BANKING-MIDTERM

Chapter 1

Evolution of Banking Institutions

Origin of the word BANK

The word "BANK" likely comes from the word "BENCH." In ancient times, people did money-
lending business while sitting on long benches. There are different theories about its origin:

1. Some think it comes from the German word "BANC," meaning a joint stock firm.
2. Others believe it comes from the Italian word "BANCO," meaning a heap or mound.
3. Another group traces it to the Greek word "BENQUE," meaning a bench.

Over time, the word "Banco" in Italian, "Banc" in French, and "Banque" in other languages
slowly turned into the word we use today: bank.

Definition of Bank: (with features)

A bank is a financial institution that collects money from people who have surplus money
(depositors) and lends it to others (borrowers) to make a profit. It acts as a middleman
between people or businesses who have surplus money and those who need money.

According to Dictionary of Banking and Finance “Bank is an institution that is registered by

central bank and mainly performs the following activities:

• Receives current deposits and give the withdrawal facilities to clients through cheque.

• Receive term deposits and pay interest on them.

• Discounting notes, approving loans, and invest in government and other credit
instrument.

• Collect cheque, draft and note etc.

• Acts as a trustee in accordance with government permission.

Origin and Historical Evaluation of Bank

The history of banking is long and complex, but it has evolved step by step over thousands
of years
1) Ancient Beginnings (2000 B.C.): 2000 B.C. - Ancient Babylon: The first forms of
banking started in Babylon, where merchants made grain loans to farmers and traders.
This was the beginning of a banking system to store and lend money.

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2) Medieval Banking:

 In 1157, the Bank of Venice was established as the first public banking institution.
It wasn’t a modern bank but an office for managing public debt.
 In 1336, a bank called ‘Monte’ existed in Florence, Italy, which managed money and
deposits.
 By 1401, a public bank in Barcelona offered services like money exchange,
deposits, and bill discounts for both locals and foreigners.
 In 1407, the Bank of Genoa was established, allowing deposits, withdrawals, and
money transfers, making it one of the greatest banks of its time.

3) Modern Banking:

 The Bank of England was established in 1694, but modern banking truly began
with the Banking Act of 1833.
 The 19th century saw the rise of joint-stock commercial banks worldwide.

4) Banking in India:

 The Joint Stock Companies Act of 1850 allowed corporate banking in India.
 The first banks under this act were the Oudh Commercial Bank (1881), Punjab
National Bank (1895), and People’s Bank (1901).

Banking History in Bangladesh

The banking system in Bangladesh has evolved over time, influenced by British banking
and significant changes after the country's independence in 1971. Here’s a simplified
overview:

1. Post-Independence (1971-1972):
o After Bangladesh gained independence in 1971, Bangladesh Bank was
established in 1972 as the central bank, replacing the State Bank of Pakistan.
o At that time, there were 12 scheduled banks operating in Bangladesh, all
established by West Pakistanis with head offices in West Pakistan.
2. Nationalization (1972):
o The government nationalized the banking system and merged the 12
commercial banks into Nationalized Commercial Banks (NCBs).
o Foreign banks were allowed to continue operating in the country.
3. Shift to Private Sector (1976 Onwards):
o In 1976, the government shifted its economic policy to encourage the private
sector.
o The first private bank was established in 1983, including banks like IIBL,
ABBL, NBL, and IFIC Bank.

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4. Growth of Private Banks:

o After the Banking Company Act of 1991, banking became more popular
and more private and specialized banks were approved.

5. Current Scenario:

o Today, there are 66 banks in Bangladesh, including nationalized, private,

and specialized banks.

Nationalization of Bank

After Bangladesh gained independence, the government decided to adopt a socialist approach,
aiming to create a society with wealth more equally distributed. To achieve this, they
nationalized all the banks in the country.

On March 26, 1972, the government passed the Bangladesh Bank (Nationalization) Order
1972, which took control of all the existing banks. The government took over 12 banks and
reorganized them into six new nationalized banks. These banks became official government
institutions with their own legal identity.

The banks that were nationalized:

 Sonali Bank (from National Bank of Pakistan, Bank of Bahawalpur, and Premier Bank)
 Janata Bank (from United Bank and Union Bank)
 Agrani Bank (from Habib Bank and Commerce Bank)
 Rupali Bank (from Muslim Commercial Bank, Standard Bank, and Australasia Bank)
 Pubali Bank (from Eastern Mercantile Bank)
 Uttara Bank (from Eastern Banking Corporation)

Objectives of Nationalization

The main goals behind nationalizing the banks were:

1. Serve the Poor: Ensure that the banking system helps poorer and weaker sections of
society by providing credit.
2. Reduce Regional Disparities: Spread banking services evenly across the country to
remove regional inequalities.
3. Promote Development: Focus on developing less-developed areas of the country.
4. Support Economic Growth: Align the banking system with national goals to help the
economy grow.
5. Improve Rural Economy: Boost production in rural areas, raise incomes, and improve
living standards for rural people.

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 Bangladesh bank
Bangladesh Bank is the central bank of Bangladesh, established on 16th December 1971
under the Bangladesh Bank Order 1972. It operates under the Bangladesh Bank Order
1972 and the Banking Companies Act 1991.

Governance: Bangladesh Bank is controlled by the government. The governor, deputy

governors, and the board of directors are all appointed by the government.
Branches: It has 10 branches across the country, including 2 in Dhaka (Motijheel and
Sadarghat), and others in Barishal, Chittagong, Rangpur, Sylhet, Bogra, Khulna, Rajshahi,
and Mymensingh.

In 2003, with recommendations from the World Bank/IMF, the government gave
Bangladesh Bank some autonomy to manage its responsibilities without excessive
government interference.

A Coordination Council was formed, headed by the Finance Ministry, to oversee fiscal,
monetary, and exchange rate policies.

Functions of Bangladesh Bank

Sp24-1(B)

Bangladesh Bank is the central bank of Bangladesh and plays a key role in managing the
country’s banking system and money market. Its main functions are:

1. Issuance of Notes & Coins: Bangladesh Bank is the only authority that issues banknotes
and coins (except for 1 and 2 taka notes/coins). This helps control the money supply in
the country.
2. Government Bank: It acts as the banker to the government, managing public debt,
maintaining government accounts, and advising on economic and financial matters.
3. Banker’s Bank: It serves as the bank for commercial banks. It provides loans to banks
when needed and acts as the lender of last resort to support struggling banks.
4. Foreign Currency Reserve: It manages and maintains the country’s foreign currency
reserves.
5. Clearing House: Facilitates the clearing and settlement of payments between banks.
6. Credit Control: Regulates and controls the supply of money and credit in the economy.
7. Other Functions :
o Formulates and implements monetary policy.
o Manages foreign exchange market interventions.
o Advises the government on monetary, fiscal, and exchange rate policies.
o Ensures a secure and efficient payment system.

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 Controlling Volume of Cre dit/ Role

Sp-24(1-C), AU23-(1-B), Sp23-(1-B)

Bangladesh Bank regulates the volume of credit in the economy to achieve government
targets for growth, inflation, and macroeconomic stability. It uses monetary and credit
policies implemented through banks.

Selective Credit Control:

1. Minimum Margins: Sets minimum margins for loans against specific commodities.
2. Credit Ceilings: Imposes limits on the amount of credit banks can provide.
3. Interest Rates: Sets minimum interest rates for loans against certain commodities.

Credit Control Mechanisms:

1. Bank Rate: This is the interest rate at which Bangladesh Bank lends to commercial
banks. If Bangladesh Bank wants to reduce credit, it raises the bank rate. If
Bangladesh Bank wants to expand credit, it lowers the bank rate. Here, changes in
the bank rate affect the cost of borrowing for commercial banks.
2. Open Market Operations (OMO): Bangladesh Bank buys or sells government
securities to influence the money supply in commercial banks.
o Buying securities adds cash to commercial banks, increasing their ability to
lend.
o Selling securities takes cash from commercial banks, reducing their lending
ability.
3. Reserve Requirements: Commercial banks must keep a certain percentage of their
deposits as reserves with Bangladesh Bank. Bangladesh Bank can increase or
decrease the required reserve amount to control the available credit. Currently, the
required reserve ratio is 5.5%. If banks don’t meet this, they are charged a penalty.
4. Exchange Control: Bangladesh Bank also manages the foreign exchange market to
protect the value of the taka. It ensures all foreign exchange earnings are properly
reported and surrendered to authorized dealers. It allocates foreign exchange based
on national priorities

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 CHAPTER-2

Commercial Bank

Definition:

A commercial bank is a financial institution that takes deposits from people and businesses
and lends money to them to earn profit through interest. It is open to the public and serves
individuals, businesses, and organizations.

 They act as a bridge between savers and borrowers in the money market.
 They collect deposits at low interest rates.
 They provide short-term loans at higher interest rates.
 Their main goal is to earn profit.

Comparison of different sources of bank funds SP24-(2-A)

Deposits are the principal source of fund for bank. In addition to deposits, a bank has many
other sources of funds. The major sources of bank funds are discussed below:

1. Paid-Up Capital

This is the money a bank gets from shareholders in exchange for shares. It represents the
actual amount shareholders have paid for their shares.

 It’s the actual investment from shareholders.

 It can’t exceed the company’s authorized capital.
 It shows the financial strength of the bank.

Example:
If a bank issues 1 lakh shares at Tk100 each and all shares are fully paid, the paid-up capital
is Tk1 crore. If some shareholders don’t pay fully, the paid-up capital will be less.

2. Reserve and Retained Earnings

These are profits the bank keeps aside instead of distributing to shareholders. They are
created from the bank’s earnings and help strengthen its financial position.

3. Call Money

This is a short-term loan that banks borrow or lend to each other for 1 to 14 days. It is used
to meet urgent cash needs.

 It’s used for emergency liquidity needs.

 It’s not stable because it can be called back quickly.

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  The interest rate can be very high.
 Not ideal for long-term financing.

4. Inter-Bank Deposits

Sometimes, banks with extra cash deposit it in other banks for a short time. However, this
is not a reliable source because the depositing bank can withdraw the money anytime.

5. Loan from Central Bank

Banks can borrow money from the central bank, but this is not always a preferred method.
The central bank may impose restrictions or limits on such loans.

6. Deposits

This is the most important and major source of funds for banks. Banks collect money from
individuals and businesses through various types of accounts (e.g., savings, current, fixed
deposits).

 There’s no fixed limit on how much a bank can collect in deposits, but central bank
regulations may sometimes restrict deposit levels.

Functions of Commercial Bank

1. Accepting Deposits:

This is the first and most important function of a commercial bank. Banks collect money
from individuals, businesses, and organizations through different types of accounts:

 Current Account: Used for frequent transactions. No interest is paid on these

deposits.
 Savings Account: For saving money. A lower interest rate is paid on these deposits.
 Fixed Deposit Account: Money is deposited for a fixed period. A higher interest
rate is paid compared to savings accounts.

By offering these accounts, banks collect funds and build a network of customers.

2. Lending Money:

Banks use a large portion of the deposits they collect to lend money to customers. This is
how banks earn most of their income. Lending is done in various ways:

a. Loans

Banks provide loans in a lump sum amount.The borrower repay the loan in fixed monthly
installments or as a lump sum, along with interest and other charges.
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b. Overdraft

Customers with current accounts can withdraw more money than they have in their
account (up to a limit). Here, Interest is charged only on the amount overdrawn. And
Collateral (security) is often required for this facility.

c. Cash Credit

Banks allow customers to borrow money against the pledge of goods (e.g., inventory).The
goods are stored in the bank’s warehouse or under its control.This are a common and
flexible form of lending.

d. Purchase and Discounting of Bills of Exchange

Banks provide funds by purchasing or discounting bills of exchange (a written order to pay
a specific amount).

 Demand Bills: Payable immediately.

 Usance Bills: Payable after a certain period.

e. Financing Foreign Trade

Banks provide funds to exporters and importers to support international trade. They also
issue guarantees to ensure smooth transactions in both domestic and foreign trade.

Subsidiary Services by Commercial Banks

Apart from their main functions of accepting deposits and lending money, modern
commercial banks offer a wide range of additional services to customers and the public.
These services can be divided into two categories:

1. Agency Services:

These are services where the bank acts as an agent for its customers. Examples include:

1. Collection and Payment: Commercial bank collect and pays values of cheque, bill of
exchange, promissory notes, pension, dividends, insurance premium, and interest
on behalf of the clients.
2. Purchase and Sale of Shares & Securities: Banks buy and sell shares, debentures,
and other securities for customers. They act as an agent and follow the customer’s
instructions carefully.
3. Execution of Standing Instructions: Banks handle regular payments for
customers, such as Insurance premiums, rent, salaries, or club subscriptions. A small
fee may be charged for this service.
4. Maintenance of Secrecy: Banks keep customer information confidential and do not
share it without the customer’s consent.

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 5. Acting as a Trustee: Banks manage assets or funds on behalf of customers as a
trustee.
6. Remittance of Funds (Transfer of Money): Banks help customers transfer money
from one place to another through:

2) General Utility or Miscellaneous Services:

Letter of Credit (LC): It’s a non-fund facility provided by banks, mainly used in
international trade. It guarantees payment to the seller once certain conditions are met.

Traveler’s Cheques: It’s a safe and universally accepted payment method for people
traveling abroad. It can be purchased by anyone, even if they are not a bank customer. It
acts as a substitute for cash and can be replaced if lost or stolen.

Bank Giro: A method of transferring money directly from one bank account to another
without using cheques.

Credit Cards: It Allows customers to buy goods or services up to a certain limit without
immediate payment. The amount is paid back later, often with interest.

Debit Cards: A payment card linked to the customer’s bank account. Money is deducted
directly from the account when used for purchases or withdrawals.

Information and Other Services: Banks provide valuable information on trade,

economics, and market conditions. They may publish reports, bulletins, or special updates
on local and international markets.

Sound Banking Principles: SP24-(2-C)

1. Principle of Liquidity: Deposits are the life blood of the commercial bank. Deposits are
repayable of demand or after expiry of a certain period. Everyday depositors either
deposits or withdraw cash. To meet the demand for cash all commercial banks have to keep
certain amount of cash in their custody

2. Principle of Profitability: The main goal of a commercial bank is to earn profit. Banks
generate income through loans, investments, and other services while keeping costs under
control.

3. Principle of Solvency: Commercial banks should have financially sound and maintain a
required capital for running the business.

4. Principle of Safety: Banks must invest funds carefully because the money they use
belongs to depositors. Safe investments ensure that banks can repay depositors and avoid
losses.

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5. Loan and Investment Policy: The main earning sources of commercial banks are
lending and investing money to the viable projects. So commercial bank always tries to
earn profit through sound investment.

6. Principle of Economy: Commercial banks never go for any unnecessary expenditure.

They always try to maintain their functions with economy that increase their yearly profit.

7. Principle of Secrecy: Banks must keep customer accounts and information confidential.
Only authorized persons are allowed access to customer details.

8. Principle of Modernization: It is the age of science and technology. So, to cope up with
the advance world the commercial bank has to adopt modern technical services like online
banking, credit card etc.

9. Principle of Publicity: Banks use advertising and marketing to attract more customers.
Publicity helps increase awareness of their services and grows their customer base.

Clearing house system/ how reciprocal liabilities of the local banks are counter-
balanced against one another? – (AU23-2A, sp23-2C)

Reciprocal liabilities of local banks are counter-balanced against one another through a
process called clearing and settlement. A clearing house is a system used by banks to
settle mutual payments and claims. Banks use the clearing house to exchange cheques and
bills. Instead of paying each other directly for every transaction, they only pay the balance
of what they owe after comparing all transactions.

Mechanism of clearing house:

o Each bank collects cheques and drafts from its customers, which are drawn
on different banks.
o A representative from each bank goes to the clearing house in the morning
with a list of these cheques.
o They hand over cheques to the banks they are drawn on and receive cheques
from other banks.
o In the afternoon, the representatives return to their banks and calculate how
much they owe or are owed by other banks.
o The clearing house supervisor then makes the final adjustments by
transferring the necessary amounts between banks' accounts, either by
crediting or debiting them.

In Bangladesh, the central bank (BB) manages the clearing house, and where it doesn't
have an office, Sonali Bank takes over.

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 Modern Clearing System

In Bangladesh, the modern clearing system is managed by the Bangladesh Automated

Clearing House (BACH), which makes inter-bank payments faster and more secure. It has
two main parts:

1. Bangladesh Automated Cheque Processing System (BACPS) :

It handles electronic processing of cheques, pay orders, and dividend warrants using
Cheque Imaging and Truncation (CIT) technology. Instead of physically moving cheques,
banks scan them and send the images and data electronically.

Clearing Sessions:

 For transactions of BDT 500,000 or more. The cutoff for submission is at 12:00 PM,
and for returns, it's at 3:00 PM.
 For transactions under BDT 500,000. The cutoff for submission is at 12:30 PM, and
for returns, it's at 5:00 PM.

2. Bangladesh Electronic Funds Transfer Network (BEFTN):

BEFTN allows paperless electronic transfers of funds between banks for various payments
like salaries, bills, remittances, taxes, etc. It enables easy, quick, and safe payments,
including both credit and debit transactions.

Both BACPS and BEFTN process payments in batches and at the end of the day, the final net
payments between banks are settled by Bangladesh Bank.

RTGS

RTGS (Real-Time Gross Settlement) is a system that allows for instant money transfers
between banks.

 It’s an electronic system for transferring funds in real-time (instantly).

 Once the transfer is done, it’s final and cannot be reversed.
 Money is transferred electronically, so there’s no need for physical cash or cheques.
 It is suitable for large transactions that require instant clearing.

The system is managed by the central bank. The receiving bank gets the funds within
seconds and must deposit them into the recipient’s account within 30 minutes.

EFT

It’s a computer-based system for moving money between accounts, whether they’re in the
same bank or different banks.

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  No physical cheques or cash are needed.
 More secure due to PIN verification and online system.
 Ideal for small amount fund transfer
 Cost effective and widely used for daily payments(electrically)

RTGS VS EFT

RTGS (Real-Time Gross

Feature EFT (Electronic Fund Transfer)
Settlement)
Settlement Real-time (instant), transactions Net-settlement, transactions processed
Type processed individually. in batches.
Transaction Slower (depends on bank timelines,
Instant (within seconds).
Speed usually 1 day).
Transaction Minimum: 2 Lakhs INR (no Maximum: 2 Lakhs INR (for smaller
Limits maximum limit). transactions).
Large-value transactions (e.g., Small-value transactions (e.g., bill
Best For
property deals, big payments). payments, small transfers).
Cost Higher transaction charges. Lower transaction charges.
Batch processing (transactions
Process Real-time (‘push’ transfer). grouped and processed at specific
times).
Transactions are final and Transactions are usually final but may
Finality
irreversible. take time to process.

Non-Performing Assets (NPA)

Non-Performing Assets (NPA) refers to loans or assets that are not generating income for
the bank. In simpler terms, these are loans where the borrower has failed to make the
scheduled payments (either interest or principal) for a certain period. If a commercial loan
is overdue for 90 days or more, or a consumer loan is overdue for 180 days or more, it is
considered a non-performing asset.

Non-performing assets are a problem for banks because they rely on regular interest
payments to make money. When these loans stop performing, it negatively affects the
bank’s income and increases financial strain on the system. The ability to manage NPAs
effectively is crucial for the success of a bank.

Factors contributed to non-performing assets:

➔ Internal Factors that cause NPA:

 Misuse of funds for irrelevant expansion or project.

 Financial support given to associate business.

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  Poor lending practices and credit assessment.
 Managerial inefficiency and corruption.
 Business failure due to strategy failure.
 Weak networking and linkage.
 Ineffective monitoring and supervision.
 Lack of Market Research and analysis.

➔ External Factors:

 Economic and Market recession.

 Rising cost at inputs.
 Natural disasters and uncertainty.
 Political and Government issues.
 Shortage of Raw materials and power supply.
 Foreign exchange rate fluctuations.
 Government scheme and rules regarding loans.

Roles of Commercial Bank in the economy of Bangladesh Sp-24(2-b)

1. Mobilizing Savings for Investment: Commercial banks encourage people to save

money by offering various deposit schemes (e.g., savings accounts, fixed deposits).They
collect these savings and use them to provide loans for productive investments.

2. Financing Industries: Banks provide short-term, medium-term, and long-term loans to

industries, especially small and medium-sized businesses. They also help large industries
by underwriting shares and debentures.

3. Financing Trade: Banks support internal and external trade by: Providing loans to
retailers and wholesalers to stock goods. And, Offering services like discounting bills of
exchange, issuing drafts, and facilitating foreign exchange for importers and exporters.

4. Financing Employment-Generating Activities: Banks provide loans for education (e.g.,

medical, engineering, vocational studies) and help young entrepreneurs start their own
businesses.

5. Supporting Monetary Policy: Commercial banks follow the central bank’s (Bangladesh
Bank) monetary policies to ensure economic stability. They help control inflation, manage
credit, and stabilize the economy by adjusting interest rates and lending practices.

6. Facilitating Money Transfers: Banks make it easy and safe to transfer money within
the country or internationally. This reduces the risk of carrying cash and supports business
growth.

7. Maintaining Economic Stability: By following the central bank’s credit control

measures, commercial banks help maintain economic stability and prevent financial crises.

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 Chapter-3
Relationship between Banker and Customer

Meaning of Banker: A banker acts as a middleman between lenders and borrowers. They
take money from savers and lend it to borrowers.

 A banker helps people and businesses manage their money safely and efficiently.

Meaning of Customer: A customer is someone who has an account with a bank or

regularly uses the bank’s services. This could be an individual person, businesses and
organization.

General relationship between banker and customer (SP23-3A, AU23-3A)

Debtor-creditor relationship: When a customer deposits money with his bank, the
customer becomes a lender and the bank becomes borrowers. The money handed over to
the bank is a debt. The relationship is that of a debtor and creditor.

Creditor and debtor relationship: When the bank lends money to the customer, the
customer is the borrower and the bank is the lender. The relationship therefore is that of a
creditor and debtor.

Banker as Agent & principal: A banker acts as an agent of his customer and performs a
number of agency functions for the convenience of his customers. These are as follows:

• Purchasing or selling of securities

• Collection of income

• Making periodical payments as instructed by his customers.

• Collecting cheques, drafts of the customers

Banker as Trustee: In some cases, bank act as a trustee by managing and holding assets
on behalf of its customer.

 The bank keeps valuable property of customer: Gold, document, securities in secret
vault.
 The bank acts as a trustee by ensuring interests are protected.

Banker as Bailee: When the bank holds valuables (e.g., jewelry, documents) for the
customer, it acts as a bailee. The bank must take reasonable care to protect these items. If
the bank is negligent and the customer suffers a loss, the bank is responsible. However, if
the loss is due to uncontrollable events (e.g., natural disasters), the bank is not liable.

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Banker as Adviser: Banks may also advise customers on investments, such as shares,
debentures, or other securities. In this role, the bank acts as a financial advisor.

Obligations of Banker (Au23-3C)

1. Obligation to honor customer’s cheques: The bank must pay (honor) the customer’s
cheques if:

 The customer has enough money in their account.

 The cheque is presented within a reasonable time.
 There are no legal orders (e.g., court orders) blocking the account.

2. Obligation to maintain secrecy of customer’s account: The bank must keep the
customer’s account details confidential. This duty continues even after the account is
closed. The bank can only share account information in specific situations, such as:

 When required by law.

 With the customer’s permission.

3. Obligation to receive cheques and other instruments for collection: The bank must
accept cheques and other payment instruments (e.g., drafts) from customers for collection.
The bank must process these collections quickly and carefully. If the bank fails to do so and
the customer suffers a loss, the bank may be held responsible.

4. Obligation to give reasonable notice before closing an account: If the bank decides
to close a customer’s account, it must give the customer reasonable notice. This allows the
customer time to make alternative arrangements. Closing an account abruptly
(আকস্মিকভাবে) can harm the customer’s reputation and credit, and the bank may be liable
for damages.

5. Obligation to provide information about the account: The bank must provide the
customer with necessary information about their account, such as balances, transactions,
and other details.

Garnishee order (SP23-3b)

A Garnishee Order is a court order that instructs a bank (the garnishee) to freeze the funds
in a debtor’s account and pay a portion (or all) of those funds to a creditor. It is typically
used to recover unpaid debts.

The court issues the Garnishee Order in two stages:

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1) Order Nisi:

 The court orders the bank to freeze the debtor’s account.

 The bank is asked to explain why the frozen funds should not be used to pay the
creditor.
 The bank must inform the debtor (customer) about the order so they can arrange to
pay the debt.
 No money is paid out until the court issues the next order.

2) Order Absolute: The court orders the bank to pay the creditor either part or all of the
frozen funds.

When does a garnishee order not apply?

A Garnishee Order cannot be used in the following situations:

1. If the account is a joint account.

2. If the identity of the debtor is unclear.
3. If the account is held by the debtor as a trustee (for someone else).
4. If the debtor has already assigned the funds to a third party (and the bank has been
informed in writing).
5. If the account has a debit balance.

Rights of a Banker to customer: (SP24-3A)

1. Right of general lien: The bank has the right to hold onto a customer’s property (e.g.,
securities, valuables) until the customer repays their debt. However, the bank cannot sell
the property unless allowed by law or custom.

2. Right of set-off: The bank can combine two accounts of the same customer (e.g., a
savings account and a loan account) and adjust the balances.

Conditions for Set-Off:

 Accounts must be in the same name and same right.

 The bank must notify the customer before combining accounts.
 It applies only to certain debts (not future or uncertain debts).

When Set-Off Cannot Be Used:

 If accounts are not in the same name (e.g., individual vs. joint account).
 For future or uncertain debts.
 For trust accounts.

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3. Right of appropriation: If a customer owes multiple debts and makes a payment, the
bank can decide which debt to be paid first (if the customer doesn’t specify).If neither the
customer nor the bank specifies, the first debt incurred is paid first, followed by the next,
and so on.

4. Right to charge interest and fees: The bank can charge interest on loans and credit
facilities. It can also charge incidental fees (e.g., maintenance fees for current accounts).
Interest rates are usually set as per the central bank’s guidelines.

5. Right to close accounts: The bank can close a customer’s account if the relationship
becomes unprofitable or problematic. The bank must give reasonable notice before closing
the account.

Lien SP24-3B
A lien is the right of a creditor to hold onto the property of a debtor until the debt is
paid. It is a legal claim on the debtor’s property to secure repayment of the debt. The
creditor can retain the property but cannot sell it unless allowed by law or agreement.

Types of Lien:

1) General Lien: General Lien is the right of a person to hold onto property belonging to
someone else until they pay their debts. The creditor can hold any property of the debtor
to cover any outstanding debts. For example: If a customer has:

o A savings account with a balance of Rs. 500.

o A current account with an overdraft of Rs. 1,000.

The bank can use the Rs. 500 from the savings account to reduce the overdraft to Rs. 500.

Conditions for General Lien:

 The property must be in the bank’s possession as a banker.

 The property must not be held for a special purpose (e.g., safe
custody).
 There must be no agreement preventing the lien.

2) Particular Lien: Particular Lien is the right to hold onto specific goods until payment
is made for a specific service or debt related to those goods. It applies only to the specific
goods involved in the transaction, not to any other property. The creditor can hold
specific property related to a specific debt. For example: A tailor can hold clothes until
tailoring charges are paid.

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 Under what circumstances a bank is bound to disclose the secrecy of its customer?
Explain.

1. Under legal obligation:

 Court Orders: If a court issues an order (e.g., garnishee order), the bank must
disclose the customer’s account details.
 Tax Authorities: Banks may be required to share information with tax authorities
for investigations or audits.
 Anti-Money Laundering (AML) Laws: Banks must report suspicious transactions
or activities to regulatory authorities.
 Other Legal Requirements: Banks may be compelled to disclose information under
specific laws or regulations.

2. with customer’s consent:

If the customer gives written or verbal permission, the bank can share their account details.

3. In the bank’s interest:

If a customer defaults on a loan, the bank may disclose information to debt collection
agencies or legal authorities.

4. In the public or national interest:

Banks may be required to disclose information to government agencies in cases involving

national security or terrorism. Elsewhere, in emergencies or situations involving public
safety, banks may share customer information.

5. Common banking practices:

Banks may share customer information with other banks or financial institutions for credit
reference purposes.

6. Under contractual agreements:

If the customer has agreed to specific terms (e.g., in a loan agreement), the bank may
disclose information as per the contract.

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 Point out the reasons determining circumstances under which a cheque can be
dishonored?

1. Insufficient Funds: The most common reason for dishonor is when the account does not
have enough money to cover the amount written on the cheque.

2. Account Closed: If the account on which the cheque is drawn has been closed, the
cheque will be dishonored.

3. Signature Mismatch: If the signature on the cheque does not match the bank’s records,
the cheque may be dishonored.

4. Post-Dated Cheque: If the cheque is post dated (future date given) ,the bank will
dishonor the cheque.

5. Stale Cheque: A cheque is considered stale if it is presented for payment after a specific
period (usually 6 months from the date of issue). Such cheques are dishonored.

6. Mismatch in Amount: If the amount written in words and figures on the cheque does
not match, the cheque may be dishonored.

7. Crossed Cheque: A crossed cheque cannot be cashed over the counter. If presented for
cash payment, it will be dishonored.

8. Legal Restrictions: If there is a court order (e.g., garnishee order) or government

directive freezing the account, the cheque will be dishonored.

9. Death or Insanity: If the account holder (drawer) dies or is declared legally insane, the
bank will dishonor the cheque.

10. Incomplete or Incorrect Details: If the cheque is incomplete (e.g., missing date, payee
name, or signature) or contains incorrect details, it will be dishonored.

11. Account Frozen or Blocked: If the account is frozen or blocked due to legal,
regulatory, or suspicious activity, the cheque will be dishonored.

12. Exceeding Withdrawal Limit: If the cheque amount exceeds the withdrawal limit set
by the bank or the account holder, it may be dishonored.

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 Chapter-4

E-Banking and M-banking

E-banking: E-banking is a modern, computerized system that allows banks to provide

services to customers more quickly, accurately, and conveniently. It uses technology to
deliver traditional banking services in a new way, eliminating the need for paper
documents. Transactions are conducted electronically, making the process faster and more
efficient.

Objectives of Electronic Banking

E-banking helps banks offer better services, improving the relationship between banks a nd
their customers. Both banks and customers benefit from technology. Here are the main
goals of e-banking:

From the Bank’s Perspective:

1. Provide services at a lower cost using technology.

2. Reduce administrative costs by cutting down on staff and paperwork.
3. Increase income through fees like debit card fees, credit card fees, etc.
4. Stay competitive in the banking industry.
5. Expand services to remote areas.

From the Customer’s Perspective:

1. Get instant information like account balances, statements, and transaction details.
2. Deposit and withdraw money quickly and easily.
3. Make payments for goods and services conveniently.
4. Transfer funds anywhere in the world.
5. Enjoy strong security for accounts managed through e-banking.

Types of Electronic Banking Services:

Electronic banking services can be divided into two main categories:

1. Retail electronic banking services (for individual customers).

2. Wholesale electronic banking services (for businesses).

Retail Electronic Banking Services:

These services are designed for individual customers and include:

1. ATM (Automated Teller Machine): ATMs are the most popular e-banking service.
With this automated computing machine, Customers can deposit or withdraw

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 money 24/7. Banks provide a plastic card to access ATMs, making transactions
quick and convenient. It saves time for customers and reduces costs for banks.
2. Debit Card: It’s a special plastic card issued by banks with a magnetic code.
Customers can withdraw money or transfer funds electronically. It acts as an
alternative to cash or checks.
3. Credit Card: It is issued to creditworthy customers by banks. It allows customers to
buy goods or withdraw cash without immediate payment. If the balance is paid
within the grace period (usually 15 days), no interest is charged. Popular credit
cards include VISA, MasterCard, and American Express.
4. Point of Sale (POS) Services: It Allows customers to pay for purchases using their
debit or credit cards at POS-enabled retailers. The buyer’s account is debited, and
the seller’s account is credited instantly.
5. Home Banking: Customers can perform banking tasks from home using a computer
or phone. It includes Services such as checking account balances, transferring funds,
and opening letters of credit (L/C).
6. Retail Automated Clearing House: It is a system for processing paperless
transactions between financial institutions. It clears and exchanges payments
electronically within a specific area. Members of the ACH association participate in
this system.

Wholesale Electronic Banking Services:

These services are designed for businesses and large organizations. They help manage
finances more efficiently and securely. The main services include:

1. Cash Management: It helps businesses manage their cash flow, payments, and
receipts. It Provides tools for tracking account balances, optimizing liquidity, and
reducing financial risks. Examples: Payroll processing, bill payments, and
collections.
2. Wire Transfer: It allows businesses to transfer large amounts of money quickly and
securely. It is used for domestic and international transactions.

Risks in Electronic Banking

E-banking, while convenient, comes with certain risks. Here are the main ones:

1. Cyber security Risks: Hackers may try to break into a bank’s systems to steal
sensitive information like login details, personal data, or financial records.
2. Fraud: Criminals use methods like phishing, identity theft, or card skimming to trick
customers and steal money. They may pretend to be customers to access accounts
illegally.

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 3. Technical Failures: Technical issues like system crashes, software bugs, or server
failures can disrupt services, making them unavailable to customers.
4. Privacy Risks: Banks store a lot of sensitive customer data. If this data is not
properly protected, it can be misused, leading to privacy violations.
5. Reputation Risk: Security breaches, fraud, or even customer dissatisfaction with
online services can damage a bank’s reputation. In the banking industry, trust is
crucial, and any issues can harm public confidence.

Benefits of E- Banking

1. Less Paperwork: E-banking reduces the need for paper-based transactions, making
banking more efficient and eco-friendly.
2. Easy Transactions: Customers no longer need to write cheques or carry cash. With
services like ATMs, transactions are quick and hassle-free.
3. Improved Security: E-banking provides secure payment systems, ensuring safe
transactions through the internet.
4. Saves Time: Customers can complete banking tasks quickly without visiting a
branch. This also reduces the workload for bank employees.
5. Lower Costs: Banks save money by reducing the number of employees and
operating costs. E-banking eliminates the need for many manual processes.
6. Expanded Market: E-banking allows customers to make payments and shop
globally, expanding national and international markets.
7. More Customers: Modern e-banking facilities attract more customers, helping
banks grow their customer base.
8. Fewer Branches Needed: With e-banking, customers don’t need to visit branches
physically. This reduces the cost of opening and maintaining new branches.
9. Easy Account Management: Customers can check account balances, make
payments, and manage finances from home, saving time and travel expenses.
10. Convenient Bill Payments: Utility bills (electricity, gas, water, etc.) can be paid
online, even from another country.
11. Quick Money Transfers: Money can be transferred easily without needing cheques
or deposit slips.
12. Credit Card Facilities: Customers can use credit cards to make purchases and
payments conveniently.

Constraints/Problems to E-Banking in Bangladesh

 At present, there is no proper infrastructure for performing Electronic banking

activities in Bangladesh.
 Slow uptake of internet access and PCs

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  Poor telecommunication network policies and slow paced regulatory initiatives
 The banking infrastructure in terms of electronic payments and inter -bank
connectivity is poor.
 Limitations of supportive legal system
 Absence of EFT (Electronic Fund Transfer) legislation
 Absence of need based business plan for online banking
 ATMs may have network problems, unavailability and shortage of money.
 High price of computer, computer hardware and banking software
 Lack of awareness at government level of e banking issue
 Lack of awareness at customer level of e banking issue
 Weather has a direct effect towards e-banking. If create heavy rain, flood or cyclone
then the entire network is down.

Mobile banking

Mobile banking is a system that allows customers to perform financial transactions using
their mobile phones.

Benefits of Mobile Banking:

 Transactions are processed instantly, providing up-to-date account information.

 Services are available 24/7 across the country, making banking convenient.
 Mobile banking is easy to use, cost-effective, and ensures secure transactions.
 It helps people, especially in developing areas, to save money more effectively.
 Mobile banking is secure, quick, and protects against fraudulent activities.

Mobile Banking Services

Mobile banking offers a variety of services to make banking easier and more convenient. These
services can be grouped into three main categories:

1. Account Information:

 View mini-statements and account history.

 Get alerts for account activities (e.g., deposits, withdrawals).
 Monitor term deposits and savings.
 Access loan statements and manage insurance policies.

2. Transactions:

 Transfer funds between linked accounts.

 Pay bills or transfer money to third parties.
 Deposit checks remotely using your mobile phone.

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3. Support:

 Check the status of credit or mortgage applications.

 Request new cheque books or cards.

Challenges for Mobile Banking Services

Mobile banking faces several challenges that can limit its effectiveness, especially in certain
areas. Here are the main issues:

1. Lack of Infrastructure: Poor connectivity in rural, remote, or low-population areas

makes it hard to access mobile banking services.
2. Handset Compatibility: Different mobile devices (Java, WAP, or SIM-based) make it
difficult for banks to provide a universal mobile banking solution.
3. Security Risks: Cyber security threats like fraud, phishing, and weak encryption can
expose users to data breaches, financial theft, or unauthorized access.
4. Digital Illiteracy: Many people, especially in rural areas, lack the skills to use
mobile banking apps effectively, even if they own a mobile phone.
5. Poor Internet Connectivity: Slow or unstable internet, particularly in rural areas,
disrupts real-time transactions and access to banking features.

Benefits of Mobile Banking from the Customers’ Point of View

1. Saves Time: Banking tasks can be done anytime, 24/7, without visiting a bank branch.
2. Quick Access to Information: Customers can check account balances and transaction
history instantly with just a few clicks.
3. Better Cash Management: Faster transactions and access to cash management tools
help customers handle money more efficiently.
4. Reduced Costs: Mobile banking lowers the cost of using banking services, as many
transactions are free or low-cost.
5. Convenience: Customers can perform banking tasks from home, office, or anywhere
they prefer.
6. Fast Transactions: Funds can be transferred quickly, even at the last minute, ensuring
timely payments.
7. Easy Funds Management: Customers can download account histories and manage
multiple accounts easily.

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