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Ancillary Services of a Banker

Remittance of Funds
This service is available to both customers as well as non-
customers of the bank. The following are some of the important
modes of transferring funds from one place to another
Bank Draft – A bank draft is “an order to pay money drawn by
one office of the bank upon other office of the same bank for a
sum of money payable to order on demand”.
 it is drawn by one office of a bank upon some another
office of the same bank
 it is payable on demand
 its payment is to be made to the person whose name is
mentioned therein
Legal Status of a Bank Draft
Its legal status has, therefore been a subject of controversy.
The Punjab National Bank Ltd. Held that a bank draft is a bill of
exchange because it fulfils all essential requisites of a bill i.e. it
is an instrument in writing directing a certain person to pay a
certain sum of money

Another vs. Jyoti Ranjan Majumdar , where it was observed

“ordinarily different branches of a bank and their head office
constitute one legal entity”.

It is to be noted that the Calcutta High Court declared a bank

draft as a bill of exchange on the basis of taking the two
branches of the bank as two different entities.
Difference between a Cheque and a Bank Draft
i. A draft cannot be made payable to the bearer while a
cheque can be so drawn
ii. A banker is under a legal obligation to pay the money of the
draft. Its payment cannot be stopped except in cases where
loss or theft of the draft has been reported
iii. The purchaser of the draft has already paid the
consideration to the drawer bank and there is a clear
direction from drawer bank to the drawee bank for payment
of the money to the payee named therein
Pay order
A pay order is an order by the issuing office of a bank upon
itself to make payment of the amount mentioned therein to
the named payee or according to his order.
Stopping payment of the draft

The payment of the draft cannot be stopped by the banker

even on receiving instructions from purchaser of the draft.

The Lahore High Court held in the case of Malik Barket Ali vs.
Imperial Bank of India that the purchaser of the draft had no
right to countermand the payment of a draft after it had been
delivered to the payee.

Loss of the draft. A banker can stop payment of a draft in

those cases where either the purchaser of the draft or the
payee of the draft has reported about the draft being lost or

A banker should refuse to cancel the draft, if it finds that the

draft has been delivered to the payee.
Travellers’ Cheques
Travellers’ Cheques are issued by banks to avoid the
risk of loss or inconvenience in having to carry large amount
of cash while traveling.

Loss of the Travellers’ Cheque

 The bank should satisfy itself that the cheques were not
endorsed by the purchaser before they were lost
 A letter of indemnity together with sureties should be
obtained for the amount involved
Collection and payment of pension
i. by accepting the valuables from the customers for safe
ii. by hiring out safe deposit vaults or lockers to the customers

Liability of a Banker
The liability of a banker in respect of the goods accepted by it
for safe custody is that of a bailee and, therefore, it is subject
to the provisions of Section 151 and 152 of the Indian contract
(i) Negligence by the banker
(ii) For conversion
(iii) Fraud by its own employees
Hiring of safe deposit vaults
Banks provide safe deposit vaults facilities to the public at
selected branches. The banks for this purpose have strong
rooms generally under the ground floor which are equipped
with safe deposit lockers. The lockers are of different sizes
and they are hired out to the public.
New services and instruments
Merchant banking – Merchant banking is basically a service
banking, concerned with providing non-fund based services
of arranging funds rather than providing them. The services
of a merchant banker can be summarized as follows:
1. Project counseling. A merchant banker helps an
entrepreneur in conception of idea, identification of projects,
preparation of projects feasibility reports, fixing locations,
obtaining money, sanctions from state an central
government departments.

2. Sponsor of issue. Merchant bankers act as sponsor of

issues rather than sources of finance.

3. Credit syndication. Merchant bankers undertake

preparation of project files, loan applications for financial
assistance on behalf of promoters from different financial
2. Servicing of issues. Merchant bankers keep register of share-
holders and debenture holders of their clients, companies, act
as paying agents for the dividends, debentures interest

3. Investment management. Merchant bankers render advice in

matters pertaining to investment decisions, effects on taxation
and inflation on filt-edged and other securities.

4. Arrangement for fixed deposits. Merchant bankers help

companies to raise finance by way of fixed deposits from the
7. Other specialist activities

(a) Corporate counseling for financial institutions, rehabilitation

and reconstruction

(b) services to NRIs for suitable investment opportunity in India

(c) Assistance in negotiations of foreign collaboration

(d) Arranging technology, finance and risk capital

Mutual Funds

A mutual fund is an institutional device through which the

investors poor their funds to invest in a diversified investment

(a) Open-end mutual funds – the fund itself is ready to buy back
the shares surrendered and sell new shares.

(b) Close-end mutual funds – The shares of such mutual fund

are purchased and sold in the secondary markets. The mutual
fund scheme offers the advantages of high return, easy
liquidity, safety and tax benefits to the investor while it offers
the bank an opportunity to collect funds from untapped areas.
Factor is a continuing arrangement between a financial
institution and a business concern selling goods and
services to trade customers.

i. Reduction in the cost of maintenance and collection of


ii. Saving in time, manpower etc. needed for collection and

iii. Monitoring of book debts and prevention of bad debts,

since the debtors would not like to be looked down in the
eyes of factoring credit institution.
i. Credit Recording

ii. Credit administration

iii. Credit protection

iv. Credit financing

v. Finance and business information

Types of factoring.

1. Recourse factoring

2. Non-recourse factoring

3. Advance factoring

4. Maturity factoring

5. Bank participation factoring

6. Supplier guarantee factoring

7. Disclosed factoring

8. International factoring
Factoring services in India.
The working procedure involved in the factoring services as
adopted by SBI Factors and Commercial Services Ltd. Can
be summarized as follows:
1. The supplier invoices his customers in the usual way
only adding the notification
2. The supplier offers assigned invoices to the SBI Factors
with a schedule of offer
3. The SBI Factors provide pre-payment to the supplier
4. The SBI factors sends an official notification and
personalized statement
5. The SBI Factors pays the remaining 20 per cent of the
invoice value to the supplier
6. The SBI factors send monthly statement of accounts to
the supplier
Leasing has become a growing activity in India. Leasing may
be defined as “a method of acquiring right to use an
equipment or asset for consideration”.
Types of lease agreements
1. Finance Lease – A finance lease is a long term arrangement
which is irrevocable during its primary lease period.
a. The lessor transfers ownership of the asset to the lessee
b. The lessee has the option to purchase the asset at a
price which is expected to be sufficiently lower than the
fair value
c. The lessee term is for the major part of the economic life
of the asset is not transferred
d. The present value of the leased minimum lease
payments amounts to at least substantially equal to the
fair value of the least asset

e. The leased asset is of a specialized nature

2. Operating Lease
A lease which does not satisfy any of the conditions as
give above for Finance Lease is termed as “Operating
Lease”. It does not give lessee all the benefits and riks
that are associated with the asset.
(a) Where there is possibility of rapid obsolescence of the
(b) Where the lessees is interested in tiding cover a
temporary problem
3. Sale and Lease Back
A firm sells an asset to another person who in turn
leases it back to the firm. The sale and lease back
arrangement is beneficial both for the lessor and the lessee.
The lessor gets the benefit in terms of tax credits due to

Leveraged Leasing
This form of leasing has become very popular in recent
years. The position of the lessee under a leveraged
leasing agreement is the same as in case of any other
type of lease. The lessee agrees to make periodic payments
over the basis lease period and gets the right to use the
asset over the agreed period of time.
Difference between hire purchase and lease financing

The goods are delivered by the owner to another person on the

agreement that such person pays the agreed amount in
periodical installments. The buyer can claim depreciation on the
cost of the asset and interest as an expense for tax purpose. In
case of lease financing, the lease rent is deducted as an
expense for tax purposes.

In case of a hire purchase, on completion of the contract, the

residual value of the asset goes to the buyer. While in case of a
lease financing, the residual value goes to the lessor.
Certificate of Deposit
The certificate of deposit is a document of title similar to time
deposit receipt issued by a bank.
i. The banker is not required to encash the deposit before
the date maturity
ii. The investor is assured of ready liquidity.
The maturity period of CD is between 15 days and one year
for scheduled commercial banks
Undertaking the responsibility by a person or firm or an
institution that if the shares or debentures offered to the public
for subscription are not fully subscribed for, the underwrite will
subscribe for such unsubscribed shares.
Bid bonds and performance guarantees

Guarantee issued by a bank on behalf of its clients in favour

of a third party that if the contract is entered into with its
customer named therein he will be able to execute the same.
It is guarantee where the bank gives an undertaking to the
third party that its client shall complete the job as per terms of
tender. Without any proof or condition, the bank cannot be
restrained from making payment to the beneficiary of the
guarantee by the customer unless there is a clear fraud to the
notice of the bank.