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1.1 INTRODUCTION TO BANK A bank has been described as an institution engaged in accepting deposits and granting loans.

It is the institution which deals in money and credit. It can also be described as an institution which borrows idle resources, makes fund available to those who need it and helps in cheap remittance of money from one place to another. In the modem time term bank is used in wider term. Now it does not refer only to particular place of lending and depositing money but it also acts as an agent which looks after the various financial problems of its customers.

1.2 HISTORY OF BANKS:

The banking system in India is based on British banking company which is largely branch banking. Commercial banks in India were started during the latter half of 19th century Bank of Bengal, Bank of Bombay and Bank of Madras were later amalgamated to form one bank called as Imperial bank of India under the Imperial bank of India Act 1920. The Imperial bank carried with business of commercial bank manages the public debt office of central and state government. The second half of 19th century saw establishment of Bank of Baroda, Allahabad bank, and Punjab National Bank. These banks were set up by merchants and traders to combined trading with banking. These led to the series if failures of banks. The strengthening of banking system took place after the establishment of Reserve Bank of India, 1939 as is empowers to regulate the banking money, inspection of mergers and acquisition in terms of Banking Companies Act 1949 which later came to be known as Banking Regulation Act 1949.

1.3 FUNCTIONS OF BANKS

Though borrowing and lending constitute the main functions of banking, yet they are not only functions of commercial banks. Commercial banks are involved in diversified activities and perform varieties of function. The functions of a modem bank are classified under the following heads:

CHART: FUNCTION OF BANKS

1.4 BANKING PRODUCTS Banks in India have traditionally offered mass banking products. Most common deposit products being Savings Bank, Current Account, Term deposit Account and lending products being Cash Credit and Term Loans. Due to Reserve Bank of India guidelines, Banks have had little to do besides accepting deposits at rates fixed by Reserve Bank of India and lend amount arrived by the formula stipulated by Reserve Bank of India at rates prescribed by the latter. PLR

(Prime lending rate) was the benchmark for interest on the lending products. But PLR itself was, more often than not, dictated by RBI. Further, remittance products were limited to issuance of Drafts, Telegraphic Transfers, and Bankers Cheque and Internal transfer of funds. In view of several developments in the 1990s, the entire banking products structure has undergone a major change. As part of the economic reforms, banking industry has been deregulated and made competitive. New players have added to the competition. IT revolution has made it possible to provide ease and flexibility in operations to customers. Rapid strides in information technology have, in fact, redefined the role and structure of banking in India. Further, due to exposure to global trends after Information explosion led by Internet, customers - both Individuals and Corporate - are now demanding better services with more products from their banks. Financial market has turned into a buyer's market. Banks are also changing with time and are trying to become one-stop financial supermarkets. A few foreign & private sector banks have already introduced customized banking products like Investment Advisory Services, SGL II accounts, Photo-credit cards, Cash Management services, Investment products and Tax Advisory services. A few banks have gone in to market mutual fund schemes. Eventually, the Banks plan to market bonds and debentures, when allowed. Insurance peddling by Banks will be a reality soon. The recent Credit Policy of RBI announced on 27.4.2000 has further facilitated the entry of banks in this sector. Banks also offer advisory services termed as 'private banking' - to "high relationship value clients.

VARIOUS PRODUCTS & SERVICES OF BANK

2.1 Deposits
Banks provide various deposit schemes for keeping the savings of people. Some of these schemes are common in nature. Banks have to comply with the Know Your Customer (KYC) norms introduced by the Reserve Bank of India while opening & allowing operations in the accounts. A few deposit schemes offered by banks are as follows:

CHART: TYPES OF DEPOSITS

1) Current Account: Current account is primarily meant for businessmen, firms, companies and public enterprises etc. that have numerous daily banking transactions. Individuals generally do not open this account. Current accounts are meant

neither for the purpose of earning interest nor for the purpose of savings but only for convenience of business hence they are non-interest bearing accounts. In a current account, a customer can deposit & withdraw any amount of money any number of times, as long as he has funds to his credit. As per RBI directive, banks are not allowed to pay any interest on the balances maintained in Current Accounts. However, in case of death of the account holder his legal heirs are paid interest at the rates applicable to Savings bank deposit from the date of death till the date of settlement. Because of the large number of transactions in the account and volatile nature of balances maintained, banks usually levy certain service charges for opening a Current Account. 2) Fixed Deposits: Bank Fixed Deposits are also known as Term Deposits. In a Fixed Deposit Account, a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest. The rate of interest for Bank Fixed Deposits depends on the maturity period. It is higher in case of longer maturity period. There is great flexibility in maturity period & it ranges from 15 days to 5 years. The interest can be compounded quarterly, half-yearly or annually and varies from bank to bank. Loan facility is available against bank fixed deposits upto 75- 90 % Premature withdrawal is permissible but it involves loss of interest. Fixed deposits with banks are nearly 100% safe as all the banks operating in the country, irrespective of whether they are nationalized, private or foreign are governed by the RBIs rules & regulations and give due weightage to the interest of the investors. 3) Savings Bank Account: Savings Bank accounts are meant to promote the habit of saving among the

citizens while allowing them to use their funds when required. The main advantage of Savings Bank Account is its high liquidity and safety. Savings Bank Account earn moderate interest. The rate of interest is decided and periodically reviewed by the government of India. Savings Bank Account can be opened in the name of an individual or in joint name of the depositors. The minimum balance to be maintained in an ordinary savings bank account varies from bank to bank. It is less in case of public sector banks and comparatively higher in case of private banks. Savings Bank Account can now be accessed through ATMs & internet. 4) Recurring Deposit Account: Under recurring deposit account, a specific amount is invested in bank on monthly basis for a fixed rate of return. The deposit has a fixed tenure, at the end of which the principal sum as well as the interest earned during that period is returned to the investor. Recurring Bank Account provides the element of compulsion to save at high rates of interest applicable to Term Deposits along with liquidity to access those savings any time. Loan/ Overdraft facility is also available against Recurring Bank Deposits. The deposit for RD account is paid in monthly installments and each subsequent monthly installment has to be made before the end of the month and is equal to the first deposit. In case of default in payment, penalty is levied for the delayed deposit. 5) Demat account: Some banks are depository participants. These banks offer demat accounts to their corporate clients. Demat account is just like a bank account where actual money is replaced by shares. Just as a bank account is required if we want to save money or make cheque payments, we need to open a demat

account in order to buy or sell shares. A Demat Account holds portfolio of shares in electronic form and obviates the need to hold shares in physical form. The account offers a secure and convenient way to keep track of shares and investment without the hassle of handling physical documents that get mutilated or lost in transit. The Securities and Exchange Board of India (SEBI) mandates a demat account for share trading involving more than 500 countries. Benefits of Demat Account Protection against loss, theft, mutilation etc Transfer of shares immediately Shorter settlement cycles Protection against bad deliveries.

6) Safe-Deposit Lockers: Safe deposit locker is a facility provided by banks to their customers to keep their valuables like jewellery, title deeds etc. Safe deposit locker is a steel cabinet having multiple cubicles. The safe deposit locker is kept inside the safe room and can be accessed only with the permission of the bank officials. A customer who is in need of a locker has to approach the bank. Customer has to mention a password in the application form for identification purpose when he comes for operating the locker. The customer has to remit annual rent for using the locker facility. The customer has full privacy in operating the locker. As per RBI guidelines, the place where the locker is kept should be segregated from the place where cash and valuables are stored using iron grill. When the customer wants to open the locker, he has to identify himself by telling the password and sign in a register noting the date and time of opening the locker which will be countersigned by the bank officials. The

agreement of locker is a contract of bailment and the bank can terminate the agreement and demand the customer to vacate locker if any of the terms and conditions in the agreement are violated or the annual rent is not remitted for a long period. At present all the banks are having safe deposit locker facility.

2.2 CREDIT CARDS: Credit cards are innovative ones in the line of financial services offered by commercial banks. Credit card culture is a old hat in the western countries. In India, it is relatively a new concept that is fast catching on. Since the plastic money has today become as good as legal tender more people are using them in their day-to-day activities. A credit card is a card or mechanism which enables cardholders to purchase goods, travel and dine in a hotel without making immediate payments. It is a convenience of extended credit without formality. Credit cards can be classified as follows:

Old types of Credit Cards: 1) Credit Card: It is a normal card whereby a holder is able to purchase without having to pay cash immediately. Generally, a limit is set to the amount of money a cardholder can spend a month using the card. At the end of every month, the holder has to pay a percentage of outstanding. Interest is charged for the outstanding amount which varies from 30 to 36 per cent per annum. An average consumer prefers this type of card for his personal purchase. 2) Charge Card: A charge card is intended to serve as a convenient means of payment for goods purchased at Member Establishments rather than a credit facility. Instead of paying cash or cheque every time the credit card holder makes a purchase, this facility gives a consolidated bill for a specified period, usually one month. There are no interest charges and no spending limits either. The charge card is useful during business trips and for entertainment expenses which are usually borne by the company. Andhra Bank card, BOB cards, Can card, Diners Club card etc. belong to this category.

3) In-Store Card: The in-store cards are issued by retailers or companies. These cards have currency only at the issuers outlets for purchasing products of the issuer company. Payment can be on monthly or extended credit basis. For extended credit facility interest is charged. In India, such cards are normally issued by Five Star Hotels, resorts and big hotels. NEW TYPES OF CREDIT CARDS 1) Corporate Credit Cards: Corporate cards are issued to private and public limited companies and public sector units. Depending upon the requirements of each company, operative Add-on cards will be issued to the persons authorized by the company. The name of the company will be embossed on Add-on cardholder. The transactions made by Add-on cardholders are billed to the main card and debits are made to the Companys Account. 2) Business Card: A business card is similar to a corporate card.it is meant for the use of proprietary concerns, firms, firms of Chartered Accountants etc. This card helps to avail of certain facilities for reimbursement and makes their business trip convenient. 3) Smart Card: It is a new generation card. When a transaction is made using the card, the value is debited and the balance comes down automatically. Once the monetary value comes down to nil, the balance is to be restored all over again for the card to become operational. The primary feature of smart card is security. It prevents card related frauds & crimes. 4) Debit Cards: Debit card is popularly known as ATM card on the move. The debit card gives the freedom to access savings or current account through ATMs at

merchant locations. Debit cards are also issued independent of ATM in which case the card is presented to the merchant establishment at the time of purchase as in a case of credit card. However, the account of the card holder will be debited instantly when the charge slip is presented by the merchant establishment instead of the card holder remitting the money as is being done in the case of credit card. Therefore, the card holder has to keep sufficient balance in his account before he uses the card. The debit card does have a daily limit which could be somewhere around Rs 15000 at ATMs and Rs 10000 at merchant locations. This again is subject to the balance available in the account. 5) ATM Card: An ATM (Automated Teller Machine) card is useful to a card holder as it helps him to withdraw cash from banks even when they are closed. This can be done by inserting the card in the ATM installed at various bank location.

6) Virtual Card: A virtual card is a card that can be generated by anybody at any time provided he has already registered his name in the Banks website. One can also set monetary limits for each card, usually limited to the value of the item he intends to purchase and the value should be limited to his bank balance or the credit limit. This completely prevents misuse. It is a kind of facility offered to existing cardholders at free of cost.

2.3 LOANS It is an arrangement by which a bank advance loans against any security like jewels, shares or debentures or insurance policy or personal security of the borrower. The interest is payable on the entire loan amount as decided by the bank. Loans can be classified as follows:

CHART: VARIOUS TYPES OF LOANS

1) Personal loans: The personal loans are granted to any customer or the non-custome if the bank is satisfied with the repayment capacity of the borrower. The borrower should have a steady income. Installment can be paid by depositing post dated cheques, authorization to debit the amount to the borrowers savings or current account, authorization to transfer interest on term deposit to the loan account, authorization to deduct the installment from the salary by the employer and remit to the bank etc. The interest varies from bank to bank. Normally banks allow 12 months to 60 months for repayment. Banks also charge time processing fee ranging from 1 to 3 percent per annum. Personal loans are generally unsecured because in most cases there is no primary security. Therefore, many banks demand collateral security in the form of landed property, gold ornaments, third party guarantee etc. Some banks instead of third party guarantee insist that another person should join as co-obligant. Many banks prefer co- obligant as a guarantor because a coobligant signs the original loan documents along with the borrower & therefore has a joint liability. The documentation is quite simple because there will be only a promissory note. 2) Housing Loans: Housing loans are given as direct loans and indirect loans. Direct loans are those loans given to the individuals or group of individuals including cooperative societies. The indirect loans are the term loans granted to housing finance institution, housing boards etc primarily engaged in the business of supplying serviced land and constructed house units. Banks are permitted to extend term loans to private builders. Banks are also granting loans under priority sector for housing purpose. Eligibility: Any person above 21 years but below the age of 65 years having sufficient

disposable income, can avail housing loan from a bank. Some banks permit even upto 70 years if the borrower can produce proof of sufficient income to repay the loan. A self-employed person can also avail of housing loan, subject to compliance of the income criteria. Amount of Loan: The loan amount starts from Rs 2 lakh. However for weaker sections the loan can be availed even for a small amount. The maximum amount of loan is decided after considering the disposable income of the borrower. While calculating the income eligibility spouses income can also be considered. The other factors considered for deciding the repayment capacity are age, qualification, status of assets, liabilities, stability and continuity of occupation and savings history etc. 3) Educational Loans: Educational loans are extended with the aim to provide financial support from the banking system to deserving students for pursuing higher education in India & abroad. The main emphasis is that every student should get an opportunity to pursue education with financial support from the banking system on affordable terms and conditions. All banks are offering educational loans, but the schemes differs from bank to bank. The scheme aims at providing financial assistance on reasonable terms to the poor and needy to undertake basic education. Student Eligibility: The student should be an Indian national and should have secured admission to professional courses through entrance test process or should have secured admission to foreign university. The student have scored minimum 60 percent in the qualifying examination for admission to graduation courses. Repayment: Course period + 1 year or 6 months after getting job, whichever is earlier.

The loan has to be repaid in five to seven years from commencement of repayment. If the student is not able to complete the course for the reasons beyond his control, sanctioning authority may at his discretion consider such extensions as may be deemed necessary to complete the course. Security: Up to Rs 2 lakh:- no security Above Rs 2 lakh:- collateral security equal to 100 % of the loan. Amount of guarantee of third person known to bank for 100% of the loan amount. 4) Automobile Loans: Banks are extending credit for purchase of new two or four wheeler for personal or professional use. Bank finance is also available for purchase of used cars less than 3 years old. Each bank has formulated their own schemes. Vehicle finance has now become one of the highly profitable area and therefore banks and other financial institutions are competing with each other for attracting the customers, even by offering some concessions. As a result, the margin, interest rate & eligibility criteria differ from one bank to the other. The loans are to be repaid in 36 to 60 equated monthly instalments. The maximum amount of loan is limited to 3 times of net income annual salary subject to a maximum of Rs 10 lakh. Security: Hypothecation of vehicle financed by the bank. Banks lien to be noted with the transport authorities. Guarantee of the spouse In case of unmarried, third party guarantee of sufficient means or other collateral securities acceptable to the bank. 5) Mortgage Loans: Mortgage loan is a financing arrangement in which a lender extends finance for acquisition of real estate against the security of the real estate purchased

out of the loan. The borrower executes a mortgage deed which registers a lien on the property in favour of the lender. The title will be re-transferred when the borrower repays the loan in full with interest. Banks provide loan/overdraft facility against mortgage of property at low rate of interest to people engaged in trade, commerce and business and also to professionals and self employed, partnership firms, companies, NRIs and individuals with high net worth including salaried people. The product provides an opportunity to customers to borrow against a fixed asset at short notice. Repayment: The loan has to be repaid within a period of eight years by way of equated monthly installments. The repayment shall commence from the month subsequent to the month in which final disbursement is made or 6 months from the first disbursement, whichever is earlier. In case of agriculturists the repayment is related to the generation of farm income from crops & other subsidiary activities.

3.2 INVESTMENT Investment is the employment of funds with the aim of getting return on it. It is the commitment of funds which have been saved from current consumption with the hope that some benefits will receive in future. Thus, it is a reward for waiting for money. Savings of the people are invested in assets depending on their risk and return. Investment avenues are the outlets of funds. In India, investment alternatives are continuously increasing along with new developments in the financial market. An investor can himself select the best avenue after studying the merits and demerits of different avenues. Even financial advertising, newspapers supplements on financial matters and investment journals offer guidance to investors in the selection of suitable investment avenues. CHART: ALTERNATIVES AVENUES FOR INVESTMENT

1) Public Provident Fund (PPF): Public Provident Fund is one attractive tax sheltered investment scheme for middle class and salaried persons. It is even useful to businessmen and higher income earning people. The PPF scheme is very popular among the marginal income tax payers. Features of PPF scheme The PPF scheme is for a period of 15 years but can be extended at the desire of the depositor The depositor is expected to make a minimum deposit of Rs 100 every year The PPF account is not transferable, but nomination facility is available Tax exemption on investment is made. A compound interest at 8% per annum is paid 2) Government of India Savings Bond: The GOI has recently started issuing 6.50% bonds which are reasonably attractive and secured investment for individuals and institutions. Features of Savings Bonds Interest 6.50%. Interest is payable half yearly or cumulative. Interest payment is exempted from income tax. Maturity period of 5 years Cumulative facility available. Rs 1000 become Rs 1377 after 5 years. Nomination facility is available 3) Real Estate Properties: Investment in the real estate is popular due to high saleable value after some years. Such properties include buildings, commercial premises, industrial land, plantations, farmhouses, agricultural land etc. They purchase such properties at low prices and do not sale them unless there is substantial

increase in the market price. The resale price will be attractive in due course when they can recover 4 times the price paid. This is one attractive as well as profitable avenue for investment. 4) Investment in Gold, Silver: In India, there is attraction for gold and silver since the early historical period. These two precious metals are used for making ornaments and also for investment of surplus funds over a long period. The prices of both the metals are continuously increasing. These metals are highly liquid, also provides a sense of security to the investors. The benefit of capital appreciation is also available. As a result, investment in gold and silver is one avenue for investment. 5) Bonds & Debentures: It is possible to purchase bonds and debentures of joint stock companies for investment purpose. Debenture indicates loan given to the company at a specific rate of interest. Debentures are more popular than shares due to the safety and security available. Easy transferability by endorsement and delivery. Investment exempted from wealth-tax. Maturity period from 5-25 years.

INNOVATIVE FINANCIALPRODUCTS & SERVICES


1) Merchant Banking: A merchant banker is a financial intermediary who helps to transfer capital from those who possess it to those who need it. Merchant banking includes a wide range of activities such as management of customer securities, portfolio management, project counseling and appraisal, underwriting of shares and debentures, loan syndication, acting as banker for the refund orders, handling interest and dividend warrants etc. Thus, a merchant banker renders a host of services to corporate and thus promotes industrial development in the country. 2) Loan Syndication: This is more or less similar to consortium financing. But, this work is taken up by the merchant banker as a lead manager. It refers to a loan arranged by a bank called lead manager for a borrower who is usually a large corporate customer or a Government Department. The other banks who are willing to lend can participate in the loan by contributing an amount suitable to their own lending policies. Since a single bank cannot provide such a huge sum of loan, a number of banks join together and form a syndicate. 3) Leasing: A lease is an agreement which a company or a firm acquires a right to make use of capital asset like machinery, on payment of a prescribed fee called rental charges. The lessee cannot acquire any ownership to the asset, but he can use it and have full control over it. He is expected to pay for all maintenance charges and repairing and operating cost. In countries like the U.S.A., the U.K. and Japan equipment leasing is very popular and nearly 25% of plant and equipment is being financed by leasing companies. In India also, many

financial companies have started equipment leasing business by forming subsidiary companies. 4) Mutual Funds: A mutual fund refers to a fund raised by a financial service company by pooling the savings of the public. It is invested in a diversified portfolio with a view to spreading and minimizing risk. The fund provides Investment Avenue for all small investors who cannot participate in the equities of big companies. It ensures low risk, steady returns, high liquidity and better capital appreciation in the long run. 5) Factoring: Factoring refers to the process of managing the sales ledger of a client by a financial service company. In other words, it is an arrangement under which a financial intermediary assumes the credit risk in the collection of book debts for its clients. The entire responsibility of collecting the book debts passes on to the factor. His services can be compared to del credre agent who undertakes to collect debts. But, a factor provides credit information, collects debts, monitors the sales ledger and provides finance against debts. Thus, he provides a number of services apart from financing.

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