What is Banking?

A system of trading in money which involves safeguarding deposits and making funds available for borrowers. In general terms, the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit. Functions : 1. Accepting Deposits from public/others (Deposits) 2. Lending money to public (Loans) 3. Transferring money from one place to another (Remittances) 4. Credit Creation 5. Acting as trustees 6. Keeping valuables in safe custody 7. Investment Decisions and analysis 8. Government business HISTORY OF BANKING IN INDIA The journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

Phase - I: Pre-Nationalization Era. Early phase from 1786 to 1969 of Indian Banks Phase - II: Nationalization Stage. Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. Phase - III: Post Liberalization Era. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

Indigenous Banks
Meaning
Indigenous bankers are individuals or private rms which receive deposits, extend loans and thereby operate as banks. They constitute the ancient banking system of India. Types

There are three types of indigenous bankers: (a) Those whose main business is banking (b) Those who combine their banking business with trading commission business, (c) Those who are mainly traders and commission agents but who do a little banking business also. The majority of the indigenous bankers belong to the second group. Functions of Indigenous Bankers 1

1. Accepting Deposits: Indigenous bankers accept deposits from the public and these deposits are of two types: (a) the deposits which are repayable on demand, and (b) the deposits which are repayable after a xed period. The indigenous bankers pay higher rate of interest than that paid by the commercial banks. 2. Advancing Loans: The indigenous bankers advance loans to their customers against all types of securities, such as land, houses, crops, gold and silver. They also give credit against personal security. In recent years, they are also providing working capital to the small industrialists. 3. Business in Hundies: The indigenous bankers deal in hundies. They write hundi es and buy and sell hundies. They also discount hundies and thereby meet the nancial needs of the internal traders. They also transfer funds from one place to another through discounting of hundies. 4. Acceptance of Valuables for Safe Custody: Indigenous bankers accept valuables of their clients for safe custody. Some indigenous bankers provide cheque facility. They provide remittance facilities also.
Defects of Indigenous Bankers

1. Mixing Banking and Non-banking Business: Many of the bankers undertake speculative activities. Their business is risky as they combine both trading and banking. 2. Unorganised Banking System: Different indigenous bankers operate separately and independently. They have no coordination with each other. The transfer of funds is not possible in such a system. 3. Insufficient Capital: The indigenous bankers largely depend upon their own capital. As a result, their nancial resources are insufficient to meet the demand of borrowers. 4. Meager Deposit Business: The main business of the indigenous bankers is to give loans and deal in hundies. Their deposit business is meager or very small. 5. Defective Lending: The indigenous bankers generally do not follow the sound banking principles while granting loans. They also do not distinguish between short-term and long-term loans. 6. Unproductive Loans: The indigenous bankers do not pay attention to the purpose for which the loan is used. They also give money for unproductive and speculative activities or for paying off old debts. 7. Higher Interest Rates: The indigenous bankers charge very higher interest rates for the loans than those charged by the commercial banks. 8. Exploitation of Customers: The indigenous bankers adopt all types of malpractices and exploit their customers in many ways. 9. Secrecy of Accounts: The indigenous bankers keep secrecy about their accounts and activities. They neither get their accounts audited nor publish annual balance sheets. This raises suspicion in the minds of the people. 2

10. No Control of Reserve Bank: The indigenous banking business is unregulated. The Reserve Bank of India has no control over these bankers and cannot regulate their activities.

Moneylenders
Moneylenders are those persons whose primary business is money lending. They lend money from their own funds. Pathans and kabulls are itinerant money lenders, they charge very high rate of interest; they do not receive deposits from people. Types : The professional moneylenders, - Professional moneylenders are those persons whose business is only lending of money. The Maharajas,Sahukars and Banias are professional moneylenders. They usually hold licenses for money lending. The non-professional moneylenders. Non-professional money lenders are those persons who combine money lending with other activities. They consist of landlords, agriculturists, traders, pensioners, rich windows etc. They have no license to carry on money lending business.

Features of Moneylenders The methods and areas of operations vary from moneylender to moneylender. However, there are certain common features of their activities. They are as follows: a. Moneylenders mostly lend their own funds. b. The borrowers from moneylenders are mainly illiterate and economically weaker sections of the society. c. The loans of the moneylenders are highly exploitative in nature. d. The credit provided by moneylenders may be secured or unsecured. e. The lending operations of moneylenders are prompt, informal and exible. Advantages of Money lending

They usually provide short-term finance of small loans - which is ideally suited to low-income groups, who cannot digest' larger loans, and do not prefer long-term commitments. They provide loans to borrowers expeditiously and in a flexible manner, thus making finance available immediately, when it is needed and with a minimum amount of paper-work and official requirements. They function in close physical proximity to the borrower, enabling frequent contact and thus dispensing the need for collateral requirements. They do not have fixed business hours, and therefore provide loans as and when requests are made. 3

Disadvantages of Money lending

They are unorganized and do not have any contact with other sections of the banking industry They combine money lending with trading and commission activities and thus introduce risk into their business. They do not distinguish between short-term and long-term finance and also in the purpose of the loans. They follow traditional methods of keeping accounts and do not give receipts in most cases. They charge high rates of interest in proportion to banking institutions.

Differences Between Moneylenders and Indigenous Bankers The following are the important differences between the moneylenders and the indigenous bankers: 1. The moneylenders do not accept deposits from the people. But indigenous bankers accept deposits from the people. 2. The indigenous bankers deal in hundies. But moneylenders do not deal in hundies. 3. The indigenous bankers generally lend for trade or productive purposes. But the moneylenders lend for consumption purposes. 4. Moneylenders operate in a limited area. So the scope of their business is limited. But indigenous bankers have a wider area of operation. So they have large scalenancial operations. 5. The indigenous bankers are largely urban-based, where as money-lenders carry on their business in rural areas. 6. Moneylenders functions in an isolated manner. Generally, they do not have any link with the organised sector of the money market. But indigenous bankers maintain some link with the organised sector because of their hundies business. Declining Role of Moneylenders : The money lending business has been playing a major role in the economy of India. But their domain is shrinking day by day for the following reasons: a. Malpractices followed b. Growth of Co-operative societies c. Growing Financial Consciousness d. Enactment of Moneylenders Act. e. Growth of Microfinance institutions

Banking System In India

Central Banking
Banking system of every nation plays vital role for the economy and it is regulated by the central banking authority of the respective countries. Meaning A Central Bank is a financial institution that controls countrys monetary policy, and usually has several mandates including, issuing national currency, maintaining the value of the currency, ensuring financial system stability, controlling credit supply, serving as a last-resort lender to other banks, acting as governments banker etc. Objective The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." Functions of RBI

1.Monetary Authority:

Formulates , implements and monitors the monetary policy. Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors. Tools of monetary control are CRR, SLR, Bank Rate, Open Market Operations, Selective Credit control Prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. Manages the Foreign Exchange Management Act, 1999. 5

2.Regulator and supervisor of the financial system:

3.Manager of Foreign Exchange

Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality. Performs a wide range of promotional functions to support national objectives. Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker. Banker to banks: maintains banking accounts of all scheduled banks.

4.Issuer of currency:

5.Developmental role

6.Related Functions

Difference between the Central bank and Commercial bank The basic difference between the Commercial bank and Central bank are briefly explained in detail as follows:1. The Central Bank of a country was established under a special statue and in India RBI was established under the RBI Act of 1934; where as a Commercial Bank was established under Banking Regulation Act, 1949. 2. The central bank occupies a dominating position as it is the apex bank among all the banks in the country; where as commercial bank occupies a subordinate position in the banking structure of a country. 3. There can be only one central bank for the entire economy and there is a large number or network of different commercial banks in a country. 4. Central bank is a non-profit making financial institution, whereas commercial banks are a profit oriented financial institution. 5. The central bank has the monopoly power to issue currency notes from Rs.2 and above; where as commercial bank cannot print currency notes. 6. The central bank is owned by the central government; where as commercial banks can be owned by the government or may be privately owned.

COMMERCIAL BANKS
Meaning A banking company is one which transacts the business of banking which means accepting for the purpose of lending all investments, of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft or otherwise. There are two essential functions that a financial institution must perform to become a commercial bank. These are a) Accepting deposit form the public b) Lending money to the needy Commercial banks include public sector banks, private banks and foreign banks. Main features: a. It accepts deposits from the public, which can be withdrawn by cheque and are repayable on demand. b. A commercial bank uses the deposited money for lending and for investment in securities. c. It is a commercial institution , whose aim is to earn profit Functions of commercial Banks Various functions of commercial banks can be divided into three main groups; A. Primary functions B. Secondary functions C. General utility functions Primary functions There are two main primary functions of the commercial banks which are discussed below:
1. Accepting deposits The primary function of commercial bank is to accept deposits form every class and from every source. To attract savings the bank accepts mainly three types of deposits. They are namely demand deposits, time deposit and hybrid deposit. 2. Advancing of loans - Commercial banks give loans and advances to businessmen, farmers, consumers and employers against approved securities. Approved securities

refer to gold, silver, bullion, govt. securities, easily savable stock and shares and marketable goods.

Secondary functions
Besides the primary functions of accepting deposits and lending money, banks perform a number of other functions which are called secondary functions. These are as follows 1. Issuing letters of credit, travelers cheques, circular notes etc. 2. Undertaking safe custody of valuables, important documents and securities by providing safe deposit vaults or lockers; 3. Providing customers with facilities of foreign exchange. 4. Transferring money from one place to another; and from one branch to another branch of the bank. 5. Standing guarantee on behalf of its customers, for making payments for purchase of goods, machinery, vehicles etc. 6. Collecting and supplying business information; 7. Issuing demand drafts and pay orders; and, 8. Providing reports on the credit worthiness of customers.

General Utility functions The modern Commercial Banks in India cater to the financial needs of different sectors 1. The banks act as trustees. On account of the knowledge of the financial market of India the financial companies are attracted towards them to act as trustees to take the responsibility of the security for the financial instrument like a debenture. 2. The Government also hires the commercial banks for various purposes like tax collection and refunds, payment of pensions etc. 3. Cash management and Treasury Services 4. Merchant banking and private equity financing 5. sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a financial supermarket Categorization of Commercial Banks The commercial banking structure in India consists of: A. Scheduled Commercial Banks - The Scheduled Commercial Banks are the banks, which are listed under the Second Schedule of the Reserve Bank of India Act, 1934. With listing in second schedule banks are conferred with some benefits in terms of access to accomodation by RBI during the times of liquidity constraints. The scheduled status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI. B. Unscheduled Banks; The banks other than the scheduled banks are Unscheduled Banks. Criteria for inclusion in the list of scheduled banks 8

Minimum paid up capital and total reserve Rs 5 lakhs It must be a company under Section 3 of the companies Act Its affairs are not detrimental to the interest of the depositors It must have earned profit for last three years

PRIVATE BANKS
Categorization of Private banks The private banks those got established after 1993 i.e. after banking sector reform bracketed as New Generation Private Sector Banks and they are well distinguished from old generation private sector banks. Features of new generation Private sector banks a. Technology- The private banks have used technology to provide quality service through lower cost delivery mechanisms. b. Convergence- The new private banks are able to provide a range of financial services under one roof, thus increasing their fee based revenues. c. High-end Customers- The new generation private sector banks mainly concentrate on high-end and high middle income segments. d. Priority sector targets - The new generation private sector banks which rely on indirect financing to accomplish the priority sector targets. e. Lucrative Business Areas -They made a strong presence in the most lucrative business areas in the country because of technology up gradation. f. Operating Expenses - their operating expenses is low as compared to the PSU banks and their efficiency ratios (employees productivity and profitability ratios) is also high. g. Value added services to customers and they undertake all most all the modern method of banking such as the internet banking, mobile banking, etc. Advantage over public sector banks

They took advantage of the following problems concerning the nationalized / state sector banks 1. Large number of unprofitable branches 2. Excess staffing 3. Mounting Non Performing Assets on account of intervention of Govt. 4. Laggard in technology 5. Development of innovative consumer oriented products 6. Lesser focus on marketing They have made banking more efficient and customer friendly. In the process they have jolted public sector banks out of complacency and forced them to become more competitive.

Disadvantages of Private Banks

Private Banks runs like a business. Even though, there are lots of advantages to this, the major disappointment comes on the service charges, which is very much higher. Unorganized HR System The minimum balance for deposit accounts is much higher than the public sector banks. Low focus on priority sector lending and financial inclusion.

COOPERATIVE BANKS
Meaning A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. They are often created by persons belonging to the same local or professional community or sharing a common interest. Features

1. Principle of self-help - Co-operative Banks are basically organized and managed

on the principle of co-operation, self-help, and mutual help and they function with the rule of one member, one vote.

2. Customer-owned entities: The needs of the customers meet the needs of the
owners, as the members are at both the ends. Hence, the first aim of a cooperative bank is not to maximize profit but to provide the best possible products and services to its members. Some co-operative banks only operate with their members but most of them also admit non-member clients to benefit from their banking and financial services.

3. Democratic control: Since they are owned and controlled by the members, the
board of directors get elected democratically by the members , usually having equal voting rights, in tune with the co-operative principle of one member , one vote.

4. Principle of no profit, no loss - They function with the principle of no profit, no

loss and generally do not pursue the goal of profit maximization.

5. Profit allocation :

Here a significant part of the annual

profit, benefits or

surplus is usually allocated to constitute reserves and a part of this profit are also distributed to the members, through a patronage dividend,( the use of the

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co-operatives products and services by each member, or the

interest /

dividend, related to the number of shares subscribed by each member)

6. Localized set up- They are deeply rooted inside local areas and communities
and are involved in local development as well as contribute to the sustainable development of their communities.

7. Regulatory prescriptions Co-operative Banks are subject to regulatory requirements of

RBI/ NABARD. However, they are allowed with preferential treatments in comparison to commercial banks..

Classifications of Co-operative Banks 1. Statutory Classifications- Some co-operative bank are scheduled banks, while others are non-scheduled banks. For instance, State co-operative banks and some Urban co-operative banks are scheduled banks but other co-operative bank are non- scheduled banks 2. According to Terms of Lending- From Terms of lending point of view, they are of two categories : a. Short term lending oriented co-operative Banks within this category there are three sub categories of banks viz state co-operative banks, District cooperative banks and Primary Agricultural co-operative societies. b. Long term lending oriented co-operative Banks within the second category there are land development banks at three levels state level, district level and village level. STRUCTURE OF COOPERATVE BANKING The cooperative banking structure in India is divided into 4 components: a) Primary cooperative credit society b) Central cooperative banks c) State cooperative banks d) Land development banks

a) Primary Agricultural Credit Societies (PACSs)- A Primary agricultural credit society can be started with 10 or more persons normally belonging to a village or a group of villages. The value of each share is generally nominal so as to enable even the poorest farmer to become a member. It gives loans and advances to needy members mainly out of these deposits.
The Urban Co-operative Banks (UCBs) refers to primary cooperative banks located in urban and semi-urban areas.

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b) Central Co-operative Banks (CCBs)-The central co-operative banks are located at the district headquarters or some prominent town of the district. Their main function is to lend to primary credit society and now a days they have been undertaking normal commercial banking business like - attracting deposits from the general public and lending to the needy against proper securities. c) State Co-operative Banks (SCBs)-The state Co-operative Banks, finance, coordinate and control the working of the central Co-operative Banks in each state. They serve as the link between the Reserve bank and the general money market on the one side and the central co-operative and primary societies on the other. They obtain their funds mainly from the general public by way of deposits, loans and advances from the Reserve Bank and their own share capital and reserves. d) Land development Banks- The land development banks are organised in 3 tiers namely, state, central and primary level and they meet the long term credit requirements of the farmers for developmental purposes. The state land development bank overseas the primary land development banks situated in the districts and tehsils in the state. They are governed both by the state government and Reserve Bank of India. Recently, the supervision of land development banks has been assumed by National Bank for Agriculture and Rural Development (NABARD). The sources of funds for these banks are the debentures subscribed by both central and state government. These banks do not accept deposits from the general public.

Functions Co-operative Banks belong to the money market as well as to the capital market and are financial intermediaries only partially, in view of limited financial products. Now a days they are performing all the main banking functions of deposit mobilization, supply of credit and provision of remittance facilities. 1. Primary agricultural credit societies provide short term and medium term loans. 2. Land Development Banks (LDBs) provide long-term loans. 3. SCBs and CCBs also provide both short term and term loans. 4. The co-operative banks in rural areas mainly finance agricultural based activities including farming, cattle, milk, hatchery, personal finance etc. along with some small scale industries and self-employment driven activities 5. The co-operative banks in urban areas mainly finance various categories of people for self-employment, industries, small scale units, home finance, consumer finance, personal finance, etc. 6. Co-operative banks are playing a more proactive role than scheduled commercial banks (SCBs) in achieving financial inclusion 7. They are also playing a pivotal role in micro finance The exponential growth of Co-operative Banks is attributed mainly to their much better local reach, personal interaction with customers, their ability to catch the nerve of the local clientele.

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REGIONAL RURAL BANKS

The Narasimham committee on rural credit recommended the establishment of Regional Rural Banks (RRBs) on the ground that they would be much better suited than the commercial banks or co-operative banks in meeting the needs of rural areas.

Objectives of Regional Rural Banks Regional Rural Banks were established with the following objectives in mind: 1. Taking the banking services to the doorstep of rural masses, particularly in hitherto unbanked rural areas 2. Bridging the credit gap in rural areas 3. Check the outflow of rural deposits to urban areas 4. Reduce regional imbalances and increase rural employment generation 5. Making available institutional credit to the weaker sections of the society who had by far little or no access to cheaper loans and are forced to depend on the private money lenders. 6. Mobilise rural savings and channelise them for supporting productive activities in rural areas. 7. Generating employment opportunities in rural areas and bringing down the cost of providing credit to rural areas.

With these objectives in mind, knowledge of the local language by the staff is an important qualification to make the bank accessible to the people 13

Nature Status of scheduled commercial banks Combines basic features of the commercial banks and cooperative societies

Amalgamation of Regional Rural Banks The total number of Regional Rural Banks (RRBs) were 196 and now stands at 86 following the process of their amalgamation initiated by the government in 2005, so as to strengthen and consolidate RRBs. There were 196 Regional Rural Banks operating in the country as on March 31, 2004 . Most of the sponsor banks were operating more than one RRB in one state and in order to give a further boost to profitability of these banks and to strengthen them further a need was felt to amalgamate more than one RRB of same sponsor bank operating in the same state.

FOREIGN BANKS
Features 1. They are operating in Urban and Metropolitan cities only with limited number of branches; catering to elite clientele 2. The foreign banks having considerable international exposure are able to launch new products besides providing better services. 3. Foreign banks tend to follow exclusive banking by offering services to a small number of clients, instead of inclusive banking. 4. Foreign banks charge higher fees from customers for providing banking services and maintaining a bank account requires substantial financial resources. 5. These banks have been complying with the 32% requirement under Priority Sector Lending but mostly concentrate on Retail Banking. 6. The low Credit Deposit ratio indicates that more than lending to business and industry, they resort to investment operations.

Role of foreign banks Foreign banks play a relatively minor role in the Indian economy, The role of foreign banks is vital and tends to elevate the efficiency and working system of the local banking system by introducing sophisticated financial services. Acquiring reports, SMS alerts, tele-banking, internet banking, and many more are some of the catchy services that plays a crucial role in satisfying the customers They cover 65% of the foreign exchange transactions in India. They have limited number of branches.

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They are not lending money to small and medium-sized enterprises (SMEs), small traders, informal sector and farmers.

BANKER CUSTOMER RELATIONSHIP

The relationship between a bank and its customers can be broadly categorized in to General Relationship and Special Relationship. The general relationship is debtor and creditor and other than this, the relationships construe special relationship.

1. CREDITOR-DEBTOR
The customer becomes a creditor and the banker becomes debtor when money is deposited in the bank. The relationship becomes opposite i.e. a customer become debtor and bank creditor when loan is advanced by the bank to the customer .

2. BENEFICIARY-TRUSTEE If a customer keeps certain valuables or securities with the bank for safe-keeping or deposits a certain amount of money for a specific purpose, the banker, acts as a trustee. The banker cannot utilize those moneys or securities as he desires since the money does not belong to him. A trustee is one who holds property for the
benefit of a person or beneficiary. The banker is a trustee when a customer deposits his valuables and securities for safe custody.

3. BAILEE - BAILOR When there is delivery of goods or securities from one person to the other which amounts to the bailment. In such case, bank becomes bank becomes bailee and customer is the bailor. 4. PRINCIPAL-AGENT
When a customer deposits draft, cheques, dividends, certificates etc., for collection, he becomes the principal and bank acts as his agent. It includes performing agency services for his customers, such as undertaking to pay the electricity bills, phone bills etc on regular basis.

5. LESSEE-LESSOR The banks provide safe deposit lockers to the customers on lease basis. The bank leases out the space for the use of clients on rent basis. The bank is not responsible 15

for any loss that arises to the lessee in this form of transaction except due to custodial negligence of that bank. Here the banker is Lessor and customer is Lessee. 6. INDEMNIFIER- INDEMNIFIED In the case of banking, this relationship happens in transactions of issue of duplicate demand draft, fixed deposit receipt etc. The underlying point in these cases is that either party will compensate the other of any loss arising from the wrong/excess payment.

BANKERS RIGHT AND OBLIGATIONS

The Rights of the bank are those, through which they enjoy legal operation and derive functional guarantee . Following are the major rights that a banker can exercise on his customer.

1. Right of Lien: Lien is the right of the creditor to retain the goods and securities owned by the debtor until the debt due from him is paid.
There are two types of lien viz. 1. Particular Lien 2. General Lien (a) 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: 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. 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.

2. Right of 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. Conditions while exercising right of Set - Off:
1. The account should be in the sole name of the customer. 2. The amount of debts must be certain and measurable. 3. Funds should not be held in trust accounts 4. The right cannot be exercised in respect of future or contingent debts.

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3. Right of appropriation
The customers can 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.

4. Right to charge interest As a creditor the banker has right to charge interest on the funds he lends as per the norms and as per the contract. Hence the banker has an implied right to charge interest on the advances granted to its customer.
a. Bankers generally charge interest monthly, quarterly or semiannually or annually. b. There must be an agreement between the banker and customer in this case the manner agreed will decide how interest is to be charged. c. Banks responsibility is to explain these in writing; such as How is interest calculated? Fixed interest Floating rate

5. Right to charge service charges

Banker has an implied right to charge for services rendered and sold to a customer. Bank charges interest on amount advanced, processing charges for the advance, charges for non-utilization of credit facilities sanctioned, charges commission, exchange, incidental charges etc. depending on the terms and conditions of advance Banks charge customers if the balance in deposit account falls below the prescribed amount.

6. Right to close an account

The contractual relationship between banker and customer is terminated by closing the account. There is no opportunity for the customer to operate the account once again. The banker can close the account of the customer when he finds ii. The account is not remunerative iii. The customer is not a desirable one.

OBLIGATIONS
Generally it is the banks primary obligation to take care of its customers and provide services which are fundamental to the contractual relationship of the banker and the customer.
1. Obligation to honor cheques It is the duty of the banker to honor his customers cheques. If he refuses to honor these cheques, he is liable to the customer in damages.

Bankers obligation to honour cheques is subject to certain conditions: 1. Sufficient funds must be available 17

2. The cheque is presented for payment on a working day and during the business hours of the branch. 3. Endorsements on the cheque are regular and proper. 4. The cheque should be in order in all respects 2. Obligation to maintain secrecy of customers account or affairs The banker must take utmost care not to disclose the state of account of his customers affairs as this may result in considerable harm to the credit and business of the customer. If he fails in this duty, he is liable for the damages. The banker should not disclose his customers financial position and the details of his account. The principle behind this duty is that disclosure about the dealings of the customer to any unauthorized person may harm the reputation of customer and the bank may be held liable. This secrecy should be maintained even after the account is closed and even after death of the customer. 3. Obligation to keep a proper record of transactions The banker must keep a proper and accurate record of all the transactions of the customer. 4. Duty to provide proper accounts

Banks are under duty bound to provide proper accounts to the customer of all the transactions done by him. Bank is required to submit a statement of accounts / passbook to the customer containing all the credits and debits in the account.

5. Obligation to abide by the instructions given by the customer The banker must abide by any express instructions of the customer provided these are within the scope of the relationship between the banker and the customer. The relationship is subject to the terms of the contract between the bankers and the customers and the rules laid down in the Negotiable Instruments Act. 6. Bankers Fair Practice Code:

Indian Banks Association has prepared a code, which sets standards of fair banking practices. This document is a broad framework under which the rights of common depositors are recognized. It is a voluntary Code that promotes competition and encourages market forces to achieve higher operating standards for the benefit of customers. 7.Redressal of Grievances The Bank need to have a customers Grievance Redressal mechanism with details, namely: a. b. c. d. Where a complaint can be made How a complaint should be made When to expect a reply Whom to approach for redressal of grievance etc.

CUSTOMERS RIGHT & OBLIGATIONS

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Rights : 1. Right to draw cheques

A customer has right to draw cheques against his credit balance and has right to receive pass book from the bank..A customer can sue the bank for wrongful dishonour of cheque 2. Rights of Compensation The customer can claim compensation from bank for the following reasons a. Loss of reputation b. Loss of market credibility 4. Rights for Claiming Damage The customer can claim for damages from bank for the following reasons: a. Wrongful dishonor of cheques b. Failure to maintain secrecy 5. Right to close the Account The customer has the right to close the account on following grounds a. When he does not agree to the terms and conditions of the bank. b. When he loses confidence on the Banking practices of the Bank c. When facilities provided by bank is not market worthy 6. Right of Raising Grievance The customers have the right to raise grievances for any deficiency in services or on violation of any established law. There are different forums for this including banking ombudsman

OBLIGATIONS

Pertaining to Cheque Books 1. Ensure safe custody of cheque book and pass book. 2. Issue crossed/account payee cheques as far as possible. 3. Check the details of the cheque, name, date, amount in words and figures, crossing etc., before issuing it. As far as possible, issue cheques after rounding off the amount to nearest rupee. 4. Not to issue cheque without adequate balance; maintain minimum balance as specified by the Bank. 5. Bring pass book while withdrawing cash from savings bank account through withdrawal slip. Get pass book updated from time to time. Pertaining to deposit 1. Observe KYC norms 2. Use nomination facility. 3. Note down account numbers, details of FDR, locker numbers, etc., separately. 4. Inform change of address, telephone number, etc., to the Branch. Loss of Instruments Inform loss of demand draft, fixed deposit receipt, cheque leave (s)/book, key of locker, etc., immediately to the Branch.

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Tools Used by RBI for Controlling Banks

Bank Rate - Bank Rate is the rate at which central bank of the country (in India it is RBI) allows finance to commercial banks. Any upward revision in Bank Rate by central bank is an indication that banks should also increase interest rates. Thus any revision in the Bank rate indicates that it is likely that interest rates on your deposits are likely to either go up or go down, and it can also indicate an increase or decrease in your EMI. This is the rate at which central bank (RBI) lends money to other banks or financial institutions. If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Thus, it can be said that in case bank rate is hiked, banks will hike their own lending rates to ensure that they continue to make profit. Current Bank Rate 9.5% Repo (Repurchase) rate - is the rate at which the RBI lends short-term money to the banks against securities. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases, borrowing from RBI becomes more expensive Repo is a collateralized lending i.e. the banks which borrow money from Reserve Bank to meet short term needs have to sell securities, usually bonds to Reserve Bank with an agreement to repurchase the same at a predetermined rate and date. Reserve bank charges some interest rate on the cash borrowed by banks. This interest rate is called repo rate. Repo Rate 8.5%
Reverse

Repo Rate -It is the rate at which banks park their short-term excess liquidity with the RBI. The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns. An increase in the reverse repo rate means that the RBI is ready to borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep more and more surplus funds with RBI. Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money is in safe hands with a good interest. An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system. Reverse Repo Rate 7.5% Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks. Net Demand and Time Liabilities 20

Liabilities payable by the bank are in the form of demand or time deposits. Demand liabilities include all liabilities which are payable on demand, mainly the balances in savings and current account come under these categories. Time liabilities are those which are payable otherwise on demand. Mainly deposits of different maturity duration come under this category. Inflation - The overall general upward price movement of goods and services in an economy (often caused by an increase in the supply of money). Inflation is nothing but a rise in the level of prices of goods and/or services in an economy over a certain period of time. Cash Reserve Ratio It refers to the liquid cash that banks have to maintain with the RBI as a certain percentage of their net demand and time liabilities. Whenever money is in excess in the market / monetary systems in the country it may increase the inflation. So the excess money needs to be squeezed from the systems. At such time RBI prescribes higher rate of CRR and money is taken out from circulation in the market. In reverse case when the markets need the money the CRR rate is lowered and money is allowed to come and circulate in the market. For example, if you deposit Rs 100 in your bank, then bank can't use the entire Rs 100 for lending or investment purpose. They have to maintain a certain percentage of their deposits in the form of cash and can use only the remaining amount for lending/investment. This minimum percentage which is determined by the central bank is known as Cash Reserve Ratio. Thus, when a bank's deposits increase by Rs 100, and if the cash reserve ratio is 9%, the banks will have to hold additional Rs 9 with RBI and Bank will be able to use only Rs 91 for investments and lending or credit purpose. Higher the CRR ratio, lower will be the amount available with the banks for lending and investment purpose and vice versa. RBI uses this tool to curb inflation and to control excessive liquidity in the market. CRR 4.75% Statutory Liquidity Ratio It refers to the amount that the commercial banks are required to maintain in the form of cash, gold or Government approved securities. The SLR is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI in order to control the expansion of bank credit. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like Government bonds. If any Indian Bank fails to maintain the required level of Statutory Liquidity Ratio, then it becomes liable to pay a penalty to the RBI. 21

With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds. SLR 24% SLR and Cash reserve ratio is maintained for bank solvency and higher ratio of SLR and CRR makes bank relatively safe as higher ratio means they have more of their funds deposited in liquid securities and can fulfill the demand on redemption of deposit from the Bank. Lets take an example :suppose a Bank has taken a deposit of 100 from public and CRR is 9 and SLR is 25 then available funds to lend from deposits with the bank will be 100-9-25=66 so their is direct relation between CRR ,SLR and Funds available with bank to lend to public out of deposit received from public. So RBI is controlling the supply side of the Funds and by changes in CRR and SLR, Bank control the supply side of the money. so when RBI increase these ratios then available funds with the banks will go down and as demand remain the same then people will have to pay more as interest and interest rate will go up. On the reverse if RBI reduces these rates, then amount available with bank for lending will be increased and they have to reduce rates to lend more. In these situation banks also reduce the rate of short term deposit from public as they have surplus money already to lend.

BASIC BANKING CONCEPTS KYC Norms - In order to prevent identity theft, identity fraud, money laundering, terrorist financing, etc, the RBI had directed all banks and financial institutions to put in place a policy framework to know their customers before opening any account. This involves verifying customers' identity and address by asking them to submit documents that are accepted as relevant proof. Mandatory details required under KYC norms are proof of identity and proof of address. Passport, voter's ID card, PAN card or driving license are accepted as proof of identity, and proof of residence can be a ration card, an electricity or telephone bill or a letter from the employer or any recognized public authority certifying the address. Some banks may even ask for verification by an existing account holder. Though the standard documents which are accepted as proof of identity and residence remain the same across various banks, some deviations are permitted, which differ from bank to bank. So, all documents shall be checked against banks requirements to ascertain if those match or not before initiating an account opening process with any bank. Thus opening a new bank account is no longer a cake walk. Those are the basic requirements of KYC to identify a customer at the account opening stage. 22

Anti Money Laundering - The word money laundering refers to the use of the financial system to hide the source of funds gained from illegal activity such as drug trafficking, bribery, extortion, embezzlement, theft or other criminal activity, as the criminals try to make their ill gotten gains appear genuine. Anti Money Laundering is the term used by banks and other financial institutions to describe the variety of measures they take to fight against this illegal activity and to prevent criminals from using individual banks and the financial system to keep their Proceeds of Crime. In all major jurisdictions around the world, criminal legislation and regulation make it mandatory for banks and financial institutions to have arrangements to combat Money Laundering, with harsh criminal penalties for non-compliance. The vast majority of criminal dealings are done in cash. Criminals need ways to dispose of the cash and have it reappear as part of their wealth with as little chance as possible of it being tracked back to the cash element. Criminals have to use the financial system and banks in particular to do this. Money laundering is traditionally done in three stages, called Placement, Layering and Integration. Placement is the physical depositing of the cash. Layering describes the process of transactions, some very simple, some more complicated and often involving transactions within and between banks and across borders, which seek to confuse the trail back to the original cash. Integration is the process by which the money is brought back into use by the criminal in the normal economy, often by the purchase of assets (houses, cars, works of art) but which make it appear legitimate. Anti Money Laundering processes and controls help banks and financial institutions protect themselves and their reputation from the criminals. Key elements of a sound Anti Money Laundering programme, many of them required by law, include : Minimum Standards and Policies, approved by Senior Management, which clearly set out your philosophy on crime prevention and business requirements.

Strong "Know Your Customer" checks at customer take-on to identify and exclude known criminals but also to be sure you know the real identity of the customers you do take on. Robust training programmes for all staff. Processes (very often automated) to monitor the activities on customer accounts to identify suspicious activity and to check incoming and outgoing payments for unauthorised transactions and to enable reports to be made to relevant authorities. CIBIL CIBIL is Credit Information Bureau (India) limited is India s first credit bureau. It is a collection of information which has been pooled by all major Banks and financial institutions of India. The aim to create such an organization is that there are lesser defaults on loans as the credit history can be checked before the loans are booked. It has over 170 million consumer database. Cibil reports helps Banks to differentiate 23

between customers who have paid there previous loans in time v/s those who either have defaulted etc. Cibil database is not a list of customers who cant be given a loan where as it collect information of all your loan and credit card payments. The biggest change it has brought is that it gives the lender ie the bank the credit history of the customer who wants to apply for the loan or credit card. It is a month and month record of a customers emi or credit card payments. All loans like Personal loan, Home loan, Car loan and credit card payments record come under this. It also contains personal information like Name, Mobile number, DOB, Address, Pan Number and Passport number. It has information on the number of times a person may have applied for a loan or a credit card in the last one year. Net Interest Margin - A performance metric that examines how successful a firm's investment decisions are compared to its debt situations. A negative value denotes that the firm did not make an optimal decision, because interest expenses were greater than the amount of returns generated by investments. Percentage difference between the interest income produced by a bank's earning assets (loans and investments) and its major expense-interest paid to its depositors. The net difference between interest earned and interest paid is a key measure of bank profitability. Calculated as:

Cost of Funds - The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one of the most important input costs for a financial institution, since a lower cost will generate better returns when the funds are deployed in the form of short-term and long-term loans to borrowers. For lenders such as banks and credit unions, cost of funds is determined by the interest rate paid to depositors on financial products including savings accounts and time deposits. Capital Adequacy Ratio - Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time liabilities and other risks such as credit risk, operational risk, etc. In the simplest formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's depositors and other lenders. Banking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system. Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Operational risk can be summarized as human risk; it is the risk of business operations failing due to human error. It is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

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Non-Performing Assets - Non-performing assets, also called non-performing loans, are loans, made by a bank or finance company, on which repayments or interest payments are not being made on time. A loan is an asset for a bank as the interest payments and the repayment of the principal create a stream of cash flows. It is from the interest payments than a bank makes its profits. Banks usually treat assets as non-performing if they are not serviced for some time. If payments are late for a short time a loan is classified as past due. Once a payment becomes really late (usually 90 days) the loan classified as non-performing. Prime Lending Rate - In banking parlance, the BPLR means the Benchmark Prime Lending Rate. BPLR is the interest rate that commercial banks normally charge (or we can say they are expected to charge) their most credit-worthy customers. Although as per Reserve Bank of India rules, Banks are free to fix Benchmark Prime Lending Rate (BPLR) for credit limits over Rs.2 lakh with the approval of their respective Boards yet BPLR has to be declared and made uniformly applicable at all the branches.. However, with the introduction of Base Rate concept, BPLR is slowly losing its importance and is made applicable normally only on the loans which have been sanctioned before the Base Rate has been made compulsory. Base Rate - The Base Rate is the minimum interest rate of a Bank below which it cannot lend, except for loans to bank's own employees and loan to banks' depositors against their own deposits. (i.e. cases allowed by RBI) What is the difference between BPLR and Base Rate? The Reserve Bank of India (RBI) committee on reviewing the benchmark prime lending rate (BPLR) recommended that the BPLR nomenclature be scrapped and a new benchmark rate known as Base Rate should replace it. Base Rate is much more transparent and banks are not allowed to lend below the base rate (except for cases specified by RBI). Base Rate is to be reviewed by the respective banks at least on quarterly basis and the same is to be disclosed publicly. On the other, the calculations of BPLR were mostly not transparent and banks were frequently lending below the BPLR to their prime borrowers and also under pressure due to various reasons. When was the Base Rate Made Applicable for Banks in India? RBI had made it mandatory for all banks to introduce Base Rate wef 1st July, 2010. Do all banks have common Base Rate ? No, each bank will arrive at its own base rate Deposit Rate - A term Deposit Rate refers to the amount of money paid out in interest by a bank or financial institution on cash deposits. Banks pay deposit rates on savings and other investment accounts. 25

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