Banking notes 1 module 2 yr hff PDF

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Banming details for the mba students....

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BANKING CONCEPT: A bank is a company that provides financial services of various sorts to various types of customers. Its major function is to gather money from various people and to lend that money out to other people. One of the most visible things that a bank does is to take deposits from customers and act as a place for them to store their money. The customers put money in the bank and then can draw that money out (by check or in cash form, for example) when they need it. The bank provides them services in that it allows them to have a secure way to store their money and convenient ways to get that money back or to pass it on to others. Banks use the money that has been deposited by customers. This is one way in which banks make money (they also make money through various fees that they charge customers for some services). A bank will take in money and hold it while paying only a very low interest rate to depositors. It will then lend that money out to others. It may loan it to someone who wants a mortgage, for example, or to a business that wants to expand. It charges a much higher interest rate to lend the money than it pays to borrow it. In this way, it makes money. Banks are a very important part of our economy because they provide us with many financial services that make it easier to use our money. BANK- A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets.

E-BANKING: Electronic banking, also known as electronic funds transfer (EFT), is simply the use of electronic means to transfer funds directly from one account to another, rather than by cheque or cash. You can use electronic funds transfer to: · Have your paycheck deposited directly into your bank or credit union checking account. · Withdraw money from your checking account from an ATM machine with a personal identification number (PIN), at your convenience, day or night. · Instruct your bank or credit union to automatically pay certain monthly bills from your account, such as your auto loan or your mortgage payment. · Have the bank or credit union transfer funds each month from your checking account to your mutual fund account.

· Have your government social security benefits check or your tax refund deposited directly into your checking account. · Buy groceries, gasoline and other purchases at the point-ofsale, using a check card rather than cash, credit or a personal check. BUSINESS PERMITTED FOR BANKING COMPANY: Permitted Activities. A bank holding company is generally permitted under the Bank Holding Company Act to engage in or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in the following activities: • Banking or managing or controlling banks; and • Any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking. Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include: • Factoring accounts receivable; • Making, acquiring, brokering or servicing loans and usual related activities; • Leasing personal or real property; • Operating a non-bank depository institution, such as a savings association; • Trust company functions; • Financial and investment advisory activities; • Conducting discount securities brokerage activities; • Underwriting and dealing in government obligations and money market instruments; • Providing specified management consulting and counseling activities; • Performing selected data processing services and support services; • Acting as agent or broker in selling credit life insurance and other types of insurance in

connection with credit transactions; and • Performing selected insurance underwriting activities. SERVICES RENDERED BY BANKS In the modern world, banks offer variety of services to attract customers. However, some basic modern services offered by the banks are discussed below: 1. Advancing of Loans Banks are profit oriented business organizations. So they have to advance loan to public and generate interest from them as profit. After keeping certain cash reserves, banks provide short-term, medium-term and long-term loans to needy borrowers. 2. Overdraft Sometimes, the bank provides overdraft facilities to its customers though which they are allowed to withdraw more than their deposits. Interest is charged from the customers on the overdrawn amount. 3. Discounting of Bills of Exchange This is another popular type of lending by the modern banks. Through this method, a holder of a bill of exchange can get it discounted by the bank, in a bill of exchange, the debtor accepts the bill drawn upon him by the creditor (i.e., holder of the bill) and agrees to pay the amount mentioned on maturity. After making some marginal deductions (in the form of commission), the bank pays the value of the bill to the holder. When the bill of exchange matures, the bank gets its payment from the party, which had accepted the bill. 4. Cheque Payment Banks provide cheque pads to the account holders. Account holders can draw cheque upon bank to pay money. Banks pay for cheques of customers after formal verification and official procedures.. 5. Collection and Payment Of Credit Instruments In modern business, different types of credit instruments such as bill of exchange, promissory notes, cheques etc. are used. Banks deal with such instruments. Modern banks collect and pay different types of credit instruments as the representative of the customers. 6. Foreign Currency Exchange

Banks deal with foreign currencies. As the requirement of customers, banks exchange foreign currencies with local currencies, which is essential to settle down the dues in the international trade. 7. Consultancy Modern commercial banks are large organizations. They can expand their function to consultancy business. In this function, banks hire financial, legal and market experts who provide advices to customers in regarding investment, industry, trade, income, tax etc. 8. Bank Guarantee Customers are provided the facility of bank guarantee by modern commercial banks. When customers have to deposit certain fund in governmental offices or courts for specific purpose, bank can present itself as the guarantee for the customer, instead of depositing fund by customers. 9. Remittance of Funds Banks help their customers in transferring funds from one place to another through cheques, drafts, etc. 10. Credit cards Credit card are cards that allow their holders to make purchases of goods and services in exchange for the credit card’s provider immediately paying for the goods or service, and the card holder promising to pay back the amount of the purchase to the card provider over a period of time, and with interest. 11. ATMs Services ATMs replace human bank tellers in performing basic banking functions such as deposits, withdrawals, account inquires. Key advantages of ATMs include: 

24 hour availability



Elimination of labor cost



Convenience of location

12. Debit cards Debit cards are used to electronically withdraw funds directly from the cardholders’ accounts. Most debit cards require a Personal Identification Number (PIN) to be used to verify the transaction. 13. Home banking

Home banking is the process of completing financial transaction from one’s own home as opposed to utilizing a branch of a bank. It includes actions such as making account inquiries, transferring money, paying bills, applying for loans, directing deposits. 14. Online banking Online banking is a service offered by banks that allows account holders to access their account data via the internet. Online banking is also known as “Internet banking” or “Web banking.” Online banking through traditional banks enable customers to perform all routine transactions, such as account transfers, balance inquiries, bill payments, and stop-payment requests, and some even offer online loan and credit card applications. Account information can be accessed anytime, day or night, and can be done from anywhere. 15. Mobile Banking Mobile banking (also known as M-Banking) is a term used for performing balance checks, account transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant (PDA), 16. Accepting Deposit Accepting deposit from savers or account holders is the primary function of bank. Banks accept deposit from those who can save money, but cannot utilize in profitable sectors. People prefer to deposit their savings in a bank because by doing so, they earn interest. 17. Priority banking Priority banking can include a number of various services, but some of the popular ones include free checking, online bill pay, financial consultation and information. 18. Private banking Personalized financial and banking services that are traditionally offered to a bank’s rich, high net worth individuals (HNWIs). For wealth management purposes, HNWIs have accrued far more wealth than the average person, and therefore have the means to access a larger variety of conventional and alternative investments. Private Banks aim to match such individuals with the most appropriate options.

Rights of a banker Apart from the obligations, the banker has certain rights also. Following are the major rights that a banker can exercise on his customer. 

Right of Lien



Right of set-of



Automatic right of set of



Right of Appropriation



Right to charge interest



Right to charge service charges

Right of Lien The right of a creditor (Bank) to retain goods and securities owned by the debtor bailed (as security) to the bank until the loan due from the debtor is repaid is called the right of lien. But the banker can insist on lien only in the absence of an agreement to the contrary. The creditor (bank) has the right to maintain the security of the debtor but not to sell it. There are two types of lien such as : 

Particular Lien



General Lien

Particular Lien Particular lien is one, in that the craftsman can retain those goods on which he has spent time, efort and money until he is paid. In Particular lien the creditor doesn’t have the right to retain all the properties of the debtor.

General Lien General lien gives the banker the right to retain goods and securities delegated to him in his capacity as a banker, in the absence of a contract contradictory to the right of lien. It extends to all goods/properties placed with him as a banker by his customer which are not particularly identified for another purpose.

Right of set-of The banker has the right to set of the accounts of its customer. This enables a debtor (Bank) to set of a debt owed to him by a creditor (customer) before the latter recovers a debt due to him from the debtor. Banks can merge two accounts in the name of the same customer and set of the debit balance in one account with the credit balance in the other. But

the

funds

should

belong

to

the

customer.

The right of set-of can be exercised only if there is no agreement express or implied that is divergent to this right. It can be exercised only after a notice is served on the customer informing the customer that the banker is going to exercise the right of set-of. To be on the safe side bankers must take a letter of set-of from the customer authorizing the bank to exercise the right of set-of without giving him any notice.

Right of Appropriation In the normal course of business, a banker accepts payments from customers. If the customers have more than one account or he/she has taken more than one loan, the customer has the right to direct his banker against which debt the payment should be appropriated/settled. If the customer does not direct the banker and there is more than one debt outstanding in his/her name, the bank can exercise its right of appropriation and apply it in payment of any debt. The banker can apply it against time barred debts also. Once an appropriation has been made it cannot

be

reversed.

Section 59 of the Indian Contract Act states that the right of appropriation is vested in the hands of debtor. He/she can appropriate the payment by an express intimation. Money received will first be set of against interest.

Section 60 of the Indian Contract Act states that if the debtor does not intimate or there is no circumstance of indicating how the payment is to be

used,

the

right

of

appropriation

is

vested

in

the

creditor.

Section 61 of the Indian Contract Act states that where neither party makes any appropriation, the payment shall be used in discharge of the debts in order of time. If the debts are of equal standing, the payment should be applied in discharge of each proportionately. Any payment made by a debtor should be applied in the first instance towards fulfillment of interest and thereafter towards principal unless there is an agreement to the contrary. If a customer has only one account and he deposits and withdraws money from it regularly, the order in which the credit entry will set of the debit entry is in the chronological order, this is known as Clayton’s rule.

Right to charge interest The banker has an implied right to charge interest on the advances granted to its customer. Bankers generally charge interest monthly, quarterly or semiannually or annually. There may be an agreement between the banker and customer in this case the manner agreed will decide how interest is to be charged.

Right to charge service charges 

Banks charge customers a particular amount if their balance is below a predetermined amount, for the usage of ATMs and withdrawals.



Banks are free to charge these but the Reserve Bank of India expects banks to advise their customers of these charges at the time of opening an account and advise them when changes are being made.

Obligations of Banker



Banks have an obligation to honour the cheques drawn on it if the customer has sufficient funds in his account. It is also obliged to honor cheques up to the overdraft limit of a customer.



Banker is bound to act as per the directions given by the customer. If directions are not given the banker should act according to how he is expected to act.



Care should be taken to make sure that the information given is general and only facts that are evident should be revealed.



Banks are obliged to maintain secrecy of their client accounts. There are times when information may be revealed.

Obligations of Banker 

When the customer is statutorily required to do so.



With express or implied permission of the customer.



In common common courtesy, whenever the other banks ask for details they have to provide. In this case no specific information such as balances, etc is given.



If the bank’s interest requires that the bank can reveal the information



If the disclosure is under the intention of protecting public/ national interest....