controlling Offices and Head Office to branches
at periodical intervals for on the spot study of the quality of service rendered by
the branches.
(l) rewarding the best branches from customer service point of view by annual
awards/running shield.
(m) Customer service audit, Customer surveys.
(n) holding Customer relation programmes and periodical meetings to interact
with different cross sections of customers for identifying action points to upgrade
the customer service with customers.
(o) clearly establishing a New Product and Services Approval Process which
should require approval by the Board especially on issues which compromise the
rights of the Common Person.
(p) appointing Quality Assurance Officers who will ensure that the intent of
policy is translated into the content and its eventual translation into proper
procedures.

Matters relating to customer service should be deliberated by the Board to ensure

that the instructions are implemented meaningfully. Commitment to hassle-free
service to the customer at large and the Common Person in particular under the
oversight of the Board should be the major responsibility of the Board.

Customer Service Committee of the Board

Banks are required to constitute a Customer Service Committee of the Board and
include experts and representatives of customers as invitees to enable the bank to
formulate policies and assess the compliance thereof internally with a view
to
strengthening the corporate governance structure in the banking system and also to
bring about ongoing improvements in the quality of customer service provided by
the banks.

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Role of the Customer Service Committee

Customer Service Committee of the Board, illustratively, could address the

following:-

formulation of a Comprehensive Deposit Policy

 issues such as the treatment of death of a depositor for operations of his account
product approval process with a view to suitability and appropriateness
annual survey of depositor satisfaction
Tri-enniel audit of such services.

Besides, the Committee could also examine any other issues having a bearing on the
quality of customer service rendered.

Monitoring the implementation of awards under the Banking Ombudsman

Scheme

The Committee should also play a more pro-active role with regard to complaints /
grievances resolved by Banking Ombudsmen of the various States.

The Scheme of Banking Ombudsman was introduced with the object of enabling
resolution of complaints relating to provision of banking services and resolving
disputes between a bank and its constituent through the process of conciliation,
mediation and arbitration in respect of deficiencies in customer service. After
detailed examination of the complaints / grievances of customers of banks and after
perusal of the comments of banks, the Banking Ombudsmen issue their awards in
respect of individual complaints to redress the grievances. Banks should ensure that
the Awards of the Banking Ombudsmen are implemented expeditiously and with
active involvement of Top Management.

Further, with a view to enhancing the effectiveness of the Customer Service

Committee, banks should also:
a) place all the awards given by the Banking Ombudsman before the Customer
Service Committee to enable them to address issues of systemic deficiencies
existing in banks, if any, brought out by the awards; and
b) place all the awards remaining unimplemented for more than three months with
the reasons there for before the Customer Service Committee to enable the
Customer Service Committee to report to the Board such delays in implementation
without valid reasons and for initiating necessary remedial action.

Board Meeting to Review and Deliberate on Customer Service

Banks are advised to review customer service / customer care aspects in the bank
and submit a detailed memorandum in this regard to the Board of Directors, once
every six months and initiate prompt corrective action wherever service quality /
skill gaps have been noticed.

Standing Committee on Customer Service

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The Committee on Procedures and Performance Audit of Public Services (CPPAPS)
examined the issues relating to the continuance or otherwise of the Ad hoc
Committees and observed that there should be a dedicated focal point for customer
service in banks, which should have sufficient powers to evaluate the functioning in
various departments. The CPPAPS therefore recommended that the Ad hoc
Committees should be converted into Standing Committees on Customer Service.
On the basis of the above recommendation, banks are required to convert the
existing Ad hoc Committees into a Standing Committee on Customer Service. The Ad
hoc Committees when converted as a permanent Standing Committee cutting
across various departments can serve as the micro level executive committee
driving the implementation process and providing relevant feedback while the
Customer Service Committee of the Board would oversee and review / modify the
initiatives. Thus the two Committees would be mutually reinforcing with one
feeding into the other.

The constitution and functions of the Standing Committee may be on the lines
indicated
below :-
i) The Standing Committee may be chaired by the CMD or the ED and include
non-officials as its members to enable an independent feedback on the quality of
customer service rendered by the bank.
ii) The Standing Committee may be entrusted not only with the task of ensuring
timely and effective compliance of the RBI instructions on customer service, but
also that of receiving the necessary feedback to determine that the action taken by
various departments of the bank is in tune with the spirit and intent of such
instructions.
iii) The Standing Committee may review the practice and procedures prevalent in
the bank and take necessary corrective action, on an ongoing basis as the intent is
translated into action only through procedures and practices.
iv) A brief report on the performance of the Standing Committee during its
tenure
indicating, inter alia, the areas reviewed, procedures / practices identified and
simplified
/ introduced may be submitted periodically to the Customer Service Committee of
the Board.

Standing Committees on Customer Service, the Standing Committee will act as

the bridge between the various departments of the bank and the Board /
Customer Service Committees of the Board.

Branch Level Customer Service Committees

Banks were advised to establish Customer Service Committees at branch level. In

order to encourage a formal channel of communication between the customers and
the bank at the branch level, banks should take necessary steps for strengthening
the branch level committees with greater involvement of customers. It is desirable
that branch level committees include their customers too. Further, as senior
citizens usually form an important constituent in banks, a senior citizen may
preferably be included therein.

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 The Branch Level Customer Service Committee may meet at least once a month to
study complaints/ suggestions, cases of delay, difficulties faced / reported by
customers / members of the Committee and evolve ways and means of improving
customer service.
The branch level committees may also submit quarterly reports giving inputs
/ suggestions to the Standing Committee on Customer Service thus
enabling the Standing Committee to examine them and provide relevant feedback
to the Customer Service Committee of the Board for necessary policy / procedural
action.

Nodal department / official for customer service

Each bank is expected to have a nodal department / official for customer service in
the Head Office and each controlling office, with whom customers with grievances
can approach in the first instance and with whom the Banking Ombudsman and RBI
can liaise.

Board approved policies on Customer Service

Customer service should be projected as a priority objective of banks along with
profit, growth and fulfilment of social obligations. Banks should have a Board
approved policy for the following:

Comprehensive Deposit Policy

Banks should formulate a transparent and comprehensive policy setting out the
rights of the depositors in general and small depositors in particular. The policy
would also be required to cover all aspects of operations of deposit accounts,
charges leviable and other related issues to facilitate interaction of depositors at
branch levels. Such a policy should also be explicit in regard to secrecy and
confidentiality of the customers. Providing other facilities by "tying-up" with
placement of deposits is clearly a restrictive practice.

Cheque Collection Policy

Banks should formulate a comprehensive and transparent policy taking into account
their technological capabilities, systems and processes adopted for
clearing arrangements and other internal arrangements for collection through
correspondents. The policy should cover the following three aspects:
 Immediate Credit for Local / Outstation cheques
 Time frame for Collection of Local / Outstation Instruments  Interest payment
for delayed collection

Customer Compensation Policy

Banks must have a well documented Customer Compensation Policy duly approved
by their Boards. They could use the model policy formulated by the Indian
Banks' Association (IBA) in this regard in formulating their own policy. Banks policy
should, at a minimum, incorporate the following aspects:-

(a) Erroneous Debits arising on fraudulent or other transactions

(b) Payment of interest for delays in collection
(c) Payment of interest for delay in issue of duplicate draft
(d) Other unauthorised actions of the bank leading to a financial loss to customer

Customer Grievance Redressal Policy

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Banks must have a well documented Customer Grievance Redressal Policy duly
approved by their Boards..
Giving publicity to the policies
(i) Banks should ensure that wide publicity is given to the above policies formulated
by
them by placing them prominently on the web-site and also otherwise widely
disseminating the policies such as, displaying them on the notice board in their
branches.
(ii) The customers should be clearly apprised of the assurances of the bank on the
services on these aspects at the time of establishment of the initial relationship be
it as a depositor, borrower or otherwise.
(iii) Further, they may also take necessary steps to keep the customers duly
informed of the changes in the policies formulated by them from time to time.

Complaint book with perforated copies in each set may be introduced, so designed
as to instantly provide an acknowledgement to the customers and anintimation to
the Controlling Office.IBA has, for the sake of uniformity, prepared a format of the
complaint book with adequate number of perforated copies, which are so designed
that the complainant could be given an acknowledged copy instantly. A copy of the
complaint is required to be forwarded to the concerned Controlling Office of the
bank along with the remark of the Branch Manager within a time frame. Bank should
introduce the complaint book as per the above format for uniformity.

All bank's branches should maintain a separate complaints register in the prescribed
format given for entering all the complaints/grievances received by them directly or
through their Head Office/Govt. These registers should be maintained irrespective
of the fact whether a complaint is received or not in the past.
The complaints registers maintained by branches should be scrutinised by the
concerned Regional Manager during his periodical visit to the branches and
his observations/comments recorded in the relative visit reports.
Banks having computerized operations may adopt the afore-said format and
generate copies electronically.

Complaint Form
Further, a complaint form, along with the name of the Nodal Officer for complaint
redressal, may be provided in the homepage itself to facilitate complaint submission
by customers. The complaint form should also indicate that the first point for
redressal of complaints is the bank itself and that complainants may approach
the Banking Ombudsman only if the complaint is not resolved at the bank level
within a month. Similar information may be displayed in the boards put up in all the
bank branches to indicate the name and address of the Banking Ombudsman. In
addition, the name, address and telephone numbers of the Controlling Authority of
the bank to whom complaints can be addressed may also be given prominently.

Analysis and Disclosure of complaints -

Disclosure of complaints / unimplemented awards of Banking Ombudsmen along
with Financial Results

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The Committee on Procedures and Performance Audit on Public Services (CPPAPS)
had recommended that banks should place a statement before their Boards
analyzing the complaints received. CPPAPS had further recommended that the
Statement of complaints and its analysis should also be disclosed by banks along
with their financial results. Further, a suggestion has been received that
unimplemented awards of the Banking Ombudsman should also be disclosed along
with financial results. Banks should place a statement of complaints before their
Boards / Customer Service Committees along with an analysis of the complaints
received.
The complaints should be analyzed
(i) To identify customer service areas in which the complaints are frequently
received;
(ii) To identify frequent sources of complaint;
(iii) To identify systemic deficiencies; and
(iv)For initiating appropriate action to make the grievance redressal
mechanism more effective.
Further, banks are also advised to disclose the following brief details along with
their financial results:

A. Customer Complaints
(a) No. of complaints pending at the beginning of the year
(b) No. of complaints received during the year
(c) No. of complaints redressed during the year
(d) No. of complaints pending at the end of the year

B. Awards passed by the Banking Ombudsman

(a) No. of unimplemented Awards at the beginning of the year
(b) No. of Awards passed by the Banking Ombudsmen during the year
(c) No. of Awards implemented during the year
(d) No. of unimplemented Awards at the end of the year

Further, banks are also advised to place the detailed statement of complaints and
its analysis on their web-site for information of the general public at the end of
each financial year. Banks should include all complaints pertaining to ATM cards
issued by them in their disclosures.

Grievance Redressal Mechanism

Banks should ensure that a suitable mechanism exists for receiving and addressing
complaints from its customers / constituents with specific emphasis on resolving
such complaints fairly and expeditiously regardless of source of the complaints.

Banks are also advised to:

(i) Ensure that the complaint registers are kept at prominent place in their
branches which would make it possible for the customers to enter their complaints.
(ii) Have a system of acknowledging the complaints, where the complaintsare
received through letters / forms.
(iii) Fix a time frame for resolving the complaints received at different levels.
(iv) Ensure that redressal of complaints emanating from rural areas and those
relating to financial assistance to Priority Sector and Government’s Poverty
Alleviation Programmes also form part of the above process.

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(v) Prominently display at the branches, the names of the officials who can be
contacted for redressal of complaints, together with their direct telephone
number, fax number, complete address (not Post Box No.) and e-mail address,
etc., for proper and timely contact by the customers and for enhancing the
effectiveness of the redressal machinery.
(vi) The names of the officials displayed at the branches who can be
contacted for redressal of complaints should also include the name and other details
of the concerned Nodal Officer appointed under the Banking Ombudsman Scheme,
2006.
(vii) Banks should display on their web-sites, the names and other details of the
officials at their Head Office / Regional Offices / Zonal Offices who can be
contacted for redressal of complaints including the names of the Nodal Officers /
Principal Nodal Officers.
(viii)Further, banks should also display on their web-sites, the names andother
details of their CMD / CEO and also Line Functioning Heads for various operations to
enable their customers to approach them in case of need, if necessary.

Further, Banks are required to disclose the brief details regarding the number of
complaints along with their financial results. This statement should include all the
complaints received at the Head Office / Controlling Office level as also the
complaints received at the branch level. However, where the complaints are
redressed within the next working day, banks need not include the same
in the statement of complaints. This is expected to serve as an incentive to the
banks
and their branches to redress the complaints within the next working day.
Where the complaints are not redressed within one month, the concerned branch /
Controlling Office should forward a copy of the same to the concerned Nodal Officer
under the Banking Ombudsman Scheme and keep him updated regarding the status
of the complaint. This would enable the Nodal Officer to deal with any reference
received from the Banking Ombudsman regarding the complaint more effectively.
Further, it is also necessary that the customer is made aware of his rights to
approach the concerned Banking Ombudsman in case he is not satisfied with the
bank’s response. As such, in the final letter sent to the customer regarding redressal
of the complaint, banks should indicate that the complainant can also approach the
concerned Banking Ombudsman. The details of the concerned Banking Ombudsman
should also be included in the letter.

Banks should give wide publicity to the grievance redressal machinery through
advertisements and also by placing them on their web sites.

Display of Names of Nodal Officers

With a view to making the Grievance Redressal Mechanism more effective, in
addition to the instructions mentioned above, banks are further advised as under:
i) Ensure that the Principal Nodal Officer appointed under the Banking
Ombudsman Scheme is of a sufficiently senior level, not below the rank of a General
Manager.
ii) Contact details including name, complete address, telephone / fax number,
email address, etc., of the Principal Nodal Officer needs to be prominently
displayed in the portal of the bank preferably on the first page of the web-site so

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 that the aggrieved customer can approach the bank with asense of satisfaction that
she / he has been attended at a senior level.
iii) Grievance Redressal Mechanism (GRM) should be made simpler even if it is linked
to call centre of customer care unit without customers facing hassles of proving
identity, account details, etc.
iv) Adequate and wider publicity are also required to be given by the respective
financial services provider.

Review of grievances redressal machinery in Public Sector Banks

Banks should critically examine on an on-going basis as to how Grievances Redressal
Machinery is working and whether the same has been found to be effective in
achieving improvement in customer service in different areas.
Banks should identify areas in which the number of complaints is large or on the
increase and consider constituting special squads to look into complaints on the spot
in branches against which there are frequent complaints.
In cases where the contention of the complainant has not been accepted, a
complete reply should be given to him to the extent possible.

Select Banks to appoint Internal Ombudsman

With a view to further boosting the quality of customer service and ensuring that
there is undivided attention to resolution of customer complaints in banks, all public
sector banks, and some private sector and foreign banks (Annex X) have been
advised to appoint an internal ombudsman . These banks have been selected on the
basis of their asset size, business mix, etc. The Internal Ombudsman should not have
worked in the bank in which he/she is appointed as INTERNAL OMBUDSMAN. The
bank’s internal ombudsman will be a forum available to bank customers for
grievance redressal before they can even approach the Banking Ombudsman.

BCSBI( Banking Codes and Standards Board of India)

Based on the recommendations of committee on Procedures and Performance Audit

of on Public Services (Tarapore Committee), RBI in its annual policy for 2005-06, had
proposed to set up an independent Banking Codes and Standards Board of India
(BCSBI).
i. Constitution
o Registered as a separate society under the Societies Registration Act, 1860.
o An independent banking industry watchdog to ensure that the consumer of
banking services get what they are promised by the banks.
o Reserve Bank to lend financial support for a limited period of five years.
o To ensure that the Board really functions as an autonomous and independent
watchdog of the industry, the Reserve Bank extends financial support to the Board
by way of meeting its full expenses for the first five years.
ii. Objectives
The Main objectives of the BCSBI are:
o To plan, evolve, prepare, develop, promote and publish voluntary comprehensive
Codes and Standards for banks, providing fair treatment to their customers

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o To function as an independent and autonomous watch dog to monitor and to
ensure that the banking Codes and Standards adopted by the banks are adhered to
in true spirit in delivering services, as promised, to the customers
CODES
BCSBI has in collaboration with the Indian Banks' Association (IBA), evolved two
codes –
1. Code of Bank’s Commitment to Customers
2. Code of Bank’s Commitment to Micro and Small Enterprises.
BCSBI, after series of deliberations/consultations with the representatives of banks,
RBI, IBA etc. has once again carried out revision in the codes in January 2014 and
MSE Codes in 2015.
Powers of the BCSBI
The Code will be enforced by the BCSBI by introducing a system of monitoring of
compliance by the member banks.
For the purpose the BCSBI will be resorting to:
o Calling for annual compliance reports from the member banks.
o Mystery shopping visits
o Visits to the offices of the member banks by persons deployed for the purpose
by the BCSBI.
The BCSBI is based on the principle of self regulation. Membership is voluntary. As
such, banks joining as members are expected to comply.
The actions taken by BCSBI will have a deterrent effect.
BCSBI is having the backing of the RBI which will derive supervisory comfort from
the success of the endeavour.
Complaints and BCSBI
The BCSBI does not deal with individual cases of complaints. However, in case
complaints point to any serious failing in complying with the code, the BCSBI may
investigate and initiate appropriate action. The BCSBI is interested in cases where
member banks appear to have breached the Code.
Bank’s code for customer service
o BCSBI on 03.07.2006 released the Bank’s codes for Customer Service which is
a voluntary Code. The code sets minimum standards of banking practices for banks
to follow when banks are dealing with individual customers. It provides protection
to the customers and explains how banks are expected to deal with the customers
for their day-to-day operations.
o Objectives of the code: the code has been developed with the view to
 Promote good and fair banking practices by setting minimum standards in
dealing with the customers
 Increase transparency so that the customers can have a better understanding
of what they can reasonably expect of the services
 Encourage market forces, through completion, to achieve higher operating
standards
 Promote a fair and cordial relationship between the customers and their bank
 Foster confidence in the banking system
o Application of code:
 Current deposit, saving deposit, term deposit, recurring deposit, PPF
accounts and all other deposit accounts

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 Payment services such as pension, payment orders, remittances by way of
de\mand drafts and wire transfers
 Banking services related to Government transactions
 Demat accounts, equity, government bonds
 Indian currency notes exchange facility
 Collection of cheques, safe custody services, safe deposit locker facility
 Loans and overdrafts
 Foreign Exchange services including money changing
 Third party insurance and investment products sold through our branches
 Card products including credit cards, debit cards, ATM cards and services
(including credit cards issued by our subsidiaries/ companies promoted by us)
 Minimum balance requirement, if any, for Savings Bank Accounts and Current
Accounts and the charges for non-maintenance thereof
 Name of the official at the branch whom you may approach if you have a
grievance
 Name and address of the Regional / Zonal Manager / Principal Nodal Officer
(PNO) whom you can approach if your grievance is not redressed at the branch
 Name and contact details of the Banking Ombudsman under whose
jurisdiction the branch falls
 Information available in booklet form
o Displaying on our website our policies on
 Deposits
 Cheque collection
 Grievance Redressal
 Compensation
 Collection of Dues and Security Repossession
o Important time schedules under BCSBI code- Summary of key time
commitments:
 Closure of account on customer request- 3 days
 Notice for closure of account by Bank – 30 days
 Acknowledgement of complaint – 1 week
 Redressal of customer complaint (max) – 30 days
 Closure of account by bank- Notice – 30 days
 Settlement of deceased claim case – 15 days
 Change in fee/charge- notice period- 1 month
 Designating an account as dormant, inoperative or unclaimed- prior notice- 3
months
 Return of unpaid/dishonoured cheque – 24 hours
 Loan recovery- time to visit customer- 7 am to 7 pm
 Draft should be valid uniformly in banks- 3 months
 Duplicate DD should be issued within – 14 days
 If duplicate DD not issued in time, interest payment should be made at FDR
rate

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 Immediate credit- outstation instruments- bank’s discretion
 Rate of interest payable in case of delay in collection of outstation cheques-
bank’s discretion
 Composition of branch level customer service committee- BM,
representatives of all staff categories
 Customer day celebrated on – 15th every month
 Employee working hours begin 15 minutes before customer service hours-
Goiporia committee
 Safe Deposit Locker: Fixed Deposit to cover 3 years’ rent
 Return securities/documents/Title Deeds – 15 days of the repayment of all
dues
 Confirm cancellation/closure of Credit Card – 7 days
 Not charge any processing fee for loans up to ` Rs.5 lakh, whether
sanctioned or not.
 Dispose of your application for a credit limit or enhancement in existing
credit limit up to Rs. 5 lakh within two weeks; and for credit limit above ` 5 lakh
and up to `Rs. 25 lakh within 4 weeks; and for credit limit above ` Rs.25 lakh within
8 weeks from the date of receipt, provided your application is complete in all
respects and is accompanied by documents as per ‘check list’ provided
 Not insist on collateral for credit limits up to ` Rs.10 lakh or up to limits
specified by Reserve Bank of India, from time to time.
 Grant you increase in the drawing power within 24 hours of lodgment of
security.

BCSBI Code Compliance Rating

BCSBI has been monitoring, as part of its mandate, compliance with the Codes of
“Bank’s Commitment to Customers” and “Bank’s Commitment to Micro & Small
Enterprises” by carrying out survey of select branches of member banks for verifying
implementation of the Codes by the banks. The Code Compliance Rating was first
published in the BCSBI website in the year 2015. The Code Compliance Rating 2017
based on the recent survey has been released and published in the BCSBI website.
Though the parameters remains the same there has been some change in the
weightage aspect.
Parameters of Ranking (Weightage)
o Information Dissemination (20),
o Transparency (22),
o Customer Centricity (30),
o Grievance Redressal (15) and
o Customer Feedback (13).

Customer Complaints
Service involves human interactions and hence there is every possibility for
complaints to arise.
o Complaint is the gap between customer’s expectations and the actual value
delivered by the product or service.
o In general, a complaint is an expression of displeasure, such as poor service
at a restaurant/bank or any organization

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o For every person who complains, there can be hundreds who do not bother to
complain but who also spread negative comments about the bank.
Resolution of Grievances or Complaints
o Branch Manager has the primary responsibility for the resolution of
complaints/grievances in respect of customers serviced by the branch. He would be
responsible for ensuring closure of all complaints received at the branches within
the Turn Around Time (TAT) prescribed in the Grievance Redressal Policy of the
bank. This will include all complaints received through Customer Care Unit also.
o It is the foremost duty of Branch Manager to see that the complaint is
resolved to the full satisfaction of the customer. If however the customer is not
satisfied then he should be informed about alternate avenues for Redressal to
enable him to escalate the issue.
o If the Branch Manager is unable to solve the problem, he should refer the
case to Regional or Field General Manager’s Office for guidance.
Grievance Redressal Policy of Our Bank
Banks policy on grievance redressal follows the under noted principles:
o Customer is treated fairly at all times
o Complaints by customers are dealt with courtesy and on time
o Customers are fully informed of avenues to escalate their complaints
o Bank will treat all complaints efficiently and fairly
o The bank employees must work in good faith and without prejudice to the
interest of the customer.
The banks internal grievance machinery provides for a nodal officer in the rank of
General Manager designated as Chief Grievances Officer with suitable administrative
structure and a Customer Care Unit, to support the handling of customer grievances.
Customers are given facility to lodge complaints through Bank’s Web site, by e-mail,
through Call Center or in writing or by oral submission to an official at its branches
or higher offices (oral submission will have to be with specific advice for registering
it as a complaint and not a casual mention or observation).
All complaints are acknowledged and given a reference number. Complaints as per
requirement are to be resolved within a maximum of 21 days (15 days in case of
online grievance), unless specific additional time is sought for resolution due to the
nature of complaint, as intimated to the complainant.
For grievances which remain unresolved even after the mandatory period or the
customer is unsatisfied about the resolution process, the bank has appointed an
Internal Ombudsman
Internal Ombudsman would try to arrive at a settlement by mutual agreement
between the bank and the complainant through conciliation and mediation and if
accepted draw a settlement agreement to be signed by both the parties.
The customer, if not satisfied with the settlement offer, will however be at liberty
to appeal to the Banking Ombudsman of the Reserve Bank of India.

Banking Ombudsman
June 15, 1995 – RBI announced the Banking Ombudsman Scheme, revised w.e.f
14.06.2006, Amended in 2007 & 2009
Essential Requirements for complaint:

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 o Bank has rejected a complaint or complainant has not received any reply
within 1 month after the bank has received his representation or he is not satisfied
with the reply given.
o A period of 1 year has not lapsed
o Compensation is limited to Rs.10.00 lacs.
o Not a subject matter settled through Ombudsman in previous proceeding and
not pending with any other court
o Not frivolous or vexatious in nature.
i. Compliance Function
The compliance Function is an integral part of Bank’s business activity and
Corporate Governance structure. A Bank should hold itself to high standards while
carrying on business and at all times strive to satisfy that effective Compliance
Policies and Procedures are followed. The bank has to comply with the various
legislations and instructions issued by various regulatory authorities like RBI, SEBI,
IRDA and Government of India.
ii. Compliance Issues
o Whether Customer Service Committee is formed?
o Whether the meeting is held once in a month?
o Whether all the printed materials used by retail customers including AOF,
Pay-in-slips, passbooks, etc. in trilingual form is available?
o Whether “May I Help You?” counter is available?
o Whether time norms for specialized business transactions are displayed
predominantly in the Banking Hall?
o Does the branch exchange soiled & mutilated notes?
o Is the TDS certificate issued without the customer asking for it?
o Whether the employees’ working hour commence, 15 minutes before
commencement of business hours?
o Whether the entrance of the branch and ATM are provided with ramps so that
the persons with disabilities /wheel chair users can enter and conduct business
without much difficulty?
o Whether the message “Customer can also tender the cheques at the counter
and obtain acknowledgement on the Pay-in-slips: is displayed?
o Whether a notice requesting the customers to meet Branch Manager is
displayed regarding grievances, if the grievances remain un-redressed?
o Whether the complaint book with perforated copies in each set, so designed
as to instantly provide an acknowledgement to the customers and intimation to the
controlling office is available?
o Whether the complaint form indicates that the first point or redressal of
complaints is the Bank itself and that the complainants may approach the Banking
Ombudsman, only if complaint is not resolved at the Bank level within a month?
o Whether all the machines installed in the branch is working?
o The above issues are indicative and not exhaustive and the bank has comply
with the various instruction issued from time to time in the interest of the
customer.

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Consumer Protection Act (COPRA)
The Consumer Protection Act, 1986 was enacted to provide a simpler and quicker
access to redress of consumer grievances. The Act seeks to promote and protects
the interest of consumers against deficiencies and defects in goods or services. It
also seeks to secure the rights of a consumer against unfair trade practices.
The Act applies to all goods and services unless specifically exempted by the Central
Government. It covers all the sectors whether private, public or cooperative.
This Act has provided machinery whereby consumers can file their complaints which
will be heard by the consumer forums with special powers so that action can be
taken against erring suppliers and the possible compensation may be awarded to
consumer for the hardships he has undergone.
The consumer under this law is not required to deposit huge court fees, which
earlier used to deter consumers from approaching the courts. The rigours of court
procedures have been replaced with simple procedures as compared to the normal
courts, which helps in quicker redressal of grievances. The provisions of the Act are
compensatory in nature.
Objectives:
The principal objective of the Consumer Protection Act is to grant shield for the
improved safeguard to consumers. Unlike prevailing laws, which are disciplinary or
precautionary in nature, the provisions of this Act are compensatory in nature. The
act is aimed to afford simple, quick and economical redressal to the consumers’
grievances, and reliefs of a particular nature and award of damages wherever
appropriate to the consumer.

Consumer redressal forum:

Under the Consumer Protection Act, every district has at least one consumer
redressal forum also called a consumer court. Here, consumers can get their
grievances heard. Above the district forums are the state commissions. At the top is
the National Consumer Disputes Redressal Commission in New Delhi.

A written complaint to the company is taken as proof that the company has been
informed. The complaint must be backed by copies of relevant documents, and
should set a deadline for the company to respond. Consumers can also complain
through a consumer organisation.

The fundamental rights of consumers as per the Consumer Protection Act are:
o Right to be conversant regarding the wholesomeness, standard ,quality,
quantity, potency, and value of goods, or services so as to shield the buyer against
unfair trade practices
o Right to be informed and be ensured that consumers’ benefit will be given
due consideration at appropriate level
o Right to search for redressal against unjust trade practices or restraining
trade practices or deceitful exploitation of consumers
o Right to consumer education

The set-up of consumer forum is geared to provide relief to both parties, and
discourage long litigation. In a process called 'informal adjudication', forum officials
mediate between the two parties and urge compromise.

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 SAFE DEPOSIT LOCKERS
RBI guidelines on various issues relating to safe deposit lockers / safe custody
articles.

Allotment of Lockers
Fixed Deposit as Security for Lockers
Banks may face situations where the locker-hirer neither operates the locker nor
pays rent. To ensure prompt payment of locker rent, banks may at the time of
allotment, obtain a Fixed Deposit which would cover 3 years rent and the charges
for breaking open the locker in case of an eventuality. However, banks should not
insist on such Fixed Deposit from the existing locker-hirers.

Wait List of Lockers

Branches should maintain a wait list for the purpose of allotment of lockers and
ensure transparency in allotment of lockers. All applications received for allotment
of locker should be acknowledged and given a wait list number.

Banks are also advised to give a copy of the agreement regarding operation of the
locker to the locker-hirer at the time of allotment of the locker.

Security aspects relating to Safe Deposit Lockers

Operations of Safe Deposit Vaults/Lockers
Banks should exercise due care and necessary precaution for the protection of the
lockers provided to the customer. Banks should review the systems in force for
operation of safe deposit vaults / locker at their branches on an on-going basis and
take necessary steps. The security procedures should be well-documented and the
concerned staff should be properly trained in the procedure. The internal auditors
should ensure that the procedures are strictly adhered to.

Customer due diligence for allotment of lockers / Measures relating to lockers which
have remained unoperated.

In a recent incident, explosives and weapons were found in a locker in a bank

branch. This emphasises that banks should be aware of the risks involved in renting
safe deposit lockers. In this connection, banks should take following measures:
(i) Banks should carry out customer due diligence for both new and existing
customers at least to the levels prescribed for customers classified as medium risk.
If the customer is classified in a higher risk category, customer due diligence as per
KYC norms applicable to such higher risk category should be carried out.
(ii) Where the lockers have remained unoperated for more than three years for
medium risk category or one year for a higher risk category, banks should
immediately contact the locker hirer and advise him to either operate the locker or
surrender it. This exercise should be carried out even if the locker hirer is paying
the rent regularly. Further, banks should ask the locker hirer to give in writing, the
reasons why he / she did not operate the locker. In case the locker-hirer has some
genuine reasons as in the case of NRIs or persons who are out of town due to a
transferable job etc., banks may allow the locker hirer to continue with the locker.
In case the locker-hirer does not respond nor operate the locker, banks should
consider opening the lockers after giving due notice to him. In this context, banks

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should incorporate a clause in the locker agreement that in case the locker remains
unoperated for more than one year, the bank would have the right to cancel the
allotment of the locker and open the locker, even if the rent is paid regularly.
(iii) Banks should have clear procedure drawn up in consultation with their lega
advisers for breaking open the lockers and taking stock of inventory.

Access to the safe deposit lockers / return of safe custody articles to Survivor(s) /
Nominee(s) / Legal heir(s).
Banks to deal with similar procedure adopted like in the issue of handing over the
proceeds of deposit accounts for return of contents of lockers / safe custody articles
to Survivor/ Nominee / Legal Heirs.

Access to the safe deposit lockers / return of safe custody articles (with
survivor/nominee clause)If the sole locker hirer nominates a person banks should
give to such nominee access of the locker and liberty to remove the contents of the
locker in the event of the death of the sole locker hirer. In case the locker was hired
jointly with the instructions to operate it under joint signatures, and the locker
hirer(s) nominates person(s), in the event of death of any of the locker hirers, the
bank should give access of the locker and the liberty to remove the contents jointly
to the survivor(s) and the nominee(s). In case the locker was hired jointly with
survivorship clause and the hirers instructed that the access of the locker should be
given over to "either or survivor", "anyone or survivor" or "former or survivor" or
according to any other survivorship clause, banks should follow the mandate in the
event of the death of one or more of the locker-hirers. However, banks should take
the following precautions before handing over the contents:
(a) Bank should exercise due care and caution in establishing the identity of the
survivor(s) /nominee(s) and the fact of death of the locker hirer by obtaining
appropriate documentary evidence;
(b) Banks should make diligent effort to find out if there is any order from a
competent court restraining the bank from giving access to the locker of the
deceased; and
(c) Banks should make it clear to the survivor(s) / nominee(s) that access to locker /
safe custody articles is given to them only as a trustee of the legal heirs of the
deceased locker hirer i.e., such access given to him shall not affect the right or
claim which any person may have against the survivor(s) / nominee(s) to whom the
access is given.
Similar procedure should be followed for return of articles placed in the safe
custody of the bank. Banks should note that the facility of nomination is not
available in case of deposit of safe custody articles by more than one person.

Banks should note that since the access given to the survivor(s) / nominee(s),
subject to the foregoing conditions, would constitute a full discharge of the bank's
liability, insistence on production of legal representation is superfluous and
unwarranted and only serves to cause entirely avoidable inconvenience to the
survivor(s) / nominee(s) and would, therefore, invite serious supervisory
disapproval. In such case, therefore, while giving access to the survivor(s) /
nominee(s) of the deceased locker hirer / depositor of the safe custody articles, the
banks should desist from insisting on production of succession certificate, letter of
administration or probate, etc., or obtain any bond of indemnity or surety from the
survivor(s)/nominee(s).

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Access to the safe deposit lockers / return of safe custody articles (without
survivor/nominee clause)There is an imperative need to avoid inconvenience and
undue hardship to legal heir(s) of the locker hirer(s). In case where the deceased
locker hirer had not made any nomination or where the joint hirers had not given
any mandate that the access may be given to one or more of the survivors by a clear
survivorship clause, banks are advised to adopt a customer-friendly procedure drawn
up in consultation with their legal advisers for giving access to legal heir(s) / legal
representative of the deceased locker hirer. Similar procedure should be followed
for the articles under safe custody of the bank.

Banks are advised to be guided also by the provisions of Sections 45 ZC to 45 ZF of

the Banking Regulation Act, 1949 and the Banking Companies (Nomination) Rules,
1985 and the relevant provisions of Indian Contract Act and Indian Succession Act.

Banks should prepare an inventory before returning articles left in safe custody /
before permitting removal of the contents of a safe deposit locker.

Further, in case the nominee(s) / survivor(s) / legal heir(s) wishes to continue with
the locker, banks may enter into a fresh contract with nominee(s) / survivor(s) /
legal heir(s) and also adhere to KYC norms in respect of the nominee(s) / legal
heir(s). Banks are not required to open sealed/closed packets left with them for
safe custody or found in locker while releasing them to the nominee(s) and surviving
locker hirers / depositor of safe custody article.

Simplified operational systems / procedures

The Indian Banks' Association (IBA) has already formulated a Model Operational
Procedure (MOP) for settlement of claims of the deceased depositors, under various
circumstances. We have advised IBA to formulate a similar Model Operational
Procedure for giving access to lockers / return of safe custody articles under various
circumstances. Banks have undertaken a comprehensive review of their extant
systems and procedures relating to settlement of claims of their deceased
constituents (locker-hirers / depositors of safe-custody articles) with a view to
evolve a simplified policy / procedures for the purpose.

Customer Guidance and Publicity

Benefits of nomination / survivorship clause
Banks should give wide publicity and provide guidance to locker-hirers / depositors
of safe custody articles on the benefits of the nomination facility and the
survivorship clause. Illustratively, it should be highlighted in the publicity material
that in the event of the death of one of the joint locker-hirer /depositor of safe
custody articles, the right to the contents of the locker or the articles under safe
custody does not automatically devolve on the surviving joint locker-hirer /
depositor of safe custody articles, unless there is a survivorship clause.

Banks should place on their websites the instructions along with the policies /
procedures put in place for giving access of the locker / safe custody articles to the
nominee(s) / survivor(s) / Legal Heir(s) of the deceased locker hirer / depositor of
the safe custody articles. Further, a printed copy of the same should also be given
to the nominee(s) / survivor(s) / Legal Heir(s) whenever a claim is received from
them.

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Banks to ensure that identification Code of the bank / branch is embossed on all the
locker keys with a view to facilitate Authorities in identifying the ownership of the
locker keys.

DEMAT
Demat Account is an account that allows investors to hold their shares in an
electronic form.
Stocks in Demat account remain in dematerialized form. Dematerialization is the
process of converting physical shares into electronic format. A demat account
number is required to enable electronic settlements of all the trades. Demat
account functions like a bank account, where you hold your money and respective
entries are done in bank passbook. In a similar form, securities too are held in
electronic form and are debited or credited accordingly. A demat account can be
opened with no balance of shares. You can have a zero balance in your account.

Why should you have a Demat Account:

As it is difficult to hold shares in physical forms because it involves a lot of
paperwork, long process and risk of fake shares. So, for simple and seamless trading
and investing, Demat account is must to trade in India’s stock exchanges. Although
the Securities and Exchange Board of India (SEBI), has allowed trades of up to 500
shares to be settled in physical form but this option is not preferable any more. A
demat account holds the certificates of financial instruments like shares, bonds,
government securities, mutual funds etc. So, it involves the process of converting
physical shares into electronic form and credited to investor’s demat account.

How does Online Demat Account work:

There are two Depositories in India – the National Securities Depositories Limited
(NSDL) and the Central Depository Services Limited (CDSL), through whom the
shares are held by the various depository participants. When you buy or sell shares,
respective DP credits or debit your account accordingly.

Following are the documents which are required for opening a demat account:
 PAN Card
 Identity Proof
 Proof of Residence (acceptable documents includes electricity bill, phone
bill, ration card, driving license etc.)
 Bank account details (A cancelled cheque for capturing MICR)
 A recent passport size photograph

For opening demat account, you need to reach to DP (Depository participant) and
fill up the account opening form and submit it along with necessary documents and

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a recent passport size photograph. You must carry original documents for
verification.

The DP will provide you with the rules and regulations and terms & conditions for
opening the account along with the charges for the same.

A member from the DP will contact you for In-Person Verification and check the
details provided in the account opening form.

Once the application is processed, The DP will provide you with an account number
and client ID. You can now access your demat account online with specified details

LIFE INSURANCE
Basic Concepts of Life Insurance

What is life insurance?

Life Insurance is a financial product, which ensures that financial obligations
undertaken by us in the discharge of ordinary business of life are met for our loved
ones, with us or even in the adverse situation of our absence from this world!
Simply explained, life insurance provides a cover for a defined sum of money based
on the income earning capacity of the insured in the event of an unprecedented
event to the insured. Thus, in the absence of breadwinner of the family, insurance
helps the affected family to mitigate the sudden financial loss suffered by them
which besides the immeasurable emotional loss suffered by the family. Further, it
may help to ensure to maintain the same standard of living by the family members.
A person during his or her life span, pass through various life stages. In the process,
financial needs keep on changing. Primarily the financial needs of an individual can
be broadly classified as under:

These are also referred to as the three cornerstones of financial security.

Protection is a planning to ensure that obligations are met in the event of death,
disability or any kind of critical illness through coverage of Term Assurance policies
of Insurance companies.

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Savings and Accumulation is developing a sound plan to meet expenses of children's
education, marriage and settlement or any other financial objectives that customers
have.
And finally, retirement is a planning to provide additional income needed to
supplement existing saving and investment plans in the old age.
When we talk about protection products, we are referring to insurance. When we
talk about wealth accumulation products we are talking about insurance products,
banking products, mutual funds, stocks and bonds, gold and even real estate.
Finally when we talk about retirement, we are typically talking about insurance
products as in pension or annuities and other types of investments which will take
care of old age needs.
The key to financial planning is to achieve an appropriate balance among different
needs, which are, protection savings and accumulation and retirement, and
therefore insurance companies offer different type products to suit the needs of the
customers depending upon his age & risk appetite.
Understanding Insurance
Asset Protection & Income Protection:
Insurance is concerned with the protection of the economic value of assets.
Insurance as a concept originated as a financial instrument designed to protect
tangible assets. Since every asset has a value, it is subject to risk and peril. There is
a distinct possibility that the asset may be destroyed or lost, resulting into
sufferance of loss by the owner of the asset. All assets which we possess, the house
we live in, the car we drive, our business assets, the products and services
manufactured or sold by a business person or an organization, have an assigned
pecuniary value. The single most important asset we the human beings possess is
the capability of being able to make a living in life! All other tangible and non
tangible assets are our creation. Our capability to earn money gives us the
confidence of managing & taking care of a family. Hence we have a responsibility to
protect this single most important asset to ensure our loved ones continue to get
what we are providing them, during our existence or absence....
Hence there is a need to protect all our assets, most importantly our own Life!
Tangible assets acquired by us may expose to various risks and perils viz.: fire,
earthquake, floods, tempest, inundation, theft, burglary or any such cause which
may result in destruction or loss of value of the asset.
Insurance can be termed as an agreement by mutual consent between the insured
and the insurance company, which is enforceable by law, wherein the insurance
company promises to pay a certain sum of money, upon receipt of premium/s as
consideration for the policy contract on certain terms and conditions contained in
the policy contract. All insurance contracts in which the subject matter of insurance
is human life come under the purview of Life Insurance. All contracts of insurance
other than life insurance are called general insurance or non- life insurance
contracts.
Three Questions which customers have in their minds?
i) Do I need Life Insurance?
Customers need life insurance to manage both planned and unplanned financial
needs...

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ii) If yes, then how much?
Protection needs for customers can further be sub classified as temporary protection
and permanent protection needs.
By temporary protection we mean the coverage for all borrowings, financial
obligations, loans or owing which a customer has undertaken or is likely to
undertake. That is to say the extent of insurance cover or the value of sum assured
should at least be equal to the aggregate amount of all loans outstanding (housing
loans, personal loans, family borrowings, credit card obligations, car loans,
education loans or any other loan undertaken) and the cover will last till completion
of repayment of all such loans. For example if Mr. Rakesh Goyal who works for an
MNC has undertaken a housing loan for Rs. 80 lakh for a term of 20 years, a car loan
of Rs 7 lakh for a term of 5 years, a personal loan of Rs. 3 lakh for a term of 3 years.
The recommended amount of life insurance cover for taking care of temporary
protection needs of Mr. Rakesh Goyal would be a level term plan or a receding term
plan for a sum assured of Rs. 90 lakh for a minimum term of 20 years. This would
ensure that the temporary protection needs of Mr. Rakesh Goyal at the current point
of time are adequately covered. God willing nothing untoward should happen to Mr.
Rakesh Goyal, though in the event of an unfortunate demise, all outstanding loans
undertaken by him would become immediately payable to the lenders by his grieving
family members!
Permanent protection need refer to the needs of protecting the portion of income
which manages the household living expenses, other than the loan outgoes. Monthly
living expenses towards food, education of children, clothing, medicines,
communication, entertainment, fuel, electric consumption and all other such
expenses of maintaining the household are incurred month on month. Hence the
income supporting these expenses needs to be protected permanently.

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For example the monthly household expenses for Mr. Rakesh Goyal’s family are Rs.
50,000 per month or Rs. 6 lakh p.a. Then what should be the amount which Mr.
Goyal should invest into a very safe fund which would yield him or his family Rs. 6
lakh p.a. or Rs. 50,000 per month? Considering the current deposit rates at say 10%
p.a. he will need a sum of =Rs. 600000X100/10= 60 lakh. Accordingly a sum of Rs. 60
lakh if invested in a safe fund which yields 10% annualized returns will ensure that
Mr. Goyal or his family receive Rs. 6 lakh p.a. or Rs. 50,000 p.m. to ensure
continuity of living expenses permanently. Alternatively Mr. Rakesh Goyal could
consider taking a level term insurance for Rs. 60 lakh sum assured to ensure peace
of mind for his family’s permanent protection needs. Since monthly living expenses
may increase over a period of time, basis financial need analysis and Mr. Goyal’s life
stage analysis permanent protection needs may be reassessed periodically.
Accordingly Mr. Rakesh Goyal needs Rs. 90 lakh of temporary protection and Rs. 60
lakh of permanent protection as per current liability and income protection as
assessed in the above example.
As far as Savings and Accumulation needs are concerned, all over the world people
are concerned about tomorrow. They hear stories about stock markets, interest
rates, inflation, their own employment, currency risks, and so on. All people want
to do is make sure they educate their children, make sure they are well settled and
to have that sense of security for tomorrow.
When we get into accumulation needs we must understand whether it is to save for
children's education, or for marriage of children, or for any other specific needs.
Once we determine that need, generally our recommendation is that we allocate in
such a way that 50% of that requirement is met by guaranteed products and the
other 50% could be contributed by variable products that gives our customers
adequate returns along with safety. The types of products that are appropriate for
this are endowment or money back plans from the traditional platform and ULIPs
from the variable or non- traditional platform.
Last but not the least the need for retirement. What are the basic needs of
customers post retirement?
Regular income to meet day to day expenses of living
Corpus for emergency needs
A safe shelter where you can live on your own terms
Maintain the same standard of living as was enjoyed during the pre- retirement
days.
What makes Retirement planning so important today?
Increasing life expectancy
Inflation
Medical expenses for self & spouse
Decreasing working years
Breakdown of joint family
Spouse’s protection in old age
Pursuing your dream that you put aside while you were earning.
For retirement needs, pension plans or annuities products are recommended and are
suitable for the purpose.

Retirement funds planning:

Step 1: Estimating the age of retirement for the individual.
Step 2: Projecting the last annual income on the date of retirement.
Step 3: Projecting the number of years for which this income will be required by the
individual (based on expected longevity).

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Step 4: Required retirement corpus = Result of Step 2 (Projected Income at the time
of retirement) X result of Step 3 (No. of years this income is required post
retirement)
For example if Mr. RakeshGoyal’s retirement age is 60 years. His projected annual
income at the date of retirement is say 30 lakh. Projected number of years post
retirement based on expected life span is say 20 years. Then the required
retirement corpus for Mr. RakeshGoyal will be 30 lakh X 20 years= 60000000 or Rs. 6
Crore.
What product/s will be suitable for my needs?
Life Stage Analysis
Financial needs of individuals change as per various life stages. Life stages change as
per age and assumption or completion of responsibilities or liabilities. Accordingly
the financial needs of a customer depend on the life stage analysis. Accordingly
financial planning needs to be done as per the current life stage analysis of the
customers.

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2. Financial Needs Analysis
Financial needs analysis is the formal process of identifying customer needs,
quantifying customer needs and prioritizing customer needs. Following a
structured financial needs analysis process, life Insurance needs can be identified,
quantified, basis priority for the customer and available resources, products which
satisfy such identified and quantified needs can be recommended for helping
customers make a well informed buying decision.

LIFE INSURANCE: A BUSINESS OF PROFESSIONAL ADVISING

Identify Quantify Prioritizing
Step 1: Identify Customer Goals
This involves getting to know what the customer cares about and what the
customer would like to achieve.
Step 2: Understand Customer’s Financial Situation
Identify customer’s financial resources and expenses.
Step 3: Analyze and Review Results
Develop the customer’s financial plan together.
Step 4: Discuss Recommendations
Discuss your plan and priorities.
Step 5: Act on Your Recommendations

Implement the financial plan for your customer based on the advice given as a life
insurance professional.
Step 6: Review the Progress
Check in periodically the needs of the customer based on changes in the life stage,
incomes and expenses to help the customer stay on track.

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Advantages of Financial Needs Analysis:

By following a formal Financial Needs Analysis process, following benefits accrue to

the customer, to the company and the sales person:
Benefits to the customer:
Personal goals management
Path to Financial Freedom

Benefits to the company:

Credibility as a customer centric organization
Increased customer satisfaction leading to higher persistency hence higher
profitability
In a highly competitive market where there is hardly any difference between
products of competing companies the only difference will be the quality of sales
persons and the sales process followed by them

Benefits to the Sales Person:

Increased referral business
Higher variable income
Up sell and cross sell opportunity.
Opportunity to convert transactional relationships to subscription relationships

Type of Life Insurance Plans

Traditional Individual Plans:

Term Insurance Plan - It is a plan that provides life cover to the insured. A term
insurance policy is a contract to pay a benefit (sum assured) on death of the life
insured within the term of the contract. Typically there is no maturity benefit
available (except to the extent of return of premiums in some return of premiums
term plans).
It provides protection against financial loss for dependents, at a lower premium
compared to endowment or whole life contracts.
Where policyholder is a corporate or a partnership firm, a pure term plan may be
used to provide protection against financial loss that might arise on the death of
the key person within the organization (key man insurance).

Endowment Assurance Plan - It is a plan that provides savings cum protection

cover to the insured.
This plan pays death benefit if the insured dies during the term of the policy or
pays the maturity benefits if the insured survives entire tenure of the policy.
Death and Maturity benefit could be same or different. If the death occurs before
maturity, the targeted sum assured with applicable bonus will be paid.

Money Back Plan- It is a plan that provides savings cum protection cover to the
insured.
It also provides liquidity in the form of periodic pay-out of money at specified time
periods within the term of the plan. (a certain % of sum assured is returned at
regular intervals)

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So apart from death benefit and maturity benefits, survival benefits too are paid
after different time periods within the policy term.

Child Beneficiary Plan - It is a savings cum protection plan that can be opted by a
parent to protect the child’s future.
Under this plan, premiums are payable by the parent to fund the child’s future
requirements like education and marriage expenses. In case of unfortunate death
of the life insured (parent) during the term of the plan, the child’s future does not
suffer as insurance company continues the plan. The plan ensures that the planned
periodic benefits are payable to the child when he/she attains the age milestones
defined in the plan whether the parent is around or not.

Annuity Plan - Annuity plans can be purchased by individuals from the proceeds/
maturity benefits of the pension plans or endowment plans. It can also directly be
purchased by the individual. The accumulated corpus under group superannuation
schemes can also be used to purchase the annuity plans. Typical options available
for immediate annuity plans are:
- Life annuity
- Life annuity with Return of purchase price
- Joint Life annuity
- Joint life last survivor annuity
- Life annuity for 5/10/15 years certain and life thereafter
- Increasing Life Annuity

Savings cum protection plans are offered on non-participating and participating

platforms. Protection and Annuity plans are offered on non-participating platforms
only.
In case of non-participating plans, all the benefits are defined in advance and are
fixed throughout the term of the contract. In case of participating plans generally
the guaranteed benefits are enhanced every year by declaration of bonuses by
insurance companies and these bonuses are attached to the guaranteed benefits.

Unit Linked Individual Plans

Unit-linked plans offer transparency and flexibility to policyholders by proving
market linked returns through multiple fund options.
All the invested premiums are converted into number of units and units are
cancelled in the form of charges defined in the policy contract. Typical charges in
the unit linked funds are premium allocation charge, administration charge,
mortality charge, charge for cost of cover, fund management charges, charges
towards service taxes etc. Fund value at any point in time is the product of Net
Asset Value (NAV) and the number of units in the funds. Here, the investment risk
is essentially borne by the policyholder as fund value depends on the performance
of the funds chosen by the policyholder and it fluctuates on a daily basis.
The sum assured will be no. of times of basic premium viz. 5 times to 10 times
depending upon age limit. At the time of any unprecedented risk to the
policyholders, higher of sum assured or the fund value OR, both (as a double
benefit) will be given to the nominee as per the type & features of the policy.
There are additional flexibilities of fund switching, partial withdrawals, premium
redirection, additional payment in the form of top-ups etc.

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Group Plans

One Year Renewable Group Insurance Plan - It provides life insurance cover to a
group of people. The Master Policyholder is generally the employer (for policies
covering employees) or lending institution (for policies covering loan borrowers) or
other affinity groups.
Like individual term insurance policy, this policy provides life insurance cover to
the group members. The insurance cover is defined in the contract and may
depend on employee’s salary, grade and the tenure of the employee in the
organization or loan outstanding etc.

Group Credit Life Plan - These are group mortgage reducing term assurance plans
(MRTA) available to borrowers of home loans, consumer loans, vehicle loans,
personal loans, etc. providing life insurance cover which is typically linked to the
amount of loan outstanding at the time of death.
Group Retirement Benefit Plan– These plans are designed to safeguard and ensure
availability of funds to meet a company’s obligations (Master Policyholder) towards
statutory and non-statutory retirement benefits payable to its employees
(Members)like gratuity, superannuation, leave encashment etc.
Riders
Riders are additional optional benefits that can be attached to the base insurance
policy. The advantage of rider is that the policyholder gets customized protection
as per his/her needs within the same base policy instead of going for multiple
plans. The cost of a rider is typically more cost effective than a standalone policy
with the same type of cover.
Typical riders available in the market are -
- Term Rider
- Income Benefit Rider
- Accidental Death/Disability Benefit Rider
- Critical Illness Benefit Rider
- Waiver of Premium Benefit Rider etc.

General Insurance

Insuring anything other than human life is called general insurance. Examples are
insuring property like house and belongings against fire and theft or vehicles
against accidental damage or theft. Injury due to accident or hospitalization for
illness and surgery can also be insured. Your liabilities to others arising out of the
law can also be insured and is compulsory in some cases like motor third party
insurance.
In respect of insurance of property, it is important that the cover is taken for the
actual value of the property to avoid applying “average clause” by insurer, should
there be a claim. Where a property is undervalued for the purposes of insurance,
the insured will have to bear a rateable proportion of the loss. For instance if the
value of a property is Rs.100 and it is insured for Rs.50/-, in the event of a loss to
the extent of say Rs.50/-, the maximum claim amount payable would be Rs.25/-
(50% of the loss being borne by the insured for underinsuring the property by 50%).
This concept is not understood by many of the policyholders.

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Personal insurance covers include policies for Accident, Health etc. Products
offering Personal Accident cover are benefit policies. Health insurance covers
offered by non-life insurers are mainly hospitalization covers either on
reimbursement or cashless basis. The cashless service is offered through Third
Party Administrators who have arrangements with various service providers, i.e.
hospitals. The Third Party Administrators also provide service for reimbursement
claims. Sometimes the insurers themselves process reimbursement claims.
There are general insurance products that are in the nature of package policies
offering a combination of the covers mentioned above. For instance, there are
package policies available for householders, shop keepers and also for
professionals such as doctors, chartered accountants etc. Apart from offering
standard covers, insurers also offer customized or tailor-made ones.
Suitable general Insurance covers are necessary for every family. It is important to
protect one’s property, which one might have acquired from one’s hard earned
income. A loss or damage to one’s property can leave him shattered. Losses
created by catastrophes such as the tsunami, earthquakes, cyclones etc have left
many homeless and penniless. Such losses can be devastating but insurance could
help mitigate them. Property can be covered, so also the people against Personal
Accident. A Health Insurance policy can provide financial relief to a person
undergoing medical treatment whether due to a disease or an injury.
It is important for proposers to read and understand the terms and conditions in
finer line of a policy before they enter into an insurance contract. The proposal
form needs to be filled in completely and correctly by a proposer to ensure that
the cover is adequate and the right one. While disclosing the details, the dictum of
“utmost good faith” to be observed by the proposers to disclose all details known
to the best of his knowledge.
The amount you insure for is called the sum assured. Normally a policy should
cover the value of the asset – either the market value while insuring, or the cost of
replacing the asset should it be lost or destroyed. The premium will depend on the
sum assured.
We have a corporate agency arrangement with The New India Assurance Co. Ltd.
since 2002 for distribution of their products through our Branch network. The New
India has around 180 different non-life insurance products ranging from insurance
of bullock cart to satellite catering to cross section of Society, Trade Industry,
Commerce and individuals.
Branches are marketing following traditional policies covering:
 Stock in Trade
 Plant and Machinery
 Vehicles
 Goods in Transit
 Buildings
 Office equipments
 Milch Animals
 Agriculture Machinery & Implements.
In addition to the above Branches are also marketing personal line products such
as:
 House holders policy
 Mediclaim Policy
 Personal Accident Policy

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  Overseas Travel Policy

Health Insurance

Health insurance provides risk coverage against expenditure caused by any

unforeseen medical emergencies. No one plans to get sick or hurt, but most people
need medical care at some point. In current times of high medical inflation rates,
failing to hold adequate amount of health insurance cover can prove to be a major
personal finance disaster. This could lead to either poor health care because of
non-affordability or push an individual into financial distress due to high medical
bills. That's where Health Insurance steps in, so that one can have access to the
best healthcare without fearing the financial strain.
Health Insurance provides financial security against medical contingencies of life.
Other benefits of health insurance are:
Makes quality treatment affordable: Modern technology has resulted in advanced
cures for various diseases but they are associated with high costs and hence
available to a select few only. If covered under health insurance, one can benefit
from modern facilities available at good hospitals without worrying about
expensive treatment costs.
Cashless Service: Health insurance providers have tie-ups with major hospitals in
each city, called network hospitals. On getting treated in such a hospital, the
claim is settled directly between the Insurance provider and the hospital. A
cashless service reduces the financial strain that may occur at the time of an
emergency.
Tax Benefit: the proposer of the health insurance can avail tax benefit under
section 80 D up to INR 15,000 per annum on buying health insurance in India for
self or for family. Additionally, he can avail tax benefit of further INR 15,000 if he
buys health insurance for his parents.
Peace of mind: Even if one is in good health, it is important to have health
insurance. The cost of basic care can quickly add up and the treatment cost for a
major illness or injury can be a big financial setback. Having health insurance
ensures peace of mind in such emergencies.
Therefore, it is imperative for each one of us to have health insurance.

Mutual Funds

A mutual fund is a collective investment vehicle. It is a pool of investors’ money

invested according to pre-specified investment objectives.
The benefits from the investment of the pooled money accrue to those that
contribute to the pool. Hence the name- Mutual Fund. When a Mutual Fund pools
money from several investors, each investor does not contribute the same sum of
money. Therefore each investors share in the fund is not equal.
The investment in a mutual fund is represented to the investor in units. Just as
investors in equity jointly holds a shares of a company, mutual fund investors
jointly holds units of the fund. A mutual fund investor is called a unit holder just as
an investor in equity shares is called a shareholder.

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Profits or losses in a mutual fund belong to the investors, in proportion to their
share in the pool of money. The losses would never be more than the amount
invested.
Below are listed the key advantages of investing in a Mutual Fund:
i. Professional Management – Mutual funds offer investors the opportunity to earn
an income or build their wealth through professional management of the investible
funds.

ii. Portfolio Diversification – Units of a scheme give investors exposure to a range

of securities held in the investment portfolio of the scheme. Thus, even a small
investment of `5,000 in a mutual fund scheme can give investors a diversified
investment portfolio.

iii. Convenient Options – The options offered under a scheme allow investors to
structure their investments in line with their liquidity preference and tax position.
iv. Economies of Scale – The pooling of large sums of money from so many
investors make it possible for the mutual fund to engage professional managers to
manage the investment. Large investment corpus leads to various other economies
of scale

v. Liquidity – Investors in a mutual fund scheme can recover the value of the
moneys invested, from the mutual fund itself. Depending on the structure of the
mutual fund scheme, this would be possible, either at any time, or during specific
intervals, or only on closure of the scheme.

vi. Tax Deferral – Mutual funds are not liable to pay tax on the income they earn.
If the same income were to be earned by the investor directly, then tax may have
to be paid in the same financial year.

vii. Tax benefits – Specific schemes of mutual funds (Equity Linked Savings
Schemes) give investors the benefit of deduction of the amount invested, from
their income that is liable to tax. This reduces their taxable income, and therefore
the tax liability. Further, the dividend that the investor receives from the scheme
is tax-free in his hands.

viii. Investment Comfort – Once an investment is made with a mutual fund, they
make it convenient for the investor to make further purchases with very little
documentation. This simplifies subsequent investment activity.
ix. Regulatory Comfort – The regulator, Securities & Exchange Board of India
(SEBI) has mandated strict checks and balances in the structure of mutual funds
and their activities. These are detailed in the subsequent units. Mutual fund
investors benefit from such protection.

x. Systematic approach to investments – Mutual funds also offers facilities that

help investor invest amounts regularly through a Systematic Investment Plan (SIP).
Such systematic approaches promote an investment discipline, which is useful in
long term wealth creation and protection.

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Mutual Fund Industry in India
The Indian mutual fund industry is one of the fastest growing and most competitive
segments of the financial sector. The MF industry in India today has come a long
way in offering a wide variety of products, backed by stringent monitoring. The
number of funds operating in the country and the schemes offered by them have
increased manifold. The MFs not only serve as a savings scheme but also offer
several investment objectives to prospective investors.
Mutual funds are an attractive low-cost diversification option for investors. Given
the plethora of schemes floating in the Indian mutual fund industry, investors look
at different performance measures and ratings, put in promotional use by the
mutual fund houses, to make their investment decision. The competitive landscape
of the mutual fund (MF) industry has undergone a tremendous change in the past
few years. MFs compete with one another either by satisfying different economic
functions or by configuring the activities in the value chain so as to produce a low-
cost or a differentiated product. Differentiation strategies have been more varied,
with firms setting themselves apart along at least three dimensions1: fund
performance, marketing efforts and new product development
Deregulation of the sector, allowing up to 100% FDI has permitted the industry to
grow rapidly. However, the regulator has treaded deregulation with caution by
mandating minimum capitalization requirements for risk minimization and ensuring
long term commitment. At the same time, private sector players have rapidly
garnered market share.
Industry has recently seen significant regulatory development including KYC
requirements, minimum net worth of AMC, abolishing of front end loads and
transparency of commission for investors.

Types of Mutual Funds including SIPs, MIPs, etc.

To cater to the varied needs of Investors, there are various types to Funds
available today. Mutual Fund Products are bifurcated based on the constitution of
the Mutual Fund Scheme, Fund management and the Investment Objective of the
Mutual Fund Scheme.
Before we dwell further into different types of funds, let us first understand that a
fund is managed Actively and or Passively. In case of an actively managed fund,
the fund manager determines the constituents of the scheme portfolio. While in
case of a passively managed fund, the fund manager does not determine the
constituents and tries to replicate the broad market index.

The Mutual Fund Scheme is constituted as follows:

Open Ended Scheme: In case of an open ended scheme, subscription (purchase)

and redemption (sell) of units is available on all business days post the initial
allotment of units after the New Fund Offer (NFO) is closed. There is no defined
time period to the Scheme tenure. Given the flexibility to invest or redeem any
time, has made the open ended scheme as the most popular type.

Close Ended Scheme: Subscription to a close ended Scheme is only possible during
the NFO period. A close ended scheme has a defined tenure called maturity. As the
name suggest, no fresh buying or selling of Mutual Fund Units is possible till the

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Scheme matures. On maturity, the Scheme is wound up by liquidating all the
securities held and money is returned back to the investors or in some cases the
constitution of the Scheme is converted to be an open ended scheme. As per the
regulation, the close ended schemes are listed on the stock exchange to provide
interim liquidity to the investors.

Interval Scheme: A combination of a close ended and open ended scheme type is
the appropriate way to explain the Interval Scheme type. An interval scheme is a
closed ended scheme type with short and regular periods for fresh purchase and
sell of units on defined interval periods. The typical interval schemes has
subscription and redemption window on monthly, bi-monthly, quarterly, half
yearly or yearly.
Going further, the Mutual Fund Schemes are classified based on the Investment
objective of the Scheme, which also determines the asset class where the scheme
would invest. The different types of Schemes are as follows:

Equity Oriented Schemes: A mutual Fund Scheme that invests majorly into Equity
stocks are classified as Equity Oriented Schemes. Equity Schemes differentiate by
defining the investment objective based on Fund management, different
Investment styles, market capitalization of equity stocks, Sector Specific and
based on an investment themes just to name a few.

Investment Style: There are three broad styles in which an Equity Oriented Fund is
defined that are Growth Style, Value Style and a Blend of Growth and Value style.
Growth style concentrates on such stocks which are valued appropriately and
derives returns based on the year on year growth prospects. Value stocks are
generally valued lower than the perceived potential. Such stocks derive returns
based on two factors yearly growth and unlocking the intrinsic value in medium to
long term time period. Blend style is the mix of the two styles explained above.

Market Capitalization: Stocks are classified based on the market capitalization of

the free float (stocks available for trade) like large cap, midcap, small cap or a
combination of the market capitalization.

Sector Funds: Funds also define the investment objective to invest in a specific
sector(s). Such funds are considered to be more risky compared to diversified
Equity Oriented Fund.

Theme Based Funds: Additional types of equity funds are those that focus on
investment themes like Infrastructure theme, consumption theme etc… Such funds
focus on stocks from sectors that fall under the specified themes.

Index Funds: Index funds are passively managed funds as they intend to replicate
the portfolio of the broader market index.

Arbitrage Funds: Arbitrage funds implement complex trading strategies to

generate returns by capturing the pricing deference between the stock prices
(cash markets) and their expected near future expected prices (stock futures in
the derivatives market segment). Among the equity oriented funds categories, this
fund type are considered to be least risky.

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 Debt Schemes: Debt schemes as the name suggests invests in Fixed Income
securities like Government securities, corporate bonds, debentures and money
market instruments like commercial deposits, commercial papers and any other
security that falls under this category. Debt funds are categories based on the
maturity, type and credit quality of fixed income securities. Different types of
Debt oriented Funds are as follows:

Gilt Fund: Gilt schemes invest primarily in Central and State Government
securities. These types of funds carry higher maturity and are subject to more
volatility as compared to other Debt Oriented Schemes.

Income Funds: An Income fund invests in varied type of corporate debt primarily.
Income funds can be further classified into short term, medium term and long term
maturity funds. Income funds derive returns from coupon (interest paid by fixed
income securities) and capital appreciation (positive impact of change in market
yields).

Liquid / Money Market Schemes: Liquid / Money market schemes are designated
cash management product from the Mutual Fund platform. By regulation, these
schemes can only invest in money market securities with residual maturity
(remaining days to mature) of not more than 91 days. The scheme earns primarily
on interest accrual basis. Only these schemes has the historic NAV concept,
wherein if invested prior to a regulatory cut off time (invested funds available for
utilization by the scheme), the investor gets the previous day NAV.

Fixed Maturity Plans (FMPs): FMPs are closed ended debt schemes. They follow a
buy and hold strategy wherein, the fund manager creates a portfolio of securities
with maturities in-line with the scheme maturity. There is generally no active
management once the portfolio is created. FMPs are launched with different
maturity profiles ranging from quarter, half yearly, yearly and above.

Hybrid Schemes: Hybrid Schemes consists of more than one asset class in the
portfolio. Hybrid schemes are intended to provide the benefit of asset allocation.
Hybrid schemes consist of Debt, Equity and in some case Gold as an asset class in
their portfolio. Allocation to the designated asset falls under a given range to
provide flexibility to the fund manager to tweak the portfolio based on the
prevailing market conditions. Few examples of Hybrid schemes are as follows:

Balanced Funds: Balanced funds consist of 65% of Equities and the remaining 35%
in fixed income securities. Higher allocation to equities is maintained, so that the
scheme qualifies as an equity scheme for the taxation purpose.

Monthly Income Plans (MIPs): MIPs are Debt oriented schemes with some portion
in Equities ranging from 5% to 25%. The product provides a stable income stream
from the fixed income part of the portfolio and the return enhancement from the
equity portion.

Capital Protection Oriented Funds (CPOFs): CPOFs are close ended Debt oriented
schemes, that endeavors to offer capital protection by investing in high quality

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debt securities along with an aim to grow your money through equity and equity
related investment. The tenure of CPOFs ranges between three to five years. The
Equity portion is invested in long tenure exchange traded index options. They are
also the only type of funds that requires credit rating as a requirement.
Mutual Funds plotted on a Risk / Return Chart

The Above graph shows the list of products based on the riskiness and ability to
generate returns.

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 DIGITAL BANKING
Digital Banking:

Digital Banking is providing the banking facilities online, like cash deposit,
withdrawal, fund transfer, updation of passbook etc, that historically were only
available to customers when physically inside a bank branch.

Need for Digital Banking:

With the introduction of Digital Banking, Bank will be benefited with the following:
▪ Customer Acquisition at low cost: Digital channels provide banks with a
unique opportunity to deliver highly customised propositions and services to
their potential and existing customers at relatively lower costs.
▪ Digital is individual and intimate: Digital channels provide access to larger
public social platforms, the inherent nature of the platform makes
communications through these channels individual and intimate.
▪ Data Opportunity: Digital brings with it the unique opportunity to capture
enormous volumes of data in a faster and efficient manner. Analytics and
data mining on these information assets are expected to enable banks to
design and provide solutions as per individual needs.
▪ Brand Loyalty: To avoid the probable shift of customers towards wallets
and proposed payments banks, the similar facilities need to be introduced
at our end to keep the customers associated and loyal to the Brand.
▪ Real Time Solutions: Digital channels have the ability to provide real-time
solutions to customers. Banks have been able to considerably simplify their
internal processes, mobile apps and digital back-end set-ups.

Initiatives of GoI:
Government of India gives foremost importance for Digitalisation. Govt. of India
has started the Digital India Project. Digital India Project consists of the three
components i.e. Creation of Digital Infrastructure, Delivery of services digitally &
Digital literacy. Facilities developed due to Digital India project are

• Digital locker
• E-education
• E-health
• E-sign
• E-hospital
• E-library
• Attendance.gov.in
• MyGov.in
Introduction of Demonetization by GoI, played an important role in digitalization
of bank transactions, which will lead to less cash society.

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Initiatives of RBI:
Reserve Bank of India has the separate Department of Payment & Settlement
Systems with a vision to set an environment for hassle free Digital payments and
remittance services by way of permitting and controlling the emerging
technologies in Banking. This guides the Banks, financial service providers, PPIs,
etc to develop the Digital Products within the set norms.
• RBI has guided NPCI to create an Infrastructure to simplify payment
system
• To expand financial services in rural and semi-urban areas, RBI has
granted license to ten small finance banks in principal. Small Finance
Banks started operating which uses Digital Banking for financial
inclusion.
• RBI has also granted license to 11 payments banks in principle to provide
basic saving and deposits, payment and remittance services. Payment
Banks also started providing digital banking facilities to the unbanked
customers, which increases the percentage share of digital banking
transactions among the public

Initiatives of NPCI:
National Payment Corporation of India, has created a common digital payment
infrastructure, which can be used by all Banks, to include the every bank customer
to use the facilities provided by the Banks. This is called as interoperability.

NPCI has developed the following payment infrastructure to suit the customers of
all banks.

• Immediate Payment services (IMPS)

• Unified payment system(UPI)
• BHIM – Bharat Interface for Money
• *99#(for financial inclusion )
• National Automated clearing house(NACH)
• Cheque Truncation system
• Aadhaar Enabled Payment System(AEPS)
• Aadhaar Payment Bridge system(APBS)
• Bharat Bill Payment System(BBPS)
• Rupay Cards
• Bharat QR
• BHIM Aadhaar Pay
• National Electronic Toll Collection (RFID Tags)
• National Common Mobility Card

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Debit Card

What is a Debit Card?

Debit Card is an instrument that can be used to
 Avail banking services such as cash withdrawal, balance enquiry, Value
added services like Fund transfer, Mobile recharge, tax payment etc., from
ATMs round the clock.
 Make payments to merchants though POS terminals and through online mode.
 Debit cards are accepted at all the ATMs and merchant establishments
across the globe displaying VISA/MasterCard/RuPay logo. Debit Cards can also
be issued for domestic transactions alone. Debit Cards are issued only to
Bank account holders. With increasing technology adoption Debit Cards can
be used for many other purposes like access card, customer validation etc.

Understanding Debit Card:

Card Number: It is a 16 digit / 19 digit number linked to customer's bank account.
It needs to be mentioned for all correspondence with the branches. In case of 16
digit cards which are now international standard, first 6 digits represent Bank’s
identification no. (BIN), next4 digits represent Branch /Sol ID. Remaining digits
indicates serial number of cards issued by that particular branch. The last digit is
always a check sum.
Valid Date: It is in mm/yy format. The cards are valid till the last day of the
month.
Magnetic Strip: Important information regarding the debit card is stored in
electronic format here and hence any kind of scratches or exposure to magnetic
fields will cause damage to the card.
EMV(Europay Master Visa) Chip: Important information regarding the debit card is
stored in chip format. EMV chip card transactions improve security against fraud as
cloning of such cards are not possible.
PIN (Personal Identification Number): PIN is the numeric password for use at the
ATM. The PIN is separately mailed/handed over to the customer by the Bank in
case of personalized cards. In case of Ready kit, the PIN is kept along with the
Card which is inactive. PINS are normally a 4 digit / 6 digit no.
2. To whom debit card will be issued?
a. Customer/Account eligible for Debit card

Following type of accounts/customers are eligible for issuance of debit cards with
adherence to KYC guidelines and Anti Money Laundering norms:
 All customers having SB account in all customers having SB account in
individual name or joint name with "any one of us" or "either or survivor"
mandate mode for operation of account.
 All existing debit card holders for renewal of debit card after its expiry.
 Proprietary Current accounts in personal names of Proprietor.
 SB/CD accounts of NREs and add-on cards to Power of Attorney holders of
NRE accounts.
 Staff OD accounts of all staff members including ex-staff members.
 Account holders under Flexi and MGSA/MGCA (Individual & Proprietorship)
and pensioners.
 No frills accounts / Small accounts

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  Persons with disabilities including blind persons.
 Savings cum CCAGR account holders.
 Minor accounts where independent operations are allowed
 Partnership, HUF (Business Debit Card, Classic Debit card)
 Private Limited Company (Corporate Debit Card)
 Special schemes
b. Customer/Account not eligible for Debit card.

Following accounts/customers not eligible for Debit Cards:

 Insolvent persons, firm
 Dormant Accounts
 Illiterate persons (only Biometric or Aadhaar based debit cards can be
issued).However illiterate persons opening accounts under PradhanMantri
Jan DhanYojana (PMJDY) are eligible to receive normal RuPay debit card.
 Trust accounts, Loan account, Cash-Credit accounts etc.
 Partnership Firms and Company A/c (with some conditions)
 SB/CD accounts with mandate of joint operation (debit card can be issued
after taking declaration)
 Accounts opened in the name of clubs, societies, Government and Quasi-
Government departments.

1. Issuing Cards to Joint Accounts:

In case the account is "Either or Survivor" cards can be issued to both the account
holders. The first named in the account will be treated as primary account holder
and the card issued to him/ her will be treated as primary card and the card issued
to the second named will be treated as Add on Card. In case of Joint accounts,
debit cards can be issued only after obtaining a declaration form signed by both
the account holders.

2. Personal Accident Insurance Cover:

For Card holders except PMJDY: Bank is offering Personal Accident Insurance
cover to Debit Card holders. In the event of death due to accident, the card
holder's nominee will receive a cover up to Rs.2 lacs in case of primary card
holders and Rs.1 lac in case of secondary card holders. The claim should be
settled to the legal heirs of the deceased if the debit card is in active status and
has been used at least once. Legal heir/ nominee for the account can surrender
the debit card to the branch and apply for the claim under Personal Accident
Insurance Cover. Braches have to send the claim with all required documents to
ATM division .Braches have to intimate to the ATM Cell / Insurance Company
within 30 days from the death and all the supporting document related to the
claim must be submitted within 90 days from accidental death of the card holder.

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For PMJDY Card holders:" PMJDY RuPay card holder will get accidental death or
permanent disability insurance cover up to Rs.1.00 lac for age group 18-70 years.
Insurance claim shall be payable only if the card holder carried out at least one
successful transaction, in last 45 days prior to the incident.
“In case of unfortunate event of accidental death, it should be intimated to the
insurance company within 30 days from the death. All supporting document
related to the claim must be submitted to the Insurance Co. within 60 days from
the date of claim intimation.

Credit Card
The term "credit card" generally refers to a plastic card assigned to the
cardholder, usually with a credit limit, that can be used to purchase goods and
services on credit or obtain cash advances. Credit cards allow cardholders to pay
for purchase made over a period of time, and to carry a balance from one billing
cycle to the next. Credit card purchase, normally become payable, after a free
credit period, during which no interest or finance charge is imposed. Interest is
charged on the unpaid balance after the payment is due. Cardholders may pay
the entire amount due and save on the interest that would otherwise
charge.
Alternatively, they have the option of paying any amount, as long as it is higher
than the minimum amount due, and carrying forward the balance.
It is a very important product as it complements other products such as POS and
payment gateway and forms potential source for fee based income.

Features of the Credit card

 No annual/renewal charges.
 Introduction of mobile alerts.
 Email statement facility
 De-activation of cards which was not use for one year.
 3 factor authentication for domestic online transaction.
 Web interface for credit card holder which enables inquires, generate and
print
statement, make service request, view unbilled transactions etc.
 EMI scheme for credit card
 20-50 days free credit period

EMI Scheme
The primary requirement for EMI is as under:
 The minimum transaction amount which can be converted to EMI is Rs 5000.00
 The eligible card holders will be those who have not missed two consecutive
payments
in the entire card life cycle.
 EMI tenure is 3/6/9/12/18/24 months as per convenience of the card
holders with
Rs.12% per annum.
 EMI facility is available in pre authorization as well as post authorization at
point of sale

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and also through customer interaction centre.

INTERNET BANKING
Internet banking facility enables the customers to make various transactions such
as payments for goods and services, transfer funds, pay taxes instantly, safely and
securely.Customer can also view his various accounts, tax details(26AS) at any
time. Internet banking works on customer ID – ALL accounts attached to customer
id will automatically get linked in customer’s profile

Who can use the internet banking facility?

Internet Banking services are provided under two categories

A. Retail customers (Individual and proprietors)
B. Corporate customers (Company, HUF, Partnership, Trust, Club, Society,
Institution)

Benefits of Internet Banking:

View Operative / Loan / Deposit Accounts

 Statement, Summary of all a/cs
 Cheque Status Inquiry & Stop Cheque
 Clearing Instruments, Lien Inquiry, Overdraft inquiry, Nominee Details,
 Details of loan a/c –repayment schedule, disbursement security.
 Tax Deduction Inquiry
 View Home Loan Provisional Interest Certificate
 View Annual Tax Statement (26AS),Income Tax e-Filling

ASBA (Application Supported by Blocked Amount)

 Register new Applicant
 Modify / Delete Applicants
 Apply / Modify / Withdraw IPO
 Status after Closure
 View Demat Holdings / Statement
Beneficiary Registration
 Registration of beneficiary for fund transfer within our bank or other bank
 Registration of RTGS/NEFT/IMPS
 After 24 hours of registration beneficiary a/c will be active for transaction
Fund Transfer
 To Own Bank accounts
 To Other Bank accounts
 To Own Bank Loan accounts
 To Other Bank accounts (NEFT/RTGS)
 Fund Transfer through IMPS (within UBI & To Other Banks)
 Credit Card Payment
 Online donation payment
 Contribution to (NPS) National Pension Scheme PRAN Number

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  PPF account opening, deposit, view statement

Tax Payments
 Direct Tax, Indirect Tax, GST

Request to Bank
 Cheque Book Request
 DD Request
 Online FD Account Opening
o Cumulative Deposit Scheme
o DRIC Scheme, FDR, FDR Monthly, SDR
o Tax Saver (DRIC, FDR, FDR Monthly)
o View online rate of interest rate of deposits
Other services
 Profile (Update Account Preference)
 Activity & Limit Inquiry (Daily, Weekly, Monthly & Yearly)
 Change Passwords
 Mobile Banking Registration
 Bill Presentment, biller registration
 Aadhaar Seeding
 LPG linkage
 Sovereign Gold Bond investment
 Pradhanmantri Bima Yojana
 DSC (Digital Signature Certificate) management
Personalized Limit
 User can view in built transaction limit as on date
 User can set his personalized limit for specific

Facilities for Corporate user

Trade finance
 Letter of Credit-Request for issue, list view of issued and advised lc
 Bank Guarantee-Request for issue ,view list of issued BG and advised BG
 Bill-Lodgement of export/import bill, view list of lodged bill and advised
import bill
 Collections-Request for collection, view list of outward/inward
collections

POS Machines

What is PoS machine?

PoS terminals are a combination of hardware and software device, which allows
MERCHANTS to accept card payments with card holder's authentication, (Debit
Cord or Credit Card) directly without updating the cash registers. A PoS terminal
is an electronic device and performs the following functions:
 Reads the information of a customer's credit/debit card without storing the
card information.

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  Checks the availability of funds in a customer's card account through the
Switch network.
 Transfers the funds from customer's account to the Merchant's account
through Switch.
 Transfers the transaction details captured at the PoS terminal to the Switch
for settlement in the merchant's Bank account.
 Prints the charge slip of the transaction both for the Merchant fit the
Cardholder.
 Promotes Digitalization through cashless transactions.

Installation Process:
The Bank has tied up with external service providers for setting up of PoS
terminals at the merchant's business establishment. Each installation is carried
out in a professional manner that involves calling the merchant before
scheduling the visit and imparting complete training to the merchant about the
PoS terminal.
 Branch Manager/Marketing Officer will generate the lead.
 Branch must guide the merchant about the terms & conditions specific to
PoS facility.
 Once the merchant agreement form is completely filled up by the merchant
and signed, it needs to be kept safe by the branch for future reference.
 Branch shall continue to send the leads in the excel format through
respective CMC at regional offices.
 At present Bank is providing the facility of PoS terminals to our own clients.
However our USPs may be used to on-board new clients and thereafter set
up POS terminals at their business establishments.
 The new requests for PoS installation received at central office are
subjected to Risk and Compliance check before approving the merchant's
PoS installation request. Therefore it is important to capture the correct
business type and address details in Finacle or excel sheet before
submitting the request to central office for processing.

Merchant Discount Rate (MDR):

The MDR is the rate that is charged to the merchant on all card based transactions
that are entered on a POS terminal. As an acquiring Bank, our Bank accepts
the card payment, verifies the card genuineness and validates the balance
using our own switch network (For our Bank's Card) and other bank switch. (For
other Bank's card)
The MDR is shared with the card network like VISA, MASTER CARD, RUPAY and also
with Card Issuing Bank. The Merchant receives the final credit of a transaction
after the deduction of MDR. Thus, the acquiring Bank at the end, receives only a
proportion of the net MDR deducted.

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 TYPES OF CREDIT FACILITIES

Introduction:
o We have seen that the banks perform their basic two fold function of taking
deposits from the public and lending them as loans/advances to the needy
persons. Bank is acting as a financial intermediary in the process.
o When we give funds for the purpose of business activity it need not be always
giving money in highly liquid and physical form.
o Even without giving any cash as outflow, still we can help the borrower viz. by
way guarantees, letter of credit, solvency certificate etc.

Let us see in detail the types of credit facilities.

 Fund based and Non fund based credit facilities.
o While giving loans and/or advances, if we part with the money immediately it is
known as Fund Based advances.
o If a person wants to buy a car and for that purpose if we finance the car, then
it is purely fund based limits.
o In Non funds based limits; we are not parting with the funds for the purpose of
any business activity to a borrower.
o It only means, we are not parting with the funds at the time of extending the
facility, but depending upon exigencies or action or situation, we may part with
the funds in future. Since the action of parting with the funds does not happen
immediately and also it is not sure whether we really have to part with funds
or not which is again based on some other external circumstances, these types
of facilities are called as Non Fund Based Limits.
o For example, if we give a guarantee towards performance of a borrower to a
government or other agencies, such guarantee can be called as non-fund based
limits to that borrower.
 Types of Fund Based Limits:
o Fund based limits are given to a borrower for different purposes.
o A new borrower may also approach for loan even to establish or start the
business.

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o An existing borrower who had already established his business and the request
may be for expansion or modernization.
o Generally the advances can be classified into two major categories viz. Working
capital Loan and Term Loan.
o If we finance to start any business activity like purchase of plant and machinery
for a manufacturing activity, purchase of shop and furniture for a trader and
purchase of tools and shed for a service entrepreneur, then it is called as Term
Loan as they are not going to be repaid immediately but over a period of years.
o If we finance for meeting day to day expenses to run the business, then it is
working capital.
o Term Loan is for creating fixed assets like land & building , plant & machinery
etc. and working capital is for creating current assets which is mainly in the
form of stock & debtors.
 Type of Working Capital:
o The working capital finance to create current assets is given in three different
ways:
i) Cash Credit ii) Overdraft and iii) Bills Purchase & Bill Discounting.
o Cash Credit is a short term bank borrowing and a demand loan for the purpose
of working capital cycle which starts from cash and ends with cash plus profit.
o Depending upon the Current Assets built up, we are prescribing a certain
margin and the balance amount we finance as Cash Credit which is used to
create current assets.
o Cash Credit is given again in two ways; by way of hypothecation of goods &
book debts and by way of pledge of goods.
o Hypothecation means Bank has charge over the current assets but the physical
possession is with the borrower. If the borrower is not repaying the loan Bank
can take possession of goods & sell it and recover the dues. Based on good
faith, without negligence and for the convenience of operation, this system is
followed. E.g., Limit for a trader dealing in consumer goods.
o Pledge means both the legal right and possession of the goods are with the
bank. E.g., Gold loan for farmers for the purpose of agricultural credit.
o Overdraft is again may be regular limit or temporary.
o Regular overdraft limit is against the security of deposits, title deeds etc.
o Temporary overdrafts are as the name itself suggests temporary in nature.
o Like Branch Manager Discretionary Power (BMDP), excess in the account, adhoc
limits are the examples which are temporary in nature.
o Bills finance is basically post production credit, which means after production is
over and the finance is given against the bills / invoices raised.
o Bills can be inland and foreign bills. When both the borrower and their
customer are in the same country it is Inland bills and if any one of them is in
foreign country then it is foreign bills.
o Bills are nothing but invoices accepted by a hundi by the purchaser of goods.

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o They are with or without Usance period, means paying the bills immediately on
delivery or after some mutually agreed time.
o Bills can be either purchased or discounted.
o By purchase we meant, the credit is given fully for the bill amount upfront.
Other charges are recovered separately. The interest is recovered at the end
after realization of bills.
o By discounting the due date of the bills is known well in advance and payment
date is confirmed. As such, we recover interest from the date of loan to date
of maturity upfront and other charges recovered separately.
 TERM LOAN:
o Term Loans are extended to acquire Fixed Assets. It is repayable over a period
of years.
o Fixed Assets may be Consumer goods like Vehicle, House etc. (Consumer
Finance)
or may be Plant & Machinery, building, Infrastructures etc. which help in
further production of Goods & Services (Business Activity Finance)
o Short Term loans are the Loans which is repayable within 12 months & Medium
Term loan repayable on installments within a period 12 to 36 months are
called as “Demand Loans Repayable on Installments”.
o Term Loans are normally payable within 84 months which is including
moratorium period but the repayment period can be extended as per specific
scheme or in case of infra project
 Types of Non Fund Based limits:
o Basically there are three types of NFB limits viz. Letter of Guarantee, Letter of
Credit and Deferred Payment Guarantee Letter (DPGL).
o In these types of limits, we are not parting with the funds, it depends upon a
future event.
o Due to this, the same cannot be controlled in the balance sheet. These are
basically off balance sheet items or also commonly called as contingent
liabilities.
o Letter of Guarantee is again bifurcated into Performance and Financial
guarantees.
o If we are guaranteeing for the performance of someone, then it is performance
guarantee.
o If we commit to pay an amount which is borrowed for which we stand as
guarantee then it is financial guarantee.
o Normally guarantees are coming to an end by way of expiry of the guaranteed
period or by invoking.
o Guarantees are invoked only when the borrower is not performing or violating
the commitments given to the beneficiary.
o Letter of Credit is basically an instrument come into picture due to lack of trust
between the buyer and seller.

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o If the buyer and seller know each other, there will be no need for resorting to
Letter of Credit.
o While the buyer and / or seller does not believe each other, the buyer with the
fear if the seller run away with the money without delivering goods - what to
do? And for the seller with the fear if the buyer run away with the good without
remitting money - what to do?
o Whereas both buyer and seller trust the bank.
o In simple the banker act as an intermediary for the smooth transfer of goods
and money between the buyer and seller through the LC mechanism.
o DPGL is another form of guarantee, where the banker is guaranteeing the
payment by way of installment. The payment by installment is allowed by the
suppliers of capital goods based on a bank guarantee.
 Secured and Unsecured:
o Any loans/advances which is secured by a tangible asset is called as secured
loans.
o If the loans and advances are given without any security then it is called as
unsecured advances.
o For example the cash credit which is purely given against the security of
current assets i.e. stock & debtors is an example of secured loan.
o A clean overdraft and an educational loan given to a student are examples of
an unsecured loan.

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 Test- TYPES OF CREDIT FACILITIES

1. What is fund based advances?

a. Any loan guaranteed by CGTMSE fund is a fund based advance.
b. All loans given by International Monetary Fund.
c. Funding of any loan without security is fund based advances.
d. Parting with the funds by the bank.
e. None of the above.
2. The three basic types of working capital.
a. Term Loan, LG and LC.
b. LG LC and DPGL.
c. Term Loan both asset and project finance.
d. BMDP, TOD and Adhoc
e. Cash credit, SOD and Bills Financing.
3. Which of the following is an unsecured loan?
a. Gold Loan
b. Union Miles
c. Housing Loan
d. Union Personal loan
e. Loan against deposits
4. Which is a secured loan?
a. Educational Loan
b. Union Personal
c. Temporary Overdraft
d. Usance bills discounted.
e. Cheque purchase.
5. For issue of a LC which parties necessarily required?
a. Buyer, Sellers Bank, Buyers Bank
b. Buyer, Seller and Buyers Bank.
c. Seller, Buyers Bank, Sellers Bank
d. Buyer, Seller and their banks.
e. None of the above.

Ans:
1 2 3 4 5
d e d d b

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 SCRUTINY OF FINANCIAL STATEMENTS, BREAK-UP OF
BALANCE SHEET, FORMATING OF P & L ACCOUNT

Objectives:
 Understand financial statements and their significance to bankers
 To be able to classify items of balance sheet and regrouping of assets
and liabilities
 To be able to format and analyse the P&L account
 To be able to enhance the skills of scrutiny of financial statements
 Improve the skills of preparing financial indicators as appear in
executive summary

A. Financial Statements
1. Organized collection of financial data, as per certain acceptable accounting
norms.
2. Prepared for periodical review of financial position of the concern.
3. Reflect honesty, integrity and managerial capability of borrower.
4. Reflect unit’s liquidity, solvency and profitability.
5. Recorded facts about the financial position of the concern.

A complete set of financial statements include

 Balance Sheet
 Statement of Profit & Loss
 Cash Flow Statement
 Notes including those relating to accounting policies and other statements
and explanatory materials that are an integral part of the financial
statement
 Directors’ Report & Auditors’ report also are the part of financial
statements

We require the complete set of financials for our analysis, as first three statements
provide us the quantitative information and last two statements provide the
qualitative information.

Balance Sheet as at 31st March, ……

As at As at
Particulars Schedule 31st March, 31st March,

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 I. EQUITY AND LIABILITIES

(1) Shareholder's Funds

(a) Share Capital 1
(b) Reserves and Surplus 2
(c) Money received against share
warrants
(2) Share application money pending allotment

(3) Non-Current Liabilities

(a) Long-term borrowings 3
(b) Deferred tax liabilities (Net) 4
(c) Other Long term liabilities 5
(d) Long term provisions 6

(4) Current Liabilities

(a) Short-term borrowings 7
(b) Trade payables 8
(c) Other current liabilities 9
(d) Short-term provisions 10
Total
II. Assets
(1) Non-current assets
(a) Fixed assets 11
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under
development
(b) Non-current investments 12
(c) Deferred tax assets (net)
(d) Long term loans and advances 13
(e) Other non-current assets 14

(2) Current assets

(a) Current investments 15
(b) Inventories 16
(c) Trade receivables 17
(d) Cash and cash equivalents 18
(e) Short-term loans and advances 19
(f) Other current assets 20
Total

The Schedules referred to above are an integral part of Balance Sheet.

Significant Accounting Policies and Notes on Accounts as Schedule '28'

As per our report of even date, For and on behalf of the board ,
Name of Audit Firm For NAME OF COMPANY
Chartered Accountants
Firm Reg. No.:-

(NAME OF (NAME OF
(NAME OF PARTNER) DIRECTOR) DIRECTOR)

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 Partner Director Director
Membership No.
Place :
Date :
NAME OF COMPANY

B. Significance of these statements to the banker

C. Classification of Assets & Liabilities

ASSETS: Classified into 4 groups

1. Current Assets

Also called Liquid Assets/Circulating Assets/Floating Assets/Gross Working

Capital

151
 Definition: Those assets which are reasonably expected to be converted
into cash during the operating cycle of the business or maximum within 1
year. Assets however liquid which do not form a part of operating cycle
are not classified as current assets by bankers.

Three Categories of current assets are-

Examples:
Inventory:
 Stock of raw materials on hand- indigenous, imported.
 Stock of work-in-process (Semi finished goods)
 Stock of finished goods on hand
 Goods at stores and spares – indigenous and imported
Receivables:
 Sundry Debtors (Trade Debts/Book Debts)
 Bills Receivables (Bills accepted by Sundry Debtors)
Other Current Assets
 Cash & Bank Balance
 Investments in Govt. & Trustee Securities (however, when investment in
such securities are made for long term purposes like Gratuity Fund, Sinking
Fund, they should be treated as ONCA i.e. other non-current assets)
 Investment in Fixed Deposits with Banks/MMFS/CPS/CD etc. (other than long
term) – if they are encumbered/earmarked for known liabilities they cannot
be treated as CA)
 Investment in quoted securities (if the investment is required for /related to
the business and is liquid or the securities are easily marketable.
 Advance given to suppliers for purchase of raw materials, stores, spares and
consumables items.
 Advance Tax payment (I.T) after adjusting reserves for taxation.
 Advance recoverable in cash or kind
 Advance accrued on investments
 Pre-paid expenses
 Cash margin on LG/LC

152
2. Other Non-Current Assets (Miscellaneous Assets)
These assets cannot be included in Current assets as

I II
They are slow moving (not readily They are not acquired for normal
realizable in cash) business purpose

Examples:
 Dead Inventory – slow moving inventory – obsolete items/slow-moving
items not readily realisable.
 Debtors older than 6 months
 Amounts due from Associates/Subsidiaries/affiliates
 Other loans and advances
 Security Deposits – Balance/Deposit with Govt. Dept./Statutory
Bodies/Tender Deposit irrespective of their maturity period.
 Receivables not related to trade –
 Advances given to directors, partners
 Advances given to companies not connected with business
 Advance for purchase of fixed assets or advance to supplier/contractor
for capital expenses.
 Investment in companies not related to trade.
 Unquoted investments/Gratuity Fund/Sinking Fund for
long term purposes.
 Other miscellaneous assets/CD etc.

3. Fixed Assets

Definition: Assets which are acquired for long term use and are not meant for sale
in the normal course of business. Also known as Block Assets/Capital Assets
/Capital Goods/Productive Assets/Tolls of Business.

Examples:

 Land (No depreciation is charged on land)

 Building
 Plant & Machinery
 Furniture, fixtures & vehicles etc.
 Construction – awaiting completion
 Other assets of long term nature
 Other fixed assets

Some important terms related to Fixed Assets

153
Gross Block The total value of all fixed assets before depreciation is
called Gross Block.
Net Block Value of fixed assets after depreciation is called Net Block
Net Block = Gross Block – Depreciation
Revaluation Where assets have been revalued the increase in their value
due to revaluation should be set off with revaluation reserve to
make comparisons meaningful.
Depreciation A company is free to charge depreciation on straight-line
method (fixed amount every year) or written down value
method (W.D.V.) (i.e. reducing amount year after year) or any
other method. The depreciation amount in straight-line method
is higher compared to that in W.D.V. method. The income tax
liability of the company is calculated after providing
depreciation in W.D.V. method at rates given in the I.T. Act.

4. Intangible Assets (Fictitious Assets)

Definition: Assets which have no tangible existence (Physical existence) or certain

fictitious assets which are in fact capitalized expenses are classified as intangible
assets.

Examples:
 Good Will (value of reputation associated to a business)
 Copyright (amount paid to the author to obtain copy right of a book)
 Patents (amount paid towards obtaining patent over a new product)
 Trade Mark
 Franchise (Amount paid towards getting exclusive right for using a brand)
 Preliminary expenses (Company formation expenses capitalised)
 Deferred Revenue Expenditure
 Debit Balance in profit and loss account (adverse profit & loss account)
 Drawings by partners. (withdrawal of capital) in partnership firm
 Bad & Doubtful debts not provided for
 Pre-operative expenses/development expenses etc. to the extent not
written off.
Nature of these assets –
A banker presumes that these assets are a drain on the capital. These assets are
not available for payment of debts as long as the business runs and they are not
realisable at the time of liquidation (as they hardly fetch any value in case of
forced sale).

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LIABILITIES

Classified into 3 groups

A. Net worth
Also known as Share holders’ funds or owners’ equity.
Definition
 Items are almost permanent source of fund (need not be paid back as
long as the business runs)
 Items represent the amount of funds (resources) given by the owner
(shareholders) of the business to the business
 They are permanent source of fund
 They represent the owners’ stake in the business
 They do not carry any fixed charge by way of interest
 They are not outside liabilities

Net worth is calculated as sum of:

 Paid up capital (Equity & Preference). Also known as ordinary share
capital
 Free Reserves like general reserves
 Share premium account
 Surplus (Balance of profit)

Redeemable Preference share with remaining maturity of 12 years or more

are treated as part of net worth.

B. Term Liability
Also known as long term or Deferred Liability
Definition: Liabilities which mature for payment after a period of one year
from the date of balance sheet are called term/deferred liabilities.
Examples:
 Term Loan from Financial Institutions, Banks (excluding installment
payable within one year)

155
  Debentures payable after one year (not maturing within one year but
maturing within 12 years)
 Deferred payment credits (excluding installments payable within one
year)
 Term Deposits payable after one year
 Preference shares redeemable after one year but before 12 years
 Working Capital Term Loan
 Deposits from dealers. – Which are refundable only on termination of
dealership are to be treated as term liability
 Other term liability (including ECB/ADR/GDR/FCNR (B) loans etc.
 Debentures

C. Current Liability
Definition:
 Liabilities payable in short term (within a year) from the date of
balance sheet are classified as current liabilities.
 They represent short term source of fund.
 Should be utilised for acquiring current assets.
Examples:
 Short term Bank Borrowing against stock, stores etc. (cash credits,
overdrafts)
 Sundry Creditors for Trade (Creditors on account of supply of raw
materials)
 Advance/progress payment from customers for supply of finished
goods.
 Sundry Creditors for expenses
 Bills payable (bill accepted on account of Sundry Creditors)
 Outstanding/Accrued expenses (expenses like rent, insurance
due/accrued but not paid)
 Provisions (made towards payment of taxed, bonus etc.)
 Dividend payable within one year of provision
 Deposits from Dealers (not accepted with a condition to be repayable
on cancellation of dealership or agency)
 Other statutory liability like PF dues etc.
 Installment of term loan, debentures, deferred payment, deposits or
preference share capital, DPG/DEB/RP (Redeemable preference)
shares/ECB/ADR/GDR due within one year.
 Working capital term loan - Term liability (for calculating MPBF,
Term Loan installments falling due on next 12 months need not be
treated as current liability, but for calculating CR it will be treated as
current liability)
 Unsecured borrowings (including ICDS etc.) from the bank including
bills discounted

156
  Unsecured borrowings from others, where no period of repayment is
mentioned. Deposits maturing within one year.
 Interest and other charges accrued but not due for payment.
 Other current liability/provision, such as gratuity liability due within
one year of provision.

D. Some important terms used in Balance sheet analysis

Total Outside liabilities Current liabilities (+) Long Term liabilities

(TOL)
Total Tangible Assets Current Assets (+) fixed assets (+) other non-current
assets
Net Working Capital Long term sources (-) long term uses
(NWC) Current Assets (-) Current liabilities

Tangible Net Worth Net worth (-) Intangible Assets

(TNW)
Capital Employed Tangible Net Worth (TNW) (+) Long Term Liabilities
(LTL)

E. Formatting Trading & Profit/Loss Account

TRADING & PROFIT AND LOSS ACCOUNT

 Normally Profit and Loss account includes Trading/Manufacturing account,

Profit & Loss account and Profit and Loss appropriation account.
 The profit and loss account is submitted for the relevant period as per the
balance sheet date, e.g. if the Balance sheet date is 31st Mar 2019 then P&L
will be submitted for the financial year 2018-19.
 For formatting of P&L account proper format of operating statement as CMA
form no II is used.

F. Some important terms used in formatting of P&L Account

Net Sales Gross Sales – GST

Raw material opening stock of raw materials + purchases during the year -
consumed closing stock of raw material
Cost of raw materials consumed + manufacturing expenses including
production depreciation + opening stock of stock in process - closing stock
of stock in process
Cost of sales [cost of production + opening stock of finished goods] - closing
stock of finished goods

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Gross profit Net sales - Cost of Sales
Operating profit gross profit - operating expenses
Net profit [operating profit + non operating incomes] - non operating
expenses

G. Step by step preparation of operating statement from P&L account

 Sales
 Less excise duty
 Net Sales
 Opening Stock of raw materials
 Add Purchases of RM during the year
 Less closing stock of RM
 Gives Raw materials consumed
Add Cost of Power, Fuel, Direct Labour, Other Mfg. Expenses, Depreciation
 Add opening stock in process
 Deduct the closing stock in process
 This gives Cost of Production
 Add Opening Stock of Finished goods (FG) and purchase of FG, if any
 Deduct Closing Stock of FG
 This gives Cost of Goods Sold
 Gross Profit (Net sales – cost of goods sold)
Deduct operation Expenses, Admn. Expenses, Selling & distribution Expenses
Interest Expenses
 This gives Operating profit
 Add non operating Income
 Deduct Non operating Expenses
 This gives Net profit before Tax
 Deduct provisions for Tax
 This gives Net Profit After Tax

H. Some important points to be remembered while formatting P&L

account

 Closing stock should be valued at cost or market price whichever is lower

 Verify large individual items and the Expenses related to activity concerned
 Compare Individual items like Electricity, Labour charges etc. for last two/
three years and relate them to business level
 Confirm that net profit is duly apportioned to capital account
 Look for Depreciation rate and method of charging
 Confirm that the Sales and Purchases accounts are properly drawn
 Opening stocks

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  Add -Purchases
 Less -Returns on purchases
 Less -Sales
 Add -Returns on sales
= Closing stocks
 Details of purchases and sales of Individual items are given
 Confirm that separate details are given for manufacturing sales and trading
sales for comparison with the previous year
 The projected sales are in conformity with past trend they are justified/
reasonable and achievable
 If there is decline in sales, reasons for the decline and plans of achieving the
estimates for the current year
 The pricing/costing system followed by the concern is uniform at all stages

I. Financial Indicators

Financial Indicators as appear in the executive summary format can be prepared

after classification of Balance Sheet and Formatting of P&L account as figures are
readily available after proper classification of balance sheet and formatting of
P&L. Format of financial indicators is as under-
S. Year ended / ending Mar.__ Mar.__ Mar.___ Mar.___ Mar.___
No. (Aud.) (Aud.) (Previous (Aud / (Proj.)
Sanction) Est.)
a. Paid-Up Capital
b. Reserves & Surplus
c. Intangible assets
d. Tangible Net Worth (a+b-c)
e. Long Term Liabilities
e(i) (w/w unsecured loan i.e.
Quasi Equity)
f. Capital Employed (d+e)
g. Net Block
h. Investments
i. Non Current Assets
j. Net Working Capital (f-g-h-i)
or (k-l)
k. Current Assets
l. Current Liabilities
m. Current Ratio (k/l)
n. DER (TL/TNW) (e/d)
o. TOL/TNW Ratio ((e+l)/d)
p. TOL/TNW along with
Contingent Liabilities
q. Net Sales
r. Cost of Sales
s. Operating Profit/EBDITA
t. Other Income
u. Interest/Finance Charges
v. Depreciation
w. Tax
x. Net Profit after Tax (s+t-u-

159
 v-w)
y. Cash Accruals (v+x)

Test Your Understanding

1. While doing analysis of Balance sheet assets and liabilities are classified into
____ &____ groups respectively?
a. 3 & 4
b. 3 each
c. 4 & 3
d. 4 each
2. Financial Statements reflect unit’s ________position.
a. Liquidity
b. Solvency
c. Profitability
d. All of the above
3. For financial analysis, we require-
a. Balance Sheet & P&L and explanatory notes related to these statements only
b. Balance Sheet, P&L, Cash Flow and explanatory notes related to these
statements only
c. Balance Sheet, P&L, Cash Flow, CMA and fund flow
d. Balance Sheet, P&L, Cash Flow and explanatory notes related to these
statements including directors’ and auditor’s report.
4. Preference shares maturing after a period of 12 years can be considered as
a. Net Worth
b. Long Term Liability
c. Intangible Assets
d. Deferred Liability
5. For preparation of financial indicators we require
a. Complete set of financial statements
b. Classification of Balance Sheet
c. Formatting of P&L
d. All of the above
6. Three categories of current assets are
a. Fixed assets, Non- current assets and intangible assets
b. Inventory, stores & spares and consumable items
c. Inventory, Receivables and other current assets
d. Raw material, semi finished goods and finished goods.
7. What is true about intangible assets-?
a. They are realizable at the time of liquidation
b. They are considered as dividend on capital
c. These assets are not available for payment of debts as long as the business
runs

160
 d. They fetch good value in case of forced sale
8. Sum total of long term liability and current liability is called as
a. Gross Liability
b. Net Liability
c. Total outside Liability
d. Capital Employed
9. The pricing and costing system followed by the concern should be uniform at
all stages-
a. True
b. Partially true as it may change as per operating cycle
c. False
d. True for manufacturing concerns, False for trading concerns
10. Cost of sales can be derived as
a. Cost of production + office expenses
b. Cost of production + opening stock of finished goods – closing stock of
finished goods
c. Net sales- Raw material consumed
d. Gross sales – cost of production

Answers:-
Q. 1 2 3 4 5 6 7 8 9 10
Ans. c d d a d c c c a b

161
 ASSET QUALITY MANAGEMENT

 Importance of Asset Quality Management

Maintaining quality of our loan portfolio is pivotal for the healthy growth of the
bank. Whatever terms & conditions the banks stipulate while sanctioning the loan
has to be strictly adhered to, only then the account can run as per bank’s
expectations. Constant monitoring is significant to ensure that the borrowers run
their business & operate the accounts on the expected lines. Poor asset quality
obviously reflects in more NPAs which is lethal to bank’s growth.
a) NEED FOR CREDIT MONITORING
o To ensure safety of funds lent.
o Loan accounts are conducted in the manner expected (compliance to sanction
terms and conditions and rules of the Bank).
o Accounts continue as performing assets and yield regular income.
o To initiate timely remedial measures on detection of early warning signals.
o To prevent / minimize slippages.
o Serves as a part of effective Risk Management System.
b) CREDIT MONITORING OBJECTIVES
o Disbursement only after compliance with terms & conditions
o Compliance with laid down procedures
o Assets to remain standard
o Assets to remain Stress free
c) CREDIT MONITORING GOALS
o Periodical monitoring of performance
o Identify the problems for shortfall in performance
o Rescheduling / restructuring
o Regular interaction with borrowers
o Exit option
o Recovery measures
d) Reasons for large slippages
o Poor / ineffective monitoring especially in accounts up to Rs.10.00 lac.

162
o Non adherence to sanction terms & conditions.
o Unjustified and continuous excesses / adhoc sanctions.
o Non inspection of prime securities at regular intervals.
o Failure to identify early warning signals at the right time and take remedial
measures.
o Failure in due diligence (especially new / taken over accounts).
o Business failures and other external reasons.
e) Preventive measures
o Timely review
o Timely restructuring
o Recovery of overdue amount
o Ledger scrutiny
o Checking accounts with other Banks
o Rectification of audit irregularities
o Credit process audit
o Excess / adhoc in the account
f) Monitoring Tools at the Branch Level
o Stock Statements
o Book Debt Statements
o Monthly Cash Budgets
o Q4/M6 Inspection Reports
o Stock Inspection Reports of outside agencies
o Factory Visit Reports
o Technical Officer’s Reports
o Concurrent Audit Reports
o Quarterly Progress Reports (QPR)
o Monthly Select Operational Data (MSOD)
o Audited/Provisional Financial Statements, Adverse/Search enquiries from other
Banks regarding the account, promoters or guarantors
o Account Operation Scrutiny – ( poor turnover, vis-à-vis sales realization,
overdues, frequent returns of cheques/Bills, issuing cheques unconnected to
main business, constant excess drawing etc.)
o Sales Tax Return/Challan, Excise duty challans to co-relate with
Turnover/Production report/Account operation/Balance Sheet/QPR etc.
o Annual accounts filed with Registrar of Companies – verification through search
at office of Registrar of Companies by empanelled company secretaries/CAs or
by our own officers, wherever need is felt, to ascertain/compare with the
balance sheet particulars as filed with Registrar of Companies
o Adverse newspaper/market reports
 Early Warning Signals
1) Signals which can be noticed within the bank
o Non-Compliance with terms of sanction
o Unplanned borrowing for margin contribution

163
o Delay in payment of interest beyond 15 days
o Installment overdue beyond 30 days
o Return of cheques for financial reasons
o Reduction in credit summations – not routing entire or pro-rata transactions
through the Bank, Opening of collection accounts with another Bank without
prior approval of appropriate authority
o Longer Outstanding in the bills purchased accounts
o Longer period of credit allowed on sales, Bills negotiated through the bank
outstanding after due dates, frequent return of bills and later or non-
realization of receivables
o Constant utilization of working capital limits to the brim
o Unexplained delay or failure to submit periodical statements such as
stock/book debts statements, MSOD, CMA, QPR, balance sheets etc other
papers needed for review of account.
o Frequent requests for excess/additional limit or for extension of time for
repayment of interest/installments
o Adhoc/excess/Bill purchase overdue, LC devolvement/Guarantee invocation
o Lack of transparency in borrower’s dealings with the bank/avoiding to meet
Bank Officials
o Constant failure or unwillingness to mention unpaid stock in stock statements
or age of book debts in book debt statement

2) Signals, which can be noticed by visiting unit or by talking to the borrower,

its employees or from market enquiries or from fellow bankers
o Delay in Project implementation
o Installation of sub-standard machinery or machinery not as per the project
report/approved quotations
o Frequent break down in plant/machinery
o Production noticeably below projected level of capacity utilization
o Labour problem and frequent interruptions in manufacturing
o Non-availability of vital spare parts/major raw material
o Production of unplanned items without reporting to the bank
o Disposal/replacement of vital plant and machinery without bank’s knowledge
o Downward trend in sales
o Higher rate of rejection at process stage/final stage/after sales
o Delay or failure to pay statutory dues
o Diversion of working capital for capital expenditure or for other use
o Abnormal increase in debtors and creditors
o Increase in inventory, which may include large quantity of slow and nonmoving
items
o General decline in the particular industry combined with many failures
o Rapid turnover of key personnel

164
o Filing of law suits against the company by its customers, creditors, employees
etc
o Unjustified rapid expansion within a short time without appropriate financial
tie up
o Sudden/frequent changes in management/infighting within the management
o Reduction in profit/unit start incurring losses
o Dependence on single or few buyers/no alternate market for product
o Threat of action against the borrower from statutory bodies e.g. Pollution
control, Labour welfare dept, Income tax/Sales tax/Excise/Customs Dept. etc.
o Poor or dubious record maintenance
o Loss of key product lines, franchises, distribution rights or sources of supply
o Speculative inventory acquisition not in line with normal purchasing practices
o Poor maintenance of plant/machinery
o Lack of planning/poor planning
o Apathy of promoters/owners in running the business
o Adverse market reports on the borrower/concern
o Loss of crucial customers
3) Irregularities-Parameters
o Loan Default
o Non-Renewal of Limits
o Other Defaults
4) Remedial measures
o Discussion with the borrower / guarantor.
o Recovery of critical amounts to avoid slippages.
o Timely restructuring of the account.
o Adhoc limits to tide over temporary problems.
o Seeking additional collaterals / guarantees.
o Borrowers to pump more funds into the system.
o Detailed stock inspection by outside agency.
o Reduction of limits.
o Exit option.
o Taking possession of securities.
o Recalling the advance / action under SARFAESIA.

 OTHER ISSUES:
o Disbursement in case of all new loans to be authorized by the Branch Manager
and in his absence, next in-charge.
o Renewal of account should not be kept pending due to overdue in the account.
o Monitoring reports on all SMA accounts monthly as per cut-off limit and on
standard accounts quarterly.
o Copy of monitoring reports to be sent to RO/FGMO.

165
  SMA CLASSIFICATION:
SMA 0 SMA 1 SMA 2

Irregularities-Parameters
Loan Default Non- Renewal of Other Defaults
Limits

LOAN DEFAULTS—FUND BASED

NATURE OF DEFAULT SMA 0 SMA 1 SMA 2
Interest/Installment/Bill Purchased or Default up Default from Default from
Discounted to 30 days 31 days up 61 days up to
to 60 days 90 days

Excess in Working Capital limit/Non- Default from Default from

adjustment of ad hoc limit 31 days up 61 days up to
to 60 days 90 days

LOAN DEFAULTS—NON-FUND BASED

NATURE OF DEFAULT SMA 0 SMA 1 SMA 2

LC/LG/DPGL Installments/Other Non-fund Up to 30 31-60 days 61 –up to 90

based commitment viz. derivatives, days days
Forward Contracts, un hedged forex
exposure etc.

SMA classification in Agricultural accounts:

Interest/Installment
Crop category Categorization of advances
1. Short Grace period for Standard SMA 1 SMA 2
Duration categorizing as
Crops NPA after due
date
A)Under irrigated 12 months (two Default up Default more Default for
conditions (more crop seasons) to 3 than 3 months more than 9
than one crop in months up to 9 months months & up to
a year) 12 months
B)Under rain fed 24 months (two Default up Default more Default more
conditions (Only crop seasons) to 12 than 12 months than 21 months
one crop in a months & up to 21 & up to 24
year) months months
2. Long duration 18 months (one Default up Default more Default more
crops crop season) to 3 than 3 months & than 15 months
months up to 15 months & up to 18
months

166
SMA -0 ACCOUNTS:
o Delay of 90 days or more in (a) submission of stock statement/other stipulated
operating control statements or (b) credit monitoring or financial statements or
(c) non-renewal of facilities based on audited financials.
o Actual sales/operating profits falling short of projections accepted for loan
sanction by 40% or more, or a single event of non-cooperation/prevention from
conduct of stock audits by banks, or reduction of DP by 20% or more after a
stock audit; or evidence of diversion of funds for unapproved purpose or drop in
internal risk rating by 2 or more notches in a single review
o Return of 3 or more cheques (or electronic debit instructions) issued by
borrowers in 30 days on grounds of non-availability of balance/DP in the
account or return of 3 or more bills/cheques discounted or sent under
collection by the borrower.
o Devolvement of Deferred Payment Guarantee (DPG) installments or Letters of
Credit (LCs) or invocation of BGs and its non-payment within 30 days.
o Third request for extension of time either for creation or perfection of
securities as against time specified in original sanction terms or for compliance
with any other terms and conditions of sanction
o Increase in frequency of overdrafts in current accounts
o The borrower reporting stress in the business and financials
o Promoter(s) pledging/selling their shares in the borrower company due to
financial stress
o A single event of non-co-operation or prevention of stock audit by Banks
o Evidence of diversion of funds for an un approved purpose
Further, RBI has mandated reporting of all stressed accounts identified under
above SMA sub categories with fund based and non-fund based exposures of
Rs.5.00 crores and above to CRILC (Central Repository of Information on Large
Credits).
NPA Management
NPA is a double-edged sword. While, on the one hand, it ceases generating income
for the Bank, on the other it takes away part of the profit earned through
provisioning. It also poses great reputational risk for the Banks. Though the NPAs
are inevitable, increasing trend is a matter of great concern, which needs to be
addressed on a war-footing and also on an ongoing basis.
WHEN AN ACCOUNT IS TREATED AS NPA?
Nature of loan When it becomes NPA?
Term Loan  Interest and installment of principal remaining
overdue for a period of more than 90 days
CC/OD  Account remaining ‘out of order’ for 90 days
Bills  Remaining overdue for a period of more than 90 days
(purchased/discounted)
Agri Advance  Installment of principal or interest remaining

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 overdue for two cropping seasons for short term
crops & one cropping season for long term crops

NPA due to technical reasons

o Review/renewal of regular or adhoc limit not done within 180 days from the
due date/date of adhoc limit
o Drawings allowed against stock/book debts statement older than 180 days
(drawings in the account based on drawing power calculated from stock
statements older than 3 months is deemed as irregular drawings and if such
irregular drawing is permitted in the account for a continuous period of 90 days
even though the unit is working/financial position is satisfactory)

What is overdue?
In case of To be considered as overdue :
Excesses over limit/drawing power  From date of such excesses
Term Loans & Loans repayable on  From due date of installments
demand
Temporary overdrafts  If amount is remaining outstanding for
more than 7 days
Bills  From due date
 In case of sight bills, if it remains
unpaid on presentation
Interest remaining unadjusted  From the last day of the quarter,
irrespective of interest charged at
monthly intervals.

What is “Out of order”?

o O/s balance remaining continuously in excess of sanctioned limit/DP
o In cases where outstanding balance is less than sanctioned limit/drawing
power, but there are no credits continuously for 90 days as on date of balance
sheet or credits are not enough to cover the interest debited during the same
period.
 ASSET CLASSIFICATION:
All NPAs are to be classified into following 3 categories:
Sub- standard Asset NPA less than or equal to 12 months
Doubtful asset NPA exceeding 12 months
Loss Asset A loss asset is one where loss has been identified by bank
or auditors. Such an asset is considered uncollectible and
of such little value that its continuance as a bankable
asset is not warranted although there may be some
salvage or recovery value.

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  INCOME RECOGNITION:
No income to be recognized in NPA accounts. Any unrecovered interest should be
reversed to the account immediately on classification of account as NPA. Further,
unrealized interest has to be controlled in Dummy Ledger.

 PROVISIONING:
For Standard assets- Funded loans
1. Direct advances to agriculture & SME 0.25%
2. Commercial Real Estate 1.00%
3. Commercial Real Estate (Residential Housing) CRE-RH 0.75%
4. Housing loans (teaser) 2.00%
5. All others not mentioned above – 0.40%
For Sub standard loans
1. General provision on o/s amount 15%
2. Unsecured exposure 25%
3. Unsecured exposure in infrastructure loans where certain 20%
safeguards such as escrow a/c are available –
Doubtful assets:
Unsecured portion 100%
Secured portion
 Doubtful up to 1 yr. 25%
 Doubtful 1 to 3 years 40%
 Doubtful for more than 3 years 100%
Loss assets 100%

Note: CGTMSE covered portion is to be treated as secured portion while working

out the provision.

Other guidelines on Classification of NPA

o Central government guaranteed accounts – to be treated as NPA only if the govt.
repudiates its guarantee when claimed.
o State govt. guaranteed accounts – Irrespective of invocation, a/c to be classified
as NPA if principal / interest is overdue for more than 90 days.
o Loan against NSCs/KVP/IVP/LIC – Not NPA up to surrender value.
o Advances under consortium – based on record of recovery of the individual Bank.
o Asset classification is borrower wise and not facility wise.
o Multiple facilities – one a/c NPA, then all accounts NPA.
o Classification is based only on recoveries and not on value of securities or net
worth of party and or guarantors.
o In case of fraud accounts, the a/c straight away classified as doubtful or loss
asset.

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o Accounts regularized near balance sheet date – is an NPA account if inherent
weakness is observed.
o Temporary deficiencies should be handled with care.
o In case of serious credit impairment due to erosion in value of security/fraud,
account should be straight away classified as doubtful or loss without going
through various stages of asset classification. Erosion in value of security can be
reckoned as significant when realizable value of security is less than 50% of
value assessed by the bank.

 RECOVERY MEASURES:
Other than legal measures are
o Reminders, Personal follow up
o Recovery camps
o Rehabilitation of sick units, Corporate debt restructuring
o Loan compromise /OTS, Write off
o Appropriation of subsidy if any
o Persuasion through guarantors /friends and relatives
o Recovery through specialized branches, Recovery through recovery agents.
o Securitization of debts and selling to ARC (Asset reconstruction Companies)
o Sale of NPAs to other Banks /NBFCs like Kotak Mahindra Bank and Standard
chartered Bank
Legal measures
o Lok Adalat -up to Rs.20.00 lacs
o Civil suits – Attachment Before Judgment
o Summary suits – where there is no security other than DPN
o Recovery through Revenue Recovery Acts
o Debt recovery tribunal – DRT – for more than Rs.10.00lacs
o Securitization and reconstruction of financial assets and enforcement of
security interest act 2002 (SARFAESI) Attachment and sale of assets by Banks
without intervention of court
o IBC(THE INSOLVENCY AND BANKRUPTCY CODE, 2016 )

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 TEST - Asset Quality Management

1. The prime aim of monitoring policy is

a. To increase the level of advances.
b. To reduce the amount outstanding in NPA category.
c. To ensure the safety of the amount lent, ensure expected conduct and
continue as performing asset.
d. To ensure that all accounts remain in Standard Category, even if
irregularities exist.
2. Credit can be disbursed
a. Without complying all terms and conditions.
b. As soon as the sanction advice is received.
c. Before EM Creation but after documentation.
d. After complying with all the stipulated terms and conditions.
3. Important Monitoring tools at the branch level are
a. Statutory Audit Report, Special Audit Report, RBI Report, Internal Audit
Report
b. Stock Statements, Book Debts Statements, Q-4 & M-6 Reports Concurrent
Audit Reports
c. Weekly Flash Data
d. All the above.
4. Important Monitoring tools at the RO/FGMO/CO levels are
a. Consortium Meeting Minutes, Advocate’s report on Documentation,
Credit report of other banks, Annual Review of the Account.
b. Factory Visit Reports, Technical Officer’s Reports, QPRs
c. MSOD, HOS, Audited Financial Statements
d. F1, M-27
5. The following are the post disbursement tools
a. Stock Statement, MSOD, QPR, HOS, Inspection Report
b. CIBIL Report and CERSAI
c. Analysis of project report and financial statements with projections
d. Pre sanction inspection report
6. The following are not the external information tools
a. Market information, Media reports, Information from Borrowers
employees
b. Borrowers customers and suppliers, Government departments raids and
enquiries
c. Changes in key personnel / management, reference from other bankers,
request for frequent excess or modifications in terms
d. None of the above.
7. Exit Option(suggesting the borrower to leave our bank) can be opted

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 a. Where the project is viable
b. Satisfactorily operated account but practicing unethical methods.
c. Further deterioration in long run and coming out of problems are remote
coupled with bad market reports.
d. Both b and c.
8. An NPA Account can remain in Sub Standard Category for a period of
(a) 12 months (b) 24 months (c) Forever (d) None of the above
9. An account may turn NPA due to
(a) Technical reasons (b) Loan Defaults (c)Other accounts of same
borrower become NPA
(d) All the above are True
10. Role of a Recovery Agent:
a. Recovery Agents are the intermediaries between the Bank and the
Borrower.
b. RA would assist the Bank in persuading the borrowers in repayment of
dues and would bring them around for a negotiated settlement.
c. RA would give necessary inputs and assist the banks in taking appropriate
legal steps in effecting recovery through courts/Tribunals.
d. All of the above

Key:
ASSET QUALITY MANAGEMENT
1 2 3 4 5 6 7 8 9 10
c d d d a d d a d d

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