Module 1

1.Structure of Banking in India

1.Reserve Bank of India:Reserve Bank of India is the Central Bank of our country. It was
established on 1st April 1935 accordance with the provisions of the Reserve Bank of India Act,
1934. It holds the apex position in the banking structure. RBI performs various developmental
and promotional functions.
It has given wide powers to supervise and control the banking structure. It occupies the pivotal
position in the monetary and banking structure of the country. Central bank is known as a
banker’s bank. They have the authority to formulate and implement monetary and credit policies.
It is owned by the government of a country and has the monopoly power of issuing notes.

2.Scheduled & Non –scheduled Banks :A scheduled bank is a bank that is listed under the
second schedule of the RBI Act, 1934. In order to be included under this schedule of the RBI
Act, banks have to fulfill certain conditions such as having a paid up capital and reserves of at
least 0.5 million and satisfying the Reserve Bank that its affairs are not being conducted in a
manner prejudicial to the interests of its depositors. Scheduled banks are further classified into
commercial and cooperative banks. Non- scheduled banks are those which are not included in
the second schedule of the RBI Act, 1934. At present these are only three such banks in the
country.

(I). Commercial Banks :Commercial banks may be defined as, any banking organization that
deals with the deposits and loans of business organizations.Commercial banks issue bank checks
and drafts, as well as accept money on term deposits. Commercial banks also act as
moneylenders, by way of installment loans and overdrafts.Commercial banks also allow for a
variety of deposit accounts, such as checking, savings, and time deposit. These institutions are
run to make a profit and owned by a group of individuals.

Types of Scheduled Commercial Banks

• Public Sector Banks ;These are banks where majority stake is held by the Government of
India.
Examples of public sector banks are: SBI, Bank of India, Canara Bank, etc.

• Private Sector Banks ;These are banks majority of share capital of the bank is held by
private individuals. These banks are registered as companies with limited liability. Examples
of private sector banks are: ICICI Bank, Axis bank, HDFC, etc.

• Foreign Banks ;These banks are registered and have their headquarters in a foreign country
but operate their branches in our country. Examples of foreign banks in India are: HSBC,
Citibank, Standard Chartered Bank, etc

• Regional Rural Banks :Regional Rural Banks were established under the provisions of an
Ordinance promulgated on the 26th September 1975 and the RRB Act, 1976 with an
objective to ensure sufficient institutional credit for agriculture and other rural sectors. The
area of operation of RRBs is limited to the area as notified by GoI covering one or more
districts in the State .RRBs are jointly owned by GoI, the concerned State Government and
Sponsor the issued capital of a RRB is shared by the owners in the proportion of 50%, 15%
and 35% respectively.

(II) Cooperative Banks :A co-operative bank is a financial entity which belongs to its members,
who are at the same time the owners and the customers of their bank. Co-operative banks are
often created by persons belonging to the same local or professional community or sharing a
common interest. Co-operative banks generally provide their members with a wide range of
banking and financial services (loans, deposits, banking accounts, etc).They provide limited
banking products and are specialists in agriculture-related products.Cooperative banks are the
primary financiers of agricultural activities, some small-scale industries and self-employed
workers.Co-operative banks function on the basis of “no-profit no-loss”.

There are three types of cooperative banks-

(a) Primary Credit Societies- These institutions are formed at village level or town level. The
operations of such banks are limited to a very small area
(b) District Central Cooperative Banks- These banks operate at the district level. They act as a
link between primary credit societies and state cooperative banks

(c) State Cooperative Banks- State Cooperative Banks are biggest forms of cooperative banks.
They operate at the state level. Some of State Cooperative banks operate in multi States.

2. Wholesale banking

Definition: Wholesale banking refers to the complete banking solution provided by the merchant
banks to the large scale business organizations and the government agencies or institutions. To
avail the facility of wholesale banking, the companies need to possess a strong financial
statement and operate on a large scale. Usually, multinational companies are the clients of
wholesale banking. Modern wholesale banks engage in: Finance wholesaling, Underwriting,
Market making, Consultancy, Mergers and acquisitions, Fund management

➢ Features of Wholesale Banking

• Large Scale Operations: Wholesale banking majorly meets the enormous financial
requirements of the large scale companies and the government.
• Low Operational Cost: The cost of carrying out transactions and other banking
operations is quite low due to a limited customer base and few numbers of transactions.
• High Risk Involved: The risk level involved in wholesale banking is very high. T the
failure of the borrower company can lead to the collapse of all the parties associated with
it.
• Control Over Financial Transaction Monitoring and Recovery: Due to limited
customers, it becomes convenient for the banks to monitor the financial transactions and
recover the loans and advances.
• Huge Impact on Non-Performing Asset: If there is delay or default in the repayment of
loans and advances provided under wholesale banking, the non-performing assets of the
bank increases.
• High Cost of Deposit: The interest rates paid by the banks on the deposits made by the
substantial business entities is high.

➢ Functions of Wholesale Banking

Primary Functions

• Making Advances: The principal purpose of wholesale banks is to provide loans and
advances of high value to the large scale business entities.
 • Accepting Deposits: These banks also receive deposits from the big companies and
provides high interest on the deposited funds.
• Credit Creation: The wholesale banks increase the flow of funds in the economy by
initiating loans and deposits by the government and large scale companies.

Secondary Functions

• Underwriting: The wholesale bank raises capital for the projects of large business
organizations by issuing debt or equity shares to the investors on behalf of the respective
companies.
• Mergers and Acquisitions: Through operations like currency conversion, these banks
facilitate the merger of two or more companies across the globe and also the acquisition of
one business unit by the other is organization.
• Trust and Consultancy Services: The merchant banks provide various other services
like investment advice and trust-building to the client companies.
• Fund Management: The merchant banks continuously function towards managing and
handling of the funds deposited by the clients wisely.

➢ Advantages of Wholesale Banking

• Provides Extra Safety to Depositors: In wholesale banking, the banks treat the deposited
funds with a high level of safety and put the amount in comparatively secured investment
opportunities.
• Low Transaction Fees: The banks charge the transaction fees at a discounted rate for the
customers of wholesale banking
• Facilitates Large Trade Transactions: It supports the high-value transactions of the
companies operating on a large scale.
• Fulfils Huge Working Capital Requirements: Large business associations require a
considerable amount of funds to carry out day to day operations. Thus, wholesale banking
accomplishes this need by providing funds for working capital.
• Lending to Government: These banks even lend funds to the government of the country for
carrying out various long-term projects.
• Provides Cash Management Solution: Wholesale banking also facilitates effective cash
management, i.e. acquisition and investment of cash into the right opportunity.

➢ Drawbacks of Wholesale Banking

• High Risk: As we know that the lumpsum transactions take place in wholesale banking,
there is a high level of risk involved.
• Expensive Business Accounts: Maintaining accounts and records is a costly affair in
wholesale banking when compared to traditional bank accounts.
 • High-Interest Rates and Processing Fees: The borrower company is liable to pay off
high interest and processing fees on loans and advances to the banks.
• Relies on Stability of Location: When the company deposits a large amount at a single
location, i.e. the wholesale bank, there is a risk of loss if the bank faces a situation of
downfall.
• Payment for Unused Services: In wholesale banking, there is always a complaint that the
client companies have to pay even for those services which are not used by them.
• May Lead to Client’s Exploitation: When the borrowed sum is of high value, there are
chances that the borrower company may be exploited by the bank.

3: Retail banking

Retail Banking is also termed as consumer banking. As the name suggests, it is a part of the
commercial banking system associated with the general public and individual customers. Retail
banking systems aim to provide banking services like checking accounts, opening accounts,
savings accounts, loans, debit cards, and more to the citizens. This system targets members of the
general public and their personal needs of handling money.

➢ Features of retail banking: Retail banking refers to the dealing of commercial banks with
individual consumers, both the liabilities and the asset side of the balance sheet.4 The
important products offered by banks in retail banking are fixed, current/ savings account on
liabilities side; and personal loans, house loans, auto loans and educational loans on the asset
side. Today’s retail banking sector is characterised by the following features:

• Retail banking aims at doing banking business in large volume of transactions involving low
value.

• The retail banking portfolio includes deposits and assets linked products as well as other
financial services provided to individuals for personal consumption

. • Retail banking business is an attractive market segment with opportunities for growth and
profits.

• It provides an opportunity to banks to diversify their asset portfolio. Since loans are given to a
large number of consumers and transactions have very low value, the risk of NPA is reduced
because all the consumers do not make default in making loan repayment at a time.

• Retail banking industry is diverse and competitive. There is a large number of retail banking
products that are extremely customer-friendly and are offered by many banks.

• Banks adopt multiple channels of distribution of retail banking products. The channels include
call centre, branch, internet, mobile phones, ATMs etc.
➢ Advantages of retail banking

• Retail deposits are stable and constitute core deposits.

• They are interest insensitive and less bargaining for additional interest.

• Effective customer relationship management with retail customers builds a strong customer
base.

• Retail banking increases the subsidiary business of banks.

• Retail banking results in better yield and improved bottom line for banks.

• Retail segment is a good avenue for funds deployment.

• Consumer loans are presumed to be of lower risk and NPA perception.

• Improves lifestyle and fulfils aspirations of people through affordable credit.

• Retail banking provides an opportunity for banks to innovate banking products as per the
expectations of various classes of customers.

•Retail banking involves minimum marketing efforts in a demand-driven economy.

• Diversified portfolio due to huge customer base enables banks to reduce their dependence on a
few or single borrower.

• Banks can earn good profits by providing non-fund based or fee based services without
deploying their funds.

• Credit risk tends to be well diversified as loan amounts are relatively small

➢ Disadvantages of retail banking

There can be problems in managing large number of clients, especially if IT systems are not
sufficiently robust.

• The cost of maintaining branch networks and handling large number of lowvalue transactions
tend to be relatively high.

• Designing own and new financial products is very costly and timeconsuming for the bank.

• Though banks are investing heavily in technology, they are not able to exploit it to the
maximum.

• Major disadvantages are monitoring and follow-up of huge volume of loan accounts inducing
banks to spend heavily on the human resource department.
• Long term loans like housing loan, due to its long repayment term, can become NPA in the
absence of proper follow-up.

➢ Retail banking products: Retail banking includes a comprehensive range of financial

products such as deposit products, loan products and payment services. The typical products
offered in the Indian retail banking segment are:

Retail deposit products

• Recurring deposit account • Current deposit account

• Term deposit account • Zero balance account for salaried people

• No frill account for common man • Senior citizen deposit account, etc

• Savings bank account

Retail loan products

• Home loans to resident Indians for purchase of land and construction of residential house/
purchase of ready built house/ for repairs and renovation of an existing house

• Home loans to Non-Resident Indians.

• Auto loans for new/ used four-wheelers and two- wheelers

• Consumer loans for purchase of jewels, for meeting domestic consumption etc

. • Education loans for pursuing higher education both in India and abroad.

• Trade related advances to individuals for setting up business, retail trade etc.

• Crop loan to farmers.

4: Fund based and Non Fund Based Income

“Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of aspects of decreases of liabilities that results in increases in equity, other than
that relation to contributions from equity participants.” There are two broad sources of bank
income or revenues. One is Interest Income or Fund Based Income and second is, Non-Interest
Income or Non-fund Based Income.

1.Fund Based Income/Interest income: “Interest income is generated over the life of loans that
have been securitized in structures requiring financing treatment (as opposed to sale treatment)
for accounting purposes; loans held for investment; loans held for sale; and loans held for
securitization. Banks sometimes keep their cash in short term deposit investment such as
certificates of deposits with maturities up to twelve month, saving account and money market
funds. The cash placed in these accounts earn interest for the business, which is recorded on the
income statement as interest income.

Components of Interest/ Fund Based Income:

(I)Income from lending of money: Generally lending of money refers with disposing of the
money or property with the expectation that the same thing will be returned. In other word
lending of money is the transfer of securities to a borrower (usually so the borrower can pay back
a short term liability), in return for a fee. The borrower agrees to replace them in due course with
identical securities and the lender risks/returns of the securities in the meantime.

(ii)Income from Investment(SLR): Every bank is required to maintain at the close of business
every day, a minimum proportion of their net demand and time liabilities as liquid assets in the
form of cash gold and un-encumbered approved securities. The ratio of liquid assets to demand
and time liabilities is known as Statutory Liquidity Ratio (SLR). An increase in SLR also
restricts the bank’s leverage position to pump more money into the economy.

2.Non Fund Based Income/Non Interest income: Non-interest income is bank and creditor
income derived primarily from fees including deposit and transaction fees, insufficient funds
(NSF) fees, annual fees, monthly account service charges, inactivity fees, check and deposit slip
fees, and so on. Credit card issuers also charge penalty fees, including late fees and over-the-
limit fees. Institutions charge fees that generate non-interest income as a way of increasing
revenue and ensuring liquidity in the event of increased default rates.

➢ Components of Non Interest/Non Fund Based Income

(i)Income from remittance of business: Apart from accepting deposits and lending money,
Banks also carry out, on behalf of their customers the act of transfer of money - both domestic
and foreign. - From one place to another. This activity is known as "remittance business”. Banks
issue Demand Drafts, Banker's Cheques, and Money Orders.

(ii) Income from third party product: Commission or income earned on selling other
companies' products (or third-party distribution business) is emerging as a new revenue source
for many banks. Although the fee amounts are still small, they are a valuable contribution to
diversifying revenue streams, increasing the mix of non-interest income and also improve profits.

(iii)Income from contingency liability: A contingent liability is a liability which may or may
not arise in the future depending on the happening or non happening of an event. A contingent
liability is a potential liability…it depends on a future event occurring or not occurring. For
example, if a parent guarantees a daughter’s first car loan, the parent has a contingent liability. If
the daughter makes her car payments and pays off the loan, the parent will have no liability. If
the daughter fails to make the payments, the parent will have a liability.
(iv)Income from Government business: In present age apart from rendering all other Personal
banking services to its customers/public, every bank in India also works as Agency Bank for
undertaking various types of Govt. Business etc. Some of these functions include:. Pension
Payment ,Collection of PPF and Payment of PPF ,Collection of Government Bonds ,Collection
of Senior Citizen Deposits, Collection of Various Taxes, like CBDT, Indirect tax Excise and
VAT Receipts/payments work of Postal/Railways.

5: Ancillary Services

Meaning:All the services provided by banks can be broadly divided into two categories. The
first one is primary services which consist of accepting demand deposits and lending money to
its customers as per their requirement. Apart from their daily primary activities, banks provide
many other supporting services; these are called ancillary services. Let us look at a few important
services of them.

Remittance services
o It means a transfer of funds from one branch of a bank to another branch of the same bank
or a different bank.
o One can make local remittances through Bankers Cheque (BC) and remit funds from one
centre to another through Demand drafts (DD), Telegraphic Transfer (TT), Mail Transfer
(MT), National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement
(RTGS) at specified service charges.
o The customer shall fill in full particulars regarding the remittance; such as-
o Nature of the remittance i.e. by filling in DD/TT/MT etc.
o Name and address of the beneficiary.
o Name of the branch to which the remittance is to be made.
o Name, address, an account number of the remitter/customer if required.

Custodial Services
o This facility is popularly known as Safe Deposit Locker.
o It is extended to the customers to enable them to keep their valuables/important
documents in a specially designed locker. A prescribed rental is charged on them.
o Lockers can be hired by individuals (not minors), firms, limited companies, specified
associations and societies.
o Lockers can be rented for a minimum period of one year.
 o There are four different types of lockers i.e. small, medium, large and extra large with
varying rentals.
o Nomination facility is available to an individual hirer.
o In a case of overdue rents bank can charge a penalty.

Forex Services
o When a person travels to different countries or wants to buy any foreign merchandises,
then they require foreign currencies.
o Bank provide these currencies to its customers.
o All transactions are done over the counter and only authorised bank branches can perform
these functions.
o When a person earns or receives foreign currencies from abroad, he can also send them to
banks.
o These foreign exchange transactions are done according to the rules and regulations of the
central banks of respective countries.
o In India, all the transactions are subjected to the regulations of Foreign Exchange
Management Act (FEMA), 1999.

Card Services
o Primarily the card services were introduced for convenience and safety purposes but
nowadays it has become the most popular payment mode among people.
o The bank issues customers two basic types of cards those are credit cards and debit cards.
o With the help of a credit card, the card holder can obtain either goods or services from
merchant establishment where such arrangement exists. Then a bill is sent to the
cardholder indicating the dues that he/she has to pay within a period of 30-40 days. It
carries a fixed interest.
o Debit cards are same as credit cards. The only difference is that a number of dues for each
transaction is debited to card holder’s account as each transaction is notified.

E- banking services
o Nowadays it is the most popular method of doing banking operation where you don’t
need to be physically present in the bank branch for performing any function/operation.
o It is also known as online banking or internet banking.
o One can do a number of activities by just sitting in front of one’s computer screen or
smartphone. Such as- Transfer of funds from one account to another in the same bank or
different banks, Keep surplus funds in a fixed deposit account, Online shopping etc.
 o The only thing he/she needs to do is to access his/her virtual account with the help of the
ID and PASSWORD, provided by the bank. E-Banking Services

Insurance services
o Banks deliver a wide range of insurance of insurance products that covers the risk of
almost every aspect of a human life, such as- Life, Health, Valuable assets like Personal
vehicles, Debit and credit cards etc.
o It is also known as Bancassurance in which a bank and an insurance company form a
partnership.
o The insurance company sales its different products to the bank's client base.
o This partnership is profitable for both companies. Banks can earn additional revenue by
selling the products and the insurance company can expand its customer base.
o Example- ICICI Prudential, Bajaj Allianz etc.
o Some banks also offer Investment services for their corporate customers. It is also
known as Portfolio services. They guide their clients especially about how to invest
adequately or raise financial capital for their business. Any individual customer can also
avail this kind of services from their respective bank.

6: Agency Services

1. Collection of Cheques, Dividends, Interests etc.: Collecting cheques, drafts, bill of exchange,
dividends, interests etc. on behalf of its customers and credit the amount in their account is one of
the most important agency services rendered by the banks. Banker accepts standing instructions
from the customers and arranges to collect dividend, interest, pension, salaries, bills etc. on behalf
of his customers.
2. Payment of Subscription, Rent, Insurance Premium etc.: Banks undertake the payment of
subscriptions, rent, insurance premium etc. on behalf of the customers and debit the account with
the amount. It accepts the standing instructions of the customer and arranges for.the payment of
such expenses on their behalf. It charges a small amount by way of commission for these services.
3. Conduct of Stock Exchange Transactions: Banks purchase and sell various securities such as
shares, debentures, bonds etc. of joint stock companies both private and Government on behalf of
their customers.
4. Acting as Executor, Trustees, Attorneys etc.: Banks act as executors of will, trustees,
attorneys and administrators. As an executor it preserves the “Wills” of the customers and executes
them after their death. As a trustee, it takes care of the funds of the customers. As an attorney, it
signs transfer forms and documents on behalf of the customer.
5. Preparation of Income Tax Returns: Banks prepare income tax returns for their customers
through their tax service departments.
6. Conducting Foreign Exchange Transactions: Commercial banks purchase and sell foreign
exchange for their customers.
7. Banker acts as an agent to the customer. When a customer deposits cheques, drafts, bills or
any other promissory notes, the banker collects them and on realization credits the account of the
customer. For this activity, the banker is given commission. Banks also act as a correspondent,
representative of their customers. Some banks may even get the travelers’ tickets, passport etc. for
their customers.
8. As the customer has to pay certain periodical payments such as monthly, quarterly, half yearly,
the banker is informed by a standing instruction. Thus, club subscription, insurance premium, road
tax, electricity charges and telephone bills of the customers are paid by the bank after debiting the
customers’ account.
9. As the customer may be a shareholder or debenture holder of companies, he will be
receiving dividend warrants and interest warrants, which will be deposited by the customer in
the bank. The bank will collect the same and credit it to the account of respective customers.
10. When customers are left with huge amount of money in their account, they can be invested in
company securities for capital appreciation or for getting a good return. The banker will be able
to advise customers about various investment opportunities as he has the services of experts.

7: Credit Creation
A central bank is the primary source of money supply in an economy through circulation of
currency.

It ensures the availability of currency for meeting the transaction needs of an economy and
facilitating various economic activities, such as production, distribution, and consumption.

However, for this purpose, the central bank needs to depend upon the reserves of commercial
banks. These reserves of commercial banks are the secondary source of money supply in an
economy. The most important function of a commercial bank is the creation of credit.

Therefore, money supplied by commercial banks is called credit money. Commercial banks
create credit by advancing loans and purchasing securities. However, commercial banks cannot
use the entire amount of public deposits for lending purposes. They are required to keep a certain
amount as reserve with the central bank for serving the cash requirements of depositors. After
keeping the required amount of reserves, commercial banks can lend the remaining portion of
public deposits.

Example of credit creation process:Suppose you deposit Rs. 10,000 in a bank A, which is the
primary deposit of the bank. The cash reserve requirement of the central bank is 10%. In such a
case, bank A would keep Rs. 1000 as reserve with the central bank and would use remaining Rs.
9000 for lending purposes.
The bank lends Rs. 9000 to Mr. X by opening an account in his name, known as demand deposit
account. However, this is not actually paid out to Mr. X. The bank has issued a check-book to
Mr. X to withdraw money. Now, Mr. X writes a check of Rs. 9000 in favor of Mr. Y to settle his
earlier debts.

The check is now deposited by Mr. Y in bank B. Suppose the cash reserve requirement of the
central bank for bank B is 5%. Thus, Rs. 450 (5% of 9000) will be kept as reserve and the
remaining balance, which is Rs. 8550, would be used for lending purposes by bank B.

Thus, this process of deposits and credit creation continues till the reserves with commercial
banks reduce to zero.

8: Priority Sector Lending

Priority Sector mean those sectors which the government of India and RBI consider as important
for the development of the basic needs of the country and are to be given priority over other
sectors. Lending by commercial banks for certain sectors which are identifies as priority sectors
by RBI is called ‘Priority Sector Lending’. Priority sector lending is an impoant role given by
RBI to commercial banks for providing a specific portion of the bank lending to few critical
sectors like agriculture and allied activities, micro and small enterprises, poor people for housing,
students’ education and other low income. The overall objective of priority sector lending
program is to ensure the adequate institutional credit flows into some of the vulnerable sections
of the society. In line with the objective, RBI directs the other banks for providing specified
portion of bank lending to few specific sectors like:

• Agriculture
• Micro small and medium enterprise
• Export credit
• Education
• Housing
• Social infrastructure
• Renewable energy
• Others

9: Important Provisions of Banking Regulation Act

1. Use of words ‘bank’, ‘banker’, ‘banking’ or ‘banking company’ (Sec.7): According to

Sec. 7 of the Banking Regulation Act, no company other than a banking company shall use the
words ‘bank’, ‘banker’, ‘banking’ or ‘banking company’ and no company shall carry on the
business of banking in India, unless it uses the above mentioned words in its name.
2. 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, however, buy, sell or barter the transactions relating to bills of exchange received for
collection or negotiation.

3. Disposal of 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”.

4. 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: Accountancy,
Agriculture and Rural Economy, Banking ,Cooperative , Economics , Finance , Law, Small
Scale Industry.

5. Restriction on Commission, Brokerage, Discount etc. on sale of shares (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
2½% of the paid-up value of such shares.

6.. Prohibition of charges on unpaid capital (Sec. 14): A banking company cannot create any
charge upon its unpaid capital and such charges shall be void.

7.. Restriction on Payment of Dividend (Sec. 15): According to Sec. 15, no banking company
shall pay any dividend on its shares until all its capital expenses (including preliminary expenses,
organisation expenses, share selling commission, brokerage, amount of losses incurred and other
items of expenditure not represented by tangible assets) have been completely written-off.

8. 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 25% 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.

9. 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.

10. Liquidity Norms or Statutory Liquidity Ratio (SLR) (Sec. 24): According to Sec. 24 of
the Act, in addition to maintaining CRR, 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 25% of its
demand and time liabilities in India.
This percentage may be changed by the RBI from time to time according to economic
circumstances of the country. This is in addition to the average daily balance maintained by a
bank.

10. Important provisions of RBI act.

Reserve Bank of India Act, 1934 was enacted on 6 March, 1934 to constitute the Reserve Bank
of India. This law commended from April 1, 1935. It provides framework for the supervision of
banks and other related matters.

➢ Important Provisions

Section-3: Section 3 of the RBI act provides for establishment of Reserve Bank of India for
taking over the management of the currency from Central Government and of carrying on the
business of banking in accordance with the provisions of this Act.

Section 4 Section 4 of the RBI Act defines the capital of RBI which is Rs. five crore.

Section 7 Section 7 of the RBI Act empowers the central government to issue directions in
public interest from time to time to the bank in consultation with RBI Governor. This section
also provides power of superintendence and direction of the affairs and business of RBI to
Central Board of Directors.

Section 17 This section deals with the functioning of RBI. . The RBI can accept deposits from
the central and state governments without interest. It can purchase and discount bills of exchange
from commercial banks. It can purchase foreign exchange from banks and sell it to them. It can
provide loans to banks and state financial corporations. It can provide advances to the central
government and state governments. It can buy or sell government

Section 18 This section describes emergency loans to banks.

Section 21 This section assigns RBI the duty of being banker to the central government and
manage public debt.
Section 22 This section grants power to RBI to issue the currency

Section 24 This section has provision that highest denomination note could be ₹10,000

Section 28 This section empowers the RBI to form laws concerning the exchange of damaged
and imperfect notes

Section 31 This section provides that in India RBI and central government only can issue and
accept promissory notes that are due on request

Section 42(1) This section provides that every scheduled bank need to hold an average daily
balance with the RBI

Module II
1.Functions of Commercial Banks

(a) Primary Functions:

1. Accepting Deposits Commercial banks accept deposits from people, businesses, and other
entities in the form of:

• Savings deposits – The commercial bank accepts small deposits, from households or
persons, in order to encourage savings in the economy.

• Time deposits – The bank accepts deposits for a fixed time and carries a higher rate of
interest as compared to savings deposits.

• Current deposits – These accounts do not offer any interest. Further, most current accounts
offer overdrafts up to a pre-specified limit. The bank, therefore, undertakes the obligation of
paying all cheques against deposits subject to the availability of sufficient funds in the
account.

2. Lending of Funds :Another important activity is lending funds to customers in the form of loans
and advances, cash credit, overdraft and discounting of bills, etc.Loans are advances that a bank
extends to his customers with or without security for a specified time and at an agreed rate of
interest. Further, the bank credits the loan amount in the customers’ account which he withdraws as
per his needs. Under the cash credit facility, the bank offers its customers a facility to borrow cash up
to a certain limit against the security of goods. Further, an overdraft is an arrangement that a bank
offers to customers wherein a temporary facility is offered to overdraw from the current account
without any security. Additionally, banks also discount and purchase bills.
(b) Secondary Functions:

(1) Agency Functions: Implies that commercial banks act as agents of customers by performing
various functions, which are as follows:

(i) Collecting Cheques: Refer to one of the important functions of commercial banks. The banks
collect chequs and bills of exchange on the behalf of their customers through clearing house
facilities provided by the central bank.
(ii) Collecting Income: Constitute another major function of commercial banks. Commercial
banks collect dividends, pension, salaries, rents, and interests on investments on behalf of their
customers. A credit voucher is sent to customers for information when any income is collected
by the bank.
(iii) Paying Expenses: Implies that commercial banks make the payments of various obligations
of customers, such as telephone bills, insurance premium, school fees, and rents. Similar to credit
voucher, a debit voucher is sent to customers for information when expenses are paid by the
bank.

(2) General Utility Functions:

(i) Providing Locker Facilities: Implies that commercial banks provide locker facilities to its
customers for safe keeping of jewellery, shares, debentures, and other valuable items. This
minimizes the risk of loss due to theft at homes.
(ii) Issuing Traveler’s Cheques: Implies that banks issue traveler’s checks to individuals for
traveling outside the country. Traveler’s checks are the safe and easy way to protect money while
traveling.
(iii) Dealing in Foreign Exchange: Implies that commercial banks help in providing foreign
exchange to businessmen dealing in exports and imports. However, commercial banks need to
take the permission of the central bank for dealing in foreign exchange.
(iv) Transferring Funds: Refers to transferring of funds from one bank to another. Funds are
transferred by means of draft, telephonic transfer, and electronic transfer.

2: Banker– Customer Relationship

Relationship between banker and customer is mainly of a debtor and creditor. However they
share some other forms of relationships also discussed in detail below.

1.Relationship of Debtor and Creditor: (i)In case of Saving Account / Current Account/ Fixed
Deposit – Customer deposit their surplus amount of money with bank. In other words, depositor
lend money to bank and bank repay it on demand as per contract of deposit. In this
case, Customer is creditor of bank and bank is debtor.
(ii)In Case of Loan Account – Bank not only accept deposit but also lend money further at an
agreed rate of interest to their customers. In this case, Banker Customer Relationship is of
creditor and debtor because the customer owes money to the banker.

2.Relationship of Agent and Principal: Relationship of Agent and Principal: Banker becomes
agent of the customer (Principal) by rendering following services to customer –

• Bank Collects cheque, bills or promissory note, dividends etc on behalf of customer
• Make Insurance Premium Payments, Phone Bill, Gas Bills, Tax Payments as per mandate or
SI received from customer
• Buy or sell securities on behalf of customer

3.Relationship of Licensor (Lessor) and Licensee (Lessee) :When customer avail safe deposit
locker facility from bank, relation between banker and customer is Licensor and Licensee | Lessor-
Lessee. Bank is Licensor (Lessor) and Customer who hirer the locker is Licensee (Lessee).

4.Relationship of Bailor and Bailee :When Customer deliver goods to bank for purpose of
safekeeping under a condition that goods will be returned to depositor when purpose is
completed. In this case, Customer becomes bailor and bank becomes bailee. The process is
known as Bailment. Example of Bailment is – Articles, Securities and valuables kept in safe
deposit locker.

5.Relationship of Pledger and Pledgee :Sometimes, bank pledges certain assets or security to
secure the loan for payment of debt in case of default by customer. In this case, customer
becomes the pledger and bank becomes pledgee. Under this agreement, asset or security will
remain with the bank until a customer repays the debt.

6.Relationship of Trustee and Beneficiary: A trustee hold the assets, property for the
beneficiary and profit so earned belongs to beneficiary. Suppose, customer deposits securities or
valuables with the bank for safe custody, banker becomes a trustee of his customer. The
customer is the beneficiary so the ownership remains with the customer.

7.Relationship of Assignor and Assignee :An Assignor is a customer who transfers his property
or security rights to the bank (lender) as collateral of the loan availed from bank. Example are
transfer of LI Policies, NSC, Shares etc in the name of lender bank to secure the loan. The bank
on whose name security or property rights are transferred is called assignee. After full payment
of debt or loan, assignor can get the security reassigned in his name.
3: Right of Lien &Set off–

1.Right of Lien :Lien is the right of an individual to retain goods and securities in his
possession that belongs to another until certain legal debts due to the person retaining the
goods are satisfied. Lien does not endorse a power of sale but only to retain the property.
This varies from other forms of charges as it does not arise from an implied or express
agreement. Whereas, it arises from the dealings between the parties.
➢ Conditions for Exercising Lien

• The goods for which this right is to be executed has to be possessed by the creditor who
exercises it.
• There has to be a lawful debt due to the person in possession of the goods by the owner.
• There should not be any contract to the contract.

2. Right of setoff :The right of setoff is a legal right by a debtor to reduce the amount owed
to a creditor by offsetting against it any amounts owed by the creditor to the debtor. For
example, a bank can seize the amount in a customer’s bank account to offset the amount of
an unpaid loan. It is a useful legal right when a borrower goes bankrupt, since the creditor
will likely obtain more asset value by seizing assets than by gaining a l esser amount through
the bankruptcy process. Therefore, set-off clauses are most frequently found in lending
arrangements where the lender suspects that the borrower may not be able to continue as
a going concern.The right of set-off can be exercised subject to the fulfillment of the following
conditions:

▪ The accounts must be in the same name in the same right.

▪ The right can be exercised in respects of debts due only not in respects of future debts or
contingent debts.
▪ The number of debts must be certain.
▪ The banker may exercise that right at his discretion

4: Garnishee Order-

A garnishee order is a common form of enforcing a judgment debt against a creditor to recover
money. Put simply, the court directs a third party that owes money to the judgement debtor to
instead pay the judgment creditor. The third party is called a ‘garnishee’. A garnishee order is a
legal notice the court issues that allows the creditor to collect the amount from either:

1. the debtor’s wages,

2. the debtor’s bank account, or

 3. other people who owe the debtor money (e.g. a real estate agent who is collecting rent)

For Example Suppose A owes Rs. 1000 to B and B owes Rs. 1000 to C. by a garnishee order
the court may require A not pay money owed to him to B, but instead to Pay C, since B owes
the said amount to C, who has obtained the order.

A Garnishee Order is issued in two stages, first as an Order Nisi and then an Order Absolute:

1.On receipt of Order Nisi, Bank is bound to stop operation of the account. We must
immediately inform the customer about the receipt of the order.

2.Order Absolute :After receipt of the explanation of Bank ,Court may issue Order
Absolute.On receipt of an “Order absolute”,Bank has to pay the amount to the court.

5.Law of Limitation

The Law of Limitation Prescribes the time limits for different suits within which, an aggrieved
person can approach the court to redress or justice. The suit, if filed after the expiry of the time
limit, is struck by the law of limitation. It’s basically meant to protect te long and established
user and to indirectly punish persons who go into a long slumber over their rights. The very 1 st
Limitation Act was established for all courts in India in 1859. And finally took the form of
Limitation Act in 1963.

Module III
1. Bank computerization

The need for computerization was felt in the Indian banking sector in late 1980s, in order to
improve the customer service, book-keeping and MIS reporting. In 1988, Reserve Bank of India
set up a Committee on computerization in banks headed by Dr. C. Rangarajan. The process of
Computerization gained pace with the opening of the economy in 1991-92. A major driver for
this change was propelled by rising competition from private and foreign banks. Several
commercial banks started moving towards digital customer services to remain competitive and
relevant in the race. Banks have benefitted in several ways by adopting newer technologies.

➢ Functions of e-bank

1. Inquiry about the information of account: The client inquires about the details of his own
account information such as the card’s/account’s balance and the detailed historical records of
the account and download the report list.
2. Card accounts’ transfer: The client can achieve the fund transfer between his own cards and
transfer the fund to another person’s Credit Card in the same city.
3. Bank-securities accounts transfer: The client can achieve the fund transfer between his own
bank savings accounts or his own Credit Card account and his own capital account in the
securities company. Moreover, the client can inquire about the present balance at real time.
4. The transaction of foreign exchange: The client can trade the foreign exchange, cancel
orders and inquire about the information of the transaction of foreign exchange according to the
exchange rate given by our bank on net.
5. The B2C disbursement on net: The client can do the real-time transfer and get the feedback
information about payment from our bank when the client does shopping in the appointed web-
site.
6. Client service: The client can modify the login password, information of the Credit Card and
the client information in e-bank on net.
7. Account management: The client can modify his own limits of right and state of the
registered account in the personal e-bank, such as modifying his own login password, freezing or
deleting some cards and so on.
8. Reporting the loss of the account: The client can report the loss in the local area (not
nationwide) when the client’s Credit Card or passbook is missing or stolen.
.

➢ Merits and Demerits of Bank computerization

Advantages Disadvantages

Understanding the usage of internet

banking might be difficult at the first.
That said, there are some sites which
An online account is simple to open
offer a demo on how to access online
and easy to operate.
accounts (not all banks offer this). So,
a person who is new to technology
might face some difficulty.

You cannot have access to online

It's convenient, because you can
banking if you don’t have an internet
easily pay your bills and transfer your
connection; thus, without the
funds between accounts from nearly
availability of internet access, it may
anywhere in the world.
not be useful.

You do not have to stand in a queue to

Security of transactions is a big issue.
pay off your bills. Also you do not
Your account information might get
have to keep receipts of all of your
 Advantages Disadvantages

bills, as you can now easily view your hacked by unauthorized people over
transactions. the internet.

It is available all the time. You can

perform your tasks from anywhere
and at any time, even at night or on
holidays when the bank is closed. The
only thing you need to have is an
active internet connection.
Password security is a must. After
receiving your password, change it
and memorize it. Otherwise, your
account may be misused.

It is fast and efficient. Funds get

transferred from one account to the Your banking information may be
other very fast. You can also manage spread out on several devices, making
several accounts easily through it more at risk.
internet banking.

You can keep an eye on your

If the bank’s server is down, then you
transactions and account balance all
cannot access your accounts.
the time.

If the bank's server is down, due to

You can get to know about any
the loss of net connectivity or a slow
fraudulent activity or threat to your
connection, then it might be hard to
account before it can pose any severe
know if your transaction went
damage.
through.

You might get overly marketed too

It's a great medium for the banks to and become annoyed by notifications.
endorse their products and services. That said, these can easily be turned
off.

More online services include loans You might become annoyed by

and investment options. constant emails and updates.

2: Core Banking –Opportunities and Challenges

Core banking refers to a centralized system established by a bank which allows its customers to
conduct their business irrespective of the bank’s branch. Thus, it removes the impediments of
geo-specific transactions. In fact, CORE is an acronym for "Centralized Online Real-time
Exchange", thus the bank’s branches can access applications from centralized data centers.
Other than retail banking customers, core banking is now also being extended to address the
requirements of corporate clients and provide for a comprehensive banking solution.

➢ Features of Core Banking

1. Customer relationship management features including a 360 degree customer view.

2. The ability to originate new products and customers.
3. Banking analytics including risk analysis, profitability analysis and provisions for capital
reserve allocation and collateral management.
4. Banking finance including general ledger and reporting.
5. Banking channels such as teller systems, side counter applications, mobile banking and online
banking solutions.
6. Best practice workflow process.
7. Content management facilities.
8. Governance and compliance capabilities such as internal controls management and auditing.
9. Security control and audit capabilities.
10. Core banking solutions to help maximize growth, increase productivity and mitigate risk.

➢ Advantages of Core Banking

1. Limited Professional Manpower to be utilized more effectively.

2. Customer can have anywhere, more convenient and easier banking.
3. ATM, Interest Banking, Mobile Banking, Payment Gateways etc. are available.
4. More strong and economical way of management information system.
5. Reduction in branch manpower.
6. Additional manpower can be available for marketing, recovery and personalized banking.
7. Instant information available for decision support.
8. Quick and accurate implementation of policies.
9. Improved Recovery Process causing reduction on recovery costs, NPA provisions.
10. Innovative, redefined or improved processes i.e. Inter Branch Reconciliation causing
reduction in manpower at Head Office.
11. Reduction in software maintenance at branch and Head office.
12. Centralized printing and backup resulting in reduction in capital and revenue expenditure on
printing and backup devices and media at branches.
13. Electronic Transactions with other Financial Institutions.
14. Increased speed in working resulting in more business opportunities and reduction in
penalties and legal expenses.
3: Any Where Banking

Anywhere Banking is a convenient banking system which allows you to access customer
facilities of your bank from anywhere across the nation. It is a secure and speedy way of making
transfers away from home. This makes the feature especially important for users who move
frequently. The benefits of anywhere banking come to light in the context that it is no longer
practically possible to carry money everywhere we go and also to restrict banking to one branch
or open multiple bank accounts wherever we go.

4.ATM

Meaning: An automated teller machine (ATM) is an electronic banking outlet that allows
customers to complete basic transactions without the aid of a branch representative or teller.
Anyone with a credit card or debit card can access most ATMs. ATMs are convenient, allowing
consumers to perform quick, self-serve transactions from everyday banking like deposits and
withdrawals to more complex transactions like bill payments and transfers.

Definition of ATM:“ATM is an automated teller machine or automatic teller machine (ATM)

which is an electronic computerized telecommunications device that allows a financial
institution’s customers to directly use a secure method of communication to access their bank
accounts, order or make cash withdrawals (or cash advances using a credit card) and check their
account balances without the need for a human bank teller (or cashier of a bank). Many ATMs
also allow people to deposit cash or cheques, transfer money between their bank accounts, top up
their mobile phones’ pre-paid accounts or even buy postage stamps.”

➢ Parts of an ATM

• Card reader: This part reads the chip on the front or the magnetic stripe on the back of the
card.
• Keypad: The keypad allows the consumer to input information like the PIN, the type of
transaction he or she intends to do, and the amount of the transaction.
• Cash dispenser: Bills are dispensed through a slot in the machine, which is connected to a
safe at the bottom of the machine.
• Printer: If required, consumers can request receipts which are printed here. The receipt
records the type of transaction, the amount, and the account balance.
• Screen: The ATM issues prompts that guide the consumer through the process of executing
the transaction. Information is also transmitted on the screen such as account information and
balances.
Precautions to be Taken by ATM Users:

The users must:

1. Keep secret his PIN number and Password. If possible it should be remembered by heart and
not noted down on any document that can be easily approached by others.

2. Never hand over your card to anyone else for use.

3. If a terminal does not look genuine, never insert your card. Please ensure that no modification
has been done on the terminal, no suspicious devices have been attached. Please also note that
terminal is not behaving in a suspicious manner.

4. In case of withdrawing money immediately collect the money and remove the Card. In case of
delay money shall go back into ATM but your account shall be debited.

5. Remember to close the transaction after every operation.

6. Do not use ATM card in presence of anyone else.

7. Do not write PIN on the ATM Card.

8. In case of lost and stolen cards it must be reported without loss of time to prevent fraudulent
transactions.

9. Never give your PIN to e-mails or over the phone. These can be hacked and cause losses for.

10. You receive several calls luring you to earn many profits from several agencies, brokers,
sellers, investors on your phone. Never give your personal information on phone to any one
particularly your PIN no. and account number.

11. Phishing is venerable point for everyone. Be careful never respond to an e-mail requesting
you to provide Card, PIN, or personal information via the internet.

12. Treat your card as if it were cash or credit card. Protect it by not exposing the magnetic stripe
to other magnetic objects, which can deactivate your card.

13. Keep record of your card issuer and their Phone numbers for reporting its lost or theft.
 5: Tele Banking and SMS Banking,

1.Tele Banking : Tele banking is another innovation, which provided the facility of 24 hour
banking to the customer.]Telebanking is based on the voice processing facility available on bank
computers. The caller, usually a customer calls the bank anytime and can enquire balance in his
account or other transaction history. ]In this system, the computers at bank are connected to a
telephone link with the help of a modem. Voice processing facility is provided in the software.
This software identifies the voice of caller and provides him suitable reply. Some banks also use
telephonic answering machine but this is limited to some brief functions. Tele banking is
becoming popular since queries at ATM’s are now becoming too long.

2 .SMS Banking: SMS banking is a form of mobile banking. It is a facility used by

some banks or other financial institutions to send messages (also called notifications or alerts) to
customers' mobile phones using SMS messaging, or a service provided by them which enables
customers to perform some financial transactions using SMS. SMS banking services may use
either push and pull messages. Push messages are those that a bank sends out to a customer's
mobile phone, without the customer initiating a request for the information. Typically, a push
message could be a mobile marketing message or an alert of an event which happens in the
customer's bank account, such as a large withdrawal of funds from an ATM or a large payment
involving the customer's credit card, etcPull messages are initiated by the customer, using a
mobile phone, for obtaining information or performing a transaction in the bank account.
Examples of pull messages include an account balance enquiry, or requests for current
information like currency exchange rates and deposit interest rates, as published and updated by
the bank.

6: Mobile banking

Mobile banking refers to the use of a Smartphone or other cellular device to perform banking
tasks while away from your home computer, such as monitoring account balances,
transferring funds between accounts, bill payment and locating an ATM.

➢ Advantages

▪ It utilizes the mobile connectivity of telecom operators and therefore does not require an internet
connection.
▪ With mobile banking, users of mobile phones can perform several financial functions
conveniently and securely from their mobile.
▪ You can check your account balance, review recent transaction, transfer funds, pay bills, locate
ATMs, deposit cheques, manage investments, etc.
▪ Mobile banking is available round the clock 24/7/365, it is easy and convenient and an ideal
choice for accessing financial services for most mobile phone owners in the rural areas.
▪ Mobile banking is said to be even more secure than online/internet banking.

➢ Disadvantages

▪ Mobile banking users are at risk of receiving fake SMS messages and scams.
▪ The loss of a person’s mobile device often means that criminals can gain access to your mobile
banking PIN and other sensitive information.
▪ Modern mobile devices like Smartphone and tablets are better suited for mobile banking than old
models of mobile phones and devices.
▪ Regular users of mobile banking over time can accumulate significant charges from their banks.

7: Electronic Clearing System (ECS)

Electronic Clearing System (ECS) is an electronic method of fund transfer from one bank
account to another. It is generally used for bulk transfers performed by institutions for making
payments like dividend, interest, salary, pension, etc. ECS can also be used to pay bills and other
charges such as payments to utility companies such as telephone, electricity, water, or for
making equated monthly instalments payments on loans as well as SIP investments

There are two types of ECS :

• ECS (Credit) is used for affording credit to a large number of beneficiaries by raising a single
debit to an account, such as dividend, interest or salary payment.
• ECS (Debit) is used for raising debits to a number of accounts of consumers/account holders
for crediting a particular institution.

➢ Working of ECS Credit Scheme

The User intending to effect payments through ECS Credit has to submit details of the beneficiaries
(like name, bank / branch / account number of the beneficiary, MICR code of the destination bank
branch, etc.), date on which credit is to be afforded to the beneficiaries, etc., in a specified format
(called the input file) through its sponsor bank to one of the ECS Centres where it is registered as
a User.
The bank managing the ECS Centre then debits the account of the sponsor bank on the scheduled
settlement day and credits the accounts of the destination banks, for onward credit to the accounts
of the ultimate beneficiaries with the destination bank branches.
 8: Cheque Truncation System (CTS)

Cheque Truncation System (CTS) is a cheque clearing system undertaken by the Reserve Bank
of India (RBI) for quicker cheque clearance. As the term proposes, truncation is the course of
discontinuing the flow of the physical cheque in its way of clearing. Instead of this an electronic
image of the cheque is transferred with vital essential data.This speeds up the process of
collection of cheques resulting in better service to customers, Shorten the clearing cycle, speeder
credit to account holders, reduces the scope of loss of instruments in transit, lowers the cost of
collection of cheques, and removes reconciliation-related and logistics-related problems,
thus benefiting the system as a whole.

Benefits of Cheque Truncation System

• Time, money and manpower expended on physical transfer of cheques from banks to clearing
house are eliminated

• Clearing related frauds become less plausible

• Probability of cheques misplaced in transit is eliminated

• CTS is more advanced and more secure.

• It provides quicker clearance of cheques

• Reduces operational risk and risks related to paper clearing

• There are no extra charges levied for the collection of cheques drawn on a bank located within
the grid, further providing no geographical restrictions

9: Plastic Money

➢ Merits :-

• Reduces the need to carry cash: Plastic money has not only provided us with convenience, but
it has also eliminated the inconvenience that is caused in carry cash. For instance, when the job of
a working executive involves a lot of inter-state travel he/she has to entail numerous expenses like
travel, stay, food etc. In such a case it is not only troublesome to carry money but also there is a
risk of theft.
• Reduction in crime: With credit or debit cards’ being used, one benefit is the reduction in thefts
and crimes. It is very difficult to hack the PIN of a card, for which a person needs to know specific
techniques. Thus the credit card holder can be sure about the safety of his/her money to some
extent. Also in the event the card is stolen, the credit or debit card holder can ask the bank to block
the card as soon as possible.

• Credit cards provide a credit facility: With the advent of credit cards an individual can avail the
benefits of credit facility and pay at a later date. This kind of benefit is not available when cash is
being used for making a purchase. Also credit cards dismiss the need for go behind people to
borrow money in case of emergencies and financial needs.

• International acceptability: Owning an international debit or credit card provides the ease to
make purchases with that card itself rather than worrying about running out of cash. Also it
eliminates the inconvenience caused in conversion of currency.

• Ease in making payments from home: Credit cards and debit cards can be used easily for making
online payments, transfer of funds and various other transactions. It is very easy to make payments
on online shops through plastic money. Further some online retailers also provide discounts on
making payments through credit and debit cards.

➢ Demerits :-

• Plastic money cannot be used everywhere: There are several places where there is a need for
cash only. For instance purchasing utilities from a small retailer or for payments to milkman,
newspaper boy, etc. Further religious places like temple generally accept cash as offerings. Thus
plastic money cannot completely replace cash and thus cannot be used everywhere.
• Plastic money is also not completely safe: When we are making an online purchase through a
form of plastic money there a certain degree of risk involved as we share our bank details and other
financial information on the internet which is not always a safe place. There are certain malicious
websites on the internet with the intention of looting people, thus it is very important to be careful
while sharing an important detail online.

• Interest liability: While it is true that credit cards give us ample time to pay for purchases made
through it, it can also not be ignored that on the lapse of that period the card holder has to pay
interest amount. This is not the case when making payment through cash.

• Impulsive purchases: Having the ease to make payments makes a person unable to keep a control
on his/her purchases and enable the person to oversee if the purchase is cost worthy or not.

• Damaged card: Sometimes the magnetic chip of the cards gets damaged due to wear and tear or
mishandling by the holder. Although this is a rare case but it cannot be avoided.
10: Fund Transfer – NEFT/RTGS/SWIFT.

1.National Electronic Funds Transfer (NEFT) :NEFT is a payment system that enables
electronic transfer of funds from one bank to another bank account. Money transfer can be made
by an individual or company to an individual or company's bank account with any bank that is a
member of the NEFT scheme, according to the Reserve Bank of India (RBI). Information on
bank branches currently part of the NEFT system can be accessed on the RBI website. Currently,
most banks in the country support NEFT payments. In NEFT, transactions are executed in half-
hourly batches. At present, there are twenty three half-hourly settlement batches, which run from
8 am to 7 pm on all working days of week except the second and fourth Saturday of the month,
according to the RBI's website.

There is no limit on the amount of funds that could be transferred using NEFT. "However,
maximum amount per transaction is limited to Rs. 50,000 for cash-based remittances within
India and also for remittances to Nepal under the Indo-Nepal Remittance Facility Scheme,"
according to the RBI.

2. Real-Time Gross Settlement (RTGS) :RTGS, primarily meant for large value money
transfers, is a payment system that enables instant transfer of funds. Unlike NEFT, RTGS
processes the instructions at the time they are received rather than at a later time. Currently, more
than 1 lakh bank branches offer the RTGS facility, according to the RBI. Information on these
branches can be accessed from the RBI website. RTGS transactions can be made from 9.00 am
to 4.30 pm on weekdays and from 9:00 am to 2:00 pm on Saturdays for settlement at the RBI-
end, according to the central bank. However, the timings that the banks follow may vary
depending on the customer timings of the bank branches, it noted.

The RTGS service window for customer's transactions is available to banks from 9:00 am to 4:30
pm on weekdays and from 9:00 am to 2:00 pm on Saturdays for settlement at the RBI-end.
However, the timings that the banks follow may vary depending on the customer timings of the
bank branches, the central bank noted.

The minimum amount to be remitted through RTGS is Rs. 2 lakh. There is no upper ceiling for
RTGS transactions.

3.Society for Worldwide Interbank Financial Telecommunication (SWIFT): SWIFT, as a

co-operative society was formed in May 1973 with 239 participating banks from 15 countries
with its headquarters at Brussels. It started functioning in May 1977. RBI and 27 other public
sector banks as well as 8 foreign banks in India have obtained the membership of the SWIFT.
SWIFT provides rapid, secure, reliable and cost effective mode of transmitting the financial
messages worldwide. At present more than 3000 banks are the members of the network. To cater
 to the growth in messages, SWIFT was upgraded in the 80s and this version is called SWIFT-II.
Banks in India are hooked to SWIFT-II system. SWIFT is a method of the sophisticated message
transmission of international repute. This is highly cost effective, reliable and safe means of fund
transfer. This network also facilitates the transfer of messages relating to fixed deposit, interest
payment, debit-credit statements, foreign exchange etc. This service is available throughout the
year, 24 hours a day.

Module IV

1. CAMEL Rating

Definition: CAMELS Rating is the rating system wherein the bank regulators or examiners
(generally the officers trained by RBI), evaluates an overall performance of the banks and
determine their strengths and weaknesses. CAMELS Rating is based on the financial statements
of the banks, Viz. Profit and loss account, balance sheet and on-site examination by the bank
regulators. In this Rating system, the officers rate the banks on a scale from 1 to 5, where 1 is
the best and 5 is the worst. The parameters on the basis of which the ratings are done are
represented by an acronym “CAMELS”.

1. Capital Adequacy: The capital adequacy measures the bank’s capacity to handle the losses and
meet all its obligations towards the customers without ceasing its operations.This can be met
only on the basis of an amount and the quality of capital, a bank can access. A ratio of Capital to
Risk Weighted Assets determines the bank’s capital adequacy.
2. Asset Quality: An asset represents all the assets of the bank, Viz. Current and fixed, loans,
investments, real estates and all the off-balance sheet transactions. Through this indicator, the
performance of an asset can be evaluated. The ratio of Gross Non-Performing Loans to Gross
Advances is one of the criteria to evaluate the effectiveness of credit decisions made by the
bankers.
3. Management Quality: The board of directors and top-level managers are the key persons who
are responsible for the successful functioning of the banking operations. Through this parameter,
the effectiveness of the management is checked out such as, how well they respond to the
changing market conditions, how well the duties and responsibilities are delegated, how well the
compensation policies and job descriptions are designed, etc.
4. Earnings: Income from all the operations, non-traditional and extraordinary sources constitute
the earnings of a bank. Through this parameter, the bank’s efficiency is checked with respect to
its capital adequacy to cover all the potential losses and the ability to pay off the
dividends.Return on Assets Ratio measures the earnings of the banks.
5. Liquidity: The bank’s ability to convert assets into cash is called as liquidity. The ratio of Cash
maintained by Banks and Balance with the Central Bank to Total Assets determines the
liquidity of the bank.
6. Sensitivity to Market Risk: Through this parameter, the bank’s sensitivity towards the changing
market conditions is checked, i.e. how adverse changes in the interest rates, foreign exchange
rates, commodity prices, fixed assets will affect the bank and its operations.

2. GAAP Probability Analysis

Generally Accepted Accounting Principles (GAAP) are basic accounting principles and
guidelines which provide the framework for more detailed and comprehensive accounting rules,
standards and other industry-specific accounting practices. For example, the Financial
Accounting Standards Board (FASB) uses these principles as a base to frame their own
accounting standards. Thus GAAP encompasses:

• Basic accounting principles/guidelines

• Accounting Standards usually issued by the premier accounting body of the country
• Industry-specific accounting practices to cover unusual scenarios

Need of Generally Accepted Accounting Principles (GAAP)

1. There are various beneficiaries and users of the financial statements presented by a company
other than the management itself like shareholders and investors, governments or taxation
departments, customers and suppliers, etc.

2. GAAP is used for simplified reporting the financial information about a company that
provides better understandability and improved clarity for all the associated parties.

3. In order to provide a set of standards applicable on every corporate organization that can
generate comparable, transparent and fair information, GAAP was introduced by The Financial
Accounting Standards Board (FASB).

4. Financial statements including balance sheets, income statements and cash flow
statements compiled using GAAP are able to represent the true economic picture of a company.
5. Without GAAP companies become free to manipulate financial information and probability to
accounting frauds will highly increase. The best example of committing an accounting fraud was
of Enron where it hides its liabilities and inflated its earnings.

3. Balance Score Card

The balance scorecard is used as a strategic planning and a management technique. This is widely
used in many organizations, regardless of their scale, to align the organization's performance to
its vision and objectives.
The scorecard is also used as a tool, which improves the communication and feedback process
between the employees and management and to monitor performance of the organizational
objectives. The balanced scorecard is divided into four main areas and a successful organization
is one that finds the right balance between these areas.
Each area (perspective) represents a different aspect of the business organization in order to
operate at optimal capacity.
• Financial Perspective - This consists of costs or measurement involved, in terms of rate
of return on capital (ROI) employed and operating income of the organization.
• Customer Perspective - Measures the level of customer satisfaction, customer retention
and market share held by the organization.
• Business Process Perspective - This consists of measures such as cost and quality related
to the business processes.
• Learning and Growth Perspective - Consists of measures such as employee satisfaction,
employee retention and knowledge management.
The four perspectives are interrelated. Therefore, they do not function independently. In real-
world situations, organizations need one or more perspectives combined together to achieve its
business objectives.
For example, Customer Perspective is needed to determine the Financial Perspective, which in
turn can be used to improve the Learning and Growth Perspective.

➢ Features of Balanced Scorecard

• Objectives - This reflects the organization's objectives such as profitability or market
share.
• Measures - Based on the objectives, measures will be put in place to gauge the progress
of achieving objectives.
• Targets - This could be department based or overall as a company. There will be specific
targets that have been set to achieve the measures.
• Initiatives - These could be classified as actions that are taken to meet the objectives.
➢ The Need for a Balanced Scorecard
• Increases the focus on the business strategy and its outcomes.
• Leads to improvised organizational performance through measurements.
• Align the workforce to meet the organization's strategy on a day-to-day basis.
• Targeting the key determinants or drivers of future performance.
• Improves the level of communication in relation to the organization's strategy and vision.
• Helps to prioritize projects according to the timeframe and other priority factors.

4. Asset Liability Management

Definition of Asset Liability Management “Asset Liability Management is the ongoing process
of formulating, implementing, monitoring, and revising strategies related to assets and liabilities
to achieve financial objectives, for a given set of risk tolerances and constraints”.

➢ Functions of Asset Liability Management

• To evaluate the interest rate structure and compare it with the interest/product pricing of assets
and liabilities
• To scrutinize the loan and investment portfolios which may involve foreign exchange risk and
liquidity risk
• To examine the credit risk and contingency risk which may be created due to interest/exchange
rate fluctuations, the quality of assets and others
• To assess and compare the actual performance with their estimations and to analyze the reasons
for its effect if any on spreads
• To maintain the stability of the short-term profits, long-term earnings and long-term substance
of the bank

The parameters that are selected for the purpose of stabilizing asset liability management of
banks are:-
• Net Interest Income (NII)
• Net Interest Margin (NIM)
• Economic Equity Ratio

➢ Fundamental Steps of an ALM Process

1) Assess the entity’s risk/reward objectives: The nature of risk is different for different
companies. The determined financial objectives and risk bearings are to be reorganized.
2) Identify risks: Identification of risk on each and every asset and liability is the prime function.
ALM has to evaluate various types of risks. It has to find the causes of each type and establish
the relationship of internal and external sources of risk.
3) Quantify the level of risk exposure: Risk exposure can be quantified in the following ways
relatively to changes in the risk component, at the maximum expected loss for a certain
confidence interval in a specified set of circumstances, or by the allocation of outcomes for
agreed set of pretentious circumstances for the risk component over a period of time Regular
measurement and monitoring of the risk exposure is mandatory.
4. Formulate and implement strategies to modify existing risk: ALM has to formulate and
implement some strategies like diversification, hedging, portfolio management etc., to reduce the
risk and optimize the risk/reward tradeoff after measuring the risk. Professional judgement is an
important part of the process.
5) Monitor risk exposures and revise ALM strategies as appropriate: ALM has to monitor and
report to the top management from time to time about all identified and quantified risk
exposures. The corrective measures must be taken whenever the risk exposure exceeds the limit.

5: Non-Performing Assets

Non-Performing Assets refers to that classification of loans and advances in the books of a
lender in which the there is no payment of interest and principal have been received and are “past
due”. In most of the cases debt has been classified as Non-Performing Assets where the loan
payments have been outstanding for more than 90 days. In the term sheet/sanction letter of every
loan, the period of default under which the loan will be classified as non-performing assets are
generally mentioned.

➢ Classification of NPA for Banks

1.Standard Assets: The loan accounts which are regular and don’t carry more than normal risk.
Within standard assets there could be accounts which though have not become NPA but are
irregular. Such accounts are called as special mention accounts.
2.Sub- Standard Assets :For a period of more than 12 months, non-performing assets are
classified under sub-standard assets. Such kind of advances possess more than normal risk and
the creditworthiness of the borrower is quite weak. Banks are generally ready to take some
haircut on the loan amounts which are categorized under this asset class
3. Doubtful Debts :For a period which is exceeding 18 months, non-performing assets come
under the category of Doubtful Debts. Doubtful debts itself means that the bank is highly
doubtful of the recovery of its advances. The collection of such kind of advances is highly
questionable and there is the least probability that the loan amount can be recovered from the
party. Such kind of advances put the bank liquidity and reputation at jeopardy
4. Loss Assets:The final classification of non-performing assets is loss assets were the loan has
been identified either by the bank itself or an external auditor or internal auditor that the loan
amount collection is not possible, and a bank has to take a dent in its balance sheet. The Bank, in
this case, has to write off the entire loan amount outstanding or need to make a provision for full
amount which needs to write off in future

➢ Reasons for NPA

• Diversification of funds to unrelated business/fraud.

• Lapses due to diligence.
• Business losses due to changes in business/regulatory environment.
• Lack of morale, particularly after government schemes which had written off loans.
• Global, regional or national financial crisis which results in erosion of margins and profits of
companies, therefore, stressing their balance sheet which finally results into non-servicing of
interest and loan payments. (For example, the 2008 global financial crisis).
• The general slowdown of entire economy for example after 2011 there was a slowdown in the
Indian economy which resulted in the faster growth of NPAs.
• The slowdown in a specific industrial segment, therefore, companies in that area bear the heat
and some may become NPAs.
• Unplanned expansion of corporate houses during boom period and loan taken at low rates later
being serviced at high rates, therefore, resulting into NPAs.
• Due to mal-administration by the corporate, for example, willful defaulters.
• Due to misgovernance and policy paralysis which hampers the timeline and speed of projects,
therefore, loans become NPAs. For example Infrastructure Sector.
• Severe competition in any particular market segment. For example Telecom sector in India.

6.BASEL Norms

Basel is a city in Switzerland which is also the headquarters of Bureau of International

Settlement (BIS).BIS fosters co-operation among central banks with a common goal of financial
stability and common standards of banking regulations. Basel guidelines refer to broad
supervisory standards formulated by a group of central banks - called the Basel Committee on
Banking Supervision (BCBS). The set of agreement by the BCBS, which mainly focuses on risks
to banks and the financial system are called Basel accord. The purpose of the accord is to ensure
that financial institutions have enough capital on account to meet obligations and absorb
unexpected losses. India has accepted Basel accords for the banking system.

Basel I :In 1988, BCBS introduced capital measurement system called Basel capital accord, also
called as Basel 1. It focused almost entirely on credit risk. It defined capital and structure of risk
weights for banks. The minimum capital requirement was fixed at 8% of risk weighted assets
(RWA). RWA means assets with different risk profiles

Basel II :In June ’04, Basel II guidelines were published by BCBS, which were considered to be
the refined and reformed versions of Basel I accord. The guidelines were based on three
parameters, which the committee calls it as pillars. - Capital Adequacy Requirements: Banks
should maintain a minimum capital adequacy requirement of 8% of risk assets - Supervisory
Review: According to this, banks were needed to develop and use better risk management
techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit,
market and operational risks - Market Discipline: This need increased disclosure requirements.
Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank. Basel II
norms in India and overseas are yet to be fully implemented.

Basel III :In 2010, Basel III guidelines were released. These guidelines were introduced in
response to the financial crisis of 2008. A need was felt to further strengthen the system as banks
in the developed economies were under-capitalized, over-leveraged and had a greater reliance on
short-term funding. Also the quantity and quality of capital under Basel II were deemed
insufficient to contain any further risk. Basel III norms aim at making most banking activities
such as their trading book activities more capital-intensive. The guidelines aim to promote a
more resilient banking system by focusing on four vital banking parameters viz. capital,
leverage, funding and liquidity.

7: CIBIL Rating

A CIBIL score is a numerical representation of your ability to repay the credit. It is a three-digit
number that falls in the range of 300-900. A score closer to 900 can get you better deals on credit
cards and loans. Majority of lenders like banks and non-banking finance companies (NBFCs)
prefer a CIBIL score of 750 and above

The CIBIL Score plays a critical role in the loan application process. After an applicant fills out
the application form and hands it over to the lender, the lender first checks the CIBIL Score and
Report of the applicant. If the CIBIL Score is low, the lender may not even consider the
 application further and reject it at that point. If the CIBIL Score is high, the lender will look into
the application and consider other details to determine if the applicant is credit-worthy. The
CIBIL Score works as a first impression for the lender, the higher the score, the better are your
chances of the loan being reviewed and approved.

For example, two individuals with Credit Scores of 810 and 620 respectively apply for a home
loan. Depending on the credit policy of the bank, it is more likely that the bank will screen the
individual with an 810 Credit Score for further evaluation, while the application with the Credit
Score of 620 may not be processed.

➢ How is CIBIL score calculated?

The basis of calculation is your credit history. The credit bureau collates all the information about
you in one report to calculate your CIBIL Transunion score. It is calculated on the basis of your
account and enquiry section in your credit report. Following are the factors that are considered in
calculating your credit score.

1. Credit history :Your credit history is given highest weightage while calculating your credit
score. How you have servced your past debt obligation has a weightage of 30% in your credit
score calculation.

2.Credit mix and duration: What percentage of your credit portfolio consists of secured loan
and unsecured loan along with the duration of the loan will contribute another 25% of your credit
score.

3. Credit exposure :The total amount of credit that you have outstanding will decide the 25% of
your credit score.

4. Other factors: Rest of the factors such as credit utilization, recent credit behavior will
contribute the rest 20% of your credit score.

➢ Factors that affect credit score

• responsible Payment Behaviour:

• High Credit Utilisation Ratio:
• Outstanding Debt:
• Paying only the Minimum Amount Due:
• Making Multiple Credit Applications:
• Errors in your CIBIL Report:
• Not Having a Credit Mix:
• Length of the Credit History:
• Closing old Credit Card Accounts:

➢ Benefits of Having a High CIBIL score

• Quicker approval for loans and credit cards
• Cheaper interest rates on loans
• Better deals on credit cards
• Credit cards with higher credit limit
• Discount on processing fee and other charges for loan application

8: Know Your Customer (KYC) Norms

KYC is an acronym for “Know your Customer”, a term used for customer identification process.
It involves making reasonable efforts to determine true identity and beneficial ownership of
accounts, source of funds, the nature of customer’s business, reasonableness of operations in the
account in relation to the customer’s business, etc which in turn helps the banks to manage their
risks prudently. The objective of the KYC guidelines is to prevent banks being used,
intentionally or unintentionally by criminal elements for money laundering.

➢ When does KYC apply?

• Opening a new account

• In respect of accounts where documents as per current KYC standards have not been
submitted while opening the initial account
• Opening a Locker Facility where these documents are not available with the Bank for all the
Locker facility holders
• When the Bank feels it necessary to obtain additional information from existing customers
based on conduct of account
• When there are changes to signatories, mandate holders, beneficial owners etc.
• For non-account holders approaching the Bank for high value one-off transactions like
Drafts, Remittances etc

➢ Why are KYC documents required?

KYC documents along with the customer’s photograph have been made mandatory only in the
recent past where fraudulent transactions, fraud accounts and money laundering had become
prevalent. Thus, only to reduce as much fraud as possible and as an anti money laundering
measure, these documents have been made mandatory.

➢ List of documents commonly accepted as Standard Identity Proof:

1. Passport
2. PAN Card
3. Voter’s Identity Card
4. Driving License
5. Photo identity proof of Central or State government
6. Ration card with photograph
7. Letter from a recognized public authority or public servant
8. Bank Pass Book bearing photograph
9. Employee identity card of a listed company or public sector company
10. Identity card of University or board of education like ISC, CBSE, etc.

➢ List of common identity documents which are accepted as Standard Address Proof:

1. Passport
2. Voter’s Identity Card
3. Driving License
4. Electricity Bill, Telephone bill including mobile, landline, wireless, etc type of connections,
not more than 6 months old
5. Bank Account Statement
6. Consumer Gas connection card or Gas Bill
7. Letter from any recognized public authority or public servant
8. Credit Card Statement
9. House Purchase deed
10. Lease agreement along with last 3 months rent receipt
11. Employer’s certificate for residence proof

9; Anti Money Laundering Act.

Money laundering is the processing of criminal proceeds to disguise their illegal origin, given
that the goal of a large number of criminal activities is to generate profit for an individual or a
group. Examples of money laundering activities are as follows – Illegal arms sales, Smuggling,
Drug trafficking and Prostitution Rings, Embezzlement, Insider trading, Bribery Computer
Fraud SchemeS. Money Laundering is the process of conversion of such proceeds of crime, to
make it appear as ‘legitimate’ money.

Why is money laundered? There are several reasons why people launder money. These include:

• hiding wealth: criminals can hide illegally accumulated wealth to avoid its seizure by
authorities;
• avoiding prosecution: criminals can avoid prosecution by distancing themselves from the
illegal funds;
 • evading taxes: criminals can evade taxes that would be imposed on earnings from the
funds;
• increasing profits: criminals can increase profits by reinvesting the illegal funds in
businesses;
• becoming legitimate: criminals can use the laundered funds to build up a business and
provide legitimacy to this business.

In India, the Anti Money Laundering (AML) measures are controlled through the Prevention of
Money Laundering Act, 2002 which was brought in force with effect from 1st July 2005. RBI,
SEBI and IRDA have been brought under the PML Act, and therefore it will be applicable to all
financial institutions, banks, mutual funds, insurance companies, and their financial
intermediaries. The agency monitoring the AML activities in India is called Financial
Intelligence Unit (FIU IND) and compliance is required by all financial intermediaries.

➢ OBLIGATIONS OF BANKING COMPANIES, FINANCIAL INSTITUTIONS AND

INTERMEDIARIES

Section 12 of the Prevention of Money Laundering Act, 2002 lays down the following
obligations on banking companies, financial institutions and intermediaries. Every banking
company, financial institution and intermediary should –

• maintain a record of all transactions, the nature and value of which may be prescribed,
whether such transactions comprise of a single transaction or a series of transactions
integrally connected to each other, and where such series of transactions take place within a
month;
• furnish information of such transactions to the Director
• verify and maintain the records of the identity of all its clients.

Module V

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. 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.

➢ Objectives of Financial Inclusion

• 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.
• 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.
• There are many governmental agencies and non-governmental organisations that are dedicated
to bringing in financial inclusion. These agencies are focussed 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.
➢ Financial Inclusion Schemes in India
• Pradhan Mantri Jan Dhan Yojana (PMJDY)
• Atal Pension Yojana (APY)
• Pradhan Mantri Vaya Vandana Yojana
• Stand Up India Scheme
• Pradhan Mantri Mudra Yojana
• Pradhan Mantri Suraksha Bima Yojana (PMSBY)
• Sukanya Samriddhi Yojana
• Jeevan Suraksha Bandhan Yojana
• Credit Enhancement Guarantee Scheme (CEGS) for Scheduled Castes (SCs)

2. Branchless Banking

Branchless banking is a relatively new electronic banking product that helps to include the
people who are staying in remote areas and do not have access to bank branches. From this
model, banks can extend service outreach without establishing a physical branch.

Customers can open bank accounts, deposit money, transfer money to other
accounts, withdraw money from their account and make payments for purchasing goods and
services at Point of Sale (POS) machine maintained by a bank or its branchless banking agent.

In the countries where majority of population lives in rural areas, opening a branch in each
village is neither feasible nor profitable. Herein comes the role of branchless banking. It is a fast
and cost-effective method to deliver banking services in remote areas

➢ Advantages of Branchless Banking:

1. Service provided at the doorstep/village

2. Availability of Basic Banking Services throughout the day
3. Hassle free transaction for the villagers
4. Familiarity in dealing with their own person
5. Reduces the cost of transaction

3. Universal Banking,

Universal banking is a combination of Commercial banking, Investment banking,

Development banking, Insurance and many other financial activities. It is a place where all
financial products are available under one roof. So, a universal bank is a bank which offers
commercial bank functions plus other functions such as Merchant Banking, Mutual Funds,
Factoring, Credit cards, Housing Finance, Auto loans, Retail loans, Insurance, etc.

➢ Advantages of Universal Banking

1. Economies of Scale: Universal banking results in greater economic efficiency in the form of
lower cost, higher output and better products. It enables the banks to exploit economies of large
scale and wider scope.

2. Profitable Diversions: The banks can utilize its existing skill in single type of financial
services in offering other kinds by diversifying the activities. Therefore, it involves lower cost in
performing all types of financial functions by one unit instead of other institution.

3. Resources Utilization: A bank possesses all types of information about the existing customers
which can be utilized to perform other financial activities with the same customer.

4. Easy Marketing of Services: A bank with established brand name can easily use its existing
branches and staff to sell the other financial products like insurance policies, mutual fund plans
without spending much effort on marketing.

5. One-stop Shopping: One-stop shopping is beneficial for the bank and its customers as it
saves lot of transaction costs by increasing the speed of economic activities.

➢ Disadvantages of Universal Banking

1. No Expertise in Long Term Lending: These are different types of long term loans like
project finance and infrastructure finance, having long gestation projects can not properly handle
by the single bank.

2. Non-Performing Assets problem: One of the most serious problems faced by universal
banking is Non-performing Assets.

3. Risk of Failure: The larger the banks, the greater the effects of their failure on the system.
The failure of a larger institution could have serious for the entire banking system. If one
universal bank were to collapse, it could lead to a systemic financial crisis.

4. Concentration of Monopoly Power in the Hands of Few Banker: Universal banking

sometimes creates monopoly power in the hands of few large bankers. Such a monopoly power
in the hands of a few big bankers is a source of danger to the community whose goal is a
socialistic pattern of society.

5. Bureaucratic and Inflexible: Universal banks tend to be bureaucratic and inflexible. They
tend to work primarily with large established customers and ignore or discourage smaller and
newly established businesses.

4. Small Finance Banks and Payment Banks

1,Small Finance Banks: Small Finance Banks area type of niche banks in India. The main
objective of these is to provide financial inclusion to sections of financial services not being
served by other banks such as small business unit, small and marginal farmers, micro and small
industries and unorganized sectors,
➢ Scope of activities of SFBs

• The small finance banks shall primarily undertake basic banking activities of acceptance of
deposits and lending to unserved and underserved sections including small business units,
small and marginal farmers, micro and small industries and unorganised sector entities.
• There will not be any restriction in the area of operations of small finance banks.

2.Payment Banks: A payments bank is like any other bank, but operating on a smaller scale
without involving any credit risk. In simple words, it can carry out most banking operations but
can’t advance loans or issue credit cards. It can accept demand deposits (up to Rs 1 lakh), offer
remittance services, mobile payments/transfers/purchases and other banking services like
ATM/debit cards, net banking and third party fund transfers.

• The advantage of Payment Banks over Traditional Banks

1.Interest Rates: The interest rate for a commercial bank is between 3.5 and 6 per cent. Payment
banks are offering a really good deal in the case of interest rate with the highest being a 7.25%.
Payment banks have a statutory limit of Rs. 1L per account from individuals and small businesses.

2.Zero balance account: Payment banks offer a zero balance account or a no minimum balance
account without any extra or hidden charge, unlike a commercial bank who levy charges if the
customer doesn’t hold a minimum balance in their account.__

5. White Label ATM

Automated Teller Machines (ATMs) set up, owned and operated by non-bank entities are called
“White Label ATMs” (WLAs). They provide the banking services to the customers of banks in
India, based on the cards (debit/credit/prepaid) issued by banks.

• Traditionally, Automated Teller Machines (ATMs) have respective bank’s logo. So just by
looking, this is SBI’s ATM, this is ICICI’s ATM and so on.

• But White label ATM doesn’t have such Bank logo, hence called White label ATMs.

• RBI has given license / permission to non-bank entities to open such ATMs.
• Any non-bank entity with a minimum net worth of Rs.100 crore, can apply for white label
ATMs. (not just NBFC, any non-bank entity can apply.)
• RBI issues guideline for White label; 2013: RBI gives license/permission.
• Tata Communications Payment Solutions Limited is the first company to get RBI’s
permission to open White label ATMs.
• They started their chain under brandname “Indicash”.
• Other White label: Muthoot Finance, Srei Infra., Vakrangee Software, Prizm Payments,
AGS. More than 15 companies given such permission.

6.Fee Based Income

Fee income is the revenue taken in by financial institutions from account-related charges to
customers. Charges that generate fee income include non-sufficient
funds fees, overdraft charges, late fees, over-the-limit fees, wire transfer fees, monthly
service charges, account research fees, and more. Credit unions, banks, and credit card
companies are types of financial institutions that earn fee income,

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7.E-wallet

Definition: E-wallet is a type of electronic card which is used for transactions made online
through a computer or a smartphone. Its utility is same as a credit or debit card. An E-wallet
needs to be linked with the individual’s bank account to make payments.

➢ _Advantages of Electronic Wallets

1. It offers more convenience for many consumers.When you’re carrying an electronic wallet,
you get to limit the number of cards you carry when you travel. You no longer have the
requirement to carry a lot of cash with you either. All you need to do is tap your device to the
payment receptacle, or have your mobile device scanned, to pay for the items you are
purchasing. That means you’re no longer carrying a pocketful of items wherever you go.

2. It provides access to other types of cards .Electronic wallets typically store credit cards and
debit cards. They can be used for a wide variety of cards, however, if the provider is compatible
with the wallet you are using. That means you can store rewards cards, loyalty cards, and even
coupons within your digital wallet, allowing you to enjoy more of a paperless lifestyle.

3. It offers more security. If you have a wad of cash in your pocket that gets lost, you have zero
options available to you to recover your funds. Losing your credit cards means you must contact
each lender to cancel each card, then have a new one issues. With an electronic wallet, the
information is stored through a third-party provider. It’s locked behind your password or
biometrics. Even if you lose your device, you’ll still have access to your e-wallet once you get a
new device.

4. It can be used at most retailers and online stores. Electronic wallets have become widely
accepted within the past few years. Most locations that accept cards as a payment option will
allow you to pay with your electronic wallet. Although there are still some locations that are
using older processing technologies, which does limit some product or service access, the
number of retailers who provide payment access in this manner continues to increase each year.

5. It requires users to authorize every transaction. Electronic wallets function like a debit card
when initiating a transaction. They require you to input your PIN to authorize payment. For
devices with biometrics, a payment would require your fingerprint to authorize it. That gives you
another layer of security against unauthorized purchases or the financial risks associated with
identity theft.

6. It may offer access to new rewards .Many electronic wallets offer incentives to encourage
consumers to use them instead of traditional payment methods. You may find discounts apply to
certain purchases, such as fuel, food, or travel. Some businesses may work with your e-wallet
provide to offer specific discounts as well. That means you have the potential to save money
without changing your spending habits. You’re just changing how you pay for those items.

➢ Disadvantages of Electronic Wallets

1. It is not fully available worldwide.The number of retailers which accept payments from an
electronic wallet depends on the actual wallet you choose. In December 2016, just 36% of
retailers accepted Apple Pay. 34% of retailers accepted PayPal as a form of payment. Just 25%
of retailers accepted MasterPass. About 2 million retailers in North America currently provide
access to some form of mobile payment through an electronic wallet.

2. It still requires you to carry something. Although an electronic wallet offers more
convenience for many consumers, it doesn’t fully eliminate the requirement of carrying
something with you. If you don’t have your mobile device on your person, then you have no way
to complete a transaction. Because these wallets don’t store your identification and other needed
items, you’re still forced to carry a traditional wallet or purse with you as well.

3. It requires your device to have a charge.There’s also the disadvantage that an electronic
wallet requires you to have a charged device to have it operate. If you’re carrying a traditional
wallet, you won’t need to worry about how much battery life is left on your phone.

4. It doesn’t eliminate your security risks.The security of your smartphone or mobile device is
dependent on the settings you use. If you don’t have your device protected with some type of
password, then someone could steal your device and potentially access the funds in your bank
account or credit cards. There are definite security advantages to consider which make an e-
wallet a beneficial technology, though it requires responsible management of it to maximize
them.
5. It could encourage reckless spending.When money is electronically-based instead of a
physical item, some people struggle with their spending habits. The money doesn’t feel real, so
proper budgeting doesn’t take place. If you are already struggling to maintain a budget with a
traditional wallet, then an electronic wallet might make that issue even worse.

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