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UNIT 1. FINANCIAL SERVICES AND MARKETS
Q1) Explain the meaning and Importance of financial services?Ans) Financial system are of Crucial significant to capital formation that adequate Capital formation
that adequate Capital formation is necessary for speedy economic development of country because the main function of these financial system is mobilizing the saving and there by stimulate capital formation thus we can say that the process of capital formation involves saving and investment activities.
The relationship between saving and investments judges the rate of capital formation in an economy because saving need transfer process to be converted in investments and this process or service is performed by financial intermediaries such as Banks, Insurance Companies, Mutual Funds, Non-Bank finance companies, Merchant bankers etc..
These financial intermediaries play a significant role in the organization of financial system. They play a vital role in economic development through capital formation. These financial intermediaries come in between ultimate borrowers and lenders in the saving investment process.
TYPES OF INTERMEDIARIES
i) COMMERCIAL BANKS
ii) MUTUAL FUNDS
iii) INSURANCE ORGANISAITION..
i.) Commercial Banks: - These collects saving primarily in the form of deposits and traditionally
finance working capital requirements. Thus these Commercial Banks pool out saving from the small savers and lend to the needy investors. But in course of time these commercial bank have also entered into term lending and investment. In capital market is also common in these days by the Commercial Banks.
ii.) Mutual Funds: - A Mutual Funds is a special type of investments institution. It pools the savings
of relatively small investors in a well diversified port folio of investments. Mutual funds issue securities known as units to the investors which are known as unit-holders. The profits or losses are shared by the investors in proportion to their investment. A mutual fund is set up in the form of a trust which includes Sponsor-Promoter of the company, trustee’s holds its property for the benefit of the unit holders and an asset management company which manages the funds by making investment in various securities.
iii.) Insurance Organisation: - Insurance Organisation or companies essentially invests the savings
of their policy holders and in exchange promise them to provide benefits at a later stage or on maturity of the insurance policy. They differ from Mutual Funds because the main business of Mutual Funds is that of investments are securities incidentally but where as the insurance organisaions are concerned other than the benefits they provide protection against risks.
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Economic development of country depends upon its financial system. It is the essential segments of the economy which deals with financial services. If these services are efficient than the system will built a powerful economy thus the financial services play a significant role. The advantages of financial services are as
follows:-1) Advantages to the Borrower
:-a) Borrowers are able to get adequate funds for investments.
b) If the financial services are efficient than the cost of borrowings will be less. c) Financial services will help the borrower to enjoy the benefits of specialisation. 2) Advantages to Economy :
-a) These services are responsible too built strong financial system. b) It promotes saves and investors.
c) It directly contributes towards Economic development through capital formation.
Q2) Explain the structure of Indian financial system?
Ans) Finance is a facility that built the Gap between deficit sector to surplus sector by shifting funds.
The financial service is an activity relating to bridging gap with various means. Thus the financial services ca be defined as for the purpose of investments.
Every country aiming at its progress depends on the efficiency of this economic system which depends upon financial system. The financial system is the network of institutions and individuals who deal in financial claims to various instruments.
Definition of Indian Financial System
“It is a set of institutions instruments and markets which fosters saving and channels them to their most efficient use”.
- H.R. Machiraju
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i) Financial Market: - It is a system through which funds are transfered from surplus sector to the
deficit sector. On the basis of the duration of financial Assets and nature of product money market can be classified into 3 types:
a) Money Market: - It is the institutional arrangement of borrowing and. lending into 2 sectors i.e. organised sector headed by RBI and unorganized
sector no way related with RBI. Further depending upon the type of instrument used money is divided into various sub market
b) Capital Market: - It deals with long term lending’s and borrowings. It is a market for long term instruments such as shares, debentures and bonds. It
also deal with term loans. This market is also dividend into 2 types:-a) Primary or New Issue Market
b) Secondary Market of Stock exchange.
c) Foreign Exchange market: - It deals with foreign exchange. It is a market . where the exchanging of currencies will takes places. It the market where currencies of different country are purchased and sold.
ii) Financial Institution : - It is classified into
categories:-FINANCIAL SYSTEM
Financial Market Financial Institution Financial Instrument Financial Services
Money Market Capital Market Foreign Exchange Market Banking Institution Non- Banking Institution Long Term Investment Short Term Investments Banking Services Non-Banking Services Other
B.COM COMPUTERS, GENERAL Banking Institution :- It includes commercial banks, private bank and
foreign banks are operating in India. There are 27 Commercial Banks of Public Sector further, we have Development Banks (ICICI, IDBI)
Agriculture Bank (RRB, Cooperative Banks, NABARD).
b) Non-Banking Institution: - These are established to mobilise saving in different modes. These institutions do not offer banking services. Such as . accepting deposit and Lending Loans. For example LIC, UTI, GIC.
iii) Financial Instruments: - It includes through these instruments financial
Institution mobilise saving. These are of 2 type’s i.e.
a) Long Term : - Shares, Debenture, Mutual Funds, Term Loans.
b) Short Term : - Call Loan (money market), Promissory Notes, Bills of exchange etc. iv) Financial Services: -
a) Banking service provided by Commercial banks and Development banks.
Accepting Deposits and lending loans.
b) Non-Banking Services: - These services are provided by Non-Banking Companies such as LIC and GIC. They accept saving in different modes and mobiles to various channels of investments.
c) Other Services: - In modern days banks are providing various new services such as ATM, Credit Cards, Debit Cards, Electronic Transfer of Funds(ETF), Internet Banking, E-Banking, off sure Banking.
Q3) Define Bank and Explain the function of Commercial Banks?
Ans) A Bank is a financial Institution whose main business is accepting deposits and lending loans. A
Banker is a dealer of money and credit. Banking is an evolutionary concept i.e. expanding its network of operations.
According to Banking revolutions Act 1949, the word BANKING has been defined as “Accepting for the purpose of lending and investment of deposits of money from the public repayable on demand or otherwise.
Functions of Commercial Banks
Globalisation of transformed commercial banks into super markets of financial services. These commercial banks offer a variety of functions which are shown with the help of the following chart.
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I. Primary Functions
These are further classified into 2 categories
i) Accepting Deposits: - Deposits are the capital of banker. Therefore, it is first Primary function of the banker. He accepts deposits from those
who can save and lend it to the needy borrowers. The size of operation of every bank is determined by size and nature of Deposits. To attract the saving from all sort (categories) of individuals, Commercial banks accepts various types of deposits account they are:
a) Fixed Deposits b) Current Deposits c) Saving Bank account d) Recurring Deposits
ii) Lending Loans: - The 2nd important function of the commercial bank is advancing loans. Bank accept deposits to lend it at higher rate of
Functions of Commercial Banks
Primary Function Secondary Function
Accepting Deposits Lending Loans
Fixed Deposits Current Account Deposits Saving Bank Account Recurring Deposits Overdraft Cash Credit Term Loans Discounting Bill Agency
Function General Utility Service
Credit Creation
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interest. Every Commercial Bank keep the rate of interest on its deposit at lower level or less that what he charges on its loans which is as NIM (Net Interest Margin). The banker advances different types of loans to the individual and firms. They are:
-a) Overdraft b) Cash Credit c) Term Loan d) Discounting Bill
II) Secondary Functions
i) Agency functions: Bankers act as an agent to the customers it
means he performs certain functions on behalf of the customers such services are called Agency Services.
Example:
a) Bank pay electricity bill, water bill, Insurance Premium etc. b) They guide the customer in Task Planning.
c) Bank provides safety locker facility. d) Pay salaries of customers employees.
ii) General Utility Services: - Bankers are the past of society. They offer : several services to general public they
are:-a) It provides cheap remittance (transfer) facilities.
b) The banks issue traveler cheque for safe traveling to its customers. c) Banks accepts and collects foreign Bills of Exchanges.
Other than these services the bankers also provide ATM services, Internet Banking, Electronic fund transfer (EFT), E-Banking to provide quick and proper services to its customers. iii) Credit Creation : - It is a unique function of Commercial Banks. When
a bank advances loan to its customer if doesn’t lend cash but opens an
account in the borrowers name and credits the amount of loan to that account. Thus, whenever a bank grants loan, it creates an equal
amount of bank deposits. Creation of deposits is called Credit Creation. In simple words we can define Credit creation as Multiple expansion of. deposits. Creation of such deposits will results an increase in the stock deposits. Creation of such deposits will results an increase in the stock of money in an economy.
Q4) Explain the function of Reserve Bank of India (RBI)?
Ans) The RBI is the Central Bank of our country. It is the open Institution of India Financial and
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RBI came into existence on 1st April, 1935 as per the RBI act 1935. But the bank was nationalised by the government after Independence. It became the public sector bank from 1st January, 1949. Thus, RBI was established as per the Act 1935 and empowerment took place in banking regulation Act 1949.
RBI has 4 local boards basically in North, South, East and West – Delhi, Chennai, Calcutta, and Mumbai.
Functions of Reserve Bank of India (RBI)
i) Monopoly in Note Issue: - RBI enjoys monopoly of Notes issue since its establishment. The banks
issue the currency notes of all denominations. Except coins which are issued by the ministry of finance in the government of India. But these coins are put into circulation only through the RBI. The Bank (RBI) issue currencies to a minimum reserve system under which Rs 20\- crores worth of Gold and foreign exchange reserve should be kept out off these 200 crores, 115 crores values should be in the form of Gold only.
To undertake this function RBI established 2 department i.e. a) Issue Department
b) Banking department
a) Issue Department : - issue department is involved in issued of currencies and banking manager
currencies circulation.
ii) Banker to the Government: - RBI acts as a banker to the central and state Government. As a
banker it provides all the services like a commercial bank to these Governments.
It accepts deposits of the Government and allows them to withdrawal of cheques. It makes payments and collect receipts on behalf of the government. It also provide temporary advances for maximum period of 3 months to these governments. It is known as “Ways” and “Means advances”. It is also the financial advisor to the central and states. It also helps them in formulation of financial policies.
iii) Bankers bank: - RBI is the apex financial institution acts as banker to other bank. RBI accepts
deposits, maintains cash reserves and lends loans to all the banks operating under its preview. It is a bankers bank in the following contacts:
Its provides short-term loans to the banks for 3 months against (recurity) i.e. eligible securities. It is known as lenders of last resort in the times of financial emergency. It also gives loans at concessional rate of Interest for a specific purpose. It also offers refinance facilities to all the eligible banks.
iv) Regulatory and Supervisor Function : - The most significant provision of the
Banking regulation act is supervision and regulation of banks. Section 35 of the act say’s that RBI can inspect any branch of Indian Bank located in or outside the country. Further, it issued licensing for the
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banks and can establish new branches to maintain regional balance in the country. It also arranges for training colleges to the banks employees and officers.
v) Controller of Credit: - RBI is an important controller of credit in our credit. The credit created by
bank leads to inflation or depression and disturbs the smooth functioning of the economy. Therefore, to regulate credit RBI uses qualitative as well as Quantitative credit control measures. They are:
a) Bank rate policy
b) Variable Reserve Ratio [CRR] c) Open market operations
d) Moral suasion e) Direct action f) Publicity
Q5) Define Insurance? What are its principles?
Ans) The term Insurance originated form the word insure which means assurance of compensation
against loss. It is a contract between insurer and Insured.
The origin of insurance can be traced in India long back. The first insurance company was established by Europeans in our country i.e. Oriental Life Insurance Company. After independence government. Introduced the act known as Life Insurance Corporation act in 1956 and LIC was created on 1st September, 1956.
Definition of Insurance
Insurance is a contract between 2 parties where by 1 party called Insurer agrees to pay the other
party (insured) a certain sum of money on the happening of a specified loss.
Terms of Insurance
Certain term are used very often in Insurance business they are:
a) Insurer: - He is the risk bearer, It is the party who agrees to pay money on the happening of an event.
b) Insured: - The party who seeks protection against the risk by paying premium. c) Premium: - It is the money is paid by the Insured to the Insurer.
d) Policy: - It is the official document issued by the insurer to the Insured.
Principles of Insurance
i) Insurance is a contract ii) Utmost good faith iii) Indemnity
iv) Insurable Interest v) Proximate cause vi) Risk must Attached vii) Contribution
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viii) Subrogation
ix) Period of Insurance
x) Insurance against a specified risk.
i) Insurance is a contract : - It is a contract between the Insurer and Insured. Therefore, it is a
general contract governed by the basic principles of law of contract. In this contract offer is the proposal and acceptance is the issue of the policy and consideration is payment of premium against loss.
ii) Utmost good faith : - As we know insurance is a contract to make if valid and effective the
insured should disclosed facts about every aspect, Good faith refers to absence of fraud and insurer will estimate the risk and decide the premium on the basis of the information given by the insured. Therefore and insured should give all factual required information to the insurer. iii) Indemnity: - it means, in case of loss the insured shell be paid the actual amount of loss not
exceeding the amount of the policy. Further, it refers to make good to the loss. It should be equal to the value of the policy. The contract of indemnity applies for Non-life Insurance. The significance of this principle is that the insured is not suppose to make any profit out off the loss incurred.
iv) Insurable Interest : - It is an important component of Insurance. It is the first most important
principle of insurance. The insurance contract will be valid only when there is insurable interest among the parties involved in it. If it is not present then the contract become invalid which cannot be enforced in the court of law. Hence the person getting insurance policy must have insurable interest in the property of life insured.
v) Proximate cause: - It is derived from the Latin word cause proxima. It means deciding the
actual cause of loss when a number of causes have contributed for the occurrence of loss.
vi) Risk must attached: - The contract of insurance can be enforced only if the risk is attached.
The insurer receives the premium for the risk coverage. If by mistake or by negligence it does not cover risk than the insurer must return thee premium.
vii) Contribution: - This principle applies in case of double insurance. In this case the total loss
suffered by the insured contributed by all the insurers in the ratio value of their policies. The principle insures equitable distribution of the losses among the insurers.
viii) Subrogation: - The principle of subrogation applies in case of general insurance. The insurer
after making payment to the insured for the loss entitled to place of insured. In the other word after paying the compensation the insurer will take the place of insure and fight with the 3rd party to recover the loss.
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ix) Period of Insurance: - Usually general insurance is for a certain period. Usually it will be 1
year. The contract comes to end after the expiry of that period. The contract of life insurance is the continuing contract with a condition that the premium is to be paid at regular intervals otherwise the policy lapses.
x) Insurance against a specified risk : - The concept of insurance originated and different from
the idea of Risk coverage. Therefore risk is base on which insurance is built.
Q6) Explain the kinds of Insurance?
Ans) There are different kinds of Insurance. Depending upon the types of risk insure. We can classify
them into 2 groups i.e.
i) Life Insurance: - It is governed by the LIC act 1956. It is contract in which the insurer, in
consideration of payment of premium compensate to a person on death or on the expiry of certain period which ever is earlier.
ii) General Insurance: - General Insurance covers a wide range of services. Section 6(b) of the
insurance act 1938 defines General Insurance. It includes all the risks except life. Classified 3. a) Marine Insurance : - It is a contract where by the insurer undertakes to compensate for the
marine losses. Section 13 (a) of the Insurance act define Marine Insurance.
b) Fire Insurance : - Fire Insurance is a contract where by the insure undertakes in consideration
of the premium paid to make good any loss cause by the fire during a specific period. The specific amount to be assured or claimed in case of loss should be mentioned or specified in the contract.
KINDS OF INSURANCE
General Insurance
Marine Insurance
Fire Insurance
Miscellaneous (or) Other Insurance
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c) Miscellaneous insurance: - Health, Motor, Deposit and Postal Insurance comes under this
category. Health insurance provides for the payment of benefits to cover the loss due to sickness. Motor Insurance provides the benefits in case of, damage or loss due to accident. Deposit insurance provides Insurance against bank deposit. This scheme was introduced by our government in 1962. Postal insurance was introduced in 2006 by postal department of India. This scheme provides insurance to postal saving account holders for accidental death.
Q7) Explain Insurance sector reforms in India
Ans) Insurance sector has been open up for competition from Indian Private Insurance companies with
the enactment of Insurance regulatory and development authority act 1999. As per the provision of the act Insurance regulatory and development authority was established on 19th April, 2000. To protect the interest holders (policy holders) and to regulate promote and ensure orderly, growth of the Insurance industry.
The authority has notified 27 regulations on various issues which include registration of insurers, regulation of Insurance agents, Re-insurance, solvency margin investment and accounting procedure, protection of policy holder interest etc. The authority has its head quarters in Hyderabad. The Insurance sector reforms can be classified into 2 categories i.e.
i) Reforms during 1990-2000
ii) Reforms during 2001-2008
i) Reforms during 1990-2000: - A committee was set up o reforms in the insurance sector during
1993. It was headed by RBI Governor R.N.Malhotra. Therefore, the committee was setup to evaluate the Indian Insurance sector and make the necessary recommendation. These committees submitted were discussed below;
a) Customer Services : - The committee recommended that LIC should be interest on delays in
payments beyond 30 days. It emphasis more to improve the customer services by updating of technology. It also recommended to improve the coverage of insurance Industry.
b) Structure: - The committee recommended that all the insurance companies should be given
grater freedom to operate and government stake in the insurance companies to be brought down to 50%.
c) Competition: - The committee recommended that no company should deal in both Life and
General Insurance through a single entity. Priivate company with a minimum paid up capital of Rupees Ten Billion should be allowed to enter the industry.
d) Investment: - The mandatory investment of LIC in government securities to be reduced from
75% - 50%. Thus, the Malhotra Committee recommended for the above recommendations which where mostly implemented as reforms in the Indian Insurance Sector.
During this act only regulatory and development authorities was established and total more or less 29 regulations where implemented in the insurance sector. In the area such as Licensing of agents, registration of the insurers, protection of policy holders, Re-insurance, obligation to rural sectors etc.
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ii) Reforms during 2001-2008: - The Government introduces the insurance laws
bill as a part of insurance reforms in 2004, i.e.
a) Increase the cap on foreign Investment in Private company from 26% - 49%.
b) It permits the foreign insurance to setup branches in India with the help of Indian promoters of Insurance Company.
c) It fix the minimum investment limit for Health Insurance company i.e. Rs 50 crores to encourage companies with smaller capita to launch health insurance business
d) It permits the State owned General Insurance Company to go public and raise funds from the capital markets.
UNIT-2 BANKING SYSTEM AND ITS REGULATIONS
1Q. Explain the different types of banking systems?
Ans. A bank is an institution which deals with money and credit. It accepts the deposits from public and makes the funds available to those who need them. A modern bank performs a variety of functions and they purview is different from each other. Depending upon their functions, size etc.. we can classify the banking system into the following categories :
1. Unit banking system 2. Branch banking system 3. Group banking system 4. Chain banking system 5. Deposit banking system 6. Investment banking system 7. Correspondent banking system 8. Mixed banking system
Different countries adopt different types of banking system depending upon their economic structure. 1. UNIT BANKING SYSTEM:
Under this type of banking system an individual bank operates through an single office. The size and area of operation is much smaller than in other types of banking system. It was originated and grew in USA. The main reason for the development of unit banking system in America is the fear of emergence of monopoly in banking business.
2. BRANCH BANKING SYSTEM:
In this type of banking system a big bank as a single owner ship operates through a network of branches spread all over the country. This type of banking system was initially developed in England. Later on it become popular in other countries like Canada, India and Australia etc.
3. GROUP BANKING SYSTEM:
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or may not be a banking company. In this system each bank maintains its separate identity. Its business is managed by the holding company. This type of banking system was popular in USA. 4. CHAIN BANKING SYSTEM:
It is another form of group of banking. It refers to the system in which two or more banks are brought under common control by a device other than the holiday company. They have common management and policies. The management may consist of group of persons through stock ownership or otherwise.
5. DEPOSIT BANKING SYSTEM:
Commercial banks are the best examples for deposit banking. Deposit bank will have to maintain liquidity i.e. enough cash reserve to meet withdrawals. Deposits bank are those banks which accept deposits of short term and loans will also be for short term periods. The business in this type of banking system is less risky. The loans provided by deposit bank are in the form of overdraft, cash credit and discounting bills of exchange.
6. INVESTMENT BANKING SYSTEM:
These banks are those financial institutions which provide long term finance to business. They invest in capital market i.e. stocks & shares of different companies. These banks act as intermediaries between savers and investors. These investment bankers are classified into various categories such as underwriters and retailers. An investment banker performs highly useful services to the co-operative bodies by supplying long term capitals. They also provide services to small investors. They mobilize the investment through shares, stocks and mutual funds.
7.CORRESPONDENT BANKING SYSTEM:
It is another important type of banking system. A correspondent bank is one which connects the two banks under unit banking system. The best examples of correspondent bank in India are RBI or central bank.
8. MIXED BANKING SYSTEM:
If the banks provide both short term and long term loans to the industries it is called as mixed banking system. German banks are the best examples of this type of banking system. These banks accept both short term and long term deposits. Therefore they are able to provide both short and long term loans required by the industry. The banks were facilitated to invest the surplus funds for the industrial development of the country in this type of banking system.
2Q. EXPLAIN THE ADVANTAGES AND DIS-ADVANTAGES OF UNIT BANKING SYSTEM?
ANS. Under unit banking system an individual bank operates through a single office. The size and area of an operation of a unit bank is smaller as compared to that of a branch banking system. Its advantages are as follows:
ADVANTAGES:
1. LOCAL DEVELOPMENT:
Unit banking system is a localized banking. The bank has specialized knowledge of the local problem and serve the requirements of the local people, because the fund of the locality are utilized for local development.
2. PROMOTES REGIONAL BALANCES:
In this banking system there is no transfer of resources from back word areas to the big industrial and commercial centers. It has to make investments in those areas only where ever it exists. Thus, promotes regional balances.
B.COM COMPUTERS, GENERAL 3. EASY IN MANAGEMENT:
The management and supervision of a unit bank is much easier and more effective due to its smaller size.
4. INITIATIVE IN BANKING BUSINESS:
Unit banks have full knowledge and greater involvement in the local problems. They are in a position to take initiative to tackle the local problem through financial help.
5. PERSONAL CONTACT WITH THE CUSTOMERS:
Unit banking system brings a small scale independent bank which can maintain personal contact with the customers for efficient banking.
DIS-ADVANTAGES:
1. NO DISTRIBUTION OF RISK:
The banks under unit banking system are highly localized without any branches. So, there us no possibility of diverting the risk.
2. LACK OF SPECIALISATION:
Another disadvantages of unit banking system is lack of specialization. Because of their small size unit banks are not able to introduce division of labors and specialization. Further these banks cannot appoint or employee highly trained & specialized staff.
3. LOCAL PRESSURE:
Unit banks are local in nature. Therefore pressure and interference generally disturb their normal functions.
4. INABILITY TO FACE PRICES:
Limited resources of the unit bank restrict their ability to face the financial prices. These banks will not have any ability to withdraw in sudden crises or rush of withdrawals.
5. DISPARITY IN INTEREST RATE:
Under unit banking system easy and cheap remittance of funds and deposits doesn’t exists. Every bank maintains its own rate of interest. Therefore interest rate varies considerable from place to place or bank to bank.
3Q.ADVANTAGES AND DIS ADVANTAGES OF BRANCH BANKING SYSTEM?
ANS. The branch system means each commercial bank will be a very large institution. The bank will have a number of branches spreads all over the country and even outside the country. Thus, we can say that branch banking system which carries on business through a number of branch offices.
ADVANTAGES:
The advantages of branch banking system are as follows: 1. ECONOMIES OF LARGE SCALE OPERATION:
Under branch banking system the bank with a number of branches posses’ huge financial resources and enjoy the benefits of large scale operations. In this type of banking system highly trained & experienced staff is appointed which increases the efficiency of the management. 2. SPREADING OF RISK:
Another advantage of branch banking system is lesser risk and greater capacity to meet risks. Since there is a wide geographical spreading and diversification of risk is possible in this system. Further the possibilities of failures are very less.
B.COM COMPUTERS, GENERAL 3. ECONOMY IN CASH RESERVE:
Under this system a particular branch can operate without keeping large amount of ideal resources. The funds can be easily transferred from one branch to another.
4. CHEAP REMITTTANCE FACILATY:
In this type of banking system as branches are spread all over the country. So it is easier and cheaper to transfer the funds.
5. UNIFORM RATE OF INTEREST:
Under branch banking system mobility of capital increases as a result of equality in the rate of interests. The funds can be transferred from the excess branches to the shortage branches. Consequently uniformity in the rate of interest prevails in the whole area.
DIS-ADVANTAGES:
The following are the important disadvantages of branch banking system. 1. PROBLEM OF MANAGEMENT:
Under branch banking system a number of difficulties regarding management and supervision and control may arise. Banks get concentrated at the head office. The branch manager has to seek permission from the head office on each and every matter. This results in unnecessary delay in banking business.
2. LACK OF INITIATIVE:
In this type of banking system the branch manager generally lacks of initiatives on all the matters. He cannot take independent decisions on every matter. He has to wait for the clearance signal from head office.
3. REGIONAL IMBALANCES:
Under this system the financial resources collected in the rural areas and back word regions are transferred to big industrial sectors. This encourages regional imbalance in the country.
4. MONOPOLISTIC TENDENCIES:
Branch banking encourages monopolistic tendencies in the banking system of a country. It may lead to the concentration of resources in few hands. A few banks may dominate the whole banking system in the country.
5. INEFFICIENT BRANCHES:
In this type of banking system weak and unprofitable branches continue to operate under the protection of large and profitable branches
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4Q. EXPLAIN THE OVERVIEW OF INDIAN BANKING SYSTEM? ANS. An overview of Indian banking system
Structure of Indian Banking System
Organized sector unorganized sector Capital market intermediary’s Money market intermediaries Money lender
Development banks LIC Agriculture finance NBFS Indigenous GIC institution Banker
Leasing Companies
Hire Purchases Companies Pawn Broker
Investment Companies
RBI Commercial Bank Co-operative Bank Post office saving Bank Government Treasury Bank
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5Q. EXPLAIN THE BANKING SECTOR REFORMS?
ANS. The govt. of India appointed 9 members committee under the chairman ship of Mr. M. Narshimam to evaluate the banking sector and make necessary recommendations to strengthen it. The committee submitted its report on 17th dec.1991. The recommendations of
committee are as
follows:-o Reductifollows:-on in CRR (cash reserve ratifollows:-o) o Reduction in SLR ( statutory liquidity ratio) o De-regulation of interest rates
o Debt recovery tribunals
o Restructuring Indian banking sector o Removal of licensing policy
o Equal opportunity to foreign PRUDENTIAL NORMS:
In April 1992 RBI issued quick lines on prudential norms. According to these norms assets should be classified into performing and non-performing assets and consider the interest or installment on recovery basis and not on annual basis.
The committee also recommended for proper asset classification for proper income recognition which provides for the stability and strengthening the banking system. This classification is as follows:
NON PERFORMING ASSETS:
An asset becomes non-performing asset when it ceases or stops generating income to the bank. In other words NPA can be defined as credit facility in which the installment of principle “past due for 90days”. It is treated as past due when it has not been paid for 30days from the due date.
For the identification of NPA’s the following norms were implemented:
o Installment over due for a period of more than 90days is respect to term loan and overdraft. o The account remains out of order for the period more than 90days in case of cash credit. o A bill remains over due for a period more than 90days in case of discounting bill.
OUT OF ORDER STATUS:
An account will be treated as out of order status if the outstanding balance exceeds the sanctioned drawing limit.
CLASSIFICATION OF ASSETS:
Assets can be classified into the following categories 1. STANDERD ASSETS:
The assets which are regular in all the respects are called as standard assets. They bring income to the banks
2. SUB-STANDARD ASSETS:
An asset which is NPA for a period up to 12 months is known as sub-standard assets.
B.COM COMPUTERS, GENERAL An asset which is NPA for more that “12 months”. 4. LOSS-ASSETS:
It is a credit facility where the loss has been identified by the auditors or RBI inspectors.
INCOME RECOGNITION NORMS:
The policy of income recognition is based on record of recovery.
1. The income on the NPA is not recognized on annual basis but on recovery basis. There fore it should be considered when it is actually received.
2. The income on the term deposits should be taken into income account on the due date only. 3. Fees, commission earned by the banks should be recognized on accrual.
CAPITAL ADEQUACY NORMS:
It is basically a measure of bank capital. It is expressed as a percentage of banks, risk weighted, credit exposure. The ratio protects the depositor’s interest. It promotes the stability and efficiency of the banking system. It is known as the ratio of capital funds in relation to deposits.
Features of capital adequacy norms:
Its features are categorized into tiers. Tire
It consists of: o Paid up capital o Statuary reserve o Disclosed fee reserves
o Equity investment in subsidiaries
o Losses in current period ad those brought forward from previous years. Tire
It consists of: o Revaluation reserve o Subordinated debt. o Surplus provision/loss
the capital adequacy is calculated by the following formula: Weighted risk asset *100 Capital adequacy = capital fund
The Narshimam committee recommended for the adoption of Basel norm on capital adequacy for banks which was accepted by RBI and implemented in 1992.
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ANS: In 1990’s Indian banking sector saw a great emphasis on the replacement of technology with the new innovations. Banks began to use these new technologies to provide better and quick services to the customers at a great speed. Some of the innovations techniques introduced in Indian banking sector in post reform era are as follows:
o Automated teller machine (ATM) o Electronic transfer of funds (ETF) o Tele-banking
o Home banking o Internet banking & o Demate facility
1. AUTOMATED TELLER MACHINE:
An ATM is a computerized Tele-communication device which provides the customers the access to financial transactions in public places without human inter-mention. It enables the customers to perform several banking operations such as withdrawals of cash, request of mini-statement etc.
2. ELECTRONIC TRANSFER OF FUNDS:
This is an electronic debit or credit of customers account. Bank customers can buy goods and services without caring cash by using credit or debit cards. There cards are issued to the customers by the bankers. This system works on a pin (personal identification number). The customer swipes the card by using the card reader device to make the transactions. The development of electronic banking and internet banking helped the customers to utilize their services.
3. TELE-BANKING:
It is increasingly used in these days. It is a delivery channel for marketing, banking services. A customer can do non-cash business related banking over the phone any where and at any time. Automatic voice recorders are used for rendering tele-banking services.
MOBILE BANKING:
It is another important service provided by the banks recently. The customers can utilize it with the help of a cell phone. The bank will install particular software and provide a password to enable a customer to utilize this service.
4. HOME BANKING:
It is another important innovation took place in Indian banking sector. The customers can perform a no. of transactions from their home or office. They can check the balance and transfer the funds with the help of a telephone. But it is not that popularly utilized in our country. 5. INTERNET BANKING:
It is the recent trend in the Indian banking sector. It is the result of development took place in information technology. Internet banking means any user or customer with personal computer and browser can get connected to his banks website and perform any service possible through electronic delivery channel. There is no human operator present in the remote location to respond. All the services listed in the menu of bank website will be available.
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It is nothing but de-materialization. This is a recent extant in the Indian banking sector. The customer who wants to invest in stock market or in share and stock needs to maintain this account with the commercial banks. The customer needs to pay certain annual charges to the banks for maintaining this type of accounts.
7Q. EXPLAIN REGIONAL RURAL BANKS? (PROBLEMS AND MEASURES)
ANS. With the view to fill up institutional credit gap in the rural areas govt. of India under multi-agency approach set up RRB’s in 1975. The main objective of the RRB is to increase the local evolvement of the banks. In order to meet credit requirements of weaker sections and marginal formers.
PROBLEMS OF RRB’S:
1. NO FREEDOM TO MAKE COMMERCIAL IMPROVEMENT:
The policy of RRB’S are starting in nature provides no freedom for any commercial improvements. RRB’S manager had virtually no authority to make any strategic decision regarding its operation.
2. POOR GOVERNANCE:
The board of RRB’S did not monitor their performance and had no interest in the affairs of the bank. Further multiple ownership of RRB’S little prospectus for profit and diluted their accountability
3. MOUNTAIN LOAN LOSSES:
Deposit the impressive coverage of RRB’S, it suffered from poor financial help, especially because of increasing loan losses and poor recovery.
4. ACTING AGAINST ITS OBJECTIVES:
Many RRB’S are actually showing improvement in their performances by moving away from their objectives to serve the poor. They are investing to rich clients. As a result, rural poor are still depending upon the unorganized money lenders.
5. CONSUMPTION CREDIT IGNORED:
RRB’S are permitted to lend only for productive purpose. The consumption credit is not allowed by RRB’S. As a result the rural people have to depend upon local money lender for such loans.
Suggestions by NABARD FOR RRB’S:
o Participation of local people in the equity share capital should be allowed.
o The activities of RRB’s, PAC’s and commercial banks must be complimentary and not competitive.
o RRB’s may also provide market guidance and consultancy services for the villagers.
o RRB’s should provide a wide range of services which could help a lot in developing banking habits among rural people.
B.COM COMPUTERS, GENERAL 8Q.CRITICALLY EXAMIN THE INDEGENOUS BANK FUNCTIONS?
ANS. Indigenous banker constitutes the ancient banking system of India. They have been carrying on their age old banking operation in different parts of the country. They are called by different names in different areas. Such as madras, shettys and marvadies, benal- seths and banniyas.
FURTHER OF INDEGENIOUS BANKING: 1. ACCEPTING DEPOSITS:
The indigenous bankers accept deposits from the public in two types. a) Deposit which are repayable on demand.
b) Deposit which are repayable after a certain fixed period 2. ADVANCING BANKING:
Indigenous bankers advances loans to its customers against the securities of land, gold etc..
3. NON-BANKING FUNCTIONS:
The indigenous bankers carry on non banking functions with banking activities. Simultaneously such as banking and non banking
4. BANKING IN HUNDIES:
The indigenous bankers deal in hundies, they write sell and buy hundies and there by meet the financial requirement of the traders.
DEFECTS OF INDIGENOUS BANKERS:
1. MIX BANKING & NON BANKING BUSINESS:
These bankers generally combine banking and non banking business which is against the principles of sound banking.
2. UNPRODUCTICE LOANS:
The indigenous do not pay the attention to the purpose of loan and they also grand loans for unproductive purpose.
3. DEFECTIVE LENDING:
These bankers do not follow proper banking principles by granting loans. They provide loans against insufficient securities and they also do not distinguish between the short term and long term loans.
4. HIGHER RATE OF INTEREST:
These banker usually charge higher rate of interest for their loans. It adversely effects the inducement to invest.
5. EXPLOITATION OF CUSTOMERS:
These bankers are involved in all types of malpractices and exploitation. 6. REFORMS:
The following are the important reforms for indigenous bankers. o They should be directly linked with RBI.
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o They should stop exploitation of their customers and other malpractices. FEATURE OF INDEGINEOUS BANKERS:
The commercial banks set up their branches in rural and semi urban areas with new technology. It was thought that these developments were lead to sunset for indigenous bankers. But these bankers where prepared to take the risk that could not be undertaken by the commercial banks. Further these bankers invest without any security. Therefore the customer who does have any thing to offer as a security has to seek indigenous bankers for the credit. Because of these reasons the indigenous bankers are surviving yet and will have a promising future.
9Q. EXPLAIN THE STRUCTURE OF CO-OPERATIVE CREDIT SOCIETIES?
ANS. Co-operative banking is established on the bases of mutual co-operative like other commercial banks. Co-operative banks are counted by collecting funds accepting deposits etc. The history of Indian co-operative banking started with the passing of co-operative society’s act 1904. This act was re-organized in 1912.
Structure of Co-operative Credit Society
Agricultural Non-Agricultural
State Co-operative Central Co-operative Primary Agricultural Bank {SCB} Bank {CCB} Co-operative credit
Societies {PACS}
SCB OR STATE CO-OPERATIVE BANK:
It is the apex institution in the three tier structure of cooperative credit society. It is operating at the state level. Every state has a state co-operative bank. It occupies a unique position in the co-operative credit structure.
CAPITAL:
SCB obtains capital from its own funds from RBI, its deposits and borrowings. FUNCTIONS OF SCB:
o It provides a link between RBI and other co-operative societies. o RBI provides credit to other co-operative societies through SCB.
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CENTRAL CO-OPERATIVE BANKS (CCB):
CCB’S are in the middle of the three-tier credit cooperative structure. CCB’S are of two types:
1) Co-operative banking union whose membership is open only to co-operative societies. 2) Member ship is open for both co-operative societies and individuals.
The main functions of CCB’S are to provide credit assistance to the primary agricultural societies (PACS). This CCB will also give loan to the individuals for agricultural purpose against the security of immovable properties.
PRIMARY AGRICULTURAL CO-OPERATIVE CREDIT SOCIETIES (PACS):
It forms the base in the three tier co-operative credit structure. It is village level institutions which directly deal with the rural people. It encourages savings among the rural population. It also accepts deposits and gives loans to the needy borrowers. It serves as the link between rural people and higher agencies such as CCB, SCB and RBI.
A “PACS” may be started with two or more persons of the same village. The member ship fee is nominal. So that even the poorest agriculturist can also become the member. CAPITAL OF PACS:
The working capital of PACS comes from the deposits and borrowings. Further it gets the credit assistance by CCB
LAND DEVELOPMENT BANK (LDB):
LDB’S are constituted for meeting the long term financial requirements of the formers. These banks provide long term loans to the farmers for the purchase and improvement of the land. LDB was started for the first time in Chennai. These banks mortgage the land & give loans up to 50% of the mortgage.
10Q. EXPLAIN THE ROLE AND PROBLEMS OF CO-OPERATIVE CREDIT SOCIETIES? ANS.
ROLE OF CO-OPERATIVE CREDIT SOCIETIES:
The role of co-operative credit societies can be discussed with the help of following points:
1. ALTERNATIVE CREDIT SOURCES:
The main objective of co-operative credit banking is to provide an effective alternative to traditional defective credit system of money lenders. These banks protect the village people from the clutches of rural money lenders.
2. CHEAP RURAL CREDIT:
The banks provide cheap credit to the rural people. It means they charge low rate of interest as compared to that of money lenders.
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An important benefit of the co-operative credit system is to bring a change in the nature of loans. These banks discourage unproductive loans and encourage productive loans. 4. ENCOURAGE SAVINGS AND INVESTMENTS:
These banks develop the habit of savings among the agriculturists and thereby encourage savings and investments among rural people.
5. IMPROVEMENT IN FARMING METHODS:
These credit societies have greatly helped in introducing better agricultural methods. By providing cheap credit facilities to the formers.
WEAKNESS OF CO-OPERATIVE CREDIT SOCIETIES: 1. PROBLEM OF OVER DUE:
One of the important problems of these societies is problem of overdue loans. It has been increasing continuously. In the year 1991 & 1992 overdue at CCB level was 41% and 39% at (PACS) village level.
2. REGIONAL DISPARITIES:
There has been a large regional disparity in the distribution of co-operative credit society. As a result there occurs regional disparity in the country.
3. BENEFIT TO THE BIG LAND OWNERS:
Most of the benefits from the societies have been enjoyed by the big land owners. The farmers of small holdings received a very less % of credit assistance.
11Q. EXPLAIN MICRO FINANCE?
ANS. In India anti-poverty programs were implemented to assist the poor and unprivileged sector of the society. Micro finance was launched by USA for the 1st time. It got further
popularity when prof. Mohammed Younus, the founder of gramin bank of Bangladesh. Awarded noble prize for peace. The concept of micro finance was initiated in India by NABARD & SIDBI in early 1990’s.
Definition of micro finance:
Micro finance refers to small savings, credit and insurance services extended to socially and economically disadvantaged segments of the society. It can also be defined as “provision of thrift” credit and other financial services and products of very small amounts to the poor rural areas, semi-urban or urban areas for enabling them to raise their income levels and improve their standard of leavings. In India at present a large part of micro finance activity is confined to credit only. Majority uses of micro-finance services in our country are women.
Features of micro-finance:
Indian micro finance sector has been making rapid progress. Some of its features are as follows:
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o Among financial institutions banks have the highest share in linkage with SHG followed by RRB’s and co-operatives
o The no. of poor families benefited through SHG is increased from 24.3 million as on 31st
march 2005 to 32.9 million 31st march 2006.
o Southern region of India obtains better linkages and secured highest loans.
o Among the states Andhra Pradesh occupied 1st place in terms of link age and credit
disperse-ment.
o SHG bank linkage model is popular and have wide geographical coverage. It started “NABARD” as a pilot project.
VARIOUS MODELS OF MICRO FINANCE: 1. SHG-BANK MODEL:
SHG is a small voluntary association of the poor people. Preferably from same socio- economic background. They come together for solving their common problems through mutual help. It promotes small savings among the members. This common fund is maintained in name of SHG. This model can be further classified into three groups.
a) SHG BANK LINKAGE MODEL-1:
Banks them self take up the work of forming the SHG’s. Their savings bank accounts and providing them bank loans.
b) SHG BANK LINKAGE MODEL-2:
In this model SHG’s are formed by NGO’S but directly financed by banks. c) SHG BANK LINKAGE MODEL-3:
In this model SHG’S are financed by banks through NGO’S and other intermediaries.
12Q. EXPLAIN THE ROLE OF NABARD?
ANS. 27 years ago on July 12 1982 by an act of parliament NABARD came into existence. Its basic objective is providing focused and undivided attention to the development of rural areas which was a crucial necessity for economic progress. NABARD has 28 regional offices at the state capital, a sub office at port Blair and 376 districts development offices.
NABARD refinances through commercial banks, cooperative banks and regional rural banks. In other words ‘NABARD’ is involved in indirect finance. It promotes loans for minor irrigation, animal husbandry, fisheries, handy-crafts etc.
INNOVATIONS BY NABARD:
NABARD has efficiently brought a no. of innovations in rural credit domain they are:
1. PROMOTION OF SELF HELP GROUP:
It is a homogeneous group of poor framed to overcome their financial difficulties. It was introduced in 1992 in 500 cities. Under this scheme 3.3 corers of Indian hose holds were covered during 2005-2006.
B.COM COMPUTERS, GENERAL 2. FARMERS CLUB:
It was introduced with a view to bring about co-operative and mutual help among farmers.
3. RURAL INFRA-STRUCTURE DEVELOPMENT FUNDS:
This project helped in development of rural areas. Till the end of 2005-2006 NABARD sanctioned RS.51283 crores loans under this RIDF. It has a separate window for villages whose population is less than 500.
4. WATER SHED DEVELOPMENT:
It was established in the year 1999-2000 with an initial capital of Rs. 200 crores. Now it is covering 124 districts and 14 states.
5. ATTRACTING YOUTH TO NON-FARM SECTOR:
In this regard NABARD introduced several schemes for rural artisans crafts-men and wocrafts-men to help self employcrafts-ment association. NABARD arranges exhibitions to increase the marketing of their products.
6. RURAL ENTREPRENEUR SHIP DEVELOPMENT:
It is a program supported by NABARD to motivate and train educated unemployed rural youth. So far more than 2 lacks individuals have been trained under this program.
CONCLUSION:
In these 27 years of its journey NABARD has been making silent in roads in the fields of rural life. It also made its reputation in the battle against poverty. Its role in agricultural sector is significant one.
13Q. Explain SIDBI ?
Small Industries Development Bank of India was established as whollyn owned subsidiary of industrial development bank of India . Under the small industries development if India Act, 1989, it is the principal institution for promotion, financing and development of industries in the small scale sector. It also co-ordinates the functions of institutions engaged in similar activities. For the purpose SIDBI has taken over the responsibilities of administering and National equity fund from IDBI.
CAPITAL:
SIDBI started its operations from April 1990 with an initial authorized capital of Rs.250 Crores, which o Rs.100000 Crores. It also took over the outstanding portfolio of IDBI relating to small scale sector held under small Industries Development Fund as on March 31, 1990 worth over Rs. 4000 Crores.
OBJECTIVES:
In the setting up of SIDBI the main purpose of the government was to ensure larger flow of assistance to the small scale units. To meet this objective, the immediate thrust of the SIDBI was on the following measures:
initiating steps for technological upgradation and and modernization of existing units; expanding the channels for marketing the products of the small scale sector;
promotion of employment-oriented industries, especially in semi-urban areas to create more employment opportunities and thereby checking migration of population to urban areas.
B.COM COMPUTERS, GENERAL FUNCTIONS:
SIDBI provides assistance to the SSI sector in the country through the existing banking and other financial institutions, such as SFC, SIDC, Commercial Banks, Co-operative banks and RRB’s etc., The major functions of SIDBI are given below:
It refinances loans and advances provided by the existing lending institutions to the Small Scale Units.
It discounts bills arising from sale of machinery to and manufactured by SSI units.
It extends seeds Capital/Soft loan assistance under National Equity Fund, Mahila Udyam Nidhi and Mahila Vikas and Seeds Capital Schemes.
It extends financial support to state small industries corporations for providing scarce raw materials to and marketing the products of the small scale units.
It provides services like factoring, leasing, etc to small units.
It extends financial support to state small industries corporations for providing scarce raw materials for marketing.
It extends financial support to State small industries corporations for providing leasing, hire purchases and marketing support to industrial units and small scale sector.
Another programme is providing financial assistance to integrated infrastructure development centres scheme of the union ministry of small industries.
It has been operating single window scheme to cover units in identified areas. It also provides refinance under Automatic Refinance Scheme.
It also set up venture capital fund to assist entrepreneurs.
Q14. Explain State Finance Corporation.
Ans. The Industrial Finance Corporation provides financial assistance to large public limited companies and cooperative societies and does not cover the small and medium seized industries. In order to meet the varied financial needs of small and medium sized industries, the Government of India passed the State Finance Corporations Act in 1951 which empower state Government to establish such corporation in their states. The first state finance corporation was set up in Punjab in 1953. At present, there are 18 SFCs operating in the country.
FUNCTIONS:
Various functiond smd types of financial assistance to be provided by the SFCs are given below:
• The SFCs have been established to provide long term finance to small scale and medium- sized industrial concerns organized as public or private companies, corporations, partnership or proprietary concerns.
• The SFCs extend loans & advances to the industrial concerns repayable within a period of 20 years.
• The SFCs gurantee loans raised by the industrial concerns in the market or from scheduled or co-operative banks and repayable within 20 days.
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• The SFCs subscribe to the debenture of the industrial concerns repayable within a period of 20 years.
• The SFCs guarantee loans raised by the industrial concerns from schedule or co-operative banks & repayable within 20 years.
• The SFCs underwrite the issue of stocks, shares, bonds & debenture by industrial concerns.
• The SFCs guarantee the deferred payments for the purchase of plant, machinery etc., within the country.
• The SFCs are probihited from subscribing directly6 to the shares or stock of any company having limited liability, except for undersriting purposes, and granting any loan or advance on the security of own shares.
• The SFCs can act as agent of the central or state government or some industrial financing institution for sanctioning & disbursing loans to small industries.
CAPITAL:
The capital resources of the SFCs include: Share capital & reserves
Bonds & Debentures
Borrowing from the Reserve Bank, the state Govts, Finance from industrial Development Bank of India, and Deposits.
Features:
Important features are as follows:
The SFCs were set up with the objective of providing financial assistance to small as well as medium industrial concerns. Though there has been a notable rise in the overall financial assistance, the performance in individual corporation differed largely due to the attitudes & motivation of the local entrepreneurs in different states.
Prior to 1966, the SFCs showed preference for medium industries. But, now there has been a marked shift in their lending policies in favour of the small units. In 1985-86, the share of small units in the total loans sanctioned was 82%.
In order to encourage self employment, the SFCs have formulated schemes of assistance to technician entrepreneurs.
Major beneficiaries of the financial assistance of the SFCs have been the food processing , service sector, chemicals textiles, etc.,
A special features of the lending operations of SFCs has been the provision of finance to industrial concerns of backward areas. In 1985-86 the share of backward areas in the total assistance sanctioned by the SFCs was 53%.
The SFCs provide concessional assistance to the industrial units located in backward areas in terms of soft loans at concessional rates, lower margins, reduced service charges etc.,
CRITICISM:
The actual performance of the SFCs has been criticized mainly because of the following defects & inadequancies:
B.COM COMPUTERS, GENERAL
The financial resources of the SFCs are inadequate. Moreover they face the difficulty of finding funds.
The SFCs have not been able to provided adequate financial assistance to meet the requirements of small & medium industries.
The SFCs charge very high interest rates on all the loans other than the soft loans. Moreover, the terms & conditions of assistance are also hard.There is also a shortage of technical personnel for judging the soundness of the proposed schemes of the borrowing units.
The SFCs lack self-sufficient organizational set up along with adequate specialized & trained staff for ensuring their efficient functioning.
Many difficulties are faced by the SFCs while extending financial assistance to the small industrial units.
The SFCs also face the serious problems of increasing magnitude of overdues. The main reasons for overdues are delays in the implementation of projects & industrial sickness.
UNIT 3 Banker and Customer - Relationship
Q1. Define banker and customer. Explain the relationship between them.
Ans.
A Banker is one who honors cheques drawn by the customers up on him and who receives money as depositsd. Banking means accepting for the purpose of lending or investments. He receives deposits of money from the public repayable on demand or withdraw able by a cheque, draft or otherwise.Definition of Banker
According to Sir.John Paget, “ A person to be called as a banker should perform these four functions”.
• Take deposit accounts
• Take current accounts
• Issue and pay cheques Definition of customer
The term customer has no statutory definition. In general we can define a customer as a person who has an account in the bank. Where as in modern days the customer is one who is engaged u\in any type of transaction with the bank.
RELATIONSHIP BETWEEN BANKER AND CUSTOMER
The relationship between banker and customer can be classified into two cateogaries: 1. general relationship
2. special relationship
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There are three types of general relationship between banker and customer:
A. Debtor and Creditor relationship:
The relationship between banker and customer and the customer is that of a debtor and creditor. The respective position between them is being deceided by the circumstances prevailing there in.
The money deposited by banker becomes his property and available for further investments. Here there is a debtor and creditor relationship between them. Banker is debtor and customer is a creditor when the customer take loan or overdraw his account. The banker will be the debtor and customer is the creditor.
trustee and beneficiary relationship:
The banker is a trustee when he accepts valuable from his customer for safe custody. Here customer will be continued as the owner of the valuable. Because, banker is a trustee. he just looks after and customer is a beneficiary.
Agent and principal relationship:
By performing various agency services banker functions as an agent of its customers. The banker becomes an agents. when he collects cheques, bills and pays insurance premium, electricity bill, water bill etc., on behalf of its customers.2.
Special
A
Statutory obligation to honour cheques:
When a customer opens an account their arises a contractual relationship between them which is called the statutory obligation under section 31 of the negotiable instruments acts of 1881.This statutory obligation to honour cheques is limited in the following ways:*
There should be sufficient balance in the customers Deposit account* The cheque should be submitted in the proper form only dealing working hours of the bank. * There should be no garnishee order issued by the court to freeze the account.
*
The cheque should be mutilated one.* It should not be a post dated cheque or a stale cheque.
