UNIT - I

Banking means the accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise and withdrawable by cheque,
draft, order or otherwise.

Banking Company means any company which transacts the business of banking.

A bank is a financial institution that serves as a financial intermediary.

Banking Management provides a comprehensive knowledge about the managerial skills

required for effectively managing the banking sector and the related industries.

Types of Banks
Banking institutions of a country can be classified in to the following types on the basis of their
functions:
1) Central Bank
2) Commercial Banks
3) Industrial Banks
4) Exchange Banks
5) Co-operative Banks
6) Agriculture Land Mortgage Banks
7) Indigenous Banks
8) Regional Rural Banks

Role of Banks

Banks play a vital role in modern economy

- by accepting deposits the banks promote the habit of saving among the people.

- the banks encourage industrial innovations and business expansion through

funds provided to entrepreneurs
- the banks exercise considerable influence on the level of economic activity
through their ability to create or manufacture money in the economy.

- through their lending policy the banks can influence the course and direction of
economic activity.
- the various utility functions performed by the banks are of great economic
significance for the economy.
Role of Banks for a Developing Country

Capital Formation

Monetisation

Innovations

Finance for priority sector

Provision for Long-Term Finance

Cheap Money Policy

Need for a Sound Banking System

The fundamental functions of a bank are :

Acceptance of deposits
- Savings Bank Account
- Current Account
- Fixed Deposit Account

Advancing of Loans
- Making Ordinary Loans
- Cash Credit
- Overdraft, Discount of BOE

Promote the use of Cheques

Agency functions of the Bank

- Transfer of funds
- Collecting Customers funds
- Purchase and Sale of Shares and Securities

- Collecting Dividends on the Shares of the Customers

- Payment of Premium
- The bank acts as a Trustee and the Executor
- Income Tax Consultant
- Act as Correspondent

Purchase and Sale of Foreign Exchange

Financing Internal and Foreign Trade

Other Functions of the Bank

- Safe Custody of Valuable Goods
- Issuing Travellers Cheque
- Giving Information about its Customers
- Collection of Statistics
- Underwriting of Company Debentures
- Accepting Bills of Exchange on behalf of Customers
- Giving advice on Financial Matters

Creation of Credit

Banking Structure
The different types of Banking Structure are :

Branch Banking

Unit Banking

Group Banking

Chain Banking

Branch Banking a typical commercial bank in most countries having a network of branches
scattered all over the country.
Advantages
- Economies of large scale operation
- Economy of Reserves
- Remittance Facilities
- Spreading of Risks
- Increasing Mobility of Capital
- Clearing of Cheques made easy
- Service of Powerful and affluent banks
- Good Social relation with Customers
Disadvantages
- Need to consult the Head Office
- Transfer of Managers
- Lack of Effective Control
- Economic Repurcussions of Failure
- Lack of Initiative and Personal touch

Unit Banking system of banking in which the banks operations are in general confined to a
single office.
Advantages:
- Catering of Local needs
- Knowledge of local Industries and Conditions
- Effective Management and Supervision
- Elimination of Bad Debts
Disadvantages:

- Limited Financial Resources and Vulnerability to Failure

- Limited scope for offering Customer services
- Difficulty in assessing Loan Applications

Group Banking is a legal form of bank organisation in which two or more independently
incorporated banks are controlled by a Holding Company.
A holding company is a corporate body which owns stock in other corporation.
There are no restrictions as regards the types of banks which may belong to the
group these may be either unit banks or branch banks.
Advantages:
- Centralised management and control of group units by a holding company.
- Chief merit of this banking system lies in economising in the maintenance of large cash
reserves.
- all members of the group can pool their resources to finance large burrowers.
- advantages of economies of scale
- better and extensive customer services
Disadvantages:
- it is difficult to exercise a direct control over the member units
- the failure of one member of the group affects all others.
- it is difficult to supervise all units simultaneouly and the holding company may utilise
the surplus reserves of the group for furthering its own economic interests.
- the group banking system lends to monopoly thereby restricting efficiency which grows
as a consequence of healthy competition among banks.

Chain Banking is a variant of Group Banking System. This system of banking is similar or
group banking except that the holding company technique is not used.

- the main feature of the chain banking is the control of two or more banking
companies by a single person, by members of the same family, by the same group of persons
through ownership of stock, through common membership on the board of directors of the banks.
- chain banking system are small confined to two or three banks, although some
chains involve substantially large number of banks.
- the extent of centralisation shows wide variations.
- the chain banking has also developed as a substitute for branch banking and has
more or less the same advantages and disadvantages of group banking system.
Role of Bank as Financial Intermediary and Constituent of Payment System

A financial intermediary is a financial institution that connects surplus and deficit

agents.

A financial intermediary is a financial institution such as bank, building society, insurance

company, investment bank or pension fund.
A financial intermediary offers a service to help an individual/ firm to save or borrow
money. A financial intermediary helps to facilitate the different needs of lenders and
borrowers.

For example, if you need to borrow 1,000 you could try to find an individual who
wants to lend 1,000. But, this would be very time consuming and you would find it
difficult to know how reliable the lender was.

Therefore, rather than look for individuals to borrow a sum, it is more efficient to go to a
bank (a financial intermediary) to borrow money. The bank raises funds from people
looking to deposit money, and so can afford to lend out to those individuals who need it.

Examples of Financial Intermediaries

1. Insurance Companies
If you have a risky investment. You might wish to insure, against the risk of default. Rather than
trying to find a particular individual to insure you, it is easier to go to an insurance company who
can offer insurance and help spread the risk of default.
2. Financial Advisers
A financial adviser doesnt directly lend or borrow for you. They can offer specialist advice on
your behalf. It saves you understanding all the intricacies of the financial markets and spending
time looking for best investment.

3. Credit Union.
Credit unions are informal types of banks which provide facilities for lending and depositing
within a particular community.
4. Mutual funds/ Investment trusts
These are mutual investment schemes. These pool the small savings of individual investors and
enable a bigger investment fund. Therefore, small investors can benefit from being part of a
larger investment trust. This enables small investors to benefit from smaller commission rates
available to big purchases.
Benefits of Financial Intermediaries
1.
2.

Lower search costs. You dont have to find the right lenders, you leave that to a specialist.
Spreading risk. Rather than lending to just one individual, you can deposit money with a
financial intermediary who lends to a variety of borrowers if one fails, you wont lose all your
funds.
3.
Economies of scale. A bank can become efficient in collecting deposits, and lending. This
enables economies of scale lower average costs. If you had to sought out your own saving, you
might have to spend a lot of time and effort to investigate best ways to save and borrow.
4.
Convenience of Amounts. If you want to borrow 10,000 it would be difficult to find
someone who wanted to lend exactly 10,000. But, a bank may have 1,000 people depositing
10 each. Therefore, the bank can lend you the aggregate deposits from the bank and save you
finding someone with the exact right sum.
Potential Problems of Financial Intermediaries

There is no guarantee they will spread the risk. Due to poor management, they may risk
depositors money on ill-judged investment schemes.
Poor information. A financial intermediary may become complacent about spreading the
risk and invest in schemes which lose their depositors money (for example, banks buying US
mortgage debt bundles, which proved to be nearly worthless precipitating the global credit
crunch.)
They rely on liquidity and confidence. To be profitable, they may only keep reserves of
1% of their total deposits. If people lose confidence in the banking system, there may be a run on
the bank as depositors ask for their money back. But the bank wont have sufficient liquidity
because they cant recall all their long-term loans. (This can be overcome to some extent by a
lender of last resort, such as the Central Bank and / or government)

Financial intermediaries provide three major functions:

1. Maturity transformation
Converting short-term liabilities to long term assets (banks deal with large number of
lenders and borrowers, and reconcile their conflicting needs)
2. Risk transformation
Converting risky investments into relatively risk-free ones. (lending to multiple
borrowers to spread the risk)
3. Convenience denomination
Matching small deposits with large loans and large deposits with small loans

Financial intermediaries obtain funds by issuing financial claims against themselves to market
participants and then investing those funds. The investments made by financial intermediaries
their assetscan be in loans and/or securities. These investments are referred to as direct
investments. As just noted, financial intermediaries play the basic role of transforming financial
assets that are less desirable for a large part of the public into other financial assetstheir own
liabilitieswhich are preferred more by the public. This transformation involves at least one of
four economic functions: (1) providing maturity intermediation; (2) risk reduction via
diversification; (3) reducing the costs of contracting and information processing; and (4)
providing a payments mechanism.
Maturity intermediation involves a financial intermediary issuing liabilities against itself that
have a maturity different from the assets it acquires with the fund raised. An example is a
commercial bank that issues short-term liabilities (i.e., deposits) and invests in assets with a
longer maturity than those liabilities. Maturity intermediation has two implications for financial
markets. First, investors have more choices concerning maturity for their investments; borrowers
have more choices for the length of their debt obligations. Second, because investors are
reluctant to commit funds for a long period of time, they will require that long-term borrowers
pay a higher interest rate than on short-term borrowing. In contrast, a financial intermediary will
be willing to make longer-term loans, and at a lower cost to the borrower than an individual
investor would, by counting on successive deposits providing the funds until maturity (although
at some risk as discussed below). Thus, the second implication is that the cost of longer-term
borrowing is likely to be reduced.
To illustrate the economic function of risk reduction via diversification, consider an investor who
invests in a mutual fund. Suppose that the mutual fund invests the funds received in the stock of
a large number of companies. By doing so, the mutual fund has diversified and reduced its risk.
Investors who have a small sum to invest would find it difficult to achieve the same degree of
diversification because they would not have sufficient funds to buy shares of a large number of

companies. Yet by investing in the investment company for the same sum of money, investors
can accomplish this diversification, thereby reducing risk. This economic function of financial
intermediariestransforming more risky assets into less risky onesis called diversification.
While individual investors can do it on their own, they may not be able to do it as cost effectively
as a financial intermediary, depending on the amount of funds they have to invest. Attaining costeffective diversification in order to reduce risk by purchasing the financial assets of a financial
intermediary is an important economic benefit for financial markets.
Investors purchasing financial assets should develop skills necessary to understand how to
evaluate an investment. Once those skills are developed, investors should apply them to the
analysis of specific financial assets that are candidates for purchase (or subsequent sale).
Investors who want to make a loan to a consumer or business will need to write the loan contract
(or hire an attorney to do so). While there are some people who enjoy devoting leisure time to
this task, most of us find that leisure time is in short supply, so to sacrifice it, we have to be
compensated. The form of compensation could be a higher return obtained from an investment.
In addition to the opportunity cost of the time to process the information about the financial asset
and its issuer, there is the cost of acquiring that information. All these costs are called
information processing costs. The costs of writing loan contracts are referred to as contracting
costs. Another dimension to contracting costs is the cost of enforcing the terms of the loan
agreement. There are economies of scale in contracting and processing information about
financial assets, because of the amount of funds managed by financial intermediaries. The lower
costs accrue to the benefit of the investor who purchases a financial claim of the financial
intermediary and to the issuers of financial assets, who benefit from a lower borrowing cost.
While the previous three economic functions may not have been immediately obvious, this last
function should be. Most transactions made today are not done with cash. Instead, payments are
made using checks, credit cards, debit cards, and electronic transfers of funds. These methods for
making payments are provided by certain financial intermediaries. The ability to make payments
without the use of cash is critical for the functioning of a financial market. In short, depository
institutions transform assets that cannot be used to make payments into other assets that offer that
property.
There are two essential advantages from using financial intermediaries:
1. Cost advantage over direct lending/borrowing
2. Market failure protection the conflicting needs of lenders and borrowers are reconciled,
preventing market failure
The cost advantages of using financial intermediaries include:
1. Reconciling conflicting preferences of lenders and borrowers
2. Risk aversion intermediaries help spread out and decrease the risks

3. Economies of scale using financial intermediaries reduces the costs of lending and
borrowing
4. Economies of scope intermediaries concentrate on the demands of the lenders and
borrowers and are able to enhance their products and services (use same inputs to
produce different outputs)
Various disadvantages have also been noted in the context of climate finance and development
finance institutions. These include a lack of transparency, inadequate attention to social and
environmental concerns, and a failure to link directly to proven developmental impacts.

What are financial intermediaries?

On one side weve common men (households), these folks spend money and save money.
So these are the people who have surplus money.
On the opposite side, weve businessmen (industries) who provide goods n services. They
need money to start new business, to expand existing business, sometimes Government also
needs money. So These are the people that want money.

Financial intermediaries are the middlemen between these two types of people.

Banks, insurance companies, pension funds, mutual funds etc. are the examples of
financial intermediaries.

They take money from the savers (or lenders) and loan it directly or indirectly to the
borrowers (Government / businessmen)

Borrower (Government / Businessman) pays the interest rate on this loan.

The intermediary (bank/insurance co./pension or mutual fund ), will get Commission

And the Common men will earn some profit / interest / dividend/ return on his
investment.

Definition
1.

The institutions that channel funds from savers to users are called financial
intermediaries.
2.
Institutions that channel funds between surplus and deficit agents are called financial
intermediaries.
3.

Financial intermediaries serve as a middleman between saver and borrower.

Examples of Financial intermediaries

1.
2.

Commercial banks
Regional rural banks (RRB)

3.
4.

Cooperative banks/ societies

Development banks and All India finance institutions (IDBI, NABARD, SIDBI, NHB
etc.)

5.

Pension/provident funds (NPS, EPFO etc.)

6.

Mutual funds (UTI and private sector mutual funds)

7.

Insurance companies (LIC, GIC etc.)

8.

Non banking financial companies (NBFC, eg. Mannapuram gold loans, Muthoot finance
etc. Jab ghar mein pada hai sona to fir kaahe ko rona?)

Why financial intermediaries = NOT bad?

If we look at the middlemen from common mans point of view, theyre usually
considered undesirable/ bad.
For example real-estate agents, they take commission and hence increase the price of
building or land.

And Youd have heard this argument hundred times : the middlemen buy carrots from
farmers for just Rs.2 rupees a kilo and charges Rs.20 per kilo to the final consumer in the
city without doing any value addition. The FDI in multibrand retail will cut down these
middlemen and hence reduce the prices of fruits and vegetables.

So based on that logic, can we say financial intermediaries are also bad because theyre
also middlemen? Answer is no. Because of following reasons:

Economies of scale

Financial intermediaries are big in size, spend lot of money in advertisements, have
branches in many places, so for them finding prospective loan taker=very easy.
When loans are given, lot of paperwork, background check has to be done. Financial
intermediaries have thousand of employees to do it. They buy stationary, printer inks etc. on
wholesale so their operation costs are low.
On the other hand, if you (aam aadmi) directly try to find someone who needs
loan/finance then amount of rickshaw fare for searching clients, making telephone calls,
seeking help of CAs and accountants, no. of hours spent in paperwork- all that will reduce
your profit margin to a very low level. So itd be better if you let the financial intermediaries
do all that work.

Your Investment is safe

Take an example of a mutual fund manager,

Hell invest part of your money in risky securities that offer higher profit.
Hell invest part of your money in Government securities, or high rated corporate bonds,
where profit is less but theyre more secure.

In addition, He has lot of clients and many new clients keep incoming, so even if he
makes losses in first place, he can make do by making profit in second place.

Often you hear newstories where someone committed suicide after losing money in
sharemarket. But You never see a news story where a mutual fund manager committed
suicide after losing money in share market.

Banks

Same goes for bank. You deposit your money in savings account then youre certainly
going to earn interest (profit).
It is banks headache to find a loan taker, collect EMIs and recover loans. Besides banks
have to maintain CRR, SLR, it also ensures safety of your investment.

Often we see in newspaper that SBI has non-performing assets (NPAs) worth thousands
of crores. It means SBI gave loans to some people but unable to recover the money.

Yet you never hear a newstory where SBI branch manager told a customer , sorry, you
cant take out money from your savings account or fixed deposit because weve unable to
recover loans from third party.

Why? Because SBI has lot of new incoming customers, and if it makes losses in one
place, it makes profit in several other places

besides SBI is doing business for years, so it has deep pockets full of cash. It can afford
to bleed, it can afford to make temporary losses and yet maintain a smile on its face.

But If a common man directly gives loan to someone, and the loan-taker doesnt repay on
time = troublesome situation. Because then common man will have to either hire goons or
goto police/court: first solution is quick but very risky, second solution is expensive and
time consuming.

Insurance / Pension funds

Lot of people takes insurance and pay premium. But not everyone dies at the same
time.
Similarly, lot of people invest money in pension / provident funds, but not everyone
retires at the same time.

Hence there is lot of idle money that insurance /pension /provident company can invest in
Government securities, corporate shares, bonds etc.

And They also take help of experts and invest some money in risky areas, some money in
safe areas.

Thats the second advantage of financial intermediaries: they ensure safety of your investment.
To put this in refined words: financial intermediaries invest in diversified portfolios and
hence suffer less risk compared to an individual investor.

Besides, financial intermediaries are supervised by regulators (RBI, SEBI, IRDA etc.) so
they cant fleece small investor and run away.
And financial intermediaries offer you a reasonable return on investment, their profit
margin is also reasonable. It is not like they give your 2% return on your investment and loan
it to businessman for 48%.

Body of Experts and asymmetry of information

Again the example of Mutual funds. A mutual fund manager is an expert in financial
matters, he has lot of experience on share market fluctuations, how individual companies are
performing, which companies shares are likely to go up in near future etc.etc.etc.
So he can make better investment decision compared to a new player in the sharemarket.

Similarly bank has battery of full time officers for processing loans application and
recovering the loans. They look at the credit history / record of a Borrower before granting
loans.

Insurance company also has experts to look into fraudulent insurance claims, and make
prudent investment decisions.

Thus, there exists an asymmetry of information. (Those intermediaries have experts so

they can make better decisions compared to an individual investor).

Large Pool of money

For the moment lets assume you love challenges and despite all the odds presented to
you so far, you still decide to play this game on your own.
But at most youll have a few lakh rupees to invest but on the other side there is a big
businessmen who needs loan worth cores of rupees for a long term project (e.g. 25 years).

You may not have the time / mood to wait for 25 years to recover your entire investment.
(even if he took partial loan from you).

But on the other hand a financial intermediary receives lot of money (e.g. SBI has lakhs
of savings accounts and fixed deposits ), so they can offer large amount of loans and wait for
years to recover the entire investment.

And if you had saved money in SBI, you would still be earning regular interest and can
take out your money any time you want.

^These are the advantages from investor / lenders side. Now lets look at the advantages from
borrowers side.
From Borrowers side
If youre a businessman, how does a financial intermediary help you?
1.

Easy availability: because you can easily find their office, take the application form.

2.

Reasonable cost of borrowing:

a.

Debt: if you borrow from a money lender, hell charge very high interest rate,
compared to a bank.

b.

Equity: if mutual fund has invested in your shares, all you have to do is pay
reasonable amount of dividend on the shares (if your company makes profit).

3.

You Can take long term loans worth crores of rupees.

So far we know how financial intermediaries help the lenders/investors/households/Aam-Aadmi

and the borrowers/loan-takers/businessmen. Now lets see how financial intermediaries help the
entire economy of a country.
+ve impact on the Whole economy
1.

Financial intermediaries help circulating money in the system. If money is staying idle
(e.g. under your bed pillow or as gold in your locker) then it is not good for the economy.
Money must keep changing hands. If you look at this from a different angle: if nobody buys
skin whitening creams then who will feed the families of those chemists who work there And
the businessman who supplies raw material to that factory?
2.
They promote the habit of savings.
a.
b.
3.

Individual can use that saved money in bad times / emergency and earn profit in
between.
A needy businessman will easily get loans.

When businessmen can get loans easily at a reasonable cost, theyll start new business,
expand existing business, hire more employees, increase production of goods / services =
Indias GDP increases, IIP increases. When people are making more money, they spend more
money. A family goes to restaurant, poor waiter makes money. Family hires maid, gardener,
driver. Family buys new car, mobile or bike- it breaks down, the repairman makes money.
Thats how money trickles down from rich people to poor people.

Big picture is: if India wants a better GDP growth rate then
1.

Financial intermediaries should be able to do their business easily. e.g. banks should have
better facilities to recover bad loans.there comes SARFAESI Act amendment.
2.
Regulators (RBI, SEBI) should have more powers to supervise the Financial
intermediaries.there comes the amendments in their respective acts/ rules.
3.

Businessman should be able to raise money not from Indian financial intermediaries but
also from abroad, wherever they can get finance at a cheaper rate.there comes ADR, GDR.

4.

People (particularly in rural areas) should be made aware of the benefits of these financial
intermediaries.there comes the topic of financial literacy.

5.

People should be able to get help from financial intermediaries easily.There comes the
topics of financial inclusion, banking correspondence agents, ultra small branches, New
pension schemes etc.

CONSTITUENT OF PAYMENT SYSTEM

The payment system is an operational network - governed by laws, rules and standards - that
links bank accounts and provides the functionality for monetary exchange using bank
deposits. The payment system is the infrastructure (consisting of institutions, instruments, rules,
procedures, standards,and technical means) established to effect the transfer of monetary value
between parties discharging mutual obligations. Its technical efficiency determines the efficiency
with which transaction money is used in the economy, and risk associated with its use.
What makes it a "system" is that it employs cash-substitutes; traditional payment systems
are negotiable instruments such as drafts (e.g., checks) and documentary credits such as letters of
credit. With the advent of computers and electronic communications a large number of
alternative electronic payment systems have emerged. These include debit cards, credit
cards, electronic funds transfers, direct credits, direct debits, internet banking and e-commerce
payment systems. Some payment systems include credit mechanisms, but that is essentially a
different aspect of payment. Payment systems are used in lieu of tendering cash in domestic and
international transactions and consist of a major service provided by banks and other financial
institutions.
Payment systems may be physical or electronic and each has its own procedures and protocols.
Standardisation have allowed some of these systems and networks to grow to a global scale, but
there are still many country- and product-specific systems. Examples of payment systems that
have become globally available are credit card and automated teller machine networks. Specific
forms of payment systems are also used to settle financial transactions for products in the equity
markets, bond markets, currency markets, futures markets, derivatives markets, options
markets and to transfer funds between financial institutions both domestically
using clearing and Real Time Gross Settlement (RTGS) systems and internationally using
the SWIFT network.
The term electronic payment can refer narrowly to e-commerce - a payment for buying and
selling goods or services offered through the Internet, or broadly to any type of electronic funds
transfer.
An efficient national payment system reduces the cost of exchanging goods and services, and is
indispensable to the functioning of the interbank, money, and capital markets. A weak payment
system may severely drag on the stability and developmental capacity of a national economy; its
failures can result in inefficient use of financial resources, inequitable risk-sharing among agents,
actual losses for participants, and loss of confidence in the financial system and in the very use of
money. The technical efficiency of payment system is important for a development of

economy. Real-time gross settlement systems (RTGS) are funds transfer systems where transfer
of money or securities takes place from one bank to another on a "real-time" and on "gross"
basis. Settlement in "real time" means that payment transaction does not require any waiting
period. The transactions are settled as soon as they are processed. "Gross settlement" means the
transaction is settled on one to one basis without bunching or netting with any other transaction.
Once processed, payments are final and irrevocable.

1. Banks enjoy the benefit of being the only institutions through which the money can be
transferred from one person to another and from one place to another.
2. Therefore, banks become the constituent of the payment system of the economy.
3. Banks, because of their reach, trust of the people, and other roles that they play, have
enabled them to emerge as the largest financial intermediaries of the world.
4. Banks are able to lend a major portion of their deposits, and play the role of a financial
intermediary and constitute the payment system because of the understanding that banks
will honor the commitments that they have made to the people.
UNIT II
WHOLESALE BANKING
Wholesale banking is the provision of services by banks to organisations such as Mortgage
Brokers, large corporate clients, mid-sized companies, real estate developers and investors,
international trade finance businesses, institutional customers (such as pension funds and
government entities/agencies), and services offered to other banks or other financial institutions.
(Wholesale finance means financial services, which are conducted between financial services
companies and institutions such as banks, insurers, fund managers, and stockbrokers.)
Modern wholesale banks are engaged in: finance wholesaling, underwriting, market making,
consultancy, mergers and acquisitions, fund management.

Wholesale Banking
Bank has identified the following new business segments as a step toward becoming Multi
Specialist Bank.

Wholesale (Large & Mid Corporates)

Urban Retail

Small & Medium Enterprises

Rural/Agri Business

Under Wholesale Banking the corporate customers are identified as Large and Mid corporates.
Companies having annual sales turnover of over Rs. 500 crore are classified as Large Corporate
and those having annual sales turnover between Rs 100 crore to 500 crore are classified as Mid
Corporate.
Under Wholesale Banking it has been proposed that Large & Mid Corporate customer of the
Bank are located at the identified branches for providing them better services. By locating the
Corporates at the identified branches, they would have the following advantages.

Single point contact to cater to all the banking requirements of the Corporates.

Expeditious decision making and shorter turnaround time.

Availability of product specialist who can customize existing products as per the
Corporates specific requirements & can also develop new products.

Existence of Core Banking Solution facilities & World-class infrastructure.

The Corporate accounts will be served at these branches by the Client Service Team (CST) of
competent credit officers. The team will comprise of :

Relationship Manager

Relationship Officer

Product Specialist

Credit officer (dedicated from Corporate Office)

The following are the areas in which Client Service Team can help the Large & Mid Corporate :

Trade Finance products

Cash Management Products

Treasury Products

Bridge Loans

Syndicated Loans

Infrastructure Loans

Cross Currency/Interest Rate Swaps

Foreign Currency Loans and many more depending upon the needs of the Corporates.

Initially 11 important centers, 2 at Mumbai & 1 each at Delhi, Chennai, Bangalore, Hyderabad,
Ahmedabad, Pune, Baroda, Kolkata and Raipur have been identified for the rollout of Wholesale
Banking.
The Corporates can take advantage of the expertise available at Wholesale Banking Branches.
RETAIL BANKING
Retail banking is when a bank executes transactions directly with consumers, rather than
corporations or other banks. Services offered include savings and transactional
accounts, mortgages, personal loans, debit cards, and credit cards. The term is generally used to
distinguish these banking services from investment banking, commercial banking or wholesale
banking. It may also be used to refer to a division of a bank dealing with retail customers and can
also be termed as Personal Banking services.
In the US the term Commercial bank is used for a normal bank to distinguish it from an
investment bank. After the great depression, through the GlassSteagall Act, the U.S. Congress
required that banks only engage in banking activities, whereas investment banks were limited
to capital markets activities. This separation was repealed in the 1990s. Commercial bank can
also refer to a bank or a division of a bank that mostly deals with deposits and loans from
corporations or large businesses, as opposed to individual members of the public (retail banking).
Typical products offered by a retail bank include:

Savings accounts
Debit cards

ATM cards

Credit cards

Traveler's cheques

Mortgages

Home equity loans

Personal loans

Certificates of deposit/Term deposits

In some countries, such as the US, they may also offer more specialised accounts such as:

Sweep accounts
Money market accounts

Individual Retirement Accounts (IRA's)

Sub-types of retail banks

Community development bank are regulated banks that provide financial services and
credit to underserved markets or populations.

Private Banks manage the assets of high-net-worth individuals.

Offshore banks are banks located in jurisdictions with low taxation and regulation. Many
offshore banks are essentially private banks.

Savings banks accept savings deposits.

Postal savings banks are savings banks associated with national postal systems.

RBIs Draft Guidelines for Private Sector Banks

Following the Finance Ministers announcement in his budget speech for 2010-11 and
a discussion paper published by the Reserve Bank of India (RBI) in August 2010, the RBI has
now released draft guidelines for licensing new banks in the private sector. The draft guidelines
lay down the conditions on which corporate groups will be permitted to set up banks in India.
While the RBI seems keen to tap into the potential (financial and managerial) of the Indian
corporate groups in establishing and managing banks so as to benefit the financial sector, the
stringent conditions imposed by RBI in the regulations are an indication of the tight control that
RBI wishes to retain over the process. In that sense, RBI seems unable to exorcise the demons
from the pre-nationalization era where the nexus between corporates and the banking sector
resulted in improper management of banks that put investors and depositors at grave risk.
The key proposals in the draft guidelines are as follows:
Eligible Promoters
Both objective and subjective criteria have been laid down to determine the eligiblity of
promoters to set up a bank. The subjective elements include diversified ownership, sound
credentials and integrity. Curiously, RBI has demonstrated some uneasiness with reference to
other businesses that prospective promoters may be carrying on. Here are some extracts:
Banking is essentially based on fiduciary principles as depositors money is involved. It therefore
becomes imperative that the fit and proper assessment framework for bank promoters is much
more comprehensive in scope as compared to other sectors. Any such framework also needs to
look into the nature of activities the promoter group of the bank is predominantly engaged in.
There are certain activities, such as real estate and capital market activities, in particular broking

activities which, apart from being inherently riskier, represent a business model and business
culture which are quite misaligned with a banking model. Post-crisis, there are concerted moves
even internationally to separate banking from proprietary trading. More importantly, in India,
past experience with brokers on the boards of banks has not been satisfactory. It will therefore be
necessary to ensure that any entity/ group undertaking such activities on a significant scale is not
considered for a bank licence. Otherwise there will be real risks of the same business approach
getting transmitted to the banks as well and it will be difficult to address this only through
regulations. Accordingly, entities/groups that have significant (10% or more) income or assets or
both from/ in such activities, including real estate construction and broking activities taken
together in the last three years, shall not be eligible to promote banks.
It is not clear if tainting all players in a specific type of business activity with the same brush is a
prudent approach. For example, as these comments observe, stock broking activity is a regulated
industry subject to fitness norms and may not deserve the type of blacklisting treated meted out
by the RBI.
Corporate Structure
RBI has specified the structure that corporates must be used while setting up banking activity.
Promoters must set up a non-operative holding company (NOHC) through which they will hold
the bank and all other regulated financial activities within the group. As the draft guidelines note,
this is to ring fence the regulated financial services activities of the group from other nonfinancial activities. Depending on existing structures of corporate groups, successful licensee
may need to restructure their group holdings to comply with the proposed structure.
Minimum Capital
An initial minimum capital requirement of Rs. 500 crores has been imposed. There are very
specific requirements on shareholding limits of the NOHC in the bank. For instance, there is a
lock-in of 40% shares of the NOHC in the bank for 5 years. Although the NOHC may start with
a higher shareholding, it has to be pared down to 40% within 2 years from the date of licensing,
to 20% within 10 years, and to 15% within 12 years. The bank will have to be listed on a stock
exchange within 2 years, which is quite a short time frame. Hence, the establishment of the bank
as well as its initial business operations must provide for early listing.
Foreign Shareholding
To begin with, a private sector bank can raise only up to 49% from foreign investors. It is only
after 5 years that the prevailing policy of foreign investment in banking will become applicable,
which is that foreign investment is allowed up to 74%. To that extent, RBI has followed a phased
approach for the new private sector banks by not making the general foreign invstment policy
applicable to them at their initial stage. This would mean that a private bank conducting an IPO
in the first 2-year period will have to largely rely on the domestic supply of capital.
Corporate Governance
The draft guidelines provide some broad indication of the type of governance norms to be

followed by private sector banks. The emphasis is on ring fencing all regulated activities under
the umbrella of the NOHC. Moreover, the draft guidelines call for a separation of ownership and
management in promoter companies that own or control the NOHC. This might be somewhat
difficult to comply with, especially in the case of banks to be established by traditional family
corporate groups. The only specific governance norm is that at least 50% of the directors of the
NOHC should be totally independent of the promoter / promoter group entities, their business
associates, and their customers and suppliers. In that sense, RBI appears less concerned with
governance issues at the level of the bank itself, but more with the corporate group estaiblishing
it, as these norms extend to both the NOHC as well as the promoters.
The draft guidelines set out several other operational conditions for grant of banking licences,
including priority sector targets, mandate on core banking solutions, and the like. Other
conditions include those relating to relationships between the bank and the promoter group
entities, and how they are to be regulated.
Overall, while the RBI has taken the bold step of further opening up the private banking sector, it
is treading with utmost caution. In terms of timing, it is unlikely that the regime for private
banking licences will be in place anytime soon. As the draft guidelines themselves suggest, they
will be finalised and the process of inviting applications for setting up new banks in the private
sector will be initiated only after the Banking Regulation Act is amended to include various
matters that are presently under consideration for legislative amendment, including removal of
restriction on voting rights and RBIs approval for change of shareholding beyond 5% in a bank.
It is difficult to hazard a guess as to the timeframe within which the legislative amendments
would be effected.
PRODUCTS AND SERVICES OFFERED BY BANKS
In general, banks offer a very wide range of products and services to their customers. The
products and services offered ranges from the traditional deposit accounts to value added
services like utility bill payments, premium payment, etc.
Banks offer the following services to account holders at their specified branches multi-city /
Payable at Par (PAP) cheque facility, anywhere banking facility, trade services, phone banking
facility, internet banking facility, credit card, debit/ATM card, mobile banking and Real Time
Gross Settlement (RTGS).
Foreign banks are expanding the number of products on offer, their complexity such as
derivatives, leverage financing. Doorstep banking facilities are being offered by some of these
banks to cater to convenience lifestyle of its customers. Private banks are extending services
including wealth management and equity trading apart from credit cards.
How do banks price their services?
The pricing mechanism is dependent on client relationship and the nature of the transaction. The
pricing can be arrived at by profiling customers into different segments. The large corporate
segment comprises of the bulk and large value transactions.

This segment is characterised by multiple service relationships. The pricing in this segment is
transaction based and depends on the size of transactions and on the banks' relationship with the
corporate. Hence, the pricing is decided on a one to one basis and public.
The other segments comprise the brokers, small and medium enterprises (SME), other banks and
the retail segment. In each of these cases, the pricing is not made public and is determined on the
basis of the nature of the transaction and the banks' relationship with the client, on a one to one
basis.
Typically, high volumes and low value characterise the SME segment. Therefore the pricing for
this segment differs from that of the large corporates. Similarly the pricing for the banks is very
different. In the retail segment, the bank publishes its tariff.
How do services contribute to the bank's income?
Increasingly banks are witnessing a growth in their non-interest or fee-based incomes. With
interest spreads decreasing, banks have little option but to ramp up their revenues from fee-based
income.
Fee-based income constitutes a major portion of a bank's other income. The ratio of other income
to total income is an indicator of the size of fee-based income. Treasury incomes of public sector
banks are no longer the major revenue driver and have been coming down as a result of rising
interest rates. Volatility of interest rates are compelling banks to increase their fee based income.
What is non-fund based income?
The non-fund based income comprises of revenues from both financial commitment and services
rendered. Financial commitment includes guarantees, letters of credit and bankers acceptances
etc.
The fees charged may vary from bank to bank and is dependant on the relationship of the bank
with the client and the size of the transaction. On the other hand, the revenues from services
rendered include fees from funds transfer and enabling services like ATM, internet banking etc.
The revenues from funds transfer come from corporate services such as cash management,
foreign exchange remittances and from retail services including drafts, pay orders etc.

BANKER CUSTOMER RELATIONSHIP

Banker customer relationship, is just a special contract where a person entrusts valuable
items with another person with an intention that such items shall be retrieved on demand
from the keeper by the person who so entrust.

It begins as soon as the acceptance of cash or a cheque for collection on an understanding

that relations will continue if references are found to be satisfactory.

The relationship can be suspended or rescinded by (1) mutual assent, (2) giving notice by
one party to the other and (3) operation of law in as in the case of death, insanity,
insolvency, war, liquidation of the bank itself, etc.

Banker
According to Section 3 of the Negotiable Instruments Act the term banker includes any person
acting as a banker.
According to Halsburys Laws of England a banker as an individual, partnership or corporation
whose sole predominating business is banking, that is the receipt of money on current account or
deposit account and the payment of cheques drawn by and the collection of cheques paid in by
the customer.
A banker is one who in the ordinary course of his business, honors cheques drawn upon him by
persons from and for whom he receives money on their account. No person or body corporate
can be a banker who does not (1) take deposit accounts and current accounts, (2) issue and pay
cheques and (3) collect cheques crossed and uncrossed for its customers. One claiming to be a
banker must acknowledge himself to be one, and the public must accept him as such; his main
business must be that of banking from which normally he should be able to earn his livelihood.
Customer
A customer is a person who has some kind of account, such as deposit or current with a bank and
from this it follows that any person may become a customer by opening a deposit or current
account or having some similar relation with a bank.
To constitute a customer, there must be some identifiable course or habit of dealing in the nature
of regular banking business. It is difficult to settle the idea of a single transaction with that of a
customer. A customer is a person; he should have some kind of an account with the bank. The
initial transaction in opening an account will not create the relation of a banker and customer.
According to the duration theory the relation of a banker and customer begins as soon as the
first cheque is paid in and accepted for collection.
In simple words a customer can be any person for whom the bank agrees to conduct an account.
Legal Requirements to be qualified as Customer:

Customer should be a major

Customer be of sound mind
He should not be debarred under any law
There must be an offer and acceptance of the proposal.

Things to be noted:

A single transaction can constitute a customer

Every customer should have an account
There should be some frequency in transactions
All the dealing must be of banking nature
The customer can be a person, a company, a society or a legal entity.

The legal relationship between a banker and a customer is of two kinds,

1) The General or Primary relationship
Debtor and Creditor Relationship
- The general relationship between a banker and a customer is that of a debtor and
creditor.
When customer deposits money with a bank the relationship of debtor and creditor will
be established, in this case Banker is the Debtor and Customer is the Creditor.
- Thus the customer is the creditor who has the right of demand on the money from the
banker. As long as the banker is keeping the customer items, the banker is indebted to the
customer.
- The terms and conditions governing the relationship should not be leaked to a third
party, particularly by the banker. Also the items kept should not be released to a third
party without due authorisation by the customer.
Creditor and Debtor
When a bank grants loan and other credit facilities to the customer, the relationship between the
banker and customer is reversed, that is
Customer is Debtor and Banker is Creditor. In such cases banker doesnt carry/ hold the money
of the customer but it is the money of the bank in the hands of the customer. In all such cases
when a customers account is over drawn, the customer does not cease to be a customer.
2) Special or Subsidiary relationship
Principal and Agent
- The first special relationship between the banker and the customer is that of an Agent
and Principal, where the banker performs a number of agency services for his customer by
charging a very nominal commission.
Some of the agency activities of a banker are specified below:

Collecting cheques on behalf of the customer

Collecting dividends and bills of exchange

Acting as an attorney, representative or executor of a customer

Buying and selling securities on behalf of his customer.

Duties of the Agent (Banker):

Some of the important duties of an agent are given below:

To follow the instructions given by principal

To show required skill and carefulness
Duty to provide proper accounts
Duty to pass on any benefits derived from agency
Duties of Principal (customer):

The principal should pay remuneration to the agent

The principal should not prevent his agent from performing the duties/ acts assigned to him
under the contract and for which remuneration is payable.
Any lawful expenses which have been incurred by the agent in the course of performance of
his duties are to be indemnified by the principal.

Bailor and Bailee Relationship:

Bailment is the delivery of goods by one person to another for some purpose, upon a contract
that they shall, when the purpose is fulfilled, be returned or disposed of according to the
directions of the person delivering them. The person delivering the goods is called the bailor
and the person to whom these are delivered is called the bailee.
Bailment is also an important type of relations between the banker and customer. It may arise in
the following situations:

Availing safe custody services (lockers)

Pledge of stocks as security for availing credit from bank
In these cases Customer is the Bailor and the Bank is the Bailee
Trustee and beneficiary
Trustee and Beneficiary relationship arises when the banker accepts valuables or securities from
the customer for safe custody.
This relationship gives the customer a right to claim any dues from his banker or recovering the
debt due to him from the bank when goes into liquidation.
Pledger and Pledgee Relationship
Pledge means the bailment of goods as security for payment of a debt or performance of a
promise. When credit facility is provided by a bank to its customers against collateral security of
movable property, the Relationship of Pledger and Pledgee is established.
In this case customer is the Pledger and banker is the pledgee.
Mortgagor and Mortgagee Relationship

Mortgage means the transfer of an interest in specific immoveable property for the purpose of
getting the payment of money advanced or to be advanced by way of loan, an existing or future
debt, or the performance of an engagement which may give rise to a financial liability.
When credit facility is provided by the bank to a customer against the security of immovable
property, the relationship of Mortgagor and Mortgagee is established.
In this situation:
Mortgagor Customer
Mortgagee Bank

Negotiable Instrument Act

A negotiable instrument is one which represents contractual rights that are generally
accepted as money.

It is written contract evidencing a right to receive money and it may be transferred by

negotiation.

Accr. To NI Act, 1881 A Negotiable Instrument means a promissory note, BOE, Cheque
payable either to order or to bearer.

Negotiable Instruments share warrants, dividends, demand draft, treasury bills, etc.

Non Negotiable Instruments bill of lading, LC, deposit receipts, share or stock
certificates, etc.

Essential features of Negotiable Instruments:

Can be transferred from one person to another like cash

A bonafide transferee for value of NI gets complete, independent title

Certain presumptions apply to all NIs. (Example Consideration)

These instruments are in writing and signed by the parties, they are used as evidence of
the fact of indebtedness because they have special rules of evidence.

These instruments relate to payment of certain money in legal tender.

These instruments can be transferred in infinitum till they are at maturity.

A cheque is a document/instrument (usually a piece of paper) that orders a payment of

money from a bank account.

Cheques are a type of bill of exchange and were developed as a way to make payments
without the need to carry around large amounts of gold and silver.

Technically, a cheque is a negotiable instrument instructing a financial institution to pay a

specific amount of a specific currency from a specified transactional account held in the
drawer's name with that institution.

Any cheque crossed with two parallel lines means that the cheque can only be deposited
directly into an account with a bank and cannot be immediately cashed by a bank over the
counter.

Cheques can be of two types:1. Open or an uncrossed cheque - An open cheque is a cheque which is payable at the counter of
the drawee bank.
2. Crossed cheque - A crossed cheque is a cheque which is payable only through a collecting
banker.
Types of Crossing

General Crossing

Special Crossing

Account Payee or Restrictive Crossing

'Not Negotiable' Crossing

Cheque crossed generally

Where a cheque bears across its face an addition of the words 'and company' or any abbreviation
thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either
with or without the words 'Not Negotiable', that addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed generally.
Cheque crossed specially
Where a cheque bears across its face an addition of the name of a banker, either with or without
the words 'Not Negotiable', that addition shall be deemed a crossing, and the cheque shall be
deemed to be crossed specially, and to be crossed to that banker.This is called special crossed
cheque.

Account Payee or Restrictive Crossing

This crossing can be made in both general and special crossing by adding the words Account
Payee. In this type of crossing the collecting banker is supposed to credit the amount of the
cheque to the account of the payee only. The cheque remains transferable but the liability of the
collecting banker is enhanced in case he credits the proceeds of the cheque so crossed to any
person other than the payee and the endorsement in favour of the last payee is proved forged.
The collecting banker must act like a blood hound and make proper enquiries as to the title of the
last endorsee from the original payee named in the cheque before collecting an 'Account Payee'
cheque in his account. The same can be done by place slanted parallel line in the top most left
corner of the cheque - in writing over their A/C payee's only.

Not Negotiable Crossing

The words 'Not Negotiable' can be added to General as well as Special crossing and a crossing
with these words is known as Not Negotiable crossing. The effect of such a crossing is that it
removes the most important characteristic of a negotiable instrument i.e. the transferee of such a
crossed cheque cannot get a better title than that of the transferor (cannot become a holder in due
course) and cannot convey a better title to his own transferee, though the instrument remains
transferable.

-A bank's failure to comply with the crossings amounts to a breach of contract with its
customer. The bank may not be able to debit the drawer's account and may be liable to the true
owner for his loss.
Collection of Cheques
Cheque collection policy of the Bank is a reflection of on-going efforts to provide better
service to customers and set higher standards for performance.
Local Cheques

All cheques and other Negotiable Instruments payable locally would be presented
through the clearing system prevailing at the centre.

Bank branches situated at centres where no clearing house exists, would present local
cheques on drawee banks across the counter and it would be the banks endeavour to
credit the proceeds at the earliest.

For local cheques presented in clearing credit will be afforded as on the date of settlement
of funds in clearing and the account holder will be allowed to withdraw funds as per
return clearing norms in vogue.

Outstation Cheques

Cheques drawn on other banks at outstation centres will normally be collected through
banks branches at those centres.

Where the bank does not have a branch of its own, the instrument would be directly sent
for collection to the drawee bank or collected through a correspondent bank.

Cheques presented at any of the four major Metro Centres (New Delhi, Mumbai, Kolkata
and Chennai) and payable at any of the other three centres : Maximum period of 7 days.

Metro Centres and State Capitals (other than those of North Eastern States and Sikkim):
Maximum period of 10 days. In all other Centres : Maximum period of 14 days.

Cheques payable in Foreign Countries

Cheques payable at foreign centres where the bank has branch operations (or banking
operations through a subsidiary, etc.) will be collected through that office.

Cheques drawn on foreign banks at centres where the bank or its correspondents do not
have direct presence will be sent direct to the drawee bank with instructions to credit
proceeds to the respective Nostro Account of the bank maintained with one of the
correspondent banks.

Such instruments are accepted for collection on the best of efforts basis. Bank would
give credit to the party on credit of proceeds to the banks Nostro Account with the
correspondent bank after taking into account cooling periods as applicable to the
countries concerned.

Dishonour of Cheques
Dishonor of Cheques - Section 92 of the Negotiable Instruments Act states that A promissory
note, bill of exchange or cheque is said to be dishonored by non-payment when the maker of the
note and acceptor of the bill makes default in payment.
Grounds of Dishonour
1. Funds Insufficient: The amount of money standing to the credit of the account of the drawer
on which the cheque is drawn is insufficient to honour the cheque, or the cheque amount exceeds
the amount that can be paid by the bank under an arrangement entered into between the bank and
the drawer of the cheque.

2. Account Closed: It is an offence under section 138 of the Act Closure of account would be
an eventuality after the entire amount in the account is withdrawn. It means that there was no
amount in the credit of that account on the relevant date when the cheque was presented for
honouring the same.
3. Stop Payment instructions: Once the cheque has been drawn and issued to the payee and the
payee has presented the cheque, stop payment instructions will amount to dishonour of cheque.
4. Refer to drawer: Makes out a case under section 138 of the Negotiable Instruments Act,
1881 which expression means that there were not sufficient funds with the bank in the account of
the respondent
5. Not a clearing member: Cheque returned with endorsement not a clearing member. To attract
the provisions of section 138 NI Act, the cheque should be presented with the bank on which it I
drawn- If the cheque is not presented to the bank on which it is drawn, then provisions of sec 138
would not be attracted. If bank on which the cheque is drawn is not a clearing member of the
Reserve Bank of India unpaid return of the cheque would not attract section 138.
6. Effect of other endorsements: It has been repeatedly held by courts that manifest dishonest
intention of the drawer resulting in dishonour of the cheque would lead to prosecution under
section 138 Negotiable Instruments Act regardless of the actual ground of dishonour.
Consequences Of Wrongful Dishonour Of Cheques
A banker has the statutory obligation to honour his customers cheques unless there are valid
reasons for refusing payments of the same. In case be dishonours a cheque, intentionally or by
mistake, he is liable to compensate the customer for the loss suffered by him. According to
Section 31 of the Negotiable Instruments Act, 1881, the banker is liable to compensate the
drawer for any loss or damage caused by the default on his part in dishonouring the cheques
without sufficient reason. The banker thus incurs heavy liability for any mistake or default
committed in dishonouring his customers cheques.

A dishonoured cheque cannot be redeemed for its value and is worthless

The NI Act makes the drawer of cheque liable for penalties in case of dishonour of
cheques due to insufficiency of funds or for the reason that it exceeds the arrangements
made by the drawer.

The NI Act also contains sufficient safe guards to protect the drawer of cheques by giving
him an opportunity to make good the payment of dishonoured Cheque when a demand
is made by the payee.

In case of dishonour, the main thrust of the amendment of NI Act is to provide for a
speedy and time bound trial, punishment of 2 years and double the amount of the cheque
as fine.

Offence under the NI Act:

Offence under Section 138 of the N I Act shall be deemed to have

been committed, if the following conditions are satisfied:

a) Cheque must have been drawn by a person(the drawer) in favour of a payee on

his bank account for making payment

b) Such payment must be either in whole or partial discharge of a legally

enforceable debt

c) Cheque must have been returned by the Banker to the payee or holder in due
course due to insufficient balance in the account of the drawer or it exceeds the
arrangement he had with the bank

Proviso requires fulfillment following additional conditions:

a) Cheque must be presented within a period of 6 months from the date of cheque
or its validity period which ever is earlier.

b) The payee or holder in due course must demand payment of the cheque
amount by written notice within 15 days of receipt of notice

c) Such notice must be issued within 30 days from the date of receipt of
intimation of dishonour from bank and

d) The drawer of cheque fails to pay demanded sum within 15 days from the date
of receipt of the notice

STATUTORY PROTECTION TO COLLECTING BANKER AND PAYING BANKER

Introduction
Collecting banker is one, who undertakes the collection of cheques for his customer. Now-adays banks undertake to collect even other instruments like bank drafts, bills of exchange,
dividend warrants etc.,
Role of a Collecting Banker
1. Collection of Cheques from his customers.

2. Segregating them into (a) Local Cheques and (b) Outstation Cheques.
a) In case of Local Cheques: The banker presents the cheque to the paying banker/drawee and if
cheque is honoured, he credits the customers account with the amount realised.
b) In case of Outstation Cheques: The banker will send the cheque for clearance to the
concerned bank through post and if cheque is honoured, the account of the customer will be
credited with the realised money.
3. If the cheque is dishonoured the same will be informed to the customer and the cheque will
be returned with a remark- R. D {refer to the drawer}.
General duties of a Collecting Banker
1. Collecting Banker should undertake the collection of cheques, drafts, bills etc., only for his
customer.
2. Before opening an account in the name of a new customer, he should insist on satisfactory
introduction or reference testifying the integrity and honesty of the customer.
3. Before accepting a cheque for collection on behalf of a customer, he should examine the
validity of the title of the customer to the cheque.
4. Before accepting a cheque for collection, he should examine the correctness of all
endorsements of the cheque.
5. If uncrossed cheques are deposited for collection, the collecting banker should first get them
crossed by the customer and then accept them for collection. The banker should never take the
responsibility of crossing the cheque, after accepting it for collection. Collecting banker as a
Holder for Value Collecting Banker becomes the holder for value, if he pays the value of the
cheque to the customer before the cheque is actually collected. In this, the collecting banker
initially pays the amount to the customer, and then presents the cheque for collection to the
Drawee/Paying banker as though, he himself is a customer.
In the following cases the Collecting Banker becomes a Holder for value:
a) When Collecting Banker pays the value of a cheque to the customer, before it is
collected/realised
b) When Collecting Banker acquires a cheque from the customer in exchange for cash.
c) When Collecting Banker allows a customer to withdraw the money against the cheque
deposited before it is realised
d) When a banker accepts a cheque from the customer, to appropriate the proceeds towards the
loan of the customer or when the banker exercises his Lien on the proceeds of the cheque.

e) When Collecting Banker advances money against the cheque meant for collection.
Rights as a holder for value:
1. The proceeds of the collection will be retained by the banker.
2. In case the cheque is dishonored, the Collecting Banker may recover the money paid, from all
or any endorser of the cheque.
3. If the cheque collected had forged endorsement the Collecting Banker has right to recover
the amount from all the concerning endorsers, subsequent to forgery.
Liabilities as a Collecting Banker
If a cheque has forged endorsement or defective title and if the Collecting Banker collects the
cheque for himself, he is liable to the real owner or to the legal owner of the cheque.

Collecting Banker As An Agent Of His Customer

In this case the Collecting Banker acts only as an agent of his customer, i.e., he collects the
cheque from the customer, sends it to the clearinghouse and credits the account with the amount
realised.
Rights of Collecting Banker as an agent of his customer
When a collecting banker collects a cheque as an agent of his customer, he has not rights of his
own. His rights or title to the cheque will be the same as that of the customer.
Liabilities:
1. The Collecting Banker should execute the collection work honestly and without any
negligence. If any loss is caused due to negligence, such loss has to be reimbursed by the
Collecting Banker
2. In case of forged endorsement/ statutory direction the realised amount shouldnt be given to
the customer. If he pays, the Collecting Banker will be held liable.
Precautions to the taken by the Collecting Banker while acting as a Holder for a Value
1. The Collecting Banker has to obtain a consent letter from the customer. It is advisable
for the banker to take an undertaking from the customer, whose cheque has been
received for a value, that the customer will reimburse the banker, in case the cheque is
dishonoured.
2. Collecting Banker must present the cheque for payment within reasonable time.

3. In case of dishonour, within the reasonable time notice has to be given to all the
concerned endorsers.
Statutory Protection To The Collecting Banker
The Negotiable Instruments act of 1881, provides some protection to the collecting banker as he
cannt examine each and every cheque in detail presented for collection. Sections 131 and 131 A
of the act deals with the protection given to the collecting banker. Section 131 gives protection to
the collecting banker in respect of a cheque bearing a forged endorsement or in respect of a
cheque to which the customer has no title or has a defective title. This section states that A
banker who has in good faith and without negligence, received payment for a customer, of a
cheque crossed {generally or specially}to himself shall not, in case the title to the cheque proves
defective, incur any liability to the true owner of a cheque by reason only of having received
such payment
The Collecting Banker may claim for protection under section 131, only if the following
conditions are satisfied:
1. This protection is available only for a Crossed Cheque.
2. The protection can be claimed only if the cheque is crossed before it reaches the collecting
banker. If the collecting banker receives open cheque and if he himself crosses it and sends for
the payment - collecting banker cant get the protection.
3. The Collecting banker can claim this protection, only when he has collected the cheque as an
agent for his customer. If he is a holder for value he cant get the protection.
4. This protection can be claimed only if the collecting banker has collected the cheque in good
faith and without negligence. Section 131 A of the Negotiable Instruments act of 1881, protects
the interests of the collecting banker against the collection of a bank draft having forged
endorsement or defective title. But in order to get the protection under law all the above stated
conditions must be fulfilled.
Banker acting as both Collecting and Paying Banker Sometimes, the cheques are drawn on the
same banker by one customer for another customer. In this case, the banker will be acting as both
paying banker and collecting banker. He will be given protection under both the capacities, if he
satisfies the conditions relating to both the provisions given for protection.
Paying Banker
Meaning
The bank on which a cheque is drawn (the bank whose name is printed on the cheque) and which
pays the amount for which the cheque is written and deducts that sum from the customer's
account.

Precautions of a Paying Banker

Presentation of Cheque
First of all a paying banker should note whether the presentation of the cheque is correct. It can
be found out by noting the following factors.
a) Type of Cheque: Cheques may generally be of two types open or crossed. If it is open one,
the payment may be paid at the counter. If it is crossed, the payment must be made only to a
fellow banker.
b) Branch: The paying banker should see whether the cheque is drawn on the branch where the
account is kept.
c) Banking Hours: The paying banker should also note whether the cheque is presented during
the banking hours on a business day.
d) Mutilation: If the cheque is from into pieces or cancelled or mutilated, then the paying banker
should not honour it.
Honoring a Cheque
a. Printed Form: The customer should draw cheques only on the printed leaves supplied by the
bankers failing which the banker may refuse to honour it.
b. Unconditional Order: The cheque should not contain any condition
c. Date: Before honoring a cheque, the paying banker must see whether there is a date on the
instrument. if a cheque is ante dated, it may be paid if it has not exceeded six months from the
date of its issue otherwise it will become stale one. If a cheque is post dated, he should honor it
only on its due date.
d. Amount: The paying banker should see whether the amount stated in the cheque both in words
and figures agree with each other.
e. Material Alteration: If there is any material alteration the banker should return it with a
memorandum Alteration requires drawers confirmation.
f. Sufficient Balance: If the funds available are not sufficient to honour a cheque, the paying
banker is justified in returning it.
g. Signature of the Drawer: It is the duty of the paying banker to compare the signature of his
customer found on the cheque with that of his specimen signature.
h. Endorsement: The banker must verify the regularity of endorsement, if any, that appears on the
instrument.

i. Legal Bar: The existence of legal bar like Garnishee order limits the duty of the banker to pay
a cheque.
Statutory Protection to the Paying Banker
Protection in case of order cheque
In case of an order cheque, Section -85(1) 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".
However, two conditions must be fulfilled to avail of such protection.
(a) Endorsement must be regular : To avail of the statutory protection, the banker must confirm
that the endorsement is regular.
(b) Payment must be made in Due Course : The paying banker must make payment in due
course. If not, the paying banker will be deprived of statutory protection.
Protection in case of Bearer Cheque
This section implies that a cheque originally issued as a bearer cheque remains always bearer. In
other words it retains its bearer character irrespective of whether it bears endorsement in full or
in blank or whether any endorsement restricts further negotiation or not. So the banks are not
required to verify the regularity of the endorsement on bearer cheque, even if the instruments
bears endorsement in full. The banker shall free from any liability (discharged) if he makes
payment of an uncrossed bearer cheque to the bearer in due course. If such cheque is a stolen one
and the banker makes its payment without the knowledge of such theft, he will be discharged of
his obligation and will be protected under Section 85
Protection in case of Crossed cheque
The paying banker has to make payment of the crossed cheques as per the instruction of the
drawer reflected through the crossing. If it is done, he is protected by Section -128. This section
states "Where the banker on whom a crossed cheque is drawn has paid the same in due course,
the banker paying the cheque and (in case such cheque has come to the hands of the payee) the
drawer thereof shall respectively be entitled to the same rights, and be placed in if the amount of
the cheque had been paid to and received by the true owner thereof". Thus, the paying banker is
free from any liability on a crossed cheque even if the payment was received by the collecting
banker on behalf of a person who was not a true owner. For example, a cheque in favour of X is
stolen by Y. He endorses it in his own favor by forging the signature of X and deposits it in his
bank for collection . In this case, the paying banker shall be discharged if he makes payment as
mentioned above and shall not be liable to pay the same to X, the true owner of the cheque.

The drawer of the cheque is also discharged since protection is also granted to him under this
Section. There is, however, one limitation to the protection granted under this Section. If the
banker cannot avail of the protection granted by other Section of the Act, the protection under
Section -128 shall not be available to him.

BANKERS LIEN:

An enforceable right of a bank to hold in its possession any money or property belonging
to a customer and to apply it to the repayment of any outstanding debt owed to the bank,
provided that, to the banks knowledge, such property is not part of a trust fund or is not
already burdened with other debts.

Principles Governing Bankers Lien

1) It has been held in Chettinad Mercantile Bank Ltd. v/s PL.A.Pichammai Achi and Anr.AIR
1945 Mad. 445 that bankers lien is the right of retaining things delivered into his possession as a
banker if and so long as the customer to whom they belonged or who had the power of disposing
of them when so delivered is indebted to the banker on the balance of the account between them
provided the circumstances in which the banker obtained possession ,do not imply that he has
agreed that this right shall be excluded .Bankers lien can properly be said to arise only in respect
of any of the securities held by the bank ,the bank has a lien over these securities and it could
hold them against the amount due by the customer.
2) It is necessary that the ownership of a thing, which is in possession of the bank, must be with
the customer and held by the bank as a security otherwise the bank can exercise no right of
lien. PNB Ltd.v. Arura Mal Durga Dass and another (AIR 1960 Pun.632.)
3) A bank may not be able to exercise any right of lien over the money deposited by the customer
inasmuch as by itself becomes the owner of the money deposited ,but still it has the right to
adjust such amounts against any debts due to from the customer. The purpose of lien in such
cases is attained by the application of the principle of set off.(AIR 1945 Mad.447)
4) The bankers lien is subject to any contract to the contrary and one alleging it must prove the
existence of such a contract.
5) An insight into the matter of City Union Bank Ltd.v.Thangarajan (2003)46 SCL 237 (Mad) it
is pertinent to state certain principles with respect to Bankers lien that was observed.
a) The bank gets a general lien in respect of all securities of the customer including negotiable
instruments and FDR s, but only to the extent to which the customer is liable. If the bank fails to
return the balance, and the customer suffers a loss thereby, the bank will be liable to pay damages
to the customer. In the present matter the Court has based its decision on the principle that in
order to invoke a lien by the bank, there should exist mutuality between the bank and the
customer i.e. when they mutually exist between the same parties and between them in the same
capacity. Retaining the customers properties beyond his liability is unauthorized and would
attract liability to the bank for damages.

When Is Lien Not Permissible :However Lien is not permissible in the following cases, viz.
(i) Where there is an express contract like by way of counter-guarantee ,providing
reimbursement - Krishna Kishore Kar v. United Commercial Bank, AIR 1982 Cal .62.
(ii) Where there is no mutual demand existing between the banker and the customer-firmJaikishan Dass Jinda Ram v. Central Bank of India,AIR 1960 Punj.1.
(iii) Where the valuables are received for safe -custody- Cuthbert v. Roberts ,(1909)2 Ch.226
(CA) and Bank of Africa and Cohen,(1902)2 Ch.129. (Pagets law of Banking (11th Edition)
(iv) Where the entrustment of goods (documents of title) is for a specific purpose stated to
banker- Greenhalgh v. Union Bank of Manchester,(1924) 2 K.B.153.
(v) When the deposit with the banker is for a specific purpose, if the banker has implied or
express notice of such purpose.
(vi) Where the valuables or documents of title are left in the bankers hands ,inadvertently.
(vii) Where the banker has only a contingent debt .A contingent debt is that "no amount would be
due on the date when he wants to exercise lien" Tannans banking Law .
(viii) Where the account is in respect of a trust.
Bankers Lien is not available against Term Deposit Receipt in Joint Names when the debt is due
only from one of the depositors
In the matter of State Bank of India v. Javed Akhtar Hussain and others ,AIR 1993 Bom.87 ,the
appellant bank obtained a decree from against applicant and non-applicant who stood as a surety
to the non-applicant No.1 .After a decree was passed ,the non-applicant No.2 deposited a sum of
Rs.32,793/-in TDR No.856671 with the appellants in joint names of himself and his wife in
another branch of the same bank .They were also having RD account. The applicant bank kept
lien on both these accounts without exhausting, any remedy against non-applicant No.1.The
Court held that the action of keeping lien was a sort of suo muto act exercised by the Bank even
without giving notice to the non-applicant No.2 and his wife. The applicant could have moved
the court for passing orders in respect of the amounts invested in TDR and RD accounts.
However the action of the appellant in keeping lien over both these accounts was unilateral and
high-handed.
Syndicate Bank v.Vijay Kumar and Others , AIR 1992 SC 1066
The Supreme Court upheld the right of bankers lien and right of set-off ,holding that these are of
mercantile custom and are judiciously recognised.
Facts
In the present matter the bank at the request of the judgment debtor had agreed to furnish the
bank guarantee in favour of the High Court of Delhi on the condition that that judgment Debtor
should deposit the entire sum of Rs.90,000 in favour of the Registrar of the High Court of
Delhi .This was done and the partner of the judgement debtor firm deposited two FDRS of Rs.
65,000 and 25,000 respectively after duly discharging them by signing on the reverse of each
FDR.
The two FDR s were duly discharged by signing on the reverse of each of them by the judgment
debtor and were handed over along with two covering letters on the banks usual printed forms

on 17.9.1980 at the time of obtaining the guarantee. The relevant clause of the letter read as
under:
"The Bank is at liberty to adjust from the proceeds covered the aforesaid Deposit Receipt
/Certificate or from proceeds of other receipts /certificates issued in renewal thereof at any time
without any reference to us ,to the said loan/OD account. We agree that the above deposit and
renewals shall remain with the said bank so long as any account is due to the bank from us for
the said M/s Jullundur Body Builders singly or jointly with others."
Held That
The bank has general lien over all forms of securities or negotiable instruments deposited by or
on behalf of the customer in the ordinary course of banking business and that the general lien is
valuable right of the banker judicially recognised and in the absence of an agreement to the
contrary, a Banker has a general lien over such securities or bills received from a customer in the
ordinary course of banking business and has a right to use the proceeds in respect of any balance
that may be due from the customer by way of a reduction of customers debit balance. In case the
bank gave a guarantee on the basis of the two FDRs it cannot be said that a banker had only a
limited particular lien and not a general lien on the two FDRs.It was hence held that what is
attached is the money in deposit amount. The banker as a garnishee, when an attachment notice
is served has to go before the court and obtain suitable directions for safeguarding its interest.
When does a general lien take effect?
A general lien arises out of a series of transactions in the general course of business rather than a
single specific transaction such as the repair of a piece of jewellery or a computer. Attorneys,
bankers, and Factors usually have general liens to ensure that his client will pay him for services
already performed, an attorney may retain possession of the papers and personal property of his
client that fall into his hands in his professional capacity. He also has a charging lien on any
judgment he has obtained for his client for the value of his services. A banker may retain stocks,
bonds, or other papers that come into his hands from his customer for any general balance owed
by the customer. A factor or commission merchant may hold onto all goods entrusted to him for
sale by the owner of the goods for any balance due. The merchant may sell the goods to satisfy
his lien, but he must account to the owner for any excess realized from the sale. General liens
occur less frequently than specific liens.
What is set-off?
The right of set off is also known as the right of combination of accounts .A bank has a right to
set off a debt owing to a customer against a debt due from him.

"A legal set-off is where there are mutual debts between the plaintiff and defendant, or if
either party sue or be sued as executor or administrator one debt may be set against the
other "(S.13 Insolvent Debtors Relied Act 1728)
From a commercial standpoint, a right of set-off is a form of security (right) for a lender.
It is an attractive security because its realization does not involve the sale of an asset to a
third party.

A set-off must be in the form of a cross claim for a liquidated amount and it can be
pleaded only in respect of a liquidated claim. Both the claim and the set-off must be
mutual debts, due from and to the same parties, under the same right A claim by a person
in a representative capacity cannot be set off against a personal claim. Even a claim
against the estate of a deceased customer cannot be set off against a debt, which was due
to the customer from his banker, during the formers lifetime, whether the accounts are
with one or more offices of the banker, it does not materially affect the position in any
way.

A bankers right of set off cannot be exercised after the money in his hands has been
validly assigned or in any case after he has been notified of the fact of an assignment.
(Official Liquidator ,Hanuman Bank Ltd. v. K.P.T. Nadar and Others 26 Comp.Cas .81)

Judgments indicating certain essentials to the exercising of the right of set off.
Punjab National Bank v. Arunamal Durgadas ,AIR 1960 Punj.632 State Bank of India v.
Javed Akhtar Hussain ,AIR 1993 Bombay ,87 where it has been established
that : (1) Mutuality is essential to the validity of a right of exercising set-off
(2) It must be between the same periods.

Relationship Between Lien And Set-Off

The bankers right of lien can attach to the money so long as it is earmarked. Where it has
ceased to be such a separate earmarked sum, the bank has not the right of set off. ( Radha
Raman Choudhary v. Chota Nagpur Banking Association Ltd.(1945) 15 Comp.Cas.4(Pat).

There is a distinction between a bankers lien and the banks right to set-off. A lien is
confined to securities and property in banks custody. Set-off is in relation to money and
may arise from a contract or from mercantile usage or by operation of law.

Right of Appropriation

Lien is the right of the creditor to retain goods belonging to the debtor until the amount
due to the former is completely discharged.

Bank can transfer money from the customers personal account into a joint account, to
cover a debt on an account held jointly by the customer, without the permission of the
customer.

If the account is overdrawn, the customer can choose how any further money paid into
the account is used (for example to pay mortgage or rent). This is called Right of
appropriation. The customer need to write to the bank with new instructions each time
he makes a deposit.

Under common law customer have a right of appropriation over his own money and
money he pays to another.

Kinds of Lending Facilities

1. Overdraft: These types of advances are given to current account holders. No separate account
is maintained. All entries are made in the current account. A certain amount is sanctioned as
overdrafts which can be withdrawn within a certain period of time say three months or so.
Interest is charged on actual amount withdrawn. An overdraft facility is granted against a
collateral security. It is sanctioned to businessman and firms.
2. Cash Credits: The client is allowed cash credit upto a specific limit fixed in advance. It can be
given to current account holders as well as to others who do not have an account with bank.
Separate cash credit account is maintained. Interest is charged on the amount withdrawn in
excess of limit. The cash credit is given against the security of tangible assets and / or guarantees.
The advance is given for a longer period and a larger amount of loan is sanctioned than that of
overdraft.
3. Loans: It is normally for short term say a period of one year or medium term say a period of
five years. Now-a-days, banks do lend money for long term. Repayment of money can be in the
form of installments spread over a period of time or in a lumpsum amount. Interest is charged on
the actual amount sanctioned, whether withdrawn or not. The rate of interest may be slightly
lower than what is charged on overdrafts and cash credits. Loans are normally secured against
tangible assets of the company.
4. Discounting of Bill of Exchange: The bank can advance money by discounting or by
purchasing bills of exchange both domestic and foreign bills. The bank pays the bill amount to
the drawer or the beneficiary of the bill by deducting usual discount charges. On maturity, the
bill is presented to the drawee or acceptor of the bill and the amount is collected.
5. Letter of Credit: 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