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1 - 12

ANNAMALAI UNIVERSITY
DIRECTORATE OF DISTANCE EDUCATION

Master of Commerce (M.Com.)

Third Semester

DYNAMICS OF BANKING
LESSONS : 1 - 12

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 MASTER OF COMMERCE (M.Com.)
Third Semester
DYNAMICS OF BANKING
Editorial Board
Chairman
Dr. K.Vijayarani
Dean
Faculty of Arts
Annamalai University
Members
Dr. R. Singaravel Dr. P. Vijayan
Director Director
Directorate of Distance Education Directorate of Academic Affairs
Annamalai University Annamalai University

Dr. K. Govindarajan Dr. R. Elangovan

Professor and Head Professor and Co-ordinator
Department of Commerce Commerce W ing. DDE
Annamalai University Annamalai University

Internals
Dr. K. Padmanaban Dr. S. Suresh
Professor Professor
Department of Commerce Department of Commerce
Annamalai University Annamalai University

Externals
Dr. P. Natarajan Dr. S. Ganapathi
Professor of Commerce Professor,
Pondicherry University Department of Management Studies.
Puducherry. Alagappa University
Karaikudi

Lesson Writer
Dr. B. Arthi
Assistant Professor of Commerce
Urumu Dhanalakshmi College
Trichy – 600 019
 i

MASTER OF COMMERCE (M.COM.)

Third Semester
DYNAMICS OF BANKING
Unit- I :Banking Legislations
Evaluation of Banking Legislations in India – Reserve Bank of India Act 1934 -
Major provisions of Banking Regulation Act 1949/1970 Act - Banking Companies
(Acquisition and Transfer of undertakings)-Changing Scenario of Banking system-
Ordinance 1980 and its Amendment Bill 2005
Unit- II :Changing Profile of Indian Banking
Changing scenario of Indian Banking System- Shift from security to purpose
orientation-Change from wholesale character to Retail Character- Financial
Exclusion-Need for financial inclusion – Move towards universal banking-Meaning –
RBI Guidelines on Universal banking – Hurdles in Universal Banking.
Unit- III :Bank Deposits, Loans and advances
Customer’s accounts with the Banker-Deposits-Opening of bank accounts-
Types of deposits accounts-NRI Deposits - General Rules of sound Lending-Forms
of Advances- Credit Appraisal Techniques –Determining credit worthiness-Sources
of credit information.
Unit- IV :Demonetization and Remonetization
Demonetization – History of Demonetization in India - Meaning – Definition -
Background-Objectives-Advantages and Disadvantages. Demonetization – Black
money – fake money- Digital financial transactions-cash less economy –
Remonetization- The Role of RBI in demonetization and Remonetization-Role of
National Payment Corporation of India.
Unit- V :Payment System & Digitalbanking
Rupay- Rupay Secure- IMPS – National Unified USSD Platform (USSD)-
National Automated Clearing House (NACH)- Aadhaar Enabled payment
System(AEPSC- KYC/MICR Vs CTS- Comparison –National Financial Switch
(NFS) RTGS,NEFT,UPI,CCIL-National Payment Corporation – Forex Settlements,
Securities Settlement- Innovative Banking PaymentSystem.
Text Books:
1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd,Chennai
2. Arunajatesan S 2017 Technology in Banking Margham Publications Chennai..
3. Digital Banking 2016 Indian Institute of Banking and Finance, Taxmann Publication
New Delhi.
Reference Books:
1. SubbaRao S and P.L Khanna 2014 Principles & Practice of Bank Management,
Himalya Publishing House, Mumbai.
2. Gurusamy S 2017 Banking Theory Law & Practice, Tata McGraw Hill,Uttarpradesh
3. MuraliS.andSubbakrishna , 2012 Bank and Credit Management, Himalaya
Publishing House,New Delhi.
4. Indian Institute of Banking and Finance, 2016 ,Principles & Practice of Banking,
McMillan, Mumbai
5. Indian Institute of Banking and Finance, 2016 ,General Bank Management,
McMillan, Mumbai
6. Websites: National Payment Corporation of India, CCIL
 ii

MASTER OF COMMERCE (M.COM.)

Third Semester
DYNAMICS OF BANKING
CONTENTS
Lesson Page
Unit Title
No. No.
I. Banking Legislations

1. Evaluation of Banking Legislations in India 1

2. Reserve Bank of India [RBI] Act, 1934 13

3. Provisions Relating to Banking Regulation Act 1949 25

II. Changing Profile of Indian Banking

4. Financial Exclusion 36

5. Financial Inclusion 42

III. Bank Deposits, Loans and advances

6. Different Types of Customers 52

7. Credit Appraisal 71

IV. Demonetization and Remonetization

8. Demonetisation 82

9. Remonetisation 89

V. Payment System & Digital banking

10. Payment System and Digital Banking - I 97

11. Payment System and Digital Banking – II 109

12. Payment System and Digital Banking – III 119

 UNIT-I :BANKING LEGISLATIONS
LESSON - 1

EVALUATION OF BANKING LEGISLATIONS IN INDIA

1.1 1INTRODUCTION
The banking sector is the lifeline of any modern economy. It is one of the
important financial pillars of the financial sector, which plays a vital role in the
functioning of an economy. It is very important for economic development of a
country that it’s financing requirements of trade; industry and agriculture are met
with higher degree of commitment and responsibility. Thus, the development of a
country is integrally linked with the development of banking. In a modern economy,
banks are to be considered not as dealers in money but as the leaders of
development. They play an important role in the mobilization of deposits and
disbursement of credit to various sectors of the economy. The banking system
reflects the economic health of the country. The strength of an economy depends on
the strength and efficiency of the financial system, which in turn depends on a
sound and solvent banking system. A sound banking system efficiently mobilized
savings in productive sectors and a solvent banking system ensures that the bank
is capable of meeting its obligation to the depositors.
1.2 OBJECTIVES
 After going through this Lesson, you will be able to understand the Concept
of banking, Evaluation of Indian Banking, Different Phases of Evaluation of
Indian Banking.
1.3 CONTENT
1.3.1 Concept of Banking Legislations
1.3.2 Evolution of Indian Banking System
1.3.3 Evaluation of Indian Banking Legislations
1.3.4 Phases of Evaluation of Indian Banking Legislations
1.3.5 Legislative Regulations of Banking in India
1.3.1 Concept of Banking Legislations
Indian banking sector is an important constituent of the Indian financial
system. The banking sector plays a vital role of promoting business in urban as well
in rural areas in recent years. Banking business and related financial services are
governed primarily by the Banking Regulation Act, 1949 (Banking Regulation Act).
The Reserve Bank of India Act, 1934 (RBI Act) empowers the Reserve Bank of
India (RBI) to issue rules, regulations, directions and guidelines on a wide range of
issues relating to banking and the financial sector. The RBI is the central bank of
India, and the primary regulatory authority for banking.
1.3.2. Evolution of Indian Banking System
In India, banks are playing a crucial role in socio-economic progress of the
country after independence. The banking sector is dominant in India as it accounts
for more than half the assets of the financial sector. Indian banks have been going
 2

through a fascinating phase through rapid changes brought about by financial

sector reforms, which are being implemented in a phased manner.

Evolution of Banking Law In India

The process of transformation should be viewed as an opportunity to convert
Indian banking into a sound, strong and vibrant system capable of playing its role
efficiently and effectively on their own without imposing any burden on government.
After the liberalization of the Indian economy, the Government has announced a
number of reform measures on the basis of the recommendation of the Narasimhan
Committee to make the banking sector economically viable and competitively strong.
The global crisis that hit every country raised various issue regarding
efficiency and solvency of banking system in front of policy makers. Now, crisis has
been almost over, Government of India (GOI) and Reserve Bank of India (RBI) are
trying to draw some lessons. RBI is making necessary changes in his policy to
ensure price stability in the economy. The main objective of these changes is to
increase the efficiency of banking system as a whole as well as of individual
institutions. So, it is necessary to measure the efficiency of Indian Banks so that
corrective steps can be taken to improve the health of banking system.
In India the RBI is the central banking institution the RBI regulates and
operates the banking system in India it supervises and administer exchange control
and banking regulations and administrators the governments monetary policy the
banking system in India works according to the guidelines issued by the RBI.
Post Independence: India observed the emergence of large number of Institution for
providing finance to different sector of the economy. The entry activities of Private
Sector and Foreign Banks were restricted through Branch licensing and regulation
norms. Steps taken by Indian Government to regulate Banking are: - RBI was
nationalized on January, 1949 under the terms of RBI. In 1949 the Banking
Regulation Act was enacted. The Banking Regulation Act, 1949 also have a
provision that the no new bank or branch of any existing bank could be opened
without a license issued by an RBI. No two banks could have common Directors.
 3

Nationalization: Nationalisation is a process by which the government takes

over private assets and brings them under public ownership. In India
Nationalization of banks took place in 1969, by Mrs Indira Gandhi. It nationalized
the 14 largest Commercial Banks on 19th July 1969. Second phase of
nationalization of Indian Banks took place in the year 1980.There was around 91%
of the banking business controlled by government of India with the inception of
second round of nationalization.
In the year 1993 Punjab National Bank merged with New Bank of India by the
government. It was the only merger between nationalized banks due to which there
is reduction of nationalized banks from 20 to 19.
Liberalisation and Globalisation: Number of small private banks were granted
license by the government due to the policies of liberalization in the early 1990s.
Due to Globalization more and more Banks are receiving the benefits and also
expanding at an incredible faster pace, publicly owned Banks handle more than
80% of the Banking Business in India and rest in the hand of private sector Banks.
However, Banking in both the government and private sector is being revolutionized
by this latest phenomenon called ‘Globalization’.
1.3.3 Evaluation of Indian banking
The period of last six decades has viewed many macro economic development
of India. The monitory, external and banking policies have undergone several
changes. The structural changes in the Indian financial system specially in banking
system has influence the evaluation of Indian Banking in different ways. After the
independence and implementation of banking reforms, we can see the changes in
the functioning of commercial banks. In order to understand the changing role of
commercial banks and the problems and challenges, it would be appropriate to
review the major development in the Indian banking sector.
1.3.4 Evaluation of Indian banking - Phases
Evaluation of Indian banking may be traced through four distinct phases:
1. Evolutionary phase (Prior to 1947)
2. Foundation phase (1947-1969)
3. Expansion phase (1969-1990)
4. Consolidation and Liberalization phase (1990 to till)
1. Evolutionary phase (Prior to 1947):
According to the Central Banking Enquiry Committee (1931), money lending
activity in India could be traced back to the Vedic period, i.e., 2000 to 1400 BC. The
existence of professional banking in India could be traced to the 500 BC.
Kautilya’sArthasasthra, dating back to 400 BC contained references to creditors,
lenders and lending rates. Banking was fairly varied to the credit needs for the
trade, commerce, agriculture as well as individuals in the economy, Mr. W.E.
Preston, member, Royal Commission on India Currency and finance set up in 1926,
observed “ It may be accepted that a system ofbanking that was extremely suited to
 4

India’s then requirements was in force in that country many countries before the
science of banking become an accomplished fact in England.” They had their own
inland bills of exchange or Hundis which were the major instruments of
transactions. The dishonoring of bundies was a rare at that time as most banking
worked on mutual trust, confidence and without securities.
The first western bank of a joint stock verity was Bank of Bombay, establishing
1720 in Bombay. This was followed by bank of Hindustan in Calcutta, which was
established in 1770 by an agency house. This agency house and banks were close
down in 1932. The first “Presidency Bank‟ was the Bank of Bengal established in
Calcutta on June 2, 1806 with a capital of Rs.50 Lakhs. The Government
subscribed to 20 percent of its share capital and shared the privilege of appointing
directors with voting rights. The bank had the task to discounting the treasury bills
to provide accumulation to the Government. The bank was given powers to
issue notes in 1823. The Bank of Bombay was the second presidency bank set up
in 1840 with a capital of Rs. 52 Lakh, and the Bank of Madras the third Presidency
bank established in July 1843 with a capital of Rs. 30 Lakh. The presidency banks
were governed by Royal charters. The presidency banks issued currency notes until
the passing of the paper currency Act, 1861, when this right to issue currency
notes by the presidency banks was taken over and that function was given to the
Government. The presidency bank act, which came into existence in 1876, brought
the three presidency banks under a common statute and imposed some restrictions
on their business. It prohibited them from dealing with risky business of foreign
bills and borrowing abroad for lending more than 6 months.
The presidency banks were amalgamated into a single bank, the Imperial Bank
of India, in 1921. The Imperial Bank of India was further reconstituted with the
merger of anumber of banks belonging to old princely states such as Jaipur,
Mysore, Patiala and Jodhpur. The Imperial Bank of India also functioned as a
central bank prior to the establishment of the Reserve Bank in 1935. Thus, during
this phase, the Imperial Bank ofIndia performed three set of functions via
commercial banking, central banking and thebanker to the government.
The first Indian owned bank was the Allahabad Bank set up in Allahabad in
1865, the second, Punjab National Bank was set up in 1895 in Lahore, and the
third, Bank of India was set up in 1906 in Mumbai. All these banks were founded
under private ownership. The Swadeshi Movement of 1906 provided a great
momentum to joint stock banks of Indian ownership and many more Indian
commercial banks such as Central Bank of India, Bank of Baroda, Canara Bank,
Indian Bank, and Bank of Mysore were established between 1906 and 1913. By the
end of December 1913, the total number of reporting commercial banks in the
country reached 56 comprising 3 Presidency banks, 18 Class “A” banks (with
capital of greater than Rs.5 lakh), 23 Class “B” banks (with capital of Rs.1lakh to 5
lakh) and 12 exchange banks. Exchange banks were foreign owned banks that
engaged mainly in foreign exchange business in terms of foreign bills of exchange
and foreign remittances for travel and trade. Class A and B were joint stock banks.
 5

The banking sector during this period, however, was dominated by the Presidency
banks.
By 1930, the number of commercial banks increased to 107 with the Imperial
Bank of India still dominating the Indian banking sector. Besides, at end-March
1929, 158 cooperative banks also existed. The number of co-operative banks rose
sharply (more than doubled) between 1922-23 to 1928-29. Although greater than
commercial banks in number but the size of deposits of co-operative banks was
much smaller.
World War I and its Impact on Indian banking sector
The World War I (1913-1918) has affected badly the Indian economy and
createdmany problems like high Inflation, low productive of agriculture sector.
During the warperiod, a large number of banks failed. Some banks that failed were
also doing trading function with banking function. Mast of the banks that failed
during war period had lowcapital base. Several exchange banks also failed during
this period mainly due to globalreasons.
The great depression (1928-1934) also affected Indian banking industry as the
number of banks failing raised sharply due to high NPAs. Reserve Bank of India
was setup in 1935, as bank failure and neglecting of agriculture sector were the
main reasons for the establishment of Reserve Bank of India. Yet, even after 12
years of the Reserve Bank establishment, bank failure did not stop. The major
concern was the existence of non-scheduled banks as they remained outside the
preview of the Reserve Bank. Banking was more focused on urban areas and the
credit requirements of agriculture and rural sectors were neglected. These issues
were solved when the country attained independence.
2. Foundation Phase (1947-1969):
When the country became independent in 1947, India banking was entirely in
the private sector. In addition to the Imperial Banks, there were five big banks,
each holding public deposits aggregating Rs.100 Cr. and more, Central Bank of
India Ltd., Punjab National Bank Ltd, Bank of India Ltd, Bank of Baroda Ltd. and
United Commercial Bank Ltd. At the time of independence, the banking structure
was domestic scheduled commercial banks. Non- scheduled banks, though large in
number but constituted a small share of the banking sector.
The banking system at the time of independence was largely urban- oriented
and remained beyond the reach of the rural population. A large percentage of the
rural population had to depend on the money lenders as their main source of credit
banks. Rural access was grossly inadequate, as agriculture was not considered as
an economic proposition by banks in these days. Thus, the rural economy, in
general, and agriculture sector in particular, which is the crucial segment of the
Indian economy was not supported by the banking system in any form.
Establishment of State Bank of India:
At the time of Independence, the Imperial Bank of India and all other
commercial banks were urban oriented. Therefore it is the need of the hour, to
 6

provide the banking facility to the rural area. It was suggested that the Imperial
Bank of India should extent its branches to Talukaor Tehsil to provide the banking
services for the neglected area. The Imperial Bank of India was given a target of
opening 114 offices within a period of five years commencing from 1st July, 1951.
But Imperial Bank of India could open only 63 branches till June 20, 1955.
Imperial Bank of India was taken over by the Government under the State Bank of
India, Act, 1955, effective from July 1, 1955. Under the State Bank of India
(Subsidiary Banks) Act, 1959, eight state owned/sponsored banks were taken over
by State Bank of India as its subsidiaries, now called Associate Banks. With
amalgamation of two of them (State Bank of Bikaner and Jaipur), the number of
these associate banks has come down to seven. At present, state bank group
consists of six banks.
3. Expansion Phase (1969-1990)
Although the banking system had made some progress in terms of deposit
growth in the 1950s and the 1960s, its spread was mainly concentrated in the
urban areas. It was felt that if bank funds had to be channeled for rapid economic
growth with social justice, then most of the banks should be nationalized9.
Accordingly, the Government nationalized 14 banks with deposits of over Rs.50 Cr.
by the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance,
1969. These banks were the Central Bank of India, Bank of Maharashtra, Dena
Bank, Punjab National Bank, Syndicate Bank, CanAra Bank, Indian Overseas
Bank, Indian Bank, Bank of Baroda, Union Bank, Allahabad bank, United Bank of
India, UCO Bank and Bank of India. The main objectives behind the nationalization
of the banks were as follows:
 Reduction in the regional imbalance of economic activities.
 To make the banking system reaches in hand of rural and semi-urban
people.
 The aim was to bring a large area of economic activity within the
organizedbanking system.
Although banks penetrated in rural areas, but amount of credit extended to
the weaker section of society was not satisfactory. In 1974 the Narasimham
Committee went into these problems and recommended the establishment of
regional Rural Banks (RRB)under the Regional Rural Banks Act, 1975. Banking in
collaboration with central and State Governments, set up Regional Rural Banks in
selected regions where the cooperative system was weak and where commercial
banks were not very active.
4. Consolidation and liberalization Phase (1990 to till)
By the time the decade of 1990s started, a number of problems were facing
Indian economy. The situation had become extremely uncontrollable. Fiscal deficit
was constantly growing, balance of payment situation had become extremely
critical. There was pressure from the external sector for putting the domestic
economy in order. The need for initiating radical structural reforms was being
greatly emphasized. Under structural reforms, the emphasis was on relaxing
 7

restrictions which severely impeded the functioning of the market mechanism and
led to inefficiency and sub optimal resource allocation. It was a period when policy
measures were directed towards liberalization, privatization and globalization of the
economy in selective phased manner. Financial sector reforms constituted an
important component of the structural reforms. The basic objectives of these
reforms was to promote a diversified, efficient and competitive financial sector for
achieving improved efficiency of available savings, greater investment profitability
and accelerated growth of the real sector of the economy. A three-pronged strategy
was adopted under these reforms.
1. Improving the overall monetary policy framework
2. Strengthening the financial institutions
3. Integrating the domestic financial system with the global economy in a
phased manner.
One of the most important policy initiative of this phase was the acceptance
and implementation of many recommendations of far reaching implications for the
financial sector, made by the Narsimham Committee Simultaneously, for
strengthening the securities market, Securities and Exchange Board of India was
made a statutory body and given sufficient power to deal with various fraudulent
practices and scams effectively. A few years later, Insurance Regulatory and
Development Authority were set up to regulate and promote the insurance business
on competitive lines. In order to improve the financial strength and the profitability
of the public sector banks and tone up the overall Indian financial system by
examining all aspects relating to structure, organisation, function and procedures,
the Government of India set up two high level committees with a former Governor
of RBI, Narshimham, as their Chairman.
The first Committee submitted its report in 1991 and the second committee,
which was set up a few years later, submitted Report in 1998. These reports made
certain recommendations for introducing radical measures.
The major thrust of the recommendations was to make banks competitive and
strong and conducive to the stability of the financial system. The Government was
advised to make a policy declaration that there would be no more nationalization of
banks. Foreign banks would be allowed to open offices in India either as branches
or as subsidiaries. In order to promote competitive culture in banking, it was
suggested that there should be no difference in the treatment between public sector
banks and private sector banks. It was emphasized that banks should be
encouraged to give up their conservative and traditional system of banking and take
to new progressive function such as merchant banking and underwriting, retail
banking, mutual funds etc. The committee recommended that foreign banks and
Indian banks should be permitted to set up joint ventures in these and other newer
forms of financial services.
The Government of India accepted all major recommendations of Narsimha
Reports and started implementing them straightway, despite stiff opposition from
 8

banks unions and political parties in the country. It is primarily because of the
financial sector reforms initiated during the last two decades or so that the Indian
financial system is acquiring fast the shades of a vibrant, dynamic, globalised,
complex system today, creating new opportunities and challenges. But it still
continues to be largely dominated by the presence of a giant public sector
particularly in banking and insurance even though the private sector has been
growing at a much faster rate in the recent years, out-playing the public sector in
the matter of efficiency and performance.
1.5. Legislative Regulation of banking in India:
In the very early phase of commercial banking in India, the regulatory
framework was somewhat diffused and the Presidency Banks were regulated and
governed by their Royal Charter, the East India Company and the Government of
India of that time. Though the Company law was introduced in India way back in
1850, it did not apply to the banking companies. The banking crisis of 1913,
however, had revealed several weaknesses in the Indian banking system, such as
the low proportion of liquid assets of the banks and connected lending practices,
resulting in large-scale bank failures. The recommendations of the Indian Central
Banking Enquiry Committee (1929-31), which looked into the issue of bank
failures, paved the way for legislation for banking regulation in the country.
Though the RBI, as part of its monetary management mandate, had, from the
very beginning, been vested with the powers, under the RBI Act, 1934, to regulate
the volume and cost of bank credit in the economy through the instruments of
general credit control, it was not until 1949 that a comprehensive enactment,
applicable only to the banking sector, came into existence. Prior to 1949, the
banking companies, in common with other companies, were governed by the Indian
Companies Act, 1913, which itself was a comprehensive re-enactment of the earlier
company law of 1850. This Act, however, contained a few provisions specially
applicable to banks. There were also a few ad hoc enactments, such as the Banking
Companies (Inspection) Ordinance, 1946, and the Banking Companies (Restriction
of Branches) Act, 1946, covering specific regulatory aspects. In this backdrop, in
March 1949, a special legislation, called the Banking Companies Act, 1949,
applicable exclusively to the banking companies, was passed; this Act was renamed
as the Banking Regulation Act from March 1966. The Act vested in the Reserve
Bank the responsibility relating to licensing of banks, branch expansion, and
liquidity of their assets, management and methods of working, amalgamation,
reconstruction and liquidation. Important changes in several provisions of the Act
were made from time to time, designed to enlarge or amplify the responsibilities of
the RBI or to impart flexibility to the relative provisions, commensurate with the
imperatives of the banking sector developments.
It is interesting to note that till March 1966, the Reserve Bank had practically
no role in relation to the functioning of the urban co-operative banks. However, by
the enactment of the Banking Laws (Application to Co-operative Societies) Act,
1965, certain provisions of the Banking Regulation Act, regarding the matters
 9

relating to banking business, were extended to the urban co-operative banks also.
Thus, for the first time in 1966, the urban co-operative banks too came within the
regulatory purview of the RBI.

Legislative framework for the Banking sector:

The Law of Contract, the Law of Torts and different branches of business and
common law are relevant to banks as to other. The Indian Banking Law is
constructing to a substantial degree upon the English Banking Law.
The Negotiable Instrument Act, 1881:- To manage the law identifying with bills
of exchange and promissory notes, the Legislature of India authorized Act 6 of
1840. In spite of the fact that Negotiable Instruments Bills was acquainted in 1866
with systematize the law in regards to negotiable instruments, it turned into a
Demonstration in 1881 with a few changes.
Bankers’ Book Evidence Act, 1891
Bankers books include all books like ledgers, day book, cash book, and all the
other records used in the ordinary business of a bank. The records can be
 10

maintained in any form such manual records, printed computer printouts, it can be
in written form or stored in a film, magnetic tape or any other form of mechanical
or electronic data. Such a record can be either on-site or at any off-site location
including a back-up or disaster recovery site.
The Banker's Book Evidence Act, 1891 is a vital enactment which is made just
for Bankers in India. It is an extraordinary Act giving certain benefits to Bankers as
respects the mode of providing of entries in their books and the creation thereof in
Courts of Law. The Law of Evidence requires that the presence, condition or
substance of a report can be demonstrated under the watchful eye of a Court just
by delivering the first archives. Be that as it may, Section 65 of Indian Evidence Act
sets out certain special case to this govern and enable copies of a document to be
produced before a Court not withstanding when the first is accessible. The Banker's
Book Evidence Act, 1891 is one of the arrangements of the law which permits the
creation of a guaranteed certified copy of the documents.
Section 4 of the Banker’s Book Evidence Act, 1891 states: “Subject to the
arrangement of this Act, a certified copy of any entry in a banker’s book shall in all
legal matters be received as a prima facie evidence of the existence of such entry
and shall also be admitted as evidence of the matters, existence of such entry, and
shall be admitted as evidence of the matters, transactions and accounts therein
recorded in every case where, and to the same extent as, the original entry itself is
now by law admissible, but not further or otherwise”.
Reserve Bank of India Act, 1934
The Act mainly covers the constitution, powers and functions of the RBI. The
act does not deal with the regulation of the banking system except for Section 42
which is related to regulation of cash reserve ratio and Section 18 which mainly
talks about direct discounting of bills of exchange and promissory notes.
RBI Act deals with:
1) Incorporation, Capital, Management and Business of the RBI.
2) Various functions of the RBI which include: the issue of bank notes,
monetary control, banker to the Central and State Governments and banks,
lender of last resort etc.
3) Provisions talking about reserve funds, credit funds, audits and accounts.
4) Issuing directives and imposing penalties for violation of provisions of the
Act.
5) Banking Regulation Act, 1949
It is deemed to be one of the most important legal frameworks for banks. It
was initially passed as the Banking Companies Act, 1949 and it was eventually
changed to the Banking Regulation Act, 1949. Along with the RBI Act, The Banking
Regulation Act provides a lot of guidelines to the banks.
The law relating to banking, in India today, is the result of the slow procedure
of advancement, before 1949. The Indian Companies Act, 1913 contained
extraordinary arrangements identifying with saving money organizations which
 11

were felt deficient and were in this way fused in the extensive enactment go in 1949
under the name of 'Banking Companies Act, 1949.' It was passed to merge and
correct the law identifying with keeping money and to accommodate the idea of
exchanges which can be carried on by banks in India. It came into compel with
impact from 16th March, 1949. With impact from 1st March, 1966, the name of the
Act has been changed to the Banking Regulation Act, 1949.
1.4 REVISION POINTS
1. Banking system: A banking system is a group or network of institutions that
provide financial services. Banking system reflects the economic health of
the country.
2. Nationalization: Nationalisation is a process by which the government takes
over private assets and brings them under public ownership.
3. Banking Regulation Act, 1949: It was initially passed as the Banking
Companies Act, 1949 and it was eventually changed to the Banking
Regulation Act, 1949. Along with the RBI Act, The Banking Regulation Act
provides a lot of guidelines to the banks.
1.5 INTEXT QUESTIONS
1. Trace out the Evolution of Indian Banking System.
2. Enumerate the Concept “Evaluation of Indian banking”.
3. Discuss the different Phases in Evaluation of Indian Banking.
4. Summarize the Legislative Regulations of Banking in India.
1.6 SUMMARY
The banking sector is the lifeline of any modern economy. It is one of the
important financial pillars of the financial sector, which plays a vital role in the
functioning of an economy. A sound banking system efficiently mobilized savings in
productive sectors and a solvent banking system ensures that the bank is capable
of meeting its obligation to the depositors. In India, banks are playing a crucial role
in socio-economic progress of the country after independence. The banking sector is
dominant in India as it accounts for more than half the assets of the financial
sector. Evaluation of Indian banking may be traced through four distinct phases
namely Evolutionary phase (Prior to 1947), Foundation phase (1947-1969),
Expansion phase (1969-1990), Consolidation and Liberalization phase (1990 to till
date).
1.7 TERMINAL EXERCISE
1. In _________________ , the GOI adopted economic liberalization that brought
about a massive change in its economic policies to enhance the participation
of private and international investments.
2. In 1982 ___________ bank was introduced to support agricultural activities.
3. _____________ was the first Indian bank.
 12

1.8 SUPPLEMENTARY MATERIALS

1. icsi.edu
2. rbi.org.in
3. money control.com
1.9 ASSIGNMENTS
1. Write a complete notes on Evolution of Indian Banking system.

1.10 SUGGESTED READINGS

1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd.,Chennai.
2. Arunajatesan S 2017, Technology in Banking Margham Publications,
Chennai.
3. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication, New Delhi.
1.11 LEARNING ACTIVITIES
1. Read and understand the pre-independence and post-independence phase of
Indian banking system.
1.12 KEYWORDS
1. Privatization, Globalization, Depression

 13

LESSON – 2
RESERVE BANK OF INDIA [RBI] ACT, 1934
2.1 INTRODUCTION
Reserve Bank of India Act, 1934 is the legislative act under which the Reserve
Bank ofIndia was formed. This act along with the Companies Act, which was
amended in 1936, was meant to provide a framework for the supervision of banking
firms in India.
"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; to have a modern monetary policy
framework to meet the challenge of an increasingly complex economy, to maintain
price stability while keeping in mind the objective of growth."
2.2 OBJECTIVES
 After students this Lesson, students will be able to understand the Concept,
Important Sections, Management, objectives and Functions relating to
Reserve Bank Act, 1934.
2.3 CONTENT
2.3.1 Meaning
2.3.2 Important Sections in Reserve Bank of India Act, 1934
2.3.3 Management of RBI
2.3.4 Objectives of RBI
23.5 Functions of RBI
2.3.1 Meaning
The Reserve Bank of India is the apex financial institution of the country
which is entrusted with the task of controlling, supervising, promoting, developing
and planning the financial system. RBI is the queen bee of the Indian financial
system which influences the commercial banks’ management in more than one
way. The RBI influences the management of commercial banks through its various
policies, directions and regulations. Its role in banking is quite unique. In fact, the
RBI performs the four basic functions of management, viz., planning, organizing,
directing and controlling in laying a strong foundation for the functioning of
commercial banks.
RBI possesses special status in our country. It is the authority to regulate and
control monetary system of our country. It controls money market and the entire
banking system of our country.
The Act is divided into 61 Sections and four schedules. Out of these four
schedules, third and fourth schedule is repealed.
2.3.2Important Sections in Reserve Bank of India Act, 1934
 Section 3: Establishment and incorporation of Reserve Bank.
 Section 4: Capital of the RBI.
 Section 6: Establishment of Offices, branches and agencies
 14

 Section 8: Composition of the Central Board, and term of office of Directors

 Section 17: The business that RBI can transact
 Section 20: Obligation of the RBI to transact Government business.
 Section 21: RBI to have the right to transact Government business in India.
 Section 21A: RBI to transact Government business of States on agreement.
 Section 22: Right to issue bank notes.
 Section 24: Denominations of notes.
 Section 27: Re-issue of notes.
 Section 26 (1): Defines legal tender of notes
 Section 26(2): Withdrawal of legal tender of notes
 Section 42: Cash reserves of scheduled banks to be kept with the Bank.
 Section 45(U): Defines repo, reverse repo, derivative, money market
instruments and securities.
2.3.3 Management of RBI
The Reserve Bank's affairs are governed by a central board of directors. The
board is appointed by the Government of India in keeping with the Reserve Bank of
India Act. The organization structure of RBI consists of a Central Board and Local
Board.
Central Board
The general supervision and control of the bank’s affairs is vested in the
Central Board of Directors which consists of 20 member team including a
Governor, 4 Deputy Governors and 15 Directors (of which 4 are from local boards,
and one is a finance secretary of Central Government). All these persons are
nominated by Central Government The chairman of the Board and its Chief
Executive authority is the Governor. Governors and Deputy Governors hold office
for such a period as fixed by Central Government not exceeding 5 years and are
eligible for reappointment. Directors hold office for 4 years and their retirement is
by rotation. As a matter of practical convenience, the Board has delegated some of
its functions to a committee called the Committee of the Central Board. It meets
once in a week, generally Wednesdays. There are sub committees to assist
committees such as building committee and staff sub-committee.
Local Board
For each regional areas of the country viz., Western, Eastern, Northern and
Southern, there is a Local Board with head quarters at Bombay, Calcutta, New
Delhi and Madras. Local boards consist of 5 members each appointed by the
Central Government. The functions of the local boards are to advise the central
board on local matters and to represent territorial and economic interests of local
cooperative and indigenous banks; advice on such matters that may generally be
referred to them and perform such duties as the Central Board may delegate to
them.
The Central office of the RBI, located at Mumbai is divided into several specialized
departments. The main departments are:
 15

1. Issue Department: - It arranges for the issue and distribution of currency

notes among the different centers of the country.
2. Banking Department: - It deals with Government transactions and maintains
the cash reserves of the commercial banks.
3. Department of Banking development:- It is concerned with the development of
banking facilities in the unbanked and rural areas in the country.
4. Department of Banking operations:- This department supervises and controls
the working of the banking institutions in the country.
5. Non-Banking Companies Department:- It regulates the activities of non-
banking financial companies existing in the country.
6. Agricultural credit Department:- This department studies the problems
connected with the agricultural credit in the country.
7. Industrial finance Department:- It is concerned with the provision of finance to
the industrial units in the country.
8. Exchange control Department:- The entire business of sale and purchase of
foreign exchange is conducted by this department.
9. Legal Department:- The main function of this department is to give legal
advices to the other departments of RBI.
10. Department of Research and Statistics:- This department is concerned with
conducting research on problems relating to money, credit, finance,
production etc.
2.3.4. Objectives of RBI
Prior to the establishment of the Reserve Bank, the Indian financial system
was totally inadequate on account of the inherent weakness of the dual control of
currency by the
Central Government and of credit by the Imperial Bank of India
The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives
of the Reserve Bank as: “to regulate the issue of Bank notes and the 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.”
The important objectives are:
1. To act as Monetary Authority: Formulates implements and monitors the
monetary policy to maintain price stability and ensuring adequate flow of
credit to productive sectors.
2. To Regulate and supervise the financial system of the country: It prescribes
broad parameters of banking operations within which the country's banking
and financial system functions. It helps to maintain public confidence in the
system, protect depositors' interest and provide cost-effective banking services
to the public.
3. To Manage the Exchange Control: Manages the Foreign Exchange
Management Act, 1999 to facilitate external trade and payment and promote
orderly development and maintenance of foreign exchange market in India.
 16

4. To issue currency: Issues and exchanges or destroys currency and coins not
fit for circulation to give the public adequate quantity of supplies of currency
notes and coins and in good quality.
5. To undertake developmental role: RBI performs a wide range of promotional
functions to support national objectives.
6. To undertake related Functions by acting as:
 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.
 Owner and operator of the depository (SGL-Subsidiary General Ledger
account) and exchange (NDS) Negotiated Dealing System is an electronic
platform for facilitating dealing in Government Securities and Money
Market Instruments that will facilitate electronic submission of
bids/application for government bonds.
To sum up the objectives include:
1. To manage the monetary and credit system of the country.
2. To stabilizes internal and external value of rupee.
3. For balanced and systematic development of banking in the country.
4. For the development of organized money market in the country.
5. For facilitating proper arrangement of agriculture finance and be in
successful for maintaining financial stability and credit in agricultural sector.
6. For proper arrangement of industrial finance.
7. For proper management of public debts.
8. To establish monetary relations with other countries of the world and
international financial institutions.
9. For centralization of cash reserves of commercial banks.
10. To maintain balance between the demand and supply of currency.
11. To regulate the financial policy and develop banking facilities throughout the
country.
12. To remain free from political influence while making financial decisions.
13. To assist the planned process of development of the Indian economy.
Besides the traditional central banking functions, with the launching of the
five-year plans in the country, the Reserve Bank of India has been moving ahead in
performing a host of developmental and promotional functions, which are normally
beyond the purview of a traditional Central Bank.
2.3.5 Functions of RBI
RBI performs various traditional banking function as well as promotional and
developmental measures to meet the dynamic requirements of the country. Main
functions of RBI can be broadly classified into three. These are
(i) Monetary functions or Central banking functions
(ii) Supervisory functions
 17

(iii) Promotional and Developmental functions.

I. Monetary functions include
A. Issue of currency notes
B. Acting as banker to the Government
C. Serving as banker of other banks
D. Controlling credit
E. Controlling foreign exchange operations
A. Issue of currency notes
Under Section 22 of the Reserve Bank of India Act of 1934, the Reserve Bank
of India is given the monopoly of note issue. Now RBI is the sole authority for the
issue of currency notes of all denominations except one rupee notes and coins in
the country. One rupee notes and coins are issued by Ministry of Finance of GOI.
The RBI has a separate department called the Issue Department for the issue of
currency notes. Since 1956 system of Note Issue changed from Proportional
Reserve System to minimum reserve system.
Under Proportional reserve system of note issue, not less than 409c of the total
volume of notes issue by the RBI was to be covered by gold coins, bullion and
foreign securities. But under the Minimum reserve system of note issue, RBI is
required to maintain a minimum reserve of gold or foreign securities or both against
the notes issued. No maximum limit is fixed on the volume of notes. RBI maintains
gold and foreign exchange reserves of Rs.200 crores of which 115 crores is in gold &
balance in foreign securities, Govt. of India securities, eligible commercial bills, Pro-
notes of NABARD for any loans etc.
This change from Proportional Reserve system to Minimum Reserve system is
made because of two major reasons. Firstly, the planned economic development of
the country called for an increased supply of money, which could not be had under
the proportional reserve system. Secondly, the foreign exchange held as reserve by
the Reserve bank had to be released for financing the five year plans. In short, this
was to enable the expanding currency requirements of the economy.
B. Acting as Banker to government
The Reserve bank act as a banker to the Central and State Governments. As a
banker to the Government RBI acts in three capacities,
(i) as a banker, (ii) as a financial agent, and (iii) as a financial advisor
(i) As a banker: - RBI renders the following services
1. Accepts deposits from the Central and State Government.
2. Collects money on behalf of Government.
3. Makes payments on behalf of the Government, in accordance with their
instructions.
4. Arranges for the transfer of funds from one place to another on behalf of the
5. Government.
 18

6. Makes arrangements for the supply of foreign exchange to the Central and
State Governments.
7. It maintains currency chests with treasuries and other agencies in places
prescribed by the Government of India. These chests are supplied with
sufficient currency notes to meet the requirements for the transactions of the
Government.
8. Short term advances are granted to Central and State Governments for a
period not exceeding three months. These advances are granted up to a
certain limit without any collateral securities.
9. In times of emergencies like war, extraordinary loans are also granted to
theGovernments by the RBI.
(ii) As a financial agent: - The services given are
1. Acts as an agent of the Central and State Governments in the matter of
floatation of loans. On account of Reserve Bank’s intimate knowledge of the
financial markets, it is able to obtain the best possible terms for the
Government in this matter. Further by coordinating the borrowing
programmers of the various Governments, it is able to minimize the adverse
effects of Government borrowings on the money and securities market.
2. Treasury Bills: On behalf of Central Government RBI sells treasury bills of 90
days maturity at weekly auctions and secures short term finance for the
Central Government. Apart from that RBI also sells adhoc treasury bills of 90
day’s maturity to the State Governments, Semi-Government Departments and
foreign central banks on behalf of the Central Government.
3. Public debts: RBI manages and keeps the accounts of the public debts of the
Central and State Governments. It arranges for the payment of interest and
principal amount on the public debt on the due dates.
4. As an agent: RBI also represents Government of India in the International
Institutions like the IMF, the IBRD etc. The Reserve Bank is agent of Central
Government and of all State Governments in India except for that of Jammu
and Kashmir and Sikkim.
(iii) As a Financial Adviser: - renders following services
1. It advices the Central and State Government on all financial and economic
matters such as the floating of loans, agricultural and industrial finance etc.
2. Advice on matters of International finance is also given to Central
Government.
3. It collects the recent information on current economic and financial
developments in India and abroad, with the help of its Research and Statistics
Department and keepsGovernment informed periodically.
C. Banker’s bank
RBI acts as banker to Scheduled banks. Scheduled Banks include commercial
banks, foreign exchange banks, public sector banks, state co-operative banks and
the regional rural banks. As a bankers’ bank it renders the following services:
1. It holds a part of the cash balances of the commercial banks:-Every
commercial bank in India is required to keep with the Reserve Bank a cash
 19

balance of not less than 6% of its demand and time liabilities. This rate can be
increased up to 20%. The two main purposes of maintaining cash reserve by
commercial banks are as follows. Firstly to protect the interest of the
depositors, secondly to enable the Reserve Bank to accommodate the
commercial banks on times of difficulties and thirdly the Reserve Bank can
control the credit created by the commercial banks by varying the statutory
cash reserve requirements.
2. It acts as the clearing house: - By acting as clearing house the Reserve bank
helps the member banks in the settlement of the mutual indebtedness without
physical transfer of cash.
3. It provides cheap remittance facilities to the commercial banks.
4. It provides financial accommodation to the commercial banks: - At times of
financial crisis the RBI is the lender of last resort for the commercial banks.
Financial assistance is given by The Reserve bank either by rediscounting
eligible bills or by granting loans against approved securities.
D. Control of Credit
RBI undertakes the responsibility of controlling credit in order to ensure
internal price stability and promote sufficient credit for the economic growth of the
country. Price stability is essential for economic development. To control credit, RBI
makes use of both quantitative and qualitative weapons by virtue of the powers
given to it by Reserve Bank of India Act of 1934 and the Indian Banking Regulation
Act of 1949. These weapons are as follows:
(A) Quantitative weapons
1. Bank rate policy
2. Open Market Operations
3. Variable Cash reserve ratio
4. Variable Statutory Liquidity Ratio
5. Repo Rate and Reverse Repo Rate
and (B) Qualitative weapons
1. Credit Ceiling
2. Credit Authorization Scheme
3. Moral Suasion
4. Regulation of margin requirements
5. Issuing of directives
(I) Quantitative weapons
1. Bank rate policy:
Bank rate is the lending rate of central bank. It is the official minimum rate at
which central bank of a country rediscounts the eligible bills of exchange of the
commercial banks and other financial institutions or grants short term loans to
them. By increasing bank rate, RBI can make bank credit costlier.
 20

2. Open Market Operations:

RBI Act authorizes the RBI to engage in the purchase of securities of central
and State Government and such other securities as specified by Central Govt. But
by and large, its open market operations are confined to Central Government
Securities and to a very limited extend to State Government Securities. RBI uses
this weapon to offset the seasonal fluctuations in money market. When there is an
excessive supply of money, RBI sells the securities in the open market. In that way
RBI is able to withdraw the excess money from circulation. But when there is
shortage of money supply in the market, it purchases securities from the open
market and as a result, more money is arrived at for circulation.
3. Variable Cash reserve ratio:
Under the RBI Act of 1934, every scheduled and nonscheduled bank is
required to maintain a fixed percentage of total time and demand liabilities as cash
reserve with RBI. It is called statutory Cash Reserve Ratio (CRR). An increase in
CRR reduces lending capacity of the bank and a decrease in CRR increases the
lending capacity.
4. Variable Statutory Liquidity Ratio:
According to sec 24 of Banking Regulation Act 1949, every commercial bank is
required to maintain a certain percentage of its total deposits in liquid assets such
as cash in hand, excess reserve with RBI, balances with other banks, gold and
approved Government and other securities. This proportion of liquid assets to total
deposits is called SLR. Banking Regulation Act empowers RBI to fix the SLR up to
40%. The variation of the SLR is intended to reduce the lendable funds in the
hands of the commercial banks and to check the expansion of bank credit. An
increase in SLR will decrease the lendable funds in the hands of commercial banks
and vice versa.
5. Repo Rate and Reverse Repo Rate:
Repo rate is the rate at which RBI lends to commercial banks generally against
government securities. Reduction in Repo rate helps the commercial banks to get
money at a cheaper rate and increase in Repo rate discourages the commercial
banks to get money as the rate increases and becomes expensive. Reverse Repo rate
is the rate at which RBI borrows money from the commercial banks. The increase
in the Repo rate will increase the cost of borrowing and lending of the banks which
will discourage the public to borrow money and will encourage them to deposit. As
the rates are high the availability of credit and demand decreases resulting to
decrease in inflation. This increase in Repo Rate and Reverse Repo Rate is a symbol
of tightening of the policy.
II. Qualitative weapons (Selective credit controls)
1. Credit Ceiling:
In this operation RBI issues prior information or direction that loans to the
commercial banks will be given up to a certain limit. In this case commercial bank
will be tight in advancing loans to the public. They will allocate loans to limited
 21

sectors. Few example of ceiling are agriculture sector advances, priority sector
lending.
2. Credit Authorization Scheme
Credit Authorization Scheme was introduced in November, 1965 when P C
Bhattacharya was the chairman of RBI. Under this instrument of credit the
commercial banks are required to obtain the RBI’s prior authorization for
sanctioning any fresh credit beyond the authorized limits.
3. Moral Suasion
Moral Suasion is just as a request by the RBI to the commercial banks to
follow a particular line of action. RBI may request commercial banks not to give
loans for unproductive purpose which does not add to economic growth but
increases inflation.
4. Regulation of margin requirements:
Margin refers to the difference between loan amount and the market value of
collateral placed to raise the loan. RBI fixes a lower margin to borrowers whose
need is urgent. For e.g. if RBI believes that farmers should be financed urgently,
RBI would direct to lower the margin requirement on agricultural commodities. RBI
has used this weapon for a number of times.
5. Issuing of directives:
Banking Regulation Act empowers RBI to issue directives to banks and banks
arebound to comply with such directives. RBI directives may relate to:
 Purpose for which advance may or may not be made
 Margins requirement
 Maximum amount of loan that can be sanctioned to any company, firm or
individual
 Rate of interest and other terms and conditions on which loans may be
given.
E. Control of foreign Exchange operations
One of the central banking functions of the RBI is the control of foreign
exchange operations. For the control of foreign exchange business, the RBI has set
up a separate department called the Exchange Control Department in September,
1939. This Department has been granted wide powers to regulate the foreign
exchange business of the country. As the central bank of India, it is the
responsibility of the RBI to maintain the external value of the Indian rupee stable.
India being member of the IMF, the RBI is required to maintain stable exchange
rates between the Indian rupee and the currencies of all other member countries of
the I.M.F. Besides maintaining stable exchange rates, RBI also acts as the
custodian of the foreign exchange reserves of the country. The foreign exchange
reserves of the country held by RBI includes Euro, U.S. dollars, Japanese yen etc.
RBI also acts as the administrator of exchange control. It ensures that the
foreign exchange reserves of the country are utilized only for approved purposes
 22

and the limited foreign exchange reserves of the country are conserved for the
future.
II. Supervisory functions
RBI has been given several supervisory powers over the different banking
institutions in the country. The supervisory functions relate to licensing and
establishment, branch expansion, liquidity of assets, amalgamation, reconstruction
and liquiditation of commercial banks and co- operative banks.
III. Promotional and developmental functions:
RBI is also performing promotional and developmental functions. These functions
includes the following:
(a) Provision of Agricultural Credit: For the promotion of agricultural credit RBI
has set up a separate department called the Agricultural Credit Department.
It. has also set up two funds namely –
1. The National Agricultural Credit (Long term operations) and
2. The National Agricultural credit (stabilization) fund for facilitating Long
term, Medium term and Short term finance for agricultural purposes.
(b) Provision for Industrial finance: - RBI has played a very significant role in
the field of industrial finance by helping the setting up of a number of public
sector industrial finance
(c) corporations that provide short term, medium term, and long term finance
for industrial purpose. These industrial finance corporations include
1. Industrial finance Corporation of India (IFCI), 2. State Finance
Corporations (SFC), Industrial Development Bank of India (IDBI),
3. Industrial Reconstruction Corporation of India (IRCI), 4. Refinance
Corporation of India, and 5. Unit Trust of India (UTI). Besides the above RBI
also renders the Credit Guarantee Scheme which intends to give protection
to banks against possible losses in respect of their advances to small scale
industrial units.
(d) Development of Bill Market: - A bill market is a place where short term bill of
3 month duration are generally discounted or rediscounted. RBI plays a very
important role in the promotion of Bill Market as a well-developed bill
market is essential for the smooth functioning of the credit system.
(e) Collection and publication of statistics on financial and economic matters: -
These functions of RBI are extremely useful to the Government in knowing
and solving the various economic problems. They are also of immense help
to financial institutions, business and industry and for general public.
(f) Miscellaneous functions:- RBI has established training centers for staff for
its own staff and other banks. Bankers’ training college Mumbai, National
Institute of Bank Management Mumbai, Staff Training College Madras, and
College of Agricultural Banking at Pune are the institutions run by RBI.
2.4 REVISION POINTS
1. Banker to government: -The Reserve bank acts as a banker to the Central
and State Governments. As a banker to the Government RBI acts in three
capacities,
 23

(i) as a banker, (ii) as a financial agent, and (iii) as a financial advisor.

2. Issue of currency notes: -
(ii) Under Section 22 of the Reserve Bank of India Act of 1934, the Reserve
Bank of India is given the monopoly of note issue. Now RBI is the sole
authority for the issue of currency notes of all denominations except one
rupee notes and coins in the country.
3. Control of Credit: -
(iii) RBI undertakes the responsibility of controlling credit in order to ensure
internal price stability and promote sufficient credit for the economic
growth of the country. Price stability is essential for economic
development.
2.5 INTEXT QUESTIONS
1. Recall the Objective of RBI Act, 1934.
2. Spell the important sections in RBI Act,
3. Discuss the different Phases in Evaluation of Indian Banking.
4. Summarize the Legislative Regulations of Banking in India.
2.6 SUMMARY
Reserve Bank of India Act, 1934 is the legislative act under which the Reserve
Bank ofIndia was formed. The Reserve Bank of India is the apex financial
institution of the country which is entrusted with the task of controlling,
supervising, promoting, developing and planning the financial system. The Reserve
Bank's affairs are governed by a central board of directors. The board is appointed
by the Government of India in keeping with the Reserve Bank of India Act. The
organization structure of RBI consists of a Central Board and Local Board. To
control credit, RBI makes use of both quantitative and qualitative weapons by
virtue of the powers given to it by Reserve Bank of India Act of 1934. The
supervisory functions relate to licensing and establishment, branch expansion,
liquidity of assets, amalgamation, reconstruction and liquiditation of commercial
banks and co- operative banks.RBI is also performing promotional and
developmental functions.
2.7 TERMINAL EXERCISE
1. What is the minimum limit of CRR that can be set by the RBI?
a. a. No limit b. 12% c. 15% d. 20%
2. When was the RBI Act amended to establish the Monetary Policy
Committee?
a. a. 2014 b. 2015 c. 2016 d. 2017
2.8 SUPPLEMENTARY MATERIALS
1. icsi.edu
2. rbi.org.in
3. money control.com
 24

2.9 ASSIGNMENTS
1. Explain the detailed facilities given by RBI to the banks for inter-bank
transactions?
2.10 SUGGESTED READINGS
1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd.,
2. Chennai.
3. Arunajatesan S 2017, Technology in Banking Margham Publications,
Chennai.
4. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication, New Delhi.
2.11 LEARNING ACTIVITY
1. Why the RBI is known as the central bank or Bankers bank?

2.12 KEY WORDS

1. Foreign exchange operations, Minimum Reserve system, Repo Rate and
Reverse Repo Rate, Credit Ceiling.

 25

LESSON – 3
PROVISIONS RELATING TO BANKING REGULATION ACT 1949
3.1 INTRODUCTION
The Banking Regulation Act 1949 contains various provisions’ governing the
Commercial Banks in India. The Act was initially known as Banking Companies
Act, 1949. It was passed in 1949 to consolidate and amend the laws relating to
banking companies. The act was changed to Banking Regulation Act, 1949 from 1st
March, 1966. The Act, as amended up-to- date, is a comprehensive piece of
legislation aimed at the development of sound and balanced growth of banking
business in the country.
3.2 OBJECTIVES
 After studying this lesson, student can understand the Concept, Objectives
and Major provisions relating to Banking Regulation Act, 1949, Banking
companies (Acquisition and transfer of Undertakings), Changing Scenario of
Banking System, Ordinance 1980 and its Amendment Bill 2005
3.3 CONTENT
3.3.1 Concept of Banking Regulation Act, 1949
3.3.2 Objectives of Banking Regulation Act, 1949
3.3.3 Major Provisions of Banking Regulation Act
3.3.4 Banking Regulation Act, 1970
3.3.5 Banking companies (Acquisition and transfer of Undertakings)
3.3.6 Changing Scenario of Banking System
3.3.7 Ordinance 1980 and its Amendment Bill 2005
3.3.1. Concept of Banking Regulation Act, 1949
The Banking Regulation Act, 1949 is one of the important legal frame works.
Initially the Act was passed as Banking Companies Act, 1949 and it was changed to
Banking Regulation Act 1949. Along with the Reserve Bank of India Act 1935,
Banking Regulation Act 1949 provides a lot of guidelines to banks covering wide
range of areas.
3.3.2. Objectives of Banking Regulation Act, 1949
 Provide specific legislation containing comprehensive provisions, particularly
to the business of banking in India.
 Prevent such bank failures by prescribing minimum capital requirements
 Ensure the balanced development of banking companies.
 Give powers to RBI to approve the appointment, reappointment, and removal
of the chairman, directors, and officers of the banks.
 Safeguard the Interests of Depositors.
 Facilitate strengthening the banking system of the country.
3.3. Major Provisions of Banking Regulation Act
1. Prohibition of Trading (Sec. 8):
According to Sec. 8 of the Banking Regulation Act, a banking company cannot
directly or indirectly deal in buying or selling or bartering of goods. But it may,
 26

however, buy, sell or barter the transactions relating to bills of exchange received
for collection or negotiation.
2. Non-Banking Assets (Sec. 9):
According to Sec. 9 “A banking company cannot hold any immovable property,
howsoever acquired, except for its own use, for any period exceeding seven years
from the date of acquisition thereof. The company is permitted, within the period of
seven years, to deal or trade in any such property for facilitating its disposal”.
3. Management (Sec. 10):
Sec. 10(a) states that not less than 51% of the total number of members of the
Board of Directors of a banking company shall consist of persons who have special
knowledge or practical experience in one or more of the following fields:
(a) Accountancy; (b) Agriculture and Rural Economy; (c) Banking; (d)
Cooperation; (e) Economics; (f) Finance; (g) Law; (h) Small Scale Industry.
The Section also states that at least not less than two directors should have
special knowledge or practical experience relating to agriculture and rural economy
and co-operation. Sec. 10(b)(1) further states that every banking company shall
have one of its directors as Chairman of its Board of Directors.
4. Minimum Capital and Reserves (Sec. 11)
Sec. 11 of the Banking Regulation Act, 1949, provides that no banking
company shall commence or carry on business in India, unless it has minimum
paid-up capital and reserve of such aggregate value as is noted below:
(a) Foreign Banking Companies: In case of banking company incorporated
outside India, its paid-up capital and reserve shall not be less than Rs.15
lakhs and, if it has a place of business in Mumbai or Kolkata or in both, Rs.20
lakhs.
(b) Indian Banking Companies: In case of an Indian banking company, the sum
of its paid-up capital and reserves shall not be less than the amount stated
below:
 If it has places of business in more than one State, Rs.5 lakhs, and if any
such place of business is in Mumbai or Kolkata or in both, Rs.10 lakhs.
 If it has all its places of business in one State, none of which is in Mumbai
or Kolkata, Rs.1 lakh in respect of its principal place of business plus
Rs.10,000.
 No such banking company shall be required to have paid-up capital and
reserves exceeding Rs.5 lakhs and no such banking company which has
only one place of business shall be required to have paid-up capital and
reserves exceeding Rs.50,000.
 In case of any such banking company which commences business for the
first time after 16th September 1962, the amount of its paid-up capital
shall not be less than Rs.5 lakhs.
 If it has all its places of business in one State, one or more of which are in
Mumbai or Kolkata, Rs.5 lakhs plus Rs.25,000 in respect of each place of
 27

business outside Mumbai or Kolkata. No such banking company shall be

required to have paid-up capital and reserve excluding Rs.10 lakhs.
5. Capital Structure (Sec. 12):
According to Sec. 12, no banking company can carry on business in India,
unless it satisfies the following conditions:
 Its subscribed capital is not less than half of its authorised capital, and its
paid-up capital is not less than half of its subscribed capital.
 Its capital consists of ordinary shares only or ordinary or equity shares
and such preference shares as may have been issued prior to 1st April
1944. This restriction does not apply to a banking company incorporated
before 15th January 1937.
 The voting right of any shareholder shall not exceed 5% of the total voting
right of all the shareholders of the company.
6. Payment of Commission
Brokerage etc. (Sec. 13): According to Sec. 13, a banking company is not
permitted to pay directly or indirectly by way of commission, brokerage, discount or
remuneration on issues of its shares in excess of 2j% of the paid-up value of such
shares.
7. Reserve Fund/Statutory Reserve (Sec. 17):
According to Sec. 17, every banking company incorporated in India shall,
before declaring a dividend, transfer a sum equal to 20% of the net profits of each
year (as disclosed by its Profit and Loss Account) to a reserve fund. The Central
Government may, however, on the recommendation of RBI, exempt it from this
requirement for a specified period.
8. Cash Reserve (Sec. 18):
Under Sec. 18, every banking company (not being a Scheduled Bank) shall, if
Indian, maintain in India, by way of a cash reserve in Cash, with itself or in current
account with the Reserve Bank or the State Bank of India or any other bank
notified by the Central Government in this behalf, a sum equal to at least 3% of its
time and demand liabilities in India.
The Reserve Bank has the power to regulate the percentage also between 3%
and 15% (in case of Scheduled Banks). Besides the above, they are to maintain a
minimum of 25% of its total time and demand liabilities in cash, gold or
unencumbered approved securities. But every banking company’s asset in India
should not be less than 75% of its time and demand liabilities in India at the close
of last Friday of every quarter.
9. Liquidity Norms (Sec. 24):
According to Sec. 24 of the Act, banking companies must maintain sufficient
liquid assets in the normal course of business. The section states that every
banking company has to maintain in cash, gold or unencumbered approved
securities, an amount not less than 20% of its demand and time liabilities in India.
This percentage may be changed by the RBI from time to time according to
 28

economic circumstances of the country. This is in addition to the average daily

balance maintained by a bank.
10. Restrictions on Loans and Advances (Sec. 20):
After the Amendment of the Act, 1968, a bank cannot:
(i) Grant loans or advances on the security of its own shares, and
(ii) Grant or agree to grant a loan or advance to or on behalf of:
(a) Any of its directors;
(b) Any firm in which any of its directors is interested as partner, manager
or guarantor;
(c) Any company of which any of its directors is a director, manager,
employee or guarantor, or in which he holds substantial interest; or
(d) Any individual in respect of whom any of its directors is a partner or
guarantor.
11. Accounts and Audit (Sec. 29 to 34A):
Every banking company, incorporated in India, at the end of financial year
expiring a period of 12 months as the Central Government may by notification in
the Official Gazette specified, must prepare a Balance Sheet and a Profit and Loss
Account as on the last working day of that year or according to the Third Schedule
or as circumstances permit.
At the same time, every banking company, which is incorporated outside
India, is required to prepare a Balance Sheet and also a Profit and Loss Account
relating to its branch in India also. We know that Form A of the Third Schedule
deals with form of Balance Sheet and Form B of the Third Schedule deals with form
of Profit and Loss Account.
According to Sec. 30 of the Banking Regulation Act, the Balance Sheet and
Profit and Loss Account should be prepared according to Sec. 29 and the same
must be audited by a qualified person known as auditor.
Every banking company must have to furnish their copies of accounts and
Balance Sheet prepared according to Sec. 29 along with the auditors’ report to the
RBI and also the Registrar of Companies within three months from the end of the
accounting period.
3.3.4. Banking Companies (Acquisition and Transfer of Undertakings)
Banking Regulation Act 1970 may be called as Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970. The provisions of this Act
(except section 21, which shall come into force on the appointed day) shall be
deemed to have come into force on the 19th day of July, 1969.
Transfer of the Undertakings of Existing Banks and Share Capitals of the
Corresponding New Banks:
 Establishment of corresponding new banks and business thereof.
 Trust not to be entered on the register.
 Register of beneficial owners
 29

 Undertaking of existing banks to vest in corresponding new banks.

 General effect of vesting.
Payment of Compensation:
Every existing bank shall be given by the Central Government such
compensation in respect of the transfer, under section 4, to the corresponding new
bank of the undertaking of the existing bank as is specified against each such bank
in the Second Schedule.
Management of Corresponding New Banks:
 Head office and management
 Corresponding new banks to be guided by the directions of the Central
Government
 Power of Central Government to make scheme
 Power of Reserve Bank to appoint additional director
 Miscellaneous:
 Closure of accounts and disposal of profits.
 Annual general meeting
 Transfer of unpaid or unclaimed dividend to Unpaid Dividend Account
 Corresponding new bank deemed to be an Indian company.
 Removal of Chairman from office
 Bonus
 Obligations as to fidelity and secrecy
 Custodian to be public servant
 Certain defects not to invalidate acts or proceedings
 Indemnity
 Arrangement with corresponding new bank on appointment of directors to
prevail
 References to existing banks on and from the commencement of this Act.
 Dissolution
 Supersession of Board in certain cases
 Power to make regulations
 Amendment of certain enactments
 Repeal and savings.
3.3.5 Changing Scenario of Banking System
Banking sector plays a vital role in the economic development of a country. It
is also an integral part of the financial system of a modern industrial economy.
Modern banking in India could be traced back to the establishment of Bank of
Bengal on January 2, 1809, the first joint-stock bank sponsored by Government of
Bengal. In 1921 the three presidency banks were merged to form the Imperial Bank
of India, with the establishment of the Reserve Bank of India (RBI) in 1935, the
central banking responsibilities that the Imperial Bank of India was carrying on
came to an end. Banking sector reforms in India are aimed at induction of best
 30

international practices and technological changes for competing globally. Today,

twenty years after the economic liberalization which began in 1991, we have a
vibrant banking sector, powered by both improved- efficiency public sector banks
and growth-hungry private ones.
Indian Government is proposing quiet stringent policies for tackling the
climate changes and financial service sector is also covered in the regime. The
massive amount of carbon emissions and pollutants are fatal for the human kind
and countries are making effort to create a carbon free economy. To foster
environmental friendly products and services, one of the buzzword in banking
industry is Green Banking. This paper is a niche attempt to unveil the awareness of
green banking initiatives, frequency of usage of green services and factor affecting
purchase of green services among customers of selected public and private sector
banks in Punjab. The findings revealed a high level of awareness about green
banking concept and the most widely used green product to be debit and credit
cards. The results highlighted that irrespective of the education level of customer,
there is no difference in usage of green banking services. Application of factor
analysis unveiled three main factor affecting purchase of green services i.e online
transactions, safe and secure transactions and environmental benefits.
Very few industries have the long history and stability the banking industry
has enjoyed. Banks depend on the firm trust of their customers, and as a result,
change usually takes a long time. However, in recent years, members of the
banking sector have realized that evolution is necessary if they are to remain
relevant in a global economy. The banking industry is letting go of some of its
traditional methods and looking at new and innovative ways to make life easier for
customers.
1. Leveraging Fin techs for a Better Customer Experience
By working with fin techs, banks can offer their customers value-add solutions
that fall outside their areas of expertise, and the appetite for such collaboration
should continue increasing. From leveraging alternative data sets and models for
enhanced underwriting to offering clients instant money transfers, banks can
improve their offerings at low cost while increasing speed to market.
2. More Technology-Driven Consolidation
Over the last decade, the number of banks in the U.S. has declined, but
there’s a lot more consolidation to come as many banks are “stuck in the middle.”
Big banks can, and have, developed technology to give them an edge over small
banks in serving consumers, and fintechs and non-bank lenders continue to take
business in both commercial and retail lending
3. The Advent of Digital Lending
In its December 2019 report on digital lending, Grand View Research cites an
estimated market size of $3.5 billion in 2018 and an anticipated compound annual
growth rate of 20.7% from 2019 to 2026. Personalized digital lending is the future.
As digital infrastructure becomes more robust and more consumers become
 31

comfortable with online transactions, the banking industry will inevitably have to
move lending services, whether business-to-consumer or business-to-business,
online.
4. The Rise of Neo banking
Expect to see the rise of mobile-based direct banks over the next five years.
Neo banks are already attracting millions of customers nationwide, suggesting a
consumer-preference shift from traditional, branch-based physical banking to the
convenience of digital-only solutions.
5. Automated and Personalized Customer Experiences
One of the biggest changes I see in working with various banking clients is
that a lot of them are realizing they are spending excessive resources in executing
repetitive processes. Banks have realized automating some of these will help free up
human capital to perform value-added activities, which will result in faster
execution, more efficiencies and personalization of consumer experiences.
6. Blockchain and Decentralized Solutions Replacing Most Banks
The biggest change to the banking industry is being caused by block chain-
based solutions, which enable nearly instant peer-to-peer transfer of money.
Furthermore, decentralized finance solutions based on smart contract platforms,
are already enabling lending platforms without the need for financial institutions.
7. New Income from Open Banking and Data-As-A-Service
Relatively low-rate environments and commodification are squeezing
traditional bank revenues. Expect dramatic business model rewrites with open
banking, which creates two-sided markets like Apple’s App Store to earn revenues
from both consumers and developers, or data-as-a-service.
8. Mid-Market Banks Becoming An Endangered Species
Similar to Amazon’s impact on retail, the top five banks are setting the tone
for what banking services customers expect. Regional banks are struggling to keep
up—particularly with AI and machine learning—in terms of budget and human
capital. The competitive advantage of scale is creating a growing chasm that will
likely result in mid-market mergers as a means to leverage assets and talent.
9. The Democratization of Consumer Finance
Secure, mobile-forward solutions will continue to enable rapid, real-time
“anywhere, anytime” answers to consumer needs and wants. These AI-fueled
services will manage and optimize an individual’s full-stack financial capacity—
available liquidity and ability to support credit—from a relational and holistic
viewpoint, not the discrete transactional nature of today’s banking.
10. Better Regulation
Traditional banks will focus on taking deposits and lending for productive
purposes and leave other financial services to innovative new fintech and digital
organizations. This decouples risk, liquidity and “know your customer” and
ameliorates the conflict of interest from modern banking’s dual mission—the safety
of customer money and financial returns for its shareholders.
 32

11. More Targeted Services for under banked Households

The fees the un banked and underbanked pay are still astonishing, but thanks
to fintech this will rapidly change. Unlike in the past, if a cell phone is there and
that opens up a bank accounts so many possibilities for banks and other
companies to provide services to this 22 % of households.
12. Big Banks Extending Services to Small Businesses
We will continue to witness legacy financial institutions offering services to
small businesses. As small business had historically struggled to access capital and
credit through mainstream banks. However, the banking industry may still not
adequately address the financial needs of Main Street businesses, such as the need
for spending controls.
13. The Reemergence of ‘Relationship Banking’
In addition to seeing some of the regulations resulting from the recession of
the early 2000s being rolled back, continue to see a proliferation of community
banks and other smaller institutions, as opposed to the merger mania and larger
banks that came on the heels of that trying economic time. The opportunity for
businesspeople is closer, more personalized banking relationships.
3.3.7. Ordinance 1980 and Its Amendment Bill 2005
An Act to provide for the acquisition and transfer of the undertakings of
certain banking companies, having regard to their size, resources, coverage and
organisation, in order further to control the heights of the economy, to meet
progressively, and serve better, the needs of the development of the economy and to
promote the welfare of the people, in conformity with the policy of the State towards
securing the principles laid down in clauses (b) and (c) of article 39 of the
Constitution and for matters connected therewith or incidental thereto.
1. This Act may be called the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980.
2. It shall be deemed to have come into force on the 15th day of April,
1980.Banking Regulation (Amendment) Bill, 2005
 The Banking Regulation (Amendment) Bill, 2005 was introduced in the
LokSabha on May 13, 2005. The Standing Committee on Finance submitted
its report to Parliament on December 13, 2005.
 The Bill seeks to amend the Banking Regulation Act, 1949 (the Principal
Act). It has eight main objectives:
3. regulating acquisition of shares in banking companies,
4. Increasing the flexibility on the Statutory Liquidity Requirement (SLR),
5. Including preference shares as capital,
6. Allowing banks to lend to companies in which their directors are engaged, (e)
Monitoring the activities of associate enterprises of banks,
(a) vesting RBI with powers to supersede the board of directors of a bank,
(b) disallowing primary credit societies from banking activities, and
(c) changing the definition of “approved securities”.
 33

7. Acquisition of banking shares. Anyone desiring to acquire more than 5%

shareholding of a bank needs to obtain prior approval of RBI. RBI may
impose certain conditions such as a minimum amount of shareholding to be
acquired or requiring specific approvals for any further increase in
shareholding. RBI is required to communicate its approval or rejection of
any such application within 90 days, failing which the application is deemed
to be approved. The restriction of 10% voting rights on any shareholder
under the Principal Act is also being revoked.
 Statutory Liquidity Ratio. RBI can notify SLR between zero and 40%
(currently the range is 25% to 40%) of a bank’s liabilities. SLR specifies
the proportion of a bank’s deposits that it must hold in government and
other approved securities. A higher SLR increases the safety of a bank
but pre-empts the funds available to extend as loans.
 Preference Shares may be included in addition to equity shares while
computing a bank’s capital.
 Banks may, with prior permission of RBI, grant loans or advances to
companies in which any of its directors is engaged as a director,
manager or employee. This was earlier prohibited.
 RBI can ask for details of the business of any associate enterprise of a
bank. It will also have the powers to inspect any such enterprise.
 RBI may supersede the board of directors of a bank in public interest or
 in the interest of the bank or its depositors. RBI may appoint an
administrator to take charge of the bank. Any supersession shall not be
for a period exceeding six months.
 A primary credit society cannot carry on banking business. This will be
applicable one year after this Amendment Bill is notified and could be
extended up to three years. Among co-operative societies, only a co-
operative bank holding a licence from RBI may carry on banking
business. RBI has been granted powers to order a special audit of a co-
operative bank in public interest or in the interest of the bank or its
depositors.
3.4 REVISION POINTS
1. Banking Regulation Act 1949:
The Banking Regulation Act 1949 contains various provisions’ governing the
Commercial Banks in India. The Act was initially known as Banking
Companies Act, 1949.
2. Statutory Liquidity Ratio:
SLR specifies the proportion of a bank’s deposits that it must hold in
government and other approved securities. A higher SLR increases the safety
of a bank.
 34

3. Ordinance 1980 and its Amendment Bill 2005:

An Act to provide for the acquisition and transfer of the undertakings of
certain banking companies, in order to meet progressively, and serve better,
the needs of the development of the economy and to promote the welfare of
the people.
3.5 INTEXT QUESTIONS
1. State the objectives of Banking Regulation Act, 1949.
2. Elucidate the major provisions relating to Banking Regulation Act, 1949.
3. Discuss the provisions pertaining to Banking Companies (Acquisition and
transfer of Undertakings) Act.
4. Interpret the changing Scenario of Banking System.
5. Write a short note on ‘Ordinance and its Amendment Bill 2005’.
3.6 SUMMARY
The Banking Regulation Act, 1949 is one of the important legal frame works.
Initially the Act was passed as Banking Companies Act, 1949 and it was changed to
Banking Regulation Act 1949. Along with the Reserve Bank of India Act 1935,
Banking Regulation Act 1949 provides a lot of guidelines to banks covering wide
range of areas. The Objective of Banking Regulation Act, 1949 is to provide specific
legislation containing comprehensive provisions, particularly to the business of
banking in India, Prevent such bank failures by prescribing minimum capital
requirements and ensure the balanced development of banking companies.
Banking sector plays a vital role in the economic development of a country. It is
also an integral part of the financial system of a modern industrial economy. The
massive amount of carbon emissions and pollutants are fatal for the human kind
and countries are making effort to create a carbon free economy. The banking
industry is letting go of some of its traditional methods and looking at new and
innovative ways to make life easier for customers.
3.7 TERMINAL EXERCISE
1. What is the full form of SLR ____________________________.
2. Which of the following words is not used in Monetary Policy?
a. Cash reserve ratio b. Repo Rate c. Bank rate d. Blue chip
3.8 SUPPLEMENTARY MATERIALS
1. icsi.edu
2. rbi.org.in
3. money control.com
3.9 ASSIGNMENTS
1. Explain in detail the banking regulation acts and its amendments.
 35

3.10 SUGGESTED READINGS

1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd., Chennai.
2. Arunajatesan S 2017, Technology in Banking Margham Publications,
Chennai.
3. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication, New Delhi.
3.11 LEARNING ACTIVITIES
1. What are the importance of Banking regulation acts.
3.12 KEY WORDS
1. Legislation, Minimum Capital Requirements, Capital Structure, Cash
Reserve.

 36

UNIT – II :CHANGING PROFILE OF INDIAN BANKING

LESSON - 4

FINANCIAL EXCLUSION
4.1 INTRODUCTION
India’s banking sector has undergone a paradigm shift, especially in the last
two decades. It has evolved a lot in terms of asset quality, technology, and
regulations. It has shifted from physical banking, which involved customer walk-in
and face-to-face interactions to digital anchors, involving branchless banking made
possible by new-age, contactless technologies.
4.2 OBJECTIVES
 After studying this lesson, student can understand the Concept of Changing
Scenario in Indian Banking System, Shift from security to Purpose
Orientation, Change from Wholesale character to Retail character and
Financial Exclusion.
4.3 CONTENT
4.3.1 Concept of Changing Scenario in Indian Banking System
4.3.2 Shift from Security to Purpose Orientation
4.3.3 Change from Wholesale character to Retail character
4.3.4 Financial Exclusion
4.3.5 Causes of Financial Exclusion
4.3.1. Concept of Changing Scenario in Indian Banking System
The digital revolution has played an important role in shaping the growth
trajectory of the banking sector in India from promising unprecedented customer
experiences to ensuring extraordinary gains in productivity.
Especially, if we evaluate the post-demonetization phase, the finance industry
has witnessed a significant shift towards digitization; and its stakeholders are now
better equipped in using the technology at their disposal.
Recent Developments in the Banking Sector are as follows
Financial inclusion refers to the availability and equality of opportunities to
access financial services. It acts as a key driver in the economic growth and
development of any nation. The Government of India, on pursuance of the RBI, is
actively propagating financial inclusion through various schemes. Some of the
government-run schemes to enhance the outreach of financial services in India
include:
 PradhanMantri Jan DhanYojana (PMJDY)
 Atal Pension Yojana (APY)
 PradhanMantriVayaVandanaYojana (PMVVY)
 Stand Up India Scheme
 PradhanMantri Mudra Yojana (PMMY)
 PradhanMantriSurakshaBimaYojana (PMSBY)
 SukanyaSamriddhiYojana
 37

 JeevanSurakshaBandhanYojana
Use of Technology
Technology is yet another important element that the banking sector in India
is leveraging to enhance its productivity. The adoption of Core Banking
Solutions (CBS) in 2002 for the incorporation of sophisticated technological
solutions was an important step towards using technology to enhance the banking
sector. CBS has not only enabled bank-to-client interactions but has also facilitated
the calculation of penalties, interests, and maturity, etc. Next, with the coming of
the digital age in 2011, technological integration has been raised a notch higher to
enable unprecedented customer experience. Some of the current digitally-enabled
government-approved banking platforms are:
 Unified Payment Interface (UPI)
 Bharat Interface For Money (BHIM)
 National Unified USSD Platform
 Aadhar Enabled Payment System
Recent Bank Mergers
Another change that the banking sector in India is witnessing is structural
in nature. The Government is reducing the number of Public Sector Banks by
announcing mega-mergers. Subsequently, the number of public sector bank in
India has been reduced to 12 from 27.
The list of public sector bank mergers (until April 2020):
 In April 2019, Vijaya Bank and Dena Bank have merged with Bank of
Baroda
 The 6 SBI associates and BhartiyaMahila Bank merged with the State Bank
of India
 With effect from April 1, 2020, United Bank of India and Oriental Bank of
Commerce have merged with Punjab National Bank making it the second-
largest public sector bank in India
 With effect from April 1, 2020, Syndicate Bank has merged with Canara
Bank.
 With effect from April 1, 2020, Allahabad Bank has merged with Indian
Bank
 With effect from April 1, 2020, Andhra Bank and Corporation Bank of India
have merged with Union Bank of India
4.3.2. Shift from Security to Purpose Orientation Banking.
In recent years, the banking industry has drastically evolved. It extended
further beyond just selling and buying money. Instead, banks today are in the
market of providing a wide variety of financial products and services. This means
that today, bank’s interaction with their customers and non-customer stakeholders
are not transactional as much as they are relational. In other words, the financial
industry has enjoyed much success over many years with little need for marketing.
In the current era, however, it is no longer the case; marketing has gained a more
 38

significant role which became a necessity for the survival and success of banks and
to meet the customer’s needs and demands. On the other, no bank is able to
provide and cover all the financial offerings for all customers, especially in the
extremely competitive market they operate in. Therefore, banks are in a critical and
urgent need to develop and maintain a distinctive position in order to reach their
targeted segments. This can be done by using the business orientation programs.
The overall business orientation of Indian consumer banks can be analyzed by
examining five important Business philosophies, namely.
 Production Orientation
 Selling Orientation
 Customer Orientation
 Market Orientation
 Relationship Marketing Orientation
It is found that Indian banks are purely customer oriented and had not yet
fully implemented a market orientation philosophy. Moreover they are not following
relationship marketing philosophy, which is the need of the hour and it is
imperative for banks to focus on developing long term relationships with their
customers. Further, the two business philosophies, namely production orientation
and selling orientation show significant impact on the overall business orientation
of Indian banks. Therefore bank management should concentrate equally on
technology and an effective promotional mix. Moreover, they should rethink
customer-oriented strategies according to the changing competitive environment
and simultaneously think of a market orientation philosophy. Further,
management should focus equally on four components of relationship marketing,
namely, trust, commitment, loyalty and customer retention.
4.3.3. Change from Wholesale Characterto Retail Character
The term wholesale banking refers to transactions between banks and large
customers involving large amount of money. Wholesale banking includes the
transactions, which the banks conduct with each other via inter-bank markets
separate from customers. On the other hand, retail banking refers to the
mobilization of deposits mainly from individual customers and lending to
individuals and small business borrowers. In contrast to wholesale banking, retail
banking consists of large volume of low value transactions.
During the first decade of 21st century, the banks followed a business model
based on bulk lending supported by bulk deposits. From 2010, since the economy
was not doing well. Large corporate credit came under stress and NPAs (Non
Performing Assets) shot up. It impacted the bank’s profitability. With a view to de-
risk the business and also improve profitability, the banks embarked upon
changing the mix of both its assets and liabilities. Their business model shifted
from bulk to retail. The improvement in their profitability in the last couple of
quarters is primarily because of the growth in low-cost CASA (Current account
saving account) deposits and rebalancing of their assets portfolio. This helped them
 39

in reducing the cost of funds. On the asset side, their loans were skewed heavily in
fovour of large corporate and the infrastructure. Since there was stress on the
wholesale segments, many banks had decided to move away from large corporate
credit to retail, SME and agricultural advances. They have reduced the share of
large corporate credit and infrastructure finance. All these measures have helped
them in improving their bottom-line, and their operating profit growth has been
among the highest in the banking industry, while net profit growth has also been
significant.
4.3.4. Financial Exclusion
Financial Exclusion is when people are unable to access financial services
such as current account, saving accounts and other beneficial financial services as
they are deemed to be too high risk. There are many negative effects of this
exclusion, and it generally means that people become unable to remove themselves
from poverty.
Causes of Financial Exclusion
There are many reasons for financial exclusion, and these can vary from country to
country. Some of the most common reasons are as follows:
1) Lack of Access : Many people find themselves financially excluded because
they are unable to maintain an IT presence and do not understand how to
access finance online such as online banking. This trend seems to impact
many people as they are not used to online systems and need support to
relearn this method of banking.
2) Lack of Products that Suit All Customers: Another cause of financial exclusion
is a genuine lack of financial services for people who do not fit a mainstream
financial profile. A lack of insurance, credit and day to day banking facilities
stops those who want to access services from getting them. This then means
that it becomes very difficult to improve its financial profile and become
included.
3) Social Exclusion: Social exclusion is a very common cause of financial
exclusion. This is when people who are unemployed, financially dependent on
another person or who have no credit history, in the country they reside in
becoming financially excluded due to their social status. It is also very
common for people who have migrated to a new country, to become financially
excluded in their new country.
4) Low Income: It is widely believed that a low income is directly related to those
people who are completely financially excluded. People who avail benefits have
low paid cash-in-hand jobs, single parents and those with a disability often
find themselves in the low-income bracket. This makes them less desirable to
mainstream banking and so it becomes virtually impossible to gain access to
financial products.
 40

4.4 REVISION POINTS

Use of Technology
Technology is yet another important element that the banking sector in India
is leveraging to enhance its productivity. The adoption of Core Banking
Solutions (CBS) in 2002 for the incorporation of sophisticated technological
solutions was an important step towards using technology to enhance the banking
sector.
Financial Exclusion
Financial Exclusion is when people are unable to access financial services
such as current account, saving accounts and other beneficial financial services as
they are deemed to be too high risk.
4.5 INTEXT QUESTIONS
1. Narrate the concept of ‘Shift from security to Purpose Orientation’ in
banking sector.
2. Recall the Government schemes to enhance the outreach of financial
services in India.
3. State the digitally-enabled government-approved banking platforms.
4. Enumerate the causes for Change from Wholesale character to Retail
character in banking.
5. Discuss the causes of Financial Exclusion.
4.6 SUMMARY
India’s banking sector has undergone a paradigm shift, especially in the last
two decades. It has evolved a lot in terms of asset quality, technology, and
regulations. Banks are in a critical and urgent need to develop and maintain a
distinctive position in order to reach their targeted segments. This can be done by
using the business orientation programs. With a view to de-risk the business and
also improve profitability, the banks embarked upon changing the mix of both its
assets and liabilities. Their business model shifted from bulk to retail.
4.7 TERMINAL EXERCISE
1. What is mortgage?
2. When was the RBI nationalized__________________________.
4.8 SUPPLEMENTARY MATERIALS
1. icsi.edu
2. rbi.org.in
3. money control.com
4.9 ASSIGNMENTS
1. Explain the working selective credit control measures.
 41

4.10 SUGGESTED READINGS

1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd., Chennai.
2. Arunajatesan S 2017, Technology in Banking Margham Publications,
Chennai.
3. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication, New Delhi.
4.11 LEARNING ACTIVITIES
1. State the role of banks as financial intermediaries.
4.12 KEY WORDS
1. Paradigm shift, Merger, Financial Exclusion

 42

LESSON – 5
FINANCIAL INCLUSION
5.1 INTRODUCTION
Financial inclusion refers to the provision of equally available and affordable
access to financial services for everyone, regardless of their level of income. It
applies to providing services to both individuals and businesses. Financial
inclusion is not only important for people in undeveloped countries. It’s estimated
that as many as one-fourth of people in the United Kingdom are low- income
individuals with limited access to financial services. A policy of financial
inclusion is a focus of the World Bank, as demonstrated by its Universal Financial
Access 2020 initiative. The initiative aims to provide at least one billion people
worldwide with at least basic access to financial services, such as maintaining a
bank account or other financial account from which they can send and receive
payments and store their money.
By the World Bank’s estimate, about 1.7 billion adults – roughly one-third of
the world’s adult population as of 2020 – are unbanked or under banked. The
United Nations Development Programme (UNDP) is another initiative that lists
increased financial inclusion as one of its goals. The private sector also strives for
greater financial inclusion, which has been shown to provide an economic boost to
countries. Of course, greater financial inclusion also means greater potential profits
for banks and other financial institutions.
5.2 OBJECTIVES
 After studying this lesson, student can understand the Need for Financial
Inclusion, Move towards Universal banking, RBI Guidelines on Universal
Banking, Hurdles in Universal Banking.
5.3 CONTENT
5.3.1 Meaning of Financial Inclusion
5.3.2 Financial Inclusion Schemes in India
5.3.3 Need for Financial Inclusion
5.3.4 Move towards Universal Banking
5.3.5 RBI guidelines on Universal Banking
5.3.6 Hurdles in Universal Banking
5.3.1. Meaning of Financial Inclusion
Financial Inclusion is described as the method of offering banking and
financial solutions and services to every individual in the society without any form
of discrimination. It primarily aims to include everybody in the society by giving
them basic financial services without looking at a person’s income or savings.
Financial inclusion chiefly focuses on providing reliable financial solutions to the
economically underprivileged sections of the society without having any unfair
treatment. It intends to provide financial solutions without any signs of inequality.
It is also committed to being transparent while offering financial assistance without
any hidden transactions or costs.
 43

5.3.2. Financial Inclusion Schemes In India

The Government of India has been introducing several exclusive schemes for
the purpose of financial inclusion. These schemes intend to provide social security
to the less fortunate sections of the society. After a lot of planning and research by
several financial experts and policymakers, the government launched schemes
keeping financial inclusion in mind. These schemes have been launched over
different years and the schemes of Financial Inclusion are as follows:
 PradhanMantri Jan DhanYojana(PMJDY)
 Atal Pension Yojana(APY)
 PradhanMantriVayaVandanaYojana(PMVVY)
 Stand Up India Scheme
 PradhanMantri Mudra Yojana(PMMY)
 PradhanMantriSurakshaBimaYojana(PMSBY)
 SukanyaSamriddhiYojana
 JeevanSurakshaBandhanYojana
 Credit Enhancement Guarantee Scheme (CEGS) for Scheduled Castes.
 Venture Capital Fund for Scheduled Castes under the Social Sector
Initiatives
 Varishtha Pension BimaYojana (VPBY)
5.3.3.Need for Financial Inclusion in India
The following points explain about the needs of financial inclusion in India.
 Access to financial services enables the poorest and most vulnerable in
society to step out of poverty.
 Financial inclusion is needed for economic growth.
 It enables and empowers people and communities.
 Financial inclusion intends to help people secure financial services and
products at economical prices such as deposits, fund transfer services,
loans, insurance, payment services, etc.
 It aims to establish proper financial institutions to cater to the needs of the
poor people. These institutions should have clear-cut regulations and should
maintain high standards that are existent in the financial industry.
 Financial inclusion aims to build and maintain financial sustainability so
that the less fortunate people have a certainty of funds which they struggle
to have.
 Financial inclusion also intends to have numerous institutions that offer
affordable financial assistance so that there is sufficient competition so that
clients have a lot of options to choose from. There are traditional banking
options in the market. However, the number of institutions that offer
inexpensive financial products and services is very minimal.
 Financial inclusion intends to increase awareness about the benefits of
financial services among the economically underprivileged sections of the
society.
 44

 The process of financial inclusion works towards creating financial products

that are suitable for the less fortunate people of the society.
 Financial inclusion intends to improve financial literacy and financial
awareness in the nation.
 Financial inclusion aims to bring in digital financial solutions for the
economically underprivileged people of the nation.
 It also intends to bring in mobile banking or financial services in order to
reach the poorest people living in extremely remote areas of the country.
 It aims to provide tailor-made and custom-made financial solutions to poor
people as per their individual financial conditions, household needs,
preferences, and income levels.
 Financial inclusion through access to an account, savings and a payment
system enables potential and empowers men, women and whole
communities this in turn promotes investment within community and
provides jobs.
• There are many governmental agencies and non-governmental
organisations that are dedicated to bringing in financial inclusion. These
agencies are focused on improving the access to receiving government-
approved documents. Many poor people are unable to open bank
accounts or apply for a loan as they do not have any identity proof. There
are so many people who live in rural areas or tribal villages who do not
have knowledge about documents such as PAN, Aadhaar, Driver’s
License, or Electoral ID. Hence, they cannot avail many of the services
offered by governmental or private institutions. Due to lack of these
documents, they are unable to avail any form of subsidies offered by the
government that they are actually entitled to.
5.3.4. Move towards Universal Banking
Universal banking is a system of banking where banks undertake a blanket of
financial services like investment banking, commercial banking, development
banking, insurance and other financial services including functions of merchant
banking, mutual funds, factoring, housing finance, insurance etc.
Universal Banking means that Financial Institutions (FIs) and Banks are
allowed to undertake all kinds of activity of banking, financing and related
businesses. As per the World Bank, the definition of the Universal Bank is as
follows: In Universal banking, the large banks operate extensive network of
branches, provide many different services, hold several claims on firms (including
equity and debt) and participate directly in the Corporate Governance of firms that
rely on the banks for funding or as insurance underwriters. So we can say that
Universal bank is a Financial Supermarket which provides all financial products
under one roof.
Apart from savings and loans, the Universal banks provides services such as
investing in securities, credit cards, project finance, remittances, payment systems,
project counseling, merchant banking, forex operations, insurance and so on.
 45

In a nutshell, a Universal Banking is a superstore for financial products under

one roof. Corporate can get loans and avail of other handy services, while can
deposit and borrow. It includes not only services related to savings and loans but
also investments.
Universal Banking is usually undertaken by large banks who can manage the
cost of such widespread operations. The concept was culmination of reports
submitted by Narasimham Committee and S.H. Khan Committee which had
suggested to consolidate the financial industry of India via medium of merging
financial activities carried by different types of financial institutions.
The practice of Universal banking is common in European countries in which it is
found in three forms:
 In-house universal banks
 Universal banking through separate subsidiaries
 Universal banking through holding companies
Meaning of Universal Banking
Universal Banking is a multi-purpose and multi-functional financial
supermarket (a company offering a wide range of financial services e.g. stock,
insurance and real-estate brokerage) providing both banking and financial services
through a single window.
Definition of Universal Banking
As per the World Bank, “ In Universal Banking, large banks operate extensive
network of branches, provide many different services, hold several claims on firms
(including equity and debt) and participate directly in the Corporate Governance of
the forms that rely on the banks for funding or as insurance underwriters”.
Universal Banking in India
In India Development Financial Institutions (DFI’s) and refinancing institutions
(RFIs) were meeting specific sectoral needs and also providing long-term resources
at concessional terms, while the commercial banks in general, by and large,
confined themselves to the core banking functions of accepting deposits and
providing working capital finance to industry, trade and agriculture. Consequently
to the liberalization and deregulation of financial sector, there has been blurring of
distinction between the commercial and investment banking.
Reserve Bank of India constituted on December 8, 1997, a Working Group
under the chairmanship of Shri S.H Khan to bring about greater clarity in the
respective roles of banks and financial institutions for greater harmonization of
facilities and obligations. Also report of the committee on Banking Sector Reforms
or Narasimham Committee (NC) has major bearing on the issue considered by the
Khan Group. The issue of universal banking resurfaced in Year 2000, when ICICI
gave a presentation to RBI to discuss the time frame and possible options for
transforming itself into an Universal bank. Reserve Bank of India also spelt out to
parliamentary Standing Committee on Finance, its proposed policy for universal
 46

banking, including a case-by-case approach towards allowing Domestic financial

institutions to become the universal banks.
Now RBI has asked Financial Institutions, which are interested to convert
itself into a universal bank, to submit their plans for transition to a universal bank
for consideration and further discussions. Financial Institutions need to formulate
a road map for the transition path and strategy for smooth conversion into an
Universal bank over a specific time frame.
5.3.5. RBI Guidelines for Existing Banks for Conversion into Universal Banks
Salient operational and regulatory issues to be addressed by the FIs for the
conversion into universal bank are:
Reserve Requirements: Compliance with the cash reserve ratio and statutory
liquidity ratio requirements (under Section 42 of RBI Act, 1934, and Section 24 of
the Banking Regulation Act, 1949, respectively) would be mandatory for an FI after
its conversion into a universal bank.
Permissible Activities: Any activity of a Financial Institution currently
undertaken but not permissible for a bank under Section 6(1) of the Banking
Regulation Act, 1949, may have to be stopped or divested after its conversion into a
universal bank.
Disposal Of Non-Banking Assets: Any immovable property, howsoever acquired
by an Financial Institution, would after its conversion into a universal bank, be
required to be disposed of within the maximum period of 7 years from the date of
acquisition, in terms of Section 9 of the Banking Regulation Act.
Composition of the Board: Changing the composition of the board of Director
might become necessary for some of the Financial Institutions after their
conversion into a universal bank to ensure compliance with the provisions of
Section 10(A) of the Banking Regulation Act, which requires at least 51% of the
total number of directors to have special knowledge and experience.
Prohibition on Floating Charge of Assets: The floating charge, if created by a
Financial Institutions, over its assets, would require, after its conversion into a
universal bank, ratification by the Reserve Bank of India under Section 14(A) of the
B.R. Act, since a banking company is not allowed to create a floating charge on the
undertaking or any property of the company unless duly certified by RBI as
required under the Section.
Nature of Subsidiaries: If any of the existing subsidiaries of a Financial
Institutions is engaged in an activity not permitted under Section 6(1) of the
Banking Regulations Act, then on conversion of the FI into a universal bank,
delinking of such subsidiary/activity from the operations of the universal bank
would become necessary since Section 19 of the Act permits a bank to have
subsidiaries only for one or more of the activities permitted under section 6(1) of
Banking .Regulation Act.
 47

Restriction On Investments: An FI with equity investment in companies in

excess of 30% of the paid up share capital of that company or 30 percent of its own
paid-up share capital and reserve, whichever is less, on its conversion into a
universal bank, would need to divest such excess holding to secure compliance
with the provisions of Section 19(2) of the Banking Regulation Act which prohibits a
bank from holding shares in a company in excess of this limits.
Connected Lending: Section 20 of Banking Regulation Act prohibits grant of
loans and advances by a bank on security of its own shares or grant of loans or
advances on behalf of any of its directors or to any firm in which its director
/manager or employee or guarantor is interested. The compliance with these
provisions would be mandatory after conversion of an FI to a universal bank.
Licensing: An FI converting into a universal bank would be required to obtain
a banking license from RBI under Section 22 of the B.R Act for carrying on banking
business in India after complying with the applicable conditions.
Branch Network: An FI, after its conversion into a bank, would also be
required to comply with extant branch licensing policy of RBI under the new banks
are required to allot at least 25 percent of their total number of branches in semi-
urban and rural areas.
Assets In India: An FI after conversion into a universal bank, will be required
to ensure that at the close of business on the last Friday of every quarter, its total
assets held in India are not less than 75 percent of its total demand and time
liabilities in India, as requirement of a bank under Section 25 of the Banking
Regulation Act.
Format of Annual Reports: After converting into a universal bank, a FI will be
required to publish its annual balance sheet and profit and loss account in the
forms set out in the Third Schedule of the Banking Regulation Act, as prescribed
for a banking company under Section 29 and Section 30 of the Banking Regulation
Act.
Managerial Remuneration of the Chief Executive Officers: On conversion into a
universal bank, the appointment and remuneration of the existing Chief Executive
Officer may have to be reviewed with the approval of RBI in terms of the provisions
of Section 35 of Banking Regulation Act. The Section stipulates Reserve Bank of
India taking into account the profitability, net NPA and other financial parameters.
Under the Section, prior approval of RBI would also be required for appointment of
Chairman and Managing Director.
Deposit Insurance: An FI, on conversion into a universal bank, would also be
required to comply with the requirement of compulsory deposit insurance from
DICGC up to a maximum of Rs. 1 lakh per account, as applicable to the banks.
Authorized Dealer’s Licence: Some of the FIs at present hold restricted AD
license from RBI, Exchange Control Department to enable them to undertake
transactions necessary for or incidental to their prescribed functions. On
 48

conversion into a universal bank, the new bank would normally be eligible for full-
fledge authorized dealer license and would also attract the full rigor of the
Exchange Control Regulations applicable to the banks at present, including
prohibition on raising resources through external commercial borrowings.
Priority Sector Lending: On conversion of a FI to a universal bank, the
obligation for lending to “priority sector” up to a prescribed percentage of their “new
bank credit” would also become applicable to it.
Prudential Norms: After conversion of a FI into a bank, the extant prudential
norms of RBI for all-India financial institutions would no longer be applicable but
norms as applicable to banks would be attracted and will need to be fully complied
with.
RBI Guidelines on Universal Banking: At A Glance
 Once the Financial Institutions becomes a universal Bank, it would be
compliant with the CRR and SLR requirements of the RBI.
 The activity which is permissible for the Financial Institutions but NOT
permissible for Bank would have to be stopped.
 Any immovable property acquired by the Financial Institutions would have
to be disposed of in 7 years time.
 The composition of the Board of Directors would be required to be changed
so that it is compliant with the Section 10 (A) of the Banking Regulation Act
which requires at least 51% of the total number of directors to have special
knowledge and experience.
 If there is any floating charge on any of its assets, it would have to be ratified
by the RBI since a banking company is not allowed to create a floating
charge on the undertaking or any property of the company unless duly
certified by RBI as required under the Section 14 (A) of Banking Regulation
Act.
 If there is any subsidiary that is engaged in an activity which is not
permissible under the Banking Regulation Act, then the subsidiary will have
to be delinked.
 Banks cannot hold shares in the companies in excess of 30% of the paid up
share capital of that company or 30 per cent of its own paid-up share capital
and reserves as per the Banking Regulation Act, so, the Financial
Institutions after becomes a Universal Bank shall divert the excess of the
equity.
 Section 20 of the Banking Regulation Act prohibits grant of loans and
advances by a bank on security of its own shares or grant of loans or
advances on behalf of any of its directors or to any firm in which its
director/manager or employee or guarantor is interested. The compliance
with these provisions would be mandatory after conversion of a Financial
Institutions to a universal bank.
 49

 The Financial Institutions would require obtaining a license from RBI to

carry business of banking in India and has to comply with the applicable
conditions.
 The Financial Institutions would need to comply with the existing branch
licensing policy of RBI which requires allotting at least 25 per cent of their
total number of branches in semi-urban and rural areas.
 At the close of business on the last Friday of every quarter, the Financial
Institutions after becomes a Universal Bank, would make sure that its total
assets held in India are not less than 75 per cent of its total demand and
time liabilities in India, as required of a bank under Section 25 of the
Banking Regulation Act.
 Publishing annual financial reports as per requirements of the Banking
Regulation Act.
5.3.6. Hurdles in Universal Banking
Different Rules and Regulations: Universal Banking offers all financial
products and services under one roof. However, all these products and services
have to follow different rules and regulations. This creates many problems. For
example, Mutual Funds, Insurance, Home loans etc, have to follow different sets of
rules and regulations, but they are provided by the same bank.
Effect of Failure on Banking System: Universal banking is done by very large
banks. If these huge banks fail, then it will have a very big and bad effect on the
banking system and the confidence of the public. For e.g. Recently Lehman
Brothers a very large universal bank failed. It had very bad effects in the USA,
Europe and even in India.
Monopoly: Universal banks are very large. So, they can easily get monopoly
power in the market. This will have many harmful effects on the other banks and
the public. This is also harmful to economic development of the country.
Conflict of Interest: Combining commercial and investment banking can result
in conflict of interest that is, Commercial banking versus investment banking.
Some banks may give more importance to one type of banking and give less
importance to the other type of banking. However, this does not make commercial
sense.
No Expertise in Long Term Lending: There are different types of long term
loans like project finance and infrastructure finance, having ling gestation projects
cannot be properly handled by the single bank.
Non Performing Assets Problems: One of the most serious problems faced by
universal banking is Non- Performing Assets.
Risk of Failure: The larger the banks, the greater the effect of their failure on
the system. The failure of a larger institution could have serious effect on the entire
banking system. If one universal bank were collapse, it could lead to a systematic
financial crisis.
 50

Bureaucratic and Infelxible: Universal Banks tend to be bureaucratic banks

tend to be bureaucratic and inflexible. They tend to work primarily with the large
established customers and ignore or discourage smaller and newly established
businesses.
5.4 REVISION POINTS
1. Financial Inclusion:
Financial Inclusion is described as the method of offering banking and
financial solutions and services to every individual in the society without any
form of discrimination.
2. Universal Banking
Universal Banking is a multi-purpose and multi-functional financial
supermarket providing both banking and financial services through a single
window.
5.5 INTEXT QUESTIONS
1. Write a short note on Financial Inclusion.
2. Explain the Financial Inclusion Schemes in India
3. Narrate the need for Financial Inclusion
4. Enumerate the circumstances forcing the banking sector for moving towards
Universal Banking.
5. Elucidate the RBI guidelines for conversions of Banks into Universal
banking.
6. Summarize the Hurdles in Universal Banking.
5.6 SUMMARY
Financial inclusion refers to the provision of equally available and affordable
access to financial services for everyone, regardless of their level of income.
Financial Inclusion is described as the method of offering banking and financial
solutions and services to every individual in the society without any form of
discrimination. There are many governmental agencies and non-governmental
organisations that are dedicated to bringing in financial inclusion. These agencies
are focused on improving the access to receiving government-approved documents.
Universal Banking means that Financial Institutions (FIs) and Banks are allowed to
undertake all kinds of activity of banking, financing and related businesses.
Financial Institutions need to formulate a road map for the transition path and
strategy for smooth conversion into an Universal bank over a specific time frame.
5.7 TERMINAL EXERCISE
1. Financial inclusion means _________________________.
a. retail banking b. bringing poor people under banking net
c. financial statements d. wholesale banking
5.8 SUPPLEMENTARY MATERIALS
1. icsi.edu
2. rbi.org.in
3. money control.com
 51

5.9 ASSIGNMENTS
1. Why does financial inclusion matter today?
5.10 SUGGESTED READINGS
1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd.,
2. Chennai.
3. Arunajatesan S 2017, Technology in Banking Margham Publications,
Chennai.
4. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication, New Delhi.
5.11 LEARNING ACTIVITIES
1. Bring out solution for the main challenge of financial inclusion to include
the rural and poor people in the coverage area.
5.12 KEY WORDS
1. Financial Inclusion, Financial Institutions, Universal banking.

 52

UNIT-III :BANK DEPOSITS, LOANS AND ADVANCES

LESSON – 6

DIFFERENT TYPES OF CUSTOMERS

6.1 INTRODUCTION
The word customer signifies a relationship in which duration is not of essence.
A person whose money has been accepted by the banker on the footing that he
undertakes to honour cheques unto the amount standing to his credit is a
customer of the bank irrespective of whether his connection is short or long
duration. For a person to be known as a customer of the bank there must be either
a current account or any sort of deposit account like saving, term deposit, recurring
deposit, a loan account or some similar relation.
6.2 OBJECTIVES
 After studying this lesson, student can understand the special types of
customers, Procedure for opening account different accounts, Classification
of NRI Account, Various Types of Bank A/c
6.3 CONTENT
6.3.1 Meaning of Customers
6.3.2 Special Types of Customers
6.3.3 Procedure for opening account different accounts
6.3.4. Meaning of Non - resident individuals (NRIs)
6.3.5 Classification of NRI Account
6.3.6 Various Types of Bank A/c
6.3.1. Meaning of Customers
In the ordinary language, a person who has an account in a bank is
considered its customer. The term customer also presents some difficulty in the
matter of definition. There is no statutory definition of the term either in India or in
England. However, the legal decisions on the matter throw some light on the
meaning of the term. Thus, in order to constitute a person as a customer, he must
satisfy the following conditions:
1) He must have an account with the bank i.e., saving bank account, current
deposit account, or fixed deposit account.
2) The transactions between the banker and the customer should be of banking
nature i.e., a person who approaches the banker for operating Safe Deposit
Locker or purchasing travelers cheques is not a customer of the bank since
such transactions do not come under the orbit of banking transactions.
3) Frequency of transactions is not quite necessary though anticipated.
The word customer signifies a relationship in which duration is not of essence.
A person whose money has been accepted by the banker on the footing that he
undertakes to honour cheques unto the amount standing to his credit is a
customer of the bank irrespective of whether his connection is short or long
duration. For a person a person to be known as a customer of the bank there must
be either a current account or any sort of deposit account like saving, term deposit,
 53

recurring deposit, a loan account or some similar relation. The relationship of

banker and customer begins as soon as money or cheque is paid in and the bank
accepts it and is prepared to open account. To be a customer of a bank it is must
that a person must have an account with the bank whether in debit or credit is
immaterial for this purpose. A person merely visits the office of a bank for some
transactions; say for purchasing of a draft or encashing of cheque etc. he does not
become a customer.
6.3.2. Special Types OF Customers
Special types of customers are those who are distinguished from other types of
ordinary customers by some special features. Hence, they are called special types of
customers. They are to be dealt with carefully while operating and opening the
accounts. They are as follows:
1) Minors
2) Lunatics
3) Drunkards
4) Married Woman
5) Insolvents
6) Illiterate Person
7) Agents
8) Joint Stock Company
9) Clubs, Associations and Educational Institutions
10) Partnership Firm
11) Joint Accounts
12) Joint Hindu Family
13) Trustees
I. Minors
Under the Indian law, a minor is a person who has not completed 18 years of
age. The period of minority is extended to 21 years in case of guardian of this
person or property is appointed by a court of law before he completes the age of
18years. According to Indian Contract Act, a minor is recognized as a highly
incompetent party to enter into legal contracts and any contract entered into with a
minor is not only invalid but voidable at the option of the minor. The law has
specially protected a minor merely because his mental faculty has not fully
developed and as such, he is likely to commit mistakes or even blunders which will
affect his interests adversely. It is for this reason; the law has come to the rescue of
a minor. A banker can very well open a bank account in the name of a minor. But
the banker has to be careful to ensure that he does not open a current account. If a
current account is opened and stands overdrawn inadvertently, the banker has no
remedy against a minor, as he cannot be taken to a court of law. It is for this
reason that the banker should be careful to see that he invariably opens a savings
bank account.
 54

The conditions for opening and maintaining accounts in the names of the minors
are:
1) The minor should have attained the age of discretion, i.e., he must be about
l4 years of age. He must be capable of understanding what he does.
2) The minor should be able to read and write.
3) The minor should be properly introduced. The account opening form should
be signed by the minor in the presence of a bank officer who should be able
to identify the minor. The date of birth of the minor should be recorded in
the account opening form.
4) Banks usually stipulate limits up to which deposits in such accounts can be
accepted.
5) Amount tendered by the minor should as far as possible be in cash.
6) In case of time deposits, the amount should be paid in cash on maturity.
Prepayment cannot be allowed.
Periodical payment of interest on deposits may be made to the minor.
Legal Provisions Regarding Guardianship of a Minor:
According to Hindu Minority and Guardianship Act, 1956, a Guardian is one
who is recognised by law to be one of the following:
(a) Natural Guardian
According to Section 6 of the Hindu Minority and Guardianship Act, 1956, in
case of a minor boy or an unmarried girl, his/her father and after him the mother
shall be the natural guardian. In case of a married girl (minor), her husband shall
be the natural guardian. The terms father or mother do not include step-father or
step-mother.
(b) Testamentary Guardian
A Hindu father, who is entitle to act as the natural guardian of his minor
legitimate children may, by will, appoint a guardian for any of them in respect of
the minor’s person or property. Such guardian acts after the death of the father or
the mother.
(c) Guardian Appointed by Court
A guardian may be appointed by the court under the Guardians and Wards
Act, 1890, but the court shall not be authorised to appoint or declare a guardian of
the person of a minor, if his father is alive and is not, in the opinion of the court,
unfit to be guardian of the person of the minor. Similar is the case of a minor girl,
whose husband is not, in the opinion of the court, unfit to be guardian of her
person. Thus the father (or the husband in case of a married girl) is exclusively
entitled to be the guardian.
II. Lunatics
A lunatic or an insane person is one who, on account of mental derangement,
is incapable of understanding his interests and thereby, arriving at rational
judgement. Since a lunatic does not understand what is right and what is wrong, it
is quite likely that the public may exploit the weakness of a lunatic to their
 55

advantage and thus deprive him of his legitimate claims. On account of this, the
Indian Contract Act recognises that a lunatic is incompetent to enter into any
contract and any such contract, if entered into, is not only invalid but voidable at
the option of the lunatic. Since a lunatic customer is an incompetent party, the
banker has to be very careful in dealing with such customers. Bankers should not
open an account in the name of a person of unsound mind. On coming to know of a
customer’s insanity, the banker should stop all operations on the account and
await a court order appointing a receiver. It would be dangerous to rely on
information. The bank should take sufficient care to verify the information and
should not stop the account unless it is fully satisfied about the Correctness of the
information. In case a person suffers from a temporary mental disorder, the banker
must obtain a Certificate from two medical officers pertaining his mental soundness
at the time of operation on the account.
III. Drunkards
A drunkard is a person who on account of consumption of alcoholic drinks get
himself intoxicated and thereby, loses the balance over his mental capacity and
hence, is incapable of forming rational judgement. The law is quite considerable
towards a person who is in drunken state. A lawful contract with such a person is
invalid. This is for the simple reason that it is quite likely that the public may
exploit the weakness of such a person to their advantage and thus, deprive him of
his legitimate claims. A banker has to be very careful in dealing with such
customers. There cannot be any objection by a banker to open an account. In case
a customer approaches the banker for encashment of his cheque especially when
he is drunk, the banker should not make immediate payment. This is because the
customer may afterwards argue that the banker has not made payment at all.
Therefore, it is better and safer that the banker should insist upon such a customer
getting a witness (who is not drunk) to countersign before making any payment
against the cheque.
IV. Married Women
An account may be opened by the bank in the name of a married woman as
she has the power to draw cheques and give valid discharge. At the time of opening
an account in thename of a married woman, it is advisable to obtain the name and
occupation of her husband and name of her employer, if any, and record the same
to enable detection if the account ismisused by the husband for crediting there in
cheques drawn in favour of her employer. In case of an unmarried lady, the
occupation of her father and name and address of her employer, if any, may be
obtained and noted in the account opening form. If a lady customer requests the
bankers to change the name of her account opened in her maiden name to her
married name, the banker may do so after obtaining a written request from her. A
fresh specimen signature has also to be obtained for records.
While opening an account of a purdah lady (purdah nishin), the bank obtains
her signature on the account opening form duly attested by a responsible person
known to the bank. It is advisable to have withdrawals also similarly attested. In
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view of practical difficulties involved, it would be better not to open accounts in the
names of purdah ladies.
V. Insolvents
When a person is unable to pay his debts in full, his property in certain
circumstances is taken possession of by official receiver or official assignee, under
orders of the court. He realises the debtor’s property and rateably distributes the
proceeds amongst his creditors. Such a proceeding is called ‘insolvency’ and the
debtor is known as an ‘insolvent’. If an account holder becomes insolvent, his
authority to the bank to pay cheques drawn by him is revoked and the balance in
the account vests in the official receiver or official assignee.
VI. Illiterate Persons
A person is said to be illiterate when he does not know to read and write. No
current account should be opened in the name of an illiterate person. However, a
savings bank account may be opened in the name of such a person. On the account
opening form the bank should obtain his thumb mark in the presence of two
persons known to the bank and the depositor. Withdrawal from the account by the
account holder should be permitted after proper identification every time. The
person who identifies the drawer must be known to the bank and he should
preferably not be a member of the bank’s staff.
VII. Agents
A banker may open an account in the name of a person who is acting as an
agent of another person. The account should be considered as the personal account
of an agent, and the banker has no authority to question his power to deal with the
funds in the account unless it becomes obvious that he is being guilty of breach of
trust. However, if a person is authorised to only act on behalf of the principal, the
banker should see that he is properly authorised to do the acts which he claims to
do. If he has been appointed by a power of attorney, the banker should carefully
pursue the letter-of attorney to confirm the powers conferred by the document on
the agent. In receiving notice of the principal’s death, insanity or bankruptcy, the
banker must suspend all operations on the account.
VIII. Joint Stock Company
A joint stock company has been defined as an artificial person, invisible,
intangible and existing only in contemplation of law. It has separate legal existence
and it has a perpetualsuccession. The banker must satisfy himself about the
following while opening an account in the name of a company:
(a) Memorandum of Association
Memorandum of Association is the main document of the company, which
embodies its constitution and is called the charter of the company. It gives details,
especially regarding objects and capital of the company’s copy of this document
should be insisted upon while opening an account.
(b) Articles of Association
The Articles of Association contain the rules and regulations of the company
regarding its internal management. It contains in detail all matters which are
 57

concerned with the conduct of day-to-day business of the company. The Articles of
Association is also another document that a banker insists upon. It enables the
banker to know the details of company’sborrowing powers quantum, persons
authorised to borrow etc.
This will also enable the banker to understand whether the acts of the officers
are within the orbit of the Company’s Memorandum and Articles.
(c) Certificate of Incorporation
This is another vital document the banker has to verify and insist upon
receiving a copy. This document signifies that the company can commence its
business activities as soon as itgets this Certificate which is not the case with a
public company.
(d) Certificate to Commence Business
Only for public companies, the banker insists upon this document for
verification. This document gives the clearance to public companies to commence
their business activities. Acompany can borrow funds provided it has obtained this
certificate.
(e) Application Form and Copy of the Board’s Resolution
A copy of the prescribed application form duly completed in all respects has to
be submitted in the beginning and that too duly signed by the company’s
authorised officers. Along with this, a copy of the resolution passed at the meeting
of the board regarding appointment of company’s bankers is quite necessary to
make everything lawful. The resolution copy should be signed by the company’s
Chairman and Secretary in addition, a copy of the specimen signatures of the
officers empowered to operate the bank account has to be furnished.
(f) A Written Mandate
This is also another document that a banker insists upon. It contains all the
details regarding operation, overdrawing of the account and giving security to the
bank by the officers of the company. This document is useful to the bank for
opening as well as for operating the account of the company.
(g) Registration of Charges
Whenever a company borrows, it has to give certain assets by way of security
and in case the banker accepts them as security, it has to be properly recorded in
the company’s books, register of charges and duly registered.
(h) Any Change in the Company’s Constitution or Offices
Whenever there is any change in the constitution like Memorandum or in
respect of company’s offices, it has to be communicated in writing to the bank and
it should not in any way affect the earlier contracts entered into by the company
with the bank. To this effect, the bankers usually take an undertaking from the
company.
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IX. Clubs, Associations and Educational Institutions

Clubs, Associations and Educational Institutions are non trading institutions
interested in serving noble courses of education, sports etc. The banker should
observe the following precautions in dealing with them:
(a) Incorporation
A sports club, an association or an educational institution must be registered
or incorporated according to the Indian Companies Act, 1956, or the Co-operative
Societies Acts. If it is not registered, the organisations will not have any legal
existence and it has no right to contact with the outside parties.
(b) Rules and by-laws of the Organisation:
A registered association or organisation is governed by the provisions of the
Act under which it has been registered. It may have its own Constitution, Charter
or Memorandum ofAssociation and rules and by-laws, etc., to carry on its activities.
A copy of the same should be furnished by the organisation to the banker to
acquaint the latter with the powers and functions of the persons managing its
affairs. The banker should ensure that these rules are observed by the persons
responsible for managing the organisation.
(c) A Copy of Resolution of Managing Committee:
For opening a bank account, the managing committee of the organisation
must pass a resolution –
(i) Appointing the bank concerned as the banker of the organisation.
(ii) Mentioning the name/names of the person or persons, who are authorised
to operate the account.
(iii) Giving any other directions for the operation of the said account. A copy of
the resolution must be obtained by the bank for its own record.
(d) An Application Form
An application form duly completed in all respects along with specimen
signatures of the office bearers of the institution is quite essential for operation of
the account.
(e) A Written Mandate
It is an important document which contains specific instructions given to the
banker regarding operations, over drawing etc.
(f) Transfer of Funds
All funds and cheques which are in the name of the Institution should be
invariably credited to the Institution account and not to the personal or private
accounts of the office bearers of the institution.
(g) Death or Resignation
In case the person authorised to operate the account on behalf of a
organisation or association dies or resigns, the banker should stop the operations
of the organisation’s account till the organisation nominates another person to
operate its account.
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X. Partnership Firm
A partnership is not regarded as an entity separate from the partners. The
Indian Partnership Act, 1932, defines partnership as the “relation between persons
who have agreed to share the profit of the business, carried on by all or any of them
acting for all.” Partnership is formed or constituted on account of agreement
between the partners and with the soleintention of earning and sharing profits in a
particular ratio. Further, the business is carried on either by all the partners or
some partners acting for all. The partners carry joint and
several liabilities and the partnership does not possess any legal entity. A banker
should take the following precautions while opening an account in the name of a
partnership firm:
(a) Application Form
A prescribed application form duly completed in all respects along with
specimen signatures of the partners of firm is quite essential for operation of the
account.
(b) Partnership Deed
The banker should, very carefully examine the partnership deed, which is the
charter of the firm, to acquaint himself with the constitution and business of the
firm. This will help him to know his position while advancing funds to the firm.
(c) A Mandate:
A mandate giving specific instructions to the banker regarding operations,
over- drawing etc., is quite necessary. It will enable the banker to handle the
accounts according to theeeds of the firm.
(d) Transfer of Funds
The banker has to be very careful to see that the funds belonging to the firm
should not be credited to the personal or private accounts of the partners.
(e) Sanctioning of Overdraft
While sanctioning funds by way of overdraft, the banker has to check up the
partnership deed and examine the borrowing powers of the partners empowered to
borrow and hean even ask for the financial statements of the previous years for
information and perusal.
XI. Joint Accounts
When two or more persons open an account jointly, it is called a joint account.
The banker should take the following precautions in opening and dealing with a
joint account:
(a) The application for opening a joint account must be signed by all the
persons intending to open a joint account.
(b) A mandate containing name or names of persons authorised to operate an
account.
(c) The full name of the account must be given in all the documents furnished
to the banker, even if the account is to be operated upon by one or a few of
the joint accountholders.
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(d) Banker must stop operating an account as soon as a notice of death,

insolvency, insanity etc., of any one account holder is received.
(e) The joint account holder, who is authorised to operate the joint account,
himself alone cannot appoint an agent or attorney to operate the account on
his behalf. Such attorneyor agent may be appointed with the consent of all
the joint account holders.
(f) If all the persons are operating the account, then banker must see that any
cheque drawn on him is duly signed by all.
(g) Banker must stop making payments as soon as letter of revocation is
obtained.
(h) Banker must see that no loan or overdraft is granted without proper
security.
XII. Joint Hindu Family
Joint Hindu family is an undivided Hindu family which comprises of all male
members descended from a common ancestor. They may be sons, grandsons and
great grandsons, their wives and unmarried daughters. “A joint, Hindu family is a
family which consists of more than one male member, possesses ancestral property
and carries on family business.”
Therefore, joint Hindu family is a legal institution. It is managed and
represented in its dealings and transactions with others by the Kartha who is the
head of the family. Other members of the family do not have this right to manage
unless a particular member is given certain rights and responsibilities with
common consent of the Kartha. The banker has to exercise greater care in dealing
with this account.
(a) He must get complete information about the joint Hindu family including the
names of major and minor coparceners and get a declaration from the
Kartha to this effect along with specimen signatures and signatures of all
coparceners.
(b) The account should be opened either in the personal name of the Kartha or
in the name of the family business.
(c) The documents should be signed by the Kartha and major coparceners.
(d) The account should be operated on only by the Kartha and the authorised
major coparceners.
(e) While making advances, the banker should ascertain the purpose for which
the loan is obtained and whether the loan is really needed by the joint Hindu
family for business.
XIII. Trustees
According to the Indian Trusts Act, 1882, “a trust is an obligation annexed to
the ownership of property and arising out of a confidence reposed in an accepted by
the owner, or declared and accepted by him, for the benefit of another, or of
another and the owner.” As per this definition, a trustee is a person in whom the
author or settler reposes confidence and entrusts the management of his property
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for the benefit of a person or an organisation who is called beneficiaries. A trust is

usually formed by means of document called the “Trust Deed.”
While opening an account in the names of persons in their capacity as trustees
the banker should take the following precautions:
(a) The banker should thoroughly examine the trust deed appointing the
applicants as the trustees.
(b) A trust deed which states the powers and functions of trustees must be
obtained by the banker.
(c) In case of two or more trustees, the banker should ask for clear instructions
regarding the person or persons who shall operate the account.
(d) In case of death or retirement of one or more trustees, banker must see the
provision of the trust deed.
(e) The banker should not allow the transfer of funds from trust account to the
personal account of trustee.
(f) The banker should take all possible precautions to safeguard the interest of
the beneficiaries of a trust, failing which he shall be liable to compensate the
latter
(g) for any fraud on the part of the trustee.
(h) The insolvency of a trustee does not affect the trust property and the
creditors of the trustee cannot recover their claims from trust property.
(i) A copy of the resolution passed in the meeting of trustees open the account
should be obtained.
6.3.3. Procedure and practice in opening the different accounts for Minors
Children’s bank accounts help parents create a corpus for their children and
teach thembasics of money management. Such accounts are called “Minor”
accounts. A minor is a person who has not attained 18 years of age.
Who can open?
 A natural guardian on behalf of the minor.
 A natural guardian, jointly with the minor.
 A legal guardian in the name of the minor.
 A minor of age 10 and above in his/her name to be operated by the minor.
 The usual account opening form can be filled up to open a minor account.
Details
 like the minor’s name, address, guardian details an d signature must be
furnished.
Following documents need to be furnished
 Proof of minor’s date of birth
 KYC documents of the guardian.
 Aadhaar card of the minor.
 Specimen signature of guardian.
 Minor’s specimen signature in case he/she is 10 years old.
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Operation of account
For accounts of minors below 10 years of age, the guardian must operate the
account. However, minors over 10 years of age can operate the account on their
own. Upon turning 18 years Once the minor turns 18, the account has to be
designated as a regular savings account. Thereafter, the guardian cannot operate
the account on the account holder’s behalf. An application form along with KYC of
minor turned major needs to be furnished .
II) Steps in opening the accounts for Joint Account holders
 A bank account can be operated by a single account holder (or) multiple
account holders.
 The joint account option can be chosen while opening an account or
whenever it is required.
 This is a simple option which is available on Account opening application
form.
 Ensure why to open a joint account? - Who can be your joint account
holder(s)? Trust and relationship equation weigh a lot while choosing the
joint - account options.
Types of Joint Accounts in India
There are different types of joint accounts offered by banks, based on the mode of
operation and accessibility.
Either (or) Survivor
 This is the most common form of joint account. Only two individuals can
operate the account i.e., primary account holder and secondary account
holder. Both can access the account and transfer the funds.
 The final balance and interest (if any) will be paid to the survivor on death of
anyone of the account holders. The survivor can opt to continue the
account.
 If the nominee is a different person then the balance money is paid to
him/her after the death of the survivor. Example: Mother and daughter can
open a joint account.
On death of anyone of them, the surviving person can continue the account
or get the account balance transferred to her name.
Anyone (or) Survivor
This is similar to “either or survivor” option. The only difference is, more than
two individuals can operate the account.
Former (or) Survivor
In this type of joint account, only the first account holder (primary) can access
and operate the account till the time he/she is alive. The second account holder
(second applicant) can operate the account only on death of the primary holder
(first applicant). The survivor can also get the balance transferred to his/her name
(if required).
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Latter (Or) Survivor

This is similar to “former/survivor” option. The main difference is, only the
second account holder can access and operate the account till the time he/she is
alive. The primary/first account holder can operate the account only on death of
the secondary account holder.
Jointly
In this type of account, all the transactions need to be signed and mandated
by all the account holders. If any of the account holder dies then the account
cannot be further operated. The balance proceeds shall be payable to survivor.
Jointly or Survivor
This is similar to “jointly” option. The only difference being, the survivor can
continue to operate the account. Alternatively, the proceeds of the account can be
transferred to his/her name. Along with the above options there is another type
which is “Minor Account.”
If the primary account holder is less than 18 years of age then there should be
an adult guardian, as a joint account holder. The various types of joint accounts
provide lot of advantages like ease of operating the account, convenience, rights of
survivorship etc.
III) Procedure for Partnership Firm Bank Account Opening:
A partnership is easy to form since no complex business formalities are
required to be fulfilled. Partnership registration is not compulsory and in at the
discretion of the partners whether they want to register the documents – required –
partnership –registration
India partnership firm or not. But a partnership firm cannot avail legal
benefits if it is not registered, hence it is always advisable to register it. Documents
required for partnership formation (whether registered or not) are:
 Partnership Deed
 Documents of Firm
 Documents of Partners
 Additional Documents in case of Registration
 GST Registration
 Current Bank Account
IV) Procedure for Joint Stock Company Account Opening
It is an association of individuals for the purpose of profit. The members
contribute capital. This common capital is divided in to shares. Each member is a
shareholder. These shares are transferable. While opening such account the banker
should be very careful and he should adopt the following precautions
Checking of Documents
A banker must check the following documents of the certificates of incorporation. It
is issued by
1. The registrar of Joint Stock Company.
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2. Certificate of business commencement.

3. Memorandum of Association.
4. Articles of Association
V) Checking Of Resolution
 Resolution of the company must be checked. It must be signed by the
chairman and secretary of the company. It must contain the following
documents:
 The name of authorized persons who will operate the account of the
company.
 The name of persons who will execute the documents on behalf of the
company.
 All types of conditions related to powers about borrowing lending,
mortgaging delegated by the company must be checked carefully by the
banker.
Directors Accounts in the same Bank
Accounts of company and personal accounts of the directors should be in the
same bank. A bankers should keep an eye that there should be no wrongful
conversion of funds between the two.
Checking of Limit
A banker must check that a company may not use the power of borrowing
than the fixed limit.
Winding Up Case
If company is wound up and liquidator is appointed the banker will stop the
payments till the instructions of the liquidator.
Charges within Prescribed Limit
The banker of a company will also check that company has got the charges of
mortgages within the prescribed limit or not. While opening the partnership
account following precautions must be taken by the banker
1) The account must be opened in the name of firm. Partnership deed and
changes made in it time to time must be studied carefully by the banker.
2) It is necessary that all the partners should sign on all the documents. All the
instructions about the operation of the account must be signed by all the
partners.
3) The specimen signatures on cards must be taken from the partners and
authorized person who will operate the accounts.
4) In case of advancing loan and execution of guarantee deed the banker will
obtain the signatures of all the partners.
5) A banker must observe the various provisions of Partnership Act in case of
death, entry or withdrawal of any partner.
6) A declaration and consent must be taken by the banker from all the
partners in regard to the drawing and disbursement.
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6.3.4. Non - Resident Individuals (NRIs)

Non - Resident Indian means, a person, being a citizen of India or a person of
Indian origin residing outside India. A person is considered Indian Origin when he
or his parents or any of his grandparents were Indian National. If at any time held
an Indian passport, (nationals of Bangladesh and Pakistan are not deemed to be of
Indian origin), a spouse (who is not a Bangladesh or Pakistan national), of a person
of Indian origin shall also be deemed to be of Indian origin.
Non - resident falls generally into the following two categories: A person who
stay abroad for the purpose of employment or to carry on business activities or
vocation or for any other purpose for an indefinite period of stay outside India and
working abroad for a specific period.
NRI stands for non-resident Indian account and this account has the purpose
of repatriate money that was earned by a person of Indian origin overseas back to
India and another purpose of the NRI account is to keep the money earned in India
inside India. NRI accounts are for people who live in other countries or work or visit
other countries for a season or also for people who are in India but who receive
earnings from foreign countries. One person has the option of either opening a NRE
account non-resident rupee account or a NRO account non-resident ordinary
account.
6.3.5. Classification of NRI Account
A) NRO Savings Account/Fixed Deposit Account
NRO Accounts are maintained in INR. This means that when you deposit the
money in the NRO Account, the foreign currency is converted to Indian rupees at
the prevailing foreign exchange rates.
 It is used to house funds from your income that you have earned from India
or abroad.
 Income like rent, dividend, pension, etc. can be sent abroad through the
NRO Account.
 Interest income earned on the amount in an NRO Account is liable for TDS
or Tax Deductible at Source.
 Other NRIs or resident Indians as joint account holders on NRO Accounts.
B) Non-Resident External (NRE) Savings Account/ Fixed Deposit Account
 NRE Accounts are maintained in INR. This means that when you deposit the
money in the NRE Account, the foreign currency is converted to Indian
rupees at the prevailing foreign exchange rates.
 It is mainly used to house your savings from income that you have earned
abroad.
 The principal amount, as well as the interest, are fully reparable, i.e.,
transferable.
 The interest income earned on the amount in an NRE account is non-taxable
in India.
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 You can have other NRIs or Resident Indians as joint account holders on
NRO Accounts
C) Foreign Currency (Non - Resident) Accounts (Banks) Scheme (FCNR (B) Accounts).
 Foreign Currency Non -Resident Accounts have to be opened and
maintained in foreign currency.
 The principal amount and the interest in an FCNR Account are fully
reparable, i.e., transferable
 Interest income earned on your money in an FCNR account is non-taxable in
India.
6.3.6. Different Types of Accounts in A Bank
A bank account is a financial account maintained by a bank for a customer. A
bank account can be a deposit account, a credit card account, a current account,
or any other type of account offered by a financial institution, and represents the
funds that a customer has entrusted to the financial institution and from which
the customer can make withdrawals. Alternatively, accounts may be loan accounts
in which case the customer owes money to the financial institution.
The financial transactions which have occurred within a given period of time
on a bank account are reported to the customer on a bank statement and the
balance of the accounts at any point in time is the financial position of the
customer with the institution.
The laws of each and every country specify the manner in which accounts may
be opened and operated. They may specify who may open an account, for example,
how the signatories can identify themselves, deposit, withdrawal limits among other
specifications. The minimum age for opening a bank account is 18 years old in
most countries. However, in some countries, the minimum age to open a bank
account is 16 years old. After going through this unit, you will be able to
understand the different types of accounts in banking sectors.
Various types of Accounts
1. Saving Account
2. Regular Savings
3. Current Account
4. Recurring Deposit Account
5. Fixed Deposit Account
6. DEMAT Account
7. NRI Accounts
1. Saving Account
a) Basic Savings Bank Deposit Accounts (BSBDA)
 This account will be considered as normal banking service.
 For this account, maintenance of minimum balance is not required.
 ATM card/ ATM cum Debit card, Rupay card will be given for the account
holders.
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 There are going to be no limit on the number of deposits that can be made in
a month but, account holders will be allowed most of 4 withdrawals in a
month, which includes ATM withdrawals also.
 The above facilities will be given without any charge. There will be no charge
levied for non-operation/ activation of in-operative basic saving bank deposit
account.
 For this account, overdraft facility will be provided up to Rs. 5000/-.
b) Basic Saving bank Deposit Accounts Small scheme (BSBDS)
 These are accounts with relaxed KYC, with a minimum document
requirement of self-attested address proof & photograph.
 Total credit should not exceed 1Lakh rupees in a year.
 Maximum balance should not exceed Rs. 50,000/- at any time.
 Cash withdrawals & transfers must not exceed Rs.10, 000/- in a month.
 Remittance from foreign account cannot be credited to this account without
completing normal KYC formalities.
 This account can be opened only at Core Banking Solution linked branches
of banks or at such branches, where it is possible to manually monitor the
fulfillments of the conditions.
2. Regular Savings
Any resident individual- single accounts, two or more individuals in joint
accounts, Associations, clubs etc., are eligible for this account.
 Modest credit option available to the depositor.
 Two free cheque books will be issued per year.
 Internet banking facility will be provided without any charge.
 Balance enquiry, NEFT, Bill payment, Mobile recharge etc., are provided
through mobile phones.
 Students can open this account with zero balance by providing the required
documents.
3. Current Account
Any resident individual- single accounts, two or more individuals in joint
accounts, associations, Limited companies, Religious Institutions, Educational
Institutions, Charitable Institutions, clubs etc., are eligible for this account.
 Payments can be done unlimited number of times.
 Funds can be remitted from any part of the country to the corresponding
account.
 Overdraft facility will be available.
 Internet banking facility is available.
4. Recurring Deposit Account
 Cumulative Deposit Scheme
 Any resident individual- single accounts, two or more individuals in joint
accounts, Associations, clubs, Institutions/Agencies specifically permitted
by the RBI etc., are eligible to open this account in single/joint names.
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 Periodic/Monthly installments can be for any amount starting from as low

as Rs.50/- onwards.
 Account can be opened for any period ranging from 6 months to 120
months, in multiple of 1 month.
 The amount selected for installment at the start of the scheme will be
payable every month.
 The number of installments once fixed, cannot be altered.
 Approved rate of interest is compounded every quarter.
 The amount after maturity will be paid to customers one month after the
deposit of the last installment.
 Pass book will be given to the depositor.
 TDS will be applicable on the interest, as per the latest changes in the
Income Tax Act on cumulative deposits also.
5. Fixed Deposit Account
a) Short deposit receipt
 Banks accepts deposits from customers varying from 7 days to a maximum
of 10 years.
 The period of 7 days & above but not exceeding 179 days deposits is
classified as ‘Short Deposits’.
 The minimum amount that can be deposited under this scheme is Rs.5 lakh
for a period of 7-14 days.
 b) Fixed deposit receipt
 Any resident individual- single accounts, two or more individuals in joint
accounts, associations, minors, societies, clubs etc., are eligible for this
account.
 The minimum FDR in metro & Urban branches is Rs.10,000/- & in Rural &
Semi urban & for Senior citizens is Rs.5000/- .
 For the subsidy kept under the government sponsored schemes, Margin
money, earnest money and court attached/ordered deposits, minimum
amount criteria will not be applicable.
 Depositors may ask for repayment of their deposits before maturity.
Repayment of amount before maturity is allowable.
 Interest rate differs from bank to bank depending upon the tenure of the
deposits & as when the bank changes the rate.
 Additional interest of 0.50% is offered for senior citizens on deposits placed
for a year and above.
6. Demat Account
 Used to conduct stress-free transactions on the shares.
 An individual, Non-Resident Indian, Foreign Institutional Investor, Foreign
National, Corporate, Trusts, Clearing Houses, Financial Institution, Clearing
Member, Mutual Funds, Banks and Other Depository Account.
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 For opening this account, an individual has to fill a form, submit a photo of
the applicant along with a photocopy of Voter ID/ Passport/ Aadhar card/
Driving License &Demat account number will be provided to the applicant
immediately after the completion of processing of the application.
 Facilities provided under this account are- Opening and maintaining of
Demat accounts, Dematerialization, Rematerialization, Purchases, sales,
Pledging and Unpledging, safe custody.
7. NRI Account
 NRO( Non-Resident Ordinary Rupees) Account
 NRE( Non-Resident External Rupees) Account
 FCNR (Foreign Currency Non-Resident) Account .
6.4 REVISION POINTS
1. Special Types of Customers:
Special types of customers are those who are distinguished from other types
of ordinary customers by some special features. Hence, they are called
special types of customers.
2. Trustees:
A trustee is a person in whom the author or settler reposes confidence and
entrusts the management of his property for the benefit of a person or an
organisation who is called beneficiaries.
3. Non - Resident Indian
Non - Resident Indian means, a person, being a citizen of India or a person
of Indian origin residing outside India.
6.5 INTEXT QUESTIONS
1. Enumerate the different types of Customers.
2. Explain the provision relating to (i) Minor
(ii) Insolvents
(iii) Joint Hindu Family
3. Summarize the procedure relating to opening of accounts for a Partnership
firm.
4. State the documents to be submitted by a company at the time of opening
an account.
5. Discuss the formalities to be adopted by a banker while opening an account
for Clubs, Associations and Educational Institutions.
6. Categorize the different types of NRI accounts.
7. Explain the different types of accounts that can be opened with the bank.
6.6 SUMMARY
The word customer signifies a relationship in which duration is not of essence.
A person whose money has been accepted by the banker on the footing that he
undertakes to honour cheques unto the amount standing to his credit is a
customer of the bank irrespective of whether his connection is short or long
duration. For accounts of minors below 10 years of age, the guardian must operate
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the account. However, minors over 10 years of age can operate the account on their
own. An account may be opened by the bank in the name of a married woman as
she has the power to draw cheques and give valid discharge. A person is said to be
illiterate when he does not know to read and write. No current account should be
opened in the name of an illiterate person. However, a savings bank account may
be opened in the name of such a person. There are different types of joint accounts
offered by banks, based on the mode of operation and accessibility. A bank account
can be a deposit account, a credit card account, a current account , or any other
type of account offered by a financial institution, and represents the funds that a
customer has entrusted to the financial institution and from which the customer
can make withdrawals.
6.7 TERMINAL EXERCISE
1. Banks are called public conservators of _________________________.
2. The financial market for long-term funds is known as _____________.
3. Accepting a bill and making it payable at the bank is called _______________.
6.8 SUPPLEMENTARY MATERIALS
1. icsi.edu
2. rbi.org.in
3. money control.com
6.9 ASSIGNMENTS
1. Get a detailed report on the total number of customer available nearby your
public and private sector bank.
6.10 SUGGESTED READINGS
1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd., Chennai.
2. Arunajatesan S 2017, Technology in Banking Margham Publications,
Chennai.
3. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication, New Delhi.
6.11 LEARNING ACTIVITIES
1. What are the procedures to open a bank account?
6.12 KEY WORDS
1. Testamentary Guardian, Lunatics, Insolvents, Joint Stock Company, Either
Or Survivor.

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LESSON – 7
CREDIT APPRAISAL
7.1 INTRODUCTION
Credit appraisal means an investigation/assessment done by the bank prior
before providing any loans and advances/project finance and also cheeks the
commercial, financial and technical viability of the project proposed its funding pattern
and further checks the primary and collateral security cover available for recovery of
such funds. Credit appraisal is a process to ascertain the risks associated with the
extension of the credit facility. It is generally carried by the financial institutions which
are involved in providing financial funding to its customers.
7.2 OBJECTIVES
After studying this lesson, student can understand the general rules of Sound
lending, Forms of Advances, Credit Appraisal process, Determining Credit
worthiness, Sources of credit Information.
7.3 CONTENT
7.3.1. General Rules of Sound lending
7.3.2. Types of Advances in Banking
7.3.3. Concept of Credit Appraisal
7.3.4. Steps Involved in Credit Appraisal Process
7.3.5. Determining Credit worthiness
7.3.6. Common Sources of credit Information.
7.3.1. General Rules of Sound lending
A banker must be extra careful while granting loans. A banker should take the
following precautions:
1. Safety
The most important golden rule for granting loans is the safety of funds. The
main reason for this that the very existence of the bank is dependent upon the
loans granted by him. In case the bank does not get back the loans granted by it, it
might fail.A bank cannot and must not sacrifice the safety of its fund to get a higher
rate of interest.
2. Liquidity
Liquidity means the possibility of converting loans into cash without loss of time
and money. The funds with the bank out of which he lends money are payable on
demand or short notice. As such a bank cannot effort to block its funds for a long time.
Hence, the bank should lend only short term requirements like working capital. The
bank cannot and should not lend for long term requirements, like fixed capital.
3. Return or Profitability
The funds of the bank should be invested to earn the highest return, so that it
may pay a reasonable rate of interest to its customers on their deposits, reasonably
good salaries to its employees and a good return to its shareholders. However, a
bank should not sacrifice either safety or liquidity to earn a high rate of interest. Of
 72

course, if safety and liquidity in a particular case are equal, the banker should lend
its funds to aa person who offers a higher rate of interest.
4. Diversification
A bank should not invest all its funds in one industry. In case that industry
fails, the banker will not be able to recover his loans. Hence, the bank may also fail.
According to the principle of diversification, the bank should diversify its
investments in different industries and should give loans to different borrowers in
one industry. It is less probable that all the borrowers and industries will fail at one
and at the same time.
5. Object of Loan
A banker should thoroughly examine the object for which his client is taking
loans. This will enable the bank to assess the safety and liquidity of its investment.
A banker should not grant loans for unproductive purposes or to buy the fixed
assets. The bank may grant loans to meet working capital requirements. However,
after the nationalization of banks, the banks have started granting loans to meet
loan term requirements. As per prudent banking policy, it is not desirable because
of term lending by banks a large number of banks had failed in Germany.
6. Security
A banker should grant secured loans only. In case the borrower fails to return
the loan, the banker may recover his loan after realizing the securing. In the case of
unsecured loans, the chances of bad debts will be very high. However, the bank
may have to relax the condition of security in order to comply with the economic
policy of the government.
7. Margin Money
In the case of secured loans, the bank should carefully examine and value the
security. There should be a sufficient margin between the number of loans and the
value of the security. If an adequate margin is not maintained, the loan might become
unsecured in case the borrower fails to pay the interest and return the loan.
The amount of loan should not exceed 60 to 70% of the value of the security. If
the value of the security is falling, the bank should demand further security
without delay. In case a person fails to do so, the loan might become unsecured
and the bank has to suffer a loss on account of bad debt.
8. National Interest
Banks were nationalized in India to have social control over them. As such,
they are required to invest a cetin percentage of loans and advances in priority
sectors, viz, agriculture, small scale, and tiny sector, and export-oriented
industries, etc. Again, the Reserve Bank also gives directives in this respect to the
scheduled banks from time to time. The banks are under obligation to comply with
those directives.
9. The Character of the Borrower
The bank should carefully examine the character of the borrower. Character
implies honesty, integrity, creditworthiness, and capacity of the borrower to return
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the loan. In case a person fails to verify the character of the borrower, the loans and
advances might become bad debts for the bank.
7.3.2Types of Advances in Banking
 Cash credit
 Overdraft
 Loans
 Demand loan vs. term loan
 Secured vs. unsecured loan
 Participation loan or consortium loan
 Purchasing and discounting bills.
Cash Credit
Cash Credit is an arrangement by which the customer can borrow money up
to a certain limit known as the ‘cash credit limit.’ Usually, the borrower is required
to provide security in a pledge or hypothecation of tangible securities. Sometimes,
this facility is also provided against personal security.
This is a permanent arrangement, and the customer need not draw the
sanctioned amount at once but draw the amount as and when required.
He can put back any surplus amount which he may find with him. Thus cash
credit is an active and running account to which deposits and withdrawals may be
affected frequently interest is charged only for the amount withdrawn and not for
the whole amount approved. If the customer does not use the cash limit to the foil
extent, the bank makes a commitment charge. This charge is imposed on the un-
utilized portion of cash credit only.
Cash credit provides an elastic form of borrowing since the limit fluctuates
according to the needs of the business. Cash credits are the most favorable mode of
financing by large commercial and industrial concerns.
Overdraft
Overdraft as “a loan made to a customer with a cheque account at a bank or
building society, in which the account is allowed to go into debt, usually up to a
specified limit.”
According to the Cambridge Advanced Learner’s Dictionary, overdraft means
“an amount of money that a customer with a bank account is temporarily allowed
to owe to the bank or the agreement which allows this.”
The Economist defines an overdraft as “a credit facility that allows borrowers
to draw upon it (up to a specified limit) as and when they need to. Borrowers pay
only for what they use”.
Overdraft is an arrangement between a banker and his customer by which the
latter is allowed to withdraw over and above his credit balance in the current
account up to an agreed limit. This is only a temporary accommodation usually
granted against security.
 74

The borrower can draw and repay any number of times, provided the total
amount overdrawn does not exceed the agreed limit. The interest is charged only for
the amount drawn and not for the whole amount sanctioned.
A cash credit differs from an overdraft in one respect. Cash credit is used for
the long-term by businesses in regular business, whereas overdraft is made
occasionally and for a short duration.
Banks sometimes grant unsecured overdrafts for small amounts to customers
having a current account with them. Such customers may be government
employees with fixed incomes or traders.
Temporary overdrafts are permitted only where a reliable source of funds is
available to a borrower for repayment.
LOANS
Loan is the “money lent on condition by a bank that it is repaid, either in
installments or all at once, on agreed dates and usually that the borrower pays the
lender an agreed rate of interest.
Bank loan as “a specified sum of money lent by a bank to a customer, usually
for a specified time, at a specified rate of interest.”
A loan means “a sum of money which is borrowed, often from a bank, and has
to be paid back, usually together with an extra amount of money that you have to
pay as a charge for borrowing.”
Loans is a “a formal agreement between a bank and borrower to provide a fixed
amount of credit for a specified period.”
Ease of loan, the banker advances a lump sum for a certain period at an
agreed rate of interest- The entire amount is paid on occasion either in cash or by
credit in his current account, which he can draw at any time. The interest is
charged for the full amount sanctioned whether he withdraws the money from his
account or not.
The loans may be repaid in installments or at the expiry of a certain period.
The loan may be made with or without security. Once repaid in full or in part, a
loan cannot be withdrawn again by the customer. In case a borrower wants a
further loan, he has to arrange for a fresh loan.
Demand Loan Vs. Term Loan
A demand loan is payable on demand. It is for a short period and is usually
granted to meet the working capital needs of the borrower. Term loans may be
medium-term or long-term. Medium-term loans are granted for a period ranging
from one year to five years for vehicles, tools, and equipment. Long-term loans are
granted for capital expenditures such as the purchase of land, construction of
factory building, purchase of new machinery, and modernization of plant.
Secured Vs. Unsecured Loan
According to section 5(e) of the Bank Companies Act, 1991, “Secured loan or
advance means such a loan or advance as made against the security assets, the
 75

market value of which is not at any means less than the amount of such loan or
advance and unsecured loan or advance is that loan or advance or part of it does
not require sanctioning against the security.”
Participation Loan or Consortium Loan
One loan is granted by more than one financing agency, termed a participation
or consortium loan. Such participation becomes necessary where either the risk
involved is too large for one or more of the participating institutions to take
individually or there are administrative or other difficulties in servicing and
following up the loan.
Purchasing and Discounting Bills
Bills of exchange, as defined in the Negotiable Instruments Act, as “an
instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay (on-demand or at a fixed or determinable future
time) a certain sum of money only to, or to the order of, a certain person or the
bearer of the instrument.”
Banks grant advances to their customers by discounting bills of exchange. The
net amount, after deducting the amount of interest/discount from the amount of
the installment, is credited to the account of the customer.
In this form of lending, the interest is received by the banker in advance.
Banks sometimes purchase the bills instead of discounting them.
Bills accompanied by the document of title to goods such as bills of lading or
railway receipt are purchased by the bankers. In such cases, the banker grants a
loan in the form of overdraft or cash credit against the security of the bills.
The term ‘bill purchased’ seems to imply that the bank becomes the purchaser
or owner of such bills. But in almost all cases, the bank holds the bill only as a
security for the advance.
7.3.3. Concept of Credit Appraisal
The process by which a lender appraises the creditworthiness of the
prospective borrower is known as Credit Appraisal. This normally involves
appraising the borrower's payment history and establishing the quality and
sustainability of his income. The lender satisfies himself of the good intentions of
the borrower, usually through an interview. Some requirements for credit appraisal
are as follows :
 The credit requirement must be assessed by all Indian financial institutions
or specialized institutions set – up for this purpose.
 Wherever financing of infrastructure project is taken up under a
consortium/syndication arrangement - bank's exposure shall not exceed
23%.
 Bank may also take up financing infrastructure project independently
exclusively in respect of borrowers promoters of repute with excellent past
record in project implementation.
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 In such cases/due diligence on the inability of the projects are well defined
and assessed. State Government guarantee may not be taken as a substitute
for satisfactory credit appraisal.
Generally everyone becomes optimistic during the upswing of the business
cycle, but tend to forget to see how the borrower will be during the downturn, which
is a shortsighted approach. Furthermore greater emphasis is given on financials,
which are usually outdated; this is further exacerbated by the fact that a
descriptive approach is usually taken, rather than an analytical approach, to the
credit. Thus a forward looking approach should also be adopted, since the loan will
be re-paid primarily from future cash flows, not historic performance; however both
can be used as good repayment indicators.
7.3.4. Steps Involved in Credit AppraisalProcess
Credit appraisal is done to evaluate the creditworthiness of a borrower. The credit
appraisals for any organisation basically follow these steps
 assessment of credit need
 financial statement analysis, and financial ratios of the company
 credit rating
 Working capital requirement
 term loan analysis
 submission of documents,
 NPA classification and recovery.
Benefits Of Credit Appraisal: The benefits of credit appraisal are as follows :
 Reduces risk involved in the loans provided for a project.
 Increase confidence among the corporate bankers and improved sales
decision.
 Reduces NPA (Non-Performing Assets) and possibility of financial loss.
 Proper assessment is done with different options.
Types of credit provided by Bank:
(a) There are four basic types of credit
(b) Service credit is monthly payments for utilities such as telephone, gas,
electricity, and water. One has to pay a deposit and late charge if payment is
not on time.
(c) Loans can be for small or large amounts and for a few days or several years.
Money can be repaid in one lump sum or in several regular payments
until the amount one borrowed and the finance charges are paid in full.
Loans can be secured or unsecured.
(d) Installment credit may be described as buying on time, financing through
the store or the easy payment plan. The borrower takes the goods home in
exchange for a promise to pay later. Cars, major appliances, and
furniture are often purchased this way. One usually sign a contract, make a
down payment, and agree to pay the balance with a specified number of
equal payments called installments. The finance charges are included in the
payments. The item one purchase may be used as security for the loan.
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(e) Credit cards are issued by individual retail stores, banks, or businesses.
Using a credit card can be the equivalent of an interest-free loan-if one pay
for the use of it in full at the end of each month.
7.3.5. Determining Credit worthiness
The process of credit appraisal is as follows:
1) Credit Processing:
Credit processing is the stage where all required information on credit is
gathered and applications are screened. Credit application forms should be
sufficiently detailed to permit gathering of all information needed for credit
assessment at the outset. In this connection, financial institutions should have a
checklist to ensure that all required information is, in fact, collected.
2) Credit-Approval:
A financial institution must have in place written guidelines on the credit
approval process and the approval authorities of individuals or committees as well as
the basis of those decisions. Approval authorities should be sanctioned by the board of
directors. Approval authorities will cover new credit approvals, renewals of existing
credits, and changes in terns and conditions of previously approved credits,
particularly credit restructuring, all of which should be fully documented and
recorded. Prudent credit practice requires that persons empowered with the credit
approval authority should not also have the customer relationshipresponsibility.
3) Credit Documentation:
Documentation is an essential part of the credit process and is required for
each phase of the credit cycle, including credit application, credit analysis, credit
approval, credit monitoring, collateral valuation, and impairment recognition,
foreclosure of impaired loan and realization of security. The format of credit files
must be standardized and files neatly maintained with an appropriate system of
cross-indexing to facilitate review and follow-up. Documentation establishes the
relationship between the financial institution and the borrower and forms the basis
for any legal action in a court of law. Institutions must ensure that contractual
agreements with their borrowers are vetted by their legal advisers. Credit
applications must be documented regardless of their approval or rejection. All
documentation should be available for examination by the Bank of Mauritius.
4) Credit Administration:
Financial institutions must ensure that their credit portfolio is properly
administered, that is, loan agreements are duly prepared, renewal notices are sent
systematically and credit files are regularly updated. An institution may allocate its
credit administration function to a separate department or to designated individuals in
credit operations, depending on the size and complexity of its credit portfolio.
A financial institution's credit administration function should, as a minimum,
ensure that:
(i) Credit files are neatly organized, cross-indexed, and their removal from the
premises is not permitted.
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(ii) The borrower has registered the required insurance policy in favor of the
bank and is regularly paying the premiums.
(iii) The borrower is making timely repayments of lease rents in respect of
charged leasehold properties.
(iv) Credit facilities are disbursed only after all the contractual terms and
conditions have been met and all the required documents have been
received;
(v) Collateral value is regularly monitored.
(vi) The borrower is making timely repayments on interest, principal and any
agreed to fees and commissions.
5) Disbursement:
Once the credit is approved, the customer should be advised of the terms and
conditions of the credit by way of a letter of offer. The duplicate of this letter should
be duly signed and returned to the institution by the customer. The facility
disbursement process should start only upon receipt of this letter and should
involve, inter alia, the completion of formalities regarding documentation, the
registration of collateral, insurance cover in the institution's favor and the vetting of
documents by a legal expert. Under no circumstances shall funds be released prior
to compliance with pre-disbursement conditions and approval by the relevant
authorities in the financial institution.
6) Monitoring and Control of Individual Credit :
To safeguard financial institutions against potential losses, problem facilities
need to be identified early. A proper credit monitoring system will provide the basis
for taking prompt corrective actions when warming signs point to deterioration in
the financial health of the borrower. Examples of such warning signs include
unauthorized drawings, arrears in capital and interest and deterioration in the
borrower's operating environment. Financial institutions must have a system in
place to formally review the status of the credit and the financial health of the
borrower at least once a year. More frequent reviews (e.g at least quarterly) should
be carried out of large credits, problem credits or when the operating
7.3.6. Determining Creditworthiness
Information from Loan application
When an application for a credit card or loan, the following will be provided by
an borrower such as your name, address, annual income, you rent or own a home,
and monthly home payment. Creditors can use this data to help verify your identity
and pull your credit reports. They may plug the information into custom scoring
models, too.
Some of these metrics are well-known indicators of creditworthiness. For
example, a creditor could compare income to monthly debt obligations from the
credit reports and monthly housing payment to determine debt-to-income ratio. This
ratio could help to decide how much additional debt can be afforded to take on.
 79

If the lender requires sharing information about current savings or retirement

account balances, it may also consider whether those funds could use to repay a loan.
Collateral
For applying a secured loan, like an auto loan or mortgage, the lender will also
consider information about the property as collateral. The model and mileage on
the vehicle, or the appraised value of a home, could be important factors in
determining whether the borrower will get the loan.
Credit scores
Many companies use a credit score or scores to help evaluate an applicant,
and some may require that you have credit scores above a certain point to qualify
for the credit card or loan application.
Companies can use credit scores, such as FICO or Vantage Score credit
scores, along with the applicant’s credit reports. Some creditors may also use a mix
of custom and generic scores. But smaller financial institutions tend to rely on
generic models. Mortgage lending is a special case, and most mortgage lenders use
specific versions of FICO® scoring models when underwriting a mortgage.
Credit bureau data
The credit reports contain information about the applicant ‘s history with
loans, credit cards and credit lines. Creditors may use information directly from
credit reports to determine creditworthiness, such as using current monthly
obligations to determine credit reports could also indirectly impact application
because most generic credit scores are based entirely on the information in credit
reports. However, some bureaus are starting to look at non- traditional data as well.
User-provided data
Some companies have started to use other types of financial information that
people are sharing with the company during the application process.
One example is Petal, a credit card company that doesn’t require applicants to
have credit scores, or even a credit report, to qualify. Petal will then analyze
information to determine if the applicant qualify for the card.
By getting access to bank accounts, companies like Petal can look for insights
and trends in the account history of the applicant like saving money, average savings
balance and how much money flows into and out of your account each month.
The creditworthiness could even depend on when the applicant’s apply, as
creditors may loosen or restrict their requirements to meet different goals. But
knowing what information creditors consider could help to figure out how to
improve the chances of getting approved for a new account with favorable terms.
7.3.6. Common Sources of Credit Information
In finance, Credit Information means, information about a person’s or
company’s ability to pay the debt, examined especially by banks before they decide
to lend money. To bring the making of credits down to a systematic and scientific
basis there are four sources from which the credit man may draw: Mercantile
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agencies, reports from the trade, reports from the salesmen, reports from local
banks or attorneys.
(a) Mercantile Agencies
The report of a mercantile agency is the basis from which a credit man can
work, all additional information qualifying the report given him. His past experience
must determine its degree of accuracy and to what extent a report is to be
absolutely relied upon. The effect upon the merchant of the existence and
supervision of the agency, is a salutary one, giving an extra incentive to keep his
commercial record clean.
(b) Trade Information
By exchanging information with other credit men in the same or allied lines of
trade, many problems in credits may be simplified. Such information, however, has
the disadvantage of being slow to secure, as a merchant’s creditors may be widely
separated.
(c) Salesmen’s Reports
Information from salesmen, under ordinary conditions, is peculiarly valuable. The
salesman is posted as is no one else by frequent visits, knows the buyer’s strong and
weak points, the general condition of trade in the town and surrounding country, and
if shrewd, can intuitively sense the moral hazard of an account from actual contact
with all the conditions surrounding it. If a salesman reports his opinion of each risk
assumed by the house it does not take long to tell the value of his observations and
whether he possesses the capacity for giving a dependable rating.
(d) Local Sources
Information obtained from local sources is open to various faults, partiality or
hostility to the one reported on or indifference to the correctness of the report, being
among the number. Banks often take the attitude that they are not called upon to
make a report, particularly upon a customer, not a depositor and of whom they
have no accurate knowledge other than of a general nature. Attorneys’ reports are
of all kinds, frequently carelessly irresponsible, the ordinary attorney not being an
accurate judge of the financial condition of a business.
7.4 REVISION POINTS
i) Cash Credit:
Cash Credit is an arrangement by which the customer can borrow money up
to a certain limit known as the ‘cash credit limit.’
ii) Credit Appraisal
The process by which a lender appraises the creditworthiness of the
prospective borrower is known as Credit Appraisal.
iii) Credit bureau data
The credit reports contain information about the applicant ‘s history with
loans, credit cards and credit lines.
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7.5 IN TEXT QUESTIONS

1. Discuss the general rules relating to Sound Lending.
2. Enumerate the steps involved in the process of credit Appraisal.
3. Recall the Benefits of Credit Appraisal.
4. Analyse the ways adopted by a banker in scrutinizing the loan application of
a borrower to determine the credit worthiness.
5. Summarize the common Sources of Credit Information.
7.6 SUMMARY
A banker must be extra careful while granting loans.The process by which a
lender appraises the creditworthiness of the prospective borrower is known as
Credit Appraisal. This normally involves appraising the borrower's payment history
and establishing the quality and sustainability of his income. Credit appraisal is
done to evaluate the creditworthiness of a borrower. In finance, Credit Information
means, information about a person’s or company’s ability to pay the debt, examined
especially by banks before they decide to lend money. To bring the making of
credits down to a systematic and scientific basis there are four sources from which
the credit man may draw from Mercantile agencies, reports from the trade, reports
from the salesmen, reports from local banks or attorneys.
7.7 TERMINAL EXECSLS
1. Central bank also performs commercial banking business
a. True b. False
2. Bank does not give loan against
a. Gold ornaments b. LIC Policy c. Lottery ticket d. NSC
7.8 SUPPLEMENTARY MATERIALS
1. icsi.edu
2. rbi.org.in
3. money control.com
7.9 ASSIGNMENTS
1. What are the credit appraisal process of SBI.
7.10. SUGGESTED READINGS
1. Gurusamy S. 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd., Chennai.
2. Arunajatesan S 2017, Technology in Banking Margham Publications,
Chennai.
3. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication, New Delhi.
7.11 LEARNING ACTIVITIES
1. Understand the internal steps taken by the bank for scrutinizing the
customer’s details and credentials.
7.12 KEY WORDS
1. Consortium loan, purchasing and discounting bills, Credit appraisal.

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UNIT-IV : DEMONETIZATION AND REMONETIZATION

LESSON- 8

DEMONETISATION
8.1 INTRODUCTION
The withdrawal of currencies or other valuables by the central bank to be used
as the legal tender in the nation. Such currencies either turn into scrap or a
deposited in the banks or replaced by the new currencies.
Governments of many countries across the world have taken this drastic
measure to curb black money and stop the counterfeiting of currency notes. Some
countries failed miserably while others were successful in their goals behind
demonetization.
It refers to the decision of RBI/Government to recall the status of a currency
note to be used as a legal tender. Usually, all the currencies issued by RBI can be
used as a legal tender as the value they carry is promised by RBI and once the
value has been demonetized, the currency note cannot be used. Globally the central
banks follow a practice wherein older currency notes are recalled and new currency
notes with enhanced security features are issued to overcome the menace of
counterfeit currency.
8.2 OBJECTIVES
 After studying this lesson, student can understand the Concept of
Demonetisation, History of Demonetisation, Objectives of Demonetisation,
Advantages and Disadvantages of Demonetisation.
8.3 CONTENT
8.3.1. Concept of Demonetisation
8.3.2. History of Demonetisation in India
8.3.3. Objectives of Demonetisation in India
8.3.4. Advantages of Demonetisation
8.3.5. Disadvantages of Demonetisation
8.3.1. Concept of Demonetisation
Demonetisation is the process by which the demonetised notes cease to be
accepted as legal currency for any kind of transaction.
After demonetisation is done, the old currency is replaced by a new currency,
which may be of the same denomination or may be of a higher denomination. The
impact of changing the legal tender status of a currency unit has a huge impact on
the economic transactions that take place in an economy. Demonetisation can
cause unrest in an economy or it can help in stabilizing the economy from existing
problems. Demonetisation is usually taken by a country for various reasons.
8.3.2. History of Demonetisation in India: From 1946 To 2016
Demonetisation in India has taken place three in the years of 1946, 1978 and
2016. The whole country was taken aback when Prime Minister NarendraModi on
November 8 announced that the currencies in the denominations of Rs 500 and
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Rs1,000 will be invalid post-midnight. However, the lower denomination –Rs 10, Rs
20, Rs 50, Rs 100 and coins –will be valid. He further announced that new notes of
Rs 500 and Rs 2,000 would introduce shortly. Thus, giving millions of Indians a
panic attack but what do you think was this the first time an Indian currency was
banned of a sudden? Well, the answer is NO. A look into the past will make you
realize that India is no new to demonetization. Demonetization has been
implemented twice -1946 and 1978 – in the past.
a) The first currency ban: Demonetisation in 1946
The first demonetisation event happened in 1946, at that time the
denominations of Rs.1000 and Rs.10000 were removed from circulation. There was
a visibly low impact of the demonetisation as the higher denomination currencies
were not available to the common people.
In 1946, the currency notes of Rs 1,000 and Rs 10,000 were removed from
circulation. The ban really did not have much impact, as the currency of such
higher denomination was not accessible to the common people. However, both the
notes were reintroduced in 1954 with an additional introduction of Rs 5,000
currency.
Rs 500 and Rs 1000 notes were introduce in 1934 and after four years in
1938, Rs 10,000 notes were introduce. In 1954, these notes were again introduced
with an additional denomination of 5000.
b)The second currency ban: Demonetisation in 1978:
The second demonetisation in India took place in 1978, at that time the Prime
Minister was Morarji Desai. The Prime Minister of India Morarji Desai announced
the currency ban taking Rs 1000, Rs 5000 and Rs 10,000 out of circulation.
During the second demonetisation the denominations of 1000, 5000 and 10000
were taken out of circulation. The whole purpose of demonetisation was to reduce
the circulation of black money in the country.
c) The Third currency ban: Demonetisation in 2016:
 The latest demonetization was announced on 8th of November, 2016 by the
Prime Minister NarendraModi.
 During this demonetization the notes that were taken out of circulation were
the denominations of 500 and 1000.
Prime Minister NarendraModi also introduced new currency of denominations
500 and2000 after demonetization
Similarities in 1978 and 2016 ban:
 The note ban by Morarji Desai also aimed to drive away black money out of
circulation in the economy. Hence, The High Denomination Bank Notes
(Demonetization) Act was implemented.
 NarendraModi announced the currency ban is an address that was
broadcasted across all news channels. Similarly, Desai announced the ban
over the radio after which the banks were closed the following day.
 Both the affairs were kept confidential.
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 Demonetization is referred to as the process of stripping a currency unit of

its status to be used as a legal tender. In simple words, demonetization is
the process by which the demonetized notes cease to be accepted as legal
currency for any kind of transaction.
 After demonetization is done, the old currency is replaced by a new
currency, which may be of the same denomination or may be of a higher
denomination.
 The impact of changing the legal tender status of a currency unit has a huge
impact on the economic transactions that take place in an economy.
 Demonetization can cause unrest in an economy or it can help in stabilizing
the economy from existing problems. Demonetization is usually taken by a
country for various reasons.
Differences in the ban:
 Unlike Modi, Desai didn’t have the backing of the RBI Governor. The
Governor I.G. Patel believed that the ban was implemented simply to
immobilize the funds of the opposition party. Patel also believed that people
never store black money in the form of currency for too long.
 It didn’t have much effect on the people and affected only the privilege few.
While the recent ban in 2016 had shaken the whole country.
 Introduction of 8th November, 2016 resembled any other day in November in
India till Prime Minister NarendraModi took to national television on 20;00
hours IST, in an unscheduled address to the nation to announce the
demonetization of the Rupees 500 and Rupees 1000 currency notes of the
Mahatma Gandhi series with almost immediate effect.
 The ban on the two currencies which together accounted for almost 15.44
lakh crore or 86 % of the total currency in circulation in India was to be
enforced from midnight onwards i.e. roughly 4 hours from the time of
announcement leaving almost no time to the citizens to respond.
 The banned currencies were to be replaced by issuance of Rupees 2000 and
Rupees 500 currency notes of the Mahatma Gandhi New Series. The next
day, the 9th November, 2016 was declared a Bank holiday to allow the
banks to prepare for the sudden changes.
 The Prime Minister described his drastic action as a planned and concerted
action ‘a triple strike’ against black money, counterfeit currencies and
terrorism. What followed ranged from disbelief, chaos to general appreciation
for leader who had come to occupy the most powerful chair in the land on
the promise of weeding out the almost endemic corruption, and black money
in the country.
 There was widespread disruption in the economy. The two major stock
market benchmark namely BSE Sensex crashed nearly 1,689 points or 6.12
% while Nifty fell by over 541 points or 6.33%2.
 Huge lines were seen across the country at select Public sector Banks for
exchange of old currencies with the new ones.
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 Definition of Demonetization: Demonetization is the act of stripping

a currency unit of its status as legal tender. It occurs whenever there is a
change in national currency. The current form or forms of money is pulled
from circulation and retired, often to be replaced with new notes or coins.
Sometimes, a country completely replaces the old currency with a new
currency.
8.3.3. Objectives of Demonetization
The objectives of demonetization are as follows:
 To stop the circulation of black money in the market.
 To help in reducing the interest rates of the prevalent banking system
 To help in creation of cashless economy
 To formalize the informal Indian Economy.
 To remove counterfeit notes from the market.
 To help reduce anti-social activities and their finances.
 To tackle the menace of black money/parallel economy/shadow economy.
 The cash circulation in India is directly connected to corruption hence we
want to reduce the cash transactions and also control corruption and
thereby move towards cashless transactions.
 To counter the menace of counterfeit currency.
 To prevent the cash being used for terrorist activities.
8.3.4. Advantages of Demonetization
Getting fake currency out of circulation: Demonetization can also be used to
get fake currency out of circulation in a country’s economy since such currencies
cannot be deposited in banks and other financial institutions.
Controlling inflation: When inflation really gets out of hand, one solution can
be to completely change the currency and to start afresh. With increase in cash
available for government expenditure and reduced state borrowing, inflation will fall
for the short term and thus prices of basic commodities will also fall.
Tax Collection: Money deposited in the bank during demonetization can be
taxed especially if the affected parties were trying to evade taxation by keeping hard
cash.
Move to digital currency: In the future, we will all be using digital currency,
such as bitcoins. If this is true, then one advantage of demonetization is that it will
help to propel us into the future.
Improved deposits and savings in financial institutions: Parallel economies
make it difficult for banks and other financial institutions to raise deposits.
Demonetization reduces the size of the parallel economy and boosts savings and
deposits.
Stopping fraudsters: When a new currency is introduced, this can also be a
great opportunity to halt the activities of fraudsters who had been making money
illegally by counterfeiting coins and notes.
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Reducing illegal activities: Money used to fund illegal activities such as

terrorism and drug trafficking will be rendered useless. Hence, the government can
use demonetization policy to trace money that has been made from illegal activities
such as drug trafficking and theft since such individuals are faced with only two
options namely either deposit the money with the bank or be left with currency that
has no value.
Growth in a country’s GDP: Due to low lending rates, improved revenue
collection, and growth in savings and deposits, a country that has demonetized is
likely to see an improvement in the growth of its GDP.
Introducing new bank note designs: Demonetization is also a good opportunity
to redesign bank notes. This might involve making them more durable, for example.
Several countries have switched from paper notes to more durable plastic notes,
which has made their monetary system more secure in several ways.
A measure of good governance practices: Demonetization policies improve the
ease of doing business and are also a measure of good governance.
8.3.5. Disadvantages Of Demonetization
Demonetization is not all beneficial and even proponents of demonetization
acknowledge that it does have its disadvantages. :
Little cash in circulation: Cash crunch is a major disadvantage of
demonetization due to the unavailability of small currency denominations, an issue
which makes it difficult to make small purchases.
Inconvenience and annoyance to the public: Sometimes, demonetization can
be very inconvenient. For example, sometimes the government will remove certain
denominations of bank notes from circulation but keep others. It can be annoying
when smaller coins are removed from circulation and you do not have enough
change. Further, queuing up in banks to deposit money or exchange currency can
be inconveniencing.
Slowdown in Economic Growth: Economic growth will experience a period of
pause due to business disruptions, at least in the short term.
Panic: Not everyone understands the essence of demonetization and, therefore,
such an exercise is likely to result in panic among a section of the population.
An avenue for fraud and corruption: Some people are likely to take advantage
of lapses in the financial system to engage in fraud and corruption when
exchanging currencies.
Disruption of Trade: The normal trading activities may be disrupted by this
process since it takes time for consumers and suppliers to adjust to the new
monetary policy.
Loss of tradition: People can feel attached to their old bank notes and coins as
they can feel that they constituted part of their tradition.
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Problems with paying bills: If someone has sent some bank notes in the post in
order to pay a bill, or if there is any substantial delay in processing a bill payment,
and demonetization hits in the meantime, the money set aside to pay the bill can
become invalid.
8.4 REVISION POINTS
Demonetisation
Demonetization is the act of stripping a currency unit of its status as legal
tender. It occurs whenever there is a change in national currency.
Controlling inflation: When inflation really gets out of hand, one solution can
be to completely change the currency and to start afresh. With increase in cash
available for government expenditure and reduced state borrowing, inflation will fall
for the short term and thus prices of basic commodities will also fall.
Disruption of Trade: The normal trading activities may be disrupted by this
process since it takes time for consumers and suppliers to adjust to the new
monetary policy.
8.5 INTEXT QUESTIONS
1. Elaborate the History of Demonetisation in India.
2. Trace out the objectives of Demonetisation.
3. Explain the advantages of Demonetisation.
4. Summarize the disadvantages of Demonetisation.
8.6 SUMMARY
Demonetisation is the process by which the demonetised notes cease to be
accepted as legal currency for any kind of transaction. Demonetisation in India has
taken place three in the years of 1946, 1978 and 2016. The main objectives of
demonetization are as follows is to stop the circulation of black money in the
market, to help in reducing the interest rates of the prevalent banking system and
to help in creation of cashless economy. Demonetization can also be used to get
fake currency out of circulation in a country’s economy since such currencies
cannot be deposited in banks and other financial institutions. Cash crunch is a
major disadvantage of demonetization due to the unavailability of small currency
denominations, an issue which makes it difficult to make small purchases.
8.7 TERMINAL EXERCISE
1. The first instance of demonetization in India was on
a. 1945 b. 1947 c. 1946 d. 1949

2. How many times demonetization has been done in India?

a. 1 b. 2 c. 3 d. 4

8.8 SUPPLEMENTARY MATERIALS

1. icsi.edu
2. rbi.org.in
3. money control.com
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8.9 ASSIGNMENTS
1. Write a detailed note on the advantages and disadvantages of
demonitisation.
8.10 SUGGESTED READINGS
1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd., Chennai.
2. Arunajatesan S 2017, Technology in Banking Margham Publications,
Chennai.
3. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication, New Delhi.
8.11 LEARNING EXERCISE
1. Examine the effects of demonetization on the farm sector in India.
8.12 KEY WORDS
1. Demonetisation, Inflation, Digital currency, GDP.

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LESSON -9
REMONETISATION
9.1 INTRODUCTION
Remonetisation is the restoration of some commodity such as silver or coins
or bank notes that are not money to be used as a legal tender. It is the reverse of
demonetisation. Demonetization is followed by remonetisation to replace the old
discontinued currency with a new currency in the economy. Remonetisation is an
uphill task initiated by Government to make India Digital. The Digital India
programme is a leading programme of Government of India with a vision to
transform India into a digitally empowered society and knowledge economy.
9.2 OBJECTIVES
 After studying this lesson, student can understand the Concept of
Remonetisation, Role of RBI in Remonetisation and Demonetisation, Sources
of Black Money, Effects of Money Money, Measures taken by Government to
curb Black Money, Types of cashless
 Payment methods, Role of NPCI in Digital Banking.
9.3 CONTENT
9.3.1 Concept of Remonetisation
9.3.2 Role of RBI in Remonetisation
9.3.4 Role of RBI in Demonetisation
9.3.3 Sources of Black Money
9.3.4 Effects of Black Money
9.3.5 Measures Taken by Government to Curb Black Money
9.3.6 Types of Cashless Payment Method
9.3.7 Role of NPC in Digital Banking
9.3.1. Concept of Remonetisation
Remonetisation is the restoration of some commodity such as silver or coins or
bank notes that are not money to be used as a legal tender. It is the reverse of
demonetisation. Demonetization is followed by remonetisation to replace the old
discontinued currency with a new currency in the economy. Remonetisation is an
uphill task initiated by Government to make India Digital. The Digital India
programme is a leading programme of Government of India with a vision to
transform India into a digitally empowered society and knowledge economy.
“Faceless, Paperless, Cashless” is one of stated role of digital India. As a part of
promoting cashless transaction and converting India into less-cash society, various
modes of digital payments are available such as Banking Cards, USSD (the
Unstructured Supplementary Service Data), AEPS (Aadhaar Enabled payment
system), UPI, Mobile wallets, Banks Pre- paid cards, Point of sale, Internet Banking,
Mobile Banking and Micro ATMs.
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9.3.2. Role of RBI in Remonetization

1. Provides Liquidity: The RBI has very large amounts of currency available and
it will continue to support the market to extend that the market needs that
kind of Liquidity.
2. Replacement of money: The markets requires currency at the time of
demonetization. Hence, the RBI will replace/release a very large new
currency with old currency by banking and post office and a lot of currency
will come to recirculation.
3. Impact on taxation and revenue: At the time of Remonetization, a lot more
money will come into banking system. Cash will have an anonymity attached
to it. What comes into banking system gets identified with the person and
therefore its impact on taxation and revenue collection will increase.
4. Removal of withdrawal limit: The RBI will be the responsible for currency
supply and management. The central bank will take a call on lifting the
restrictions, which is removing restrictions on withdrawals of cash
gradually.
5. Digital payments: The RBI plays a role on pushing and incentivising digital
payments. Cash economy has many vices as it leads to crime and tax
evasion. Hence, Digital economy far better than cash economy and there is
need to change the way the trade and commerce is undertaken in the
country.
9.3.3. Role of RBI in Demonetization
1. Collection of Black Money: The RBI will play a role on collection of black
money. The amount of collection of black money that government was
expecting was definitely a lot more than that as almost 84% of the cash was
in the notes of 500(45%) and 1000(39%).
2. Change the Guidelines: RBI changed the guidelines several times. One of the
major issues that RBI faced was the fact that the ATMs needed recalibration
because the sizes of the new notes were not compatible with the old
calibration. “It is a massive operation, it will take time.”Re-calibration of
ATMs involved multiple agencies – banks, ATM manufacturers, National
Payment Corporation of India (NPCI), Switch Operators, etc., and multiple
activities making it a complex operation requiring immense coordination
among these agencies.
3. Exchange notes: The Reserve Bank of India also made arrangements for
exchange and /or deposit of such notes at the counters of the Reserve Bank
and commercial banks, Regional Rural banks and Urban Cooperative Banks.
4. Cash exchange and withdrawal: The Reserve Bank of India stipulated that
the demonetised banknotes could be deposited with banks over a period of
fifty days. The banknotes could also be exchanged for legal tender over the
counter at all banks.
5. Shifting of goal posts: The government was described as 'shifting the
goalposts' with respect to the goals of the demonetisation exercise. The
initial stated goal was to curb black money, corruption, and terrorism, but
as it became apparent that almost all the cash was being exchanged the
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goals were expanded to include making India a cashless economy,

neutralisation of money held by Maoists, terrorists and human traffickers,
among others.
6. Evasion: There were reports of people circumventing the restrictions
imposed on exchange transactions by conducting multiple transactions at
different bank branches, and by sending hired people, employees, and
followers in groups to exchange large amounts of demonetised banknotes at
banks
7. Tax collection: The number of income tax returns filing increased from 43.3
million to 52.9 million between the financial year of 2016 and 2017, which
was not a significant increase compared to the increase between 2015 and
2016. The tax compliance had increased with a number of income tax
returns filing increased but the majority of them were from salaried and
non-business class.
8. Digital payments: The push for digital payments was one of the stated
intentions of demonetisation. There was an immediate and sharp jump in
digital payments in November–December 2016 owing to shortages of cash.
The debit card point of sales transactions was twice the size of value
suggested by trends before demonetisation. The value of credit cards
increased but no sharp growth was seen. The mobile wallet transactions
picked up immediately after demonetisation, followed by a dip in mid-2017
due to easing cash shortages. There was again sharp rise thereafter. By April
2018, the volume of the digital payments had doubled. After return of the
cash, the growth in digital payment had been modest.
9.3.4. Sources of Black Money
Black money is money on which tax is not paid to the government. The sellers
in both examples have earned money from legal sources but evaded taxes. The most
common source of black money is the black market or underground economy.
In India, black money is funds earned on the black market, on which income
and other taxes have not been paid. Also, the unaccounted money that is concealed
from the tax administrator is called black money. The black money is accumulated
by the criminals, smugglers, hoarders, tax-evaders and other individuals opposed
to theft.
In layman’s language, it is money that has been acquired through illegitimate
means or money which is unaccounted for, that is, for which tax is not paid to the
government.Spurious notes or counterfeit money is generally not counted as black
money. Counterfeit notes are currency notes that are illegally printed by
unauthorised agents.Black money is hidden from government authorities and is not
reflected in the GDP of India, national income, etc. White money is money that
is earned through legitimate means and is accounted for, for which income or other
tax is paid. In an ideal economy, all money that is transacted should be accounted
for. This would help the government to collect taxes. Cash transactions without
proper accounting are known as black money.
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Black money is generated by any of the following three ways and the sources are as
follows:
i) Illegitimate Activities
The illegal activities that can lead to black money generation are:
 Crime
 Corruption
 Non-compliance with tax requirements
 Complex procedural regulations
 Money laundering
 Smuggling
ii) Tax Evasion
This is where an entity wilfully does not pay taxes that are due to the
government.
iii) Tax avoidance
This is where an entity takes advantage of the existing loopholes in the system
and avoids paying taxes. This is not illegal though
Some of the chief sources of black money are described below.
 Sellers or traders who do not give bills or receipt creates black money.
 Many people invest in bullion or jewellery to hide their actual income from
the authorities.
 In the real estate sector, many people undervalue their real assets to refrain
from paying the rightful tax. They cheat the government of the correct
amount of property tax.
 Some Self-Help Groups (SHGs) and trusts do not provide proper sources for
their funds and donations received.
 Tax havens are generally small countries where foreigners don’t have to pay
taxes. These countries generally have very liberal regulatory frameworks,
which big corporations take advantage of. They set up shell companies there
and redirect all their profits to this entity, by which they can reduce their tax
liabilities by a huge margin.
 Hawala is an informal method by which money can change hands without
the use of banks. This works through codes, contacts and trust with no
paperwork at all.
 Investments through innovative derivative instruments like participatory
notes also is a means to hide black money.
Size of the problem
 A Bank of Italy calculation reveals India’s share in tax havens globally to be
$152-181 billion or Rs. 10 lakh crore.
 India is ranked eighth in the world in black money generation by the Global
Financial Integrity Report.
 A former director of the Central Bureau of Investigations has said that the
total black money in India is around USD 500 billion.
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Money Laundering
Money laundering is the process by which black money is converted into white
money.
People who possess black money cannot spend it publicly. They should either
hide it or spend it on the underground economy. Through money laundering, they
convert it into white money. It is a method by which criminals mask their
accumulated wealth.
Through money laundering, people separate the money earned (illegally) from
its source, mix it with white money, and then funnel it back into the source.
Another commonly heard related term is round-tripping. Here, people send
money to a tax haven like Mauritius or Cayman Islands (to avoid paying tax) and
then invest that money into India, thus becoming a foreign investment.
9.3.5. Effects of Black Money in India
Black money has some serious consequences on the economy of a country.
Some of them are discussed below.
 It affects the financial system of the country. The central bank is not able to
control money supply in the economy causing higher inflation. This will lead
to a fall in the value of the currency.
 Black money affects the credibility of a country negatively.
 Black money is most often used for illegal activities such as drugs and
narcotics dealing, terrorism, etc. which is detrimental to the heath of the
country.
 The government suffers a big loss in the form of taxes because of black
money.
 Black money creates a parallel economy in the country, which is completely
underground. For example, in Mexico, there is a thriving parallel economy
because of the illegal trafficking of drugs. This leads to governance problems.
 Black money can also cause real estate prices to go up, which may lead to
an asset bubble.
9.3.6. Measures Taken by the Government to Curb Black Money
The government has undertaken many measures to curb black money. They
are discussed below.
1) Tax reforms have been initiated with a view to resisting black money. The
tax base has been increased and rates have been slashed. Reforms are being
made to incorporate tax deduction at the source itself.
2) Through the Black Money Bill, the government has allowed the reporting of
black money generated through tax evasion in a given time frame.
3) Demonetisation of Rs.500 and Rs.1000 was carried out in 2016 with the
primary view of making black money.
4) The government is encouraging cashless/digital transactions with a view to
making things more transparent.
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5) Electoral reforms are also intended to curb black money as much of the
black money generated in India is used in elections.
Legislative Framework to deal with Black Money
1) Prevention of Corruption Act, 1988
2) Benami Transactions Prohibition Act, 1988
3) Prevention of Money Laundering Act, 2002
4) The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015
5) Lokpal and Lokayukta Act
Fake money
Counterfeit money, goods, or documents are not genuine, but have been made
to look exactly like genuine ones in order to deceive people. He admitted possessing
and delivering counterfeit currency.
Digital financial transition
A digital transaction is a process by which transactions take place without the
use of cash. These kinds of transactions have become increasingly prevalent and
necessary as consumers move from a cash-powered economy to a digital one.
9.3.6. Types of Cashless Payment Methods
Credit and debit cards are a popular way to make online payments, but they
aren’t the only cashless payment options. Here are a few other kinds of cashless
transactions that are widely utilized in India:
E-wallets
E-wallets are a popular mode of online payment, with PayTM and MobiKwik
being the most widely used providers. The user should register their mobile number
with the app and link their credit or debit card(s) to make payments. Users should
also provide their KYC details to make payments through the digital wallets. KYC is
a verification process set up by the Reserve Bank of India, which requires firms to
collect information from their customers including their identification details and
biometrics. E-wallets can be used in places that debit/credit cards can’t, as not a
lot of small businesses invest in card machines.
Mobile banking applications
Most of the larger banks offer banking apps, with which business owners can
transfer funds between bank accounts instantly. They can also view their account
balance and transaction history at any time.
UPI (Unified Payments Interface) system
This system enables instant transfers of funds between bank accounts. Users
can send and receive funds once they provide bank details like their account
number, IFSC code, and mobile number.
BHIM app:
This newly launched app is used to transfer funds between bank accounts.
It’s reliable and it’s secured with three-factor authentication. The user’s mobile
number or Aadhar card number is used to make payments. Though this app works
on the UPI platform, customers need not download mobile applications of multiple
banks. All they have to do is install the BHIM app.
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Andhra payment app

This app was launched in 2016 with the primary aim of boosting online
payments in the country. It allows users to make offline payments and fund
transfers between banks, using their biometrics and Aadhar card details for
authentication.With the increase in online payments, we’ve seen a decrease in the
long queues to make utility bill payments and the need to be physically present at
showrooms and service centers to pay or recharge DTH and mobile services.
Business owners and customers have taken to digital payment methods for all sorts
of transactions.Since a major part of the Indian population is not yet well-versed in
digital payment modes, there’s a certain amount of reluctance in utilizing them.
However, despite the limited availability of internet and knowledge of such payment
modes, the move towards online payment is inevitable.
Demonetisation gave a much-required push to cashless transactions. Though
digital payments have reduced a tad bit after demonetizations, they’re still up by
50% compared to their levels during the pre-demonetization days. At this point,
both customers and business ownyers are seriously considering digital payment
modes. Some business owners have already adopted digital payment modes, and
others are coming forward to shyow their interest in moving towards a cashless
economy. Though the growth is gradual, digital modes of payment are here to
stay in the Indian economy.
9.3.8. Role of NPCI (national payment corporation of India) in Digital Banking
1) NPCI owns and operates the Unified Payments Interface (UPI) platform
2) NPCI prescribes rules, regulations, guidelines, and the respective roles,
responsibilities and liabilities of the participants, with respect to UPI. This
also includes transaction processing and settlement, dispute management
and clearing cut-offs for settlement
3) NPCI approves the participation of Issuer Banks, PSP Banks, Third Party
Application Providers (TPAP) and Prepaid Payment Instrument issuers (PPIs) in UPI
4) NPCI provides a safe, secure and efficient UPI system and network
5) NPCI provides online transaction routing, processing and settlement services
to members participating in UPI
6) NPCI can, either directly or through a third party, conduct audit on UPI
participants and call for data, information and records, in relation to their
participation in UPI
7) NPCI provides the banks participating in UPI access to system where they
can download reports, raise chargebacks, update the status of UPI
transactions etc.
9.4 REVISION POINTS
Black money
Black money is money on which tax is not paid to the government. The sellers
in both examples have earned money from legal sources but evaded taxes. The most
common source of black money is the black market or underground economy.
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Money Laundering
Money laundering is the process by which black money is converted into white
money.
People who possess black money cannot spend it publicly.
9.5 INTEXT QUESTIONS
1. Summarize the role of RBI in Demonetisation and Remonetisation.
2. Bring out the Sources of Black Money.
3. Indicate the effects of Black Money.
4. Recall the measures taken by Government to curb Black Money
5. Categorize the types of Cashless Payment methods.
6. Explain the role of NPC in Digital Banking.
9.6 SUMMARY
Remonetisation is the restoration of some commodity such as silver or coins or
bank notes that are not money to be used as a legal tender. It is the reverse of
demonetisation. Demonetization is followed by remonetisation to replace the old
discontinued currency with a new currency in the economy. The RBI has very large
amounts of currency available and it will continue to support the market to extend that
the market needs that kind of Liquidity. Tax Evasion is an entity wilfully does not pay
taxes that are due to the government. Credit and debit cards are a popular way to
make online payments, but they aren’t the only cashless payment options. NPCI owns
and operates the Unified Payments Interface (UPI) platform. NPCI prescribes rules,
regulations, guidelines, and the respective roles, responsibilities and liabilities of the
participants, with respect to UPI. This also includes transaction processing and
settlement, dispute management and clearing cut-offs for settlement.
9.7 TERMININAL EXERCISE
1. KYC means ___________________________________.
2. Who can open bank account?
9.8 SUPPLEMENTARY MATERIALS
1. icsi.edu
2. rbi.org.in
3. money control.com
9.10 SUGGESTED READINGS
1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd., Chennai.
2. Arunajatesan S 2017, Technology in Banking Margham Publications,
Chennai.
3. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication, New Delhi.
9.11 LEARNING ACTIVITIES
1. Difference between Demonetization and Remonitisation.
9.12 KEY WORDS
1. Fake money, Remonetisation, Money Laundering, Liquidity.

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UNIT-V :PAYMENT SYSTEM & DIGITALBANKING

LESSON – 10

PAYMENT SYSTEM AND DIGITAL BANKING - I

10.1 INTRODUCTION
A payment system is any system used to settle financial transactions through the
transfer of monetary value, and includes the institutions, instruments, people,
rules, procedures, standards, and technologies that make such an exchange
possible. A common type of payment system is the operational network that links
bank accounts and provides for monetary exchange using bank deposits. The term
electronic payment can refer 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.
10.2 OBJECTIVES
 After studying this lesson, student can understand the Concept of Concept
of Payment System, Benefits of Rupay card, Types of Rupay card, Agreement
of Rupay with International Payments in Banking, Procedure of Online
Transactions with Rupay card, Rupay Secure, Immediate Payment Service
(IMPS) and USSD
10.3 CONTENT
10.3.1 Concept of Payment System
10.3.2 Requirements for E – Payment
10.3.3 History of Rupay
10.3.4 Benefits of Rupay card
10.3.5 Types of Rupay card
10.3.6 Agreement of Rupay with International Payments in Banking
10.3.7 Procedure of Online Transactions with Rupay card
10.3.8 Rupay Secure
10.3.9 Immediate Payment Service (IMPS)
10.3.10 USSD
10.3.1 Concept of Payment System
Payment system a system is the use of cash-substitutes; traditional payment
systems are negotiable instruments such as drafts and documentary credits such
as letters of credit. Electronic banking has many names like e banking, virtual
banking, online banking, or internet banking. It is simply the use of electronic and
telecommunications network for delivering various banking products and services.
Online banking, also known as internet banking, e-banking or virtual banking, is
an electronic payment system that enables customers of a bank or other financial
institution to conduct a range of financial transactions through the financial
institution's website. Financial institutions now routinely allocate customers
numbers, whether or not customers have indicated an intention to access their
online banking facility.
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10.3.2 Requirements For E-Payments

1. Security
Since payments involve actual money, payment systems will be a prime target
for criminals. Since Internet services are provided today on networks that are
relatively open, the infrastructure supporting electronic commerce must be usable
and resistant to attack in an environment where eavesdropping and modification of
messages is easy.
2. Reliability
As more commerce is conducted over the Internet, the smooth running of the
economy will come to depend on the availability of the payment infrastructure,
making it a target of attack for vandals. Whether the result of an attack by vandals
or simply poor design, an intemiption in the availability of the infrastructure would
be catastrophic. For this reason, the infrastructure must be highly available and
should avoid presenting a single point of failure.
3. Scalability
As commercial use of the Internet grows, the demands placed on payment
servers will grow too. The payment infrastructure as a whole must be able to handle
the addition ofusers and merchants without suffering a noticeable loss of
performance. The existence of central servers through which all transactions must
be processed will limit the scale of thesystem. The payment infrastructure must
support multiple servers, distributed across the network.
4. Anonymity
For some transactions, the identity of the parties to the transaction should be
protected; it should not be possible to monitor an individual's spending patterns,
nor determine one's source of income. An individual is traceable in traditional
payment systems such as checks and credit cards. Where anonymity is important,
the cost of tracking a transaction should outweigh the value of the information that
can be obtained by doing so.
5. Acceptability
The usefulness of a payment mechanisms is dependent upon what one can
buy with it. Thus, a payment instrument must be accepted widely. Where payment
mechanisms are supported by multiple servers, users of one server must be able to
transact business with users of other servers.
6. Customer base
The acceptability of a payment mechanism is affected by the size of the
customer base, i.e. the number of users able to make payments using the
mechanism. Merchants want to sell products, and without a large enough base of
customers using a payment mechanism, it is often not worth the extra effort for a
merchant to accept the mechanism.
7. Flexibility
Alternative forms of payment are needed, depending on the guarantees needed
by the parties to a transaction, the timing of the payment itself, requirements for
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auditability, performance requirements, and the amount of the payment. The

payment infrastructure should support several payment methods including
instruments analogous to credit cards, personal checks, cashier's checks, and even
anonymous electronic cash. These instruments should be integrated into a common
framework.
8. Convertibility
Users of the Internet will select financial instruments that best suit their needs
for a given transaction. It is likely that several forms of payment will emerge,
providing different trade off with respect to the characteristics just described. In
such an environment it is important that funds represented by one mechanism be
easily convertible into funds represented by others.
9. Efficiency
Royalties for access to information may generate frequent payments for small
amounts. Applications must be able to make these "micropayments" without
noticeable performance degradation. The cost per transaction of using the
infrastructure must be small enough that it is insignificant even for transaction
amounts on the order of pennies.
10. Ease of use
Users should not be constantly interrupted to provide payment information and
most payments should occur automatically. However, users should be able to limit
their losses. Payments beyond a certain threshold should require approval. Users
should be able to monitor their spending without going out of their way to do so.
10.3.3 Historyof Rupay
Rupay (portmanteau of Rupay and payment) is an Indian multinational
financial services and payment service system, conceived and launched by the
National Payment Corporation of India (NPCI) on 26 march 2012. It was created to
fulfil the Reserve Bank of India’s (RBI) vision of establishing a domestic, open and
multilateral system of payments. Rupay facilitates electronic payment at all Indian
banks and financial institutions. NPCI maintains ties with Discover Financial, JCB
to enable Rupay card scheme to gain international acceptance.
As of November 2020, around 60.3 crores (603.6-million) Rupay cards have
been issued by nearly 1,158 banks. All merchant discount rate (MDR) charges were
eliminated for Rupay transactions from 1 January 2020.
Rupay was dedicated to India on 8 may 2014, by the then president of India,
Pranab Mukherjee, at the RashtrapatiBhavan in New Delhi. NPCI launched an
international subsidiary called NPCI International payments limited(NIPL) on 19
August 2020 to increase the globalization and availability of Rupay in foreign
markets. As of march 2021,the market share of Rupay in India by volumes to
traction is at 34% and by value 30% respectively.
In 2009, RBI had asked the Indian Bank Association to create a non-profit
payment company which will design an indigenous payment card. The card was
tentatively referred as Indian pay.
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After years of planning, NPCI was entrusted with the implementation and
finalized the name of the proposed card as Rupay, a portmanteau of the words
rupee and payment to avoid naming conflicts with other financial institutions using
the same name. The colours used in the logo are an allusion to the tricolour flag of
India. NPCI conceived it as an alternative to master card and visa while consolidate
and integrate various payment systems in India.
RBI in it vision paper 2009-2012 on payment system in India said that the
need for such a system arises from the absence of domestic price setter that has
caused the Indian banks to bear the high cost for affiliation and the connection
with international card associations schemes like visa and master card resulting in
the need for routing even domestic transactions which account for more than 90%,
through a switch located outside the country.
On December 14,2021, the government of India approved ₹1300 crores ($170
million packages to promote Rupay among marginalized section of the population.
Master card and visa called this move protectionism which threaten their duopoly
in the Indian card payment market. the companies further raised their complaints
with office of the united states trade Representative (USTR).
10.3.4 Benefits of Rupay Card
Rupay is a brainchild of RBI, exclusively crafted to meet the needs and
requirements of Indian customers:
Security of information related to Indians: Customer data and transaction
details pertaining to Rupay card transactions will not be passed outside India.
Safe transactions: With SMS alerts and notifications that are sent to the
customer’s phone number after every transaction, Rupay cardholders can ensured
of a secure transaction.
Designed for Indian citizen:Rupay cards have been customized keeping in
mind the product and service requirements of Indians.
Greater reach in Rural areas: When it comes to the Rupay cards
transactions, all the processing happens within the country. This results in lower
cost of settlement and clearing for the transaction processing becomes affordable.
Payment solutions across platforms
Rupay debit card is designed to provide complete interoperability between
payment channels including mobile technology, ATMs, cheques etc.
Less transaction costs
When it comes to the rupay cards transactions, all the processing happens
within the country. This results in a lower costs of settlement and clearing for the
transaction made using a rupay debit card. Banks will profit immensely from this
as costs for transaction processing become affordable.
Accidental insurance for rupay ATM cardholders
All rupay ATM-cum-debit cardholders are presently eligible for accidental
death and permanent disability insurance cover. Rupay classic cardholders are
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eligible for a cover of Re.1 Lakh, whereas rupay premium cardholders are eligible
for a cover of Rs.2 lakhs.
Rupay PMJDY (PradhanMantri Jan DhanYojana)
Card is issued to people who have opened accounts under the Pradhan mantra
jandhanyojana(PMDJY)- A national mission for financial inclusion that was
developed to provide people access to financial services like banking,
savings/deposit accounts, remittance, credit insurance, and pension, in an
affordable way. The card allows the users to make transactions at all ATMs, POS
terminals, and e- commerce websites. It also comes with a personal accidental
death and total disability coverage of up to Rs.2 lakhs.
10.3.5 Types of Rupay Card
I) Rupay Debit card
Rupay issues debit cards in three variants-Rupay classic, Rupay platinum and
Rupay select. Classic is the standard basic rupay-branded card which offers
minimum features such as various merchant offers in incategories like dining,
travel, pharmacy, lifestyle, cosmetics Retails, shopping and jewelry and it does not
offer benefits such as airport lounge access.
Platinum is the middle tier offering from rupay which provides all the features
of classic, plus more offers and benefits such as airport lounge access,
comprehensive insurance coverage of up to 200,000 rupees, amazon pay offer and
various merchant offers.
Rupay select card launched by a NPCI in the 2020 targeting affluent
customers. It is the most premium debit card offering from rupay. The card is
different from previous offerings as it is independent of issuing bank that form
partnership with various businesses to provide card specific benefits.
Types of Rupay Debit Cards
Rupay debit cards are currently the most convenient domestic cards to use. It
is the first- of-its-kind debit and credit card payment networks in India. Basically,
rupay word is created by mixing two words-rupee and payment. This initiative
intends to fulfil RBIs vision of a ‘less cash’ in economy.
Presently rupay has collaborated with almost 600 international, regional and
local banks across the country. The leading promoters of rupay are ICICI Banks,
HDFC Banks, State bank of India, Bank of Baroda, Union Bank of India, Panjab
National Bank, Canara bank, Bank of India ,etc. Also, it expanded its shareholding
in2016 to 56 banks to bring more banks across sectors under its umbrella. The
following are the debit cards offered by rupay to citizens of India:
Rupay platinum debit card
This debit card by rupay encourages to celebrate the joys of life every day with
hassle- free transactions. A gift voucher from croma worth Rs.500 can avail 15%
gift voucher from Apollo pharmacy. Rupay lightens travel experience with access to
over 20 plus domestic lounges two times per calendar quarter per card. While
travelling rupay gives assistance to hotel reservations to consultancy services.
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Rupay PMJDY Debit card

Government of India’s initiative towards affordable basic banking services This
scheme ensures access to financial services like-savings and deposit accounts,
remittance, credit, insurance, pension in an affordable manner, under the scheme,
a basic savings banks deposit account can be opened in any bank branch or
business correspondent (bank mitra) outlet.
Rupay Mudra Debit card
MUDRA loans under pradhan mantra mudra yojanascheme(PMMYS), is an
initiative by the government of Indian. The objective of the scheme is to work in a
sustainable manner by supporting and promoting partner institutions and creating
an ecosystem of groth for the micro enterprise sector.
Rupay Pun Grain debit card
This rupay debit card has been launched as an initiative of the government of
Punjab. Pungrain is basically a grain procurement project of the Punjab
government launched in October 2012. The arthias are provided with a
rupaypungrain card under this account.It can be used as rupaypungrain debit card
at ATMs for cash withdrawal and for the automated grain procurement facility at
pungrainmandis.
Rupay Kisan card
Kisan credit card (KCC) is a government of India scheme which supports
farmer with a credit line. The aim of the scheme is to save farmers from high
interest rates usually charged by lenders in the unorganized sector.
Farmer under the KCC scheme are issued a rupaykisan card on their account.
It aims at providing timely credit support to the farmers for their cultivation needs
as well as non-farming activities in a cost effective manner. You can use the card at
both ATMs and POS machines.
Rupay Classic Debit Card
With classic debit card benefit from a comprehensive insurance cover. By availing
this, we can always keep family safe. The card gives you, an insurance cover of Rs 1
lakh. Also, celebrate round the year with exclusive domestic merchant offers.
II) Rupay Credit Cards
Like rupay debit cards, rupay credit cards are also available in three variants
namely Rupay classic, Rupay platinum and Rupay select. Rupay credit cards were
in operation since june 2017, with eight public sector banks, one private sector
bank one corporative bank issuing the card without any formal launch. A pilot
project was going on to technically enabling more and more banks in rupay credit
cards with additional five public sector banks and by march 2018, NPCI plans to
have 25 banks altogether on board. Total 17 banks launched rupay credit cards.
Axis Bank, HDFC Bank, IDBI Bank, United Bank of India, Union Bank of
India, Panjab national bank, Panjab and Maharashtra co-operative bank, Saraswat
bank, Canara bank, jaya bank, Bank of India, SBI Card, Federal bank, Kotak
Mahindra bank, Bank of baroda and Yes bank.
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Types of Rupay Credit Card

Rupay Combo cards
The union bank of India launched rupay combo debit cum credit cards in
November 2018, the first rupay card that facilitates both debit and credit
transactions through a single card. The card has 2 EMVs and 2 magnetic stripes.
Rupay prepaid cards
Rupay issues prepaid cards in three variants – Rupay classic, rupay corporate
and rupay platinum. Indian railway catering and tourism corporation (IRCTC) in
collaboration with the union bank of India and the national payment corporation of
india launched the IRCTC-UBI Rupay prepaid card on 2015 to book tickets, do
shopping and pay services bills. The card is a first-of-its-kind in the market as both
virtual as well as physica cards are being issued to customers in two variants.
Rupay Global
The NPCI started issuing global cards in 2014. Singapore has offered
assistance to promote Indians digital payment network rupay card overseas by
becoming its firsts international partner. On 7 march 2012, NPCI entered into a
strategic partnership with discover financial services (DES) for rupay, enabling the
acceptance of rupay global cards to utilize the discover, diners club international
and PULSE networks for international purchase and cash access outside India.
10.3.6 Agreement of Rupay with International Payments Networks
Rupay has several agreements with other international payment networks
some examples includes Discover , diners club international, pulse in united states,
JCB in japan, NETS in Singapore, unionpay in china, BC card in south korea, Elo
in brazil, Dinacard in Serbia.
Rupay for business/Rupay E-commerce
Rupay e-commerce is the payment gateway that facilitates online transactions
by rupay card holders. It supports one click payments, seamless APIs, and
connected checkout, and also offers additional payment options such as
subscription payment, EMI online credit card bill payments and balance transfers.
Commercial credit card
NPCI launched the rupay commercial credit card for corporate clients on 23 july
2020 at global fin tech fest in partnership with state bank of Mauritius (SBM)
fintechstartup helped in developing the application programming interface (API)
powering the card while Enkash will provide dedicated customer support and expense
management services. Rupay business credit card is offering instant bulk payout, 30-
day credit period on business purchase, automated goods and services (GST)
Rupay contactless
Rupay contactless is a contactless payment technology feature that allows
cardholders to wave their card in front of contactless payment terminals without
the need to physically swipe or insert the card into a point-of-sale device. This is an
EMV-compatible, contactless payment feature similar to master card contact less
card, visa contactless and express pay which use RFID technology. Contactless can
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currently be used on transactions up to and including Rs.2000. in march 2019

under ‘one nation, one card’ scheme a national common mobility card (NCMC) for
transportation was launched by Prime minister NarendraModi at a function in
Ahmedabad on rupay platform in order to avoid vendor lock in and create an
interoperable system under make in India.
BHARAT-QR
This is developed by NPCI in collaboration with mater card and visa as
integrated interoperable QR code based payment system and was launched in
September 2016. It facilitates users to transfer their money from one secure to
another without the need of physical cards. The money transferred through
BHARAT QR is received directly in the users linked bank account using IMPS. It
provides a common interface between rupay, master card, visa, American express
as opposed to other such individual proprietary system. Bharat QR is supported on
both android and iOS devices.
10.3.7 Procedure of Online Transaction with Rupay Card
The NPCI provides the rupay debit card, permitting clients to manage online
exchange. When utilizing rupay debit card Online for the first time, follow the given
steps:
 To use the rupay card for any purchase, first register for e-commerce
payments.
 After registered, payment screen will be sent. Now pick the rupay card
as method of payament.
 Enter the details for your card, along with the card number, expiry dates,
and CVV
 Receive OTP on both your registered mobile number and email address.
 Insert the one-time password (OTP).
 Choose a picture from a tiny collection. For all future transactions, the
picture must be memorized.
 Now type a combination limited to 40 characters, keep this combination in
mind for future transactions.
 Lastly, enter ATM pin.
 A pop-up window appears on the screen for some banks, and you are
registered while making the transactions
10.3.8. Rupay Secure
Rupay secure is an online payment services powered by NPCI and offered by
south Indian bank to rupay cardholders. All Rupay debit card issued by south
Indian bank can be used e-commerce transaction without registration. In this
method you do not have to remember any password, images or phrase to initiate
transactions. It is a simplified and highly secured method of payment.
Making RUPAY SECURE In E-commerce transaction
 Enter the credentials of rupay card while checking out of the merchant
website
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 Redirected to a rupaypay secure system where one time password (OTP) will
berequired to enter.
 Choose to receive this either via email or as SMS on registered mobile number.
 Click on the submit button after entering the 6 digit OTP received at any
chosen medium Rupay paysecure system verify OTP and approves the
transaction.
10.3.9 Immediate Payment Service (IMPS)
IMPS is an instant payment inter-bank electronic funds transfer system in
India. IMPS offers an inter-bank electronic funds transfer services through mobile
phones. The services is available 24*7 throughout the year including bank holidays.
NEFT was also made available 24*7 from December 2019.
RTGS was also made available 24*7 from 14th December 2020. Owner is
National payments corporation of India. It is managed by the NPCI and is built
upon the existing National financial switch network. In 2010, the NPCI initially
carried out a pilot for the mobile payment system with 4 member banks (state bank
of India, Bank of India, Union bank of India and ICICI bank), and expanded it to
include YES bank, Axis bank and HDFC bank later that year.
This feature offered by the NPCI was launched in 2010. It provides robust,
real-time fund transfer which extends 24*7*365 inter-bank electronic fund transfer
services. This can be executed on multiple channels like Mobile, Internet, ATM and
SMS.
There are 53 commercial banks, 101 Rural/District/Urban and co-operative
banks, and 24 PPI signed up for the IMPS service. Around 200 million IMPS
transactions amounting to roughly US$20 billion of transaction amount happen
every month in India. The sender requires to know the bank account number and
the Indian financial system code of the beneficiary to transfer money.
IMPS also includes
 Payment and settlement system in India
 Prepaid payment instruments in India
 National electronic fund transfer
 Real time gross settlement
 Unified payments interface
10.3.10 National Unified USSD Platform (USSD)
India is transforming towards the cashless economy. As the government is all
set to make India a cashless economy, common mans worries are rising. Prime
Minister Narendramodi , in his radio address Mann Ki Baat, has hailed youth to
march forward and to aware people to use alternative like National unified USSD
Platform (NUUP) like USSD-based mobile banking, Unified payment interface (UPI)
Net banking, rupay card, PoS Machines and Aadhaar based bio-metric payment
app but with opposition fueling the fire, it doesn’t seem roads to cashless economy
will be smooth for ModiSarkar. For all those who say, in a country with poor
literacy rate and poor internet network coverage the dream of a cashless economy
 106

will fade soon, we bring a guide on how to make online transactions without having
a smart phone or an internet connection.
NUUP (National unified USSD Platform) is a USSD based mobile banking
services from NPCI that is as easy as dialing a number from your regular GSM
phone. A scholar or illiterate, anyone can access mobile banking services by just
pressing *99# from GSM phone. There is no need any internet for using mobile
banking via USSD code and still can check account balance, mini statement and
transfer your money from one account to another just by entering a simple code
MMID.
Indian government has stated the new USSD technology for sending and
receiving money through and into bank account. There is not required to use the
internet for banking anymore. They do not need any e-wallet app. USSD technology
has become the solution. Although, the mentioned payment method is applicable
for only small value transaction up to Rs.5000 as per RBI guidelines.
Meaning of USSD
USSD stands for ‘Unstructured supplementary services data’. The codes
that directly communicate with the server of a telecom company is called as the
USSD. NUUP means National Unified USSD platform. It is an innovative service
developed by National Payments corporation of India (NPCI) which is known as an
umbrella organization for all retail payments system in India. NPCI started by the
Indian government in the year 2014.
Unstructured supplementary services data (USSD) is technology by NUUP
generally used in the field of telecommunication this is available for all GSM mobile
phones which doesn’t need any internet service to use.
Using NUUP service user can access the following services
1) Balance enquiry
2) Mini statement
3) Fund services
a) Fund transfer using mobile number and MMID.
b) Fund transfer using IFSC and account number.
4) MMID generation
5) Know MMID
6) Change M-PIN
M-PIN for mobile banking application and NUUP services is same. Fund transfer limit:
1.Maximum amount per transaction - Rs.5,000/-
2. Maximum amount per day - Rs.5,000/-
3. No. of transaction per day - No limit
Mobile telephone operator charges would applicable for availing this services and
accordingly charged for by the mobile telephone operators. These might be charged
even in case of failed transactions. Apart from this the bank would charge normal
IMPS charges.
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10.4 REVISION POINTS

1. Rupay
Rupay is an Indian multinational financial services and payment service
system, conceived and launched by the National Payment Corporation of
India (NPCI).
2. Immediate Payment Service (IMPS)
IMPS is an instant payment inter-bank electronic funds transfer system in
India. IMPS offers an inter-bank electronic funds transfer services through
mobile phones.
3. USSD stands for ‘Unstructured supplementary services data’
USSD stands for ‘Unstructured supplementary services data’. The codes
that directly communicate with the server of a telecom company is called as
the USSD.
10.5 INTEXT QUESTIONS
1. Summarize the Requirements for E – Payment.
2. Recall the History of Rupay.
3. Indicate the effects of Black Money.
4. Recall the Benefits of Rupay card
5. Narrate the types of Rupay card.
6. Explain Procedure of Online Transactions with Rupay card
7. Enumerate the concept ‘Immediate Payment Service (IMPS)’
10.6 SUMMARY
Payment system a system is the use of cash-substitutes; traditional payment
systems are negotiable instruments such as drafts and documentary credits such
as letters of credit.
Rupay was created to fulfil the Reserve Bank of India’s (RBI) vision of
establishing a domestic, open and multilateral system of payments. Rupay
facilitates electronic payment at all Indian banks and financial institutions. Rupay
PMJDY Debit card is
Government of India’s initiative towards affordable basic banking services This
scheme ensures access to financial services like-savings and deposit accounts,
remittance, credit, insurance, pension in an affordable manner. NUUP (National
unified USSD Platform) is a USSD based mobile banking services from NPCI that is
as easy as dialing a number from your regular GSM phone.
10.7 TERMINAL EXERCISE
1. What does NEFT stands for?
2. One can use _________ UPI application on the same mobile.
10.8 SUPPLEMENTARY MATERIALS
1. icsi.edu
2. rbi.org.in
3. money control.com
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10.9 ASSIGNMENTS
1. Find out e-banking facilities available in your bank branch.
10.10 SUGGESTED READINGS
1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd., Chennai.
2. Arunajatesan S 2017, Technology in Banking Margham Publications, Chennai.
3. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication,New Delhi.
10.11 LEARNING ACTIVITIES
1. How to use mobile baking facility for purchasing a product online.
10.12 KEY WORDS
1. E-Payment, Rupay card, Scalability, Real Time Gross Settlement.

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LESSON – 11
PAYMENT SYSTEM AND DIGITAL BANKING – II
11.1 INTRODUCTION
Payment systems may be physical or electronic and each has its own
procedures and protocols. Examples of payment systems that have become globally
available are credit card and automated teller machine networks. 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. To access a financial
institution's online banking facility, a customer with internet access would need to
register with the institution for the service, and set up a password and other
credentials for customer verification.
11.2 OBJECTIVES
 After studying this lesson, student can understand the Concept of Digital
banking, Benefits of National Automated Clearing House (NACH),
National Payment Corporation of India (NPCI), Roles and Responsibilities of
NPCI, Objectives of Aadhar Enabled Payment System, Features and
Benefits of AEPS
11.3 CONTENT
11.3.1 Concept of Digital banking
11.3.2 Benefits of National Automated Clearing House (NACH)
11.3.3 Regulation of Payment and Settlement System in India
11.3.4 NACH Credit and NACH Debit
11.3.5 National Payment Corporation of India (NPCI)
11.3.6 Objectives of NPCI
11.3. 7 Roles and Responsibilities of NPCI
11.3.8 Formation of NPCI
11.3.9 Aadhar Enabled Payment System (AEPS)
11.3.10 Objectives of Aadhar Enabled Payment System
11.3.11 Banking Services offered by Aadhar Enabled Payment System (AEPS)
11.3.12 Features and Benefits of AEPS
11.3.1 Concept of Digital Banking
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. Through e-banking, a customer can access his account
and conduct many transactions using his computer or mobile phone. Internet
Banking is a convenient way to do banking from the comfort of your home or office.
Avoid the queue or delays and try our simple and secure Internet Banking facility
for an unmatched online banking experience. The online banking system will
typically connect to or be part of the core banking system operated by a bank and is
in contrast to branch banking which was the traditional way customers accessed
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banking services. . Customers' numbers are normally not the same as account
numbers, because a number of customer accounts can be linked to the one
customer number.
11.3.2 National Automated Clearing House (NACH)
National automated clearing house or NACH is a centralized system which is
implemented by the national payment corporation of India or NPCI for financial
institutions, corporate and government as a web based solution for the facilitation of
interbank, highly volume electronic transactions. The NACH system was implemented
with the aim of providing a single set of rules for operations of all electronic
transactions that are common across all services. It was on (1st may 2016) that the
NACH was introduced with an aim to consolidate the multiple electronic clearing
systems or ECS running across the country to provide an harmonization of standard
and practices and eliminate the local barriers or inhibitors. Since then NACH has been
used in place of the electronic clearing system (ECS).
Offering credit and debit services to corporate, banks, and Financial
institutions, the services, aimed at integrating all regional ECS into one national
payment system, is claimed to be better than its predecessor.
According to the services website, “NACH System can be used for making bulk
transactions towards distribution of subsidies, dividends, interest, salary, pension
etc. and also for bulk transactions towards collections of payments pertaining to
telephone, electricity, water, loans, investments in mutual funds, insurance
premium etc. In March 2017, NPCI via a circular notified a paperless way for
corporate to register NACH mandates for its customers.
Benefits Of NACH
The national automated clearing house system makes it easier for those who
make large transactions frequently. This system benefits the bank, its customers
and also business organizations that engage in such transactions as frequently as
on monthly basis. The different benefits offered by NACH:-
Benefits to the Banks
 Banks can offer a much better customer services by providing faster
payment processing and creating stronger ties with the associated
organizations.
 Collections of EMI, loans, premiums and other payments becomes a lot
easier and quicker with this system. This is because there is no longer a
need to rely on the traditional checks or paperwork.
 The workflow is much smoother and errors are limited There are no manual
processes involved.
 All the transactions are much quicker and take very less time to complete as
compared to before.
 Benefits to large organizations:
 Large business organizations do not have to depend on cheques for
clearance.
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 There is no need to keep track of due dates for payments manually as they
are automatically registered.
 Salaries, dividends, pensions payments and other payments are made on
time without any delay which makes the whole process a lot more efficient.
 Larger payments like allowances and scholarships take less time to process.
 Even the large business organizations and companies can offers a much
improved customer service and faster bill payments.
Benefits to the Customers
 The customers also have no need to undertake any manual processes in
these transactions.
 The entire transactions process is a lot easier, efficient and faster than before.
 The customers do not need to keep track of the due dates for payments like
utility bills, credit card bills, interest payments, phone bills, electricity bills,
and various other payments.
 That are made on a repetitive and periodic basi
 This is because all these are automatically handled through the registered
banks.
Payment System in India
 Payment system in India is authorized and implemented by the reserve bank
of India.
 The payment system is a solution through which the central bank of the
country as allowed core banking through electronic solution. There are net
and gross payment system by RBI
 Reserve bank has left no stone unturned to facilitate diverse methods of
payment system to assist banking and transactions across the nation.
 RTGS is one such gross payment system.
 Electronic transfers allow one to transfer bulk volume money hassle free
through electronic payment solution.
 Currently more than 75% of the total transactions across the nation is done
by online payment system only.
 Now with innovation of new and advanced technology the RBI has allowed
mobile banking and online banking for the high volume payment anywhere
in the country.
 Plastic money is also an important part of payment system in India today.
 It largely overshadowed paper transactions in most of the parts of the
nation.
 Debit cards and credit cards are example of plastic money in India.
11.3.3 Regulation of Payment and Settlement System in India
 In 2007, the payment and settlement systems started by the RBI under the
payment and settlement act.
 It was a big step taken by the Indian government to encourage e-payment or
online transaction in the nation.
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 It was declared by the governor of India that the regulation will be

completely handled by the reserve bank of India.
 The entire supervision, regulation and activities of the payment and
settlement system in India is regulated and handled by RBI only.
 There are some basic instruction and information that commercial banks
have to consolidate regarding the confidential information of the customers.
 Apart from these basics the entire regulation is maintained by the RBI.
 Looking at the current scenario of online payment services, the central bank
of the nation has also facilitated non-banking financial corporations to
involve in e-payments.
 There is a number of NBFCs and other financial institutions that are also
allowing NEFT and other payment and settlement system.
11.3.4 NACH Credit & NACH Debit
NACH Credit
NACH credit is an electronic payment services governed by the RBI for the
bulk payment by the organization and corporate sectors. Through NACH credit any
organization that is authorized under RBI guideline can make a huge payments to
the multiple beneficiaries directly to their personal bank accounts. Salary from
Corporate, dividends, pension, interest and subsidies are provided through NACH
credit system by using single system.
Features of the system are
 The system is capable of engaging 10 million transactions in a single day.
 Safe and secure for web access, file and document uploads and downloads.
 Online dispute management system is available.
 There is a provision of multiple file processing that can be done in single
settlement.
 Direct corporate access for the corporate organization.
 Corporate sectors now can check the status of their payment through direct
access to the NACH via direct corporate access.
NACH Debit
NACH debt is similar to NACH credit. It is system in NACH through which
banks and other institutions are accept payment transactions in large volume
without interference/barriers of the third party.
Through NACH debit bulk payments like utility charges can be collected
through single settlements. The banks, NBFCs, corporate sectors and government
can easily accept large amount of payment like EMI, loans, electricity bills, water
bills, tax and other payment
Features of NACH Debit
 Online disputes management system.
 Unique mandate reference number available that helps the customer to
track multiple payments.
 Safe and secure transactions between the organization and parties.
 Confidential information security.
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National Automated Clearing House Or Nach’s Aadhaar Payment Bridge System

NACH has an aadhaar payment bridge system or APB which is gain developed
by the national payments corporation of India or NPCI and has been helping the
government and government agencies in making the direct benefit transfer scheme
successful.
This Aadhaar payment bridge system or APB system uses the Aadhaar
numbers of the intended beneficiaries for successfully channelizing the government
subsidies and benefits to them. Through the APB system the government
departments and their sponsor banks are linked on one side whereas the
beneficiary banks and beneficiary are linked on the other side.
11.3.5 National Payment Corporation of India
National Payment Corporation of India as known as NPCI was incorporated in
the year 2005. The organization was set up in the supervision of the central bank of
India that is RBI.
RBI has initiated the idea of setting up the NPCI with the objective of
encouraging retail payment system in the nation.
NPCI has formed to facilitates all the financial institutions, government,
corporate sectors and banks along with the NBFCs access the payment system
easily. There are 10 prominent nationalized and private banks that are said to be
the promoters of NPCI. These banks are state bank of India, union bank of India,
HSBC, HDFC, ICICI Banks, anara bank, Citibank, bank of baroda, Punjab national
bank and bank of India.
National Payments Corporation of India (NPCI) is an initiative taken by the
Reserve Bank of India (RBI) and Indian Bank’s Association (IBA) to operate the
retail payments and settlement systems in India. This organisation was founded in
the year 2008 under the Payment and Settlement Systems Act, 2007 Headquarters
at Mumbai. NPCI has been incorporated as a ‘not for profit’ company under section
8 of Companies Act 2013.
11.3.6 Objectives of NPCI
 The long-term vision of NPCI is to increase fund transfer options and to
evolve as the best payments network internationally.
 The mission of NPCI is to reach every Indian with either one or the other
payment services be it in-person or through electronic methods
 The organisation aims to create a robust payment and settlement
infrastructure in India.
 NPCI has been implemented as a ‘Not for Profit’ company under the
provisions of Section 8 of Companies Act, 2013.
 This was accomplished with an intention to provide infrastructure to the
entire Banking system in India for in-person as well as digital payment and
settlement processes.
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 The corporation is primarily focused on bringing innovations amidst the

retail payment systems through various technological updates for ensuring
higher operational efficiency rate and to strengthen the payment procedures.
 NPCI is striving hard to transform India into a ‘cashless society’ by reaching
every citizen with several payment services.
 This corporation was initiated by our former President Pranab Mukherjee,
endorsed by the honourable Prime Minister NarendraModi and later framed
into a card of choice for the PradhanMantri Jan DhanYojana (PMJDY)
 Thus, throughout its journey of seven years, NPCI has created a significant
impact on retail payment services in the country.
11.3.7 Roles and Responsibilities of NPCI
 NPCI owns and operates the Unified Payments Interface (UPI) platform.
 NPCI prescribes rules, regulations, guidelines, and the respective roles,
responsibilities and liabilities of the participants, with respect to UPI. This
also includes transaction processing and settlement, dispute management
and clearing cut-offs for settlement.
 NPCI approves the participation of Issuer Banks, PSP Banks, Third Party
Application Providers (TPAP) and Prepaid Payment Instrument issuers (PPIs)
in UPI.
 NPCI provides a safe, secure and efficient UPI system and network.
 NPCI provides online transaction routing, processing and settlement services
to members participating in UPI.
 NPCI can, either directly or through a third party, conduct audit on UPI
participants or call for data, information and records, in relation to their
participation in UPI.
 NPCI provides the banks participating in UPI access to system where they
can download reports, raise charge backs, update the status of UPI
transactions etc.,
Values of NPCI
NPCI firmly believe that their values have eventually shaped their culture,
work ethics and decisions. NPCI has also stated that their values have assisted in
extending their limits and striving for a better today, So that a foundation is laid for
a successful tomorrow.
Core values fostered by NPCI include
 Passion for Excellence
 Integrity
 Customer Centricity
 Respect
 Collaboration
11.3.8 Formation OfNPCI
Department of Payment and Settlement Systems (DPSS) provided the initial
approval to issue an authorization to NPCI for operating diverse retail payment
systems in the country.
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NPCI was also granted the Certificate of Authorization for operation of National
Financial Switch (NFS) and the ATM Networks since 15th of October, 2009.
The corporation has also debuted its officials to Institute of Development and
Research in Banking Technology (IDRBT) Hyderabad and has taken over NFS
Operations from 14th of December, 2009. The membership rules and regulations
were framed for enrolling all banks in the country as members.
11.3.9 Aadhar Enabled Payment System
In order to further speed track Financial Inclusion in the country, Two
Working Groups were constituted by RBI on MicroATM standards and Central
Infrastructure & Connectivity for Aadhaar based financial inclusion transactions
with members representing RBI, Unique Identification Authority of India, NPCI,
Institute for Development and Research in Banking Technology and some special
invitees representing banks and research institutions.
The working group on Micro ATM standards & Central Infrastructure &
Connectivity has submitted its report to RBI. As a part of the working group it was
proposed to conduct a Lab level Proof of concept (PoC), integrating the
authentication & encryption standards of UIDAI, to test the efficacy of MicroATM
standards and transactions using Aadhaar before they are put to actual use. The
PoC was successfully demonstrated at various venues.
AEPS is a bank led model which allows online interoperable financial inclusion
transaction at PoS (MicroATM) through the Business correspondent of any bank
using the Aadhaar authentication. AePS allows to do six types of transactions. The
only inputs required for a customer to do a transaction under this scenario a
 Bank Name
 Aadhaar Number
 Fingerprint captured during enrolment.
Aadhaar Enabled Payment System (AEPS) is a type of payment system that is
based on the Unique Identification Number and allows Aadhaar card holders to
seamlessly make financial transactions through Aadhaar-based authentication. It is
nothing but an AePS through which you can transfer funds, make payments,
deposit cash, make withdrawals, make enquiry about bank balance, etc.
11.3.10 Objectives of Aadhar Enabled Payment System
 To empower a bank customer to use Aadhaar as his/her identity to access
his/ her respective Aadhaar enabled bank account and perform basic
banking transactions
 To enable banks to route the Aadhaar initiated interbank transactions
through a central switching and clearing agency.
 To sub-serve the goal of Government of India (GOI) and Reserve Bank of
India (RBI) in furthering Financial Inclusion.
 To sub-serve the goal of RBI in electronification of retail payments.
 To enable banks to route the Aadhaar initiated interbank transactions
through a central switching and clearing agency.
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 To facilitate disbursements of Government entitlements like NREGA, Social

Security pension, Handicapped Old Age Pension etc. of any Central or State
Government bodies, using Aadhaar and authentication thereof as supported
by UIDAI.
 To facilitate inter-operability across banks in a safe and secured manner.
 To build the foundation for a full range of Aadhaar enabled Banking
services.
11.3.11 Banking Services Offered by AEPS
 Cash Deposit
 Cash Withdrawal
 Balance Enquiry
 Mini Statement
 Aadhaar to Aadhaar Fund Transfer
 Authentication
 BHIM Aadhaar Pay
Other Services offered by AEPS:
 eKYC
 Best Finger detection
 Demo Auth
 Tokenization
 Aadhaar Seeding Status.
11.3.12 Features and Benefits of AEPS
1. Easy to use
2. Safe and secure payment method
3. Interoperable across various banks
4. Encourages financial inclusion and serves the under banked sections of
society
5. Through AEPS, all bank account holders will be able to access their bank
accounts through Aadhaar authentication
6. AEPS facilitates disbursements of Government schemes using Aadhaar
authentication.
How Does AEPS Work?
The AEPS machine works like a Point of Sale (POS) machine. Instead of a
debit/credit card pin, the merchant will have to key in the customer’s Aadhaar
number and authenticate the transaction using the customer’s biometric data. The
following formation are required to carry out an AEPS transaction:
 Bank’s Issuer Identification Number (IIN) or name
 Aadhaar Number
 Fingerprint
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11.4 REVISION POINTS

1. National Automated Clearing House (NACH)
The NACH system was implemented with the aim of providing a single set of
rules for operations of all electronic transactions that are common across all
services.
2. National Payments Corporation of India (NPCI)
National Payments Corporation of India (NPCI) is an initiative taken by the
Reserve Bank of India (RBI) and Indian Bank’s Association (IBA) to operate
the retail payments and settlement systems in India.
3. Aadhaar Enabled Payment System (AEPS)
Aadhaar Enabled Payment System (AEPS) is a type of payment system that is
based on the Unique Identification Number and allows Aadhaar card holders to
seamlessly make financial transactions through Aadhaar-based authentication.
11.5 INTEXT QUESTIONS
1. Discuss the Benefits of National Automated Clearing House (NACH)
2. Explain Regulation of Payment and Settlement System in India
3. Categorise the types of NACH.
4. Recall the Objectives of NPCI
5. Describe the Roles and Responsibilities of NPCI
6. Narrate the Objectives of Aadhar Enabled Payment System
7. Enumerate the Banking Services offered by Aadhar Enabled Payment
System (AEPS)
8. State the Features of Aadhar Enabled Payment System (AEPS)
11.6 SUMMARY
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. Through e-banking, a customer can access his account
and conduct many transactions using his computer or mobile phone. Payment
system in India is authorized and implemented by the reserve bank of India. NPCI
is striving hard to transform India into a ‘cashless society’ by reaching every citizen
with several payment services. NPCI was also granted the Certificate of
Authorization for operation of National Financial Switch (NFS) and the ATM
Networks since 15th of October, 2009. The corporation has also debuted its officials
to Institute of Development and Research in Banking Technology (IDRBT)
Hyderabad and has taken over NFS Operations from 14th of December, 2009. The
AEPS machine works like a Point of Sale (POS) machine. Instead of a debit/credit
card pin, the merchant will have to key in the customer’s Aadhaar number and
authenticate the transaction using the customer’s biometric data.
11.7 TERMINAL EXERCISE
1. NPCI Stands for__________________________.
2. The upper limit per UPI transaction is ________________________.
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11.8 SUPPLEMENTARY MATERIALS

1. icsi.edu
2. rbi.org.in
3. money control.com
11.9 ASSIGNMENTS
1. How to start a mobile baking facility in your mobile.
11.10 SUGGESTED READINGS
1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd., Chennai.
2. Arunajatesan S 2017, Technology in Banking Margham Publications,
Chennai.
3. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication, New Delhi.
11.11 LEARNING ACTIVITIES
1. What are the difference between traditional and modern banking.
11.12 KEYWORDS
1. Encryption, Financial Inclusion, Authentication, Security, Confidential.

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LESSON -12
PAYMENT SYSTEM AND DIGITAL BANKING – III
12.1 INTRODUCTION
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.
Standardization has allowed some of these systems and networks to grow to a
global scale, but there are still many country- and product specific systems.
12.2 OBJECTIVES
 After studying this lesson, student can understand the Concept of Payment
System and Digital Banking, Know Your Customer (KYC), Documents
required for KYC, Process of KYC, Characteristics of MICR, , Importance of
MICR in Banking, Benefits of Cheque Truncation System (CTS) in Banking,
National Financial Switch (NFS), Features of NFS, Features and Benefits of
Real Time Gross Settlement (RTGS), How does RTGS works, Procedure of
National Electronic Fund Transfer (NEFT), Benefits of Using NEFT for fund
transfer, Participants and Benefits of UPI, Difference between NEFT, RTGS
& UPI, Clearing Corporation of India Ltd (CCIL) and Continuous Linked
System (CLS)
12.3 CONTENT
12.3.1 Concept of Payment System and Digital Banking
12.3.2 Know Your Customer (KYC)
12.3.3 Purpose of Know Your Customer (KYC)
12.3.4 Significance of Know Your Customer (KYC)
12.3.5 Documents required for KYC
12.3.6 KYC Process Flow
12.3.7 Robotic Process Automation (RPA) for KYC
12.3.8 Meaning and Characteristics of MICR
12.3.9 Benefits and Drawbacks of MICR
12.3.10Importance of MICR in Banking
12.3.11Meaning and Benefits of Cheque Truncation System (CTS) in Banking
12.3.12Need for Cheque Truncation System (CTS) in India
12.3.13How does CTS Work?
12.3.14Process of CTS
12.3.15National Financial Switch (NFS)
12.3.16Member Banks of NFS
12.3.17Features of NFS
12.3.18Value added Services of National Financial Switch (NFS)
12.3.19Real Time Gross Settlement (RTGS)
12.3. 20Features and Benefits of RTGS
12.3.21How does RTGS works?
12.3.22Concept of National Electronic Fund Transfer (NEFT)
12.3.23Procedure of National Electronic Fund Transfer (NEFT)
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12.3.24Benefits of Using NEFT for fund transfer

12.3.25Unified Payment Interface (UPI)
12.3.26Participants and Benefits of UPI
12.3.27Products of UPI
12.3.28Services of UPI
12.3.29Difference between NEFT, RTGS & UPI
12.3.30Clearing Corporation of India Ltd (CCIL)
12.3.31 CCIL Certification
12.3.32 Benefits of CCIL
12.3.33Clearing & Settlement Procedure of CCIL
12.3.34 Continuous Linked System (CLS)
12.3.35. Forex Settlements
12.3.1 Concept of Payment System and Digital Banking
Applications must be modified to use the payment infrastructure in order to
make a payment service available to users. Ideally, a common API should be used
so that the integration is not specific to one kind of payment instrument. Support
for payment should be integrated into request response protocols on which
applications are built so that a basic level of service is available to higher level
applications without significant modification. The credentials for online banking is
normally not the same as for telephone or mobile banking. . The customer number
can be linked to any account that the customer controls, such as cheque, savings,
loan, credit card and other accounts. The customer visits the financial institution's
secure. . The customer number can be linked to any account that the customer
controls, such as cheque, savings, loan, credit card and other accounts. The
customer visits the financial institution's secure
12.3.2 KYC – Know Your Customer
“Know Your Customer.” is a process where banks obtain information about
their customers’ identity thereby ensuring that bank services and government
regulations not misused.
Know Your Customer (KYC) refers to the process of verifying the identity of
your customers, either before or during the time that they start doing business. The
term “KYC” also references the regulated bank customer identity verification
practices to assess and monitor customer risk. The KYC process is also a legal
requirement intended as an anti-money laundering (AML) measure.
The KYC procedure is used when bank customers open accounts. Banks are
also required to periodically update their customers’ KYC details.
What is eKYC?
In India, Electronic Know Your Customer or Electronic Know your Client or
eKYC is a process wherein the customer's identity and address are verified
electronically through Aadhaar authentication. Aadhaar is India's national
biometric eID scheme.
eKYC also refers to capturing information from IDs (OCR mode), the extraction
of digital data from government-issued smart IDs (with a chip) with a physical
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presence, or the use of certified digital identities and facial recognition for online
identity verification.
Customer on boarding can then be done via mobile. eKYC (aka online KYC) is
considered more and more feasible as its accuracy is improving by utilizing
Artificial Intelligence (AI).
12.3.3 Purpose of Know Your Customer KYC
 To reduce the risk of identity theft, money laundering, financial fraud, and
the financing of criminal organizations.
 To manage risks and helps to understand customer behaviour. This
importance of the KYC process requires banks.
 To collect and verify basic details of customers which includes their name
and authorized signatures, legal status of an entity or person, the identity of
owners on the account and other information depending on FI risk
approach.
 To create and run an effective KYC process in banks, these are thefollowing
elements that are required
 Customer Identification Program (CIP): The Customer Identification Program
requires that financial institutions like banks take the appropriate steps to
have the reasonable belief that all customers who enter a formal banking
relationship with them are who they say they are. The CIP is also commonly
referred to as the “know your customer program.”
 Customer Due Diligence: Customer due Diligence information includes facts
about a customer that enable an organization to assess the extent to which
the customer exposes the institution to a range of risks. These risks include
terrorist financing and money laundering.
 On-going monitoring: collection of documents which show proof of identity
(government issued IDs), establishing and verifying customer identity, and
screening the identity information against political exposure, sanction lists,
criminal lists, and unreliable customers lists.
12.3.4 Significance of Know Your Customer KYC
 KYC procedures defined by banks involve all the necessary actions to ensure
their customers are real, assess, and monitor risks.
 Client-onboarding processes help prevent and identify money laundering,
terrorism financing, and other illegal corruption schemes.
 KYC process includes ID card verification, face verification, document
verification such as utility bills as proof of address, and biometric
verification.
 Banks must comply with KYC regulations and anti-money laundering
regulations to limit fraud. KYC compliance responsibility rests with the banks.
 Trust in a customer profile.
 Allows the bank to understand the nature of customer activities.
 Provides protection from fraud and losses.
 It also helps mitigate risk associated with money laundering.
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 Standardizes the on boarding process making it easier to monitor customer

behaviour based on their risk profile.
 According to a Forbes article written by CEO of Jumio, Robert Prigge in the
U.S., Europe, the Middle East, and the Asia Pacific, a cumulated USD26
billion in fines have been levied for non-compliance with AML, KYC, and
sanctions-fines the past ten years (2008-2018) - let alone the reputational
damage done and not measured.
 According to the United Nations, criminals are laundering between $1.6 to
$4 trillion (between 2 to 5% of global GDP) annually. Stricter KYC/CDD
processes are helping to stop that.
Periodicity of KYC Refresh
The KYC guidelines have been put in place by the Reserve Bank of India in the
context of the recommendations made by the Financial Action Task Force (FATF) on
Anti Money Laundering (AML) standards and on Combating Financing of Terrorism
(CFT). The Prevention of Money Laundering Act requires banks, financial
institutions and intermediaries to ensure that they follow certain minimum
standard of KYC and AML.
KYC is to be provided at the time of opening a new account as well as refresh.
It may be necessary to obtain additional information from existing customers based
on the conduct of the account, where there are changes to the account or at fixed
periodic refresh cycles based on the risk categorization of the customer. Similarly,
an existing customer will be required to provide fresh KYC for new account opening
to adhere to the latest applicable KYC standards.
12.3.5Documents required for KYC
a) KYC Documents - Individuals
Individuals (Documents acceptable as proof of identity/address)
 Passport
 Voter's Identity Card
 Driving Licence
 Aadhaar Letter/Card
 PAN Card
 NREGA Card
Any one document towards proof of identity and proof of address (either
permanent or current)
b) KYC Documents - Minors
 If minor is less than 10 years of age, ID proof of the person who will operate
the account to be submitted.
 In cases where minor can operate the account independently, KYC
procedure for identification/address verification as in the case of any other
individuals would apply.
c) KYC Documents - NRIs
 Passport and Residence Visa Copies, duly attested by
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 Foreign offices
 Notary Public
 Indian Embassy
 officers of correspondent banks whose signatures are verifiable through an
authorized(A/B category Forex handling branch) branch of the Bank
12.3.6 KYC Process Flow

KYC policies
 Customer Policy
 Customer Identification Procedures (data collection, identification,
verification, politically exposed person/sanctions lists check) aka Customer
Identification Program (CIP)
 Risk assessment and management (due diligence, part of the KYC process)
 Ongoing monitoring and record-keeping
 This involves verifying a customer's identity through documents, including a
national ID Document with a document reader and advanced document
verification software.
12.3.7 Robotic Process Automation (RPA) for KYC
KYC is a Robotic Process Automation (RPA) software designed specifically for
banks and other financial institutions. While KYC in AML is typically a repetitive
process that is both labours intensive and prone to human error, Comarch’s KYC
process in banks uses optimization by enhancing data collection and input. The
system uses automatic processes to derive data from different sources, both
external and internal, and instantly turns them into user- friendly reports ready for
further analysis in compliance with regulatory requirements for KYC in AML. RPA
in banking reduces the number of manual tasks and allows us to focus on what
matters most: accurate and efficient customer risk evaluation.
12.3.8 Meaning and Characteristics of Magnetic Ink Character Recognition (MICR)
Magnetic ink character recognition (MICR) is a technology used primarily to
identify and process chqques. The MICR on a check is the string of characters that
appears at the bottom left of the check. It consists of three groups of numbers,
including the bank routing number, the accountnumber, and the check number.
The data printed with MICR technology appears on the bottom left of a
checque and includes three strings of characters. From left, they are:
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 The nine-character routing number that identifies the bank branch

 The 12-character account number that identifies the payer
 The four-character check number that indicates which check in a series that
the account holderhas used.
MICR Code is used in the processing of cheques by machines. This code
enables faster processing of cheques. One is required to mention the MICR code
while filing up various financial transaction forms such as s investment forms or
SIP form or forms for transfer of funds etc.
The magnetic ink character recognition line enables a computer to rapidly read
and record numbers or other information from printed documents, such as a
personal check. In this case, that information is a check number, routing number,
and account number. The system was developed by the American Bankers
Association (ABA) in the late 1950s and was later recognized as an industry
standard by the American National Standards Institute.
The MICR number, which is sometimes confused with just the account
number, is printed on the check using magnetic ink or toner, less than an inch
above the bottom of the document. The magnetic ink allows a computer to read the
characters even if they have been covered with signatures, cancellation marks,
bank stamps, or other marks.
MICR lines help facilitate automatic check-clearing when banks send their
checks to central processing systems at the end of the day. They are designed to be
easily read by people as well, so that check information can be communicated
easily.
The numbers are usually printed in one of two specially-designed fonts, called
E-13B and CMC- 7 Both are used worldwide, with the E-13B used primarily in
North America, Australia, and the United Kingdom. The CMC-7 font is mainly used
in Europe and parts of South America.
a) Characteristics of MICR
 Paper Standard: The paper on which MICR cheques are printed must be the
CBSI (Clearing Bank Specification 1 Or Clearing Bank standard 1)
 Security Standards: As increased security measures, some special features
are added to the MICR cheques.
 Watermark: Watermark of the bank is seen in the MICR cheques.
 Microprint: Microprints are used as increased security measures.
 Magnetic Ink: Magnetic ink is used to avoid forgery.
 Invisible UV Florescent: Invisible UV Fluorescent is used as an extra step to
avoid forgery.
 Chemical Sensitivity: Particular chemical sensitivity helps to detect forgery.
12.3.9 Benefits & Drawbacks of MICR
a) Benefits of MICR
i) In spite of rough handling, one can read the MICR information with high
degree of accuracy.
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ii) The processing of MICR information is fast.

iii) It offers greater security compare to OCR technology as printed
characters cannot be altered.
iv) There is no manual input and hence errors are reduced.
v) The characters can be read even if somebody writes on them. This is due
to the fact that special ink containing iron particles is used to
print the characters. The document is not easy to forge.
b) Drawbacks of MICR
i) It can recognize only 10 digits & 4 special characters.
ii) Alphanumeric characters are not used in MICR. Only certain characters
can be read.
iii) It is more expensive method of data entry.
12.3.10 Importance OF MICR in Banking
MICR is a character recognition technology that is mainly used in the banking
industry. This system facilitates the processing of cheques and offers excellent
security when performing financial transactions. MICR uses magnetically
chargeable printer ink and toner containing iron oxide to print numbers and a
special character font family. These characters are printed in special typefaces
across the bottom of all cheques which includes the bank’s routing number, the
customer’s account number, and the cheque number.
The technology behind the magnetic Ink character Recognition is not only used
in banking but is also applicable for ticket verification in airline companies. An
advantage of this system over other computer-readable information such as bar
codes is that humans are able to read MICR.
Magnetic readers easily process cheques because they can quickly identify the
banks that issued them. It also eliminates the need to manually verify or validate
the cheque.
It facilitates document processing more efficiently. Even if the MICR line has
been covered with signatures or cancellation marks, the magnetic quality of the
characters still allows the MICR read head to read the information accurately.
Before the Magnetic Ink character Recognition system was used, it took weeks
for banks to clear cheques. But now, this technology rapidly processes high volume
of cheques per day making bank transactions done within minutes. The system
truly makes banking a pleasant experience for everyone.
Any information provided by the bank in its mobile banking application,
website, or banking kit depicts a purpose and use. The information provided
through any of the mediums is used by both the bank and the users to easily
complete and record the transaction.
12.11. Meaning and Benefits of Cheque Truncation System (CTS)in Banking
a) Meaning
Cheque Truncation System (CTS) is a process of clearing cheques
electronically rather than processing the physical cheque by the presenting bank
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en-route to the paying bank branch. It is a step undertaken by the Reserve Bank of
India (RBI) for quicker cheque clearance.
Even though major products are being offered in the form of RTGS (real-time
gross settlement) and NEFT (national electronic funds transfer), that can enable
inter-bank and customer payments online and in near-real time, cheques, on the
other hand, continue to be the prominent mode of payments in the country and
that is the reason why RBI has decided to focus on improving the efficiency of the
cheque clearing cycle.
b) Benefits of Cheque Truncation System(CTS)
Customer Service
• Extended cut off time for acceptance of Customer Cheques by banks
• Easy retrieval of information
• Reduced timelines for clearing
Operational Benefit
• MICR amount encoding not required
• Reconciliation difference eliminated - MICR and Image data travel together
• No cheques being lost/tampered/pilfered
• No risk of any manipulation of data and image during transit
• CTS 2010 standards leading to enhanced security and automation
Commercial Benefit
• Cost involved in paper movement eliminated
• Grid implementation allowing better liquidity management for banks
Fraud Prevention Mechanism
• Manipulation of data and image during transit is prevented by digital
signature / encryption.
• CTS 2010 standards lead to enhanced security (Pl refer to attached NPCI
circular for CTS 2010 standard) MICR reject repair flag
12.3.12 Need for Cheque Truncation System (CTS) In India
Cheques remain a popular form of payments in India even with the increased
availability of alternate payment channels. RBI continues to classify paper clearings
as a System-Wide Important Payment System (SWIPS) due to the high volumes of
transactions. Cheque Truncation speeds up collection of cheques and therefore
enhances customer service, reduces the scope for clearing related frauds,
minimizes cost of collection of cheques, reduces reconciliation problems, eliminates
logistics problems etc. With the other major product offering in the form of RTGS,
the Reserve Bank created the capability to enable inter-bank payments online real
time and facilitate corporate customer payments. The other product, National
Electronic Funds Transfer, is an electronic credit transfer system.
However, to wish away cheques is simply not possible and that is the reason
why the Bank decided to focus on improving the efficiency of the Cheque Clearing
Cycle. Cheque Truncation is the alternative. Moreover contrary to perceptions,
Cheque Truncation is a more secure system than the current exchange of physical
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documents in which the cheque moves from one point to another, thus, not only
creating delays but inconvenience to the customer in case the instrument is lost in
transit or manipulated during the clearing cycle. In addition to operational
efficiency, Cheque Truncation has several benefits to the banks and customers
which includes introduction of new products, re-engineering the total receipts and
payments mechanism of the customers, human resource rationalization, cost
effectiveness etc., Cheque Truncation thus is an important efficiency enhancement
initiative in the Payments Systems area, undertaken by RBI.
12.3.13. How Does CTS Work?
Cheque Truncation System is an online image-based cheque clearing system
which involves scanning of cheque images and subsequent electronic movement /
replication of these images within the system for processing and clearing of cheques.
RBI first introduced this system in National Capital Region of India and New
Delhi from 1 February 2008 with ten pilot banks. The deadline for which was set as
30th April, 2008 for all the banks to acquire this system. After this, it was launched
in Chennai on 24tn September, 2011.
Before the introduction of Cheque Truncation System, instruments used to get
settled in MICR Clearing. In India, there were about 66 MICR centres which used to
undertake clearing and settlement in their local geography. Moreover, the intra
clearing was considered as outstation clearing. Now, a new approach called Grid-
based approach has been introduced to manage the entire cheque volume in India.
New Approach to Cheque Truncation System (CTS) Implementation in India has
been introduced and is called Grid-based approach. The entirecheque volume of the
country is now consolidated into three grids in New Delhi, Chennai and Mumbai.
Each grid provides processing and clearing services to all the banks under its
respective jurisdiction. Banks, branches and customers based at small / remote
locations falling under the jurisdiction of a grid would be benefitted, irrespective of
whether there exists at present a formal arrangement for cheque clearing..The
jurisdictions of the three grids are indicated below:
a) New Delhi Grid:
National Capital Region of New Delhi, Haryana, Punjab, Uttar Pradesh,
Uttarakhand, Bihar, Jharkhand, Rajasthan and the Union Territory of Chandigarh.
b) Mumbai Grid:
Maharashtra, Goa, Gujarat, Madhya Pradesh and Chhattisgarh.
c) Chennai Grid:
Andhra Pradesh, Telangana, Karnataka, Kerala, Tamilnadu, Odisha, West
Bengal, Assam and the Union Territory of Puducherry.
i) Status of CTS implementation in India
CTS have been implemented in New Delhi, Chennai and Mumbai with effect
from February 1, 2008, September 24, 2011 and April 27, 2013 respectively. After
migration of the entire cheque volume from MICR system to CTS, the traditional
MICR-based cheque processing has been discontinued across the country.
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ii) Benefits of CTS Cheque books

• Elimination of physical movement of cheques
• Reduction in cost and time.
• Faster collection process.
• Better Customer service.
• Reduction in risk of losing instruments in transit.
• No Outstation cheque collection charges
iii) Benefits to Account Holders
• No physical movement of cheques.
• No fear of loss of cheque in transit.
• Quicker clearance.
• Shorter clearing cycle and speedier credit of the amount to your account.
• Cheques getting cleared on the same day or within 24 hou
iv) Benefits to Various Customers of Banks
• Comparatively Shorter clearing cycle.
• Superior verification and reconciliation process.
• No geographical restrictions as to jurisdiction.
• Operational efficiency for banks and customers alike.
• Reduction in operational risk and risks associated with paper clearing.
• Scope for frauds is minimum.
12.3.14 Process of Cheque Truncation System (CTS)
The process of CTS can be discussed as follows:
 Collection of Cheques: Firstly, branches collect cheques from customer and
then at scheduled time, send them to their respective service branch.
 Capturing of Data: Service branch captures the data (like MICR code, cheque
number, amount etc.) and the images of a cheque using their Capture System
(containing scanner, core banking or CTS application) which is internal to them,
and meeting the specifications and standards prescribed for data and image.
After this complete information of cheque securely transmitted at Clearing House
Interface (CHI) then from CHI to CH where actual settlement of clearing occur.
 Security of Data: To ensure security, safety and non-repudiation of data /
images, end-to-end Public Key Infrastructure (PKI) has been implemented in
CTS. However, as part of the requirement, the collecting bank (presenting
bank) sends the data and captured images duly signed and encrypted to the
central processing location (Clearing House) for onward transmission to the
paying bank (destination or drawee bank).
 Clearing House Interface: For the purpose of participation, the presenting and
drawee banks are provided with an interface / gateway called the CHI that
enables them to connect and transmit data and images in a secure and safe
manner to the Clearing House (CH).
 Presentation Clearing: The Clearing House processes the data, arrives at the
settlement figure and routes the images and requisite data to the drawee
banks. This is called the presentation clearing.
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 Processing of Payment: The drawee banks through their CHIs receive the
images and data from the Clearing House for payment processing. The drawee
Cheque Truncation System also generates the return file for unpaid
instruments, if any. The return file / data sent by the drawee banks are
processed by the Clearing House in the return clearing session in the same
way as presentation clearing and return data is provided to the presenting
banks for processing.
 Completion of Cycle: The clearing cycle is treated as complete once the
presentation clearing and the associated return clearing sessions are
successfully processed. The entire essence of CTS technology lies in the use of
images of cheques (instead of the physical cheques) for payment process
12.3.15 National Financial Switch (NFS)
The National Financial Switch is the largest interconnected network of
automated teller machines (ATMs) in India. This system was developed by Institute
of development and research in Banking Technology (IDRBT), Hyderabad.
The national financial switch enabled the interconnectivity between the bank’s
switches such that the transactions made at any ATM could be routed to the
connected banks. These were done with a view to connecting all the ATMs in the
country and facilitate easy banking for the common man residing anywhere in the
country.
IRDT is the pioneer of ATM switching service and to keep up with its further
research and development activities; it handed over the national financial switch to
the National Payments Corporation of India (NPCI). NPCI is the principal institute
which looks, after all, retail payment systems in the country.
The NPCI has allowed any bank offering the core banking services round the
clock with or without ATM can be a part of this national financial switch through a
sponsor bank. The objective behind such a move is to enable the non-scheduled
cooperative banks and other regional rural banks to access the wide network of
ATMs in the country, Thereby enabling the customers of such bank to access
banking services through any ATM of a connected bank.
12.3.16 Member Banks of NFS
As of April 2017, the NFS Network connects total of 2, 36,199 ATMs in India.
Among them 2, 16,952 ATMs of 99 Direct Member banks, 4,058 ATMs of 692 Sub
Member banks, 1,034 ATMs of 56 RRB Member banks and 14,146 ATMs of 8 White
Label ATM providers, which is the largest number of ATMs under a single network
in India.
NFS has established a strong and sustainable operational model with in-house
capabilities and today can be compared at par with other major and well-
established switch networks. The operational functions and services are at par with
most of the global ATM networks.
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12.3.17 Features of National Financial Switch (NFS)

 NFS has introduced sub-membership model which enables smaller, regional
banks including RRBs and local co-operative banks to participate in the ATM
network.
 NFS has maintained high standards of application and network uptime of above
99.50% which has helped our member banks ensure enhanced customer
experience.
 The Dispute Management System (DMS), has benefitted members with high
operational efficiency and ease of online transaction life cycle management in the
network apart from being compliant with local regulatory requirements.
 NPCI has also tied up with International card schemes like Discover Financial
Service (DFS), Japan Credit Bureau (JCB) and China Union Pay International
(CUPI) which allows their cardholders to use ATMs connected to NFS network.
 The Fraud Risk Management (FRM) solution is offered as a value added service
to monitor transactions (in real time) and to generate alert or decline the
transaction in the NFS network.
12.3.18 Value Added Services of National Financial Switch (NFS)
The service enables cardholders of participating member banks to use NFS
networked Cash Recyclers/Cash Deposit Machines of participating member banks
for depositing cash in their own account or third party account.
The service is beneficial for banks as well as its customers as it will help banks
to optimize cash handling cost and at the same time provide convenience to
customers by allowing them to use any participating Bank’s Cash Recycler/Cash
Deposit Machine to deposit cash into their own account or any third party account.
Many Banks have already deployed about 30,000 + Cash Recyclers/Cash
Deposit Machines for catering their own customers, which can be enabled for
interoperable transactions.
Apart from basic transactions like Cash Withdrawal, Balance Enquiry, PIN
Change and Mini Statement, NFS also offers other Value Added Services (VAS) on
ATMs/CDMs like: Interoperable Cash Deposit (ICD):
a) Mobile Banking Registration (MBR)
The service enables cardholders of participating member bank to register for
Mobile Banking using any other participating member bank’s ATM.
b) Card-to-Card Fund Transfer (C2C)
The service enables cardholders of participating member bank to use NFS
network ATMs of participating member bank for initiating funds transfer to the any
other participating member bank’s cardholder’s account.
c) Cheque Book Request (CBR)
This service enables cardholder of participating member bank to request for
Cheque Book using any other participating member Bank’s ATM.
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d) Statement Request (SR)

This service enables cardholder of participating member bank to request for
account statement using any other participating member Bank’s ATM.
e) Aadhaar Number Seeding (ANS)
This service enables cardholder of participating member bank to request for
seeding of Aadhaar number in the account linked to the card using any other
participating member Interoperable Cash Deposit (ICD)
Interoperability will further help to optimised cash handling cost and earn
higher fee income leading to enhance Return on Investment. Some of the key
features of this service are:
 Real time credit to beneficiary account
 Instant verification of notes by cash recycler/cash deposit machine
 Optimize cash handling cost and reduce idle cash in machines
 Limit per Transaction is restricted to less than Rs.50,000/-
 Paperless Transaction
NFS with its primary facility in Mumbai and a special disaster recovery site at
a strategic site in a different seismic zone offers its service to each of the ATM
across the country.
i) It allows for a robust network, data security and back of critical data using
highly equipped infrastructure facility.
ii) Faster grievance redressal with zero down time and zero data thefts or loss.
iii) Through its special and real time Fraud Management enables member banks
to inform their customers with respect to any suspicious transaction on a
real-time basis.
The recently zero charge bank project is aiming at more checks and measure
to help banks acquires status of their complaints on their ATMs. Further every
possible attempt is being made to increase the cost efficiency of ATMs.
12.3.19Real-Time Gross Settlement (RTGS)
The term real-time gross settlement (RTGS) refers to a funds transfer system
that allows for the instantaneous transfer of money and/or securities. RTGS is the
continuous process of settling payments on an individual order basis without
netting debits with credits across the books of a central bank. Once completed,
real-time gross settlement payments are final and irrevocable. In most countries,
the systems are managed and run by their central banks.
RTGS system is a funds transfer mechanism where transfer of money takes
place from one bank to another bank branch on a “real time” and on “Gross” basis
settlement takes place in “real time” which means payment transaction is not
queued or staggered subjecting the transaction for any waiting period.“Gross
Settlement” means the transaction is settling on one to one basis without bunching
with any other transaction.
 Real-time gross settlement is the continuous process of settling interbank
payments on an individual order basis across the books of a central bank.
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 This system's process is opposed to netting debits with credits at the end of the day.
 Real-time gross settlement is generally employed for large-value interbank funds
transfers.
 RTGS systems are increasingly used by central banks worldwide and can help
minimize the risks related to high-value payment settlements among financial
institutions.
12.3.20 Features And Benefits of RTGS Transactions
The main features and benefits of RTGS transactions are mentioned below:
 Real-time online fund transfer
 Used for high value transactions
 Safe and secure
 Reliable and backed by the RBI
 Immediate clearing
 Funds credited on a one-on-one basis
 Transactions executed on an individual and gross basis
a) Fees and Charges for RTGS Transactions
In case of online transfers, no charges are levied for RTGS transactions. In
case the RTGS transaction is completed at a bank branch, a charge of Rs.15 plus
GST is levied.
b) What are the Timings and limits for RTGS?
RTGS transactions can be completed on a 24/7 basis, expect between 11:30
p.m. and 00:30 a.m. due to cut-off.
The minimum amount for RTGS transactions is Rs.2 lakh. There is no
maximum limit.
c) Acknowledgement of Funds Transfer
The remitting bank receives a message from the RBI that money has been
credited to the receiving bank. Based on this message, the remitting bank can advise
the remitting customers that funds have been delivered to the receiving Bank.
12.3.21How Real-Time Gross Settlement (RTGS) Works?
When we hear the term real-time, it means the settlement happens as soon as it
is received. So, in simpler terms, the transaction settles in the receiving bank
immediately after it is transferred from the sending bank. Gross settlement means
transactions are handled and settled individually, so multiple transactions aren't
bunched or grouped together. This is the basis of a real-time gross settlement system.
An RTGS system is generally used for large-value interbank funds transfers
operated and organized by a country’s central bank. These transfers often require
immediate and complete clearing. As mentioned above, once transactions are
settled, they cannot be reversed.
i) Steps to make RTGS Funds Transfer
Log in to Internet Banking/iMobile
Step-1: Go to the ‘Fund transfer’ tab
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Step-2: Select ‘Beneficiary’ from the list of registered beneficiaries

Step-3: Select the Debit Account, enter the amount and add remarks (optional)
Step-4: Select RTGS as the payment method
Step-5: Review the details, and, if all is correct, click on ‘Confirm’ to complete
the process Step 6– Authenticate the transaction using OTP and click
on ‘Submit’.
ii) Tracking of Remittance Transaction under RTGS by the Remitter
It would depend on the Arrangement between the remitting customers on the
remitting bank. Some Banks with internet banking facility provide these services.
Once the funds are credited to the account of the beneficiary bank the remitting
customer gets a confirmation from his bank either by an e-mail or by a SMS on his
mobile.
iii) Availability of RTGS services in Branches
All the Bank Branches in India are not RTGS enabled. Only CBS enabled Bank
branches can extend this facility. As on Jan-31st -2009 more than 57000 Bank
Branches enable for RTGS System.
12.3.22 Concept of NEFT - National Electronics Fund Transfer
National Electronics Fund Transfer (NEFT) is a country-wide electronic fund
transfer system for sending money from one bank account to another in a safe and
hassle-free manner.“Moving funds between different accounts in the same or
different banks, through the use of wire transfer, automatic teller machine or
computers, but without the use of paper document”
The National Electronic Fund Transfer (NEFT) is payment platform which is
used nation-wide by many banks. This allows the easy and hassle-free transfer of
money from one bank account to another bank account. With the world slowly
shifting to online banking, the concept NEFT has become very popular in the
country and is an easy way of transferring funds. It eliminates the need to visit the
bank to transfer funds, as you can transfer funds from while being at home.
NEFT includes direct-debit transactions, wire transfers, direct deposits, ATM
withdrawals and online bill pay services. Transactions are processed through the
Automated Clearing House (ACH) Network.
Direct deposit is another form of an electronic fund transfer. In this case,
funds from your employer’s bank account are transferred electronically toyour bank
account, with no need for paper-based payment systems.
The National Electronic Funds Transfer or NEFT is a nationwide centralised
payment system owned and operated by the Reserve Bank of India (RBI).The
objective of NEFT was to establish an efficient, secure and economical electronic
fund transfer system.
NEFT – Transaction Timings
Earlier, the NEFT transaction timings for most banks were between 8 a.m. and
6 p.m. from Monday to Friday and 8 a.m. to 12 p.m. on Saturdays. However, with
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effect from 16 December 2019, you can transfer money via NEFT 24x7. Money can
be transferred via NEFT on holidays and weekends as well.
12.3.23 Procedure of National Electronic Funds Transfer (NEFT)
The procedure for National Electronic Funds Transfer (NEFT) is mentioned below:
Step-1: First login to your net banking account. If you do not have a net banking
account then registers for it on the website of your bank.
Step-2: Add the beneficiary as a payee. To do so, you have to enter the following
details about the beneficiary in the ‘Add New Payee’ section:
Account Number:
Name:
IFSC Code:
Account Type.
Step-3: Once the payee is added, choose NEFT as mode of Fund Transfer.
Step-4: Select the account you wish to transfer money from, the payee, enter the
amount that you wish to transfer, and add remarks (optional).
Step-5: Click on submit.
12.3.24 Benefits of Using NEFT for Fund Transfer: NEFT offers a lot of benefits
The system allows the one-way cross-border transfer of funds from India to
Nepal. This is under the Indo-Nepal Remittance Facility Scheme.
• With NEFT, you can easily transfer funds from one bank account of any
branch to another account.
• It avoids the need for a physical instrument to transfer funds.
• There is no need for any physical presence of parties.
• NEFT is easy, simple and efficient.
• There is no need to visit the bank as long as you have a valid bank account
• Internet banking can be initiated from any location.
• The confirmation of a transaction will be received via email and SMS
notifications
• The real-time transactions of NEFT give assurance to both parties.
• It is a faster mode of transfer of funds which facilitate transference of funds
within 24 hours
• The system is customer-savvy as no paper work is involved and delay is
witnessed.
• In-built security systems ensure safer mode of transference of funds.
Who is Eligible to Complete a NEFT Transaction?
The list of bank branches that come under the NEFT scheme is provided by
the Reserve Bank of India. Corporates, firms, and individuals who have a bank
account under the NEFT scheme will be eligible to make NEFT transactions.
Individuals who do not have a bank account can also make a NEFT transaction by
visiting the bank branch and providing the relevant details.
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12.3.25 Unified Payments Interface (UPI)

Unified Payments Interface is an instant real-time payment system developed
by National Payments Corporation of India facilitating inter-bank peer-to-peer and
person-to-merchant cash less transactions.
 Markets: India; Bhutan; Nepal; Malaysia; Singapore; United Arab Emirates;
International by cross border payment agreements
 Owner: National Payments Corporation of India
 Introduced: 11 April 2016
Unified Payments Interface (UPI) is an instant real-time payment system
developed by NationalPayments Corporation of India (NPCI) facilitating inter-bank
peer-to-peer (P2P) and person-to- merchant (P2M) transactions. The interface is
regulated by the Reserve Bank of India (RBI) and works by instantly transferring
funds between two bank accounts on a mobile platform.
As of February 2022, there are 304 banks available on UPI with a monthly
volume of 452 crore (4.52 billion) transactions and a value of $8.26 lakh
crore(US$110 billion). UPI witnessed 6,800 crore (68 billion) transactions till
November 2021. The mobile-only payment system helped transact a total of $34.95
lakh crore (US$460 billion) during the 67 months of operation starting from 2016.
As of May 2021, the platform has 15 crore (150 million) monthly active users
in India. The proportion of UPI transactions in total volume of digital transactions
grew from 23% in 2018–19 to 55% in 2020–21 with an average value of $1,849 per
transaction. There were digital transactions worth $8.31 lakh crore in January
2022 via the platform. In FY 2022, the UPI crossed transactions worth $1 trillion.
a) Uniqueness OfUPI
 Immediate money transfer through mobile device round the clock 24*7 and 365
days.
 Single mobile application for accessing different bank accounts.
 Single Click 2 Factor Authentication – Aligned with the Regulatory guidelines,
yet provides for a very strong feature of seamless single click payment.
 Virtual address of the customer for Pull & Push provides for incremental security
with the customer not required to enter the details such as Card no, Account
number; IFSC etc.
b) QR Code
 Best answer to Cash on Delivery hassle, running to an ATM or rendering exact
amount.
 Merchant Payment with Single Application or In-App Payments.
 Utility Bill Payments, Over the Counter Payments, QR Code (Scan and Pay)
based payments.
 Donations, Collections, Disbursements Scalable.
 Raising Complaint from Mobile App directly.
12.3.26 Participants and Benefits of UPI
a) Participants in UPI
 Payer PSP
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 Payee PSP
 Remitter Bank
 Beneficiary Bank
 NPCI
 Bank Account holders
 Merchants
b) Benefits of UPI
i) To Banks
 Single click Two Factor authentication
 Universal Application for transaction
 Leveraging existing infrastructure
 Safer, Secured and Innovative
 Payment basis Single/ Unique Identifier
 Enable seamless merchant transactions
ii) To Customers
 Round the clock availability
 Single Application for accessing different bank accounts
 Use of Virtual ID is more secure, no credential sharing
 Single click authentication
 Raise Complaint from Mobile App directly
iii) To Merchants
 Seamless fund collection from customers - single identifiers
 No risk of storing customer’s virtual address like in Cards
 Tap customers not having credit/debit cards
 Suitable for e-Com & m-Com transaction
 Resolves the COD collection problem
 Single click 2FA facility to the customer - seamless Pull
 In-App Payments (IAP).
iv) Steps for Registration
 User downloads the UPI application from the App Store/Banks website
 User creates his/her profile by entering details like name, virtual id (payment
address), password etc.
 User goes to “Add/Link/Manage Bank Account” option and links the bank
and account number with the virtual id
12.3.27 Products OfUPI
a) Financial Transactions
UPI supports the following financial transactions
 Pay Request: A Pay Request is a transaction where the initiating customer is
pushing funds to the intended beneficiary. Payment Addresses include
Mobile Number & MMID, Account Number & IFSC and Virtual ID.
 Collect Request: A Collect Request is a transaction where the customer is
pulling funds from the intended remitter by using Virtual ID.
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 Non-Financial Transactions: UPI will support following types of non-financial

transactions on any PSP App viz.
• Mobile Banking Registration
• Generate One Time Password (OTP)
• Change PIN
• Check Transaction Status
• Raise Dispute/Raise query
Mobile Banking Registration is possible only if the mobile number (which is to
be registered) is registered with the Issuer Bank for SMS Alerts/mobile alerts.
UPI can be accessed on all platforms viz. Android / iOS – The Apps have been
developed by members on Android 4.2.2 and above/iOS 8.1 and above platforms.
b) UPI Fees and Charges
There are no fees and charges applicable to the UPI platform. The UPI
programme was launched with the aim to promote digital transactions. The NCPI
had earlier marked the transaction charges to be 50 paisa per transaction.
However, the Government of India had later cancelled these charges to make sure
that more and more people started using the platform.
c) UPI vs. Cards and Cash
The main aim of the UPI applications is to promote digital transactions and
paving way for a cashless economy. With UPI, users can avail the benefit of not
carrying physical cash or any form of plastic money. All transactions can be taken
care of using their smartphones.
D) How secure are UPI transactions
UPI transactions are secured using UPI PINs which is a 4-6 digit numerical
combination. In addition to that, the applications are highly encrypted and have
heavy bandwidth capacity.
e) Apps with UPI Feature in India
 PhonePe
 Paytm
 BHIM app
 MobiKwik
 Google Tez
 Uber
 Chillr
 Paytm Payments Bank
 SBI Pay
 iMobile
 Axis Pay
 BOB UPI
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f) Features of UPI
 Bill payment
 Pre- Authorised Transaction
 Biometric Authentication
 Check on Speed of Transaction
 Error Resolution
 Scheduled Payment
 Aadhaar Based Payments
12.3.28 Services of UPI
Unified Payments Interface is a real-time payment system that allows sending
or requesting money from one bank account to another. Any UPI client app may be
used and multiple bank accounts may be linked to a single app. Money can be sent
or requested by using a user-created Virtual Payment Address (VPA) or UPI ID that
helps in sending or requesting money from a bank account using the know your
customer (KYC) linked mobile number. UPI also generates a specific QR code for
each user account for the purpose of contact-less payment.
12.3.29. Difference Between NEFT, RTGS, &UPI
CATEGORY NEFT RTGS UPI
Minimum amount that Rs.1 Rs.2 lakh Rs.1
can be Transferred
Maximum amount that No maximum Limit No maximum Limit Rs.1 lakh
can be Transferred
Timings 24×7 Depending on the bank 24×7
Details to be provided IFSC code, Account IFSC code, Account MPIN and
Number, Bank Name Number, Bank Name VPA
Payment options Offline/Online Offline/Online Online
Time for completion of Minimum 2 hours Immediate Immediate
transfer
Transaction charges Depends on bank Depends on bank No charges
Beneficiary Addition Yes Yes No
12.3.30. Clearing Corporation of India Ltd (CCIL)
CCIL is a Central Counterparty (CCP) which was set up in April 2001 to
provide clearing and settlement for transactions in Government securities, foreign
exchange and money markets in the country. CCIL acts as a central counterparty
in various segments of the financial markets regulated by the RBI viz. the
government securities segment i.e. outright, market repo and triparty repo, USD-
INR and forex forward segments.
Moreover, CCIL provides non-guaranteed settlement in the rupee denominated
interest rate derivatives like Interest Rate Swaps/Forward Rate Agreement market.
It also provides non-guaranteed settlement of cross currency trades to banks in
India through Continuous Linked Settlement (CLS) bank by acting as a third-party
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member of a CLS Bank settlement member.CCIL also acts as a trade repository for
OTC interest rate and forex derivative transactions.
The Core Committee, appointed at the behest of Reserve Bank of India for
setting up CCIL, identified six ‘core promoters’ for CCIL-State Bank of India, IDBI
Bank Ltd.(formerly Industrial Development Bank of India), ICICI Bank Ltd, Life
Insurance Corporation of India (LIC), Bank of Baroda and HDFC Bank Ltd. The
Company was incorporated with the authorized Equity Share Capital of Rs.50
Crores.
The Clearing Corporation of India Ltd was established in April 2001to render
guaranteed clearing and settlement functions concerning transactions in G-Secs,
money, derivative markets, and foreign exchange. The establishment of
guaranteedclearing and settlement led to substantial advances in transparency,
market efficiency, liquidity, and risk management/measuring practices in these
markets, alongwithadditionalbenefits, suchasoperatingriskandreducedsettlement,
savings with respect to settlement costs, etc.
CCIL also offers a non-guaranteed settlement concerning cross-currency
transactions and Rupee interest rate derivatives via CLS Bank. CCIL's compliance
with the stringent principles governing its operations as a Financial Market
Infrastructure led to its recognition by Reserve Bank of India as a Qualified Central
Counterparty (QCCP) in 2014. It also established a Trade Repository for enabling
financial institutions to report their transactions via OTC derivatives.
CCIL is also a trade repository for every OTC transaction in interest rate,
Forex, and credit derivative transactions. Portfolio compression is also undertaken
on a semi-annual basis for unpaid cleared Forex forward derivative transactions
and Rupee Interest Rate Swaps. CCIL, via its subsidiary Legal Entity Identifiers
India Limited, is the Local Operating Unit (LOU) for releasing globally compatible
Legal Entity Identifiers (LEIs) in the Indian financial market.
As of today, CCIL is the calculation agent for a few of the big benchmarks
utilised by the market under the backing of the Benchmark Administrator,
Financial Benchmarks India Limited (FBIL).
12.3.31 Clearing Corporation of India Ltd (CCIL) Certification
CCIL obtained certification ISO / IEC 27001:2013 from DNV GL in 2015 to
protect its information properties. CCIL, through its publications and website
updates, disseminates information and data on CCIL activities and financial
markets.
Over the years, CCIL has grown with the rising paradigms of the financial
system to take on various positions in the financial industry. With the help of its
wholly-owned subsidiary, the Clearcorp Dealing Systems Limited (CDSL), CCIL has
launched various platforms for the electronic execution of transactions in different
market segments.
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a) Market Segments
The main market segments currently covered by CCIL are:-
 Government Securities
 Money Market
 Forex
 Derivatives
 Trade Reposit
Members in these committees are employees of various banks and are
presentat the level of Assistant General Manager or Deputy General Manager in
their cadre.
b) Promoter Banks
The NPCI comprises of ten core promoter banks which significantly eases the
transaction processes initiated through NPCI. They are enlisted as follows:
 State Bank of India
 Punjab National Bank
 Canara Bank
 Bank of Baroda
 Union Bank of India
 Bank of India
 ICICI Bank
 HDFC Bank
 Citibank
 HDFC Bank
Services Offered
NPCI can operate the following payment systems:
 National Financial Switch (NFS)
 Immediate Payment System (IMPS)
 Affiliation of RuPay Cards (debit cards/ prepaid cards) issued by banks and
co-branded credit cards issued by non-banking financial companies (NBFCs)
or any other entity approved by the RBI.
 National Automatic Clearing House (ACH)
 Aadhaar Enabled Payments System (AEPS)
 Operation of Cheque Truncation System
12.3.32 Benefits Of CCIL
 Elimination of principal/credit risk
 Assurance of settlement on the settlement date
 Improved Operational efficiency
 Easier reconciliation of accounts
 Improved liquidity and better leveraging
 Lower operational cost
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12.3.33 Clearing and Settlement Procedure of CCIL

Deal confirmation files are transmitted over the INFINET to CCIL, and form the
starting point for processing by it. The trades are validated and matched. Matched
trades are subjected to an online exposure check and trades that pass such
exposure check are ‘Accepted’ for settlement. Novation occurs at the point in time
when the trade is accepted for guaranteed settlement. Following the multilateral
netting procedure, the net amount payable to or receivable from CCIL in each
currency is arrived at, member-wise.A Settlement window of five hours (i.e. 2:30
p.m. to 7:30 p.m.) is defined. Within this window, the settlement is effected. The
rupee leg is settled through the member’s current accounts with RBI and the USD
leg through CCIL’s account with the Settlement Bank. Settlement happens on a
Payment versus payment basis (PVP) i.e. the final settlement of one obligation
occurs if and only if the final settlement of the linked obligation occurs. Various
reports are generated to update members on the status of deals reported by it to
CCIL and the net settlement obligations that become due to and from them. These
reports are accessed by members over a Report Browser.
Foreign-exchange transactions are settled via correspondent banks or via CLS,
which is an international system for settlement of such transactions. Danmarks
National bank makes settlement accounts available to the banks for settlement via
CLS.
A foreign exchange transaction consists of two opposite payments. For
example, trading kroner against euro entails a payment in kroner by one party to
the other party and an opposite payment in euro. Traditionally, the two payments
are settled independently of each other, e.g. via correspondent banks in the
currencies in question.
If the two payments are not settled simultaneously, the parties incur
settlement risk, which is the risk that settlement will not take place as expected,
e.g. if one of the parties fails after it has received the currency purchased, but
before it has delivered the currency sold. Factors such as different time zones can
increase this risk, while also making simultaneous settlement very difficult for the
parties. The credit risk linked to traditional settlement can be large and can
potentially develop into systemic risk.
In the international payment system CLS, risk on settlement of foreign-
exchange transactions is reduced for banks and currency dealers worldwide.
12.3.34 Continuous Linked Settlement (CLS)
CLS was launched in 2002 with a view to reducing the settlement risk on
foreign-exchange transactions. CLS is owned by some of the world's largest banks.
CLS was developed with the support of and in dialogue with the central banks of
the currencies connected to CLS.
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In CLS, foreign-exchange transactions are settled according to the Payment

versus Payment (PvP) principle: ensuring that the final settlement of a payment
instruction in one currency occurs if, and only if, settlement of the payment
instruction for the currency being exchanged is also final. To ensure that the funds
are available, all payments must be effected via the central banks of the relevant
currencies, e.g. Danmarks National bank.

How CLS works within the trade lifecycle

CLS offers settlement of foreign-exchange transactions in US, Canadian,
Australian, New Zealand, Singapore and Hong Kong dollars, euro, pounds sterling,
Swiss francs, Japanese yen, South Korean won, South African rand, Mexican
pesos, Israeli shekels, Hungarian forint, Danish and Norwegian kroner and Swedish
kronor
Most stocks and bonds settle within two business days after the transaction
date. This two-day window is called the T+2. Government bills, bonds, and options
settle the next business day. Spot foreign exchange transactions usually settle two
business days after the execution date. A primary exception is the U.S. dollar vs.
the Canadian dollar, which settles the next business day.
12.3.35. Forex Settlements
A corporate Foreign exchange transaction involves a bank, on behalf of their
corporate client, paying for the currency it sold at an agreed rate to another bank
and receiving a different currency in return for the funds being cleared and settled
in the local clearings.
Foreign exchange (FX) settlement risk is the risk of loss when a bank in a
foreign exchange transaction pays the currency it sold but does not receive the
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currency it bought. FX settlement failures can arise from counterparty default,

operational problems, market liquidity constraints and other factors.
The settlement of Forex transactions by CCIL started from November 8, 2002.
This segment accepts the inter-bank Cash, Tom, Spot and Forward USD-INR
transactions for settlement through a process of multilateral netting. The
multilateral netting system provides a netting benefit of well over 95%. Every
eligible foreign exchange contract, entered into between members, will get novated
and be replaced by two new contracts - between CCIL and each of the two parties,
respectively. CCIL has since moved to a settlement on a Payment V/S Payment
basis from April 2015.The Corporation has been granted an 'Authorized Person'
License under FEMA 1999 by the Reserve Bank of India for conduct of foreign
exchange clearing and settlement operations and activities related thereto.
12.4 REVISION POINTS
1. KYC – KNOW YOUR CUSTOMER
“Know Your Customer.” is a process where banks obtain information about
their customers’ identity thereby ensuring that bank services and government
regulations not misused.
2. Magnetic ink character recognition (MICR)
Magnetic ink character recognition (MICR) is a technology used primarily to
identify and process cheques.
3. National Financial Switch
The national financial switch enabled the interconnectivity between the bank’s
switches such that the transactions made at any ATM could be routed to the
connected banks.
4. Real-Time Gross Settlement (RTGS)
The term real-time gross settlement (RTGS) refers to a funds transfer system
that allows for the instantaneous transfer of money and/or securities.
12.5 INTEXT QUESTIONS
1. Indicate the Purpose of Know Your Customer (KYC)
2. Enumerate the Significance of Know Your Customer (KYC)
3. Recall the documents required for KYC
4. Discuss the Process of KYC
5. State the Benefits of Cheque Truncation System (CTS).
6. Explain the Process of CTS
7. Spell out the Features of National Financial Switch (NFS)
8. Infer the Benefits of Real Time Gross Settlement (RTGS)
9. Summarize the Procedure of National Electronic Fund Transfer (NEFT)
10. State the Participants and Benefits of Unified Payment Interface (UPI)
11. Difference between NEFT, RTGS & UPI
12. Elucidate the Clearing & Settlement Procedure of Clearing Corporation of
India Ltd (CCIL)
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12.6 SUMMARY
Support for payment should be integrated into request response protocols on
which applications are built so that a basic level of service is available to higher
level applications without significant modification. KYC process includes ID card
verification, face verification, document verification such as utility bills as proof of
address, and biometric verification. MICR Code is used in the processing of cheques
by machines. Cheque Truncation System (CTS) is a process of clearing cheques
electronically rather than processing the physical cheque by the presenting bank
en-route to the paying bank branch. The National Financial Switch is the
largest interconnected network of automated teller machines (ATMs) in India. RTGS
is the continuous process of settling payments on an individual order basis without
netting debits with credits across the books of a central bank. National Electronics
Fund Transfer (NEFT) is a country-wide electronic fund transfer system for sending
money from one bank account to another in a safe manner. Clearing Corporation Of
India Ltd (CCIL) is a Central Counterparty (CCP) which was set up in April 2001 to
provide clearing and settlement for transactions in Government securities, foreign
exchange and money markets in the country.
12.7 TERMINAL EXERCISE
1. Which of the following account is supported by BHIM?
2. What is the default time to approve a collect request by a payer in UPI?
12.8 SUPPLEMENTARY MATERIALS
1. icsi.edu
2. rbi.org.in
3. money control.com
12.9 ASSIGNMENTS
1. Explain in detail the importance of KYC.
12.10 SUGGESTED READINGS
1. Gurusamy S 2017, Banking Theory Law & Practice, Vijay Nicole Imprints (P)
Ltd., Chennai.
2. Arunajatesan S 2017, Technology in Banking Margham Publications,
Chennai.
3. Digital Banking 2016, Indian Institute of Banking and Finance, Taxmann
Publication, New Delhi.
12.11 LEARNING ACTIVITIES
1. Why there is daily limit to withdraw money from your bank account.
12.12 KEYWORDS
1. Customer risk, Artificial Intelligence (AI), Robotic Process Automation, Public
Key Infrastructure, Operational efficiency.

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Annamalai University Press : 2022 – 2023