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Contents
INTRODUCTION ....................................................................................................................................... 1


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INTRODUCTION

RETAIL BANKING
Retail banking is a banking service that is geared primarily towards individual consumers
rather than corporations or other banks. Retail banking is usually made available by
commercial banks, cooperative banks, and other smaller institutions which lend money to
public. Retail banking focuses strictly on consumer markets. Retail banking entities provide a
wide range of personal banking services, including offering savings and checking accounts,
bill paying services, as well as debit and credit cards. Through retail banking consumers may
also obtain mortgages, and personal loans. Today much of retail banking is streamlined
electronically via Automated teller machine, or through virtual retail banking known as
online banking. Related ancillary services include credit card or depository services.
Retail banking has wider connotation and not the same as that of retail lending.
Retail banking refers to the efforts of the bankers to reach up to the customers on both fronts
of the balance sheet i.e. liabilities side and asset side. Under the liabilities side, we have
deposits. Under the asset side, we have credit schemes of the various banks. Banks today are
offering various sops to attract the potential consumers.
Retail banking activity is commonly understood to comprise:-
Banking services for consumers (Individuals/private households) and
Banking services for small and medium- sized enterprises (SMES)
Characteristics of Retail banking
Multiple products- Deposits, credit cards, insurance, investments, and securities.
Multiple channels of distribution- Call centre, branch, Internet, and kiosk.
Multiple customer groups- Consumer, small business, and corporate.

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Retail banking products and services
Within the segment of banking services for consumers, three set of retail banking products
from the core of the sector inquiry.
1) Current accounts:- The bank account which individual use for most of their household
transactions such as receiving wages or paying bills.
2) Deposit accounts:- An account which individual use for saving. The accounts provide
instant (sight deposits) or time limited (time deposits) access to funds.
3) Consumer term loans:- A loan account operating for a specified time period, which is used
to fund personal or household consumption.
In addition to these three set of products, the sector inquiry has also taken some account of
other retail banking products for individuals such as payment cards, mortgages and
investment funds.

The analysis of banking services for small enterprises (SMEs) focuses on-
1) Current accounts:- The bank account which SMEs use for the bulk of the payments they
make and receive.
2) Term loan:- A loan account operating for a specified time period, which on SME uses to
finance its business expenditure.
3) Credit lines:- An open- ended facility which incorporates the credit element of a loan
enabling SMEs to draw down finance and the flexibility of a current account for making and
receiving payments.
Reasons for retail growth- An analysis
1) Economic prosperity: - Economic prosperity and the consequent increase in purchasing
power have given a boost to consumer boom. It is noted that during the 10 years after 1992,
Indias economy grew at an average rate of 6.8 percent and continues to grow at almost the
same rate- not many countries in the world match this performance.
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2) Changing consumer demographics: - indicate vast potential for growth in consumption
both qualitatively and quantitatively. India is one of the countries having the highest
proportion (70%) of the population below 35 years of age.
3) Technological factors:- played a major role. Convenience banking in the form of debit
cards, internet and phone banking, anywhere and anytime banking has attracted many new
customers into the banking field. Technological innovations relating to increasing use of
credit/debit cards, ATMs, direct debits and phone banking have contributed to the growth of
retail banking in India.

Advantages of retail banking
The advantages of retail banking could be analysed from two perspectives:-
1. Recourse side
a) Retail deposits such as savings accounts, current accounts and term deposits are stable and
contribute to core deposits.
b) They provide low cost funds for the banks.
c) Effective customer Relationship Management (CRM) with customers build a strong
customer base.
d) The typical products offered in the Indian retail banking segment are housing loans,
consumption loans for purchase of durables, auto housing loans, credit cards and educational
loans.
2. Assets side
a) Retail banking results in better yields and better bottom line.
b) Retail segment is a good avenue for funds deployment.
c) The consumer loans help diversify risk
d) It helps in economic revival
e) It ensures innovative product development.
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Drivers of Retail growth
Changing consumer demographics
Growing disposable incomes
Youngest population in the world
Increasing literacy levels
Higher adaptability to technology
Growing consumerism
Fiscal incentives for home loans
Changing mindsets- willingness to borrow/lend
Banks vying for high market share.
REGULATION OF RETAIL BANKING
Across the EEA, competition are increasingly tuming their attention to banking markets.
Competition authorities in both Iceland and Norway have dealt with several cases involving
retail banking markets over the years. It is by now firmly established that EEA competition
law applies to the banking sector.
One tool of prudential regulation is entry regulation by means of bank license requirements.
This is explainable by the rules on own funds adequacy. However, the promotion of stability
and the avoidance of a systemic crisis cannot justify all occurring entry restriction. Such
restrictions may also be used by governments to prevent foreign entries or takeovers and thus
impede effective competition. Another regulatory issue that do not affects market entry
concerns specific rules on the ownership and activity of certain type of banks such as saving
banks and cooperative banks.
The authority scrutinizes advantages provided to certain financial institutions by means of
state aid control in order to ensure a level playing field for all market participants and to
enhance undistorted competition. In particular, the authority ensures that public and private
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institutions operate under similar conditions by removing unlimited state guarantees or fiscal
advantages favouring particular banks and by applying the so-called Market Economy
Investor principle (MEIP).

PRODUCTS OF RETAIL BANKING
Typical products offered by a retail bank include:-
o Transactional accounts
o Checking accounts
o Current accounts
o Saving accounts
o Debit cards
o Credit cards
o ATM cards
o Travelers cheques
o Mortgages
o Home equity loans
o Personal loans
o Certificate of deposits/term deposit


RETAIL BANKING LIABILITY PRODUCTS
Liability products of banks are those which appear on the liability side of the balance sheet.
When bank accept deposits, they are liable to repay the deposits either on demand or at future
date. Hence they derive the name liability.
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Once the account is opened, the relationship between banker and customer becomes debtor
creditor. Examples of liability products are saving accounts, Current accounts, fixed deposits
including cumulative deposits, recurring deposits, sweep accounts, etc.
FEATURES OF LIABILITY PRODUCTS
1) Liability products, otherwise known as deposits, are the source of funds for the banks.
2) Liability products can be retail liability products and wholesale liability Products.
3) Retail liability products are those products which address the needs of non High Net worth
individuals (HNI), non corporate and non institutional clients These products cater to the
needs of individual in the middle income and Below, small business units (SBU), Micro
small and Medium enterprises (MSMEs) and agriculturists.
4) The cost of procurement of funds in retail liability is less when compared to Wholesale
liability due to the presence of large number of savings and Current accounts. Savings
accounts are low cost deposits and current accounts come with zero interest cost.
5) Retail liability products are small tickets with large volumes. This means the number of
accounts will be more but size of each accounts will be small.
6) With the advent of computers and technology driven accounting processes, managing
retail liability products have become much easier.
7) With the RBI and the Ministry of Finance focusing on financial inclusion, the scope of
retail liability products have assumed importance. Financial inclusion is making banking
products and services available at affordable costs or almost free for sections of the society
which are economically weak.
8) The cost of operation (transaction cost) is high in terms of benefits from retail
Products. Banks in order to reduce operational costs, have installed ATMs a
and have also come out with alternate channels like internet banking, mobile
banking, banking at doorstep to reduce the footfalls in the branch and divert
retail customers toward these alternate channels. Providing debit card is one
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way of reducing cost of operation, otherwise, customers may use cheque
books. Cheque operation is costlier in comparison to debit cards.
9) The large number of retail client is also an advantage to banks in terms of
portfolio retention and expansion of customer base.
10) The movement in retail portfolio is generally high. However, reduction in
Volume will be insignificant as increase in volume is also seen in retail
Portfolio.
TYPES OF LIABILITY PRODUCTS
Following are the types of liability products:-
1) Demand deposits
The current account and savings account (CASA) put together constitute
Demand deposits. They are referred as CASA deposits. An individual opens a
saving bank account and in the case of business, a current account is opened.
Individual can also open current account. Current accounts do not earn
Interest whereas savings accounts earn a simple interest at a rate per annum
at the discretion of the bank. Bankers prefer more demand deposits since cost
of funds is low.
Reserve Bank of India has deregulated interest payable on savings accounts
also effective 26
th
November 2011, therefore, every bank can quote rate of
interest on deposits according to their need for funds, save current account
where interest is not paid.

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2) Term deposits
Term deposits remain for a longer duration with the bank. They earn higher
Interest according to the period of deposit. As they remain for a fixed period
these deposits are also known as fixed deposits.

Method of opening deposit accounts
The relationship between a banker and customer starts from the moment an account is
opened. The customer while opening an account has to follow certain
guidelines laid down by the bank. The application submitted enables the banker
to know the customer. Know your customer (KYC) guidelines require submission of the
following:
Specified application form duly filled along with the photo duly signed by the
customer

Copy of proof of identity and present address of the customer.
Copy of PAN card or form 60 of the customer.
Proper introduction either by an existing customer or through a person known to or
acceptable to the bank.

A banker has to satisfy the genuineness of the person who offers to introduce the account.
Similarly due importance should be given towards verification of the ID and address proof of
the customer. In the case of women, who does not have separate address proof, she can
submit her parents/spouses address as proof duly signed by parents/spouse.

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1) Demand deposits
a) Savings bank account
This is an ideal account suited to those people who cannot invest money for a
longer duration. Savings bank account is well suited to those who wish to save
money to meet future expenditure. Savings bank account encourages people to
cultivate the habit of savings. All commercial banks are concentrating on this
account as the cost of funds mobilised through this account is low.
Interest is calculated on the daily balance maintained in the account and it is
paid at the end of every half year. Effective 26
th
November, 2011, RBI has
deregulated the interest on savings bank accounts.

Anyone can open a savings bank account provided he satisfies the norms under
KYC guidelines. Commercial banks have uniformly fixed the minimum
Amount to be remitted at the time of opening the account. In rural and semi
Urban centres, the minimum amount is Rs. 500 and in other centres it is Rs.
1000. All commercial banks are under statutory obligation to necessarily
Obtain the PAN card particulars of depositors for all transactions involving
amount exceeding Rs.50000 and above in a day. Hence a customer can deposit
up to Rs.49999 without submission of PAN card details per day. There are no
restrictions on the quantum of deposit in the account provided the above
restrictions are followed.

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The number of withdrawals varies from banks to banks and it depends upon the
discretion of the individual banks. With development of technology and
introduction of Automated Teller Machine (ATM) in banks, every savings
account holder is provided with a debit card. This card enables the customer
to withdraw cash from ATMs round the clock. Maximum limit of cash
withdrawal permitted per day through ATMs is restricted. Cash withdrawal is
further made easy as any ATM of a commercial bank can be used to withdraw
money. RBI has restricted the number of free withdrawal per month through
debit card in other banks ATMs. Withdrawal beyond the specified number will
attract service charges from the bank concerned.
Banks are not permitted to open a savings bank account in the name of:-
Government departments
Government bodies receiving budgetary allocations
Municipal corporations
Panchayat samitis
State Housing boards
Water and sewage boards
State Text book publishing corporation
Metropolitan Development authority
State/ district level Housing cooperative societies
b) Current account
Current account is a running account where frequent deposits of money and
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Withdrawals are allowed. Due to frequent remittance and withdrawal in the
account, the funds keep floating. Hence current account is also called floating
account. This account is suited to businessman, companies, institutions, and
government bodies. RBI prohibits payment of interest in current account.
The method of opening current account is the same as that of savings bank
account with regard to submission of application with photos and following
KYC norms. A current account is opened by an individual, sole proprietor
Partnership firm, limited company, government departments and societies

Individual account
Individual account can be opened either individually or jointly with others. When an
account is opened jointly, it can be operated as either or
Survivor or jointly or survivor or former or survivor.

Sole Proprietor account
Sole proprietor account is similar to that of an individual current account.
Here in addition to personal ID proof, the applicant is required to provide a copy of
the sales tax certificate or registration certificate from a Government department.
Additionally, a certificate from the auditor is
also insisted upon by some banks. For seal of the sole proprietorship,
should be affixed and signed by the sole proprietor in all relevant columns of the
application. The account should be properly introduced by another person who is
having an account at the bank branch or by a reputed current account holder. An
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individual account holder generally cannot introduce a person to open a current
account unless the introducer is known to the bank.
Partnership firm
Here the account is similar to that of sole proprietorship concern, partnership is a
relation between two partners. According to The Indian
Partnership act, 1932, partnership is defined as the relation between persons who
have agreed to share the profits of the business, carried on
by all or any of them acting for all.
While opening a current account, the bank obtains a partnership letter. The bank is
under obligation to open a current account only in the name of partnership firm and
not in the individual names of the partners. The bank is required to take extra
precautions while allowing operation in the partnership account for the following
reasons:-
1) Any partner in the partnership can give notice of stop payment of a
Cheque.
2) In case an uncrossed cheque, payable to partnership firm, is credited to the
Individual partners account, the bank has to take necessary permission
from al other partners to protect itself under section 131 of Negotiable
instrument act. Otherwise, it amounts to conversion. Conversion means
wrongfully applying the proceeds of a cheque to an account in which the
account holder is not a beneficiary and is not entitles to receive the amount.

All pages of the application should be signed by al the partners and the
authorised partner is required to sign and affix For seal of the partnership
firm.
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Limited company
When a company (private or public) desires to open a current account, it is required to
produce the following additional documents apart from the application:-
1) Copy of resolution of the Board of Directors authorising the bank to open
and allow operation of their limited company account in the concerned bank.
2) Memorandum of association
3) Article of association
4) Certificate of incorporation
5) Certificate of commencement of business ( in case of public limited companies only)
The application should be signed by the authorised person under seal of the company. The
banker is required to go through the memorandum and article of association of the company
before opening the account.

Government accounts
The bank, while opening government accounts should be careful with regard
to the operation of the account and the authorities responsible to operate such accounts. In
addition to the application, the following documents should be obtained and retained with
the application:
1) A certified letter from the head of the department delegating powers to the authority
concerned to open and operate the bank account. The letter should furnish powers and
responsibilities of the authorised person to operate the account.
2) Attestation of specimen signature of the authorised persons.

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Societies
To open an account for a society, the following account needs to be
Produced along with the application.
1) Resolution of the managing committee, appointing the bank concerned as
their banker; furnishing the names of the persons who are authorised to
operate the account.
2) Copy of bye laws of the society.
3) Copy of certificate of registration of the society
4) Specimen signature of the authorised persons duly attested by the managing
Committee.
Percautions:-
At the time of opening of the account, KYC norms should be strictly followed and there
should be no deviations from the laid down norms applicable for each type of accounts.
As soon as an account is opened, bankers should send a thanking letter directly to the
customer and to the introducer and keep a copy of letter with the application . If any of
such letter returns with remarks like no such addressee the bank has to exercise caution
regarding the operation of the account and should watch deposits and
Withdrawals in the account. The bank should not issue cheque book to those accounts
immediately.

2) Term deposits
Term deposits is an interest bearing bank deposit that has a specified date of maturity.
Generally speaking, the longer the term the better the yield on the money. At present,
banks offer interest for a minimum period of 7 days and above.
a) Fixed deposits
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The term fixed deposit refers to a certificate of deposit that pays a fixed rate of interest
until a given maturity date. Fixed deposit often used by individuals, businesses and
financial institutions around the world as a means of storing their liquid funds for a fixed
period of time for future use. In Retail market, fixed deposits are relatively safe
investments when provided by insured financial institutions such as banks, savings and
loan corporations and credit unions that are duly regulated within the country in which
they operate.
Under fixed deposit, the time of repayment is known in advance. Hence banks are able to
invest the funds in profitable ways and earn income. From,
October 1997, RBI deregulated the control on the rate of interest. At present, each bank
regulates the payment of interest on the fixed deposit based on the Repo and Reverse repo
rate, fixed by RBI. The banks are permitted by RBI to pay certain higher rate of interest
on deposits invested by senior citizens.
There is a specific application form for fixed deposit schemes and customer needs to fill
that application only. The customer can opt for payment of interest in any of the
following ways- monthly, quarterly, half-yearly or annually or at the time of maturity of
deposit.
Payment of interest on deposits
The deposits cease to earn interest from the date of maturity if it is not renewed by the
depositor. The deposit is classified as overdue deposit and
no interest is payable on the overdue deposit as it is classified as demand deposit by
banks.
RBI has made amendments with regard to payment of interest on overdue deposits.
As per the amendments, the banks are advised to pay the contracted rate of interest if
the customer renews the deposits from the date of maturity for a further minimum
period of 15 days. In such cases,
the banks pay interest at the rate applicable for 15 days at the time of renewal plus
overdue interest at the contracted rate from the date of maturity to the date of renewal
of deposits. With total computerisation
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of banks and implementation of core banking solutions in all banks , the deposits are
renewed automatically by the computer system for a similar period from the date of
maturity at the applicable rate of interest on the date of maturity.

Premature closure of deposits
If a deposit is closed by the depositor before the due date, it is called premature
closure of deposits. The depositor is required to give a requisition letter for premature
closure of deposits. The rate of interest
Payable in such cases is arrived at by deducting penal rate of interest from the rate
applicable for the period the deposit has run as per the rate prevailed on the original
date of deposit for that period.
The levy of penal interest is waived when the deposit is paid to the legal heirs on the
death of depositor before the maturity of the fixed deposit. In such instances, the bank
is permitted to pay interest at actual rate applicable for the period the deposit is held
by the bank.
Mode of payment of fixed deposit
At the time of payment of matured deposits, the bank has to comply with statutory
obligation as laid down under section 269 of income tax act, 1961. The bank can
credit the proceeds of the deposit to the customers savings bank account with the
bank. If the bank does not comply with the statutory obligation, then they are liable to
be penalised to the extent of a sum equal to the amount of deposit.

b) Cumulative deposit
The cumulative deposits are similar to fixed deposit, except that the
interest on the deposit is added to the deposit every quarter and
compounded quarterly. Through this scheme the depositor earns higher
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interest since the interest is compounded quarterly.
The cumulative deposits are accepted for a minimum period of 6
months and a maximum period of 120 months.

c) Recurring and variable recurring deposit (RD)
A recurring account can be opened by any person and the minimum
number of instalments under this scheme is 6. This scheme is intended
to motivate the habit of savings regularly on a monthly basis. The
minimum amount of deposit under this scheme is Rs. 50 and deposit
can be opened for a maximum period of 120 months. The procedure for
opening and other formalities are same as applicable to other deposits.
The important point is that a recurring deposit becomes payable with
Interest only after 30 days or one month from the date of payment of
last instalment. No tax deducted at source (TDS) is deducted in respect
of RD account. This is a unique feature of RD account.
Some banks have also introduced variable Recurring deposit scheme.
Under variable recurring deposit, the amount of instalment can be
Varied depending upon customers savings ability. The schemes
requires a customer to exercise his option on the initial amount of
deposit. Thereafter, the customer can vary the amount of instalment
higher than the initial amount. Maximum deposit allowed under this
scheme is Rs. 15 lakhs.
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Combination of Demand and Term Deposit
With the introduction of total computerisation in banks and implementation
Of core banking solution, banks have introduced savings bank cum term
term deposit account and current account cum term deposit account.
These accounts are differently named in various banks, but the mode of
operation in the accounts is the same. Under this account, the customer is
able to deposit unused portion of the funds in the account as term deposits
for an acceptable period ( minimum period 15 days). In this way the
customer is able to earn sizable interest on his savings. And whenever the
customer is in need of money, the system allows for the withdrawal of
money from the account. The amount also earns interest for the period
it has remained as term deposits.

Rules regarding deposits
The banks are under statutory obligations to abide by certain rules and
regulations as amended in banking regulation act.
1) TDS on deposits
The banks, including cooperative bank are under statutory obligation to
deduct income tax on the interest payable on deposits as per section 269 of
the income tax act, 1961. At present, if the total interest on deposit exceeds
Rs. 10000 , banks are required to deduct 10%of the interest that exceeds
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Rs. 10000 and to remit to the income tax department. If customer undertakes
to remit the same by submitting form 60 G, then deduction need not be made
in the particular account. To claim exemption under income tax, the senior
citizen are required to submit form 60H duly filled with relevant particulars.
Section 88B of the income tax act, allows rebate of income tax up to 100% to
to an interest paid on deposits, total interest paid in all deposit accounts
maintained by a customer is taken into account and 10% of interest paid is
deducted as TDS and remitted to the income tax account before 7
th
of
succeeding month. TDS is deducted as and when interest is paid on the
deposit. Banks have to comply with the statutory obligation of providing
form 16A to depositors at the end of the financial year to enable them to
submit their returns to the income tax department.
2) Garnishee order
A garnishee order is an order issued by the court in favour of judgement
creditor attaching the funds of judgement debtor lying with the third party.
Here three parties are involved, they are:
Judgement creditor:- The judgement creditor is one who has approached the
court to obtain such order against the debtor.
Judgement debtor:- The judgement debtor is one who is liable to make
Payment to the creditor when garnishee order is issued, it affects the debtor
in two ways:
The account of the judgement debtor is attached to the judgement
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Creditor.
The debtors banker is legally obliged to suspend all transactions in the
account after receipt of such order from the court.
Garnishee is otherwise the third party and in all probability is the banker.
The position of a banker is debtor to the judgement debtor and is responsible
for the compliance of the garnishee order.
The court usually issues two kinds of garnishee orders. They are:
a) Order Nisi
Order Nisi is an order issued by the court to attach account (s) of judgement
debtor and advises the banker not to allow operations in the account till further
orders. When order Nisi is received by the banker, it is recorded properly in
the register/ system regarding the date of receipt of order, time of receipt of
order and the amount for which the order is issued. Immediately the banker
attaches all the money of the judgement debtor or attaches the actual amount
as mentioned in the garnishee order. Further transactions in the account are
suspended.
The date and time of receipt of order Nisi are more important to a banker
while implementing the order. The banker is not liable for any payment
made in the account of judgement debtor during the transit payment of the
order.
b) Order absolute
Garnishee order absolute is issued by the court. The order directs the banker to
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make payment of the specified amount to the judgement creditor. Such payment made by the
banker is deemed to be payment in due course as per
negotiable instrument act. Payment in due course means payment in accordance with the
apparent tenor of the instrument. After the settlement of amount to the judgement creditor,
the banker may start allowing transactions in the account of judgement debtor. On receipt of
garnishee order, the banker is obliged to inform the customer about the receipt of garnishee
order so as to avoid unnecessary problems for himself. Judgement creditor is fully discharged
if he complies with the garnishee order.
The garnishee order is not applicable in the following cases:-
The identification of judgement debtor is doubtful
Judgement debtor s account is overdrawn.
Garnishee order is not applicable on the proceeds of a cheque sent for collection at
the time of receipt of order.
A new account opened after receipt of order and further deposit of money into new
account cannot be attached under the garnishee order.
Amount earmarked for payment as per instructions of the customer to banker before
receipt of garnishee order like standing instructions for payment of telephone bills.
Judgement debtor holds the funds of a trustee which is known to the banker.
Judgement debtors deposit account is in a foreign branch of the banker.

3) Income tax attachment order (ITorder)
The income tax department is empowered under section 226(3) of income tax
Act, 1961 to attach the bank account of an assessee who defaulted in payment
Of income tax. The attachment order provides for attachment of money owed
by others or payable by others to the income tax defaulter.
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Important features of the income tax attachment order are as follows:-
The name in the attachment order and customer name should tally
Verbatim.
IT order attaches future sums of money also similar to garnishee order.
If the tax defaulter is one of the joint account holders in a bank, the attachment is
applicable on pro rata basis.
The banker is requested to make such payment from the account of the defaulter of
tax without production of cheque and pass book as per section 226 of the income tax
act, 1961.
When such payments are made to income tax department, the payment is said to be
payment in due course as per negotiable instruments act.
The banker is liable if he does not comply with the attachment order, it will be
proceeded against as assessee in default.
4) Bankers lien
Depositors can pledge their term deposit receipt and take a loan. The bank
marks a lien on the deposit until the debt is paid. The bank can also hold a
lien against credits lying in the customer account for unpaid dues in another
account.
General lien
General lien is applicable in respect of all amounts due from debtor to the
Creditor. The banker is conferred with rights of general lien as per section 171
of the Indian contract act, 1872. General lien is applicable to balances in
deposit accounts.
5) Loan against deposits
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A depositor can request for loan against his deposit. For availing of the loan,
The depositor has to discharge the deposit receipt and submit the relevant
documents for loan. Some banks do not issue deposit receipt and the deposit
remains in demat form. The banker marks lien over the deposit in the
concerned account and sanctions loan to the customer. If physical receipt and
is issued, the same is retained by the bank with lien marked on the receipt and
is retained till the loan is paid off in full. The depositor cannot close the
deposit till the loan is repaid. Upon repayment in full, the lien marked earlier
is lifted in the account as well as in the receipt as the case may be.
6) Nomination facility
Nomination facility is available for deposit accounts. The banking laws
(amendement) act 1983 introduced section 45ZA in the banking regulation
Act, 1949, which facilitates applicability of nomination to all deposit
accounts.
Nomination facilities help banks in settlement of claims expeditiously in the
account of deceased depositors and thus minimise the hardship to the family
members of the deceased depositor.
Legal status enjoyed by the the nominee
Even though a nominee may receive the proceeds of deposits of the deceased
depositor, he may not be the absolute owner of such amount. He is only a
trustee for the money belonging to the legal heirs. The claim by legal heirs to
to the deceased depositor remains unaffected by such nomination. This is
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highlighted in a judgement given by supreme court in sarbati devi vs. usha
devi. This case pertains to an insurance policy- wife of the deceased policy
holder was the nominee. Mother and minor son of the the deceased, claimed
their share from the life insurance company for the money received by the
deceased wife. The supreme court held that,
A mere nomination made under section 39 of the insurance act, does not
have the effect of conferring on the nominee any beneficial interest in the amount
payable under the life insurance policy on the death of the assured.
The nomination only indicates the hand which is authorised to receive
the amount, on the payment of which the insurer gets a valid discharge of its liability
under the policy. The amount, however, can be claimed by the the heirs of the assured
in accordance with the law of succession governing them.
It is clear from the above ruling, that the nominee does not enjoy the absolute
ownership of the amount received by him through nomination. The law of
succession will still prevail over nomination.

RETAIL BANKING ASSET PRODUCTS
Asset products of bank are those which appear on the asset side of the balance sheet. Banks
accept deposits from the public . In order to service the deposits,
Banks are required to invest the funds profitably so that interest on deposits can be paid.
Loans and advances are assets of the bank. Loans and advances represent money due to the
bank from borrowers who are either public or business enterprises. Hence the name derived
as asset product. The relationship between banker and customer under an asset product is
creditor and debtor. The demand for credit has increased manifold and bankers are alert to
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seize opportunities to cater to the needs of the customers. Further, competition amongst banks
has compelled them to design new products.
Principles of lending
Banks lend deposits collected from public. To avoid risks and to ensure safety
Of these funds, banks are required to adhere to the principle of lending. There are basically
five principles of lending which is considered as significant. They are as follows:-
1) safety
Safety regarding return of money advanced is important. Banks are liable to repay the
deposits to public as and when demanded by them. Hence, banks have to safeguard the funds
when they lend or invest it by adhering to sound lending and investing principles. The banker
is required to ascertain the borrowers background, purposes, capacity to repay and the
security available to cover the money advanced.
2) Liquidity
Bankers should have the capacity to realise debt at short notices. If the funds advanced to the
public get locked up, repayment of deposit as agreed to, become difficult. Banks have to
recover advances granted to the borrower as per the terms of repayment to ensure liquidity.
Maintaining liquidity is an important function of banks.
3) Profitability
The purpose of extending credit by banks is to earn interest on deposits received from the
public. The banks have to fulfil certain social obligations, and hence charge a reasonable rate
of interest on loans to meet their expenses and earn profit.
4) Purpose of loan
The purpose of loan should be ascertained before the sanction of loan. This is necessary to
know the end use of funds and ensure that the purpose of activity of the borrower is not in
contravention of laws of the land. Banks lend for productive purposes so that they can
contribute to the development of the economy.
5) Diversification
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Banks should diversify their lending portfolio to minimise risk. The advances should be
spread over various business activities, professional activities, agricultural activities and
small and cottage industries. Higher the diversification of funds, lesser will be the risk for
banks.
From the angle of assessing a borrower, banks can apply 5Cs.

FEATURES OF RETAIL ASSET PRODUCTS
1) Retail asset products are small in size and large in numbers.
2) Since the volumes are more, risk is spread.
3) Retail asset products are contractual advances- ( account operated based on mutual
agreements).
4) Bank earns interest and fee income from this portfolio.
5) Retail asset products are subject to repayment and other terms of sanction
which the borrowers will have to adhere to.
6) Retail asset products can be secured or unsecured.
7) Retail asset products are subject to margin requirements i.e. Borrowers contribution.
8) Retail asset products are subject to credit scoring. Individual banks devise their own
method of creating scoring models. The model serves as a checklist for considering loan
proposals/ applications.
9) Retail asset products acquire homogeneity. It is easy to manage in such cases. Example of
homogenous retail loan is personal loan to school teachers which have similar account,
interest and repayment period.
10) Retail asset products cater to individuals ( not being High Networth individuals (HNI),
small traders, self employed professionals, micro small and medium enterprises,
agriculturists, etc.
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11) Retail asset business is subjected to directed lending. RBI has provided guidelines to
commercial banks that a portion of their advances portfolio should be to priority sector (
agriculture and small business, education, etc.) whereas wholesale assets are not subjected to
directed lending barring ceiling on advances to group and sector.
12) Since failure to recover the amount lent by banks will strain the capital of the banks, RBI
closely monitors and engages supervision through a number of ways like reporting, onsite
and offsite supervision, providing for bad and doubtful debts, etc. Failed loans become part of
bad debts and are termed as Non performing Assets( NPAs). NPAs erode the capital of the
bank and to that extent fresh infusion of capital will be warranted.
RETAIL CREDIT PROCESS
Retail credit process involves:-
a) Account acquisition and
b) Account management
The applicant signs the application form and the loan documents and receives the finance
from the bank. The applicant borrower repays the loan on the due date or as per terms of the
repayment. This step has a defined process behind.

The process of retail credit commences from account acquisition. Bankers go for worthy
credit propositions and therefore embark on marketing credit products. They acquire reliable
customers for their credit products through lead generation. Lead generation is the process of
ascertaining people who are interested in taking a loan or buying a credit product from the
bank. Tele-calling, selling to prospects, tie up through dealers of consumer durables, cars etc.
conducting marketing campaigns, repeat business of existing customers, marketing products
through staff or through direct marketing agents etc.are some of the ways of acquiring clients
for credit products.

Account acquisition also involves collecting application form, documentary evidences as per
KYC norms, verification such as field verification or telephonic verification or reference
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checks of the borrower. Creating customer profile, conducting credit evaluation and arriving
at a credit decision to lend, completing documentation and other formalities, disbursement of
loan amount and collecting post dated cheques for repayment of installement and interest,
etc.are part of account acquisition teams work. The team divides and shares the
responsibility.

Account management involves monitoring the account. Storage and safe keeping of
documents, documents of collateral securities such as insurance policy, mortgage deed, etc.
collections and recoveries of loan advanced, monitoring the portfolio and customer service
are part of account management teams work. Systematic working of credit team helps the
bank to reduce the loss to loan portfolio. Timely action and continuous monitoring are a must
for the staff working in credit department.

TYPES OF RETAIL ASSET PRODUCTS
1) Loans
2) Cash credit
3) Overdraft
4) Discounting of bills

1) Loans

In finance, a loan is a debt provided by one entity (organization or individual) to another
entity at an interest rate, and evidenced by a note which specifies, among other things, the
principal amount, interest rate, and date of repayment. A loan entails the reallocation of the
subject asset(s) for a period of time, between the lender and the borrower.
In a loan, the borrower initially receives or borrows an amount of money, called the principal,
from the lender, and is obligated to pay back or repay an equal amount of money to the lender
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at a later time. Typically, the money is paid back in regular installments, or partial
repayments; in an annuity, each instalment is the same amount.
The loan is generally provided at a cost, referred to as interest on the debt, which provides an
incentive for the lender to engage in the loan. In a legal loan, each of these obligations and
restrictions is enforced by contract, which can also place the borrower under additional
restrictions known as loan covenants. Although this article focuses on monetary loans, in
practice any material object might be lent.
Acting as a provider of loans is one of the principal tasks for financial institutions. For other
institutions, issuing of debt contracts such as bonds is a typical source of funding.
Loan is also classified as secured and unsecured loan.
Secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property)
as collateral.
A mortgage loan is a very common type of debt instrument, used by many individuals to
purchase housing. In this arrangement, the money is used to purchase the property. The
financial institution, however, is given security a lien on the title to the house until the
mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the
legal right to repossess the house and sell it, to recover sums owing to it.
In some instances, a loan taken out to purchase a new or used car may be secured by the car,
in much the same way as a mortgage is secured by housing. The duration of the loan period is
considerably shorter often corresponding to the useful life of the car. There are two types
of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to
a consumer. An indirect auto loan is where a car dealership acts as an intermediary between
the bank or financial institution and the consumer.

Unsecured loan
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Unsecured loans are monetary loans that are not secured against the borrower's assets. These
may be available from financial institutions under many different guises or marketing
packages:
credit card debt
personal loans
bank overdrafts
credit facilities or lines of credit
corporate bonds (may be secured or unsecured)
The interest rates applicable to these different forms may vary depending on the lender and
the borrower. These may or may not be regulated by law. In the United Kingdom, when
applied to individuals, these may come under the Consumer Credit Act 1974.
Interest rates on unsecured loans are nearly always higher than for secured loans, because an
unsecured lender's options for recourse against the borrower in the event of default are
severely limited. An unsecured lender must sue the borrower, obtain a money judgment for
breach of contract, and then pursue execution of the judgment against the borrower's
unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency
proceedings, secured lenders traditionally have priority over unsecured lenders when a court
divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in
the event of insolvency, the debt may be uncollectible.
The loan is also classified as demand loan and/ or term loan, depending on the period of
repayment of loan.
Demand loan
Demand loan is repayable on demand. Demand loan is usually allowed for short-term.
Reserve bank of India (RBI) has classified a demand loan as a loan whose repayment does
not exceed 36 months. Jewel loan, working capital advance to businessman, loan against
deposit, short-term agriculture loan for crop cultivation are examples of demand loan.
Demand loan is usually repaid in a single payment. It can also be repaid in agreed instalments
but before 36 months.
Bridge loan
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Bridge loan is a short term loan and they are repaid immediately out of amount of term loan
sanctioned. Large industrial units avail of bridge loan to meet their immediate commitments
during the period before formal availing of term loans sanctioned by banks or financial
institutions.
In Real estate, Bridge loans are often used for commercial real estate purchases to quickly
close on a property, retrieve real estate from foreclosure, or take advantage of a short-term
opportunity in order to secure long-term financing. Bridge loans on a property are typically
paid back when the property is sold, refinanced with a traditional lender, the borrower's
creditworthiness improves, the property is improved or completed, or there is a specific
improvement or change that allows a permanent or subsequent round of mortgage financing
to occur. The timing issue may arise from project phases with different cash needs and risk
profiles as much as ability to secure funding.
A bridge loan is similar to and overlaps with a hard money loan. Both are non-standard loans
obtained due to short-term, or unusual, circumstances. The difference is that hard money
refers to the lending source, usually an individual, investment pool, or private company that
is not a bank in the business of making high risk, high interest loans, whereas a bridge loan
refers to the duration of the loan.
RBI permits sanction of bridge loan by banks against the commitments of other financial
institutions or other banks under following conditions:-
Prior approval of the financial institutions or banks, which sanctions term loan, must
be obtained.
A commitment letter from the term loan sanctioning institutions, to remit the amount
due under bridge loan directly to bank.
The period of bridge loan is restricted to 4 months only and no further extension for
repayment of bridge loan is allowed.
Ensure proper utilisation of bridge loan in terms with sanction of term loan.
Personal loan
A personal loan is an unsecured loan, meaning the borrower does not put up any collateral or
security to guarantee the repayment of the loan. For this reason, personal loans tend to carry
high interest rates. If a borrower owns a home, a lower interest rate alternative is a home
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equity loan. However, this option requires that the borrower put up his or her home or other
real estate property as collateral. Personal loans are sanctioned to individuals to meet their
consumption needs.
A loan, whether a personal loan or another type of loan, is typically used to finance a large,
one-time purchase or expense. The borrower is given all the money at once and agrees to pay
back a certain amount per month until the debt is repaid. The monthly payment includes both
principal (the amount you borrowed) and interest.
Personal loans tend to carry higher interest rates than loans secured by collateral such as a
home. The relatively high interest rate compensates for the fact that you arent guaranteeing
repayment of the personal loan with some kind of asset.
A personal loan may be the only option for people who have established little credit, or for
those who dont own a house, real estate, or other assets to use as collateral. A personal loan
may be a sensible alternative to financing a major expense with credit cards, which may
charge even higher interest.
Personal loans can also be used to consolidate debt. If the interest rate on the loan is lower
than the interest rate on credit cards, it may make sense to pay off debt with a personal loan.
If any have a low credit score, however, it may be more difficult to get a personal loan with
an interest rate low enough to improve your debt situation. One way to secure better terms is
to have a family member or other responsible person co-sign with you, guaranteeing
repayment. In this situation, the co-signer agrees to make payments on your loan if you
default, so you get the benefit of a lower interest loan. If you default (fail to repay the loan),
the co-signer is responsible for repaying the entire remaining debt. Lenders also have the
right to seize any assets that are securing the loan in the event of default.
Personal loans are sanctioned against the personal surety of individuals and are classified as a
high risk weighted asset. Maximum period allowed for repayment is 36 months ( loan
sanctioned for purchase of consumer durables or to meet contingent expenses, etc).
Types of secured and unsecured personal loans
Unsecured
There are two major types revolving line of credit and fixed-interest installment loans.
Credit cards, medical bills, and auto, student, and payday loans are categorized as unsecured
debt. There are different types of credit cards, including no annual fee, rewards, low interest,
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and department store credit cards. They are offered with different perks such as concierge
service, insurance policies, extended warranty, free airfare, and hotel stays. Some issuers also
feature discounted purchases, flowers, movie tickets, and more. Discounts may not be
available for internet purchases. Many credit card issuers offer roadside assistance, including
breakdown towing, lock-out assistance, fuel delivery, and flat tire changes. Hazard weather
services, emergency accommodation, and car rental are also offered.
Auto financing is another type of personal loan offered by financial institutions and car
dealerships. The money can be used to purchase a new or used vehicle. This type of financing
is offered to borrowers with good or tarnished credit, but in the latter case collateral is often
required. Student loans are another variety, offered by financial institutions and government
authorities. The money is used to pay tuition and board, textbooks, school supplies, and other
expenses.
Personal loans also come in the form of secured debt whereby borrowers pledge a valuable
asset as collateral. There are different types of collateral, including vehicle, real estate,
jewelery, money in a savings account, and home equity. Whether an asset is liquid and how
much it costs determine the amount of financing, the interest rate, and the terms.
Secured
There are different types of secured debt, including mortgages, repossession, non-recourse
loans, and home equity lines of credit. Mortgages are the most common type of secured debt,
which is backed by some real estate property. They come with a lower interest rate because
banks face a lower risk when collateral is pledged. This is long-term financing, with
repayment terms of 15, 20, or 35 years. There are different types of mortgages, including
adjustable rate, fixed rate, interest only, and balloon loans. The 2-step mortgage comes with a
floating interest rate. The rate remains the same for a specified period and then adjusts. The
borrower can choose from a fixed or variable interest rate.
Other types of personal loans include multiple term, open and closed, and 6 month
convertible mortgages. A secured line of credit is yet another variety. The money is used for
car purchases, home improvements, investments, and other purposes. Lines of credit are
offered with a low interest rate, but there are legal and appraisal fees. Financial institutions
usually offer up to 80 percent of the value or purchase price of the real estate property. Up to
90 percent is offered for second mortgages
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Composite loan
A composite loan is a loan granted to small borrowers like artisans, farmers, small industries,
to buy capital assets and for working capital purposes. Term loan and cash credit limit
sanctioned as composite loan. Repayment allowed is within 36 monthly instalments.
Terms and Conditions of composite loan
- Working Capital loan should be availed within one year from the date of commencement of
production.
- The unit should open a current account with a designated bank and the amount of working
capital of the loan will be credited as and when disbursed by the Corporation.
- The unit should route its entire transaction of the business including all the receipts and
payments through this account only.
- The unit should repay the entire working capital loan sanctioned by the Corporation at once
in case the unit approached the bank for more working capital.
- The unit should provide monthly stock statement showing the position of inventory level of
the Corporation. If they fail to provide the same, the Corporation may recall the loan.
- All other terms and conditions would be applicable as per details given in the General
Folder of the Corporation.
The above information regarding Composite Loan Scheme is by way of indicative guidance
for entrepreneurs and it is not a binding obligation on a Bank/Corporation while considering
the loan and is subject to change from time to time.
Term loan
Term loans are loans where the repayment period of loan extends beyond three years. Term
loans can be given on an individual basis but are often used for small business loans. The
ability to repay over a long period of time is attractive for new or expanding enterprises, as
the assumption is that they will increase their profit over time. Term loans are a good way of
quickly increasing capital in order to raise a business supply capabilities or range. For
instance, some new companies may use a term loan to buy company vehicles or rent more
space for their operations.
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Term loans are classified as medium and long-term loans as per RBI directives. Such loans
are given by banks for establishment of new units, expansion/ replacement requirements of
existing units, purchase of capital assets by industries, etc. Term loans form a major
constituent of project finance. Projet finance is the finance required to complete a project.
Usually such project finance is provided by banks along with specialised financial institutions
like Industrial Finance corporation of India.
Term loans to agriculture include finance extended for digging of new well, renovation of
agricultural land, laying of pipe lines, procuring of agricultural implements, etc. Plantation
loans sanctioned for cultivation of coffee, tea, coconut are also classified as term loans. The
repayment of term loans under agriculture is fixed to coincide with the harvest and hence, the
repayment of agriculture loan is fixed half yearly or annually. Home loans for purchase of
house or vacant site are sanctioned as term loans, the repayment of which may extend beyond
a period of 180 monthly instalments. Term loans are usually secured by tangible assets like
land, building, and plant and machinery.
Considerations of term loan
One thing to consider when getting a term loan is whether the interest rate
is fixed or floating. A fixed interest rate means that the percentage of interest will never
increase, regardless of the financial market. Low-interest periods are usually an excellent
time to take out a fixed rate loan. Floating interest rates will fluctuate with the market, which
can be good or bad for you depending on what happens with the global and national
economy. Since some term loans last for 10 years, getting that the rate will stay consistently
low is a real risk.
Also, consider whether the term loans are looking at uses compound interest. If it does, the
amount of interest will be periodically added to the principal borrowed amount, meaning that
the interest keeps getting higher the longer the term lasts. If the loan does use compound
interest, one should check to see if there are any penalties for early repayment of the loan. If
we get a windfall or profits increase spectacularly, may be able to pay off our entire balance
before it is due, preventing us from paying additional interest by waiting for the loan term to
end.
Home loan
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Loan acquired from a financial institution to purchase a home. Home loans consist of an
adjustable or fixed interest rate and payment terms. Home loans may also be referred to
as mortgage loans. The most common purpose of a home loan is to provide the funds a buyer
needs to purchase a home. Home equity loans allow a homeowner to borrow against the
difference between the homes value and the current loan balance, or equity. Investor loans
permit buyers to purchase homes as rental properties or to fix up and sell at a profit.
The two most widely used types of home loans are fixed-rate loans and adjustable-rate loans.
A fixed-rate loan keeps the same interest rate for the life of the loan, which means that the
principal and interest portions of the monthly payment stay the same. Adjustable-rate
mortgages begin with a lower interest rate for the first few years and then adjust to market
rates after the initial period is over. Caps are placed on how much the rate can adjust at any
one time, as well as on how much the rate can increase over the life of the loan. This means
the principal and interest portions of the monthly payment change repeatedly through the life
of the loan.
Because home loans are a large share of the financial situation of the majority of Americans,
taking the time to determine the right type of loan and to investigate terms is essential for any
home buyer or owner. Federal law promotes the consumers ability to shop for the best loan
by requiring lenders to give prospective borrowers Good Faith Estimates and Truth In
Lending (TIL) statements that disclose and itemize the terms and costs associated with a loan.
2) Cash credit
Cash credit facility is a working capital advance, sanctioned against the security of stocks or
book debts. The facility is continuous i.e. it is a roll over facility as long as the facility is
covered by securities hypothecated or pledged to the bank. The facility is usually allowed for
a maximum period of one year and is subject to renewal on satisfactory conduct of the
account.
Features of cash credit account are as follows:-
Interest on the account is charged for the actual amount utilised by the borrower.
This account is covered by sufficient security by way of hypothecation of goods, pledge of
securities.
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A banker while sanctioning cash credit facility looks into the purpose of requirement of such
facility and fixes the limit based on the value of goods hypothecated and on the assessment of
the working capital requirements.
Advantage of cash credit
Cash credit is flexible in that, the borrower can utilise funds more efficiently and can
minimise the interest burden on borrowings. The bank is able to earn interest on the funds
utilised by the borrower. Thus cash credit ensures optimum cost of funds to the borrowers. As
banks are required to maintain sufficient funds to meet the demands under cash credit facility,
some of the banks charge a commitment fee annually.
Disadvantage of cash credit
Since the cash credit facility is renewed once a year, the borrower may misutilise the funds
for unproductive purposes. There are practical difficulties in monitoring the disbursement
which are actually done by way of cheques issued by the borrower to various payees.
The banker cannot verify the end use of funds with regard to every debit in the account. The
system thus lacks proper supervision over the management of funds by the borrower.
Commitment charge on cash credit
RBI has permitted banks to levy commitment charge on unutilised portion of cash credit
limits. This was necessitated to bring about discipline among borrowers in availing of bank
finance and to enable banks to manage funds. Banks were asked to arrive at the unavailed
portion of cash credit limits., based on the average utilisation of funds during the quarter.
However, the commitment charge is not levied on the cash credit limits sanctioned to sick
units, limits sanctioned for exports and limit sanctioned to commercial banks, financial
institutions, and cooperative banks.
3) Overdraft
An overdraft occurs when money is withdrawn from a bank account and the available
balance goes below zero. In this situation the account is said to be overdrawn. If there is a
prior agreement with the account provider for an overdraft, and the amount overdrawn is
within the authorized overdraft limit, then interest is normally charged at the agreed rate. If
the negative balance exceeds the agreed terms, then additional fees may be charged and
higher interest rates may apply.
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Overdraft is similar to cash credit facility. Unlike cash credit facility, overdraft limit is either
fully secured by tangible securities ( pledge of shares, assignment of insurance policy) or
unsecured. Overdraft is repayable on demand and is allowed for a period not exceeding one
year and renewed annually. Sometimes, banks allow overdraft in the current account of
customers for a temporary period. This is termed as Temporary overdraft. Temporary
overdraft in an account is to be adjusted within a maximum period of 15 days. Temporary
overdrafts are generally allowed by banks to high net worth customers and to those accounts
that are well maintained by customers. The temporary overdraft is allowed to meet immediate
commitments of customers only on written request ( like honouring cheques presented in
clearing).
Reasons for overdrafts
Overdrafts occur for a variety of reasons. These may include:
Intentional short-term loan - The account holders finds themselves short of money and
knowingly makes an insufficient-funds debit. They accept the associated fees and
cover the overdraft with their next deposit.
Failure to maintain an accurate account register - The account holder doesn't
accurately account for activity on their account and overspends through negligence.
ATM overdraft - Banks or ATMs may allow cash withdrawals despite insufficient
availability of funds. The account holder may or may not be aware of this fact at the
time of the withdrawal. If the ATM is unable to communicate with the cardholder's
bank, it may automatically authorize a withdrawal based on limits preset by
the authorizing network.
Temporary Deposit Hold - A deposit made to the account can be placed on hold by
the bank. This may be due to Regulation CC (which governs the placement of holds
on deposited checks) or due to individual bank policies. The funds may not be
immediately available and lead to overdraft fees.
Unexpected electronic withdrawals - At some point in the past the account holder may
have authorized electronic withdrawals by a business. This could occur in good faith
of both parties if the electronic withdrawal in question is made legally possible by
terms of the contract, such as the initiation of a recurring service following a free trial
period. The debit could also have been made as a result of a wage garnishment, an
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offset claim for a taxing agency or a credit account or overdraft with another account
with the same bank, or a direct-deposit chargeback in order to recover an
overpayment.
Merchant error - A merchant may improperly debit a customer's account due to
human error. For example, a customer may authorize a $5.00 purchase which may
post to the account for $500.00. The customer has the option to recover these funds
through chargeback to the merchant.
Chargeback to merchant - A merchant account could receive a chargeback because of
making an improper credit or debit card charge to a customer or a customer making
an unauthorized credit or debit card charge to someone else's account in order to
"pay" for goods or services from the merchant. It is possible for the chargeback and
associated fee to cause an overdraft or leave insufficient funds to cover a subsequent
withdrawal or debit from the merchant's account that received the chargeback.
Authorization holds - When a customer makes a purchase using their debit card
without using their PIN, the transaction is treated as a credit transaction. The funds are
placed on hold in the customer's account reducing the customer's available balance.
However the merchant doesn't receive the funds until they process the transaction
batch for the period during which the customer's purchase was made. Banks do not
hold these funds indefinitely, and so the bank may release the hold before the
merchant collects the funds thus making these funds available again. If the customer
spends these funds, then barring an interim deposit the account will overdraw when
the merchant collects for the original purchase.
Bank fees - The bank charges a fee unexpected to the account holder, creating a
negative balance or leaving insufficient funds for a subsequent debit from the same
account.
4) Purchase of/discounting bills
The bill of exchange can be:
a) Demand and usance bills
b) Clean and documentary bills
a) Demand and usance bill
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A bill payable at sight or on demand or on presentation is called demand bill.If the bill is due
for payment after certain period of time like 60 days or 90 days after date or sight of bill, it is
called usance bill. All demand bills are purchased and all usance bills are discounted. The
difference between purchase and discount is in recovering interest. In bill purchase, the
interest is recovered at the time of realisation of the bill of exchange. In bill discounting, the
interest is recovered upfront as tenure (due date of bill) is known.
When a demand bill or usance bill is accompanied by documentary credit ( letter of credit) ,
the bill is negotiated.
b) Clean and documentary bill
When the drawer of a bill encloses the documents of title to goods, such as Railway
receipt(RR) or lorry receipt( LR) along with the bill, the bill is called documentary bill.
without these documents, the bill is called a clean bill. Clean and documentary bill arise out
of trade transactions.
Purchase of/discounting bills is another way of extending credit to customers.
Bill of exchange arise out of commercial transactions and such bills are purchased
from/discounted for reputed customers. This enables the customer to realise the amount of the
bill immediately without the need to wait till the due date of the bill. The banker retains the
bill and presents the bill on the due date to the debtors bank for realisation. On receipt of
payment from paying bank, the bill liability is adjusted. The commission and other out of
pocket expenses are recovered at the time of granting advance against bills. In the case of
discounting, interest is also recovered upfront while in the case of purchase interest is
recovered upon realisation. If the bill is dishonoured, the creditors bank recovers the entire
amount of the bill along with interest and other changes from the customer ( account of the
drawer of the bill).

Advantage of discounting bills
Purchase/discounting of bills is profitable to the bank. Here the amount is certain and the
yield on income is more compared to the loan portfolio. The advantage of discounting bills
are as follows:-
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The primary advantage to a banker in purchase of/discounting bills is the safety of the
banks funds. The bill is a negotiable instrument and the banker can enforce his claim
over the bill in case of default.
Bills of exchange arise an account of commercial transactions and the debtor meets
his obligation on due date. Hence payment is certain. Bill of exchange is an ideal self-
liquidating asset to a banker and it is called a semi-liquid asset.
At times of need the discounted bills can be re-discounted with RBI or with any other
commercial bank to meet the cash reserve Ratio(CRR) requirement.
The value of the bill is certain and it cannot be changed once the bill comes into the
hands of the banker. In case of default, both parties can be sued to realise the amount
of bill discounted.
Discounting of bills entitles the banker to deduct certain commission plus interest at
the time of allowing such facilities. The yield of income by discounting bills is more
when compared with yield on loan and advances.