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M.com. 1 Financial Accounting (Notes) Q..1 Ans.

Relationship between a banker and customer Relation of a debtor and a creditor The general relationship between banker and a customer is that of a debtor and a creditor i.e. borrower and lender. In Foley v. Hill, Sir John Paget remarks, the relation of a banker and a customer is primarily that of debtor and creditor, the respective positions being determined by the existing state of account. Instead of the money being set apart in a safe room, it is replaced by the debt due from the banker. The money deposited with him becomes his property, and is absolutely, at his disposal, and, save as regards the following of the trust funds into his hands, the receipt of money by a banker from or on account of his customer constitutes him merely the debtor of the customer with super added obligation to honour his customers cheques drawn upon his balance, in so far the same is sufficient and available. In Shanthi Prasad Jain v. Director of Enforcement, Foreign Exchange Regulation, the SC held that the banker and customer relationship in respect of the money deposited in the account of a customer with the bank is that of a debtor and a creditor. On the opening of an account a banker assumes the position of a debtor. The money deposited by the customer with the bank is in legal terms lent by the customer to the banker who males use of the same according to his discretion. The creditor has the right to demand back his money from the banker, and the banker is under an obligation to repay the debt as and when he is required to do so. A depositor remains a creditor of his banker so long as his account carries a credit balance. But he does not get any charge over the assets of his debtor/banker and remains an unsecured creditor of the banker. Since the introduction of deposit insurance in India in 1962 the element of risk of the depositor is minimized as Deposit Insurance and Credit Guarantee Corporation undertakes to insure the deposits upto a specified amount. Bankers relation with the customer is reversed as soon as the customers account is overdrawn. Banker becomes creditor of the customer who has taken a loan from the banker and continues in that capacity till the loan is repaid. As the loans and advances granted by a banker are usually secured by the tangible assets of the borrower, the baker becomes a secured creditor of his customer. Various legal relationships of banker and customer 2) Agent and Principal- Sec.182 of The Indian Contract Act, 1872 defines an agent as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented is called the Principal. One of the important relationships between a banker and customer is that of an agent and principal. The banker performs various services of the customer, where he acts as the agent. Buying and selling securities of customer Collection of cheques, bills of exchange, promissory notes on behalf of customer Acting a trustee, executor or representative of a customer Payment of insurance premium, telephone bills etc.

1) Trustee and beneficiary- section 3 of the Trusts Act defines a trustee as one to whom property is entrusted to be administered for the benefit of another called the beneficiary. A banker becomes a trustee under special circumstances. When a customer deposits securities or other valuables with the banker for safe custody, the banker acts as trustee of customer. 2) Bailee and bailor- during certain circumstances banker becomes bailee. When he receives gold ornaments and important documents for safe custody he takes charge of it as bailee and not trustee or agent. He cannot make use of them as he is bound to return the identical articles on demand. 3) Pawnee and pawner- pawn is a sort of bailment in which the goods are delivered to another as a pawn, to be a security for money borrowed. Thus a banker acts as a pawnee where a customer delivers he goods to him to be kept as security till the debt is discharged. The banker can retain the goods pledged till the debt is paid. 4) Mortgagee and mortgagor- the relation between a banker as mortgagee and his customer as mortgagor arises when the latter executes a mortgage deed in respect of his immovable property in favour of the bank or deposits the title deeds of his property with the bank to create an equitable mortgage as security for an advance. 5) Lessee and lessor- when a customer hires a locker in the banks safe deposit vault, the bank undertakes to take necessary precaution for the safety of the articles in the locker. The relation between the parties is that of a lessor and lessee. 6) Guarantor and guarantee- a bank as guarantor gives guarantee to its customer by issuing a letter of credit. It is a kind of credit facility to its customer to facilitate international trade. A bank guarantee contains an undertaking to pay the amount without any demur on mere demand of the principal amount on the ground for non-performance or breach of contract. 7) Fiduciary relationship- every relation of trust and confidence is a fiduciary relation. A banker who receives a customers money is under a duty not to part with it which is inconsistent with the customers fiduciary character and duty. In Official Assignee v. Rajaram Aiyar, it was held that where banks old money for a specific purpose of sending it somebody the money is impressed with trust.

--------------------------------------------------------------------------------------------------------------------------------------Q..2 Ans...2 Endorsement Definition of Endorsement

When the maker or holder of negotiable instrument signs the same, otherwise than as maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, or signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to have endorsed the same and is called the endorser. Endorsement consists of the signature of the maker (or drawer) payee of a negotiable instrument with the intention of negotiation. Provisions Regarding Endorsement Effect of endorsement The endorsement of a negotiable instrument followed by delivery transfers to the endorsee the property therein with the right of further negotiation. Endorsee an agent The section permits that an instrument may also be endorsed so as to constitute the endorsee an agent of the endorser.

Right to endorse Every sole maker, drawer, payee or endorsee or all of several joint makers, drawers, payees or endorsees of an negotiable instrument m ay endorse and negotiate the same.' Time limit for endorsement A negotiable instrument may be negotiated until its payment has been made by the banker, drawee or acceptor. (Section 60) Endorsement for a part amount Endorsement for a part amount is prohibited (Section 56) but instruments which have been partly paid can be negotiated for the balance amount. No right to legal representative The Legal representative of the deceased cannot endorse the instrument.

Order of endorsement Unless contrary is proved, it is presumed under Section 118 that the endorsements appearing upon a negotiable instrument were made in order in which they appear thereon (Section 118) General Rules regarding the form of Endorsements 1. Signature of the endorser on the document for the purpose of endorsement must be that of the endorser or any other person who is duly authorized to endorse on his behalf. 2. Spelling: The endorser should spell his name in the same way as his name appears on the instrument as its payee or endorsee. 3. No addition or omission of initial of the name. For example, J.C. Mishra cannot endorse as J.Mitra. 4. Prefixes and suffixes to be struck out (Mr., M/s, Miss, Shri, Smt. Lala, Babu,General, Dr., Major) Payee Regular Endorsement Mrs. Asha Gupta Asha Gupta Irregular Endorsement Mrs. Asha Gupta

If a cheque is payable to a woman in her maiden name e.g. to Miss Jyoti Mishra now married to Mrs.S.C.Das may endorse it as follows. Jyoti Mishra (Now Mrs.S.C.Das) or Jyoti Das nee (or formerly) Jyoti Mishra Illiterate Person If the payee of a negotiable instrument is an illiterate person, he may endorse the instrument by affixing his thumb impression duly witnessed or attested by somebody who should give his full address. Thumb Impression of 'A' Attested and witnessed by XYZ, Advocate

111, G.K.Road, Pune-16 Partnership Firm In case of a partnership firm, the name of the firm must be signed by a person (partner, manager etc.) who is duly authorized to sign on behalf of the partnership firm. For example a cheque payable to M/s Krishen Chand Raja Ram may be endorsed in any of the following ways:(Per pro) (For) Kishan Chand Raja Ram For (on behalf of) Raja Ram (Sd/-) Partner Agent A person may duly authorize his agent to endorse the cheque on his behalf Kinds of Endorsements 1. Endorsement in blank If the endorser signs his name only, endorsement is said to be in blank (Section-16). The endorser does not specify the name of the endorsee with the effect that an instrument endorsed in blank becomes payable to bearer, even though originally payable to order (Section 54) and no further endorsement is required for negotiation. 2. Endorsement in full If in addition to signature, the endorser adds a direction to pay the amount mentioned in the instrument to, or to the order of a specified person, the endorsement is said to be endorsement in full. 3. Conditional Endorsement If the endorser of a negotiable instrument by express words in the endorsement makes his liability or the right of the endorsee to receive the amount due thereon is called a conditional endorsement. Restrictive Endorsement (Section 50) Examples: a) Pay the contents to 'C' only b) Pay to 'C' for my use Endorsement Sans Recourse (Section 52) Example: (i) Pay to 'A' or order at his own risk Sd/-R (ii) Pay to 'B' without recourse to me Sd/'C' Q3 Ans..3

PARTNERSHIP A bank should take the following precautions in the course of having business dealing with the firm: v The banker should open an account in the name of partnership firm only when one or more partners make an application to the effect. v The bank should ask for a copy of the partnership agreement and thoroughly acquaint itself with its clauses. v The banker should take a letter signed by all the partners containing the following: v The name and address of all partners v The nature of the firms business v The names of the partners authorized to operate the account in the name of the firm. v The banker should not credit a cheque in the firms name to the personal account of a partner without enquiring from other partners.[16] In the absence of any contract to the contrary, a partnership firm stands dissolved on the death of a partner. In case the firm continues to carry on the business, the estate of the deceased is not liable for any act of the firms after his death. TRUSTEES According to the Indian Trusts Act, 1882, a trust is an obligation annexed to the ownership of property, and arising out of a confidence responed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner Section 3. The person who resposes the confidence is called the author of the trust. Trustees is the person in whom the confidence is resposed. The person for whose benefit the trust is formed is called beneficiary. In the case of New Bank of India v. Union of India[15], Supreme Court observed that a trustees is generally not entitled to dispose of or appropriate trust property for his benefit. In the present case the banker was entitled to dispose of the share and utilities the amount thereof for adjustment to the loan account if the debtor defaults. This bankers obligation to transfer back the shares can arise only when the debtor clears dues of the bank. Hence bank was not considered as trustees. CHAPTER IV ACCOUNTS IN THE NAME OF LIQUIDATORS A liquidator is a person appointed by the court to wind up the affairs of a company. His business is to realize the companys assets and apply funds thus collected in repayment of debts and distribute the balance among shareholders. He has power to borrow money on the security of the companys assets and to draw endores and accept instruments on behalf of the company. While exercising such powers, the liquidator is free personal liability. Every official liquidator is required to maintain a personal ladges account with RBI or SBI or any Nationalized Bank in terms of the court order. CO OPERATIVE SOCIETIES These are established under Co operative socities act in force in various states. They are governed by their respective rules and by laws. Before opening the accounts, these have to be scrutinized to see if there are any restrictions on opening bank accounts. In some states, the co- operative societies cannot open accounts with commercial banks without permission from the registrar of co- operative societies and

the registrar may also impose certain conditions like maximum balances. All such conditions should be observed while opening and operating the accounts. RECOMMENDATIONS AND SUGGESTIONS The present discussion highlights the legal position of the special cases of a banks customer and the necessary precautions that a prudent banker should take while dealing with them. A bank account may be opened by any person who can legally enter into a valid contract and applies to the bank in the proper manner i.e., undertakes to abide by the banks procedure and stipulated terms and conditions. Some persons like the minors, drunkards, lunatic, and insolvents are not competent to enter into valid contracts. Thus requiring extra care to ensure that their accounts are conducted in accordance with the provisions of their respective charters. CONCLUSION The customers of banks consist of millions of private individuals, hundreds of thousands of small businesses some formed as private limited companies the majority being sole traders or partnerships. Some persons like the minors, drunkards, lunatics and insolvent not competent to enter into valid contracts. Some other persons like agents, trustees, executors, etc. who act on behalf of others, have limitations on their powers. Thus requiring extra care to ensure that their accounts are conducted in accordance with the provisions of their respective charters. --------------------------------------------------------------------------------------------------------------------------------------Q4 Ans4 holder in due course -- any subsequent owner of a negotiable instrument such as a check, note or other document. The holder must have accepted possession of the financial instrument in good faith and given something of value for it. The holder is presumed to be unaware that the financial instrument previously may have been overdue, been dishonored when presented for payment, or had a claim against it, if in fact such were the case. For example, someone who accepts a third party check or NOW draft is a holder in due course, as are all subsequent holders of the instrument. Likewise, the holder of a note or loan agreement concluded by two other parties (the original consumer and the seller who first extended credit) is also a holder in due course. Until 1976, the Uniform Commercial Code held that a holder in due course was not liable for any prior claims made against the instrument held. However, in 1976, the Federal Trade Commission ruled that holders in due course could be liable in some cases. For example, if the original customer stops making loan payments because the merchandise purchased on credit is faulty, and the original seller refuses to honor the terms of the guarantee, all subsequent holders of the note may be subject to claims against the seller. While claims may be made against holders of a note, innocent holders of a check or NOW draft generally have the right to collect the face amount from the payer or drawer, regardless or prior claims. The holder of a Negotiable Instrument (P.N./B.E./Cheque) is called as the holder in due course and possesses the right to sue upon the instrument in his own name. Holder and holder in due-course A negotiable instrument is transferable from person to person. The Negotiable Instrument Act confers upon the person who acquires it bonafide and for value, the RIGHT TO POSSESS good title to the instrument. such a person is called HOLDER IN DUE COURSE. Each and every person in possession of a cheque or bill cannot be its holder in due course and cannot claim statutory protection available under the Act.

In terms of Section 8, "The Holder of a Promissory Note, Bill of Exchange or cheque means any person entitled in his own name to the possession thereof and to receive and recover the amount due thereon from the parties thereto." Holder in due course As per Section 9, "Holder in due course means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or payee or endorsee thereof if payable to order before the amount mentioned in it became defect in the title of the person from whom derived his title." -------------------------------------------------------------------------------------------------------------------------------------Q..5 Ans.5 A safe deposit box, also called a safety deposit box[1] is an individually-secured container, usually held within a larger safe or bank vault. Safe deposit boxes are generally located in banks, post offices or other institutions. Safe deposit boxes are used to store valuable possessions, such as gemstones, precious metals, currency, marketable securities, important documents such as wills, property deeds, and birth certificates, or computer data storage that need protection from theft, fire, flood, tampering or other reasons. In the typical arrangement, a renter pays the bank a fee for the use of the box, which can be opened only with production of an assigned key, the bank's own guard key, the proper signature, and perhaps a code of some sort.[2] Some banks additionally use biometric dualcontrol security to complement the conventional security procedures.[3] Many hotels, resorts and cruise ships offer safe deposit boxes or small safes for their patrons.[4] The contents of safe deposit boxes may be seized under the legal theory of abandoned property.[5
DEPOSIT POLICY 1. PREAMBLE: One of the important functions of the Bank is to accept deposits from the public for the purpose of lending. In fact, depositors are the major stakeholders of the Banking System. The depositors and their interests form the key area of the regulatory framework for banking in India and this has been enshrined in the Banking Regulation Act, 1949. The Reserve Bank of India is empowered to issue directives / advices on interest rates on deposits and other aspects regarding conduct of deposit accounts from time to time. With liberalization in the financial system and deregulation of interest rates, banks are now free to formulate deposit products within the broad guidelines issued by RBI. This policy document on deposits outlines the guiding principles in respect of formulation of various deposit products offered by the Bank and terms and conditions governing the conduct of the account. The document recognizes the rights of depositors and aims at dissemination of information with regard to various aspects of acceptance of deposits from the members of the public, conduct and operations of various deposits accounts, payment of interest on various deposit accounts, closure of deposit accounts, method of disposal of deposits of deceased depositors, etc., for the benefit of customers. It is expected that this document will impart greater transparency in dealing with the individual customers and create awareness among customers of their rights. The ultimate objective is that the customer will get services they are rightfully entitled to receive without demand. While adopting this policy, the bank reiterates its commitments to individual customers outlined in Bankers Fair Practice Code of Indian Banks Association. This document is abroad framework under which the rights of common depositors are recognized. 1.1 KNOW YOUR CUSTOMER (KYC) GUIDELINES: Know Your Customer (KYC) is the platform on which banking system operates to avoid the pitfalls of operational, legal and reputation risks and consequential losses by scrupulously adhering to the various procedures laid down for opening and conduct of accounts. The Bank shall follow appropriate Know Your Customer Policies, procedures and internal control mechanism designed to :

1. Establish and document the true identity and address of the customers who maintain/establish relationships, open accounts or conduct business transactions. 2. Obtain background information on existing and/or new customers; 3. Safeguard the Bank from the risks of doing business with any individual or entity whose identity cannot be determined. 4. Protect the Bank from the risks of having business relationships with any individual or entity who refuses to provide information, or who has provided information that contains significant inconsistencies which cannot be resolved after due investigation. 1.2 IDENTIFICATION THROUGH DOCUMENTS PROVIDED BY THE CUSTOMER: 1. The Bank shall establish customers identity (true name, residential and mailing address) with the help of certain official documents as may be provided by the customer concerned in original such as: a. Electoral Card/Voters Identity Card b. Passport c. Driving License d. Identity Card issued by an institution/Income Tax Authorities e. Copy of the electricity bill or telephone bill showing residential address f. Any document or communication issued by an authority of Central Government, State Government or Local Bodies showing residential address g. Any other documentary evidence in support of his/her address given in the declaration covering PAN Card No., Sales Tax No. etc. 1. The Bank shall not rely upon Ration Card as a document to establish ones identity. 17. NOMINATION FACILITY: 1. 2. 3. 4. 5. Nomination can be made in favour of one individual only. Nomination facility is also available to a sole proprietary concern accounts. Nomination facility is available for all deposit accounts opened by the individuals. Nomination so made can be cancelled or changed by the account holder/ s any time. Nomination can be made in favour of a minor for which the date of birth of the minor and full details of the guardian is to be furnished. Bank recommends that all depositors avail nomination facility. The nominee, in the event of death of the depositor/s, would receive the balance outstanding in the account as a trustee of legal heirs. The depositor will be informed of the advantages of the nomination facility while opening a deposit account.

Bank recommends that all depositors avail nomination facility. The nominee, in the event of death of the depositor/s, would receive the balance outstanding in the account as a trustee of legal heirs. The depositor will be informed of the advantages of the nomination facility while opening a deposit account.

21. SAFE DEPOSIT LOCKERS : This facility is not offered through all bank branches and wherever the facility is offered, allotment of safe deposit vault will be subject to availability and compliance with other terms and conditions attached to the service. Safe deposit lockers may be hired by an individual ( being not a minor) singly or jointly with another individual(s), HUFs, firms, limited companies, associates, societies, trusts etc. Nomination facility is available to individual(s) holding the lockers singly or jointly. In respect of lockers held in joint names, up to two nominees can be appointed. Joint locker holders can give mandate for access to the lockers in the event of death of one of the holders on the lines similar to those for deposit accounts. In the absence of nomination or mandate for disposal of contents of lockers, with a view to avoid hardship to common persons, the bank will release the contents of locker to the legal heirs against indemnity on the lines as applicable to deposit accounts. ---------------------------------------------------------------------------------------------------------------------------------------



Protection to the paying banker: Section 85 of the Negotiable Instruments Act, 1881 grants protection to a paying banker on his making payment on a cheque.

Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment tin due course. Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or blank appearing thereon, and notwithstanding that any such endorsement purports to restrict or further negotiation.

Paying banker should ensure that the cheque is regular in all respects and should take the precautions while making payment of the cheque: 1. The cheque must have been drawn properly. It is interesting to note that Negotiable Instruments Act defines a cheque but does not prescribe its form. It does not even say that it should be drawn on the printed form issued by the bank. Strictly speaking, a baker can not refuse to honour a cheque drawn on piece of paper provided it carries an unconditional order to the banker and fulfills other requirements of a cheque. But by tradition and custom, banks all over recognize only the cheque drawn on the printed form issued by the bank. Accordingly, if customer demands that the payment be made on the basis of a letter other than by way of a cheque, the entire thing the banker should do is to demand stamped discharge. We are aware that in the case of cheque, it need not be stamped. This exemption is accorded to cheques, if they are in the prescribed format. A cheque must bear a date because the mandate of the customer to the banker becomes legally effective on the date mentioned therein. The date should not be incomplete. If the drawer mentions a date earlier to the date of writing then it is called an ante-dated cheque. In India, a cheque is treated as stale cheque after the expiry of six months from the date of the cheque. If the drawer mentions a date on the cheque, which is subsequent to the date on which it is drawn, it is called a post-dated cheque. Paying banker should not make payment of a post-dated cheque before the date mentioned therein. Otherwise, he will be liable as follows:

If the drawer instructs the banker, before the date mentioned in the cheque, not to make payment of the post-dated cheque, the banker can not debit his account with the amount of the cheque. If the banker had paid the cheque, it would be deemed as payment made without authority of the drawer. If as a consequence of payment of a post-dated cheque by the bank, any other cheque issued by the drawer is dishonoured on the ground of insufficiency of funds, the drawer will be entitled to claim damages for its dishonour under section 31 of NI Act. If the customer unfortunately dies, becomes insolvent after the banker has made the payment but before the date mentioned in the cheque, the amount can not be debited to the customers account because the latters mandate becomes ineffective on the occurrence of these events. Payment of a post-dated cheque before the date of the cheque is not considered as payment in due course. The banker, therefore, can not avail the statutory protection under section 85. But its payment on or after the date of the cheque is valid and the banker will bear no liability in this regard.

Paying banker must refuse payment of the cheque under the following circumstances:

1.When the drawer countermands the payment: A cheque is an unconditional order of the drawer to the banker. The drawer is competent to cancel or withdraw such order at any time before its payment is made. The drawer need not explain the reason for stopping payment of a cheque. 2. Death of the drawer: On receipt of reliable information about the death of the customer, the banker must stop payment of the cheques signed by him because the order of the customer to the bank ceases to operate on the occurrence of his death. 3. Insolvency of the drawer: If the debtor commits an act of insolvency as defined in the Insolvency Law, either he or any of his creditors may present a petition in the court of law for an order of adjudication. When the court issues an order of adjudication, the whole property of the insolvent person (with certain exceptions) vests in the court or an official receiver and becomes available for distribution among the creditors. The banker must stop payment from customers account as soon as he receives the information that an insolvency petition has been filed by or against the customer.



Bills of Exchange A bill of exchange is defined by Sec. 5 of the Negotiable Instrument Act., 1881 as an instrument in writing, containing an unconditional order, signed by the makers, directing a certain person to pay a certain sum of money only to or to the order of, a certain person, or to the bearer of the instruments. In England, a bill of exchange is defined under Section 3 (1) of the Bill of Exchange Act as an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specific person, or to the bearer. Both these definitions points out that a bill exchange should be 1) in writing, 2) unconditional, 3) in the form of an order not a promise or request, 4) for a sum of money, not for a sum of money, not for a commodity or anything and 5) payable to a certain person or to his order or to the bearer of the instrument. SPECIMEN OF PROMISSORY NOTE ----------------------------------------------------------------------------------Rs. 10,000 New Delhi 110 016 Oct. 13, 1987 Six months after date pay to order the sum of Rupees Ten Thousand only for value received. To Z Address -------------Stamp Sd: ---------------------------------------------------------------------------------The specimen given above is of a usance bill, payable after a specified period of time. A bill of exchange may be drawn payable at sight i.e. on demand or payable after certain time after sight Basic features of a bill exchange may be summed up as hereunder. ------------------------------------------------------------------------

Essentials or Characteristics of a Bills of Exchange 1. It must be stamped 2. It contains an order to pay 3. Order must be unconditional 4. Sum payable must be certain 5. May be drawn payable to bearer 6. Cannot be made payable to bearer on demand 7. Cannot be crossed like a cheque 8. Requires acceptance by the drawee unless payable on demand 9. It is dishonoured by non-acceptance or non-payment 10. It may be payable by instalments -----------------------------------------------------------------------------------

Definition and Explanation of Bill of Exchange: A bill of exchange has been defined as an unconditional order in writing addressed by oneperson to another; signed by the person giving it, requiring, the person to whom it isaddressed to pay on demand or at a fixed or determinable future time, a certain sum inmoney to or to the order of a specified person or to bearer. Difference Between Inland and Foreign Bills: The bill of exchange may be inland or foreign. An inland bill is a bill which is both drawn andpayable within the a country. A foreign bill is one which is drawn in one country butaccepted and payable in another country. Parties to a Bill of Exchange: There are three parties in a bill: 1.Drawer 2.Drawee 3.Payee Specimen/Sample of a Bill of Exchange:

--------------------------------------------------------------------------------------------------------------------------------------Q.9 Ans9

A bank has to perform not only core banking functions of taking deposits and extending loans, but also a variety of functions in order to increase its utility to the community. These are called subsidiary services. These services are classified into: a) Agency services and b) Miscellaneous or general utility services

Agency Services Agency services: Besides collection and payment of cheques and bills, a bank acts as a special agent for its customer in the performance of the following important functions: i. Payment of subscriptions permia, rent etc. and collection of promissory notes, coupons, dividends, salaries, pensions etc. ii. Purchase and sale of stocks and shares. iii. Acting as trustee executor and attorney. Banks can act as trustee in respect of any trust property and banker should conform to trust deed. iv. Services as correspondent and representative of its customers, other banks and financial institutions. Miscellaneous or General Utility Services The major services under this head are:

1) Receiving of deeds securities and other valuables for safe custody. 2) Dealing in foreign exchange 3) Issuing letters of credit circular notes travelers cheques etc. 4) Serving as referee as to the financial standing business reputation and respectability of their customers. 5) Underwriting of loans raised by Government, public bodies and trading corporations. 6) Providing specialized advisory services to customers. 7) Guarantees 8) Safe deposit vault 9) Collection of interest on securities debentures and dividend on shares collection of pension bills 10) Remittance of funds bank drafts, mail transfers, telegraphic transfers etc. to other parts of the country and to foreign countries. Extra Notes
FUNCTIONS OF COMMERCIAL BANKS A commercial bank is a financial institution whose main business is to accept deposits from the public and to give loans to those who require it for short periods. The general functions of a commercial bank may be summarized as follows:1. Receiving of Deposits The most important functions of the commercial banks is to receive deposits form the public. The commercial banks not only protect them but also help transfer of funds through cheques and even undertake to repay the money in legal tender money. Deposits received by the commercial banks are of various types, - fixed deposits, savings deposits, current deposits and recurring deposits. Fixed deposits or Time deposits are with the bank for a specified period of time and they can be withdrawn only after the expiry of the said period. The interest rate depends on the time agreed upon. The longer the maturity period, the higher the interest rate and vice versa. Form the point of view of safety and interest, fixed deposits are preferable. Savings deposits are those deposits received subject to certain restrictions. For instance, the interest is normally lower on savings deposits; withdrawals may be made once or twice a week.

a) Performance guarantee

b) Financial guarantee

Current deposit or demand deposits as they the often called, are those deposits withdrawable by the depositor at any time without any prior notice by means of cheques. The banks do not pay any interest on demand deposits, but in fact make a small charge on customers with current account. Recurring deposits are those deposits received by the banks in equal monthly premium for a certain number of years the total of which will be paid to the depositor with interest due thereon after the expiry of the date of maturity. Deposits at cal according to which deposits may be withdrawn when asked for by the depositor, deposits at short notice by which depositors are required to give notice before certain number of days (7,21,30,45 or 90) for withdrawal of deposits, short-time deposits for short period of a year or less for lower interest and retirement benefits deposits, are some of the important forms of deposits received by the commercial banks. 2. Making loans and Advances The second principal functions of the commercial bank is to make loans and advances out of the public deposits. Direct loans and advances are given to all persons against personal security, gold and silver and other movable and immovable assets. This the banks do by overdraft facilities, that is, by allowing the borrower or overdraw his current account and also by discounting bills of exchange. The merchants and manufacturers enabled to obtain adequate funds for production of goods and services. They help in the development of those industries which perform the most useful service to the community. The loans and advances made by the commercial banks are of various forms, like cash credit, overdraft, demand loan, hire purchase loan, etc. Cash credit is that loan given by a commercial bank in installments against the security of raw materials, produced goods, etc. Overdraft is made on security against stock and shares, insurance policies, etc., under current account. Demand loan is paid in full to the debtor at a time. Hire purchase loans are made to all persons for the purchase of customer durable goods like radio, bicycle, tailoring machine, sites for buildings etc and these loans are repayable to the bank in easy installments with interest due thereon. 3. Agency Services A commercial bank provides a range of investment services. Customers can arrange for dividends to be sent to their bank and directly remitted into their bank accounts, or for the bank to detach coupons from bearer bonds and present them for payments and to act upon announcements in the Press of drawn bonds, coupons payable, etc. Orders for the purchase or sale of stock exchange securities are executed through the banks brokers who will also their opinions on securities or lists of securities. Similarly, banks will make applications of behalf of their customers for allotments arising from new capital issues, pay calls as they fall due (that is, subscriptions to capital issues made over a period), and ultimately obtain the share certificate or other documents of title. On certain agreed terms the banks will allow their names to appear on approved prospectuses or other documents as bankers for the issue of new capital, they will receive applications and carry out other instructions. A commercial bank undertakes the payment of subscriptions, premia, rents and collection of cheques, bills, promissory notes etc., on behalf of its customers. It also acts as a correspondent or representative of its customers, other banks and financial corporations. Most of the commercial banks have an executor and trustee departments; some may have affiliated companies to deal with this branch of their business. They aim to provide, before, a complete range of trustee, executor, or advisory services for a small charge. The business of banks acting as trustees, executors, administrators, etc., has continuously expanded with considerable usefulness to their customers. By appointing a bank as an executor or trustee of his will the customer secures the advantage of continuity, and avoids having to make changes; impartiality in dealing with beneficiaries and in the exercise of discretions; and the legal and specialized knowledge pertaining to executor and trustee services. When a person dies without making a will the next-of-kin can employ the bank to act as administrator and to deal with the estate in accordance with the rules relating to intestacies. Alternatively, if a testator makes a will but fails to appoint an executor, or if an executor is unable of unwilling to act, the bank can usually undertake the administration with the consent of the persons who are immediately concerned. Banks will act solely or jointly with others in these maters, as also in the case of trustee for stocks, shares funds, properties or other investments. Under a declaration of trust, a bank undertakes the supervision of investments and distribution of income; a customers investments can be transferred into the banks name of control, this enabling it to act immediately upon a notice or rights issue, allotment letters, etc. Alternatively, where it is not desired to appoint the bank as nominee, these services may still be carried out by appointing the bank as attorney. Where business is included in an estate or trust, a bank will provide for its management for a limited period, pending its sale to the best advantage as a going concern or transfer to a beneficiary. Private companies wishing to set up pension funds may appoint a bank as a custodian, trustee and investment adviser, while retaining the administration of the scheme in the hands of the management of the fund. Most banks will undertake on behalf of their customers the preparation of income tax returns and claims for the recovery of overpaid tax; they also assist the customers in checking of assessments. In addition to the usual claims involving personal allowances and reliefs, claims are prepared on behalf of residents abroad, minors, charities, etc. 4. General Utility Services These services are those in which the bankers position in not that of an agent for his customer. They include the issue of credit instruments like letters of credit and travellers cheques, the acceptance of bills of exchange, the safe custody of

valuables and documents, the transaction of foreign exchange business, acting as a referee as to the respectability and financial standing of customers and providing specialized advisory service to customers. By selling drafts or orders and by issuing letters of credit, circular notes, travellers cheques, etc., a commercial banker is discharging a very important function. A bankers draft is an order, addressed by one office of a bank to any other of its branches or by any one bank to another, to pay a specified sum to the person concerned. A letter of credit is a document issued by a banker, authorizing some other banker to whom it si addressed, to honour the cheques of a person named in the document, to the extent of a stated amount in the letter and to charge the same to the account ofhte grantor of the letter of credit A letter of credit includes a promise by the issuing banker to accept all bills to the limits of credit. When the promise to accept is conditional on the receipt of the documents of title to goods, it is called a documentary letter of credit. But the banker will still be liable for bills negotiated before the expiry of the period of its currency. Circular letter of Credit is generally intended for travelers who may require money in different countries. They may be divided into travelers letters of credit and guarantee letters of credit. A travelers letter of credit carries the instruction of the issuing bank to its foreign agents to honour the beneficiarys drafts, Cheques, etc., to a stated amount which it undertakes to meet on presentation. While issuing guarantee letters of credit, the banker secures a guarantee for reimbursement at an agree rate of interest or the may insist on sufficient security for the grant of the credit, the banker secures a guarantee for reimbursement at an agreed rate of interest or he may insist on sufficient security for the grant of the credit. There is yet another type which is knows as Revolving Credit. Here the letter is so worded that the amount of credit available automatically reverts to the original amount after the bills negotiated under them are duly honored. Circular Notes are cheques on the issuing baker for certain round sums in his own currency. On the reverse side of the circular note is a letter addressed to the agents specifying the name of the holder and referring to a letter of indication in his hands, containing an specimen signature of the holder. The not will not be honource unless the letter of indication is presented. Travellers cheques are documents similar to circular notes with the exception that they are not accompanied by any letter of indication. Circular cheques are issued by banks in certain countries to their agents abroad. These agents sell them to intending visitors to the country of the issuing bank. Another important service rendered by a modern commercial bank is that of keeping in safe custody valuables such as negotiable securities, jewellery, documents of title, wills, deed-boxes, etc., Some branches are also equipped with specially constructed strong rooms, each containing a large number of private steel safes of various sizes. These may be used by non-customers for a small fee as well as by regular customers. Each licensee in provided with the key of an individual safe and thus not only obtains protection for his valuables, but also retains full personal control over them. The safes are accessible at any time during banking hours and often longer. For shopkeepers and other customers who handle large sums of money after banking hours. night safes are available at many banks. Night safe take the form of a small metal door in the outside wall of the bank, accessible from the street, behind which there is a chute connecting with the banks strong room. Customers who require this service are provided with a leather wallet, which they lock before placing in the chute. The wallet is opened by the customer when he calls at the bank the next day to pay the contents into his account. Another function of great value, both to bankers and to businessman, is that of a referee as to the respectability an financial status of the customer. Among the services introduced by modern commercial banks during the last quarter of a century or so, the bank giro and credit cards deserve special mention. The bank giro is a system by which a bank customer with many payments to make, instead of drawing a cheque for each item, may simply instruct his bank to transfer to the bank accounts of his creditor the sum due from him, and he writes one cheque debiting his account with the total amount. Credit advices containing the name of each creditor with the name of his bank and the branch will be cleared through the credit clearing of the clearing-house, which operates in a similar way as for the clearing of cheques. Even non-customers of a bank for a small charge may make use of this facility. A direct debiting service is also operated by some banks, This service is designed to assist organizations which receive large number of payments on a regular basis. A creditor is thereby enabled with the prior approval of the debtor, to claim any money due to him direct from the debtors bank account. To some organizations, for example, insurance companies, which receive, say, six equal sums on six dated in a year, the scheme is only an extension of the standing order facility; but for the public utilities and traders which send out invoices for variable amounts at differing times, the scheme is an entirely new one. Credit cards are introduced for the use of credit-worthy customers. Users are issued with a card on production of which their signature is accepted on bills in shops and establishments participating in the scheme. The banks thereby guarantee to meet the bill and recover from the cardholders through a single account presented periodically. In some cases uses are required to pay a regular subscription for the use of the service as well. An extension of the scheme allows the repayment of large sums (subject to a maximum) over a period at interest. Some banks are opening budget accounts for credit-worthy customers. The bank guarantees to pay, for a specific charge, certain types of annual bills (for example, fuel bills, rates, etc.) promptly as they become due, whilst repayments are spread over a 12-monthly period from the customers current account.

All these new money transmission services have particular regard to the developments in computerized book-keeping which the banks in some countries have already introduced. Some banks are reported to be experimenting with the use of electronic machines which will scan cheques and dispense notes or coins, thus saving time at the counter. Overseas Treading Services Recognition of overseas trade has led modern commercial banks to set up branches specializing in the finance of foreign trade and some banks in some countries have taken interest in export houses and factoring organizations. Assisted by banks affiliated to them in overseas territories, they are able to provide a comprehensive network of services for foreign banking business, and may transactions can be carried through from start to finish by a home bank or its subsidiary. In places where banks are not directly represented by such affiliated undertakings, they have working arrangements with correspondents so that banks are in a position to undertake foreign banking business in any part of the world. The banks provide more than just a means for the settlements of debts between trades both at home and abroad for the goods they buy and sell; they are also providers of credit and enable the company to release the capital which would otherwise be tied up in the goods exported. 5. Information and other Services As part of their comprehensive banking services, many banks act as a major sources of information on overseas trade in all aspects. Some banks produce regular bulletins on trade and economic conditions at home and abroad, and special reports on commodities and markets. In some cases they invite enquiries for those wishing to extend their foreign trade, and are able through their correspondents to furnish the names of reputable and interested dealers of goods and commodities and to advise on the appointment of suitable agents. For businessmen traveling abroad letters of introduction, indicating the purpose of journey taken, can be issued addressed to banking correspondents in the various centers it is proposed to visit. In this way it is often possible to establish new avenues of business. On request, banks obtain for customers, for business houses, confidential opinions on the financial standing of companies, firms or individuals at home or overseas. Commercial banks furnish advice and information outside the scope merely of trade. If it is desired to set up a subsidiary or branch overseas (or for an overseas company to set up in the home country) they help to establish contracts with local banking organizations. To sum up, the service rendered by a modern commercial bank is of inestimable value. It mobilizes the scattered saving of the community and redistributes them into more useful channels. It enables large payments to be made over long distances with maximum expenses. It constitutes the very life blood of an advanced economic society. In the words of Walter Leaf: The banker is the universal arbiter of the worlds economy.