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Section 5 (b) of the Banking Regulation Act 1949

defines Banking as

Accepting for the purpose of


lending and investment,
deposits of money from the
public
repayable on demand or
otherwise
and withdrawable by cheque,
draft, order or otherwise

INTERMEDIATION

Between those who save money


and those who need money
Financial intermediation plays an
important economic function

RISKS IN LENDING
Credit Risk
Liquidity Risk
Interest Rate Risk
Banks are essentially risk
managers

Payment

system
Pay deposits on demand
Payment through cheques
Facilitate movement of money
Circulatory system of the economy
Financial services provider
Products of mutual funds and
insurance companies
Collection of utility bills, etc.

Banking

is based on the trust


that banks will honour their
commitments
Principles on which banking
business is based
Liquidity
Safety
Profitability
Secrecy
Service Quality

PAYMENT SYSTEM CONSTITUENT


Payments and remittances
Collection
FINANCIAL
INTERMEDIARY
Deposit
Loan
ALLIED SERVICES
Distribution
Collection
Demat services
Safe keeping
Advisory

written instruction issued by a


customer (Drawer) to his bank
(Drawee) to pay the specified
amount to the person named
(Payee) in the cheque
Crossed and uncrossed cheques
Requirement of sufficient
balance for making payment

Cheque

issued by a bank on
itself but payable at another
branch
In case there is no branch of the
issuing bank, arrangements can
be made with the other bank(s)
having its/their branch(es)

cheque which can be paid


at any branch of the bank

Networking

of the branches
and centralised computer
system is a pre-requisite

Faster mode of remitting money to far


away places
Centralised computer system enables the
transaction
The payment can be made instantly if the
payee / beneficiary has an account with the
payment branch
In case payer and payee maintain accounts
with two different banks, the transaction
can be completed through the Reserve
Bank of India
Cost effective and fast mode of transaction

substitute for cheques


Can be used for withdrawing
cash from ATM as well as making
payments to third parties
through POS
Account of the customer is
debited instantly
Add-on facilities
24 X 365 days banking

Customer

gets certain credit limit


from the credit card issuing bank
The amount utilized is debited to
credit card account
Customer gets some time to
make payment to the bank
Customer gets interest free
credit for upto 50 days

A pre-paid debit card


Useful for travel abroad
Image of a travel card

Transfer
Local

Clearing
ECS or Electronic Clearing
Cheque Collection
National Clearing
CMS Cash Management
Services
Bills Collection
Services involving Foreign
Exchange

Transactions involving transfer of money


from one account to another account
within the branch of a bank or within
the branches of the same bank
Inter-connection through networking
enables speedier transfer within
branches
Traditional methods (without
networking) take time in realisation of
proceeds

Facilitating collection of cheques which


are drawn on local branches of banks
Bankers meet at Clearing House for
exchange of cheques
RBI and / or SBI and / or commercial
banks maintain Clearing House in
different locations
Days inward and outward cheques
between banks are exchanged and
transaction amounts are netted
Local clearing is NET settlement

Payment instructions are transmitted


electronically
Covers high volume, low value transactions
Both debit (ECS Debit) and credit (ECS Credit)
transactions are covered
Managed by RBI or SBI
Credit ECS

Example: Interest on Securities,


Dividends, Regular Salaries

Debit ECS

Example: Insurance premiums, Loan


repayments, Utility bill payments

Benefits

Speed
Accuracy
Secured channel
Avoids manual intervention (processing of
transactions)
Saves time due to systemic handling
Benefits flow to bank, customer and user
public

Local cheques are collected in local


clearing
Outstation cheques (upcountry) are
collected by sending the cheques to
respective banks branches
Unlike local clearing, cheque
collection takes time due to travel
and realisation of proceeds into
customers account

Speedier collection of outstation


cheques drawn on larger cities
RBI has linked larger cities
Works under the same principle as
local clearing
Communication has enabled
networking and efficiency in
collection
Unlike outstation cheque collection,
national clearing facilitates faster
collection

Best suited for customers with wide


network of operations and dealers
Enables to manage liquidity efficiently
through speedier collection and
efficient management of payments
Availability of MIS on collections and
payments a major benefit of CMS
Distributed collection and payment at
point of occurrence of transactions
Enables customers under CMS to
reconcile their payments and
collections on a daily basis

Instead of paying through cheques, business


houses draw bills of exchange at times
Bills can be demand bills or usance bills
Invoice, bill and document of title to goods (trade
documents) are handed over to the bank by seller
The Bank sends the same to the buyers bank for
collecting payment
Buyers bank hands over all trade documents
upon receipt of payment from buyer on a demand
bill or receipt of acceptance from the buyer in
case of usance bill
Buyers bank remits the proceeds to the sellers
bank and seller gets money for goods / services
sold

Need arises when payments are to be


made to a beneficiary in an overseas
country in foreign currency
Payments received in foreign currency
needs to be realised in Indian currency
Banks maintain accounts in an overseas
country to facilitate transactions
involving foreign currency
Such accounts are known as Nostro
accounts

Current Accounts
Demand deposits
No interest is paid on balances in current
accounts
Savings Accounts
Demand deposits for non-business entities
Interest is paid on balances
Fixed Deposit Accounts
Accepted for fixed period
Pre-mature payment is permitted as measure
of customer service
Recurring Deposit Accounts
Saving of a fixed sum every month for a fixed
period

Retail Loans
Personal Overdrafts
Credit Cards

Retail Loans
Provided to individuals
Nature
Consumer durables
Housing
Vehicle
Personal expenses
Eligibility
Margin
Interest application
Repayment monthly or quarterly
Unsecured and secured

Personal Overdraft
For unexpected and periodic
requirements

Eligibility
Margin
Interest application
Repayment
Unsecured and secured

Credit Cards
For purchases / withdrawals

Eligibility
Credit limit
Repayment monthly or in
installments
Unsecured

Business credit
For acquisition of fixed assets
For financing current assets

Eligibility
Amount
Borrowing/repayment
Secured and unsecured

Given for acquiring of fixed assets


Secured by a charge on the assets
created out of bank finance
Margin requires to be contributed
Repayment is out of profits
generated by the assets created and
is spread over a time in installments

The assets required by the business


are acquired by the bank and leased
out to the customer
Lease rentals are paid by the
customer
Not very popular now as the tax
incentives available earlier are now
withdrawn

In this section you will understand


the various types of working capital
facilities
Nature

overdraft
cash credit
packing credit
demand loans and lines of credit
business cards

Given for financing the working capital cycle


Can be Pre sale or Post sale financing
Overdraft

For meeting short term requirements


For meeting temporary mismatches in cash flow
Can be secured or unsecured

Cash Credit

Most Common and popular facility in India


Running Account
Permanent in nature
Limit established and withdrawals within limit
Secured by a hypothecation charge on current
assets
Margin is maintained over the value of assets

Packing Credit
Similar to cash credit
For meeting export orders
Originally on order to order basis
Presently running account facility is
permitted
Concessive interest rate
Liquidation can be only by export
proceeds
Delay in liquidation attracts penalty
Secured by a charge on the current
assets
Sagar mal sharma

Demand Loans/Lines of Credit


Demand loan is for meeting short term
requirements
Attracts cheaper interest
Preferred by large corporates as cost
effective
Liquidated at the end of the stipulated period
Line of Credit is an assurance by the banker
to make available short term credit when
needed
Terms and conditions are pre-agreed
Gives a feeling of security for the corporate
The assurance is over a period of time

Business Card
Equivalent of a credit or debit card to
individuals
Enables business entities to make their
purchase of required supplies without
resorting to use of cheques or demand
drafts
Interest is charged from day one
Being popularized in India

In this section you will understand


the various modes of financing post
sale or credit sales

Cheque purchase
Bill purchase
Bill Discount
Letter of Credit
Bill Negotiation
Guarantees

Cheque Purchase
Avoids delay involved in collection of cheques
Funds are made available to sellers immediately
Interest is charged from the date of purchase to
date of realization of the cheque

Bill Purchase
Advance against documentary bills is payable at
sight
Bills are then sent for collection
Advance is liquidated from collection proceeds
Interest is charged from the date of purchase to
the date of receipt of proceeds is recovered
upfront

Bill Discount
Advance against documentary Usance
bills
Interest charged for the Usance period is
called discount
Discount is recovered upfront

Letter of Credit

Guarantee given by the purchasers


bank to the seller that the bill
representing sale of goods will be paid
Parties to an LC are applicant (buyer of
goods), issuing bank (buyers bank), and
beneficiary (Seller of goods)
Treated as a credit facility by the buyers
bank
It is a non-fund based facility
Normally secured by a charge on current
assets
Commission is charged resulting in fee
income to bank

Bill Negotiation
Purchase or discounting of a bill
accompanied by an LC
Risk to negotiating bank is less
Interest/discount is charged upfront

Guarantees
Issued by banks at the request of
customers in respect of transactions
other than normal trade transactions
It can be as a replacement of EMD, for
receipt of mobilisation advance, for
release of retention money, towards
payment of penalty for non performance
Commission is charged for issue of
guarantee resulting in fee income to
bank
It is a non-fund based facility

The services provided by banks


under the role of provider of allied
services are

Distribution
Collection of taxes and bills
DeMAT accounts
Safe keeping
Advisory services

In banking today, distribution of


products and third parties have
assumed great importance due to

Generation of fee income


Ability to provide single umbrella service
Ability to create exit barrier

Activities involved are:

Mutual Fund Units


Insurance Products
Sale of Bonds
Trade in Gold / Gold coins
Mobile Phone Recharge
Shares of companies offering Public
Issues

The

products offered by
banks within the collection
service are
Taxes
Utility Bills

A depository is like a bank. Only


difference is that it holds your
securities and not cash
The account opened with a
depository participant is called a
DeMat account
Dematerialisation is the process of
converting physical shares into
electronic form
Rematerialisation is the process of
converting securities from electronic
form into physical form

Physical securities are transferred on


basis of transfer deeds, DeMat
securities get transferred
electronically
Each security (i.e., share of a
particular company) has a unique
identification No. called ISIN
(International Securities
Identification Number) through
which the securities are recognised

Transfers are affected


Through the TIFD or Delivery Slip
Which is given by the seller to his DP
The shares will be transferred out of the
sellers DeMat account
And into the buyers DeMat account with
his DP

The entire clearing process is put


through a central depository
At present we have two depositories,
namely CDSL & NSDL who are
registered with SEBI

Safe Deposit Vault:


Safe keeping facility is a traditional
function of banks
Lockers provided at very reasonable
rates
Rents are charged as per size of the
locker and are payable in advance
Lockers can be hired by individuals,
firms, Ltd. Companies, associations,
societies etc
Lockers are rented out for a minimum
period of one year

Safe Custody Service:


Under safe custody, banks accept sealed
packets for safe keeping in their strong
rooms for which a receipt is issued
Articles are returned upon the customer
handing over the receipt
Not offered any more as a matter of
course
Banks today deposit the duplicate keys
of branches for safe custody with other
banks in the area for use in emergencies

The

product offered by banks


within the Advisory service is:
Investment Advice

Banking Channels:
ATMs
POS Terminals
Internet banking
Phone banking
Mobile banking
Branch

Migrating from branch banking to


other channels- Advantages:

Convenience to customers
Cost effective to banks
Nearly 70% of transactions through nonbranch channels

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