Commercial Banks 635

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Introduction:

Bank plays an important role in the economic development of the country. The

entire commercial and industrial activities are well knitted with the banks. One cannot

imagine the cessation of the banking activities even for a day. There may be an economic

crisis in the country if the banks stop functioning for some days.

In the early days, the banking business was confined to receiving of deposits and

lending of money. But the modern bankers undertake wide variety of functions to assist

their customers. In countries like United Kingdom, banking development preceded

industrial development and in United States of America, the Banking development

followed the industrial development. But in many other countries including India, the

development has almost been simultaneous. The peculiarity of Indian Banking is that the

banks were started, funded and managed by industrialists to enable them get adequate

finance for their businesses or industries, we can see a direct relationship between banks

and the business houses. The Tata group was associated with Central Bank of India;

House of Birla with United Commercial Bank.

It is often said that a banker is one who deals with other peoples money. The term

Banking has been understood differently by different people at different times. Even

mills and industrial concerns, which accepted public deposits, were classified as banks

between 1932-1943. According to Sir John Pagget, no person or body, corporateotherwise, can be a banker who does not take deposit accounts; take current accounts;

issue and pay cheques; and collect cheques, crossed and uncrossed, for his customers.

But a statutory definition was introduced through the Banking Regulation Act, 1949.

Accordingly, a bank is a company which accepts deposits of money from the public, for

the purpose of lending or investment, repayable on demand or otherwise. This definition

excludes mere money lending from the banking business. Similarly, mills and industrial

concerns, which accept deposits, are also excluded from the classification of the term

Banks.

Commercial banks play an important role in directing the affairs of the economy

in various ways. As a matter of fact the operations of commercial banks record the

economic pulse of the country. The size and composition of their transactions mirror the

economic happenings in a country. Long back the well-known 19 th century economist

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David Ricardo had stated that a bank was a dealer or transactor in money. Banks are thus

financial intermediaries collecting deposits and lending loans. But now they are not

only the purveyors of money but also the creators or manufacturers of money in a

financial system. It is the bank who set the tempo of aggregate economic activity in any

economy.

1. Nationalised Banks:

The Government of India with effect from 19 July 1969 nationalised 14 major

Indian Banks, each with an aggregate deposit of Rs-50 crores or more with a view to to

serve better the needs of development of the economy, in conformity with National

Priorities and Objectives.

The following were considered to be the compelling reasons for the Bank

Nationalisation:

1. Concentration of wealth and economic power in industrialists and businessmen;

2. Branch expansion was confined only to urban areas with rural areas being neglected;

3. Sectors like agriculture, small scale industries and the other deserving sectors were

outside the purview of lending operations of the bank;

4. Various malpractices indulged in by banks under private ownership and management

to favour big businessmen and industrialists and

5. To give a re-orientation in attitude and outlook of the bankers so as to make them

conscious of social objectives and to make them embrace social banking.

The ordinance through which the Banks were nationlised was struck down by

Supreme Court as unconstitutional and invalid, on grounds of hostile discrimination

and illusory compensation. So the Government addressed these lacunae and Banking

Companies {Acquisition and Transfer of Undertakings} Act, 1970 was introduced.

The fourteen banks covered under this Act of Nationalisation were

1. Central Bank of India Ltd.

2. Bank of India Ltd.

3. Punjab National Bank Ltd.

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4. Bank of Baroda Ltd.

5. United Commercial Bank Ltd.

6. Canara Bank Ltd.

7. United Bank of India Ltd.

8. Dena Bank Ltd.

9. Syndicate Bank Ltd.

10. Union Bank of India Ltd.

11. Allahabad Bank Ltd.

12. Indian Bank Ltd.

13. Bank of Maharashtra Ltd.

14. Indian Overseas Bank Ltd.

Eleven years after nationalisation of 14 commercial banks the Government on

April 15, 1980 took over six schedule Commercial Banks each with demand and time

liabilities exceeding Rs-200 crores through an ordinance issued by the President. These

banks were

1. Andhra Bank Ltd.

2. Corporation Bank Ltd.

3. New Bank of India Ltd.

4. Oriental Bank of Commerce Ltd.

5. Punjab and Sind Bank Ltd.

6. Vijaya Bank Ltd.

Of these twenty banks nationalised in two installments, New Bank of India got

merged with Punjab National Bank in September 1993. Thus as of today, there are 19

nationalised banks operating in our country.

Thus, as on date there are totally 19 nationalised banks existing as on date.

Nationalised banks have been permitted to offer their equity shares to the public to the

extent of 49% of their capital. Accordingly, the following nationlised banks offered

shares to the public -

1. Corporation Bank

2. Bank of India

3. Bank of Baroda

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4. Oriental Bank of Commerce

5. Dena Bank

Apart from the above, the following banks coming under the State Bank of India

Group, have also offered shares to the public

1. State Bank of India

2. State Bank of India

3. State Bank of Travancore

4. State Bank of Bikaner and Jaipur

As of September97, nationalised banks contributes 55% of the aggregate deposits

of the Banking System. The contribution of the nationalised banks in the domain of credit

of the entire Banking System is to the extent of 48.5%.

Similarly, as of September97, State Bank of India and its associates, contribute to

25% of the aggregate deposits of the Banking System and 28.4% of the aggregate credit

of the banking system.

Parameter: Nationalised banks SBI and its Associates

No of banks( as march97) 19 8

No of branches 31,398 12,995

Amount of deposits (as march96) 2,37,512 crores 1,13,163 crores

Amount of advances 1,28,644 crores 83,419 crores

2. Private Sector Bank:

By private sector banks we mean those banks where equity is held by private

shareholders that is to say there is no government holding of the equity shares.

This category of banks also occupies a significant position in the Banking

Scenario. There are already 25 private sector banks operating in our country for quite

some time. These banks are listed as under-

1. The Vysya Bank Ltd.2. The Federal Bank Ltd.

3. The Jammu & Kashmir Bank Ltd.

4. Bank of Rajasthan Ltd.

5. Karnataka Bank Ltd.

6. The South Indian Bank Ltd.

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7. The United Western Bank Ltd.

8. Bank of Madura Ltd.

9. The Catholic Syrian Bank Ltd.

10. The Karur Vysya Bank Ltd.

11. Tamilnad Mercantile Bank Ltd.

12. The Lakshmi Vilas Bank Ltd.

13. The Sangli Bank Ltd.

14. The Dhanalakshmi Bank Ltd.

15. Development Credit Bank Ltd.

16. Bharat Overseas Bank Ltd.

17. City Union Bank Ltd.

18. The Benares State Bank Ltd.

19. The Nedungadi Bank Ltd.

20. Lord Krishna Bank Ltd.

21. Bareily Corporation Bank Ltd.

22. Nainital Bank Ltd.

23. The Ratnakar Bank Ltd.

24. The Ganesh Bank of Kurundwad Ltd.

25. SBI Comm.& Int. Bank Ltd.

There has been a growing presence of private sector banks, more so, after the

introduction of financial sector reforms from 1991. Six new private banks listed as under

were issued licenses in 1994-95 and commenced operations during the same year.

1. UTI Bank Ltd.

2. IndusInd Bank Ltd.

3. ICICI Banking Corporation Ltd.

4. Global Trust Bank Ltd.

5. Centurion Bank Ltd.

6. HDFC Bank Ltd.

Again, during 1995-96, the following three banks were issued the licenses and

commenced their operations:

1. Times Bank Ltd.

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2. Bank of Punjab Ltd.

3. IDBI Bank Ltd.

Thus, apart from the twenty-five old private sector banks (already listed above),

we have got nine new private sector banks.

During the period Times Bank ltd. was merged with HDFC bank. However The

Nedungadi Bank Ltd. was merged with one of the nationalise bank i.e. Andra Bank Ltd.

The size of the private sector banks in our country as on date is furnished

hereunder. (As at June97)

Number of Private Sector Banks in operation 35

Number of Bank branches of Private Sector Banks 4,473

Amount of Deposits ( as at march96) 31,692 crores

Amount of Advances ( as at march96) 21,588 crores

Private sector banks have been rapidly increasing their presence in the recent

times and offering a variety of newer services to the customers and posing a stiff

competition to the group of public sector banks.

3. Foreign Banks:

The other important segment of commercial banking system is that of foreign

banks. Foreign Banks, being banks registered and headquartered in Overseas Centres,

have opened branches in our country on a continual basis. Even in the initial decades of

the century, we had the presence of foreign banks in our country albeit in a smaller way.

Here again, the presence of foreign banks has rapidly improved after 199, after

the advent of the financial sector reforms.

The statistics relating to foreign banks operating in our country is given below

Number of Foreign Banks operating in our country

(as at June97)

41

Number of Foreign Bank Branches operating in our country 179

Number of representative offices operating in our country 28

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Amount of Deposits ( march96) 30,523 crores

Amount of Advances ( march96) 22,746 crores

The increasing presence of foreign banks in our country has accentuated the

competition in the Banking Industry bringing in the process newer products as well asresulting in improved customer service. They are employing and enhancing the impact of

technology for the growth of business volumes along with sophisticated service delivery

mechanism to the clientele.

As per the present policy measures in force, all the foreign banks together cannot

have more than 15% of the total business of the banking industry as a whole.

TIME DEPOSITS

Time deposits may also be termed as Term Deposits as the deposits are made by

the customers for a specific period. Time deposits consists of Fixed Deposits and

Recurring Deposits. Term deposits are not normally withdrawn before the fixed term.

Demand deposits, as the name indicated, are those deposits, which can be withdrawn by

the customers at any time without giving notice to the bank. Current account and Saving

bank account fall under this category of demand deposits.

FIXED DEPOSITS

Fixed deposits are made by the customers for a specified period, ranging from 15days to 5 years or more, the rate of interest ranges from % to 11%. The longer the

period of deposit, higher is the rate of interest. The depositor is assured of the safety of

the funds, apart from higher returns. The depositor, as per the terms, agrees not withdraw

the amount earlier. In acknowledgement of the fixed deposit, the customer is given a

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receipt called fixed deposit receipt popularly known as FDR in the business circle. The

rules governing fixed deposits are printed on the reverse side of the FDR.

At the end of the term, the customer may either withdraw the amount along with

interest or renew the deposit for a further period at this convenience. Since the customer

would withdraw the funds at the end of the period, the banker can lend the money

confidently without keeping any reserve to meet the withdrawals. In case the customer

needs money prior to the due date, although he may not be able to withdraw from the

Fixed Deposit, he can obtain a loan from the bank on the strength of the Fixed Deposit

Receipt. The banker charges an interest for this loan.

RECURRING DEPOSIT ACCOUNT

This is a type of account, which is a combination of the characters of saving bank

account and fixed deposit accounts. In this account, the depositors can pay a fixed sum of

money every month for various periods, say 12 to 120 months. This account is normally

opened by salaried persons or individuals who get regular income. Deposits may be paid

in easy installments. The commercial banks have introduced the Recurring Deposit

Scheme to enable the small depositors to save for a predetermined period. In one way it

may be viewed as compulsory savings to enable them to build up sizeable amount. The

bankers allow compound rate of interest. In case the depositor needs the money even

before the stipulated period he can get back the money. In such cases, the banker may pay

a lesser rate of interest than it was agreed upon.

MISCELLANEOUS TYPE OF DEPOSITS

In order to meet the multifarious needs of the customers, banks are adopting

various methods of mobilizing the savings of the customers. They have introduced new

saving schemes to enable the customers to deposit money in the bank according to their

convenience. The banks have even opened extension counters at the schools and colleges

to help the community at large.

(1) Pigmy/Janata Deposits: -

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This is a type of small saving, which encourages thrift by facilitating daily

savings. The banks authorized agents collect the amount at the depositors door and give

receipts. In case the customer needs money before the stipulated period he may receive

the total amount deposited by him. The customer can also obtain advance against the

deposit at a reasonable rate of interest. After completion of the stipulated time, the

balance in the account may be transferred to a Pigmy Fixed Deposit Account to enable

the depositor to get the benefit of a higher rate of interest.

(2) Insurance Linked Deposits: -

The commercial banks, in cooperation with the Life Insurance Corporation of

India, came forward with a few schemes to promote the savings habit among the people.

Any person in the age group of 18-49 is eligible to open this account. An account holder

from a rural area should maintain a minimum interest bearing balance of Rs-500/- and in

other areas Rs-1000/-. The commercial banks undertake to pay the premium at 1.25% of

the deposit. However, interest at the prevailing rate would be credited. The customer is

entitled to get the whole amount. In case of death, the legal heirs can get the following

benefits, provided that the deposits have been made for a continuous period of 2 years.

(1) In case the deceased account holder is less than 21, an amount equal to twice the

average of the minimum monthly balances which formed the basis for calculation of

the premium in the account during the half-yearly period immediately preceding the

death will be paid, subject to a maximum of Rs-10000/-.

(2) In case of the deceased account holder is more than 41 years, half the amount as

stated in the earlier case alone would be paid subject to a maximum of Rs-500/-.

(3) In case the deceased is above 47 years, insurance benefit is not payable.

(3) People Saving Plan: -

Under this scheme a customer is to deposit Rs-500/- per month for a period of 12

months. After having deposited for 3 months, he may withdraw 1/10 of the balance once

in a month. The bank allows interest applicable at fixed rate of interest. This scheme

enables a common man to save and invest in bank deposit.

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(4) Daily Saving Schemes: -

This is a type of small savings facilitating daily savings on which interest is paid

at prescribed rates.

(5) Minors Savings: -

Under this scheme young children of 12 years and above are allowed to open this

account in their own name and operate this account. The bank inculcates in them the

habit of savings, in addition the children feel important as they are also the account

holders in commercial bank. They are pleased to operate the account by themselves.

(6) Annuity /Retiring Scheme: -

The customer should continue to deposit a certain sum every month for a

predetermined period. At the end of such period, they will be paid a lump sum or a

regular monthly income. Normally salaried people may opt for this scheme as they are

guaranteed of the monthly payments after retirement.

(7) Farmers Deposit Scheme:-

In the case of agriculturists, they are able to deposit in the bank only after the

harvest of their crops. In order to facilitate them to get regular returns this type of deposit

account was introduced. Under this scheme one has to deposit a lump sum of money once

or twice in a year, subject to a minimum amount of Rs-500/-. After a certain period they

are allowed to withdraw 1/12 of the amount deposited along with the interest every

month.

(8) Monthly Income Plan: -

This scheme is suitable for pensioners. When they get their gratuity, they can deposit this

lump sum in the bank for a specified number of years. While their deposit is repayable on

maturity, interest is paid to them every month at the prescribed rates.

(9) Cash Certificate Scheme: -

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Many banks issue cash certificates to the depositors. This is a long-term deposit.

The principal and interest together will be paid at the maturity period. In case of need for

money, the depositor can obtain a loan on the basis of the Fixed Deposit or he may

encash it with appropriate discount.

(10) Housing Deposit Scheme: -

This is an arrangement by which the depositor has to pay a regular monthly

installment for a specified number of years, at the end of this period the banker pays back

not only principal but also an amount of loanas agreed upon. This loan is repayable in

easy installments.

(11) Amudha Surabi Deposit Scheme: -

This is a type of savings scheme for children. A box resembling a cow is given to

the children, who will save their pocket money in the box, the banker will open this when

the box is taken to the bank periodically for depositing the cash. After counting, the

amount would be credited; the guardian is allowed to withdraw the amount on behalf of

the minor child.

DEMAND DEPOSITS

(a) Saving Bank Account: -

As the name indicates, the purpose of opening a savings bank account is to save

money to meet the future contingencies. A person is allowed to open a savings bank

account provided he is properly introduced. The customer is expected to maintain a

minimum balance of rs-20/- in his account. Nowadays, any savings bank account holder

who agrees to maintain a minimum balance of Rs-500/- in his account may make use of

the cheque facilities. The interest is allowed at the rate of 5% on the minimum balance as

in the case of any date as stipulated and the last day of each calendar month. The rate

allowed on savings bank account is 5% p.a. there are some restrictions relating to the

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number and amount of withdrawals. The number of withdrawals are generally restricted

100 per year and the total amount of withdrawals at any time should not exceed Rs-10000

or 10% of the balance whichever is higher. But if he wants to withdrawal large sum, he

should give prior notice to the banker.

Saving Bank Accounts are usually opened in the name of individuals. No saving

bank account is opened for a trading company or a business concern whether such a

concern is a proprietory concern, partnership firm, a company or association.

Nowadays, a banker facilitates the collection of cheques drawn in the name of the

customer through the savings bank account. However, he does not collect third party

cheques. A third party cheque is one, which is drawn in the name of a person other than

the customer.

Saving Account for NRIs:

For that we should understand who is NRI (Non-Resident Indian)

As per the Foreign Exchange Regulation Act of Reserve Bank of India, NRI

means an individual being a citizen of India or a person of Indian resident outside India.

(a) Person is deemed to be of Indian origin if person had at any time held Indian

passport.

(b) He or either of his parents or any of his grand parents was a citizen of India.

(c) A spouse of a person other than of a National of Pakistan or Bangladesh shall also

deemed to be a person of Indian origin. In other words, the Indian person those who

stay abroad for employment or for business or any other purpose for indefinite period

of stay outside India and Indian citizens who are working abroad on assignment with

foreign ship/international agencies or assignment with foreign

Government/Government agencies shall deemed to be a NRI. Normally no person

other than Indian is allowed to open Bank Account with Banks in India, without

specific permission from RBI. However, NRIS are permitted to open their Saving

Account with banks in India as well as abroad. NRIs are allowed to open Savings

Account as under:

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NRO Account (Ordinary Non Resident Account):

NROaccount can be opened by NRIs jointly with the resident Indians who are

close relations. The resident Indian can operate NRO account freely. The NRO account

can be Current Account also a Term Deposit Account or Saving Bank Account.

NRO account can be opened by an Indian national or person of Indian origin

while leaving for a foreign country with the intention of becoming a non-resident. His

bank account in India will be designated as NRO account. NRO account can be opened

by NRIs during their visit to India without prior permission reference to RBI in their

name with initial deposit for opening such account is received by either from remittance

abroad or out of the foreign exchange brought by NRIs during their visit or by transfer of

funds from existing NRE account. In some cases bank may allow opening of NRO

Account from local funds provided bank is satisfied that funds are eligible for credit to

the account.

NRE Account (Non-Resident External Rupee Account)

Banks who are authorized to deal in foreign exchange are permitted to freely open

NRE Account with remittance received from abroad in the approved manner from the

country of residence. NRE Account can be opened jointly with Indian national subject to

prior approval of RBI. NRE Account can also be opened with travellers cheques or

foreign currency notes bought by him during his visit to India. NRE Account can be

opened with two or more Non-Residents of his country. NRE Account cannot be opened

with Indian persons/relatives. With specific terms and conditions. NRE Accounts can be

opened in the form of Saving Bank Account, Current Account or Term Deposit Account.

Transfer of funds from one NRE Account to another NRE Account, to Indian Account or

NRO Account is permitted. However no transfer of funds from ordinary Indian Account

or NRO Account to NRE Account is permitted.

FCNR Account (Foreign Currency Non Resident Account)

FCNR Account is in the form of Fixed Deposit denominated in four designated

currencies US Dollars, UK Sterling, Japanese Yen or Deutsche Marks (DM). These

accounts can be opened with specially designated branch of the banks in India. The

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minimum period of a deposit is six months and maximum is three years. FCNR Account

is required to be opened with funds remitted from abroad or transfer of funds from his

NRE Account. NRIs of bilateral countries are not permitted to open FCNR Account. The

remittance received from abroad in currency other than four designated countries

mentioned above will require to be converted in any of the above-mentioned four

designated currencies.

(b) Current Account: -

A businessman for the purpose of his business normally opens a current account.

He should always maintain such minimum balance in the account. A banker should be

doubly cautious to get an introduction letter from the customer at the time of opening

such account. He should also see that such introductory letters are verified, due to the

following reasons: -

(1) The RBI has given a direction that the prospective customers should produce

Introductory letter at the time of opening the account;

(2) The banker should ascertain the bonafides of the customer;

(3) Since third party cheques are collected through the account, there is a chance

for fraud by unscrupulous elements;

(4) Since overdraft and cash credit facilities are available, the banker should not

be exploited by an unscrupulous customer.

In a current account the banker is obliged to honour the cheques drawn on him if

there is sufficient balance to his credit. One of the peculiar features of the current account

is that the banker does not allow any interest on the deposits whatever the balance is.

However, if the customer overdraws the account he may have to pay interest to the

banker. Overdraft may be granted for a temporary period of one moth or more depending

upon the requirements of a customer. Cash credit facility is also available in the current

account. Bankers allow certain special facilities such as free collection of outstation

cheques, issue of demand drafts and mail transfers without any extra charges.

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LENDING OF FUNDS

A shrewd banker should be able to employ his funds profitably. He should lend

the deposit to others, keeping in mind the principles of lending viz. Safety, liquidity and

profitability

Methods of lending: -

(a) Overdraft:-

Overdraft is an arrangement whereby the banker under prior arrangement and

request allows a customer to overdraw his current account. Generally, this system is

resorted to in case of temporary accommodation needed by individual customer or

personal segment customer. The facility is repayable on demand and is determined by the

arrangement arrived at between banker and customer. Overdraft may be clean or secured

depending on the banks relationship with the customer. It is perhaps quickest and easiest

method of granting an advance. Generally this systems not favoured for other advances.

Overdraft are granted against Govt. securities, shares, debentures, banks own term

deposit receipts, life insurance policies, etc. While clean overdraft does not require any

documents.

(b) Cash Credit: -

This is most popular system of financing loans for the purposes of meeting

working capital needs. This is a short-term finance, which is repayable on demand. The

customer withdraws funds when he needs the funds and deposits cash left with him or

sales realisation in his cash credit account. The cash credit facility is continuing one

where loan gets repaid with every production cycle viz. From cash to raw material to

finish goods, finish goods to bills and bills to cash. Since cash credits are repayable on

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demand there is no fixed installment towards repayment. In effect, therefore, cash credit

accounts continue for longer period. However, these accounts are reviewed every year

by the bank and decision on continuation of or otherwise of the cash credit is taken. In

case any of the stipulation of loan is not followed or if there is any breach of agreement

bank can call up the advance and call upon the party to repay entire loan at short notice.

Under the cash credit system level of advance or maximum limit up to which a

unit can draw is determined based on level of activity of the borrowing unit. The limit so

fixed is available to borrower subject to availability of adequate security to cover the loan

after complying with the margin requirements. The customer is required to regulate his

drawings in accordance with the terms and conditions of sanction and the banker on his

part satisfies that everything is alright by calling periodical statements from the borrower

and by monitoring the loan account and movement of funds.

(c) Discounting Of Bill of Exchange: -

This is one of the familiar methods of granting short-term loans to businessmen.

In the case of a credit sale, the buyer or his bank may accept the bill. The holder may

discount the bill before the due date. The banker will present the bill to the acceptor on

the due date and collect the amount. In case the acceptor fails to pay, the banker will debit

the customers account.

For e.g. in a particular transaction company A supplies goods to company B.

Company B accepts the goods, also accepts the bill of company A and agrees to pay

after specified credit period. However, A requires money immediately. He approaches a

banker who pays him up front against that accepted bill. Banker does not pay him full

amount but adjusts its interest payment for the value and period and pays A. This is

called, as banker discounts the bill. This is a fund-based facility as banker actually pays

up front. Supplier has to get prior limit set for such bill discounting facility. Discounting

may be done either by suppliers banker or purchasers banker. It is diagrammatically

represented as follow:

Goods supplied accepts bills

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Pays

Up front pays after credit period

Bankers earns interest

(d) Loans and Advances: -

The banker may grant advances to the customer on the basis of certain securities

as cover for advances made by them. There are different types of advances provided by

bank such as, trust receipt, term lending, export finance etc.

Packing credit is an advance, which is made by the banks at the pre-shipment

stage for financing an exporter customer. Under this scheme, the banker sanctions facility

to the exporter to purchase raw materials for processing and for packing it, thus making

the goods ready for export. This type of facility is granted generally against an

irrevocable letter of credit opened by the foreign buyers in favour of the Indian supplier

or against firm contracts of the foreign buyer. The packing credit advance is generally

allowed for a period of 90 days within which period the exporter is expected to

manufacture and ship the goods.

Trust Receipt: when the goods are received under an import licence it is often

found that the importer either does not have funds or he has to deliver those goods

immediately to the consumer and would pay to the bank after receiving money from the

consumer. The bank releases the goods against execution of a trust receipt by the party in

favour of the bank. It is a sort of clean advance and the borrower gives an undertaking to

the effect that he is holding the goods released under Trust Receipt in trust for the bank

and will be dealing in them on behalf of the bank. The duration of trust receipt would be

thirty to sixty days and in some cases, ninety days. During the said period, the party deals

with the goods, receives the money and immediately on receipt of the money, pays the

same into the trust receipt account. Such a facility is granted only to valued and honest

clients, as it is a clean advance.

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Term lending means giving an advance, which is not repayable on demand but is

repayable over a period of time. Term loans are basically meant for financing part of the

capital costs of the projects, the fixed assets which are acquired out of share holding or

Directors contribution. Term loans available from various financial institutions help the

promoter to carry on its manufacturing activities, earning profits and out of such profits

so generated repay the liability under the term loans. Fixed assets are offered as security

by way of different types of mortgage for granting such advances.

Against such type of advances banker requires security cover. Which are

explained below.

Advances against Banks own Fixed Deposit Receipt:

This is perhaps a scheme, which has been gaining a lot of popularity in recent

times. Schemes like Your Own Money, Unfixed Deposit, Cash Key and other brand

names adopted by the banks are a few examples where the facility of an advance is made

available against the Fixed Deposit Receipt on the opening of the deposit account. Even

otherwise, banks freely advance to their customers a loan against their own Fixed Deposit

Receipts. This was so because it helped the bank to retain its own deposits and at the

same time, provide a measure of liquidity to tide over the immediate needs of their

customers.

Since the fixed deposit is issued by the same bank, it forms a good security as the

issuing bank can earmark a lien against it. As per RBIs directives, the amount of advance

cannot exceed 75% of the face value pays the accrued interest, banks charge interest at

2% more than the rate of interest applicable to the fixed deposit. In case of borrowings by

a company, the rate of interest chargeable would be the rate applicable to their other

borrowal account from the bank.

Life Insurance Policies:

Life insurance policies are generally accepted by banks as security for advances

granted to individual borrowers if the policies are in their personal names. Among the

policies, endowment policies are very popular. Generally, banks do not grant advances

against whole life policies or against a policy taken under the Married Womens Property

Act, as such a policy creates a trust in favour of the married woman and it cannot be

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validly assigned to the bank. Another advantage of granting loans against insurance

policies is that so long as the policy is in force by the regular payment of premia, the

banks position becomes secure as the security appreciates in value and its surrender

value goes up. Surrender Value is the amount which becomes payable by the insurance

company to the insured in the event of the foreclosure of the policy. Thus, the banks have

very little to worry about the repayment of advance. However, the capacity of the

borrower to repay the loan in monthly installment is the main consideration before the

bank.

Government Securities:

All securities issued by the Central and State Government fall under this category.

They are administered under the Public Debt Act, 1944 by the RBI, Treasuries and Sub-

Treasuries, SBI and other nationalised banks. The different types of securities that we

come across are:

Government Promissory Notes:

They undertake to pay a certain sum of money to or to the order of a specified

person, on a specified date with interest stipulated on the bond. In some cases, interest

may be stipulated, payable after a stated period if the bond is not cumulative. These notes

are transferable by endorsement made in the cages printed on the reverse. Since they are

non-negotiable instruments, the person taking them will take with him all the defects of

the transferor. But the title would become clean once the GP Note is renewed. GP Notes

can also be renewed and fresh ones can be obtained from the Public debt Office of the

RBI if they are torn, mutilated or destroyed or the cages have been exhausted.

Stock Certificates:

The Public Debt Office (PDO) issues a certificate to the holder of a certain

number of stock entitling him to be the owner thereof. The terms of issue, date of

maturity, rate of interest, etc. are indicated on the certificate. The ownership of the sock

certificate vests in the person by virtue of his name being registered in the PDO. Thus, a

transfer requires registration with the PDO. Since the transfer is done on the stock itself,

no stamp duty is payable thereon. Stocks are an ideal security for advances by banks

since they are safe and the custody of the stocks remains with the banks.

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Bearer Bonds:

In this type of securities, the bearer of the bond is entitled to payment on maturity.

The date of repayment is indicated on the bond itself and interest coupons are attached to

it for facilitating payment of interest. The coupons are to be sent to the PDO for claiming

interest. These bonds are not very popular with the public.

Advances against Stock Exchange Securities:

These represent shares and debentures issued by companies registered under the

Companies Act, 1956. These are actively traded on the stock exchanges and their values

can be ascertained by referring to the prices quoted in the newspapers on a daily basis.

Advance against share by banks has been one of the traditional avenues of

employment of funds. Banks grant such advances to persons of good standing and

integrity.

Various other kinds of collateral securities are offered to a bank by its customers

as cover for loans and advances, which are explained below: -

Hypothecation: - under this mode of security, the banks provide credit to

borrowers against the security of movable property, usually inventory of goods. The

goods hypothecated, however, continue to be in the possession of the owner of these

goods. The rights of the lending bank depend upon the terms of the contract between the

borrower and the lender. Although the bank does not have physical possession of the

goods, it has the legal right to sell the goods to realise the outstanding loan.

Hypothecation facility is normally not available to new borrowers.

Pledge: - pledge, as a mode of security, is different from hypothecation in that in

the former, the goods which are offered as security are transferred to the physical

possession of the lender. An essential prerequisite of pledge, therefore, is that the goods

are in the custody of the bank. The borrower who offers the security is called a pawnor

(pledgor), while the bank is called the pawnee (pledge). The lodging of the goods by the

pledgor to the pledge is a kind of bailment. Therefore, pledge creates some liabilities for

the bank. It must take reasonable care of goods pledged with it. The term reasonable

care means care, which a prudent person would take to protect his property. He would be

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responsible for any loss or damage if he uses the pledged goods for his own purposes. In

case of non-payment of the loans, the bank enjoys the right of sell the goods.

Lien: - the term Lien refers to the right of a party to retain goods belonging to

another party until a debt due to him is paid. Lien can be of two types: Particular Lien

and General Lien. Particular Lien is a right to retain goods until a claim pertaining to

these goods is fully paid. On the other hand, General Lien can be applied till all dues of

the claimant are paid. Banks usually enjoys General Lien.

Mortgage: - it is the transfer of a legal/equitable interest in specific immovable

property for securing the payment of debt. The person who parts with the interest in the

property is called mortgagor and the bank in whose favour the transfer takes place is the

mortgagee. The instrument of transfer is called the mortgage deed. Mortgage is, thus,

conveyance of interest in the mortgaged property. The mortgage interest in the property is

terminated as soon as the debt is paid.

(e) Letter of Credit:

This can be explained with the help of example. If supplier X is supplying goods

to Buyer Y, buyer Y would wish to get credit from X. X does not have his regular supply

to Y and hence perhaps does not have enough comfort to extend credit to Y. In such case

banker of Y may come forward to guarantee payments to X on behalf of Y. Since the

payments are guaranteed by a bank, X would not hesitate to extend credit to Y.

The diagrammatic representation of above would make the concept clear.

Goods Supplied

Letter of Credit

Payment guaranteed on behalf of Y

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X Y

Banker


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( f ) Export Finance:

Export of goods and services are considered most important segment of economic

activities. The performance and success of export trade, therefore, depend to a large

extent on the availability of finance and cost of credit. In India, exports have been given

top priority in allocation of credit. Commercial banks are the major source of finance for

exports. Banks provide various types of credit facilities to ensure that they can meet all

the requirements of exporters.

Commercial Banks provide following types of credit to exporters:

(1) Pre-shipment Credit or Packing Credit:

The pre-shipment credit is provided before the shipment of goods for exports.

Before shipment of goods, exporters need finance for purchasing raw material etc. in

domestic markets or even in international markets for manufacturing of goods for

exports. Usually, pre-shipment credit is given credit against firm export orders. In some

cases, where there is continuous flow of orders for exports or exporters have to procure

materials in advance or during particular season etc. banks provide packing credit even

without firm export order depending upon the performance of the exporters in the past.

Usually pre-shipment finance is provided for 180 days or six months at concessional

interest rate. In some type of exports where the manufacturing of goods takes more than

six months, banks provide pre-shipment credit is liquidated through the sanction of post-

shipment credit.

(2) Post-shipment Credit:

At the time of shipment of credit, pre-shipment credit is liquidated and exporters

are provided credit against export bills in the form of post-shipment credit. Post-shipment

credit is usually given against the bills accepted by the importers or export bills. In case

of Usance Bills, concessional credit is provided up to 90 days and higher interest rate is

charged for the period beyond six months.

(3) Credit against Duty Drawback:

Government provides incentives to exporters in the form of exemption of export

goods from various taxes and duties imposed on goods. In many cases, exporters have to

pay taxes and duties initially on goods manufactured for exports and thereafter; they have

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to claim refunds from government. As refund of taxes take sometime, exporters need

some financial support. Therefore, banks provide credit against such duty drawbacks.

(4) Export Credit in Foreign Currency:

Usually exporters are provided credit in domestic currency i.e. Indian rupee.

When exporters receive export proceeds in foreign currency, they sell the foreign

currency to banks and liquidate their export credit. Now, exporters have been given

option that they can get export credit in Indian rupee or in Foreign Currency. In case of

export credit in foreign currency, bank charge interest rates related to LIBOR i.e. London

Inter-Bank Overnight Rates. Exporters, who prefer to have export credit in foreign

currency, they have to repay their outstanding export credit in foreign currency. Under

this facility exporters get export credit at international interest rates. However, exporters

would not get the advantage of any depreciation of rupee in exchange market.

(5) Interest Rates on Export Credit:

As mentioned earlier export credit is provided at concessional interest rates.

However, the benefit of concessional interest rate is given only for a limited period. If the

exporters delay in the remittances of export proceeds, banks charge higher interest rate

and even penal interest rate.

AGENCY SERVICES

In order to facilitate the customers, the banks accept standing instructions from

their customers either to make payments on their behalf or collect money or effect

transfer of money. The relationship between the banker and customer, in this case, is that

of principal and agent. The customer directs the banker as to what he should do. The

banker acts according to his direction. In case of any loss, the customer alone will bear

this as his directions are carries out by the banker. The banker will charge the customer

for doing such services. Some of the agency functions are as follows:

(a) The banker pays rent, insurance premium, subscription etc. on behalf of the customer

as per his prior instructions on the appropriate dates. The payment will be made from

the customers account.

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(b) In the same way the bank undertakes to collect such income on behalf of the

customer.

(c) The banker also collects cheques/bills etc. on behalf of the customer.

(d) In India, we do not have banks exclusively dealing in foreign exchange. The

commercial banks, in addition to their normal functions, undertake the business in

foreign exchange. They buy and sell foreign exchange currencies as per the

regulations. They also discount the foreign exchange bills.

(e) The financial stability of the bank and complete confidence of the customers, dealing

with it has made the bank a natural and trusted friend for undertaking executorship

and trusteeship. In addition to this, an increasing reluctance of customers to trust

individuals, combined with insufficient knowledge of law on their part has led

commercial banks to act as trustees/executors to their customers. As a trustee, the

banker takes care of the management trust and administers the trust funds effectively.

The functions undertaken under the executor/trustee services are as follows:

To handle the investments/estates during the life time of the owner; and distribute

them according to the terms of the will after his death; To manage the property during

the owners life time and after his death on behalf of his dependants through their life

time or till such property is distributed/ applied according to the instructions of the

deceased; To manage movables and also act as a guardian of a minors property;

Guide customers in filing estate duty returns and appear before Estate Duty

Authorities when called upon to do so; Administration of public trusts; Acting as

trustees for debentureholders.

GENERAL UTILITY SERVICES

A number of incidental functions are carried on by the commercial banks to help

his customers.

(1) Safe Custody of valuables:

One of the important services which a bank renders to his customers is that of

keeping valuables of customers is that of keeping valuables of customers in safe custody

including jewellery, share certificates, insurance policy, title deeds, gold ornaments, will

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etc. while banker accepts anything for safe custody he accepts them under duly sealed

box, and banker passes receipt for such deposits. The safe deposit receipt has to be

returned duly discharged when the banker redelivers the boxed/pocket. The relationship

between banker and customer is that of a bailor and bailee. The contract entered into is a

contract of Bailment. In present day banking, bankers are offering locker facility, which

is superior, and hence becoming popular. However, at centres where locker facility is still

not available the articles in safe custody is a service of great value to customers.

Under this facility, bankers responsibility is higher, because if there is any

damage to property bailed he would be responsible. This facility is used by bankers

themselves to deposit their branch duplicate keys in some other bank/branch. In the

event of any loss of keys or other problem, the duplicate keys can be withdrawn to ensure

smooth functioning of the branch.

The articles in safe custody facility is utilised by the people for depositing their

will, their last wish as to how to deal with their property.

Except in States of MP and UP in all other states probate or letters of

administration will be necessary to deliver the articles.

(2) Safe Deposit Locker Facilities:

Many banks offer safe deposit locker facility. Under the arrangement, a customer

hires a locker cabinet, which is kept by the bank for the purpose. Lockers are generally

kept in strong room, which is a water proof/ fireproof place. There are different sizes of

lockers like small, medium, large and extra large, etc. The locker rent is recovered for a

year in advance and depends on the size of the locker.

A locker hirer has to sign an agreement on Rs-10/- stamp paper with the bank.

Thereafter, a locker is allotted to him. The locker has two keys. The master key is kept

by the bank whereas the other key is given to the customer. There is no duplicate key

available for the customer. In case, it is lost, the locker has to be broken open at the cost

of the customer.

The locker is a most essential facility in cities and urban places and even in

villages for safe keeping of valuables. The locker system is superior to safe custody

system because customer can keep anything the customer chooses to keep, he need not

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inform banker about the contents. It can be operated on locker, no need to seal, pack the

contents etc. the charges are very nominal. Small locker with SBI costs Rs-100/- per

annum.

A locker can be opened jointly and access to the locker can be had by either of

the joint account holder.

If there is defaults in payment of locker, persistently, say more than 3 years, then

bank can give notice to locker hirer and if he does not respond, with due notice break

open the locker in presence of witnesses. The banker is at liberty to recover its locker rent

from the proceeds of contents. The relationship of the banker and customer in the safe

deposit locker is that of licensor and licensee.

While surrendering the locker, the original locker holder has to come personally

to surrender the key.

At the time of allowing access to the locker, the hirer has to sign access register

his signature is verified and thereafter access to locker is allowed.

(3) Transfer of Money:

Money may be transferred from one place to other through the bank in the

following ways.

The customer may purchase a bank draft drawn in favour of the payee. The

procedure for purchasing a draft from the bank is a simple one. A form for obtaining a

draft should be filled in by entering the required particulars. The amount payable to the

payee along with the commission should be paid into the bank account. The banker will

issue a bank draft in the name of the payee. A bank draft is nothing but a cheque issued

by one banker ordering the other branch of his bank to pay the specified sum of money to

the payee mentioned therein. The customer can send this by registered post to the payee

who can collect the draft through his account or collect cash if it is not crossed in the

respective branch.

(4) Mail Transfer and Telegraphic Transfer:

The customer can transfer funds from one place to another through mail transfer

or telegraphic transfer. Mail transfer is a method by which the customer requests his

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banker to transfer a portion of the balance in his account to the payees account, kept in a

different place in the same bank for a nominal commission. After receiving the

customers instruction the banker arranges to send an advice to the concerned bank

manager, through mail, asking him to credit the account of the payee with certain amount

as instructed by his customer.

In the case of telegraphic transfer, the banker in one place advises the other bank

manager by a telegram to credit the account of a specified customer on the other end with

the necessary funds. Hence, the transfer is made and such telegraphic transfer enables the

payee to make use of such funds within a short time.

(5) Rupee Travellers cheque:

Various banks have introduced the system of issuance of Rupee Traveller Cheque

to serve customer as also to get float fund. It helps in minimizing the risk of carrying cash

by people while travelling. American Express Company was the first to issue travellers

cheques. The RTCs are issued in the denominations of Rs-100/-, Rs-200/-, Rs-500/- and

Rs-1000/-. The validity period of RTCs with different denomination causes

inconvenience to the prospective purchaser and may result in diversion of business

usually buffer stock is maintained by the branches. The facility of immediate supply of

RTCs in required denomination results in projecting the image of the bank. In view of

low float funds, expenses on account of handling cost, overheads, cost of stationery and

printing, etc. nominal service charges are levied on the sale of RTCs.

The Rupee Traveller Cheques are popular instruments as these are accepted at

banks, hotels, airports, petrol pumps, and departmental stores without identification by

simply putting the signature on the travellers cheque. Rupee Travellers Cheques issued

by one bank can be encashed with other bank when such arrangement is made.

(6) Acting as Referees:

When a seller intends to sell his goods to an unknown buyer, he may do so only

after knowing the financial standing of the buyer. In this case, the buyer would request

his bank to reveal his financial standing when an enquiry is made by the seller. The bank

may respond to such an enquiry only with the customers consent.

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(7) Merchant Banking:

Some commercial banks have also started Merchant Banking Division in order to

assist new industries to obtain various types of information and plan out their

promotional activities. The banks assist the promoters to obtain technical data relating to

feasibility, market demand and other relevant information. Banks also underwrite shares

and debentures of companies

During the recent past, the needs of the individuals for services of banking-

investment has grown. In order to meet needs of the individuals and corporate sector in

the year 1949, section 19 of Banking Company Act was enacted and now a banking

company is permitted to establish a subsidiary company for the purpose of undertaking of

such other business which the RBI may consider to be conducive to the spread of banking

in India or to be otherwise useful or necessary in public interest.

With the growing needs of the individuals and corporate bodies, banks have

thought of establishing their subsidiaries and diversify their activities. SBI and Canara

Bank were pioneer in establishing Merchant Banking first in the bank as a special

department.

At the end of June 1996, 11 subsidiaries were set up by the banks in the field of

equipment leasing, hire purchase cum merchant banking business and 8 subsidiaries in

Housing Finance. The main activities of the Merchant Banking:

The merchant banking subsidiaries assist the entrepreneurs in formulating their

project and offer services like selection of appropriate technology, project report

preparation, market surveying, advise on financing pattern, assistance in obtaining

various Government Approval. Merchant bankers act as trustees on behalf of debenture

holders when company issue secured debentures.

The merchant bankers manages the portfolio on behalf of their corporate, non-

corporate clients, sales and purchases of securities and provide market intelligence

advisory services to them they provide on lease all types of industrial and non-industrial

equipements.

(8) Teller system:

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The reputation of the bank depends on its ability to satisfy the customers at the

counter. Acceptance of cash and payment of cheques are the two important services at the

counter. The customer feels irritated if he is made to wait for a long time either at the time

of deposit or withdrawal of cash. Some banks have even put up a notice at the bank

assuring their customers that the cheques could be encashed within a specified time.

However, it is often felt that the waiting time at the counter is longer and should be

reduced. In order to minimize the waiting time of the customers, the Teller System has

been introduced. Under this system, the teller examines the cheques presented to him and

pays the cheques to the holders on identification. In case of doubt, he may refer to the

records. Some banks allot codes on cheque forms based on the creditworthiness of the

account-holders. In case of doubt about the balance in the customers account, the teller

may direct the presenter to the accounts counter where the cheque will be dealt with.

The teller combines himself the twin functions of passing the cheque and paying

the cash. Many banks have fixed a ceiling on the amount of the cheque paid by the bank.

(9) Automatic Teller Machine:

Automatic Teller Machine is an important introduction for better customer service

from the year 1990. With the opening up of trade business and Indian economy many

facilities which were being enjoyed by the users in Western countries have been provided

first by the foreign banks like Citi Bank, Grindlays Bank and now by many private and

public sector banks in India.

In order to provide better customer services and sometimes vesting energy and

ordeal in waiting in long queues for depositing money in bank account and making

withdrawal from his bank account, Teller System was introduced, whereby a special

Receipt-Payment counter was opened and a Teller was authorised to accept cash up to

Rs-5000/- and make payment up to Rs-2000/- to the personal account holder. To meet

ever-increasing demand of efficient and finest services some of the foreign banks have

introduced ATM instead of manning Teller Counters as their banking transactions have

been computerized by them. Thus ATM is Mechanised Teller System for making payment

and deposits of cash. It has replaced manual operations.

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A customer has been given a plastic-metal card, which contain chip-a magnetic

strip, which is required to be inserted in a Teller Machine, which decode the code

number. Customer has been given a specific code number for his identity. For operation

he uses his designated code number by pressing keys on the machine upon which he can

be permitted to

(a) Withdraw cash up to the specific limit- say Rs-2000/-, Rs-5000/- in multiples of

Rs-10/- or Rs-50/- or Rs-100/- in round sum amount.

(b) Deposit cash in his account in round sum amount.

(c) Deposit cheques in his account.

The machine is loaded by adequate quantity of cash in various denominations in

multiples say Rs-10/-. Customers can withdraw cash after the identification process by

pressing button and cash comes out. As the teller computer machine is linked with a

computer, the operation of withdrawal or deposit is automatically get posted in his

account and transaction slips comes out from the Teller Machine which is a record for

customer towards the transaction made by him. Computer slip furnishes the details of

opening balance, type of transaction made and the balance in the account. Thus all

functions of counting of cash, effecting payment to the customer, receiving of cash from

the customer, debit or credit posting and accounting work, issue of transaction slip in

token of withdrawal/deposit of cash and more so advising the balance in the account is

done by the machine.

(10) Various types of Cards:

Following types of cards are available in India:

Credit Card:

The credit card is an instrument, which enables the cardholder to obtain goods or

services from shops and establishments where arrangements have been made by issuing

bank to reimburse them. The goods and services are bought by the cardholders from

shops and establishments upon presentation of card instead of cash or cheque for

settlement of their bills up of specified amount fixed the card-issuing bank. Such bills are

sent for settlement by the shops and establishments to the card-issuing bank, monthly or

periodically for obtaining reimbursement. Card issuing bank upon receipt of such bills

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from shops and establishments for reimbursement settle it by debiting the customers

account. Thus cardholder gets credit for 30 to 45 days free of cost.

Cash Card:

Certain banks issue Cash Cards in addition to Credit Card which enable holder of

card to draw certain amount of cash from the branch office, of the card issuing bank or

now from ATM installed by the bank at various places.

Smart Card:

This type of cards are also known as Chip Card. With the increasing computerized

network, banks extend the Chip Card facilities to the select customers. The Smart Card

is a microcomputer chip giving its intelligence and a memory capacity much more

than usual magnetic cards. Smart card has much computing power of Personal

Computers. It has storage capacity of all types of personal data of the cardholder.

Smart Card can be used with a Personal Identification Number (PIN). The Smart Card

can be programmed to do any task within its processing power and memory capacity.

It is a Data Carrier Identity Card and also meant for using for monetary transactions

like payment of hotel bills, electricity bills.

Co-Branded Cards:

This type of credit cards are those which banks promotes jointly with another

financial agencies, like Master Card, BOB Card, Diners Card, Taj Card, Bank of India

BOI Card. These types of Cards are used with other non-financial institutions, which

enables the cardholder to claim discount in price for the use of card.

Debit Card:

Debit Card is also known as a Payment Card used to obtain cash, goods and

services automatically debiting the payments to the cardholders bank account

immediately.

Charge Card:

Charge Card is a type of card in which card holder is required to settle the

outstanding in full at the end of a short period within 25-30 days to the extent of certain

amount say Rs-5000/- to Rs-10000/- at one time.

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(11) Gift Cheques:

The gift cheques are issued by the commercial banks in different denomination

like Rs-11/-, Rs-21/-, Rs-51/-, Rs-101/-, Rs-201/-, Rs-501/-, etc. to facilitate their

customers to make presents to their relatives and friends on important occasions like

marriage, birthdays, religious and other festival days, etc. No interest on these deposits is

payable these are encashable on demand. The eligibility for prizes has been withdrawn

with effect from 1.1.77 in the light of Ground Rules and Code of Ethics for deposit

mobilization prescribed by the Indian Banks Association. Gift cheque is payable to order.

The cheque is payable to the payee or endorsee or to their bankers who should certify that

the amount has been placed to their credit. Gift cheques will be encashable at the branch

of issue but can be negotiated at par at all the branches of the bank. The payment being

made in cash upon establishment of the beneficiaries identity. Gift cheques can be freely

issued for presentation to infants and minors and such cheques can be paid by crediting

the accounts of natural or legal guardians. Thus this scheme may not be very

remunerative for the banks, but it is a service to customers and helps in building image.

(12) Collection and payment of pension:

The bank offer services for collecting and payment of pension from the paying

authority or other banks, which are authorised to effect payment of the pension. Similarly,

as per the amounts, banks are paying the pension by crediting the amount on every month

in the beneficiaries account. For the above purpose the beneficiaries are required to

authorise the bank to collect the pension regularly and credit the payment in his account.

The banker while accepting the pension on every month ensure regularly the

living condition of the pensioner. He should be called every month or at least a valid

certificate of life should be obtained.

(13) Mutual Funds:

The concept of mutual funds is to pool the resources of a group of persons for

purposed of investment in securities to achieve growth and higher yield. In order to

achieve the above, they employ funds managers who judiciously employ the funds in

stocks and securities. In India, the Unit Trust of India introduced the first mutual fund.

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Thereafter, there was no other mutual fund till the late eighties. The SBI started the

second mutual fund, closely followed by Canara Bank, PNB and LIC. These mutual

funds float in the market. Growth oriented schemes, which are either open-ended or

close-ended, and the rate of return is fixed or floating. The mutual funds growth has, in

fact, affected the growth of banks deposits in view of the higher rates of returns offered

by the mutual funds. Although at present, the mutual funds are in the public sector, the

Government is considering the question of permitting the private sector to float mutual

funds.

Innovations Introduced by the Commercial Banks in their Banking Operations:

Indian banking system has well developed over the last five decades. Indian

banking system is considered one of the best systems in emerging economies. After

nationalisation of major Indian scheduled commercial banks in July 1969, Indian banks

were assigned higher responsibility in the planned development particularly the

alleviation of poverty through the extension of credit support and geographical expansion

of bank branches network. At the time of nationalisation of banks in 1969, total number

of banks branches were about 8000. These branches were mostly located in urban and

metropolitan areas. The number of branches in rural areas was negligible. Therefore, this

first priority assigned to banks in post nationalisation was to expand banking activities in

rural areas to meet the growing requirements of agricultural sector and allied activities.

As a result of new thrust in banking system, today the number of bank branches have

crossed the number of 60,000 branches. Further, at the time of nationalisation of banks,

the share of bank credit to agricultural sector and other weaker section of the society was

only 2% of total bank advances. As a result, the thrust of bank lending was given on

lending to priority sector and weaker sections of society. Initially banks were advised to

achieve the target of 331/3% of total bank advances. In 1985, the ratio of lending to

priority sector was raised to 40%. Today banks are required to lend at least 40% of their

advances to priority sector.

Further, banks were assigned to achieve sub-targets under the priority sector to

ensure that the directed flow of credit goes to particular sectors like agriculture, small

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scale industries, lending under differential interest rates, housing, exports, etc. As a result

of this strategy, there was an accelerated flow of credit to thrust areas. For achieving the

target set by the RBI, banks were required to adopt innovative banking practices. Initially

banks adopted following innovative measures to ensure flow of credit to thrust areas:

(1) Credit camps:

Banks organized credit camps in different areas to identify potential borrowers

and disburse the credit expeditiously. This system was good to disburse the credit to

weaker sections and thrust areas. However, credit camps affected the quality of lending.

As a result, credit was given to many undeserving borrowers. Hence, this system resulted

in poor recovery and banks were affected by overdues and non-performing assets. Now,

the system of Credit Camps has been discontinued.

(2) Schematic Lending:

Banks were advised to adopt schematic lending for priority sectors. Banks,

accordingly, prepared schemes for lending to various thrust areas through formulation of

viable schemes.

(3) Lead scheme:

The RBI started a lead scheme under which districts were assigned to different

banks. Lead Banks were advised to prepare credit plan for the district after making

assessment of the developmental potentialities of the district. Under the Lead Bank

Scheme, the lead bank has responsibility for coordination among all banks and financial

institutions in the district.

(4) Service Areas Approach:

In order to assign the responsibility of ensuring flow of credit in a particular area,

a new method called Service Area Approach was introduced. Under the SAA, a

particular branch of a commercial bank is assigned certain areas viz. 15-16 villages and

the particular branch was required to coordinate with other banks in the area.

(5) Differential Interest Rate Scheme:

Banks required to extend credit to very poor people who are below the poverty

line at concessional interest rate of 4%. In order to ensure that banks make adequate

lending under DIR scheme, a target of 1% bank advances has been fixed.

(6) Directed Lending:

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In order to provide credit to certain sectors of high priority, the RBI has adopted a

system of directed lending. Under this scheme, banks have to achieve certain minimum

targets. Directed credit is provided for sectors covered under priority sectors like

agriculture, small scale industries, housing, exports etc. at present banks have been

advised to lend at least 40% to priority sectors and 12% to exports. The RBI regularly

monitors the flow of credit to the directed sector and takes appropriate measures in case

of any default in meeting these targets.

Apart from these, banks have been adopting innovative methods for mobilization

of funds and lendings to become competitive in the globalised banking. Some of the

innovative systems are:

Mobilisation of deposits:

For mobilisation of deposits at competitive interest rates, banks are paying interest

on short-term deposits up to a period of 15 days. Further, banks have been offering

interest rate on deposits on the basis of size of deposits. Thus, the banks can offer higher

interest rates of large sized deposits. In order to help customers in deposit mobilisation,

some banks are even mobilising deposit on telephone from houses. Customers are,

therefore, not required to visit bank offices. Even within term deposits, banks are offering

flexibility to customers. As a result, in case of withdrawal of a part of term deposits,

customers do not have to loose entire interest on deposits.

Banks are also mobilising deposits through issue of certificates of deposit. The

certificates of deposits are a negotiable instrument and investors can transfer to others.

Similarly, banks are issuing stock invest to investors who want to invest in equities. In

case of stock invest, the depositors or investors continue to get interest on the amount

till the allotment of shares by the company.

Many banks have set up subsidiaries to undertake merchant banking, leasing and

hire purchase business. Some banks are setting up subsidiaries to take up securities

broking business. Some banks have issued credit cards, which brings good income to

banks on utilization of such card by customers.

Lending: Like deposit mobilisation, banks have developed many innovative

methods for lendings. Now days, security is not a prime consideration for lending. Banks

lend money directly and indirectly. For example, for housing purposes, banks lend

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directly to customers. Similarly, banks subscribe to bonds floated by Housing Finance

Companies, which are utilized for lending to houses. Similarly banks can lend directly to

farmers for electrification of wells or to State Electricity Boards or Rural Electrification

Corporation for lending funds for electrification.

At last we will focused on different services provided by one of public sector commercial

bank which is State Bank of India:

SBI Vishwa Yatra Foreign Travel Card :

The card can be issued to any bonafide citizen of India who plans to visit abroad

except Nepal and Bhutan.

The Corporate can purchase the card for their employees whom they plan to send

abroad for official. The Card can be purchased by the Parents/Sponsors of the students

going abroad for higher studies, in the students name and can be subsequently reloaded

up to the statutory ceiling prescribed from time to time.

SBI Vishwa Yatra Foreign Travel Card carries lost card liability upto a maximum

of Rs.2 lakhs. This protects the cardholder against misuse of the card, pre and post 48

hours from the time of receipt of the report regarding the loss/theft at SBI/VISA helpline.

In other words, any loss arising out of misuse of the card, which might have taken place

within the past 48 hours or within the subsequent 48 hours, from the time of reporting of

loss of the card, is insured. This insurance cover has been arranged with The New India

Assurance Company Limited (NIACL), the insurer. All claims will be payable by the

insurer directly, subject to their rules and regulations and the terms and conditions

contained in the master policy issued to State Bank of India (SBI). SBI shall have no

liability in respect thereof. Further, SBI will not be a party to any dispute between the

cardholder and the insurer. However, cardholders are expected to adopt all possible

precautions to avoid the chance of misuse.

SBI may, at any time (at its sole discretion) suspend, amend or cancel the benefit

of such insurance cover and there will be no binding obligation on SBI to continue this

benefit.

Travelers going abroad on leisure trip may find the card as most convenient as it

saves their precious time in locating authorized moneychangers and also from exchange

risk.

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The SBI Vishwa Yatra Card is a magnetic strip Pre-paid Card, which offers you a

convenient and secure way to carry cash. This prepaid dollar Card offers you the freedom

to shop anywhere in the world and provides access to the currency of your destination at

competitive market rates. Cash withdrawals can be made anytime with a pre-set Personal

Identification Number (PIN) at 850,000 Visa ATMs worldwide and usage of the Card for

purchases can be done at over 13 million Visa Electron merchant establishments

worldwide.

An individual don't need to have an account with SBI to purchase the SBI Vishwa

Yatra Card. Simply walk into any of our authorized SBI Branches in India and purchase a

SBI Vishwa Yatra Card over the counter.

The minimum purchase value of the SBI Vishwa Yatra Card is US$ 500 whereas,

The maximum value that can be carried on a Card at any given time is US$10,000.

Locker:

For the safety of customers valuables SBI offer their customers safe deposit vault

or locker facilities at a large number of their branches. There is a nominal annual charge,

which depends on the size of the locker and the centre in which the branch is located.

Telebanking:

This is a secure, fast & convenient way to obtain a range of services by using a

telephone without visiting the branch e.g. information on account, conduct of selected

transactions, report loss of ATM card, order a cheque book, draft etc.

What are the services available under "Telebanking"?

Online balance inquiry.

Details of transactions

1. Last five transactions

2. Transactions from a recent date

Request for service

1. Cheque book request

2. Funds transfer request

3. Drafts request

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Request for statement of account

1. From the date of last statement

2. From a specific date Change on PIN...etc.

The facility is protected with two level passwords in addition to the Customer's

account number, which is his login ID. The Customer should be careful to maintain

secrecy of his password & PIN number.

All individual customers in Personal segment except those whose accounts are

operated through joint signature and whose accounts are not running satisfactorily, can

avail the facility. Even the minors who are allowed to open and operate account can seek

to avail the facility.

The Customer is required to apply for the facility in the application form

prescribed for the purpose. After scrutiny, the Branch will register the name & allot the

PIN & Transaction password, which the Customer will change on his first log in for a

number of his choice. Presently the facility is available in select fully computerized

branches. The service is provided 'free of charge'.

What happens if one forgets his 'PIN' / Transaction password?

The customer has to re-apply by a simple letter. The Branch Manager after due scrutiny

will allot a new PIN & Transaction password. The facility is available for all Customers

having Savings/Current accounts in their individual capacity at the branches offering thefacility

What happens if ChequeBook delivered through 'Telebanking'? Can it fall in wrong

hands?

If the Bank gets the instruction to mail the chequebook, it will be couriered only at the

address registered with the Bank. Any misuse of the system can be averted if the

Customer ensures that the address and any change therein are correctly recorded with the

Bank. The customer may choose to collect the chequebook personally or through his

authorized representative.

How does the Customer benefit by availing the 'Telebanking' facility?

The customer can access information to his account and do a few transactions without

visiting the branch even when he is out of station, that too; around the clock. Thus, the

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facility carries with itself the advantages of convenience, economy and efficient time

management.

www.onlinesbi.com is the Internet banking service of the State Bank of India. India's

Premier Commercial Bank. Smart products for the smart customer.

If a person is customer of SBI Bank and if that Branch is e-enabled then he can

become an e-customer. All he need is Internet connectivity -Anywhere. And of course he

will also need to sign-up for Registration. Just download the application form and submit

it to SBI branch* after completing it. He will shortly receive his User-Id and Password.

As soon as he receives them then he has to log on to the www.onlinesbi.com and charge

his username and password. That's all. Simple, fast and convenient anytime-anywhere -

always open. Person can now check his account balances, view his account, request for

cheque book, drafts, Bankers cheques, stop cheque payment and issue standing

instructions. He can also transfer funds to his other accounts at the Branch, request for

third party transfers, invest and renew Term Deposits.

* Whether your Branch is e-enabled can be seen on the Branch locator on

www.onlinesbi.com

All this at no cost - It's free! And most important all transactions are secure.

General Information:

The www.onlinesbi.com registration form(s) should be addressed and sent directly to the

Branches where the applicant(s) maintain his/her/their account(s).

Separate registration is required in case the accounts are maintained at different branches.

Separate registration is allowed for single and joint accounts at the option of the user.

Normally the account holders can access his accounts through the www.onlinesbi.com

only after he/she acknowledges to the respective Branch(es) the receipt of the User-Id and

Password sent to him/her.

Each account holder in a joint account with Either or Survivor type mode of operation

may register himself/ herself as a USER of the www.onlinesbi.com facility.

All other accounts not listed in the registration form will be available on the

www.onlinesbi.com for the purpose of enquiry only. The customers may approach

Branch for enabling transaction rights on such accounts any time.

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Banks Terms:

All requests received from the USERS are logged and transmitted to the Users Branch

for their fulfillment. The requests become effective from the time these are recorded/

registered at the respective branch. While registering the request, the USER is informed

about the time normally taken by the Bank for fulfillment such requests.

The www.onlinesbi.com service is a VeriSign certified secure site. It assures that during

the session user is dealing with web-site of SBI. The two-way communication is secured

with 128-bit SSL encryption technology, which ensures the confidentiality of the data

during transmission. The access-control methods designed on the site afford a high level

of security to the transactions conducted on www.onlinesbi.com.

Home loan:

No hidden clauses or costs or unnecessary documentation. SBI loans have the

longest tenors and their repayment terms are amongst the most flexible. They offer a

totally transparent process. They even give an in-principle approval prior to identifying a

house/flat, relieving customers of the tension of anticipating the approved amount!

Last, but not the least, they have specialized Housing loan branches to serve customers

needs better

A special Short Term Housing Loan Scheme for loans of repayment period upto 5

years has been launched by SBI. This scheme carries still lower rates of interest.

The SBI Advantage:

Excellent service and lower costs. A quick survey of similar schemes available elsewhere

and find out that SBI housing loans offer

Low Equated Monthly Installments (EMI)

Low interest rates, currently between 8% p.a. and 9.5% p.a. on daily reducing

balances

A nominal processing fee of 0.25% will be charged.(Compare this with the 1.5% -

2% charged by others)

No hidden costs or administrative costs

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Complete transparency - When say at SBI rate of interest is 8% p.a. you pay only

8%. When others say 7.5%, you may be paying even 9% p.a., as interest may be

levied even on the amounts you have already repaid. This is because SBI apply

interest on a daily reducing balance while housing finance companies/ other banks

mostly apply interest on annual reducing balance. On an annual reducing balance,

the interest for the full year is decided on the balance outstanding at the beginning

of the year and thus Customer continue to pay interest even on the amounts he

repay monthly during the year.

The Scheme

Purpose

Person can take a loan for:

* Purchase or construction of a new house/ flat.

* Purchase an existing (old) house/ flat.

* Extend, repair, renovate or alter a house/ flat.

* Purchase a plot of land meant for construction of a dwelling unit.

Eligibility

Anyone who is over 21 years of age and has a steady source of income is eligible.

Loan amount

The actual loan amount is determined on the basis of repayment capacity taking intoaccount income, age, assets and liabilities. As a rule of thumb - Upto 60 times the net

monthly income will be sanctioned dep

Commercial Banks 635

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Transcript of Commercial Banks 635