Let Us Sum Up

1. Relationship between the Bank and the Customer
(a) In a deposit account, the relationship between the bank and the customer is that of debtor and creditor (Bank-debtor, Customer-creditor)
(b) In case of loan accountadvance, the bank is the creditor and the customer is debtor.
(c) In the case of deposit of safe custody of valuables, the bank is the bailee and the customer is the bailor.
(d) In the case of remittance, foreign exchange business collection of bills cheque the relation is Agent (Bank)-Principal (Customer)
(e) In the case of safe deposit locker, the bank is the lessor and the customer is lessee.
(f) Bank also functions as Executor and Trustee for and on behalf of the beneficiary-customer.

2. Obligations
Banker-Customer relationship creates
1. Certain obligations on the part of the banks
2. Certain rights available to banks

Keywords
Bank, Debtor, Creditor, Bailor, Bailee, Applicable funds, Secrecy, Opinion.

Check your progress
1. The term Customer has been defined in
(a) Negotiable Instruments Act
(b) RBI Act
(c) Banking Regulation Act
(d) Not defined anywhere

2. When a banker allows overdraft to his customer, the relationship between banker and customer is that of
(a) Bailor and Bailee
(b) Lessor and lessee
(c) Debtor and Creditor
(d) Creditor and Debtor

3. When a customer takes a locker in the bank, what is the relationship between the bank and the Customer(a) Lessor and lessee
(b) Pledgor and pledgee
(c) Principal and Agent
(d) Trustee-Beneficiary

4. A bank received the payment of an outstation bill on behalf of his customer, But before the money could be credited to the customer’s account the bank failed. What is the relationship between the bank and the Customer.
(a) Creditor and Debtor
(b) Principal and Agent(c) Bailor and Bailee
(d) Trustee & Beneficiary

5. When the Banker-Customer relationship is terminated.
(a) On the death of the customer.
(b) On customer becoming lunatic.
(c) On customer being declared insolvent.
(d) On closure of the account

FURNISHING OF OPINION

One of the important duties of a bank is to submit an opinion reort on its customer if asked for by fellow banker. A bank is also required to obtain such report from other banks before processing any application for credit facilities. The bank invariably obtains opinion reports before sanctioning credit facilities to a new person who is maintaining deposit/advance accounts with other banks. While obtaining guarantees from a third party, not known to bank or while sanctioning bills purchase/discount/book debts facility, etc. banks invariably call for opinion report from other agencies. The bank should consider the following aspects at the time of submission of the report.

1. An implied authority of customer is available to the bank to disclose information about the customer to the other bank.

2. The information may be sought by the other bank as the customer would be undertaking some liability direct or contingent, like request for credit facilities, or would be accepting bills, or would be a guarantor, etc. As such the report should be based on factual records at the bank. No special efforts should be made to obtain more information about the customer. Banker should make the report on the basis of available information, if possible.

3. No personal opinion of the bank official should be given. Bank should not volunteer information which is not asked for.

4. The opinion should be given in general terms only. The bank should not misguide/misrepresent the other bank. It (bank) should give true opinion of the customer as held by the bank. While indicating worth of the customer, it is customary not to give it in figures but to couch it in certain conventional terms used in the bank.

5. While furnishing opinion report, the bank should stipulate that the report is submifted without any responsibility on the part of the bank and its officers and should also indicate that all information so furnished should be treated as confidential.

6. If the bank furnishing such report, had any bad experience about the customer in the past, the report should invariably convey the signal to the fellow banker about the bad feature of the account.

PRECAUTIONS TO BE ADOPTED WHILE DISCLOSING THE INFORMATION

Banker should adopt proper precaution while disclosing the financial status or any other information of his customers. Undue or irrelevant information can, not only make the banker liable for compensation but also the third party who makes use of such information may suffer loss. It is, therefore, necessary to note the following points

1. Only facts should be revealed: Only such facts as are evident from the customer’s account to be revealed. In other words, the disclosure should not be based on rumours.

2. It should be a statement in general: The banker should give the information about the customer’s financial position in a general form. Terms commonly used and understood in the banking fraternity like ‘ordinary’, ‘fair’, ‘good’, ‘excellent’, ‘unsatisfactory’, ‘in the ordinary course of business’, etc., may be used for describing the means, credit of a customer:

3. Secrecy should be maintained by the recipient also: The banker should clearly state while giving the information that the recipient should maintain absolute secrecy of information furnished.

4. Disclosure of secrecy: It is the practice among bankers to state while sharing information about customers with other bankers that the information was being furnished in strict secrecy and that the banker giving the information was not responsible and would not be liable for the information so given and further that the recipient authority should also treat it as confidential.

5. Information should not be given to persons out of context and without proper justification: If a person who is not at all directly concerned with a customer of the bank, asks for information about the customer’s account, the request from such a person is out of context and hence the banker should not make disclosure.

BANK’S OBLIGATION TO MAINTAIN SECRECY OF ACCOUNTS

When a person opens an account in a bank he/she is entitled to a reasonable assurance that information regarding the account remains a matter of knowledge only between the banker and the account holder. This is because, it is one of the principal duties of the banker to maintain complete secrecy of the status of the customer’s account. This obligation of the Bank to maintain secrecy continues even after the customer’s account is closed. If the banker makes an unwarranted disclosure of the status of account of the bank’s customer, the banker becomes liable to compensate the customer. However, the bank’s obligation of keeping the secrecy of the status of the customer’s account is qualified and not absolute. There are certain circumstances in which the banker is entitled or required to make disclosures about a customer’s account. Let us understand the conditions under which a banker is justified in making disclosure.Disclosures permitted by Law

(i) Under iaw: A Bank is justified to disclose any information about the customer’saccount when it is statutorily required to do so under
(a) Income Tax Act, 1961(Section 131 & Section 133(6)
(b) Companies Act, 1956 (Section 235 andSection 237)
(c) Bankers Book Evidence Act, 1891 (Section 4)
(d) ReserveBank of India Act, 1 937 (Section 26)
(e)(1) Foreign Exchange Management Act1973 (Section 11)
(f) Gift lax Act, 1958 (Section 36)

(ii) Under express or implied consent of the customer: When an account is opened with the bank, there is an implied contract between the customer and the Bank that the latter will not disclose information relating to his account without the customer’s consent. If however, a customer permits, this information can be disclosed. For example, the customer may permit giving information about his! her account to a prospective guarantor, or, customer. It is necessary to obtain the customer’s consent before disclosing the information. The consent can be expressed or implied.

(iii) Common courtesy among bankers: As per the practices/usages in the banking system (business) it is customary to share information about customers among the bankers, that whenever a bank makes inquiries with another bank, on matters such as proposed sureties or acceptors etc. An implied consent of the customer is presumed to exist therefor. However, such information is kept confidential at both the ends and adequate precautions should be taken while furnishing such information.

(iv) Disclosure in the bank’s interest: A bank can disclose information when it is essential to protect its own interest, legally. For instance, if there is any dispute between the customer and a banker, regarding balance standing in the account of the customer or if there is a loan default, then the bank will be justified in revealing the information to the guarantor or to a solicitor for initiating legal proceedings in the court of law.The sharing of information between a bank and its agent for collection purposes will fall under this head. It is necessary that the information shared with the agent is exclusive and not to put to other uses. Therefore the banks should take adequate care and due diligence in selecting the agents..

(v) Disclosure in Public/National interest: Banker may be required to make disclosure in the interest of the nation and public at large. Public interest may be reckoned only according to the prevailing circumstances.

DIFFERENT TYPES OF BANKER-CUSTOMER RELATIONSHIP

Banker-customer relationship arises from the services rendered by banks to their customers. The relationship varies depending on the services.

a. Debtor-Creditor (Bank as the Debtor and Customer, the Creditor) When a customer deposits money by opening an account with the bank, the customer becomes a lender and the bank becomes borrower. As such, the relationship is that of a Debtor and Creditor.

b. Creditor-Debtor (Bank isa Creditor and Customer a Debtor) When the bank lends money to the customer, the customer is the borrower and the bank is the lender. The relationship, therefore, is that of a Creditor and Debtor. The Customer/ Borrower executes documents and offers security to the Bank before utilising the loans.

c. (Bailee-Bailor Relationship) When a customer deposits certain valuables such as bonds, securities or other documents with the bank, for safe custody, the bank performs the role of a bailee and the customer is the bailor.

d. Agent-Principal Relationship (Bank is Agent and Customer is Principal) Some of the ancillary services rendered by the bank are remittances, collection of cheques, bills, etc., on behalf of the customers. It could also undertake to pay regularly, based on the instructions of the customer, electricity bills, telephone bills, insurance premia, club fees, etc. In all such cases, the bank acts as an agent, the principal being the customer.

e. Lessor and Lessee (Bank is a Lessor and Customer is a Lessee) When a bank provides safe deposit lockers to the customers who hire them on lease basis, the relationship is that of lessor and lessee.

f. Trustee and Beneficiary (Bank - Trustee and Customer - Beneficiary) When a trust is created appointing the bank as a trustee, the relationship is that of a trustee and a beneficiary.

Check Your Progress

1. Savings accounts contain some restrictions regarding..........

(a) Number of withdrawals per quarter

(b) Amount of withdrawals per transaction in ATM

(c) Number of deposits into the account per quarter

(d) Both (a) and

(b) above

2. Overdraft is allowed generally by banks in.........

(a) Savings accounts

(b) Term deposit accounts

(c) Current accounts

(d) Recurring deposit accounts

3. A bank’s Fixed Deposit is characterized by.........

(a) Fixed/Floating interest rate as agreed with the customer at the time of the deposit

(b) Fixed period of the deposit

(c) Periodical Repayment of interest

(d) A the above

4. Fixed deposits cannot be.........

(a) Renewed for a further period on maturity date

(b) Transferred to third parties

(c) Pre-paid before the maturity date

(d) All the above

5. A Recurring Deposit account requires the customer to..........

(a) Deposit any amount at specified intervals for a specified period

(b) Deposit a fixed amount at will for a specified period

(c) Deposit a fixed amount at specified intervals for any period

(d) Deposit a fixed amount at specified intervak for a specified period

Endorsements

a. Requirements for Endorsement:A cheque, payable to order, can be negotiated only by endorsement and delivery. Endorsement is made on the back of the instrument, or by attaching a slip of paper (‘allonge’) if the space on the instrument is not enough. Following are the main requirements of endorsementi. Signature of the endorser, without adding any words, is adequate to constituteendorsement. -ii. Endorsement has to be made by the payee or by all the payees ointIy. Astranger cannot endorse an instrument, unless he is a holder in due course.iii. An endorsement cannot be partial as to only a part of the amount of theinstrument.

Scrutiny of the cheques received by DRAs in Loan Recovery
• The cheques should be drawn on local banks and no out-station cheques be received, except in exceptional circumstances where the Bank’s branches are networked under CBS.

• The cheques should be crossed “Account Payee” and the Bank’s name and the borrower’s account No. should be clearly written as F5ayee. In the case of Credit Card dues, the Card Issuing Bank’s Name and the Credit Card No. should be written.

• The word “Bearer” printed on the cheque should have been cancelled.

• No third party cheques viz., the cheques endorsed in favour of the borrower, can be accepted by the DRA.• The date of the cheque should be the date on which the cheque is received by the DRA. If the cheque is dated a few days before the date when actually received by the DRA, it may be overlooked. No post-dated cheques should be received in any event.

• The amount of the cheque in words, as well as in figure, should match exactly.

• No torn or mutilated cheques be accepted.

• No defaced cheques, where the name of the payee or, the amount in words or, in figure, cannot be read clearly, may be accepted by the DRA.

• Immediately on his accepting the cheque for the due receivables from the borrower, the DRA should pass a valid receipt mentioning the number, date and amount of the cheque and the Bank on which it is draWn and hand it over to the borrower. The receipt so passed should read that the cheque is accepted subject to its realization.

• The Debtor Bank should apply the proceeds of the cheque for redemption of debt in the account to which the payment is ostensibly made by the borrower, failing which it will be construed to be ‘ conversion of the borrower’s money”.
Let us sum up
There are dif-ferenttype of banks, based on the ownership and activities. There are Public Sector Banks, Nationalized banks, Private Banks, Foreign Banks, Co-operative Banks and RRBs, functioning in our country. The major activity of all these banks is accepting savings from public in deposits and lending money to various persons who are in need of them fortheir personal requirements or business requirements. Banks offer remittance facility in the accounts. Accounts can be opened by individuals, trusts, companies etc. KYC is an important aspect of account opening and monitoring.
Key Words
Savings, Current, Term and Flexi deposits, Electronic banking, know your customer,money laundering, Cheque book, Power of attorney, specimen signature, operating instructions and nomination.

Crossing of cheques

a. General Crossing:A cheque may be crossed by the drawer/issuer and holder by drawing on its face two parallel transverse lines simply, either with or without the words ‘not negotiable’ or ‘and company’ or ‘account payee’. These are examples of “general crossing” and in such cases, the drawee banker shall not pay it otherwise than to a banker. The effect of such a crossing is that the cheque will be payable not in cash, but through the bank, by credit to the account of the payee.

b. Special Crossing:A special crossing consists of an addition of the name of a banker across the face of a cheque with or without two parallel transverse lines. The effect of such crossing is that the drawee bank shall not pay the cheque otherwise than to fhe banker to whom it is crossed or his agent for collection. This means that a specially crossed cheque has to be routed through an account with the named bank.

Cheques

‘A cheque is a bill of exchange, drawn on a specified banker, and not expressed to be payable otherwise than on demand”. (section 6 of NI Act). This means that a cheque is an instrument that is exclusive to the banking system and no other institution is empowered to operate a cheque system, A cheque has three parties. The drawer is the account holder signing the cheque drawee is always the bank (branch, where the account holder maintains his account) and the payee is the beneficiary who will receive the amount, mentioned in the cheque. Other features of a cheque may be described as follows.

(i) In writing : A cheque should be in writing (by ink pen or ball point pen, or typed, but not in pencil as the writing can be easily erased or altered). A cheque can be written by another person, and not necessarily by the drawer only.

(ii) Drawer’s signature: The cheque has to be signed in ink, by the account holder, as per the specimen signature on record with the bank branch. If the signature of the drawer differs materially, the cheque may be returned by the banker, to protect the customer’s interest from possible forgery.

(iii) Date of cheque: A cheque has to be dated, as date constitutes a material element of a cheque. A holder of an undated cheque may fill in the date while presenting it for payment. A post-dated cheque cannot be paid before its due date. An ante-dated cheque (i.e. date prior to the presentment) may be paid, provided more than six months have not elapsed from the date of the cheque. As per the banking practice in India, a cheque presented after the expiry of 6 months from its written date (called a stale cheque), cannot be paid unless it is revalidated by the drawer under his signature.

(iv) Amount of cheque: In the printed cheque forms of all banks, there two spaces for writing the amount of the cheque - in figure and also in words. While both these requirements have not been laid down in law, it has become a banking practice not to pay a cheque written only in figures, as the amount written only in figures can be easily altered by the holder or any other person. However, a banker can pay a cheque written only in words or where the amount in words and figures mutually differs, after consulting the drawer, who can later remove the deficiency.

Power of Attorney

At times, a customer/depositor would like to transact his/her business through another person. Banks acceptthis arrangement, forwhich, a power of attorney is essential. Power of Attorney (POA) is a document, duly stamped as per Stamp Act, given by a customer to his/her banker, authorizing his/her attorney or agent, named therein, to operate the account. Power of attorney could be general or specific.

Specimen Signature

Specimen signature of the customer is obtained on the account opening form in the presence of the bank staff and it is attested by an authorized bank officer in the form itself. A customer is recognized mainly by his/hersignature on the cheques/vouchers and these are compared with the specimen signature on record to verify the genuineness of the customer’s signature. In respect of credit cards and ATM, customers are given specific PIN numbers by the banks. Customers are expected to use the initial PIN and replace the same with their own PIN. Signature and PIN are essential to ensure safety of customers’ funds and avoid misuse.

KYC guidelines of RBI

In 2002, RBI had issued directive to all banks for complying with the procedure of ‘know your customer’ in respect of all of their new and existing domestic and non-resident customers. KYC establishes the identity and residential address of the customers by specified documentary evidences. One of the main objectives of KYC procedure is to prevent possible misuse of the banking system for money laundering and financing of terrorist activities. RBI has stipulated that banks should show strict adherence to ‘KYC’ guidelines and monitoring of cash transactions based on prescribed norms (above specified amounts). The ‘KYC’ guidelines, issued by RBI, reinforce the existing customer identification practice of banks. KYC guidelines have to be compulsorily adhered by banks in regard to all of their customers who maintain domestic or non-resident rupee or foreign currency accounts with them. This would prevent illegal moneys coming into the banking stream. Accounts opened by individuals, group of individuals, companies, firms, religious trust accounts and non-religious trust accounts etc. should be subjected to KYC procedure.

Identity and Residence Proof

• Introduction is the process by means of which banks satisfy themselves that the applicant is a genuine (not fictitious or benami) person of certain standing and known through the bank’s existing client.

• Such introduction and verification ensures that the bank will get the protection which the provisions of the Negotiable Instruments Act, 1 881 - an Act governing the cheques - confer to all acts done ‘in good faith and without negligence’ in relation to the account holder. Opening an account without proper introduction would not confer such a protection to the banker and such banker may be held liable for loss caused to others by a customer depositing forged or stolen cheques in his account and withdrawing the proceeds.

• As per existing guidelines, issued by Reserve Bank of India, all banks have to obtain acceptable direct proof of the identity of the person (e.g. passport, driving license, voter’s ID card, Income Tax PAN Card), proof of the customer’s residential address (ration card, house owner/lease receipt, society letter) and keep attested photo copies of these documents along with the account opening form. These documents would establish the correct identity and residence of the person and would obviate the need for further enquiries. The procedure would also prevent ‘benami’ deposits or other transactions by undesirable social elements.

DEPOSIT ACCOUNTS - GENERAL ASPECTS

A person, desirous of opening a deposit account in a bank, has to fill up and sign the prescribed account opening/application form and furnish.
• introductory reference of an acceptable person,
• acceptable proof of his/her identity and residential address,
• his/her photographs, and
• initial deposit of an amount not less than the prescribed minimum (Initial deposit could vary from bank to bank and ranges from Rs 500 to Rs 10,000 depending on whether an account is to be operated by cheque or otherwise)

Electronic Banking

In the wake of the recent strides in information and communication technologies, almost all of banking operations have been computerized by most commercial banks both in private and public sectors during the last ten years. Infact, the new generation private sector banks started their operations with IT advantage. Today, IT and computerization has been adopted for front-office operations where interaction with customers takes place, back-office operations such as internal accounting and book balancing and settlement of transactions with other branches and banks/institutions. Electronic banking has opened new banking channels like phone banking, internet banking, Credit Cards, ATM etc. In this background, modern banks look quite different from the traditional ‘brick and mortar’ branch banking. VMost importantly, Information Technology has brought about ‘anywhere and any time bank’ and contributed to the speed, accuracy and confidentiality of customers’ transactions, while enhancing customers’ convenience. The funds transfer and cheques clearing and collection of bills of exchange are also done electronically with accuracy, speed and safety. Internal house keeping is done accurately and much faster. The new banking channels have ensured that the customer need not necessarily go to the branches for cash withdrawal, deposit of cheques, obtaining account statement etc. but has access to other channels such as ATM, Card or internet.

Miscellaneous Services

In addition to the above-mentioned core functions, banks also render other services, which are useful to customer’s business firms and members of the society. These services include safe deposit lockers, safe custody of valuables, issuance of traveller’s cheques, letters of credit and guarantees, collection of outstation cheques/bills/hundies, furnishing opinion reports on their customers, agency services for government business, correspondents, trusteeship and executor’s business. Banks charge a commission or fee on such services, which provides them with non-interest income, which add to their profits.

Funds Remittance

Customers have to make payment for purchases in the place of their business or in the place of business of the vendor/seller. This calls for movement of money from place to place. However, it may not be possible for a buyer to move from place to place for making payments. Nor, it will be economically viable. It is, therefore, necessary that a good payment and settlement system should exist in a country. Banks perform the job of payment and settlements in the financial market.In this regard, Banks have branch network, spread across various cities/regions/states in the country. Some banks have branches and correspondent banks overseas as well. This network enables the banks to remit funds of their customers, if needed, from one place to another in the same country or overseas, by mail/ telegraphic/electronic funds transfer or by issuing bank drafts. Banks charge appropriate fee from the remitting person. Remiftance of funds by banks is fast, safe, secure and cheap, as compared to other modes of funds transfer, like post office money order, physical transfer of money.

Overdue Loans and NPA

Banks expectthat all the borrowers, who fake the loans, are prompt in payment of interest and repayment of principal amount. However, it is possible that on account of a number of reasons, the interest and principal may become defaulted or overdue. Thus, some portion of loans may turn into ‘non-performing assets’ (NPAs), which causes loss of income (interest not being paid or recovered) and in some cases loss of the amount lent. Lending, therefore, calls for good credit appraisal and requires adequate care, caution and supervision/monitoring, by the bank, to prevent loans turning overdue (past dues) and eventually into NPAs. Collection or recovery of dues/overdues is important for the sustainability of banks.

Advantages of Deposits

There are several advantages which accrue to the customers in maintaining deposit accounts with banks namely, safety, liquidity, interest earnings etc. Currently, investors in term deposits, which have a lock in period for five years, enjoy certain exemptions from Income Tax. Banks give the depositors, periodically, statement of transactions, statement of account, and cheque book facility (current and savings account) to operate the deposit accounts.

Lending

Banks have to pay interest on the deposits at agreed rates of interest. In addition, they have to meet their operational expenses. Therefore, banks have to invest/lend the monies and earn interest. Lending money by way of loans and advances of various kinds is, thus, an important traditional function of a bank, The funds mobilised from deposits are deployed by a bank as loans and advances to earn profits by way of interest spreads, i.e. the differential between the average interest rates on loans and on deposits. The interest income from loans and advances forms a major chunk of a bank’s operating profit.Banks lend in the form of Cash Credits, Overdrafts, Demand Loans and Term Loans. Based on the borrower profile, loans can be classified as Corporate Loans, SME advances, Agricultural Loans, Retail Loans, Foreign Currency Loans, Educational Loans, Vehicle Loans etc.Loans are also classified on the basis of security. Security could be in the form of Surety, Pledge of Securities (LIC policies, Deposit receipts, shares and debentures), Mortgage of property, etc. A loan account with security is known as secured loan whereas, a loan without security is known as clean loan (clean advance).

Equated Monthly Instalment

The most commonly adopted method of repayment of loan now is EMI, where the principal and interest is repaid through equal monthly instalment over the fixed tenure of the loan. It is fixed on the basis of the loan amount, interest rate and the tenure of loan.

accounts where nominal interest is paid. Normally, business firms/companies open current accounts which facilitate larger number of transactions. In the case of individuals, and where commercial transactions are not involved, savings accounts are opened. In both these cases, the amount deposited is repayable back to the customer as and when needed. Current account and savings account are’a Iso known as demand deposits and customers can withdraw the funds by issuing cheques. Individuals can also draw cash in the AIMs.The accounts, where the savers can keep their funds for a longer time are called term deposits. Within term deposits, there could be variations, depending upon the need of the customer, like fixed deposits, recurring deposits, monthly income deposits, cumulative deposits etc. Unlike current and savings bank deposits, wherein the amount deposited with the banks are repayable an demand, in the case of term deposits, the amounts deposited are, normally, repayable only after the expiry of the agreed term/ period for which it is kept. There are, however, provisions for closing the account prematurely and withdrawing the amount, subject to certain penal interest stipulations. Term deposits constitute the largest portion of a bank’s funds, apart from its own capital.

Front ended interest

In these cases, the interest (flat rate) is collected upfront and the party gets net amount. For example, in a loan of Rs 1 00 and front ended rate of 1 0%, the borrower will get a net amount of Rs 90 and repay Rs 1 00. The front ended rate is often called the discount. In the given case, since the borrower gets to use only Rs 90 and the interest is Rsl 0, the effective rate of interest will be 10/90 100=11.12%. This is often called the discount rate.

Fixed and floating interest rates

In fixed rate, the rate of interest, once fixed, will not change during the entire period of loan. In floating rate, the rate of interest changes, depending upon the market conditions, subIetto the reset clause, if any, incorporated in the loan agreement. Thus, on every reset, the rate may increase or decrease.A fixed rate is when a bank issues a loan in which the ROl is fixed say 1 0% per annum for 5 years.A floating rate is when the lender asks the borrower to pay a rate of.interest say “inflation rate + 5%.” Here the rate of interest will be reset every half year based on the inflation rate prevailed in the previous half year. For example, if the 1 st half year Inflation is 5%. thenthe2nd half yeorrateof interestwillbe5% + 5% = 10%. lfthesecond HYinflation is 4% then the 3rd HY ROl will be 4% + 5% = 9%. The floating rates will be reset at predetermined periodicity in this case half year.

Compound Interest

When interest is added to the account, as opposed to paying it immediately to the lender, the interest is said to be capitalized and earns interest during the next time period for compounding interest. This is compounding of interest or in simple term “Compound Interest”. The formula for calculating compound interest is as follows:P = A (1 + r/n)tWhere P = the principalA = the amount borrowedr = the rate (expressed as fraction) of interest per yearn number of times per year that interest is compoundedt = number of years of the loan.

You deposit Rs. 10,000 with a bankfor one year at 6% interest p.a. The Bank pays monthly compounded interest which is reinvested in the account. What amount would you get on maturity of your deposit?
By applying the above formula Let us now solve the problem

P = Principal on maturity
A = Rs. 10000
r =. 0.06
n = No. of times a year that interest is cornpounded=12
t = No. of years of the deposit
P = 10000(1 +0.06/12)12*1 = 10000(1 + 0.005)12= 10000 (1.005)12 P=Rs. 10000(1.06167)= 106l6.77sayRs. 10617.

Simple Interest

Simple Interest is a fixed percentage of the amount borrowed for a period. The formula for calculation of simple interest is as follows:Interest = Principal x Rate of Interest X TimeWhere:Interest is the total amount of interest paid,Principal is the amount of money borrowedRate is the percentage of the principal charged as interest each year, expressed as a decimal fraction.If Rs. 1 bc is the money borrowed for 12 months and the ROl is 12% p.a, then what would be the Interest paid by the borrower to the lender?By applying the above formula, let us calculate the amount of interest payable in the above illustration.Answer- Interest = Rs. 1 ,00,000 x 1 2/1 00 x 1 yearAnswer= Rs. 12,000

What is interest

Interest is the price that someone pays for the temporary use of someone else’s funds. Interest can also be said to be the compensation that someone receives for temporarily giving up the abilityto spend money. Without interest, lenders wouldn’t be willing to lend, or to temporarily give up the ability to spend, and savers would be less willing to defer spending. To repay a loan, a borrower has to pay interest, as well as the principal, the amount originally borrowed.When money is advanced by a bank, the borrower usually pays a price in consideration of the loan, to the bank, till it is repaid (to the bank). This price is called ‘Interest”. Similarly, a bank pays interest at agreed rates on deposits accepted by it.

Interest Rates

It is essential for recovery agents to understand the term ‘interest’ and the different methods of its calculation. Types of loans taken by Individuals are numerous; home loans, car loans, credit cards, etc. Although the price ofcrdit is generally stated as a rate of interest, the amount of interest paid or earned depends on a number of other factors, including the method used to calculate interest.

Hybrid Deposits

These deposits are a combination of demand and fixed deposits, for meeting customer’s financial needs in a flexible manner. Hence these are hybrid deposits or flexi-deposits.e.g. Quantum Deposit Scheme of ICICI Bank, t’4ulti Option Deposit Scheme (MODS) of SBI.The flexi deposits show a fusion of demand and fixed deposits, as reflected from the following features of the product:
• Only one savings/current account is opened and the term deposits issued under the scheme are linked to the account. Banks do not issue deposit receipts but issue a statement of deposits to the customer. The fixed deposits are linked to the savings or current account such that once balance in savings/current account cross a pre-agreed level, such surplus amount is automatically transferred to fixed deposit account of a pre-determined maturity (usually one year) in the customer’s name, for higher interest earning. Similarly if the cheque issued in the savings/current account exceeds the balance in the account, but less than the total in all the accounts, the fixed deposits are automatically closed and the money credited to the savings/current account such that the cheque is honoured. It is also possible to partially close the fixed deposit accounts.
Thus, the main advantages of the flexi-deposits to a customer are
• Advantage of convenience: The customer opens only ore account (savings or current) under the scheme and need not come to the bank branch each time for opening term deposit accounts or for pre-paying/breaking term deposit for meeting the shortfall in the savings/current account.
• Advantage of higher interest earning: The customer earns higher interest on his surplus funds than is possible when he opens two separate accounts- savings and term deposits.

Recurring Deposits

The main features of these deposits are

• The customer deposits a certain sum of amount pre-fixed frequency (generally monthly/quarterly) for a specified period (1 2 months to 1 20 months).

• The interest rate payable on recurring deposits is pre-fixed and it is generally a liffle lower than the fixed deposit rate for the same period.

• The total amount deposited, along with the interest, is repaid on the maturity date.

• Depositor can take a loan or advance against the deposits or have the deposit pre-paid before the maturity, for meeting emergent expenses. In the latter case, the interest rate payable by the bank would be lower than the contracted rate and some penalty would also be charged.

Fixed Deposits

Fixed deposits are repayable on the fixed maturity date along with the principal and agreed interest rate for the period. Unlike current account and savings account, no operations are allowed to the customer in the fixed deposit account. The main features of fixed deposits are as follows:

• Fixed deposits are accepted for specified periods at specified interest rates as mutually agreed between the depositor and the banker at the time of opening the account. Since the interest rate on the deposit becomes contractual, it cannot be altered even though the interest rate could change - upward or downward - during the period of the deposit.

• Banks offer varying interest rates for different maturities as decided by their Boards. The maturity-wise interest rates in a bank will, however, be uniform for all customers subject to two exceptions - high value deposits above certain cutoff value and deposits of senior citizens (above the specified age normally 60 years) may be offered higher interest rate.

• Minimum period of fixed deposit is 7 days and maximum period for which a bank may accept a deposit is, presently 1 0 years. Those term deposits, which are held for periods of 6 months and less, are called Short Term Deposits or Short Deposits.

• A deposit receipt is issued by the bank branch accepting the fixed deposit- mentioning the depositor’s name, principal amount, maturity period and interest rate, date of the deposit and its maturity etc.

• The deposit receipt is not a negotiable instrument, nor is it transferable, like a cheque. Only exception to this is the Certificate of Deposits, issued by banks as OTC negotiated product, which are negotiable.

• Banks cannot, as per the current stance of policy, prepay the deposits. However, banks agree to the customers’ request for pre mature closure of deposits, at their discretion, to accommodate customers’ request for meeting emergent expenses. In such cases, interest is paid for the period the deposit was actually with the bank (period between the date of deposit and pre mature closure) at the rate of interest which would be generallyl% lower than the rate applicable to the period elapsed.

• Banks also may grant overdraft/loan against the security of their fixed deposits to meet emergent liquidity requirements of the customers. The interest on such facility will be 1 % to 2% higher than the interest rate on the fixed deposit.

• Banks are required to calculate and credit the interest, payable on the deposits, on a quarterly basis. However, for the convenience of the depositors, banks pay interest at different desired intervals namely monthly, quarterly, half yearly or yearly. At times, the customer opts to reinvest the interest, in which case, the final payment on maturity is at compound rate of interest.

• Banks give different names to such deposits for easy identification, both by the bank and also the depositor.

Savings Bank Accounts

As the name indicates, Savings bank accounts are intended for keeping savings of individuals and small businesses (other than business transaction purposes) for meeting their future money needs. Banks pay interest on these accounts with a view to encourage saving habit in the community. Currently, the rate of interest on savings accounts is regulated by Reserve Bank of India. Savings accounts can be opened by individuals, guardians (on behalf of their minor children/wards), clubs, associations, trusts, small businesses etc.

The Savings bank accounts are of two types

(a) Accounts with Cheque book facility in which withdrawals are permitted by cheques drawn in favour of self or other parties. The payees of cheques can receive payment in cash at the drawee bank branch or through their bank account via clearing or collection. The account holder may also withdraw cash by filling up withdrawal form or in ATM

(b) Accounts without cheque book where withdrawals are permitted to the account holders only at the drawee bank branch by filling up a withdrawal form or letter accompanied with the account passbook. In such accounts, third parties cannot receive payments.The main features of Savings bank accounts are as follows:

• Withdrawals are permifted on demand of the account holder by presentment of cheques or withdrawal form/letter. However, cash withdrawals in excess of the specified amount per transaction/day (the amount varies from bank to bank) require prior notice to the bank branch.

• Banks stipulate certain restrictions on the number of withdrawals per month! quarter, amount of withdrawal per day, minimum balance to be maintained in the account on all days, etc. and levy fee/penalty for violations of these rules. These rules are different for different banks. The rationaLe of these restrictions is that the savings bank account should not be used like a current account, as it is primarily intended for keeping and accumulating the savings.

• Banks pay interest on the minimum balance maintained in the account during the specified period of every month, say from 1 0th to the last day of the month. Let us illustrate this with an example. Suppose, in a savings bank account, the credit balances in the month of July were Rs. 20,000 on the 1 st, Rs. 1 2,000 on the 2nd, Rs. 8,000 on the 20th and Rs. 5,500 on the 30th July. The bank would pay interest only on Rs. 5,500 for the month of July..as this was the minimum balance maintained during July 10-31.

• Interest on savings bank account continues to be regulated by the Reserve Bank of India. It is 3.50% per annum and all commercial banks have to pay this rate on savings bank accounts.• No overdraft (payment in excess of the credit balance) is allowed in a savings bank account, as there cannot be any debit balance in savings accounts.

• Most banks provide, to every savings bank account holder, a passbook, wherein date-wise debit/credit transactiors and credit balances are shown as per the customer’s ledger account maintained by the bank. These days, banks offer printer statement of account as per the convenience of the account holder.

• Under electronic banking, a customer can access the account through internet by using a customer ID number and password assigned to him/her by the bank. The electronic banking enables the customer to transfer funds from one account to another, verify the transactions in the account etc. Nowadays customers can also get their account statement through e-mails.

Demand Deposits

Current AccountsCurrent accounts form a large porhon of demand deposits of a bank. Current accounts can be opened by individuals, business entities (firms, company), institutions, government bodies/departments, societies, liquidators, receivers, trusts, etc. The main features of current accounts are

• There are no restrictions on khe number and amount of withdrawals/deposits. Hence this account is maintained for the purpose of business.

• Cheque book facility is provided to each current account holder. Withdrawals are permitted by cheques. There is no restriction on the number of cheques that can be transacted in a day.

• Balance of deposit in the current accounts do not earn any interest. Banks are not allowed to pay interest or brokerage, in any form, to the current account holders.

• Customers are allowed overdraft facility. Overdraft is a facility whereby banks honour cheques drawn by current account customers even when the balance in the account is less than the amount of the cheques. Banks charge an agreed rate of interest on such overdrafts. Overdraft can be temporary or regular. Banks can sanction regular Overdraft (permanent) facility as per prior arrangement made by the account holder with the bank. In such cases, the bank would honour cheques drawn in excess of the credit balance but not exceeding the overdraft limit. The bank would charge agreed interest on the overdraft amount.

• The account holder gets periodical statements of accounts from the bank, giving the details of transactions, for customer’s verification and record. The statement of account would show, date-wise, the entire debit and credit transactions and balances, as recorded in the bank’s ledger account of the customer.

TYPES OF DEPOSiTS

Deposits of banks are broadly classified into three categories
(i) Demand deposits, which are repayable on demand by the customers. These comprise of
• Current account deposits
• Savings bank deposits
• Call deposits

(ii) Term deposits, that are repayable on maturity dates as agreed between thecustomers and the banker. These comprise
• Fixed deposits
• Recurring deposits

(iii) Hybrid deposits or flexi deposits, which combine the features of demand and term deposits. These deposits have been introduced, in recent times, by some banks, to meet customers’ financial needs and convenience and are known by different names in different banks.

Closing a deposit account

(i) Closure at customer’s requestA customer is entitled to terminate the relationship with a bank by applying for closing the deposit account if he/she is not satisfied with the services of the bank or for any other reason e.g. transfer/relocating to another place.

(ii) Closure of accounts by bankA banker may close account or stop operation on a customer’s deposit account in any of the following cases, by giving reasonable notice to the customer, wherever necessary:

(a) An Account may be closed on receipt of notice of death of the customer

(b) A oint account may also be closed on the death of anj one of the account holders and fresh account opened in the names of the surviving account holders, to avoid legal problems.

(iii) Stopping of operationsGarnishee order or order of courtsIf a bank is served with an order, to stop payments or not to allow operations in an account, in execution of a decree of a court ,a garnishee order, or by Income Tax authority, the bank would immediately note a ‘caution’ in the account and stop payment of cheques or debits to the account, until the order is lifted in writing by the court, Income Tax department. The customer will be simultaneously advised of such order and the consequent freeze on the withdrawals from the account. It should be observed that in such cases the account operations are ‘stopped’ for temporary period of the court order and the account is not closed.

Nomination

At the time of opening an account, banks advise the customer to indicate the nominee to whom the amounts are payable in the event of death of depositor/s. The effect of a valid nomination is that in the event of death of the sole depositor or all depositors, the amount lying in the account will be returned to the nominee without any further legal formality.

Illiterate persons

Illiterate persons, who cannot sign, are allowed to open savings account (without cheque facility) or fixed deposit account. Current account is not generally opened for such persons. Withdrawals are permitted in the account, on production of the passbook and after verification of the thumb impression and against proper identification of the account holder.

Joint Accounts

It is also possible that more than one individual come togetherand open a bank account. These are called joint accounts. In these cases, for practical reaons, the account holders will have to give instructions to the bank about who would be operating the account. Such accounts con be operated by one of the account holders or jointly by two or more account holders. The operating instructions given by the joint account holders should be explicit, unambiguous and would be accepted as per the original wish onfirmed at the time of opening of the account. Normally the type of instructions could be

(i) ‘either or survivor’, wherein the account can be operated by any one of the joint holders (this means that both of them have the right to operate and it is enough if one of them signs the cheques etc) and, in the event of closure of account, the deposit can be repaid to any one or the survivor’,

(ii) ‘former or survivor’, wherein the account will be operated only by the first named depositor and the balance will be payable to only the first named depositor or if the first named is deceased, the survivor as the case may be,

(iii) ‘both ointIy or survivor’ wherein the account will be operated jointly and the money repayable to both jointly or the survivor, if one of the joint holders is deceased

(iv) ‘any two jointly or last survivor’ wherein the number of account holders is more than two and any two will operate the account etc.

OPERATIONS IN DEPOSIT ACCOUNTS

Individuals
Deposit Accounts, opened by individuals, account for a major share of the deposit accounts in Personal segment of most banks. An individual, who is above 1 8 years of age (major), being of sound mind, can open a deposit account.Savings or fixed deposit accounts for the benefit of minor child can also be opened and operated by the father/mother/guardian in one of the following modes (child will operate the account only on attaining the majority)

(i) In the single name of the child operated by the father/mother/guardian, or

(ii) In the joint names of the father/mother/guardian and the child (payable to either or survivor)

Further, in orderto inculcate saving habit among children, many banks also allow minor children, above specified age, to open savings account in their single name and operate the account, with certain limitations on withdrawing of money. Such accounts are known as ‘kid’s accounts’

FUNCTIONS OF BANKS

1. Traditional Functions
a. Deposit-taking: A bank accepts money from its customers (members of the public). A customer can keep his/her monies in currentaccounts where no interest is payable (by the bank) or in savings

Cooperative Banks

1.Cooperative Banks are registered under the State Cooperative Act or the Multi State Cooperative bank with the Registrar of Cooperatives. Their main regulator is the State Government (or Central Government in cases of the cooperative banks operating in more than one State). The organizational structure and management set-up of cooperative banks is based on cooperative principles. It is observed that these banks are not professional in management as in the case of commercial banks.

2.Cooperative Banks are classified into Primary Cooperative Banks (Urban Cooperative Banks), Short Term Cooperative Banks (Agriculture Cooperative Banks) and Agriculture and Rural Development Bank (Land Mortgage Banks)

3.Cooperative banks’ size of assets/liabilities is much smaller as compared to commercial banks. Cooperative banks operate on ‘no profit no loss’ principle of cooperation and commercial banks operate with profit objective (for the shareholders).

Private sector banks

a. Indian Private Sector banks
These are banks incorporated in India. Public and business houses are the major shareholders of these banks. Majority of these banks belong to the category of old generation private banks characterized by small balance sheet size, regional operations, traditional style of management and business activities. The other category of private sector banks is the new generation banks, incorporated post-1993. These banks are technology- driven, aggressive in business development and display a style of functioning comparable to foreign banks operating in India. These banks adopt a riety of delivery channels. Some of these have become big with merger and acquisition and now have country-wide operations.

b. Foreign Banks
These are the banks incorporated abroad but granted license by RBI to do banking business in India through their Indian branches. While the total number of foreign banks in India is larger than the total number of private sector banks, the branch network of these foreign banks is smaller and confined mostly to the metropolis/big commercial centres. Their operations are technology driven and a good part of their business comprises foreign exchange, export/import finance and merchant banking.

c. Local Area Banks
These are banks which have been given license to function in a given area and are not highly capitalized. There are only four Local Area Banks in the country.

Public Sector banks

These Banks are characterized by maiority ownership (51 % or more share capital) held by the Government of India. They account for (as at the end of March 2007) about 72% of the banking business of the country. The following is the further classification of Public sector banks

a. The State Bank Group:State Bank of India is the largest bank in India and has more than 1 0,000 branches. It has 7 associate banks namely State Bank of Patiala, State Bank of I ndore, State Bank of Bikaner and Jaipur, State Bank of Saurashtra, State Bank of Mysore, State Bank of Hyderabad and State Bank of Travancore. State Bank of India has many financial subsidiaries such as SBI Life Insurance Company, SBI Mutual Funds, SBI Factors, SBI DFHI, SBI Capitol Markets, and SBI Cards etc. The fist of subsidiaries is indicative of the variety of services that banks render these days.

b. Nationatised BanksNationalised Banks are twenty in number. This group has the largest numberof branches in metro! urban/rural areas throughout the country. [ach of these banks has very large branch network spread over all parts of the country, large deposits and assets base and performs all kinds of core and modern banking functions.

c. Regional Rural Banks (RRBs):Regional Rural Banks were started with a focus on rural development. These are also scheduled banks, but, unlike commercial banks, they are small localized banks operating at district level with 3 or 4 districts as there area of operation. RRBs have been sponsored by public sector banks. Their ownership/capitol is provided jointly by Central Government (50%), concerned State Government (1 5%) and the sponsoring public sector bank (35%). To ensure better viability, RRBs ore being merged at State level.

Scheduled Banks

Banks can be either scheduled or non-scheduled. Banks which are listed in the second schedule of the Reserve Bank of India Act, 1934 are known as Scheduled Banks. These banks are further classified as:

(i) Public Sector banks : These are further classified as

a. State Bank and its seven Banking Subsidiaries:

b. Nationalised Banks

c. Regional Rural Banks

(ii) Private Sector Banks:

a.Old private sector Banks

b. New private sector Banks

c. Foreign Banks

(iii) State Cooperative Banks and

(iv) Urban Cooperative Banks

Brief description of these banks is as follows.

BANK

A bank is a financial institution which acts as an intermediary between savers and usersof funds. It is easy to understand a bank from the various services it offers, such as,
1. It accepts deposits from public in the form of Savings, Current or Term Deposits.
2. It allows a customer remit money or funds from one place to another, in the form of Demand Draft or Money transfer.
3. It accepts instructions from the customer and makes, on their behalf, payment for utilities such as electricity bill, school fees etc.
4. It accepts, on behalf of Government, tax payments.
5. It lends money for business, agriculture, purchase of house, purchase of vehicles etc.
6. It transacts in foreign exchange and helps business people and others pay inforeign exchange. Pt buys and sells foreign currency as per customers’ needs
7. It offers safe deposit vault facilities for safe keeping of customers’ valuablesviii. It operates ATM machines, which allow the customer to withdraw funds throughout the day and night, and.
ix. It offers credit/debit and charge card facilities which helps customers makepayments, as also borrow money.It is evident that the list of activities of banks is very large. Bank is able to do all the above activities because it is a financial intermediary. Its primary function is acceptance of money in the form of deposits and lending money to borrowers and, invest funds. Thus, deposit taking, lending and investments are the basic functions of a Bank.