Banking part 2

A.SATHYALEKHA
M.com.,M.phil.,SET.,NET.,PGDEC
ASSISTANT PROFESSOR
DEPARTMENT OF COMMERCE
E.M.G.YADAVA WOMENS COLLEGE
THIRUPPALAI
MADURAI -14

Meaning
 Lending is one the primary function of a
bank. The banks accept deposits from
people and then lend that money to the
needy people in the form of loans,
advances, cash credit and overdraft.
Interest received from these lending is the
main source of income for the bank. So a
bank should examine the security offered
against loan, credit worthiness of the
borrower and the purpose of the loan.
Therefore a bank uses these following
principle for smooth running of the
business.

 Liquidity - Liquidity is an
important principle of bank lending.
Banks lend money for short periods
only because they lend public
money (money accept as deposits
from people) which can be
withdrawn at any time by
depositors. They, therefore, advance
loans on the security of such assets
which can be easily converted into
cash at a short notice. A bank
chooses such securities because if
the bank needs cash to meet the
urgent requirements of its
customers, it should be in a position
to sell some of the securities at a
very short notice without disturbing
their price much. There are certain
securities such as central, state and
local government bonds which are
easily saleable without affecting
their market prices.
 Safety - The safety of funds
lent is another principle of
lending. Safety means that the
borrower should be able to repay
the loan and interest in time at
regular intervals without default.
The repayment of the loan
depends upon the nature of
security, the character of the
borrower, his capacity to repay
and his financial standing. Like
other investments, bank
investments involve risk. But the
degree of risk varies with the type
of security. Securities of the
central government are safer than
those of the state governments
and local bodies.

 Diversity -
A commercial bank should follow
the principle of diversity. It
should not invest its surplus
funds in a particular type of
security but in different types of
securities. It should choose the
shares and debentures of
different types of industries
situated in different regions of the
country. The same principle
should be followed in the case of
state governments and local
bodies. Diversification aims at
minimizing risks of the
investment portfolio of a bank.
 Profitability -
A commercial bank by definition is a
profit hunting institution. The bank
has to earn profit to pay salaries to
the staff, interest to the depositors,
dividend to the shareholders and to
meet the day-to-day expenditure.
Since cash is the least profitable
asset to the bank, there is no point in
keeping all the assets in the form of
cash on hand. The bank has got to
earn income. Hence, some of the
items on the assets side are profit
yielding assets. They include money
at call and short notice, bills
discounted, investments, loans and
advances, etc.

 Stability in the Value of
Investments - The bank
should invest its funds in those stocks
and securities the prices of which are
more or less stable. The bank cannot
afford to invest its funds in securities,
the prices of which are subject to
frequent fluctuations.
 Principle of Purpose -
At the time of granting an advance
the banker must ask about the
purpose of the loan. If it is for
unproductive purposes, then there is
less chances of repayment of loan.
On the other hand, If it is for
productive purposes then there is
more chances of repayment loan
value with the interest.
 Saleability of
securities - Further, the bank
should invest its funds in such types of
securities as can be easily marketed at a time
of emergency. The bank cannot afford to
invest its funds in very long term securities or
those securities which are un saleable. It is
necessary for the bank to invest its funds in
government or in first class securities or in
debentures of reputed firms. It should also
advance loans against stocks which can be
easily sold.
 Margin Money – in case of
secured loans (A secured advance is one
which is made on the security of either assets
or against personal security or other
guarantees. An advance which is not secured
is called an unsecured advance), the bank
should carefully examine and value of
security. There should be sufficient margin
between the amount of loan and value of the
security. If adequate margin is not maintained,
the loan might become unsecured, in case the
borrower fails to pay the interest and return
the loan.

Cash Credit
 Cash Credit is an arrangement by
which the customer is allowed to
borrow money up to a certain
limit known as the ‘cash credit
limit’.
 Usually, the borrower is required
to provide security in the form of
a pledge or hypothecation of
tangible securities. Sometimes,
this facility is also provided
against personal security.
 This is a permanent arrangement
and the customer need not draw
the sanctioned amount at once
but draw the amount as and
when required.
Overdraft
 It is an arrangement between a banker
and his customer by which the latter
is allowed to withdraw over and above
his credit balance in the current
account up to an agreed limit. This is
only a temporary accommodation
usually granted against security.
 The borrower is permitted to draw and
repay any number of times, provided
the total amount overdrawn does not
exceed the agreed limit. The interest is
charged only for the amount drawn
and not for the whole amount
sanctioned.
 A cash credit differs from an overdraft
in one respect. Cash credit is used for
long-term by businesses in doing
regular business whereas overdraft is
made occasionally and for short
duration.

Loans
 Ease of loan, the banker
advances a lump sum for a
certain period at an agreed rate of
interest- The entire amount is
paid on an occasion either in
cash or by credit in his current
account which he can draw at
any time. The interest is charged
for the full amount sanctioned
whether he withdraws the money
from his account or not.
 The loans may be repaid in
installments or at the expiry of a
certain period. The loan may be
made with or without security.
 A loan once repaid in full or in
part cannot be withdrawn again
by the customer. In case a
borrower wants a further loan, he
has to arrange for a fresh loan.
Demand Loan Vs Term
Loan
 The loan may be a demand loan
or a term loan.
 A demand loan is payable on
demand. It is for a short period
and usually granted to meet the
working capital needs of the
borrower.
 Term loans may be medium-term
or long-term. Medium-term loans
are granted for a period ranging
from one year to five years for
vehicles, tools, and equipment.
 Long-term loans are granted for
capital expenditures such as the
purchase of land, construction of
factory building, purchase of new
machinery and modernization of
plant.

Secured Vs
Unsecured Loan
 According to section 5(e) of
the Bank Companies Act,
1991, “Secured loan or
advance means such a loan or
advance as made against the
security assets, market value
of which is not at any means
less than the amount of such
loan or advance and
unsecured loan or advance is
that loan or advance or part
of it does not require
sanctioning against the
security”.
Participation Loan or
Consortium Loan
 Where one single loan is granted by
more than one financing agency, it is
termed as a participation or
consortium loan
 Such participation becomes
necessary where either the risk
involved is too large for one or more
of the participating institutions to take
individually or there are
administrative or other difficulties in
servicing and follow up of the loan.

 Bills of exchange, as defined in the Negotiable Instruments Act, 1
SSI, is “an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay (on-
demand or at a fixed or determinable future time) a certain sum of
money only to, or to the order of, a certain person or to the bearer
of the instrument”.
 Banks grant advances to their customers by discounting bills of
exchange.
 The net amount, after deducting the amount of interest/discount
from the amount of the installment, is credited in the account of
the customer.
 In this form of lending, the interest is received by the banker in
advance.
 Banks sometimes purchase the bills instead of discounting them.
 Bills which are accompanied by documents of title to goods such as
bills of lading or railway receipt are purchased by the bankers.
 In such cases, the banker grants a loan in the form of overdraft or
cash credit against the security of the bills.
 The term ‘bill purchased’ seems to imply that the bank becomes the
purchaser or owner of such bills. But in almost all cases the bank
holds the bill only as a security for the advance.

 Life insurance policies are considered as one of best securities available for
bank advances and are readily accepted as collateral security. Need based
advance is also granted against life insurance policies on a restricted basis.
A life insurance policy has three different values attached to it as under:
 1.Insured value : The face value of the policy equivalent to the
 sum assured.
 2. Paid- value : The value which has been already paid by the
assured against the policy.
 3. Surrender value : The value which Life Insurance Corporation
will be prepared to pay should the policy be
surrendered to it and the contract of insurance
under the policy is cancelled.
4. Maximum Amount of Advance : 90% of the surrender value.
5. Rate of interest : Rate of interest differs from bank to bank.
6.Form of advance : Demand loan or overdraft.

 For securities which are held in the form of stocks, the owner is only given
a certificate to the effect that his name has been registered as an owner of
certain amount of stock in a specified loan in the Public Debt Office. These
stocks are transferable only by submitting a special transfer form
obtainable from a public debt office. Public Debt Office will transfer the
stock and issue a fresh certificate in favour of the transferee.
The general terms and conditions of advances against securities,are
given below:
(i) The bank should satisfy themselves as to the acceptability of the
credit needs of the borrower and end use of funds lent and they should not
be guided solely by availability of the security.
(ii) The interest rate should be as per the directives on interest rate
issued by the Reserve Bank of India.
(iii) Adequate margin should be maintained to cover the defaults, if any,
in repayment of the principal and interest.
(iv) They should ascertain and follow the procedure prescribed by the
Public Debt Office of the RBI, postal authorities, etc., when advances
against Government securities, postal certificates, etc. are granted.

 Advances against goods are allowed to traders for their trading activities, to
manufacturers and producers for their requirements of raw materials etc and also to
enable them to sell their products at better prices. The account is to facilitate the borrower
to hold on to the goods for a short period, by creating a pledge in favour of the Bank.
 In the case of lending, some principles should be followed by banker against
goods.
 Quality of goods: Generally, the bank should accept goods which could be marketed
easily, quickly and standard quality in nature. Because there exists a greater risk if the
goods are not a good quality which is taken as security.
 Marketability: Goods are tangible securities and are better than guarantee and bill of
exchange. If a borrower makes a default, the banker can realize his duties by disposing of
the goods in the market.
 Price: Banker should take those goods which have a ready market. They can be sold off
easily than another kind of securities. The existence of a ready market makes the goods
reliable and safe security.
 Short period: Normally, advances against goods are for short periods because of
seasonal character. Therefore, there is no necessity’ to lock up funds for long period.
 Stability: Generally, banks accept goods which are necessaries of life such as rice,
Wheat, sugar, cotton etc. The price of such goods does not fluctuate widely.
 Evaluate: It is easy to evaluate the prices of goods such as wheat, rice, grains, pulses
etc. Market trends and reports are available in respect of almost all commodities in
newspapers. So banker should take these types of goods as security.
 Margin: In the case of goods, demand and nature determine the margin. Depending upon
the quality and risk the margin is prescribed.

 Secured Advances
 Secured advances is a loan given out by a financial institution wherein an asset
is used as collateral or security for the loan. For example, you can use your
house, gold, etc., to avail a loan amount that corresponds to the asset’s value. In
the case of a secured loan, the bank or financial institution that is dispensing the
loan will hold on to the ownership deed of the asset until the loan is paid off.
 Examples of secured loans
 Loan against property
 Home equity line of credit
 Car loan
Unsecured Advances
 Unsecured advances, like the name suggests, is a loan that is not secured by a
collateral such as land, gold, etc. These loans are comparatively riskier to a
lender and therefore associated with a high interest rate. When a lender releases
an unsecured loan, he does so after evaluating your financial status and
assessing whether or not you are capable of repaying your loan.
 Examples of unsecured loans
 Credit cards
 Personal loans
 Student loans

 The most important difference between a secured and unsecured
loan is the collateral required to attain the loan. A secured loan
requires you to provide the lender with an asset that will be used as
a collateral for the loan. Whereas and unsecured loan doesn’t
require you to provide an asset as collateral in order to attain a
loan.
 Another key difference between a secured and unsecured loan is
the rate of interest. Secured loans usually have a lower rate of
interest when compared to an unsecured loan. This is because
unsecured loans are considered to be risker loans by lenders than
secured loans.
 Secured loans are easier to obtain while unsecured loans are
harder to obtain, as it is less risker for a banker to dispense a
secured loan.
 Secured loans usually have longer repayment periods when
compared to unsecured loans. In general, secured loans offer a
borrower a more desirable contract that an unsecured loan would.
 Secured loans are easier to obtain for the mere fact that they are
less risky for a lender to give out, while unsecured loans are
comparatively harder to obtain.

INTRODUCTION
 Reserve Bank of India (RBI) is the
Central Bank of India. RBI was
established on 1 April 1935 by the
RBI Act 1934. Key functions of RBI
are, banker’s bank, the custodian of
foreign reserve, controller of credit
and to manage printing and supply
of currency notes in the country.
 Reserve Bank of India (RBI) is the
central bank of the country. RBI is a
statutory body. It is responsible for
the printing of currency notes and
managing the supply of money in
the Indian economy.
 Initially, the ownership of almost all
the share capital was in the hands
of non-government shareholders. So
in order to prevent the
centralisation of the shares in few
hands, the RBI was nationalised on
January 1, 1949

 1. Issue of Notes —
The Reserve Bank has a
monopoly for printing the
currency notes in the country.
It has the sole right to issue
currency notes of various
denominations except one
rupee note (which is issued by
the Ministry of Finance).
 The Reserve Bank has
adopted the Minimum
Reserve System for
issuing/printing the currency
notes. Since 1957, it
maintains gold and foreign
exchange reserves of Rs. 200
Cr. of which at least Rs. 115
cr. should be in gold and
remaining in the foreign
currencies.
 2. Banker to the
Government– The second
important function of the
Reserve Bank is to act as
the Banker, Agent and
Adviser to the
Government of India and
states. It performs all the
banking functions of the
State and Central
Government and it also
tenders useful advice to
the government on
matters related to
economic and monetary
policy. It also manages
the public debt of the
government.

 3. Banker’s Bank:-
The Reserve Bank
performs the same
functions for the
other commercial
banks as the other
banks ordinarily
perform for their
customers. RBI lends
money to all the
commercial banks of
the country.
 4. Controller of the
Credit:- The RBI undertakes
the responsibility of controlling
credit created by commercial
banks. RBI uses two methods
to control the extra flow of
money in the economy. These
methods are quantitative and
qualitative techniques to
control and regulate the credit
flow in the country. When RBI
observes that the economy has
sufficient money supply and it
may cause an inflationary
situation in the country then it
squeezes the money supply
through its tight monetary
policy and vice versa.

 5. Custodian of
Foreign Reserves:-
For the purpose of keeping the
foreign exchange rates stable, the
Reserve Bank buys and sells
foreign currencies and also
protects the country's foreign
exchange funds. RBI sells the
foreign currency in the foreign
exchange market when its supply
decreases in the economy and
vice-versa. Currently, India has a
Foreign Exchange Reserve of
around US$ 487 bn.
 6. Other Functions:-
The Reserve Bank performs a
number of other developmental
works. These works include the
function of clearinghouse
arranging credit for agriculture
(which has been transferred to
NABARD) collecting and
publishing the economic data,
buying and selling of Government
securities (gilt edge, treasury bills
etc)and trade bills, giving loans to
the Government buying and
selling of valuable commodities
etc. It also acts as the
representative of the Government
in the International Monetary
Fund (I.M.F.) and represents the
membership of India.

 RTGS, primarily meant for large value money transfers, is a
payment system that enables instant transfer of funds. Unlike
NEFT, RTGS processes the instructions at the time they are
received rather than at a later time. Currently, more than 1
lakh bank branches offer the RTGS facility, according to the
RBI. Information on these branches can be accessed from
the RBI website. RTGS transactions can be made from 9.00 am
to 4.30 pm on weekdays and from 9:00 am to 2:00 pm on
Saturdays for settlement at the RBI-end, according to the
central bank. However, the timings that the banks follow may
vary depending on the customer timings of the bank branches,
it noted.
 The RTGS service window for customer's transactions is
available to banks from 9:00 am to 4:30 pm on weekdays and
from 9:00 am to 2:00 pm on Saturdays for settlement at the
RBI-end. However, the timings that the banks follow may vary
depending on the customer timings of the bank branches, the
central bank noted.
 The minimum amount to be remitted through RTGS is Rs 2
lakh. There is no upper ceiling for RTGS transactions.

 IMPS is a payment service managed by
the National Payments Corporation of India
(NPCI). This service enables individuals to
make money transfer instantly through banks
and RBI-authorised Prepaid Payment
Instrument Issuers (PPI) across the country.
Unlike NEFT and RTGS, IMPS is available
round the clock throughout the year, even on
bank holidays. Currently, there are 53
commercial banks and 101 rural, district,
urban and cooperative banks that support the
IMPS service, according to the NPCI website.
An IMPS transaction can be initiated from a
mobile phone, through internet or an ATM,
wherein confirmation of debit or credit is sent
by an SMS.

 NEFT is a payment system that enables electronic transfer of
funds from one bank to another bank account. Money
transfer can be made by an individual or company to an
individual or company's bank account with any bank that is
a member of the NEFT scheme, according to the Reserve
Bank of India (RBI). Information on bank branches currently
part of the NEFT system can be accessed on the RBI website.
Currently, most banks in the country support NEFT
payments. In NEFT, transactions are executed in half-hourly
batches. At present, there are twenty three half-hourly
settlement batches, which run from 8 am to 7 pm on all
working days of week except the second and fourth Saturday
of the month, according to the RBI's website.
 There is no limit on the amount of funds that could be
transferred using NEFT. "However, maximum amount per
transaction is limited to Rs 2,00,000 for cash-based
remittances within India and also for remittances to Nepal
under the Indo-Nepal Remittance Facility Scheme,"
according to the RBI.

 National Electronics Fund Transfer (NEFT) is a country-wide electronic fund
transfer system for sending money from one bank account to another in a safe
and hassle-free manner. All NEFT settlements are made in a batch-wise format.
Money can be sent using this system to all NEFT-enabled banks in India on an
individual basis.
 NEFT Benefits NEFT Timings NEFT
Transaction Limits
 Safe and secure At present from 9.00 a.m. to 7.00 p.m. transaction limit
on all weekdays
 Economical At present from 9.00 a.m. to 1.pm per transaction
on Saturdays limit is Rs.2,00,000
 No minimum or maximum
Reliable and error free
 Organised and batch-wide
settlement
 Paperless

 Step 1: First login to your net banking
account. If you do not have a net banking
account then register for it on the website of
your bank.
 Step 2: Add the beneficiary as a payee. To
do so, you have to enter the following
details about the beneficiary in the ‘Add
New Payee’ section:
 Account Number.
 Name.
 IFSC Code.
 Account Type.
 Step 3: Once the payee is added, choose
NEFT as mode of Fund Transfer.
 Step 4: Select the account you wish to
transfer money from, select the payee,
enter the amount that you wish to transfer
and add remarks (optional).

 MEANING:
Internet banking is the system that provides the facility to the customer to
conduct the financial and non-financial transactions from his net banking
account. The user can transfer funds from his account to other accounts of the
same bank/different bank using a website or an online application. The
customer uses a resource and a medium to conduct financial transactions. The
resource that a customer uses might be an electronic device like a computer, a
laptop, or a mobile phone. The internet is the medium that makes the technology
possible.
 Advantages of Internet Banking
1. 24/7 Account and Service Access
Online banks are accessible 24/7, as long as you have an internet connection.
Some online banks, giving you 24/7 phone access to a real-life customer service
agent. This can be extremely helpful if you don’t have access to the internet, or if
you feel you need the assistance of a human brain, rather than a computer
algorithm.
2.Speed and Efficiency
If you need to transfer money, apply for a new loan, or perform nearly any
banking transaction, you’ll typically have to wait in line at a bricks-and-mortar
banking location. With an online bank, there’s never any waiting. As long as you
can log in, you can access your accounts, request a new credit card, or perform
nearly any banking transaction you desire without driving down to a bank or
waiting in line.

Online Bill Payment
One of the great advantages of online banking is online bill pay. Rather than
having to write checks or fill out forms to pay bills, once you set up your
accounts at your online bank, all it takes is a simple click — or even less, as you
can usually automate your bill payments. With online bill pay, it’s easy to
manage your accounts from one central source and to track payments into and
out of your account.
Low Fees
Online banks don’t have to pay for things like electricity, janitorial services,
landscaping, or rent, so they can pass those savings along to customers.
Typically, this means that online banks can charge fewer fees than traditional
banks. For example, most online banks offer a free online checking account with
no deposit, along with other no-fee bank accounts, such as IRAs. There are a
number of online banks with free checking and no minimum balance; if you’re
worried about applying for an account with bad credit, you might be able to open
a bank account online for free, no credit check required, although there might be
ongoing fees.
Yield High Rates
In addition to offering low fees, online banks often have the best interest
rates, whether you are looking for a certificate of deposit, a high yield
checking account or deposit accounts with high interest, such as a money
market account. Although rates fluctuate, if you look at a current list of
best CD rates or best free online checking account rates, you’ll usually find
that the banks paying the best interest rates are online banks.

 Technology Issues
In many ways, an online bank is only as good as your — or their — internet
connection. If there’s a power outage, or if servers go down, you might not
have any access to your account whatsoever. While some banks offer a
phone number for customer service, it might be overwhelmed if online
access is down. With a real bank, you can always find someone to talk to in
the branch.
 Security Issues
While many online banks are reputable and well-established, sometimes it
can be hard to feel comfortable with a bank that doesn’t have a physical
presence, particularly when large sums of money are involved. If a website
suddenly folds up, what will happen to your money? There’s also the risk of
identity theft — or actual theft — if someone gains unauthorized access to
your account via a hacked or stolen password or log-in credentials.
 Inefficient at Complex Transactions
Online banks might be able to transfer money between accounts or pay bills, but
you might be more comfortable with an international, bricks-and-mortar bank if
you have complex transactions. Worldwide, business-oriented banks like Chase
have global transaction capabilities, such as the ability to send payments to more
than 35 different currencies worldwide, that online banks might not be able to
muster. Without a real-world presence, most online banks can’t even offer the
services of a notary public, which require an in-person visit and necessary for
most important financial transactions like buying a home.

 What Is a Debit Card?
 A debit card is a payment card that deducts money directly from a
consumer’s checking account to pay for a purchase. Debit cards
eliminate the need to carry cash or physical checks to make purchases
directly from your savings. In addition, debit cards, also called “check
cards,” offer the convenience of credit cards and many of the same
consumer protections when issued by major payment processors such
as Visa or Mastercard.
 Unlike credit cards, debit cards do not allow the user to go into debt,
except perhaps for small negative balances that might be incurred if
the account holder has signed up for overdraft protection. Debit cards
usually have daily purchase limits, meaning it may not be possible to
make an especially large purchase with a debit card.
 KEY TAKEAWAYS
 Debit cards eliminate the need to carry cash or physical checks to
make purchases, and they can also be used at ATMs to withdraw cash.
 Debit cards usually have daily purchase limits, meaning it may not be
possible to make an especially large purchase with a debit card.
 Debit card purchases can usually be made with or without a personal
identification number (PIN).
 Some debit cards offer reward programs, similar to credit card reward
programs, such as 1% back on all purchases.

 What Is a Credit Card?
 A credit card is a thin rectangular slab of plastic issued by a
financial company, that lets cardholders borrow funds with
which to pay for goods and services. Credit cards impose the
condition that cardholders pay back the borrowed money,
plus interest, as well as any additional agreed-upon charges.
An example of a credit card is the Chase Sapphire Reserve
credit card which you can read our review of to get a good
sense of all the various attributes of a credit card.
 The credit company provider may also grant a line of
credit (LOC) to cardholders, enabling them to borrow money
in the form of cash advances. Issuers customarily pre-set
borrowing limits, based on an individual's credit rating. A
vast majority of businesses let the customer make purchases
with credit cards, which remain one of today's most popular
payment methodologies for buying consumer goods and
services.

Banking part 2

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