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Kulkarni

FUNCTIONS OF BANKS

Third Session
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2.1.1BANKER CUSTOMER RELATIONSHIP

Debtor- creditor : when customer deposits money with the bank, the customer becomes lender and bank become borrower. The money handed over to the bank is debt. The relationship between the banker and the customer is that of a debtor and creditor. The bank is free to use the money beneficial to them. On demand the repayment has to be made. Bank will not pay voluntary. The demand should be made proper manner-during working hours and in particular branch. No security is provided by the bank for the deposit

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Creditor-Debtor

relationship: when bank lends

money to the customers, the customer is borrower and the bank is lender. Bailee- Bailor Relationship : when customer deposits certain valuables, bonds, securities, with the bank for their safe custody, the bank become trustee-bailee and customer bailor and bailor will be liable for any loss. Agent Principal Relationship: Bank is agent and customer is principal. The bank provide the services like collection of remittances , collection of cheques, bill. Further it under take the payment of electric bill , insurance, telephone bills payment. In all such cases bank act as agent. The agency relationship will get terminated after the death of the customer.

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2.1.1
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Lessor and lessee : the bank provide safe deposit locker to the customer who hire them on lease basis. The relationship therefore is that of lessor and lessee. Different Deposit Products : Deposits are normally classified as demand deposits and time deposits. Demand Deposits : Payable on demand, low interest rate no interest. It include current, saving, overdue deposits, unclaimed deposits. Current Deposits : are opened foe business transactions , not entitle for interest, the minimum balance differ bank to bank, no restriction on transactions per day.

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Saving Deposits :It is opened by individuals / trustee. Interest is paid at a rate determine by RBI The customer can withdraw the amount either by cheque or withdrawal form. Interest is paid on a half yearly basis. Number of withdrawals restricted by each bank. The minimum amount has to be maintain in the account. Time or Term Deposits :Account may be opened by individuals or firm or corporate. Amount is repayable on maturity. Rate of interest is fixed. Interest payment may cumulative or quarterly. Term deposits are not tranferable.

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SERVICES LENDER BY THE BANKS

The main objective of services to customers and investors is to provide comprehensive range of services. Merchant Banking : Mobilize the funds either through IPO, private placement of debt or equity. Lease Financing : Plastic Money : Plastic money in the form of credit card and other cards has become preferred mode of payment. Charge cards : In this transactions by the cardholder are accumulated over a period of time and total amount is charged and debited to the account of the cardholder. The amount is payable immediately If there is insufficient amount the cardholder is given 25 to 50 days time
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Credit cards : Debit Cards : Debit cards are the same as the credit cards. The only difference in this card is that the amount of dues from the cardholder for each and every transactions is debited to the cardholders accounts as soon as each transaction is notified by the issuer. ATM Card : These are the cards issued to the saving account holders for drawing cash from ATM. some of the debt cards are also used for ATM

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BANKERS LIEN
Lien is the right of the banker to retain possession of the goods and securities owned by the debtors until debt is paid. The bank acquire the right to sell the goods in case borrower failed to pay debt. Right to set off: Set of is the right of debtor to take into account a debt owned by him by a creditor. In case of a banker the right of set off enables him to adjust a debt balance in a customers account with any balance outstanding to his credit in the books of the bank. In other words, the banker can adjust his claim from the account that is payable to the customer.

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2.1.1KNOW YOUR CUSTOMER (KYC):

In November 2004, RBI issued comprehensive guidelines. The objective of the guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities or for financing of terrorism. KYC procedures enables banks to know / understand their customers and their financial dealings better which in turn help them manage their risks prudently. Banks have been asked to frame their KYC policies incorporating the following for key elements: Customer Acceptance Policy Customer Identification Procedures Monitoring of Transactions Risk Management Recent relaxation in KYC Norms For opening small accounts, banks need to seek only a photograph of the account holder and self-certification of address.

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TYPES OF RETAIL BANKING PRODUCTS

Liability Products: Opening of Deposit Accounts : Photographs: Two copies of photographs of customer / Authorized Signatories For minors, guardians photographs Photographs should be recent Only one set of photograph should be taken and separate photographs are not needed for different categories of different accounts in the same name Photographs may be waved in cases of Ordinary SB Account without cheque facility Fixed and other Term Deposits up to Ts 10,000/ Banks, local authorities and government departments Borrower accounts Bank staff Address Independent confirmation from telephone bill, electricity bill, passport, etc. Sending a letter to the customer at the recorded address

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For companies : to verify the name of the company(1) certificate of incorporation, Principal place of business ,resolution of board director for opening account, power of attorney granted to manager, PAN allotted letter ,Telephone number and telephone bill. For Partnership firm: To verify the name (1) registration certificate (2)power of attorney granted to operate the account (3)Any other vaild document to verify the partners. For Trust :( 1) registration certificate power of attorney to transact the business (3) document to identify the trustee (4) resolution passed by the trustee.

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TYPES OF RETAIL BANKING PRODUCTS

Liability Products: Opening of Deposit Accounts : PAN Number / General Index Registrar Number (GIR number is given by an assessing officer to assessee) For deposits of Rs 50,000/- and above Form 60 of Income tax Department for persons who do not have PAN / GIR number Specimen Signature Personal Presence Legible, having relevance to the name Must not be in dots and dashes Authorization Opening should be authorized by the Branch Managers

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2.1.2PAYMENT AND COLLECTION OF CHEQUE

1.

2.
3.

A bank is under statutory obligation to make payment of a cheque drawn on an account, if there are sufficient funds in the account. Bank has to ensure that the cheque is drawn properly fulfilling various requirement. The cheque is the bill of exchange drawn on a specified banker. It include the electronic image. It contains instructions in writing by the account holder to his bank for the payment of money from his account. There is statutory obligation on the part of banker to make the payment of the cheque if The cheque is properly drawn There is sufficient balance in account There is no legal restriction on bank duty to pay.
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2.1.2The branch on which it is drawn : presented for the payment only at the branch where account is maintained. Now a days multi city cheque facility the customer can present the cheque at any of its branch. Date :A cheque may bear future date, current date. Payee : A cheque may be payable to a single payee or joint payees. Whether order cheque or bearer cheque : Whether the amount stated in word and figure are the same : if it not tally , the amount stated words shall be paid. Whether crossed ?: Signature of the drawer :

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2.1.2LIABILITY OF THE PAYING BANK

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As per the N.I. Act the drawee bank is under the liability to honor a cheque drawn on its account that is having a sufficient balance. In case of default the bank must compensate the drawer for any loss or damage cause by such default. If funds are not sufficient, the payment of the cheque is stopped. Forged endorsement the payment is stopped Forged Instrument : Forged instrument means forging the signature of the drawer or endorser. Forgery in signature and alteration in payee name, amount and date are not protected under law. The transferee will not be able to enforce payment from parties to bill.

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2.1.3OPENING ACCOUNT FOR VARIOUS

TYPES OF CUSTOMERS
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Bankers deals with various types of customers like individuals , partnership firm, companies. While opening and in conduct of account of these person s, the banker has to comply with the law applicable to each of them. There are certain types of depositors / borrowers which are different than the individuals requiring some care and attention. Every person is legally capable of opening an account with a banker provided the bank is satisfied with his bona fide.

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2.1.3DOCUMENTATION
a. b.

c.

Sole proprietorship firm Certified true copy of shops and establishments license or any other approval from the Government Declaration that he is the sole proprietor Hindu Undivided Families (HUF): HUF Declaration signed by all coparceners affirming composition of HUF, its Karta and names and relations of all coparceners including minor sons and their dates of birth. HUF deed Account is opened in the name of the Karta / HUF business Certified true copies of the IT returns for last 2-3 years Partnerships: Certified true copy of Partnership Agreement. List of all the partners and their addresses Attested true copy of a resolution of the partners / letter signed by all the partners addressed to the bank to open an account and the manner how it is to be operated

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d. e. f.

2.13Association / Society / Club: Certificate of registration Certified true copy of bye-laws Copy of Management Committee Resolution Names and address of all Committee Members including phone numbers Trust Account Certified true copy of the trust deed Bye-laws Resolution of the trustees to open an account and the manner it is to be operated Limited Companies Memorandum and articles of associations Certificate of incorporation Certificate of commencement of business (for public related companies) Resolution passed by the Board of Directors to open the account and the manner it is to be operated along with the authority given to them

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2.1.3Minor Account : As per the section 11 of the Indian Contract Act 1872 when the age of maturity has been provided by law to be 18 years, any persons less than that age, even by a day would be minor in law. The minor is not competent to open the account. Usually, the account should be opened by the guardian on behalf of minor. After attaining majority. The guardian is not allowed to operate the account any further. Two minor can not open joint account. If guardian dies during the minority, then balance can be paid to the minor after his attaining major. If the minor account holder dies the balance will be paid to gurandian.

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2.1.3Joint Account Holders : A joint account is an account opened by two or more persons. While opening account an account opening form should be signed by all account holders. The instructions for operating the account may be one of the following (1) either or survivor (2) both jointly (2) former or survivor.

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Negotiable Instruments (NI): The NI Act 1881The NI Act is based upon English Common Law relating to Promissory Notes, Bills of Exchange and Cheques Negotiable Instrument:: Definition A Negotiable Instrument is one the property in which is acquired by anyone who takes it bonafied and for value not withstanding any defect of title in the person from whom he took it. Characteristics: Free transferability by delivery, by endorsement and delivery Title to transferee transferee gets good title despite any defect in title of transferor

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Presumptions: Considerations Date Acceptance before maturity Transfer before maturity Order of indorsements Holder in due course Proof of dishonor Rules of Estoppel: Deny original validity of the document Deny capacity of the payee to indorse Deny signature or capacity of prior party Payee Payable to bearer Payable to order

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2.2 CREDIT

The main source of funds for a banker is deposits from the public, which are payable whenever demanded. The banker while lending should therefore follow the sound principles of lending . Principles of lending : The business for lending is not without certain inherent risks The cardinal principles for lending are : Safety Liquidity Profitability Purpose Diversification Security

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1.Safety :Safety first is the most important principles of lending. The repayment of loan depends upon the borrowers (1) Capacity to pay (2) willingness to pay (3) income generation. The banker must therefore take utmost care in ensuring that the enterprise or business for which loan is sought, is sound and the borrower is capable of carrying it out successfully. 2. Liquidity : It is to seen that money lent is not going to be locked up for long time The money should return to the bank as per repayment schedule. 3.Profitability : A fair return on investment is essential Bank is commercial organization and profit earning is the motto of bank. It is prudent for a bank to look at the overall profitability from all business undertaken from customers instead of applying the test of profitability against each components of business.

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4.Purpose: Loan for un desirable and speculative purposes can not be granted. 5.Diversification of risk: It mean that the banker should not grant advances to only a few business houses, undertakings, cities, industry or region. 6. Securities : The security offered against the loans may consist of a large variety of items. It may be plot or land, building, flat, shop shares bonds. The banker must realize that it is only a cushion to fall back upon in case of need. 2. Non-Fund Based Limit : The non fund based limit are normally two types (1) bank guarantee (2) letter of credit Guarantee : By issuing guarantee , the guarantor bank accept the responsibility for an obligation. While assessing the bank guarantee limit required by the borrower, details such as the nature of guarantee , it purpose , the particular of the contract period and the amount is sought and assessed.
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Letter of credit : A letter of credit is a binding document that buyer of the goods can request from the bank in order to guarantee that the payment for goods will be transferred to the seller. Working Capital :The term working capital denotes the requirement of the money by manufacturing enterprise for its day to financing. It is for (1) purchase of raw materials (2) Payment of wages (3) payment of other expenses . There are two concepts of working capital. (1) gross working capital and (2) net working capital. Estimation of Working Capital need : There are four methods of working requirement of a borrower: The operating cycle method (2) The projected net working capital method (3) The projected turn over method and (4) The cash budget

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Difference between Term loan and working Capital : The major difference between term loan and working capital finance lies in the purpose of finance and type of assets created out of it. Term loan used for acquisition of fixed assets while working for acquisition of current assets. The term loans for longer period, while working capital for one year The working capital finance is generally available of in cash credit hypothecation account. Credit Appraisal : In credit appraisal process, the decision maker make the attempt to find the answer to two important questions. First, whether the enterprise required the funds, also what is his credentials? Second question is all about the extent of his requirement and the way in which the requirement will met.

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1. 2. 3.

4.
5. 6.

Credit Management : Credit management is the management of the credit portfolio of the bank. The credit management includes pre- sanction appraisal .sanction, documentation, disbursement, and post lending supervision and control. The credit management encompasses the following : Capital adequacy norms Risk Management Exposure norms Risk pricing Assets classifications Appraisal

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1.

2. 3. 4.

Credit Monitoring : The credit monitoring in a bank is to ensure that the funds are utilized for the sanctioned purpose. At the same time complying with all sanction term and conditions. Under credit monitoring arrangement bank ensure the following : Borrower should maintain reasonable estimates of current and current liabilities. Maintain the classification of current and current liabilities Maintain minimum current ratio 1.33 Ad-hoc limit are sanctioned for the period not exceeding three months.

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2.2.2DOCUMENTATION

Documentation is one of the vital areas in the credit portfolio of a bank. The purpose of taking documents are fix the terms and condition between the bankers and borrowers. There are some enactment such as Indian contract Act, Partnership Act, Companies Act, Indian Registration Act, Limitation Act, Indian Stamp Act which affect directly the banker loan documentation. Different types of Documents : The documents taken by the banker for a loan may be: (a) Demand Promissory Notes (DPN) (b) Agreement (c) Forms 1.Demand Promissory notes : Where no specification for fixed period for the repayment of loan is given. In DPN the borrower makes a promise to the banker to repay the loan amount on demand with agreed rate of interest. It should be in conformity with N.I Act. It attract stamp duty.
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Agreements: The form of agreement should be in conformity with Indian Contact Act. The terms and conditions are set in the agreement. The amount of loan, rate of interest, rate of panel interest, period repayment, right of banker in case of default, details of security, are included in the agreement. The agreement attract the stamp duty. It vary state to state. Forms : Forms are not in the nature of promise or agreement. These are obtained to specify clearly the intension of the borrower. For example , when loan is granted against the security of a fixed deposit standing in joint names, one of the depositor gives an authorization to the other to raise the loan on the deposit . Such authorization is taken in a form.

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Documentation Procedure : The document should be error free. Selection of correct set of documents: Documentation varies depending upon the nature of the facility and type of person. The document prescribed for a cash credit facility may not be used for term loan facility. Similarly a document meant for an individual borrower can not use for company. Stamping : Next step of document is stamping. The document should stamped in accordance with Indian Stamp Duty Act Filling :The banker are using the preprinted formats of documents with blank in appropriate places. It is necessary to fill these blank as per the terms of sanctions Execution : The next step is the execution of document- signing of document. It should ensure that the signature in the document tallies , signature all pages of document. The document should executed in the presence of bank officials.

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Legal Formalities : Some documents should be submitted to some legal authorities. Keeping Document Alive :The documents taken by the bank for credit facilities dot not have perpetual life. The provision of limitation Act apply to them. The limitation Act prescribes the period of limitation for different types of documents Renewal of Document: The bank should obtain a fresh set of documents. It is not mandatory to obtain fresh sets of documents for renewal of credit facility

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TYPES OF CHARGES

Banks tend to safeguard their advances by taking different types of securities. The method of creating charge over the property depend upon nature of property and nature of charge. Banks charge over the properties confines itself to one or more of the following six types charges . (1) Assignment (2) Lien (3) Set-off (4)Hypothecation (5) Pledge (6) Mortgage Assignment :It is method of providing security to a banker for an advance. It is transfer of the right , property or debt. In banking practice , borrower may assign the book debt , money due from government and LIC policies as a security. Lien :Lien is the right of the banker to retain possession of goods and securities owned by the borrower. The bank acquire the right to sell.
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Set off: Set means total or partial merging of claim of one person against another in a counter claim by the latter against the former. Hypothecation; Creating the change against the security of movable assets In case of pledge the assets are under the custody of the Bank, while Hypothecation assets are in possession with borrower goods are kept under lock and key of banker It has to be registered (Section 25) of Indian Company Act 1956.

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2.2.2 MORTGAGE
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There can be immovable property that are offered as security. The process of offering immovable property as security is know as mortgages. According to section 58 of Transfer of Property Act 1882, the concept of mortgage has been defined. Mortgage is the transfer of an interest in specific immovable property for the purpose of securing the existing or future debt, or the performance of an engagement which may give rise to pecuniary liability.

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Through

mortgage the interest and the right on the mortgage property are transferred from mortgagors (borrower) to mortgagee. There are essentially six type of mortgages. Simple Mortgage-A simple mortgage take place without delivering possession of the mortgaged property .And any failure the mortgagee has right to sell the property. An equitable mortgage is created by way of deposit of title deeds. The ownership documents of the property are deposited with the bank. No formal mortgage deed is executed. This is the simplest and cheapest form of bad credit mortgage.

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Registered

mortgage is the safest form of mortgage. This is also referred to as English mortgage. No documents of property are required to create an English Mortgage. The borrower has to enter into a mortgage agreement with the bank. This deed is then stamped and registered in order to make it enforceable. This is an expensive mortgage. The stamp and registration charges have to be borne by the borrower.

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The

borrower binds himself to repay the mortgage loan amount as per an agreed schedule and transfers property absolutely to the mortgagee (lender) subject to the condition that the bank or lending institution would transfer the property back to the mortgagor on repayment dues. An English Mortgage is distinct from a mortgage by conditional sale. In the former, there is an absolute sale in the beginning and in the case of the latter, there is only an "ostensible sale" and not an absolute sale.

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