LAW & PRACTICE OF BANKING:

Module: 1 - INTRODUCTION TO BANKING

Introduction- Meaning – Need – Importance – Primary, Secondary & Modern functions of banks
- Origin of banking- Banker and Customer Relationship (General and special relationship) -
Origin and growth of commercial banks in India – Types of Banks in India– Banks’ Lending -
changing role of commercial banks. RBI: History-Role & Functions.

Paying banker: Introduction - Meaning – Role – Functions - Duties - Precautions and Statutory
Protection and rights - Dishonor of Cheques – Grounds of Dishonor – Consequences of wrongful
dishonor of Cheques; Collecting Banker: Introduction - Meaning – Legal status of collecting
banker - Holder for value -Holder in due course – Duties & Responsibilities - Precautions and
Statutory Protection to Collecting Banker.

Module: 2 – CUSTOMERS & ACCOUNT HOLDERS

Introduction - Types of Customers and Account Holders - Procedure and Practice in opening and
operating accounts of different customers: Minors - Joint Account Holders- Partnership Firms -
Joint Stock companies - Executors and Trustees - Clubs and Associations and Joint Hindu
Undivided Family.

Module: 3 – NEGOTIABLE ISTRUMENTS

Introduction – Meaning & Definition – Features – Kinds of Negotiable Instruments: Promissory Notes -
Bills of Exchange - Cheques - Crossing of Cheques – Types of Crossing; Endorsements: Introduction -
Meaning - Essentials & Kinds of Endorsement – Rules of endorsement.

Module: 4 – RECENT DEVELOPMENTS IN BANKING

Introduction - New technology in Banking – E-services – Debit and Credit cards - Internet
Banking-Electronic Fund Transfer- MICR – RTGS - NEFT –ECS- Small banks-Payment banks-
Digital Wallet-Crypto currency- KYC norms – Basel Norms - Mobile banking-E-payments - E-
money. Any other recent development in the banking sector.
 Introduction:

A bank is a financial intermediary for the safeguarding, transferring, exchanging, or lending of

money. Banks distribute “money” - the medium of exchange. A bank is a business and banks sell
their services to earn money, and they need to market and manage those services in a competitive
field.

What is a Bank?

A bank is a financial institution and a financial intermediary that accepts deposits and channels
those deposits into lending activities, either directly by loaning or indirectly through capital
markets.

A bank may be defined as an institution that accepts deposits, makes loans, pays checks and
provides financial services. A bank is a financial intermediary for the safeguarding, transferring,
exchanging, or lending of money.

The tem bank refers to a financial institution which deals with deposits and advances and other
related services. Bank received money from those who want to save in the form of deposits and it
lends money to those who need it.

Definition of Bank:

According to oxford Dictionary bank as defined "an establishment for custody of money which it
pays out on customer's order".
The Indian Banking Companies Act, 1949 “Banking means the acceptance for the purpose of
lending or investment, of deposits of money from the public repayable on demand or otherwise,
and withdrawal by cheque, draft, order or otherwise"

Functions of Bank:
1. PRIMARYFUNCTIONS
Primary banking functions of the commercial banks include:
i. Acceptance of deposits,
ii. Advancing loans,
iii. Creation of credit
iv. Clearing of cheques,
v. Financing foreign trade,
vi. Remittance of funds
i) ACCEPTANCEOFDEPOSITS
Commercial bank accepts various types of deposits from public especially from its clients.
These deposits are payable after a certain time period. Banks generally accept three types of
depositsviz. ,(a) CurrentDeposits (b) SavingsDeposits (c) Fixed Depositsand d)Recurring
Deposit.

(a) Current Deposits: These deposits are also known as demand deposits. These deposits can
be withdrawn the customer is required to leave a minimum balance undrawn with the bank.

(b) Savings Deposits: This is meant mainly for professional men and middle class people to
help them deposit their small savings. It can be opened without any introduction. Money can
be deposited at anytime but the maximum cannot go beyond a certain limit.

(c) Fixed Deposits: These deposits are also known as time deposits. These deposits cannot be
with drawn before the expiry of the period for which they are deposited or without giving a
prior notice for withdrawal.

d) Recurring Deposit: Recurring Deposits are a special kind of Term Deposits offered by
banks in India which help people with regular incomes to deposit a fixed amount every month
into their Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits.
It is similar to making FDs of certain in amount in monthly installments, forexampleRs1000
every month.

ii) ADVANCINGLOANS
Loans are made against personal security, gold and silver, stocks of goods and other assets.
The second primary function of a commercial bank is to make loans and advances to all types
of persons, particularly to businessmen and entrepreneurs. The most common way of
advancing loans are given below:

(a) Overdraft Facilities: In this case, the depositor in a current account is allowed to draw
over and above his account up to a previously agreed limit. Suppose a businessman has only
Rs.6,000/- in his current account in a bank but requires Rs. 12,000/- to meet his expenses. He
may approach his bank and borrow the additional amount of Rs. 6,000/-.

(b) Cash Credit: Under this account, the bank gives loans to the borrowers against certain
security. But the entire loan is not given at one particular time, instead the amount is credited
into his account in the bank; but under emergency cash will be given. The borrower is required
to pay interest only on the amount of credit availed to him.
(c) Discounting Bills of Exchange: This is another type of lending which is very popular with
the modern banks. The holder of a bill can get it discounted by the bank, when he is in need of
money. After deducting its commission, the bank pays the present price of the bill to the
holder. Such bills form good investment for a bank.

(d) Money at Call: Banks grant loans for a very short period, generally not exceeding 7 days
to the borrowers, usually dealers or brokers in stock exchange markets against collateral
securities like stock or equity shares, debentures, etc., offered by them. Such advances are
repayable immediately at short notice hence; they are described as money at call or call
money.

(e) Term Loans: Banks give term loans to traders, industrialists and now to agriculturists also
against some collateral securities. Term loans are so-called because their maturity period
variesbetween1 to 10years.

(f) Consumer Credit: Banks also grant credit to households in a limited amount to buy some
durable consumer goods such as television sets, refrigerators, etc., or to meet some personal
needs like payment of hospital bills etc. Such consumer credit is made in a lump sum and is
repayable in installments in a short time.

(g) Miscellaneous Advances: The other forms of bank advances there are packing credits
given to exporters for a short duration, export bills purchased/discounted, import finance-
advances against import bills, finance to the self employed, credit to the public sector and
credit to the cooperative sector.

iii) CREATIONOFCREDIT
Credit creation is the multiple expansions of banks demand deposits. It is an open secret now
that banks advance a major portion of their deposits to the borrowers and keep smaller parts of
deposits to the customers on demand. Even then the customers of the banks have full
confidence that the depositor’s lying in the banks is quite safe and can be withdrawn on
demand.

iv) PROMOTETHEUSEOFCHEQUES,DDORONLINETRANSACTIONS
The commercial banks render an important service by providing to their customers a cheap
medium of exchange like cheques. It is found much more convenient to settle debts through
cheques rather than through the use of cash. The cheque is the most developed type of credit
instrument in the money market.
v) FINANCINGFORINTERNALANDFOREIGNTRADE
The bank finances internal and foreign trade through discounting of exchange bills. Some
times, the bank gives short-term loans to traders on the security of commercial papers. This
discounting business greatly facilitates the movement of internal and external trade.

vi) REMITTANCEOFFUNDS
Commercial banks, on account of their network of branches throughout the country, also
provide facilities to remit funds from one place to another for their customers by issuing bank
drafts, mail transfers or telegraphic transfers on nominal commission charges. As compared to
the postal money orders or other instruments, bank drafts have proved to be a much cheaper
mode of transferring money and have helped the business community considerably.

2. SECONDARYFUNCTIONS:
i) AGENCYSERVICES:
Commercial banks act as attorney for their clients. They buy and sell shares and bonds, receive
and pay utility bills, premiums, dividends, rents and interest for their clients. Banks also
perform certain agency functions for and on behalf of their customers. The agency services are
of immense value to the people at large. The various agency services rendered by banks are as
follows:

(a) Collection and Payment of Credit Instruments: Banks collect and pay various credit
instruments like cheques, bills of exchange, promissory notes etc., on behalf of their
customers.

(b) Purchase and Sale of Securities: Banks purchase and sell various securities like shares,
stocks, bonds, debentures on behalf of their customers.

(c) Collection of Dividends on Shares: Banks collect dividends and interest on shares and
debentures of their customers and credit them to their accounts.

(d) Acts as Correspondent: Sometimes banks act as representative and correspondents of

their customers. They get passports, traveler’s tickets and even secure air and sea passages for
their customers.

(e) Income-tax Consultancy: Banks may also employ income tax experts to prepare income
tax returns for their customers and to help them to get refund of income tax.
(f) Execution of Standing Orders: Banks execute the standing instructions of their customers
for making various periodic payments. They pay subscriptions, rents, insurance premium etc.,
on behalf of their customers.
 (g) Acts as Trustee and Executor: Banks preserve the ‘Wills’ of their customers and execute
them after their death.

Modern functions of banks:

 It provides lockers facility to the customers where the customers can keep the valuable
documents and ornaments etc.
 It underwrites the company debentures and shares.
 It provides information’s about the customers.
 It issues travelers cheques, letter of credit etc. to the customers and it accepts bills on
behalf of the customers.

Origin of banking:

The banking sector development can be divided into three phases:

Phase I: The Early Phase which lasted from 1770 to 1969
Phase II: The Nationalization Phase which lasted from 1969 to 1991
Phase III: The Liberalization or the Banking Sector Reforms Phase which began in 1991 and
continues to flourish till date

Pre Independence Period (1786-1947)

The first bank of India was the “Bank of Hindustan”, established in 1770 and located in the then
Indian capital, Calcutta. However, this bank failed to work and ceased operations in 1832.
During the Pre Independence period over 600 banks had been registered in the country, but only
a few managed to survive.
Following the path of Bank of Hindustan, various other banks were established in India. They
were:

 The General Bank of India (1786-1791)

 Oudh Commercial Bank (1881-1958)
 Bank of Bengal (1809)
 Bank of Bombay (1840)
 Bank of Madras (1843)
During the British rule in India, The East India Company had established three banks: Bank of
Bengal, Bank of Bombay and Bank of Madras and called them the Presidential Banks. These
three banks were later merged into one single bank in 1921, which was called the “Imperial Bank
of India.”
The Imperial Bank of India was later nationalised in 1955 and was named The State Bank of
India, which is currently the largest Public sector Bank.

Post Independence Period (1947-1991)

At the time when India got independence, all the major banks of the country were led privately
which was a cause of concern as the people belonging to rural areas were still dependent on
money lenders for financial assistance.
With an aim to solve this problem, the then Government decided to nationalise the Banks. These
banks were nationalised under the Banking Regulation Act, 1949. Whereas, the Reserve Bank of
India was nationalised in 1949.
Following it was the formation of State Bank of India in 1955 and the other 14 banks were
nationalised between the time duration of 1969 to 1991. These were the banks whose national
deposits were more than 50 crores.
Given below is the list of these 14 Banks nationalised in 1969:

1. Allahabad Bank
2. Bank of India
3. Bank of Baroda
4. Bank of Maharashtra
5. Central Bank of India
6. Canara Bank
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank
11. Syndicate Bank
12. Union Bank of India
13. United Bank
14. UCO Bank

In the year 1980, another 6 banks were nationalised, taking the number to 20 banks. These banks
included:

1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Comm.
5. Punjab & Sind Bank
6. Vijaya Bank
Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were
nationalised in 1959:

1. State Bank of Patiala

2. State Bank of Hyderabad
3. State Bank of Bikaner & Jaipur
4. State Bank of Mysore
5. State Bank of Travancore
6. State Bank of Saurashtra
7. State Bank of Indore

All these banks were later merged with the State Bank of India in 2017, except for the State
Bank of Saurashtra, which merged in 2008 and State Bank of Indore, which merged in 2010.

Impact of Nationalisation
There were various reasons why the Government chose to nationalise the banks. Given below is
the impact of Nationalising Banks in India:

 This lead to an increase in funds and thereby increasing the economic condition of the
country
 Increased efficiency
 Helped in boosting the rural and agricultural sector of the country
 It opened up a major employment opportunity for the people
 The Government used profit gained by Banks for the betterment of the people
 The competition decreased, which resulted in increased work efficiency
This post Independence phase was the one that led to major developments in the banking sector
of India and also in the evolution of the banking sector

Liberalization Period (1991-Till Date)

Once the banks were established in the country, regular monitoring and regulations need to be
followed to continue the profits provided by the banking sector. The last phase or the ongoing
phase of the banking sector development plays a hugely significant role.
To provide stability and profitability to the Nationalised Public sector Banks, the Government
decided to set up a committee under the leadership of Shri. M Narasimham to manage the
various reforms in the Indian banking industry.
The biggest development was the introduction of Private sector banks in India. RBI gave license
to 10 Private sector banks to establish themselves in the country. These banks included:

1. Global Trust Bank

 2. ICICI Bank
3. HDFC Bank
4. Axis Bank
5. Bank of Punjab
6. IndusInd Bank
7. Centurion Bank
8. IDBI Bank
9. Times Bank
10. Development Credit Bank

The other measures taken include:

 Setting up of branches of the various Foreign Banks in India

 No more nationalization of Banks could be done
 The committee announced that RBI and Government would treat both public and private
sector banks equally
 Any Foreign Bank could start joint ventures with Indian Banks
 Payments banks were introduced with the development in the field of banking and
technology
 Small Finance Banks were allowed to set their branches across India
 A major part of Indian banking moved online with internet banking and apps available
for fund transfer

Banker and Customer Relationship (General and special relationship):

The relationship arises between a banker and a customer with the opening of an account by the
customer with a banker. The application for opening an account is considered as a letter of
agreement for establishing the banker-customer relationship. The general view is that the banker-
customer relationship is mainly that of a debtor and a creditor with certain special features.

However, today the range of banking services is more extensive, and indeed is expanding all the
time, so it must be expected that other relationships will arise besides that of debtor and creditor.
For instance, the relationship of principal and agent is present when the customer instructs his
bank to buy or sell stocks on his behalf, and when items are held in safe-custody the relationship
is that of bailer and bailee.
Where the bank’s executorships service takes on the administration of a deceased’s estate the
relationship is that of trustee and beneficiary. Duties akin to a trusteeship might also happen
when a branch comes into possession of funds or property that belongs to a third party, as when
the bank has sold property in mortgage, and has a surplus to pass to the subsequent mortgagee.
Obviously the relationship with the customer in that situation is that of a mortgagor with a
mortgagee. However, if the security had been given by a third party then another state of affairs
would exist between the lender and his surety. There, duties and obligations would arise
irrespective of the banker-customer relationship with the borrowing customer.

The nature of the relationship depends upon the type of services rendered by the banker, which
has two aspects: one is legal and another is behavioral. Some of the important relationships they
share are depicted below.

Relationship between Banker and Customer

A) General Relationship between Banker and Customer
B) Special Relationship between Banker and Customer

A) General Relationship between Banker and Customer

1. Debtor and Creditor
2. Creditor and Debtor
3. Agent and Principal
4. Trustee and Beneficiary
5. Pledgee and Pledger
6. Bailee and Bailor
7. Advisor and Client

1. Debtor and Creditor

When a ‘customer’ opens an account with a bank or he enters into an agreement/contract
with the banker or deposits money in his account, banker becomes the debtor and the
customer becomes the creditor.

Why Banker is a Dignified Debtor?

1. Banker is called a 'dignified debtor'. Virtually banker borrows money but it is given a
name called 'deposit'. No security need be given for the borrowing.
2. Customer is not the secured creditor of the bank, as he is not having any charge on any
asset of the bank. He is only an unsecured creditor.
3. Customer's balance at bank is not repayable until a demand for repayment was made by
the customer. There should be an express demand for it.
4. Banker should pay the deposit money on demand by the customer. The deposit should be
paid at the appropriate place.
5. The demand should be made by the customer on working days and during the business
 hours and it should be made in proper form.

2. Creditor and Debtor

Lending money is the primary activity of a banker. When banker lends money to customer, the
banker becomes the creditor and the customer becomes the debtor.

3. Agent and Principal

Agent is a person who acts for and on behalf of the principal. Banker collects cheques, bills
and makes payment to various authorities’ such as rent, telephone bills, insurance premium,
subscription etc., on behalf of its customers. In all such cases banker acts as an agent of his
customer and the customer acts as a principal.

4. Trustee and Beneficiary

A trustee is an entity who takes care of assets and performs certain functions for the gain or
benefit of another person known as beneficiary. For instance, when a customer gives certain
standing instructions to the banker about the usage of certain sum of money, the banker
becomes the trustee and the customer becomes beneficiary.

5. Pledgee and Pledger

The relationship between banker and customer can be that of Pledgee and Pledger as well.
This happens when a customer pledges (promises) certain assets or security with the banker
in order to get a loan. In this case, the customer becomes the Pledger and the banker
becomes the Pledgee. Under this agreement, the assets or security will remain with the
banker until the customer repays the loan.

6. Bailee and Bailor

The relationship between banker and customer can be that of Bailee and Bailor. Bailment is
a contract for delivering goods by one party to another to be held in trust for a specific
period and returned when the purpose is ended. Bailor is the party who delivers property to
another. Bailee is the party to whom the property is delivered. So, when a customer gives
valuables to the banker for safe keeping, the customer becomes the bailor and the banker
becomes the bailee.
7. Advisor and Client
The banker acts as an advisor when a customer invests in securities. While giving advice the
banker has to take maximum care and caution. Here, the banker becomes an Advisor, and
the customer becomes the client.

Various Types of Relationships:

B) Special Relationship between Banker and Customer

1. Rights of a Banker and 2. Obligations of a Banker
 1. RIGHTS OF A BANKER
It is not that the bank has only duties towards its customers; it too has certain rights to his
customers.

The rights can broadly be classified as:

i) Banker’s Right to Lien
ii) Banker’s Right to Set-Off
iii) Banker’s Right to appropriate payments
iv) Right to Charge Interest and Commission
v) Right under Garnishee order

i) Banker’s Right to Lien

A lien is the right of a creditor in possession of goods, securities or any other assets
belonging to the debtor to retain them until the debt is repaid. The creditor (bank) has the
right to maintain the security of the debtor but not to sell it. There are two types of lien:
a) Right of Particular Lien and
b) Right of General Lien

(a) Right of Particular Lien: A 'particular lien' gives the right to retain possession only of
those goods in respect of which the dues have arisen. It is also termed as ordinary lien. If the
bank has obtained a particular security for a particular debt, then the banker's right gets
converted into a particular lien.

(b) Right of General Lien: A 'general lien' gives the right to retain possession of any goods
in the legal possession of the creditor until the whole of the debt due from the debtor is paid.
Banker has a right of general lien against his borrower. General lien confers banks right in
respect of all dues and not for a particular due.

ii) Banker’s Right to set-off

The banker has the right to set off the accounts of its customer. It is a statutory right available to
a bank, to set off a debt owed to him by a creditor from the credit balances held in other accounts
of the borrower. This right is applicable in respect of dues that are due and are becoming due
shortly. It is not applicable on future debts. It is applicable in respect of deposits that are due for
payment.

i) Banker’s Right to Appropriate payment

It is the right of the customers to direct his banker against which debt (when more than one
debt is outstanding) the payment made by him should be appropriated. In case no such
direction is given, the bank can exercise its right of appropriation and apply it in payment of
any debt.
 ii) Banker's right to charge interest and commission
Banker has an implied right to charge for services rendered and sold to a customer. Banker
charges interest on amount advanced, processing charges for the advance, charges
commission etc. depending on the terms and conditions of advance banks charge interest at
monthly, quarterly or semi-annually or annually. Banker charges commission for online
share trading.

iii) Banker’s Right to Garnishee order

Garnishee Order is a court order instructing a garnishee (a bank) that funds held on behalf of
a debtor (the judgment debtor) should not be released until directed by the court.

2. BANKER’SOBLIGATIONS
The various Bankers’ Obligations are as follows:

i) Obligation to honor the customer’s cheques.

ii) Obligation to maintain secrecy of customer’s account.
iii) Obligation to maintain proper records.

i) Banker’s obligation to honor customer’s cheques

When a customer of a bank issues cheque and demand money the banker must honour the
customer’s cheque after the necessary verifications. The drawee (banker) of a cheque having
sufficient funds of the drawer (customer) in his hands must pay the cheque amount.

ii) Banker’s obligation to maintain secrecy of customer’s Account

The banker has an implied obligation to maintain secrecy of the customer’s account. He
should not disclose matters relating to the customer’s financial position since it may
adversely affect the customer’s credit and business.

iii) Banker’s obligation to maintain proper records

The banker should maintain the proper records of customer’s transactions. Any mistake of
maintaining the records, customer is not liable.

Origin and growth of commercial banks in India:

Indian banking came into existence in a small way during 19th century. Some industrialists
established a few banks at that time. In the early years of 20th century the swadeshi movement
gave a stimulus for the setting up of banks in India by Indian national. In the begining banks
faced severe financial crisis. Particularly during and after the First World War, about 87 banks
liquidated. During great depression in 1930s the bank failure in India was very severe. During
1937-48, as many as 620 banks failed. Thus the development of banking in India before
independence was lopsided. It was characterized as a crop of bank failures.
The Second World War brought a revolutionary change in the Indian banking system. In the
wake of huge war expenditure, deposits of the banks increased. Branches were opened in Public
sector and self-employment was to receive their due share in obtaining bank finance.
Apart from this the banks are required to reconstitute their board of directors. The government
set up National credit council in 1968. The Finance Minister was the chairman and the Governor
of the Reserve Bank was the vice chairman of the council.
The main functions of the National credit council were:
 Assessing the volume of credit required for the economy as a whole.
 Providing guidelines for the distribution of credit to the priority sector.
 Ensuring equitable distribution of credit in the economy.

Types of Banks in India:

Banks are financial institutions that perform deposit and lending functions. There are various
types of banks in India and each is responsible to perform different functions.

Central Bank
The Reserve Bank of India is the central bank of our country. Each country has a central bank
that regulates all the other banks in that particular country.
The main function of the central bank is to act as the Government’s Bank and guide and regulate
the other banking institutions in the country. Given below are the functions of the central bank of
a country:

 Guiding other banks

 Issuing currency
 Implementing the monetary policies
 Supervisor of the financial system
In other words, the central bank of the country may also be known as the banker’s bank as it
provides assistance to the other banks of the country and manages the financial system of the
country, under the supervision of the Government.
 Cooperative Banks
These banks are organized under the state government’s act. They give short term loans to the
agriculture sector and other allied activities.
The main goal of Cooperative Banks is to promote social welfare by providing concessional
loans
They are organized in the 3 tier structure

 Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt,
NABARD)
 Funded by RBI, government, NABARD. Money is then distributed to the public
 Concessional CRR, SLR applies to these banks. (CRR- 3%, SLR- 25%)
 Owned by the state government and top management is elected by members
Tier 2 (District Level) – Central/District Cooperative Banks
Tier 3 (Village Level) – Primary Agriculture Cooperative Banks

Commercial Banks

 Organized under the Banking Companies Act, 1956

 They operate on a commercial basis and its main objective is profit.
 They have a unified structure and are owned by the government, state, or any private
entity.
 They tend to all sectors ranging from rural to urban
 These banks do not charge concessional interest rates unless instructed by the RBI
 Public deposits are the main source of funds for these banks
The commercial banks can be further divided into three categories:

1. Public sector Banks – A bank where the majority stakes are owned by the Government
or the central bank of the country.
2. Private sector Banks – A bank where the majority stakes are owned by a private
organization or an individual or a group of people
3. Foreign Banks – The banks with their headquarters in foreign countries and branches in
our country, fall under this type of bank
 Public Sector Banks Co Private Sector Bank Foreign Banks
State Bank of India Catholic Syrian Bank Australia and New Zealand
Allahabad Bank City Union Bank Banking Group Ltd.
Andhra Bank Dhanlaxmi Bank National Australia Bank

Bank of Baroda Federal Bank Westpac Banking Corporation

Bank of India Jammu and Kashmir Bank Bank of Bahrain & Kuwait BSC

Bank of Maharashtra Karnataka Bank AB Bank Ltd.

Canara Bank Karur Vysya Bank HSBC

Central Bank of India Lakshmi Vilas Bank CITI Bank

Corporation Bank Nainital Bank Deutsche Bank

Dena Bank Ratnakar Bank DBS Bank Ltd.

Indian Bank South Indian Bank United Overseas Bank Ltd

Indian Overseas Bank Tamilnad Mercantile Bank J.P. Morgan Chase Bank

Oriental Bank of Axis Bank Standard Chartered Bank

Commerce Development Credit Bank (DCB Bank There are over 40 Foreign
Punjab National Bank Ltd) Banks in India

Punjab & Sind Bank HDFC Bank

Syndicate Bank ICICI Bank
Union Bank of India IndusInd Bank
United Bank of India Kotak Mahindra Bank
UCO Bank Yes Bank
Vijaya Bank IDFC
IDBI Bank Ltd. Bandhan Bank of Bandhan Financial
Services.

Regional Rural Banks (RRB)

 These are special types of commercial Banks that provide concessional credit to
agriculture and rural sector.
 RRBs were established in 1975 and are registered under a Regional Rural Bank Act,
1976.
  RRBs are joint ventures between the Central government (50%), State government
(15%), and a Commercial Bank (35%).
 196 RRBs have been established from 1987 to 2005.
 From 2005 onwards government started merger of RRBs thus reducing the number of
RRBs to 82
 One RRB cannot open its branches in more than 3 geographically connected districts

Specialized Banks
Certain banks are introduced for specific purposes only. Such banks are called specialized banks.
These include:

 Small Industries Development Bank of India (SIDBI) – Loan for a small scale industry or
business can be taken from SIDBI. Financing small industries with modern technology
and equipments is done with the help of this bank
 EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other
financial assistance with exporting or importing goods by foreign countries can be done
through this type of bank
 National Bank for Agricultural & Rural Development (NABARD) – To get any kind of
financial assistance for rural, handicraft, village, and agricultural development, people
can turn to NABARD.

Payments Banks
A newly introduced form of banking, the payments bank have been conceptualized by the
Reserve Bank of India. People with an account in the payments bank can only deposit an amount
of up to Rs.1,00,000/- and cannot apply for loans or credit cards under this account.
Options for online banking, mobile banking, the issue of ATM, and debit card can be done
through payments banks. Given below is a list of the few payments bank in our country:

 Airtel Payments Bank

 India Post Payments Bank
 Fino Payments Bank
 Jio Payments Bank
 Paytm Payments Bank
 NSDL Payments Bank
 Banks’ Lending:
After accepting deposits from the customer, a bank goes for lending or for investment in
different types of securities, such as government, company etc. For deposits received under
savings account and fixed deposits, the bank has to pay an agreed interest rate. This, the bank has
to pay only from its earnings. On the investments, the bank earns a good return. Similarly, when
the bank lends, it earns a higher interest rate. From out of the return on investments and from the
interest earned on loans, the bank will be able to offer interest for the deposits, the difference
between the interest offered on deposits, and the interest earned on lending will be the profit of
the bank.’

“Bank lending refers to the process of disposing of money or property with the
expectation that the same thing will be returned along with specified interest.”

Principles of Lending
Bank lending involves risk; banks need to follow certain basic principles at the time of
lending loans and advances. Some of the principles to be followed are:

1. Principle of Safety
Safety is the most important principle of good lending. When a banker lends, he must feel
certain that the advance is safe and the money will definitely come back. If the borrower
invests the money in an unproductive or speculative venture, or if the borrower himself is
dishonest, the advance would be in danger.

2. Principle of Liquidity
The borrower must be in a position to repay within a reasonable time after a demand for
repayment is made. This can be possible only if the money is employed by the borrower for
short-term requirements and not locked up in acquiring fixed assets, or in schemes which
take a long time to pay their way. The reason why bankers attach as much importance to
'liquidity' as to safety' of their funds is this.

3. Principle of Purpose
The purpose should be productive so that the money not only remain safe but also provides a
definite source of repayment. The purpose should also be short termed so that it ensures
liquidity. Banks should discourage advances for hoarding stocks or for speculative activities.

4. Principle of Profitability
Profitability is a financial benefit that is realized when the amount of revenue gained from a
business activity exceeds the expenses, costs and taxes needed to sustain the activity. Banks
must make profits because they have to pay interest on the deposits received by them. They
have to deserve expenses on establishment, rent, stationery, etc.
5. Principle of Security
It has been the practice of banks not to lend as far as possible except against security. The
banker carefully examines all the different aspects of an advance before granting it.

6. Principle of Spread
The principle of good lending is the diversification of advances. An element of risk is
always present in every advance, however secure it might appear to be. In fact, the entire
banking business is one of taking calculated risks and a successful banker is an expert in
assessing such risks.
7. Principle of National Interest, Suitability, etc.
Even when an advance satisfies all good principles, it may still not be suitable. The advance
may run counter to national interest. The Central Bank may have issued a directive
prohibiting banks to allow a particular type of advance

5 C’s of Lending Principles

The important 5 C’s of Lending Principles are:

(a) Character: The character of the borrower indicates two things: the ability to pay versus
the willingness to pay. The ability to pay refers to the borrower’s financial credibility to pay.
The lender should check on the borrower’s character.

(b) Capacity: Capacity refers to the sources of repayment, i.e. the cash flow. The borrower
must be able to meet all his financial obligations on the due dates.

(c) Capital: Capital represents the degree of commitment and the ability to sustain this
commitment during bad times.

(d) Conditions: Condition refers to the macroeconomic environment. For example, if the
loan is needed for setting up a retail business in a particular area, then the lender must make
a study of the economic conditions (the degree of propensity to spend by residents in that
locality).

Collateral: Collateral is the lender’s second line of defense. If the payback is derived from
cash flows, then the collateral will not be liquidated for repayment.
Different types of borrowing facilities granted by Banks
1. Loan
2. Cash credit
3. Overdraft
4. Bills purchasing
4. Bills discounting
5. Letters of credit

1. Loan
Loan is an arrangement in which a lender gives money to a borrower and the borrower
agrees to return the money along with interest after a fixed period of time. Examples: Home
Loans, Car Loans, Personal Loans etc.
2. Cash credit
Cash credit is a short-term cash loan to a company. A bank provides this type of funding,
but only after the required security is given to secure the loan. Once a security for repayment
has been given, the business that receives the loan can continuously draw from the bank up
to a certain specified amount.

3. Overdraft
Overdraft is the amount by which withdrawals exceed deposits or the extension of credit by a
lending institution to allow for such a situation.
A bank overdraft is a limit on borrowing on a bank current account.
4. Bills discounting
Bill discounting refers to the trading or selling a bill of exchange prior to the maturity date at
a value less than the par value of the bill. The amount of the discount will depend on the
amount of time left before the bill matures and on the perceived risk attached to the bill.

5. Letters of Credit (LOC)

Letter of Credit refers to 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 payment on the purchase, the bank will be required to cover the full or remaining
amount of the purchase. It is a payment term generally used for international sales
transactions.
 RBI: History-Role & Functions.
History: The Reserve Bank of India was set up on the basis of the recommendations of the
Hilton Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the
statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935.

The Bank was constituted to

* Regulate the issue of banknotes
* Maintain reserves with a view to securing monetary stability and
* to operate the credit and currency system of the country to its advantage.

The Bank began its operations by taking over from the Government the functions so far being
performed by the Controller of Currency and from the Imperial Bank of India, the management
of Government accounts and public debt. The existing currency offices at Calcutta, Bombay,
Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue
Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras,
Delhi and Rangoon.

Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act
as the Central Bank for Burma till Japanese Occupation of Burma and later upto April, 1947.
After the partition of India, the Reserve Bank served as the central bank of Pakistan upto June
1948 when the State Bank of Pakistan commenced operations. The Bank, which was originally
set up as a shareholder's bank, was nationalized in 1949

OBJECTIVES OF RBI:
Regulating the issue of currency in India;

 Keeping the Foreign Exchange Reserves of the Country;

 Establishing the Monetary Stability in the Country; And

 Developing the Financial Structure of the Country On Sound Lines

Consistent With the National Socio-Economic Objectives and Policies.

Role of RBI:

As the central bank of the country, the RBI is the one of the architects of the nation's economy
and its decisions touch everyday lives of all Indians. From ensuring stability of interest rates and
exchange rates to providing adequate liquidity for productive sectors and ensuring adequate
supply of currency, the Reserve Bank of India also monitors flow of credit to desired sectors and
ensures orderly development of financial markets and institutions.
 Monetary Authority
The Reserve Bank of India constantly works towards keeping inflation under check and
ensuring adequate supply of liquidity for the productive sector as also towards financial
stability.
 Supervisor of the Financial System
Prescribes regulations for sound functioning of banks and financial institutions, including
non-banking finance companies
- Promotes best practices in risk management and corporate governance to protect
depositors' interest and to enhance public confidence in the financial system of the
country
- Encourages use of technology in banks to provide cost-effective service to consumers.
 Issuer of Currency
Ensures good quality coins and currency notes in adequate quantity
- Mops up notes and coins unfit for circulation
- Advises the Government on designing of currency notes with the latest security
features.

 Manager of Foreign Exchange

Formulates policies to facilitate external trade and payments, facilitates foreign
investments in India and Indian investments abroad and promotes orderly development of
foreign exchange markets.
 Banker to the Government
Maintains accounts of central and state governments. Performs merchant banking
function for the central and the state governments
- Encourages development and orderly functioning of Government securities market
- Advises central and state governments in better cash management.
 Payment Systems
Work towards establishment of modern, robust, efficient, secure and integrated payment
and settlement system for the country.
 Bankers' Bank
Ensures adequate liquidity in the financial system and in individual banks, on a daily
basis
- Performs lender of the last resort function.
 Developmental Role
Performs a wide range of functions to support national objectives such as ensuring
orderly growth and development of financial markets and institutions, creating
institutions to serve specialized financial needs and extending the organized financial
sector to all parts of the economy.
  Under Research
Serves as the primary source of information on Indian economy and financial system
- Analyses the issues and problems affecting the Indian economy
- Renders advice for policy formulation and shaping monetary, banking and financial
policies
- Prepares the Bank's publications
- Warehouses data to enable decision-making.
FUCTIONS OF RBI:

There are various functions which are performed by Reserve Bank of India, which are following:

a) Traditional functions
b) Development functions
c) Supervisory functions

A. Traditional functions

1. RBI issues Currency Notes

Section 22 of the Reserve Bank of India Act 1934 provides that RBI has sole right to issue
currency notes except one rupee note and coins of smaller denomination. RBI issues, against the
security of gold bullion, foreign securities, rupee coins, exchange bills, promissory notes and
government of India bonds etc, currency notes of Rs. 2, 5, 10, 20, 50, 100, 500,2000.

2. As a banker to other Banks

RBI guides, helps and directs other commercial banks of the country. RBI keeps control the bank
reserves. Every commercial bank has to maintain a part of their reserves with RBI which is
called Cash Reserve. If bank need fund they approach to RBI for fund and RBI lend to them

Banker of the Government RBI also works as an agent of the governments. RBI makes
payments, taxes and deposits etc on the behalf of governments. It represents the government at
international level also. It maintains accounts of government and also provides financial advice
to the government whenever required

3. Management of Exchange Rate

RBI prepares domestic policies for maintaining value of rupee. It also prepares and implements
also the foreign exchange rate policy which helps in attaining the exchange rate stability. It
brings demand and supply of foreign currency (U.S.) dollar close to each other for maintenance
of exchange rate stability.
 4. Credit Control
RBI has to balance growth with stability. Thus it checks the credit creation capacity of
commercial banks by using various credit control tools. If the credit creation by commercial
banks is unregulated then it may lead the economy into inflationary cycles

5. Supervision
RBI has to supervise the commercial banks. It has the power to give license to new banks which
are going to open or to new branches to be established. It guides and conducts the audit of other
banks.

B. Development functions:
1. Financial System Development:
The financial system includes many things like, financial institutions, financial markets and
financial instruments. For rapid economic development of the nation’s economy, sound and
efficient financial system is necessary for which RBI encourages the banking and non – banking
institutions.

2. Agricultural Development-
RBI always pays attention to agriculture sector by assessing credit needs of this particular sector.
Regional Rural Banks (RRBs), National Bank for Agriculture and Rural Development
(NABARD) which are only for agriculture finance are under the direct control of RBI.

3. Industrial Finance-
For economic growth of the country, Industrial development is necessary and for this purpose
RBI supports the industrial sector as well. RBI plays vital role for setting up of industrial finance
institutions like ICICI Limited, IDBI, SIDBI, EXIM etc.

4. Promotion of Export
RBI always encourage the facilities for providing finance for foreign trade especially exports
from India. The Export Import Bank of India (EXIM), and the Export Credit Guarantee
Corporation of India (ECGC) are supported by RBI.

5. Reports Publication
RBI has a separate publication division. It collects and publishes data on different sector of the
economy. The reports and bulletins are regularly published by the RBI and available for public.

6. Collection of Data
RBI collects important statistical data about several topics like interest rates, inflation, savings,
investments, deflation etc. the data collected by RBI is very much useful for policy makers and
researchers.
 C. Supervisory functions:
1. License to Banks
RBI provides license to the banks going established. It also provide license to the new branches
of existing banks.

2. Inspection of Banks
RBI may as and when required, may inspect the assets and liabilities of the banks which are
under its control.

3. Control on Non-Bank Financial Institutions

RBI may issue directives to the NBFIs from time to time with regard to their functioning. It can
control the NBFIs through periodic inspection.

Paying banker:
Introduction:
A paying banker is the person who pays the cheque either to his customer or on the instructions
of his customer. A cheque is a Negotiable instrument that orders a banker to pay when certain
conditions are met.

For example: Ramesh is a customer of State Bank of India and has drawn a Cheque for Rs.
50,000 in the name of Suresh in exchange of goods purchased by him. Suresh, brings the cheque
at his bank to clear the amount and encashes the cheque. The Bank from where he enchases the
cheque is the Paying Banker in this situation. In other words, the drawee banker is the paying
banker who pays the cheque of his customers.

Meaning:
“Paying banker refers to the banker who holds the account of the drawer of the cheque and
is obliged to make payment, if the funds of the customer are sufficient to cover the amount
of his cheque drawn”

Duties:
 The paying banker has to verify whether the signature on the cheque is done by the
account holder or not. The signature on the check must be done by the person who has an
account in the bank, only then the check is considered valid. If the signature is fake, the
paying banker can take strict action against it.
 The paying banker has to verify that the account holder’s name written on the cheque is
still valid. It means his account must be active. For, this they may check the documents
available in the bank related to the account holder. If the account is not valid, the
transaction cannot be processed.
 The amount written on the check must be available in the account holder’s account. If the
amount isn’t available then, the paying banker can stop the transaction. Therefore the
account of account holder’s account must have enough balance for the transaction.
 Precautions and Statutory Protection and rights:

Precautions to be taken by paying banker while making payment of Cheques

The banker has to take the following precautions while honoring the cheques of his customers:

1. Crossed Cheque: The most important precaution that a banker should take is about
crossed cheques. A banker has to verify whether the cheque is open or crossed. He should
not pay cash across the counter in respect of crossed cheques. If the cheque is a crossed one,
he should see whether it is general crossed or special crossed. If it is general crossing, the
holder must be asked to present the cheque through some banker and should be paid to a
banker. If the cheque bears a special crossing, the banker should pay only the bank whose
name is mentioned in the crossing.

2. Open Cheque: If it is an open cheque, a banker can pay cash to the payee or the holder
across the counter. If the banker pays against the instructions as indicated above, he is liable
to pay the amount to the true owner for any loss sustained. Further, a banker loses statutory
protection in case of forged endorsement.

3. Proper Form: A banker should see whether the cheque is in the proper form. That means
the cheque should be in the manner prescribed under the provisions of the Negotiable
Instruments Act. It should not contain any condition.

4. Presentment of Cheque: Presentation of the cheque should be in right format and right
place. A banker can honour the cheques provided it is presented with that branch of the bank
where the drawer has an account or another branch if it is multi-citycheque.

5. Date of the Cheque: The paying banker has to see the date of the cheque. It must be
properly dated. It should not be either a post-dated cheque or a stale-cheque. If a cheque
carries a future date, it becomes a post-dated cheque. If the cheque is presented on the date
mentioned in the cheque, the banker need not have any objection to honour it. If the banker
honours a cheque before the date mentioned in the cheque, he loses statutory protection. If
the drawer dies or becomes insolvent or countermands payment before the date of the
cheque, he will lose the amount. The undated cheques are usually not honoured.

6. Words and Figures: The amount of the cheque should be expressed in words, or in
words and figures, which should agree with each other. When the amount in words and
figures differ, the banker should refuse payment. However, Section 18 of the Negotiable
Instruments Act provides that, where there is difference between the amount in words and
figures, the amount in words is the amount payable. If the banker returns the cheque, he
should make a remark ‘amount in words and figures differ’.

7. Alterations and Overwriting: The banker should see whether there is any alteration or
over- writing on the cheque. If there is any alteration, it should be confirmed by the drawer
by putting his full signature. The banker should not pay a cheque containing material
alteration without confirmation by the drawer. The banker is expected to exercise reasonable
care for the detection of such alterations. Otherwise, he has to take risk. Material alterations
make a cheque void.

8. Proper Endorsements: Cheques must be properly endorsed. In the case of bearer

cheque, endorsement is not necessary legally. In the case of an order cheque, endorsement is
necessary. A bearer cheque always remains a bearer cheque. The paying banker should
examine all the endorsements on the cheque before making payment.

Statutory Protection for Paying Banker

The paying banker should take the following protection, in order to protect himself and
customer’s interest, while making the payment of his customer’s cheques:

(i) Protection regarding the order cheque

In case of an order cheque, Section 85(1) of the NI Act provides statutory protection to the
paying banker as follows, where a cheque payable to order purports to be endorsed by or on
behalf of the payee, the drawee is discharged by payment in due course.

(ii) Protection in case of bearer cheques

Section 85 (2) of the Negotiable Instruments Act, 1881 states, “Whereas a cheque is
originally expressed to be payable to bearer, the drawee is discharged by payment in due
course to the bearer thereof, notwithstanding any endorsement whether in full or in blank
appearing thereon, notwithstanding that any such endorsement purports to restrict or exclude
further negotiation.”

(iii) Protection in case of crossed cheques

Regarding payment of crossed cheque, the paying banker gets the protection under Section
128 of the Negotiable Instruments Act, 1881: “Whereas the banker on whom a crossed
cheque is drawn has paid the same in due course, the banker paying the cheque and the
drawer thereof (in case such cheque has come to the hands of the payee) shall be entitled
respectively to the same rights and placed in the same position if the amount of the cheque
had been paid to and received by the true owner there of.”
 (v) Protection in case of draft
Section 85A of the NI Act states that, Drafts drawn by one branch of a bank on another
payable to order where any draft, that is an order to pay money, drawn by one office of a
bank upon another office of the same bank for a sum of money payable to order on demand,
purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in
due course.

Dishonour of Cheque
A cheque is said to be dishonoured when it is refused to accept or pay when presented to the
bank. It is a condition in which the paying banker does not pay the amount of the cheque to the
payee
Dishonor of Cheques:
Dishonour of Cheque
A cheque is said to be dishonoured when it is refused to accept or pay when presented to the
bank. It is a condition in which the paying banker does not pay the amount of the cheque to
the payee.

Circumstances or reasons for dishonour of Cheques:

A paying banker must refuse payment on cheques, issued by his customers, in the following
circumstances:
1. Insufficiency of funds: When adequate funds are not available in the account of a
customer, then the cheque can be dishonoured. If the banker pays a countermanded cheque,
he will not only be required to reverse the entry but also be held liable to pay damages for
dishonouring the cheques presented subsequently which would have been honoured
otherwise.

2. Notice of the Customer’s Death: The banker should not make payments on cheques
presented after the death of the customer. He should return the cheque with the remark
‘Drawer Deceased’.

3. Notice of the Customer’s Insolvency: A banker should refuse payment on the cheques
soon after the customer is adjudicated as insolvent.

4. Receipt of the Garnishee Order: Where Garnishee order is received attaching the whole
amount, the banker should stop payment on cheques received after the receipt of such an
order. But if the order is for a specific amount, leaving the specified amount, cheques should
be honoured if the remaining amount is sufficient to meet them.
5. Presentation of a post dated cheque: The banker may refuse the cheque when the
cheque is presented before the valid date.
 6. Stale Cheques: When the cheque is presented after a period of three months from the
date it bears, the banker may refuse to make payment.

7. Material Alterations: When there is material alteration in the cheque, the banker may
refuse payment.

8. Drawer’s Signature: If the signature of the drawer on the cheque does not tally with the
specimen signature, the banker may refuse to make payment.

Grounds of Dishonor:
Reasons for Dishonour of Cheque

1. If the cheque is overwritten.

2. If the signature is absent or the signature in the cheque does not match with the specimen
signature kept by the bank.
3. If the name of the payee is absent or not clearly written.
4. If the amount written in words and figures does not match with each other.
5. If the account number is not mentioned clearly or is altogether absent.
6. If the drawer orders the bank to stop payment on the cheque.
7. If the court of law has given an order to the bank to stop payment on the cheque.
8. If the drawer has closed the account before presenting the cheque.
9. If the fund in the bank account is insufficient to meet the payment of the cheque
10. If the bank receives the information regarding the death or lunacy or insolvency of the
drawer.
11. If any alteration made on the cheque is not proved by the drawer by giving his/her
signature.
12. If the date is not mentioned or written incorrectly or the date mentioned is of three
months before.

Consequences of wrongful dishonor of Cheques:

(i) Wrongful dishonour of the customer's cheque makes the Bank liable to compensate the
customer on contractual obligations as well as for injury to his creditworthiness. A return of
a cheque would cause injury to the drawer’s reputation.

(ii) Quantum of Damages is not limited to the actual pecuniary loss sustained by reason of
such dishonour. When the customer is a trader he is entitled to claim substantial damages
even if he had suffered no actual pecuniary loss sustained by such dishonour, if he can show
that his creditworthiness had suffered by the dishonour of thecheque.
 (iii) A non-trader is not entitled to recover substantial damages unless the damage he has
suffered is alleged and proved as special damages, otherwise he would be entitled to
nominal damages.

(iv) The Plaintiff's evidence on the transaction was vague, ill-defined and indeterminate and
further he had not proved any actual or special damages, unless special damages are claimed
and proved nominal damages will be awarded.

Collecting Banker:
Meaning of Collecting Banker

A Collecting banker is one who undertakes to collect cheques, drafts, bill, pay order,
traveller cheque, letter of credit, dividend, debenture interest, etc., on behalf of the customer.
For undertaking this collection, the collecting banker will be charging commission.
Examples: ICICI Bank, HDFC Bank, SBI Bank etc.

Duties and Responsibilities of a Collecting Banker:

The duties and responsibilities of a collecting banker are discussed below:
1. Due care and carefulness in the collection of cheque. 2. Serving notice of dishonour.
3. Agent for collection. 4. Payment of interest to the customer.
5. Collection of bills of exchange.

1. Due Care and carefulness in the Collection of Cheques: The collecting banker is
bound to show due care and carefulness in the collection of cheques presented to him. In
case a cheque is entrusted with the banker for collection, he is expected to show it to the
drawee banker within a reasonable time.

2. Serving Notice of Dishonour: When the cheque is dishonored, the collecting banker is
bound to give notice of the same to his customer within a reasonable time. It may be noted
here, when a cheque is returned for confirmation of endorsement, notice must be sent to his
customer.
3. Agent for Collection: In case a cheque is drawn on a place where the banker is not a
member of the ‘clearing-house’, he may employ another banker who is a member of the
clearing-house for the purpose of collecting the cheque. In such a case the banker becomes a
substituted agent.

4. Payment of Interest to the Customer: In case a collecting banker has realised the
cheque, he should pay the interest to the customer as per his (customer’s)direction.

5. Collection of Bills of Exchange: There is no legal obligation for a banker to collect the
bills of exchange for its customer. But, generally, bank gives such facility to its customers.
 Legal status of collecting banker:

Holder Definition:
Holder is an individual who has lawfully received possession of a Commercial Paper, such as
a cheque and who is entitled for payment on such instrument.

Holder for Value

Holder for value is a holder to whom an instrument is issued or transferred in exchange for
something of value as a promise of performance or a negotiable instrument.

Example: A banker becomes a holder for value when: The value of cheque is paid before
collection of the cheque.

Holder in Due Course

A holder in due course is the holder of negotiable instruments who has given value in good
faith without notice of any previous dishonour in taking the bill, which appears to be
complete and regular.

“Holder in due course”.—“Holder in due course” means any person who for consideration
became the possessor of a promissory note, bill of exchange or cheque if payable to bearer,
or the payee or indorsee thereof, if 1[payable to order], before the amount mentioned in it
became payable, and without having sufficient cause to believe that any defect existed in the
title of the person from whom he derived his title.

Duties & Responsibilities:

Duties And Responsibilities Of A Collecting Banker The Duties And Responsibilities Of A

Collecting Banker Are Discussed Below:

1. Due Care and Diligence in the Collection of Cheques:

The collecting banker is bound to show due care and diligence in the collection of cheques presented to
him. In case a cheque is entrusted with the banker for collection, he is expected to show it to the drawee
banker within a reasonable time. According to Section 84 of the Negotiable Instruments Act, 1881,
“Whereas a cheque is not presented for payment within a reasonable time of its issue, and the drawer or
person in whose account it is drawn had the right, at the time when presentment ought to have been made,
as between himself and the banker, to have the cheque paid and suffers actual damage, through the delay,
he is discharged to the extent of such damage, that is to say, to the extent to which such drawer or person
is a creditor of the banker to a large amount than he would have been if such cheque had been paid.” In
case a collecting banker does not present the cheque for collection through proper channel within a
reasonable time, the customer may suffer loss. In case the collecting banker and the paying banker are in
the same bank or where the collecting branch is also the drawee branch, in such a case the collecting
banker should present the cheque by the next day. In case the cheque is drawn on a bank in another
place,it should be presented on the day after receipt

2. Serving Notice of Dishonour: When the cheque is dishonoured, the collecting banker is
bound to give notice of the same to his customer within a reasonable time. It may be noted here,
when a cheque is returned for confirmation of endorsement, notice must be sent to his customer.
If he fails to give such a notice, the collecting banker will be liable to the customer for any loss
that the customer may have suffered on account of such failure. Whereas a cheque is returned by
the drawee banker for confirmation of endorsement, it is not called dishonour. But in such a case,
notice must be given to the customer. In the absence of such a notice, if the cheque is returned
for the second time and the customer suffers a loss, the collecting banker will be liable for the
loss.

3. Agent for Collection: In case a cheque is drawn on a place where the banker is not a member
of the „clearing-house‟, he may employ another banker who is a member of the clearinghouse
for the purpose of collecting the cheque. In such a case the banker becomes a substituted agent.
According to Section 194 of the Indian Contract Act, 1872, “Whereas an agent, holding an
express or implied authority to name another person to act in the business of the agency has
accordingly named another person, such a person is a substituted agent. Such an agent shall be
taken as the agent of a principal for such part of the work as is entrusted to him.” 4

4. Remittance of Proceeds to the Customer: In case a collecting banker has realized the
cheque, he should pay the proceeds to the customer as per his (customer‟s) direction. Generally,
the amount is credited to the account of the customer on the customer‟s request in writing, the
proceeds may be remitted to him by a demand draft. In such circumstances, if the customer gives
instructions to his banker, the draft may be forwarded. By doing so, the relationship between
principal and agent comes to an end and the new relationship between debtor and creditor will
begin. 5. Collection of Bills of Exchange: There is no legal obligation for a banker to collect the
bills of exchange for its customer. But, generally, bank gives such facility to its customers. In
collection of bills, a banker should examine the title of the depositor as the statutory protection
under Section 131 of the Negotiable Instruments Act, 1881.Thus the collecting banker must
examine very carefully the title of his customer towards the bill. In case a new customer comes,
the banker should extend this facility to him with a trusted reference. From the above discussion,
there is no doubt to say that the banker is acting as a mere agent for collection and not in the
capacity of a banker. If the customer allows his banker to use the collecting money for its own
purpose at present and to repay an equivalent amount on a fixed date in future the contract
between the banker and the customer will come to an end.
 Precautions and Statutory Protection to Collecting Banker:

Statutory protection to Collecting Banks under the negotiable instruments Act:

The protection provided by Section 131 is not absolute but qualified. A collecting banker
can claim protection against conversion if the following conditions are fulfilled:

1. Good Faith and Without Negligence:

Statutory protection is available to a collecting banker when he receives payment in good
faith and without negligence. The phrase in “good faith” means honestly and without notice
or interest of dishonesty or fraud and does necessarily require carefulness. Negligence
means failure to exercise reasonable care. The banker should have exercised reasonable care
and diligence.
2. Collection for a Customer:
Statutory protection is available to a collecting banker if he collects on behalf of his
customer only. If he collects for a stranger or noncustomer, he does not get such protection.
A bank cannot get protection when he collects a cheque as holder for value

3. Acts as an Agent:
A collecting banker must act as an agent of the customer in order to get protection. He must
receive the payment as an agent of the customer and not as a holder under independent title.
The banker as a holder for value is not competent to claim protection from liability in
conversion. In case of forgery, the holder for value is liable to the true owner of the cheque.
4. Crossed Cheques:
Statutory protection is available only in case of crossed cheques. It is not available in case
uncrossed or open cheques because there is no need to collect them through a banker.
Cheques, therefore, must be crossed prior to their presentment to the collecting banker for
clearance.

Liabilities of collecting bankers following are the liabilities of collecting bankers:

1. Acting as agent: While collecting an instrument, the Bankers works as agent of his customer.
As an agent he has to take some steps & precautions to protect the interest or his customer as a
man of ordinary discretion would take to safeguard his own interest.

2. Scrutinizing the instruments: Name of the holder, Branch name, amount in world and figure,
date, material alteration of any to be checked carefully.

3. Checking the endorsement: Bankers have to check the instrument whether it has been
endorsed properly.
4. Presenting the instrument in due time: It is the responsibility of the collecting bank to
present the instrument in due time to the paying bank.

5. Collecting the proceeds in the payee’s account: It is the duty of collecting banks to collect
and credit the proceeds of the instruments to the proper/correct account.

6. Notice of dishonor and returning the instruments: If any instrument is dishonoured by the
paying bank it should be informed to the customer on the day following the receipt of the unpaid
instruments
 Module: 2 – CUSTOMERS & ACCOUNT HOLDERS
Introduction:
Customer
Customer is a person who has an account either savings account, current account, term
deposit account or maintains any similar relationship with a banker such as deposit cash to
others account, makes DD, deposits cheques to others account etc.

Account Holder:
Account Holder is any person designated and authorized to perform business on behalf of an
account. Each account holder's signature needs to be on file with the bank. The signature
authorizes that person to conduct business on behalf of the account.

A deposit account is a current account, savings account, or other type of bank account, at a
banking institution that allows money to be deposited and withdrawn by the account holder.

Types of Bank Deposit Account

Bank deposit accounts may be classified as follows:
i) Savings Bank Account
ii) Current Deposit Account
iii) Fixed Deposit Account
iv) Recurring Deposit Account
v) No Frills Saving Account
i) Savings Bank Account
A Savings bank account is the most common operating account for individuals and others
for non-commercial transactions. A Savings account helps people to put through day-to-day
banking transactions besides earning some return on the savings made.

Characteristics of Savings Bank Accounts

1. Best suited for all classes of persons.
2. Internet Banking/ATM/Mobile Banking Facilities are available.
3. Liberal withdrawal facilities.
4. No Income Tax deduction at source on interest.
5. Minors above 10 years can open and operate the account.
6. Nomination facility is available
7. Quarterly Average Minimum Balance to be maintained in SB accounts is Rs.1000/- with
Cheque Book facility and Rs.500/- without Cheque Book facility.
 ii) Current DepositAccount
Current Account is the type of deposit account which facilitates the unlimited transactions.
The current account holder gets the overdraft facility. Opening of current account is
restricted to businessmen, companies or institutions.

Characteristics of Current Accounts

1. Current account with unlimited banking transaction facilities.
2. Minimum balance to be maintained is Rs. 3000/- for rural branches and Rs.5000/- for
others.
3. Monthly statement of accounts made available.
4. Standing instructions for remittances of insurance premium, rent and similar payments
carried out.
5. Internet Banking Facility is available.
6. Opening of current account is restricted to businessmen, companies or institutions.

iii) Fixed Deposit Account

The term fixed deposit means that the fixed amount of money deposits in a bank for a fixed
period of time by considering a fixed interest rate. This is a type of investment of money for
long period.

Characteristics of Fixed Deposit Account

1. Term of FD can range from 15days to 5years.
2. The interest can be compounded quarterly, half-yearly or annually and varies from bank
to bank.
3. Minimum deposit amount is Rs 1000/- and there is no upper limit.
4. One can get loans up to 75- 90% of the deposit amount from banks against FD receipts.
5. One can break the FD in case of emergency monetary requirement but it involves loss of
interest.
6. Tax will be deducted at the source, if the interest exceed Rupees 10,000 per year.

iv) Recurring Deposit Account

The Recurring deposit account is an account in the bank where an investor deposits a fixed
amount of money every month for a fixed tenure (mostly ranging from one year to five
years). This scheme is meant for investors who want to deposit a fixed amount every month,
in order to get a lump sum after some years.
Characteristic of Recurring Deposit Accounts
1. Recurring deposit for periods ranging from 12 to 120 months with fixed monthly
remittances.
2. No Income tax deducted at source.
3. Premature withdrawal is permitted.
4. Minors above 10 years can open accounts in their name independently subject to the
maturity value not exceedingRs.2,00,000/-.

v) No Frills Saving Account

No Frills Savings Account allows to bank with a zero minimum balance requirement. No
Frills' Savings Account which offers all the basic banking facilities with no additional
charge.

Characteristic of No Frills Saving Account

i) Individuals of 18 years and above earning a gross income of Rs.5000/- p. m. or less.
ii) Mode of operation is single or joint.
iii) Initial deposit amount is Rs.50/- to open the account.
iv) Minimum balance is NIL.
v) Maximum balance/ amount is Rs.10,000/-, being the total value of business connection of
the account holder, including other deposit accounts.
vi) Cheque book and Debit Card facilities are available.

Procedure in opening Bank Accounts

The various steps to be followed in opening bank account are:
Step-1: Decide the Type of Bank Account you want to open

There are several types of bank accounts such as Saving Account, Recurring Account, Fixed
Deposit Account and Current Account. So, a decision regarding the type of account to be
opened must be taken.

Step-2: Approach any Bank of choice & meet its Bank Officer
Once the type of account is decided, the person should approach a convenient bank. He has
to meet the bank officer regarding the opening of the account. The bank officer will provide
a proposal form (Account Opening Form) to open bank account.
Step-3: Fill up Bank Account Opening Form - Proposal Form
The proposal form must be duly filled in all respects. Necessary details regarding name,
address, occupation and other details must be filled in wherever required. Two or three
specimen signatures are required on the specimen signature card. If the account is opened in
joint names, then the form must be signed jointly. The banks ask the applicant to submit
copies of his latest photograph for the purpose of his identification.

Step-4: Give the details of Introducer for Opening your Bank Account
The bank normally required introduction of the prospective account holder by any of the
existing account holders for that type of account. The introducer introduces by signing his
specimen signature in the column meant for the purpose.

Step-5: Submit Bank Account Opening Form and Documents

The duly filled in proposal form must be submitted to the bank along with necessary
documents such as documents for identity proof and address proof. In case of a joint stock
company, the application form must accompany with the Board's resolution to open the
account. Also, certified copies of articles and memorandum of association must be
produced.

Step-6: Officer will verify your Bank Account Opening Form

The bank officer verifies the proposal form. He checks whether the form is complete in all
respects or not. The accompanying documents are verified. If the officer is satisfied, then he
clears the proposal form.

Step-7: Deposit initial amount in newly opened Bank Account

After getting the proposal form cleared, the necessary amount is deposited in the bank. After
depositing the initial money, the bank provides a pass book, a cheque book and pay in slip
book in the case of savings account. In the case of fixed deposits, a fixed deposit receipt is
issued. In the case of current account, a cheque book and a pay in slip book is issued. For
recurring

Types of Account Holders

The various types of Account holders are:

1. Minor
2. Joint Account Holder
3. Partnership Firm
4. Joint Stock Company
5. Executor and Administrator
6. Trustees Account
7. Clubs and Associations
8. Joint Hindu Family or Hindu Undivided Family(HUF)
 Definition of Minor

According to Section 3 of the Indian Majority Act 1875 “Minor is a person who has not
completed the age of 18 years.”
Precautions to be taken by the Banker while opening an account for Minor is a person
who has not completed the age of 18 years. The Banker has to take certain precautions
while opening and maintaining an account with a minor:

i) It is not advisable for a banker to open a current account in the name of minor since it is
likely to be overdrawn, in which case, the minor will not be personally liable for such
overdraft. Therefore, the banker can open a savings bank account in the name of a minor
either in the name of the minor himself or in the joint names of the minor and the guardian
or in the name of the guardian.
ii) When the banker opens an account in the name of a minor or in the joint names of the
minor and his guardian, he should consider the followings: a) He should make sure that the
minor has attained the age of judgment. It is the age at which the minor is able to understand
what he does.
b) He should make sure that the minor is able to read and write English, Hindi or any
regional language. c) He should allow the minor to operate his account so long as it shows a
credit balance.
iii) It is always advisable for a banker to open a minor’s account in the name of his natural
or legal guardian. In case the natural guardian is not available the court may appoint
somebody connected to the minor as his guardian, and such a guardian is called the legal
guardian.
iv) The banker should obtain the specimen signature of the guardian who is to operate the
account. He should take down the birth date of the minor in the account opening form, and
note down the same in the ledger and in the passbook.
v) In the event of the death of the minor, the money will be paid to his guardian. In the event
of the death of the minor on his attaining majority or to any other person appointed by the
Court as his guardian.
vi) A minor can be appointed as an agent and authorized to operate the account of his
principal.
 Joint Account Holder
A Joint Account is an arrangement where an account is opened in the name of two or more
persons such as father and son, husband and wife, trustees, executors etc. Persons who open
an account jointly are called as Joint Account Holders.

Precautions to be taken while opening an account in the name of Joint Account Holder
(i) The application form must be signed by all who wish to open an account.
(ii) A mandate containing name or names of persons authorized to operate an account.
(iii) If all the persons are operating the account, then banker must see that any cheque drawn
on him is duly signed by all.
(iv) Banker must stop operating an account as soon as a notice of death, insolvency, insanity
etc., of any one account holder is received.
(v) A mandate containing the name or names of survivor must be obtained.
(vi) A mandate stating the name of person authorized to overdraw account is to be obtained.
(vii) Banker must stop making payments as soon as letter of revocation is obtained,
(viii) If such a letter is received, then banker must obtain the specimen signatures and names
of new people authorizing for operation of an account.
(ix) Banker must see that no loan or overdraft is granted without proper security.

Partnership Firm
Partnership Firm is a firm which is established and operated by two or more persons and
shares profit and loss with an agreed ratio. The persons who establish the business are called
partners.

Precaution to be taken a banker while opening an account for Partnership Firm

i) A partnership account must always be opened in the name of the firm and not in the name
of the individual partner/partners.
ii) When a partner retires, his liability to outside parties ceases in respect of all transactions
entered into after his retirement. If the banker is not informed, the retiring partner will
continue to be liable.
iii) If a partner does something which is not related to the kind of business carried on by the
firm, other partners will not be liable for losses/ debts incurred.
iv) At termination the debts of the firm shall be settled out of the assets of the firm and the
surplus is to be applied to paying the debts of the partners.
v) If a cheque payable to the partnership is endorsed by a partner and is deposited by him to
be credited to his personal account, the transaction should be done only after checking with
all the other partners.
 vi) If the documents are signed by the partners individually as well as jointly creditors of the
firm can recover their debts all together.

Joint Stock Company

Joint Stock Company is defined as an artificial person, recognized by law, with a common
capital, common seal comprising of shares of fixed value, having limited liability and
carrying perpetual existence.

Precautions to be taken while opening an account in the name of Joint Stock Company
i) The certificate of incorporation which is often termed birth certificate must be obtained by
the banker.
ii) In case of Public Limited Company, a certificate of commencement issued by the
Register of Joint Stock Company must be obtained.
iii) Banker must also obtain Memorandum of Association which contains important clauses
and Articles of Association which contains rules and regulations for internal management.
iv) In case of existing company, the banker must obtain the recent copies of profit and loss
account and balance sheet to judge the financial position of the company.
v) An application form for opening an account with the signatures of all Board of directors
must be obtained.
vi) Names and signatures of directors authorised to operate the account must be obtained.
vii) Banker must see that company’s funds are not misappropriated by Directors of the
company for their personal benefit.
viii) In case the directors want to raise any loans, the banker must verify the borrowing
powers of the directors by consulting the Articles o f Association.
ix) Banker must accept the securities which are registered with Registrar.

Executor
Executor is a person for whom testator (owner of the property) makes a will. The certified
copy of the final will is called Probate. Probate is granted only to an executor appointed by
a will.

Administrator
Administrator is a person for whom court makes a certificate of ownership of property.
When a person dies without making any will, the court makes a letter of administration for
the beneficiary. The beneficiary is called an administrator.

Precautions to be taken by Banker

i) The banker must verify the Probate of will in the case of executor and letter of
administration in the case of the Administrator.
 ii) The banker must be careful to ensure there is no misappropriation.
iii) The banker should not permit transfer of amount to the personal accounts of executors/
administrators.
iii) If an executor/administrator dies and he is one of the joint signatories of an account,
cheques issued should not be dishonoured because his powers are vested in the surviving
executors/administrators.
iv) Bankers cannot exercise their right to set off of the debit balance against the credit
balance in the executor’s personal account.
(v) If the executor requires a loan to make payments before receipt of the probate, the
advances are made on the personal security of the executor.
(vi) If a loan is given all the executors should sign.

Trustees Account

Trustee is a person who take care of others property. He/She is appointed to administer or
manage the trust property for the benefit of beneficiaries. A banker can open an account in
the name of such trustee.

Precautions to be taken while opening an account in the name of Trustee

a) A trust deed which states the powers and functions of trustees must be obtain by the banker
b) In case of death or retirement of one or more trustees, banker must see the provision of
the trust deed.
c) In case of insolvency of trustee, trust property is not to be touched for making payment to
the creditors of trustee.
d) The banker should not allow the transfer of funds from trust account to the personal
account of trustee.
e) The banker must thoroughly examine the trust deed as certain to the borrowing powers of
the trustee.
f) In case of charitable trust, a banker should open an account only after its registration.

Clubs and Associations

Clubs or associations are the organization composed of people who voluntarily meet on a
regular basis for a mutual purpose other than educational, religious or financial activities.
Club or association is any kind of group that has members who meet for a social, literary or
political purpose such as health clubs, country clubs, book clubs and women's associations.
Precautions to be taken while opening an account in the name of Clubs or Associations
(i) Banker must verify that the club is incorporated under a Legal Act and obtains separate
legal entity.
(ii) An application form with the signatures of all committee members must be obtained.
(iii) Names and address of persons authorized to operate an account must be obtained.
(iv) Banker must obtain the regulations of the institution.
(v) Banker must see that members do not use money for their personal benefit.
(vi) Banker must take care while debiting or crediting the personal account of committee
members.
(vii) If any overdraft is asked for, banker must see that borrowing powers of members are as
in the charter of club.
(viii) Banker must see that change in authorized person to operate the account is
immediately notified to them.
Joint Hindu Family or Hindu Undivided Family (HUF)

Hindu Undivided Family is an extended family arrangement, consisting of many generations

living under the same roof. The family is headed by a person, usually the oldest male called
"Karta", who makes decisions on economic and social matters on behalf of the entire family.

Precautions to be taken by the Banker while opening an account for HUF

i) The Banker should take all the details of the Karta and the family and take the signatures
of all the concerned.
ii) The Banker should insist on the instructions about the persons who are authorized to
operate the account of the family.
iii) The Banker has to be very cautious and must take all the necessary undertakings before
granting a loan or advance to either Karta or the coparceners.
iv) A HUF declaration that has been signed by all the persons affirming the composition of
the HUF, its karta and names and relationship of all persons including minor sons and their
dates of birth;
v) A HUF deed (if any)
vi) The account is opened in the name of the karta or in the name of the HU Fbusiness;
vii) Certified true copies of the IT Returns for the last two/ three years.
 Module: 3 – NEGOTIABLE ISTRUMENTS
Introduction:
A negotiable instrument is a piece of paper which entitles a person to a sum of money and which
is transferable from person to person by mere delivery or by endorsement and delivery. The
person to whom it is so transferred becomes entitled to the money also to the right to further
transfer it. Thus, negotiable instruments play a major role in the trade world.

Purpose
Main purpose of negotiable instruments is to avoid the carriage of higher amount of money and
to reducing the risk of theft; robbery etc.

To give legal effect to negotiable instruments there is legislation and the name of that legislation
is The Negotiable Instruments Act, 1881.

Introduction to Negotiable Instruments Act, 1881:

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

Meaning:
Negotiable Instrument is a transferable, signed document that promises to pay to a certain person
or to the bearer of the instrument, a certain sum of money at a future date or on demand

Definition
According to section 13 of Negotiable Instruments Act, 1881- A 'negotiable instrument' means a
promissory note, bill of exchange or cheque payable either to order or to bearer.

Features of a Negotiable Instrument:

The important features of negotiable instrument are:

1. Property: Negotiable instrument is the property like other valuable assets. The person
for whom the instrument is drawn is the holder and owner of that property.

2. Defects in Title: The holder in good faith and for value called the ‘holder in due
 course’ gets the instrument free from all defects of any previous holder.

3. Payable to certain person: Certain person is a person whose name is mentioned in

negotiable instrument. The Negotiable instrument instructs to pay only to the certain
person.

4. Right: The holder in due course is not affected by certain defects which might be
available against previous holder, for example, fraud, to which he is not aparty.

5. Payable to Order: All the negotiable instruments are payable to order which is
expressed to a particular person.

6. Payable to Bearer: The negotiable instrument is expressed to be payable to bearer

when it is blank endorsement. It specifies that the person in possession of the bill is a
bearer of the instrument which is so expressed payable to bearer.

7. Payment: A negotiable instrument may be made payable to two or more payees, or it

may be payable in alternative to one or two payees.

8. Consideration: Consideration is the concept of legal value in connection with contracts.

Consideration in the case of a negotiable instrument is unspecified

Kinds of Negotiable Instruments

The various kinds of Negotiable Instruments are as follows:

1. PromissoryNotes

2. Bills ofexchange

3. Cheques

Promissory Notes:
Promissory Note [Section 4]:

Definition According to section 13 of Negotiable Instruments Act, 1881- 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 to, or to the order of, a certain
person or to the bearer of the instrument.
A promissory note is a promise in writing by a person to pay a sum of money to a specified
person or to his order.[3]
Maker and Drawer: The person who makes the promissory note and promises to pay is called the
maker.
Payee: The person to whom the payment is to be made is called the payee

Meaning:

A promissory note is an instrument in writing 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.

SPECIMEN OF PROMISSORY NOTE

Features of a Promissory Note:

The important features of a Promissory Note are:

1. Instrument in Writing: The promissory note must be in writing. Oral engagement or

promise is excluded.

2. Undertaking to Pay: It is not necessary to use the word “promise” but the intention
must clearly show an ‘unconditional undertaking’ to pay theamount.
3. Unconditional: It must contain definite and an unconditional undertaking to pay.
Promise to pay should be unconditional. A conditional instrument isinvalid.

4. Signed by the maker: The instrument must be signed by the maker thereof. Person
must sign with his consent. It should not only be a physical act but also a mental act
with an intention to sign

5. Payable to certain person: The maker and payee of the instrument must be a definite
person. A note may be made by several people to bind them jointly. A promissory note
cannot be made by two persons. Two different people should fill in the role of a maker
and payee.
 6. Certain sum of money: The maker of the promissory note promises to pay a certain
sum of money only.

7. Payable on demand: The amount is payable on demand of payee

8. Stamping: Promissory notes are chargeable with stamp duty. An unstamped or

improperly or insufficiently stamped promissory note is not valid as evidence in court of
law. No suit can be maintained upon an unstamped or improperly stamped promissory
note.
Bill Of Exchange [Section 5]:

According to section 5 of Negotiable Instruments Act, 1881- 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.It is also called a Draft

Characteristic Features of a bill of exchange:

1. It must be in writing.
2. It must contain an order to pay and not a promise or request.
3. The order must be unconditional.
4. There must be three parties, viz., drawer, drawee and payee.
5. The parties must be certain.
6. It must be signed by the drawer.
7. The sum payable must be certain or capable of being made certain.
8. The order must be to pay money and money alone.
9. It must be duly stamped as per the Indian Stamp Act.
10. Number, date and place are not essential.
 The Parties of Bills of Exchange

1. The Drawer: The person who draws a bill of exchange is called the drawer.

2. The Drawee: The party on whom such bill of exchange is drawn and who is directed
to pay is called the drawee.

3. The Acceptor: The person who accepts the bill is known as the acceptor. Normally the
drawee is the acceptor. But a stranger can also accept a bill on behalf of the drawee.

4. The Payee: The person to whom the amount of the bill is payable is called the payee.

5. The Endorser: When the holder transfers or endorses the instrument to any other person
the holder becomes the Endorser.

6. The Endorsee: The person to whom the bill is endorsed is called the endorsee.

7. The Holder: Holder of bill of exchange means any person who is legally entitled to the
possession of it and to receive or recover the amount due thereon form the parties.

Promissory Note Bill of Exchange

i) It contains a promise topay. i) It contains an order topay.

ii) The liability of the maker of a note is ii) The liability of the drawer of a bill is secondary
primary andabsolute. andconditional.

iii) It is presented for payment without any iii) If a bill is payable some time after sight, it is
previous acceptance by themaker. required to be accepted either by the
draweehimself.

iv) The maker of a promissory note stands in iv) The maker or drawer of an accepted bill stands
immediate relationship with the payee and is in immediate relationship with the acceptor and
primarily liable to the payee or the holder. thepayee.

v) In case of dishonour no notice

ofdishonour isrequired. v) A notice of dishonour must be given in case of
dishonour of Bills ofExchange.
vi) In the case of a promissory note there are
only two parties, viz., the maker and the vi) There are seven parties, viz, drawer, drawee,
payee. payee, acceptor, endorser, endorsee and holder.
vii) A promissory note cannot be drawn vii) The bills of exchange can be drawn in sets.
insets.
viii) A bill of exchange too cannot be drawn
viii) A promissory note can never conditionally, but it can be accepted conditionally
beconditional. with the consent of the holder.

Cheque [Section 6]

According to section 6 of Negotiable Instruments Act, 1881- A cheque is defined as 'a bill of
exchange drawn on a specified banker and not expressed to be payable otherwise than on
demand’.Thus, a cheque is a bill of exchange with two added features, viz.:

It Is Always Drawn On A Specified Banker.

It Is Always Payable On Demand And Not Otherwise.

Meaning:

Cheque is an instrument in writing, containing an unconditional order, drawn on a specified

banker, signed by the drawer, directing the banker, to pay, on demand, a certain sum of money
only, to a certain person or to his order or to the bearer of the instrument.

Essentials Of Cheque:

1. In Writing: The cheque must be in writing. It cannot be oral.

2. Unconditional: The language used in a cheque should be such as to convey an unconditional
order.
3. Signature of the Drawer: It must be signed by the maker.
4. Certain Sum of Money: The amount in the cheque must be certain.
5. Payees Must be certain: It must be payable to specified person.
6. Only Money: The payment should be of money only.
7. Payable on Demand: It must be payable on demand.
8. Upon a Bank: It is an order of a depositor on a bank.

Parties of Cheque

There are three parties involved in every cheque or payment order:

i) Drawer: The person who draws thecheque.

ii) Drawee: The financial institution or Bank upon whom the cheque is drawn.

iii) Payee: The person or organization named to receive payment.

Cheque Bills of Exchange

1. Cheque can be drawn only on a banker. 1. The drawee may be any person.

2. A cheque may be crossed. 2. A bill of exchange cannot be crossed.

3. Cheque is payable on demand and no 3. While calculating maturity three day’s

grace period is allowed. grace is allowed.

4. Notice of dishonour is not necessary. 4. A notice of dishonour is required.

5. A cheque can be drawn to bearer and 5. A bill cannot be made bearer if it is

made payable on demand. payable on demand. A bill drawn ‘payable
to bearer on demand’ is void.

6. Bills sometimes, require presentment for

6. A cheque is not required to be
acceptance.
presented for acceptance.
7. Affixation of proper stamps is necessary
7. No stamp duty is payable on cheques.
in case of Bills of Exchange.
8. The drawer does not get discharged
from his liability because of delay in 8. The drawer of the bill of exchange stands
discharged from his liability if it is not duly
presenting the cheque to the bank for
presented for payment.
payment.
Features of Cheque

The main features of cheques are:

1. Cheque is an instrument inwriting

A cheque must be in writing. It can be written in ink pen, ball point pen, typed or even
printed. Oral orders are not considered as cheques.

2. Contains an unconditional order

Every cheque contains an unconditional order issued by the customer to his bank. It does not
contain a request for payment. A cheque containing conditional orders is dishonoured by the
bank

3. Cheque is drawn on a specified banker

A cheque is always drawn on a specific banker. Cheque book facility is made available only
to account holder who are supposed to maintain certain minimum balance in the account.

4. Cheque must be signed bycustomer

A cheque must be signed by customer (Account holder). Unsigned cheques or signed by

persons other than customers are not regarded as cheque.

5. Payable on demand: A cheque when presented for payment must be paid on demand. If cheque is
made payable after the expiry of certain period of times then it will not be a cheque.

6. Certain sum of money

The amount to be paid by the banker must be certain. It must be written in words and figures.

7. Payable to a certain person or to the bearer

The payee of the cheque should be certain whom the payment of a cheque is to be made i.e.
either real person or artificial person like Joint Stock Company. The name of the payee must
be written on the cheque or it can be made payable tobearer.

8. Cheque must be duly dated by customer of bank

A cheque must be duly dated by the customer of bank. The cheque must indicate clearly the
date, month and the year. A cheque is valid for a period of three months from the date of
issue.
Types of Cheque
Cheques can be categorized into two, viz:
1) Open Cheque
a) Bearer Cheque
b) OrderCheque
2) CrossedCheque
a) General Crossing
b) Special Crossing
c) Double Crossing

1) Opencheque

An open cheque is a cheque which is payable at the counter of the drawee bank on
presentation of thecheque.

a) Bearer cheque: A bearer cheque is the one which is issued without the name of the
payee and the same can be encashed by any one. Bearer cheque is made payable to the
bearer i.e. it is payable to the person who presents it to the bank for encashment.

b) Order cheque: A cheque which is paid to a named person with the words ‘or order’ after
the payee’s name, showing that he or she can endorse it and pass it to someone else if
desired.

2) Crossedcheque

A crossed cheque is a cheque which is payable only through a collecting banker and not
directly at the counter of the bank. Crossing ensures security to the holder of the cheque as
the collecting banker credits the proceeds to the account of the payee of the cheque.

a) General Crossing: It is a cheque which bears across its face two parallel transverse lines
without or with any words as (& Co.), A/C Payee, Not Negotiable written in between these
two lines.

Specimen of General Crossing

 b) SpecialCrossing

It is a cheque in which the name of the bank is written between the two parallel lines and
hence it can be paid to that specific banker only.

Specimen of Special Crossing

a) Double Crossing: Double crossing is a form of special crossing of cheque under which two
collecting bankers’ name is mentioned between two parallel lines. One is the collecting
banker of the payee and another banker is the agent for collection of cheque. It is very
important to include the words “as agent for collection” under doublecrossing.
 Difference between General Crossing and Special Crossing

Particulars General Crossing Special Crossing

Meaning General crossing where a cheque Special crossing where a cheque

bears across its face, an addition of bears across its face, an addition of
the words; and company or any the name of a banker, with or
abbreviation thereof between two without the words “Not Negotiable”,
parallel transverse lines or of two that addition shall be deemed
parallel transverse lines simply, acrossing, and the cheque shall be
either with or without the words “not deemed to be crossed specially, and
negotiable”, that addition shall be to be crossed to thatbanker.
deemed to be a crossing, and the
cheque shall be deemed to be
crossedgenerally.

Objectives The objective of general crossing is The objective of special crossing is

to make the cheque secure. to provide a greater degreeof security
to thecheque.

Use of Words In general crossing, the use of words In special crossing, the mention of
between the two parallel lines is the name of a specific bank between
optional. the two parallel lines is essential.

Payment In case of general crossing, the In case of special crossing, the

payment for the cheque may be payment for the cheque canbe
received through any bank. received only from the bankin whose
name the cheque has been crossed.
Nature The general crossing of cheque in The special crossing of cheque in the
the nature of generalpurposes. nature of special purposes.
 Endorsement
Endorsement is a signature which is used to legally transfer a negotiable instrument from
one party to another. This means signing one’s name on negotiable instrument like bills of
exchange, a promissory note or a cheque with a view to transfer the interest, right, property
or title in the instrument to anotherperson.

Section 15 of the Negotiable Instrument Act defines the term. “Endorsement is the signature
by the maker or drawer or a holder of the negotiable instrument, with or without writing, for
the purpose of negotiation. Depending on the case, the endorsement is done by the holder,
and if no space is left then the endorsement is done on a separate paper slip annexed which
is known as “allonge”.”

The person doing the endorsement is known as endorser while the person receiving such
endorsed instrument is known as endorsee.

Types of Endorsements

1.Blank Endorsement 2. Full Endorsement

3.Restrictive Endorsement 4. Conditional Endorsement

5. Sans Recourse Endorsement 6. Facultative Endorsement

Blank Endorsement

Blank endorsement is an endorsement without mentioning payee’s name and allowing any
party in possession of the endorsed item to execute a claim. Once the cheque is signed, it can
be used in a similar manner to cash.
 Special of full endorsement:
Meaning- an endorsement in full is one where the endorser not only puts his signature on the
instrument but also mentions the name of the person to whom the payment has to be made.

Restrictive endorsement:

Meaning- it is a kind of endorsement which either by express words restricts or prohibits further
negotiation of the bill. The endorsement expresses that it is not a complete and unconditional
transfer of the instrument but it is a mere authority to the endorsee to deal with the bill as
expressed in section 50.
A restrictive endorsement specifies the way in which a cheque can be negotiated. The most
common form of restrictive endorsement is "account payee".
 Conditional Endorsement:

Section 52 States That If the Endorser of a Negotiable Instrument, By Express Words in The
Endorsement, Makes His Liability Dependent on The Happening of a Specified Event, Such
Endorsement Is Called a Conditional Endorsement. Such An Endorsement Limits the Liability of
The Endorser.

3. Sans recourse endorsement: Under this endorsement, the endorser frees himself from
any such liability arising from the dishonour of the instrument. For example pay Mr. X at his
own risk.

Rules of endorsement:
 Place: The endorsement must be on the instrument. It can be either on the front or back
side of the instrument. In case there is no space left on the instrument, a separate paper
may be affixed to it. Such an attachment is called ‘allonge’ and should be in ink.
 Holder: The endorsement can only be made by the holder of the instrument.
 Intent to transfer: The endorsement may be made by the endorser either by signing his
name on the instrument or by any words showing the intent to transfer or endorse the
instrument to a specific individual.
 Delivery: The delivery of instrument must be done by the endorser or by someone on his
behalf.
 Entire Bill: The endorsement should be an entire bill. A partial endorsement does not
operate as a valid endorsement.
  Essentials of endorsement:

The following are essentials of a valid endorsement:

i) it must be on the negotiable instrument.

ii) Signature may be made on any part of the instrument.

iii) It must be made by the maker or holder of the instrument. A stranger cannot endorse it.

iv) It must be signed by the endorser.

v) If thumb-impression, that should be attested.

vi) It may be made either by the endorser merely signing his name on the instrument or by
any word showing an intention to endorse or transfer the instrument to a specified person.

vii) It must be completed by delivery of the instrument. The delivery must be made by the
endorser himself or by somebody on his behalf with the intention of passing property
therein.

viii) It must be an endorsement of the entire bill.

 Module: 4 – RECENT DEVELOPMENTS IN BANKING

Introduction:

The banking sector is constantly evolving, new technology is continuously being

introduced into banking systems and leaders in the banking industry are continuing to
implement ground-breaking financial products and services. There has been strategic
investment in banking innovations through crowd sourcing, piloting, collaboratio ns and
partnering to develop revolutionary banking solutions. With the ever-changing banking
sector new regulations and revised banking standards have been developed. Digital-only
banking is perhaps the most significant change that has happened in the fina ncial industry
in the last few years.

In recent years, the Reserve Bank has endeavored to improve the efficiency of the financial
system by ensuring the presence of a safe, secure and effective payment and settlement system.
In the process, apart from performing regulatory and oversight functions the Reserve Bank has
also played an important role in promoting the system’s functionality and modernization on an
ongoing basis.

The consolidation of the existing payment systems revolves around strengthening computerized
cheque clearing, and expanding the reach of Electronic Clearing Services (ECS) and Electronic
Funds Transfer (EFT).

The critical elements of the developmental strategy are the opening of new clearing houses,
interconnection of clearing houses through the Indian Financial Network (INFINET) and the
development of a Real- Time Gross Settlement (RTGS) System, a Centralized Funds
Management System (CFMS), a Negotiated Dealing System (NDS) and the Structured Financial
Messaging System (SFMS).

E-BANKING

Definition: E-banking is a blanket term used to indicate a process through which a customer is
allowed to carry out, personal or commercial banking transactions using electronic and
telecommunication network.

It is a product offered by banks which facilitates online banking, with the help of which the
customer can have access to the bank account in just one click.

E-banking covers facilities such as – fund transfer, checking account statements, utility bill
payments, opening of bank account, locating nearest ATM, obtain information on financial
products and services, applying for loans, etc. using a personal computer, smart phone, laptop or
personal digital assistant.
 E-banking Services

In simple words, e-banking refers to a banking arrangement, with which the customer can
perform various transactions over the internet, which is end-to-end encrypted, i.e. it is
completely safe and secure.

E-banking promotes paperless/cashless transactions. It comes with a number of rights,

responsibilities and fees as well. The range of services covered under E-banking are:

1. Internet Banking: A banking facility provided to the customers through which the
customers are able to perform a number of monetary and non-monetary transactions,
using the internet, through the bank’s website or application.
2. Mobile Banking: Almost all the banks have designed their mobile applications with
which you can perform transactions at your fingertips. For this, four things are required –
a smart phone, internet, mobile application, and mobile banking service enabled in your
bank account.
3. ATM: Automated Teller Machine, popularly known as ATM is one of the most common
and initial service, provided under e-banking. It is not just a machine with which you can
withdraw cash as and when required, but it also allows you to check your account status,
transfer fund, deposit fund, changes mobile number, change Debit Card PIN, i.e. Personal
Identification Number.
4. Debit Card: Debit cards are used in our day to day life so as to perform end number of
transactions. Debit cards are linked to the customer’s bank account and so the customer
only needs to swipe the card, in order to make payment at Point of Sale (POS) outlets,
online shopping, ATM withdrawal. In this way, the amount is deducted from the
customer’s account directly.
5. Credit Card: Just like a debit card, a credit card is also a payment card which the banks
issue to the customers on their request, after checking their credit score and history. It
enables the cardholder to borrow funds up to the pre-approved limit and make payment.
The limit is granted by the banks which issue the card. The cardholder promises to repay
the amount within a stipulated time, with some charges, for the use of credit card.
6. Point of Sale (POS): Points of sale system refers to the point, in terms of date, time and
place (retail outlet) where the customer makes a payment, using a plastic card, for the
purchase made or services received.
7. Electronic Data Interchange (EDI): EDI is a new mode of communicating information
between businesses electronically using a standardized format, which was conventionally
paper-based.
 8. Electronic Fund Transfer (EFT): When money is transferred electronically from one
bank to another, it is called as electronic fund transfer. It covers direct debit, direct
deposits, wire transfers, NEFT, RTGS, IMPS, etc.

Benefits of E-banking service:

 It enables digital payments, which encourages transparency.

 It allows 24/7 access to the bank account.
 It also sends notifications and alerts to get updated with the banking transactions and
changes in the rules.
 It lowers transaction cost for the banks.
 It is convenient and easy for customers, as they are not required to visit the bank branch
every time.

Debit card definition: A debit card is a payment card that lets you make secure and easy
purchases online and in person by drawing money directly from your checking account. You're
not borrowing from a line of credit like you would with a credit card; the money on your debit
card is your own. You can also use a debit card to access your cash at ATMs.

A debit card (also known as a bank card or check card) is a plastic card that provides an
alternative payment method to cash when making purchases. Functionally, it can be called an
electronic cheque, as the funds are withdrawn directly from either the bank account or from the
remaining balance on the card. In some cases, the cards are designed exclusively for use on the
Internet, and so there is no physical card.

Debit cards may also allow for instant withdrawal of cash, acting as the ATM card for
withdrawing cash and as a cheque guarantee card. Merchants may also offer “cash back”/”cash
out” facilities to customers, where a customer can withdraw cash along with their purchase.

Features and Benefits of Debit Cards

Besides knowing Debit card meaning, you should be aware of its unique features and benefits
such as:

 Debit Cards are quick, contactless, and convenient payments tools.

 They enable you to make real-time payments from your linked account.
  Banks offer discounts, offers, and cash back on certain Debit Cards
 You can use Visa and MasterCard Debit Cards abroad by enabling international usage.
 You can load digital wallets using your Debit Card.

An example of the front of a typical debit card:

1. Issuing bank logo

2. EMV chip (euro pay, Mastercard and visa)
3. Hologram
4. Card number
5. Card brand logo
6. Expiration date
7. Cardholder’s name

An example of the reverse side of a typical debit card:

 Magnetic stripe
 Signature strip
 Card security code

Types of debit card systems:

Online Debit System

Online debit cards require electronic authorization of every transaction and the debits are
reflected in the user’s account immediately. The transaction may be additionally secured with the
personal identification number (PIN) authentication system; some online cards require such
authentication for every transaction, essentially becoming enhanced automatic teller machine
(ATM) cards.

One difficulty with using online debit cards is the necessity of an electronic authorization device
at the point of sale (POS) and sometimes also a separate PIN pad to enter the PIN, although this
is becoming commonplace for all card transactions in many countries.
 Offline debit system:

An offline debit card is a type of automated payment card, similar to a traditional (online) debit
card, that allows a cardholder to pay for goods and services directly from their bank account.
As it is not "online," there is a delay before the incurred cost is debited from the account and it
does not require a PIN for use.

These types of cards are not common in the U.S. but are available in some foreign countries.
Offline debit cards may also be known as “cheque cards.”

 An offline debit card is not connected to an online system when used. Funds are
therefore withdrawn from an account 24 to 72 hours later.
 An offline debit card does not require a PIN for use, only a signature, and can be
compared to writing a check.
 Offline debit cards are primarily used for payments and cannot be used for withdrawing
or depositing funds at an ATM.
 Card network providers, such as Visa and Mastercard, sponsor offline debit cards.
 The same overdraft fees and returned payment fees of a debit card apply to offline debit
cards.

Electronic purse card system (EPSC):

An electronic purse is the store of value on a card, which can be used in a manner similar to cash
to pay for travel or for other small-scale transactions. The electronic “purse” is secure
information stored in a dedicated area or file in the smart-card.
Benefits of electronic purse are:
 The customer pays only for the travel made.
 Incentives such as free transfers, discounts and fare-capping can be offered to the
customer in a secure and consistent way.
 Cash handling is reduced as customers migrate to prepaid tickets.
 Electronic purse can be offered for infrequent customers when it is desired to
eliminate all cash transactions.
 Innovative means of adding/renewing value can be utilized.
 High degree of security.
 Third parties can become involved in issuing value
 Prepaid debit card:
A prepaid card is a card you can use to pay for things. You buy a card with money loaded on it.
Then you can use the card to spend up to that amount.
A prepaid card is also called a prepaid debit card, or a stored-value card. You can buy prepaid
cards at many stores and online.
Many prepaid cards come with the Visa or MasterCard logo. These prepaid cards look just like a
credit card.

Debit card:
A debit card is a plastic card we use as a payment method instead of cash when we buy things.
We also call it a bank card or cheque card.

“A small plastic card that consumers use to purchase goods and services. When the cardholder
makes a purchase, the money is debited from their bank account automatically”

Components of a debit card

A debit card has the following details:

The card number: this is a 16- digit number. The card number is unique and is not the same as
the bank account number.
The issue and expiration date: The issue date is also printed in the MM/YY format. The expiry
date is also printed in the same MM/YY format.
The Logo: The card has the logo of the bank that has issued it. It also has the logo which
determines the type of debit card it is: Visa, Mastercard or RuPay logo.
Customer service number: The toll-free number is printed on the back of the card. You can call
this number in case of any questions or to report the loss or theft of your card.
The signature bar: A signature bar is provided on the back of the card. It is important that you
sign the bar as soon as you receive the card. This can help you to prevent fraudulent transactions.
Some merchant retail outlets do not swipe the card unless the signature is verified.
 Advantage of debit card:
1. Debit Card offers the convenience of cashless transaction.
2. It can be used for cash withdrawals at ATM and shopping online or at Point of sale.
3. It ensures instant payment as well as transfer of funds.
4. Unlike credit cards, which are a loan in disguise, debit card encourages judicious spending.
5. It lets you redeem the reward points obtained from certain services like insurance coverage,
bonus points, cash back offers that are offered by banks.
6. Debit cards are safer than carrying cash.
7. You can pay EMIs on certain online purchases as well.
8. Keeping a track on the debit card transaction is easy. All you need to do is update the
passbook or be watchful of the SMS/email notifications.
9. Using the ATM, you transfer funds via debit card. Although the amount is limited, it’s a
great help especially on bank holidays.
10. You can pay utility bills, tax, recharge mobile phones and even use it at the filling station.
11. The maintenance cost is comparatively less.
 Disadvantage of debit card:
 A debit card has some limit of transaction amount beyond which extra charges are
applicable.
 Banks often charge processing fees for the withdrawal of funds from an ATM that is not
affiliated with the bank of the cardholder.
 A debit card is useful only if there is an availability of terminals ready to accept debit
cards.
 A debit card is protected by PIN only so there is a possibility of fraud if the PIN is known
by someone other than the cardholder.
 Unprotected against identity: Debit cards are protected only by a number known as the
PIN that can be used for the transfer of funds. Anyone carrying the card can access the
account if the PIN is known. So there is less protection against identity theft.

Credit cards:

Advantages:

Convenience: It’s convenient to use in a wide variety of places in stores, on the phone or online.

Recordkeeping: A credit card provides a useful record of your spending through your monthly
statement and online account, which would also be the case if you relied on a debit card for
spending. Some credit cards do send yearend summaries, though, that can be a great resource
when you’re doing your taxes.

Low-cost loans: You’re getting your paycheck in five days, but there’s a purchase you need to
make today. You can charge your purchase now and pay off the charge after you get paid. The
key here is to make sure you will be able to pay off the charge by the due date.

Cash advances: You can get money when you need it. Be aware that cash advances often have a
higher interest rate, so it’s important that you have a realistic plan to pay back those advances.

Member perks: With some smart shopping, you can choose from a wide range of discounts or
cash back based on your purchases. Compare the cards available to see which perks best fit your
needs and spending habits.

Build a good credit history: Using a line of credit by making purchases—and paying them
off on time—will help you get a good credit rating from credit rating agencies, which will make
lenders more likely to lend to you and offer you a good interest rate.
Purchase protection: Your credit card may step in to help if you want to dispute a charge or
return a defective product. While a debit card may offer similar protection, you will have to wait
until the issue is investigated before getting your money back.

Disadvantages:

If you make a late payment, do not pay the balance in full, or exceed your credit limit, you will
have to pay extra in fees and interest.

Credit cards can lead to debt and negatively affect your credit history if it is not managed
properly.

If you do not track your purchases, it can be difficult to know how much you spend in one month
until your statement arrives.

The terms and conditions can be confusing and, in some cases, they are only available in
English.

Interest charges: If you buy something and don’t pay it off immediately, you will end up paying
not only the purchase price but also the interest charge on that item. In other words, if you carry
a balance, all your purchases will end up costing you a little more.

Fees: Some accounts have annual fees. There may also be fees for cash advances, along with
high interest rates. In addition, you may spend more on interest and fees than you earn in
discounts or cash back. Make sure the benefits outweigh the costs.

Monthly scrutiny: You must review your bill each month to confirm that it accurately reflects
your purchases and that there aren’t any signs of fraudulent use of your card. Credit cards are a
prime target for scammers.

Internet Banking:
Introduction to Internet Banking:
Internet banking allows a user to conduct financial transactions via the Internet. Internet banking
is also known as online banking or web banking. Internet banking offers customers almost every
service traditionally available through a local branch including deposits, transfers, and online bill
payments. Virtually every banking institution has some form of online banking, available both
on desktop versions and through mobile apps.
Features of Internet Banking:
The customer using this facility can conduct transactional and non-transactional tasks including:
The customer can view account statements.
 It is 24 x 7 services.
 The customer can check the history of the transactions for a given period by the
concerned bank.
 Bank, statements, various types of forms, applications can be downloaded.
 The customer can transfer funds, pay any kind of bill, recharge mobiles, DTH
connections, etc. The customer can buy and sell on e-commerce platforms.
 The customer can invest and conduct trade.
 The customer can book, transport, travel packages, and medical packages.

Advantages of Online Banking:

 An online account is simple to open and easy to operate.
 It's convenient, because you can easily pay your bills and transfer your funds between
accounts from nearly anywhere in the world.
 It is available all the time. You can perform your tasks from anywhere and at any time,
even at night or on holidays when the bank is closed. The only thing you need to have is
an active internet connection.
 It is fast and efficient. Funds get transferred from one account to the other very fast. You
can also manage several accounts easily through internet banking.
 It's a excessive medium for the banks to endorse their products and services.
 More online services include loans and investment options.

Convenience is a major advantage of online banking: Basic banking transactions such as

paying bills and transferring funds between accounts can easily be done 24 hours a day, seven
days a week, wherever a consumer wishes.

Online banking is fast and efficient: Funds can be transferred between accounts almost
instantly, especially if the two accounts are held at the same institution. Consumers can open and
close a number of different accounts online, from fixed deposits to recurring deposit accounts
that typically offer higher rates of interest.

Consumers can also monitor their accounts regularly: By allowing them to keep their
accounts safe. Around-the-clock access to banking information provides early detection of
fraudulent activity, thereby acting as a guardrail against financial damage or loss.
Disadvantages of Online Banking:
 Understanding the usage of internet banking might be difficult at the first. A person who
is new to technology might face some difficulty.
 Password security is a must. After receiving your password, change it and memorize it.
Otherwise, your account may be misused.
 If the bank’s server is down, then you cannot access your accounts.

Technology Issues
In many ways, an online bank is only as good as your or their internet connection. If there’s a
power outage, or if servers go down, you might not have any access to your account whatsoever.
While some banks offer a phone number for customer service, it might be overwhelmed if online
access is down. With a real bank, you can always find someone to talk to in the branch.

Security Issues
While many online banks are reputable and well-established, sometimes it can be hard to feel
comfortable with a bank that doesn’t have a physical presence, particularly when large sums of
money are involved.

Inefficient at Complex Transactions:

Online banks might be able to transfer money between accounts or pay bills, but you might be
more comfortable with an International, bricks-and-mortar bank if you have complex
transactions.

No Relationship with Personal:

Banker Over time, you can develop a relationship with a personal banker if you visit a traditional
bricks-and mortar location. If you’re dealing with an online bank, on the other hand, you’re
typically handed off to an anonymous customer service agent who is unlikely to know you from
the next customer.

Electronic Fund Transfer (EFT):

An electronic funds transfer (EFT) is a transaction that takes place over a computerized network,
either among accounts at the same bank or to different accounts at separate financial institutions.
Electronic funds transfer (EFT) are electronic transfer of money from one bank account to
another, either within a single financial institution or across multiple institutions, via computer-
based systems, without the direct intervention of bank staff.
Benefits of EFT
 Electronic funds transfer provides an easy, cheaper and faster method of transferring
money.
 It helps individuals and organizations to save on costs such as printing checks as well as
the time to deliver or collect checks and deposit them in the banks for processing.
 The money moves to the recipient’s account much faster since there is no manual moving
of checks from one bank to the other.
 It is more efficient
 less administrative procedures, hence reduced labor and staff costs An electronic funds
transfer is much safer and secure. For instance, it eliminates the need to carry huge
amounts of money.
MICR :
Magnetic ink character recognition code: Magnetic ink character recognition code, known in
short as MICR code, is a character recognition technology used mainly by the banking industry
to streamline the processing and clearance of cheques and other documents. MICR encoding,
called the MICR line, is at the bottom of cheques and other vouchers and typically includes the
document-type indicator, bank code, bank account number, cheque number, cheque amount
(usually added after a cheque is presented for payment), and a control indicator. The format for
the bank code and bank account number is country specific.

The technology allows MICR readers to scan and read the information directly into a data-
collection device. Unlike barcode and similar technologies, MICR characters can be read easily
by humans. MICR encoded documents can be processed much faster and more accurately than
conventional OCR encoded documents.

In MICR technology the information is printed on the instrument with a special type of ink
which is made up of magnetic material. On insertion of the instrument in the machine, the
printed information is read by the machine. MICR system is beneficial as it minimizes chances
of error, clearing of cheques becomes easy and transfer of funds becomes faster in order to
facilitate operations.
 MICR Code Benefits & Features

 Safe and secure verification of cheques

 Faster clearance of cheques
 Helps avoid fraud and fake cheque circulation
 Standardized technique that is reliable
 Printing is done with the help of magnetic ink or a toner
 Systems will be able to read the code even if there are other ink marks or signatures
 Used by the banking industry
 This is make it more difficult for people to alter cheques and hence avoids theft, etc
 Reduces the chances of human error

Disadvantages Of MICR
Following are the drawbacks or disadvantages of MICR:
 It can recognize only 10 digits & 4 special characters.
 Alphanumeric characters are not used in MICR. Only certain characters can be read.
 It is more expensive method of data entry.

Parameter IFSC Code MICR Code

Full form Indian Financial System Code Magnetic Ink Character
Recognition
Purpose Used for fund transfers via NEFT, RTGS or Used for cheque clearing
IMPS
Number of 11-digit alphanumeric code 9-digit numerical code
digits
 Real Time Gross Settlement (RTGS):
RTGS or Real Time Gross Settlement is a fund transfer method through which money is sent in
real time basis without any delays. This electronic fund transfer system allows the money sent by
the remitter to immediately reach the payee/beneficiary as and when the money transfer
transaction is initiated.
Gross Settlement refers to the processing of transactions on an individual basis and not in a batch
wise system.

Features of RTGS
Transaction here are the main features of an RTGS transaction that one should be aware of
before using it:
1. Real-time online fund transfer
2. Used for high value transactions
3. Safe and secure
4. Reliable and backed by RBI
5. Immediate clearing
6. Funds credited on a one-on-one basis
7. Transactions executed on an individual and gross basis
There are two modes to perform RTGS:
a. Internet banking: Many banks offer the facility to add beneficiary online using the internet
banking facility. Upon successfully adding beneficiaries, you can transfer funds to the
beneficiary. In addition to individuals, corporate account holders can also utilize internet banking
to make RTGS transfers.

b. Branch: Visit the nearest bank branch and fill the RTGS form to initiate a fund transfer.

National Electronic Funds Transfer (NEFT):

National Electronic Funds Transfer (NEFT) is a mode of online funds transfer that is introduced
by the Reserve Bank of India (RBI).
It quickly transfers money between banks throughout India. A bank branch must be NEFT-
enabled for a customer to be able to transfer the funds to another party.

The benefits of NEFT given to the consumers are as follows:

Safe and Effective: For a flawless transfer of funds on the Internet, NEFT helps you to transfer
any amount of money quickly.
Low Processing Charges: NEFT is flexible payment options which are very economical. To
utilize this facility, you don’t have to pay a huge sum of money to your bank. The processing
charges are economical, and you can transfer any amount of money without any difficulty.

Highly Dependable: NEFT, an integral aspect of Internet banking, is a highly dependable

method of making payments and receiving funds online. In India, most of the banks are regulated
under the norms set by RBI and, hence, the Internet banking facility too is quite safe.

Rapid Settlement: Unlike the regular banking methods of fund transfer, NEFT transfer isreally
quick, and you can enjoy rapid settlement of accounts, thereby improving the overall
functionality of your business.

Electronic Clearing Service

ECS is an electronic mode of payment / receipt for transactions that are repetitive and periodic in
nature. ECS is used by institutions for making bulk payment of amounts towards distribution of
dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone /
electricity water dues, cess tax collections, loan installment repayments, periodic investments in
mutual funds, insurance premium etc

Advantages

1. Banks handling ECS get freed from paper handling

2. Work load of destination branches is reduced
3. The customer get immediate credit in respect of interest and dividend on securities held
by them.
4. There is no need for issuing cheque by the person for making payments because debit in
his or her bank account will be made automatically .

Disadvantages

1. The scheme covers the amounts exceeding one lakh rupees

2. The scheme is available only in big cities

Small banks:
Small finance banks are a type of bank that helps those sections which do not get support from
other banks. Small finance banks provide basic bank facilities to the economical sections which
are not supported by the other banks.
 It helps to provide financial aid to the small business units, small or marginal farmers, micro or
small industries. It includes small scale businesses, the unorganized sector, low-income
households, farmers, etc.

 Small Finance Banks are the financial institutions which provide financial services to the
unserved and unbanked region of the country.
 They are registered as a public limited company under the Companies Act, 2013.

The objective of small finance banks

 Its main and foremost purpose is to provide an institutional mechanism for promoting
savings among the rural & semi-urban sections of society.
 It helps in the supply of credit to small business units; small & marginal farmers; micro
& small industries and other unorganized sectors.
Rules for Small Finance banks
 Small finance banks will perform basic banking services of accepting the deposits and
lending money to backward sections.
 It will provide banking facilities to boost saving habits among rural people.
 These small finance banks are established as a public limited company. They may be
promoted either by individuals, corporate, trust or societies.
 These are governed by the provisions of the Reserve Bank of India act 1934 and the
Banking Regulation Act 1949.
 Small Finance Banks cannot borrow funds from the Reserve Bank of India, unlike any
other scheduled bank.
Eligibility Criteria for Banks
 Min. Paid Up Capital Rs. 100 Crores
 Promoters minimum initial contribution to above 40%(to be bought to 26% within 12
years of commencement)
 Foreign Shareholding as per FDI policy for private banks
 Subjected to all prudential norms and regulations of commercial banks
 Extend 75% of ANBC to the sectors classified as PSL
 At least 50% of its loan portfolio should constitute of loan and advances up to 25 lakhs.

Payment banks:
 A payments bank is like any other bank, but operating on a smaller scale without
involving any credit risk
A payment bank is a new form of bank constituted by the Reserve Bank of India on the
recommendation of Dr. Nachiket Mor committee to widen the spread of payment and provide
financial services to low-income households, small businesses, and the migrant labor workforce.

 There are 6 payment banks in India: Airtel Payments Bank, Jio Payments Bank, NSDL
Payments Bank, Paytm Payments Bank, India Post Payments Bank, and Fino Payments
Bank.
 Payment Bank can accept demand deposits up to 2 lakh. Payment banks provide services
like- net banking, mobile banking, debit Banks, and ATM cards, but they cannot lend
loans and issue credit cards.

Features of Payment Banks

The function of Payment banks and Commercial banks are almost the same. However, there are
some restrictions on Payment banks as follows-

 There is a limitation on saving deposits in the Payment Bank that a maximum limit of
saving deposit in a Payment bank is up to 1 lakh per person.
 The customers can open both savings and current accounts in the Payment Banks.
 Payment Banks provide services like ATM or debit cards but not credit cards to the
customer.
 Non-Resident Indians cannot deposit in the Payment Banks.
 Customers of the Payment Banks are not provided services like lending a loan.
 The customers of such Banks cannot receive remittances on the current accounts from the
cross border.
 Like the other commercial banks, they are required to deposit amounts with the Reserve
Bank of India in the form of the Cash Reserve Ratio(CRR).
 Payment Bank also provides the facility to pay utility bills online to their customers, i.e.,
mobile banking and net banking services.
 To differentiate itself from the other banks, the word 'Payments Bank' must be included
in their names.
 Payment Banks can work as partners with the other commercial banks and sell mutual
funds, insurance, etc., only by prior approval from the RBI.
 Payment banks are prohibited from Undertaking any activities affiliated with Non-
Banking Financial Services.

Limitations of Payment Banks

 Payment Banks cannot provide services such as lending loans and credit cards.
 As they can't lend money, they cannot earn high interest as commercial banks did.
  There is intense competition between the Payment banks and the Unified Payment
Interface (UPI) system.
 There is a lack of awareness about how to access the services among the public.
 Poor infrastructure and poor operational resources.
 Issues related to various techniques.

S.No. Name of Bank Headquarters Features

1 Airtel Payment New Delhi First payment bank in India which was
Bank incorporated in January 2017.
2 Fino Payment Mumbai, It was incorporated in April 2017
Bank Maharashtra
3 India Post New Delhi It was launched in September 2018.
Payment Bank
4 Paytm Payment Noida, Uttar It is India only first mobile bank with zero
Bank Pradesh balance-zero digital transaction to charge
accounts
5 NSDL Payment Mumbai, It was set up in 2018
Bank Maharashtra
6 Jio Payment Navi Mumbai, It is the sixth payment bank in India
Bank Maharashtra

Digital Wallet:

A digital wallet is a digital version of a traditional or physical wallet. Users can use a digital
wallet to make transactions such as bill payments, mobile recharges, travel/movie bookings,
money transfer from one bank account to another, among many others.

 Digital wallets enable users to make quick payments online

 Users can use digital wallets to book train/flight tickets, complete mobile recharge
transactions, pay electricity bills, book gas cylinders, etc.
 A digital wallet requires a user to add money from a linked bank account
 These wallets are secure and can be used for all sorts of transactions
 To complete digital wallet transactions, one must have a smart phone, a payment app
such as Paytm, and an internet connection
 Types of Digital Wallets

Closed wallet

 A closed wallet enables users to make payments via an app or website

 They are typically created by businesses that sell products or services to their customers
 Users of a closed wallet can only use the stored funds to complete a transaction with the
wallet’s issuer
 If a transaction is canceled or a refund is issued, the entire amount is stored in the wallet
 Closed wallets do not allow users to make payments outside of the wallet

Semi-closed wallet

 A semi-closed wallet allows users to easily perform transactions at merchants

 Semi-closed wallets have a limited coverage area
 To accept payment from the wallet, merchants must accept the contract or agreement
with the issuer

Open wallet

 Banks provide open wallets which can be used to perform any type of transaction
 Open wallets offer the flexibility to transfer funds easily
 Payments can be made online and in-store at any time
 The open e-wallets service provider allows users to conduct transactions from anywhere
in the world; however, both the sender and the receiver must have accounts on the same
application

Crypto currency:
A crypto currency or crypto, is a virtual currency secured by cryptography. It is designed to work
as a medium of exchange, where individual ownership records are stored in a computerised
database.

Latest Developments regarding Crypto currency in India – The Crypto currency and
Regulation of Official Digital Currency Bill 2021 is likely to be introduced in the winter session
of the Parliament. It is a bill that would regulate Crypto currency in India. On December 7 2021,
Finance minister Nirmala Sitharaman asserted that the the proposed Central Bank Digital
Currency will not boost crypto currency in India.
 Definition of Crypto currency
In simplistic terms, Crypto currency is a digitized asset spread through multiple computers in a
shared network. The decentralized nature of this network shields them from any control from
government regulatory bodies.
The term “crypto currency in itself is derived from the encryption techniques used to secure the
network.
As per computer experts, any system that falls under the category of crypto currency must meet
the following requirements.:

1. Absence of any centralized authority and is maintained through distributed networks

2. The system maintains records of crypto currency units and who owns them
3. The system decides whether new units can be created and in case it does, decided the
origin and the ownership terms
4. Ownership of crypto currency units can be proved exclusively cryptographically.
5. The system allows transactions to be performed in which ownership of the cryptographic
units is changed.

Types of Crypto currency

The first type of crypto currency was Bitcoin, which to this day remains the most-used, valuable
and popular. Along with Bitcoin, other alternative crypto currencies with varying degrees of
functions and specifications have been created. Some are iterations of bitcoin while others have
been created from the ground up
Bitcoin was launched in 2009 by an individual or group known by the pseudonym “Satoshi
Nakamoto. As of March 2021, there were over 18.6 million bitcoins in circulation with a total
market cap of around $927 billion.
The competing cryptocurrencies that were created as a result of Bitcoin’s success are known as
altcoins. Some of the well known altcoins are as follows:

1. Litecoin
2. Peercoin
3. Namecoin
4. Ethereum
5. Cardana

Advantages and disadvantages of Cryptocurrency

Cryptocurrency has the following advantages

 Funds transfer between two parties will be easy without the need of third party like
credit/debit cards or banks
 It is a cheaper alternative compared to other online transactions
  Payments are safe and secured and offer an unprecedented level of anonymity
 Modern crypto currency systems come with a user “wallet” or account address which is
accessible only by a public key and pirate key. The private key is only know to the owner
of the wallet
 Funds transfer are completed with minimal processing fees.

Crypto currencies have the following disadvantages.

 The almost hidden nature of crypto currency transactions makes them easy to be the
focus of illegal activities such as money laundering, tax-evasion and possibly even terror-
financing
 Payments are not irreversible
 Crypto currencies are not accepted everywhere and have limited value elsewhere
 There is concern that crypto currencies like Bitcoin are not rooted in any material goods.
Some research, however, has identified that the cost of producing a Bitcoin, which
requires an increasingly large amount of energy, is directly related to its market price.

KYC norms:
KYC (Know Your Customer) is today a significant element in the fight against financial crime
and money laundering, and customer identification is the most critical aspect as it is the first step
to better perform in the other stages of the process.

KYC means Know Your Customer and sometimes Know Your Client.
KYC or KYC check is the mandatory process of identifying and verifying the client's identity
when opening an account and periodically over time.
In other words, banks must make sure that their clients are genuinely who they claim to be.
Banks may refuse to open an account or halt a business relationship if the client fails to meet
minimum KYC requirements.

Types of KYC
There are two types of KYC verification processes. Both are equally good, and it is simply a
matter of convenience whether one chooses to opt for one type over the other. Both are as
follows:

 Aadhar-based KYC: This verification process is done online, making it highly

convenient for those with a broadband or internet connection. Here, the customer needs
to upload a scanned copy of their original Aadhar card. If the customer wishes to invest
 in a mutual fund, with Aadhar based KYC the opportunity to do so is only up to 50,000 a
year.
 In-Person based KYC: If the customer wishes to invest more in mutual funds per year,
they will be required to carry out an in-person verification KYC which is done offline. To
do so, the customer can choose to visit a KYC kiosk and authenticate their identity using
Aadhar biometrics or can call the KYC registration agency to send an executive to their
home/office to carry out this verification.

Basel Norms:
 Basel norms or Basel accords are the international banking regulations issued by the Basel
Committee on Banking Supervision.
 The Basel norms are an effort to coordinate banking regulations across the globe, with
the goal of strengthening the international banking system.
 It is the set of the agreement by the Basel committee of Banking Supervision which focuses
on the risks to banks and the financial system.
 Basel-I
 It was introduced in 1988.
 It focused almost entirely on credit risk.
 Credit risk is the possibility of a loss resulting from a borrower's failure to repay
a loan or meet contractual obligations. Traditionally, it refers to the risk that a
lender may not receive the owed principal and interest.
 It defined capital and structure of risk weights for banks.
 The minimum capital requirement was fixed at 8% of risk weighted assets
(RWA).
 RWA means assets with different risk profiles.
 For example, an asset backed by collateral would carry lesser risks as compared
to personal loans, which have no collateral.
 India adopted Basel-I guidelines in 1999.
Basel-II
o In 2004, Basel II guidelines were published by BCBS.

o These were the refined and reformed versions of Basel I accord.

o The guidelines were based on three parameters, which the committee calls it as pillars.
 Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy
requirement of 8% of risk assets
  Supervisory Review: According to this, banks were needed to develop and use better risk
management techniques in monitoring and managing all the three types of risks that a
bank faces, viz. credit, market and operational risks.
 Market Discipline: This needs increased disclosure requirements. Banks need to
mandatorily disclose their CAR, risk exposure, etc to the central bank

Basel III
o In 2010, Basel III guidelines were released.

o These guidelines were introduced in response to the financial crisis of 2008.

o A need was felt to further strengthen the system as banks in the developed economies were
under-capitalized, over-leveraged and had a greater reliance on short-term funding.
o It was also felt that the quantity and quality of capital under Basel II were deemed
insufficient to contain any further risk.

Mobile banking:
Mobile banking (m-banking) refers to the use of a mobile device to access banking and financial
services offered by banks. It enables customers to check their bank account balance, conduct
online transactions, transfer funds, pay bills, etc., without visiting banks.

 Mobile banking (m-banking) refers to the use of a mobile device like a smart phone or tablet to
perform banking activities. It is done through a mobile app, USSD, or SMS.
 It enables customers to access banking services easily, quickly, and conveniently anytime,
anywhere.
 Customers utilize mobile banking to view and monitor account details, transfer funds, apply or
repay a loan, make investments, lodge complaints, deposit checks, etc.
 The key difference between mobile and internet banking is that the former uses a mobile device
while the latter employs a desktop or PC.
 M-banking is susceptible to online frauds but safety features like two-step OTP verification,
biometric login, and antivirus help to secure transactions.

Advantages

 Offers 24-hour accessibility to banking

 Saves time
 Provides a convenient way of making fund transfers and payments
 Enables easy tracking and monitoring of bank accounts
 Facilitates quick reporting of any illegal transaction or fraudulent activity
 Allows swift redressal of consumer complaints
 Increase request processing speed
 Makes online shopping possible
 Allows trouble-free management of investments
 Sends notification of bill or loan payments
 Encourages customers to stay indoors during a pandemic
 Eliminates the need to carry cash all the time
 Reduces chances of theft

Disadvantages

 Causes inconvenience for less tech-savvy account holders

 Removes human touch from banking
 Raises security concerns and online fraud
 Results in delays or losses in transactions due to mistakes
 Gives rise to comprehension issues due to the app interface
 Makes follow up on fraud reports difficult
 Delays service requests in case of internet issues

Mobile banking Internet banking

It is performed by using a mobile device. It can be accessed using a desktop or laptop.
It is based on an app curated by the bank to be It does not require any such app.
used on mobile devices by the customers.

It is conducted using SMS, phone, USSD, or Customers only need a web browser to access
an app. internet or online banking.
Account-holders can use mobile-based Internet banking requires an internet
banking without an internet connection also. connection.

It is more convenient to use. It is less convenient to use.

The mobile app for banking is less secure due Online banking is more secure as it uses
to unseen loopholes in coding. HTTPS secure gateway, which is difficult to
hack.
It provides limited banking functionality. It gives a full range of access to banking
services to the customer.
It is easily available to everyone having a It can be used only by people having desktops
smart phone and is affordable. or laptops, which are costly.
 E-payments:
E-payments have been part of us for some time and have shown their importance, especially
during the pandemic when we try to maintain social distance, where e-payments help us pay
anyone anytime as per our convenience.

Advantages:

1. Increased speed:

We do not have to worry about carrying paper money or wait in line to withdraw money from
ATMs. Through E-payments you can pay anyone at any time.

2. Increased Sales:

As people are able to pay to anyone and are not much dependant, the demands of products in the
market have increased which resulted to increase in sales of almost every product.

3. Instant Receipts:

As soon as you make an online payment, you receive receipts and feedback almost instantly.

4. Better Deals:

As people are getting more indulged in e-payments, almost every payment service provider has
started giving exciting offers helping people get good deals.

Disadvantages:

1. Service Fees:

Many a time while using e-payment services we are liable to pay service fees or a convenience
fee which adds to our expense.

2. Risk of Theft: There have been many incidents in which cybercriminals have manipulated
people and money has been looted.

3. Technical Problems: As it is an online service, it may go down due to technical issues and
people who get 100% reliable on this service for their payments may face an issue.
4. Remote Areas:

Remote areas still rely on cash. You might find it difficult in making payments on the go while
traveling to some remote areas.

E-money:
Electronic money (e-money) is a digital store of a medium of exchange on a computerized
device. E-money can be used for payment transactions, with or without bank accounts. The great
advantage of course is a cashless payment system that makes money transfers of any size quick
and easy.
Electronic money plays a massive role in the digital currency revolution that is sweeping the
world.

E-money presents several advantages, including:

 The ability to move money quickly, literally at the speed of light.

 Better recordkeeping.
 Global money transfers.
 The ability to move large sums of money without any physical burden.

Disadvantages:

 Cybercrime and new digital forms of money laundering.

 Users must have a minimum level of training and knowledge, especially with more
complicated forms of electronic transfers.
 Some types of e-money, most notably crypto currencies, are closely linked to criminal
activity.
 Both hardware and software are required to perform transfers of electronic cash.