Module I- INTRODUCTION TO BANKING

Banking
According to Banking Regulation Act 1949, “a banking is one, which
transacts the business of banking which means the accepting for the
purpose of lending or investment of deposits of money from the
public, repayable on demand or otherwise and withdrawable by
cheque, draft, and order or otherwise.”
Bank
Bank is a financial institution which deals with money and credit. It
accepts deposit and lends money to those who are need of it.
Characteristics / Features of a bank
 Dealing in money.
 Acceptance of deposit.
 Giving loans.
 Payment and withdrawal.
 Individual, firm or company.
 Agency and utility services.
 Profit and service orientation.
 Ever increasing function.
 Connecting link.
 Banking business
Evolution of banking in India
 Money lending business was prevalent in India.
 East India Company launched few commercial banks in 18th
century.
 The first Indian bank started in 1770. (Bank of Hindustan)
 Three presidency banks started by East India Company. (Bank of
Calcutta, Bank of madras, Bank of Bombay)
 Allahabad bank came into existence in 1865.
 Alliance bank came into existence in 1875.
 First purely commercial bank formed in 1880.
 RBI established in 1935.
 RBI was nationalized in 1949.
 Banking companies Act passed in 1949.
 Imperial bank was nationalized in 1955. (Renamed as SBI)
 14 Banks were nationalized in 1969.
 Regional rural bank schemes started in 1975.
 NABARD was set up in 1982.
 In 2017 5 associate banks and Baratiya Mahila Bank merged with
SBI.
Types of Banks
1. Commercial banks
Commercial banks are those types of banks, which accepts deposit
from public and lend money to trade and commerce.
2. Agricultural banks
Agricultural banks are those banks which provides finance to
agricultural purposes.
3. Local area banks
Local area banks are those banks which is established for the
purpose of mobilizing the rural savings by local institution.
4. Savings bank
Saving banks are those specialized banks which mobilizes the saving
habits of the people.
5. Foreign bank
It is a type of bank which is owned by foreign investors.
6. Industrial banks
Industrial banks are those banks which meets the requirements of
industrial concerns. It is also known as investment banks.
Functions of industrial banks
 It accepts long term deposits.
 It grant long term loans to industries.
 It provide technical assistance to industries.
 Advice given to government matters relating to industry.
 It participate management in industrial concerns.
7. Exchange banks
Exchange banks are those banks which deals with foreign exchange
and international trade.
Functions of exchange banks
 Purchase and sale of foreign currencies, silver, gold etc...
 They accept and collect foreign bills of exchange.
 Purchase and discount export and import bills.
 Transfer of money from one country to other.
 Issue letter of credit to importers.
8. Central banks
It is the highest banking and monetary institution of a country. It is
the leader of the all banking institution of a country.
9. World bank
It is the financial institution which provides financial assistance to its
member countries of the world.
10. New development bank BRICS
It is a multilateral development bank operated by BRICS states.
(Brazil, Russia, India, China, South Africa).
11. Small Finance Bank
It is a type of bank which is created with the objective of further
financial inclusion by primarily undertaking basic banking activities to
unserved and undeserved section.
12. Payment bank
It is a type of bank, it is like any other bank but operating on a small
scale without involving any credit risk.
Types of banking
1. Unit banking
Unit banking refers to a single, small bank that provide financial
services to its local community.
Features of unit banking
 It has only one office
 It is situated in a particular area
 Capital is limited
 It is small in size
 Small scale operations
 Efficient management
 Easy formation
2. Branch banking
Branch banking refers to a big bank which has number of branches in
different part of the country.
3. Monopoly banking
It means a few big banks open branches in all part of the country.
4. Group banking
It is a type of multiple office banking consisting of two or more banks
under the control of a holding company.
5. Chain banking
It is a banking system where the same individual or group of
individuals control two or more banks.
6. Mixed banking
Mixed banking is an approach where banks undertake both
commercial and industrial banking.
7. Correspondent banking
It refers to a financial institution that provides services to another
one usually in another country.
Types of bank accounts (PREVIOUS YEAR ESSAY)
1. Saving bank account
Saving bank account are mainly meant for non-trading customers. It
is generally preferred by middle and low income group.
Features of saving bank account
 It is meant for middle and low income groups.
 It can be opened with very small amount.
 Rate of interest fixed by RBI.
 Customer can deposit any amount to a minimum of Rs. 5
 Minimum amount of cheque should be Rs. 5
2. Recurring deposit
This is a special type of saving bank account introduced by the banks
in recent years. It creates the saving habits of lower income group.
3. Current accounts
Current accounts are those accounts generally meant for the
commercial and industrial undertakings.
Features of current accounts
 It is meant for commercial establishments.
 No restrictions for deposit and withdrawal amount.
 Deposits can be made by pay in slip.
 Withdrawals can be made by cheques.
4. Fixed deposit account
Fixed deposits are moneys deposited by customers for a fixed period.
It is also called term deposit.
Procedures for opening a bank account
 Fill up application on the prescribed form.
 Proper introduction of the applicant.
 Banker should obtain specimen signature of the applicant.
 Banker should obtain initial investment.
 Opening the account.
Circumstances under which bank accounts can be closed
 Death of a customer
 Insolvency of a customer
 Dissolution of firm
 Garnishee order
 Winding up of company
 Assignment of credit balance
Circumstances under which a banker can refuse payment
 When the banker receive notice of customers death.
 When customer has been adjudged insolvent.
 When the banker receives notice of customer insanity.
 When an order.
 When banker receive the notice of lost of a cheque.
Deposit schemes for Indian abroad
 NRO Accounts
 NRE Accounts
 NRNR Accounts
 FCNR Accounts
Pay in slip book
It is a book which contains printed slip. This book is supplied by the
bank to the customers.
Cheque book
A cheque book is a book which contains 10 or 20 blank cheque leaves
serially numbered. These are used to withdraw money.
Pass book
A pass book is a small book issued by a banker to his customer to
record all dealings between them.
Dormant account
Dormant account means inoperative or not functioning of a bank
account last two years.
KYC (Know Your Customer)
It is a process by which bank obtain information about the identity
and address of the customers.
FDR (Fixed Deposit Receipt)
After depositing money, the banker will issue a receipt to the
depositor is called fixed deposit receipt.
Demat banking
It is nothing but de-materialization. This is a recent extent in the
Indian banking sector. The customer who wants to invest in the stock
market need this account with commercial banks.
Banker
A person who owns a bank or who has an important job in the bank.
Customer of a bank
A customer is a person who has an account in a bank in his name and
dealing between the banker and customer should be of regular
banking business.
Special Types of Customers
 Minors
 Lunatics
 Drunkards
 Married Women
 Pardanashin women
 Insolvents
 Illiterate Persons
 Agents
 Joint Stock Company
 Clubs, Associations and Educational Institutions
 Partnership Firm
 Joint Accounts
 Executors and administrators
 Local authorities
Money lenders
Money lenders are those person are those person who do not accept
deposits from the public but lend their own funds.
Indigenous bankers
It is an individual or private firm receiving deposits and dealing in
hundies or lending money.
Commercial Bank
A commercial bank is a financial institution which performs the
functions of accepting deposits from the general public and giving
loans to the investment with the aim of earning profit.
Functions of commercial bank (PREVIOUS YEAR ESSAY)
 Primary functions
 Receiving deposit.
 Giving loans.
 Credit creations.
 Use of cheque system and plastic card
 Transfer of funds
 Secondary functions
Agency Services
 Collection of credit instrument
 Collection of dividend
 Transfer of funds
 Deal of foreign exchange
 Purchase and sale of securities
 Execution of standing orders
General Utility Services
 Locker facility
 Issue travellers’ cheques
 Issue Letter of Credits
 Collect information
 Collection of statistics
 Underwriting securities
 Merchant banking
Innovative Functions of Commercial Bank
 ATM Services
 Credit card facilities
 Tele banking
 Home banking
 Internet banking
 EFT
 Electronic clearing services
 RTGS
 Mobile banking
Role of banks in economic development
 Simulation of savings.
 Capital formation.
 Facilitating agricultural development.
 Innovating entrepreneurs.
 Promotion of small-scale industries.
 Monetisation of economy.
 Facilitate international trade.
 Create employment opportunities.
 Implementation of monetary policy.
 Encouraging right type of industries.
 Influencing economic activities.
 Balanced development.
Emerging Trends of banking in India
 Banking Regulation Act, 1949
 Creation of FBI
 Nationalisation of banks
 Lead banking scheme
 Deposit insurance
 Number of banks
 Branch expansion
 Increase in deposits and credits
 Change in the composition of deposits
 Credit expansion
 Advance to priority sector
 Micro finance
 Reserve bank control
 Industrial finance
 Development oriented bank
 Shift of banking from big customers to small customers
 New innovations
 Technology adoption
 Online payment services
 Multichannel banking
 Mergers and acquisitions of banks
 Mobile banking transactions
 Outsourcing activities of Indian banks
 Financial inclusion
Scheduled Bank
A scheduled bank is a bank which is included in the second schedule
of the RBI Act 1934.
Non-scheduled Bank
Commercial banks which have a paid-up share capital and reserves of
an aggregate value of less than 5 lakh is considered as non-scheduled
bank.
EXIM Bank (Export Import Bank)
Exim bank was set up in January 1982. It is a public sector financial
institution, it facilitates and finance foreign trade in India.
Objectives / Functions of EXIM Bank
 To finance, facilitate and promote foreign trade in India.
 To contribute foreign exchange to our country.
 To finance joint ventures in foreign countries.
 To provide technical and financial assistance to export import
sectors.
 To provide financial help for export and import of goods and
services.
Co-operative Banks
Co-operative banks are institutions established on the principle of
co-operation and it deal in ordinary banking business.
NABARD (National Bank for Agriculture and Rural Development)
It is an apex development bank for agriculture and rural
development. It was established in 12th July, 1982.
Functions of NABARD
 It functions as an apex institutions.
 It provide short term, medium term and long term credit.
 It coordinate operations of rural credit agencies.
 It has the responsibility to inspect cooperative banks.
 It advise government matters related to rural credit.
 It maintain a research and development fund to promote research
in agriculture and rural development.
 It provides facilities for training and development.
 It formulates project and programs for rural development.
Land Development Bank
It is a type of bank, which meet the long term credit requirement of
agriculturalist against security of their land.
Micro finance institutions
Micro financial institutions are those financial institutions, which
provides financial services like micro credit, micro savings, and micro
insurance to poor people.
Mudra Bank (Micro unit development and refinance agency bank)
It is a public sector financial institution in India. It provides loans at
micro finance institutions and non-banking financial institutions. It
was launched by Prime Minister Narendra Modi on 8th April, 2015.
RRB (Regional Rural Bank)
Regional rural bank is a type of bank to enhance the local
participation of the bank to meet the credit requirements of weaker
section of the society.
Drawbacks of Regional Rural Banks
 Lack of coordination in branch expansion.
 Difficulty in deposit mobilisation.
 Urban orientation of staff.
 Procedural rigidities.
 Slow progress in lending activities.
Gift cheque
The gift cheque is another banking instrument presented for gifting
money to the loved ones alternatively of hard cash.
Letter of Credit
A letter of credit is a promise by a bank on behalf of the buyer. It is a
document from bank that guarantees payment.
Financial inclusion
It is a method of offering banking and financial services to
individuals. It provides financial solutions to economically backward
areas.
Objectives of financial inclusions
 To provide micro insurance
 To provide non-micro insurance
 To empower women belongs to low income group
 To bring in mobile banking
 To bring in digital financial solution
 To improve financial literacy
 To improve financial awareness in the nation.
Financial inclusion schemes in India (Recent initiatives)
 PMJDY (Pradhan Mantri Jan Dhan Yojana)
 APY (Atal Pension Yojana)
 PMVVY (Pradhan Mantri Vaya Vandana Yojana)
 Stand up India loan scheme
 MUDRA loan
 Jan Suraksha Scheme
 SSY (Sukanya Samriddi Yojana)
 Jeevan Suraksha Bandhan Yojana
 Varistha Pension Bima Yojana (VPBY)
 Credit Enhancement Guarantee Scheme for scheduled casts
 Venture capital fund for scheduled casts under social sector
initiatives
Micro Finance Institution (MFI)
These are financial companies that provides small loans to people
who do not have any access to banking facilities.
Industrial finance
It is the financial support or assistance provided by the banks to the
industries.
BHIM Adhar
It is the common mobile introduced by NPCI for any merchant
associated with BHIM adhar pay service to allow them to accept
payment from a customer of any bank.
Traveller’s cheque
It is a medium of exchange that can be used in place of hard
currency.
Bank assurance
It means the delivery of insurance products through banking
channels.
Central Bank
Central bank is a supreme monetary authority of a country. It is the
leader of all banks in a country.
Functions of Central Bank
 Monopoly of note issue.
 Banker, agent and advisor to the government.
 Custodian of cash reserve.
 Custodian of foreign exchange.
 Lender of last resort.
 Clearing house function.
 Credit control.
 Collection of data.
1. Monopoly of note issue
Note issue is the main function of a central bank in every country.
The currency note issued by a central bank are the legal tender
money of that country. Every central bank got the monopoly of the
sole right of the note issue.
Advantages of Note issue by central bank
 Central bank controls credit creating power of commercial banks.
 People have more confidence in the currency issued by central
bank.
 Uniformity in the currency system in the country.
 Currency system of the country will be flexible.
 It helps in economic development of the country.
2. Bankers, agent and advisor to the government
As a banker to the government, central bank provide all those
banking services and facilities to the government. As an agent, bank
helps the government in all financial matters. As an advisor, bank
advice the government on monetary, banking and financial matters.
3. Custodian of cash reserve
Central bank is the bank of bank. This signifies that it has the same
relationship with the commercial banks in the country that they gave
with the customers.
4. Custodian of foreign exchange
Central bank is the custodian of foreign currency obtained from
various countries.
5. Lender of last resort
Central bank work as a lender of the last resort for commercial bank
because in a time of need, it provides financial help.
6. Clearing house function
All commercial bank have their account with central bank. Therefore
central bank settles the mutual transaction of banks.
7. Credit Control
This is one of the most important function the central bank to
control the volume of credit for maintaining price stability.
8. Collection of data
Central bank in almost all the countries collect statistical data
regularly relating to economic aspects of money, credit, foreign
exchange, banking etc.
Reserve bank of India (RBI)
RBI is our central bank. It was established in 1935. Prior to the
establishment of RBI, there was no central bank. But some of the
central banking functions were performed by Imperial bank of India.
Objectives of RBI
1. To regulate and control monetary system of our country.
2. To regulate the issue of bank note.
3. To have an authority to control money market.
4. To regulate banking system of our country.
Organisation structure of RBI
1. Central Board
2. Local Board
1. Central Board
Central board consists of 20 members. It includes one governor, four
deputy governors and fifteen directors
2. Local Board
Besides the central board, there are local board for regional areas of
the country with their headquarters at Mumbai, Kolkata, Madras and
New Delhi.
Departments of RBI
 Issue department
 Banking department
 Currency management department
 Budgetary control department.
 Exchange control department
 Agricultural credit department
 Rural credit department
 Industrial credit department
 Legal department
 Inspection department
Functions of RBI
1. Monopoly of note issue.
2. Banker, agent and advisor to the government.
3. Lender of last resort.
4. Act as clearing house
5. Credit control
6. Custodian cash reserves.
7. Custodian foreign exchange.
Credit Control
This is one of the most important function the central bank to
control the volume of credit for maintaining price stability.
Credit ceiling
It is an operation of RBI, in which it issues prior information that
loans to the commercial banks will be given up to a certain limit.
Base rate
It is the minimum rate set by the RBI below which banks are not
allowed to lend to its customers.
Repo rate
It is the rate at which RBI lends money to commercial banks or
financial institutions in India against government securities.
Bank rate
It is the minimum rate at which RBI is ready to grant loans and
advances to commercial banks.
Bank overdraft
It is a facility extended by a bank to its clients to withdraw funds
from their accounts in excess of the balance.
There are two types of credit control weapons.
1. Quantitative credit control weapons
2. Qualitative credit control weapons
 Quantitative credit control weapons
 Bank rate
It is the minimum rate at which RBI is ready to grant loans and
advances to commercial banks.
 Open market operation
Open market operation means purchase and sale of government
securities in an open market.
 Cash reserve ratio (CRR)
Every scheduled bank is required to maintain fixed percentage of
their time and demand deposit as cash reserve with RBI. It is called
cash reserve ratio.
 Statutory Liquidity Ratio (SLR)
Every commercial bank is required to maintain not less than 255 of
its total time and demand liabilities in liquid assets in the form of
cash and gold with RBI. This is known as SLR.
 Qualitative / selective credit control weapons
 Issuing of directives.
 Regulation of margin requirements
 Differential rate of interest
 Restriction on clean advances.
 Credit authorisation scheme.

Module II- NEGOTIABLE INSTRUMENTS

Negotiable Instruments
Negotiable instrument is a written document that promises the
payment of a sum of money to a specified person or bearer of the
instrument.
Features / Characteristics of negotiable instruments (Essentials)
 These are easily and freely transferable.
 All negotiable instrument must be in writing.
 It must be an unconditional order or promise.
 It involves payment of certain sum of money.
 Time of payment must be certain.
 Payee must be a person.
 The instrument must bear the signature of the maker.
 Delivery of instrument is essential.
 Stamping of bill of exchange and promissory note is mandatory.
Types of Negotiable instruments
 Promissory notes
 Bills of exchange
 Cheque
 Other negotiable instruments like railway receipts, delivery order,
etc.
Promissory Notes
A Promissory note is a negotiable instrument. It contain a promise to
pay a certain sum of money to a specified person or bearer on
demand or on a future date.
Essential characteristics of a promissory note
 Promissory note must be in writing.
 It is a promise to pay.
 The promise to pay must be unconditional.
 The amount promised must be certain and definite sum of money.
 The promissory note must be signed by the maker.
 It involves two parties, i.e. drawer and payee.
 The maker must be a certain person.
 It must be properly stamped.
Parties to a promissory note
1. Drawer: The person who makes a promissory note is called drawer
or maker.
2. Payee: Payee is the person to whom the amount is payable.
Bill of exchange (BOE)
A bill of exchange is a negotiable instrument. It contain an order to
pay a certain sum of money to a specified person or bearer on
demand or on a future date.
Essential characteristics of bill of exchange
 It involves three parties, drawer, drawee and payee.
 It must be in writing.
 It must be signed by the drawer.
 It must be an order to make the payment.
 It is an order to pay money only.
 It must be properly stamped.
 It must be accepted by the drawee.
Parties to bill of exchange
1. Drawer: Drawer is the maker of the bill of exchange.
2. Drawee: Drawee is the person upon whom the bill of exchange is
drawn.
3. Payee: Payee is the person to whom the payment is made.
Classification of bill of exchange
1. On the basis of period of bill:
a) Demand bill of exchange:
There is no fixed date for payment of such bill.
b) Term bill of exchange:
There is a fixed date for payment of such bill.
2. On the basis of writing the bill:
a) Trade Bill:
These bills are drawn and accepted against the sale and purchase of
goods on credit.
b) Accommodation bills:
These bills do not involve sale and purchase of goods on credit.
3. Other type of bill:
a) Inland bill:
These bills are drawn in a country upon person living in the same
country.
b) Foreign bills:
These bills are drawn in one country and accepted in another
country.
Difference between bill of exchange and promissory note
Bill of Exchange Promissory Note
It is an order to make a It is a promise to make payment.
payment.
It involves three parties namely, It involves two parties namely
drawer, drawee and payee. drawer and payee.
It is drawn by the creditor. It is drawn by the debtor.
It is defined under section 5 of It is defined under section 4 of
negotiable instrument act. the negotiable instrument act.
It requires acceptance. It does not require acceptance.
Mainly used for financing trade. Mainly used for raising loans.
Cheque
A cheque is a negotiable instrument. It is transferable either by mere
delivery or by endorsement and delivery.
Essential features or requisites of a valid cheque
 A cheque must be in writing.
 A cheque must contain an unconditional order.
 Cheque is always drawn on a specified banker.
 It must be signed by the drawer.
 A cheque is always payable on demand.
 A cheque can be crossed.
 A cheque is used for payment.
Parties to a cheque
1. Drawer: Drawer is a person who issues a cheque.
2. Drawee: Drawee is the bank on which the cheque is issued.
3. Payee: Payee is the person to whom the amount of cheque is
payable.
Difference between bill of exchange and cheque
Bill of Exchange Cheque
A bill is need not be on a printed A cheque is always drawn on a
form printed form.
A bill cannot be crossed. A cheque can be crossed.
Grace days are allowed. Grace days are not allowed.
A bill is payable on demand or A cheque is always payable on
after date. demand.
Acceptance is essential. Does not require acceptance.
A bill cannot countermanded. A cheque may be
countermanded.
Kinds / Types of Cheque
1. Bearer Cheque
A bearer cheque is always payable to bearer.
2. Order cheque
An order cheque is a cheque which is payable to a certain person.
3. MICR cheque
MICR (Magnetic Ink Character Recognition) cheque is a recent
innovation. Bank issue cheques in MICR format using the special
quality paper and printing specifications.
4. Truncated cheque
It is an electronic image of a paper cheque which means physical
cheque is scanned at the bank of first deposit.
5. Electronic cheque
It is simply refers to an electronic version of a paper cheque.
Dating of cheque
 Ante- dated cheque
A cheque bear the date earlier to the date of issue is called ante-date
cheque.
 Post-dated cheque
A cheque bears a date which is yet to come is called post-dated
cheque.
 Stale cheque
A cheque which is not presented for payment within a reasonable
period of time is called stale cheque.
Mutilitated cheque
If a cheque is torn into two or more pieces, it is called mutilated
cheques.
Holder of a cheque
Any person who is entitled in his name to the possession there of
and to receive or recover the amount due thereon from the parties
thereto.
Holder in due course
Any person who acquires the title to the instrument for a
consideration is called holder in due course.
Crossing of Cheques
Crossing of cheque means drawing across the face of the cheque two
parallel transverse lines with or without the words “and company”.
Types of crossing
 General crossing
 Special crossing
 Not negotiable crossing
 Account payee crossing
 Double crossing
General Crossing
In general crossing, the cheque bears across its face an addition of
two parallel transverse lines and the addition of the words “and
company” or “not negotiable” between them.
Essential Features of general crossing
 There must be two parallel transverse lines on the face of the
cheque.
 The lines are drawn on the left-hand top corner of the cheque.
 The words “and company” or its abbreviation may be written in
between these lines.
 The words “not negotiable” or “account payee” also be added
with general crossing.
 The paying banker is required to pay the amount of a generally
crossed cheque to another bank.
Special Crossing
In special crossing, the name of a banker with or without the words
“not negotiable” is written on the cheque.
Essential features of special crossing
 Two parallel transverse lines is not essential.
 The name of the collecting banker should be specified.
 The words such as “not negotiable” or “account payee” are also
added with special crossing.
 The special crossing makes a cheque safer.
Difference between general crossing and special crossing
General Crossing Special Crossing
Two parallel transverse line are Two parallel transverse lines are
essential. not essential.
General crossing makes cheque Special crossing makes a cheque
safer. more safer than general crossing
The words “and company” may These words are not written.
or may not written.
The amount of generally crossed The amount of specially crossed
cheque can be paid to any cheque can be paid only to the
banker. specified banker.
Name of the collecting banker Name of the collecting banker is
not written in the face of written in the face of the
cheque. cheque.
 Not negotiable Crossing
The word “not negotiable” may be included in general and special
crossing. Not negotiable does not mean not transferable.
Account payee crossing
The word “account payee” or “payees account” may be included in
general or special crossing. This type of crossing gives further
protection to a cheque.
Double crossing
Double crossing means crossing a cheque especially to more than
one banker.
Demand Draft (DD)
Demand draft is an instrument used for transfer of money. It is a
negotiable instrument.
Difference between Cheque and Demand Draft
Cheque Demand Draft
A cheque is issued by an A draft is issued by a banker.
individual.
A cheque can be dishonoured. A draft cannot be dishonoured.
A cheque is defined in the Draft has no precise definition.
negotiable instrument act.
A cheque is drawn by an account A draft is drawn by one branch
holder of a bank. of bank.
In a cheque, drawer and drawee In draft, drawer and drawee are
are different person. same person.
Payment of cheque can be Payment of draft cannot be
stopped by the drawer. stopped.
Endorsement
Endorsement means signing on the back of a negotiable instrument
for the purpose of negotiation.
Types / Kinds of endorsement
 Blank endorsement
 Special endorsement
 Restrictive endorsement
 Conditional endorsement
 Sans Recourse endorsement
 Sans Fraise endorsement
 Facultative endorsement
Effects of endorsement
 Endorsee gets right, title or property in the instrument.
 He also gets the right of further negotiation.
 The endorser certifies genuineness of the instrument.
 The endorsee acquires the right of the instrument as its holder.
Liability of endorser
 By endorsing an instrument, the endorser impliedly promises that
on due presentation the instrument will be accepted and paid.
 Endorser will not deny the validity of the endorsement.
 Where there are two or more endorsements, the liability of the
endorser will be fixed in the order in which their signature appear
on the instrument.
 The liability of an endorser can be excluded by a spate contract.
 The liability of the endorser continues even alter the death till the
instrument is paid.
Payment in due course
A payment in due course means a payment in accordance with the
apparent tenor of the instrument, in good faith and negligence to
any person in possession thereof.
Collecting banker
Collecting banker is one who collects the proceeds of a cheque for a
customer.
Electronic Payments
Electronic payment means payment for buying and selling goods or
services through internet.
Features and importance of electronic payment
 There is no paper involved.
 Fast, efficient, safe and secure.
 Less costly.
 It is convenient to the consumers.
 It improve customer attention.
 These are fully traceable.
 Module III- E-Banking
E - Banking
E-banking is a method of banking in which banking transactions are
done through electronically.
Advantages of E - banking
 Internet banking have lower operational cost.
 Internet banking have lower transactional cost.
 Online banking is convenient.
 Online banking offers 24×7 services.
 Online banking facilitate better customer retention.
 There is less chance for errors.
 Easy transfer of fund from one account to another.
 Online banking is fast, efficient and effective.
 Customers can obtain funds at any time from ATM
 It is a safe way of handling our money.
 Internet banking is not limited to a physical site.
 Internet banking provides enlarged range of services.
Disadvantages of E-banking
 Understanding the usage of internet banking is difficult for
beginners.
 It require huge initial start-up cost.
 Without internet connection, online banking is not useful.
 There is a chance of hacking personal information.
 It is not useful in case of banks server down.
 It is not useful for illiterate persons.
Difference between T- Banking and E-Banking
Traditional Banking E-Banking
Banking business done through Banking business done through
traditional method is called electronically is called
traditional banking. E-banking.
It does not offer 24x7 services. It offers 24x7 services.
There is a high chance for There is less chance for errors.
errors.
Compare to e-banking, it is not It is fast, efficient and effective.
fast, efficient and effective.
It is limited to a physical site. It is not limited to a physical
site.
Compared to online banking, it Online banking is convenient.
is not convenient.
Transactional costs are high. Transactional costs are lower.
Operational costs are high. Operational costs are lower.
Customers can have face to face Customers can have electronic
contact. contact.
Need and importance of E-banking
 Reduce burden
 Need for transformation
 Ever increasing competition
 Introduction of more customer friendly products and services
 Boundary less banking
 Use of electronic means
 Influence of Information technology
Dimensions of E-banking
1. Customer to bank e banking
Customers can easily access all important information relating to
their deposit, transfer and payments through internet.
2. Bank to bank e banking
It is related with interbank transactions which are done between
banks through internet.
3. Electronic central banking
All banks within the control of a central bank are to be
interconnected via extra net.
4. Intranet procurement
An intranet is meant for the exclusive use of the organization and its
associates.
E- Based products or services
 ATM
 Credit card
 Debit cards
 Smart card
 Mchq product
 Telephone banking
 Internet banking
 Virtual banking
 Core banking
 SWIFT
 SPNS
 EDI
 INFENET
 Automated clearing houses
 CFMS
 Home banking
 EFT
 Electronic clearing services
 RTGS
 Mobile banking
 Doorstep banking
 E- purse
1. ATM (Automated Teller Machine)
ATM is a device that allow customers to perform routine banking
transactions by using ATM cards.
ATM card
It is a plastic card issued by a financial institution, which enables a
customer to access their financial accounts.
Functions of ATM
 A card holder is able to withdraw money.
 A card holder gets latest and updated information.
 It allows transfer of funds.
 It also possible to make deposits.
 Payment of loan can be made through ATM
 It provide printed copy of transactions.
2. Credit card
A credit card is a plastic card, which can be used more than once to
borrow money or buy products and services on credit.
Advantages of credit card
 Convenience
 Flexibility
 Purchase protection
 Travel benefits
 Worldwide acceptance
Limitations of credit card
 High interest rates
 Annual fees
 Late payment fees
 Temptation to overspend
 Fraud and identity theft risks
3. Debit cards
Debit card is a plastic card, issued by the bank to their customers
who have maintained an account in the bank with sufficient credit
balance.
Types of debit card
 Direct debit cards
It allows only online transactions, also called point of sale.
 Deferred debit card
This card allows online transactions as well as offline transactions.
4. Smart card
A smart card is a plastic card that contains an embedded plastic chip
either a memory or microprocessor that transacts data.
5. Mchq product
It is a recently innovative banking product. It is nothing but a mobile
to mobile payment option.
6. Telephone banking
Telephone banking is a service provided by a financial institution,
which allow customer to perform transactions over the telephone.
7. Internet banking
It is a method of banking in which transactions are conducted
electronically through internet.
Services provided through online banking
 Easily transfer of money.
 Customers can open FD account via net.
 Customer can order for issue of a demand draft.
 Customer can inquire account balance.
 Customer can request for a cheque book.
Necessities required for operating online banking
 An active bank account.
 Debit or credit card number.
 Customer's user ID.
 Bank account number.
 Internet banking PIN number.
 A PC with net
8. Virtual banking
Virtual bank is an internet based financial institution that offers
deposit and withdrawal facilities, and other banking services through
ATM or other services.
Advantages of virtual banking
 Transaction cost is less.
 Account maintenance cost is less.
 Operations cost are less.
 Virtual banks are safe.
 No need of visiting a bank physically.
 These are convenient.
 24×7 services.
Limitations of virtual banking
 Initial start-up cost are high.
 Difficult for new users.
 Difficult for illiterate persons.
 Problems related to server down.
 Technological hacking.
9. Core banking
Core banking simply refers to doing all banking operations of
branches and head office by connecting to a central computer kept
at data centre.
Advantages of core banking (PREVIOUS YEAR ESSAY)
 Total cost can be reduced.
 Multiple data entry risk reduced.
 Ability to offer developed operations.
 Increased efficiency.
 Improved customer services.
 Better risk management.
 Enhanced data analytics.
 Increased productivity.
 Flexibility and scalability.
 Improved security.
Limitations of core banking
 It is mainly depending on technology.
 Recurring cost are heavy.
 Stoppage of work has adverse effect on banks image.
 High initial investment
 Need for technical expertise
 Risk of system failure
 Dependency on technology vendors
 Limited customisation
 Data privacy and security risks
 Difficulty in data migration
10. SWIFT
SWIFT is the society for worldwide interbank financial
telecommunication, a member owned cooperative through which
the financial world conduct its business operations with speed,
certainty and confidence.
11. SPNS (Shared payment network system)
SPNS is a large network of ATMs spread in the city of Mumbai, Vashi
and Thane.
12. EDI (Electronic Data Interchange)
EDI is the electronic exchange of business information between two
concerns in a specified format.
13. Indian Financial Network (INFENET)
It is a very small aperture terminal based satellite network for
messaging, file transfer and chat services.
14. Automated clearing houses
The computerized centres where cheques are cleared are called
automated clearing houses.
15. Centralized funds management system (CFMS)
It is a system that aims at inter connecting the 17 deposit account
departments of RBI.
16. Home banking
Home banking is the practice of conducting banking transactions
from home. It is also called personal computer banking.
17. Electronic Fund Transfer (EFT)
EFT means speedier transfer of funds between different banks for
the bank customers electronically. It was introduced by RBI in 1996.
It is worked on the principle of “next day availability of funds."
National electronic fund transfer (NEFT)
It is a nation - wide payment system facilitating one to one fund
transfer.
18. Electronic clearing services (ECS)
It consist of electronic credit clearing and electronic debit clearing.
19. Real Time Gross Settlement System (RTGS)
RTGS is an online fund transfer mechanism provided by the RBI.
RTGS facilitates fund transfer from one bank account to other on real
time basis without any waiting time.
Benefits of RTGS
 It facilitates fund transfer on real time basis.
 RTGS is a safe and secure fund transfer mechanism.
 Lower remittance charges.
 RTGS could also be done offline.
20. Mobile banking (M –Banking)
Mobile banking is a system of providing service to a customer to
carry out banking transactions through a mobile phone.
21. Doorstep banking
Doorstep banking means bank allow you to take banking facilities to
your home.
22. E-Purse
E-purse is a plastic card with a small amount of money stored
electronically on it.
Module IV- Introduction to insurance
Insurance
According to John Megi " Insurance is a plan where in persons
collectively share the losses of risk."
Characteristics/ Features of insurance (PREVIOUS YEAR ESSAY)
 Sharing of risk
 Evaluation of risk
 Transfer of risk
 Spreading of risk
 Protection against risk
 Cooperative devices
 Large number of insured person
 Insurance is not charity
 Insurance is not gambling
 A contract
 Social device
 Based on certain principle
 Regulation under the law
 Based on mutual goodwill
 Insurance is for pure risk only
 Payment of happening specified event
Benefits / Importance / Advantages of Insurance
 Assures for financial compensation
 Reduction of risk
 Encourage savings and investment
 Basis of credit
 Maintains economic stability
 Promotes business activities
 Provides employment opportunities
Disadvantages of insurance
 Later damage compensation
 Many terms and conditions
 Long and costly legal procedures
 Fraud agency
 Increases costs
 Additional fees
 Professionalism gap
 Limited offers
 Lack of experiences
Purpose and Need of Insurance
 Protection against unwanted events
 Tool to eliminate risk
 Risk management tool
 Sharing of losses
 Spreading risks
 Continuous living standard
 Capital protection
 Assurance of financial future
 Reduces burden on government
Parties of insurance
 Insured: A person covered by insurance is called insured.
 Insurer: A person contracting to indemnify against the loss is
called insurer.
 Beneficiary: The person to whom the indemnity is paid is called
beneficiary.
Functions of Insurance
 Primary functions
 Providing protection
 Collective risk bearing
 Evaluating risk
 Provide certainty
 Secondary functions
 Preventing losses
 Provides capital
 Covering larger risk with small capital
 Development of larger industries
 Other functions
 It is a saving and investment tool.
 Medium of earning foreign exchange.
 Risk free trade.
Basic principles of insurance
1. Insurable interest
2. Utmost good faith
3. Indemnity
4. Subrogation
5. Proximate cause
6. Contribution
7. Mitigation of loss
 Insurable interest
The insured must have insurable interest in the subject matter of the
insurance.
 Utmost good faith
It is essential that there must be utmost good faith and mutual
confidence between the insured and insurer.
 Indemnity
A contract of insurance except contract of life insurance is contract
of indemnity. This means that insured in case of loss against which
the policy has been issued, shall be paid the actual amount of loss or
value of policy whichever is less.
 Subrogation
Subrogation is the transfer of rights and remedies of the insured to
the insurer who has indemnified the insured in respect of loss.
 Causa Proxima
Causa Proxima means the most immediate cause which results into a
definite loss.
 Mitigation of loss
Mitigation of loss means to minimize or reduce the severity of loss.
 Contribution
It is another outcome of principle of indemnity. Where there are two
or more insurance on one risk, the principle of contribution comes
into play. The aim of contribution is to distribute the actual amount
of loss.
General principles of insurance
 Offer and acceptance
 Legal relationship
 Consensus ad idem
 Competency of parties
 Free consent
 Lawful consideration
 Legal object
Kinds or Types of Insurance
1. Life insurance
Life insurance is a type of contract that pays out a sum of money
either on the death of the insured or a specified period.
2. Marine insurance
Marine insurance is a type of insurance that cover loss or damages of
ships or cargo from point of origin and final destination.
Types of marine policies
a) Voyage policy: Insure the subject matter from one place to
another is called voyage policy.
b) Time policy: Where the subject matter is insured for a definite
period of time is called time policy
c) Mixed policy: mixed policy is a combination of voyage and time
policy.
d) Valued policy: It is a policy which specifies the agreed value of a
subject matter.
e) Open policy: It is a type of policy where the policy value of the
subject matter insured is not specified.
f) Floating policy: It is type of policy in which the value of goods
being insured cannot be calculated exactly.
Features of marine insurance
 In this type of insurance cargo, ship, and fright is to be insured.
 There is a contract between insurer and insured.
 It includes third party insurance also.
 Insurance can be taken for single journey or number of journeys.
 It can be taken against losses incurred in inland also.
3. Fire insurance
Fire insurance is a type of insurance which protects people from cost
incurred from fire during a specified time.
Features of fire insurance
 It is a contract of indemnity.
 It should fulfil essentials of a valid contract.
 It is a contract of utmost good faith.
 Fire policies covers losses against fire.
 In fire insurance insured must have insurable interest.
 A fire insurance is generally for taken one year.
 Fire insurance policy issued for a lawful consideration.
4. Medical / Health insurance
Health insurance is a type of insurance that cover medical expenses
that arises due to an illness.
5. General insurance
An insurance which is not life insurance is called general insurance. It
includes vehicle and home owners insurance.
Personal accident insurance
It is a type of insurance for personal accidents or illness.
Auto insurance
Auto insurance is a type of insurance, it helps of repair or
replacement in the event of accident.
Disability insurance
It is a type of insurance, it may protect the insured from financial ruin
if he is injured.
Long term care insurance
It is a type of insurance designed for those diagnosed with chronic
illness.
Homeowners insurance
It is a type of insurance which helps to cover losses of a home or
property due to fire, natural disaster, faulty plumbing work, bad
electric work etc...
Miscellaneous/ Liability insurance
It refers to contract of insurance other than life insurance. It includes
fire, marine etc.
Property insurance
Property insurance is a type of insurance protection against risks of
the property.
Hull insurance
Hull insurance is a type of insurance policy especially designed for
covering ship damage expenses.
Burglary insurance
Burglary insurance means a type of crime insurance that covers
losses resulting from burglary.
Re - insurance
Re insurance simply means insurance for insurance company. It
means an insurance company purchase another insurance company.
Double insurance
When same subject matter is insured with two or more insurer is
called double insurance.
Social insurance
Social insurance are those insurance, which provides protection to
the weaker section of the society who is unable to pay the premium
for adequate insurance.
Role of insurance in economic development
 Investment for economic development.
 Promotes trade and commerce.
 Insurance makes financial resources.
 Insurance spreads risk.
 Encourage financial stability.
 Substitute for government security programs.
 Insurance provides increasing GDP.
 Facilitate efficient capital allocation.

Module V- Insurance Laws

Life insurance
Life insurance is a type of contract that pay out a sum of money
either on the death of the insured or a specified period.
Types of life insurance policies
 Term life insurance
 Whole life insurance
 Universal life insurance
 Endowment plan
 Money back policy
 Group life insurance
 Critical illness insurance
 Joint life insurance
 Survivorship life insurance
Features of life insurance
 It is an outcome of offer and acceptance.
 It is not a contract of indemnity.
 It is best alternative way of savings.
 Insurable interest must be present at the time of taking policy.
 It offers flexible premium payments.
Importance of life insurance
 It is a protection against untimely death.
 It is a savings for old age.
 It initiates investment.
 It improves creditworthiness of the business.
 It is a social security tool.
 It facilitate tax benefits.
 Promotion of savings.
General principles of life insurance (Essential elements)
 Offer and acceptance
 Legal relationship
 Consensus ad idem
 Competency of parties
 Free consent
 Lawful consideration
 Legal object
Basic principles of life insurance
 Principle of good faith
 Principle of insurable interest
 Principle of not a contract of indemnity
Difference between General Insurance and Life Insurance
General Insurance Life Insurance
It is a personal contract. It is a non-personal contract.
It is a contract of indemnity. It is not a contract of indemnity.
General insurance insures Life insurance insures one’s life
homes, automobiles and other or the life of someone.
personal properties.
General insurance is taken Life insurance is generally for
generally for one year. long period.
The object of general insurance The object of life insurance is
is to protect from risks. the security and investment.
Principal of indemnity is Principals of indemnity does not
applicable. apply.
Insurance policy
Insurance policy is a contract of insurance. It describes the term,
coverage, premium and deductibles.
Claim
A claim is the payment made by the insurer to the insured on the
occurrence of the event specified in the contract.
No-claim bonus (NCB)
It is a reward given by an insurance company to an insured for not
raising any claim request during a policy year.
Nomination
A nomination is an important part of a life insurance. It is the
common to nominate a person usually spouse, child or one parent
while taking an insurance policy.
Assignment
Assignment of a policy means transfer of all rights, title and liabilities
of the life insurance policy in favour of the assignee.
Premium
An insurance premium is the amount of money an individual or
business pays for an insurance company.
Assurance
Assurance refers to financial coverage that provides remuneration
for an event that is certain to happen.
Peril
It is an event that causes a personal or property loss by fire, flood,
windstorm, explosion, etc.
Hazard
Hazard is a condition that may create, increase or decrease the
chances of loss from a given peril.
Exposure
It is a measure of physical extend of the risk.
IRDA (Insurance Regulatory and Development Authority)
It is an autonomous apex statutory body which regulates and
develops the insurance industry in India.
Powers, Functions, and Duties of IRDA
 Registering and regulating insurance companies.
 Protecting interest of the policy holders.
 Promoting professional organizations in insurance.
 To control over management of insurers.
 Maintenance of solvency margin.
 Ensuring insurance coverage in rural areas.
 Regulating investment of policy holders.
Role of IRDA
 IRDA provides a certificate of registration to a life insurance
company.
 IRDA is responsible for renewal, modification, withdrawal and
cancelation of certificate of registration.
 IRDA protects the interest of the policy holders
 IRDA offers policy holders the right to voice their complaints.
 IRDA has to set up the grievance redressal cell.
 It promote and regulate activities of professional organizations.
 It regulate and maintenance of margin of solvency.
 It regulates the investments of funds.
Laws relating to general insurance
 Insurance Act 1938
 Indian marine insurance Act 1963
 General insurance business Act, 1972
 The general insurance business amendment Act, 2002.
Laws relating to life insurance
 Insurance Act, 1938
 The life insurance corporation Act, 1956
 The IRDA Act, 1999
Life insurance Corporation of India (LIC)
LIC is an Indian public sector life insurance company. It is India’s
largest insurance company. Its headquarters is at Mumbai. It is under
the ownership of government of India.
Objectives of LIC of India
 Spread life insurance widely.
 Mobilization of peoples saving.
 Provide complete security to the policy holders.
 Promote efficient services to the policy holders.
 Meets the various life insurance need of the community.
 Provide adequate financial cover against death.
Role and functions of LIC
 It collects savings of the people through life policies.
 It subscribes shares of companies and corporations.
 It has to provide indirect support to industries.
 It provides loans for national economic welfare projects.
 It gives housing loans at reasonable rate of interests.
 It acts as a link between saving and investment process.
 It nominate directors on the board of the company.
 It provides refinancing activities through SFCs.
Popular insurance companies in India
1. Life insurance Corporation of India (LIC)
2. Bajaj Allianz general insurance
3. New India assurance
4. Reliance general insurance
5. HDFC life insurance

(This is the short note of the subject BANKING AND INSURANCE. This can be used for 2019,
2020 and 2021 admissions. For detailed study you may refer all the available materials
based on your syllabus.)

JUBAIR MAJEED
RAHUL MURALI

8089778065 / 9947050644(WhatsApp only)