SYLLABUS

Class – B.Com Hons 3rd Year

Subject – Banking Law & Practice in India
Unit-I Principles of Banking: Definition of Bank, Creation of Money: Present
Structure of Commercial Banks India.
Principles of Management in Banks: Managerial Functions in Bank,
Recruitment, Selection, Training, Promotion and Control Staff.

Unit – II Indian Banking System – Features, Money Lenders, Nationalization of

Commercial Banks and its Effects, Classification of Banking Institutions.
Reserve Bank of India – Functions, Control of Credit by RBI, Power of RBI.

Unit – III Management of Deposits and Advances Deposit Mobilization, Classification

and Nature of Deposit Accounts, Advances, Lending Practice, Types of
Advances. Investment Management: Nature of Bank Investment, Liquidity and
Profitability. Cheques, Bills and their Endorsement, Government Securities.
Procedure of E – Banking

Unit – IV Banking Regulation Act 1949 – Important provisions: Restrictions on

Advances. Privatization of Banks, Narasimhan Committee Report, Banking
Sector Reforms in India.

Unit – V Management of Finance: Bank Accounts, Records, Reports, Statement of

Advances, Appraisal of Loan Application. Development Banking In India –
IFCI, IDBI, ICICI, Export Credit and Guarantee Corporation of India.

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 Class – B.Com IV Sem Subject – Banking Law & Practice in India

Unit – 1

DEFINITION OF BANK:
A bank is an institution which deals with money and credit. It accepts deposits from the public, makes the funds
available to those who need them, and helps in the remittance of money from one place to another. In fact, a
modem bank performs such a variety of functions that it is difficult to give a precise and general definition of it.
It is because of this reason that different economists give different definitions of the bank.

According to Crowther, a bank "collects money from those who have it to spare or who are saving it out of
their incomes, and it lends this money to those who require it.”

In the words of Kinley, “A bank is an establishment which makes to individuals such advances of money as
may be required and safely made, and to which individuals entrust money when not required by them for
use."

According to John Paget, "Nobody can be a banker who does not (i) take deposit accounts, (h) take current
accounts, (iii) issue and pay cheques, and (iv) collects cheques-crossed and uncrossed-for its customers,"

Prof. Sayers defines the terms bank and banking distinctly. He defines a bank as "an institution whose
debts (bank deposits) are widely accepted in settlement of other people's debts to each other."

Again, according to Sayers, "Ordinary banking business consists cash for bank deposits and bank deposits
for cash; transferring bank deposits from one person or corporation to another; giving bank deposits in
exchange for bills of exchange, government bonds, the secured promises of businessmen to repay and so
forth".

According to the Indian Companies Act, 1949, banking means "the accepting for the purpose of Indian
Companies lending or investment, of deposits of money from the public, repayable on demand or
otherwise, and withdraw able by cheque, draft or otherwise."

In short, the term bank in the modern times refers to an institution having the following features:
i. It deals with money; it accepts deposits and advances loans.
ii. It also deals with credit; it has the ability to create credit, i.e., the ability to expand its liabilities as a
multiple of its reserves.
iii. It is commercial institution; it aims at earning profit.
iv. It is a unique financial institution that creates demand deposits which serve as a medium of exchange
and, as a result, the banks manage the payment system of the country.

HISTORY OF BANKING IN INDIA

The Banking system of the country is the base of the economy and economic development of the country. It is
the most leading part of the financial sector of the country as it is responsible for more than 70 % of the funds
flowing through the financial sector in the country.
The banking system in the country has three primary functions:

 Operations of Payment system

 Depositor and protector of people’s savings
 Issue loans to individual and Companies
The Banking system in India can be categorised in two phases

 Pre-Independence Phase (1786-1947)

 Post- Independence Phase (1947 to till date)

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 The post-Independence period may further be divided into three phases-

 Pre-nationalisation Period (1947 to 1969)

 Post nationalisation Period (1969 to 1991)
 Liberalisation Period (1991 to till date)

Pre-Independence Phase (1786-1947)

The origin of the Banking system in India can be traced with the foundation of Bank of Calcutta in 1786. The
Banking in India originates in the last decade in the 18th century with the foundation of the English Agency
houses in Bombay and Calcutta (now Kolkata).

 Three presidency banks Bank of Bengal, Bank of Bombay and Bank of Madras established in the 19th Century
under the charter of the British East India Company.
 In 1935, the presidency banks merge together and formed a new bank named Imperial Bank of India.
 The Imperial Bank of India subsequently named the State Bank of India.
 The first Indian-owned Allahabad Bank was set up in 1865 in Allahabad.
 In 1895, the Punjab National Bank was established in 1895.
 The Bank of India founded in 1906 in Mumbai.
 Many more commercial banks such as Canara Bank, Indian Bank, Central Bank of India, Bank of Baroda and
Bank of Mysore were established between 1906 and 1913 under Indian ownership.
 The central Bank of India, RBI establish in 1935 on the recommendation of Hilton-Young Commission.
At that time, the Banking system was only covered the urban population and need of rural and agriculture
sector was totally neglected.

Post- Independence Phase (1947 to till)

 At the time independence, the entire Banking sector was under private ownership. The rural population of the
country had to dependent on small money lenders for their requirements. To solve these issues and better
development of the economy the Government t of India nationalised the Reserve Bank of India in 1949.
 In 1955 the Imperial Bank of India was nationalised and named the State Bank of India.
 The Banking Regulation Act enacted in 1949.
Nationalisation Period (1969 to 1991)
 In 1969, Government of India nationalised 14 major banks whose national deposits were more than 50 crores.
1. Allahabad Bank
2. Bank of India
3. Punjab National Bank
4. Bank of Baroda
5. Bank of Maharashtra
6. Central Bank of India
7. Canara Bank
8. Dena Bank
9. Indian Overseas Bank
10. Indian Bank
11. United Bank
12. Syndicate Bank
13. Union Bank of India
14. UCO Bank
The Indian Banking system immensely developed after nationalisation but the rural and weaker section of the
society was still not covered under the system.

To solve these issues, the Narasimham Committee in 1974 recommended the establishment of Regional
Rural Banks (RRB). On 2nd October 1975, RRBs were established with an objective to extend the amount of
credit to the rural section of the society.
 Six more banks further nationalised in the year 1980. With the second wave of nationalisation, the target of
priority sector lending was also raised to 40%.
1. Andhra Bank
2. Corporation Bank

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3. New Bank of India
4. Oriental Bank of Commerce
5. Punjab & Sindh Bank
6. Vijaya Bank

Liberalisation Phase (1990 to till)

In order to improve financial stability and profitability of Public Sector Banks, the Government of India set up a
committee under the chairmanship of Shri. M. Narasimham. The committee recommended several measures to
reform banking system in the country.
 The major thrust of the recommendations was to make banks competitive and strong and conducive to the
stability of the financial system.
 The committee suggested for no more nationalisation of banks.
 Foreign banks would be allowed to open offices in India either as branches or as subsidiaries.
 In order to make banks more competitive, the committee suggested that public sector banks and private sector
banks should be treated equally by the Government and RBI.
 It was emphasised that banks should be encouraged to abandon the conservative and traditional system of
banking and adopt progressive function such as merchant banking and underwriting, retail banking, etc.
 Now, foreign banks and Indian banks permitted to set up joint ventures in these and other newer forms of
financial services.
 10 Privates players got a license from the RBI to entry in the Banking sector. These were Global Trust
Bank, ICICI Bank, HDFC Bank, Axis Bank, Bank of Punjab, IndusInd Bank, Centurion Bank, IDBI Bank, Times
Bank and Development Credit Bank.
The Government of India accepted all the major recommendation of the committee.

Recent Development in Indian Banking Sector:

 Kotak Mahindra Bank and Yes Bank got a license from RBI to entry in the system in the year 2003 and 2004.
 In 2014, RBI grants in-principle approval to IDFC and Bandhan Financial Services to set up banks.
Today, Indian Banking industry is one of the most growing flourishing industries. Banking systems of any
country need to be effective, efficient as it plays the active in the economic development of the country.

CREATION OF MONEY
In economics, money creation is the process by which the money supply of a country or a monetary region (such
as the Eurozone) is increased. A central bank may introduce new money into the economy (termed
'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions.
Commercial bank lending then multiplies this base money through fractional reserve banking, which expands
the total of broad money (cash plus demand deposits).
Central banks monitor the amount of money in the economy by measuring monetary aggregates such as M2.
The effect of monetary policy on the money supply is indicated by comparing these measurements on various
dates.

Money creation by the central bank

Monetary policy regulates a country's money supply, the amount of broad currency in circulation. Almost all
modern nations have special institutions (such as the United States Federal Reserve System, the European
Central Bank (ECB), and the People's Bank of China) for conducting monetary policy, often acting independently
of the executive. In general, these institutions are called central banks and often have other responsibilities such
as supervising the smooth operation of the financial system.
The primary tool of monetary policy is open market operations: the central bank buys and sells financial assets
such as treasury bills, government bonds, or foreign currencies. Purchases of these assets result in currency
entering market circulation, while sales of these assets remove currency. Usually, open market operations aim
for a specific short term interest rate. In other instances, they might instead target a specific exchange rate
relative to some foreign currency, the price of gold, or indices such as the Consumer Price Index. For example,

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the US Federal Reserve may target the federal funds rate, the rate at which member banks lend to one another
overnight.
Other monetary policy tools to expand the money supply include decreasing interest rates by fiat; increasing the
monetary base; and decreasing reserve requirements. Some other means are: discount window lending (as
lender of last resort); moral suasion (cajoling the behavior of certain market players); and "open mouth
operations" (publicly asserting future monetary policy). The conduct and effects of monetary policy and the
regulation of the banking system are of central concern to monetary economics.

Quantitative easing

Definition: Quantitative easing is an occasionally used monetary policy, which is adopted by the government to
increase money supply in the economy in order to further increase lending by commercial banks and spending
by consumers. The central bank (Read: The Reserve Bank of India) infuses a pre-determined quantity of money
into the economy by buying financial assets from commercial banks and private entities. This leads to an
increase in banks' reserves.
Quantitative Easing is mainly an asset purchase or asset swap policy. The purpose is to increase money supply
to the banks. A central bank implements quantitative easing by buying specified amounts of financial
assets from commercial banks and other private institutions, thus increasing the monetary base and
lowering the yield on those financial assets. This is distinguished from the more usual policy of buying or
selling short term government bonds in order to keep interbank interest rates at a specified target value.

Definition :- QE is an unconventional monetary policy used by central banks to stimulate the economy when
standard monetary policy has become ineffective. A central bank implements quantitative easing by buying
specified amounts of financial assets from commercial banks and other private institutions, thus increasing
the monetary base, so that the banks have now more money to lend.

Need for Quantitative Easing

1. When interest rates have been lowered to nearly zero (because of either deflation or extremely low money
demand).
2. When a large number of non-performing or defaulted loans prevent further lending (money supply
growth) by member banks.
3. When the main systemic risk is a recession or depression.

Problems of Quantitative Easing

1. If the money supply increases too quickly, quantitative easing can lead to higher rates of inflation.
2. Banks may decide to keep funds generated by quantitative easing in reserve rather than lending those
funds to individuals and businesses (failing the purpose of QE).
3. Difficult to gauge how much QE is required.
4. Potential to destroy the confidence in an economy.
5. Central bank can lose money.
6. May not work if not implemented aggresevily enough.

Physical currency
In modern economies, relatively little of the supply of broad money is in physical currency. The manufacturing
of new physical money is usually the responsibility of the central bank, or sometimes, the government's
treasury.
Contrary to popular belief, money creation in a modern economy does not directly involve the manufacturing of
new physical money, such as paper currency or metal coins. Instead, when the central bank expands the money
supply through open market operations (e.g. by purchasing government bonds), it credits the accounts that
commercial banks hold at the central bank (termed high powered money). Commercial banks may draw on

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these accounts to withdraw physical money from the central bank. Commercial banks may also return soiled or
spoiled currency to the central bank in exchange for new currency.

Money creation through the fractional reserve system

Through fractional reserve banking, the modern banking system expands the money supply of a country beyond
the amount initially created by the central bank. There are two types of money in a fractional-reserve banking
system: currency originally issued by the central bank, and bank deposits at commercial banks:
1. central bank money (all money created by the central bank regardless of its form, e.g. banknotes, coins,
electronic money)
2. commercial bank money (money created in the banking system through borrowing and lending) –
sometimes referred to as checkbook money
When a commercial bank loan is extended, new commercial bank money is created if the loan proceeds are
issued in the form of an increase in a customer's demand deposit account (that is, an increase in the bank's
demand deposit liability owed to the customer). As a loan is paid back through reductions in the demand
deposit liabilities the bank owes to a customer, that commercial bank money disappears from existence.
Because loans are continually being issued in a normally functioning economy, the amount of broad money in
the economy remains relatively stable. Because of this money creation process by the commercial banks, the
money supply of a country is usually a multiple larger than the money issued by the central bank; that multiple
is determined by the reserve requirements or other financial ratios (primarily the capital adequacy ratio that
limits the overall credit creation of a bank) set by the relevant banking regulators in the jurisdiction.

Money multiplier
The most common mechanism used to measure this increase in the money supply is typically called the money
multiplier. It calculates the maximum amount of money that an initial deposit can be expanded to with a given
reserve ratio – such a factor is called a multiplier. As a formula, if the reserve ratio is R, then the money
multiplier m is the reciprocal, and is the maximum amount of money commercial banks can legally create for a
given quantity of reserves.
In the re-lending model, this is alternatively calculated as a geometric series under repeated lending of a
geometrically decreasing quantity of money: reserves lead loans. In endogenous money models, loans lead
reserves, and it is not interpreted as a geometric series. In practice, because banks often have access to lines of
credit, and the money market, and can use day time loans from central banks, there is often no requirement for
a pre-existing deposit for the bank to create a loan and have it paid to another bank.

The money multiplier is of fundamental importance in monetary policy: if banks lend out close to the maximum
allowed, then the broad money supply is approximately central bank money times the multiplier, and central
banks may finely control broad money supply by controlling central bank money, the money multiplier linking
these quantities; this was the case in the United States from 1959 through September 2008.

If, conversely, banks accumulate excess reserves, as occurred in such financial crises as the Great Depression
and the Financial crisis of 2007–2008 – in the United States since October 2008, then this equality breaks down,
and central bank money creation may not result in commercial bank money creation, instead remaining as
unlent (excess) reserves.[11] However, the central bank may shrink commercial bank money by shrinking central
bank money, since reserves are required – thus fractional-reserve money creation is likened to a string, since
the central bank can always pull money out by restricting central bank money, hence reserves, but cannot
always push money out by expanding central bank money, since this may result in excess reserves, a situation
referred to as "pushing on a string".

PRESENT STRUCTURE OF COMMERCIAL BANKS IN INDIA

Banking in India in the modern sense originated in the last decades of the 18th century. The first banks were
Bank of Hindustan (1770-1829) and The General Bank of India, established 1786 and since defunct.

The largest bank, and the oldest still in existence, is the State Bank of India, which originated in the Bank of
Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three
presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were

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established under charters from the British East India Company. The three banks merged in 1921 to form the
Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955. For many
years the presidency banks acted as quasi-central banks, as did their successors, until the Reserve Bank of India
was established in 1935.
In 1969 the Indian government nationalised all the major banks that it did not already own and these have
remained under government ownership. They are run under a structure know as 'profit-making public sector
undertaking' (PSU) and are allowed to compete and operate as commercial banks. The Indian banking sector is
made up of four types of banks, as well as the PSUs and the state banks, they have been joined since 1990s by
new private commercial banks and a number of foreign banks.

Banking in India was generally fairly mature in terms of supply, product range and reach-even though reach in
rural India and to the poor still remains a challenge. The government has developed initiatives to address this
through the State bank of India expanding its branch network and through the National Bank for Agriculture
and Rural Development with things like microfinance.

As per Section 5(b) of the Banking Regulation Act 1949: “Banking” means the accepting, for the purpose of
lending or investment, of deposits of money from the public, repayable on demand or otherwise, and
withdrawal by cheque, draft, order or otherwise.”

All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are scheduled
banks. These banks comprise Scheduled Commercial Banks and Scheduled Cooperative Banks.

Scheduled Commercial Banks in India are categorized into five different groups according to their ownership
and / or nature of operation. These bank groups are:
(i) State Bank of India and its Associates,
(ii) Nationalized Banks,
(iii) Regional Rural Banks,
(iv) Foreign Banks and
(v) Other Indian Scheduled Commercial Banks (in the private sector).
(vi) Co-operative Banks

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Besides the Nationalized banks (majority equity holding is with the Government), the State Bank of India (SBI)
(majority equity holding being with the Reserve Bank of India) and the associate banks of SBI (majority holding
being with State Bank of India), the commercial banks comprise foreign and Indian private banks. While the
State bank of India and its associates, nationalized banks and Regional Rural Banks are constituted under
respective enactments of the Parliament, the private sector banks are banking companies as defined in the
Banking Regulation Act. These banks, along with regional rural banks, constitute the public sector (state owned)
banking system in India. The Public Sector Banks in India are back bone of the Indian financial system.

The cooperative credit institutions are broadly classified into urban credit cooperatives and rural credit
cooperatives. Scheduled Co-operative Banks consist of Scheduled State Co-operative Banks and Scheduled
Urban Co-operative Banks.

Regional Rural Banks (RRB’s) are state sponsored, regionally based and rural oriented commercial banks. The
Government of India promulgated the Regional Rural Banks Ordinance on 26th September 1975, which was
later replaced by the Regional Rural Bank Act 1976. The preamble to the Act states the objective to develop
rural economy by providing credit and facilities for the development of agriculture, trade, commerce, industry
and other productive activities in the rural areas, particularly to small and marginal farmers, agricultural
labourers, artisans and small entrepreneurs.

Different types of bank categorized by functions, ownership and domicile

Banks can be classified into various types on the basis of their functions, ownership, domicile, etc. The following
are the various types of banks:

various types
of banks

Scheduled
Classification
Commercial Industrial Agricultural Exchange and Non-
Saving Banks Central Bank on the Basis
Banks Banks Banks Banks Scheduled
of Ownership
Banks

1. Commercial Banks:
The banks, which perform all kinds of banking business and generally finance trade and commerce, are called
commercial banks. Since their deposits are for a short period, these banks normally advance short-term loans to
the businessmen and traders and avoid medium-term and long-term lending.

However, recently, the commercial banks have also extended their areas of operation to medium-term and long-
term finance. Majority of the commercial banks are in the public sector. However, there are certain private
sector banks operating as joint stock companies. Hence, the commercial banks are also called joint stock banks.

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2. Industrial Banks:
Industrial banks, also known as investment banks, mainly meet the medium-term and long-term financial needs
of the industries. Such long-term needs cannot be met by the commercial banks, which generally deal with
short-term lending.

The main functions of the industrial banks are:

(a) They accept long-term deposits.
(b) They grant long-term loans to the industrialists to enable them to purchase land, construct factory building,
purchase heavy machinery, etc.
(c) They help selling or even underwrite the debentures and shares of industrial firms,
(d) They can also provide information regarding the general economic position of the economy. In India,
industrial hanks, like Industrial Development Bank of India, Industrial Finance Corporation of India, Slate
Finance Corporations, are playing significant role in the industrial development of the country.

3. Agricultural Banks:
Agricultural credit needs are different from those of industry and trade. Industrial and commercial banks
normally do not deal with agricultural finance. The agriculturists require:

(a) short-term credit to buy seeds, fertilizers and other inputs, and
(b) long-term credit to purchase land, to make permanent improvements on land, to purchase agricultural
machinery and equipment, etc. In India, agricultural finance is generally provided by co-operative institutions.
Agricultural co-operatives provide short-term loans and Land Development Banks provide the long-term credit
to the agriculturists.

4. Exchange Banks:
Exchange banks deal in foreign exchange and specialise in financing foreign trade. They facilitate international
payments through the sale, purchase of bills of exchange, and thus play an important role in promoting foreign
trade.

5. Saving Banks:
The main purpose of saving banks is to promote saving habits among the general public and mobilise their small
savings. In India, postal saving banks do this job. They open accounts and issue postal cash certificates.

6. Central Bank:
Central bank is the apex institution, which controls, regulates and supervises the monetary and credit system of
the country. Important functions of the central bank are:
(a) It has the monopoly of note issue;
(b) It acts as the banker, agent and financial adviser to the state;
(c) It is the custodian of member banks reserves;
(d) It is the custodian of nation's reserves of international currency;
(e) It serves as the lender of the last resort;
(f) It functions as the bank of central clearance, settlement and transfer; and
(g) It acts as the controller of credit. Besides these functions, India's central bank, i.e., the Reserve Bank of India,
also performs many developmental functions to promote economic development in the country.

7. Classification on the Basis of Ownership:

On the basis of ownership, banks can be classified into three categories:

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 Private
Sector Banks

Public Sector Cooperative

Banks Banks

Classification
on the Basis
of Ownership

(a) Public Sector Banks:

These arc owned and controlled by the government. In India, the nationalized banks and the regional rural
banks come under these categories,
(b) Private Sector Banks:
These banks are owned by the private individuals or corporations and not by the government or co-operative
societies,
(c) Cooperative Banks:
Cooperative banks are operated on the cooperative lines. In India, cooperative credit institutions are organised
under the cooperative societies law and play an important role in meeting financial needs in the rural areas.

8. Classification on the Basis of Domicile:

On the basis of domicile, the banks are divided into two categories:
(a) Domestic Banks:
These are registered and incorporated within the country,
(b) Foreign Banks:
These are foreign in origin and have their head offices in the country of origin.

9. Scheduled and Non-Scheduled Banks:

In India, banks have been broadly classified into scheduled and non-scheduled banks. A Scheduled Bank is that
which has been included in the Second Schedule of the Reserve Bank of India Act, 1934 and fulfills the three
conditions
(a) it has paid-up capital and reserves of at least Rs. 5 lakhs. It ensures the Reserve Bank that its operations are
not detrimental to the interest of the depositors;
(b) It is a corporation or a cooperative society and not a partnership or a single owner firm. The banks which
are not included in the Second Schedule of the Reserve Bank of India Act are non-scheduled banks.

PRINCIPLES OF MANAGEMENT IN BANK RECRUITMENT

Recruitment is a process to discover the sources of manpower to meet the requirement of the staffing schedule
and to employ effective measures for attracting that manpower in adequate numbers to facilitate effective
selection of efficient personnel.

Recruiting is an ongoing project for any organization. From the moment an employment application is
submitted, recruitment software should be there to rank it, match the applicant to job if necessary and place the
information in a database that can share the information across different software applications or applicant
tracking tasks, including scheduling interviews and sending out letters for every stage of the recruitment
process.

Definitions:
It is the process of finding and attracting capable applicants of employment. The process begins when new recruits
are sought and ends when their applications are submitted. The result is pool of applicant from which new
employees are selected.
- K. ASWATHAPPA.

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Recruitment is the process of searching for prospective employees and stimulating them to apply for the jobs in the
organization.
- EDWIN. B. FLIPPO

Significance:
The general purpose of recruitment is to provide a pool of potentially qualified job candidates. Specifically, the
purpose is to:
1. Determine the present and future requirements of the organization in conjunction with its personal
planning and job-analysis activities.
2. Increase the pool of job candidates at minimum cost.
3. Help to increase the success rate of the selection process by reducing the number of visibly under
qualified or over qualified job applicants.
4. Help to reduce the probability that job applicants, once recruited and selected, will leave the
organization only after a short period of time.
5. Meet the organization’s legal and social obligations regarding the composition of its workforce.
6. Begin identifying and preparing potential job applicants who will be appropriate candidates.
7. Increase organizational and individual effectiveness in the short term and long term.
8. Evaluate the effectiveness of various recruiting techniques and sources for all types of job applicants.

Objectives of recruitment:
1. To attract people with multi dimensional skills and experiences that suits the present and future
organizational strategies.
2. To induct the outsiders with a new perspective to lead the company
3. To infuse fresh blood at all levels of the organization.
4. To develop an organizational culture that attracts competent people to the company.
5. To devise methodologies for assessing psychological traits.
6. To seek out non-conventional grounds of talent.
7. To design entry pay that competes on quality but not on quantum.
8. To anticipate and find people for positions that does not exist.

Recruitment policy:
The recruitment policy of any organization is derived from the personnel policy of the same organization. It
includes:
 Government policies
 Personnel policies of other competing organizations
 Organization’s personnel policies
 Recruitment sources
 Recruitment needs
 Recruitment cost
 Selection criteria and preference etc

Sources of recruitment:
The sources of recruitment are broadly divided into internal and external sources.

Internal Sources:
 Present permanent employees
 Present temporary or casual employees
 Retrenched or retired employees
 Dependents of deceased, disabled, present and retired employees.

Why do organizations prefer internal sources?

 It can be used as a technique for motivation.
 Morale of the employees can be improved.
 Suitability of the internal candidates can be judged better than the external candidates as “known devils
are better than unknown angels”.
 Cost of selection can be minimized.

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  Trade unions can be satisfied.
 Stability of the employees can be ensured.

External Sources:
a) Campus recruitment:
Different types of organizations like industries, business firms, service organizations ,social organizations can
get inexperienced candidates of different types from various educational institutions like colleges and
universities. Many companies realize that campus recruitment is one of the best techniques for recruiting new
blood. These include
 Short listing the institutes based on the quality of the students intake, faculty facilities and past track
record.
 Offering the smart pay rather than high pay package.
 Presenting a clear image of the company and the corporate culture.
 Getting in early. Make an early bird offer.
 Include young line managers and business school and engineering school alumni in the recruiting team.

b) Private employee agencies:

Consultants in India perform the recruitment functions on behalf of a client company by charging fee. Line
managers are relieved from recruitment functions so that they can concentrate on operational activities. Hence
these agencies work effectively in the recruitment of executives.

c) Public employee exchanges:

The government set up public employment exchanges in the country to provide information about vacancies to
the candidates and to help the organization in finding out suitable candidates.

d) Professional Organizations:
These organizations maintain complete bio-data of their members and provide the same to various
organizations on requisition. They also act as an exchange between their members and recruiting firms in
exchanging information, clarifying doubts etc.

e) Data banks:
The management can collect the bio-data of the candidates from different sources like employee exchange,
educational training institutes, candidates etc and feed them in the computer. it will become another source and
the company can get the particulars as and when it needs to recruit.

f) Casual applicants:
Depending upon the image of the organization, its prompt response, participation of the organization in the
local activities, level of unemployment. Candidates apply casually for jobs through mail or handover the
applications in the personnel department.

g) Similar organizations:
Generally experienced candidates are available in organizations producing similar products or are engaged in
similar business. The management can get most suitable candidates from this source.

h) Trade unions:
Generally unemployed or underemployed persons or employees seeking change in employment put a word to
the trade union leaders with a view to getting suitable employment due to latter’s intimacy with management.
In view of this fact and in order to satisfy the trade union leaders, management enquires trade unions for
suitable candidates.

Reasons for external sources:

 Candidates can be selected without any pre-conceived notion or reservations.
 HR mix can be balanced with different background, experience and skill etc.
 Latest knowledge skill, innovative or creative talent can also be flowed in to the organization.
 Long run benefit to the organization in the sense that qualitative human resources can be brought.

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Recruitment Techniques:
These are the techniques by which the management contracts prospective employees or provides necessary
information or exchanges ideas or stimulates them to apply for jobs. Management uses different types of
techniques to stimulate internal and external candidates. Techniques useful to stimulate internal candidates
are:
 Promotions  Transfers
Techniques useful to stimulate external candidates:
 Present employees

Modern sources and techniques of recruitment:

A number of modern recruitment sources and techniques are being used by the corporate sector in addition to
traditional sources and techniques. These techniques include.
a) Walk-in:
The busy organizations and the rapid changing companies do not find time to perform various functions of
recruitment. Therefore, they advise the potential candidates to attend for an interview directly and without a
prior application on a specified date, time and at a specified place.
b) Consult-in:
The busy and dynamic companies encourage the potential job seekers to approach them personally and consult
them regarding the jobs; the companies select the suitable candidates from among such candidates through the
selection process.
c) Head Hunting (search consultants):
In this the professional organizations search for the most suitable candidates and advise the company regarding
the filling up of the positions.
d) Body Shopping:
The prospective employees contact these organizations to recruit the candidates. These professional and
training institutions are called body shoppers and these activities are known as body shopping.
e) Business Alliances:
Business alliances like acquisition, mergers and takeovers help in getting human resources. In addition, the
companies do also have alliances in sharing their human resources on ad-hoc basis.
f) Tele-recruitment:
Organizations advertise the job vacancies through the World Wide Web (internet). The job seekers send their
applications through e-mail or internet.

TRAINING:
Training is the acquisition of knowledge, skills, and competencies as a result of the teaching of vocational or
practical skills and knowledge that relate to specific useful competencies. Training has specific goals of
improving one's capability, capacity, productivity and performance.

Importance of Training:
1. Increased executive management skills.
2. Development in each executive of a broad background and appreciation of the company's overall operations
and objectives.
3. Greater delegation of authority because executives down the like are better qualified and better able to
assure increased responsibilities.
4. Creation of a reserve of qualified personnel to replace present incumanets and staff new positions.
5. Improved selection for promotion. .
6. Minimum delay in staffing new positions and minimum a distribution of operations during replacement in
incumbents.
7. Provision for the best combination of youth, vigour and experience in top management and increased span
of productive life in high level position.
8. Improved executive morale.
9. Attractive t6 the company of ambitious men who wish to move ahead as rapidly as their abilities permit.
10. Increased effectiveness and reduced costs, resulting in greater assurance of continued profitability.

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Methods of Training:

A. On- the job training Methods: This type of training is also know as job instruction training. Under on - the
job training method, the individual is placed on a regular job and taught the skills necessary to perfrorm that
job. The trainee learns under the supervision and guidance of a qualified worker or instructor.

On-the - job training methods include the following:

(i) Under Study :This method makes the trainee an assistant to the current job holder. The trainee learns by
experience, observation and imitation. It is a kind of mentoring that to help the employee to learn the skills of
superior position.

(ii) Coaching : This method involves training by a superior about the knowledge and skills of a job to the junior
or subordinate. The superior points out the mistakes committed by the trainee and make suggestions to
improve upon.

(iii) Job rotation : This method involves movement of employees to different types of jobs to gain knowledge
and functioning of various jobs within the organisation.Banks and insurance companies follow this approach.
This method is also known as position rotation or cross training

(iv) Committee Assignment : In this method a committee consisting of a group of emplyees are given a problem
and invited solutions. The employees solve the problem and submit the solution. The object of this method is to
develop a team work among the employees.

(v) Selective readings: Selective reading may include professional journals and books. Some business
organisations maintain libraries for their executives. This is a good method for assimilating knowledge.

B) Of -the job training Method: In off- the -job training, a trainee has to leave his place of working and devote
his entire time for training purpose. During this period, the trainee does not contribute anything to the
organization. These methods can be followed either in the organization itself or the trainee may be sent away
for training courses organized by specialized institutions.

In our country, there are many organizations which have their own training institutes.

Prominent among them in the private sector are TISCO, Larsen & Tubro, ITC, Hindustan Unilever Ltd etc. And
Steel Authority of India Ltd (SAIL), State Trading Corporation (STC), Life Insurence corporation, Coal India etc.in
the public sector. Besides, there are special training institutes like Administrative Staff College of India, National
Productivity Council, All India Management Association, India Institute of Management etc.

Various methods of off-the job training are as follows:

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 Lecture
Method

Sensitivity
Conferences
Training

Methods
of off-the
job
training

Management
Case Study
Games

Role Playing

(i) Lecture Method : Special courses and lectures are knowledge based training methods. These courses are
organised for a short period. Lectures are supplemented by demonstrations. It also known as class room
training.

(ii) Conferences: In order to overcome the limitations of lecture method many organisations have adopted
guided-discussion type of conferences in their training programmes. In this method, the participants pool their
ideas and experiences and draw conclusions.

(iii) Case Study: Case Study method of training has been developed by Harvard Business School of USA. Cases
are widely used in a variety of programmes. This method increases the trainees power of observation. Case
studies are generally used for teaching law, marketing, personnel management etc.

(iv) Role Playing: This mehod of training is used for improving human relations and development of leadership
qualities. Role playing technique is used in group where various individuals are given roles of different
managers. Dialogue spontaneously grows out of the situation. This method helps the trainee to develop insight
into his behaviour and deal with others accordingly.

(v) Management Games: Management games are used to stimulate the thinking of people to run an
organisation or its department. A game involves the participation of two or more teams depending on the
situation. All the teams have to make decisions regarding the operation of their companies in the given
situation. Strength and weakness of decisions are analysed in the light of the results.

(vi) Sensitivity Training: Sensitivity training was first used by National Training Laboratories at Bethel, USA.
The training group called itself as T- group. Therefore, it is also called as T-Group training. It is a laboratory
training method. The trainees can develop tolerance for others views, become less prejudiced, develop
understanding for group process and listening skills.

After imparting training to the employees it becomes necessary to evaluate the training programme because
organizations spend a sizeable amount on it. It is, therefore, necessary to examine what value is added to the
performance by the training so that in future such training programmes may be arranged or abandoned if they
fail to pay some benefit.

The effectiveness of the training Programme can by judged on the basis of the following criteria:

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(a) Need: After training, the performance is evaluated .If there is positive demonstration from the workers the
need is fulfilled. It is to ascertain whether the training has helped in achieving the results
(b) Change in behavior: The training should bring about change in the behavior of the employee as regards his
performance of job. He should use the knowledge acquired by him during training for job performance.
(c) Value addition: Value addition is another criterion for assessment of training. It can be visualized through
overall performance, change in trainees’ personality, socialization, development etc.

PROMOTION
A promotion is the advancement of an employee's rank or position in an organizational hierarchy system.
Promotion may be an employee's reward for good performance, i.e., positive appraisal. Before a company
promotes an employee to a particular position it ensures that the person is able to handle the added
responsibilities by screening the employee with interviews and tests and giving them training or on-the-job
experience. A promotion can involve advancement in terms of designation, salary and benefits, and in some
organizations the type of job activities may change a great deal. The opposite of a promotion is a demotion.

Advantages of Promotion:
i. It is an important source of internal vi. It promotes self development of
recruitment. employees.
ii. It motivates employees. vii. Reduced training cost.
iii. It increases job satisfaction. viii. Better industrial relations.
iv. It increases morale. ix. No induction delay.
v. It increases loyalty.

Disadvantages of Promotion:
i. Lack of new blood.
ii. Breeds Corruption
iii. Lack of capable or suitable employees.
iv. Not suitable for posts requiring innovative thinking.

Bases of Promotion
Promotion is given on the basis of seniority or merit or a combination of both. Let us discuss each one as a basis
of promotion.

Merit as a
basis
Seniority-
Seniority
cum-Merit
as a basis
as basis

Bases of
Promotion

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Seniority as a basis: It implies relative length of service in the same organization. The advantages of this are:
relatively easy to measure, simple to understand and operate, reduces labour turnover and provides sense of
satisfaction to senior employees. It has also certain disadvantages: beyond a certain age a person may not learn,
performance and potential of an employee is not recognized, it kills ambition and zeal to improve performance.

Merit as a basis: Merit implies the knowledge, skills and performance record of an employee. The advantages
are: motivates competent employees to work hard, helps to maintain efficiency by recognizing talent and
performance. It also suffers from certain disadvantages like: difficulty in judging merit, merit indicates past
achievement, may not denote future potential and old employees feel insecure.

Seniority-cum-Merit as basis: As both seniority and merit as basis suffer from certain limitations, therefore, a
sound promotion policy should be based on a combination of both seniority and merit. A proper balance
between the two can be maintained by different ways: minimum length of service may be prescribed, relative
weightage may be assigned to seniority and merit and employees with a minimum performance record and
qualifications are treated eligible for promotion, seniority is used to choose from the eligible candidates.

Merit Vs Seniority
MERIT SENIORITY
Advantages:
Motivates Employees It is objective
Adds to job satisfaction. Simple
Increases loyalty Favoured by Union
Increases Loyalty
Reduces Turnover
Disadvantages
It is subjective Promotes Inefficiency
Complicated Reduces motivation
Scope for Favoritism Kills initiative and Innovative
Thinking
Opposition by Union Lowers morale of employees
Promotes Industrial Unrest

CONTROL OF STAFF:-
The setting up of a good control system should be guided by certain important principles.

Principle of
Reflection of
Plans

Principle of Principle of
Pyramid Prevention

Important
principles

Principle of Principle of
Critical Points Responsibility

Exception
Principle

1. Principle of Reflection of Plans:

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The more clear and complete the plans of the organisation and the more contr61s are designed to reflect these
plans, the more effectively will controls serve its needs.

2. Principle of Prevention:
The truth of the saying 'Prevention is better than cure' is well-established. In control more attention should be
directed to prevention of shortfalls than, remedying them after they occur. Peed forward control is very helpful
in this respect.

3. Principle of Responsibility:
Responsibility for control particular measurement of deviations taking corrective action should be given to
specific individuals at each stage of the operation.

4. Exception Principle:
The managers should concern themselves with exceptional cases i.e., those where the deviations from standards
are very significant. Deviations of a minor mature may be left to subordinates for necessary action.

5. Principle of Critical Points:

All operations have got' certain vulnerable or critical points. It is these which cause most of the troubles - give
rise to major deviations. The managers should pay more attention to the guarding of these points.

6. Principle of Pyramid:
Feedback data should first be communicated to the bottom of the pyramid i.e., those supervisors and even
operating staff who is at the lowest levels. This will give the employees opportunity to control their own
situations, apart from quickening remedial action.

The important provisions:

i. Punctuality
ii. Leave Rules
iii. Trade Union Activities

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 UNIT-II
INDIAN BANKING SYSTEM

Introduction-

The existing Indian Banking System structure makes progress over several decades, is elaborated and has been
providing the credit and banking services needs of Indian economy. Indian Banking System is divided into
multiple layers which follows the requirements of different customers and borrowers of the country. The
banking structure played a crucial role in the mobilisation of savings and promoting economic development. In
the post-financial sector reforms (1991) phase, the performance and strength of the Indian Banking structure
improved noticeably. India cannot possess a healthy economy without a strong and productive banking system.
The banking system should be hassle free and must be able to meet the new challenges posed by technology and
other factors.

SALIENT FEATURES OF INDIAN BANKING SYSTEM

1. Laws governing establishment of banks: Companies Act, 1956; Banking Regulation Act, 1949; Reserve Bank
of India Act, 1934; Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; Central or
State Co-operative Acts.
2. Ownership: Public Sector Banks and Private Sector Banks
3. Capital Requirement: Scheduled Bank: Rs. 5.00 Lakhs; Nationalized Banks: Rs. 1500 Crore.
4. Capital Adequacy Norms: 8%
5. Mixed Banking
6. Increased credit to private sector
7. Control over the banks
8. Maintenance of CRR
9. Maintenance of SLR
10. Reserve Bank’s Monopoly of Note Issue
11. Uniform Accounting Policy
12. Technology Changes
13. Internet Banking
14. Branch Banking
15. Diversification of Banking Operations
16. Cleaning NPAs
17. Changing trend of the payment system from cash to cashless.
18. UCID Code for bank’s customers in India.
19. Implementation of business continuity plan.

Additional Reforms:
20. Prudential Measure
21. Competition Enhancing Measures.
22. Measures enhancing role of market forces.
23. Institutional and legal measures.
24. Supervisory Measures\
25. Technology Related Measures
26. Technological Developments in Scheduled Commercial Banks

Money Lenders

Meaning of Moneylenders:
Moneylenders are those whose primary business is moneylending.

They are classified into two categories:

(a) Professional, and

(b) Non-professional.

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The professional moneylenders are those whose primary business is moneylending. On the other hand, the non-
professional moneylenders are those who are engaged in some other profession but whose side business is
moneylending.

They include landlords, agriculturists, merchants, traders, rich widows, pensioners, advocates, teachers, or any
other person who has got surplus money. The professional and non-professional money lenders operate both in
rural and urban areas. But this division is not water-tight because an urban merchant may also lend to a farmer
whose produce he buys.

Working of Moneylenders:
The functions of moneylenders are:
(1) The main function of moneylenders is to give short-term loans. Loans may be given for consumption
purposes, to meet social and religious obligations or the needs of farmers for seeds, cattle, fertilisers, etc.

(2) Loans are generally given on the personal security of borrowers. However, grant of loans on the security of
costly things in urban areas and against land or crop in rural areas; is also common.

(3) They have personal contacts with the borrowers who approach them directly and informally,

(4) The moneylenders normally lend their own funds.

(5) The non-professional moneylenders prefer to lend in kind.

(6) Since the moneylenders have a personal knowledge about the creditworthiness of borrowers they adopt
rigid or flexible attitude while lending, charging interest, and recovery of loans.

(7) They charge excessively high rates of interest.

(8) The moneylenders in rural areas are quite influential persons who adopt pressure tactics in the recovery of
loans, such as forcible occupation of the cultivator’s land, caste disapproval, pressure from panchayats, etc.

(9) The moneylenders also resort to some malpractices in rural areas which are: manipulating accounts,
deducting interest in advance, demanding presents, exacting free services from the borrower, demanding
donations, obtaining thumb impression of borrower on blank paper, non-issue of receipts for payment of
interest and principal, keeping the deed of land or house of the borrower as a security, forcing the borrower-
farmer to sell his produce in advance at a price lower than the market, etc.

Importance of Moneylenders:
The importance of moneylenders is immense in rural India because of the inadequacy of institutional financing
agencies like commercial banks and cooperative banks. They meet the short-term monetary requirements of
farmers, landless agricultural workers, marginal farmers, rural artisans, and petty shopkeepers and traders.
They give loans for consumption needs, for social and religious ceremonies, and for such productive purposes as
seeds, fertilisers, cattle etc.

The professional moneylender is more useful because he also provides articles of daily requirements. There
being personal contact with the moneylender, the borrowers approach him directly and informally. Generally
they get loans on personal security. As the moneylender is known to every borrower personally, the former is in
a position to get the loan easily. A moneylender is often regarded as the friend, guide, and helper of the people in
rural areas.

The importance of moneylenders can be assessed from the All India Rural Credit Survey Committee’s findings
that in 1950-51 professional and agricultural moneylenders accounted for nearly 70 per cent of the total

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borrowings of cultivators, and only 7.3 per cent was contributed by the organised institutions like commercial
banks and cooperatives.

The All India Investment and Rural Debt Survey estimated that in 1960- 61 the moneylenders accounted for 49
per cent of the total borrowings by farmers.

During the British rule in India, a number of Provinces passed Acts in 1938 to restrain some of the objectionable
practices of moneylenders, such as provisions for registration, licensing, and regulation of their activities. But
these Acts remained on paper.

However, after nationalisation of 14 banks and with branch expansion and opening of rural banks, and
strengthening of cooperative banks, the hold of moneylenders on rural credit has become weak.

Nationalization of Commercial Banks and its Effects

Nationalization is a process whereby a national government or State takes over the private industry,
organisation or assets into public ownership by an Act or ordinance or some other kind of orders. This strategy
has been frequently adopted by socialist governments for transition from capitalism to socialism.
The banking sector in India has been facing extreme changes with the economic growth of the country. In 1948,
RBI (Transfer of public ownership) Act was passed to nationalised the Reserve Bank. On Jan 1, 1949, RBI was
nationalised. In 1955, the Imperial Bank of India was nationalized and was given the name “State Bank of India”,
to act as the principal agent of RBI and to handle banking transactions all over the country. It was established
under State Bank of India Act, 1955.

On 19th July, 1969, 14 major Indian commercial banks of the country were nationalized. In 1980, another six
banks were nationalized, and thus raising the number of nationalized banks to20. Seven more banks were
nationalized with deposits over 200 Crores. Later on, in the year 1993, the government merged New Bank of
India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the
reduction of the number of nationalized banks from 20 to 19. Till the year1980 approximately 80% of the
banking segment in India was under government’s ownership. On the suggestions of Narsimhan Committee, the
Banking Regulation Act was amended in 1993 and hence, the gateways for the new private sector banks were
opened.

Objectives (Reasons) Behind Nationalisation of Banks in India:-

To reduce
monopoly
practices
Greater
Social control
Stability of
was not
banking
adequate
structure

Reasons To reduce
Greater
behind misuse of
control by
nationalisatio savings of
the Reserve
n of Banks in general
Bank
India public

Balanced Greater
Regional mobilisation
development of deposits
Advance loan
to agriculture
sector

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1. To reduce monopoly practices: Initially, a few leading industrial and "business houses had close association
with commercial banks. They exploited the bank resources in such a way that the new business units cannot
enter in any line of business in competition with these business houses. Nationalisation of banks, thus, prevents
the spread of the monopoly enterprise.

2. Social control was not adequate: The 'social control' measures of the government did not work well. Some
banks did not follow the regulations given under social control. Thus, the nationalisation was necessitated by
the failure of social control.

3. To reduce misuse of savings of general public: Banks collect savings from the general public. If it is in the
hand of private sector, the national interests may be neglected, besides, in Five-Year Plans, the government
gives priority to some specified sectors like agriculture, small-industries etc. Thus, nationalisation of banks
ensures the availability of resources to the plan-priority sectors.

4. Greater mobilisation of deposits: The public sector banks open branches in rural areas where the private
sector has failed. Because of such rapid branch expansion there is possibility to mobilise rural savings

5. Advance loan to agriculture sector: If banks fail to assist the agriculture in many ways, agriculture cannot
prosper, that too, a country like India where more than 70% of the population depends upon agriculture. Thus,
for providing increased finance to agriculture banks have to be nationalised.

6. Balanced Regional development: In a country, certain areas remained backward for lack of financial
resource and credit facilities. Private Banks neglected the backward areas because of poor business potential
and profit opportunities. Nationalisation helps to provide bank finance in such a way as to achieve balanced
inter-regional development and remove regional disparities.

7. Greater control by the Reserve Bank: In a developing country like India there is need for exercising strict
control over credit created by banks. If banks are under the control of the Govt., it becomes easy for the Central
Bank to bring about co-ordinated credit control. This necessitated the nationalisation of banks.

8. Greater Stability of banking structure: Nationalised banks are sure to command more confidence with the
customers about the safety of their deposits. Besides this, the planned development of nationalised banks will
impart greater stability for the banking structure.
Arguments in favour and against nationalisation of banks

Arguments in favour of nationalisation

1. It would enable the government to obtain all the large profits of the banks as its revenue
2. Nationalization would safeguard interests of public and increase their confidence thereby bringing about a
rapid increase in deposits. Thus preventing bank failures
3. It would remove the concentration of economic power in the hands of a few industrialists
4. It would help in stabilizing the price levels by eliminating artificial scarcity of essential goods
5. It would enable the baking sector to diversify its resources for the benefit of the priority sector.
6. Eliminates wasteful competition and raises the efficiency of the working of banks
7. Enables rapid increase in the number of banking offices in rural & semi-urban areas & helped considerably in
deposit mobilization to a great extent
8. necessary for the furtherance of socialism and in the interest of community
9. Enables the Reserve Bank to implement its monetary policy more effectively.
10. It would replace the profit motive with service motive
11. It would secure standardization of banking services in the country
12. Would check the incidence of tax evasion and black money

13. Through pubic ownership and control, banks function like other public utility services by catering to the
financial need of the common man.
14. Like other countries, India should also get profit by nationalizing her banking industry.
15. Essential for successful planning and all-round progress of the national economy, community development
and for the welfare of the people.

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Arguments against nationalisation (Criticism):-

Less attractive
customer's
service Secrecy of
Scope for
customer's
inefficiency
accounts

Beginning of Branch
state capitalism expansion

Political purpose Arguments

rather than for Burden of
Productive against compensation
purpose nationalisation

1. Political purpose rather than for Productive purpose: The government has acquired the strength of a
giant and there is the danger of using the financial resources for political purposes rather than for productive
purpose.

2. Beginning of state capitalism: Such a drastic step of nationalisation of about 90% of the banking resources
is wholly unnecessary, especially if we take into consideration the enormous powers vested in the Reserve Bank
of India for controlling banks' resources. It is considered as the beginning of state capitalism and not socialism
in India.

3. Scope for inefficiency: Some are of the opinion that after nationalisation banks will degenerate to the level
of agricultural co-operatives, which are known for their inefficiency and corrupt practices.

4.Less attractive customer's service: Inefficiency, indecision, corruption, and lack of responsibility are the
evils with which the government undertakings are suffering. A government bank may not care to attach
importance to the customer service.

5. Secrecy of customer's accounts: In spite of the assurances given and provisions made in the Act,
businessmen still fear about the maintenance of the secrecy of the customer's accounts. As such, they may be
forced to withdraw their deposits and go to some bank in the private sector and foreign banks. Thus
nationalisation of big Indian banks .will diverts some of the deposits of Indian banks to the foreign banks which
is not at all desirable.

6. Branch expansion: To argue that nationalisation will help to facilitate branch expansion to rural areas much
more rapidly than the private banks cannot be supported by facts. Weather it is private bank or nationalised
bank; it has to go by business principles and satisfy itself that the new branch is economically viable. In other
words, branch expansion can be achieved by private banks as well, without nationalisation.

7. Burden of compensation: Nationalisation leads to the payment of heavy compensation to the shareholders.
This gives additional financial burden on the government. Moreover, it is also argued that nationalisation will
not bring much income to the government.

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In spite of these criticisms, we cannot ignore the fact that at present, nationalisation of banks is an accomplished
fact. By and large this measure received support from almost all sections of the public. It was welcomed by the
middle class people and small industrialists and small traders.

Achievements of Nationalized Banks

A banking revolution occurred in the country during the post-nationalization era. There has been a great change
in the thinking and outlook of commercial banks after nationalization. There has been a fundamental change in
the lending policies of the nationalized banks. Indian banking has become development-oriented. It has changed
from class banking to mass-banking or social banking. This system has improved and progressed appreciably.
Various achievements of banks in the post-nationalization period are explained below:

1.Branch Expansion

2. Expansion of Bank Deposits

3. Credit Expansion

4. Investment in Government
Securities

5. Advances to Priority Sectors

6. Social Banking - Poverty Alleviation

Program

7. Differential Interest Scheme

8. Growing Importance of Small

Customers

1.Branch Expansion: Initially, the banks were conservative and opened branches mainly in cities and big
towns. Branch expansion gained momentum after nationalization of top commercial banks. This expansion was
not only in urban areas but also in rural and village areas.

2. Expansion of Bank Deposits: Since nationalization of banks, there has been a substantial growth in the
deposits of commercial banks. Thus bank deposits had increased by 200 times. Development of banking habit
among people through publicity led to increase in bank deposits.

3. Credit Expansion: The expansion of bank credit has also been more spectacular in the post-bank
nationalization period. At present, banks are also meeting the credit requirements of industry, trade and
agriculture on a much larger scale than before.

4. Investment in Government Securities: The nationalized banks are expected to provide finance for
economic plans of the country through the purchase of government securities. There has been a significant
increase in the investment of the banks in government and other approved securities in recent years.

5. Advances to Priority Sectors: An important change after the nationalization of banks is the expansion of
advances to the priority sectors. One of the main objectives of nationalization of banks to extend credit facilities
to the borrowers in the so far neglected sectors of the economy. To achieve this, the banks formulated various
schemes to provide credit to the small borrowers in the priority sectors, like agriculture, small-scale industry,

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road and water transport, retail trade and small business. The bank lending to priority sector was, however, not
uniform in all states.

6. Social Banking - Poverty Alleviation Program: Commercial banks, especially the nationalized banks have
been participating in the poverty alleviation Program launched by the government.

7. Differential Interest Scheme: With a view to provide bank credit to the weaker sections of the society at a
concessional rate the government introduced the “Differential interest rates scheme” from April 1972. Under
this scheme, the public sector banks have been providing loans at 4% rate of interest to the weaker sections of
the society.

8. Growing Importance of Small Customers: The importance of small customers to banks has been growing.
Most of the deposits in recent years have come from people with small income. Similarly, commercial banks
lending to small customers has assumed greater importance.

9. Diversification in Banking: The changes which have been taking place in India since 1969 have necessitated
banking companies to give up their conservative and traditional system of banking and take to new and
progressive functions.

10. Globalization: The liberalization of the economy, inflow of considerable foreign investments, frequency in
exports etc., have introduced an element of globalization in the Indian banking system.

11. Profit making: After nationalization, banks are making profits in addition to achieving economic and social
objectives.

12. Safety: The government has given importance to safety of the banks. The RBI exercises tight control over
banks and safeguards depositors interest

13. Advances under self-employment scheme: Public sector banks play a significant role in promoting self
employment through advances to unemployed through various schemes of the government like IRDP,JGSY, etc.

Classification of Banking Institutions

Bank is an institution that accepts deposits of money from the public.

Anybody who has account in the bank can withdraw money. Bank also lends money.

Indigenous Banking:
The exact date of existence of indigenous bank is not known. But, it is certain that the old banking system has
been functioning for centuries. Some people trace the presence of indigenous banks to the Vedic times of 2000-
1400 BC. It has admirably fulfilled the needs of the country in the past.

However, with the coming of the British, its decline started. Despite the fast growth of modern commercial
banks, however, the indigenous banks continue to hold a prominent position in the Indian money market even
in the present times. It includes shroffs, seths, mahajans, chettis, etc. The indigenous bankers lend money; act as
money changers and finance internal trade of India by means of hundis or internal bills of exchange.

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Defects:
The main defects of indigenous banking are:
(i) They are unorganised and do not have any contact with other sections of the banking world.

(ii) They combine banking with trading and commission business and thus have introduced trade risks into
their banking business.

(iii) They do not distinguish between short term and long term finance and also between the purpose of finance.

(iv) They follow vernacular methods of keeping accounts. They do not give receipts in most cases and interest
which they charge is out of proportion to the rate of interest charged by other banking institutions in the
country

Suggestions for Improvements:

(i) The banking practices need to be upgraded.

(ii) Encouraging them to avail of certain facilities from the banking system, including the RBI.

(iii) These banks should be linked with commercial banks on the basis of certain understanding in the respect of
interest charged from the borrowers, the verification of the same by the commercial banks and the passing of
the concessions to the priority sectors etc.

(iv) These banks should be encouraged to become corporate bodies rather than continuing as family based
enterprises

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Structure of Organised Indian Banking System:

Reserve Bank of India (RBI):

The country had no central bank prior to the establishment of the RBI. The RBI is the supreme monetary and
banking authority in the country and controls the banking system in India. It is called the Reserve Bank’ as it
keeps the reserves of all commercial banks.

Commercial Banks:
Commercial banks mobilise savings of general public and make them available to large and small industrial and
trading units mainly for working capital requirements.

Commercial banks in India are largely Indian-public sector and private sector with a few foreign banks. The
public sector banks account for more than 92 percent of the entire banking business in India—occupying a
dominant position in the commercial banking. The State Bank of India and its 7 associate banks along with
another 19 banks are the public sector banks.

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Scheduled and Non-Scheduled Banks:
The scheduled banks are those which are enshrined in the second schedule of the RBI Act, 1934. These banks
have a paid-up capital and reserves of an aggregate value of not less than Rs. 5 lakhs, hey have to satisfy the RBI
that their affairs are carried out in the interest of their depositors.

All commercial banks (Indian and foreign), regional rural banks, and state cooperative banks are scheduled
banks. Non- scheduled banks are those which are not included in the second schedule of the RBI Act, 1934. At
present these are only three such banks in the country.

Regional Rural Banks:

The Regional Rural Banks (RRBs) the newest form of banks, came into existence in the middle of 1970s
(sponsored by individual nationalised commercial banks) with the objective of developing rural economy by
providing credit and deposit facilities for agriculture and other productive activities of al kinds in rural areas.

The emphasis is on providing such facilities to small and marginal farmers, agricultural labourers, rural artisans
and other small entrepreneurs in rural areas.

Other special features of these banks are:

(i) their area of operation is limited to a specified region, comprising one or more districts in any state; (ii) their
lending rates cannot be higher than the prevailing lending rates of cooperative credit societies in any particular
state; (iii) the paid-up capital of each rural bank is Rs. 25 lakh, 50 percent of which has been contributed by the
Central Government, 15 percent by State Government and 35 percent by sponsoring public sector commercial
banks which are also responsible for actual setting up of the RRBs.

These banks are helped by higher-level agencies: the sponsoring banks lend them funds and advise and train
their senior staff, the NABARD (National Bank for Agriculture and Rural Development) gives them short-term
and medium, term loans: the RBI has kept CRR (Cash Reserve Requirements) of them at 3% and SLR (Statutory
Liquidity Requirement) at 25% of their total net liabilities, whereas for other commercial banks the required
minimum ratios have been varied over time.

Cooperative Banks:
Cooperative banks are so-called because they are organised under the provisions of the Cooperative Credit
Societies Act of the states. The major beneficiary of the Cooperative Banking is the agricultural sector in
particular and the rural sector in general.

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The cooperative credit institutions operating in the country are mainly of two kinds: agricultural (dominant)
and non-agricultural. There are two separate cooperative agencies for the provision of agricultural credit: one
for short and medium-term credit, and the other for long-term credit. The former has three tier and federal
structure.

At the apex is the State Co-operative Bank (SCB) (cooperation being a state subject in India), at the intermediate
(district) level are the Central Cooperative Banks (CCBs) and at the village level are Primary Agricultural Credit
Societies (PACs).

Long-term agriculture credit is provided by the Land Development Banks. The funds of the RBI meant for the
agriculture sector actually pass through SCBs and CCBs. Originally based in rural sector, the cooperative credit
movement has now spread to urban areas also and there are many urban cooperative banks coming under
SCBs.

RESERVE BANK OF INDIA

The Reserve Bank of India (RBI) is India's central banking institution, which controls the monetary policy of
the Indian rupee. It was established on 1 April 1935 during the British Raj in accordance with the provisions of
the Reserve Bank of India Act, 1934. The share capital was divided into shares of 100 each fully paid, which was
entirely owned by private shareholders in the beginning. Following India's independence in 1947, the RBI was
nationalized in the year 1949.

The RBI plays an important part in the development strategy of the Government of India. It is a member bank of
the Asian Clearing Union.

Structure of RBI:-
The Reserve Bank’s affairs are governed by a central board of directors. The Central Board of Directors is the
apex body in the governance structure of the Reserve Bank. There are also four Local Boards for the Northern,
Southern, Eastern and Western areas of the country which take care of local interests. The central government
appoints/nominates directors to the Central Board and members to the Local Boards in accordance with the
Reserve Bank of India (RBI) Act. The composition of the Central Board is enshrined under Section 8(1) of
the RBI Act, 1934.
The Central Board consists of:
 The Governor (currently Mr. Shaktikanta Das)
 4 Deputy Governors of the Reserve Bank
 4 Directors nominated by the central government, one from each of the four Local Boards as constituted
under Section 9 of the Act
 10 Directors nominated by the central government
 2 government officials nominated by the central government
The Central Board is assisted by three committees:
1. The Committee of the Central Board (CCB)
2. The Board for Financial Supervision (BFS)
3. The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS)

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Powers/ Functions of RBI:

Issue of
Currency
Notes
Measures of
Banker to The
Credit Control
Government
in India

Clearing Banker’s bank

House And Lender of
Functions Powers/ Last Resort
Functions of
RBI

Regulator and
Supervisor of Controller of
Commercial Credit
Banks
Manages
Exchange Rate
Collection and and Is
Publication of Custodian of
Data the Foreign
Exchange
Reserve

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 1) Issue of Currency Notes

 Under section 22 of RBI Act, the bank has the sole right to issue currency notes of all denominations except one-
rupee coins and notes.
 The one-rupee notes and coins and small coins are issued by Central Government, and their distribution is
undertaken by RBI as the agent of the government.
 The RBI has a separate issue department which is entrusted with the issue of currency notes.

2) Banker to The Government

 The RBI acts as a banker agent and adviser to the government. It has an obligation to transact the banking
business of Central Government as well as State Governments.
 Example, RBI receives and makes all payments on behalf of the government, remits its funds, buys and sells
foreign currencies for it and gives it advice on all banking matters.
 RBI helps the Government – both Central and state – to float new loans and manage public debt.
 On behalf of the central government, it sells treasury bills and thereby provides short-term finance.

3) Banker’s bank And Lender of Last Resort

 RBI acts as a banker to other banks. It provides financial assistance to scheduled banks and state co-operative
banks in the form of rediscounting of eligible bills and loans and advances against approved securities.
 RBI acts as a lender of last resort. It provides funds to the bank when they fail to get it from any other source.
 It also acts as a clearing house. Through RBI, banks make inter-banks payments.

4) Controller of Credit

 RBI has the power to control the volume of credit created by banks. The RBI through its various quantitative
and qualitative measures regulates the money supply and bank credit in an economy.
 RBI pumps in money during recessions and slowdowns and withdraws money supply during an inflationary
period.

5) Manages Exchange Rate and Is Custodian of the Foreign Exchange Reserve

 RBI has the responsibility of removing fluctuations from the exchange rate market and maintaining a
competitive and stable exchange rate.
 RBI functions as custodian of nations foreign exchange reserves.
 It has to maintain a fair external value of Rupee.
 RBI achieves its objective through appropriate monetary and exchange rate policies.

6) Collection and Publication of Data

 The RBI collects and compiles statistical/data information on banking and financial operations, prices, FDIs,
FPIs, BOP, Exchange Rate and industries etc., of the economy.
 The Reserve Bank of India publishes a monthly Bulletin/publication for the same.
 It not only provides information but also highlights important studies and investigations conducted by RBI.

7) Regulator and Supervisor of Commercial Banks

 The RBI has wide powers to supervise and regulate the commercial and co-operative banks in India.
 RBI issues licenses regulate branch expansion, manages liquidity and Assets, management and methods of
working of commercial banks and amalgamation, reconstruction and liquidation of the banks.

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 8) Clearing House Functions

 The RBI acts as a clearing house for all member banks. This avoids unnecessary transfer of funds between the
various banks.

9) Measures of Credit Control in India

The management of the money supply and credit control is an important function of the Reserve Bank of India.
The money supply has an important bearing on the functioning of the economy.

Objectives
The primary objectives of RBI are to supervise and undertake initiatives for the financial sector consisting of
commercial banks, financial institutions and non-banking financial companies (NBFCs).
Some key initiatives are:

i. Restructuring bank inspections

ii. Fortifying the role of statutory auditors in the banking system

CONTROL OF CREDIT BY RBI

What is Credit Control: Credit Control is an important tool used by the Reserve Bank of India, a major weapon
of the monetary policy used to control the demand and supply of money (liquidity) in the economy. Central
Bank administers control over the credit that the commercial banks grant. Such a method is used by RBI to
bring "Economic Development with Stability". It means that banks will not only control inflationary trends in
the economy but also boost economic growth which would ultimately lead to increase in real national
income stability. In view of its functions such as issuing notes and custodian of cash reserves, credit not being
controlled by RBI would lead to Social and Economic instability in the country.

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Why Credit Control is required: The basic and important needs of Credit Control in the economy are:
 To encourage the overall growth of the “priority sector” i.e. those sectors of the economy which is
recognized by the government as “prioritized
 To keep a check over the channelization of credit so that credit is not delivered for undesirable
purposes.
 To achieve the objective of controlling “Inflation” as well as “Deflation”.
 To boost the economy by facilitating the flow of adequate volume of bank credit to different sectors.

What are the methods of Credit Control?

The various methods employed by the RBI to control credit creation power of the commercial banks can be
classified in two groups, viz., quantitative controls and qualitative controls. Quantitative controls are designed
to regulate the volume of credit created by the banking system qualitative measures or selective methods are
designed to regulate the flow of credit in specific uses.

The two categories are: I. Quantitative or General Methods II. Qualitative or Selective Methods.

There are two methods that the RBI uses to control the money supply in the economy-

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(1) Quantitative Method: By Quantitative Credit Control we mean the control of the total quantity of credit.
Different tools used under this method are:

(a) Bank Rate Policy : The bank rate is the rate at which the Central Bank of a country is prepared to re-
discount the first class securities.
It means the bank is prepared to advance loans on approved securities to its member banks. As the Central
Bank is only the lender of the last resort the bank rate is normally higher than the market rate.

Bank Rate also known as the Discount Rate is the official minimum rate at which the Central Bank of the country
is ready to rediscount approved bills of exchange or lend on approved securities. When the commercial bank for
instance, has lent or invested all its available funds and has little or no cash over and above the prescribed
minimum, it may ask the central bank for funds. It may either re-discount some of its bills with the central bank
or it may borrow from the central bank against the collateral of its own promissory notes. In either case, the
central bank accommodates the commercial bank and increases the latter’s cash reserves. This Rate is increased
during the times of inflation when the money supply in the economy has to be controlled.

For example: If the Central Bank wants to control credit, it will raise the bank rate. As a result, the market rate
and other lending rates in the money-market will go up. Borrowing will be discouraged. The raising of bank rate
will lead to contraction of credit.

Similarly, a fall in bank rate mil lowers the lending rates in the money market which in turn will stimulate
commercial and industrial activity, for which more credit will be required from the banks. Thus, there will be
expansion of the volume of bank Credit.

(b) Open Market Operations: Open Market Operations indicate the buying/selling of government securities in
the open market to balance the money supply in the economy. During inflation, RBI sells the government
securities to the commercial banks and other financial institution. This reduces their cash lending and credit
creation capacities. Thus, Inflation can be controlled. During recessions, RBI purchases government
securities from commercial banks and other financial institution. This leaves them with more cash balances
for lending and increases their credit creation capacities. Thus, recession can be overcome.

(c) Repo Rates and Reverse Repo Rates:

Repo rate also known as the benchmark interest rate is the rate at which the RBI lends money to the
banks for a short term. When the repo rate increases, borrowing from RBI becomes more expensive. If
RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate
similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate. Current
repo rate is 5.75%

Reverse Repo rate is the short term borrowing rate at which RBI borrows money from banks. The
Reserve bank uses this tool when it feels there is too much money floating in the banking system. An
increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a
result, banks prefer to lend their money to RBI which is always safe instead of lending it others (people,

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 companies etc) which is always risky. Current repo rate is 5.5%

Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas Reverse
Repo rate signifies the rate at which the central bank absorbs liquidity from the banks.

(d) Cash Reserve Ratio: Banks in India are required to hold a certain proportion of their deposits in the form
of cash. However Banks don't hold these as cash with themselves, they deposit such cash(aka currency
chests) with Reserve Bank of India , which is considered as equivalent to holding cash with themselves. This
minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is
known as the CRR or Cash Reserve Ratio.

When a bank's deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to hold
Rs. 9 with RBI and the bank will be able to use only Rs 91 for investments and lending, credit purpose.
Therefore, higher the ratio, the lower is the amount that banks will be able to use for lending and
investment. This power of Reserve bank of India to reduce the lendable amount by increasing the CRR,
makes it an instrument in the hands of a central bank through which it can control the amount that banks
lend. Thus, it is a tool used by RBI to control liquidity in the banking system. Current CRR is 4%.

(e) Statutory Liquidity Ratio: Every bank is required to maintain at the close of business every day, a
minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and
un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as
Statutory Liquidity Ratio (SLR). RBI is empowered to increase this ratio up to 40%. An increase in SLR also
restricts the bank's leverage position to pump more money into the economy.
Net Demand Liabilities - Bank accounts from which you can withdraw your money at any time like your
savings accounts and current account.
Time Liabilities - Bank accounts where you cannot immediately withdraw your money but have to wait for
certain period. e.g. Fixed deposit accounts.
Current SLR is 19%.

(f) Deployment of Credit: The RBI has taken various measures to deploy credit in different of the economy.
The certain percentage of bank credit has been fixed for various sectors like agriculture, export, etc.

(2) Qualitative Method: The qualitative or the selective methods are directed towards the diversion of credit
into particular uses or channels in the economy. Their objective is mainly to control and regulate the flow of
credit into particular industries or businesses.

The following are the important methods of credit control under selective method:

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 Rationing of
Credit

Regulating the
Marginal
Requirements Direct Action
on Security
Loans
methods
of credit
control
Regulation of
Moral
Consumer’s
Persuasion
Credit

Method of
Publicity

1. Rationing of Credit.
 2. Direct Action.

 3. Moral Persuasion.

 4. Method of Publicity.

 5. Regulation of Consumer’s Credit

 6. Regulating the Marginal Requirements on Security Loans.

1. Rationing of Credit.
A credit rationing is a measure taken by Central Bank to limit or deny credit based on the investor’s
credit worthiness. The Central Bank denies the supply of credit when the investor does not have any
collateral to pledge against the loan. Credit rationing is imposed when there is a shortage of
institutional credit available to the business sector but the institution tries to capture institutional
credit by paying a higher interest rate. This is an important method of credit control and this policy has
been adopted by a number of countries like Russia and Germany.

 Therefore, an increase in the demand for credit is seen. There are three measures to control the credit
rationing situation:

 1. Firstly, by setting an upper limit to the credit.

 2. Secondly, by charging higher interest rate on the loan amount

 3. Thirdly, providing loans to the weaker section at a minimal interest rate

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2. Direct Action:- Under this method if the Commercial Banks do not follow the policy of the Central Bank, then
the Central Bank has the only recourse to direct action. This method can be used to enforce both quantitatively
and qualitatively credit controls by the Central Banks. This method is not used in isolation; it is used as a
supplement to other methods of credit control.

Direct action may take the form either of a refusal on the part of the Central Bank to re-discount for banks
whose credit policy is regarded as being inconsistent with the maintenance of sound credit conditions. Even
then the Commercial Banks do not fall in line, the Central Bank has the constitutional power to order for their
closure.

This method can be successful only when the Central Bank is powerful enough and has cordial relations with the
Commercial Banks. Mostly such circumstances are rare when the Central Bank is forced to resist to such
measures.

3. Moral Persuasion:- This method is frequently adopted by the Central Bank to exercise control over the
Commercial Banks. Under this method Central Bank gives advice, then request and persuasion to the
Commercial Banks to co-operate with the Central Bank is implementing its credit policies.

If the Commercial Banks do not follow or do not abide by the advice or request of the Central Bank no gross
action is taken against them. The Central Bank merely was its moral influence and pressure with the
Commercial Banks to prevail upon them to accept and follow the policies.

4. Method of Publicity:- In modern times, Central Bank in order to make their policies successful, take the
course of the medium of publicity. A policy can be effectively successful only when an effective public opinion is
created in its favour.

Its officials through news-papers, journals, conferences and seminar’s present a correct picture of the economic
conditions of the country before the public and give a prospective economic policies. In developed countries
Commercial Banks automatically change their credit creation policy. But in developing countries Commercial
Banks being lured by regional gains. Even the Reserve Bank of India follows this policy.

5.Regulation of Consumer’s Credit:- Under this method consumers are given credit in a little quantity and this
period is fixed for 18 months; consequently credit creation expanded within the limit. This method was
originally adopted by the U.S.A. as a protective and defensive measure, there after it has been used and adopted
by various other countries.

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6.Regulating the Marginal Requirements on Security Loans:- Regulation of consumer credit is designed to
check the flow of credit for consumer durable goods. This can be done by regulating the total volume of credit
that may be extended for purchasing specific durable goods and regulating the number of installments through
which such loan can be spread. Central Bank uses this method to restrict or liberalise loan conditions
accordingly to stabilise the economy.

Management of Deposits and Advances Deposit Mobilization, Classification and Nature of Deposit Accounts,
Advances, Lending Practice, Types of Advances. Investment Management: Nature of Bank Investment, Liquidity
and Profitability. Cheques, Bills and their Endorsement, Government Securities. Procedure of E – Banking

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 UNIT-III
MANAGEMENT OF DEPOSITS

DEPOSITS MOBILIZATION
In India commercial banks promote the habit of thrift and savings among public and mobilize deposits. The
deposits of scheduled commercial banks were Rs. 1080 crore in 1947, Rs. 4646 crore in 1969 but it increased to
Rs. 605410 crore in 1998 and it has risen further to Rs. 701871 crore as on March 1999.

Aggregate deposit of all scheduled commercial banks crossed one million crore rupees mark in 2001. The total
deposit amounted to Rs. 11, 31,188 crore as at end March, 2002. The increase in deposits is attributed to the
Five Year Plans, policy of the Government, rapid branch expansion and industrialization of our country, etc.

CLASSIFICATION AND NATURE OF DEPOSITS ACCOUNT:-

Money and banking are part of everyday life. Banks offer all sorts of financial products to help you manage your
money on a day-to-day basis. The bank is such a place where once we deposit money, it remains safe and also earns
an interest over some time. This is known as the deposit and to each deposit, the bank assigns a unique identity
which is known as the account. Each deposit corresponds to a unique account and vice versa.

Sometimes we use numbers to uniquely identify an account. This is what we call the account number. It may also be
a combination of alphanumeric letters. Bank deposits serve different purposes for different people. Some people
cannot save regularly. They deposit money in the bank only when they have extra income. The purpose of deposit
then is to keep money safe for future needs. Some may want to deposit money in a bank for as long as possible to
earn interest or to accumulate savings with interest so as to buy a flat, or to meet hospital expenses in old age, etc.
Some, mostly businessmen, deposit all their income from sales in a bank account and pay all business expenses out
of the deposits.

Kinds of Deposits:-

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1. Time Deposits: When money is deposited with tenure it cannot be withdrawn from the deposit before its
tenure ends. This is known as “Time Deposits” or “Term Deposits”. The interest rate is generally higher for time
deposits of longer tenure. On the basis of their nature, time deposits may be of three types as follows:

· Fixed deposits: In this type of time deposit, a fixed rate of interest is paid. These are deposits that are
maintained for a fixed term. The time period can be anything from 7 days to 10 years. This is not like a normal
operating bank account. Therefore, cheque book facility is not offered. Benefit of term deposits is that the
interest rate would be higher. Weakness is that if the investor needs the money earlier, he bears a penalty. He
will earn 1% less than what the deposit would otherwise have earned, if it had been placed for the time period
for which the
money was left with the bank.

Banks may also offer the facility of loan against fixed deposit. Under this arrangement, a certain percentage of
the fixed deposit amount may be made available as a loan, at an interest rate, which would be higher than the
term deposit rate. This is an alternative to premature withdrawal.

Unlike interest rate on savings account, the interest in term deposits is de-regulated. Therefore, every bank
decides its own interest rate structure. Further, it is normal to offer 0.50% extra interest to senior citizens. For
large deposits of above Rs. 1 crore, the bank may be prepared to work out special terms.

The term deposits may also be structured as recurring i.e. the depositer would invest a constant amount every
month / quarter, for anything from 12 months to 10 years. Benefit of such an account is that the interest rate on
the future deposits is frozen at the time the recurring account is opened. Thus, even if interest rates on fixed
deposits, in general, were to go down, the recurring deposits would continue to earn the committed rate of
interest.

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Interest rate in a recurring deposit may be marginally lower than the rate in a non-recurring term deposit for
the same time period.

· Re-investment deposits: Interest is compounded quarterly and paid on maturity, along with the principal
amount of the deposit. In the Flexi Deposits amount in savings deposit accounts beyond a fixed limit is
automatically converted into term-deposits.

· Recurring deposits: Fixed amount is deposited at regular intervals for a fixed term and the repayment of
principal and accumulated interest is made at the end of the term. These deposits are usually targeted at
persons who are salaried or receive other regular income. A Recurring Deposit can usually be opened for any
period from 6 months to 120 months.

2. Demand deposits: When the funds deposited can be withdrawn by the customer (depositor / account
holder) at any time without any advanced notice to banks; it is called demand deposit. One can withdraw the
funds from these accounts any time by issuing cheque, using ATM or withdrawal forms at the bank branches.

· Current Accounts: In this type of deposit, bank has to pay the money on demand to the depositor. The cost to
maintain the accounts is high and banks ask the customers to keep a minimum balance. This is maintained by
businesses for their banking needs. It can be opened by anyone, including sole-proprietorships, partnership
firms, private limited companies and public limited companies.
The current account comes with a cheque book facility. Normally, there are no restrictions on the number of
withdrawals. Subject to credit-worthiness, the bank may provide an overdraft facility i.e. the account holder can
withdraw more than the amount available in the current account. Current accounts do not earn an interest.
Therefore, it is prudent to leave enough funds in current account to meet the day-to-day business needs, and
transfer the rest to a term deposit.
CASA is a term that is often used to denote Current Account and Savings Account. Thus, a bank or a branch may
have a CASA promotion week. This means that during the week, the bank would take extra efforts to open new
Current Accounts and Savings Accounts.

· Saving Accounts: Savings deposits are subject to restrictions on the number of withdrawals as well as on the
amounts of withdrawals during any specified period. Further, minimum balances may be prescribed in order to
offset the cost of maintaining and servicing such deposits. This is the normal bank account that individuals and
Hindu Undivided Families (HUFs) maintain. The account can be opened by individuals who are majors (above
18 years of age), parents / guardians on behalf of minors and Karta of HUFs. Clubs, associations and trusts too
can open savings accounts as provided for in their charter. Banks insist on a minimum balance, which may be
higher if the account holder wants cheque book facility. The minimum balance requirement tends to be lowest
in the case of co-operative banks, followed by public sector banks, private sector Indian banks and foreign
banks, in that order.

Banks do impose limits on the number of withdrawals every month / quarter. Further, overdraft facility is not
offered on savings account. Traditionally, banks paid an interest on the lowest balance in the bank account
between the 10th and the end of the month.

3. CASA Deposit: CASA Deposits refers to Current Account Saving Account Deposits. As an aggregate the CASA
deposits are low interest deposits for the Banks compared to other types of the deposits. So banks tend to
increase the CASA deposits and for this they offer various services such as salary accounts to companies, and
encouraging merchants to open current accounts, and use their cash-management facilities

4. NRO, NE(E)RA and FCNA(A) Account: There are several kinds of accounts available for non resident Indians
, Persons of Indian Origin and Overseas Citizens of India. They are as follows:

· Non Resident Ordinary Accounts: (NRO): As with a NRE account,

o It can be operated with a cheque, as in the case of any savings bank account.

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o It is maintained in rupees with the resulting implications in terms of currency conversion losses for the
depositer.

The differences from NRE are:

o The money can come from local sources – not necessarily a foreign remittance or FCNR / NRE account.
o The principal amount is not repatriable, though the interest can be repatriated.
o The bank will deduct tax at source, on the interest earned in the deposit.
o A non-resident can open an NRO account jointly with a resident

· Non-Resident (External) Rupee Account (NR(E)RA :- As in the case of FCNR,

o The money has to come through a remittance from abroad, or a transfer from another FCNR / NRE account.
o The principal and interest are freely repatriable.
o Interest earned is exempt from tax in India.

The differences are:

o It can be operated with a cheque, as in the case of any savings bank account.
o It is maintained in rupees. Therefore, a depositor bringing money in another currency will have to first
convert them into rupees; and then re-convert them to the currency in which he wants to take the money out. If
during the deposit period, the rupee becomes weaker, then that loss is to the account of the depositor.

· Foreign Currency Non-Resident Account: (FCNR):- These are maintained in the form of fixed deposits for 1
year to 3 years. Since the account is designated in foreign currency (Pounds, Sterling, US Dollars, Japanese Yen
and Euro), the account holder does not incur exchange losses in first converting foreign currency into rupees
(while depositing the money) – and then re-converting the rupees into foreign currency (when he wants to take
the money back).

The depositer will have to bring in money into the account through a remittance from abroad or through a
transfer from another FCNR / NRE account. If the money is not in the designated foreign currency, then he will
have to bear the cost of conversion into the designated currency. On maturity, he can freely repatriate the
principal and interest (which he will receive in the designated currency that he can convert into any other
currency, at his cost). Interest earned on these deposits is exempt from tax in India.

5. Deposit Insurance in India: In India, the bank deposits are covered under the insurance scheme provided by
DICGC. When a bank covered by DICGC fails, or undergoes liquidation or is merged with another bank; the
DICGC pays the amount due to depositors via the officially appointed liquidator in a time bound manner.
Deposit Insurance and Credit Guarantee Corporation (DICGC) was set up by RBI with the intention of insuring
the deposits of individuals. The deposit insurance scheme covers:
• All commercial banks, including branches of foreign banks operating in India, and Regional Rural Banks
• Eligible co-operative banks.
The insurance scheme covers savings account, current account, term deposits and recurring accounts.
However, the following deposits are not covered by the scheme:
• Deposit of Central / State Government
• Deposit of foreign governments
• Inter-bank deposits
• Deposits received outside India
In order for depositers in a bank to benefit from the insurance scheme, the bank should have paid DICGC the
specified insurance premium (10 paise per annum per Rs. 100 of deposit).

Under the Scheme, in the event of liquidation, reconstruction or amalgamation of an insured bank, every
depositor of that bank is entitled to repayment of the deposits held by him in the same right and same capacity
in all branches of that bank upto an aggregate monetary ceiling of Rs. 1,00,000/- (Rupees one lakh). Both
principal and interest are covered, upto the prescribed ceiling.

Joint Accounts
Two or more individuals may open a joint account. Various options exist for operating the account:

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• Jointly by A and B – Both A and B will have to sign for withdrawals and other operations. For example, high
value transactions in a partnership firm may require the joint signature of two or more partners.
• Either or Survivor – Either of them can operate the account individually. After the demise of one, the other can
operate it as survivor. This is the normal option selected by families.
• Former or Survivor – The first person mentioned as account-holder will operate it during his / her lifetime.
Thereafter, the other can operate. This option is often selected by a parent while opening an account with the
son / daughter.
• Latter or Survivor - The second person mentioned as account-holder will operate it during his / her lifetime.
Thereafter, the other can operate. While opening the account, the operating option needs to be clearly specified.

Nomination
The bank account opening form provides for the account holder to select a nominee. In the event of demise of
the account holder, the bank will pay the deposit amount to the nominee, without any legal formalities. The
salient provisions regarding nomination facility in bank accounts are as follows:
• Nomination facility is available for all kinds of bank accounts – savings, current and fixed deposit.
• Nomination can be made only in respect of a deposit which is held in the individual capacity of the depositor
and not in any representative capacity such as the holder of an office like Director of a Company, Secretary of an
Association, partner of a firm and Karta of an HUF.
• In the case of a deposit made in the name of a minor, nomination shall be made by a person lawfully entitled to
act on behalf of the minor.
• Nomination can be made in favour of one person only.
• Nomination favouring the minor is permitted on the condition that the account holder, while making the
nomination, appoints another individual not being a minor, to receive the amount of the deposit on behalf of the
nominee in the event of the death of the depositor during the minority of the nominee.
• Cancellation of, or variation in, the nomination can be made at any time as long as the account is in force.
While making nomination, cancellation or variation, witness is required and the request should be signed by all
account holders.
• When the nominee makes a claim to the bank account, two documents are normally asked for:
o Proof of death of depositer
o Identity proof of nominee
• Payment to nominee only releases the bank from its obligation on the account. The nominee would receive the
money, in trust, for the benefit of the heirs. The legal heirs of the deceased person can claim their share of the
deposit proceeds from the nominee.

Closure of Deposit Accounts

This might occur in different ways:
• Account-holder can request closure of the account, and give instructions on how the balance in the deposit
should be settled.
• On death of the sole account holder, the account would be closed and balance paid to the nominee. If nominee
is not appointed, then bank would pay the legal representative of the account holder.
• On receipt of notice of insanity or insolvency of the sole account holder, the bank will stop operations in the
account.
• On receipt of notice of assignment of the bank account, the bank would pay the amount lying in the account to
the assignee.
• On receipt of a court order or garnishee order from Income Tax authorities, the bank would stop the
transactions in the bank account during the pendency of the order.

MANAGEMENT OF ADVANCES
In finance, a loan is a debt provided by one entity (organization or individual) to another entity at an interest
rate, and evidenced by a note which specifies, among other things, the principal amount, interest rate, and date
of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and
the borrower.

In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender,
and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the

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money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same
amount.

The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the
lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract,
which can also place the borrower under additional restrictions known as loan covenants. Although this article
focuses on monetary loans, in practice any material object might be lent.

Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing
of debt contracts such as bonds is a typical source of funding.

Types of loans:-

Demand

Unsecured Subsidized

Secured
Types Concessional
of loans

Secured
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral.

A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In
this arrangement, the money is used to purchase the property. The financial institution, however, is given
security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the
loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same
way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often
corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto
loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts
as an intermediary between the bank or financial institution and the consumer.

Unsecured
Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available
from financial institutions under many different guises or marketing packages:
 credit card debt
 personal loans
 bank overdrafts
 credit facilities or lines of credit

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  corporate bonds (may be secured or unsecured)

The interest rates applicable to these different forms may vary depending on the lender and the borrower.
These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come
under the Consumer Credit Act 1974.

Interest rates on unsecured loans are nearly always higher than for secured loans, because an unsecured
lender's options for recourse against the borrower in the event of default are severely limited. An unsecured
lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of
the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured
lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a
court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event
of insolvency, the debt may be uncollectible.

Demand
Demand loans are short term loans that are atypical in that they do not have fixed dates for repayment and
carry a floating interest rate which varies according to the prime lending rate. They can be "called" for
repayment by the lending institution at any time. Demand loans may be unsecured or secured.

Subsidized
A subsidized loan is a loan on which the interest is reduced by an explicit or hidden subsidy. In the context of
college loans in the United States, it refers to a loan on which no interest is accrued while a student remains
enrolled in education.

Concessional
A concessional loan, sometimes called a "soft loan," is granted on terms substantially more generous than
market loans either through below-market interest rates, by grace periods or a combination of both. [3] Such
loans may be made by foreign governments to poor countries or may be offered to employees of lending
institutions as an employee benefit.

Target markets
Personal or commercial
Loans can also be subcategorized according to whether the debtor is an individual person (consumer) or a
business. Common personal loans include mortgage loans, car loans, home equity lines of credit, credit cards,
installment loans and payday loans. The credit score of the borrower is a major component in and underwriting
and interest rates (APR) of these loans. The monthly payments of personal loans can be decreased by selecting
longer payment terms, but overall interest paid increases as well. For car loans in the U.S., the average term was
about 60 months in 2009.

Loans to businesses are similar to the above, but also include commercial mortgages and corporate bonds.
Underwriting is not based upon credit score but rather credit rating.

Loan payment
The most typical loan payment type is the fully amortizing payment in which each monthly rate has the same
value over time.

The fixed monthly payment P for a loan of L for n months and a monthly interest rate c is:

Abuses in lending
Predatory lending is one form of abuse in the granting of loans. It usually involves granting a loan in order to put
the borrower in a position that one can gain advantage over him or her. Where the moneylender is not
authorized, they could be considered a loan shark.

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Usury is a different form of abuse, where the lender charges excessive interest. In different time periods and
cultures the acceptable interest rate has varied, from no interest at all to unlimited interest rates. Credit card
companies in some countries have been accused by consumer organizations of lending at usurious interest rates
and making money out of frivolous "extra charges".
Abuses can also take place in the form of the customer abusing the lender by not repaying the loan or with an
intent to defraud the lender.

INVESTMENT MANAGEMENT
Investment management is the professional asset management of various securities (shares, bonds and other
securities) and other assets (e.g., real estate) in order to meet specified investment goals for the benefit of the
investors. Investors may be institutions (insurance companies, pension funds, corporations, charities,
educational establishments etc.) or private investors (both directly via investment contracts and more
commonly via collective investment schemes e.g. mutual funds or exchange-traded funds).

The term asset management is often used to refer to the investment management of collective investments,
while the more generic fund management may refer to all forms of institutional investment as well as
investment management for private investors. Investment managers who specialize in advisory or discretionary
management on behalf of (normally wealthy) private investors may often refer to their services as money
management or portfolio management often within the context of so-called "private banking".

The provision of investment management services includes elements of financial statement analysis, asset
selection, stock selection, plan implementation and ongoing monitoring of investments. Coming under the remit
of financial services many of the world's largest companies are at least in part investment managers and employ
millions of staff.

Fund manager (or investment adviser in the United States) refers to both a firm that provides investment
management services and an individual who directs fund management decisions.

At the heart of the investment management industry are the managers who invest and divest client investments.
A certified company investment advisor should conduct an assessment of each client's individual needs and risk
profile. The advisor then recommends appropriate investments.

Asset allocation
The different asset class definitions are widely debated, but four common divisions are stocks, bonds, real-
estate and commodities. The exercise of allocating funds among these assets (and among individual securities
within each asset class) is what investment management firms are paid for. Asset classes exhibit different
market dynamics, and different interaction effects; thus, the allocation of money among asset classes will have a
significant effect on the performance of the fund. Some research suggests that allocation among asset classes
has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the
skill of a successful investment manager resides in constructing the asset allocation, and separately the
individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and
stock indices).

Long-term returns
It is important to look at the evidence on the long-term returns to different assets, and to holding period returns
(the returns that accrue on average over different lengths of investment). For example, over very long holding
periods (e.g. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have
generated higher returns than cash. According to financial theory, this is because equities are riskier (more
volatile) than bonds which are themselves more risky than cash.

Diversification
Against the background of the asset allocation, fund managers consider the degree of diversification that makes
sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list
will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of
portfolio diversification was originated by Markowitz (and many others). Effective diversification requires
management of the correlation between the asset returns and the liability returns, issues internal to the
portfolio (individual holdings volatility), and cross-correlations between the returns.

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Investment styles
There are a range of different styles of fund management that the institution can implement. For example,
growth, value, growth at a reasonable price (GARP), market neutral, small capitalisation, indexed, etc. Each of
these approaches has its distinctive features, adherents and, in any particular financial environment, distinctive
risk characteristics. For example, there is evidence that growth styles (buying rapidly growing earnings) are
especially effective when the companies able to generate such growth are scarce; conversely, when such growth
is plentiful, then there is evidence that value styles tend to outperform the indices particularly successfully.

CHEQUES
A cheque (or check in American English) is a document that orders a payment of money from a bank account.
The person writing the cheque, the drawer, has a transaction banking account (often called a current, cheque,
chequing or checking account) where their money is held. The drawer writes the various details including the
monetary amount, date, and a payee on the cheque, and signs it, ordering their bank, known as the drawee, to
pay that person or company the amount of money stated.

A cheque is a special type of bill of exchange.

A 'cheque, is a bill of exchange drawn on a specified banker, expressed to be payable only on demand (Sec.6).
Although a cheque is a bill of exchange, yet is have two additional characteristics, namely:
(i) A cheque is always drawn on a specified banker with whom the drawer has deposited the money;
(ii) It is always payable on demand.

Thus all cheques are bills of exchange but all bills of exchange are not cheques.

Crossing of Cheques:
Cheques are of two types, open cheques and crossed cheques. Open cheques are those which are paid over the
counter of the bank. In other words, they need not be put through a bank account. Open cheques are liable to
great risk in the course of circulation.

They may be either lost or stolen and the finder or thief can get it encased at the bank unless the drawer has in
the meantime countermanded payment. With a view to avoiding such risks, and protect the owner of cheque, a
system of crossing was introduced.

Crossing is a direction to the banker not to pay the cheque across the counter but to pay to a bank only or to
particular bank in an account with the bank. Thus crossing provides a protection and safeguard to the owner of
the cheque as by securing payment through a banker; it can easily be detected to whose use the money is
received. Crossing does not, however, affect the negotiability or transferability of a cheque. But where the words
‘not negotiable’ are added, the cheque is not negotiable. The practice of crossing is confined to cheques only and
cannot be extended to any other instrument.

Modes of crossing:
To cross a cheque, two transverse parallel lines are drawn on the left hand corner of the cheque. It is also usual
to write the words "& Co", in between these two lines. However, it is not necessary to write these words. A
crossing is a direction to the paying banker not to pay the money to the holder at the counter.

Types of Crossing:

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 called
Special
restrictive
crossing
crossing

Not
General
negotiable
crossing
Types of crossing
Crossing

1. General Crossing:
In a general crossing, simply two parallel transverse lines, with or without the words 'not negotiable' in
between, may be drawn. Such a cheque is crossed generally.
The effect of general crossing is that the payment of the cheque will not be made at the counter, it can be
collected only through a banker.

2. Special Crossing:
In a special crossing, the name of a banker with or without the words 'not negotiable' is written on the cheque.
Such a cheque is crossed specially to that banker.
It should be noted that two transverse parallel lines are necessary for a general crossing, whereas for a special
crossing, no such lines are necessary.
The effect to special crossing is that the paying banker will be the amount of the cheque only through the bank
named in the cheque.

3. Restrictive crossing:
Besides the two statutory types of crossing discussed above, there is one more type of crossing namely,
restrictive crossing. This type of crossing has been recognised by usage and custom of the trade.
In a restrictive crossing the words 'Account Payee' or Account Payee Only' are added to the general or special
crossing.
The effect of restrictive crossing is that the payment of the cheque will be made by the bank to the collecting
banker only for the account payee named. If the collecting banker collects the amount for any other person, he
will be liable for wrongful conversion of funds.
It should be noted that the duty of the paying banker is only to ensure that the payment is made through the
named bank, if there is any. He is not liable, in case the collecting banker collects the cheque for any other
person than the account payee. In that case collecting banker will be liable to the true owner.

4. Not negotiable Crossing (Sec. 130):

A person taking is cheque crossed generally or specially, bearing in either case the words 'not negotiable' shall
not be able to give a better title to the holder than that of the transferor.
The effect of a not negotiable crossing is that the cheque can be transferred but the transferee will not acquire a
better title to the cheque. Thus a cheque is deprived of its essential feature of negotiability.
The objects of "not negotiable" crossing is to protect the drawer against loss or theft in the course of transit.

Example:

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 A cheque was drawn in favour of a firm B & Co. The cheque was crossed 'not negotiable'; one of the partners, A
in fraud of his Co-partner B, endorsed the cheque to P who encashed it. Held that B, who under the terms of the
partnership agreement was entitled to the cheque could recover the amount from P as A could not transfer
better title than he himself had [Fisher v. Roberst]
Who may cross a cheque? As a rule, it is the drawer who can cross a cheque. However, Sec. 125 provides that
even a holder can cross the cheque. It further provides that a banker can cross the cheque specially for
collecting to another banker as his agent for collection.

Between a Bill of Exchange and a Cheque:

Although a cheque is a bill of exchange and there is too much of similarity between the two, yet there are the
following points of difference between a bill and a cheque;
i. A bill of exchange may be drawn on any person. A cheque is always drawn on a specified banker with whom
the drawer has deposited money. 'A bill' can be drawn even on a bank.
ii. Certain types of bills of exchange must be accepted before they are presented for payment. In case of a
cheque, acceptance is not at all necessary.
iii. A bill of exchange has to be stamped according to the Indian Stamp Act. Stamp is not at all necessary on a
cheque.
iv. A bill of exchange may be payable on demand or after a certain period. A cheque is always payable on
demand.
v. A bill of exchange cannot be made payable to bearer on demand. A cheque can be made payable on demand.
vi. In a bill three days of grace are allowed to the acceptor for payment. In case of a cheque, no such grace
period is allowed and it is payable immediately on demand, of course, during working hours of the bank.
vii. In case a bill of exchange is not presented for payment, the drawer is discharged from his liability. Failure to
present the cheque discharges the drawer, only when he has suffered any loss due to the failure of the
holder to present the cheque for payment within a reasonable time of its issue. In such a case the loss is
limited to the loss suffered by the drawer due to non - presentment.

Bank Draft of Demand Draft:

A bank draft or a demand draft, is a bill of exchange drawn by one bank on its own branch or any other bank.
The essential features of a bank draft are:
1. It is always drawn by a bank upon its own branch or another bank.
2. It is always payable on demand and it cannot be made payable to bearer.
3. Ordinarily, payment of ^demand draft cannot be stopped or countermanded. It is because of this reason that
payment is demanded through a bank draft.

BILLS AND THEIR ENDORSEMENT

A non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed
sum of money to another party at a predetermined future date.
Bills of exchange are similar to checks and promissory notes. They can be drawn by individuals or banks and are
generally transferable by endorsements. The difference between a promissory note and a bill of exchange is that
this product is transferable and can bind one party to pay a third party that was not involved in its creation. If
these bills are issued by a bank, they can be referred to as bank drafts. If they are issued by individuals, they can
be referred to as trade drafts.

Endorsement:

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Endorsement means the signature of the maker/ drawer or a holder of a negotiable instrument, either with or
without any writing, for the purpose of negotiation. The endorsement is done by the payee or endorsee, as the
case may be by signing on the instrument customarily on its back & where the space is insufficient on a slip of
paper annexed thereto called “allonge”.

There are five kinds of endorsement:

Blank
endorsement

Partial Special or Full

endorsement endorsement

kinds of
endorsement

Restrictive Conditional
endorsement endorsement

1. Blank endorsement: If the endorser signs his name only, the endorsement is said to be in blank and it
becomes payable to bearer,

2. Special or Full endorsement: An endorsement “in full” or a special endorsement is one where the endorser
not only puts his signature on the instrument but also writes the name of a person to whom or to whose
order the payment is to be made.

3. Conditional endorsement: In conditional endorsement the endorser puts his signature under such a
writing which makes the transfer of title subject to fulfillment of some conditions of the happening of some
events.

4. Restrictive endorsement: An endorsement is called restrictive when the endorser restricts or prohibits
further negotiation.

5. Partial endorsement: In Partial endorsement only a part of the amount of the bill is transferred or the
amount of the bill is transferred to two or more endorsees severally. This does not separate as a negotiation
of the instrument. The law lays down that an endorsement must relate to the whole instrument. However,
where the amount has been partly paid, a note to that affect may be endorsed on the instrument which may
then be negotiated for the balance. This is not done in case of cheques or banker’s drafts.

GOVERNMENT SECURITIES
A bond (or debt obligation) issued by a government authority, with a promise of repayment upon maturity that
is backed by said government. A government security may be issued by the government itself or by one of the

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government agencies. These securities are considered low-risk, since they are backed by the taxing power of the
government.

A government bond is a bond issued by a national government, generally with a promise to pay periodic
interest payments and to repay the face value on the maturity date. Government bonds are usually denominated
in the country's own currency. Bonds issued by national governments in foreign currencies are normally
referred to as "sovereign bonds", although the term sovereign bond may also refer to bonds issued in a
country's own currency.

Risks- There are various types of Risk-

Credit
risk

types
of Risk
Inflation Currency
risk risk

Credit risk
Government bonds in a country's own currency are sometimes taken as an approximation of the theoretical
risk-free bond, because it is assumed that the government can raise taxes or create additional currency in order
to redeem the bond at maturity. There have been instances where a government has defaulted on its domestic
currency debt, such as Russia in 1998 (the "ruble crisis") (see national bankruptcy).

Currency risk
Currency risk is the risk that the value of the currency a bond pays out will decline compared to the holder's
reference currency. For example, a German investor would consider United States bonds to have more currency
risk than German bonds (since the dollar may go down relative to the euro); similarly, a United States investor
would consider German bonds to have more currency risk than United States bonds (since the euro may go
down relative to the dollar).

Inflation risk
Inflation risk is the risk that the value of the currency a bond pays out will decline over time. Investors expect
some amount of inflation, so the risk is that the inflation rate will be higher than expected. Many governments
issue inflation-indexed bonds, which protect investors against inflation risk by linking both interest payments
and maturity payments to a consumer prices index.

PROCEDURE OF E-BANKING
Online banking (or Internet banking or E-banking) allows customers of a financial institution to conduct
financial transactions on a secured website operated by the institution, which can be a retail bank,virtual bank,
credit union or building society.

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 To access a financial institution's online banking facility, a customer having personal Internet access must
register with the institution for the service, and set up some password (under various names) for customer
verification. The password for online banking is normally not the same as for [telephone banking]. Financial
institutions now routinely allocate customers numbers (also under various names), whether or not customers
intend to access their online banking facility. Customers numbers are normally not the same as account
numbers, because number of accounts can be linked to the one customer number. The customer will link to the
customer number any of those accounts which the customer controls, which may be cheque, savings, loan,
credit card and other accounts. Customer numbers will also not be the same as any debit or credit card issued
by the financial institution to the customer.

To access online banking, the customer would go to the financial institution's website, and enter the online
banking facility using the customer number and password. Some financial institutions have set up additional
security steps for access, but there is no consistency to the approach adopted.

Features
Online banking facilities offered by various financial institutions have many features and capabilities in
common, but also have some that are application specific.

The common features fall broadly into several categories

 A bank customer can perform non-transactional tasks through online banking, including -
o viewing account balances
o viewing recent transactions
o downloading bank statements, for example in PDF format
o viewing images of paid cheques
o ordering cheque books
o download periodic account statements
o Downloading applications for M-banking, E-banking etc.
 Bank customers can transact banking tasks through online banking, including -
o Funds transfers between the customer's linked accounts
o Paying third parties, including bill payments (see, e.g., BPAY) and telegraphic/wire transfers
o Investment purchase or sale
o Loan applications and transactions, such as repayments of enrollments
o Register utility billers and make bill payments
 Financial institution administration
 Management of multiple users having varying levels of authority
 Transaction approval process
 the process of banking has become much faster

Some financial institutions offer unique Internet banking services, for example
 Personal financial management support, such as importing data into personal accounting software.
Some online banking platforms support account aggregation to allow the customers to monitor all of
their accounts in one place whether they are with their main bank or with other institutions.

Procedure in E-Banking
i. Request for opening new account and opt for Internet Banking facility at the branch.
ii. User-id/passwords would be provided as per the procedure defined above.
iii. Activation of the users would be as per the above procedure.
iv. Login into Internet banking services with a valid User-id & password.
v. Click on the Requests option
vi. Select “Request for Transaction Password”
vii. Submit the details for transaction passwords (like address, user-id etc.)
viii. The transaction password will be created at HO and sent directly on the address mentioned in the request.
ix. On receipt of transaction password, login into the services
x. Select “Request for activation of Transaction password”.
xi. Submit the details.
xii. Activation would be done within 24 hours of receiving the request.

45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
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