BUSINESS CORRESPONDENT &

FACILITATOR

CONTENTS
1. BANKING: BASIC INFORMATION
2. BANKER-CUSTOMER RELATIONSHIPS
3. ANTI-MONEY LAUNDERING AND KNOW YOUR CUSTOMER
4. PRINCIPLES OF LENDING & PRIORITY SECTOR FINANCE IN BANKS
5. RETAIL LOANS
6. CREDIT LOANS
7. ASSET CLASSIFICATION
8. SECURITIES AND MODES OF CHARGING THEM
9. DOCUMENTATION
10. MICROFINANCE AND SELF-HELP GROUPS (SHGs)
11. FINANCIAL INCLUSION AND RURAL DEVELOPMENT:BANKING FOR
THE UNBANKED
12. BUSINESS FACILITATOR AND BUSINESS CORRESPONDENT (BF/BC))
MODEL : A VEHICLE FOR FINANCIAL INCLUSION
13. COMMUNICATION AND FINANCIAL COUNSELLING (INCLUDING
FINANCIAL LITERACY AND FINANCIAL EDUCATION)
14. CASH FLOWS
15. CREDIT AND SAVINGS PRODUCTS

BANKING : BASIC INFORMATION

1.1 OBJECTIVES
After going through this chapter, the readers would be able to understand
Various types of banks in India
Various functions performed by banks
Types and legal implications of the relationships that the banks have with their
customers and
Deposit (liability) accounts of customers
1.2 INTORDUCTION
Banks offer savings, remittance, credit and other financial products to their customers. In
addition, customers will also require insurance and other risk management products.
Everyone needs access to financial services. The situation wherein people are not able to
access financial products from formal financial institutions is termed as Financial
Exclusion. Such a situation could result in certain economically and socially undesirable
consequences.
There are a large number of commercial bank branches and cooperative societies which are
offering banking services to the people of India. Yet it is estimated that nearly 45% of the
adult population of India have not accessed financial services from formal financial
institutions. Further, it is seen that the issue of financial exclusion is not confined to the rural
India alone inasmuch that in the case of urban poor also, exclusion is a critical issue.
The financial needs of the excluded are varied and distinct. They need access to savings,
insurance and most importantly credit. In equal are financial intermediaries. It is important to
note that the primary function of banks is acceptance of money in the form of deposits and
lending it to borrowers. A part of the deposits collected by the banks are also invested in
bonds and securities. Thus, deposit taking, lending and investment are the basic functions of
a bank. The other activities listed above could be treated as other functions of a bank.
1.4 STRUCTURE OF INDIAN BANKING SYSTEM
Banks in India are generally classified into various categories as follows.
1.4-1 Scheduled Banks:
Banks can be either scheduled or non-scheduled. Banks which are listed in the second
schedule of the Reserve Bank of India Act, 1934 are known as scheduled banks. These banks
are further classified as:
(i) Public Sector banks : These are further classified as:

(a) State bank and its six banking subsidiaries

(b) Nationalized banks
(c) Regional Rural Banks
(ii) Private Sector Banks:
(a) Old private Sector Banks
(b) New Private Sector Banks
(c) Foreign Banks
(iii) State Cooperative Banks
(iv) Urban Cooperative Banks
Brief description of these banks is as follows :
1.4-2 Public Sector banks :
These banks are characterized by majority ownership (51% or more share capital) by the
Government of India. About 72% of the banking business in India is performed through
these banks. They can further be classified as under:
(a) The State Bank Group:
State bank of India is the largest bank in India and has more than 10,000 branches. It has
today, six associate banks namely, State Bank of Patiala, State Bank of Indore, State Bank of
Bikaner and Jaipur, State bank of Mysore, State bank of Hyderabad and State Bank of
Travancore.
State bank of India has many financial subsidiaries such as SBI Life Insurance Company,
SBI Mutual Funds, SBI Factors, SBI Capital Markets, SBI Cards etc. The list of subsidiaries
is indicative of the variety of services that the banks render.
(b) Nationalised Banks
Nationalised Banks are nineteen in number. They have the largest number of branches in
metro/urban/semi-urban/rural areas through-out the country. The nationalized banks have a
very large branch network spread over the entire country, large deposits and assets base and
perform all kinds of financial services.

(c) Regional Rural Banks (RRBs)

Regional Rural Banks have been established with a focus on rural development. These are
also scheduled banks sponsored by public sector banks. But unlike commercial banks, their
area of operations was restricted to 3 or 4 districts. Also, they do not offer all the financial
services that offered by commercial banks. Their ownership/capital is provided jointly by
Central Government (50%), concerned State Government (15%) and the sponsoring bank
have started merging their RRBs at State level. After the merger, the number has been
reduced from 196 to 88 at present.
1.4-3 Private Sector banks:
(a) Indian Private Sector banks :
These are banks incorporated in India whose shares are held by public. Majority of these
banks belong to the category of old generation private banks characterized by small balance
sheet size, regional operations, traditional style of management and business activities. The
other category of private sector banks is the new generation banks, incorporated post-1993.
These banks are better capitalized, technology functioning comparable to foreign banks
operating in India. These banks adopt a variety of delivery channels. Though a number of
new private sector banks were started, there are only five of them operation today on account
of merger of some of these banks among themselves.
(b) Foreign Banks :
These are the banks incorporated abroad but granted license by RBI to do banking business
in India through their Indian branches. While there are many foreign banks operation in
India, their branch network is smaller and the most of them operate in metropolitan cities and
State Capitals. Their operations are technology driven and a good part of their business
comprises of corporate banking, foreign exchange, export/import finance and merchant
banking.
(c) Local Area Banks:
These are banks which have been given license to function in a given area. They operate with
a low level of capital and cannot offer all the financial services of a commercial bank. There
are only four Local Area Banks in country as of now.
1.4-4 Cooperative Banks:
Cooperative banks are registered under the State Cooperative Act and Multi State
Cooperative banks with the Registrar of Cooperative Societies. Their main regulator is the
State Government (or Central Government in cases of the cooperative banks operating in
more than one State). The organizational structure and management set-up of cooperative
banks is based on the cooperative principles. It is observed that these banks are not
professional in management as in the case of commercial banks.

Cooperative banks are classified into Primary Cooperative Banks (Urban Cooperative
Banks), Short term Cooperative Banks (Agriculture Cooperative Banks) and Agriculture and
Rural Development Banks (Land Mortgage Banks).
Cooperative Banks balance sheets are much smaller as compared to commercial banks. Not
all the cooperative banks enjoy the scheduled status.
Cooperative Banks operate through their branches and through the societies. Societies are not
banks though some of them accept all the types of deposits.

1.5 FUNCTIONS OF BANKS

1.5-1 Traditional Functions:
(a) Deposit-taking:
A bank accepts money from its customers (members of the public). A customer can keep
his/her monies in current accounts where no interest is payable or in savings accounts (also
known as savings deposit accounts) where nominal interest Is paid. Normally, business
firms/companies open current accounts which facilitate large number of transactions. In the
case of individuals, and where commercial transactions may not be involved, savings
accounts are opened. In both these cases, the amount deposited is repayable back to the
customer as and when demanded/needed. Because of this aspect, current accounts and
savings accounts are also known as demand deposits and customers can withdraw the funds
by issuing cheques. Savings account holders are issued ATM cards by using which they can
withdraw cash in the ATMs.
The accounts, where the customers/savers can keep their funds for a longer time are called
term deposits. Term deposits could be in the form of fixed deposits, recurring deposits,
monthly income deposits, cumulative deposits etc. Unlike current and savings bank deposits,
wherein the amount deposited with the banks are repayable on demand, in the case of term
deposits, the amounts deposited are, normally, repayable only after the expiry of the agreed
term/period for which it is kept. There are, however, provisions for closing the deposit
account pre-maturely and withdrawing the amount subject to certain penal interest
stipulations. Term deposits constitute the largest portion of a banks funds.
Advantages of Deposits
There are several advantages which accrue to the customers in maintaining deposit accounts
with banks. These advantages are safety, liquidity, interest income etc. Currently, investors
in term deposits which have a lock in period for five years enjoy certain exemptions from
Income Tax. Banks give, to the depositors, periodical statement of transactions, and

statement of account. Current and Savings bank account holders are issued cheque book for
operating the account.
(b) Loans and Advances
Banks have to pay interest on the deposits at agreed rates of interest. In addition, they have to
meet their operational expenses. Therefore, banks have to invest/lend the monies and earn
interest. Lending money by way of loans and advances of various kinds is thus an important
traditional function of a bank. The funds mobilized, in the form of deposits, and monies
borrowed are deployed by a bank as loans and advances to earn profits by way of interest
spreads, i.e. the differential between the average interest rates on loans and on deposits. The
interest income from loans and advances forms a major source of a banks operating profit.
Banks lend in the form of Cash Credits, Overdrafts, Demand Loans and Term Loans. Based
on the borrower profile, loans can be classified as Corporate Loans, SME advances,
Agricultural Loans, Retail Loans, Foreign Currency Loans, Educational Loans, Vehicle
Loans etc, Loans are also classified on the basis of security. Security could be in the form of
surety, pledge of banks Deposit receipts, shares and debentures, assignment of Life
Insurance policies, Mortgage of immovable property, hypothecation of plant and machinery,
raw material etc. A loan account with security is known as secured loan whereas a loan
without security is known as clean loan (clean advance).
Overdue Loans and NPA
In order to repay depositors on demand and pay interest on borrowed funds and deposits,
banks expect that all the borrowers who take the loans are prompt in payment of interest and
repayment of principal amount. However, it is possible that on account a number of reasons,
the interest and principal may get defaulted and become overdue. Loans and advances which
remain overdue for more than a stipulated period is known as non-performing assets
(NPAs). NPAs cause loss of income (interest not being paid or recovered) and in some cases
loss of the principal (amount lent). Lending, therefore, calls for good credit appraisal and
requires adequate care, caution and supervision/monitoring by the bank to prevent loans
turning overdue and eventually into NPAs. Collection or recovery of dues/overdues is
important for sustaining the viability of banks.
(c) Remittance services:
Customers have to make payment for purchases in the place of their business or in the place
of business of the vendor/seller. This calls for movement of money place to place. However,
it may not be possible for a buyer to move from place to place for making payments. Nor
will it be economically viable to carry large sums of money from place to place. It is,
therefore, necessary that a good payment and settlement system should exist for enabling

trade and commerce in the county. Banks perform the job of payment and settlements in the
financial market.
In this regard, Banks have branch network spread across various cities/regions/states. Some
banks have branches and correspondent banks overseas as well. This network enables the
banks to remit funds of their customers, if needed, from one place to another in the same
country or overseas by mail/telegraphic/electronic funds transfer or by issuing bank drafts.
Banks charge appropriate fee from the remitting person for the service rendered. Remittance
of funds by banks is fast, safe, secure and cheap as compared to other modes of funds
transfer, like post office money order (which is generally for small sums of money for
personal use), physical transfer of money etc.
1.5-2 Other Functions:
(a) Miscellaneous Services:
In addition to the above-mentioned core functions, banks also render other services, which
are useful to customers, business firms and members of the society. These services include
safe deposit lockers, safe custody of valuables; issuance of travellers cheques, letters of
credit and guarantees; collection of out-station cheques/bills/hundies; furnishing opinion
reports on their customers; agency services for Government business, correspondent,
trusteeship and executors business. Banks charge a commission or fee on such services,
which provides them with non-interest income adding to their profits.
(b) Electronic Banking:
In the wake of the recent strides in information and communication technologies, almost all
banking operations have now been computerized. Information Technology and IT driven
systems have been adopted by most commercial banks both in private and public sectors and
a few banks in the cooperative sector also. In fact, the new generation private sector banks
started their operations with IT advantage. Today, IT and computerization have been adopted
for front-office operations where interactions with customers takes place, back-office
operations such as internal accounting and books balancing and settlement of transactions
with other branches and banks/institutions. Electronic banking has opened new vistas in
service delivery by adopting new banking channels like phone banking, internet banking,
credit/debit cards, ATM etc. In this background, modern banks look quite different from the
traditional brik and mortar branch banking.
Information Technology has thus brought about any where and any time banking and
contributed to the speed, accuracy and confidentiality of customers transactions while
enhancing customers; convenience resulting in customer delight. The funds transfer and
cheques clearing and collection of bills of exchange are also done electronically with
accuracy, speed and safety. Internal house keeping is done accurately and much faster. These

new banking channels have ensured that the customer need not necessarily go to the branches
for cash withdrawals, deposit of cheques, obtaining account statement etc., but has access to
other channels such as ATM, Credit/Debit Card or internet.
The information and Communication Technology (ICT) will play an important role in
financial inclusion efforts. It will also ensure that a large number of accounts are handled by
the banking system more easily than in the past.
1.6 DEPOSIT ACCOUNTS-GENERAL ASPECTS
A person desirous of opening a deposit account in a bank has to fill up and sign the
prescribed account opening/application form and furnish.
Introductory reference of and acceptable person,
Acceptable proof of his/her identity and residential address, his/her photographs, and
Initial deposit of an amount not less than the prescribed minimum (Initial deposit
could vary from bank to bank and ranges from Rs. 500 to Rs. 10,000 depending on
whether an account is to be operated by cheque or otherwise. Banks also open nofrills savings account for persons of small means where the initial balance could be
either nil or as low as Rs. 5.
1.6-1 Need for Introduction/identity and residence proof:
Introduction is the process by means of which banks satisfy themselves that the
applicant is a genuine (not fictitious or benami) person of certain standing and known
through the banks existing client.
Such introduction and verification ensures that the bank will get the protection under
the provisions of the Negotiable Instruments Act, 1881 an Act governing the
cheques-to all acts done by a banker in good faith and without negligence in relation
to the account holder. Opening an account without proper introduction would not
confer such a protection to the banker and the banker may be held liable for the loss
caused to others by a customer depositing forged or stolen cheques in his account and
withdrawing the proceeds.
As per existing guidelines issued by Reserve Bank of India, all banks have to obtain
acceptable direct proof of the identity of the person, (e.g. passport, driving license,
voters ID card, Income Tax PAN Card) and proof of the customers residential
address (house ownership documents/rent receipt, utility bill, society letter) and keep
attested photo-copies of these documents along with the account opening form. These
documents would establish the correct identity and residence of the person and would
obviate the need for further enquiries. The procedure would also prevent benami
deposits or other transactions by undesirable and anti-social elements.
1.6-2 KNOW YOUR CUSTOMER (KYC) GUIDELINES OF RBI:

In 2002, RBI had issued directive to all banks for complying with the procedure of know
your customer in respect of all their new and existing domestic and non-resident customers.
KYC establishes the identity and residential address of the customers by specified
documentary evidences. One of the main objectives of KYC procedure is to prevent possible
misuse of the banking system for money laundering and financing of terrorist activities. RBI
has stipulated that banks should show strict adherence to KYC guidelines and monitoring
of cash transactions based on prescribed norms (above specified amounts). The KYC
guidelines, issued by RBI, reinforce the existing customer identification practice of banks.
KYC guidelines have to be compulsorily adhered by banks in regard to all of their customers
who maintain domestic or non-resident rupee or foreign currency accounts with them. This
would prevent money from illegal and/or undesirable sources coming into the banking
system. Accounts opened by individuals, group of individuals, companies. Firms, religious
trust accounts and non-religious trust accounts etc. should be subjected to KYC procedure.
1.6-3 Specimen Signature:
Specimen signature of the customer is obtained on the account opening form in the presence
of the bank staff and it is attested by an authorized bank officer in the form itself. A customer
is recognized mainly by his/her signature on the cheques/vouchers and these are compared
with the specimen signature on record to verify the genuineness of the customers signature.
In respect of credit/debit cards and ATM cards, customers are given specific PIN numbers by
the banks. Customers are expected to use the initial PIN and replace the same with their own
PIN. Specimen signature and PIN are essential to ensure safety of customers funds.
In the case of illiterate customers, banks take the thumb impression for identification
purposes.
1.6-4 Power of Attorney:
At times, a customer/depositor would like to transact his/her business through another
person. Banks accept this arrangement for which a power of attorney is essential. Power of
Attorney (POA) is a document, duly stamped as per the Indian Stamp Act, given by a
customer to his/her banker, authorizing his/her attorney or agent named therein, to operate
the account. Power of attorney could be general or specific.

1.7 OPERATIONS IN DEPOSIT ACCOUNTS (OF VARIOUS TYPES OF

CUSTOMERS)

1.7-1 Individuals:
Deposit Accounts opened by individuals form a major share in the personal segment of the
banks. An individual who is above 18 years of age being of sound mind can open a deposit
account.
Savings or fixed deposit accounts for the benefit of minor child can also be opened and
operated by the father/mother/guardian in one of the following modes (a child will operate
the account only on attaining the majority)
(i) in the single name of the child operated by the father/mother/guardian, or
(ii) in the joint names of the father/mother/guardian and the child (payable to either or
survivor)
Further, in order to inculcate the saving habit among children, many banks allow minor
children above specified age to open savings account in their single name and operate it, with
certain restrictions on withdrawals. Such accounts are known as kids accounts.
1.7-2 Joint Accounts:
It is also possible that more than one individual come together and open a bank account.
These are called joint accounts. In these cases, for easy operations in the account, the account
holders will have to give instructions to the bank about who would be operating the account.
Such accounts can be operated by one of the account holders or jointly by two or more
account holders. The operating instructions given by the joint account holders should be
explicit, unambiguous and would be accepted as per the original wish confirmed at the time
of opening of the account. Normally, the type of instructions could be
(i) either or survivor wherein the account can be operated by any one of the joint holders
(this means that both of them have the right to operate and it is enough if one of them signs
the cheques) and in the event of closure of account, the deposit can be repaid to anyone and
in the event of death of a joint holder to the survivor,
(ii)former or survivor, wherein the account will be operated only by the first named
depositor and the balance will be payable to only the first named depositor or if the first
named is deceased, the survivor, as the case may be,
(iii) both jointly or survivor wherein the account will be operated jointly and the money
repayable to both jointly or the survivor, if any one of the joint holders is deceased,
(iv) any two jointly or last survivor wherein the number of account holders is more than
one and any two will operate the account etc.
1.7-3 Illiterate Persons:

Illiterate persons, who cannot sign, are allowed to open savings account (without cheque
facility) or fixed deposit account. Current account is not generally opened for such persons.
Withdrawals are permitted in the account on production of the passbook and after
verification of the thumb impression and against proper identification of the account holder.
1.7-4 Nomination:
At the time of opening an account in a single name, banks advise the customer to indicate the
nominee to whom the amounts are payable in the event of death of depositor/s. the effect of a
valid nomination is that in the event of death of the sole depositor or all depositors, the
amount lying in the account will be returned to the nominee without any further legal
formality.
1.7-5 Closing a deposit account:
(i) Closure at customers request:
A customer is entitled to terminate the relationship with a bank by applying for closing the
deposit account if he/she is not satisfied with the services of the bank or for any other reason
e.g. transfer/relocating to another place.
(ii) Closure of accounts by bank:
A banker may close account or stop operation on a customers deposit account in any of
the following cases, by giving reasonable notice to the customer, wherever necessary:
(a) On receipt of notice of death of the customer
(b) A joint account may also be closed on the death of any one of the account holders and
fresh account opened in the names of the surviving account holders, to avoid legal problems.
(iii) Stopping of operations:
Garnishee order or order of courts:
If a bank is served with an order by a court to stop payments or not to allow operations in an
account, in execution of a decree, which is called a garnishee order, or by an Income Tax
authority, the bank would immediately note a caution in the account and stop payment of
cheques or debits to the account, until the order is lifted in writing by the court, or Income
Tax department, as the case may be. The customer will be simultaneously advised of such
order and the consequent freeze on the withdrawals from the account. It should be observed
that in such cases, the account operations are stopped for a temporary period and the
account is not closed.

1.8 TYPES OF DEPOSITS:

Deposits of banks are broadly classified into three categories:
(i) Demand deposits which are repayable on demand by the customers.
These comprise of
Current account deposits
Savings bank deposits
Call deposits
(ii) term deposits that are repayable on maturity dates as agreed between the customers and
the banker. These deposits comprise of the customers and the banker. These deposits
comprise of
Fixed deposits
Recurring deposits
(iii) Hybrid deposits or flexi deposits which combine the features of demand and term
deposits. These deposits have been introduced, in recent times, by some banks to meet
customers financial needs and convenience and are known by different names in different
banks.
1.8.1 Demand Deposits:
(i) Current Accounts Current accounts form a large portion of demand deposits of a bank.
Current accounts can be opened by individuals, business entities (firms, companies etc.),
institutions, government bodies/departments, societies, liquidators, receivers, trusts, etc. The
main features of current accounts are:
There are no restrictions on the number and amount of withdrawals/deposits. Hence,
this account is maintained for the purpose of business.
Cheque book facility is provided to each current account holder. Withdrawals are
permitted by cheques. There is no restriction on the number of cheques that can be
transacted in a day.
Balances in the current accounts do not earn any interest. Banks are not allowed to
pay interest or brokerage in any form to the current account holders.
Customers are allowed overdraft facility. Overdraft is a facility whereby banks
honour cheques drawn by current account customers even when the balance in the
account is less than the amount of the cheques. Banks charge an agreed rate of interest
on such overdrafts. Overdraft can be temporary or regular. Banks can sanction regular
overdraft (permanent) facility as per prior arrangements made by the account holder
with the bank. In such cases, the bank would honour cheques drawn in excess of the

credit balance but not exceeding the overdraft limit. The bank would charge agreed
interest on the overdraft amount.
The account holder gets periodical statements of accounts from the bank giving the
details of transactions for customers verification and record. The statement of
account would show date wise the entire debit and credit transactions and balances, as
recorded in the banks ledger account of the customer.
(ii) Savings Bank Accounts As the name indicates, Savings bank accounts are intended for
keeping saving of individuals and small businesses (other than business transaction purposes)
for meeting their future money needs. Banks pay interest on these accounts with a view to
encouraging saving habit in the community. Currently, the rate of interest on savings
accounts is regulated by the Reserve Bank of India. Savings accounts can be opened by
individuals, guardians (on behalf of their minor children/wards), clubs, associations, trusts,
small businesses etc.
The Savings bank accounts are of two types:
(a) Accounts with cheque book facility in which withdrawals are permitted by cheques
drawn in favour of self or other parties. The payees of cheques can receive payment in cash
at the drawee bank branch or through their bank account via clearing or collection. The
account holder may also withdraw cash by filling up withdrawal form or in ATM
(b)Accounts without cheque book where withdrawals are permitted to the account holders
only at the drawee bank branch by filling up a withdrawal form or letter accompanied with
the account passbook. In such accounts, third parties cannot receive payments.
The main features of Savings bank accounts are as follows:
Withdrawals are permitted on demand of the account holder by presentment of
cheques or withdrawal form/letter. However, cash withdrawals in excess of the
specified amount per transaction/day (the amount varies from bank to bank) require
prior notice to the bank branch.
Banks stipulate certain restrictions on the number of withdrawals per month/quarter,
amount oif withdrawal per day, minimum balance to be maintained in the account on
all days, etc. and levy fee/penalty for violations of these rules. These rules are
different for different banks. The rationale of these restrictions is that the savings
bank account should not be used like current account, as it is primarily intended for
keeping and accumulation the savings.
Banks pay interest on the minimum balance maintained in the account during the
specified period of every month, say from 10th to the last day of the month, let us
illustrate this with an example. Suppose, in savings bank account, the credit balances
n the month of July were Rs. 20,000 on the 1st, Rs. 12,000 on the 2nd, Rs. 8,000 on

the 20th and Rs. 5,500 on the 30th July. The bank would pay interest only on Rs.
5,500 for the month of July as this was the minimum balance maintained during July
10-31.
Interest on savings bank account continues to be regulated by the Reserve Bank of
India. It is 3.50% per annum and all commercial banks have to pay this rate on
savings bank accounts.
No overdraft (payment in excess of the credit balance) is allowed in a savings bank
account, as there cannot be any debit balance in savings accounts.
Most of the banks provide to every savings bank account holder a passbook wherein
date-wise debit/credit transactions and credit balances are shown as per the
customers ledger account maintained by the bank. These days, banks offer computer
generated statement of account as per the convenience of the account holder.
Under electronic banking, a customer can access the account through internet by using a
customer ID number and password assigned to him/her by the bank. The electronic banking
enables the customer to transfer funds from one account to another, verify the transactions in
the account etc. Now-a-days, customers can also get their account statement through e-mail.
(iii) Term Deposits
(a) Fixed Deposits Fixed deposits are repayable on the fixed maturity date along with the
principal and agreed interest rate for the period. Unlike current accounts and savings account,
no operations are allowed to the customer in the fixed deposit account.
The main features of fixed deposits are as follows:
Fixed deposits are accepted for specified periods at specified interest rates as mutually
agreed between the depositor and the banker at the time of opening the account.
Since, the interest rate on the deposit becomes contractual., if cannot be altered even
though the interest rate could change upward or downward during the period of
the deposit.
Banks offer varying interest rates for different maturities as decided by their Boards.
The maturity-wise interest rates in a bank will, however, be uniform for all customers
subject to two exceptions high value deposits above certain cut-off value and
deposits of senior citizens (above the specified age normally 60 years) may be offered
higher interest rate.
Minimum period of fixed deposit is 7 days and maximum period for which a bank
may accept a deposit is, presently 10 years. Those term deposits which are held for
periods of 6 months and less are called Short Term Deposits or Short Deposits.
A deposit receipt is issued by the bank branch accepting the fixed deposit- mentioning
thereon the depositors name, principal amount, maturity period and interest rate,
dates of the deposit and maturity etc.

 The deposit receipt is not a negotiable instrument nor is it transferable like a cheque.
Only exception to this is the Certificate of Deposits, issued by banks as OTC
negotiated product, which is negotiable.
Banks generally agree to the customers request for premature closure of deposits at
their discretion, to accommodate the depositors request for meeting emergent
expenses. In such cases, interest is paid for the period the deposit was actually with
the bank (period between the date of deposit and premature closure). The rate of
interest payable in such cases of pre mature closure would be generally 2% less than
the rate applicable to the period for which the deposit remained with the bank.
Banks also may grant overdraft/loan against the security of their fixed deposits to
meet emergent liquidity requirements of the customers. The interest on such facility
will be 1% to 2% higher than the interest rate offered on the fixed deposit against
which the loan is taken.
Banks are required to calculate and credit the interest payable on the deposits on a
quarterly basis. However, for the convenience of the depositors, banks pay interest at
different desired intervals namely monthly, quarterly, half yearly or yearly, at times,
the customer opts to reinvest the interest, in which case, the final payment on maturity
is at compound rate of interest. Banks give different names to such deposits for easy
identification both by the bank and also the depositor.
(b) Recurring Deposits The main features of these deposits are:
The customer deposits a certain sum of amount as per pre-fixed frequency (generally
monthly/quarterly) for a specified period (12 months to 120 months).
The interest rate payable on recurring deposits is pre-fixed and it is generally a little
lower than the fixed deposit rate for the period which the recurring deposits are made.
The total amount deposited along with the interest is repaid on the maturity date.
Depositor can take a loan or advance against the deposits or to have the deposit prepaid before the maturity, for meeting emergent expenses. In the latter case, the
interest rate payable by the bank would be lower than the contracted rate and some
penalty would also be charged.
(c) Hybrid Deposits or Flexi Deposits These deposits are a combination of demand and
fixed deposits for meeting customers financial needs in a flexible manner. Hence, these are
hybrid deposits or flexi-deposits. Quantum Deposit Scheme of ICICI Bank, and Multi Option
Deposit Scheme (MODS) of SBI one examples of hybrid deposits.
The flexi deposits show a fusion of demand and fixed deposits as reflected from the
following features of the product:
Only one savings/current account is opened and the term deposits issued under the
scheme are linked to the account. Banks do not issue deposit receipts but issue a

statement of deposits to the customer. The fixed deposits are linked to the savings or
current account such that once balance in savings/current account cross a pre-agreed
level, such surplus amount is automatically transferred to fixed deposit account of a
pre-determined maturity (usually one year) in the customers name for higher interest
earning. Similarly, if the cheque issued in the savings/current account exceeds the
balance in the account, but less than the total in all the accounts, the fixed deposits are
automatically closed and the money credited to the savings/current account such that
the cheque is honoured. It is also possible to partially close the fixed deposit accounts.
Thus, the main advantages of the flexi-deposits to a customer are:
Advantage of convenience: The customer opens only one account (saving or current)
under the scheme and need not come to the bank branch each time for opening term
deposit accounts or for pre-paying/breaking term deposit for meeting the shortfall in
the savings/current account.
Advantage of higher interest earning: The customer earns higher interest on his
surplus funds than is possible when he opens two separate accounts-savings and term
deposits.

1.9 SOME IMPORTANT TERMS

1.9-1 Interest Rates:
It is essential to understand the term interest and the different methods of its calculation.
Interest is the price paid by the banks to the depositor for the deposits it has accepted or paid
by the borrower to the bank for the loans and advance he/she has taken from the bank. The
interest rate applicable for each type of deposit or loan is specified as a percentage. Although
the price of credit is generally stated as rate of interest, the amount of interest paid or earned
on deposits or payable on loans depend upon a number of other factors, including the method
used to calculate interest.

1.9-2 What is interest?

Interest is the price that someone pays for the temporary use of someone elses funds.
Interest can also be said to be the compensation that someone receives for temporarily giving
up the ability to spend money. Without interest, lenders would not be willing to lend or
temporarily give up the ability to spend, and savers would be less willing to defer spending.

To repay a loan, a borrower has to pay interest, as well as the principal amount originally
borrowed.
When money is advanced by a bank, the borrower usually pays a price in consideration of
the loan to the bank, till it is repaid (to the bank). This price is called Interest. Similarly, a
bank pays interest at agreed rates on deposits accepted by it.
1.9-3 Simple Interest:
Simple Interest is a fixed percentage of the amount borrowed for a period. The formula for
calculation of simple interest is as follows:
Interest is the total amount of interest paid,
Pricipal is the amount of money borrowed
Rate is the percentage of the principal charged as interest each year, expressed as a decimal
fraction
Time is the period for which the money is used/borrowed
Que: If Rs.1 lac is the money borrowed for 12 months and the ROI is 12% p.a, then what
would be the Interest paid by the borrower to the lender?
By applying the above formula, let us calculate the amount of interest payable in the above
illustration.
Answer Interest=Rs. 1,00,000 * 12/100 * 1 year
Answer = Rs. 12,000
1.9-4 Compound Interest:
When interest is added to the account as opposed to paying it immediately to the lender, the
interest is said to be capitalized and earns interest during the next time period for
compounding interest. This is compounding of interest or in simple term Compound
Interest. The formula for calculating compound interest is as follows:
A=P(1+r/n)nt
Where P=the principal (original amount)
A= the amount on maturity
r=the rate (expressed as fraction)
n=number of times per year that interest is compounded

t=number of years of the loan/deposit

Que. You deposit Rs. 10,000 with a bank for one year at 6% interest p.a. The Bank pays
monthly compounded interest which is reinvested in the account. What amount would you
get on maturity of your deposit?
By applying the above formula, let us now solve the problem
A=Amount on maturity
P=Rs. 10000
r=0.06
n=No. of times a year that interest is compounded=12
t=No. of years of the deposit
A=1000(1+0.06/12)12*1
=10000(1+0.0005)12
=Rs. 10000(1.06167)
=Rs. 10616.77 say Rs. 10617

1.9-5 Fixed and floating interest rates:

In fixed rate, the rate of interest once fixed will not change during the entire period of loan.
In floating rate, the rate of interest changes depending upon the market conditions subject to
the reset clause, if any, incorporated in the loan agreement. Thus, on every reset, the rate may
increase or decrease.
A fixed rate is when a bank issues a loan in which the ROI is fixed say 10% per annum for 5
years.
A floating rate is when the lender asks the borrower to pay a rate of interest say inflation
rate+5%. Here, the rate of interest will be reset every half year based on the inflation rate that
prevailed in the previous half year. For example, if the first half year Inflation is 5%, then,
the second half year rate of interest will be 5%+5%=10%. If the second half year inflation is
4%, then, the third half year rate of interest will be 4%+5%=9%. The floating rates will be
reset at predetermined periodicity, in the given case, every half year.

1.9-6 Front ended interest:

In these cases, the interest (flat rate) is collected upfront and the party gets net amount. For
example, in a loan of Rs. 100 and front ended rate of 10% the borrower will get a net amount
of Rs. 90 and repay Rs. 100. The front ended rate is often called the discount. In the given
case, since the borrower gets to use only Rs. 90 and the interest is Rs. 10, the effective rate of
interest will be 10/90*100=11.12%. this is often called the discount rate.
1.9-7 Flat rate of Interest:
Let us see a case where the borrower pays back a loan every month in instalments. In simple
and/or compound method, the bank will calculate the interest on reducing balances method.
As against this, in the case of a flat rate, the bank will calculate interest on the original
amount lent though the borrower repays in instalments.
Let us understand this for an amount borrowed Rs. 10,000 at (a) simple ROI 10% pa and (b)
Flat Rate 10% pa. The stipulated quarterly repayment is Rs. 2000
Period of loan : 15 months
Amount o/s

Interest Simple

Flat

Rs.

Rs.

Rs.

Opening

10,000

I Qtr

8,000

250

II Qtr

6,000

200

III Qtr

4,000

150

IV Qtr

2,000

100

V Qtr

50

Total Interest

1,250

750

1,250

It is seen that the flat rate interest is charged in the beginning at 10% p.a. and Rs. 1250 is
collected. Whereas in the case of reducing balance method, the interest adds up to Rs. 750
only.
1.9-8 Equated Monthly Instalment (EMI):

In the above case, it is seen that the interest is paid separately and the repayments of principal
is as stipulated. As against this, the most commonly adopted method of repayment of loan
now is EMI, where the principal and interest is repaid through monthly instalment over the
fixed tenure of the loan. It is fixed on the basis of the loan amount, interest rate and the
tenure of loan.
The formula for calculation of EMI given the loan amount, tenure and interest is :
EMI=(P*r) (1+r)n/(1+r)n -1
Where P =principal, r=rate of interest per instalment period (i.e., if interest is 12% p.a., no. of
instalments in a year is 12, then r=1/100=0.01), n=number of instalments in the entire tenure
of loan.
Que. Find out EMI for a housing loan of Rs. 10 Lacs at an interest rate of 10.5% per annum
repayable in 15 years.
By applying the formula given above,
P=10,00,000
r=10.5%/12=10.5/1200=0.00875
n=15*12
Therefore, EMI= 10,00,000 * .00875 (1+.00875) 180/(1+.00875)180-1
= 8750 * 4.797761/3.797761
EMI = Rs. 11,054

1.10 CHEQUES
Savings and current account holders are issued cheques book. Each cheques book
contains a number of cheques leaves. A customer can use the cheques book to direct the bank
to make payments from his/her account. As per definition, A cheque is a bill of exchange
drawn on a specified banker and not expressed to be payable otherwise than on demand.
This means that a cheque is an instrument that is exclusive to the banking system and no
other institution is empowered to operate a cheque book system,
A cheque has three parties. The drawer is the account holder signing the cheque;
drawee is always the bank (branch where the account holder maintains his account) and the
payee is the beneficiary who will receive the amount mentioned in the cheque. Other features
of a cheque may be described as follows:

(i) In writing: A cheque should be in writing (by ink pen or ball point pen, or typed, but no in
pencil as the writing can be easily erased or altered). A cheque can be written by another
person, and not necessarily by the drawer only.
(ii)Drawers signature: The cheque has to be signed in ink by the account holder as per the
specimen signature on record with the bank branch. If the signature of the drawer differs
materially, the cheque may be returned by the banker, to protect the customers interest from
possible forgery.
(iii) Date of cheque: A cheque has to be dated as date constitutes a material element of a
cheque. A holder of an undated cheque may fill in the date while presenting it for payment.
A post-dated cheque cannot be paid before its due date. Also a cheque may be paid, provided
more than six months have not elapsed from the date of the cheque. As per the banking
practice in India, a cheque presented after the expiry of 6 months from its written date (called
a stale cheque), cannot be paid unless it is revalidated by the drawer under his signature.
(iv) Amount of cheque: I the printed cheque forms of all banks, there are two spaces for
writing the amount of the cheque in figure and also in words. While both these
requirements have not been laid down in law, it has become a banking practice not to pay a
cheque written only in figures, as the amount written only in figures can be easily altered by
the holder or any other person. However, a banker can pay a cheque written only in words or
where the amount in words and figures mutually differs, after consulting the drawer, who can
later remove the deficiency.
1.10-1 Crossing of cheques :
The effect of crossing of a cheques is that the cheque will be payable not in cash, but through
the bank by credit to the account of the payee.
(a) General Crossing :
A cheque may be crossed by the drawer/issuer and holder by drawing on its face two parallel
transverse lines simply, either with or without the words not negotiable or and company
or account payee. These are examples of general crossing and in such cases the drawee
banker shall not pay it otherwise than to a banker
(b) Special Crossing :
A special crossing consists of an addition of the name of a banker across the face of a cheque
with or without two parallel transverse lines. The effect of such crossing is that the drawee
bank shall not pay the cheque otherwise than to the banker to whom it is crossed or his agent
for collection. This means that a specially crossed cheque has to be routed through an
account with the named bank.

1.10-2 Endorsements:
A cheque can be made payable to a bearer or to the order of the payee. Bearer cheques can be
encashed by the payee or the bearer of the cheques. An order cheque has to paid to the
specified payee or his/her endorsee. In such cases it is essential to identify the payee and
validity of the endorsement.
A cheque payable to order can be negotiated only by endorsement and delivery. Endorsement
is made on the back of the instrument, or by attaching a slip of paper (allonge) if the space
on the instrument is not enough. Following are the main requirements of endorsement:
(i) Signature of the endorser without adding any words is adequate to constitute endorsement.
(ii) Endorsement has to be made by the payee or by all the payees jointly. A stranger cannot
endorse an instrument, unless he is a holder in due course.
(iii) An endorsement cannot be partial as to only a part of the amount of the instrument.

1.11 LET US SUM UP

As a banks face in the area where there is no branch of its own, a Business Facilitator or a
business Correspondent assists the people in various banking and finance related matters. It
is, therefore, necessary for him to be familiar with basic banking knowledge. There are
different type of banks based on the ownership and activities. There are Public Sector Banks,
Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks and RRBs
functioning in our country. The main activity of all these banks is accepting savings from
public in deposits and lending money to various persons who are in need of them for their
personal requirements or business requirements. Banks offer remittance facility in the
accounts, apart from various other functions. There are various types of deposits accepted by
the banks like demand deposits, time deposits and a combination of both, called flexi or
hybrid deposits. Bank accounts can be opened by individuals, trusts, companies etc. KYC is
an important aspect of account opening and monitoring. It is well-recognized that a business
facilitator or a business correspondent should be abreast of basic banking terminologies like
interest rate and the various ways in which it is calculated, Equated Monthly Instalment etc.
Besides, he should also be exposed to how cheque facility is operated in the banking system.
1.12 KEY WORDS
Savings, Current, Term and Flexi deposits, Electronic Banking. Know Your Customer,
Cheque book, Mandate, Power of Attorney, specimen signature, operating instructions,
nomination, Simple interest, Compound Interest, Flat Interest, Equated Monthly Instalment,

Crossing of Cheques, Endorsement, Automated Teller Machine (ATM), No-frills Savings

Account.

1.13 CHECK YOUR PROGRESS

1. Savings accounts contain some restrictions regarding .. :
(a) Number of withdrawals per quarter
(b) Mount of withdrawals per transaction in ATM
(c) Number of deposits into the account per quarter
(d) Both (a) and (b) above
2. Overdraft is allowed generally by banks in .. :
(a) Savings Accounts
(b) Term deposit accounts
(c) Current accounts
(d) Recurring deposit accounts
3. A banks Fixed Deposits is characterized by :
(a) Interest rate as agreed with the customer at the time of the deposit
(b) Fixed period of the deposit
(c) Periodical Payment of interest
(d) All the above
4. Fixed deposits cannot be :
(a) Renewed for a further period on maturity date
(b) Transferred to third parties
(c) Pre-paid before the maturity date
(d) Cannot be pledged to the bank as security
5. A Recurring Deposit account requires the customer to :
(a) Deposit any amount at specified intervals for a specified period

(b) Deposit a fixed amount at will for a specified period

(c) Deposit a fixed amount at specified intervals for any period
(d) Deposit a fixed amount at specified intervals for a specified period
6. Principal functions of banks are :
(a) accepting deposits
(b) lending and investing
(c) non-fund business and remittance services
(d) All of above
7. Demand Deposits are those which can be withdrawn :
(a) On Request
(b) On Sanction by Manager
(c) On Demand
(d) On persuasion
8. Current account deposits are not entitled to .. :
(a) Cheque book above 100 leaves
(b) Monthly Statements
(c) Cash Payments
(d) Interest
9. In saving account deposits, interest is paid on . balance in the account
between 10th to last day of month.
(a) Maximum
(b) Average
(c) Minimum
(d) Last Balance at the end of month

1.14 ANSWERS TO CHECK YOUR PROGRESS

1. (d) 2. (c) 3. (d) 4. (b) 5. (d) 6. (d) 7. (c) 8. (d) 9. (c)

BANKER CUSTOMER RELATIONSHIPS

2.1 OBJECTIVE
The objective of this unit is to familiarise the reader with

Banker-customer relationship
Obligation and rights of bankers
Obligation of bankers about secrecy and exceptions thereto
Legal aspects of banker customer relationship
Practical aspects of courtesy among bankers

2.2 INTRODUCTION
Generally speaking, anyone conducting a banking transaction with a bank is the banks
customer. A customer could be an individual, a group, a firm, a company, a trust, an
institution or a government/semi-government/local self-government organization. If a person
does not have a transaction with a bank, he/she cannot claim to be its customer.

2.3 DIFFERENT TYPES OF BANKER-CUSTOMER RELATIONSHIP

Banker - customer relationship arises from the services rendered by banks to its customers.
The relationship varies depending on the services rendered by banks to their customers.
These relations are always mentioned from the point of view of the bank. That means, the
first mentioned party is always the Bank.
(a) Debtor-Creditor (Bank is the Debtor and Customer, the Creditor)
When a customer deposits money by opening an account with the bank, the customer
becomes a lender and the bank becomes borrower. As such, the relationship is that of a
Debtor and Creditor.
(b) Creditor - Debtor (Bank is a Creditor and Customer Debtor)
When the bank lends money to a customer, the customer is the borrower and the bank is the
lender. The relationship, therefore, is that of a Creditor and Debtor.
(c) Bailee Bailor Relationship (Bank is bailee Customer is bailor)
When a customer deposits certain valuables such as bonds, securities or other documents
with the bank for safe custody, the bank performs the role of a bailee and the customer is the
bailor.
(d) Agent-Principal Relationship (Bank is Agent and Customer is Principal)
Some of the ancillary services rendered by the bank are remittances, collection of cheques,
bills, etc., on behalf of the customers. It could also undertake to pay regularly, based on the

instructions of the customer, electricity bills, telephone bill, insurance premium, club fees,
etc. in all such cases, the bank acts as an agent, the principal being the customer.
(e) Lessor and Lessee (Bank is Lessor and Customer is a Lessee)
When a bank provides safe deposit lockers to the customers who hire them on lease basis for
storing their valuables, the relationship is that of lessor and lessee.
(f) Trustee and Beneficiary (Bank is Trustee and Customer, Beneficiary)
When a trust is created appointing the bank as a trustee, the relationship is that of a trustee
and a beneficiary

2.4 BANKS OBLIGATION TO MAINTAIN SECRECY OF ACCOUNTS

When a person opens an account in bank, he/she s entitled to a definite assurance that
information regarding the account remains a matter of knowledge only between the banker
and the account holder. Thus, one of the principal duties of the banker is to maintain
complete secrecy of the status of the customers account. This obligation of the Bank to
maintain secrecy continues even after the customers account is closed. If the bank makes an
unwarranted disclosure of the status of account of his customer to any other person, even a
close relative, it is liable to compensate the customer. However, the banks obligation of
keeping the secrecy of the status of the customers account is subjective and not absolute.
There are certain circumstances in which the banker is entitled or required to make
disclosures about a customers account. Let us understand the conditions under which a
banker is justified in making disclosure.
Disclosures permitted by Law
(i) Under law : A Bank is justified to disclose any information about the customers account
when it is statutorily required to do so under (a) Income-tax Act, 1961 (Section 131 &
Section 133(6)) (b) Companies Act, 1956 (Section 235 and Section 237, (c) Bankers Book
Evidence Act, 1891 (section 4), (d) Reserve Bank of India Act, 1937 (Section 26), (f)
Foreign Exchange Management Act, 1999 (Section 11) (g) Gift Tax Act, 1958 (Section 36).
(ii) Under express or implied consent of the customer : When an account is opened with the
bank, there is an implied contract between the customer and the Bank that the latter will not
disclose information relating to his account without the customers consent. If, however, a
customer permits, this information can be disclosed. For example, the customer may permit
giving information about his/her account to a prospective guarantor or a customer dealing
with him in his business. It is necessary to obtain the customers consent before disclosing
the information. The consent can be expressed or implied.

(iii) Common courtesy among bankers : As per the practices/usages in the banking business,
it is customary to share information about customers among the bankers whenever a bank
makes inquiries with another bank, on matters such as proposed sureties or acceptors of bills
of exchange etc. An implied consent of the customer is presumed to exist for this. However,
such information is kept confidential at both the ends and adequate precautions taken while
furnishing such information.
(iv) Disclosure in the banks interest : A bank can disclose information when it is essential to
protect its own interest, legally. For instance, if there is any dispute between the customer
and a banker, regarding balance standing in the account of the customer of if there is a loan
in default, then the bank will be justified in revealing the information to the guarantor or to a
solicitor for initiating legal proceedings in the court of law.
The sharing of information between a bank and business correspondent/facilitator will fall
under this head. It is necessary that the information shared with BC/BF/agent is exclusive
and not to put to other users.
(v) Disclosure in Public/National interest : Banker may be required to make disclosure in the
interest of the nation and public at large. Public interest may be reckoned only according to
the prevailing circumstances.

2.5 PRECAUTIONS TO BE ADOPTED WHILE DISCLOSING INFORMATION

A banker should exercise due caution while disclosing the financial status or any other
information of this customers. Undue or irrelevant information may make bank liable for
compensation. Besides that, due to use of such information by the third party, Bank may
suffer loss. It is, therefore, necessary for a banker to note the following points:
1. Only facts should be revealed : Only such facts as are evident from the customers account
to be revealed. In other words, the disclosure should not be based on hearsay or rumours.
2. It should be a statement in general : The banker should give the information about the
customers financial position in general form. Terms commonly used and understood in the
banking industry like ordinary, fair, good, excellent, satisfactory, unsatisfactory,
in the ordinary course of business, etc., maybe used for describing the means, credit
standing of a customer
3. Secrecy should be maintained by the recipient also : The banker should clearly state while
giving the information that the recipient should maintain absolute secrecy of information
furnished.

4. Disclosure of secrecy : It is the practice among bankers to state while sharing information
about customers with other bankers that the information is being furnished in strictest
confidence and that the banker giving the information is not responsible and liable for the
information so given, further making it explicit that the recipient should also treat it as
confidential.
5. Information should not be given to persons out of context and without proper justification :
If any person not directly concerned with a banks customer solicits information on his
account, the request from such a person is out of context and hence the banker should not
make disclosure.

2.6 FURNISHING OF OPINION : IMPORTANT ASPECTS

One of the important duties of a bank is to submit an opinion report on its customer if asked
for by a fellow banker. A banker is also required to obtain such report from the other bankers
before processing application for credit facilities if the customer has been banking with them
earlier. The bank invariably obtains opinion reports before sanctioning credit facilities to a
new customer who was hitherto dealing with other banks. While obtaining guarantees from a
third party, not known to the bank or while sanctioning bills purchase/discount/book debts
facility, etc. banks invariably call for opinion report from other banks/agencies. The bank
should consider the following aspects at the time of furnishing of the opinion reports.
1. An implied authority of customer is available to the bank to disclose information to the
other bank.
2. The information may be sought by the other bank as the customer would be undertaking
some liability, direct or contingent, like request for credit facilities, or would be accepting
bills, or would be a guarantor, etc. As such, the report should be based on factual records. No
special efforts should be made to obtain more information about the customer. Banker should
make the report on the basis of available information.
3. No personal opinion of the bank official should be given. Bank should not volunteer
information which is not asked for.
4. The opinion should be given in general terms only. The bank should not
misguide/misrepresent to the other bank. While indication the net worth of the customer, it is
customary not to give it in figures but to couch it in certain conventional terms used in the
bank.
5. While furnishing opinion reports, the bank should stipulate that the report is submitted
without any risk or responsibility on the part of the bank and its officers and should also
indicate that all information so furnished should be treated as confidential.

6. If the bank furnishing such report had any bad experience about the customer in the past,
the report should invariably convey the signal to the fellow banker about the bad feature of
the account.

2.7 LET US SUM UP

1. Relationship between the Bank and the Customer
(a) In a deposit account, the relationship is that of debtor and creditor (Bank-debtor,
Customer-creditor).
(b) In case of loan account/advance, the bank is the creditor and the customer, the debtor.
(c) In the case of deposit of safe custody of valuables, the bank is the bailee and the
customer is the bailor.
(d) In the case of remittance, foreign exchange business and collection of bills/cheque, the
relationship is that of Agent (Bank) Principal (Customer).
(e) In the case of safe deposit locker, the bank is the lessor and the customer is lessee.
(f) Bank also functions as Executor and Trustee for and on behalf of the beneficiary
customer, in the case of trust accounts where the bank is so appointed.
2. Obligations/rights
Banker-customer relationship creates:
1. Certain obligations on the part of banks
2. Certain rights available to banks

3. One of the important duties of a bank is to submit an opinion report on its customer if
asked for by fellow banker. A banker should however exercise precaution while discosing
the financial status or any other information on his customers, as undue or irrelevant
information may make him liable.

2.8 KEY WORDS

Debtor, Creditor, Bailor, Bailee, Agent, Principal, Trustee, Beneficiary, Secrecy, Opinion,
Opinion Report. Bankers Book of Evidence.

2.9 CHECK YOUR PROGRESS

1. The term Customer has been defined in :

(a) Negotiable Instruments Act
(b) RBI Act
(c) Banking Regulation Act
(d) Not defined
2. When a banker allows overdraft to his customer, the relationship between his customer
and him is that of
(a) Bailor and Bailee
(b) Lessor and lessee
(c) Debtor and Creditor
(d) Creditor and Debtor
3. When a customer takes a locker in the bank, what is relationship between the bank and the
Customer?
(a) Lessor and lessee
(b) Principal and Agent
(c) Trustee-Beneficiary
(d) none of the above
4. When does the Banker-customer relationship stand terminated?
(a) On the death of the customer
(b) On customer becoming lunatic
(c) On customer being declared insolvent
(d) On closure of the account
5. In deposit accounts, the main relationship between bank and customer is :

(a) Creditor-bank, debtor-customer

(b) Debtor-bank, creditor-customer
(c) Agent-principal
(d) only a and b
6. Bailor-bailee relationship is applicable in :
(a) Cash deposited with cashier by customer
(b) Safe deposit locker
(c) Demand draft issued by bank
(d) Keeping articles in safe custody with bank
7. What relationship is created when the bank collects a cheque in clearing?
(a) Clearing member and principal
(b) Agent and Principal
(c) Collecting bank and holder
(d) None of the above
8. When any FDR is lost by a customer of a bank, what document is executed :
(a) Guarantee bond
(b) Government bond
(c) Promissory bond
(d) Indemnity bond

2.10 ANSWERS TO CHECK YOUR PROGRESS

1. (d) 2. (d) 3. (a) 4. (d) 5. (b) 6. (d) 7. (d) 8. (d)

ANTI-MONEY LAUNDERING AND KNOW YOUR CUSTOMER

3.1 OBJECTIVES
After reading this chapter, the reader would understand

Meaning of money laundering and its implications

Measures taken by Government of India to prevent money laundering
Banks role in anti money laundering measures
Different requirements for complying with KYC norms for different customers

3.2 INTRODUCTION
Money laundering is an undesirable process wherein the origin of funds generated by illegal
means (blood diamonds, terrorism, drug trafficking, illegal arms trade, corruption, extortion
etc.) is concealed. The purpose of money laundering is to route the moneys so generated
through the banking systems of various countries and transferred to various entities such that
moneys can be invested in legitimate activities. By routing the same through the banking
system, it becomes clean/white (gets laundered). The issue of generation of illegal money
and routing the same into legal channels is not new but it used to be mostly confined to the
economies where it is generated. However, of late, this has become a grave danger to the
humanity because of usage of this channel by terrorists to fund terrorist activities. Improved
IT usage in banking transactions where a face to face contact with customer is missing, has
also made it difficult to detect money laundering. Thus, the money laundering activity has
become a menace not only to the economies of the world but also to the security and peace of
humanity.

3.3 STEPS TAKEN BY THE GOVERNMENT OF INDIA

Money laundering needs to be curbed. As a member of the international financial system, our
country is also serious about and committed to curbing this. Moreover, international
investment flows do not happen in those countries, which have not implemented the enacted,
in the year 2002, Prevention of Money Laundering Act. According to this, any person who
either directly or indirectly attempts to indulge in or knowingly assists or unknowingly is
party or is actually involved in any process it as untainted property shall be guilty of offence
of money laundering.
The objectives of Prevention of Money Laundering Act is to
Enable banks to know and understand the customers and their financial dealings
better which in turn would help the bank to manage risks prudently.
Put in place appropriate controls for detection and reporting of suspicious activities in
accordance with acceptable laws and laid down procedures.
Comply with applicable laws and regulatory guidelines.

 Take necessary steps to ensure that the bank staff is adequately trained in the above
required procedures.

3.4 MONEY LAUNDERING STAGES AND TYPES

The process of money laundering can be said to take place in three phases as under :
Placement : it means physical disposal of proceeds of criminal activity.
Layering : it means separation of illicit proceeds from their source by creating complex
layers of financial transactions thereby avoiding audit trail and providing anonymity to the
source of funds
Integration : this is the final phase in which such moneys are invested in legitimate economic
activity as normal funds.

3.5 ROLE OF BANKS

As per proverb prevention is better than cure, banks are required to initiate steps to prevent
the money laundering at the first stage itself which means do not accept funds the sources of
which are not satisfactorily explained. This can be done only if banks know the financial
details of the customer. Banks have been always insisting on introduction of the customer,
while opening his account. In this process a new person is identified to the Bank by an
existing customer. Thus the identity of prospective customer is established. But, mere
introduction will not enable the bank to avoid undesirable accounts. For this, they have to
adopt much stricter norms of customer identification. These norms are called KNOW YOUR
CUSTOMER (KYC) guidelines. Under this, banks are required to know the actual identity of
the customer, his financial background and the likely volume of transactions in the account
before accepting him as a customer such that transactions can be monitored to verify that the
Bank a/c is not used for illegal transactions. KYC procedure is important both for deposit and
loan transactions.

3.6 KEY ELEMENTS

There are four key elements of KYC guidelines, which are as under :
Customer acceptance policy
Customer identification procedures

 Monitoring of transactions
Risk management
While banks are not to inconvenience the customers in general, they are required to divide
the customers in to various risk categories and specify criteria for each group for accepting
them as customers.
Customer identification should be generally from reliable independent source documents
instead of third person identification. The list of acceptable documents as proof of identity is
:
1.
2.
3.
4.
5.

Passport
Permanent account number (PAN)
Voter identity card
Driving License
Identity card issued by the employer, if acceptable to the bank

While the above are acceptable as proof of identity, the same may not serve the purpose of
residential proof and for this purpose, the latest telephone bill or electricity bill or statement
of a bank account is accepted.
While the above is to be applied as the general rule, in cases of people with low income, an
acceptable third party introduction is accepted provided the total credit into the account in a
year is not expected to exceed Rs. 1 lac. In the case of firms, companies and other
organizations, the KYC norms are required to be applied to the individuals who deal with the
Bank.
Banks are required to monitor the transactions in new accounts at least for a period of six
months and report any suspicious transactions to the designated authority who is Govt. of
India. Even in the case of other accounts, banks are required to monitor the transactions. If
there is any suspicion about any account being used for money laundering activity, the same
should be reported to the Government of India through proper channel without at the same
time alerting the customer. In any case, cash transactions of over Rs. 10 lacs are required to
be reported to the RBI on a fortnightly basis.

3.7 LET US SUM UP

Money laundering is an undesirable process wherein the origin of funds generated by illegal
means is concealed only to be retrieved later through the banking systems of various
countries and transferred to various entities such that moneys can be invested in legitimate

activities. The Government of India has legislated, in the year 2002, Prevention of Money
Laundering Act with a view to curb this menace. Under this, banks are required to know the
actual identity of the customer, his financial background and the likely volume of
transactions in the account before accepting him as a customer such that transactions can be
monitored. The RBI has advised banks in 2002 that the KYC guidelines are strictly followed
both for deposit and loan transactions. Accordingly, Customer identification should be
generally from reliable independent source documents instead of third person identification.
The list of acceptable documents as proof of identity and address is also stipulated. Banks are
also required to monitor the transactions in new accounts and report any suspicious
transactions to the designated authority. If there is any suspicion about any account being
used for money laundering activity, the same should be reported to the Government of India
through proper channel without at the same time alerting the customer.

3.8 KEY WORDS

Anti Money Laundering(AML), Know Your Customer, placement, layering, integration, risk
management.

3.9 CHECK YOUR PROGRESS

1. Money Laundering refers to
(a) Conversion of assets into cash
(b) Conversion of Money which is illegally obtained
(c) Conversion of cash in to gold
(d) Conversion of assets into cash
2. One of the important steps in Money Laundering is
(a) Placement & Layering
(b) Organization & Controlling
(c) Depositing & Withdrawing
(d) Backward & Forward integration
3. Which one of the following is a valid document available to the bank for customer
identification.

(a) Election ID card

(b) Ration card
(c) Photograph
(d) Bank statement of account
4. Objectives of KYC :
(a) to ensure appropriate customer identification
(b) to monitor transactions of suspicious nature
(c) if loan given, it would not be a NPA
(d) only (a) and (b)

3.10 ANSWERS TO CHECK YOUR PROGRESS

1. (b)

2. (a) 3. (a) 4. (d)

PRINCIPLES OF LENDING & PRIORITY SECTOR FINANCE IN BANKS

4.1 OBJECTIVES
After reading this unit, the candidate should be able to know :

1. The cardinal principles or basics of lending by banks to customers.

2. Analyze the changes in the lending principles with the changing times and
developments in the society.
3. The concept of Priority Sector Lending, the RBI guidelines on Priority Sector
Lending and the latest developments in this field.
4. The various aspects of agriculture finance through banking sector.

4.2 INTRODUCTION
The main source of funds for a banker for lending or investments is deposits from the public,
which are repayable whenever demanded by the depositors. So, the banker while lending
should fellow sound principles of lending and should assess the quantum of finance to be lent
on the basis of accepted norms. To ensure safety and liquidity of funds, banks have been
mandated to keep a portion of the deposits (demand and time deposits) in the form of Cash
(Cash Reserve Ratio) and securities (Statutory Liquidity Ratio). The remaining money is
used by the banks in making loans and advances and other investments. Banks also borrow
funds from other sources. In their lending function, all commercial banks are mandated to
achieve the target of priority sector lending at forty percent of the aggregate bank advances.
Sub targets are also specified for lending to agriculture, SME and the weaker sections within
the priority sector. The credit needs of a farmer are met through broad categories of
advances. Viz., direct finance and indirect finance. Based on the period of credit, direct
finance is classified as shout term loans and medium/long term loans. Banks extend shout
term loans for the purposes of crop cultivation etc., whereas the medium term loans are
extended for multi purposes like land reclamation, land levelling, minor irrigation, dairying,
poultry keeping, fisheries etc. you will read more about this in the subsequent paragraphs.

4.3 PRINCIPLES OF LENDING

4.3-1 Cardinal Principles of Lending:
The business of lending is not without certain inherent risks, especially when the lending
banks depend largely on borrowed funds. The cardinal principles of lending are therefore as
follows:
1.
2.
3.
4.
5.

Safety
Liquidity
Profitability
Productive Purposes
Diversification of Risks

6. Security
1. Safety
Safety of funds is the most important principle of good lending. When a banker lends certain
monies, he has to ensure that the advance is safe and that the money lent will comeback.
While banks are no doubt traders in money; the money lent does not belong to them but to
the public i.e., the depositors. The banker is a custodian of public funds and lends money
which has been entrusted to the banks care by the depositor which is to be repaid in
accordance with the tenure of the deposit. The repayment of loans depends upon the
borrowers (i) capacity to pay, (ii) willingness to pay, (iii) income generation. The banker
must, therefore, take utmost care in ensuring that the business for which a loan is sought is a
sound one and the borrower is capable of running it successfully. Safety is also ensured by
taking collateral securities for the loans. Collateral is security such as land and building,
which in the event of non-payment of dues by the borrower can be sold for recovering the
dues.
2. Liquidity
It is to be seen that money lent is not going to be locked up for a long time. The money
should return to the bank as per the repayment schedule. Banks are intermediaries for shout
term funds as seventy percent of the deposits collected are payable within a year so the funds
advances should be, to a large extent for working capital and term loans of not above three
years.
3. Profitability
A fair return on investment is essential in the case of lending by banks. Banks are
commercial organisations and profit earning is the motto of banks to pay adequate dividend
to the shareholders. An interest margin (spread), between lending and borrowing, of three to
four percent is essential to meet the administrative expenses and leave some profit for reserve
and distribution purposes. While looking at profitability, it is prudent for a banker to look at
profitability against the totality oif business undertaken on behalf of a customer by the bank
instead of applying the test of profitability against each component of business or service
offered. Possibly, a banker may not be earning a desirable return in a service undertaken for a
customer while, he may be more than compensated, in respect of another service or business
undertaken for the same customer. It is, therefore, advisable to have a customer profitability
analysis (CPA) done when the banker is engaged in more than one service or business for a
customer. Such an analysis will be very helpful to the banker in pricing the product whether
it is in lending or offering a service to a customer. Thus, there is a direct relationship between
profit and pricing of credit or service offered by a banker.
4. Productive Purposes

Loans for non productive purposes cannot be granted. Although the earnings on non
productive business may be higher, even then bank cannot resort to non productive loans
being contrary to the National interests.
5. Diversification of Risks
By diversification of risk it is meant that the banker should not grant advances to only a few
borrowers or few activities undertaken in an area. The advances may be diversified in a good
number of customers and purposes. Diversification will help avoid concentration of advances
in the hands of few people, or purposes or a limited geographical area.
6. Security
The security offered against the loans may consist of a large variety of items. It may be a
piece of land, building, gold ornaments, insurance policies etc. there may be cases where
there is no security except the personal promise. The banker is aware that the security is only
a cushion to fall back upon in case of need and its adequacy and/or availability of security
(collateral) alone should not form the sole consideration for judging the suitability of loan.
The security, if accepted, must be adequate and readily marketable, easy to handle and free
from encumbrances.
4.3-2 Types of Loans and advances:
Working capital and term loans:
The type of loan that a borrower needs will depend upon the need of the borrower namely
whether the funds are required for meeting the day to day expenses or for investment in plant
and machinery etc. the loan for meeting day to day business/trading/manufacturing activities
is known as Working Capital Finance. These loans take the form of Cash Credit or
Overdrafts. The investment loans are granted is term loans.
The major difference between term loans and working capital finance lies in the purpose of
the finance, the type of assets created out of it and the form in which the advance is made by
the bank. The other differences are:
(i) Term loans are utilized for establishing, expanding or modernizing a farming and service
enterprise by acquisition of fixed assets, while the working capital finance is utilized for
cultivation and operation purposes resulting in the creation of current assets for production
and the sale of final produces or finished goods.
(ii) Term loans are usually of medium or long term duration and are repayable in quarterly or
half yearly instalments over an agreed period of time. As against this, the working capital
finance is generally availed for crop cultivation in a farming enterprise or in cash credit

(hypothecation) accounts in a production or service enterprise, with frequent drawings and

repayments within the time period fixed and is repayable on demand.
(iii) Term Loans are secured by Mortgage or Hypothecation of plant and machinery etc.
whereas working capital loans are secured by hypothecation of raw material/standing crop
etc.
4.4 CREDIT APPRAISAL
A banker has to ensure that the money lent is repaid or recovered and interest is paid
regularly by the borrower. Whether this will happen or not depends upon the cash flows of
the borrower, appropriateness of the terms of credit, adequacy of collateral etc. the process of
evaluating whether or not the credit would be used properly and whether it will be repaid in
time etc., before giving the loan is known as credit appraisal. In the credit appraisal process,
the banker makes an attempt to find the answer to few questions. Some of the questions
could be (i) whether the farmer or other entrepreneur requires funds (ii) what is the volume
of funds required (iii) what are income levels of the borrower before and after the credit
disbursal (iv) will the venture/activity generate enough surplus to pay the interest, (v)
whether the cash flows will be sufficient and timely for repayment and (vi) what are the
chances that the loan will become an NPA?
Assessment of credit requirements and appraisal of repayment capacity call for information
about the venture or business, its underlying and financial information of the proponent. It is
often seen that collection of financial information for small and medium enterprises working
in small scale is often difficult, because of lack of data relating to operations of the unit. RBI
has therefore suggested that lending banks may not insist on the submission of audited
financial statements up to credit requirements of Rs.25 Lac from the prospective borrowers.
Banks, as a matter of policy and based on RBI guidelines, assess the working capital
requirements including those of village industries, tiny medium and small enterprises (both
manufacturing and service enterprises) based on their sales turn over. As regards Retail loans
and Agriculture loans, banks adopt standardized methods of assessment based on the
experience in lending to the sector over the last forty years.
4.5 PRIORITY SECTOR LENDING
India has large number of people living below the poverty line. There are equaly large
number of people who have no access to funds to take up ventures or economic activity.
Therefore, India has adopted the concept of Priority Sector Lending wherein certain lending
norms are relaxed such that the access to credit by technologists, poor and small business
people is increased. All commercial banks are mandated to achieve the target of priority
sector lending at forty percent of the aggregate bank advances. Sub-targets are also specified
for lending to agriculture to agriculture and the weaker sections within the priority sector.

4.5-1 Categories of priority sector:

(i) Agriculture (direct and Indirect Finance): Direct finance to agriculture (which means that
loans are made available to farmers and agricultural labourers and for people having allied
activities) would include; short, medium and long term loans given for agriculture and allied
activities (dairy, fishery, piggery, poultry, beekeeping, etc.). these loans are made directly to
individual farmers, self-help groups (SHGs) or joint liability groups (JLGs) of individual
farmers and to others (such as corporates, partnership firms and institutions) up to certain
limits, for taking up agriculture and allied activities. Indirect finance to agriculture include
loans given to companies/persons such as electricity companies for making available rural
electrification, fertilizer companies for enhancing availability of fertilizers in rural areas etc.
in other words, these loans help in agriculture though loans are not made to the farmers.
(ii) Small Enterprises (Direct and Indirect Finance): Direct finance to small enterprises
includes all loans given to micro and small (manufacturing) enterprises engaged in the
manufacture/production, processing or preservation of goods, and micro and small (service)
enterprises engaged in providing or rendering of services, and whose investment in plant and
machinery and equipment (original cost excluding land and building and such items) does
not exceed Rs.5 Crore and Rs.2 Crore respectively for micro (tiny) enterprises. The micro
and small (service) enterprises shall include small road and water transport operators, small
business professional and self-employed persons, and all other service enterprises. Indirect
finance to small enterprises shall include finance to any person providing inputs to or
marketing the output of artisans, village and cottage industries, handlooms and to
cooperatives of producers in this sector.
(iii) Retail Trade : Includes retail traders/private retail traders dealing in essential
commodities (fair price shops), and consumer cooperative stores.
(iv) Micro Credit : Provision of credit and other financial services and products of very small
amounts not exceeding Rs. 50,000 per borrower either directly or through a SHG/JLG
mechanism or to NBFC/MFI for on-lending up to Rs.50,000 per borrower, will constitute
micro credit.
(v) Education Loans: Education loans, include loans and advances granted to individuals for
educational purposes up to Rs.10 Lacs for studies in India and Rs.20 Lacs for studies abroad.
Loans issued to institutions are not treated as educational loans.
(vi) Housing loans: Loans up to Rs.20 Lacs to individuals for purchase/construction of a
dwelling unit per family, (excluding loans granted by banks to their own employees) and
loans given for repairs to the damaged dwelling units of families up to Rs.1 Lac in rural and
semi urban areas and up to Rs.2 Lacs in urban and metropolitan areas.
4.5-2 Targets/sub-targets:

The scheduled commercial banks are expected to enlarge credit to the priority sector and
ensure that priority sector advances constitute forty percent of the net bank credit and that a
substantial portion is directed to the weaker sections. Within the overall main lending target
of forty percent of net bank credit, banks may ensure that eighteen percent of net bank credit
goes to agricultural sector, ten percent of net bank credit is given to the weaker sections and
one percent of previous years total advances is given under the differential rate of interest
(DRI) scheme.
The targets and sub-targets set under priority sector lending for domestic and foreign banks
operation in India are furnished below:
Total Priority Sector advances
For domestic Commercial Banks: Forty percent of adjusted net bank credit (ANBC) or credit
equivalent amount of off balance sheet exposure, whichever is higher.
For Foreign Banks: Thirty two percent of ANBC or credit equivalent amount of off balance
sheet exposure, whichever is higher.
Export Banks: Thirty two percent of ANBC or credit equivalent amount of off balance sheet
exposure, whichever is higher.
Export credit: Export credit is not a part of priority sector for domestic commercial banks.
For foreign banks, twelve percent of ANBC or credit equivalent amount of off balance sheet
exposure, whichever is higher.
For domestic commercial banks
Total agricultural advances: Eighteen percent of ANBC or credit equivalent amount of off
balance sheet exposure, whichever is higher. Of this, indirect lending in excess of 4.5% of
ANBC or credit equivalent amount of off balance sheet exposure, whichever is higher, will
not be reckoned for computing performance under the eighteen percent target. However, all
agricultural advances under the categories direct and indirect will be reckoned in
computing of performance under the overall priority sector target of forty percent of ANBC
or credit equivalent amount of off balance sheet exposure, whichever is higher. (No target for
foreign banks)
Small Enterprise advances: Advances to small enterprises sector are taken in consideration
for computing performance under the overall priority sector target of forty percent of ANBC
or credit equivalent amount of off balance sheet exposure, whichever is higher. For foreign
banks it is 10% of ANBC or credit equivalent amount of off balance sheet exposure,
whichever is higher.
Micro enterprises within Small Enterprises sector

I. Forty percent of total advances to small enterprises sector should go to micro

(manufacturing) enterprises having investment in plant and machinery up to Rs.5 lacs and
micro (service) enterprises having investment in equipment up to Rs.2 lacs;
II. Twenty percent of total advances to small enterprises sector should go to micro
(manufacturing) enterprises with investment in plant and machinery above Rs.5 lacs and up
to Rs.25 lacs, and micro (service) enterprises with investment in equipment above Rs.2 lacs
and up to Rs.10 lacs. (Thus, sixty percent of the small enterprises advances should go to the
micro enterprises). The target for foreign banks is the same as that for domestic banks.
Advances to weaker sections: Ten percent of ANBC or credit equivalent amount of off
balance sheet exposure, whichever is higher. No target for foreign banks.
4.5-3 Differential Rate of Interest Scheme:
Target for financing under DRI scheme is one percent of total advances outstanding, as on
the end of the previous year. It should be ensured that not less than forty percent of the total
advances granted under DRI scheme go to scheduled caste/scheduled tribes. At least twothirds of DRI advances should be granted through rural and semi-urban branches.
4.5-4 Weaker Sections:
The weaker sections under priority sector include the following:
(a) Small and marginal farmers with land holding of 5 acres and less, and landless labourers,
tenant farmers and share croppers;
(b)Artisans, village and cottage industries where individual credit limits do not exceed
Rs.50,000
(c) Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY);
(d) Scheduled castes and scheduled tribes;
(e) Beneficiaries of DRI scheme;
(f) Beneficiaries under Swarnajayanti Shahari Rozgar Yojana (SJSRY);
(g) Beneficiaries under the scheme for liberation and rehabilitation of scavengers (SLRS);
(h) Advances to self-help Groups;
(i) Loans to the distressed poor, to prepay their debt to informal sector, against appropriate
collateral or group security.
4.5-5 Recent developments in priority sector lending:

During the budget speech 2006-07, Honourable Finance Minister has announced the
Governments decision to ensure that the farmers receive shout term credit at a rate of
interest of seven percent with an upper limit of Rs.3 lacs on the principal amount.
The salient features of the guidelines are:
The Government will provide interest subvention of two percent p.a. to the banks in
respect of shout term production credit up to Rs.3 lacs provides to farmers.
The amount of subvention will be calculated on the amount of the crop loan disbursed
from the date of disbursement/withdrawal up to the date of payment or up to the date
beyond which the outstanding loan becomes overdue. This subvention will be
available to banks on the condition that they make available short term credit at the
ground level at seven percent per annum.
With the significant changes in the economic environment and the thrust given by
Government of India for doubling of agriculture credit in the tenth five year plan, it is
important to increase the farmers participation in the existing extension system. The RBI has
advised banks to form farmers advisory committees in all rural branches. This committee
will play a vital role in the rural development and it will not only strengthen the extension
system, but will also make it more reliable and transparent by proper planning and resource
allocation. A branch advisory committee comprising of select elected representatives,
including women leaders of local Panchayat Raj institutions, within the service area of the
branch is established at every rural branch. It should meet at least once every quarter. These
meetings are made mandatory and are to be attended by the official from the controlling
office of the bank.

4.6 AGRICULTURAL FINANCE

The credit needs of a farmer are met through broad categories of advances viz., direct finance
and indirect finance. Based on the period of credit, direct finance is classified as shout term
loans and medium/long term loans.
4.6-1 Short-term loans:
Loans repayable up to 18 months are termed as shout term loans. This includes: crop loan
and the limits sanctioned through Kisan Credit Cards scheme for raising crops, loan against
gold ornaments for agricultural purposes.
4.6-2 Medium/long-term loans:
The period of credit under this category is more than thirty six months. This includes loan for
the purpose of minor irrigation, farm/land development, farm mechanization, plantation and

horticulture, allied activities such as dairy farming, sheep/goat raring, piggery and rabbit
farming, poultry farming, fisheries, sericulture, bee-keeping, mushroom cultivation, biogas
plants, etc. Indirect finance includes credit for financing distribution of fertilizers, pesticides,
loans granted to Electricity Boards for energizing of pump sets under Rural Electrification
Corporation (REC) Scheme, finance for construction and running storage facilities in the
producing areas, loans to individuals, institutions or organizations who undertake spraying
operations, advances to State Corporations for onward lending to weaker section etc.
Certain important features of agricultural loans are given below:
4.6-3 Crop loan:
The purpose of the crop loan is to facilitate the agriculturists to carry on seasonal operations,
i.e., to meet the expenses for raising of seasonal crops including the cost of seeds, fertilizers
and pesticides, irrigation charges; labour charges, etc. Agriculturists, tenant farmers and
share croppers who actually cultivate the lands are eligible for these loans. All categories of
farmers-small/marginal (SF/MF) and others are eligible for loans. The amount of loan for the
farmer is worked out based on the cost of cultivation. Generally full amount of cost of
cultivation or about 40% of the produce value is financed. Banks estimate the loan required
by using the scale of finance developed by district level technical committees taking into
account various inputs that are needed for crop cultivation in that area. The crop loans don
not have a direct margin but it is expected that the labour and other inputs are met by the
farmers.
Crop loan for one crop could be extended by way of a demand loan repayable as and when
the crop is harvested and sold. As such the normal period of loan may not exceed one year.
Sugar cane crop loans are for 18 months in view of the longer gestation period.
4.6-4 Kisan credit card:
A demand loan for crop is often inadequate as the farmer has repayment commitments which
coincides with expenses on account of new crop. Also some farmers have two crops a year
and some three depending on the irrigation availability. Therefore, banks started sanctioning
a limit based on calculating peak finance required based on crops cultivated using scale of
finance and acreage under each crop. Farmers were allowed to operate the account based on
the fund requirement within the limit sanctioned. An improvement of this cash credit system
is the Kisan credit card scheme.
Purpose: Kisan credit cards are issued to farmers to meet their cultivation needs including
purchase of inputs and other shout term requirements together with working capital
requirements for allied activities in a flexible and cost effective manner. Apart from a loan
for cultivation purposes, certain non-farm activities and consumption loan of a certain
percentage of limit is also given for other/household expenses.

Eligibility: Owner cultivators or those engaged in allied activities are eligible for Kisan credit
cards. Farmers cultivating authorized leased lands are also eligible.
Credit Limits. Limit is fixed based on the crops proposed to be raised and the area to be
cultivated. The credit extended under the Kisan credit card scheme is in the nature of a
revolving cash credit and provides for any number of withdrawals and repayments within the
limits. Certain percentage of increase, say ten percent in the limit is allowed every year, to
take care of increase in scale of finance.
Period: Normally, the Kisan credit card is valid for a period of three years subject to annual
review. There is no prescribed repayment in the account. However every farmer is expected
to show some turnover each season and each debit should be repaid within 12 months time.
Issuance of cards: Beneficiaries under the scheme are issued a credit card and passbook, the
borrowers would be required to produce this over the counter for operation the account.
Majority of cards are not plastic cards. However of late banks have started allowing KCCs to
be used in ATMs and also in some merchant establishments.
Documents: Farmers are required to submit land records only once in three years. The
security for the KCC could be hypothecation of standing crop and/or mortgage of land
depending on individual banks policy on collaterals.
4.6-5 Agricultural term loans:
Purpose: agricultural term loans are provided for the purchase of assets (farm machinery,
bullocks, sheep, etc.) creation of assets (orchard development, poultry, dairy development,
etc.) connected with rural activities under agriculture, horticulture, plantation, sericulture,
animal husbandry, fisheries, etc., where the loan amount is repayable over a period of time
exceeding three years.
Eligibility: All categories of farmers and agricultural labourers are eligible for term loans.
Documents: For activities like purchase of bullocks etc., there is no need for any supportive
documents. For larger amounts of loan, an estimate/quotation/project report will be called
for. For land based related requirements, land records are to be produces.
4.6-6 Land development:
Purpose: Credit for land development projects, in the form of finance to cultivators is given
for better productivity. Loans under this head cover various activities like land clearance
(removal of bushes, trees, etc.), land levelling and shaping, bench terracing for hilly areas,
contour stone walls, staggered contour trenches, disposal drains, reclamation of
saline/alkaline soils and fencing, etc.
Eligibility: All farmers owning agricultural land are eligible.

Documents to be submitted: The borrower has to produce a repor on the estimated cost,
supported by estimates of an engineer.
4.6-7 Minor Irrigation:
Purpose: Credit for the creation of irrigation facilities from underground/surface water
sources are covered under minor irrigation scheme. All structures and equipment connected
with the proposed facility are also finances. Loans also cover various activities like digging
of new wells (open/bore wells), deepening of existing wells (traditional/bore), energizing of
wells (oil engine/electrical pump set), laying of pipe lines, installing drip/sprinkler irrigation
system and lift irrigation system.
Eligibility: All those farmers who are having known source of water, which is usable for
irrigation purposes.
Documents to be submitted: An estimate for the civil works to be undertaken and quotations
for the assets to be purchased are required. Land records to ascertain the title to the property,
a Geologist certificate and a feasibility certificate from the electricity board, where relevant.
4.6-8 Farm mechanization:
Purpose: Credit for the purchase of farm equipments and machinery for agricultural
operations. The scheme covers activities ranging from purchase of tractors and accessories,
trailers, power tillers, combine harvesters, power sprayers, dusters, threshers etc.
Eligibility: Farmers owning a minimum of eight acres of perennially irrigated lands are
eligible for a loan for tractor. The minimum acreage could be relaxed if some custom hire is
possible. Eligibility for purchase of other farm equipments is dependent on the income
generated by the agricultural activity undertaken by the borrower.
Documents to be submitted: Quotation for the assets to be purchased has to be submitted.
Land records to ascertain cultivation rights/title to the property are also required.
4.6-9 Finance to horticulture:
Purpose: Loans for development of fruit orchards like mango, chikoo, guava, grapes,
pomegranate, apple, litchee, etc., as well as shout-term fruit crops (banana, pineapple, etc.),
flowers in open and green houses (roses, carnation, chrysanthemums, jasmine, etc.) and
vegetable crops (potato, tomato, brinjal, gourds, peas, etc.) are financed.
Eligibility: All farmers having cultivable lands.
Documents to be submitted: For orchard development, the borrower has to submit the
following:

Water and soil test report

A feasibility certificate from the local horticulture department
Land records
Quotation/estimates for the costs to be incurred
If the project is large then a project report

4.6-10 Land purchase:

Purpose: Loan to small and marginal farmers/landless labourers for purchase of agricultural
land.
Eligibility: Small/marginal farmers, tenants, sharecroppers subject to land holding criteria.
Security: Land purchased with the bank finance will be mortgaged as security. No other
security will be insisted upon.
Repayment: In respect of term loans, normally repayment of loan will be half yearly/yearly
instalments depending on the harvest of the crops, its marketing and liquidity created by the
agricultural activity undertaken over a period of ten years. Adequate gestation period is
allowed for activities such as creation of minor irrigation structure, development of land etc.

4.7 LET US SUM UP

Analyzing the principles of lending with reference to the changing times and developments
in the society and reinventing them is an important function of a banker. The cardinal
principles of lending applicable to financing to all sectors of the economy, be it corporate
lending, commercial finance or for agriculture and other priority sectors remain unchanged.
In this chapter, an overview of these cardinal principles was seen. We have also studied the
concept of working capital finance and the differences between working capital and term
loans in this chapter. The projected turnover method for assessment of working capital limits
up to Rs.5 crore was also studied.
This chapter has given an idea of the various purposes for which banks are granting advances
and how these are essential for development of our economy keeping in view, our large
population, rural base of the economy, the resources available and now the competition
emerging from the liberalization of the economy. We have also discussed the other priority
sectors and their relevance to the overall economic development. Various features like
targets and sub-targets assigned to both domestic and foreign banks each sector and subsector are also discussed, when the revised definition of micro (tiny), small, and medium
enterprises, both under manufacturing and services sector, was seen.

The credit needs of a farmer are met through broad categories of agricultural advances viz.,
direct finance and indirect finance. Based on the period of credit, direct finance is classified
as short term loans and medium/long term loans. Direct finance to agriculture is provided to
farmers for short term purposes like cultivation of crops or for other medium/long term
purposes like, among others, land development or for augmenting water resources. A novel
offering by banks to farmers for meeting their cultivation needs and other non-farm
requirements, including consumption needs in timely manner and without any procedural
delay by banks is Kisan Credit Cards. With these cards, farmers can draw amounts from
banks whenever needed by them and up to a pre-fixed limit or purchase needed inputs from
suppliers as per their convenience. Finance is also provided by banks for undertaking allied
activities like dairy development, poultry farming, bee-keeping, sericulture, piggeries,
pisciculture, sheep/goat rearing, etc, indirect finance to agriculture includes credit for
distribution of fertilizers and other inputs used by farmers in agricultural operations. Finance
areas and advances to State Electricity house facilities in the producing areas and advances to
State Electricity Boards for energizing wells in villages and to State corporations for onward
lending to weaker sections also come under this category.

4.8 KEY WORDS

Working Capital Limit, Term Loan, Credit Appraisal, Cash Budget, Fund Flow, Cash Flow
Statement, Priority Sector, Small farmers, Marginal farmers, NABARD, Margin, Weaker
sections, Agriculture, Horticulture, Kisan Credit Cards, Farm Mechanization, Direct Finance,
Indirect Finance, Crop Loan, Minor Irrigation, Drip Irrigation, Sprinkler Irrigation,
Sericulture, Pisciculture, Dairy Development, Plantation Crops

4.9 CHECH YOUR PROGRESS

1. Cardinal principles of lending are
(a) Safety and liquidity
(b) Profitability and diversifications of risks
(c) Productive purpose and security
(d) All of (a) to (c)
2.Liquidity with a banker means
(a) Cash on Hand

(b) Cash and Bank balances

(c) Short term current assets to convert into cash
(d) All of the above
3. Customer profitability analysis means
(a) Exercise done by bank before lending to a customer
(b) Exercise before opening a new branch
(c) Assess the profitability of customers business
(d) Only (a) and (c)
4. Banker can reduce risk in lending to a borrower
(a) By obtaining adequate security
(b) By ensuring that there will be no problem of liquidity with borrower
(c) By ensuring that there will be no default on account of lack of liquidity and lack of
willingness to pay on the part of the borrower.
(d) By doing due-diligence under KYC guidelines
5. In bankers parlance, credit risk in lending refers to:
(a) Default of repayment by a borrower
(b) Default of bankers in maintaining SLR
(c) Default of a banker to release credit to a borrower
(d) Change in value of foreign currency
6. Working capital means
(a) Requirements for the day-to-day transactions
(b) Excess of current assets over current liabilities
(c) Fixed assets current assets
(d) Current assets current liabilities
7. Term loans mean Loans
(a) Payable after one year to ten years

(b) Repayments are done in instalments

(c) Term loans are utilized for acquisition of fixed assets
(d) All of the above
8. Working capital needs are estimated by
(a) Operating cycle method
(b) Projected turnover method
(c) Cash budget method
(d) Any of above
9. Housing Loans granted to individuals up to Rs. . For construction
of houses (Excluding loans granted by banks to their employees) are treated as priority sector
advances.
(a) five lakh
(b) ten lakh
(c) twenty lakh
(d) fifteen lakh
10. Educational loans should include only loans and advances granted to individuals for
educational purposes up to Rs. for studies in India, to be classified
as priority sector.
(a) Seven and half lakh
(b) ten lakh
(c) fifteen lakh
(d) twenty lakh

11. The scheduled commercial banks are expected to enlarge credit to the priority sector and
ensure that priority sector advances constitute
(a) eighteen percent of net bank credit
(b) forty percent of net bank credit

(c) twelve percent of net bank credit

(d) twenty five percent of net bank credit
12. Kisan Cards are issued to farmers to enable them to
(a) withdraw money from ATM in rural branches
(b) purchase farm equipments
(c) purchase agricultural implements on credit from dealers
(d) meet their cultivation needs and non-farm requirements, including purchase of inputs and
other short term requirements and working capital requirements for allied activities
13. Under farm mechanization scheme, loan is given for
(a) Providing irrigation facilities
(b) Cultivation expenses
(c) Purchase of farm equipments
(d) For digging wells
14. The export finance made by .. is reckoned as priority sector advance.
(a) Domestic scheduled commercial banks.
(b) Co-operative banks
(c) Foreign Banks
(d) Old generation commercial banks
15. The Export Credit target for foreign banks in India is . Of ANBC.
(a) 40%
(b) 32%
(c) 12%
(d) 10%

4.10 ANSWERS TO CHECK YOUR PROGRESS

1. (d) 2. (d) 3. (c) 4. (c) 5. (a) 6. (a) 7. (d) 8. (d) 9. (c) 10. (b)

11. (b) 12. (d) 13. (c) 14. (c) 15. (c)

RETAIL LOANS
5.1 OBJECTIVES
At the end of the chapter, the candidate would be able to learn the features of
Housing loans

Vehicle loans
Loans for purchase of consumer durables
Personal loans
Overdrafts
Credit card loans

The candidates would also familiarize themselves with the present scenario of the retail
lending sector and its fast growing over dues.

5.2 INTRODUCTION
Retail banking refers to the business of commercial banks with individual customers, both in
liabilities (deposits and borrowings) and assets (loans and advances). Fixed, current/savings
accounts on the liabilities side; and loans (e.g., personal, housing, auto, and educational) on
the assets side, are their more important of the products offered by banks. Related ancillary
service include credit cards, remittances, selling of mutual fund and insurance products and
depository services. Todays retail banking sector is characterized by three basic aspects:
Multiple products (deposits, credit cards, insurance, investments and securities);
Multiple channels of distribution (outsourcing, call center, branch internet and kiosk);
and
Multiple customer groups (consumer, small business, and corporate).
5.3 RETAIL LOANS PRESENT SCENARIO
There has been a sharp growth of retail loans-both in the number and amount especially in
the last five years. The main reasons/features of such growth are:
Fast growing population of the middle income class, coupled with fast rising income
levels of middle and higher classes, in the country. These population groups mainly
comprise of salaried employees, self-employed professionals, traders and
businessmen and entrepreneurs forming SMEs (Small and Medium Enterprises).
Other demographic factors which are conducive for growth of retail loans is the
workers migration to cities/metros and increasing number of entrepreneurs, selfemployed professionals, and women workers.
The number of loans for vehicles (bikes and cars), houses, consumer durables and
other consumption needs has increased significantly across the country due to reasons
such as poor public transport system and the fast growing middle class population.
Aggressive marketing of credit cards by banks and card companies. The issuers of
credit cards are mostly subsidiaries of banks, finance companies and business

companies and they issue credit cards and also give loans for repayment of the dues
on liberal terms due the increased competition on this fields.
The typical products offered in the Indian retail-banking segment are housing loans, loans for
purchase of consumer durables, auto loans, credit cards and educational loans. These loans
are marketed under attractive brand names to differentiate the products offered by different
banks and loan values of retail lending typically range between Rs.20,000 and Rs.100 Lacs.
The loans are generally issued with a repayment period of five to seven years with housing
loans having a longer duration of say 15-20 years.

5.4 SEGMENTS AND TARGET GROUPS

The Retail Loans mainly comprise the following sub-segments and their target customer
groups are:
Home loans to salaried and self-employed professionals. Home loans account for
about half of total retail loans.
Auto loans (car and two wheelers) to salaried and self-employed professionals. This
sub-segments accounts for about one third of total retail loans.
Loans/advances against shares to high net worth individuals (HNIs), businessmen and
traders.
Personal loans to salaried, self-employed professionals and traders/businessmen.
These loans, for consumption needs and unsecured (i.e. without tangible security), are
granted on the basis of income flows or net worth of the individual borrowers.
Credit card receivables from salaried, self-employed professionals and
traders/businessmen.
In this Unit, we will briefly describe the salient features of important retail credit products
viz. housing loan, vehicle loans, loans for purchase of consumer durables, personal
(consumption) loans, overdrafts, loans through credit cards.

5.5 HOUSING LOANS

Loans sanctioned by the banks and housing finance companies for purchase of plot of land
and for construction of house, residential flat and for renovation of existing house etc. are
classified as housing finance/loans. Housing is a basic need of every family as a majority of
the Indian population does not own houses. Companies also need funds to buy housing
colonies for allotment of houses to their employees. In this back ground, there has been good
demand for housing loans. Housing/Home loans account for almost a half of the retail

lending portfolio of banks. The amount of loans issued by the banks and outstanding there
against has been increasing very rapidly during this decade.
In the recent years, there has been a steep rise in the salary package in the services sector,
thanks to the upswing in the economy in general and the IT sector in particular. This coupled
with the availability of a suitable and efficient IT infrastructure to handle home loan
appraisals by banks on the basis of a score card and outsourcing possibilities enhancing the
banks capability to service a large number of borrowers and their accounts has been the
reason for rapid growth of home loan portfolio. Opening of the securitization window has
also led to the increased appetite of banks for increased lending to the retail sector as the
loans could be quickly packaged and sold to other investors.
The scope for growth in housing loans is enormous. The salient features of a home loan
account are as follows:
Purpose: Purchase/construction/up-gradation/extension of house.
Amount of Loan: Will cover the cost of land and construction of house thereon.
Alternatively, the cost of the flat and interior decoration.
Type of Borrower: Single or Joint or Corporate.
Period of Loan/Term: Medium (3-5 years) to very long term (15-20 years), depending
on the cash flows and the age of the borrower. If in service, the remainder period of
the service will be considered.
Interest Rate: Fixed/floating rate. Currently, home loans are issued at the lowest
interest rate among all retail products.
Security: First Mortgage (Equitable or Registered) of the land/house or other
immovable property (being purchased/constructed or already built) by the borrower in
favour of the bank.
Registration: The mortgage charge is registered with Registrar of Assurances in the
case of a registered mortgage.
Guarantee: Taken in cases where margin is low or net worth of the borrowers is
inadequate.
Documents: Promissory Note, Term Loan Agreement and a suitable undertaking from
the borrower for prompt payment of instalments. Letter of Guarantee, wherever
applicable.
Repayment is generally in the form of EMI (equated monthly instalments) for the
period of loan. EMI includes both interest and principal. EMI is fixed on the basis of
borrowers cash flow which is examined at the time of sanction of loan. In respect of
flats where the construction takes time, banks may stipulate that the borrower has to
pay the periodical interest till the house construction is completed and possession
obtained.

 Step up Repayment: At times the borrower may not have adequate income level for
the likely EMI. In these cases, some banks offer lower EMI in initial years and higher
EMI in later years, when the cash inflows are expected to increase. This is known as a
step up loan.

5.6 VEHICLE LOANS

Auto loan [for LMVs (passenger cars), two wheelers] accounts for a third of the total retail
lending portfolio of banks. The amount of loan outstanding for vehicle loans is next only to
housing sector. This portfolio has also grown very fast in the recent years. The demand for
car and two wheeler loans come from professionals and self-employed persons. Due to the
inadequacy of public transport system, demand for loans for auto-rickshaws and car-taxis is
also increasing in most cities. However, such loans are not included in retail loans.
Purpose: Purchase of vehicles (2-4 wheelers) for own use
Period/Term of Loan: 3-7 years generally, depending on the estimated income/cash
flows and nature/cost of vehicle, e.g. for old cars the term may be lower (2years)
Interest Rate: Generally floating rate; the rate is higher than the rate in housing loan
Security: Hypothecation of the vehicle purchased in favour of the bank
Registration: Hypothecation charge is registered with the Road Transport
Commissioners office
Guarantee: Surety or personal guarantees is stipulated in the case of loan for taxis
Repayments: EMI.

5.7 LOANS FOR PURCHASE OF CONSUMER DURABLES

Loans granted by banks (term loans) and finance companies (usually hire purchase finance)which are the subsidiaries of companies manufacturing white goods for purchase of
refrigerators, washing machines, TVs, music system, micro wave/electric ovens, other
kitchen equipments, etc. are classified in this category. Generally, the loans are for the
periods of less than 5 years. These loans attract a higher rate of interest than home loans.
In the case of hire purchase finance, the title to the goods passes on to the purchaser only on
payment of the last instalment. In the case of term loans, it vests in the purchaser from the
date of purchase and therefore the goods are hypothecated in favour of the lender. An
agreement of Hypothecation is executed by the borrower, in addition to such other
documents considered necessary.
In case of default of instalments, the hire purchase transaction gives the right of repossession to the vendor as the title is stil with the vendor. As against this in the case of loan

which is supported by a hypothecation agreement, there is a need for the lender bank to
follow the due process of law before taking possession of the goods. It should be added that
even HP vendor has to comply with certain legal formalities, such as issue of notice about
intention to re-possess etc.
Purpose: Purchase of white goods
Repayment term: 18-48 months, depending on the cost/nature of the product and
income/cash flows of the borrower
Repayment: By EMI
Interest Rate: Floating. The rate is higher than home/vehicle loans
Security: Hypothecation of the assets purchased
Guarantee: Generally not required, unless income/cash flow of the borrower is not
adequate.

5.8 CONSUMPTION (PERSONAL) LOANS

THESE LOANS ARE FOR PURPOSES WHICH ARE NOT SPECIFIC ABOUT END
USE. Generally, the purpose does not include purchase of goods/property as is the case with
other retail loans. Being a clean loan without any tangible security, they are granted to
individuals/businessmen with good net worth.
Purpose: Travel, marriage or other function/event requiring large expensed or for
treatment of illness in the family
Period of Loan: Generally not exceeding 36 months.
Repayment: EMI or as agreed up on.
Interest Rate: Floating rate. The rate is higher than other tangible security in cases
where the net worth or income/cash flows in not adequate.
Guarantee: Required, if net worth/cash flows are not adequate and tangible security is
not available.
Consumption loans are normally granted to people in high income bracket among the
salaried, self-employed professionals, and businessmen, though banks are financing the rural
people to overcome their financing problems arising out of crop failure etc.

5.9 OVERDRAFTS
Overdrafts are granted in the Current accounts, whereby a customer can overdraw (i.e. in
excess of the credit balance) up to a sanctioned limit as per his/her cash requirements. It is a
running account and interest is charged only on the debit balances, generally on daily product

basis. The interest rate is highest in this retail loans segment. This gives flexibility to the
borrower regarding when to utilize the funds and when to repay.
Purpose: Omnibus or general purpose, for meeting contingencies and ad hoc cash
requirement
Term: Payable on demand
Interest; Floating rate. Highest rate in Retail Loan Segment.
Security: Generally unsecured. But liquid (movable) security (e.g. fixed deposit
receipts, bonds/certificates issued by RBI/FLLs/Post offices) is asked for in cased of
large amount and/or in the case of long term loans
Guarantee: Generally not required if the above security requirements are met
Other: Documentation is very easy and less time consuming for existing account
holders

5.10 CREDIT CARD DUES

Several banks issue both debit cards and credit cards directly or through their
subsidiaries/affiliates. Both these cards allow cash-less purchased of goods and services,
which are convenient and safe. These are the prime reasons for their increasing usage in
cities and metros. While credit card allows certain free credit period, in the case of debit
cards, the card holders account is debited instantaneously with the amount of purchase
transactions.
In addition to the initial free credit period between the bill date and due date for payment, the
credit card companies also them to roll over the credit and make payments in instalments. In
this case, the card issuing banks charge interest from the date on which the purchase
transaction is made by the card holder till the date he finally makes full payment of his card
dues. In the recent years, credit card over-dues have substantially increased. Since the
debtors are in large numbers and are located far and wide, the collection work is out-sourced
by many card issuers.
Free credit period: Up to 45-60 days from purchase date (depending on the billing
cycle)
Statement date: Statement date (monthly is fixed. It shows particulars of all purchased
made via the credit card during the previous month, payments made and the balance
payable
Payment due date: Fixed date of payment each month
Over dues: Payments not made within the due date of payment
Interest Rate: 20-24% p.a. or even more on the overdue amount, plus service tax

 Loan offers: some credit card companies offer unsecured loan to the card holders for
repaying the credit card dues, to be repaid as EMIs or stipulated interest rate
(generally higher than clean overdraft rate, but lower than credit card rate). The
advantage of such a loan is that it converts the credit card dues into a short term loan
repayable in instalments. As such, there will not be over-dues so long as the long
instalments are paid in time.

5.11 OVERDUES IN RETAIL LOANS

Due to the fast growth in the number of accounts, increase in the volume/amount of total
retail loans and increase in those accounts which are classified as Non-Performing Assets
(i.e. principal and/or interest in default for more than 90 days) or those which are likely to be
NPAs, several banks have started outsourcing debt collection function, instead of managing
internally by their own staff. The obvious reason for this emerging trend seems to be that the
banks have issued retail loans to those who are not maintaining deposit accounts with them,
the assets are widely dispersed and the experienced bank staff can be deployed more
productively and efficiently in other functional areas like marketing, sanction, review and
monitoring of loans. The large number of retail assets and the fact that they are widely
dispersed encourage use of outsourced agencies by banks in the collection/recovery function.

5.12 LET US SUM UP

Retail Banking is defined as doing banking business with individual customers. With
liberalization in the early nineties, the Indian economy started growing fast. Helped by the
huge inflow of foreign investments into India, the liquidity in the banking system has
improved. On the other hand, liberalization has led to increased incomes and purchasing
power with people accompanied by aspiration for a better life style. As on off-shoot, the
retail lending in banks has, of late, grown leaps and bounds. Todays retail banking sector is
characterized by three basic aspects viz: multiple products, multiple channels and multiple
customer groups.
Of retail loans extended by banks, home loans and consumer loans form a major percentage.
With the growth in employment and the per-capita income and savings, the demand for
housing has also gone up. Related ancillary services include credit cards, remittances, selling
of mutual fund and insurance products and depository services.
A hassle-free approach to buying a house for a salaried employee is to take a home loan from
banks or housing finance companies. The related procedures for raising a home loan and the
practices the banks follow while sanctioning such loans are explained in this Unit. Following

the home loans, the demand for consumer loans is increasing also corresponding to the
increase in the living standards of the people. So is the case with personal loans and the
demand for credit cards. The details of the personal and consumer loans are also provided in
this Unit.

5.13 KEY WORDS

Fixed rate and Floating rate of interest, EMI, Security, Documents, Hire purchase, due date,
term loan, consumption loan, credit card. Non-Performing Asset, Debt Collection Agent

5.14 CHECK YOUR PROGRESS

1. A Housing loan is granted against the security of:
(a) Pledge of the house finances
(b) Hypothecation of the house finances
(c) Mortgage of the house financed
(d) Lien on the house finances
2. The term EMI in a housing or vehicle loan is calculated on the basis of:
(a) Principal of the loan
(b) Principal and Interest on the loan
(c) Interest on the loan
(d) Either (b) or (c)
3. Housing loans are granted for:
(a) Short term
(b) Medium term
(c) Long term
(d) Either (b) or (c)
4. A vehicle loan is granted against the security of:
(a) Pledge of the vehicle finances

(b) Hypothecation of the vehicle finances

(c) Mortgage of the vehicle borrower
(d) Hypothecation of all assets of the borrower
5. A loan for a refrigerator is granted against the security of:
(a) Pledge of the item financed
(b) Hypothecation of the item finances
(c) Mortgage of the item finances
(d) Mortgage of all assets of the borrower
6. Retail Loans include:
(a) Home Loans, Auto Loans, Corporate Loans
(b) Home Loans, Auto Loans, Bridge Loans
(c) Home Loans, Auto Loans, personal Loans
7. Retail Loans are generally of:
(a) Large amounts
(b) Medium amounts
(c) Small amounts
(d) Medium and small amounts
8. Retail Loans are generally granted to:
(a) Professionals, Individuals, Companies
(b) A person to whom some money is owed
(c) Individuals, Institutions, Companies
(d) Professions, Salaried Employees, Corporations
9. Which one constitutes the largest percentage of retail loans in India?
(a) Auto Loans
(b) Home Loans

(c) Personal Loans

(d) Overdrafts to individuals
10. The term debtor means:
(a) A persons who owes some money
(b) A person to whom some money is owed
(c) Lender
(d) Depositor with the bank
11. The amount of loan in retail lending normally ranges between
(a) Rs.20,000 to Rs.100 Lacs
(b) Rs.100 Lacs to Rs.10 crores.
(c) More than Rs.10 crores
(d) None of the above
12. The retail loans given by commercial banks are generally for a duration of
..
(a) Five to seven years with housing loans granted for a longer duration
(b) Less than five years only
(c) Less than one year only
(d) None of the above

5.15 ANSWERS TO CHECK YOUR PROGRESS

1. (c) 2. (b) 3. (d) 4. (b) 5. (b) 6. (d) 7. (d) 8. (d) 9. (b) 10. (a) 11. (a) 12 (a).

CREDIT CARDS
6.1 OBJECTIVES
After going through this chapter the reader would be able to understand the various types of
cards that are available in the Indian market and features of cards.

6.2 INTRODUCTION
Payments for purchases can be made in cash, or by cheques or cards. In respect of cash there
is the limitation that bigger payments cannot be made in cash on account of the need to carry
bulk. Cheques are not often accepted as the credit standing of the person issuing cheques is
not apparent. In such circumstances credit cards come in handy and are used in making
payments for day to day purchases and expenses.
Now-a-days, plastic money in the form of credit cards has become a preferred mode of
payments and has wide acceptance among public, with the increasing use of the credit cards,
the financial system is moving more towards cashless transactions.
In the recent years our country has seen rapid growth in the use of cards. However, currently
the use of credit facility under the card has not been high as use of credit cards seems
restricted to small value and mostly personal transactions. The international credit card
giants, viz. Visa international, Master Card international and Amex are already present in
India and banks issue the cards in collaboration with them.

6.3 CARDS
A card is small plastic card of size 8.5 cm by 5.5 cm issued by a bank in association with one
or more of the three card companies. The name if the card holder, card number and the
validity period is embossed on the face of card. Further on every card the name, account
number of the holder, and end of the month up to which the card is valid will also be
encrypted. In addition, the reverse of the card contains a three-digit security-number which is
to be kept in confidence and used as a measure to establish that the user is in possession of
the card while carrying out the transaction. The card issuer should normally get the card
holder to sign on the specimen signature panel in his presence before parting with the credit
card. The limit up to which the card holder can make purchases in a month, known as the
card limit is also informed to the cardholder. A part of this limit is permitted to be used for
withdrawing cash for emergency purposes and service fee for such withdrawals is levied.
Many banks also have credit cards, which double up as ATM cards.
There are different types of credit cards some of which are discussed below:
There are different types of credit cards of which are discussed below:
1.
2.
3.
4.
5.

Charge card
Debit card
Credit card
Smart card or Chip card
Restricted card/Member card

6. ATM CARD
6.3-1 Charge Card:
Charge card is a variety of credit card. In these cards, transactions by the card holder are
accumulated over a period of time generally a month, and the total amount is charged, i.e.
debited to the account of the card holder. The cardholder is given about 25 to 50 days time
to credit his account in case there are insufficient funds in his account at the time of debit.
Since the transactions are only accumulated and charged when the holder is expected to pay
the amount, such cards are called charge cards.
6.3-2 Credit card:
This is the same as a charge card where the transactions are charged to the account with the
total value of transactions debited to the card holders account once in a month. The
difference between the credit and charge card is that in case of charge card, the amount
becomes payable immediately on the debit to the account. In case of credit cards, the
cardholder is sent a bill indication the dues and he/she has the option to pay the entire
amount as soon as the bill is received or choose to pay only certain percentage of the amount
billed in which case the card holder gets credit to extent of remaining among, i.e. he/she can
pay it in monthly instalments later. Whereas no fee is levied if the full amount billed is paid
within a given due date, a service fee is charged on the amount of payment which is deferred.
Whereas charge card would warrant maintaining an account with the concerned bank, the
dues on the credit card can be paid by any cheque. Credit card holder need not maintain an
account with the card issuer bank.
It is expected that the card holder makes the payment of the billed amount within the
stipulated due date or seek instalments as offered by the card company. Generally card
companies will indicate in the bill the minimum amount payable to avail of the instalments.
The bill will also indicate the rate of interest or fee payable if the card holder seeks to pay in
instalments.
Like other loans and advances credit card dues also may be defaulted. Thus Credit Cards
might cause credit risk for the banks. Given that credit card holders could be dispersed in a
large geographical area where the card issuing bank may not have reach and some of
cardholders may not have accounts with the bank the card issuing banks have to select the
Card Clients after through appraisal.
Collection of card dues should also be done carefully and methodically, Banks, credit card
subsidiaries of banks and card companies use call centers and collection/recovery agents in
managing card dues.
There are a number of parties involved in the credit card business. They are

(i) Card Holder: The person on whose name the card has been issued
(ii) Card Issuing Bank: This is the bank which identifies the customer and issues the card.
This bank will raise a bill on the customer as per agreed billing schedule
(iii) Merchant: Is the person who has accepted payment through the credit card for services
rendered or goods sold.
(iv) Merchant Bank or Acquiring Bank: Once the card is swiped in the shop, the merchant
will seek credit from his/her bank. The bank which reimburses the merchant is known as the
merchant bank.
(v) The Merchant Bank will claim the payment from the card issuing bank. This is known as
the collecting bank.
(vi) VISA and Master Card are companies which run the credit card operations and they
capture all deals and settle the dues among the different intermediaries.
6.3-3 Debit Cards:
Debit cards are similar to the credit cards. The only difference in this card is that the amount
of dues from the card holder for each and every transaction is debited to cardholders account
as soon as each transaction is notified to the issuer. If the balance is insufficient to cover the
debit, the difference becomes payable immediately or else a service fee is levied. Id the
amount payable is overdue for a long period, the card may be cancelled. Quite obviously, a
debit card may not be the appropriate card for those who would like to have a credit period.
This has however an advantage in the sense that it replaces the requirement of carrying cash
or cheque book when the transactions are being carried out. As the transactions in the Debit
Card are debited to the account instantaneously they are relatively less risky to banks than
credit cards. However credit cards show a larger volume of business.
6.3-4 Smart Cards:
The Smart Card looks exactly like any other plastic card or an ATM card with an integrated
circuit (IC Chip) installed. The IC contains memory, may contain a processor, and
communicates with the external would through contacts on the surface of the card. The size,
position and utility of the contacts are specified by an international standard (ISO 7816), so
that cards can interact with a variety of equipment.
Some cards have a photo of the holder printed on the card which also serves the purpose of
identification in case of need.
6.3-5 Member Card:

This is used exclusively by members of a club or a chain of hotels. For example, the Taj
Card, is a card issued by the Management of Taj Group of Hotels to be used by patrons of
their hotels. The cards are for use in their hotels only. Similarly, there are many other types
of cards where the usage is exclusive to the members of a group or establishment.
6.3-6 ATM Card:
These are cards issued to the savings account holders for drawing cash from AT Machines
which can be placed in the branch or off site. Some of the debit/credit cards are also used as
ATM cards. The ATMs ensure availability of cash 24 hours and the customer need not visit
the branch for small transactions.

6.4 ADVANTAGES OF A CREDIT CARD

The advantages of credit card system to various concerned are as under:
To the cardholder:
It is convenient for a card holder to carry a credit card in his/her wallet and make
payment towards travel or purchase. It allows the card holder to draw cash too.
It is inculcates a sense of financial discipline in them.
It provides a proof of purchase through banking channels to strengthen the card
holders position in case of disputes with sellers, etc.
It also allows giving spending power to add-on members.
It also extends additional facilities like insurance cover/discount, etc.
To the merchant establishment:
Increase in sales because of increased purchasing power of the cardholder due to
credit available to the cardholder.
Preferred by a cardholder to another who does not accept cards.
Merchant establishments can avoid provision of direct credit to customers.
Systematic accounting since sale receipts are routed through banking channels.
Advertising and promotional support on a national scale.
Development of a prestigious clientele base.
Assured and immediate settlement/payment.
Avoidance of all costs and security problems involved in handling cash.
To banks:
Scope and potential for better profitability out of share earned from the traders
turnover.

 Helps in establishing banking relationship with new customers.

This also provides additional customer service to the existing clients.
Better network spread of cardholders and their increased use means higher popularity
and image for the banks.
Savings of expenses on cash holding/stationery printing and manpower to handle
clearing transactions.

6.5 LET US SUM UP

Apart from being a delivery channel of the banking services, credit cards issued by banks are
also a good source of credit delivery. Due to advancement of technology and easy
accessibility to credit they provide for card users, they have gained popularity and wide
acceptance in the market today. It is, no doubt, a novel way of providing value added
services to bank customers. If used prudently, they offer a bundle of benefits to card users.
To prevent the customers from falling into a debt trap and consequent harassment from the
recovery agents of the card issuers, Reserve Bank of India has come out with a welldocumented policy guidelines called Fair Practices Code for banks. This apart, the
customers rights in relation to card operations are protected. The card issuing banks/NBFCs
are responsible as the principal, for all acts of omission and commission of their
collection/recovery agents. Clear-cut grievance redressal machinery and procedures are also
put in place by banks. There are different types of cards such as credit card, debit card,
charge card etc. With the increasing use of credit cards, the society is moving towards
cashless transactions or plastic money.

6.6 KEY WORDS: Debit card, charge card, credit card, smart card, ATM card.

6.7 CHECK YOUR PROGRESS

1. The difference between the credit and the debit card is:
(a) Your account gets debited immediately on using a credit card
(b) Your account gets debited immediately on using a debit card
(c) Your account does not get debited immediately on using a debit card
(d) None of the above
2. Credit risk to bank is high from the:

(a) credit card holders

(b) debit card holders
(c) both the above
(d) none of the above
3. The bank which pays the merchant for the transactions is called as:
(a) issuer bank
(b) clearance bank
(c) acquiring bank
(d) none of the above
4. Disadvantages to Credit Card holders:
(a) Over Spending ending in Debt Trap
(b) Frauds due to loss or theft of cards
(c) Forged signatures
(d) All of above
5. One of the following statements is not true with respect to credit cards.
(a) The card issuing banks would not be responsible for fulfilment of KYC requirements,
where agents solicit business
(b) While issuing cards, the terms and conditions for issue and usage of a credit card should
be mentioned in clear and simple language.
(c) Card issuers should quote annualized percentage rates (APR) on card products.
(d) The card issuing bank/NBFC should not unilaterally upgrade credit cards and enhance
credit limits. Prior consent of the borrower should invariably be taken whenever there are
any change/s in terms and conditions.

6.8 ANSWERS TO CHECH YOUR PROGRESS

1. (a) 2. (a) 3. (c) 4. (d) 5. (a)

ASSET CLASSIFICATION
7.1 OBJECTIVES
At the end of the chapter, the student would be able to understand

Definition of NPA
Standard assets
Sub-standard assets
Doubtful assets

 Loss assets

7.2 INTRODUCTION
Loans and advances of banks appear on the asset side of the balance sheet and are classified
as assets. It is expected that the banks recover interest on their loans and advances and that
the principal amount comes \bank as stipulated at the time of sanctioning loans. If the
payment of interest is delayed or defaulted and the principal amount or the instalments are
delayed defaulted an account is said to be overdue. If the accounts remain overdue beyond
the stipulated time the accounts are classified as Non-Performing Assets (NPA).
Due to uncertainty (delay or default) of income flows the banks income could be impacted
and volatile. It is therefore important to note that in the case of NPA accounts the banks do
not recognize the income till it is actually received. Also, if the assets are NPA for longer
time there is the possibility that the assets could become irrecoverable or bad. It is therefore
prudent for the banks to provide for loan losses. In this regard Banks are required to classify
their loan assets as per the regulatory guidelines issued by Reserve Bank of India (RBI), into
4 different classes namely Standard assets, Sub-standard assets, Doubtful assets, and Loss
assets. The definition of the terms and treatment of Non-Performing Assets have been
indicated by RBI in its guidelines.

7.3 DIFINITION ON NPA

An asset, including a leased asset, becomes non-performing when it ceases to generate
income for the bank, as per RBI guidelines in force, a non-performing asset (NPA) is a loan
or an advance where:
(i) Interest and/or instalment of principal remains overdue (unpaid) for a period of more than
90 days in respect of a loan,
(ii) The account remains out of order for a period of more than 90 days (the outstanding
balance being in debit or in excess of the limit sanctioned) in respect of an overdraft/cash
credit,
(iii) The bill remains overdue (unpaid) for a period of more than 90 days in case of the bill
purchased and discounted,
(iv) The instalment of principal and/or interest on a loan/cash credit remain overdue for two
crop seasons for short duration crops,

(v) The instalment of principal and/or interest on a loan/cash credit remains overdue for one
crop season for long duration crops.
Banks should classify an account as NPA if the interest charged during any quarter is not
services fully within 90 days from the end of the quarter.
An account/cash credit/overdraft should be treated as out of order if the outstanding
balance remains continuously in excess of the sanctioned limit/drawing power. In cases
where the outstanding balance in the principal operation account is less than the sanctioned
limit/drawing power, but there are no credits continuously for 0 days as on the date of the
balance sheet, or credits are not enough to cover the interest debited during the same period,
these accounts should be treated as out of order.

7.4 ASSET CLASSIFICATION

RBI guidelines stipulate that banks must classify assets or loans into four categories:

Standard Assets
Sub-standard Assets
Doubtful Assets
Loss Assets

An asset is either NPA or non-NPA. Standard Assets are those assets which are not NPAs.
Therefore NPA accounts are grouped under three remaining categories. In other words, NPA
accounts can be further classified into three sub-categories: Sub-standard, Doubtful and Loss
assets.
7.4-1 Standard Assets:
Standard assets are those that service their interest and principal instalments on time. NPAs
are characterized by non-servicing of interest and principal on time, as defined later.
Standard Assets are called performing assets as they yield regular interest to the bank and the
principal amount/instalments is received in time, thus enabling them to earn profits and recycle the repayments for further loaning.
The following three NPA categories of debtors will, however, be characterized by
delay/avoidance/resistance in payment of the overdue amount, due to their financial
difficulty or unwillingness to pay or similar other reasons.

7.5 SUB-STANDARD ASSETS

As per existing guidelines, a sub-standard asset would be one, which has remained NPA for a
period up to 12 months. To illustrate, if EMIs of a loan remain unpaid for a period of over
90 days but less than 12 months, the account will be treated as a sub-standard asset.
The collection of sub-standard assets will become progressively difficult. For example if the
default period is 91 days, it may be less difficult to collect the overdue amount as compared
to a regular amount will increase due to 6 months EMI in default (as compared to 3 months
earlier) and also additional interest on the overdue amount added up.

7.6 DOUBTFUL ASSETS

An asset would be classified as doubtful if it has remained in the sub-standard category for a
period of 12 months.
Doubtful assets are cause for concern as it is worsening of sub-standard asset as they have
remained unpaid for at least 12 months since they were classified as sub-standard asset. It
would be more difficult to collect the overdue amount in doubtful assets, as the overdue
amount relates to additional 12 months(or more) along with additional interest.
In these cases it is evident that the financial/liquidity position of the debtor has obviously
deteriorated as reflected in the debtors continued inability to pay the overdue amount despite
lapse of 12 months from the time his account was classified as sub-standard asset. Such
assets are rightly called doubtful, since their recovery seems improbable on the basis of the
currently known facts, condition and values of the security for the loan.

7.7 LOSS ASSETS

A loss asset is one where loss has been identified by the bank or internal or external auditors,
or the RBI inspection, but the amount has not been written off wholly.
Loss assets are considered uncollectable. They are of such little value that their continuance
as bankable assets is not warranted. However, there may be some salvage value in the long
term, in some cases.
We may conclude the Asset Classification by stating that the probability of repayment of
loans in four categories will generally be:
High in Standard assets,
Good or fair in Sub-standard assets,
Doubtful or Questionable in Doubtful assets, and

 Improbable or negligible

7.8 LET US SUM UP

In this unit, we learnt what are non-performing assets, when a loan account is classified as
NPA and the applicable norms for classification of non-performing assets into sub-standard,
doubtful and loss assets. An asset becomes a non-performing asset when it ceases to generate
income for the bank. The policy of income recognition is based on the record of recovery.
Non-performing assets are classified into three categories based on the period for which they
remained in non-performing category.

7.9 KEY WORDS:

Dues, past dues, NPAs, sub-standard asset, loss asset, doubtful asset, standard asset, Income
recognition.

7.10 CHECK YOUR PROGRESS

1. Loans and advances of banks appear in their balance sheets on the side of:
(a) Liabilities
(b) Assets
(c) Income
(d) Expenses

2. A loan advance of a bank is defined as Non-Performing Asset (NPA) when it remains

overdue or out of order for a period of:
(a) 90 days
(b) Less than 90 days
(c) More than 90 days
(d) More than 180 days

3. A loan or advance of a bank is defined as Doubtful when it has remained in Sub-standard

category for a period of at least:
(a) 6 months
(b) 12 months
(c) 3 months
(d) 18 Months
4. A Standard Asset of a bank is defined as an asset which is:
(a) Not a Non-Performing Asset (NPA)
(b) A Doubtful Asset
(c) A Loss Asset
(d) None of the above
5. When will loan be NPA?
(a) Interest and/or loan instalments overdue for more than 90 days
(b) A/c is out of order for more than 90 days in case of overdraft/cash credit
(c) Bill remains overdue for more than 90 days in BP/BD
(d) All of the above
6. Charging of interest at monthly rests would/would not change over dues under NPA.
(a) Would make overdue of 90 days from monthly interest debiting
(b) Would make overdue 90 days from previous quarter ending
(c) Both of above
(d) None of above
7. Sub-standard asset is one which has remained NPA for a period less than or equal to
(a) 12 months
(b) 6 months
(c) 90 days
(d) 180 days

7.11 ANSWERS TO CHECK YOUR PROGRESS

1. (b) 2. (c) 3. (b) 4. (a) 5. (d) 6. (b) 7. (a).

SECURITIES AND MODES OF CHARGING THEM

8.1 OBJECTIVES
By reading unit, the candidates will be able to know
(a) different types of securities generally taken by bankers while lending
(b) the characteristics of these securities, and
(c) get an insight into how do banks create their charges on different securities.

8.2 INTRODUCTION
Banks are financial intermediaries where the resources of the public are mobilized and lent to
various sectors of the economy. The money mobilized from the public by way of deposit is
repayable as and when demanded by the depositors. Therefore, bankers take utmost care to
see that the money lent to various types of borrowers gets back as per the repayment
schedule along with interest. In order to safeguard the advance, bankers normally take
securities which will enable them to recover, in case the borrowers commit default.
Various types of securities could be offered to banks by the borrowers. These could be
classified as immovable security and movable security, etc. Land and building including
agricultural land, plant and machineries embedded to earth, etc., come under the category of
immovable securities/properties whereas finished goods/raw material, agricultural produces
(including standing crops in the field), farm machinery like tractors, power tillers, combine
harvesters, vehicles, agricultural implements, gold ornaments, Life Insurance Policies etc.,
come under the category of movable securities. Accounts receivables, known as book debts,
other trade receivables could also be taken as security. In the case of finished goods and raw
material banks use them for arriving at the limit for cash credit and overdraft accounts. In
these cases banks reduce the value of the security by given margin and fix the drawing limits.
Whatever may be the nature of the securities, the banker, while taking them, has to ensure
that
The securities are saleable, whenever the need arises, in the case of default by
borrowers
The value of the securities is ascertainable at any time from reliable sources, to fix the
drawing limit, saleable value, etc.
The value is not subject to heavy fluctuation; as otherwise banks have to fix a higher
percentage of margin
The title to the securities is easily transferable without, as far as possible, going
through legal formalities.
The securities may be classified into personal and tangible as well as primary and collateral.
Personal security means the personal liability of the borrower or the surety/guarantor. The
banker has a right of action against the borrower, as in the case of Personal Guarantee.
Tangible security is something that can be realized by a sale or transfer e.g., land, goods,
stock, crops etc.
Securities may also be classified as primary security and collateral security. Primary security
is one that is regarded as the main security cover for an advance; generally, assets for
creation of which or against which the advance is made e.g., standing crops in the field, stock

for cash credit, machinery for term loans, etc. Collateral security is the security other than the
primary security lodged with the bank by the borrower or by a third party.

8.3 CREATING A CHARGE ON THE SECURITY

The method of creating charge over a security depends upon the nature of security and the
nature of charge. For example, when a bank gives a loan against the security of gold
ornaments, it takes the possession of the ornaments under pledge, whereas when it advances
against the security of a vehicle or a house property, the bank does not take physical
possession.
8.3-1 Land (including agricultural land) and buildings:
The nature of charge created on immovable properties like land and buildings while taking
them as security to the advance granted by banks is known as mortgage. Immovable
properties are accepted by lending banks both as primary and collateral securities.
Mortgage is transfer of interest in immovable property to secure an advance. Though the
Transfer of Property Act mentions six types of mortgages, banks are seen to prefer Simple
Mortgage and Mortgage by Deposit of Title Deeds. In these two types of mortgages,
possession of the property is not given to the mortgagee (it remains with the borrower or the
surety as the case may be. Simple Mortgage is created by a deed, which is required to be
registered with the Registrar of Assurances. Mortgage by Deposit of Title Deeds also called
equitable mortgage is created by depositing the document of title to property (title deed) by
the mortgagor with the mortgagee at a Govt., notified center. Here, there is no need for a
mortgage deed and also for registration with the registration authorities. The limitation
period for filing a suit for sale of the mortgaged property by the mortgagee is twelve years
from the date the mortgage debt becomes due. Depending up on the rules in the State where
the mortgage is created both these types of mortgage attract stamp duty. It should be ensured
that the stamp duty is accurate in order that the mortgage is without any difficulties.
In the event of the borrowers default in repayment of the advance granted against
immovable property, the lending bank may bring it for sale. However, it can do so only
through adopting appropriate legal process. Normally, banks have to file a suit before the
civil court for recovery, if the amount due in the loan account is less than Rs. Ten lakh and,
before the Debt Recovery Tribunal (DRT), if the amount due is Rs. Ten lakh and above.
However, under the provisions of the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest (SARFAESI) Act, 2002, banks can sell the immovable
property taken under mortgage, without intervention of the court after observing certain
formalities mentioned in the Act. Because of this right of sale without the court intervention,
this type of security has gained importance now and viewed with favour by banks.

8.3-2 Examining the title to the property:

Before an immovable property is accepted as security, the title to the borrower over the said
property should be examined by the banks lawyer to as certain that the person in whose
name the property stands has a good, valid, subsisting and marketable title over the property,
it may also have to be ensured that the property is free from all encumbrances and is not
subject to any litigation or attachment from any Court or Statutory authorities. It is advisable
for the bank to inspect the property offered as security to ensure the correctness of the
particulars given by the proponent/borrower. The banker may also inquiry through
independent sources to satisfy the borrowers ownership of the property.
8.3-3 Documents to be taken from the Mortgager:
(a) All material documents of title, like the sale deed/gift deed/will/partition deed that convey
the title in his/her favour
(b) Parent documents for the prescribed period to ascertain the flow of title. Some banks call
for parent documents for thirty years.
(c) Encumbrance certificate, normally for thirteen years to see, if any encumbrance subsists
on the property. It is advisable to apply for an encumbrance certificate for the property
through the banks advocate so as to avoid possible manipulation
(d) Tax receipts for the property to evidence the possession of the property by the proposed
mortgagor
(e) If the property offered is standing in the name of a minor, permission of the competent
court to encumber the property
(f) Search report, if the immovable property belongs to a company, in order to ascertain any
charge is subsisting on the property
(g) Normally, banks take an opinion from their panel advocate regarding the clear, good and
marketable title of the proposed mortgagor over the property. The advocate should see that
the documents produced are genuine and not fake. The advocates opinion should be clear
and unconditional and should certify that a valid mortgage can be created by the proposed
mortgager over the property.
8.3-4 Valuation of property:
When an advance is allowed against the security of an immovable property, it is necessary to
get it valued by an approved valuer. Valuation must be conservative, realistic and should be
on a forced sale basis. While valuing the property, the following may be taken into
consideration:

(a) Location of land and the consequent location value

(b) Age of the building and its present strength
(c) The nature of its construction
(d) Taxes paid
(e) Extent (Area in acres etc.) of the land and the building area
(f) Cost incurred for building construction
8.3-5 Leasehold properties:
If the land is leasehold, it is necessary to ascertain whether the terms of the lease permit the
borrower to assign or transfer by way of mortgage, the leasehold rights in the land. It must be
ensured that the repayment of loan by the borrower does not extend beyond the period of
lease.

8.4 STANDING CROPS AND OTHER AGRICULTURAL PRODUCES/GOODS

Banks advance loans routinely against the security of the standing crops, agricultural
produces/goods, agricultural inputs like fertilizers, pesticides, etc. The assistance by the bank
may take the shape of loan, key cash credit or open cash credit. In key cash credit cases the
banks use pledge. When the possession of the goods is transferred to banker, the nature of
charge created is a pledge. One of the main and the most essential requirements of a pledge is
the actual or constructive delivery of the goods pledged to the pledgee (in this case the
banker). The term constructive delivery means that there is no need for physical transfer of
good s from the custody of the pledge to the pledgee. An agreement of pledge may be
implied from the nature of transaction or the circumstances of the case.
When the possession of goods is not transferred, the nature of charge created is
hypothecation. Hypothecation differs from mortgage in two respects. Firstly mortgage relates
to immovable property whereas hypothecation relates to movables. Secondly, in a mortgage,
there is transfer of interest in the property to the creditor but in hypothecation there is only
obligation to repay money and no transfer of interest. In the case of pledge and
hypothecation, the title in the goods is not transferred to the bank.
8.4-1 Precautions for advice against goods:
1. No advance should be made for speculation or hoarding purposes.
2. The goods charged to bank should have been fully paid. This is to avoid loss of
charge on the property on account of the rights of the unpaid seller.

3. The age of the stock should be reasonable. Otherwise the stock may not be saleable in
the market.
4. The ownership of the goods should be ensured by verifying the original paid invoices.
5. As the price of goods/raw material pledged may vary from time to time the bank
should stipulate and maintain an appropriate margin at all times.
6. If the borrower has own goods apart from pledged goods then he/she should segregate
the goods while storing in the godown.
7. The goods should be, adequately insured.

8.5 ADVANCES AGAINST LIFE INSURANCE POLICIES

Life insurance policies are acceptable either as a primary or collateral security for an
advance.
8.5-1 Points to be taken into consideration:
Before making an advance against Life Policies the points to be taken into consideration are:
The policy must be in force and the premium paid up to date. The latest premium
receipt must be kept on record by the bank.
The policy should be an original, duly stamped and signed by the issuing authority.
The policy should be free from restrictive/onerous clauses.
The insurance company should have admitted the age of the assured.
Generally, the following life policies are not acceptable as security

Children endowment policy

Policies taken out specifically for purposes like estate duty
Children deferred policy
Policies with nominations under section 6 of the Married Womens Property Act

Banks lend against the life policies based on surrender value. Surrender value is the amount
which the insurance company will pay if the policy is surrendered on any day before
maturity of the policy.
8.5-2 Assignment of the policy:
Assignment is the process in which the life policy is assigned to the lender or bank entitling
the late to claim the surrender value in case of default by the borrower. The assignment
should be obtained by indicating words to that effect. Assignment should be witnessed by a
person. Nominee under the policy need not join in assigning the policy as nomination under
the policy is automatically cancelled in the event of assignment of the policy. The

assignment shall not be operative as against the insurance company until the notice in writing
of assignment is given to the insurance company either by the assignor or by the assignee.
In case of death of the life assured, the assignee becomes entitled to receive the policy
amount. When the advance is repaid, the policy has to be reassigned in favour of the
policyholder.

8.6 LOANS AGAINST TERM DEPOSITS

8.6-1 Nature of facility:
Banks often lend against their term deposits, such as fixed deposits, cumulative deposits,
recurring deposits, etc. The nature of a facility granted against the security of term deposits
may either be a loan or an overdraft. The nature of charge created while granting this type of
facility is a pledge.
8.6-2 Margin and Rate of Interest:
Normally banks lend up to ninety percent of the deposit amount/accrued value of the deposit.
The rate of interest charged on the loan would be one percent or two percent above the
interest rate offered on the deposit.
The borrower can repay the loan out his/her sources on any date before the maturity. If not
paid in full before the maturity of the deposits, only the balance amount over and above the
loan amount and interest due thereon if any will be paid to party. If there is any shortfall in
the maturity proceeds of deposit in meeting the loan repayment commitment, the party has to
pay the same to the bank.
8.6-3 Deposits in the name of minor:
Normally, no loan can be granted against the security of deposit receipt standing in the name
of a minor. However, if the loan is sought by the guardian for the necessities of the minor
depositor, the bank may consider it on getting from the guardian an undertaking letter to the
effect that the proceeds of loan would be utilized only for the necessities of the minor
depositor.
8.6-4 Other aspects:
While granting the facility, banks get the deposit receipt duly discharged by the deposit
holder. In case, of more than one deposit holder, all of them should discharge the deposit
receipt. The depositor/s should also execute necessary loan documents. In case of more than
one depositor, all of them should execute the documents or one of them on the strength of
authorization letter given by the depositors who is/are not executing the loan documents.

Loan given to a sole proprietor against deposits in the name of the proprietary concern is not
treated as a third-party loan, whereas loan granted to a partner against the deposits in the
name of the firm is classified as third-party loan, in the later case interest shall be charged not
at one or two percent over the rate of interest on deposit but at commercial rates
In case of premature closure of deposits, the interest should be 1-2% over the actual reate of
interest applicable for the prematurely closed deposit.
Loan can be granted against deposits receipt of other branches of the same bank. However,
before grant of loan, lien should be noted in the records of the deposit branch.
Where a loan is sought by a company, against its deposits, a Board Resolution authorizing
the company there is no need, in the case of loans against deposit, to register the charge with
the ROC

8.7 LOAN AGAINST GOLD ORNAMENTS

Banks give loans against gold ornaments for agricultural as well as for non-agricultural
purposes. The nature of charge created while giving this type of loan is a pledge. Some banks
allow an overdraft also against the security of gold ornaments.
8.7-1 Important aspects:
1. The amount of loan on ornaments depends upon the market value and purity of the
gold. Normally banks keep a margin of around thirty percent on the market value of
the ornaments.
2. The rate of interest varies with the purpose of the loan.
3. The repayment period depends upon the purpose of the loan. If the loan is for
agricultural purpose, the repayment period normally coincides with the harvest and
marketing of the produce.
4. On closure of the loan, the ornaments should be returned to the pledger or his/her
authorized representative.
5. Even after the closure of a loan, the banker can, by exercising right of general lien
retain the possession of the ornaments, if any other loan is due/overdue loan in the
name of the borrower.
6. In case of a default in repayment of the loan, the bank as pledgee has the right to sell
the ornaments pledged, in an auction or by private sale, only after giving to the
pledger a reasonable notice of intended sale as per section 176 of the Indian Contract
Act; otherwise the bank has to compensate the borrower for the loss suffered. The
expensed incurred by the bank in connection with notice of sale, including cost of
advertisement/notice in the paper if any, shall be recovered from the party.

7. Normally banks appoint appraisers for the purpose of appraising the purity of the gold
ornaments.
8. The loan granted under this category is also subject to NPA norms.

8.8 LET US SUM UP

Bankers take different types of securities for safeguarding their advances. Each type of
security has its own features. The method of creation of a charge on these securities varies
according to the type. This unit explains the basic features of the securities that the banker
resorts to . the charge of pledge and hypothecation applies to movable properties. In the case
of pledge, the possession of the property is transferred and it is not so in the case of
hypothecation. In both these cases, ownership does not change. Among the various
mortgages, the mortgage by deposit of title deeds and simple mortgage are usually taken by
banks. Banks charge on insurance policies is created by way of assignment. Though banks
generally grant loans against its own deposits, no loans are given against minors deposit,
unless the guardian states that the loan is meant for the minors necessities.

8.9 KEY WORDS

Immovable property, Goods, Inspection of goods, Personal Guarantee, Assignment,
Constructive Delivery, Simple Mortgage, Mortgage by Deposit of Title Deed Notified
Center.

8.10 CHECH YOUR PROGRESS

1. The nature of charge created while advancing against LIC policy is
(a) Assignment
(b) Lien
(c) Pledge
(d) Set off
2. Loan against minors term deposit
(a) can be granted if the documents are signed if the minor has completed the age of 14 years
(b) cannot be granted under any circumstances as the minor does not have the contractual
capacity.

(c) can be granted to the guardian of the minor, if it is for the necessities of the minor
(d) can be granted only with the permission of the Court.
3. State True or False:
(a) in the case of assignment of LIC Policy as a security to an advance, the assignment is not
complete unless a notice of assignment is given to the insurance company.
(b) To above notice of assignment may be given either by the assignor or by the assignee.
(c) There is less risk for the bank when hypothecation charge created by a company is
registered with the ROC.
(d) One of the essential requirements of a pledge is the actual or constructive delivery of the
goods pledged by the pledger to the pledgee.
(e) Limitation period for filing suit for sale of an immovable property is thirty years from the
date mortgage debt becomes due.

8.11 ANSWERS TO CHECK YOUR PROGRESS

1. (a) 2. (c) 3. (a) T (b) T (c) T (d) T (e) F

DOCUMENTATION
9.1 OBJECTIVES
After studying this unit, you will be able to know and appreciate the importance of
documentation and the procedure for obtaining proper and error free documents to secure the
advances made by a bank.

9.2 INTRODUCTION
Documentation is one of the vital areas in the credit portfolio of a bank. The purpose of
taking documents is to fix the terms and conditions between the bankers and the borrowers,
to identify the borrowers, to identify the securities, to count the period of limitation, to enable
to resort to legal remedies in case of need and so on. There are certain enactments such as
Indian Contract Act, Partnership Act, Companies Act, Indian Registration Act, Limitation

Act, Indian Stamps Act, etc., which directly impact/affect the bankers loan documentation.
While taking documents for a credit facility, the provisions of these enactments are to be kept
in mind. Non-compliance of any of the provisions of any of these enactments may affect the
validity of documents. For example, of a loan is given to a minor other than for his/her
necessities, the documents executed may not be enforceable in a court of law, as a contract
with a minor is void as per the provisions of the Indian Contract Act.

9.3 DIFFERENT TYPES OF DOCUMENTS

The document taken by a banker for a loan may be
(a) Demand Promissory Notes (DPN)
(b) Agreements
(c) Forms
9.3-1 DEMAND PROMISSORY NOTES:
Where no specification for a fixed period for the repayment of loan is given, the bankers take
the DPN. In DPN, the borrower makes a promise to the banker to repay the loan amount on
demand with agreed rate of interest. The form of DPN should be in conformity with section 4
of the Negotiable Instruments Act, 1881. The form of a DPN varies normally to suit the
situation such as fixed rate of interest, floating rate of interest, single borrower, joint
borrowers, joint and several borrowers etc. DPN attracts a stamp duty as per Indian Stamp
Act. The rate of stamp duty on DPN is uniform throughout India. As per section 35 of the
Indian Stamp act, if a DPN is unstamped or under-stamped, the defect cannot be rectified
even by paying a penalty at a late date. Such a DPN cannot be admissible as evidence in a
court of law. It must be ensured that the DPN is duly filled in and stamped before the
borrower signs it.
9.3-2 Agreements:
The form of an agreement should be in conformity with the Indian Contract Act. The terms
and conditions are set out in the agreement. The amount of loan, rate of interest, rate of penal
interest, percentage of margin, period of repayment, rights of the bankers in case of default of
loan, details of security/securities charged are included in the agreement. The agreements
attract stamp duty as per Indian Stamp Act. The rate of stamp duty on agreements varies
from State to State. Bankers use different forms of agreement such as pledge agreement,
hypothecation agreement, term loan agreement, clean loan agreement, guarantee agreement,
etc. The stamp duty is different for different type of agreements. The agreement duly filed in
and stamped, is checked before the party signs it. Banks take steps to ensure that the

borrower understands the terms of the loan and the covenants of the agreement clearly and
without any doubt so that the parties do not dispute the agreement at a later date.
9.3-3 Forms:
Forms are not in the nature of promise or agreement. These are obtained to specify clearly
the intention of the borrower. For example, when a loan is granted against the security of a
fixed deposit standing in join names, one of the depositors gives an authorization to the other
to raise a loan on the deposit. Such an authorization is taken in a printed form. Similarly,
when a payment is to be made out of loan proceeds to a supplier of goods, a letter from the
borrower authorizing the bank to pay the proceeds by means of draft or bankers cheque, is
taken by means of a form. Yet another example of a form would be a letter from the guardian
of a minor stating that the loan against the minors deposit will be used only for the minors
necessities. This is in view of the fact, that no loan can be granted against a minors deposit,
as the minor has no capacity to contract.
Such forms are used as part of documentation to prove the intention of the borrowers. These
are also called undertakings or authorizations.

9.4 DOCUMENTATION PROCEDURE

For a document to be error free and proper, the steps to be followed are:
9.4-1 Selection of correct set of documents:
Documents to be taken and the process varies depending upon the nature of facility and type
of person. The document prescribed for a cash credit facility may not be used for a term loan
facility. Similarly, a document meant for an individual borrower cannot be used for a
company or partnership borrower. As the bankers have pre-printed forms of documents, it
should be ensured that the correct set of documents, which are relevant for the particular
facility and borrower are used. It is preferable that the documents are in the local vernacular
for better understanding.
9.4-2 Stamping:
The next aspect of documentation is stamping. A document shall be stamped in accordance
with the Indian Stamp Act as amended by the concerned State Governments. Indian Stamp
Act contains provisions regarding time of stamping for instruments executed in India and out
of India. A document executed in India shall be stamped before or at the time of execution.
Section 12 of Indian Stamp Act provides for cancellation of adhesive stamp so that the same
cannot be used again. Any instrument bearing an adhesive stamp which has not been
cancelled so that it cannot be used again, shall be deemed to be unstamped.

9.4-3 Writing or filing the document:

The next aspect of documentation procedure is filling. As bankers are generally using the
pre-printed formats of documents with blanks in appropriate places, it is necessary to fill
these blanks as per the terms of sanction of the credit facility before execution. Once the
document is executed, it becomes a concluded contract and any subsequent filling by bank
without the consent of the executants will invalidate it. The document should be filled and
completed without any alteration, overwriting or cutting. The entire document shall be filled
with same ink, in same handwriting and by same person in single sitting. Otherwise, it may
give rise to a suspicion that the document is filled, subsequent to the execution.
9.4-4 Execution:
After filing, the next step in the documentation procedure is the execution or signing of the
document. It should be ensured that the signature in the document tallies with the signature
as appearing in the application for the loan and also with the specimen signature, in case the
party maintains a deposit account with the bank. In case of execution in the representative
capacity of sole proprietor or partner or director or agent or trustee or executor, etc., the fact
should be clearly mentioned. Similarly, in case document is taken for a loan sanctioned to a
minor borrower for his/her necessity, the signature of the guardian is to be obtained for self
and as guardian to the minor borrower. Normally, bankers take the signature of the
executants in all the pages of the documents, so that they may not take a plea later that the
contents of the pages were not known. In case the document contains any alteration,
overwriting or cutting, it must be authenticated with the full signature of the executants. The
documents shall be executed in the presence of bank officials and the fact of execution of
documents with the date and time of execution, the details of documents executed, the fact of
having explaining the contents of the documents in the language known to the executants
shall be recorded in a register with the signature of two bank officials so that in case of any
dispute regarding execution of documents, this register may be produced as evidence before
appropriate authority in case of dispute in a court of law at a late date.
9.4-5 Legal Formalities:
In some cases, after execution of the documents, certain legal formalities are required to be
undergone. For example, in case of advances to limited companies against its assets, the
required forms are to be presented to the Registrar of Companies within thirty days from the
date of execution Similarly, in the case of creation of registered mortgage, the mortgage deed
is presented for registration before the Registrar of Assurances within four months from the
date of execution of the deed. If these formalities are not observed, then the bank may have
to loose priority over the security. The documents may not be admissible as evidence before
the competent authority. This process is called registration of charge created
9.4-6 Keeping documents valid:

The documents taken by banks for a credit facility do not have perpetual life. The provisions
of Limitations Act apply to them. The Limitation Act prescribes the period of limitation for
different types of documents. For example, the period of limitation for a DPN is three years
from the date of execution. If a loan is not repaid within the period of limitation, then the
bank has to get fresh document/s or revival letter for extending the period of limitation as per
the provisions of Limitation Act. As per section 18 of the Act, when the borrower
acknowledges the debt before the expiry of period of limitation, then the life of the document
is extended by one more period from the date of such acknowledgement. As per section 19 of
the Act, if the borrower or his duly authorized agent makes any part payment towards the
loan before the expiry of period of limitation, then the period of limitation is extended by one
more period from the date of such part payment.
According to section 3 of Limitation Act, a suit cannot be filed for recovery on the strength
of a time barred document. Even the provisions regarding condonation of delay in taking
appropriate legal action as per section 5 of the Act, is not applicable for filing a suit for
recovery of debt. Hence, if the documents are time barred, the banks right of legal remedy
for recovery is lost.
9.4-7 Renewal of Documents:
At the time of renewal or if there is variation in the limit or amount originally sanctioned by
the bank, it is necessary to obtain a fresh set of documents or continue the existing set of
documents duly supported by supplemental/additional deeds, if required. Cancellation of the
existing set of documents would cause a discontinuity in the banks charge on the security
for the credit facility.
It is not mandatory to obtain fresh sets of documents for renewal of the credit facility. A
formal letter to the borrower agreeing to continue the credit facility by the bank for a further
period of say, one year, at his request would suffice. Acknowledgement of the debt
incorporating particulars of the original security document duly signed by the borrower is
obtained at the time of renewal and attached to form part of the original set of documents.
9.4-8 Safekeeping and preservation of documents:
Now-a-days, banks give loan for a longer period say twenty years or even twenty-five years.
Until such time the entire dues are recovered, the documents are to be preserved in good
condition.

9.5 STAMPING OF DOCUMENTS

The Indian Stamp Act, 1899 contains provisions regarding instruments chargeable with duty,
mode of using stamps, time of stamping instruments, etc. As per section 17 of the Act, all

instruments chargeable with duty and executed by any person in India shall be stamped
before or at the time of execution.
Section 35 of the Act provides that any person shall not admit an instrument, not duly
stamped in evidence for any purpose. However, instruments other than bill of exchange and
promissory note can be admitted in evidence on payment of duty with which the same is
chargeable together with a penalty of five rupees or ten times of the amount of proper stamp
duty whichever is higher.

9.6 SARFAESI ACT, 2002

In the past, banks/financial institutions had to enforce their security only through the decree
of a court. This was a very slow and a time consuming process. There was also no specific
provision, in the then existing law, in respect of hypothecation, through hypothecation is one
of the major security interests taken by the bank/financial institution. Keeping in mind the
above factors, among many others, the Securitization and Reconstruction of Financial Assets
(SRFA) AND Enforcement of Security Interest Act [ESI] was enacted with effect from 21
June, 2002. The Act deals with three aspects:
1. Enforcement of Security Interest by secured creditor (Banks/Financial Institutions).
2. Transfer of non-performing assets to Securitization Company or Reconstruction
Company [SCRC], which will then dispose of those assets and realize the proceeds.
3. To provide a legal framework for securitization of assets.

9.7 LET US SUM UP

Among the various purposes of taking documents, resorting to legal remedies, in case of
necessity, is the prime one. The various steps namely, selection of correct set of documents,
stamping at right point of time, filling in a proper manner, their execution on observing the
legal formalities, keeping the documents alive and preserving the documents till the entire
dues are recovered, discussed in this unit, will help a reader to make error free
documentation.
9.8 KEY WORDS
Documentation, Demand Promissory Note, Form, Agreement, Stamping, Execution.

9.9 CHECK YOUR PROGRESS

1. As per the Stamp Act, a document executed in India shall be stamped

(a) only before execution
(b) at any time, but before filing suit
(c) within 30 days after execution
(d) before or at the time of execution
2. One of the following statements is not true
(a) The Court cannot condone delay in filing suit, if the document is time-barred.
(b) If a demand promissory note is not stamped before or at the time of execution in India,
the defect can be set right by paying penalty.
(c) When the borrower acknowledged the debt before the expiry of limitation period, the
period of limitation is extended by one more period.
(d) If the borrower makes part payment into the loan account before the expiry of limitation
period, the period of limitation is extended by one more period.
9.10 ANSWERS TO CHECK YOUR PROGRESS
1. (d) 2. (b

MICROFINANCE AND SELF-HELP GROUPS (SHGs)

10.1 OBJECTIVES
On going through this unit, the candidates will be able to understand the concept of
microfinance in the Indian environment and the role of Self help Groups in the microfinance
activities of banks.

10.2 INTRODUCTION
Micro credit is a small amount of money lent to a person, whereas Micro finance is a
provision of thrift, credit, financial services and products to the poor. Dr. Md.Yunus, Nobel
prize winner has defined microfinance as availability of loans to rural people without
obtaining collateral for income generating purposes in order to reduce the poverty levels.
Micro-credit is also termed as collateral free loans.
In its report on the latest estimates on global poverty, the World Bank has estimated that the
poverty ratethose below $1.25/day level for India has come down from 59.8% of the

population in 1981 to 41.6% in 2005. This means that the poverty rate in India is declining at
a much slower rate. In contrast, while India had 421 million people below the $1.25-a-day
level in 1981, this number has swelled to 456 million by 2005. It may thus be seen that,
while there has been a decline in the poverty ratio, the ranks of the poor are still swelling. In
other words, nearly four out of 10 Indians live below what the worlds poorest countries
consider the poverty line.
This brings us to the point that there is a growing need to evolve a system to target these
people living below the poverty line,. This is an effort to reaching out to the bottom of the
pyramid. The banking industry has shown tremendous growth in volume and complexity
during the last few decades. Despite making significant improvements in all the areas, there
are concern that banks have not been able to bring vast segment of the population, especially
the underprivileged sections of the sections of the society, in rural and urban areas alike, into
the fold of basic banking services. The reasons may vary from country to country and place
to place within a country and hence, the strategy could also vary. But, one thing is common.
The opening up of opportunities for self-employment by creating appropriate institutions and
policies to help in livelihood creation is unquestionably the best strategy.
Despite priority sector lending targets over the last decade, banks outreach to small
borrowers in the bottom of the pyramid has progressively declined, both as a proportion of
credit and in terms of total number of bank accounts. To fill this gap, Microfinance
institutions (MFIs) have emerged as key providers of financial services for the poor. Majority
of the MFIs are not-for-profit organizations that facilitate the formation of grameen groups or
self-help groups (SHGs) and link them with formal banks, often leading to activities that
extend beyond microfinance. This model accounts for about 70% of microfinance of India.

10.3 MICROFINANCE DELEVERY MODELS

Microfinance institutions (MFIs), the world-over, are using various Finance/credit Lending
Models (Credit Delivery Models). They are broadly as under:
(a) Group
The group models basic approach lies in the fact that the collective responsibility and
security overcomes shortcomings and weaknesses of the individual level. The collective
coming together of individual members is used for a number of purposed: educating and
awareness building, collective bargaining power, peer pressure etc.
(b) Individual
This is a model wherein micro loans are given directly to the borrower. It does not include
the formation of groups, or generating peer pressures to ensure repayment. The individual

model is, in many cases, a part of a larger credit plus program, where economic services are
provided.
(c) Intermediaries
This model is a go-between organization between the lenders and the borrowers. The
intermediary plays a critical role of generating awareness and educating the borrowers about
savings, credit etc. these activities are aimed at raising the credit worthiness of the borrowers
to a level attractive enough to the lenders. The links developed by the intermediaries could
cover funding, program links, training and education, and research.
Intermediaries could be individuals, NGOs, micro enterprise/micro credit programmes and
commercial banks (for government schemes). Lenders could be commercial banks,
government agencies, international donors, etc.
Non-Governmental Organisations (NGOs) have emerged as key players in the field of micro
credit. Their role includes creation awareness about the importance of micro credit within the
community. They have developed resources and tools for communities and micro credit
orginisations to monitor progress and identify good practices. They have also created
opportunities to learn about the principles and practices of micro credit through various
methods like training programmes etc.
The diagram below describes the manner in which the micro credit is generally delivered.
Micro credit can thus be provided by the financial institutions either directly to individuals or
the group of individuals or through intermediaries. NGOs provide the most effective
intermediation in micro finance. They not only identify the right kind of the borrower but
also ensure the success of the project through development of skills and community
participation. Their direct and regular contact with the borrower pressurizes him/her into
timely repayment. Their involvement, however, adds up to the cost of financing. Efforts are
underway to devise ways and means to reduce the cost of intermediation. In the present
scenario, it is very difficult to foresee any substantial direct lending to the poor in near future.
Creating an environment conducive for MFIs to raise low cost funds may, therefore, be a
step towards reduction in the overall cost of financing. Access to low cost funds by MFIs
through deposit mobilization from the general public may also be thought of.
The following diagram describes both the nature of the inputs and the nature of the demand
that leads to the development of group model of lending.

10.4 HOW IS MICROFINANCE DIFFERENT?

1. Community organizing: The ability to draw in and attract active self-willed

participation of target communities is the most important factor for success of
microfinance. The organization, which arises from the small size and homogeneity
among members, leads to the establishment of mechanisms that in turn lead to better
screening of clients and enforces repayment that makes the lending programme more
efficient than those of the banks.
2. Large outreach: Within these complex and diverse conditions, the NGOs and MFIs
have managed to reach a large number of clients. From 55000 clients in 1996; the
bank-linkage programme today covers approximately 22 million clients. The loan
portfolio of microfinance has grown from Rs.6 Crore to Rs.1139 Crore. This growth
may be viewed in the light of the fact that the microfinance movement has managed
to draw into the financial sector a set of clients who did not ever participate in the
formal financial services market.
3. Encouraging savings: There is increasing consensus that services required by the poor
is much more than credit and include deposits and remittances. Such services would
enable them to build assets and to leverage capital for emergencies that confront them
at regular intervals. Currently, microfinance institutions are not allowed to offer
deposit products. However, the opening up of insurance sector has led to an increase
in the provision of micro-insurance.
4. Multiple delivery models: An encouraging factor for microfinance in the country is
the multiple delivery models adopted in the country. It is important to note that banks
have come forward in large numbers to finance, directly self-help groups SIDBI has a
scheme for refinancing MFIs/NGOs to lend either directly to individuals or through
grameen and other groups.
5. Enterprise support design: NGOs, when involved, use one of the three broad options
area, sector or function focused strategy. The area approach may be described as
limited to a cluster of villages or within an urban settlement. The sector approach
involves providing specialist inputs such as marketing, technology, etc. around a
particular occupation. The functional approach is limited to providing services, in
most cases, credit, which will help unlock the potential of individuals or families.
We have so far seen the broad contours of micro finance and the models through which it is
delivered to the rural poor. We have also seen that the success of micro finance depends
more on the group dynamics exerted to the benefit of both the lenders and the beneficiaries.
One such delivery channel for micro lending is the Self Help Group (SHG) Model in the
micro credit delivery system, about which we will see in detail in the following paragraphs.

10.5 SHG DEFINITION

Self-Help Group is a voluntary association of poor formed with the common goal of social
and economic empowerment.
Micro finance through SHGs offer the best form of credit reaching the unreached and the
under-reached. The members volunteered to organize themselves into a group for the
eradication of poverty of the members. They agree to save regularly and convent their
savings into a common fund known as the group corpus. The members of the group agree to
use this common fund and such other funds that they may receive as a group through a
common management.
10.5-1 Need for SHGs:
The rural poor are incapacitated due to various reasons such as most of them are socially
backward, illiterate, with low motivation and a poor economic base. Individually, the poor is
not only weak in a socio-economic sense but also lacks access to the knowledge and
information, which are the most important components of todays development process.
However, in a group, they are empowered to overcome many of these weaknesses. Hence,
there ae needs for SHGs, which in specific terms are as under:
1. To mobilize the resources of individual members for their collective economic
development
2. To uplift the living conditions of the members
3. To inculcate a habit of savings
4. For utilization of local resources
5. To mobilize individual skills for the groups interest
6. To create awareness about the rights and responsibilities
7. To assist the members financially in the times of need
8. For entrepreneurship development
9. To identify problems, analyzing and finding solutions in the group
10. To act as a medium for socio-economic development of the village
11. To develop linkages with institutions of NGOs
12. To organize training for skill development
13. To help in the recovery of loans
14. To gain mutual understanding, develop trust and self-confidence
15. To build up teamwork
16. To develop leadership qualities
10.5-2 Organizing the Group:
The following broad guidelines are considered while forming the group:
The number of members in a group should not exceed twenty; otherwise, registration
becomes compulsory; generally, a self-help group may consist of ten to twenty persons.

However, in difficult areas like drought-prone areas and areas with scattered and sparse
population and in case of economically weaker and/or physically disabled persons, this
number may be from five to twenty.
Generally, all members of the group should belong to families below the poverty line.
In the case of Government sponsored schemes, if necessary, a maximum of twenty percent
and in exceptional cases, where essentially required, up to a maximum of thirty percent of
the members in a group may be taken from families marginally above the poverty line living
contiguously with BPL 9Below Poverty Line) families and if they are acceptable to the BPL
members of the group. However, wherever the groups are eligible for subsidy, the APL
(Above Poverty Line) members will not be eligible for the subsidy under the scheme. The
BPL families must actively participate in the management and decision making, which
should not ordinarily be entirely in the hands of APL families. Further, APL members of the
Self-Help group shall not become office bearers (Group Leader, Assistant Group Leader Or
Treasurer) of the Group.
The group shall not consist of more than one member from the same family. A person should
not be a member of more than one group. The group should devise a code of conduct (Group
management norms) to bind itself. This should be in the form of regular meetings (weekly or
fortnightly), functioning in a democratic manner, allowing for a free exchange of views,
participation by the members in the decision making process. The group should be able to
draw up an agenda for each meeting and take up discussions as per the agenda. The members
should build their corpus through regular savings. The group should be able to collect the
minimum voluntary saving amount from all the members regularly in the group meetings.
The savings so collected will be the group corpus fund.
The group corpus fund should be used to advance loans to the members. The group should
develop financial management norms covering the loan sanction procedure, repayment
schedule and interest rates. The members in the group meetings should take all the loaning
decisions through a participatory decision making process. The group should be able to
prioritise the loan applications, fix repayment schedules, fix an appropriate rate of interest for
the loans advanced and closely monitor the repayment of the loan instalments from the
loanee.
The group should operate a group account preferably in their service area bank branch, to
deposit the balance amounts left with the groups after disbursing loans to its members. The
group should maintain simple basic records such as minutes book, attendance register, loan
ledge, general ledger, cash book, bank passbook and individual passbooks.
10.5-3 Functions of SHGs:

To develop a group into a well-managed self-help group, the members should evolve rules
and regulations, which are to be adopted, after discussions with all the members for
compliance in full. Some illustrative guidelines for the formulation of such rules and
regulations are given as under:
Meeting: The group should meet regularly. Ideally, the meetings should be weekly or at least
monthly. (Advantage: They become closer if they meet regularly. This helps them to
understand each others difficulties better).
Compulsory Attendance: Full attendance in all the group meetings will make it easy for the
SHG to stabilize and start working to the satisfaction of all.
Membership register, minutes register, etc., have to be maintained and kept up to date by the
group, by making the entries regularly. (Advantage: This helps one to know about the
functioning of the SHG clearly and easily. It also helps to build trust among the SHG
members).
Fixed day for meetings: The group should have a fixed day or date for the meetings.
(Advantage: This will help the members to plan in advance their routine works).
Common place: The group should fix a common place to conduct the meetings.
Savings: Savings should be deposited by all the members in the meeting itself. No interest
will be paid to the members for their money with the group. The members will not be
encouraged to adjust their savings amount against their loan due to the group.
Keeping of accounts: Simple and clear accounts and books for all transactions have to be
maintained. If not member is capable to maintain the books, the SHG may take outside help.
Generally, all registers and account books are written during the course of the meeting.
Resolution from the SHG: The SHG has to pass a resolution in the group meeting, signed by
all members, indicating their decision to open SB A/c with the bank. This resolution is filled
with the bank.
Opening a bank account: This is done on the basis of authorization from the SHG: The SHG
should authorize at least three members, any two of whom, to jointly operate upon their
account. The resolution along with the filled in application form duly introduced by the
promoter may be filed with the bank branch. SHGs need not submit a copy of the rules and
regulations of the SHG for opening bank accounts. Even if the group has not formulated any
such rules or regulations, loans could be sanctioned. A savings bank account passbook is
issued to the SHG. This should be in the name of the SHG and not in the name of any
individual(s).

Conduct of internal lending by SHG: After saving for a minimum period of two to three
months, the common savings fund could be used by the SHG for lending to its own
members.
10.5-4 Other conditions of indirect finance to SHGs through NGOs:
As regards financing NGOs or MFIs, the following are important points
1. NGO must be registered under the society/Company/Partnership or Co-operative act.
2. It should submit audited balanced sheet for three years. Bank will analyse it for its
performance.
3. The Bye-laws of NGO must provide for borrowing for SHG activities. This should be
supported by a resolution to borrow from bank and a statement of credit required by
SHGs.
10.5-5 Self-Help Groups (SHGs) and PMRY:
Educated unemployed youth satisfying the eligibility criteria as laid down under the scheme,
volunteer to form SHG to set up Self-employed ventures (Common Economic Activity). A
Self-Help Group may consist of 5 to 20 educated unemployed youth. There is no upper
ceiling on loan. Loans are provided as per individual eligibility, taking into account the
requirement of the project.
SHG may undertake a common economic activity for which a loan is sanctioned without
resorting to onward lending to its members.
Subsidy is provided to the SHG as per the eligibility of the individual members, taking into
account the relaxation provided in North Eastern States, Uttaranchal, Himachal Pradesh and
Jammu & Kashmir.
Required margin money contribution (i.e. subsidy and margin to be equal to twenty percent
of the project cost) should be brought in by the SHG collectively.
The exemption limit for obtaining collateral security will be Rs. Five lakh per borrowing
account for projects under the Industry Sector. Exemption from collateral will be limited to
an amount of Rs. One lakh per member of SHG for projects under service and business
sectors. Enhancement in limit of exemption of collateral may be considered in deserving
cases.
Implementing agencies may decide the necessity of pre-disbursal training for all the
members/majority of the members in the group.
10.6 SELF-HELP GROUP AND SGSY SCHEME

The SGSY scheme has come into operation from 1 April, 1999 replacing all other schemes
like the IRDP, TRYSEM, DWCRA, SITRA, GKJ, MWS, Etc. The objective of the scheme is
to bring the poor people above the poverty line within three years. For this purpose, an
emphasis has been laid on group financing and group activities, taking into account the
natural resources available in the area and the activities suitable to that area. The scheme
envisages supplementary dosed of credit, if necessary, to the participants. Preference will be
given to well-functioning SHGs in the villages both under the group finance and individual
finance.

10.7 CAPACITY BUILDING OF THE SELF-HELP GROUPS

SHGs which are in existence for about six months and have demonstrated the potential of a
viable group enters the stage, wherein it receives the revolving fund of Rs.25,000 from the
bank as a cash credit facility and also embarks on further capacity building of its entire team.
DRDAs will arrange to provide the revolving fund to such groups, meeting their share from
out of the SGSY fund. Of this, a sum of Rs.10,000 is given to the bank by the DRDA. Banks
may charge interest only on the sum exceeding Rs.10,000. The subsidy of Rs.10,000 released
by DRDA is adjusted against the loan at the end of cash credit period on the request of the
group.

10.8 LET US SUM UP

Over the last decade, banks lending to small borrowers in the bottom of the pyramid has
progressively declined, both as a proportion of credit and in terms of total number of bank
accounts. To fill up the gap, microfinance institutions (FFIs) have since emerged as key
providers of financial services for the poor. Microfinance institutions (MFIs), the world-over,
are using various Credit Models. One of the way of reaching the poor is the intermediary
model which is more popular and widely practices. Intermediaries could be individuals,
NGOs, micro enterprise/micro credit programmes and commercial banks, government
agencies, international donors, etc. in this unit, we have seen that the success of micro
finance depends more on the group dynamics exerted to the benefit of both the lenders and
the beneficiaries. One such delivery channel is Self Help Group (SHG) Model in the micro
credit delivery system. We have also seen how microfinance is moving fast from its small
business base to offer a wide range of financial services, including savings, insurance and
money transfers and a broad array of loan products.

10.9 KEY WORDS

Microfinance, Micro credit, Self-Help Group, Joint Liability Group, Bank Linkage, Capacity
building, Thrift, Entrepreneurship Development, Team Work, Skill Development, Below
Poverty Line (BPL), Above Poverty Line (APL), DRDA, Capacity Building, Financial
Inclusion.

10.10 CHECK YOUR PROGRESS

1. Maintenance of the following books/registers is not compulsory for SHG
(a) Minutes book
(b) Savings and Loan register
(c) Visitors book
(d) Members passbook
2. SHGs, for assistance under PMRY, may consist of
(a) 5-20 educated unemployed youth
(b) 3-15 educated unemployed youth
(c) 10-25 educated unemployed youth
(d) 2-10 educated unemployed youth
3. Provision of credit not exceeding per borrower, either directly or
through SHG/JLG mechanism will constitute micro credit.
(a) Rs. 10,000
(b)Rs. 25,000
(c) Rs. 50,000
(d) Rs. 1 lac
4. A micro enterprise in manufacturing sector is one where the investment in plant &
machinery does not exceed ..
(a) Rs. 10 lac

(b) Rs. 20 lac

(c) Rs. 25 lac
(d) Rs. 50 lac

10.11 ANSWRS TO CHECK YOUR PROGRESS

1. (c) 2. (a) 3. (c) 4. (a).

FINANCIAL INCLUSION AND RURAL DEVELOPMENT : BANKING

FOR THE UNBANKED
11.1 OBJECTIVES
After reading this unit, the candidates will be able to understand

What financial inclusion is

How does it matter to our rural poor in their developmental process
Some Indian initiatives to tackle the issue
Present banking scenario
Policy issues and implementation

11.2 INTRODUCTION

As indicated in the first chapter, there are a large number of people in the country who have
not accessed the formal financial system. With an appropriate business mode. The formal
financial system can realize the huge potential coming from the unmet demand for financial
services from such excluded. Focus, thus, should be on creating customized, composite and
yet a simple delivery system. The banking products should be improved. At the same time
new products like insurance and remittance also need to be developed.
However, the banks themselves will not be able to achieve the goal more particularly in the
last mile and might need the assistance of intermediaries. Microfinance institutions have
proved that they can reach the bottom of the pyramid, and profitably at that. The SHG-bank
linkage is another channel. Other innovative channels also need to be developed. Finally, the
financially excluded section needs to be educated about the benefits of being a part of the
organized financial system. The above draws attention to the fact that financial literacy and
product innovation are the needs of the hour if microfinance is to extend its reach, and reach
and deliver on its goal of financial inclusion in India.

11.3 WHAT IS FINANCIAL INCLUSION?

The definition of financial inclusion currently in use is the delivery of financial services by
the formal financial system at an affordable cost to vast sections of disadvantaged and lowincome groups. Financial services include the provision of savings, loans, insurance,
payments and remittance facilities by the formal financial system to those who tend to be
excluded. The following diagram illustrates the same:

The word disadvantaged may be referred to in a broader context and may include not only
the rural poor comprising marginal and sub-marginal farmers, landless labourers and share
croppers, but also women, workers in the unorganized sector, pensioners etc.

11.4 NEED FOR FINANCIAL INCLUSION

Since basic financial services (savings and remittances) are generally provided by the
banking system, any discussion on financial inclusion should start from a question. Whether
the banking system by itself or indirectly through the SHG bank linkage model (which we
have studied in the previous unit) is reaching the poor? There can be no two opinions on that
there has been a remarkable improvement in the banks outreach to the poor, especially in the
decades that followed their nationalization. Yet the financial exclusion is a large issue. The

real question therefore is whether the banking system is reaching the excluded or putting it
differently, whether can it ever reach? And if the answer to the latter is negative and
unfortunately it is so, the further question is what can then be done?

11.5 PRESENT BANKING SCENARIO

We started the discussions on Microfinance with a note that the customer reach of banks is
still far from satisfactory. Currently, for every 16,000 people in India, there is only one
branch of commercial bank to meet their banking needs. It is also a matter of record that
there still remain about 400 under banked centres in the country. It is also interesting to note
that while banks have added 1065 branches in 2005-06, the number of rural and semi-urban
branches have indeed come down by 916 and 285 respectively. While analizing the root
caused for the above state of affairs, one must recognize the following:
1. A major issue in expanding the outreach of the formal banking system is the
transaction cost for banks. The credit requirements of small and marginal farmers,
agricultural labourers, artisans and petty traders in rural areas are often small, urgent
and frequent. The cost structure, systems and procedures in the formal banking
system make the transaction costs for small banking operations quite high. With bias
towards low interest rate for small loans, the attractiveness of this segment purely for
credit expansion from business point of view of banks was rather low.
2. Poor credit discipline in rural loans is another important issue. The rural credit is
generally considered developmental lending which has a negative cannotation in the
minds of the borrower in many states. The problem was further compounded, as the
borrowers in rural areas could not clearly distinguish between the Grants provided
by the Government and the Credit. Sometimes, the poor got bank loans for
purposes for which they had not training/skill or the amount to which they have no
capacity to handle. This has made monitoring of borrowal accounts by banks for more
difficult.
3. Adequacy of manpower in the rural branches is another issue. The banks do not find
willing takers for the rural postings, resulting in poor motivational level in the staff.
4. Not only do the banks find it difficult to reach the poor in the rural areas, the poor
also do not find it easy to relate to the urban-oriented staff at the rural branches. They,
therefore, are look-out to someone with whom they can easily relate to and speak in
their own dialect.
5. Often the distance at which the banks branches located necessitated customers to
incur out-of-pocket expensed and also to forego their earnings during the days they
visited.
6. As per statistics published by RBI and Cooperative Union there are more than one
lakh primary agricultural societies in the country. Yet, it is a fact that more than two

third of them are defunct. The cooperatives are not efficient and financially strong to
undertake larger credit disbursement.
All these have considerably increased the transaction costs for banks and borrowers alike,
thereby thwarting the genuine efforts of banks in realizing the objectives of financial
inclusion in villages.

11.6 THE CASE OF REGIONAL RURAL BANKS

The regional rural banks (RRBs) were started in 1975, during the Emergency, with the aim
of providing credit to small and marginal farmers, agricultural labourers, rural artisans, street
vendors, and all those living below the poverty line. The need for RRBs was felt then as
existing rural lending institutions was found to be suffering from some weaknesses vis--vis
rural credit, particularly for the weaker sections. Hence, as a conscious policy, it was
presumed that they would incur some losses. These losses were supposed to be treated as the
necessary social cost for the social benefit of covering the rural poor.
But, this principle of social cost for social benefit was given a go-by shortly after and the
profit and profitability became the prime concern for these banks. As a first measure, the
barrier of financing to the weaker sections was removed resulting in the non-target group
becoming the new target group. The second main objective, the cheap credit was also given a
go-by in tandem; the rates of interest charged on loans have become higher than that of
commercial banks. The third objective of mobilizing rural savings and deploying them for
the development of the same area for the benefit of the rural people has also suffered a
setback as a result of excessive concern for profitability, as indicated by a low credit-deposit
ratio in these banks. The CD Ratio of RRBs has fallen from 100 percent in the beginning to
about 50 percent today. Instead of attracting funds from the urban centres, the RRBs are
taking the rural resources to urban centres as shown by their high Investment-Deposit Ratio,
ranging between 55 and 60 percent during the last three years. They have put together
invested in securities of Rs.45666 crore against their deposit base of Rs.83143 crore in 2007.
The fourth major objectives of taking the banking services to the door steps of the rural
people has also suffered set back. As of March, 2008, RRBs had in all 14,458 branches
(accounting for 20 percent of total bank branches). Of this and strangely enough, there were
only 11,353 branches located in the rural areas. The number of the rural branches has
consistently gone down in view of that as many as 1,014 rural branches were closed or
shifted to non-rural areas between 1998 and 2007 on the plea of non-viability.
The Regional Rural banks were originally conceived as low cost institutions having rural
bias, local feel and pro-poor focus. The regional character of RRBs and the principle of each
RRB functioning in a homogenous agro climatic area, which are two pre-requisites for
financial inclusion (for successfully taking the banking services to the rural poor), have also

suffered a setback, following the consolidation exercise that started in 2005, leading to
reduction in the number of RRBs from the original 196 to 88 as on today.

11.7 INITIATIVES OF RESERVE BANK OF INDIA

The Reserve Bank of India in its annual policy statement of April 2005 recognised the
problem of financial exclusion and has initiated several steps. Some of the major initiatives
aimed at promotion of financial inclusion include:
Introduction of basic no-frills savings account either with nil or very low balances
as well as charges that make such accounts accessible to vast sections of populations.
A simplified general purpose credit card (GCC) facility to be issued by banks without
insistence on collateral or purpose, with a revolving credit limit up to Rs.25,000 based
on cash flow of the household to enable hassle free access to credit by rural
households.
Introduction of a Pilot Project for 100 percent financial inclusion in one district each
in all the states and Union territories in the country.
In order to improve provision of financial services in the North-Eastern Region and
prepare an appropriate State-specific action plan, RBI has set up a Committee on
Financial Sector Plan for North-Eastern Region headed by a deputy Governor, with
members drawn from the financial sector, the State Governments of the North-Eastern
States and the academics.
Know Your Customer (KYC) norms followed by banks for opening of new
relationship accounts have been relaxed and banks are asked to open new accounts
with introduction from persons on whom KYC verification already done or from
persons of status in the area.
Banks have been advised to cover 100 new borrowers by each rural branch every
year, besides doubling the agricultural lending in three year time.

11.8 INITIATIVES OF NABARD

NABARD has implemented several initiatives that have significantly contributed not only to
the financial inclusion of the poor but also improved their living conditions especially of
rural women. The foremost among them is the SHG bank linkage programme. Through the
judicious use of SHG-Bank Linkage mechanism, NABARD has been able to catalyse the
banking system to partner informal delivery channels and give a thrust to inclusive finance.
Followed by the success of SHG-bank linkage programme as also Bangladesh Grameen
Bank model, many of the Non-Governmental Organisations (NGOs) engaged in social

intervention have taken to financial intermediation for providing financial services to their
target clients adopting innovative approaches.
Though initially only a handful of NGOs were into financial intermediation using a variety of
delivery channels, their numbers have increased considerably today.

11.9 BUSINESS FACILITATOR AND BUSINESS CORRESPONDENT MODEL

With the objective of ensuring greater financial inclusion and increasing the outreach of the
banking sector, banks have been allowed to use the services of the NGOs, Self-Help Groups
(SHGs), Microfinance Institutions (FFIs) and other Civil Society Organizations (CSOs) as
intermediaries in providing financial and banking services through the use of Business
Facilitator and Business Correspondent model. This provision for correspondent banking has
opened up new vistas in financial inclusion.

11.10 WATERSHED DEVELOPMENT APPROACH

In India, nearly two-third of cultivable land is under rain fed cultivation; agriculture in arid
land contributes about 45 percent of the countrys food grain production. Productivity of land
in rain fed areas is quite low at around one-third of the irrigated areas. Lower per capita
income is a bane in these areas and leads people living there to financial exclusion.
NABARD has therefore adopted the watershed development approach with community
participation for increasing crop production and productivity and thereby leading to higher
employment and income generation opportunities.
In yet another variant of the above approach, NABARD has ensured participatory approach
wherein the community had a major role in planning, implementation, supervision and
monitoring of the programme besides maintaining the common assets created under the
project. The community was also given the responsibility of managing the project funds,
resolving conflicts and taking all project related decisions. The services of the experienced
NGOs were provided to the villagers to guide them in project implementation as also for
imparting training and providing technical guidance.
In addition, individual banks have also formulated schemes targeting small and marginal
farmers engaged in arid cultivation, as any failure of crop in these lands may push the
farmers into the clutches of village money lenders. Keeping this in view, necessary provision
is made in the scale (quantum) of finance for undertaking the cultivation activities. The
modalities of one such scheme formulated by a bank is reproduced in part ii of this book for
the benefit of candidates.

11.11 TRIBAL DEVELOPMENT PROGRAMME

NABARD has been closely associated with the implementation of an Adivasi Development
Programme through Wadi, approach in Gujarat in collaboration with NGOs. This
programme was later extended to Maharashtra also. The central focus of this programme in
on Wadi,which means small orchard with other development interventions. They are soil
conservation, water resource development, community health, sanitation and women and
children development.

11.12 LET US SUM UP

Financial services include the provision of savings, loans, insurance, payments and
remittance facilities by the formal financial system to those who tend to excluded. Financial
inclusion can be achieved by alleviation of poverty and the resultant ignorance with people.
(a) If we look at the various efforts for alleviation of poverty in India, three main pillars are
clearly visible:
1. The role of the State to create proper climate and suitable infrastructure and invest
economic and social capital.
2. The role of the financial system involving economic capital and efficient payment
system.
3. The role of Community Based Organisations (CBOs) and Non-Government
Organisations (NGOs) in catalyzing the local participation to enhance the efficiency
of the delivery of services.
(b) When we look at the issue of financial exclusion, one particular set of economic
community stands out as very distinct. This is the class of marginal and sub-marginal
farmers who have no access to irrigation and cultivate non-commercial crops.
(c) If the problems of this class of farmers are addressed, we have critically looked at the
core issue of poverty and financial inclusion in the rural areas.

11.13 KEY WORDS

Marginal farmers, Sub-Marginal Farmers, Agricultural Labourers, Artisans, Transaction
Cost, Regional Rural Banks (RRBs).

11.14 CHECK YOUR PROGRESS

1. Define Financial Inclusion in one sentence.
Ans. The definition of financial inclusion currently in use is the delivery of financial
services by the format financial system at an affordable cost to vast sections of
disadvantaged and low-income groups.
2. The following are a few of the root caused that prevent banks reaching out to the rural
poor. (State what is incorrect)
(a) High transaction cost in banks.
(b) Poor credit discipline in the rural areas, making credit monitoring by banks more
difficult.
(c) Poor deposit-base in the rural branches.
(d) No willing takers among the bank employees for the rural postings.
3. The Regional Rural Banks are the best fitted to be the vehicle for financial inclusion in
rural in rural areas. (State what is incorrect)
(a) Their Regional character.
(b) Their functioning in a homogenous agro-climatic area
(c) Their employees, hailing from the same area, are best suited to relate with the rural
customers.
d) They are managed by people from their parent banks.
4. The initiatives of Reserve Bank of India towards financial inclusion of the rural poor
include. (State what is incorrect)
(a) Introduction of basic no-frills savings accounts making them accessible to vast
sections of the rural poor.
(b) Issuance of simplified General Purpose Credit Card (GCC) without insistence on
collateral or purpose.
(c) Financing of SMEs on concessional terms.
(d) Relaxation of KYC norms for opening new relationship accounts in rural areas.
5. Intermediaries through who banks reach-out to the rural poor in areas they have no
branches include. (State what is incorrect)

(a) Self-Help Groups

(b) Non-Government Organisations
(c) Debt Recovery Agents
(d) Microfinance Institutions

11.15 ANSWERS TO CHECK YOUR PROGRESS

2. (c) 3. (d) 4. (c) 5.(c)

BUSINESS FACILITATOR AND BUSINESS CORRESPONDENT (BF/BC)

MODEL: A VEHICLE FOR FINANCIAL INCLUSION
12.1 OBJECTIVES
On studying this unit, the readers will know

What is a Business Facilitator Model?

What is a Business Correspondent Model?
BF versus BC and the services each of them offer
The role of BF and BC in extending microfinance and finance to other priority and
neglected sections of the rural as well as urban society
Scope of the activities of BF/BC in achieving financial inclusion
Role and Responsibilities of BCs and BFs

12.2 INTRODUCTION

We have seen in the previous unit that the customer-reach of the banks is still far from
satisfactory. For every 16000 people in India, there is only one branch of a commercial bank
to meet their banking needs. As of 206, there still remained about 400 under banked districts
in the country, of which, the majority were in Uttar Pradesh (63), followed by Madhya
Pradesh (41) and Bihar (36). While the Metro centres could boast of more than 500 branches
each centre, many villages had to do with only one branch among them. While banks have
added 1065 branches in 2005-06, the number of rural and semi-urban branches has in fact
come down by 916 and 285 respectively, this is the position despite a massive expansion of
branch net-work undertaken by the banks in the period that followed nationalization. Though
IT has mode remarkable improvements in the banking systems and mode innovative delivery
channels possible, rural areas do not, as yet, have the benefit of IT driven banking in full. All
this have led the policy-makers to think of an alternative source that may enable banks to
outreach those sections of the society, especially the rural people, who would otherwise
continue
to
be
neglected.
The Business Facilitator and Correspondent Model, an out come of the process and an
attempt to use the local organizations/systems to intermediate with the banks and customer is
an ideal route for banks to take banking services to the underprivileged hitherto remained
untouched by them and to cover the villages still remaining unbanked. The model so
evolved with the objective of ensuring greater and sustainable financial inclusion and
increasing the outreach of the banking sector is known as Branchless Banking Model.

12.3 NEED FOR THE BF/BC MODEL

It is estimated that only 27% of the Indian farmhouse holds have access to institutional credit
as on today. Another 22 percent access the money lenders. The remaining 51 percent do not
get any access to institutional credit, leaving them to fend for themselves for their funding
needs to carry on agricultural and other activities. There is therefore an urgent need for their
greater financial inclusion. Recently, the Union Finance Minister has exhorted that each bank
branch may open at least 250 new accounts each year to remedy this situation. This will see
opening of 12.5 million new accounts by banks each year.
There is, therefore, a vast untapped market in the rural areas for taking banking and financial
services to people living there and those who are so far untouched by the formal banking
system. The task is daunting enough that the banks cannot handle it single handedly as
shown by their past performance. Nor could the current tempo of branch expansion by banks
indicate that the task is anywhere achievable in the near future. This led the policy makers to
believe that unless a vast army of business facilitators/correspondents with appropriate
technology is deployed for the purpose, there can be no remedy for the issue. These
agents/agencies may not be regular employees of banks but work on an outsourcing basis for

taking the banking services to the hitherto unbanked centres. These banking services include
rural credit disbursement, delivery of savings and insurance products, small value payments
and remittances.
The BC idea has come from Brazil where retail vendors, lottery outlets and post offices
double as bank branches. An estimated $ one billion in transactions were processed with
point-of-sale (POS) devices such as biometric or smart card readers through Brazils 90,000
agents in 2005 and a total of about 12 million accounts were opened across the network in
only three years.

12.4 ROLE AND RESPONSIBILITIES OF BUSINESS FACILITATORS/BUSINESS

CORRESPONDENTS
It is said that the Business Facilitator/Business Correspondent will be a friend, philosopher
and guide to the people in the villages served by him/her. A Business Facilitator/Business
Correspondent is normally the one residing and/or located in the area he/she serves. He/she
may have the agriculture background and work with dedication to the cause of upliftment of
the rural poor. He/she may educate the villagers in general and the farmers in particular about
various aspects of banking and finance with reference to rural development and possibly
improved agricultural practices for cost-cutting and improving the yield of crops and the
income of the people in the area.
Role of a Business Facilitator/Business Correspondent
(1) He/she is an intermediary between the Bank and the villagers.
(2) He/she is an intermediary and confidant of the bank. He/she gathers information on
the prospective borrowers,
Name
Address
Family size
Family details
Details of the economic and income earning activity pursued by the members of the
household
Land Holding including its size and pattern and its whereabouts
Crops cultivated and the cropping pattern followed
Cash Flow Pattern
Annual Net Income of the household
Spending Pattern of the household

The information so gathered is used for drawing the Borrowers Profile which in turn helps
the bank to take appropriate credit decisions.
(3) He/she is an information assimilator. Using the information he/she has gathered, it is
possible to prepare a Cash-Flow Statement and prepare the farmers Cash Budget.
(4) This follows customer counseling o the financial needs and how can it be met and
customer education on the products and services available from the bank.
(5) He/she should give to the farmers and others complete, factual and truthful
information on the bank on various products and other aspects.
(6) He/she should not overlook or hide any vital and material information to the
customer.
(7) He/she should protect and respect the privacy of the customer.
(8) He/she should not compromise his/her personal interest to that of the Bank.
(9) He/she should treat all customers alike and with no disparity and with respect and
dignity. He/she should not differentiate the customers one against the other and
should not harbor any caste or communal feelings.
Apart from the above roles a Business Facilitator/Business Correspondent is expected to
perform, they can be entrusted with the following specific activities/duties:
(1) Identification of prospective borrowers.
(2) Determining suitability of the activities chosen by them and advising the branch
thereof.
(3) Education the prospective borrowers on the loan products available with the bank
and advising them of the one that suits them.
(4) Helping the prospective borrower in filling the loan application
(5) Collection of the application forms from the applicants and initial scrutiny thereof.
(6) Verification of primary information given therein.
(7) Ensuring that the KYC norms have been complied with.
(8) Processing of loan applications with the help of the Banks template applicable to
the product category and submission of the proposals to the branch.
(9) Post-sanction and pre and post disbursal verification and monitoring.
(10) Follow-up for recovery
(11) Giving inputs to farmers and villagers on skill development and micro
enterprises.
(12) Formation /Bank Linkage of SHGs
(13) Establishment of Farmers Clubs.

12.5 WHO CAN BE THE BUSINESS FACILITATORS?

The following organizations and their members/staff can be business facilitators.

(1) Non-Government Organisations (NGOs)

(2) Farmers Clubs
(3) Community Based Organisations (CBOs)
(4) Co-operative Societies
(5) Post offices
(6) Insurance Agents
(7) Village Knowledge Centres (VKCs)
(8) Agri-Clinics and Agri Business Centres
(9) Krishi Vigyan Kendras
(10) KVIC/KVIP units in the area.
(11) IT enabled Rural outlets of Corporate Entities
(12) Farmers service Societies
(13) Well functioning Panchayats.
Apart from the above organizations and institutions, individuals may also function as
Business Facilitators. An illustrative list of such individuals is given below:

Primary and Secondary School Teachers

Members of NGOs/LBOs
Members of Self Help Groups
Anganwadi/Balwadi workers
Primary Health Centre Staff
Postal Staff such as Post Masters/Village Post Masters, Postmen, Postal clerks
Municipal and Gram Panchayat staff
Village Officer and his staff
Members of Farmers Service Societies
Ration Dealers
Shop Keepers and Kirana Merchants
Members of any other Business Organisations and institutions functioning in the area

12.6 WHO CAN BE BUSINESS CORRESPONDENTS?

Unlike business facilitators, business correspondents can also handle some cash transactions
on behalf of the bank and clients. Hence, the following can function as Business
Correspondent.
(1) Non-Government Organisations (NGOs)
(2) MFIs set up under Societies/Trust Acts.
(3) Societies registered under Mutually Aided Co-operative Societies Act or the Cooperative Societies Acts of states.

(4) Companies registered under section 25 of the Companies Act, 1556.

(5) Registered NBFCs not accepting public deposits.
(6) Post Offices
(7) Insurance Agents
(8) Krishi Vigyan Kendras
(9) KVC/KVIB units
(10)
Registered Village Organizations.
Apart from the above organizations and institutions, individuals may also function as
business correspondents, in the light of the announcement by the Union Finance Minister in
his Budget Speech 2008-09. An illustrative list of such individuals is given below:
Retired Bank employees
Ex-servicemen
Retired Government employees.

12.7 BUSINESS FACILITATORS: SCOPE OF ACTIVITIES

(1) Identification of borrowers and fitment of activities
(2) Collection and preliminary processing of loan applications
(3) Preliminary verification of primary information/data
(4) Creating awareness among people in the villages about savings and debt products
(5) Educating people and advising them on managing money
(6) Credit (also debt) Counselling
(7) Submission of loan applications to banks branch
(8) Post-sanction monitoring
(9) Follow-up for recovery

12.8 BUSINESS CORRESPONDENTS: SCOPE OF ACTIVITIES

In addition to services identified for facilitation by business facilitators, the activities
undertaken by the business correspondents would be such as may fall within the normal
course of the banking business, but conducted on places other than the banks premises.
These include:
(1) Disbursal of small value credit
(2) Mobilization of small value deposits
(3) Recovery of principal and collection of interest on item above.
(4) Sale of micro insurance, mutual fund products etc.,
(5) Receipt and delivery of small value remittances and other payment instruments.

Such third party intermediaries doing banking business in villages away from the Banks
location attract significant reputation, legal and operational risks for banks engaging them to
work as Business Correspondents. To mitigate these risks, banks generally:
(1) Specify suitable limits on cash holding by Business Correspondents
(2) Specify limits on individual payments and receipts
(3) Ensure that the transactions performed by them are accounted for and reflected in the
banks books at the end of the day or at least the following working day, and
(4) Ensure that all agreements/contracts with the customer shall clearly specify that the
bank is responsible for the acts of commission and omission of the Business
Correspondent.

12.9 BUSINESS FACILITATOR V/S BUSINESS CORRESPNDENT

As seen above, a business facilitator is one who provides lead management facilitation
services on banking and finance related matters to those people residing in villages/centre
where there is no banks branch. In contrast, the scope of activities performed by the
business correspondents will include, in addition to the facilitation services listed above, such
activities performed within the normal course of the banking business also, but conducted at
places other than the bank premises. Here lies the major point of difference between the
Business Facilitators and Business Correspondents. The dividing line between the Business
Facilitator and Business Correspondent is that the latter is allowed to handle small-value cash
transactions in centres where there is no banks branch, which in the normal course may have
to be performed in the branch premises only.

12.10 COMPLIANCE WITH KNOW YOUR CUSTOMER (KYC) NORMS

Compliance with KYC norms will continue to be in force for customer identification and
customer relationship for banks and is the sole responsibility of banks. Since the objective is
to extend savings and loan facilities to the underprivileged in the unbanked centres, banks
may however adopt a flexible approach in this regard. In addition to introduction from any
person on whom KYC has been done, banks may also rely on certificated of identification
issued by the Block Development Officers, Heads of Village Panchayats, Post Masters of the
Post Office concerned, or such other public functionary known to the bank.

12.11
AWARENESS
OF
BUSINESS
FACILATATORS/BUSINESS
CORRESPONDENTS ABOUT VARIOUS BANKING OPERATIONS

The BF/BC should be generally aware about:

Deposits
Opening of accounts, receipt and payments of amounts in the following deposit accounts:

Savings accounts including No-frills accounts

Term deposits
Deposit Reinvestment Certificates
Monthly Income Deposits
Recurring Deposit Accounts
Add-on features of deposit accounts
Insurance-linked deposits
Pre-mature closure/extension of deposits
Calculation of interest on deposits and payments thereof
Simple Interest
Compound Interest
KYC Norms for opening of deposit accounts
Kisan ATMs

(FAQs on various aspects of Rate of Interest and methods of interest calculation including
EMIs are furnished in Appendix I)
Loans and Advances
Similarly, the BF/BC should also be aware of the loans and advances and the product
differentiation in respect of various products.
(1) Advances to agriculture (Tenure-wise Classification)
(2) Short Term Advances to Agriculture
(a)For cultivation of crops
(i)Scale of Finance
(ii)Disbursements in stages
(iii) Marketing of produce
(iv)Recovery of loan
(b)Kisan Credit Cards
(c)Cash Credit system for Agricultural lending
(d)Financing of sugarcane growers under tie-up arrangement with sugar
Factories
(e)Loan against hypothecation/pledge of agricultural produce (including
warehouse receipts)

(3) Medium Term Loans for Agriculture

(a)For Minor Irrigation
(i)
(ii)

For digging/deepening of wells

For sprinkler/drip irrigation system

(b)For Land Reclamation

(c) For land Development
(i)
(ii)

For Land leveling

For Bunding etc.,

(d) For purchase of Farm Machinery and Equipments

(i) For purchase of Harvest Combines
(ii) For purchase of Tractors and Power Tillers
(iii)

For purchase of other equipments

(e) Bio-Gobar Gas Plants

(f) For other Allied Activities
(g) Dairy Farming
(h) Poultry Keeping
(i) For Piggeries
(j) For Sericulture
(k) for Bee Keeping

(4) Long Term loans for construction/setting-up of

Warehousing and godown facilities
Cold Storage facilities
Agri-clinics/Agri-business Centres
Agro-service Centres
Farmers Service Societies
(5) Long /Medium Term Loans for cultivation of Fruit Crops
(6) Floriculture Ventures
Cultivation of Mechanical herbs

(7) Consumption Loans (including to Urban Poor) and

(8) Gold loans

12.12
PROFILE
OF
A
BUSINESS
FACILITATOR/BUSINESS
CORRESPONDENT AND NORMS FOR APPOINTMENT
Banks may obtain an application form from the prospective business
facilitator/business correspondent. The bank may also obtain legal opinion in case
the applicant is a Society registered under the Socielities Act, an NGO, or any
other constituted body.
The details furnished in the application form may be thoroughly checked and
satisfied for their authenticity.
Due-diligence check may also be conducted to evaluate the capability and
creditworthiness of the applicant.
As far as possible, NGOs or reputed Village Officers should be encouraged to
work as Business Correspondents.
12.12-1 While evaluating the suitability of the applicant , the following points may be
considered:
Past experience vis--vis ability to implement the outsourced activity to the
satisfaction of the bank.
If the BC/BF has the required financial soundness and ability to fulfill commitment
even under adverse conditions.
Business reputation and culture.
Satisfy that there are no complaints, litigations, potential litigations etc. against the
applicant.
The efficacy of security, internal control etc. of the business facilitator on outsourced
activities. To enable the business facilitators to keep secrecy of data/information, the
internal systems should be robust. Business continuity to be ensured even in case of
employees leaving the agencies.
Knowledge and acquaintance of the area and work
The systems of the service provider should be compatible with the bank and the
standards of performance, area of customer service should be acceptable to the bank.
The service provider with an independent internal audit function in place may be
preferred.
Banks may do a due diligence and have insurance coverage to mitigate operational
risk, if any. An independent review and market feedback about the service provider
may be obtained.

12.13 ELIGIBILITY CRITERIA FRO ENGAGING BUSINESS FACILITATORS

Business facilitators may also be individuals. The following eligibility criteria may
broadly be adopted for engaging the Business Facilitators:
(a) Individuals:
Permanent resident of the village/area of operation and/or continuously staying
in the area of operation for the past three years.
Minimum education level SSC passed.
Aged between 21 and 50 years. In deserving cases like teachers, ex-bank
employees etc., the age criterion may be flexible
Should not be a defaulter to any bank
Should not be engaged by more than one bank as Business Facilitator.
No criminal proceeding against him/her on any court of law.
(b) Institutions
May be a voluntary organization or a registered organization.
If registered, should have authority to work as Business Facilitator. This
should be as per the objective Clause in case of NBFC companies.
The credentials of the promoters and the office bearers of the organizations
should be checked.
The institution or its office-bearers should not be defaulters to any bank.
Should not be attached as Business Facilitator in more than one Bank and
should give an undertaking not to join any other organization during the
period they work for the Bank
In case of registered organizations, the latest audit report/balance sheet may
also be checked.
12.1 ELIGIBILITY CRITERIA FOR ENGAGING BUSINESS CORRESPONDENTS
Business correspondents should generally be institutions. The following eligibility criteria
may broadly be adopted for engaging the Business Correspondents:
Should be registered organizations, such as (i) NGOs/MFIs set up under
Societies/Trust Act, (ii) Societies registered under Mutually Aided Co-operative
Societies Act or the Co-operative Societies Acts of States (iii) Companies
incorporated under section 25 of the Companies Act, 1956 (iv)Registered NBFCs not
accepting public deposits (v) Post Offices and (vi) Registered Village Organizations.
They should have authority to work as business correspondent in the Objective
Clause.
The credentials of the office bearers should be verified.

 The institution and/or its office-bearers should not be the defaulters to any
bank/financial institution.
In case of registered institutions, the latest audit report/balance sheet may also be
checked.
The committee on financial inclusion headed by Dr.C.Rangarajan, Chairman of the
Economic Advisory Council to the Prime Minister has, however, recommended the
individuals could also be appointed as banking Correspondents. Consequent to this, the
Finance Minister said that individuals like retired bank/Government employees and exservicemen can be appointed as business correspondents, in addition to micro-finance
institutions and non-governmental organizations now appointed, which has been accepted by
RBI and banks advised accordingly.
In the beginning of the appointment as business facilitator/business correspondent, there shall
be quarterly review to judge the effectiveness as a business facilitator/business
correspondent; thereafter the review may be annual. The Business Facilitator/Business
Correspondent may not be appointed in the village where the Banks branch is located.

12.15 PRECAUTIONS TO BE ADOPTED BEFORE ENGAGING BUSINESS

CORRESPONDENTS AND BUSINESS FACILITATORS
As seen before, before engaging Business Facilitators/Business Correspondents, their
capability will have to be evaluated thoroughly. This is usually done by the Bank is the form
of due-diligence check. The following are the steps involved in the due-diligence check:
(a) Interviewing the applicant in case of individuals and the office-bearers in case the
applicant is an institution.
(b) Verifying the track record and the present activities.
(c) Obtaining details about qualification, school/college last attended in the case of
individuals and in the case of NBFc, Society etc., copies of registration certificate,
Bye-Law, Constitution, list of office-bearers, financial papers of the last year.
(d) Undertake visit to the applicants place and the office as the case may be. In case of
companies, societies etc., verify the meeting register, minutes book, account books
and to check the copies provided as in C above with the original documents.
(e) Make market enquiries about the work, conduct, behavior and bonafides of the
individual by contacting, as far as possible, his friends, relatives, teachers, community
members and other known persons. Branch should also make market enquiries about
the reputation, work/activity of the institution and its office, in case of institutional
applicants. This is to ensure that they are not engaged in any unwarranted and antisocial activities.

(f) To enquire and be satisfied about the applicants ability to bring-out a perceptible
change in the peoples attitude by bearing influence on them.
The due-diligence check so carried out should be documented.

12.16 RISKS AND THEIR MITIGAITON

As the outsourced activity exposes the banks to various kinds of risks, it will be pertinent to
examine the nature of risks that may arise to the banks due to the deviations from the
accepted role performance of the business facilitator/business correspondent and how can
they be mitigated. The following table will throw light on the above:
Sr. No.
1.

2.

3.

4.

Risks
Stragetic Risk

Risks Mitigation Techniques

The role/duties of Business Facilitator
shall be publicized through media for the
The service provider may conduct information of the public, so that he/she
activities on its own behalf, which are
cannot enter into any other Activity on
inconsistent with the overall strategic behalf of the Bank. The Branch Manager
goals of the regulated entity.
has to keep occasional check on the same.
An MOU can also be signed with the
stipulation that he/she shall not conduct
any activities on his/her own behalf or any
other inconsistent activity.
Inadequate expertise to oversee the
Service provider.
Proper training shall be given to them
Reputation Risk
Poor Service from the service provider.
A feedback system from the customer
shall be developed. The market enquiry
Customer interaction by the service
from reputed persons of the village may
provider may not be consistent with the
also be be done.
overall standards of the regulated entity.
Proper training shall be given to them.
Compliance Risk
Privacy, consumer and prudential laws
The Business Facilitator/Business
not adequately complied with, by the
Correspondent shall not have access to the
service provider.
branch record.
Outsourced service provider has
In the event of breach of privacy, he/she
inadequate compliance system and
may be penalized or black-listed.
controls.
An undertaking to that effect shall be
Obtained.
The compliance system/controls
requirements shall be ensured by the
Branch while engaging Business
Facilitators/Correspondents.
Exit Strategy Risk

Appropriate exit strategies are not in

Place.
Over reliance on a single agency.
Loss of relevant skills in the regulated
Entity.
5.

6.

7.

Contractual Risk
Inability to enforce the contract

Access Risk
Hinders ability of the regulated entity to
provide timely data and other
information.
Concentration and Systemic Risk
Lack of control of Individual firms over a
service provider.
Systemic risk when considerable
exposure to one single service provider.

The role/duties of Business facilitators/

business correspondents is not highly
technical.
The replacement is possible.
Stand-by arrangement should be available
with the Bank.
The contractual capacity of the Business
Facilitators/Correspondents shall be
Checked through due diligence check at
the time of engagement.
Business Facilitators/Correspondents shall
work in rural places where the
transactions shall be manual.
Shall be checked through due diligence
check and reporting system. The business
shall be distributed through many
Business Facilitators/ stand by
arrangement.

12.17 CHECKS AND BALANCES SYSTEM

Banks may install a proper and effective checks and balances systems in place to counter
various risks faced by banks in engaging the business facilitators/business correspondents.
They are as follows:
(1) The business facilitator/business correspondents shall identify the potential borrowers
and submit their loan applications to the branch. The branch should verify the
following documents to establish the identity of the borrower and keep the copies on
record:
Photograph of the applicant.
Residence Proof such as rent receipt, title deed, electric bill, ration card,
voters list, etc.
The information/data such as land record, quotations, licenses, permits,
etc.
(2) As the applicants are from the distant villages, their identity can also be established
through witness of any reputed and respectable residents of that village.
(3) As far as possible, the details of the applicant should be got counter-checked from any
person of good credential of the respective village.
(4) The applicants should be called in the branch for completion of formalities.

(5) The business facilitator/business correspondent should have no say in the sanction
process or access to the books of account of the Bank.
(6) Before release of the loan sanctioned, pre-sanction inspection should be carried-out
and the execution of security documents should be done in the presence of the bank
officials.
(7) Credit should be released by making payment directly to the suppliers as far as
possible. Necessary bills/invoices should be held on record.
(8) Post-sanction inspection should be carried-out after disbursement to ascertain the enduse of credit.
(9) Business facilitator/business correspondent should not be allowed to access any
banks book/record.
(10)
A feedback system should be developed to ensure the quality of service
offered by the business facilitator/business correspondents.
(11)
The branch officials should carry-out surprise checks to verify the
antecedents/bonafides of the borrowers.
Disbursement of small-value credit, recovery of principal and collection of interest etc., shall
be effected by the business correspondent as per pre-arrangement with the bank.
Financial inclusion will be faster achieved if it is technology driven. This is possible if
accounts of the rural people are opened on smart card on which the balance in the account
will be pre-loaded. Such cards have comprehensive multifunction/multiproduct capability.
They enable biometric fingerprint based identification and authentication. These cards will
be operated on hand-held devices available with the Business Correspondents. These devices
are on line as will as battery operated and have in-built capacity to print receipts for cash
received and also acknowledge payment transactions. Whenever any customer takes payment
of cash or deposit cash, the balance will automatically will get affected to his account. If the
customer approaches Business Correspondent at his/her premises and conducts business,
then the transaction will go on line to the Central processor. Alternatively, if the Business
Correspondent goes to villages and the transaction is carried-out off-line, then the device will
store the said transaction which will be communicated to the Central Processor in the
evening by connecting the device on line. For ordinary receipt and payment, the above
system will get through without any problem. However, if the bank wants to use the system
for credit of loans sanctioned to such customers, then the branch will either keep hand-held
device on which it can pass-on the credit to the customer of the loan amount may be credited
in the Business Correspondents account that may in turn pass on the credit to the borrowers
card. Similarly, when customer repays the loan through the Business Correspondent, he will
issue receipt generated from the hand-held device immediately. However, in certain cases
like Post Offices or others, if the account is not opened on biometric cards, then the system
as applicable in the bank giving manual receipts etc., may be observed.

Generally, the Business Correspondents should have his own place in his/their area of
operation. He/she should be adequately informed on banking processes and use of
technology. Alternatively he/she should also employ such persons.
It is preferable that the Business Correspondents have on-line connectivity to receive and
transmit data to service-providers-central server/branch. The Business Correspondents
should be able to offer liquid security/collateral to the bank for making cash advance for dayto-day needs. In deserving cases, they may be offered cash-credit/loan to start with.

12.18 AREA OF OPERATION

The Business Facilitator/Business Correspondent Model is encouraged with the sole
intention to increase the Banks outreach to customers, especially in the unbanked centres.
Ideally, the area of operation of each rural and semi-urban branch may be extended in such a
manner as to cover at least 20-25 villages. The Business Facilitator/Correspondent may
therefore be engaged to take banking services to people and canvass/mobilize banking
business and offer limited banking services assigned to them respectively in the areas not so
far covered by any bank. It is thus possible to increase outreach of the banks branches and to
cover more and more rural/semi-urban population under financial inclusion, thereby
achieving its objective. This is also the Banks way for showing their commitments to those
who have so far remained out of the banks reach. Ideally, there could be one Business
Facilitator/Correspondent to cover 2-5 villages within a distance of 15 kilometers from the
banks branch, who shall also be a local person/entity. In this way, it may be within the
banks reach to achieve the target of opening 12.5 million new accounts each year as desired
by the Finance Minister recently to achieve the goal of speedy financial inclusion. In the case
urban branches, the distance criterion is 5 kms from the place of the business of the BC/BF
and the branch.

12.19 ETHICS TO BE OBSERVED BY BUSINESS FACILITATORS/BUSINESS

CORRESPONDENTS
Public confidence and customer trust are the major planks on which banks build on their
reputation. The confidentiality and secrecy of the customer information is of paramount
importance, especially in rural areas, where message spreads very fast. The ethics that are to
be born in mind and practiced by the Business Facilitator and Business Correspondents are as
follows:
1. Give complete, factual and truthful information on the bank on various products and
other aspects

2.
3.
4.
5.
6.

Protect and respect the privacy of the customer.

Should not compromise his personal interest to that of the Bank
Should treat all customers alike and with no disparity and with respect and dignity
Should not discriminate or differentiate the customers one against the other.
Should not harbor any caste or communal feelings.

12.20 TRAINING NEEDS AND HOW CAN IT BE MET

1. Business Facilitators/Business Correspondents shall need inputs on knowledge of
banks products which shall enable them to explain the schemes to public at large.
2. They shall also need training on competitive edge and superior features of the banks
products over the other banks products.
3. They may be imparted skill sets on marketing, influencing the people and crossselling of the banks other products.
4. In addition, the Business Correspondents should be given training on technology
related aspects.
5. The training inputs may also given to Business Correspondents for handling cash
receipts/payments, issue of receipts, accounting procedures, remittances etc.

12.21 DOS AND DONTS FOR BUSINESS FACILITATORS AND BUSINESS

CORRERSPONDENTS
As mentioned previously, public confidence and customer trust is a pre-requisite for the
outsourcing model to succeed and achieve its objective of financial inclusion. This should
reflect in every action taken by the Business Facilitators/Business Correspondents:
1. The confidentiality and the secrecy of the customer information in their custody is of
paramount importance. The BF/BC should maintain it completely.
2. Their access to the customer information should be limited to those areas where the
information is required for performing the outsourced function. Other records should
not be made available to them.
3. They should be able to isolate and clearly identify the Banks customer information,
documents, records and assets to protect the Banks confidentiality.
4. They should be impartial and should not indulge in politics, caste-divisibility,
irrespective of the caste, creed or sex.

12.22 IT ENABLED FINANCIAL INCLUSION USING BC MODEL

The term Information Technology enabled Financial Inclusion can be as provision of

banking and financial services to the hitherto excluded population through the medium of
business correspondents with the help of latest developments in information and
communication technology. Pilots run by the banks have clearly established that the use of
IT solutions for achieving financial inclusion for making available banking facilities at the
doorsteps of the rural poor is not only viable but also holds the potential for scalability. In
these projects, banks have used smart cards for opening and operating bank accounts with
biometric identification. Use of the smart cards along with mobile or hand held devices
ensure that the transactions are recorded in the banks books on real time basis. Some of the
State Governments are routing Social Security payments and also payments under the
National Rural Employment Guarantee Scheme through smart cards. It is now evident that
the same delivery channel can be used for providing other financial services like low cost
remittances and insurance.
These pilots have shown that banks can leverage the use of IT is to handle huge volume of
transactions emanating from the vast population in the rural areas. Moreover, while the IT
enabled banking outreach may not be as costly as establishing a branch in the rural areas it is
expected that the delivery costs in the IT driven financial inclusion will come down as and
when the scheme is up-scaled.
Banks, both in the public sector and the private sector, have made huge initiatives towards IT
Enabled Financial Inclusion using the Business Correspondent Model for reaching the unreached. A write-u on the structure and functions of three such Business Correspondent
Models under implementation with different banks two from the Public Sector (Annexure 1
and 2) and a third one from the Private Sector (Annexure 3) along with a case of a section 25
IT Company (Annexure 4) follows this unit for the benefit for the readers. On studying the
details of these models, the reader should be able to appreciate how the Information and
Communication Technology can be used for the benefit of the rural poor hitherto excluded
from the formal banking sector. The four cases also document the process of financial
inclusion through the BC model.

12.23 LET US SUM UP

Branchless banking can greatly extend the distribution of financial services to poor and
hitherto excluded, both by reducing the cost of delivery (by renting and maintaining building,
and handling low value transactions directly) and by reducing the cost to customers by
accessing services (travel and queuing time and thus foregoing the days wage income).
There was therefore a great deal of excitement in 2006 when RBI permitted the use of the
business correspondents for increasing the client coverage by banks branches. As only 27
percent of rural households and access to financial services, the Rangarajan Committee

sought this figure to be raised to 50 percent by 2012 and 100 percent by 2015. The Business
Correspondent Model, riding on appropriate technology, is the core of the strategy for
banks to achieve this, with the goal of having at least one BC in every village.
A BF or BC will act as an intermediary between bank and its customers generally in
customer identification and marketing of bank products. A BC can also transact on cash on
behalf of the bank. The BC/BF should have adequate knowledge of bank products,
procedures and technology. Individuals, firms, NGOs and NBFCs can perform the role of
Business Correspondents.

12.24 KEY WORDS

Branchless Banking, Business Facilitator, Business Correspondent, Rangarajan Committee,
Non-Government Organisation (NGO), Empathy, Small Value Transaction, Core Strategy,
Strategic Risk, Reputation Risk, compliance Risk, Exit Strategy Risk, Access Risk,
Concentration Risk, Contractual Risk, Systemic Risk, Point of Sale (POS) Machine, Point of
Transaction (POT) Device, Biometric Card, Smart Card Reader, Village Sarpanch, Risk
Mitigation, Checks and Balances, Borrower Profile, Debt (Credit) Counselling, EMI

12.25 CHECK YOUR PROGRESS

1. The scope of the activities to be undertaken by the Business Correspondents will not
include
(a) disbursal of small value credit
(b) recovery of principal and collection of interest from the borrower
(c) collection of small value deposits
(d) payment of Demand Drafts not exceeding Rs.1,000
2. Banks cannot use the services of one of the following as intermediaries under BF/BC
Model
(a) NGOs
(b) SHGs
(c) Village Sarpanch

(d) MFIs

12.26 ANSWERS TO CHECK YOUR PROGRESS

1. (d) 2. (c)

COMMUNICATION AND FINANCIAL COUNSELLING (Including

Financial Literacy and Financial Education)
13.1 OBJECTIVES
On studying this unit, the candidates will be able to understand:

What is financial literacy?

Its importance in financial inclusion.
Tools used for spreading financial literacy
Role of Financial Education in the process.
Role of communication and counseling in Financial Education
Types of structured communication in counseling
Essential components of effective communication
Role played by effective communication in financial counseling
Meaning and importance of Financial (Credit) Counseling
Counseling leading to client profiling and cash flow/cash budget
Role of financial counseling in clients Debt Management
Cross-selling techniques

13.2 INTRODUCTION
Financial Literacy is the ability or understanding to make informed judgments about money
or financial services that are suited to ones needs. Unwillingness on the part of individuals
to save is possibly the most adverse impact of lack of financial literacy. In an Income and
Savings Survey Dataworks recently, it was found that, of over 320 million paid workforces
in India, close to 60 percent do not set aside any money to save in financial instruments,
including gold and property. Financial education of these excluded people therefore assumes
importance to spread financial literacy among them.
This Unit focuses on the various types of structured communication in counseling and on the
essential components of effective communication and counseling. Adoption of effective
communication and counseling techniques are of primary importance in the financial
counseling leading to financial planning of the clients, be they farmers or small
entrepreneurs. To develop the clients financial profile leading to cash flow working and cash
budget, and finally to (develop) financial plans tailored to individual client (farmer too)
needs, it is essential that financial counselors possess skills and effective counseling
techniques.

13.3 FINANCIAL EDUCATION

The delivery of financial education comprises of three key themes namely buildings skills,
increasing knowledge and developing understanding.
Building Skills:
Literacy and numeracy are the fundamental skills in managing money and understanding of
financial products available. It is well established that there is a direct correlation between
people who have low levels of literacy and financial difficulties they face. So, increasing
literacy and numeracy is important in making people understand financial products/services.
Increasing knowledge
Giving knowledge inputs on finance and financial products is the key to helping people make
informed decisions. Financial institutions tend to concentrate their marketing efforts in cities
and avoid deprived areas. These are areas, where people are more likely to be financially
excluded. This makes them further more excluded. In terms of promoting financial inclusion,
much of the work is simply in providing easily understandable information in an engaging
environment.
Developing understanding

While increasing knowledge is mostly about the provision of information, developing

understanding is about giving an individual a strategy for dealing with this information,
which might include skill for budgeting, planning, understanding the types of products and
shopping around to find the best deal. There is no unique/definite way for delivering this type
of training, but it is generally agreed that, for the customer, there has to be something in it
for me. Credit Counseling is useful for engaging people in financial education.
Building Confidence
Skill building for budgeting, planning, understanding the types of products may be
undertaken in an environment suitable to build the customers confidence. The skills and
confidence necessary for filling in banks forms, asking probing questions, getting further
clarification and making complaints, if one is not satisfied, will be the end results of building
confidence.
There is however no single solution for financial exclusion and a financially capable person
has a little chance of becoming financially included, if the environment is set against
him/her. Though authorities have taken many initiatives in the recent times for creating a
more accessible environment, the access to mainstream financial services through the
provision of appropriate financial products will be the most important step towards financial
inclusion. By taking steps for financial inclusion, a bank could expand its client base
significantly. For example, amrketing no-frills savings account to the excluded population
in villages, either directly or through the financial intermediaries, could open up ample
avenues for cross-selling of other financila products. It is also likely that some customers
having no-frill accounts with overdrafts facility, may graduate towards borrowings of other
types.

13.4 IMPORTANCE OF FINANCIAL EDUCATION FOR BANKS

According t RBI data, as a percentage of financial savings, mutual funds constituted 7.7
percent of the financial savings of the household sector, while insurance accounted for 17.5
percent and provident funds and pension funds made up for 8.2 percent of the total financial
savings in 2007-08. This leads us to the fact that a predominant share of the household
savings is still parked in banks. (55 percent)
The above indicates the importance of financial education for banks. A good financial
education programme can provide a boost to the financial inclusion drive of banks by
encouraging the population from un-banksed and under banded areas to avail mainstream
banking services. In a short-term perspective, thesee customers can be attracted and retained
as accountholders whereas they prove to be good savers in the long-term. Svings by such

customers lead to asset building in their household. These are the people who, given the
exposure, utilise various retail financial products offered by banks.
It is well-known that the retail banking business is pegged with a high delinquency rate. The
share of non-performing assets (NPA) to net advances in cousumer finance and vehicle loans
tend to increase in the case of downturnsin business cycles. The recent (July-Sept 2008)
disclosure of high incidences of NPAs in retail credit, mechanized agricultural inputs such as
tractors and harvesters, is a case in the point. An il-informed customer is attracted towards
the will packaged loan products without realising the risks attached to it. Such customers
though initially contributing to increase in the business of commercial banks; ultimately
become a cause of concern due to rising NPAs. Default by a very large number of such
customers can lead to a systemic problem for the banking industry as a whole. The banks
will always benefit in the long term by creating a well-informed, good customer base out of
continous financial education programmes. Improved financial literacy results in better
understanding of financial products-both asset and liabilities products-by the coustomer.
Such knowledgeable consumers make more discerning choice of investments and other
financial products.
But, a large portion of Indian population is illiterate and remains away from the formal
channels of finance available to them. Moreover, the existing formal educatikon system does
not cover aspects of financial importance such as family budgeting, savings, financial
planning and the like. It is also seen that advertisements about savings and insurance
schemes, and mutual funds do not highlight the risk attached to them except a small statutory
warning advising the investors to carefully read the offer documents before investing in
them. A well designed financial education programme backed by knowledgeable financial
counsellors will go a long way in not only attracting such retail customers to formal banking
sector, but also in paving way for taking informed decisions on investing in such products.

13.5 ROLE OF COMMUNICATION

FINANCIAL COUNSELLING

IN

FINANCIAL

EDUCATION

AND

13.5-1 Essentials of communication:

Communication is far too important a skill, especialy in financial education (and counseling),
to treat it lightly. It is the single most critical skill a counsellor brings to a counseling session.
Let us now examine the communication process as it exists in a counsellor-client
relationship.
13.5-1.1 Three types of structured communcation
Interviewing

 Counselling
Advising
Interviewing
One of the most common forms of structured communication is interviewing. It is the
communication most often between two people, with a predetermined and specific purpose,
usually involving the asking and answering of questions to gather meaningful information. In
the case of a rurla setting, the non-directive form of interview is adopted which allows both
the interviewer and the client a wider areas to be discussed, and the interviewee usually
contrls the pacing and purpose of the interview. The advantages of this type include greater
flexibility, more in depth responses. And the potential of a closer relationship between the
interviewer and the client. The interview is usually a short-term relationship between the
above two.
Counselling
Counselling implies help giving. A counsellors job is to provide assistance to clients as they
explore their present situations, begin to understand where they are in relation to where they
would like to be, and then act to get from where they are to where they want to be. Is is
usually a long-time process eading to an ultimate change in behaviour in clients. In short,
counselling is not as stylized as interviewing because the format is less formal and less
structured. Much more of the humanness of both the counsellor and the client comes into
focus, all with the purpose of giving the help to the client.
Advising
Advising involves getting specific guidance or suggestions to the client. Advising is often
confused with counseling. Advisers know much more about their field of expertise than do
their clients, and the clients use this knowledge in order to reach decisions. In financial
counselling, occasions do arise when counsellors give advice. However, the danger in
offering advice too soon in the counseling relationship is that the clients ability to make
decisions is discounted in favour of the counsellors opinion. Perhaps the best way for a
counsellor is to hear clients out first in order to understand their situation more completely
and to assess their goals, and then to explain what alternatives or options are available.
13.5-2 Essentials of financial counselling:
In the avve paragraphs, we differentiated between three types of planned, purposeful
communication: nterviewing, Counselling and Advising. Each one of these types of
communication can be found in the financial counselling relationship. For instance,
interviewing in the form of data collection for a fact finder might well constitute the early
stages of the communication process. After the data are collected, the second phase would

probably consist largely of counselling listening cosely to the clients, and trying to
understand the clients inner world of needs, desires, fears, attitudes, values and goals. The
third and final stage of communication in financial counselling would include giving expert
advice, or carefully exploring possible alternatives for achieving the clients objectives.
13.5-2.1 Profile of an effective counsellor
The main thing a counsellor brings to a counselling session is his skills and effectiveness.
Financial counsellors first and foremost must be themselves in the relation to and interaction
with their clients. There are three conditions necessary to bring about constructive client
change:
(a) Showing Positive Regard to the cleint.
Un conditional Positive Regard is an attitude of valuing the client. Liking and respecting
another person have a positive effect. When you value clients, your sense of liking wil be
communicated to them; this by itself will enhance their feeling for themselves.
(b) Empathy
Accurrate empathy gives clients the feeling that you are in touch with them. When clents
say That is exactly right, it indicated that your response was right on target and that
they feel you are closely following and understanding them. Learning to understand is not
an easy process, it involves skilful and cautious listening, so you can hear not only the
obvious but also the subtleties of which even the client may be unaware of.
(c) Genuineness
Genuineness means simply, that the counsellor is the real person, that is there is no
faade, no role palying of what a professinal counsellor is considered to be. A counsellor
who is a genuine one communicates in a spontaneous and expressive manner and does
not conceal anything, is open and willing to listen to whatever the client is willing to
discuss and is consistent.
13.5-2.2 Counsellor Leading Responses
A leading response is one I which the counsellor takes a lead and deviates somewhat
from the clients responses. In such an event it is the counsellors frame of reference that
comes into focus. Up to this point, the counsellors responses have followed from the
clients statements, but here the emphasis shifts. This is because (a) the counsellor based
on his experience, and having listened to the client, would like to guide the client in a
particular path and (b) the counsellor has already arrived at the appropriate solution and
would like to lead the client towards that. An obvious risk of this shift is that the
counsellor may move in a direction in which the client is not yet ready or willing to move

Despite this risk, if the counsellor has followed the clent closely so far, and if a good
relationship has been established between the counsellor and the client, then this different
kind of response should not threaten the client.
(a) Explanation
The first of the leading responses is known as Explanation. Explanation is a relatively
neutral descrikption of the way things are. It deals in logical, practical, factual
information. A cleint may be confused by some terminology that the counsellor may use
and ask for example What is an EMI? The Counsellors explanation should be simple
and comprehensible. The Counsellors explanation should be simple and comprehensible.
The counsellor should also guard against explaining things in a patronizing tone, lest it
may be misunderstood by the client as a seling technique.
(b) Interpretive Response
Interpretations can be particular risky as often interpretations come across as sounding
authoritarian. Despite these drawbacks, interpretations can be extremely effective
responses because they often cut to the heart of the matter. When the interpretations make
sense to the clients they definitely accelerate the process of counselling. We should keep
in mind that the goal of all interpretive efforts is self-interpretation by the client in order
to increase the clients ability to act effectively.
(c) Reassurance or Encouragement
This is the third type of leading response frequently employed by the counsellors. A
reassuring response is disigned with the intension of making the client feel better, to
bolster his spirits and offer support in the time of need. It communicates clearly to the
clients that Iam here by your side. As a means of helping, however, the reassuring
response tends to be merely a temporary measure.
(d) Advice or Suggestion
The final type of leading response is called Advice or Suggestion. Many people actively
see the advice of the others possibly hoping that the advice given will make the difficult
decision for them, or solve the problem for them. In a financial counselling relationship,
however, the best king of advice is self advice. Cousellors who have been responding
clients discover n their own way and in their own time, what advice is best suited to
them. When advice is given, it should be offered tentatively in the form of suggestion
about which the client has the final decision. Otherwise, the counsellor not only leads but
takes over the ultimate responsibility for the clients financial plans.
13.5-2.3 How Ethical Behavior improves Communication

Sometimes, words are insufficient and good financial counsellor should understand the
two essential rules to effectively dealing with the clients. The first is to earn clients trust
because trust breaks down communication barriers. Different counsellors may
accomplish this in different way, but the counsellor must feel free to as chalenging
questions and continue to probe until a satisfactory level of understanding is achieved.
When there are limits to what a client can understand, earned trust is essential.
The second rule is to maintain turst, a critical factor in the client-counsellor relationship.
Although the cleints do not fully understand they should not fail to act. Indeed, if they
understood every aspect of financial counselling, they would not need a counsellor.
Clients often make decisions based solely on their financial counsellor. There is no better
way to earn and maintain trust then to develop a reputation for ethical and professional
behaviour. A valuable side benefit is improved communication.

13.6 ROLE OF FINANCIAL COUNSELORS IN FINANCIAL EDUCATION

Financial (Credit) Counsellors are in a better position to understand and appreciate the
difficulties of a stressed borrower (as compared to the bank officials) since these
borrowers tending to disclose the real situation to the counsellors. We have already seen
before, how, the counsellors can, by their leading responses in the communication
process, not only earn the clients turst but also maintain it. The financial counsellors are
thus capable of devising a borrowing or repayment plan for such borrowers. They can
convince the borrowers to adhere to such revised repayment schedule. Before doing so,
they thoroughly analyse the cash in-flow in the hands of the borrower, whom they
counsel and its pattern. This process is called Debt Management. In this way, the
recovery performance of banks is likely to improve without resorting to much criticised
methods of recovery agents and their likes.
The financial counsellor have an opportunity for a person-to-person talk with the
prospective customers of banks during their counselling programmes. These counsellors,
apart from guiding the individuals on how to select the best product, can also create a
market for banks various retail products by way of creating awareness amongst the
people. They, thus, become the banks ambassadors to the people in the area.
The last but not the least, banks are commited to social objectives to social objectives and
goals. Educating general public abut the financial products and risk attached to them is an
important role of banks. This is the best way to ensure transparency in dealing with
customers. The efforts of commercial banks and other institutions in financial literacy
and counselling would go a long way in building up their image as responsible corporate
commited to the welfare of the society. To illustrate, several years ago, when
dematerialisation of securities was being launched, Indias leading depository, National

Securities Depository Ltd., (NSDL), did a lot of road shows to push the concept, as a part
of financial literacy compaign.

13.7 ROLE OF FINANCIAL COUNSELLORS IN CROSS SELLING (CROSS

SELLING SKILL)
13.7-1 What is cross selling?
Selling multiple products to the customers already having banking relationship with the
branch is called cross selling. More often, cross selling results in win-win situation both
for the bank and the customer. The aim is to meet the total financial requirements of the
customer in a given situation like crop loan, medium term loan for minor irrigation, for
purchase of equipments/farm machinery or requirement in his persuit of ancillary
business related to farming. If may also be connected to selling the customer saving
products such as bank deposit accounts, mutual funds, insurance products etc.,
13.7-2 Benefits of cross selling:
Banks usually incur heavy expenses for marketing of products especially to new
customers who are approached for the first time. By cross selling to their existing
customers, their marketing efforts are reduced as the bank-customer relationship is
already established. The time taken to break ice with the customer and the efforts and
energy spent thereon is geometrically reduced. This reduces the banks overall cost of
marketing, thereby enabling them to offer competitive pricing to the customer. The cross
selling thus increases the competitive edge of the bank vis--vis its competitors in selling
its products and services in the market . apart from the low customer acquisition cost,
cross seling develops deeper and lasting relationship for banks with the customers. The
more the products the banks cross-sell, the more are they strengthening relationship with
customers. Selling this way is also becomes easy for banks because the track-record of
the customer is already with them. It is also risk-free or fraught with the minimum risk in
the case of asset products cross-sold by banks. The customer is in turn benefited as he
enjoys the ease and convenience of quick sanction, less documentation and the prompt
post-sanction services. He is also spared from the uncomfortable questions a new
customer is normally subjected to.
Cross-selling comes with its advantages for banks, as it considerably reduces the
customer acquisition costs, servicing, marketing and communication costs, thereby
substantialy increasing the banks spread. It is important to talk to customers on their won
terms. By figuring out what they really need, one can sel products that are right for them.
If products are sold only when customers need them, their satisfaction level increases and
so does the marketing mans morale. This opportunity to make out what is right for them

is seized by the Business Facilitators/Business Correspondents at the interviewing stage

when they also draw the customer profle. In short, cross selling is all about the art of
relationship building, for the deeper the relationship the bank has with a customer, the
more loyal the customer will be and the greater will be his unwillingness to move to
another bank.

13.8 BORROWER PROFILING

We have seen in the previous paragraphs that the counselling process is used by a good
counsellor to elicit useful information on the client, say a farmer. The information so
elicited will be either on physical contours viz., information on his land holding, its
location, whether it is fragmented or contiguous, whether the land is irrigated or rainfed,
the crops cultivated, the cropping pattern followed, extent of mechanization etc., or on
financial parameters like how and when he markets his agricultural produces, his annual
income, pattern of income flows in his hands, his household expenditure, his borrowings
from banks, financial institutions and others and the amount and the periodicity of
repayment etc. the information so gathered on physical contours are tabulated in such a
manner as to give at a glance all that are needed by a financing banker for his credit
dicision. The technique followed here by a counsellor is called borrower profiling
technique
The following illustrative check-list of questions and the prospective borrowers response
thereto will help a counsellor (as interviewers) in their role of identifying the prospective
borrowers and determining the suitability of the activities chosen by them for bank
finance.
1. For Agricultural Loans
Whether farmer has necessary land
Whether it is contiguous or fragmented.
Whether the crops proposed are generally cultivated in the areas
Farmers experience in cultivation of the crop
Whether farmer has adequate tilling equipments/implements.
Whether irrigation facilities available or is the land rain fed
Suitability of cropping pattern
2. For Minor Irrigation
Whether underground survey is carried-out in the area.
Whether digging of new wells permitted in the land owned by the farmer
Whether adequate area of land available for sustainable irrigation
Availability of diesel/power for energizing the well.

3. For Dairy Farming

Adequate accommodation for animals proposed

Available of fodder and feed in the area and their source
Marketing arrangement for milk and milk products
Availability of veterinary assistance

4. For Poultry Farming

Whether the proposed site is ideally-located

Suitability of land an climate
Water supply
Availability of veterinary assistance
Availability of poultry feed
Availability of market for eggs and birds.

5. For Tractor Loan

Size of land-holding
Whether it is contiguous or fragmented
Demand for tractor (hire) in the neighbourhood
Availability of facilities for repairs and servicing of tractor.

6. For Smal Traders and Small business

Whether borrower has sufficient knowledge of and experience in the business

Suitability of the area for the business proposed
Availability of proper infrastructure
Source of the procurement

13.9 DEBT MANAGEMENT SKILLS

Another objective of counselling is to prepare Cash Flow workings and then Cash Budget for
the customers future operations. As a first step in prioritising and alocation resources
available in the hands of an entrepreneur (or a farmer) prudently, a Financial (Credit)
Counsellor needs to know the clients cash flow pattern and other details. It begins with the
assessment of clients current financial situation and then t provide him/her a debtmanagement slution based upon his/her net income and living expenses to make his/her debt
manageable. All this pre-supposes knowledge in Cash Flow workings and Cash Budgeting
Techniques. Cash Flow Working is used to ascertain the actual cash requirements of an
enterprise, be it a farming or manufacturing or service oriented. When agriculture is getting

more and more organised, especially with the advent of modern technology and improved
agricultural practices, the concept of cash flow assumes more relevance. Credit decision
making in agriculture and rural enterprises has therefore now come to be based on cash
flows. Considering the importance of and the relevance attached to the subject, and exclusive
unit is provided for the benefit of readers.

13.10 ROAD AHEAD

The RBI has taken various steps for improving the financial literacy with its own initiatives
as also with the support and involvement of commercial banks. It has formulated a scheme
for credit counselling centres to be established in all districts and advised banks accordingly.
Many banks have launched Credit Counseling Centres as a part of their corporate strategy in
tackling the need for faster Financial Inclusion in villages. This initiative provides financial
education services as a supportive activity to financial counselling. To illustrate, one such
initiative taken by banks, we may look at Union MITR set-up by Union Ban of India the
banks novel financial education initiative in over 51 centres across the country. Each such
centre provides to villagers:

Information on financial products, services and where they are available

Guidance on opening of a bank account
Information on Banks products including interest rates and other charges
Information on managing savings and the avenues of investment
Guidance on management of existing debt

Financial education requires a highly individualised approach. This is why financial

education is attempted through individual counselling. The experience in many countries has
shown that Financial Education through counselling process is effective when it takes into
account the social and cultural environment of the individual and the community in which he
lives. Its success therefore will depend on the counsellors ability to inspire trust and
conficence of the community as a whole. This pre-supposes ability to communicate and
relate to the social and economic context of the community members. This is all the more
necessary in rural areas. We have already seen in the foregoing paragraphs how and why a
financial counsellor earns trust of the clients and maintains it too. This is why a good deal of
effort and care is needed to identify the right man/institution to fit the role of a Financial
(Credit) Counselor/Financial Advisor, for he is identified with his knowledge of local
conditions, his ability to relate to the cultural and social context of the area and his expertise
in various aspects of financing the rural area. As a logical sequence to Financial Education
through counselling process, rural youth will have to be provided with gainful selfemployment opportunities and also empowered to gain sustainable employment. As a step in
this direction, they need right king of training and therefore training facilities are needed to

be provided in the local areas. Towards this objective, banks have started establishing Rural
Development and Self-Employment Training Institutes in rural areas. The Financial
Counselor will also identify the training needs in the area and counsel the local youth to
utilize the training facilities as well.
Establishment and functioning of credit counselling centres needs financial support from the
sponsoring banks. Individual banks sponsoring such centres creates avoidable duplication of
efforts and strain on banks resources instead, all banks can together form a legal entity
which will in turn establish and manage a network of counselling centres. The expenses can
be shared by banks, like they do in the case of ATM network. This will also enable them to
launch a common advertising compaign aimed at creating awareness in public. This will also
increase the public confidence in these centres.
In addition, setting up of and managing credit counseling centres independent of any banks
is, itself, a skiled job, to which third party outsourcing may be enlisted. Such third party can
arrange for selection and training of credit counsellors and can also assist in putting in place
a suitable accreditation process utilizing the services of the retired bankers as counsellors,
particularly in the background of the Union Finance Ministers suggestion to carve out a
greater role for such retired bankers in development of financial systems in the country.

13.11 LET US SUM UP

The lack of adequate knowledge and understanding of risk and benefits attached to various
financial services available in the market affects the ability to take an informed decision on
ones personal finances. This problem has been engaging the attension of financial services
providers and regulators worldwide.
The concept of financial literacy is thus born and increasingly gaining ground. Arising from
the felt need in this area, the RBI has recently issued draft guideline for setting up of
counseling centres by banks towards this purpose. Already a few banks have taken the
initiative of setting up such counselling centres while others are also likely to follow to
implement RBIs suggestion for having at least one credit counselling centre in each district.
This Unit focusses on the need for financial literacy and financial (credit) counselling, it also
traces the role played by banks in furthering this initiative.
While looking at the need for effective communication in financial counseling, we have seen
the various types of structured communication: interviewing, counselling and advising. We
understood differences between these three types. From there, we proceeded to some of the
essentials inherent in financial counseling: structuring the counselling relationship;

establishing rapport; and dealing with resistance. Next, we looked at some of the
characteristics of effective counselling: unconditional positive regard, empathy, genuineness,
and self-awareness. We understood need for unconditional regard of client with accurate and
utmost empathy which comes out of genuineness to help and self knowledge of the
counsellor.

13.12 KEY WORDS

Financial (Credit) Counsellor, financial (Credit) Counselling, Financial Literacy, Financial
Education, Empathy, resistance behaviour, leading response, Financial Advising, Active
Response, Borrower Profiing, Cash Flow, Cash Budget.

13.13 CHECK YOUR PROGRESS

1. Describe three forms of effective communication.
2. Describe the importance of establishing rapport with the client in financial counseling.
3. Describe four types of the counsellors leading responses.
4. Describe four characteristics of an effective counsellor.
5. State True or False.
(a) The single most important skil financial counsellors have is their technical expertise.
(b) Interviewing, counseling and advising are all similar to and different from each other.
(c) the purpose of advising clients in financial counselling is to convince them to do what
counselors think they should do.
(d) It is not particularly important for the counselor to convey an attitude of acceptance
toward the client.
(e) The clients resistance behaviors are unimportant to a successful financial counselor.
(f) All advices offered in financial counselling should be tentative, with the client making
the final decision.
(g) Asking the client questions is usually appropriate only when it is an honest attempt to
gather information what the counsellor needs and the client can provide.

13.14 ANSWERS TO CHECK YOUR PROGRESS

(a) False. His ability to communicate is the most important skill.
(b) True.
(c) False. The best advising is self-advising
(d) False. Without it, rapport will not be established with the client.
(e) False. Resistance behaviours are always indicators that the client is having trouble
relating to the counsellor
(f) True
(g) True

ANNEXURE 1
CASE 1- BUSINESS CORRESPONDENT MODEL OF A PUBLIC SECTOR BANK
THE modalities of the business correspondent mechanism with a Public Sector bank are
detailed below:
The bank is issuing the bio-metric smart card which for canvassing and extending the
banking facilities to the weaker sections of the society in the remote parts of the country
under the financial inclusion scheme.
The bank has, currently issued about 8000 cards. It expects to reach a figure of 40,000 by the
end of this calendar year. One of the constraints faced by the bank in speeding up the issue of
cards is the non-availability or short supply of the magnetic chip used in the bio metric card.
Again the bank is currently incurring Rs. 150 towards issuance of the smart card. The cost is
expected to come down to Rs. 60 in the near future. The card will have a validity period of 5
years from the date of issue and can store up to transactions of the customer. The hand held
set (card reader) has a one time cost of Rs. 30,000. The recurring cost in respect of this
machine is only towards the replacement of the batteries once in a year.
The bank is using the BC for the purpose of financial inclusion. Each BC or its agent is
attached to a particular branch of the bank which is mostly networked under the CBS
scheme. There are about 500 branches which are outside the CBS but under a computerized
environment called Total bank mechanization. Branches under TBA are also connected to
banks data centre at Mumbai through a separate server at the data centre. The transactions
recorded in the CBS system are also recorded in this particular server before they are merged
with the main server at the data centre. This server maintains the details of all individual
accounts including those covered under this financial inclusion unlike some other banks
which permit the individual accounts to be maintained by the BC and a consolidated account
of the BC is maintained by the bank. This method of maintaining individual accounts by the
bank in its books of account instead of through a consolidated account of the BC will
facilitate the customer to access his/her account through a different BC in case of a need or
an emergency.
The selection and enlistment of BC or it agents is undertaken by the Zonal Managers. There
are specific guidelines and draft of the agreements to be entered into by the bank with the
BC. These documents as usual incorporate all the expectations and responsibilities from both
sides. It is important to note that while the identification of the customer is delegated to the
BC the compliance of KYC rests with the branch officials to whom the respective B C is
attached. Each BC is supposed to cater to about 5 to 6 villages in 15 KM radius from the
branch. The exact movements of the BC or its agents to the villages is left to the discretion of

the BC and the convenience of the villagers in as much that the BC may visit each village on
a specified time during each day or specified day in each week.
The remuneration paid to the BC is based on the transactions recorded. As such the BC is
appropriately incentivized. The bank, initially, gives the BC an amount of RS. 3000 to
establish his/her activity centre and also paid Rs. 500 each month towards his/her
transportation
costs.
BC can be an individual or a firm. Thus a BC or its agent can undertake the specified items
of work involved in enabling the outreach of banking to the targeted clients. Each transaction
is recorded in the hand held device of the BC where both the BC and the customer have to
use their smart cards for the purpose of identification as will as recording the transactions
and confirming the transaction. At the end of each transaction the customer is given a printed
copy of his/her transactions on a plain paper unlike a chemically treated paper under credit
cards so that the same can be preserved for longer durations. The machine is also voice
enabled in the local language for the transactions so that the customer can satisfy
himself/herself about the correctness of the transactions. The voice enabled system ensures
the reach of service to blind persons or illiterate customers of the bank who can have access
to this facility. These security measures would help establish confidence amongst the
customers for dealing with the BCs and help eliminate the reputational risk for the bank. The
other features are as under:
Each branch is authorized to have two or three BCs. Higher number of BCs can be
entertained as there is no specific restriction on the number of BCs.
Each BC is allowed an overdraft of RS. 10,000
The transaction limit per BC per day is RS. 10,000. As regards the customer, while
the minimum amount of the transaction is Rs. 10, the maximum amount that can be
withdrawn is Rs. 5000. There is no ceiling for the amounts deposited.
Currently, the ceiling for the cash carrying by the BC is kept at Rs. 10,000. If the BC
arranges for transit insurance this can be enhanced.
The BC can scan up to 6 finger prints of each customer. Each hand held device can
store finger prints of 100 customers (600 images). After the same are transported to
the server of the bank the device will be free again for further storing.
Transactions
(i)
At the Beginning of the Day(BOD) the BC captures the necessary data
from the banks system in respect of the customers who reside in the area
fixed for the visit.
(ii)
He/She also withdraws the money (Rs. 10,000)from the account for that
days transaction.
(iii) The Customer withdraws or pays money by swiping the smart card using
the card reader which records the transaction, reads it out (voice) for the

customer and issues a receipt with details such as name of the customer,
account number, balance in the account etc.
(iv) The BC pays on receives the cash for the transaction.
(v)
The BC uploads the data with the banks server. If there is difficulty the
uploading can be done in the branch later.
(vi) After completing his business for the targeted customers the BC has to pay
the balance amount to the branch/account. (net of paid and received)
(vii) The transactions in the handheld machine should also be transferred to or
uploaded to the banks server.
(viii) The bank settles the BCs account with the net balance in respect of the
days activities.
The BC is paid value based (not on per transaction based) commission which acts as
an incentive for canvassing higher average balances.
The bank is asking its BCs to canvass for business only in those villages which are in
its service area.
The system presently is not web based and hence the hand held device cannot be utilized by
BCs for augmenting their fee income through offering other services like booking of rail and
road tickets. However, electronic credit like those of the State and Central Government
pensions, disbursements under the National Rural employment guarantee scheme can be
handled by this system.
The banks cost of operation is, currently higher. Also the commission of remuneration paid
by banks to BCs attract service tax. If this is to be borne by the bank it would add to the
disincentive. Exempting this activity from service tax is desirable.

ANNEXURE 2
CASE 2 IT ENABLED FINANCIAL INCLUSION
(Case of Public Sector Bank using IT Enabled BC Model for increasing its customer reach)
It is will-known that, despite a massive expansion of branch network undertaken by the
banks in the period that followed nationalization the customer-reach of the banks is still far
from satisfactory. For every 16,000 people in India, there is only one branch of a commercial
bank to meet their banking needs, Banks have used IT based solutions to expand and
improve their services. Though IT has enabled remarkable improvements in the banking
systems and made innovative delivery models possible, rural areas do not, as yet, have the
benefit of IT driven banking in full.
The issue of financial exclusion is not new. The delivery of very small value banking
transactions at affordable cost and making available banking to one and all has been a major
challenge. Recently, the Union Finance Minister has exhorted that each bank branch may
open at lease 250 new accounts each year to remedy this situation. This will in effect see
opening of 12.5 million new accounts by banks each year. There is therefore a vast untapped
market in the rural areas for taking banking and financial services to people living there and
those who are so far untouched by the formal banking system. The task is daunting enough
that led the policy makers to believe that unless a vast army of business correspondents with
appropriate technology is deployed for the purpose, this objective will never be achieved.
Will ICT make financial inclusion possible and make it cost effective.
The Business Correspondent (BC) Model, and attempt to use the local organizations/systems
to intermediate between the banks and customers is an ideal route for banks to take banking
services to the underprivileged hitherto remained untouched by them and to cover the
villages still remaining unbanked. This model evolved with the objective of ensuring greater
and sustainable financial inclusion and increasing the outreach of the banking sector is
known as Branchless Banking Model.
Brazil experience in IT Enabled Financial Inclusion
The BC idea came from Brazil where retail vendors, lottery outlets and post offices double as
bank branches. An estimated US$ one billion in transactions were processed with point-ofsale (POS) devices such as biometric or smart card readers through Brazils 90,000 agents in
2005 and a total of about 12 million accounts were opened across the network in only three
years.
Public Sector Banks initiative in IT Enabled Financial Inclusion
The bank carried out pilot projects with biometric cards with two technology partners in
Varanasi Region of U.P. and in Hyderabad Region of A.P. These technology organizations

have floated Correspondent firms for operational convenience the following paragraphs will
provide the technical details of the process flow. The stakeholders involved in the process are
as follows:
Target Customers
The target customers are the ones who are hitherto financially excluded in rural and urban
areas alike and to whom the Bank intends to reach the banking services, especially the
liability products first (to start with No-Frills Savings Accounts) to be followed by asset
products (to start with overdraft in No-Frill Savings Accounts, with a limit of Rs. 1,000 to
Rs. 3,000 depending upon the customer class).
BCs Business Correspondents
The BCs, appointed after following the prescribed policy and procedures for identification
and acceptance as per RBI norms, including rigorous due diligence, are the ones who
interface between the customers and the bank, by acting as a bridge between them. They in
turn appoint agents, who act as Customer Service Points (CSPs). The BCs handle all
operational activities on behalf of the Bank.
Customer Service Point (CSP)
The CSPs are the agents appointed by the BCs, who are also subjected by them to rigorous
due diligence norms. A specific check on the reputation in terms of commitment, integrity
and competence in the local area where the CSP would operate would form a key element in
their identification and acceptance by the bank. The socio-economic and financial status and
his acceptance in the society will also be the other selection criteria.
These agents fulfill all relevant criteria stipulated by RBI for appointment of BCs. The
distance criterion of 15 KM as applicable to BC, from the Base Branch (rural & semi-urban)
is followed in the case of agents too.
Banks Branch
The Bank branch sets up the payment and settlement infrastructure, opens in its books
accounts of BCs accepts deposits and withdrawal of money from the BCs accounts.
Process Details
The bank has a Core Banking System which will also include NO-Frills Savings Accounts
and administering them deposit, withdrawal and interest calculation. There is an enabling
provision for overdraft in the accounts in two categories with overdraft limit of Rs. 1,000
and Rs. 3,000 separately. Recurring deposits, Term deposits and asset products will be added
on successful completion of the initial phase. Creation of accounts and transactions are
updated online and the base branch opens BC account in its CBS platform, where all

transactions are online. On opening of the account with BC, the customer is enrolled for a
Biometric Card (Smart Card). The card will be the proof of identity (using Fingerprints and
Thumb Impression biometrics) for deposits and withdrawals from his/her account at
Customer Service Point (from the agent). The system flow will be as under:
Customer Enrolment
A prospective customer approaching the agent (CSP)/approached by the agent appointed by
BC for opening an account will collect an account opening form. On receipt of the form duly
filled-in (in most cases, with his assistance), the agent will make preliminary enquiries in the
local area and verify the customer details furnished in the form by visiting his place of
residence and from the local enquiries in the local area and verify the customer details
furnished in the form by visiting his place of residence and from the local enquiries. On
complying with these basics, the agent submits the form to BC and BC in turn to the base
branch
Compliance/Adherence to KYC norms
Compliance with KYC norms will be the responsibility of the base branch. Since the
objective is to extend savings and loan facilities to people in the rural areas, a flexible
approach is adopted within the overall KYC guidelines. Accordingly for customer
identification; introduction from any person on whom KYC has been done or a Certificate of
Identification issued by BCs, BDO, Post Master of the post office concerned or such other
public functionary is sufficient.
During customer enrolment, the agent captures, in the BCs system (computer), Customer
Name, Date of Birth, Address, Finger print, Photograph, Account Type, Branch Code and
other details required by the bank. The BC, later transfers the required data to the main server
offline/online and web-camera, with all connected accessories.
Personalisation of Biometric Card is done by the bank at a central location and delivered to
the customers. The card contains details such as card number, customer name, photograph,
and expiry date, and the Banks disclaimer. During the personalization process, finger prints
of customer, Bank ID, Account Type, and other customer details required by the bank are
stored inside the smart card. Smart Card will be capable of storing last 10 transactions
performed by the customer. The card is sent to the respective agent for issuing it to the
customer. During card issuance, the customer is asked to verify his/her finger against the
fingerprint stored in the card to activate the card and to unsure that the card is issued to the
authorized customer only. A Transaction Terminal (hand-Held Device) stores the
information fo the activated cards and uploads them to the main server.
Transaction Terminal

The Transaction Terminal enables a CSP to deposit and withdraw cash. Transaction would
support both Online and Offline models. Transaction data will be sent Online if GPRS
connectivity is available and in case the connectivity is not there, then the terminal stores
transactions data in the internal database of the terminal, later data is transferred to main
server.
The system provides two types of solutions:
(1) Transactions using terminal
(2) Transactions using phone.
The terminal is device which will have contact less smart card reader/writer, biometric reader
and a thermal printer attached to it. When a mobile phone is used, a Java supported phone
will be connected to a thermal printer which is having biometric reader and a contact less
smart card reader/writer. Connectivity between mobile phone and the thermal printer with
smart card reader/writer and biometric will be via Bluetooth. GPRS will be communication
channel used by both terminal and mobile and works both Offline & Online.
Transaction Terminal/Mobile Phone will be installed with Terminal application and
personalization is required to enable cash deposit and cash disbursement. During
personalization is required to enable cash deposit and cash disbursement. During
personalization, terminal/mobile phone downloads cryptographic keys, Terminal ID, CSP
ID, Terminal Working Days, Date & Time, Business rules, List of associated Link Branch
IDs, Batch No., Associated Customer account details etc.
Each terminal/mobile phone will be linked to a specific CSP. The terminal/mobile phone
application requires User DD and Password of the authorized agent to start the application to
undertake transactions. Before performing any type of transaction, terminal/mobilw phone
application validates the card status first. The terminal/mobile phone application maintains
transaction data like the deposits, withdrawal and the transactions history in the internal
database and also writes transaction details on smart card. If GPRS connectivity is not
available, transaction details will be stored and sent whenever terminal/mobile phone
connects to main server. If GPRS connectivity is available, transaction details will be sent
online.
Apart from periodical uploads, every day CSP has to perform settlement from the
terminal/mobile phone by uploading all transactions residing in the terminal/mobile to the
main server. (Given elsewhere in this write-up are the illustrations of the Customer
Enrolment Process using the laptop, Biometric Card, and the Transaction Terminal (HHD),
which may be referred for the better understanding of the readers).

Deposit Transaction
During deposit of cash, the customer or representative of the customer should bring the smart
card. No biometric verification is required for making cash deposit. CSP collects the cash,
brings the smart card close to terminal and then selects the deposit option on terminal
application and enters the amount collected. Application stores the deposit data along with
batch code in to the internal memory of the terminal then receipts are printed as proof of
deposit. The terminal application also writes the transaction details in to smart card along
with the amount deposited and updated balance on the card.
If GPRS connectivity exists, then the deposit details will be sent to the main server with BC
online. On updating the deposit details, terminal will generate two receipts. One receipt
should be handed over to the customer signed by the CSP and other receipt signed by the
customer should be maintained by the CSP. There is a provision to generate the receipts in
the local language also. On receiving deposit details online or offline from the terminal
mobile phone by the main server, it will credit the customers virtual account.
If the card is deactivated, terminal will not accept deposit and will display card deactivated
message on terminal screen. Similarly, terminal will not accept deposit if the transaction
amount exceeds days limit and displays deposit amount exceeds days limit message
screen.
During withdrawal, the customer brings the smart card. CSP shows the smart card near to the
terminal and place customers finger in the scanner. The device compares the fingerprint
against the fingerprint stored in the smart card. On successful verification, the terminal
creates a new transaction entry and stores the withdrawal data inside the terminal along with
batch code. Terminal also makes an entry on the smart card regarding the cash withdrawal
and maintains the available balance in the card. The CSP will handover the cash to the
customer by selecting cash withdrawal option on terminal application. On updating the
withdrawal details, terminal will generate two receipts. One receipt should be handed over to
the customer signed by the CSP and other receipt signed by the customer should be
maintained by the CSP. If required, receipts will be generated in local language. If the card is
deactivated, terminal will not allow withdrawal of cash and displays card deactivated
message on terminal screen. Similarly, terminal will not allow withdrawal of cash if the
transaction amount exceeds days limit and displays withdrawal amount exceeds days
limit on the terminal screen. The terminal will have the facility to view the No. of deposits,
total deposited amount, No. of withdrawals total withdrawal amount performed by the CSP
in the day.
Process for handling Card Loss/Damage
The customer will have to approach the CSP and give a request in writing along with the
card number. In case he/she is unable to furnish card number, then he/she should present any

one of the earlier transaction receipt. CSP wil immediately record the details of lost card in
the register and inform the same to the service provider to deactivate the card along with the
reason for deactivation. Service provider will wait for one week to ensure that all offline
transactions are updated and then issues a duplicate card with Zero balance. CSP verifies the
fingerprints of the customer and issue the card to the customer. On first use of the duplicate
card, terminal identifies and updated the balance of the card to reflect the customers balance
in the BCs account.
FAQs on Biometric Card
What is Biometric card?
A plastic card, having memory of all bio-metric data of thump impressions of customer in its
microchip and stores all the information of customer and his/her account/s which is secure
and user friendly. There will be photo on the face of the card and card number and logos of
sponsoring Bank/corporate and technology partner. It is also called biometric smart card.
What are the advantages of biometric card?
It enables bank to reach the un-reached at an affordable cost with branch less banking
concept. Customer need not remember PIN numbers and gives abundant security to literates
as well as to illiterates. Easy operation. The card has all the information on accounts of
customers can be read through the card reader offline.
What are the other devices required for enabling transaction through biometric card?
Unless customer swipes the biometric card on hand held device (Photo & details of it are
given elsewhere) and authenticates the transaction through thumb impression. The Hand
Held Device (HHD) gives thermal print of the transaction carried out which ensures
transparency of the transaction carried out. The HHD can work online as well as offline for
avoiding delay and connectivity problems. It has battery backup and can work on battery up
to 200 transactions.
What are the advantages of HHD (hand Held Device)?
it is very easy to carry. It is just like a branch as it has all the information required to carryout
branch operations. This is why this is called Branchless Banking Model
Bank can fix transaction limit, cash limit and time limit for uploading offline transaction data
to server for enabling day end and day begin process as per our convenience depending upon
the demand and magnitude of operations.
What are the other requirements for biometric card enabled financial Inclusion?

The data captured in HHD offline transactions are to be uploaded to server where the
accounts of customers are maintained. The data transportation can be done through
connecting the HHD to telephone line. Thus, the requirements are:
1.
2.
3.
4.
5.

Electricity connection
Telephone connection
Enrolment personnel engaged by technology partner
Biometric Card printing Machine
Server for storing data (may be hired or owned by technology tie-up partners of
owned by bank)
6. Laptop, web camera, connecting chords & battery backup/charging etc.
7. Business correspondent for mobilizing and organizing customers at the time of
enrolment & for facilitating further cash & non-cash transactions with card & HHD.
8. Nodal Branch Officer (Nodal Branch is the one which is attached for controlling the
biometric card accounts business in their books) for verification of KYC norms etc.,
for monitoring the progress of all the agencies involved.
What is the cost incurred by the bank in issuance of the biometric cards?
Each card costs to the bank close to Rs. 200
Summary of Procedures & modalities adopted by the PS Bank
1. While undertaking transactions, both deposits and withdrawals, the customer will be
identified by photo/signature/fingerprint with the help of hand held electronic device,
which is provided to the BC Agents.
2. BC will put in place a centralized card management system to issue smart cards after
receiving the relevant information about the customers from the base branch.
3. The biometric smart cards provided by the BC are multi-functional and can also be
used at merchant establishments.
4. BC shall put in place the infrastructure for IP connectivity
5. BC will build the necessary interface for capturing and customizing the information
about the implemented schemes.
6. BC will obtain the finger print of all the ten fingers of the customers such that
identification can be done even if the finger print of at least one finger matches. This
is apart from the photo and signature to be obtained.
7. The agents of business correspondents will be recording the transactions on the hand
held devices to be provide to them and will issue a receipt generated by the machine
to customer.
8. These devices are online as well as offline battery operated ones. The battery once
charge will be able to operate the device for about ten hours continuously.

9. The transactions done through the business correspondent swill be transmitted to the
processing centre by connecting the machine to a telephone.
10. The transactions done through the business correspondents will be passed on to the
branch controlling the account of the BC on day-to-day basis. The same will be
reconciled and recorded in the books of the branch.
11. Cash is provided to the business correspondents appointed by the bank from the
branch nearest to them. Reconciliation fo the same shall be done at regular intervals.
12. The Business Correspondents shall be paid commission/remuneration as per the terms
of agreement with them.
13. BC shall provide MIS reports to Bank/Business Correspondents.
14. BC shall be the one point contact organization for the Bank for all purposes
15. The BCs shall have the following two alternatives for their day-to-day purposes
(i)
After obtaining the required guarantee/indemnity/security from the
Business Correspondent, the Bank will sanction clean overdraft limit to
the Business Correspondent to the extent of average requirement of cash.
The Business Correspondent shall withdraw the cash from the overdraft
account. After reconciliation, cash requirements will be recouped by the
Banks base branch.
(ii)
The Business Correspondent will keep sufficient balance in the SB
account with the base branch. An ATM card will be issued to him, by
which he can draw cash from any of the ATMs. After reconciliation,
necessary reimbursement will be made to him.
Remuneration to BCs.
The Bank has negotiated with the technology vendors a package which includes sensitization
of the Business Correspondents and also training them and their agents (CSPs) in the use of
electronic appliances like laptop, scanning devices, POS terminals etc., While doing so, what
in the Banks mind was that the total burden including the cost of funds and the overall
compensation package to BCs should not result in the usurious rates being charged to the
rural borrowers. Moreover, the compensation pattern arrived at by the Bank will also be
based on the volume of business elicited by the BCs and their agents. The tentative package,
negotiated with the technology partners is as under:
For deposit Accounts
Opening of Account:
Term Deposits

Rs.10 per account

: 0.5% of the deposit amount.

For transactions in the accounts:

Cash Deposit : 0.5% of the transaction amount

Cash withdrawals : 0.5% of the transaction amount
Remittances: 0.5% of the transaction amount

For asset products:

For approved loans: 0.5% of the loan amount.
Loan disbursement : 0.5% of the amount disbursed.

Applications rejected on Technical ground: Rs. 10 per application.

Products covered/proposed by the PS Bank under IT Enabled Financial Inclusion

The PS Bank has identified the following products for its IT Enabled Financial Inclusion:
A. No-Frills Savings Accounts:
No minimum balance requirement.
Smart Card cash limit is Rs. 10,000 per day.
POS Limit is Rs. 10,000
No ATM transactions permitted by using Biometric cards.
No charges for cash deposits and withdrawals.
Minimum cash withdrawal permitted is Rs. 10.

B. Payment of NREGS wages and Social Security Pension: PROCESS FLOW under the
scheme:
Branch receives the list and cheque for the NREGS/SSP payment verifies and tallies the
list and the amount in the cheque.

Branch would then send the cheque in clearing/Collection by creating the voucher for
Sundry/Bills Payable. The amount so realized would then be transferred from
Sundry/Bills Payable to the Nodal Tech vendor or BC account at the Branch through
CBS.
The list of account holders would be given to BC for uploading into their CBS for
updation in Accounts/cards. BC will give confirmation that the cards have been updated
to the concerned Branch.
Once this confirmation is received the BCs district representative would approach the
district headquarter branch with a cheque/authorization letter authorizing the branch to
pay the BC agent the amount required for onward disbursement to beneficiaries.
After ascertaining the veracity of the cheque/authorization letter and adhering to the
procedure BC would then disburse the amount to the Customer Service Providers (CSP)
at village level enabling them to pay to the NREGS/SSP beneficiaries.
This payment to beneficiaries would be done using the biometric smart cards and POS
machine at the village level.

C. Others: The PS Bank is also exploring to bring the following products within the
ambit of its IT Enabled Financial Inclusion:
Fixed Deposits
Recurring Deposits
Overdraft in No-Frills Savings accounts. (Pilot Project is already under
implementation in the Banks select centers)
In addition, the PS Bank has introduced two loan schemes for financing the Banks
Biometric card holders, as an incentive to rural people in its Financial Inclusion efforts.
Risks mitigation
The engagement of Business Intermediaries and Business Agents as Business
Correspondents involves significant reputation, legal and operational risk. As a part of the
Banks strategy to mitigate these risks arising from its implementing Financial Inclusion
measures, the PS Bank has adopted technology-based solutions, with acclaimed technology
partners. Other measures taken by the Bank for mitigating these risks encountered in the
process is:
(a) Identification of Business Correspondents and their agents:

The Bank believes that the right person for the right job is the only consideration for
selection and appointment of individuals and institutions as Business Correspondents.
The identification process is therefore strictly based on:
Grass root presence in the area proposed to be served and reputation, socioeconomic status and BC acceptance in the society.
Governance structure.
Capability for proper handling of information, documentation, maintenance of
accounts and records.
Capacity to provide social support and guidance to the poor and marginalized
sections.
Experience of prior relationship with a bank, insurance company, financial
institution.
A specific check on the reputation in terms of commitment, integrity and
competence in the local area, the financial status and source of income.
(b) Training-enabled compensation package to BCs:
The Bank has negotiated with the technology partners a compensation package which
includes sensitization and training of the Business Correspondents and also training their
agents (CSPs) in the use of electronic appliances like laptop, scanning devices, POS
terminals etc.,
(c) Stipulation of Cash Holding Limits by BCs and their agents:
Separate cash holding limits are stipulated for Business Correspondents and their agents.
In no context, these limits are allowed to be exceeded. Moreover, the HHD will not allow
deposits exceeding Rs. 10,000 and its cash holding capacity will never exceed Rs.
10,000. The BCs are given by the Bank Overdraft limits, against full security, collateral
or third-party guarantee.
(d) Transit Insurance:
The cash carried from the Banks base branch to the BCs office and from the BCs office
to the village by the BC Agent is covered by adequate Transit Insurance provided by a
reputed Insurer.

ANNEXURE 3
CASE 3 PRIVATE SECTOR BANK AND BUSINESS CORRESPONDENT
Background
A Business Correspondent (BC) unit is used for distribution of banking services in
remote and un-banked areas for achieving Financial Inclusion. Banks use BC for
sourcing and servicing deposit and loans and advances for its customers. A business
correspondent for the purpose of banking operations is district from a business facilitator
in that the later does not handle cash and functions merely as an agent to market bank
products.
As per the extant guidelines, Post office, Cooperative Societies, specified individuals,
MFIs, NGOs, and section 25 Companies can function as BCs. Banks can use BCs in
conjunction with POS machine. Banks can deploy Point of Sale (POS) machines oat the
BC locations for IT enabled transactions by the customers. Customers can swipe their
Cards of the POS machines. POS machines can be accessed through credit/debit cards
and the transactions can be, through handheld devices, seamlessly integrated with the
banks own systems.
Co-operative Banks and Societies and post offices can act as BCs and hel the commercial
banks in financial inclusion by managing cash of the commercial banks customers along
with their own cash and do a settlement with a commercial Bank through
clearing/bilateral or online arrangements. Though banks are following this model the
possibility of co-operative bank losing its customers to the commercial banks is a
discouraging factor. Yet co-operative banks which have cash management arrangement
with commercial banks help the later in their outreach through the BC concept.
In the technology driven model of a Kiosk or POS Terminal owned by a BC; which h is
not in the business of Banking or handling cash, the Bank makes arrangements to provide
for Cash to the BC at the beginning of day and collect the same back at the end of the day
next day. The Customer however has to be given credit in his account within 24 hrs. the
BC uses the cash to make the transaction with the banks customer. The following
captures the functioning of a typical BC and Bank.
ICT based financial Inclusion
In the Annual Policy Statement of 2007-08 the RBI has asked Banks to provide banking
services to customers in remote and un-banked areas, through no frill accounts. It is
recognized that keeping the cost of funds at the hand of the borrower at a lower level is a
challenge. Banks can use BCs owning IT Kiosk/POS platform, which is a feasible
method of outreach.

Information and Communication Technology (ICT Kiosks) are being set up across the
country by various private companies. These are shared distribution outlets across
products and services which include FMCG, Agriculture Inputs, Agriculture advisory,
Education, Health and other basic services like photography, Xerox, Railway bookings
mobile recharge etc. Generally, the kiosk operators are the local entrepreneurs who invest
in the kiosk infrastructure (Computer, UPS, etc.). The company promoting the venture
aggregates the products and services it through the Kiosk; provide training to the kiosk
operators. They employ field staff for monitoring the activities. A kiosk normally serves
around 6 villages i.e. a population of 10,000. The estimated number of footfalls (users) at
the kiosk on an average is around 700 per month. The opportunity in this space is likely
to be further enhanced by the Governments recent ICT Initiatives. Department of IT is
setting up 1 lac kiosks under PPP model also includes G2C services through the kiosk
under the Customer Service Center (CSC) programme.

Introduction
Model Development and Communication Ltd. (MDCL), an ICT enterprise has evolved
an entrepreneurial network of ICT Centers of Kiosk that provide information and services
related to education, health, employment, government services, insurance, e-commerce,
etc. in the rural areas. The network of more than 1000 Kiosks owned by the company
connects panchayats to each other and provides required information and delivers various
services to the rural customers. At the rate of one Kiosk on every fove to six villages,
MDCL caters to more than 50,000 villages across India.
The Kiosks established by MDCL are run by village level entrepreneurs who invest in a
PC, a shop/office and some basic furniture. These entrepreneurs/Kiosk operators are
trained by a Foundation promoted by MDCL on the kiosk and banking operations. They
are exposed to a two week induction course followed by refresher course from time to
time. The kiosks are monitored and supported by Foundation field staff. The key products
currently distributed by the kiosks are Computer/English Education, Mobile recharge
vouchers, and Insurance. MDCL earns a fee for each of these services. The kiosk
operator keeps a security deposit of specified sum with MDCL through which these
transactions are settled. In addition the kiosk operator earns exclusive income by
providing other services as well such as photography, photocopying, Online Railway
bookings, etc.
Private bank observes that it can expand its banking activities through the kiosks
established by the BC namely MDCL. It has entered into an arrangement with the MDCL
that the companys staff will collect and settle cash between the customers and the Bank.
The staff member of MDCL, trained by Bank will move from kiosk to kiosk accepting

deposits/withdrawal requests/repayment of loan on behalf of the bank. In order that the

banks customers get proper service the transaction time will be regular and fixed. BC
staff will be present at the kiosk at the stipulated fixed time and to do the transaction.
Transactions made by the BC as above will be captured through a POS machine. The
POS machine will be ported from one kiosk to another by the MDCL staff and connected
through a pin based RIM Connection (mobile phone). The details of the settlement
process in this model are captured separately under in a later section.
The bank is also considering the possibility of entering into an arrangement where the BC
sup-contracts the cash collection and disbursement activity to the kiosk operator within
the prescribed limit. This could be a more cost effective method however the controls
will be diluted.
Transaction Process:
BC will open a Current Account with the designated Branch of private bank,
which will be used to settle transactions done on the POS machine at Kiosk
locations.
BC will arrange to carry cash to and from the Branch to the locations. Every day
at the beginning of the day the BC will withdraw cash from the branch and carry
the same for disbursement at the kiosks.
The bank will open a current account with an overdraft limit as per the standard
credit procedure. Cash withdrawn will be restricted to the limit of over draft.
BC staff will make cash deposit/withdrawal at each kiosk.
In the daily transactions,
(i)
If withdrawal exceed deposits the net cash in hand with the BC at the
end of the day will be nil.
(ii)
If the deposits exceed the withdrawals there will be cash surplus with
the BC which needs to be deposited into the account on the next day.
(iii) Individual transactions done on the POS machine will be reflected in
the BCs account when the settlement is done at the start of the next
day. In this way withdrawal transactions are reflected on line whereas
deposit transactions are reflected at the BOD next day.
(iv) The balance in the settlements account of the BC has to be brought
down to nil before the next withdrawal can be effected.
In case the balance is not brought down to nil the differential
amount needs to be parked in an accounts payable/receivable
account and sorted out or reconciled within one day by the
branch with the BC.

 In case the issue is not resolved within the stipulated time the
controlling authority of that area will resolve the same.
Transaction Limits:
As per Private Banks policy a BC will be collecting and disbursing small value
deposits which will be capped at a maximum amount of Rs. 10,000 per customer per
day. However, in view of the relative small means of the account holders it is
estimated that the actual volume will be much lower.
The maximum amount of Cash in Transit i.e. cash carried by the BC officials from
Branch to kiosk or from Kiosk to Kiosk, will be capped at Rs. 1 lakh. The BC will
take appropriate insurance cover for the same. In addition the bank will also follow a
Daily Limit for BC. Accordingly the authorized BC staff will operate within a ceiling
of Rs. 50,000 per day from the current a/c of BC.
Settlement and Operations Process:
Settlement process has been explained above. The operations will be as under:
There will be one POS machine is common to the 5-6 kiosks or one POS machine
common to a set of kiosk attached to the branch. Each kiosk will have a unique
Terminal ID. The BC staff carrying the POS machine will initiate the Terminal ID for
the kiosk that he/she is present at by selecting the appropriate ID option on the
machine.
When the BC staff has completed his activity at the POS he will run the end of the
day batch settlement for that particular Kiosk. Once this is done no further
transactions will be possible form that kiosk.
The BC staff will generate tow copies of the end of the day report for that kiosk and
attach with the individual vouchers i.e. one set pertaining to the BC copy and once set
pertaining to the bank copy. Once this process is completed the BC will move to the
next kiosk.
BC will ensure that signature of customer on the voucher and the transaction slip
generated by the PCS machine is obtained as per policy.
Products
Private bank has identified the following products for the scheme.
(A) Premier savings accounts:
This will be opened with a minimum average quarterly balance of Rs. 1500 and the
customers would be issued free Debit Cards enabling cash withdrawal/deposit at

Business Correspondents. The deposit will be marketed to customers of Rural and Under
Banked markets and identified locations near the branches.
These accounts will offer the following to the customers:
Debit card cash limit of Rs. 10,000 per day at ATMs & Rs. 10,000 POS limit
2 Free ATM Cash Transactions per month.
8 Free cash transactions per month done at Business Correspondents through
Electronic Data Capture machines. At the time of the transaction customer would
be charged Rs. 10 per transactions. The surcharge would be reversed in the
subsequent month in case of the free transaction.
Other cash transactions done at Business Correspondents through EDC machines
will attract a charge of Rs. 15 per transactions.
Bank will collect all other charges as per the rules ion force for regular savings
account
(B) No frills savings a/c
The bank will offer a No-Frills Savings A/c through the BCs.
Under this the customer will be required to sign a declaration meant to screen whether
he/she fulfills anyone of the following conditions namely, (a) he/she does not have
another bank a/c and/or (b) the annual income is less that Rs. 50,000 or (c) he/she is a
beneficiary of Govt schemes.
The bank will allow 4 FREE Cash transactions per month at POS terminals (As indicated
previously the system will first charge and then auto reversal will happen as per premium
savings A/c).
Other features will be similar to Premium Savings A/c.

(C) Fixed Deposits:

The BCs will also be allowed to service FD customers of the banks as per the above
procedure.
Welcome Kits and Pin Numbers
The Welcome kits and PIN Numbers will be delivered through the BC/Bank.
Identification: Customers will be identified by the kiosk operator. IT enabled rural outlets
qualify to act as a BF and may create awareness of savings products
(DBOD.N>.BL.BC.58/22.01.002/2005, dated January 25, 2006). KYC will be done by the
bank.

Fee/Compensation:
The compensation to BC will be as follows:

Product
SB- No Frills a/c (Zero min Balance)

Slab & Fee per Month per A/c (in Rs.)

up to 25 accounts Rs. 15 per customer.
Above 25 accounts Rs. 20 per customer.

SB- Premier savings a/c (AHB-1500)

Up to 25 accounts Rs. 75
Above 25 customer Rs. 125

FD- Amounts Rs 5000 to 20000

Rs. 20 per customer

Apart from the above, transaction fee @ Rs. 5 per POS transaction for SB No Frills a/c and
POS transaction fee @ Rs. 10 per POS transaction for the rest (Premier savings accounts).

Training:
Training for the BC official will be conducted at the Branch. A process manual will
be provided to the BC.
Under train the trainer mechanism where the bank will train the training staff at
MDCL.
Customer Training on security issues related to PIN numbers etc. to be conducted at
the kiosk monthly intervals by Branch Staff.

Risks and risk mitigation strategy identified by the bank

Type
Strategic

Reputation

Compliance
Operational

Legal

Exit Strategy

Counter Party
Contractual

Risks
BC & BF conducting business on
its own Behalf which is
inconsistent with the overall
Objective of the Bank.
Poor service from the BC&BF,
Customer Interaction not being
consistent with overall standard of
the Bank.
Privacy, consumer and prudential
Laws inadequately complied with.
Frauds, Fake Currency,
technological failure, errors,
inadequate financial capacity,
theft and other calamities

Exposure to fines, penalties, or

punitive damages resulting from
BCs actions, as well as private
settlements due to omissions and
Commissions of the BC&BF.
This could arise from overreliance on the BC & BF, the loss
of relevant skills in the Bank itself
preventing in from bringing the
activity back in-house and
contracts entered into wherein
speedy exists would be
prohibitively expensive.
Due to inappropriate underwriting
or creating Assessments
Arising from whether or not the
Bank has ability to enforce the

Mitigation
Monitored
onongoing
basis
through mystery shopping and
Feedback from customers and
Third parties.
Training
Adequate
incentive
payouts
Constant monitoring
-Detailed Agreement with
BC&BF
Careful Selection and
setting transactional limits
based
on
financial
strength of the BC.
Dealing with small value
of
Deposits
and
withdrawals from Savings
banks accounts.
Bank to do KYC for each
individual Customers.
Insurance cover on Cash
in Transit and infidelity.
Training for cash handling
using existing technology.
Mystery Shopping.
Agreement with BC&BF.
Have more than one BC in
each location.
Detailed
Agreement
between the bank and
BC&BF.
Have more than one BC
in each location.

Detailed Agreement with

BC&BF.
Detailed Agreement with
BC&BF.

Concentration
& systemic

contract.
Due to lack of control of
individual Banks over the BC &
BF, more so when overall
Banking industry has a
considerable exposure to one BC
& BF.

Have more than one BC

in each locations.
Exploring ATM sharing
arrangements with other
Banks.

Making no frill profitable

Private bank believes that this ICT imitative can be made into a profitable venture by
exploring the following possibilities:
Creating a cashless eco system around the kiosk. All transaction around the kiosk
could be settled by account to account transfer with the kiosk operator. Kiosk operator
transaction with MDCL can be settled through the account with Bank. Thus adding to
the float captured through the eco system and reducing the transaction costs.
Adopting cheaper technology for No frill product: Looking at the cost components
in the rural product, bank has to adopt technology options that are low cost
(i)
Data entry cost: A/c data entry can be done at the kiosk (BC) which is IT
enabled, the kiosk operator can be the maker and the Bank staff can be the
checker. This will be comparatively cheaper than the existing cost.
(ii)
Account maintenance cost: Software products are available on ASP that
provide the service at a low cost.
(iii) Smart card vis a vis Magnetic Cards. Life Cycle management cost of
Magnetic Strip cards in much lesser than Smart cards.
(iv) Branch vs. non branch: These accounts will not have branch footfall and
ATM withdrawals.
The bank has identified the following challenges in achieving financial inclusion.
Online vs. Offline transactions. Many locations are lacking basic connectivity and
hence need to be provided with offline transactions. If technological infra is provided
in rural areas more of on-line transactions can be enabled which will make early
financial inclusion.
Illiterate customers: Have to be enabled with Biometric Authentication as against PIN
Based Debit Cards, which is costly.
The private banks approach is to use the BC for financial inclusion, as also serving other
customers. This, it hopes, will make the operation viable.

In due course of time, the Private Bank intends to introduce appropriate asset products Based
on the account conduct and the data available bank will develop asset products which will
further add to the income generated by the customer, again keeping the operating cost low
through technology and controlling the supervision and monitoring cost of the asset through
effective use of the BC/BF ecosystem.

ANNEXURE 4
CASE 4 THE CASE OF A TECHNOLOGY ENABLED COMPANY OFFERING
ITS SERVICE TO BANKS FOR FINANCIAL INCLUSION
This is a technology enabled service. The system is capable of using local language and offer
voice enabled doorstep banking using mobile phone with biometric support. Let us see a
pictorial view of the process before we read about the process.
Technology Enabled BC Process.
(i)
(ii)

(iii)
(iv)
(v)

(vi)

(vii)

The agent carries the mobile phone with application and a small handheld
printer to the customers doorstep.
The printer has a magnetic card reader and a finger print scanner.
Customer has to swipe his/her debit card on the handheld printer before
performing any transaction.
The customers details are flashed on the agents mobile screen as it
captures the data from the magnetic card.
Based on the customers choice of financial transaction the agent selects
the appropriate option in the application.
On receiving the intimation, the agents mobile application prints a
receipt. The agent gives the receipt to the customer who in turn signs or
puts a thumb impression on a copy of the receipt and hand it over to the
agent.
The server processes the transaction online after validating the agent and
the customer. The server processes the transaction by connecting to the
MFI system online.
The transaction details are played over the mobile phones speaker either
in English or in local language. When the customer is satisfied with the
transaction details he/she has to place his/her thumb on finger print
scanner to proceed with the transaction. Once the customers thumb
impression matches the application encrypts the data and sends encrypted
data to server.

The A.S. company is Subsidiary of F-Tech Limited. It offer new age transaction service
providing company enabling any transaction on mobile. The company offer AS cards
Platform for issuing credit/debit cards on customers mobile phones and AS-Project
Financial Inclusion.
The objective of the process is to (a) take banking to the customers door-step at a lower
transaction cost (b) offer secure and safe banking in rural areas and urban slums and (c)
security and safety data and information.

The company uses a mobile phone and a biometric card reader.

The operations:
A.S is a mobile phone based on-the-spot cash deposit/withdrawal solution. In making
available the service to the Banks customer the following steps are taken.
(1) The agent carries the mobile phone with A.S application loaded (this needs to be
preloaded with data of the customer of the bank) on it and a small handheld printer
(having an integrated magstripe reader) to the customers doorstep.
(2) Based on the customer choice of cash deposit/withdrawal, agent selects the
appropriate option in the application, swipes the customer card in the printer (this
automatically enters the customer account number), amount and agents PIN.
(3) The phone application announces the transaction details to the customer in the local
language of the customer and asks him/her to place the thumb on the fingerprint
scanner to confirm the transaction.
(4) After verifying the customers thumbprint on the device the phone application sends
the transaction details to the backend. (Banks core bank or Total Bank solution).
(5) The backend processes the transaction online and on a deposit made by the customer
debits the agents account and credits the customer account. (or vice versa for a
withdrawal). After processing the transaction the backend sends the confirmation to
the phone application.
(6) The phone application prints transaction receipt and informs the success/failure of the
transaction to the customer in the local language and asks him/her to collect the
receipt (printed in local language) duly signed by the agent.
The company is in effect a B.C and together with the bank be able to offer:
(1) Doorstep banking facility to customers. This will be restricted to such items of
banking as permitted by RBI.
(2) An extremely portable solution. With the availability of Insurance the transactions
will be safe.
(3) The bank and the customer will get online transaction support.
(4) Given the possibility of illiterate customer there is the Voice intimation to customer.
(5) The system will be able to generate Receipts in local language.
The company says that it works with contract less MIFARE/DESFIRE smart cards and it is
easy to integrate with banks system over industry standard ISO 8583 messages. It can
support Offline and Online Transactions.

One of the major concerns of financial Inclusion is security of transactions. In the technology
based solutions it is seen that

All the transactions PIN protected

It enables Biometric Voice confirmations
Offers Local language Voice Confirmations
Unique cryptographic keys
Session key based encryption

In view of this the system in dependable.

As regards robustness the following can be seen.

Fault tolerant Unix platform

Clustered Environment
Online Database replication
RAID Support
Redundant Communication links
24*7 Monitoring

In view of the large number of financially excluded it is important to study the scalability of
the system. It is seen that the system is highly scalable to support large number of customers
and BC/agents. Also Multiple Banks/MFIs/RRBs can be supported on the some backend.
As regards BCs who may not be viable on the basis of transactions that they do for the banks
the system offers additional facilities/services can be offered by the agent to the customers
like Remittance, Mobile Recharge, Bill Payments, Ticket Booking etc. by interfacing it with
trusted third parties systems.