Management of Banking Operations: Chapter 13-Banking Functions, Retail Banking AND Laws in Everyday Banking

MANAGEMENT OF BANKING
OPERATIONS
CHAPTER 13- BANKING FUNCTIONS,

RETAIL BANKING AND LAWS IN
EVERYDAY BANKING
1
COMMERCIAL BANKING STRUCTURE
Commercial
Banks
Retail Corporate Investment

Banking Banking Banking
Copyright © 2018 Pearson India Education Services Pvt. Ltd 2

Management of Banking and Financial services, 4/e 2
Negotiable Instruments
Discounting of Bill of Exchange
Cheque
Copyright © 2018 Pearson India Education Services Pvt. Ltd Management of Banking and Financial services, 4/e 3
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Discounting the Bill Of Exchange
● Drawer: Maker of the bill is the drawer
● Drawee: Person directed to pay
● Payee: Person named in the instrument to whom or on whose order the
payment is made
● Normally the drawer and payee are same person
● For example, a drawer has a bill for Rs.10,000. He discounted this bill
with his bank two months before its due date at 15% p.a. rate of
discount. Discount will be calculated as the follow:
● 1,0000 × 15/100 × 2/12 = 250
● Thus the drawer will receive a cash worth Rs.9,750 and will bear a loss
of Rs.250.
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Discounting the Bill Of Exchange
The bank will keep this bill in possession till the due date. On
maturity (due date) the bank will present the bill to the acceptor
and will receive cash from him (if the bill is honoured)
In case, the acceptor does not make the payment to the bank,
then the drawer or any person who has discounted the bill have
to take this liability and will pay cash to the bank.
Until the bill is honoured on the due date, there is always a

chance that the drawer will become liable on the bill. This is
called a contingent liability - a liability that will only arise if a
certain event occurs - the acceptor does not honour the bill.

CHEQUE
● A cheque is bill of exchange with two more

qualifications, namely, (i) it is always drawn on a
specified banker, and (ii) it is always payable on
demand.
● Consequently, all cheque are bill of exchange, but all

bills are not cheque.
● Cheque must be signed by the drawer,
● Must contain an unconditional order on a specified
banker to pay a certain sum of money to or to the
order of a certain person or to the bearer of the
cheque. It does not require acceptance.
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Parties to Cheque
1. Drawer
2. Drawee
3. Payee
Compiled by: Dr. Rajsee Joshi

Copyright © 2018 Pearson India Education Services Pvt. Ltd Management of Banking and Financial services, 4/e 7 17
Cheque Returned
Under what
circumstances can a
Cheque be
returned by the
Bank?
Compiled by: Dr. Rajsee
Joshi Management of Banking and Financial services, 4/e 8
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Treatment of returned Cheque
● The paying bank should return dishonoured cheques

to the collecting bank through the clearing house
● The collecting bank despatch it immediately to the
payees / holders.
● Cheques dishonoured for want of funds should be
returned along with a memo indicating therein the
reason for dishonour as "insufficient funds".

Joshi Copyright © 2018 Pearson India Education Services Pvt. Ltd 20
What are Dormant
Accounts?

Frozen
accounts
● RBI, SEBI, Income-tax authorities, and court have

rights to freeze an account

Joshi Management of Banking and Financial services, 4/e 12
Frozen accounts
What can be the reasons due to which a bank can

freeze your account?
Unpaid Private Loans
Tax Dues
Unpaid money to an organization
Suspicious activities in the account Use of the account for
illegal activities Money laundering
Terrorist financing

Frozen accounts
Kingfisher accounts Sahara Group accounts

were frozen as the were frozen by SEBI
Airline failed to clear as per an order from
dues of Rs. 40 crore to the Honourable
the tax department Supreme Court
Cheque Truncation
System

Cheque Truncation System
● Stopping the flow of the physical cheque by the presenting bank

(bank where the cheque is presented/dropped off!)
● en-route to the drawee bank’s (bank on which the cheque is
drawn on) branch.
Instead of the physical cheque, an electronic image of the cheque

is transmitted to the drawee branch, along with relevant
information like
● Data on the MICR band, date of presentation, presenting bank,
etc.
Cheque truncation, thus, removes the need to move the actual
physical cheque from branch to branch.

Eg. You drop an HDFC Bank (Drawee) cheque worth Rs.10000 at SBI
Bank’s (Presenting) drop box
SBI captures the data on the MICR Code

•Captures image of cheque using capture system
•It is encrypted and sent to Clearing House for Processing
Clearing house Interface (CHI) enables both the Drawee

and Presenting bank to transmit data and images securely
•Clearing house process the data, arrives at a settlement
figure and routes the requisite images and data to drawee
banks
Drawee bank (HDFC) receives the data and images for

payment processing
•Drawee bank generates return file for unpaid cheques if any
•Processing cycle is complete when the clearing and the
associated return sessions are sucessfully processed
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Benefits of CTS:
Reduces the scope

Speeds up the for clearing-related Lowers the cost of
process of collection frauds or loss of collection of
of cheques instruments in cheques
transit
Removes
reconciliation- Reduces scope for
related and Reduces the time of frauds inherent
logistics-related clearing cycle in paper
problems instruments

What is CTS -2010?
● CTS-2010 is a standard benchmark recommended by

RBI for the standardisation of:
Cheque forms (leaves) in terms of size
MICR band
Quality of paper, having protection against alteration, should be sensitive to

acid/alkali/bleach etc. and should not glow under UV light – CTS -2010 paper is
UV-dull!
Carry a standardized watermark, ‘CTS INDIA’ – should be oval and 2.6 to 3 cms
in diameter,
Mandating colour schemes in pastels to ensure clarity of image etc.

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Deposits
Demand Term Deposits:

Deposits: Saving Fixed
and Current Deposits,
account Recurring
Deposits

Current Accounts:
Enable them (mostly businessmen) to conduct their business

transactions smoothly.
No restrictions on the number of times deposit in cash /cheque

can be made or the amount of such deposits;
Usually do not have any interest. However, in recent times some

banks have introduced special current accounts where interest (as
per banks' own guidelines) is paid
The current accounts do not have any fixed maturity as these are
on continuous basis accounts

Who can open Current account?
Sole
proprietorship Partnership
Adult individual
concern firms
Associations,
Private/Public
Clubs, Societies,
limited HUF
Trust or other
companies
institutions

Saving Accounts
Till 24/10/2011, the interest on Saving Bank Accounts was regulared by RBI and
it was fixed at 4.00% on daily balance basis
However, wef 25th October, 2011, RBI has deregulated Saving Fund account
interest rates and now banks are free to decide the same within certain
conditions imposed by RBI
Under directions of RBI, now banks are also required to open no frill accounts
(this term is used for accounts which do not have any minimum balance
requirements).
Although Public Sector Banks still pay only 4% rate of interest, some private
banks like Kotak Bank and Yes Bank pay between 6% and 7% on such deposits.
From the FY 2012-13, interest earned upto Rs 10,000 in a financial year on

Saving Bank accounts is exempted from tax.

Term Deposits/Fixed Deposits
All Banks in India offer fixed deposits schemes with a wide range
of tenures for periods from 7 days to 10 years
However, in case of need, the depositor can ask for closing (or
breaking) the fixed deposit prematurely by paying a penalty
(usually of 1%, but some banks either charge less or no penalty)
FD are compounded monthly , quarterly, half yearly or yearly basis
TDS is levied by banks on interest payment

Interest Rates
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Banks FD Interest Rates Tenure
SBI 3.30% – 6.50% 7 days to 10 years
Canara Bank 4.00% – 6.25% 7 days to 10 years
HDFC 3.00% – 6.25% 7 days to 10 years
PNB Housing 12 months to 120

7.20% – 8.00%
Finance months
ICICI Bank 3.25% – 6.25% 7 days to 10 years
Axis Bank 3.50% – 6.75% 7 days to 10 years
IDFC First Bank 4.00% – 7.75% 7 days to 10 years
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Recurring Deposits
Suitable for people who do not have lump sum amount of savings, but are ready to
save a small amount every month.
Usually deposit a fixed amount of money every month (usually a minimum of

Rs,100/- p.m.). Any default in payment within the month attracts a small
penalty
Standing Instructions can be given
Maturities ranging from 6 months to 120 months A Passbook is usually issued

Non-Resident Indian (NRI) Accounts
Non-resident (External)
Rupee accounts (NRE)
Non-resident
(Ordinary) Rupee
accounts (NRO)
Foreign currency non-

resident accounts
(FCNR)

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Joshi
Key features of NRE account
(Primary reason) want to park your Overseas earnings

remitted to India converted to Indian Rupees;
Type of account: Savings, Current, Recurring and Fixed

deposits are available
Can hold a joint account with another NRI;
Joint account with Indian resident is not permitted, but

resident can hold power of attorney
Principal amount and interest are freely repatriable

Key features of NRO account:
(Primary reason) want to park India based earnings in Rupees

in India;
Want account to deposit income earned in India such as
rent, dividends, etc;
Type of account: Savings, Current, Recurring and Fixed
deposits are available
Want to open joint account with resident Indian (close relative)
Principal is not repatriable Interest earned is repatriable

Key features of FCNR account:
FCNR can be kept only in the form of term deposits, for periods
ranging from 6 months to 3 years
Can be held in major foreign currencies like Pound Sterling, US

Dollar, Jap Yen or Euro
Principal amount and interest are freely repatriable
Joint account with Indian residents are not allowed but

resident can hold power of attorney
Can hold a joint account with another NRI

Mandates and Power of Attorney
● An account holder can appoint a third person to act on his behalf for certain
acts like drawing cheques or instructing bank to debit for drafts, etc.
● Mandates:
 Itis an unstamped letter signed by the customer, authorizing a person to
operate the account on his behalf
 Signature of the mandatory should be there
 Generally issued for a short and temporary period
● Power of Attorney:
 Stamped document and generally executed in the presence of a notary/
magistrate of a court
 Special power attorney is often for a single transaction and general power of
attorney gives very extensive powers
Why Banks focus on Retail Banking?
Financial Disintermediation:
Corporate banking scenario has
changed with respect to
funding requirements
Advent of Economic
Liberalization:
Lesser risk of NPA’s and
Focus on Individuals Better margins
rather than corporate
to improve income

Emerging Issues in Handling Retail Banking
Know the Customer
Technology Issues Product
Innovation Pricing of Products
Issues related to Human Resources
Low cost and No-cost Deposits

SWOT ANALYSIS OF RETAIL BANKING
Strengths Weakness Opportunities Threats
• Low level of • Longer • Growth in • Incidences

NPAs tenure for retail of
• Tendency to loans lending is concurrent
default retail especially expected to borrowings
loans are housing continue are on
low loans • Cross- increase
• Housing • Whereas selling • Shrinkage in
loan has tenure for products current
been proved deposits is accounts (no
to be the less than cost) results
safest 3 years in
usually increasing
the average
cost of
deposit

Strategies for Success in Retail Banking
Adoption of advanced technology
Skilled manpower
Balanced and sustained growth in deposits and advances
Risk management
Service quality with a human touch

Customer Relationship Management
Customer
Customer value
Acquisition Maximization
Customer
Retention

Blending Tradition with Technology
Banks are
moving from
Banks today
Use CRM tools product-focused,
focus on
to identify which mass marketing
automation and
‘customers’ are to customer-
information
to be targeted focused, micro-
technology
marketing
approach

Example
ICICI BANK
Smart Vault

Laws in Everyday Banking
Key acts that Govern the Functioning
The Reserve Bank of India Act, 1934
The Negotiable Instrument

(Amendment) Act, 2018
The Banking Regulation Act, 1949

Rights of a Banker
Right of General Lien
Right of Setoff: Can set off the credit balance in another

account belonging to the same customer
Right to Appropriation: Who and How

•Case of Multiple Loans taken and payment made without specific
instructions
Right to Charge Interest and Levy Charges

Obligations of a Banker
Honour Cheques
Wrong Dishonour of Cheques

•Case: Mistake in posting and account of a customer is debited
•Case: Honoured a post-dated cheque
Maintain Confidentiality
Premature Closure of Fixed Deposits
Act in good faith without negligence
Payment to Nominee Closure of Accounts
Deceased Depositors

So now you
know the Basics
of Retail
Banking!!!

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MANAGEMENT OF BANKING

CHAPTER 13- BANKING FUNCTIONS,

Retail Corporate Investment

Copyright © 2018 Pearson India Education Services Pvt. Ltd 2

Discounting of Bill of Exchange

Until the bill is honoured on the due date, there is always a

Copyright © 2018 Pearson India Education Services Pvt. Ltd 15

● A cheque is bill of exchange with two more

● Consequently, all cheque are bill of exchange, but all

Compiled by: Dr. Rajsee Joshi

● The paying bank should return dishonoured cheques

Compiled by: Dr. Rajsee

Compiled by: Dr. Rajsee Joshi

● RBI, SEBI, Income-tax authorities, and court have

Compiled by: Dr. Rajsee

What can be the reasons due to which a bank can

Unpaid money to an organization

Suspicious activities in the account Use of the account for

illegal activities Money laundering

Compiled by: Dr. Rajsee Joshi

Kingfisher accounts Sahara Group accounts

Management of Banking and Financial services, 4/e 25

● Stopping the flow of the physical cheque by the presenting bank

Instead of the physical cheque, an electronic image of the cheque

Copyright © 2018 Pearson India Education Services Pvt. Ltd 26

SBI captures the data on the MICR Code

Clearing house Interface (CHI) enables both the Drawee

Drawee bank (HDFC) receives the data and images for

Reduces the scope

Copyright © 2018 Pearson India Education Services Pvt. Ltd 31

● CTS-2010 is a standard benchmark recommended by

Quality of paper, having protection against alteration, should be sensitive to

Mandating colour schemes in pastels to ensure clarity of image etc.

Copyright © 2018 Pearson India Education Services Pvt. Ltd 32

Demand Term Deposits:

Copyright © 2018 Pearson India Education Services Pvt. Ltd 35

Enable them (mostly businessmen) to conduct their business

No restrictions on the number of times deposit in cash /cheque

Usually do not have any interest. However, in recent times some

Copyright © 2018 Pearson India Education Services Pvt. Ltd 36

Copyright © 2018 Pearson India Education Services Pvt. Ltd 37

From the FY 2012-13, interest earned upto Rs 10,000 in a financial year on

Copyright © 2018 Pearson India Education Services Pvt. Ltd 38

FD are compounded monthly , quarterly, half yearly or yearly basis

TDS is levied by banks on interest payment

Copyright © 2018 Pearson India Education Services Pvt. Ltd 39

SBI 3.30% – 6.50% 7 days to 10 years

Canara Bank 4.00% – 6.25% 7 days to 10 years

HDFC 3.00% – 6.25% 7 days to 10 years

PNB Housing 12 months to 120

ICICI Bank 3.25% – 6.25% 7 days to 10 years

Axis Bank 3.50% – 6.75% 7 days to 10 years

IDFC First Bank 4.00% – 7.75% 7 days to 10 years

Usually deposit a fixed amount of money every month (usually a minimum of

Standing Instructions can be given

Maturities ranging from 6 months to 120 months A Passbook is usually issued

Copyright © 2018 Pearson India Education Services Pvt. Ltd 42

Foreign currency non-

Compiled by: Dr. Rajsee

(Primary reason) want to park your Overseas earnings

Type of account: Savings, Current, Recurring and Fixed

Can hold a joint account with another NRI;

Joint account with Indian resident is not permitted, but