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 INDIAN
INSTITUTE OF
BANKING &
FINANCE,
MUMBAI, 2005,
2008(This book
has been published
by Indian Institute
of Banking &
Finance.
Permission of
theInstitute is
essential for
reproduction of
any portion of this
book. The views
expressed
hereinare not
necessarily the
views of the
Institute.)All rights
reserved. No part
of this publication
may be reproduced
or transmitted, in
any formor by any
means, without
permission. Any
person who does
any unauthorised
act in relationto
this publication
may be liable to
criminal
prosecution and
civil claims for
damages.First
edition, 2005
Second edition,
2008 Reprinted,
2008,
2009(twice)MAC
MILLAN
PUBLISHERS
INDIA
LIMITEDChennai
Kolkata Bangalore
Bhopal
Chandigarh
NewDelhi
Coimbatore
Cuttack
HubliHyderabad Ja
ipur Lucknow Mad
urai Mumbai Nagp
ur Patna Punc Silig
uriThiruvananthap
uram
Viskhapatanam.
Companies and
representatives
throughout the
worldISBN 10:
0230-63611-X
ISBN 13: 978-
0230-63611-
8Published by
Rajiv Beri for
Mucmillan
Publishers India
Limited and
Printed by S.M
Yoganat
Macmillan India
Press, Chennai r
600
041PRINCIPLES
& PRACTICES
OF
BANKINGOrigina
lly prepared by
A.M. Arundekar
(Module A), O.P.
Agarwal (Module
B), Dr. Onkar Nath
(Module C), P.S.
Khandelwal
(Module D) under
the guidance of
T.S.
Radhakrishnan.Re
vised and updated
by D. Srinivasan
(Module A), R.
Malayarasan
(Module B),
V.Radhakrishnan
& V. Suresh
(Module C),
Praveen Kumar &
H.M. Prathiba
(Module D)
allfaculty at
IMAGE, Chennai
under the guidance
of N.C. Rao, Asst.
General Manager,
IndianBank,
Chennai & Dr.
U.A.
Balasubramanian,
Faculty, IMAGE,
Chennai.Glossary
prepared by Mr.
B.S.
Khubchandani;
Former Chief
Manager, Bank of
India.This book is
meant for
educational and
learning purposes.
The author) s) of
the bookhas/have
taken all
reasonable care to
ensure that the
contents of the
book do not violate
anyexisting
copyright or other
intellectual
property rights of
any person in any
mannerwhatsoever.
In the event the
author(s) has/have
been unable to
track any source
and if
anycopyright has
been inadvertently
infringed, please
notify the
publisher in
writing
forcorrective
action.
FOREWOR
D
The world of
banking and
finance is changing
very fast and banks
are leveraging
knowledgeand
technology in
offering newer
services to the
customers. Banks
and technology
areevolving so
rapidly that bank
staff must
continually seek
new skills that
enable them not
onlyto respond to
change, but also to
build competence
in handling various
queries raised
bycustomers.
Therefore, there is
a need for today's
bank employees to
keep themselves
updatedwith a new
set of skills and
knowledge.The
Institute, being the
main provider of
banking education,
reviews the
syllabus for
itsassociate
examinations, viz.,
JAIIB /CAIIB and
various other
examinations with
the help ofExpert
Groups from time
to time to make the
contents relevant
and contemporary
in nature.The latest
revision has been
done by an expert
group under the
Chairmanship of
Prof. Y.K.Bhushan.
This book and the
other two books
mentioned below
are the courseware
for JAIIB
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which aims to
impart up-to-date
knowledge in the
field of banking
and finance with a
view toequipping
the bankers to face
the emerging
challenges of today
and tomorrow.As
there is a growing
demand for
qualified
manpower in the
banking sector
with accent
on banking
knowledge and
skills, together
with technology-
familiarity,
customer-
orientation
andhands-on
application skills
which will
substantially
reduce the training
intervention at
the bank level
before/
immediately after
they are employed,
the institute has
launched
theDiploma in
Banking &
Finance (DBF) in
2007 for
graduation-plus
level
candidates.Candid
ates to the course
will get extensive
and detailed
knowledge on
banking and
financeand details
of banking
operations. The
Diploma is offered
in the distance
learning mode
witha mix of
educational
support services
like provision of
study kits, contact
classes, etc.
Thekey features of
the Diploma is that
it aims at exposing
students to real-life
bankingenvironme
nt and that it is
equivalent to
JAIIB.The JAIIB
and the Diploma in
Banking &
Finance has three
papers,
viz.1. Principles &
Practices of Banki
ng2. Accounting &
Finance for Banker
s3. Legal & Regula
tory Aspects of Ba
nkingThis book,
the courseware for
the first paper on
Principles &
Practices of
Banking, starts
withan overview of
Indian financial
system and covers
deposit,
remittances,
collection and
alliedservices with
greater emphasis
on day-to-day
operations in
addition to the law
related
thereto.Special
focus is on retail
banking which
takes the
participants
through the
concepts
and processes of
retail deposit and
credit products in
great detail.
Marketing of Bank
productshave been
covered in length.
Aspects such as
insurance, mutual
funds, credit cards,
etc., havealso been
covered. The flow
of transactions in a
centralised
(computerised)
operatingenvironm
ent and delivery of
services through
multiple channels
have been given
adequatecoverage
to make the
participants aware
of the latest
banking
environment and
practices.The
Institute had
constituted teams
consisting of
eminent bankers
and academicians
to prepare the
reading material
for all the subjects
as self-
instructional study
kits obviating
theneed for the
intervention of a
teacher. This book
represents the
outcome of this
endeavour to bring
out self-contained
comprehensive
courseware/book
on the subject. The
Instituteacknowled
ges with gratitude
the valuable
services rendered
by the authors in
preparing
thecourseware in a
short period of
time.The team,
who developed the
book, have made
all efforts to cover
the entire
syllabus prescribed
for the subject.
However, the
candidates could
still refer to a few
standardtextbooks
to supplement this
material which we
are sure, will
enhance the
professionalcompe
tence of the
candidates to still a
higher degree. We
have no doubt that
the studymaterial
will be found
useful and will
meet the needs of
the candidates to
prepare
adequatelyfor the
examinations. In
addition, we are
sure that these
books will also
prove useful
to practitioners,
academicians, and
other interested
readers.We
welcome
suggestions for
improvement of
the book.Mumbai
3-7-2008R.
BhaskaranChief
Executive Officer
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RECOMMENDE
D READINGThe
Institute has
prepared
comprehensive
courseware in the
form of study kits
to
facilitate preparati
on for the
examination
without
intervention of the
teacher. An attempt
has heenmade to
cover fully the
syllabus prescribed
for each
module/subject
and the
presentation
oftopics may not
always be in the
same sequence as
given in the
syllabus.Candidate
s are also expected
to take note of all
the latest
developments
relating to the
subjectcovered in
the syllabus by
referring to
Financial Papers,
Economic
Journals, Latest
Booksand
PublicationsPAPE
R1
- PRINCIPLES &
PRACTICE OF
BANKING.
The candidates
would be able to
acquire an in-depth
knowledge of the
following:

Various functions
associated with ba
nking.

Practice and proce

dures relating to de
posit and credit, do
cumentation, monit
oring andcontrol.

 An insight into ma
rketing of banking
services and banki
ng technology.MO
DULE A -
INDIAN
FINANCIAL
SYSTEM