Legal Aspects of

Banking and Insurance

Syllabus - BBA-BI (PU)
POKHARA UNIVE RSI T Y
COURSE CODE NUM B E R – L AW 29 2
YE AR\SEME ST E R - I II /VI
CREDIT HOURS - 0 3 L E ARNING HOURS - 48
B ACHEL OR IN B USINE SS ADM INIST RATION- B I (BB A-B I)
Unit IV: Bank Operations

Laws relating to deposit, lending, international trade, remittance and ancillary services;
negotiable instruments;
capital adequacy ratio;
 prudential norms relating to capital;
 and consequences of non-compliance.
Deposit
Deposit is amount taken from the customer/amount deposited by the customer.
Accepting deposit is the primary function of the bank.
Different accounts (saving, current, fixed, margin call account) are used to collect the amount.
The deposit can be interest-bearing and non-interest bearing.
Deposit is the primary source of lending.
Deposit is dominant liabilities of the bank.
Deposit is assets of the customer and bank have to repay back to the customer whenever the
customers demand.
The deposit can be categorized into different categories based on the currency, collection, time,
interest-bearing and nature as follows.
Basis Types

1) Local Currency Deposit

On the Basis of Currency
2) Foreign Currency Deposit

1) Interest Bearing Deposit

On the basis of Interest Bearing
2) Non-interest Bearing Deposit

1) Demand Deposit
On the basis of Tenure/Time
2) Term Deposit (Time Deposit)

1) Recurring Deposit
On the basis of Collection
2) Non-recurring Deposit

1) Current Account Deposit

2) Saving Account Deposit
On the basis of Nature 3) Fixed Account Deposit
4) Margin Account Deposit
5) Call Account Desposit
Factors Affecting Deposit (निक्षेपलाई प्रभाव
पार्ने कारक तत्वहरु )
Level of income and consumption pattern of the people
Saving pattern and banking facility
Inflation pattern and size of the economy
Interest Rate and Tax rate
The flow of remittance and investment opportunities
Banking access, literacy, and baking habit
Product of the bank and marketing
Customer behavior
The policy of the government (i.e. fiscal policy, monetary policy)
Laws relating to deposit
Laws related lending
Laws related lending
Laws related lending
Laws related lending
Laws related lending
International Trade
International trade is the exchange of goods and services between countries.
Trading globally gives consumers and countries the opportunity to be exposed to goods and
services not available in their own countries, or more expensive domestically.
The importance of international trade was recognized early on by political economists such as
Adam Smith and David Ricardo.
Still, some argue that international trade can actually be bad for smaller nations, putting them at
a greater disadvantage on the world stage.
Understanding International Trade
International trade was key to the rise of the global economy. In the global economy, supply and
demand—and thus prices—both impact and are impacted by global events.
Political change in Asia, for example, could result in an increase in the cost of labor. This could
increase the manufacturing costs for an American sneaker company that is based in Malaysia,
which would then result in an increase in the price charged for a pair of sneakers that an
American consumer might purchase at their local mall.
Imports and Exports
A product that is sold to the global market is called an export, and a product that is bought
from the global market is an import. Imports and exports are accounted for in the current
account section of a country's balance of payments.
Global trade allows wealthy countries to use their resources—for example, labor, technology,
or capital—more efficiently. Different countries are endowed with different assets and natural
resources: land, labor, capital, technology, etc.
This allows some countries to produce the same good more efficiently; in other words, more
quickly and at a lower cost. Therefore, they may sell it more cheaply than other countries. If a
country cannot efficiently produce an item, it can obtain it by trading with another country
that can. This is known as specialization in international trade.
 Types of International Trade
For practical purposes, international trade is divided into three major types. These are:
1. Import Trade
To put it simply, import trade means purchasing goods and services from a foreign country because
they cannot be produced in sufficient quantities or at a competitive cost in your own country.
For example, India imports 82% of its crude oil requirements from countries like UAE and Venezuela.
This is because these countries possess massive oil fields and are quite competent in exploring,
processing, and transporting oil at an economical rate. Similarly, UAE imports agriculture and apparel
based products from India because it is easier and cheaper to import these, rather than produce them
in their own country.
2. Export Trade
Quite like its import counterpart, export trade is a type of international trade which relies on selling locally
manufactured goods and services to foreign countries. In theory, it is considered to be just the opposite of
import trade.
For example, India exports inorganic chemicals, oilseeds, raw ores, iron and steel, plastics, and dairy products
to a country like China. In return, China exports electrical equipment, organic chemicals, silk, mineral fuels, and
fertilizers to India. These goods are exchanged between both countries so that they can make the most of their
respective production capacities.
3. Entrepot Trade
Entrepot trade, in simple terms, is a specific form of international trade that comprises both – import and export
trade. Under this type, goods and services are imported from one country so that they can further be exported
to another country. This is to say that the imported goods are not used for consumption or sale in the importing
country. Instead, the importing country just adds some value to the goods before exporting them yet again. For
example, if India imports rubber from Thailand, processes it, and re-exports it to another country like Japan, it
would be referred to as Entrepot trade.
Most countries deal in Entrepot trade because of the following reasons:
Lack of access or direct connection between any two countries
Better processing or logistical facilities available with a third country
Absence of a trade agreement between two countries
No trade finance in banking facilities available in the importing country
 Advantages of International Trade
International trade proffers a variety of strategic advantages for all the countries involved. These include:
Countries can exclusively focus on producing goods and services which are specific to their geography, skills,
and capacity. This breeds a culture of differentiation and specialization.
International trade enables a country to get high-quality goods and services at exceptionally affordable prices
so that the specific needs and requirements of its people can be met.
Global trade triggers a stream of competition within the local market. Local producers and suppliers begin to
beef up their own capacities with the singular aim of beating the foreign competition.
For facilitating international trade, a number of countries have begun to enter into unique trade agreements.
These agreements emphasize the transfer of technology from the more developed to the less developed
nations, thereby enabling the latter to improve their production abilities.
The world of international trade and finance also opens a lot of doors in terms of creating jobs and providing
employment. Countries trading with one another tend to generate more professional opportunities as
compared to their non-trading counterparts.
However, international trade, if not used with checks and balances, has the potential to render a few
disadvantages, too. These are:
Over-dependence on another country for goods/services
High transport, communication, distance, and logistics costs
Risk and uncertainties in global trade due to unforeseen events
Government-initiated import, export, and customs restrictions
Documentation, currency, information, and payment-based difficulties
Lack of proper understanding of foreign markets
Despite such weaknesses, international trade, over the ages, has continued to flourish and prosper across
various geographical boundaries.
 What Is a Letter of Credit?
A letter of credit, or "credit letter," is a letter from a bank guaranteeing that a buyer's payment to a seller will be
received on time and for the correct amount. In the event that the buyer is unable to make a payment on the
purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as
a facility.
Due to the nature of international dealings, including factors such as distance, differing laws in each country,
and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect
of international trade.
 How a Letter of Credit Works
Because a letter of credit is typically a negotiable instrument, the issuing bank pays the beneficiary or any bank
nominated by the beneficiary. If a letter of credit is transferable, the beneficiary may assign another entity,
such as a corporate parent or a third party, the right to draw.
Banks also collect a fee for service, typically a percentage of the size of the letter of credit. The International
Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used
in international transactions.
 Remittance and Ancillary services
A remittance is money sent to another party, usually one in another country.
The sender is typically a foreign worker and the recipient a relative back home.
Remittances represent one of the largest sources of income for people in low-income and developing nations,
often exceeding direct investment and international development assistance.
Remittances play an increasingly large role in the economies of small and developing countries. They also play an
important role in disaster relief, often exceeding official development assistance (ODA). They help raise the
standard of living for people in low-income nations and help combat global poverty.
In fact, since the late 1990s, remittances have exceeded development aid, and in some cases make up a
significant portion of a country's gross domestic product (GDP).
According to the World Bank's 2019 Migration and Development Brief, $529 billion in remittances were sent to
low- and middle-income countries in 2018—an increase of 9.6% over the previous record high of $483 billion in
2017. This figure is significantly larger than the $344 billion of foreign direct investment in these countries,
excluding China, in 2018. Including high-income countries, the total amount of remittances jumps to $689
billion, up from $633 billion in 2017
 Ancillary Services of a Commercial Bank
Main objective of emergence of banks was to keep the people’s money safe and provide
loan to the people with requirement. People used to deposit their hard-earned money in
banks and banks used to lend this money who are worthy to get loans (Repayment
capacity). Now a days along with basic banking functions like deposit and lending facilities
banks are rendering various other types of financial services to its customers. These
expansion in products and services are due to various
factor such as high competition among public, private and foreign banks, advancement of
technology, openness to national economies for business transitions and many more.

As time value of money is commonly known concept among public now a days and they
know the future opportunities for their money. They don’t just rely only on saving accounts
investment and investing in other investment schemes. Thus, for the existence banks can
not depend on the money being deposited by the customers in the bank and had to venture
in other financial services to earn profit. These banking services other than lending and
. Some ancillary services are as following:
∑ Bank draft
∑ Mail/ telex transfer
∑ Fund Transfer (NEFT/RTGS)
∑ Travelers cheque
∑ Custodial Services
∑ Pension
∑ Merchant banking
∑ Retail banking
∑ Factoring
∑ Bank assurance/ Guaranty
∑ Mutual funds
∑ Sale and purchase of gold
∑ Insurance
∑ Foreign exchange / Forex services
∑ Notary services
∑ Bank cards
∑ Venture capitalist
∑ Internet banking
∑ Mobile banking
 What is a Negotiable Instrument?
A negotiable instrument is a document that guarantees payment of a specific amount of money to a
specified person (the payee). It requires payment either upon demand or at a set time and is structured like
a contract.
A negotiable instrument is a document that guarantees the payment of a specific amount of money to a
specified person (the payee) and requires payment either on-demand or at a set date.
Negotiable instruments are distinct from non-negotiable instruments in that they can be transferred to
different people, and, in that case, the new holder obtains full legal title to them.
Negotiable instruments contain key information such as principal amount, interest rate, date, and, most
importantly, the signature of the payor.
 Features of Negotiable Instruments
The term “negotiable” in a negotiable instrument refers to the fact that they are transferable to different
parties. If it is transferred, the new holder obtains the full legal title to it.
Non-negotiable instruments, on the other hand, are set in stone and cannot be altered in any way.
Negotiable instruments enable its holders to either take the funds in cash or transfer to another person. The
exact amount that the payor is promising to pay is indicated on the negotiable instrument and must be paid
on demand or at a specified date. Like contracts, negotiable instruments are signed by the issuer of the
document.
 Types of Negotiable Instruments
There are many types of negotiable instruments. The common ones include personal checks, traveler’s
checks, promissory notes, certificates of deposit, and money orders.
1. Personal checks
Personal checks are signed and authorized by someone who deposited money with the bank and specify the
amount required to be paid, as well as the name of the bearer of the check (the recipient).
While technology has led to an increase in the popularity of online banking, checks are still used to pay a
variety of bills. However, a limitation of using personal checks is that it is a relatively slow form of payment,
and it takes a long time for checks to be processed compared to other methods.
2. Traveler’s checks
Traveler’s checks are another type of negotiable instrument intended to be used as a form of payment by
people on vacation in foreign countries as an alternative to the foreign currency.
Traveler’s checks are issued by financial institutions with serial numbers and in prepaid fixed amounts. They
operate using a dual signature system, which requires the purchaser of the check to sign once before using the
check and a second time during the transaction. As long as the two signatures match up, the financial
institution issuing the check will guarantee payment to the payee unconditionally.
3. Money order
Money orders are like checks in that they promise to pay an amount to the holder of the order. Issued by
financial institutions and governments, money orders are widely available, but differ from checks in that there
is usually a limit to the amount of the order – typically $1,000.
4. Promissory notes
Promissory notes are documents containing a written promise between parties – one party (the payor) is
promising to pay the other party (the payee) a specified amount of money at a certain date in the future. Like
other negotiable instruments, promissory notes contain all the relevant information for the promise, such as
the specified principal amount, interest rate, term length, date of issuance, and signature of the payor.
5. Certificate of Deposit (CD)
A certificate of deposit (CD) is a product offered by financial institutions and banks that allows customers to
deposit and leave untouched a certain amount for a fixed period and, in return, benefit from a significantly
high interest rate.
Usually, the interest rate increases steadily with the length of the period. The certificate of deposit is
expected to be held until maturity when the principal, along with the interest, can be withdrawn. As such,
fees are often charged as a penalty for early withdrawal.
 The capital adequacy ratio (CAR)
The capital adequacy ratio (CAR) is a measure of how much capital a bank has available, reported as a
percentage of a bank's risk-weighted credit exposures.
The purpose is to establish that banks have enough capital on reserve to handle a certain amount of losses,
before being at risk for becoming insolvent.
Capital is broken down as Tier-1, core capital, such as equity and disclosed reserves, and Tier-2, supplemental
capital held as part of a bank's required reserves.
A bank with a high capital adequacy ratio is considered to be above the minimum requirements needed to
suggest solvency.
Therefore, the higher a bank's CAR, the more likely it is to be able to withstand a financial downturn or other
unforeseen losses.
How the Capital Adequacy Ratio Is Calculated
The capital adequacy ratio is calculated by dividing a bank's capital by its risk-weighted assets. The
capital used to calculate the capital adequacy ratio is divided into two tiers.
Tier-1 Capital
Tier-1 capital, or core capital, is comprised of equity capital, ordinary share capital, intangible assets,
and audited revenue reserves, or what the bank has stored to help it through typical risky transactions,
such as trading, investing, and lending. Tier-one capital is used to absorb losses and does not require a
bank to cease operations.
Tier-2 Capital
Tier-2 capital comprises unaudited retained earnings, unaudited reserves, and general loss reserves.
This capital absorbs losses in the event of a company winding up or liquidating. Tier-2 capital is seen as
less secure than Tier-1.
Prudential norms relating to Capital