FINANCIAL SERVICES

BANKING PRODUCTS AND SERVICES

 CHAPTER OUTLINE
 INTRODUCTION TO BANK
 INDIAN BANKING SYSTEM
 RESERVE BANK OF INDIA (RBI)
 DEPOSIT PRODUCTS
 LOAN PRODUCTS AND OTHER INSTRUMENTS
 MONEY MARKET PRODUCTS
 PRINCIPLES OF BANK FUND MANAGEMENT

Prepared By: Dr. Bhavin Patel 2

 MEANING OF BANK
 “Bank is link between money savers and money
seekers”
 “Bank is a financial intermediary which mobilize
savings of investors and channelize these savings
in to investment”
 “Bank is a financial institution which is engaged in
the business of purchasing and selling of money”

Prepared By: Dr. Bhavin Patel 3

 RESERVE BANK OF INDIA (RBI):
THE APEX BANK (CENTRAL BANK)

THE RBI IS THE NERVE-CENTRE OF THE MONEY MARKET AND

THE MAIN REGULATOR OF THE BANKING SYSTEM.
THE FUNCTIONS/ROLES OF THE RBI COMPRISE:
1. NOTE ISSUING AUTHORITY (ISSUE OF CURRENCY),
2. GOVERNMENT BANKER,
3. BANKERS' BANK,
4. SUPERVISORY AUTHORITY,
5. PROMOTER OF THE FINANCIAL SYSTEM AND
6. REGULATOR OF MONEY AND CREDIT (MONETARY
AUTHORITY).

Prepared By: Dr. Bhavin Patel 5

 1. NOTE ISSUING AUTHORITY/ISSUER OF CURRENCY

RBI has sole right to issue Currency Notes of all denominations

(except the one rupee notes and coins).
The currency notes issues by the RBI are legal tender through
out INDIA.
Currency management by the RBI involves efforts to achieve
self-sufficiency in the production of currency notes/coins, with
a judicious denomination mix, withdrawal and destruction of
notes, technology upgradation and enhancement in the
security features of currency notes.

Prepared By: Dr. Bhavin Patel 6

 2. GOVERNMENT BANKER

As the Government banker, apart from banking services

relating to receipts/payments on behalf of the government,
the issue, management and administration of government
public debt is a major function of the RBI.
As a GOVT. Banker, RBI provides short term loan and advances
to various Govt. bodies for meeting their short term cash flow
mismatches.
For providing various services, the RBI charges commission
from GOVT.

Prepared By: Dr. Bhavin Patel 7

 3. BANKER’S BANK OR CENTRAL BANK
As a banker’s bank, the RBI controls the volume of reserves of
the banks and determines their deposit-credit creation ability.
As a central bank, the RBI has a special relationship with
banks. It controls the volume of SLR and CRR and determines
their credit creation ability.
It is, in effect, the banker of the last resort means provide
credit to commercial banks as and when they need.

Prepared By: Dr. Bhavin Patel 8

 4. SUPERVISING AUTHORITY /
REGULATOR AND SUPERVISOR
As a regulator and supervisor, the RBI prescribes the broad
parameters within which the banking and financial system
functions.
It regulates and supervises the banking system, under the
provisions of the Banking Regulation Act.
RBI issue licenses for the establishment of new banks/setting
up new branches/prescribe minimum capital and reserve
rules/ inspect working of banks/ investigate any complaints
and irregularities/ approve merger / reconstruction/
liquidation of banks.

Prepared By: Dr. Bhavin Patel 9

 5. PROMOTER OF THE FINANCIAL SYSTEM

Over a time, RBI has setup various DFI/PFI.

The RBI promoted institutes like IDBI, IFCI, ICICI, IRBI, EXIM
BANK, SIDC, NIDC, SIIC, TFCI, DICGC, ECGC etc.

Prepared By: Dr. Bhavin Patel 10

 6. REGULATOR OF MONEY AND CREDIT /
MONETARY AUTHORITY
As the central bank of the country, the RBI formulates and
conducts the monetary policy.
Monetary policy is a set of actions available to a nation's
central bank to achieve sustainable economic growth by
adjusting the money supply.
The instruments of monetary control used by the RBI are:
OPEN MARKET OPERATIONS (OMOs),
BANK RATE (BR),
CASH RESERVE RATIO (CRR ),
STATUTORY LIQUIDITY RATIO (SLR) AND
REPO.
Prepared By: Dr. Bhavin Patel 11
 6. REGULATOR OF MONEY AND CREDIT - CONTD…

OPEN MARKET OPERATIONS (OMOS):

The OMOs involve sale and purchase of Government securities
and T-bills. Through the OMOs, the RBI can affect the reserve
position of banks, and volume/ cost of credit. They are poised
to emerge as a major tool of monetary policy in India.
OMOS can be one of the measure adopted by RBI to control
inflation in the economy.

Prepared By: Dr. Bhavin Patel 12

 6. REGULATOR OF MONEY AND CREDIT - CONTD…

BANK RATE (B/R):

The B/R is the standard rate that RBI charges from commercial
banks for offering short term advances.
In the event of a fund deficiency, a commercial bank can
borrow money from the central bank of a country (RBI).
The B/R technique regulates the cost/availability of finance to
banks/FIs.
At present BR is 6.75%.

Prepared By: Dr. Bhavin Patel 13

 6. REGULATOR OF MONEY AND CREDIT - CONTD…

CASH RESERVE RATIO (CRR):

The CRR refers to the cash which banks have to maintain with
the RBI as a percentage of their net demand and time
liabilities to ensure safety and liquidity of bank deposits.
As an instrument of policy, the CRR has been used by the RBI
very actively.
CRR IS THE PRIMARY RESERVE REQUIREMENT.

At present CRR is 4.5%.

Prepared By: Dr. Bhavin Patel 14

 6. REGULATOR OF MONEY AND CREDIT - CONTD…

STATUTORY LIQUIDITY RATIO (SLR):

The SLR enables the RBI to impose a secondary and
supplementary reserve requirement.
Strictly speaking, SLR is not a technique of monetary control; it
only distributes bank resources in favour of the
Government/Public Sector.
SLR investment is in the form of G-Sec.

At present SLR is 18%.

Prepared By: Dr. Bhavin Patel 15

 6. REGULATOR OF MONEY AND CREDIT - CONTD…

REPOS :
A repo/reverse repo/ready forward/ repurchase (buy-back) is
a transaction in which two parties agree to sell and repurchase
the same security.
The seller sells specified securities, with an agreement to
repurchase the same at a mutually decided future date and
price. Likewise, the buyer purchases the security with an
agreement to resell the same to the seller, on an agreed date
and at a pre-determined price.
At present REPO RATE is 6.5%.
Prepared By: Dr. Bhavin Patel 16
 6. REGULATOR OF MONEY AND CREDIT - CONTD…

REPOS : CONTD…
The same transaction is 'REPO' from the viewpoint of the
seller and 'REVERSE REPO‘ from the angle of the buyer.
Repo is also known as ready forward as it is a means of
funding by selling a security held on a spot basis and
repurchasing the same on a forward basis.

Prepared By: Dr. Bhavin Patel 17

 DEPOSIT PRODUCTS
Deposit products are the major source of bank funds. The two
components of deposit products are:
(i) Types of Deposits and
(ii) Operations of Deposit Accounts.

Prepared By: Dr. Bhavin Patel 18

 TYPES OF DEPOSITS / ACCOUNTS

Deposits of banks are classified into:

(i) DEMAND DEPOSIT,
(ii) TERM/FIXED DEPOSIT AND
(iii) HYBRID/FLEXI DEPOSIT.

Prepared By: Dr. Bhavin Patel 19

 TYPES OF DEPOSITS/ACCOUNTS – CONTD..

 DEMAND DEPOSITS
 Demand deposits, repayable to depositors on demand, are of
two types: (i) Current and (ii) Savings.

Prepared By: Dr. Bhavin Patel 20

 TYPES OF DEPOSITS/ACCOUNTS – CONTD..

CURRENT DEPOSITS/ACCOUNTS:
The primary objective of current deposits is not soliciting savings
but convenience of the large customers who are relieved of
handling payments.
There are no restrictions on withdrawals/deposits in current
accounts. Withdrawals are permitted by cheques in favour of
self/other parties.
They are non-interest bearing. In case of accounts which do not
have sufficient balances, the bank may levy service charges.
Overdrafts of different durations, short term / regular are
permitted.

Prepared By: Dr. Bhavin Patel 21

 TYPES OF DEPOSITS/ACCOUNTS – CONTD..

SAVINGS DEPOSITS:
• As a product, savings deposits encourage saving habits among
the depositors.
• Such deposits may be either with cheque book facility or with no
cheque book facility. Withdrawals are on demand.
• There are restrictions on the number of withdrawals and the
minimum balance to be maintained.
• The interest rates are regulated by the RBI.
• No overdraft facility is available on such deposits
• At present SAVING BANK RATE is 2.70% - 3.00%.
Prepared By: Dr. Bhavin Patel 22
 TYPES OF DEPOSITS/ACCOUNTS – CONTD..

TERM/FIXED DEPOSITS:
• Term/fixed deposits are repayable on pre-fixed maturity.
• They comprise of (i) FIXED and (ii) RECURRING deposits.

Prepared By: Dr. Bhavin Patel 23

 TYPES OF DEPOSITS / ACCOUNTS – CONTD..
FIXED DEPOSITS :
 Fixed deposits are for a fixed period specified at the time of making
the deposits.
 The repayment on maturity includes principal and the accrued
interest. The option to receive interest on quarterly/ monthly basis
also is available at the discretion of the depositors.
 On maturity, the deposits can be renewed for another term at the
prevailing rate of interest.
 Loans against the security of fixed deposits may be availed of. The
minimum period of deposit is 7 days.
 The interest on such deposits is higher vis-à-vis saving deposits.
 At present FD RATE is 6.00 - 7.25% for more than 1 Year period.
24
Prepared By: Dr. Bhavin Patel
 TYPES OF DEPOSITS/ACCOUNTS – CONTD..
RECURRING / CUMULATIVE DEPOSITS:
Recurring/ cumulative deposits are a variant of savings deposit.
A pre-fixed amount at a pre-fixed frequency (monthly /
quarterly) for a pre-specified period (12 to 120 months) can be
deposited.
The interest is pre-fixed and almost equal to the fixed deposit
rate. Loans against the deposit are permitted.

Prepared By: Dr. Bhavin Patel 25

 TYPES OF DEPOSITS/ACCOUNTS – CONTD..
HYBRID/FLEXI DEPOSITS: “THE NEW INNOVATION”
The hybrid/flexi deposits are a fusion of demand and fixed
deposits.
Balance in excess of a specified level in a savings deposit is
automatically transferred (sweep transfer) to the term deposit
of a pre-defined maturity.
In the event of a shortfall in the savings component, funds are
automatically transferred back through reverse sweep.

Prepared By: Dr. Bhavin Patel 26

 OPERATIONAL ASPECTS OF DEPOSITS
The operational aspects of deposits are:

(I) Opening/Closing Accounts,

(II) Deposit Insurance And
(III) Nomination.

Prepared By: Dr. Bhavin Patel 27

OPERATIONAL ASPECTS OF DEPOSITS – CONTD..
(i) OPENING/CLOSING ACCOUNTS:
 While opening new accounts, banks have to comply with the RBI-
prescribed KYC procedure in terms of establishing the identity and
residential address of the depositor by special documentary
evidence.
 A person who wants to open a deposit account has to (i) fill up and
sign the prescribed application form (ii) furnish
(a) Introductory reference from an existing depositor of the bank,
(b) Acceptable proof of his identity/residential address such as
passport, license, ration card, voters ID card, telephone/electricity
bills and so on (c) a photograph and (d) a minimum initial deposit.

Prepared By: Dr. Bhavin Patel 28

OPERATIONAL ASPECTS OF DEPOSITS – CONTD..

II. DEPOSIT INSURANCE:

Banks deposits to the extent of Rupees ONE Lac per account
are insured by the DICGCI of the RBI.

Prepared By: Dr. Bhavin Patel 29

OPERATIONAL ASPECTS OF DEPOSITS – CONTD..

III. NOMINATION:
Nomination facility is available to the depositors in all types of
deposits.
The nominees would be paid the outstanding amount in the
event of the death of the depositor.

Prepared By: Dr. Bhavin Patel 30

 LOAN PRODUCTS AND OTHER INSTRUMENTS

The loan products of banks are their assets. There are three
aspects of loan/advance products of banks:
(i) Credit facilities given to customers,
(ii) Mode of security/creation of charge on secured
loan/advances and
(iii) Instruments used by customers in banking transactions.

Prepared By: Dr. Bhavin Patel 31

 LOAN PRODUCTS /CREDIT FACILITIES

The credit facilities from banks are divided into:

A. Fund-based and
B. Non-fund-based.

Prepared By: Dr. Bhavin Patel 32

 LOAN PRODUCTS /CREDIT FACILITIES –
CONTD…
A. FUND BASED
The fund-based credit facilities provide funds for (i) working
capital finance and (ii) term/project finance for capital
expenditure.

Prepared By: Dr. Bhavin Patel 33

 LOAN PRODUCTS / CREDIT FACILITIES –
CONTD…
A. WORKING CAPITAL FINANCE :
The working capital finance is provided by way of
(a) Cash Credit
(b) Overdraft
(c) Demand Loan And
(d) Bills Purchased/Discounted.

Prepared By: Dr. Bhavin Patel 34

 LOAN PRODUCTS /CREDIT FACILITIES – CONTD…
CASH CREDIT / OVERDRAFT/ DEMAND LOAN/ BILLS
DISC.
Cash credit is a unique credit facility. It is a running account for
drawing of funds with three ele­ments: credit limit/line of credit,
drawing power and actual drawls. Interest is payable on the
actual drawls.
Overdraft is drawing from a current account in excess of credit
balance.
A demand loan is a one-time facility subject to periodic/
lumpsum principal repayment together with monthly/quarterly
interest payments.
Bills purchase/ discounting is a specific-asset credit facility.
Prepared By: Dr. Bhavin Patel 35
LOAN PRODUCTS /CREDIT FACILITIES – CONTD…
TERM LOANS/ PROJECT FINANCE
Term/project loan involves a detailed project appraisal of the
borrower. It is secured by mortgage of property.
To ensure safety of funds loan agreements contain some
positive/negative covenants/ conditions.
Prime Lending Rate (PLR) later on renamed as Base Rate
AT PRESENT PLR STANDS @ 8.75% - 10.10%

Prepared By: Dr. Bhavin Patel 36

 LOAN PRODUCTS /CREDIT FACILITIES – CONTD…

B. NON-FUND-BASED:
The non-fund-based credit facilities do not involve outlay of
funds.
They are contingent liabilities and banks would be liable to
honour its commitments.
The credit facilities in this category are: Letter of Credit / OR
BANK Guarantees.

Prepared By: Dr. Bhavin Patel 37

 MODES OF SECURITY ON
SECURED ADVANCES BY BANKS

Secured advances of banks have charge against assets in

various modes:
(i) Lien
(ii) Pledge
(iii) Hypothecation and
(iv) Mortgage.

Prepared By: Dr. Bhavin Patel 38

 MODES OF SECURITY ON
SECURED ADVANCES BY BANKS – CONTD…
(I) LIEN:
 Lien means lender’s claim on assets offered as security for a
loan.
 Lien refers to the right of bank to retain assets of the borrowers
and sell them under the specified circumstances.

(II) PLEDGE:
 Pledge is DELIVERY of Movable Property (say inventory of
goods) from borrower to the bank to secure a debt. While the
ownership in the goods lies with the borrower, their possession
is given to the bank who can sell them in the event of default in
repayment.
Prepared By: Dr. Bhavin Patel 39
 MODES OF SECURITY ON
SECURED ADVANCES BY BANKS – CONTD…
(III) HYPOTHECATION:
Hypothecation refers to a charge on movable goods/
commodities in which possession and ownership of the assets
charged to banks remains with the borrower.
Borrower has the right to sell/use them.
On a periodic basis, borrower has to submit stock statement of
goods to the bank.
(IV) MORTGAGE:
Mortgage is a charge on Immovable Property offered as
security for a loan.
Various types of Mortgage (will be discussed later on)
Prepared By: Dr. Bhavin Patel 40
 INSTRUMENTS USED IN
BANKING TRANSACTIONS
The instruments issued by banks for use by customers in
banking transactions are:
(i) Bankers Draft / Demand Draft
(ii) Travelers Cheque

Prepared By: Dr. Bhavin Patel 41

 RETAIL BANKING PRODUCTS – CONTD…
Retail banking refers to banking products/services
offered to primarily individual customers of various
types.
CHANNELS OF RETAIL BANKING SERVICES:
(i) ATM

(ii) Mobile banking and

(iii) Internet banking.

Prepared By: Dr. Bhavin Patel 42

 RETAIL BANKING PRODUCTS – CONTD…
Channels of Retail Banking Services: Cotd…
AUTOMATED TELLER MACHINE (ATM):
A full-fledged ATM can perform the following functions:
A. Cash Deposit and Withdrawal
B. Generation of State­ment of Accounts
C. Account Balance Enquiry
D. Request For Cheque Book
E. Deposit Of Cash/ Cheques
F. Issue Of Traveller Cheques
G. Utility Payments like telephone/electricity bills and so on.
 As a service delivery channel, the merits of ATM are round the
clock accessibility, convenient loca­tions, automatic accounting of
transaction andPrepared
cost By:
effectiveness.
Dr. Bhavin Patel 43
 RETAIL BANKING PRODUCTS – CONTD…
Channels of Retail Banking Services: Cotd…
TELE-BANKING /MOBILE BANKING:
Tele-banking enables customers access their accounts for
information/ transaction.
But cash deposits/withdrawals are not available through such
services. Some banks offer cash delivery/collection to select
customers.
INTERNET BANKING :
Banks can enlarge their market area through internet banking
without building new offices.

Prepared By: Dr. Bhavin Patel 44

RETAIL BANKING PRODUCTS – CONTD…
The popular retail banking products are:
(i) Cards
(ii) Home Loans
(iii) Auto Loans
(iv) Commercial Durable Loans
(v) Personal/Unsecured Loans
(vi) Educational Loans.

Prepared By: Dr. Bhavin Patel 45

 PRINCIPLES OF
BANK FUND MANAGEMENT
PROFITABILITY
LIQUIDITY
FLEXIBILITY
RISK MGT.

Prepared By: Dr. Bhavin Patel 46

 Thank You…

Prepared By: Dr. Bhavin Patel 47