Unit-2

Banking deposits
&
Operations

Functions of Bank
NO

Activity

Description

Accepting deposits

Advancing loans

Investing funds

Fixed deposits / savings account / current

account
Demand loan/ cash credit / Over draft /
Discounting of bills / term loan/ bridge loan/
short term loan/ consumer loan/ personal
loan/ Mortgage loans
Government securities / bonds/ stocks/
Approved securities as per B R Act 1949,
money market instruments

Promoting banking
habit

Campaigning on opening new accounts to

promote savings/ Banking habits

Agency services

Execution of standing instructions which

includes Funds transfer, (RTGS/NEFT) Funds
collection, portfolio management, collecting
dividends, premium payment, trustee &
executor , I T consultant, acting as
correspondent, Foreign exchange dealings,

Functions of Bank
6

Financing trade.

General utility
services
(Financial services)

8
9

Providing Non
funded credit
Credit creation

10

Social objectives

11

Economic
development

Extends short term loans to traders on

security of
C Ps.
Safe custodial services, issue of travelers
cheques, credit information at the request of
the customers, business information to
customers, Underwriting services, merchant
banking services, bank assurance, selling
mutual
funds,inland
investment
Banking
services
BG, LC (both
& foreign)
, DPG
etc.
etc.
Banks creates assets/ liabilities on itself in its
books when they accept deposits or grants
loans. The deposits while circulated by
advances lead to net increase of money flow
in
the economy.
Realizing
socio economic objectives by
supporting various government schemes for
BPL, Agriculture, etc by removing inequalities
amongst
various sections
Capital
formation
by mobilizing the savings to
productive purposes, financing industry,
trade, Agriculture, consumer financing,
financing employment generating activities,
supporting monitory policies of RBI by
scrupulously following the same.

Banks Customers
Relationship
A customer constitutes a person who has an account
with the Bank whether savings or fixed & has
dealings of Banking nature.

Once the Bank accepts the deposits on the footing

that the bank undertakes to honour the cheques up
to amount standing in the credit of the customer ,
the relationship is created.
He must necessarily have an account with the bank
and the dealings must be of regular banking
business.

Banks Customers Relationship

(G)

Debtor- creditor

Trustee- beneficiary

Credit balance
Customer is
creditor &
bank is Debtor

Agent- Principal

Bank acts as agent o

Banker acts as trustee by a customer
maintaining the deposits & carries out the
of customer.
agency functions
Such as collecting
Debit balance
Banker accepts securities cheques, bills of
Customer is debtor& other valuables of
payment etc.
& bank is creditorThe customer & acts as
trustee. (Bailee)
The customer is the
Beneficiary (Bailor)

Obligations & rights of banker

Obligations

Rights

1. Honour the cheques subject to 1. Right of lien

availability of balance in the account.
Particular lien/ general lien
Liable if he dishonours the cheque
without justification
Exceptions
2. Maintain secrecy except in
following cases.

Safe custody deposits, entrustment

for specific purpose
Securities held by bank inadvertently
and trust accounts

By compulsion of law
Public duty (money laundering)
Protect his own interest (Action
2.Right to combine accounts/ set of
against the customer by law/ other
banker)
3.Right of appropriation
Customer gives consent
4.Right to charge interest ,
commission & other charges.

Opening of accounts- K Y C
norms
RBI guidelines under section 35 ( A ) of B R act 2004.

Customers
acceptance
policy

Customers identity Monitoring Risk

transactionsmanagement

No account to be
opened in benami
names

Identity proof

Normal

Address proof

Unusual

To have full
knowledge
About the
business
activity
Location, CCC of

Two copies of
recent
Photographs

abnormal

PAN

Avoid internal
Risk of any
Unwanted
activity

Types of
customers
Type

Description

Minors
Below 18
years

As per section 11 of Indian contract act 1872, a minor cannot

enter into a contract. So a guardian has to be appointed & look
after his assets till he attains the age of maturity. Banker has to
follow some precautions .
Cheques issued /signed by minor-not valid
Banks should not provide any loan/guarantee to minor.
Minor can be a partner & enjoys benefits but not debts / liabilities

Partnersh
ip
Firms

KYC Norms ,Partnership deed (registered), letter of introduction,

Application, Authorization letter on operational instructions
including signing of cheque , Manager to be careful in dealing
with Private account of partner ,
Precautions to be taken while new partner is introduced or
Retiring of a partner .
KYC norms , Resolution to be passed for opening the account
with common seal, Memorandum & articles of association,
certificate of commencement of business, Mandate to the banker
on such matters as signature of the cheques , authorized person
to operate the account etc, borrowing powers of the company,
Registration of charges etc

Joint
stock
company

/ Documents

Type

Types of
customers
Documents to be obtained

Joint
Joint accounts are those opened & operated jointly by more than
accounts one person.
KYC norms to be followed, Joint application signed by all the
persons who are opening the account, Mode of conduct of the
account to be intimated to branch , Precautions to be followed in
case of Death of the account holder , insolvency etc In case of
either or survivor, the account can be operated by any one of the
joint
account
Joint
Banker
has toholder.
go through the provisions of Hindu Law that govern
Hindu
bank dealings.
Family
The Kartha (the eldest member of the family is allowed to
operate, borrow etc) in the interest of JHF. The other members are
called coparceners.
While loan is given, it is better to obtain the signatures of all the
male members of the family to protect the interest of the bank.
All members are liable for the act of the Kartha.
Kartha is personally liable whereas the other members are liable
to the extent of their share in JHF.
Trust
A person on whom confidence is reposed by another person is
called a trustee. A trustee usually acts on behalf of another
person. The person who stands to derive the benefit is called
beneficiary. Documents to be obtained are KYC norms, Trust deed,
Authorization letter on who has cheque signing power ,
precautions to be followed for retirement/death of any trustee.

Special types of
customers
Type
Description / Documents
Insolven
ts

No withdrawals permitted once a person is declared insolvent

Dealings to be done only as per the instructions of receiver.

Lunatics

Cannot enter into any contract as per Indian contract law (sec 12)
No new account to be opened and existing account should be
freezed.
Can permit operations after the court gives sanity certificate.

Drunkar
ds

Banks to take precautions to pass the cheque . Can do with the

support of witness.
Contract entered with Drunken person is void as per Indian law.

Illiterate
persons

No bar on opening/ operating the account.

Thumb impression and photograph attested to be obtained for
identification

Agents

Mandate from the principle to be obtained for allowing

operations such as
Mode of operation/ Drawing/ acceptance of B O E/ O D accounts
etc.

Opening of accounts
Type

Description

/ Documents

Partner
ship

KYC norms, Partnership deed, Powers of partners, Operational

instructions, Partnership registration, Retirement/ death /
insolvency of partner partners private account etc

Joint
KYC norms ,Certificate of incorporation, M A A, Board resolution,
stock
Certificate of commencement of business, Financial statements,
company powers to borrow , common seal etc.
Private
Max 50 members, No public participation ,KYC norms , Certificate
ltd
of incorporation, M A A, Board resolution, Financial statements,
company powers to borrow , common seal etc.
Clubs,
schools
Colleges

Certificate of registration, Authenticated copy of the resolution

of the managing committee on appointing bankers, operational
instructions, appointment of treasure in case of club/ association
etc. Office bearers private account to be separate .

Local
authorit
y

Government offices like municipal corporation, port trust, other

corporations etc are local bodies. Statutory powers to borrow,
securities permitted and ofered etc.

Co op
societies

Rules governed by co operative rules and laws of the respective

society.
Copy of resolution passed by B O D on the aspects of appointing

Opening of account

Letter of
Introduction
With photograph
&
KYC norms documents

Application
form

Specimen
signature

Issue
Of cheque
Books & pass
Books
ATM /Debit/credit
cards

In addition to the above, Banker will obtain certain forms such as nomination
Forms, 15 G (Tax deduction purpose) .

Types of Deposits

R. D

F.D

Interest
Regularly
paid

CASA

N.R

Interest
reinvested

Floating

Flexi deposit

The products vary from bank to Bank. Bank has created its own name for these
products.

Non Resident account

Rupee account

NRO account

NRE account

Foreign currency accou

FCNR account

Resident

F C account

Opened singly /jointly

Not permitted to open Opened Only
NRI coming back for
With resident Indian
with resident Indian
by NRI Only
Good
In Fixed deposits
No restrictions on
Indian national
Opened by transfer of
withdrawal
residing abroad
Foreign currency Funds, currency etc
can open this account loans permitted
OD permitted on the
Amount is Transferable
deposit
Opened with direct
remittances from
Rupee loans givenAmt received from
Interest taxable as
abroad
on Security of
Abroad can be credite
normal
FCNR deposits
Withdrawals permitted
Withdrawals in India
Non repatriable
In Rupee only
Repatiable

Clearing house
A process in which a banker exchanges cheques drawn
against other banker & receives by him for collection or
clearance from his customer.
It is an institution where reciprocal liabilities are balanced
against one another.
It is an association of banks that facilitates settlement of
interbank claims due to cheques received for collection
by each bank
It saves cash for use of settlements.
The first clearing house was established in London in
1775.
The practice of clearing balances between banks have
been adopted by all the central Banks as a part of duty as
per the laid down law.

Clearing house process

Each bank who is a member of the clearing house
prepares summery sheet of the out- clearing which
contains record of all the cheques which he has to
realize from other bank.
Separate summary sheets are prepared for each bank.
The cheques & DDs are sorted out into Separate
bundles, taken to clearing house & handed over to
respective bank.
Similarly, the inward Clearing cheques are collected in
similar way from other bank & debited to the
respective account.
The credit/debit is collected from the central bank.
Every bank has to maintain current account with

Clearing house in India

No of clearing houses- 860
Managed by SBI & its associates- 840
RBI-13
Nationalized banks- 7
There may be changes from time to time as per RBI
guidelines.
Hyderabad clearing house is managed by BOB
Since 1986, MICR technology has changed the
functioning of clearing activities and is now Electronic
clearing service (ECS)

RTGS & NEFT

Two conventional modes of money transfer between banks in India

RTGS
Real Time (fastest) gross
settlement
No waiting period . Transactions
are settled as soon as they are
processed .
Transactions are settled on one to
one basis.
They are irrevocable as money
transfer occurs in RBI records
Is an exclusive message based
transfer mechanism for over Rs
2.00 lakhs
In just two hrs, the account gets

NEFT
National electronic funds transfer
Is an online transfer of money in
batches in selected centers.
Is slower compared to RTGS as it is
netted.
NEFT transactions are on deferred net
settlement. Transactions are clubbed
by the bank and net amount is
transferred.
Takes place 7 times a day on regular
working days within the cut of time .
NEFT is for transfer of money below Rs
2 lakhs . No maximum limit for

CHIPS
Clearing house inter Bank payment system is US bankers
clearing house for payment & accepting funds.
It is an electronic system operated through terminals in
branches of banks
The banks participating in the system are members of
New York clearing house association.
Most of the international transactions are through CHIPS
Since majority of the trade transactions are in $

CHAPS
Clearing house automated payment system

Electronic payment system in U K which provides instantane

service for settlement of payments.
Most of the clearing banks in U K are connected to CHAPS
terminal.

MICR Cheque

Magnetic ink character recognition

Code line at the bottom of the cheque for

mechanical processing

First 6 nos
Cheque no
Next three nos - city code
Next three nos - Bank code
Next three nos - Branch code
No after space- Transaction ( SA/CA)

When a cheque is placed in the MICR

equipment, these nos are read
immediately &
identified

Electronic Clearing service (ECS)

Banking transactions cleared through electronic device is
ECS
It is a series of electronic payment instructions which replace
paper instruments.
This system works on single debit transaction triggering a
large number of credit Entries.
These credits / electronic payment instructions possess the
following details
1.Beneficiary's account No
2.Amount
3.Branch
4.Bank

Electronic Clearing service (ECS)

The credits are done through magnetic media duly
encrypted/ hard
copies

Corporate bodies/ government departments which have to

efect
payments to Large no of beneficiaries submit the details in
magnetic media to the clearing House through a Sponsor
Bank

ECS Features
1. Minimize the operational difficulties due to physical clearing
system
2. No need for Preparing the payment data by the user which
has to make payments to large number of customers.
3. This is done on magnetic media/ tape/CD
3. Presenting the payment data by the sponsor bank to the
local bankers clearing house .
4. The manager of the clearing house debits the sponsor bank
s
account & credits destination banks s account where the
beneficiary's account exists.

ECS Features
5. Branch wise credit reports indicating the details of
branches,
customers, account numbers , type of account etc are
furnished by clearing house to the service branches of the
destination bank.
6. The service branches of the destination banks passes the
advise to the concerned branches to the credit/ debit of
the customers account

Negotiable Instruments Act

Negotiability is the essence of a negotiable instrument.
As per NI act 1881, only three instruments (P N, B O E, &
cheques) were N I.
Section 137 of transfer of property act speaks of
instruments that are negotiable as per law or customs
& many more were added to the list in due course.
1.Promissory notes
2.Bills of exchange
3.Cheques
4.Government securities
5.Dividend warrants
6.Hundis
7.Bank Drafts
8.Share warrants

Negotiable Instruments Act 1881

Negotiation- Transfer of right, title & interest of the holder of

the instrument
The transferee gets the good title if he is the holder in due
course.
NI can be transferred by just deliver. (bearer) or by
endorsement & delivery.
The bona fide transferee gets even better title than the
transferor as he is not a party to the defects of the title to the
instrument.

Negotiable Instruments Act 1881

Every N I is was made for a consideration & endorsed/transferred

is for consideration.
Every N I has been drawn on a date.
Every bill of exchange has been accepted within reasonable
period before its maturity
The holder of the NI is holder in due course & has been obtained
from its lawful owner.

No marker of a promissory note / no drawer of BoE & no acceptor of

BoE by a holder in due course is Permitted to deny the validity of th
instrument as originally made/drawn.

No endorser/acceptor /subsequent holder shall be permitted to

deny the signature to the contract of any Prior party to the instrum

Cheque

N I act

Parties to

Sec 6 of N I act

The cheque

Drawer

Drawee
Is a B O E drawn on
Specified banker , not
expressed to be
Payable otherwise on payee
demand
It includes truncated
Cheque in E form

A valid cheque

Unconditional order in writing to be

Paid on demand only for certain
amount
Amount in figures/ words to tally
Drawn on specified

banker

Signed by drawer for Certain sum

only to a certain payee
Drawees signature to tally
In printed form with number by the
bank
Post/ anti dated , stale cheques

Holder in due course

Section 8 of N I Act 1881
Holder in due course is the person who is the holder of the PN , BOE,
Cheque & is entitled to receive the amount due thereon from the parties
thereto
As per section 9 of N I act 1881
He must satisfy the following conditions
1.Possession of the instrument lawfully as per section 8 of the act
2.His name must appear on the instrument as payee / endorsee
3.He must have the right to receive the amount
4.Must have the possession of the instrument before maturity
5.Must possess the instrument for valuable consideration
6.Must be the holder without having sufficient cause to believe that any
30
defect existed inn the title of the person from whom he received.

Crossings
Two parallel transverse lines are drawn across the cheque with or
without the words and co .
The effect of such crossing is that the banker on whom it is drawn shall
not pay the same otherwise than to a banker.
The person to whom the payment is not entitled to receive is prevented
from getting the cheque encashed. At the counter.

General crossing
&

co
No

g
ne

ye
Pa

Special crossing
le
ab
i
t
o

a
es

t
un
o
cc

ank e
B
e
a
y
r
a
h
P
d
An ount
Acc

31

Endorsements in Cheque
Section 15 of NI act.
Maker/holder of the instrument signs the same for the
purpose of
negotiation on the back of the instrument or a slip of
paper
annexed thereto or signs a stamp paper intended to be
completed
as negotiable instrument .

Allonge

If the back of cheque is filled with endorsements , an

additional
paper is attached.

endorsee
person in whose favour the instrument is endorsed

Kinds of endorsements

Blank

No name

Special
or Full

Partial

Restrictive Sans
Conditional
recourse

Only part Restricts Without

Name
Further
specified Of the
recourse
amount is negotiationTo me
Transferred.

Transfer
Depending on
fulfillment of
A condition

Duties of paying Banker

Section 31 of N I Act.
To verify the following
1.Genuineness of the cheque
2.Sufficiency of available funds in the account.
3.Cheque to be acceptable form.
4.The date should be proper.
5.The cheque should not be post dated or stale
6.Amount of cheque in words & figures should tally.
7.Material alteration should not be found
8.Drawers signature should tally
9.Mutilated cheques to be dishonoured
10.Crossing should be proper.
11.Proper remarks to be mentioned for dishonoring the cheque
12.Death of the principle drawer invalidates the cheque
34

Protection to paying Banker

Section 85 & 89 of N I Act.
1.If the banker is convinced that there is no alteration
2.Payment is made according to the tenor of the instrument.
3.If the alteration is not clearly visible after the Banker

exercise sufficient caution.

4. Payment made in due course as

per section 10 of N I Act.

5.If the endorsements are regular.

35

Duties of collecting Banker

1.
2.
3.

Prompt presentation of the instrument.

Prompt credit to the customers account.
Prompt notice of dishonor

In addition to the above , the banker has to ensure the following

aspects in respect of the account holder.
1.
2.
3.
4.
5.
6.

Proper opening of the account .

Collection of cheques to customer & not others.
Ensure regularity of endorsement.
Proper title of the instrument in favour of the customer.
Proper crossing to be verified
No suspicion of the transaction
36

Protection to collecting Banker

Section 131 of N I Act.
1.
2.
3.
4.

Acts in good faith without negligence.

Payment is made only to the customer
Acts as agent to the customer
Proper verification of prior crossings.

Protection will not be available in the following cases.

1.
2.
3.
4.
5.

Lack of good faith.

If it is a forged cheque.
Has full knowledge of the defective title.
Cheque has not negotiable crossing.
An account payee cheque is collected for a third party.

37

Bouncing of cheque
A criminal activity . Can have serious repercussion
party.
1.
2.
3.
4.
5.
6.
7.

on the guilt

Is a legal offence & can land a person in jail.

Is an offence under N I act , punishable up to 6 months.
Loss of credibility for the person who did not honour the
cheque.
Future dealings with creditors may be adversely affected.
Credit scoring can be affected.
Blot on the bank statement. Cheque bouncing charges will be
collected at both the ends.
Bank may not issue further cheque books.

38

Cheque- DD - PO

Cheque

DD

PO

Issued by customer

Bankers cheque

Bankers cheque

To be debited to the
account on
presentation

Amount already received

By the Bank

Amount already received

By the Bank

Will be dishonored if
funds are not
available

Cannot be dishonored since Cannot be dishonored sinc

funds are already received funds are already received
By the bank.
By the bank.
Issued for outstation

Issued within the local are

Forged instrument
Title to the instrument is obtained fraudulently by writing the name of

an existing person , by signing the name of fictitious person , by

signing ones
name With an intention that the signature may pass as signature of
some
other person

There is complete absence of title including the holder in due course .

In case of forgery of endorsement on bearer cheque, the rights of

parties will
not be afected as the instrument is negotiable on delivery.

The title of the holder in due course is perfect.

Parties to the N I cannot disclaim their liability (section 41) if

a) they have the knowledge of forgery b) Fictitious parties.
40

Bankers Lien
Lien is the right of creditor in possession of goods / securities /any assets

belonging to the debtor to retain them until the debt is paid, provided that
no contract expressed or implied , to the contrary.

It is the legal claim on the property on another as security till the

As per legal requirement , there is no need of any special agreement / writt

or oral to create a right of lien. It arises by the operation of the law as per s
171 of Indian contract act.

Bankers lien is a general lien recognised by the law. It is an implied pledge.

paymen

The right of sale extends to all properties and securities belonging to a cus
in the hands of the banker except title deeds of immovable properties whic
cannot be sold.

41

Bankers Lien
Bankers lien does not exist in the following cases.
1. No mutual demand exists.
2. valuables are received for safe custody ( balor & balee )
3. Entrustment of goods for specific purpose to the banker.
4. Deposit with the banker for a specific purpose.
5. Valuables are held with the Banker inadvertently.
6. Banker has only contingent debt.
7. The amount is in respect of a trust.

8. If the deposit is in joint names & debt is due from one of the depo
42

Right to set off

The right to set of is also known as the right combination of accounts.

It is the right to set of a debt owing to a customer against a debt due from
The legal set of is mutual debts between plaintif & defendant.

Limitations
Mutuality is essential to the valid right of exercising set of.
It must be for the same period.
A claim by a person in a representative capacity cannot be set of
against a debt.

Bankers Lien & set off

Bankers right of lien can attach as long as it is earmarked.
A lien is confined to securities & property in Banks custody.
43

Setof is in relation to the money & may rise from contract / operation by la

nit-2
concluded

44