100 MRKS SECONDARY FUNCTIONS OF COMMERCIAL BANKS
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Transcript of 100 MRKS SECONDARY FUNCTIONS OF COMMERCIAL BANKS
UNIVERSITY OF MUMBAI
LALA LAJPAT RAI COLLEGE OF COMMERCE & ECONOMICS
MAHALAXMI, MUMBAI-400034TELEPHONE: 23548240/41
A PROJECT ON“FUNCTIONS OF COMMERCIAL BANKS”
SUBMITTED BYBHAVIN HARIYA
PROJECT GUIDE: PROF.VIJAYA GANGAL
SEMESTER –VBACHELOR OF COMMERCE (BANKING & INSURANCE)
SUBMISSION DATE:EXAM SEAT NO:
1
ACKNOWLEDGEMENT
With great pleasure I express my gratitude to Prof.Vijaya Gangal, Lala
Lajpat Rai College of Commerce & Economics and I am very thankful to
her for being my inspiration in the completion of my project. She gave me
precious time and valuable advice for this project.
I am thankful to the college library that gave me full support by providing
different types of information resources. I am also thankful to my friends
who supported me throughout the project. I also pay in record that, I am very
much thankful to my parents who always inspired me to do this work and
complete in time.
2
DECLARATION
I, Mr. Bhavin Hariya, student of Lala Lajpat Rai College of Commerce &
Economics T.Y.B.B.I. (Sem-V) hereby declare that, I have completed this
project on “FUNCTIONS OF COMMERCIAL BANKS” in the academic
year 2010-2011. This project submitted by me is true and my own work.
This work is not submitted earlier.
------------------------
Signature of student
3
CERTIFICATE
I, Prof. Vijaya Gangal of Lala Lajpat Rai College of Commerce &
Economics hereby to certify that Mr. Bhavin Hariya, student of T.Y.B.B.I.
(Sem-V) have completed her project on “FUNCTIONS OF COMMERCIAL
BANKS” in the academic year 2010-2011.
This project submitted is true and original copy to best of my knowledge.
--------------------------------- ------------------------------------
Signature of Project Co-ordinator Signature of External Examiner
(Prof.Vijaya Gangal)
-------------------------------------
Signature of Principal
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EXECUTIVE SUMMARY
Banks have developed around 200 years ago. The natures of banks have
changed as the time has changed. The term bank is related to financial
transactions. It is a financial establishment which uses, money deposited by
customers for investment, pays it out when required, makes loans at interest
exchanges currency etc.
The development of banking is evolutionary in nature. A Bank performs a
multitude of functions and services which cannot be put into a single
definition. A bank may mean different things to different people. For some it
is a storehouse of money, for others as institution of funding for Finance and
yet for many others bank is a depository for their savings.
Today in English bank is largely understood as an institution that accepts
money as a deposit to further lend it out for profit.
The Indian banking has evolved in its present form from the days of the
British Raj. The structure and the pattern of banking are largely based on the
British Banking System.
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Commercial banks are an organization which normally performs certain
financial transactions. It performs the twin task of accepting deposits from
members of public and make advances to needy and worthy people form the
society. When banks accept deposits its liabilities increase and it becomes a
debtor, but when it makes advances its assets increases and it becomes a
creditor. Banking transactions are socially and legally approved. It is
responsible in maintaining the deposits of its account holders.
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CHAPTER NO. TOPIC PAGE NO.
I Introduction 9-10
II What is a Commercial Bank 11-12
III Objectives of Commercial Banks 13
IV Functions of Commercial Banks 14
IV 1 Primary Functions 15
IV 1 A Receiving Deposits 15
IV 1 A (i) Current Account 16-17
IV 1 A (ii) Savings Banks Account 18-19
IV 1 A (iii) Fixed Deposit Account 20-21
IV 1 A (iv) Recurring Deposit Account 22-23
IV I B Advancing Loans 24
IV 1 B (i) Overdraft 25
IV 1 B (ii) Cash Credit 26-27
IV 1 B (iii) Loans 28-29
IV 2 Secondary Functions 30
IV 2 A Agency Services 30-31
IV 2 B General Utility Services 32
IV 2 B (i) Safe Deposit Vault 33
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IV 2 B (ii) Collection of Cheques, Bills & Promissory
Notes
33
IV 2 B (iii) Issuing Letter of Credit 34
IV 2 B (iv) Bank Drafts 35-36
IV 2 B (v) Automated Teller Machine 37-38
IV 2 B (vi) Debit Card 39-41
IV 2 B (vii) Credit Card 42-44
IV 2 B (viii) Tele Banking 45-47
IV 2 B (ix) Internet Banking 48-50
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CHP I: INTRODUCTION
Commercial banks are the oldest and fastest growing banks in India. They
are also most important depositories of public savings and the most
important lenders. Commercial banking in India is a unique system in the
world. The commercial banking in India has social control and public
ownership. The operations of banks have been determined by Lend Bank
Scheme, Differential Rate of Interest Scheme, Credit Authorized Scheme,
inventory norms and lending system prescribed by the authorities.
Commercial banks are simple business organizations which provide various
types of financial services to customers in return for payment in one form or
another such as interest, discount, commission, fees, etc. their objective is to
make profits, commercial banks includes schedule, non-schedule, Indian,
foreign, public sector, private sector and Regional Rural Banks. Profitability,
liquidity, safety and social welfare are the, major principles which
commercial banks strive to incorporate in their working. The Indian Banking
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system is of branch banking type and it is characterized by excessive
concentration of business in a small number of big public sector banks.
There has been a tremendous growth of commercial banks during the past 40
years. There has been phenomenal increase in bank deposits and bank
branches. Banks accepts various types of deposits such as demand, saving,
fixed and call. Individuals own more than 3/4 th of these deposits. The
commercial banks have developed innovative approaches such as
consortium, single window and participatory lending. Banking business is
subject to market seasonal variations. The massive quantative expansion has
not been accompanied by quick, reliable and better customer service.
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CHP II: What is a Commercial Bank?
Commercial banks are banking institutions that are geared more toward the
lending of money to customers, rather than focusing on generating or raising
money. A commercial bank accepts deposits to personal and corporate
accounts, and then uses the combined strength of the deposits to finance
loans for individuals and businesses. This is in contrast to an investment
bank, which focuses on generated revenue through investments.
The commercial bank will extend a number of different types of loans to
customers. For individuals, a commercial bank may loan funds for the
purchase of personal property, such as vehicles or homes.
A commercial bank may also extend a personal loan to an individual for
home improvements or to consolidate a number of personal debt
instruments. Loans of this type are usually extended with interest included,
allowing the bank to cover the costs associated with extending the loan.
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Business clients may also obtain loans from a commercial bank. The type
of business loans that would be offered by a commercial institution would
include funds to finance a payroll or to purchase operating supplies.
However, if the funds were needed to effect a corporate realignment or
restructuring, investment banks would more likely finance that type of
business loan.
A commercial bank will also offer a wide range of savings programs for
customers. Along with standard savings accounts, the commercial bank may
also offer interest bearing checking accounts, certificates of deposit, and
other savings strategies that are considered to provide a small but consistent
return in exchange for doing business with the bank.
Banking Company of India has been defined in the Banking Companies Act,
1949 as, “one which transacts the business of banking which means the
accepting for the purpose of lending or investment of deposits of money from
the public, repayable on demand or otherwise and withdrawable cheques,
draft, order or otherwise.”
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CHP III: Objectives of Commercial Banks
The main objective of a commercial bank is to generate profitability for its
ownership by providing quality based products and services to the residents
of the communities and regions that they represent. Aside from offering
traditional banking products, commercial banks must be highly competitive
and provide specialized products.
Commercial banks are to profess higher profitability by maintaining circular
and efficient flow of amount of money deposited by the customers and the
lenders. Commercial bank contributes to the economic cycle by keeping the
money circulation among households, government and corporate businesses.
The commercial banks lend money to the financial agents through their
various products and services by earning interest income on the borrowed
money. Commercial banks design their short permanent status and long term
loans and other products to cater to the need of customers while enhancing
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their own returns. Their objective is to attract more customers and build
profitable relationships next to the new and existing customers.
CHP IV: Functions of Commercial Banks
Modern Commercial Banks perform a large number of functions and
services to industry and commerce. It is not possible t make an exhaustive
list of its functions and services as they are diverse, varied and ever-
expanding. The functions of a bank are increasing day by day depending
upon the environment prevailing in the country. There cannot be a standard
pattern of banking functions that can hold good for all the countries, or even
for the same country at different periods of time. It is not surprising,
therefore that banks in developing countries perform many such functions as
to suit their particular requirements and have branched out into new areas.
Banks in modern times are doing a large number of non-traditional
functions. They have thrown their conservative approach and are doing their
best to help all sectors of the economy by adopting progressive and
enlightened approach. The functions and services rendered by modern banks
can be grouped under the following heads:
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A) Primary Functions.
B) Secondary Functions.
CHP IV 1: PRIMARY FUNCTIONS
Broadly speaking there are two functions which comes under this category:
1) Receiving Deposits
2) Advancing Loans
CHP IV 1 A: Receiving Deposits:
This is an important function because banks mainly depend on the funds
deposited with them by the public. By offering various types of deposit
accounts, banks mobilize the savings of the community. A bank’s financial
strength is measured by its ability to attract the various types of deposits.
People who have surplus money deposit the same with a bank for safe
keeping. The commercial bank receives deposits on the following four types
of accounts:
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a) Current Account.
b) Savings Bank Account.
c) Fixed Deposit Account.
d) Recurring Deposit Account.
CHP IV 1 A i: CURRENT ACCOUNT
Current Account is primarily meant for businessmen, firms, companies,
public enterprises etc. that have numerous daily banking transactions.
Current Accounts are cheque operated accounts meant neither for the
purpose of earning interest nor for the purpose of savings but only for
convenience of business hence they are non-interest bearing accounts. In a
Current Account, a customer can deposit any amount of money any number
of times. He can also withdraw any amount as many times as he wants, as
long as he has funds to his credit. Generally, a higher minimum balance as
compared to Savings Account is required to be maintained in Current
account.
The following are the important features of current account:
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i) Current account indicates deposits always payable on demand. Hence they
are called demand deposits.
ii) There is no restriction on the number and amount of withdrawals from
this account.
iii) Banks insist on the maintenance of certain minimum balance on current
account. If the balance goes below this amount, the bank has a right to close
that account
iv) Generally no interest is paid on money deposited in this type of account.
Recently, banks have started giving lower interest on this account.
v) Overdraft facilities are given in case of current accounts only.
vi) Current account suits the requirements of businessmen, joint stock
companies, institutions, societies, public authorities and public corporations
etc. whose banking transactions happen to be numerous on every working
day.
vii) All banking services are made available to current account holders are
reasonable service charges.
viii) Banks are given full freedom to decide the rules and regulations
regarding the operation of current account.
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CHP IV 1 A ii: SAVINGS BANK ACCOUNT
Savings Bank Accounts are meant to promote the habit of saving among the
citizens while allowing them to use their funds when required. The main
advantage of Savings Bank Account is its high liquidity and safety. On top
of that Savings Bank Account earns moderate interest too. The rate of
interest is decided and periodically reviewed by the Government of India.
Presently, the rate of interest is 3.5% compounded half yearly.
The following are the main features of this account:
i) As the name indicates, these accounts are opened for the purpose of
mobilizing savings. These accounts are meant to encourage savings and to
develop the habit of thrift. It aims at checking extravagance of the peoples.
This account may be joint or single.
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ii) Though money can be deposited in this account as often as the depositor
wishes, it cannot be withdrawn more that twice or thrice a week. At present
25 withdrawals are permitted quarterly by most of the banks. Rules in this
regard may vary from bank to bank and from time to time.
iii) This account can be opened by depositing nominal amount.
iv) The rate of interest payable by the banks on this account is generally
prescribed by the Central Bank of the country. It is generally 4% to 5%.
v) Money from this account can be withdrawn by cheques or by using
bank’s withdrawal slips.
vi) No limit is prescribed in India for the maximum amount that may be held
in a saving bank account. But banks in India allow interest on a maximum
balance of Rs. One lakh only in one account.
vii) Savings account is not given overdraft facilities like current account.
viii) This account is more suitable to salary earners, wages earners and
persons of limited means.
ix) Usual banking services are provided to savings bank account holders.
This account is meant for all those who want to build up personal savings for
meeting emergencies and contingencies.
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CHP IV 1 A iii: FIXED DEPOSIT ACCOUNT
A Fixed Deposit also known as a Term Deposit is an account which allows
us to deposit money for a fixed time period. When the deposit period
elapses, the depositors get interest on the amount deposited. The fixed
deposit interest rates can be as high as 9.5% or more.
The following are the features of fixed deposit account:
i) Fixed deposits are deposits received for a fixed period specified in
advance. No withdrawal is allowed during this period. Therefore they are
called time deposits.
ii) The depositor is neither given a cheque book nor a pass book. Withdrawal
of interest or principle through cheque is not permitted. The depositor gets a
fixed deposit receipt, acknowledging the receipt o a sum of money specified
therein.
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iii) The fixed deposit receipt is non-transferable. It is not a saleable asset.
iv) The depositor gets attractive rate of interest on money deposited in this
account. The rate of interest allowed varies with the period. The longer the
period of deposit, the higher the rate of interest. Interest is paid half-yearly.
v) If the depositor is in need of money before the due date, he can borrow
from the same bank against the security of his fixed deposit receipt. Of
course, he has to pay a slightly higher rate of interest. In India, the directive
of the Reserve Bank of India requires the banks to charge a minimum of 1%
above the rate payable on such deposits.
vi) Individuals, firms or companies with surplus money may invest their idle
funds profitably in this account. The person who want safety of funds and
steady return, deposit money in this account. These deposits are called
earning assets.
vii) Some of the leading banks transfer funds in excess of some minimum
amount from Current Account to Time Deposit so that the accountholder
gets income on the same.
viii) According to recent Reserve Bank circular, the Time deposits can be
kept even for a period of seven days for the amount in excess of 15 lakhs
and above.
21
CHP IV 1 A iv: RECURRING DEPOSIT ACCOUNT
Under a Recurring Deposit account (RD account), a specific amount is
invested in bank on monthly basis for a fixed rate of return. The deposit has
a fixed tenure, at the end of which the principal sum as well as the interest
earned during that period is returned to the investor. Recurring Bank
Account provides the element of compulsion to save at high rates of interest
applicable to Term Deposits along with liquidity to access those savings any
time. Since a recurring deposit offers a fixed rate of return, it does not
provide protection against inflation.
The notable features of this type of account are as follows:
i) This type of account is the latest innovation with most of the banks in
India. Banks have introduced this scheme with the object of affording
convenience and incentive to small depositors for savings.
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ii) A depositor opening a recurring deposit account is required to deposit an
amount chosen by him, generally a multiple of Rs. 5/- or Rs. 10/- in his
account every month for a period selected by him. The period of recurring
deposit varies from bank to bank generally between two to ten years.
iii) The rate of interest given on recurring account stands favorably as
compared with the savings bank account because the former partly
resembles the fixed deposit account.
iv) As in savings bank account, the customer is furnished a passbook. The
passbook ordinarily is to accompany each installment as and when it falls
due. The accountholder can give a standing order to deduct installments
from his savings bank account in the bank.
v) At the expiry of the period, the depositor gets a lump sum representing the
installments and handsome interest on his savings.
vi) In case depositor needs money before the due date he may borrow upto
90% of the amount in the account at the prevailing rate of interest.
vii) Recurring deposit accounts are transferable from one branch to another
without charge.
viii) The recurring deposit account can be opened by any person, more than
one person jointly or severally, by a guardian in the name of a minor and
even by a minor.
23
CHP IV 1 B: Advancing Loans
The money that is received by banks by way of deposits is utilized for
granting loans and advances to worthy borrowers. Apart from playing a vital
role in the development of the economy, banking is a business with a motive
to earn profit. The successful operation in this function forms the main
source of income i.e. profit of the bank. Banks advances enable commerce
and industry to meet their short term and long term requirements of funds. In
recent years, the lending attitude of banks has undergone a marked change.
Now, advances granted by banks are expected to develop all sectors of the
economy.
The strength of a bank is primarily judged by the soundness of its advances.
The advances by banks may be made in any one or more of the following
forms:
a) Overdrafts.
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b) Cash Credit.
c) Loans.
CHP IV 1 B i: OVERDRAFTS
An overdraft occurs when withdrawals from a bank account exceed the
available balance. In this situation a person is said to be "overdrawn".
If there is a prior agreement with the account provider for an overdraft
protection plan, and the amount overdrawn is within this authorised
overdraft limit, then interest is normally charged at the agreed rate. If the
balance exceeds the agreed terms, then fees may be charged and higher
interest rate might apply.
The following are the distinctive features of overdrafts:
i) This facility is given only to current accountholders.
ii) Here a current accountholder is permitted by the banker to draw more
than what stands to his credit.
iii) The banker may take some collateral security or may grant such advance
on the personal security
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iv) The customer is permitted to withdraw the amount as and when he needs
and to make deposit in his account as and when it is convenient.
v) Interest is charged on the amount overdrawn and for a short period it is
utilized.
CHP IV 1 B ii: CASH CREDIT
This account is the primary method in which Banks lend money against the
security of commodities and debt. It runs like a current account except that
the money that can be withdrawn from this account is not restricted to the
amount deposited in the account. Instead, the account holder is permitted to
withdraw a certain sum called "limit" or "credit facility" in excess of the
amount deposited in the account. Cash Credits are, in theory, payable on
demand. These are, therefore, counter part of demand deposits of the Bank.
The following are the notable features of the cash credit arrangements:
i) Under this scheme, the banker specifies a limit for each customer upto
which the customer is permitted to borrow against some security or
guarantee.
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ii) The customer is allowed to withdraw from this account as and when he
needs money and deposits in this account any surplus that he has
iii) Generally the customer is required to provide tangible asset as security to
cover the amount borrowed.
iv) For availing of the cash credit facility it is not necessary to have an
account in a bank.
v) The advances sanctioned under this arrangements are technically
repayable on demand, but in practice they ‘roll over’ a period of time. It is a
seasonal borrowing renewed from time to time.
vi) This method of borrowing is very popular in India, accounting for about
70 per cent of the total bank credit. Cash credit facility is regularly granted
to commercial and industrial concern for longer periods.
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CHP IV 1 B iii: LOANS
A loan is a type of debt. Like all debt instruments, a loan entails the
redistribution of financial assets over 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 money is paid back in regular installments, or partial
repayments; in an annuity, each installment is the same amount.
The following are the distinctive features of loan facility granted by a bank:
i) A fixed amount sanctioned for a definite period of time is called loan.
ii) Loans are repayable at one time or in installments as agreed.
iii) Interest is charged on the total amount of the loan sanctioned whether it
is utilized or not.
iv) Loans are given on the security of shares, Government securities, life
insurance policies, gold and other assets. In suitable cases, unsecured
advances are also granted by banks.
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v) There are different types of loans. For instance, term loans, participation
loans and personal loans.
vi) Banks charge a slightly lower rate of interest on loan account than on
overdraft and cash credit, other things being equal.
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CHP IV 2: SECONDARY FUNCTIONS
These secondary functions can be classified into two main divisions:
1) Agency Services.
2) General Utility Services
CHP IV 2 A: AGENCY SERVICES
The agency services are provided to regular customers of the bank. While
providing agency services, banker acts as the agent of the customer. Some of
the important services rendered to the clients are given below:
a) Payment of insurance premium, subscriptions and contributions etc of
societies, clubs, associations etc which are of recurring nature.
b) Collection of salary and pension bills, dividend coupons and interest
payable on debentures and other securities
c) Transfer of funds of customers from one bank to another by means of
bank drafts, mail or telegraphic transfer.
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d) Purchase and sale of stock, shares, debentures and other securities as per
instructions from the customers.
e) Collection and payment of cheques, bills and promissory notes.
f) Acting as attorney or representative of client.
g) Acting as a trustee, executor or administrator.
h) Acting as correspondents, agents or representative of their customers to
other banks or financial corporations.
i) Filing of income tax return
j) Collection of postal orders.
CHP IV 2 B: GENERAL UTILITY SERVICES
Some important utility services provided by commercial banks are:
a) Safe Deposit Vault
b) Collection of Cheques, Bills and promissory Notes
c) Issuing Letter of Credit
d) Bank Drafts
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e) ATM
f) Debit Card
g) Credit Card
h) Tele-Banking
i) Internet Banking
CHP IV 2 B i: Safe Deposit Vault
A bank undertakes the safe custody of the customer’s valuables and
documents by providing a safe deposit vault. These are kept in specially
constructed strong rooms. There are lockers available to the customer on a
nominal charge. There are two keys for each locker, one is given to the
customer and the other remains with the Bank Manager. The locker is
opened as well as closed by both the keys one after another. Customers can
keep custody. A register is maintained by the bank in which all the
particulars about the valuables and documents are recorded in it. Banks
provide the services of safe deposit vault on hire basis to the customers.
CHP IV 2 B ii:Collection of Cheques, Bills and promissory Notes
32
The customers deposit cheques, bills of exchange and promissory note into
their accounts with the banks. These instruments are collected by the bank
on behalf of their customers and credited to their accounts. These services
are provided by the cheques, bills and promissory notes issued on branches
out of the city are collected with some nominal charges for postage etc. this
is a very popular and essential service provided by the banks to their
customers.
CHP IV 2 B iii: Issuing Letter of Credit
A letter of credit is a commercial instrument of assured payment. It is widely
used by the businessman for various purposes. The bank undertakes to make
payment to a seller on production of documents stipulated in the letter of
credit. It specifies as to when payment is to be made which may be either on
presentation of documents by the paying bank or at some future date
depending upon the terms stipulated in the letter. There are many parties
involved in the letter of credit. One is the applicant who is the buyer of
goods or importer of goods. He makes an application to a bank who issues
the letter of credit. The bank is known as issuing bank. The beneficiary is
named in the letter of credit who is the seller of goods or exporter. Other
banks are also involved in the transaction such as negotiating bank,
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confirming bank and advising bank. There are different types of letter of
credit. This is a very important service provided by the banks specially for
the importers and exporters.
CHP IV 2 B iv: BANK DRAFTS
A bank draft is an order from one branch to another branch of the same bank
to pay a specified sum of money to a person named therein or to his order. A
draft is always payable on demand. Banks issue drafts at the request of the
customers on their branches at the place of destination for remitting money
from one place to another place. Any person who wants to remit money has
to purchase a draft from the bank by paying the amount in advance to the
bank. The purchaser of the draft then sends the draft to the payee’s place of
residence by post or courier for the purpose of encashment at the drawee
branch of the bank. The bank issuing the draft charges some commission
depends upon the amount of the draft. The purchaser need not be a customer
of the bank.
34
The bank draft is like a bill of exchange payable on demand. In case the
draft is lost by a purchaser, he has to report to the issuing banker for loss of
the draft without any endorsement, the banker may safely refuse to pay the
amount of the draft. The bank should take all the precautions and payment of
the draft should be made only when the banker is fully satisfied about the
valid title of the holder. The banker should take an indemnity bond and then
issue a duplicate draft to the purchaser. The draft may be cancelled by the
bank if it is not delivered to the payee. When a bank draft is delivered to the
payee he acquires a right in the instrument, which cannot be set aside by the
‘stop-payment’ order issued by the purchaser. The bank issuing the draft
sends an advice to the drawee branch, intimating about the issue of the draft.
The drawee branch after verifying the signature of the authorized officials
makes the payment. However, the payment of the draft should not be refused
because of non-receipt of drawing advice.
35
CHP IV 2 B v: Automated Teller Machine (ATM)
ATM is a channel of banking service to its customers. It’s traditional and
primary use is to dispense cash upon insertion of a plastic card and its
unique PIN i.e. Personal Identification Number. The banks issue ATM card
to their customers having current or savings account holding a certain
minimum balance in their accounts. ATM card is a plastic card with a
magnetic strip with the account number of the individuals. When the card is
inserted into the machine the sensing equipment of the machine identifies
the account holder and asks his PIN. It is a secret number which is known
only to the account holder.
36
If the PIN is matched, the ATM pops up a menu screen which allows the
user to transact almost all types of banking transactions, such as withdrawal
of cash, deposit of cash/cheques.
Following are the advantages of ATM:
1. ATM provides 24hour service; the customer can withdraw cash up to a
certain limit during 24hours. It is now called all time money facility.
2. It provides a great deal of convenience to customers. Most of the ATMs
are located at the convenient place and as such this facility is a boon to
customers. ATM machines are installed at suitable locations such as Airport,
Railway station, Residential colony, near big malls etc.
3. ATM facility also reduces pressure on bank staff. The bank staff is free
from the botheration of keeping large ready cash for withdrawal by people.
4. Here the work of deposition and withdrawal is handled by the machine.
The machines are perfect and provide accurate service. The human errors are
absent when operations are performed by machines.
5. Operations through machines provide a kind of privacy and secrecy to
banking business.
37
CHP IV 2 B vi: DEBIT CARD
A debit card is a plastic card that provides an alternative payment method
to cash when making purchases. Functionally, it can be called an electronic
check, as the funds are withdrawn directly from either the bank account or
from the remaining balance on the card. In some cases, the cards are
designed exclusively for use on the Internet, and so there is no physical card.
In many countries the use of debit cards has become so widespread that their
volume of use has overtaken or entirely replaced the check and, in some
instances, cash transactions. Like credit cards, debit cards are used widely
for telephone and Internet purchases and, unlike credit cards, the funds are
transferred immediately from the bearer's bank account instead of having the
bearer pay back the money at a later date.
38
Debit cards may also allow for instant withdrawal of cash, acting as
the ATM card for withdrawing cash and as a check guarantee card.
Merchants may also offer cashback facilities to customers, where a customer
can withdraw cash along with their purchase.
Advantages & Disadvantages of Debit Card:
Advantages of Debit Card:
1. No need to carry cash. Just about every merchant accepts the debit card
including the dollar store and some thrift shops. You do not need to worry
about losing cash or misplacing it in a pair of jeans only to find it two
months later. If your purse or wallet is stolen your money is safe since the
perpetrator would need your PIN number to access your funds.
2. You don't need to make a trip to the bank every time you need to
withdrawal money. You can use your card just about any where you go, and
if you need the cash you can access your money at an ATM machine any
time of day or night.
39
Disadvantages of Debit Card:
1. With a debit card you must keep accurate records. You must record each
transaction so you will know what your account balance is at all times. If
you do not keep records you run the risk of overdrawing your account which
will result in bank fees. Not to mention the embarrassment you will suffer at
the checkout line when your card is denied.
2. If your child needs lunch money you can't just hand them the debit card.
You have to drive to the nearest ATM machine to access a few rupees to
send to school with your child.
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CHP IV 2 B vii: CREDIT CARD
A credit card is an instrument of payment. It is a source of revolving credit.
The cards are plastic cards issued by the banks to their customers. The name
of the customer, card number and expiry date are printed on the plastic
cards. Some banks also use the photograph of the customers on the credit
card. The cardholder can buy goods or services from various merchant
establishments where such arrangements exist. The card issuing bank makes
the payment to the supplier or seller. The outstanding amount on account of
use of the credit card is payable by the card holder to the bank over a
specific period which carries a fixed amount of interest. A debit card is a
payment card used to obtain cash, goods and services automatically debiting
the payments to the cardholder’s bank account instantly, in which credit
balance exists.
A credit card is more then a simple piece of plastic, it is first and foremost a
flexible payment tool accepted at 30 million locations worldwide, and if the
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card balance is paid off every month, then no interest is charged on
purchases made so, essentially, short-term credit is granted without the
consumer paying any interest.
Some of the features of Credit Card are:
1. Access to unsecured credit (no collateral required against amounts
charged).
2. Interest-free payment from time of purchase to the end of the billing
period
3. Instant payment of purchases, allowing for instant receipt of goods and
services
4. 24/7 access
5. Fraud protection
Advantages & Disadvantages of Credit Card:
Advantages of Credit Card:
1. Offer free use of funds, provided you always pay your balance in full, on
time.
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2. Be more convenient to carry than cash.
3. Help you establish a good credit history.
4. Provide a convenient payment method for purchases made on the Internet
and over the telephone.
5. Give you incentives, such as reward points, that you can redeem.
Disadvantages of Credit Card:
1. Cost much more than other forms of credit, such as a line of credit or a
personal loan, if you don't pay on time.
2. Damage your credit rating if your payments are late;
3. Allow you to build up more debt than you can handle;
4. Have complicated terms and conditions.
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CHP IV 2 B viii: TELE BANKING
Telephone banking is a service provided by a Commercial Banks, which
allows its customers to perform transactions over the telephone.
Most telephone banking services use an automated phone answering system
with phone keypad response or voice recognition capability. To guarantee
security, the customer must first authenticate through a numeric or
verbal password or through security questions asked by a live representative.
With the obvious exception of cash withdrawals and deposits, it offers
virtually all the features of an automated teller machine: account balance
information and list of latest transactions, electronic bill payments, funds
transfers between a customer's accounts, etc.
Usually, customers can also speak to a live representative located in a call
centre or a branch, although this feature is not always guaranteed to be
offered 24/7. In addition to the self-service transactions listed earlier,
telephone banking representatives are usually trained to do what was
traditionally available only at the
branch: loan applications, investment purchases and
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redemptions, chequebook orders, debit card replacements, change of
address, etc.
Banks which operate mostly or exclusively by telephone are known
as phone banks. They also help modernize the user by using special
technology.
Advantages & Disadvantages of Tele Banking:
Advantages of Tele Banking:
1. You may not have time to visit your bank every week and if your business
is located out of town, getting to a branch can be time consuming and
expensive. With telephone banking, your bank is on the other end of the line
whenever you need it.
2. You can manage your business account at any time, which is ideal if you
are busy during the day with running your business.
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3.As well as the basics of running your business account – paying a bill,
transferring money, setting up a direct debit and so on – you may also be
able to apply for finance and make an appointment with your Bank Manager.
4. Making payments by phone can simplify your banking – you don’t need
to confirm the payments in writing, and you can check all your transactions
against your statement when it arrives.
Disadvantages of Tele Banking:
1. The most common one would have to be the fact that not all banks and
building societies offer 24 hour telephone banking.
2. Telephone banking like online banking can seem impersonal, but like
online banking, if you use it on conjunction with your regular bank account
it can be a useful tool.
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CHP IV 2 B ix: INTERNET BANKING
Internet is a channel of service to banking customers. The access to account
information as well as transaction is offered through the world-wide-web
network of computers on the internet. Each account holder is provided with
a PIN similar to that of ATM or phone banking. The access to the account is
allowed to the customer upon a match of the account details and PIN entered
on the computer system. A higher level of security may be reached by an
electronic fingerprint. Transaction such as e-business, Railway-Air
Reservation, payment of bills, transfer of money can be carried out while
sitting in the house with the help of an internet.
The following is a list of the advantages of internet banking:
Easy to Set-Up: It is easy and fast to set up an internet bank account. All that
users have to do to create an online bank account is complete a short form
and then set the security features such as a password and username. Finally,
they just print and sign a form and send it in to the bank.
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Fewer Costs: There are fewer costs associated with internet banking because
online banks do not have the overhead like traditional banks. Because there
are fewer costs, internet banks pass the savings on to consumers such as
reduced service charges and increased interest rates for savings accounts.
They can even offer reduced lending rates for their loans.
Easy and Convenient online Bank Comparison: It is easy to research many
internet banks online allowing you to compare such features as interest rates,
available credit cards and their interest rates, FDIC bank rating, and terms
and interest rates of their loans. You can then pick the best internet bank that
meets your needs.
Easy Bank Account Monitoring: You can track your internet banking and
money 24 hours a day, 7 days a week. You can track such things as deposits,
clearing of checks, and your account balance. It allows you to keep your
account from going into the negative.
Maintain Accurate Financial Records: You can keep track of your financial
records by using software programs such as Microsoft Money or Quicken.
This will allow you to budget more efficiently and track your spending.
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Bank Account Security: Along with bank internet security features, you have
the ability to monitor you account any time which helps to detect any
fraudulent activity. You will know immediately if someone has written a
check or withdrew money from your account. You will then immediately be
able to start resolving the problem before there is too much damage to your
finances.
Convenient Banking Online: Traditional banking has always been slow.
With online banking, you will no longer have to stand in long lines to obtain
financial information about your account. As well, there is less paperwork
and applying for loans is faster, easier, and more convenient. You can even
transfer funds from one account to another in almost an instant and you can
carry out such investment tasks as bond exchanges, stock trades and other
investment activities.
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DEBIT CARD
CREDIT CARD
ATM CARD
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CONCLUSION
What will the future of Indian banking looks like? Will the reform in
banking sectors face the same fate as in power and telecom? It is
increasingly evident that the economy offers opportunities but no security!
Therefore, the future will belong to those who develop good internal
controls, checks and balances and a sound market strategy. Business
Growth, Cost Efficiency and Evolution are therefore regarded as key drivers
which will have to be addressed.
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BIBLIOGRAPHY
Principles and Practices of Banking and Insurance-
By P. K. Bandgar.
Organisation of Commerce and Management-
By N. G. Kale.
S. C. Karnavat.
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