CHARACTERS &

CLASSIFICATIONS OF

COMMERCIAL BANK SCHEDULED BANKCOOPERATIVE BANK

FOREIGN BANK

The Banking Regulation Act, 1949, defines banking as accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order otherwise.

Commercial banks are like other financial institution (e.g. ,money lenders, Indigenous bankers, cooperative societies, agricultural and industrial credit institution). Which are in the business of lending and borrowing of money or credit.

COMMERCIAL BANKS

The operations of all these banks are regulated by the Reserve Bank of India, which is the central bank and supreme financial authority in India. The main source of income of a commercial bank is the difference between these two rates which they charge to borrowers and pay to depositors.

Commercial banks are the primary vehicle through which credit and monetary policies are transmitted to the economy. Credit and monetary policies are implemented through action on bank reserves (cash and statutory liquidity ratios), margin requirements and the rate at which scheduled banks can borrow from the RBI. These affect the supply, availability and cost of credit at banks.

The nature of lending and investing by commercial banks is multi-functional. 

CHARACTERISTICS…

They deal in a wide variety of assets and accommodate different types of borrowers.

They facilitate the spread of the impact of monetary policy to non-bank lenders and to other sections of the economy.

 The operations of commercial banks are highly flexible since they provide facilities for financing different types of borrowers which enables them to channel funds according to specified priorities and purposes

Scheduled banks :- Banks which have been included in the Second Schedule of RBI Act 1934.

Public Sector Banks :- are those banks in which majority of stake is held by the government. E.g.. SBI, PNB, Syndicate Bank, Union Bank of India etc.

Private Sector Banks :- are those banks in which majority of stake is held by private individuals. E.g.. ICICI Bank, IDBI Bank, HDFC Bank, AXIS Bank etc.

Foreign Banks :- are the banks with Head office outside the country in which they are located. E.g.. Citi Bank, Standard Chartered Bank, Bank of Tokyo Ltd. etc.

CLASSIFICATION…

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. The banks included in this schedule list should fulfil two conditions. 1. The paid capital and collected funds of bank should not be less than Rs. 5 lakh. 2.Any activity of the bank will not adversely affect the interests of depositors. 

SCHEDULED BANK

Every Scheduled bank enjoys the following facilities. 1. Such bank becomes eligible for debts/loans on bank rate from the RBI 2. Such bank automatically acquire the membership of clearing house.

Co-operative bank

“A Co-operative bank, as its name indicates is an institution consisting of a number of individuals who join together to pool their surplus savings for the purpose of eliminating the profits of the bankers or moneylenders with a view to distributing the same amongst the depositors and borrowers”.

Origin of co-operative bank

Co-operative banks in India came into existence with the enactment of  the Agricultural Credit Co-operative Societies Act in 1904. Co-operative bank form an integral part of banking system in India. Under the act of 1904, a number of co-operative credit societies were started. Owing to the increasing demand of co-operative credit, anew act was passed in 1912, which was provided for establishment of co-operative central banks by a union of primary credit societies and individuals.

types of co-operative bank

CLASSIFICATION OF CO-PERATIVE BANKS:

The Co-operative banking structure in India comprises of: 1. Urban Co-operative Banks 2. Rural Co-operatives

Some co-operative banks are scheduled banks, while others are non-scheduled banks. For instance, State Co-operative banks and some Urban Co-operative banks are scheduled banks but other co-operative banks are non-scheduled banks

Urban co-operative bank

The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centred around communities, localities work place groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.

The origins of the urban cooperative banking movement in India can be traced to the close of nineteenth century when, inspired by the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany such societies were set up in India. Cooperative societies are based on the principles of cooperation, - mutual help, democratic decision making and open membership. Cooperatives represented a new and alternative approach to organisaton as against proprietary firms, partnership firms and joint stock companies which represent the dominant form of commercial organisation.

2. Rural Co-operatives

Rural Cooperative Banking and Credit Institutions play an

important role in meeting the growing credit needs of rural India. The

volume of credit flowing through these institutions has increased. The

performance of these institutions, however (apparent in the share of

total institutional credit and the indicators of their financial health),

has been less than satisfactory and is deteriorating rapidly. Of late, a

number of Committees have gone into the reasons for this situation

and suggested remedial measures, but there has been little progress

in implementing their recommendations.

Foreign bank

Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative.

New rules announced by the Reserve Bank of India for the foreign banks in India in this budget has put up great hopes among foreign banks which allows them to grow unfettered. Now foreign banks in India are permitted to set up local subsidiaries. The policy conveys that forign banks in India may not acquire Indian ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not be able to open branches freely. Please see the list of Foreign banks in India till date.

Commercial banks engage in the following activities: Processing of payments by way of telegraphic transfer, EFTPOS(electronic

fund transfer point of sale), internet banking, or other means. Issuing bank drafts and bank cheques. Accepting money on term deposit. Lending money by overdraft, installment loan, or other means. Providing documentary and standby letter of credit, guarantees,

performance bonds, securities underwriting commitments and other forms of off balance sheet exposures.

THE ROLE OF COMMERCIAL BANKS

Safekeeping of documents and other items in safe deposit boxes. Sales, distribution or brokerage, with or without advice, of: insurance, unit

trusts and similar financial products as a “financial supermarket”. Cash management and treasury. Merchant banking and private equity financing. Traditionally, large commercial banks also underwrite bonds, and make

markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.

A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of , a certain person or to the bearer of the instrument.

ESSENTAIL ELEMENTS OF A BILL OF EXCHANGE Writing: It must be in writing and may be in any language, and in any

form. Parties: The must be three parties to the bill of exchange, for example,

Drawer, Drawee and Payee. The person who draws a bill is called a “Drawer” or “Maker”. The person on whom the bill is drawn is called a “Drawee” and the person to whom the money is paid is called “Payee”.

BILL OF EXCHANGE

Payee: section 7 defines “Payee” as the person named in the instrument, to whom or to whose order the money is, by the instrument directed to be paid. It is not necessary that the three parties should be three distinct persons. One person can play the role of two, for example, one person can be the drawer and payee or drawee and payee acting in two different capacities. However, drawer and drawee cannot be the same person as the person cannot order himself the payment. There should, therefore, be at least two distinct persons. In any case, three parties must be pointed out in the bill with reasonable certainty. There may be joint drawers or joint payees, but bill cannot be addressed to two or more drawees in the alternative.

Order to pay: The bill of exchange must contain an order by the drawer to drawee to pay under any circumstances. Only excessive politeness will not construe an order to pay and the instrument would not be a bill of exchange.

Unconditional: The order in the bill must be unconditional, for example, payable under all events and circumstances. A promise or order to pay is not conditional simply because the time for payment of the amount or any instalment thereof being expressed to be payable on the lapse of a certain period after the happening of a specified event which, according to the ordinary expectation of mankind, is certain to happen although the time of its happening may be uncertain. Conditional bill is invalid.

Signed: The bill must be signed by the drawer.

Person directed, for example, the drawee must be certain: The order to pay must be directed to a certain person. Certainty of the drawee helps the payee to present the bill for acceptance or payment to a certain person and also helps the drawee to know whether it is addressed to him or not. Drawee must be designated with reasonable ceetainty.

Money: The order must be to pay money only. Payee must be certain: It must be payable to a definite person or his order.

The payee must be certain. Bill may be made payable to two or more payees jointly or in the alternative.

Certain sum: The sum payable must be certain. The sum payable must be certain although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange. What the section indicates is that the principal sum payable must be certain.

Stamping: Bill of exchange is chargeable

Order to pay: The bill of exchange must contain an order by the drawer to drawee to pay under any circumstances. Only excessive politeness will not construe an order to pay and the instrument would not be a bill of exchange.

Unconditional: The order in the bill must be unconditional, for example, payable under all events and circumstances. A promise or order to pay is not conditional simply because the time for payment of the amount or any instalment thereof being expressed to be payable on the lapse of a certain period after the happening of a specified event which, according to the ordinary expectation of mankind, is certain to happen although the time of its happening may be uncertain. Conditional bill is invalid.

Signed: The bill must be signed by the drawer.

Person directed, for example, the drawee must be certain: The order to pay must be directed to a certain person. Certainty of the drawee helps the payee to present the bill for acceptance or payment to a certain person and also helps the drawee to know whether it is addressed to him or not. Drawee must be designated with reasonable ceetainty.

Money: The order must be to pay money only. Payee must be certain: It must be payable to a definite person or his order.

The payee must be certain. Bill may be made payable to two or more payees jointly or in the alternative.

Certain sum: The sum payable must be certain. The sum payable must be certain although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange. What the section indicates is that the principal sum payable must be certain.

Stamping: Bill of exchange is chargeable with stamp duty.

PROMISSORY NOTE

A promissory note is a negotiable instrument, wherein the one party (the issuer or maker) make an unconditional promise to pay a determined sum of money to the other (the payee), either at a fixed or determined future time, or on the demand of the payee under specific terms.

Elements of a Promissory Note Writing: The promissory note must be in writing. Oral engagements or

promise is excluded. Undertaking to pay: It is not necessary to use the word “promise” but the

intention must clearly show an ‘unconditional undertaking’ to pay the amount.

Eg: “I owe you Rs. 3500.” This is not a promissory note. UNCONDITIONAL: Promise to pay should be unconditional. A

conditional instrument is invalid. It must be certain of payment. Eg:

- I promise to pay you Rs.2500 when you will score 85% in your exams. (conditional promissory note)

-I will pay you Rs.2500 on 28 october,2012

(unconditional promissory note)

Elements (cont…)

SIGNED: The instrument must be signed by the maker thereof. Person must sign with his free consent. It should not only be a physical act but also a mental act with an intention to sign.

CERTAIN PERSON: Two different persons should fill in the role of maker and payee. A note cannot be made payable to the maker himself. Eg: A promissory note payable to“ my own son living in london”… is a valid promissory note.

SPECIFIC SUM: The sum promised to be paid must be certain and specific. Eg: “I promise to pay you Rs. 1 lakh and all other sum due to you.”

Stamping: Promissory notes are chargeable with stamp duty.it is advisable to cancel the stamps with maker’s signature or initials.

CHEQUES

A ‘cheque’ is a ‘bill of exchange’ drawn on a specified banker

and not expressed to be payable otherwise than on demand. It includes the electronic image of a truncated cheque and a cheque in the electronic form.

A cheque is drawn on a banker only, while bill of exchange can be drawn on any one.

Cheque has three parties:

drawer, drawee, payee

A bill of exchange is wider than cheque. Therefore, all cheques are bills of exchange but all bills of exchange are not cheques.

(Cont…)

A cheque does not require acceptance. There is no privity of contract between the payee and the banker. The banker is liable only to the drawer. Drawing of a cheque is simplya direction to pay. A cheque is not invalid because it is post-dated or anti-dated. A cheque is payable only on demand and on presentation. Vaild for period of six months. It may be drawn on Sunday or holiday.

Types of Cheques

1. Bearer or open cheques: These cheques are payable at the counter of drawee banker on presentment. As the bearer cheques carry risk of being lost or stolen and the finder may be able to get it encashed, crossing of cheques avoids such a contigency and secure payments.

2. Crossed cheques: crossing of cheques is of different types

cheques crossed generally: (SEC 123) when It has two transverse parallel lines marked across its face; or It bears an abbreviation “& Co.” between the two parallel lines; or It bears the word “not negotiable” between the two parallel lines.

Types of Cheques (cont…)

CHEQUE CROSSED SPECIALLY: (SEC 124 & 126) Where a cheque is crossed by two parallel transverse lines and

the name of the banker is written between the two parallel lines,with or without the words, ‘not negotiable’ it is called “Special crossing” (Sec. 124)

It may be noted that two transverse parallel lines are not

necessary in special crossing. The banker on whom it is drawn shall not pay it otherwise than to the

banker to whom it is crossed, or his agents for collection. (Sec.126)

Types of Cheques (cont…)

Cheque bearing ‘not negotiable’: (Sec.130)

A cheque bearing ‘not negotiable’ is deprived of the main feature

of ‘negotiability.’ it, however, does not render the instrument

non-transferable. Such cheques can be transferred but the

Transferee dose not acquire the right of a holder in due course.

The object of ‘not negotiable’ crossing is to afford protection to

the drawer against dishonesty, loss or theft in the course of

transit.

HUNDIS Hundis are negotiable instruments written in an original language. They are

sometimes bills of exchange and sometimes promissory notes, and are not covered under the Negotiable Instruments Act,1881.

Generally, they are governed by the customs and usages in the locality but if custom is silent on the point of dispute before the court, this Act applies to the Hundis.

The term “Hundi” was formerly applicable to native bills of exchange. The promissory notes were then called “teep”.

The hundis were in circulation in India even before the present Negotiable Instrument Act,1881 came into operations. Its usage varies with the locality in which they were in circulation.

Types of Hundis

SHAH JOG HUNDI

“SHAH” means a respectable and responsible person or a man of worth in the bazar. Shah Jog Hundi means a hundi which is payable only to a respectable holder, as opposed to a hundi payable to bearer.

JOKHMI HUNDI

A “JOKHMI” hundi is always drawn on or against goods shipped on the vessel mentioned in the hundi. It implies a condition that money will be paid only in the event of arrival of the goods against which the hundi is drawn. It is in the nature of policy of insurance. The difference, however, is that money is paid before hand and is to be recovered if the ship arrives safely.

Type of Hundis (Cont…)

NAM JOG HUNDI

It is a hundi payable to the party named in the bill or his order. The name of the payee is specifically inserted in the hundi. It can also be negotiated like a bill of exchange. Its alteration into a Shah Jog hundi is a material alteration and renders it void.

DARSHANI HUNDI

this is a hundi payable at sight. It is freely negotiable and the price is regulated by demand and supply. They are payable on demand and must be presented for payment within a resonable time after they are received by the holder.

Types of Hundis (Cont…)

MIADI HUNDI

This is otherwise called “MUDDATI” hundi, that is payable after a specified period of time. Usually money is advanced against these hundis by shroffs after deducting the advance for the period in advance. There are other forms of hundis also like:

DHANI HUNDI- A hundi that is payable to the ‘dhani’ (owner)

FIRMAN HUNDI- which is payable to order if can be negotiated by endrosment and delivery.

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