BANKING Ritika Jain

Definition of Banking Under sec 5(1) of the Banking Regulation Act,1949 defines banking company as, “ any company which transacts the business of banking” Under sec 5(1)(b) ‘banking’ means -“ accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise”. Negotiable Instruments Act,1881 defines a banker as, “ a body of persons who carry on the business of banking”.

Definition of Customer In Great Western railway Company vs London and Country Banking Company, a customer was defined as a person who has some sort of an account, either deposit or current account, or some similar relation with a banker. According to Sir John Paget, to constitute a customer there must be some recognizable course or habit of dealing in the nature of regular banking business.

Characteristics of a Customer Maintains a deposit account with the Bank Duration of the account is immaterial State of account is immaterial Banker-customer relationship can exist even between two banks Visiting banks for merely for encashing a cheque or purchasing a draft doesn’t make a person the customer of the bank A customer of one branch doesn’t become a customer of another branch Even a agreement to open an account would make a prospective depositor a customer of the bank

Relationship: Banker & Customer Debtors and Creditors Principal and Agent Entrustor and Trustee Bailor and Bailee Lessor and Lessee

Relationship: Banker & Customer Debtor and Creditor: The true relationship between banker and customer is primarily of a debtor and creditor. When a customer deposits money with a bank, the bank then is the debtor and the customer is the creditor. The position is reversed if the customer is advanced loan then the banker becomes creditors and the customer is debtors.

Relationship: Banker & Customer Principal and agent: The special relationship between the customer and the banker is that of principal and agent. The customer (principal) deposits checks, drafts, dividends for collection with the bank. He also gives written instructions to the bank to purchase securities, pay insurance premium, installments of loans etc on his behalf. When the bank performs such agency services, he becomes an agent of his customer.

Relationship: Banker & Customer Bank as a trustee The bank act as a trustee for his customer in those cases where he accept securities and other valuables for safe custody. In such cases the customer continues to be the owner of the valuables deposited with the bank. In the event of a customer’s death, the bank may be responsible for looking after the estate of the customer Bank preserves the ‘Wills’ of their customers and execute them after their death.

Relationship: Banker & Customer Bailer and Bailment relationship Bailment arises when one person (bailer) deposits goods with another (bailee) for specific purpose on terms that goods should be redelivered to the bailor. The bailor retains the right of ownership of the goods A bank may accept the valuables of his customer such as jewellery, documents, securities for safe custody. The bank (bailee) charges a very small amount as service charges for safe custody of the valuables from his customer (bailer). This relationship between the bank and the customer as bailee and bailer started from the days of earlier goldsmiths.

Relationship: Banker & Customer Lessor and Lessee: When a bank offers the service of renting out a safe deposit locker to a customer the relationship is strictly that of a lessor (the bank) and a lessee (the customer) Though the banker doesn't know the contents in the locker, it is his responsibility to ensure the safety of the contents of the deposit in the locker.

Special Features of the Relationship Appropriation of payments Banker’s right of set-off Banker’s obligation to honour the Customer’s cheques Banker’s duty to maintain Secrecy of the Customer’s Account Banker’s Lien Banker’s right to charge interest and commission

Special Features of the Relationship Appropriation of Payments When money is paid in by the customer, or when the bankers receives money from the third parties for the credit of the customer, the customer has the right to say that it should be placed to a particular account or should be applied in payment of a particular debt or in meeting some cheques or bills Banker’s right to set-off The banker can be on the safer side by taking an agreement from the customer authorizing him to combine the accounts at any time without notice and to return cheques which, as a result of his having taken such an action, would overdraw the combined account.

Special Features of the Relationship Banker’s obligation to honour the customer’s cheques Sec 31 of the Negotiable instruments Act, 1881 imposes a statutory obligation upon the banker to honour the cheques of his customer drawn against his current account so long as his balance is sufficient to allow the banker to do so, provided the cheques are presented within a reasonable time after their ostensible date of issue. Banker’s duty to maintain secrecy of the customer’s a/c Sir John Paget states that, this duty of the banker to maintain secrecy doesn’t even end with the closing of the customer’s account.

Special Features of the Relationship Banker’s Lien A ‘lien’ may be defined as the right to retain property belonging to a debtor until he has discharged a debt due to the retainer of the property Lien can be a general lien or particular lien A particular lien confers a right to retain the goods in respect of a particular debt involved in connection with a particular transaction. A general lien confers a right to retain goods not only in respect of debts incurred in connection with a particular transaction but also with respect of any general balance arising out of the general dealing between the two parties

Special Features of the Relationship Banker’s Right to charge interest and commission A banker is entitled to charge interest on loans, either by express agreement or by right of custom or usage of trade Bank is allowed to charge compound interest unless there is an agreement to the contrary Bank is not entitled to debit his charges at any other than the customary dates. Bank is also entitled to charge commission for services rendered to his customer.

Termination of the Relationship Mutual agreement Death of the customer Insolvency of customer Insanity of customer Attachment Order from Tax Authority Unsatisfactory customer dealings Garnishee Order- it is an order issued by a court at the instance of a judgement creditor attaching funds belonging to a judgement debtor lying with a third party (in this case, a bank). The order requires not to release the money until the court directs it so.

Rights of the Bank Right to choose a customer Right of lien Right of set-off Right to charge interest and service charges Right to close an account

Commercial banks Commercial Banks are organized on a joint stock company system, primarily for the purpose of earning a profit. A commercial bank is a profit-seeking business firm, dealing in money and credit. It is a financial institution dealing in money in the sense that is accepts deposits of money from the public to keep them in the custody for safety. It deals in credit, i.e., it creates credit by making advances out of funds received to needy people.

Function of Commercial Bank Primary Function Secondary Function Acceptance of deposits Agency Services Advancing Loans General Utility Services Creation of Credit Overdraft Term Loans Clearing of Cheques Cash Credit Consumer Credit Financing of foreign Trade Discounting Trade Bills Misc advances Remittance of funds Money at Call

Primary Function A) Acceptance of deposits Accepting deposit is the primary function of a commercial bank. It mobilizes savings from household sectors. Bank generally accepts three types of deposits viz, Current Deposits, Saving Deposits and Fixed Deposits

Primary Function Current Deposits These deposits are also known as demand deposits as deposits can be withdrawn any time on demand No interest is allowed on current deposits These deposits are kept by businessmen and industrialists who receive and make large payments through banks The bank levies certain incidental charges on the customer for the services rendered by it.

Primary Function ii) Saving Deposits As the name suggest, this account or deposit is perfect to park your temporary funds. These account provide cheque facility and lot of flexibility for deposits and withdrawal of funds in certain limits. Interest is allowed on the credit balance of the funds. The rate of interest is much less than that of fixed deposits. This system encourages the habit of savings.

Primary Function iii) Fixed Deposit This deposits are also known as time deposits. These deposits cannot be withdrawn before the expiry of the period for which they are deposited or without giving a prior notice for the withdrawal The interest rates varies with the terms of deposits, it is usually higher for the longer period Loans can be raised against this deposits.

Primary Function B) Advancing Loans The second primary function of a commercial bank is to male loans and advances to all types of people, particularly to businessmen and entrepreneurs. Loans are made against personal security, gold and silver, and other assets The most common ways of lending are :- Overdraft Facility Cash Credit Discounting of bills of exchange Money at call Term loans Consumer credit Miscellaneous Advances

Primary Function C) Creation of credit A unique function of a bank is to create credit. Bank supply money to traders and manufacturers. When a bank grants a loan to its customer, it doesn't pay cash. It simply credits the account of the borrower. He can withdraw the money whenever he wants by a cheque. In this case bank has created a deposit without receiving cash i.e. banks are said to have created credit D) Promote the use of cheque The commercial bank renders an important services by providing to their customers a cheap means of exchange like cheque It is much easier to settle debts through cheques rather than through use of cash Cheques are the most developed type of credit instrument in the money market

Primary Function E) Financing internal and foreign trade The bank finance internal and foreign trade through discounting of exchange bills The bank even gives short term loans to traders on security F) Remittance of funds Commercial Banks also provide facilities to remit funds from one place to another for their customers by issuing bank drafts on a nominal charges.

Secondary Function Agency Services Bank performs certain agency function on behalf of their customers. The various agency services rendered by banks are:- Collection and payment of credit instruments like cheques, bills of exchanges etc Purchase and sale of securities Collection of dividends on shares Acts as a representative and correspondents of their customers Income-tax Consultancy Execution of standing order Acts as Trustee and executor

Secondary Function B) General Utility Services The modern banks provide the following general utility services to the community :- Locker facility Credit cards Letter of credit Collection of statistics Underwriting Securities Special advisory services

Systems of Banking Unit and Branch Banking Unit Banking: Unit banking refers to a single bank which renders services and operates without any branches anywhere These banks are often allowed to have some branches within a limited areas These units are linked together by the correspondent bank system, the latter acts as a medium for remittances between one bank and another, and provides facilities for consultation for lending risks and sharing loans This kind of banking system is common in the USA

Systems of Banking Branch Banking Branch banking consists of conducting banking operations at two or more centers by a bank from one location called as head office The branches may be located in the same city, state or across other states in the nation or overseas This kind of banking system is common in India. e.g. State Bank of India The head office and all other branches are controlled by the same boards of directors and are owned by the Government of India in case of public sector or by the shareholders in the case of private sector

Systems of Banking B) Retail and Wholesale Banking Retail Banking Retail banking refers to the mobilization of deposits from individuals and lending to small business and in retail loan market. It consists of large volumes of low-value transactions Wholesale Banking Wholesale banking is the term used for transactions between banks and large customers involving large sums. It also includes the transactions which the banks conduct with each other via interbank market separate from customers

Systems of Banking C) Universal Banking Universal Banking can be defined as the conduct of range of financial services comprising deposit taking and lending, trading of financial instruments and foreign exchange, underwriting of new debt and equity shares, brokerage, investment management and insurance. Universal Banking refers to the combination of commercial banking and investment banking including securities business

Design of Deposit Scheme Recurring Deposit Scheme Recurring Deposit is a special type of deposit account which enables a depositor particularly in fixed income group to save by paying into the account an agreed fixed sum of money monthly over a stipulated period. Reinvestment Deposit Scheme In this scheme, a lump sum amount is invested for a fixed period and repaid with interest on maturity. Interest on the deposit is reinvested at the end of each quarter and hence, there is interest on interest

Design of Deposit Scheme D) Fixed Deposit Scheme A specific amount is deposited for a fixed term during which the amount cannot generally be withdrawn. Interest can be paid out on a monthly/quaterly/half- yearly/annual basis. E) Cash Certificate This is a variant of the re-investment deposit scheme, where the maturity value will be a pre-determined lump sum. The amount of initial deposit will be the issue price of the cash certificate and will be computed based on the maturity amount or the face value of the cash certificate and the tenure of the deposit

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