Principles and Practices of Banking
Principles and Practices of Banking
Principles and Practices of Banking
Various Acts
293(1)
Company Act
Borrowing limits of the company
125 Indian Companies
Charge created on companies assets have to be
Act
registered within 30 days.
11 Indian Contract Act
Lunatics disqualified from contracting
59 Indian Contract Act
Rights of Appropriation is vested with debtor
60 Indian Contract Act If debtor does not intimate, the right of appropriation is
vested with creditor
124 Indian Contract Act
Indemnity
148 Indian Contract Act
Bailee-Bailor
171 Indian Contract Act
Banker an absolute right for General Lien
3
Indian Majority Act
A person attains majority at the age of 18
371 Indian Succession In the absence of will, Legal hairs will have to obtain
Act
Succession Certificate from the Court
17(4)
17(4)
Description
The reserve Bank was constituted for taking over management of
currency from central govt,
Body corporate having perpetual succession and a common seal
Capital of RBI is Rs.5 crore
The Govt. has Power to Issue Directions to the RBI in public
interest after consultation with the Governor.
general superintendence and direction of the affairs and business
of the RBI to Central Govt.
RBI is headed by Governor
Govt can appoint 4 Deputy Governors for RBI
Govt. may appoint a Deputy Governor of RBI as Chairman of
NABARD
Businesses which the Reserve Bank may transact
Reserve Bank is authorised to accept on money on deposit from
the Central/State Govt. local authorities, banks Without Interest
No interest on deposit accounts of Cental and State Govt.
Reserve Bank is authorised to grant loans and advances to any
scheduled bank, cooperative banks, SFC's repayable on demand
or on expiry of fixed periods not exceeding 180 days
against the security of stocks, funds and trustee securities, gold or
silver or documents of title to the same, such bills of exchange
and promissory notes
11(3)(i)
12
12(2)
12A(1)
13
14A(1)
15
16
17
18
19(1)
19(2)
20(1)
20A(1)
21
21A
company incorporated in India and having place in more than one state
but not in Bombay / Kolkatta
Rs. 5 lakhs
and in Bombay / Kolkatta
Rs. 10 lakhs
The minimum ratio between authorised, Subscribed, and paid-up capital of a
banking company should be: 4 : 2 : 1
No person holding shares in a banking company shall exercise voting rights on
poll in excess of 10% of the total voting rights of all shareholders of the banking
company
RBI may ask a banking company to : call a general meeting of shareholders and
elect fresh directors.
Prohibits banks from making payment of commission, brokerage, discount or
remuneration on any shares issued by it in excess of 2.5% of the paid-up value of
such shares.
Prohibits a banking company from creating floating charge on the undertaking or
any property of the company or any part thereof.
Prohibits a banking company from paying any dividend on its shares until all its
capitalized expenses have been completely written off
Prohibits a person to be appointed as director of more than one banking company
Reserve Fund(53)
Every banking company incorporated in India is required to transfer each year to a
reserve fund a sum equivalent to not less than 20% of profit before dividend
Every banking company not being scheduled bank, cash reserve need not be
maintained with the Reserve Bank. It may be with bank itself, or in current account
with the Reserve Bank.
The balance maintained should not be less than 30% of the demand and time
liabilities as on the last Friday of the 2nd Fort Night.
Return of Cash Reserve of Non-scheduled Banks
Approval of Central Govt. is required for formation a subsidiary for the purpose
carrying on business of banking exclusively outside India
effecting, insuring, guaranteeing, underwriting, participating in managing and
carrying out of any issue, public or private
undertaking and executing trusts
No banking company shall hold shares in any company, whether as pledge,
mortgagee or absolute owner of an amount exceeding 20% of the paid-up share
capital of that company or 30% of its own paid-up share capital and reserves,
whichever less.
Banking Company is prohibited from granting any loan or advance against the
security of its own shares.
Banking Company shall not, except with the prior approval of the RBI, remit in
whole or in part any debt due to it by
any of its directors
any firm or company in which any of its directors is interested
Empowers RBI to control advances by banking companies
Transaction between a banking company and its debtor cannot be reopened by
35A
35(4)
36
36(2)
36AA
36AB
36AE
36AF
37
38
39
44A
44B
45(1)
45
45B
45Y
45Y
Conduct Inspection of any banking company and its books and accounts
Carry out scrutiny of the affairs of any Banking company and its books and
accounts
Inspection of branches outside India carried out by RBI - 35 (ii) (b)
Power to Regulate banking companies
Banking Ombudsman is an authority established in 1995.
Central Govt. based on the report from RBI
Prohibit the banking company from receiving fresh deposits
Direct the RBI to apply under section 38 for the winding up of the banking
company
Reserve bank is empowered to
Caution or prohibit banking companies against entering into any particular
transaction
Generally give advise to the banking company
Assist, as intermediary or otherwise, in proposals for amalgamation of baning
companies
Publication released by RBI Trends and Progress of banking in India
(33) RBI is empowered to remove Chairman, director, officer or employee from the
office of the banking company
Reserve Bank is authorised to appoint additional directors
Govt: Power to acquire undertakings of banks
The central govt. is empowered to make a scheme for any acquired bank in
consultation with RBI.
The High Court may, on application of the banking company suspend its business
The RBI may make an application to the High Court for the winding up of a
banking company against which an order under section 37(1) has been passed
The high court may order the winding up of the company if the banking company
is unable to pay its debts.
Reserve Bank, upon an application made by it, May be appointed as official
liquidator by the High Court in any winding up proceeding.
(77) : Amalgamation of one banking company to another.
No high court will sanction a compromise or arrangement between a banking
company and its creditors unless it is certified by RBI
RBI apply to govt for an order of moratorium
Suspension of Business and amalgamation of banks.
Preservation of Records by a Banking Company (Section 45)
Specifying period for which bank has to preserve the books, accounts, instruments
etc are made by Central Govt.
Following records to be maintained by banks for 5 Years
Cheque Book Register
Vault Register
Telegraphic Transfer Confirmations
Demand Liability Register
Demand Remittances Dispatched Registered
Following records to be maintained by banks for 8 Years
45ZA
45ZC
45ZE
52
56
58
Promissory Note
Bill of Exchange
Cheque
Holder
Holder In Due Course
Payment in Due Course
Endorsement in Blank / Full
Minor may draw, endorse, deliver and negotiate a N.I. so minor can draw a
cheque. No Overdraft / LOAN can be given to the banker
31
Liability of the Paying Bank
50
Restrictive Endorsement
52
Conditional Endorsement
52
Sans Recourse
85
Cheque Payable to Order : Paying Bankers' Protection
87
Material Alternation
89
Payment according to apparent tenor thereof at the time of payment and
otherwise in due course, shall discharge the person/banker from all liability
thereon.
123
General Crossing
124
Special Crossing
125
Crossing of Cheque
130
Not Negotiable Crossing
131
Protection to Banker While collecting cheques
138
Drawer of cheque is liable to be punished if the cheque is bounced for
Insufficiency funds, the drawer is punishable with and imprisonment which
may extend to one year and or a fine may extend to twice the amount of the
cheque or with both.
141
Offences By Company
143
Summary Trial by Court
144
Mode Of Service of Summons
145
Evidence On Affidavit
146
BANKS' SLIP Prima facie evidence
147
Offences to be Compoundable
10/31/ Payment Of Cheques
85/126
126 to Payment in Due Course of Cross Cheques
129
131A Protection to Banker While collecting Drafts
85A
Draft Payable to Order : Paying Bankers' Protection
85A
Drafts Payable to Order
Section
7(1)
BR Act
4 & 53
BR Act
6(1)(0)
BR Act
BR Act
BR Act
10B
14A
19
BR Act
BR Act
22
24(2)
BR Act
BR Act
BR Act
BR Act
BR Act
BR Act
29
35
36AA
36AE
45
52
Tier I Capital
Paid Up Capital, Statutory
Reserves,
and
other
disclosed free reserves, if
any and
Capital
Reserves
representing
surplus
arising
out
of
sale
proceeds of assets
Tier II Capital
Undisclosed
reserves
and
cumulative
perpetual preference shares
Revaluation Reserves
General Provisions and Loss Reserves
Hybrid Debt Capital Instruments
Subordinated Debt
Authorised Capital of each public sector bank cannot be less than Rs. 1500
crores.
To establish a new private sector bank, the minimum Paid-Up Capital of Rs.
200 crores.
Foreign Investors are permitted to hold up to 10% of Paid-Up capital of banks
established in India.
Shareholders of commercial banks can exercise one vote for every share held
by them. However, no person can exercise more than 10% of total voting
rights of shareholders of the bank. The above restriction on voting rights
does not apply to GOI in respect of holding of shares.
As far as Cooperative Bank is concerned, each share holder can exercise only
one vote, irrespective of number of shares held by him.
Bank
Debtor
Creditor
Bailee
Lessor
Agent
Customer
Creditor
Debtor
Bailor
Lessee
Principal
Indemnified
/ Indemnity
Holder
Indemnifier
Chapter 4: Mandates
A Mandate is an authority given by the account holder in favour of a third person
to do certain acts on his behalf. This is issued by the account holder to his bank.
Salient Features
It is unstamped letter signed by the customer
The signature of the person so authorized should be appended in the letter of
mandate.
It is for short and temporary period.
In case of joint account holders all the partner must signed the mandate.
Power of Attorney is a stamped Document.
There are two types of Power of Attorney
Special Power of Attorney It is for a single transaction
General Power of Attorney empowers an agent to act in more than one
transaction.
Power of attorney is a stamped document and generally executed in the
presence of Notary Public/ Magistrate of a Court of government officials
The bank should obtain the original power of attorney for perusal and copy of
the same is retained for record purposes.
The power of attorney holder must sign as
Per ProAttachment Orders
Those issued by the court, called Garnishee orders and
Those issued by Revenue Authorities.
Garnishee Orders
They are issued by a court in favor of judgment of creditors. A garnishee order is
issued by two stages
Order Nisi Freeze or stop all the txns in the debtor account.
Order absolute What is Attachable And What is Not?
Amount Specified and Unspecified
Debts due and accruing
Payment of Cheques and Garnishee Order
Right of Set-off and Garnishee Order
Unclear effects, Subsequent Credits and Undrawn overdrafts Credit into
account subsequent to the receipt of the Garnishee Order are not attachable,
because the order can attach only debts due or accruing at the time of the
receipt of the order by the banker.
Joint Accounts - If the order is issued for the attachment of As deposits, the
deposits held jointly by A and B cannot be attached, if the account is operated
Drawee
Cheque
Always drawn on a banker
Pay ability
Payable on Demand
Maturity
Crossing
Notice Of Dishonor
It can be crossed
No notice of dishonor given
Bill Of Exchange
Not necessarily be drawn
on a banker
May be payable on
demand or may be on
future date
Three days grace period
given usuance bill.
Cannot be crossed
Notice of dishonor to be
given to the drawer.and
other parties entitled to
receive the notice.,
Crossing Of Cheques
General Crossing (123)
Not Negotiable Crossing (130)
Special Crossing (124) where a cheque bears across its face in addition of the
name of the banker either with or without the words Not Negotiable
Holder
Holder in Due Course
Endorsement Of Cheques
1. Endorsement in Blank
2. Endorsement in Full
3. Conditional Endorsement In normal circumstances endorser binds himself
to pay upon no other condition than on dishonor of the instrument on due
notice of dishonor to him.
4. Restrictive Endorsement right of negotiation restricted or excluded by the
endorsement. If the instrument is Pay to Mr.M.M. Lal only, then Mr.Lals right
to negotiate is restricted.
5. Sans Recourse Endorsement Without recourse/liability to me
128
129
Payment Of Cheques
Precautions to be taken
1. Open or Crossed Cheques
2. Payment at the branch where account stands
3. Mutilated Cheques
4. Cheque must be drawn in proper form
5. Post-dated/Stale
6. Stale Cheque A cheque in circulation for an unreasonably long period is
said to be stale.
7. Amount in words and figures should tally: - if it is stated differently in
figures and in words, the amount stated in words shall be the amount
ordered to be paid.
8. Payment within banking hours: Section 65 of N.I. Act: Payment of
cheques after banking hours are not Payment in Due Course and not
eligible for protection under section 10 of the N.I. Act.
9. Alternation :
10. Material Alternation : Section 87 of NI Act
11. Computational Balance : Effects not cleared, Please present again
12. Endorsements
13. Forged Signature
Holder For Value where a banker has parted with funds before collecting the
proceeds of the cheque from another banker, the banker is holder for value.
Lunatics
Joint Hindu Family
Joint Account Holders (207)
A joint account is an account opened by two or more persons
Insanity of a joint account holder
Insolvency of the Joint account Holder
Death of a Joint account Holder As the mandate taken for the operation of the
account also deals with survivorship, on the death of one of the joint account
holders, the survivors are entitled to the whole amount both under the law of
devolution applicable to joint owners and by the customer of bankers. Where
the mandate is operation by joint signatures and if one of them dies, the
balance is payable (or recoverable from if debit balance) to the survivor and
the legal heirs of deceased (or recoverable from estate of deceased in case
of debit balance).
Accounts in the Name of Joint Hindu Families (JHF) The members of the
family are called coparceners and the eldest male member is the manager or
the Karta. When an account in the name of the JHF is opened all the adult
coparceners are to sign the Account opening form, even though the Karta
would operate on the account.
Accounts in the Name of Partnership Firms (106)
A partner has no authority to give a guarantee on behalf of the firm and if
such guarantee is to be given, it should be signed by all partners.
Retirement of Partner
Death of Partner: The death of partner has the legal effect of
dissolving the firm, as his legal heirs cannot step into his shoes.
The surviving partners have the right to carry on the business for the
purpose of winding up.
Any cheque presented for payment should be paid only with the
consent of the surviving partners
When the account is in debit balance, the operations should be
stopped to fix the liability of the deceased partner.
Advances to Companies
The purpose of the advance should be within the scope of the MOA of the
company
The MOA should empower company to borrow
Section 293 (1)(d) of the companies act provides Board of Directors of the
Public Company shall not borrow limits in excess of paid up capital of the
company and its free reserves.
Section 125 of the companies act provides that all charges created on a
companys assets have to be registered with the ROC within the 30 days
of creation of charge.
Accounts in the Name of the TRUSTS
The instrument by which the trust deed is created is called the TRUST DEED
i.
ii.
iii.
iv.
v.
Opened
Where can
these
accounts be
opened
Can funds
held in
these
accounts be
repatriated
Are Joint
accounts
allowed
What can
be credited
to these
accounts
NRO
NRNR
Can be opened by all non-resident
individual
NRE
FCNR(B)
Only by non resident individuals
of Indian origin, OCBs and
Overseas trusts owned directly or
indirectly by NRIs
Bank branches
authorized to
deal in foreign
exchange
Entire interest
Interest accrued
Freely
Freely
earned is
on NRNR
repatriable
repatriable
eligible for
accounts is
repatriation.
eligible for
Principal
repatriation.
amount is not
(Funds non
normally
repatriable)
repatriable
May be jointly held with residents Cannot be held jointly with
residents but residents holding
power of attorney(POA) may
operate these accounts for local
payments and investments in India
(only) permitted by Reserve Bank
Remittance from abroad, income Remittance from abroad, income
made in India which is of made in India which are of
repatriable nature. Legitimate local repatriable nature
dues in rupees to the account
holder viz. rent of flat, other
income of no-repatriation basis
can be credited only to NRO
accounts.
What can
be debited
to these
accounts.
Rates Of
Interest
Conversion
of Accounts
Interest on
Conversion
When a person
resident in India
leaves the
country for
employment
etc., abroad
his/her accounts
are treated as
NRO accounts
Interest is
payable at the
rate agreed to
by the bank
NO tax
exemptions on
interest earned
on NRO
Accounts.
Local payments/
disbursements
in rupees and
repatriable
interest accrued
on the deposits
NRE
FCNR (B)
Interest earned are Exempted from
Indian Tax
Balances held are exempted from
Wealth-Tax and gifts made from
these accounts to close relatives in
India are free of Gift Tax
The Present CRR and SLR requirement are 3% and 25% respectively.
New prudential Accounting Norms cover Capital Adequacy, Income
Recognition, Asset Classification and Provisioning
Capital Adequacy
Income Recognition and Asset Classification / Provisioning
No income can be taken to Profit and Loss account if the interest /
installment in a borrower account remains unpaid for a period of more
than two quarters from the past due date. The account has to be
designated as NPA.
Banks are required to classify accounts according to its performing or nonperforming. While interest on performing assets can be taken to P & L,
interest on NPA cannot be taken to P & L
Banks has to make provisions for NPA. Longer the NPA, higher the
provisioning.
Deregulation of Interest Rates
Disadvantages to Lessee
Ownership of the asset is with the
Lessor and not Lessee.
Since Lessor imposes usage terms and
conditions on assets, asset is
permitted to be used for agreed
business purposes only; this takes
away the leverage from Lessee for
utilizing the asset for alternative
business purposes if any.
Possibility of Lessor Owner becoming
insolvent or going into liquidation;
thus asset may be attached by the
creditors official liquidator.
Confiscation/Repossession of asset by
Lessor on breach of terms and
conditions of use of asset.
Bill Factoring
Ideal tool for growth and development
of expanding SMESs
Advances are given against Bill of There is an outright purchase of trade
exchange
debts after providing for returns.
Advantages of Factoring
Disadvantages of Factoring
The client need not undertaken any It may result in over-aggressiveness in
responsibility of collecting the dues
the behaviour of the client resulting
from the buyer thus saving cost on
in over trading or mismanagement.
various fronts like maintaining of Possible fraudulent act in furnishing the
sales ledger/supervision etc.
Invoice
Discounted value up to 80% to 85% is Companies having large number of
available to client on the basis of
debtors for small amounts
invoices and balance is paid on
realization of receivables
Providing expert credit an other
business related advise to clients
Agri
SSI
18
12
Weaker
Section
10
Small
Business/ Cost of equipment should not exceed 10 Lakhs.
Business
Working Capital limit Rs, 5 Lakhs or less
Enterprise
Loan may be given for acquiring / repairing business
premises, to purchase of machinery, equipments,
land, building, furniture etc.
Loan for running STD/ISD/PCO, Travel agency,
5
6
Agriculture (9)
Direct Finance
Short Term Loans
Medium and Long Term Loans
Indirect Finance
goods
The WCF is generally availed of a
cash-credit Hypothecation accounts
with
frequent
drawings
and
repayments within the time fixed
and is payable on demand.
The Projected turnover Method the bank as a matter of policy and based on
RBI guidelines assess the working capital including village industries, tiny
industries with fund based working capital limit up to Rs. 4 crore by the turnover
method.
20% of minimum of their projected sales turnover
Drawing power may be worked out through stock statements, unpaid
stocks are not to be financed as it would result in double financing.
5% should be contributed by borrowers.
The Cash Budget System: (if fund based limits in excess of Rs. 10 Crore)
Advantages
1. Borrower plans to advance cash requirements.
2. Banker is able to spot danger signal quickly and corrective measures
could be taken.
3. Banker can plan his resources to meet credit requirements.
1
2
Cash Budget
It deals with Cash transactions only
Cash budgets for short periods
Cash Flow
It deals with cash and no-cash funds
Cash flow statement are for quarterly
or half yearly.
It is historical
Major Networks
INET
4
5
Physical Goods
Tangible
Homogeneous
Production and Distribution are
separated from consumption
A thing
Core value produced in factory
6
7
8
1
2
3
Services
Intangible
Heterogeneous
Production,
Distribution
and
Consumption are simultaneous process
An activity or process
Core value produced in buyer-seller
interactions
Customers participate in the production
Cannot be kept in stock
No Transfer of Ownership
Bank Marketing
Product Planning
The process of product planning consists of determining the strategies in respect
of various elements:
Product Line
Product Mix
Branding
Packaging and New Product Development
Product Life Cycle (442)
Introduction
Growth
Maturity
Decline
New Product Development
The Process of product Development comprises five main stages:
Idea Screening
Concept Testing
Product Development
Test Marketing
Pricing Strategies
Geographical Pricing: different locations, different prices, cost of
transportation included.
Price Discounts and Allowance : Cash Discount, Quantity Discount,
Functional Discount, Seasonal Discount
Psychological Pricing: To many consumers think that higher priced product to
be of better quality. By setting the price in particular range sellers can create
an impression about the product belongs to the particular class
Promotional Pricing :
Discriminatory Pricing: when different prices are changed to different buyers.
Product-Mix Pricing :
Market-skimming Pricing: Product is initially priced higher, and over a period
of time it is reduced to attract more buyers, with a view to skimming the
revenues layer to layer from the market.
Market-penetration Pricing: Setting the price low initially in order to penetrate
the market quickly and deeply attracting a large market share.