Notes for JAIIB

Compiled by Sekhar Pariti

Book No 62 from The Banking Tutor

Page 1 of 140
 Preface
With a view to help the young Bankers in preparation for Promotion Tests or
Professional Examinations conducted by various Institutes, I am sharing Notes
related to Principles and Practices of Banking (PPB) which is prepared based on
the revised syllabus, 2023 of IIBF.

IIBF Syllabus consists the following 4 Modules –

Module A: General Banking Operations

Module B: Functions of Banks

Module C: Banking Technology

Module D: Ethics in Banks and Financial Institutions

In this Notes, I am covering topics related to only Module A – General Banking

Operations. I will share Notes related to other 3 Modules soon. After sharing
Notes related to all the Modules I will share Objective Type Points related to
entire paper in one Book.

I hope this Book may be useful to those Bankers who are appearing for Promotion
Tests, Certificate/Diploma Examinations conducted by various Institutes.

04-04-2023 Sekhar Pariti

+91 94406 41014

Page 2 of 140
 Syllabus 2023

Principles and Practices of Banking (PPB)

Module A: General Banking Operations

Banker-Customer Relationship, AML- KYC Guidelines, Operational Aspects of KYC,

Opening Accounts of Various Types of Customers, Operational Aspects of Deposit
Accounts, Operational Aspects of Handling Clearing/Collection/Cash, Banker’s
Special Relationship, Foreign Exchange Remittance Facilities for Individuals,
Operational Aspects of NRI Business, Foreign Currency Accounts for Residents and
Other Aspects, Cash Management Services and its Importance, Payment and
Collection of Cheques and Other Negotiable Instruments, Responsibility of Paying
Bank, Responsibility of Collecting Bank, Ancillary Services, Financial Inclusion &
Financial Literacy, Customer Service Guidelines, Duties & Rights of a Banker and
Customer Rights, Grievance Redressal & RBI Integrated Ombudsman Scheme
2021, The Consumer Protection Act, 2019: Preamble, Extent and Definitions, The
Right to Information Act, 2005.

Module B: Functions of Banks

Principles of Lending, Different Types of Borrowers, and Types of Credit Facilities,

Appraisal and Assessment of Credit Facilities, Operational Aspects of Loan
Accounts, Types of Collaterals and their Characteristics, Different Modes of
Charging Securities, Documentation, Non-Performing Assets/ Stressed Assets,
Important Laws Relating to Recovery of Dues, Contracts of Indemnity, Contracts of
Guarantee & Bank Guarantee, Letters of Credit, Deferred Payment Guarantee,
Laws Relating to Bill Finance, Personal Finance, Priority Sector Advances,
Agricultural Finance, Finance to MFIs/Co-Lending Arrangements with NBFCs,
Micro, Small and Medium Enterprises in India, Government Sponsored Schemes,
Self-Help Groups.

Page 3 of 140
Module C: Banking Technology

Essentials of Bank Computerisation, Operational Aspects of CBS Environment,

Alternate Delivery Channels Digital Banking, Data Communication Network and
EFT Systems, Digital Payment Systems-NPCI, Impact of Technology Adoption and
Trends in Banking Technology, Security Considerations and Mitigation Measures
in Banks, Operational Aspects of Cyber Crimes/Fraud Risk Management in Cyber
Tech, Technology Trends in Banking, e-RUPI, Fintech – RegTech, Sup Tech,
Hashtag Banking etc.

Module D: Ethics in Banks and Financial Institutions

Ethics, Business Ethics & Banking: An Integrated Perspective, Ethics at the

Individual Level, Ethical Dimensions: Employees, Work Ethics and the Workplace,
Banking Ethics: Changing Dynamics.

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Page 4 of 140
 Index
Principles and Practices of Banking (PPB)
Module A: General Banking Operations

Chapter No Topics covered

01 Banker-Customer Relationship, AML- KYC Guidelines, Operational

Aspects of KYC, Opening Accounts of Various Types of Customers

02 Operational Aspects of Deposit Accounts, Operational Aspects of

Handling Clearing/Collection/Cash, Banker’s Special Relationship,

03 Foreign Exchange Remittance Facilities for Individuals, Operational

Aspects of NRI Business, Foreign Currency Accounts for Residents
and Other Aspects

04 Cash Management Services and its Importance,

05 Payment & Collection of Cheques and Other Negotiable Instruments,

Responsibility of Paying Bank, Responsibility of Collecting Bank.

06 Ancillary Services

07 Financial Inclusion & Financial Literacy.

08 Customer Service Guidelines, Duties & Rights of a Banker and

Customer Rights, Grievance Redressal & RBI Integrated Ombudsman
Scheme 2021, The Consumer Protection Act, 2019

09 Preamble, Extent and Definitions, The Right to Information Act, 2005.

@@@

Page 5 of 140
 Chapter 1- Bank and Customers
Topics covered in this Chapter are…….>

Banker-Customer Relationship, AML- KYC Guidelines, Operational Aspects of

KYC, Opening Accounts of Various Types of Customers

###

The relationship between banker and customer is a legal relationship that starts
after the formation of a contract.

When a person opens a bank account in the bank and banker gives his
acceptance for the account, it binds the banker and costumer in the contractual
relationship.

The person who holds the bank account in the bank and uses its services is called
a bank customer.

The contractual relationship between bank and customer creates more types of
banker and customer relationships.

Although the relationship is totally based on contact, trust is an important part of

the relationship between bankers and customers.

The relationship between banker and customer can be of various types because it
totally depends upon the activities, products and services provided by the banker
to the customer.

The customer-banker relationship is built on trust and mutual understanding, and

both parties have certain rights and obligations that they must adhere to.

Banks have a fiduciary duty to act in the best interests of the customer and to use
reasonable care, skill, and diligence in managing the customer’s assets.

Customers, on the other hand, have the right to access their accounts and
financial information, to receive a fair and transparent service, and to be protected
against fraud and other financial crimes.

The relationship between a banker and a customer may come to an end for a
variety of reasons, including voluntary or involuntary closure of the account, non-
compliance with regulations, bankruptcy or insolvency of the customer.

Page 6 of 140
Relationship between the Bank and the Customer in various different transactions
is furnished in the table form as under.

Relationship between Bank & Customer

Type of Transaction Bank Customer

Deposit in the bank Debtor Creditor

Loan from Bank Creditor Debtor

Safe Deposit Vault Lessor (Licensor) Lessee (Licensee)

Safe custody Bailee Bailor

Issue of draft Debtor Creditor

Payee of draft Trustee Beneficiary

Collection of cheque & Standing Agent Principal

instruction

Goods left negligently by customer Trustee Beneficiary

Purchase of cheque from customer Holder for value Endorser

Purchase/sale of securities on behalf of Agent Principal

customer

Currency Chest on behalf of RBI Agent RBI is principal

Money deposited. No instructions for Trustee Beneficiary

its disposal

Pledge Pawner (Pledgee) Pawnee (Pledger)

Mortgage Mortgagee Mortgagor

Hypothecation Hypothecatee Hypothecator

Page 7 of 140
KYC and AML
The objective of KYC guidelines are

(a) to prevent Bank from being used, intentionally or unintentionally, by criminal

elements for money laundering activities.

(b) to enable the bank to understand the customers and their financial dealings be
er so that the risks can be managed prudently.

The 4 main pillars on which the KYC norms of the Bank rests are:

1) Customer Acceptance Policy

2) Customer Identification Procedure

3) Monitoring of Transactions

4) Risk Management

Objectives of the Customer Acceptance Policy :

a) No account is opened in anonymous or fictitious/benami name.

b) Parameters of risk perception are clearly defined

c) Documentation requirements and other information to be collected in respect

of different categories of customers

d) Not to open an account or close an existing account where the bank is unable
to apply appropriate customer due diligence measures.

FIU IND stands for Financial Intelligence Unit - India (FIU-IND) is the central,
national agency responsible for receiving, processing, analyzing and
disseminating information relating to suspect financial transactions to
enforcement agencies and foreign FIU.

Cash Transaction Report ( CTR) All cash transactions of the value of more than
Rs 10 Lacs or it’s equivalent in FC or series of cash transactions aggregating Rs 10
Lacs or more in one month. Report to be submitted to FIU IND by 15th of
succeeding month.
Page 8 of 140
Suspicious Transaction Report (STR) A transaction may be of suspicious nature
irrespective of the amount involved. There is no restrictions on operations in the
accounts where an STR has been made. There is no periodicity of reporting
suspicious transactions.

Non Profit Organisation ( NPOs) Transaction Report ( NTR) : NPO means any
organization that is registered as a Trust or society under Societies Registration
Act 1860 or any similar State Legislation or a company registered under Section
25 of the Companies Act 1956.

Receipt transaction of more than Rs 10 Lacs or equivalent in foreign currency in

NPO accounts is reported to FIU-IND .

"Customer risk" in the present context refers to the money laundering and
terrorist funding risk associated with a particular customer from a Bank's
perspective.

For risk categorization of customers, the IBA has provided a hybrid model
containing seven parameters .

(1) Customer Type ;

(2) Customer Profession ;

(3) Type of Business ;

(4) Product code ;

(5) Account Status ;

(6) Account vintage ;

(7) Deposit Balance (SB+CA+TD-).

Customer Type means - Individual Salaried // Proprietorship concern / NGOs /

Trust / Private Ltd. Co. / Corporate / Associations / NRIs.

Customer Profession - Service/ Pensioner/ Accountant / Architect /Contractor /

Real Estate services /Agriculturist / Lawyer / HNI.

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Type of Business : Central Govt. / State Manufacturing / Hotel / Import / Export /
Govt. / PSU Health services / NBFC.

Product code : SB Gen / FD Gen / SB CGA / SB NRO, NRE/FD / Staff / NRO,

NRE/FCNR.

Account Status : Active / Regular / Inoperative / dormant / Blocked / Unclaimed.

Account vintage : One year and above // 6 months to less than one year / Less
than 6 months

Deposit Balance (SB+CA+TD) : Less than Rs. 25 lakh // 25.00 lakhs & above to
Rs. 100 lakh / Rs. 100 lakh above.

Money Laundering

As per Sec 3 of Prevention of Money Laundering Act, ”Money Laundering” is an

offence committed by anyone who acquires, owns, possess or transfers any
proceeds of crim

or

knowingly enters into a transaction which is related to proceeds of crime, either

directly or indirectly

or

Conceals or aids in the concealment of the proceeds or gains of crime within India
or outside India commits the offence of money.

Customer

For the purpose of KYC Norms, a 'Customer' is defined as a person who is

engaged in a financial transaction or activity with a reporting entity and includes a
person on whose behalf the person who is engaged in the transaction or activity,
is acting.

Designated Director

Designated Director means a person designated by the reporting entity (Bank,

financial institution, etc.) to ensure overall compliance with the obligations
imposed under chapter IV of the PML Act and the Rules.

Page 10 of 140
Person : In terms of PML Act a 'person' includes an individual ; a Hindu undivided
family ; a company ; a firm ; an association of persons or a body of individuals.

Transaction means a purchase, sale, loan, pledge, gift , transfer, delivery or the
arrangement thereof and includes- opening and operating of an account.

All customer profiles/accounts of NRIs, HNIs, PEPs, NGOs, Trusts, Cooperative

Societies, HUF, Exporters, Importers and Accounts having Beneficial Owners are to
be invariably categorised as High Risk. (irrespective of the lower risk category
(low/medium) allotted under other parameters in the Matrix.

Blocked Accounts and Unclaimed deposits are to be categorised as High Risk.

Accounts of dealers in jewellery, gold/silver/bullions, diamonds and other

precious metals/stones are to be categorised under High Risk.

Under vintage parameter, newly opened CASA accounts which have not
completed 6 months are to be categorised as High Risk.

Accounts in respect of which complaints received from Legal Enforcement

Authority or fraud is reported should be categorised under “High Risk” category.

Suggested Risk Categorization under Customer Type are as follows :

Individual, salaried- Low

Proprietorship concern/Pvt Ltd. Co./Corporates - Medium

NGOs/Trusts/Associations/NRIs- High

Suggested Risk Categorization under Customer Profession are as follows :

Service/Pensioner/Agriculturist – Low

Accountant/Architect/Lawyer – Medium

Contractor/Real Estate services/HNI- High

Page 11 of 140
Suggested Risk Categorization under Type of Business are as follows

Central Govt./State Govt./PSU – Low

Manufacturing/Hotel/Health services – Medium

Imports/Exports/NBFC – High

Suggested Risk Categorization under Product Code are as follows :

SB Gen/FD Gen/Staff – Low

SB CGA – Medium

SB NRO, NRE/FD NRO, NRE/FCNR – High

Suggested Risk Categorization under Account Status are as follows :

Active/Regular – low

Inoperative/dormant – Medium

Blocked/Unclaimed – High

Suggested Risk Categorization under Account Vintage are as follows :

(Account Vintage refers to age of the account).

Less than six months old – High

Six months to less than one year – Medium

One year and above – Low

Page 12 of 140
Total risk will be assigned based on the highest risk carried by any of the
following 10 parameters –

(1) Customer Type,

(2) Customer Business/Profession,

(3) Account Status,

(4) Account Vintage,

(5) Product Code,

(6) Country of Residence,

(7) Economic Profile of Account Holder

(8) Regulatory guidelines such as PEP, Defaulters, Fraudsters

(9) Suspicious Transaction Report (STR) filed for the customer and (

10) AML alerts.

Rating based on the deposits/account balance : (applicable to accounts which

have completed 6 months)

Account Types High Medium Low

Only SB Rs 2 lacs - & Rs 1 lakh- & above but Less than Rs 1

above less than Rs 2 lacs. lakh.

Only Current Rs 5 lacs - & Rs 2 lakh- & above but Less than Rs 2
above less than Rs 5 lacs. lakh.

Only Term Rs 10 lacs - & Rs 5 lakh- & above but Less than Rs 5
Deposits above less than Rs 10 lacs. lakh.

(for current/SB accounts balance amount and for Term deposits, principle amount
shall be taken for consideration on the date of review).

Low Risk Customers also known as Level 1 customers.

Medium Risk Customers also known as Level 2 customers.

High Risk Customers also known as Level 3 customers.

Page 13 of 140
Objective of PMLA ( Prevention of Money Laundering Act, 2002) - to prevent
money-laundering and to provide for confiscation of property derived from
money-laundering.

The Act and Rules notified there under impose obligation on banking companies,
financial institutions and intermediaries to verify identity of clients, maintain
records and furnish information in prescribed form to Financial Intelligence Unit –
India (FIU-IND).

Low Risk Customers

Non-Profit Organisations (NPOs)/ Non-Government Organisations (NGOs)

promoted by the United Nations or its agencies, and such international/
multilateral organizations of repute, may be classified as low risk customers.

Medium Risk Customers

The following customers are classified as Medium Risk Customers:

Gas Dealers // Car/boat/plane dealers // Electronics (wholesale) // Travel agency

// Telemarketers // Telecommunication service providers // Pawnshops //
Auctioneers // Restaurants, Retail shops, Movie Theatres, etc.// Sole practitioners
// Notaries // Accountants // Blind // Purdanashin.

Blind Person (customer) to be classified as Medium Risk Customer.

Purdanashin Customer to be classified as Medium Risk Customer.

Gas Dealers to be classified as Medium Risk Customer.

Travel Agency to be classified as Medium Risk Customer.

Notaries to be classified as Medium Risk Customer.

Accountants to be classified as Medium Risk Customer.

Retail Shops to be classified as Medium Risk Customer.

Movie Theatres to be classified as Medium Risk Customer.

Restaurants to be classified as Medium Risk Customer.

Page 14 of 140
The following customers are classified as High Risk Customers:

Trusts, charities, NGOs and organizations receiving donations to be classified as

High Risk Customer.

Companies having close family shareholding or beneficial ownership to be

classified as High Risk Customer.

Firms with sleeping partners to be classified as High Risk Customer.

Accounts under Foreign Contribution Regulation Act to be classified as High Risk

Customer.

Politically Exposed Persons (PEPs) to be classified as High Risk Customer.

Customers who are close relatives of PEPs and accounts of which a PEP is the
ultimate beneficial owner to be classified as High Risk Customer.

Those with dubious reputation as per public information available to be classified

as High Risk Customer.

Accounts of non-face-to-face customers to be classified as High Risk Customer.

High Net worth Individuals to be classified as High Risk Customer.

Non-Resident customers to be classified as High Risk Customer.

Accounts of Cash intensive businesses such as accounts of bullion dealers &

jewellers to be classified as High Risk Customer.

Overall Risk grade for the customer will be the Highest Risk grade among the
chosen parameters.

A low risk category may be classified otherwise based on following illustrative list
of parameters considered as "High Risk" such as:

a) Unusual transaction/behaviour (Detailed in the KYC/AML/CFT policy)

b) Suspicious Transaction Reports (STR) for customer

c) Cash Transaction Report (CTR) for customer

d) Frequent Cheque returns etc.

Page 15 of 140
Review of Customer Risk Categorization - to be carried out not less than once in
six months i.e.as on 15th of May and November every year.

KYC exercise should be done at least every two (2) years for High Risk customers.

KYC exercise should be done at least every eight (8) years for Medium Risk
customers.

KYC exercise should be done at least every ten (10) years for Low Risk customers.

Customer Identification Procedure means undertaking client Due Diligence (CDD)

measures based on the Risk profile, while commencing an account based
relationship (whether regular or occasional).

Customer identification procedure to be carried out – While selling bank's own

product for more than Rs 50000/-.

Customer identification procedure to be carried out - During periodic review of

KYC.

Accept only the Officially Valid Documents (OVD) while opening of accounts/
periodical KYC up-dation.

A document is deemed to be an “Officially Valid Document” even if there is a

change in the name subsequent to its issuance, provided it is supported by a
marriage certificate issued by State Government or a Gazette notification.

Passport is a OVD in case of Individual Customer.

Driving License is a OVD in case of Individual Customer.

Aadhaar card or Proof of possession of Aadhaar number is a OVD in case of

Individual Customer.

Voter Identity Card issued by Election Commission of India is a OVD in case of

Individual Customer.

Job Card issued by NREGA duly signed by an officer of the State Government is a
OVD in case of Individual Customer.

Letter issued by the National Population Register containing details of name and
address is a OVD in case of Individual Customer.

Certificate of incorporation is a OVD in case of Company.

Page 16 of 140
Memorandum and Articles of Association is a OVD in case of Company.

Do not insist on a Company's Common Seal, unless there is a provision to that

effect in their Memorandum and Articles of Association.

Parameters for defining High Net worth Individuals - Customers with any of
the following:

1) Average balance of Rs. 100 lakh and above in all (SB+CA+TD) deposit accounts.

2) Enjoying Fund based limits/term loans exceeding Rs. 100 lakh.

Registration certificate is a OVD in case of Partnership Firms.

Partnership deed is a OVD in case of Partnership Firms.

PAN Card of the Firm is a OVD in case of Partnership Firms.

Registration certificate is a OVD in case of Trusts and Foundations.

Trust deed is a OVD in case of Trusts and Foundations.

PAN number of the Trust is a OVD in case of Trusts and Foundations.

For proprietary concerns, in addition to the OVD applicable to the individual

(proprietor), any two documents in the name of the proprietary concern are
required to be submitted as Activity Proof.

Though the default rule is that any two documents, mentioned above, should be
provided as activity proof by a proprietary concern, in cases where the banks are
satisfied that it is not possible to furnish two such documents, they would have
the discretion to accept only one document as activity proof.

Introduction is not mandatory for all the accounts, including those of legal
entities.

Aadhaar is not mandatory for opening SB account for Individual.

We may accept e- KYC service as a valid process for KYC verification.

Fresh photographs will be required to be obtained from minor customer on

becoming major.

Page 17 of 140
In case a customer categorised as low risk is unable to submit the KYC documents
due to genuine reasons, she/he may submit the documents to the Bank within a
period of six months from the date of opening account.

Foreign students have been allowed a time of one month for furnishing the proof
of local address.

To open account for close relatives of low risk customers e.g. wife, son, daughter
and parents etc. who live with their husband, father / mother and son, the utility
bills which are in the name of close relatives can be accepted.

Customers' name should be screened with UN list of terrorist individuals/ entities

before creation of new customer ID. If any resemblance is observed, transactions
are to be verified in such accounts and report those accounts to RBI/FIU-IND.

For opening of accounts of juridical persons, such as Government or its

departments, Societies, Universities and Local Bodies like Village Panchayats, a
certified copy of the following documents shall be obtained:

a) Document showing name of the person authorised to act on behalf of the

entity;

b) Officially Valid Documents for proof of identity and address in respect of the
person holding a power of attorney to transact on its behalf and

c) Such documents as may be required by the Bank to establish the legal

existence of such an entity/ juridical person.

Additional document pertaining to the nature of occupation/activity and financial

status (income) of the customer while opening of accounts, along with OVDs and
photographs should be obtained. If it is not possible to provide a document
related to occupations, such as, unemployed, housewife, labour, street vendor,
etc., the same need not be insisted.

In case proof of address furnished by the customer is not the local address or the
address where the customer is currently residing, the branch may take a
declaration of the local address .

Foreign remittance exceeding USD 1000 is not allowed into the accounts of
foreign students, within the period of first thirty days, when local address is not
verified.

Page 18 of 140
If the address of the customer mentioned as per proof of address undergoes a
change, fresh proof of address may be submitted to the branch within a period of
six months.

PAN or Form 60 are mandatory for opening of accounts other than “small
accounts”.

For Low Risk category, KYC requirement of proper identification and verification
on of proof of address would suffice.

For medium risk category, higher due diligence is required, which includes
customer's background, nature and location of activity, country of origin, source
of funds and their client's profile etc., besides identification.

High Risk category accounts require higher due diligence as per medium risk
category and such accounts require enhanced monitoring on an on-going basis.

Threshold limits are to be fixed as per limits mentioned by customer at the time of
opening the account and review the threshold limits once in 6 months.

Fresh proofs of identity and address need not be obtained at the time of periodic
up-dation from those customers who are categorised as 'low risk', in case of no
change in status with respect to their identities and addresses.

A self-certification by the customer to that effect should suffice in such cases

In case of change of address of low risk customers, they could merely forward a
certified copy of the document (proof of address) by mail/post, etc. Branches
need not insist on physical presence of such low risk customer at the time of
periodic up-dation.

If an existing KYC compliant customer of the bank desires to open another

account in the bank, there should be no need for submission of fresh proof of
identity and/or proof of address for the purpose.

Banks should impose partial freezing on KYC non-compliant accounts in a phased

manner by giving due notice.

Due diligence to be observed wherever notices are returned undelivered.

Page 19 of 140
The option of partial freezing is to be exercised after giving due notice of three
months initially to the customers to comply with KYC requirements and followed
by a reminder for further period of three months. Thereafter, partial freezing
should be imposed by allowing all credits and is allowing all debits with the
freedom to close the accounts.

If the accounts are still KYC non-compliant after six months of imposing initial
partial freezing, branches should disallow all debits and credits from/to the
accounts, rendering them inoperative.

Further, it would always be open to the branches to close the account of such
customers.

Non-account based customer, that is a walk-in customer, where the amount of

transaction is equal to or exceeds rupees fifty thousand, whether conducted as a
single transaction or several transactions that appear to be connected, the
customer's identity and address shall be verified.

A juridical person has been defined as an Entity, as a firm, that is not a single
natural person, as a human being, authorized by law with dues and rights,
recognized as a legal authority having a distinct identity, a legal personality

A juridical person also known as artificial person, juridical entity, jurisdiction

person, or legal person.

"Beneficial Owner” is the natural person who ultimately owns or controls a

client. and/or the person on whose behalf the transaction is being conducted, and
includes a person who exercises ultimate effective control over a juridical person.

In case of Companies,(Beneficial Owner”) “Controlling ownership interest” means

ownership of / entitlement to more than 25 per cent of the shares or capital or
profits of the company.

In case of Partnership firm, (Beneficial Owner”)“Controlling ownership interest”

means ownership of / entitlement to more than 15% of the shares or capital or
profits of the Partnership Firm.

In case of an Unincorporated Association or Body of Individuals, (Beneficial

owner”) “Controlling ownership interest” means ownership of / entitlement to
more than 15% of the property or capital or profits of such Association or Body of
Individuals.

Page 20 of 140
In other cases, (Beneficial Owner)“Controlling ownership interest” is relevant
natural person who holds the position of senior managing official.

Politically exposed persons (PEPs) are individuals who are or have been
entrusted with prominent Public functions in a Foreign Country, e.g., Heads of
States or of Governments, Senior Politicians, Senior Government /judicial / Military
Officers, Senior Executives of State-owned Corporations, important Political Party
Officials, etc.

Persons of Foreign/Diplomatic Missions, located in India, also qualify as PEPs.

Persons holding prominent positions in multilateral agencies such as the United

Nations, World Bank etc., can also be construed as PEPs.

In the event of an existing customer or relatives of an existing customer

subsequently becoming a PEP, the decision to continue the business relationship
has to be taken by Executive.

Penalty of not less than rupees ten thousand extended upto one lakh rupees may
be levied by RBI on any of the employees for non-compliance of KYC/ AML / CFT
guidelines.

AML stands for Anti Money Laundering.

CFT stands for Combating Financial Terrorism.

Account of non face to face customers : This is opening of account without the
customer coming to the branch.

In case of Non Face to Face Customer Account First credit should be by way of
account credit.

In case of Non Face to Face Customer Account, Documents should be certified

/or/attested.

Transactions using forged or counterfeit Indian Currency notes to be reported

under Counterfeit Currency Report (CCR).

Attempted transactions by customers ( where counterfeit or forged currency are

used) are to be reported under STR even if the transactions are not completed by
customers irrespective of the amount.

Page 21 of 140
Records of transactions to be maintained for at least ten years from the date of
transaction.

Records pertaining to identification of the customer and his address to be

preserved for at least ten years after the business relationship is ended.

Accounts of Trusts/Charities/Organisations, receiving foreign funding should be

opened after permission of Ministry of Home Affairs.

Accounts of Trusts/Charities/Organisations, receiving foreign funding are treated

as High Risk.

Branches may transfer existing accounts at the transferor branch to the transferee
branch without insisting on fresh proof of address and on the basis of a self-
declaration from the account holder about his/her current address, subject to
submitting proof of address within a period of 6 months.

KYC once done by one branch of a Bank should be valid for transfer of the
account within the Bank as long as full KYC has been complied for the concerned
account.

“In-Person verification” means customer to sign in the presence of Bank official

and the Bank Official has to affix signature and Staff No.

eKYC : Under eKYC, the customer need not bring any document for opening of an
account. He/she has to inform his/her Aadhaar number only. He/she has to fill up
the Account opening Form and give a consent letter to undergo e-KYC process
and provide his/her fingerprint on the biometric reader.

Ensure e-KYC authentication of Aadhaar through only either Biometric

authentication or OTP based authentication facility only.

All cross border wire transfer of the value of more than Rs 5 lakhs are to be
reported to Financial Intelligent Unit (FIU-IND) on monthly basis.

Records of ALM to be preserved for 10 years.

Suspicious Transaction Report ( STR) - A transaction may be of suspicious

nature irrespective of the amount involved.

There are no restrictions on operations in the accounts where an STR has been
made. There is no periodicity for reporting suspicious transactions.

Page 22 of 140
FATF stands for Financial Action Task Force.

Correspondent Banking is the provision of banking services by one bank (the

“correspondent bank”) to another bank (the “respondent bank”).

Banks should not enter into a correspondent relationship with a “shell bank”.

Shell Bank is bank which is incorporated in a country where it has no physical

presence and is not affiliated to any regulated financial group.

UAPA stands for Unlawful Activities (Prevention) Act, 1967.

The United Nations periodically circulates the following two lists of individuals and
entities suspected of having terrorist links, and as approved by its Security Council
(UNSC) - (a) The “ISIL (Da’esh) &Al-Qaida Sanctions List” - associated with the Al-
Qaida. and (b) The “1988 Sanctions List” - associated with the Taliban.

UNSCRs stand for The United Nations Security Council Resolutions.

In case of Accounts of Married Women - a document shall be deemed to an -OVD

even if there is a change in the name subsequent to its issuance, provided it is
supported by a marriage certificate issued by the State Government or a Gazette
notification, indicating such a change of name.

Accordingly, accept a copy of marriage certificate issued by the State Government

or Gazette notification indicating change in name, together with a certified copy
of the “OVD” in the existing name of the person while establishing an account
based relationship or while undergoing periodic up-dation exercise.

Small Accounts: If a person who wants to open an account and is not able to
produce any of the OVDs or the documents applicable in respect of simplified
procedure, bank shall open a Small Account.

BCSBI stands for Banking Codes And Standard Board Of India .

BCSBI is a registered society formed on the recommendations of committee on

Procedures and Performance Audit on Public Services by S S Tarapore Committee.

BCSBI is Voluntary Code. However, on 28 September 2021, the member banks

passed resolutions approving BCBSI dissolution. Accordingly it has stopped its
operations and is under dissolution.

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Demographic information includes information relating to the name, date of
birth, address and other relevant information of an individual, but shall not
include race, religion, caste, tribe, ethnicity, language, records of entitlement,
income or medical history. (defined in the Aadhaar Act)

“Regulated Entities” (REs) means

a) All Banks

b) All India Financial Institutions (AIFIs)

c) All Non-Banking Finance Companies (NBFC)s, Miscellaneous Non-Banking

Companies (MNBCs) and Residuary Non-Banking Companies (RNBCs).

d) All Payment System Providers (PSPs)/System Participants (SPs) and Prepaid

Payment Instrument Issuers (PPI Issuers)

e) All authorised persons (APs) including those agents of Money Transfer Service
Scheme (MTSS), regulated by the Regulator.

“FATCA” means Foreign Account Tax Compliance Act of the United States of
America (USA) which, inter alia, requires foreign financial institutions to report
about financial accounts held by U.S. taxpayers or foreign entities in which U.S.
taxpayers hold a substantial ownership interest.

“IGA” means Inter Governmental Agreement between the Governments of India

and the USA to improve international tax compliance and to implement FATCA of
the USA.

“KYC Templates” means templates prepared to facilitate collating and reporting

the KYC data to the CKYCR, for individuals and legal entities.

CIDR stands for Central Identities Data Repository is defined in the Aadhaar Act,
means a centralised database containing all Aadhaar numbers issued along with
the corresponding demographic information and biometric information of such
individuals and other information related thereto.

“Central KYC Records Registry” (CKYCR) means an entity established to receive,

store, safeguard and retrieve the KYC records in digital form of a customer.

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Biometric information”, as defined in the Aadhaar Act, means photograph,
finger print, Iris scan, or such other biological attributes of an individual as may be
specified by Aadhaar (authentication) regulations.

”Enrolment number” or “Enrolment ID” is a 28 digit Enrolment Identification

Number allocated to residents at the time of enrolment of Aadhaar.

“E-KYC authentication facility”, means a type of authentication facility in which

the biometric information and/or OTP and Aadhaar number securely submitted
with the consent of the Aadhaar number holder through a requesting entity, is
matched against the data available in the CIDR, and the Authority returns a
digitally signed response containing e-KYC data along with other technical details
related to the authentication transaction.

“Identity information”, in respect of an individual, includes individual’s Aadhaar

number, biometric information and demographic information.

“Resident”, as defined in Aadhaar Act, means an individual who has resided in

India for a period or periods amounting in all to one hundred and eighty-two
days or more in the twelve months immediately preceding the date of application
for enrolment for Aadhaar.

“Yes/No authentication facility”, as defined in Aadhaar Act, means a type of

authentication facility in which the identity information and Aadhaar number
securely submitted with the consent of the Aadhaar number holder through a
requesting entity, is then matched against the data available in the CIDR, and the
Authority responds with a digitally signed response containing “Yes” or “No”,
along with other technical details related to the authentication transaction, but no
identity information.

“Common Reporting Standards” (CRS) means reporting standards set for

implementation of multilateral agreement signed to automatically exchange
information.

“Walk-in Customer” means a person who does not have an account based
relationship with the RE, but undertakes transactions with the RE.

“Customer Due Diligence (CDD)” means identifying and verifying the customer
and the beneficial owner.

“Customer identification” means undertaking the process of CDD.

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“Non-face-to-face customers” means customers who open accounts without
visiting the branch/offices of the REs or meeting the officials.

“On-going Due Diligence” means regular monitoring of transactions in accounts

to ensure that they are consistent with the customers’ profile and source of funds.

“Periodic Up-dation” means steps taken to ensure that documents, data or

information collected under the CDD process is kept up-to-date and relevant by
undertaking reviews of existing records at periodicity prescribed by the Reserve
Bank.

“Wire Transfer” means a transaction carried out, directly or through a chain of

transfers, on behalf of an originator person (both natural and legal) through a
bank by electronic means with a view to making an amount of money available to
a beneficiary person at a bank.

When the originator bank and the beneficiary bank is the same person or
different person located in the same country, such a wire-transfer is a Domestic
Wire Transfer,

If the ‘originator bank’ or ‘beneficiary bank’ is located in different countries such a

wire-transfer is Cross-border Wire Transfer.

Aadhar number shall not be sought from individuals who are not ‘residents’.

In case an individual customer who does not have Aadhaar/enrolment number

and PAN and desires to open a bank account, banks shall open a ‘Small Account’.

The bank shall obtain a self-attested photograph from the customer while
opening Small Account.

While opening Small Accounts, the designated officer of the bank certifies under
his signature that the person opening the account has affixed his signature or
thumb impression in his presence.

Small Accounts are opened only at Core Banking Solution (CBS) linked branches
or in a branch where it is possible to manually monitor and ensure that foreign
remittances are not credited to the account.

In case of Small Accounts, ensure that the stipulated monthly and annual limits on
aggregate of transactions and balance requirements in such accounts are not
breached, before a transaction is allowed to take place.

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The Small Account shall remain operational initially for a period of twelve months
which can be extended for a further period of twelve months, provided the
account holder applies and furnishes evidence of having applied for any of the
OVDs during the first twelve months of the opening of the said account.

The entire relaxation provisions shall be reviewed after twenty four months

The Small Account shall be monitored and when there is suspicion of money
laundering or financing of terrorism activities or other high risk scenarios, the
identity of the customer shall be established through the production of an OVD
and Aadhaar Number or where an Aadhaar number has not been assigned to the
customer through the production of proof of application towards enrolment for
Aadhaar which is not more than six months old, along with an OVD.

In Small Accounts , Foreign remittance shall not be allowed to be credited into the
account unless the identity of the customer is fully established through the
production of an OVD and Aadhaar Number or the enrolment number which is
not more than six months old, where the person is eligible to enrol for Aadhaar
number has not been assigned an Aadhaar number.

High risk accounts have to be subjected to more intensified monitoring.

Simplified KYC norms for Foreign Portfolio Investors (FPIs)

Accounts of FPIs which are eligible/ registered as per SEBI guidelines, for the
purpose of investment under Portfolio Investment Scheme (PIS), shall be opened
by accepting KYC documents specified, subject to Income Tax (FATCA/CRS) Rules.

Provided that banks shall obtain undertaking from FPIs or the Global Custodian
acting on behalf of the FPI that as and when required, the exempted documents
specified will be submitted.

Government of India has authorised the Central Registry of Securitisation Asset

Reconstruction and Security Interest of India (CERSAI), to act as, and to perform
the functions of the CKYCR.

Payment of cheques/drafts/pay orders/banker’s cheques, if they are presented

beyond the period of three months from the date of such instruments, shall not
be made.

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“Money Mules” are used to launder the proceeds of fraud schemes (e.g.,
phishing and identity theft) by criminals who gain illegal access to deposit
accounts by recruiting third parties which act as “money mules.” If it is established
that an account opened and operated is that of a Money Mule, it shall be deemed
that the bank has not complied with these directions.

Account payee cheques for any person other than the payee constituent shall not
be collected. Banks shall, at their option, collect account payee cheques drawn for
an amount not exceeding rupees fifty thousand to the account of their customers
who are co-operative credit societies, provided the payees of such cheques are
the constituents of such co-operative credit societies.

Any remittance of funds by way of demand draft, mail/telegraphic

transfer/NEFT/IMPS or any other mode and issue of travellers’ cheques for value
of rupees fifty thousand and above shall be effected by debit to the customer’s
account or against cheques and not against cash payment.

The name of the purchaser shall be incorporated on the face of the demand draft,
pay order, banker’s cheque, etc., by the issuing bank.

Types of Customers in Bank

The banker deals with different types of customers. The banker should acquaint
himself with various laws governing different types of customers. The customers
can be classified as follows:

1. Personal accounts: Banker should take care and verify the certain fact while
opening of accounts of individual. As per Indian Contract Act 1872, a person is
competent to enter into a valid contract and open a bank account provided:

a) Individual should be major, i.e. of 18 years of age;

b) He should be sound mind;
c) He is otherwise not disqualified by any law;
d) He Should not be an insolvent;
e) Drunken person is not legally competent to enter into a contract;
f) He should be in good sense while lending a loan and entering into a contract.

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Various types of personal accounts in banks are as under:

a) Accounts of Single Individual: This is purely a personal account in the name

of an individual and is normally operated upon by the account holder himself. The
account holder may authorise another person to operate on his account. For this
purpose, he gives a Mandate or executes a Power of Attorney in favour of such a
person.

In order to avoid legal complications that may arise after the death of the account
holder, it is desirable to suggest opening of a joint account in the names of two
individuals (unless it is essential in certain circumstances to open an account in
the single name only), and/or to obtain proper nomination.

b) Joint Accounts of Individuals: A joint account is opened in the names of

more than one individual for convenience of operations and/ or to avoid legal
complications upon death of one of the joint account holders. A joint account is
neither a partnership nor a trust account. It is important to obtain clear and
unambiguous instructions regarding the mode of operation and repayment of
balance of a joint account in the event of death of one or more joint account
holder(s). Different types of operational instructions are as under:

(i) Jointly or Survivor

(ii) Either or Survivor

(iii) Former or Survivor

(iv) any one or Survivor

One or more of the joint account holders can authorise operation on the account
on his/their behalf by giving a Mandate or executing a Power of Attorney, but,
such Mandate or Power of Attorney must be given by all the parties to the
accounts. Addition/deletion of any name, material alteration, closure of account &
operational instructions in the joint account can be changed by all the account
holders jointly. However, in joint accounts with operational instructions “Former or
Survivor”, instructions can be changed/revoked only by Former.

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c) Illiterate person: Illiterate person is a person who cannot read or write. Such
persons are competent to enter in to a valid contract. The account(other than
Current Account) of such a person may be opened provided he calls on the Bank
with a latest passport size photograph. Photograph is essential for identification.
Thereupon, his thumb impression or mark should be obtained on the account
opening form/card in the presence of the Bank’s official. Such thumb impressions
or marks affixed by illiterate persons on instruments are equivalent to their
signatures. Any withdrawal/repayment of deposit amount and/or interest by way
of withdrawal form or otherwise should similarly be affixed with the thumb
impression or mark of the depositor.

d) Blind Persons: Blind Persons can operate the account in bank. Signature of
Thumb impression of blind person in the A/c opening form to be witnessed by a
person who should certify that contents of the A/c opening form were explained
to the blind person in his presence. The sign may be authorised by bank officer
and a witness known to both the bank and the blind person. He should always
visit the branch for cash withdrawal. As per all banking facilities including net
banking, ATM, Cheque Book, Locker facility, loans to be offered to visually
challenged customers without discrimination.

e) Minors’ Accounts: A minor is a person below the age of 18 years. A minor is

under legal incapacity to contract by himself and, therefore, a guardian
recognised by law along can deal with the person and property of the minor. The
term “guardian” includes a natural guardian or guardian appointed by the Court
of Law. Ordinarily, an account of a minor is opened and operated upon by the
natural guardian of the minor or by the guardian appointed by the Court.

According to RBI guidelines (RBI/2013-14/581DBOD. No. Leg. BC. 108/09.07.005/

2013-14) with a view to promote the objective of financial inclusion and also to
bring uniformity among banks in opening and operating minors’ accounts, banks
are advised as under:

A savings /fixed / recurring bank deposit account can be opened by a minor of

any age through his/her natural or legally appointed guardian.

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Minors above the age of 10 years may be allowed to open and operate savings
bank accounts independently, if they so desire. Banks may, however, keeping in
view their risk management systems, fix limits in terms of age and amount up to
which minors may be allowed to operate the deposit accounts independently.
They can also decide, in their own discretion, as to what minimum documents are
required for opening of accounts by minors.

On attaining majority, the erstwhile minor should confirm the balance in his/her
account and if the account is operated by the natural guardian / legal guardian,
fresh operating instructions and specimen signature of erstwhile minor should be
obtained and kept on record for all operational purposes.

Banks are free to offer additional banking facilities like internet banking, ATM/
debit card, cheque book facility etc., subject to the safeguards that minor
accounts are not allowed to be overdrawn and that these always remain in credit.

It is permissible to open any type of deposit account in the name of and/or to be

operated upon by a minor within the framework of rules of business of the Bank
as outlined hereunder, but no Current Account should be opened.

According to Section 26 of NI Act, a minor can draw, endorse or negotiate a

cheque or a bill but he cannot be held liable on such cheques or bill. Minor can be
admitted to the benefits of partnership with the consent of other partners but
cannot be made liable for the losses. A minor may be appointed as an agent on
behalf of his principal but legally he cannot be held responsible to his principal.

When the minor becomes major he has the sole right to operate the account and
guardian’s power ceases. The payment should be made to the erstwhile minor
upon provided his identity. When the account is operated upon by the guardian
on behalf of the minor a Balance Confirmation Letter duly signed by the erstwhile
minor and verified by the guardian. If account is operated by the minor himself,
the erstwhile minor should be asked to sign a Balance Confirmation Letter.

2. Hindu Undivided Family(HUF): Hindu Undivided Family’ otherwise known as

‘Joint Hindu Family’ property, business or ancestral estates and its common
possession, enjoyment ownership is the basis of formation of HUF.As per Hindu
law, the Hindus, Sikhs & Jains can form HUF.

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HUF is governed basically by two schools of thought. In Bengal, it is governed by
Dayabhag Law. In other parts of India, it is governed by Mitakshara Law. The law
governing Hindu Undivided Family is codified under Hindu Code and now,
succession among Hindu is governed by Hindu Succession Act, 1956. Parts of this
Act was amended in 2005 by the Hindu Succession (Amendment) Act,
2005.Creation of Hindu Law under which all major members of the family get
right by birth in the ancestral property of the family.

HUF property is managed by senior most major male member called ‘Manager’ or
‘Karta’. Upon death of Karta, next senior male coparcener becomes Karta. Joint
owners of HUF are known as coparceners. It consists of one common living
ancestor and his all male & female (female included from Sept. 2005) descendent
up to three generations next to him. HUF cannot enter into a partnership as per
Supreme Court judgement of 1998.

HUF account is operated by Karta. Karta has authority to borrow money for the
family necessities & for ancestral family business. Documents are to be executed
by Karta. All major coparceners are to be made guarantors. The liability of the
‘Karta’ is unlimited, whereas the liability of the coparceners is limited to their
shares in the joint family estate.

3. Sole Proprietary Firms: Business is wholly owned by an individual. In law, there

is no difference between proprietor & the firm.

In all respects, it is an account in the name of an individual only except that it is

operated upon by the proprietor on behalf of firm.

The firm should have PAN or GST Number. Proprietorship letter in bank’s
Performa is to be obtained.

Proof of proprietorship to be obtained.

Creditors have recourse not only against assets of the firm but also against private
assets of the proprietor.

Proprietor can authorize another person to operate the account through Mandate
or Power of Attorney.

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For opening an account in the name of a sole proprietary firm, CDD of the
individual (proprietor) shall be carried out.

In addition to the above, any two of the following documents as a proof of

business/ activity in the name of the proprietary firm shall also be obtained:

(a) Registration certificate

(b) Certificate/licence issued by the municipal authorities under Shop and

Establishment Act.

(c) Sales and income tax returns.

(d) CST/VAT/ GST certificate (provisional/final).

(e) Certificate/registration document issued by Sales Tax/Service Tax/Professional

Tax authorities.

(f) IEC (Importer Exporter Code) issued to the proprietary concern by the office of
DGFT or Licence/certificate of practice issued in the name of the proprietary
concern by any professional body incorporated under a statute.

(g) Complete Income Tax Return (not just the acknowledgement) in the name of
the sole proprietor where the firm’s income is reflected, duly acknowledged by
the Income Tax authorities.

(h) Utility bills such as electricity, water, landline telephone bills, etc.

In cases where the Regulated Entities (REs) are satisfied that it is not possible to
furnish two such documents, Regulated Entities (REs) may, at their discretion,
accept only one of those documents as proof of business/activity.

Provided Regulated Entities (REs) undertake contact point verification and collect
such other information and clarification as would be required to establish the
existence of such firm, and shall confirm and satisfy itself that the business activity
has been verified from the address of the proprietary concern.

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4. Partnership Firm: Partnership is the relation between persons who have
agreed to share profits of business carried on by all or any one them acting for all
(Indian Partnership Act 1932). As per RBI instruction now Registration Certificate
and Partnership deed to be obtained. As per Indian Companies Act 2013,
Maximum number of partner can be up to 100 in a firm (Earlier number of partner
was restricted to 20 for other businesses & 10 for banking business). Partnership
is not a distinct legal person from the partners who have made partnership firm.
HUF cannot enter into a partnership as per Supreme Court judgement of 1998.
The firm should have PAN or GST Number. A partner cannot delegate his
authority to operate the account.

A minor cannot be a partner, but he can be admitted for his benefit in an existing
partnership firm. The particulars of minor partner, particularly the DOB should be
properly recorded.

In case of death/retirement/insolvency of a partner account should be stopped, if

the balance is in debit and a fresh account should opened after fresh sanction of
limit. In case of dispute when one partner revokes the authority against the other
partner, operation in the account should be stopped.

Dissolution of the Partnership firm can take place by following ways:

By mutual consent;

Death/insolvency/retirement of a partner;

Operation of Law (insolvency of all partners, business becoming unlawful,

dissolution by a competent court;

5. Limited Liability Partnership (LLP): A limited liability partnership (LLP) is a

partnership in which some or all partners (depending on the jurisdiction) have
limited liabilities.

LLP is governed by limited liability partnership Act 2008.

Liability is limited to the extent of his contribution in the LLP.

Minimum 2 designated partner and no limit on maximum number of Partners.

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A partner is not liable for another partner’s misconduct or negligence, except in
certain cases.

LLP is a legal entity separate from its partner. It has own assets in his name, sure
and be sued.

Since LLP contains element of both ‘a corporate structure’ as well as ‘a partnership

firm structure’ LLP is called a hybrid between a company and a partnership.

It has perpetual succession (death of a partner does not affect the existence of
LLP).

Partners have a right to manage the business directly. Firms and companies can
get themselves converted into LLP.

LLP cannot raise fund from public.

6. Companies: Companies are defined in Indian Company Act 1956. As per the
provision of Company Act 2013 (implemented with effect from 1st April 2014),
recognizes a joint Stock Company is a legal person with perpetual entity & is
distinct from its members. A company or association of persons can be created at
law as legal person so that the company in itself can accept limited liability for
civil responsibility. Because companies are legal persons, they also may associate
and register themselves as companies otherwise it will be treated as illegal.
Address of the registered office is compulsory. It is the address at which all the
documents & notices may be served upon the company. Cheques favouring
company are not to be credited to the personal accounts of the Directors or other
officers of the company.

Following documents are required for account opening of a company:

i) Certificate of Incorporation: Issued by Registrar of Companies. It is conclusive

proof for incorporation of the company & compliance of all formalities by
promoters.

ii) Certificate of commencement of business: A company having share capital

cannot commence business until it has obtained the certificate to commence
business (COB) from the concerned Registrar of Companies. Certificate of
commencement of business is not required by Private Ltd. Co. as its shares are
closely held & it can commence business on its incorporation.

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iii) Memorandum of Association: Company’s fundamental & unalterable law.
Embodies Company’s name, Authorized capital, Objectives of the company,
Liability of shareholders.

iv) Article of Association: Regulations controlling internal management of the

company. Rights & powers of the Directors, rules about conduct of company
meetings & business, Procedure for borrowing & limit on borrowing etc.

iv) Copy of Board Resolution: Certified copy of Board Resolution authorizing to

borrow from the Bank with details of limit, security etc., Persons who are
authorized to sign the security documents & operate the Bank Account, persons
in whose presence Seal of the company will be affixed to the security documents.

v) Company identification Number (CIN): As per RBI guidelines Company

Identification Number (CIN) assigned by the ROC is now compulsory for opening
of bank account of the company.

vi) Company common Seal: Common seal if any, of the company available should
be embossed on bank`s documents. As per Companies (Amendment) Act, 2015
and RBI instruction Company Common Seal is not necessary, if other documents
available during current account opening.

Different types of companies in India

a) Private Company: Private Company has shareholders with limited liability and
its shares may not be offered to the general public. Private Limited Company
having a no minimum paid-up share capital limitation now. (As per Companies
(Amendment) Act, 2015, paid-up share capital of one lakh rupee or such higher
paid-up share capital as may be prescribed is omitted now). It has minimum two
members and maximum member restricted to two hundred and Minimum two
directors and no maximum number of directors is restricted.

b) Public Company: Public company means a company which is not a private

company and has no minimum paid-up share capital limitation now (As per
Companies (Amendment) Act, 2015, paid-up share capital of Rs 5 lakh or such
higher paid-up share capital as may be prescribed is omitted now). Shares are
offered to the public & are listed on stock exchange.

Minimum seven members no limit of maximum number.

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Minimum 3 directors maximum 15 director limits. Provided that a company may
appoint more than fifteen directors after passing a special resolution (As per
Companies Act 2013, no Central Govt. permission required now).

At least one-woman director shall be on Board.

Certificate of commencement of business is must to do any type of business.

c) Government Company: “Government Company” means any company in which

not less than fifty one percent. Of paid-up share capital is held by the Central
Government, or by any State Government, or partly by the Central Government
and partly by one or more State Governments and includes a company which is a
subsidiary company of such a Government company.

d) One Person Company: The Companies Act 2013 Act introduces a new type of
entity to the existing list i.e. apart from forming a public or private limited
company, the 2013 act enables the formation of a new entity a ‘one-person
company’ (OPC). An OPC means a company with only one person having a sole
member [section 3(1) of 2013 Act]. An OPC can be formed only by an Indian
Resident and citizen.

e) Other Companies: As per Companies act 1956, companies can be classified on

the basis of time, place of incorporation and nature of working share capital as
follows:

i) Foreign Company: It means a company incorporated outside India and having

a place of business in India whether by itself or through an agent, physically or
through electronic mode and conduct any business activity in India in any other
manner.

ii) Existing Company: A company which is established before the Company Act
1956 is called Existing Company.

iii) Holding Company: A company is known as the holding company of another

company if it has control over another company.

iv) Subsidiary Company: A company is known as subsidiary of another company

when control is exercised by the latter over the former called a subsidiary
company. A company is to be deemed to be subsidiary company of another.

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7. Trust: Trusts are governed by the Indian Trust Act, 1882. A trust is created
when ownership of a property is transferred to someone for holding or managing
it for benefit of another person(s). Trust may be public charitable trust or private
trust (for benefit of private individuals). Trusts managed by trustees. Loan can be
granted if it is for the purpose of the trust. Trustee is authorised to borrow as per
the trust deed. Original Trust Deed to be examined before financing. Certificate of
Registration under Public Trust Act to be examined & copy to be kept on record.

8. Non-Corporate Bodies:

Clubs, Associations and the like are non-corporate bodies. These bodies, whether
registered or unregistered, are governed by their rules and bye-laws. The
following guidelines are to be observed while opening accounts of such bodies

Copy of the rules and bye-laws of the Club/Association/Committee is to be

obtained, duly certified by one of the office bearers as true, up to date and
correct. The rules and bye-laws are to be perused with particular reference to
activities of the body, powers of the office bearers, powers to borrow, operations
in bank accounts etc.

In the case of Unregistered Bodies – Account Opening form form should be

obtained along with the duly passed resolution and specimen signatures of the
authorised persons.

In the case of Registered Bodies , Account Opening Form should be obtained

along with specimen signatures of the authorised persons, Certificate of
Registration (for perusal and return after retaining a true copy thereof duly
certified) and copy of resolution authorising the opening and operation of the
account. The copy of the resolution should be signed by the Chairman /President
and countersigned by the Secretary.

All relative sections in the rules and bye-laws should be perused carefully and
all instructions regarding operations in the resolutions, are to be noted in Bank’s
Books.

For closure of accounts of non corporate bodies, a resolution along with a letter
for closure of the account, signed by all the authorised persons should be
obtained.

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Clubs & Societies: Clubs & Societies are non-profit making organisation and
represent a group of persons. These are normally incorporated under Cooperative
Society Act. Clubs can be registered under Society Act 1860, or Company Act
1956. These get the status of a legal entity only after their incorporation in their
own name. These are governed by rules & regulations (bye laws). Certified true
copy of resolution.

Cheques favouring society, club, association not to be collected in individual

accounts of office bearers or employees.

Executors/Administrators:

When a person dies intestate or has not named an executor, his estate will be
managed by administrators appointed by a Court of law.

If the deceased has left a will, naming executors, a probate is generally obtained
by the executors under the will, whereafter they manage the estate.

Original Will and Codicil if any, and Probate if any / Letters of Administration
should be called for perusal and returned and certified copies thereof are to be
kept for bank records. In the case of executors, unless the will / probate provides
otherwise, each can operate the account individually.

However, as a matter of precaution, written authority from all the executors is to

be taken, if it is desired that a few of them should operate the account.

In the case of administrators all must join in operating the account, unless the
Letter of Administration provides otherwise.

Accounts are to be opened in the individual names of the parties with the
addition of ‗Executor‘ or ‗Executor and Administrators‘ or ‗Administrators to the
estate of ...............‘. Instructions regarding operations on the account are to be
noted.

Government/Semi-Government Departments, Taluk/District Boards:

For opening accounts in the names of Government Departments (both Central

and State), Semi-Government Departments, Taluk/District Boards, Account
Opening Form is to be obtained signed by the concerned authorised Officer/s
along with the specimen signatures

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Application and specimen signature cards should be signed by the concerned
Government officials, in their official capacity only, viz., Secretary, Director etc.,
under seal of their respective offices.

A copy of the Government Notification/Order authorising the concerned Officer/ s

to open and/or operate the account has to be obtained, perused and filed.

Interest Free Deposits:

Banks are not permitted to open ‘Interest Free Deposits‘ for customers. However,
where a customer so intends, ’Interest free deposit account‘ can be accepted
under Current account.

A note to be made in the system as ‘Interest free deposit‘ account.

These accounts are exempted from the usual stipulations of current account, such
as maintenance of minimum balance, payment of service charges etc.

Special Types of accounts:

All monies contributed to a Provident Fund (whether by the employer / employee)

may be deposited in a Current/SB Account of a scheduled commercial bank as per
Rule 67 of IT Rules, 1962.

Opening of Provident Fund Accounts of school/Red Cross Society and its

employees:

i) For opening the account in the name of a School/Red Cross Society, usual
account opening form to be obtained. In addition, the opening of such an
account with us should be duly authorised by the Managing Committee of the
School/Red Cross Society by passing a Resolution to this effect and also naming
the person/s, who can operate the account. A certified copy of the same must be
obtained and preserved in Bank’s files.

ii) With regard to opening of PF accounts in the names of employees, the

following precautions / safeguards are to be taken :

a) No cheque books should be issued to any of the accounts thus opened,

obviously no withdrawals either by transfer or through loose leaf cheques in
individual accounts shall be permitted.

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b) At the time of making the final payment to the individual employee, a letter of
request in writing should be obtained from the concerned authorities duly
attesting the signature of the concerned employee.

c) Separate account opening forms from the individual employees for opening PF
account in their names, need not be obtained. However, a specific letter from the
concerned authorities requesting for opening an account in the name of the
employee containing the above said particulars, should be obtained.

Accounts of Schools/Head Masters:

In respect of Schools which are under ‘private management‘ the permission of the
concerned A.E.O. is not necessary. However, the bye-laws, rules & regulations etc.,
of the school have to be scrutinised and taken note of. Besides, a resolution
passed by the Managing Council of the School authorising the opening of the
account with the branch and informing the persons permitted to operate the
account should be obtained.

Accounts with Minor as Proprietor:

i) Even though Current Accounts in the names of minors should not be ordinarily
opened, under the following circumstances, such accounts may be opened:

ii) Section 26 of the Negotiable Instruments Act entitles a minor to draw, endorse
and negotiate a promissory note, bill of exchange or cheque so as to bind all
parties except himself. If the account is opened by a father as guardian paying in
money to be drawn by the infant, the banker can incur no risk by applying the
money according to the directions given at the time of opening the account.

As long as the accounts are not overdrawn, there cannot be any risk in opening an
account in the name of a minor whether it be an SB account or a current account.
If any over-drawings are permitted in the account, the minor may deny his liability
to pay such debts due to the Bank since his relationship with the Banker would be
that of debtor and a contract cannot be enforced against the minor.

Page 41 of 140
Accounts of Associate of persons:

As a rule, such accounts are normally not opened by the Bank. Unless
incorporated as a Company under the Companies Act or registered under any
other Act, any association of persons will have no separate legal status as an
entity and as such will have no powers to enter into contractual relations. Such
association cannot be sued in law and members thereof are not personally liable
for the borrowings by the Association unless documents in favour of the creditor
are executed by them in their individual capacities. If at all such accounts are to be
opened, the accounts should be opened in joint names of all persons or in the
name of association guaranteed by its members whose integrity is beyond any
question.

An Association for promoting art, commerce, religion or any other useful object
can be registered under Section 25 of the Companies Act as a company with
limited liability, with the permission of the Central Government. In such a case, all
the procedures required to be followed in the case of companies are to be
complied with.

If the association is registered under any other Act, its byelaws will have to be
carefully perused and the conduct of the account should be authorised by
suitable resolutions. Depending upon the nature and constitution of the
Association, suitable account opening form will have to be taken.

Association of persons having no separate legal status cannot become a partner

in a firm. Liability and obligations of members inter-se and to the outsiders are
governed by Memorandum of Association/ Byelaws, as the case may be.

Account in the name of a limited company - Receiver account:

A current account can be opened in the name of the receiver/ official liquidator
appointed by the court. It would suffice if documents as applicable for a single
(individual) accounts are obtained, accompanied by a letter of request in the
capacity of receiver/official liquidator and a certified copy of the order of the
court. Necessary note, mentioning the particulars of such order will have to be
made in the account.

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Accounts of Post Offices with Banks:

Current accounts of post offices can be opened in branches subject to the

following terms and conditions:

a) Opening of a current account with the branch should be specifically authorised

by the concerned higher authorities.

b) The official authorised to operate the account must be clearly stated in the
order for opening the account.

c) The account may be opened as : The Post Master, , Post Office,….

Accounts for issue of Dividend Warrants and Interest Warrants:

At the request of joint stock companies, we can handle the assignment of

payment of Refund Order/Dividend Warrant issued by the Companies.

The procedure is detailed here below.

A. Refund Order

i) When an Equity/Debenture Issue offered to the public is oversubscribed,

Registrar to the Issue decides the basis of allotment in consultation with a Stock
Exchange. Application Money (Subscription Money) of the successful applicants
(allottees) is adjusted to the capital account. Application Money of the
unsuccessful applicants (Non-allottees) is refunded. The instrument of Refund is
called ‘Refund Order‘.

ii) At the time of finalising the allotment, application Money (Subscription Money)
collected at various designated centres of the Bank/Other Bankers is pooled at the
Pooling Centre of the Main Bankers. For the purpose of refund, a separate
account is opened by the Company in a branch of one of its Bankers, providing
funds equivalent to the amount of Refund. The Company provides the Refund
Order funds by transferring the amount from the Subscription Money Pooling
account.

B. Dividend Warrant

i) On finalisation of accounts, at the end of a financial year, the company may, out
of its profits, declare a ‘dividend‘ to its share holders. The instrument of payment
of the dividend is called ‘Dividend Warrant‘.

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ii) From the moment of declaration of dividend, the company shall set apart the
amount so declared and shall not mix it with its own funds or appropriate it even
temporarily for its own use, as prescribed under Companies Act. The Company,
therefore, opens a separate account in one of the branches of its Bankers,
providing the amount of dividend declared.

Opening of RO/DW/IW Account

Prior permission of Controlling Office of Bank should be obtained before

accepting the assignment/opening the account.

Opening of separate bank accounts for election expenditure by candidates

(i) Each candidate is required to open a separate bank account exclusively for the
purpose of election accounting expenditure. Such an account can be opened
anytime, but not later than one day before the date on which the candidate files
his nomination papers.

(ii) Such a bank account can be opened either in the name of the candidate or
jointly with his election agent for the purpose of meeting election expenditure.
The said bank account should not be opened in the joint name with any family
member of the candidate or any other person, if he/she is not the election agent
of the candidate.

(iii) Such a bank account can be opened anywhere in the state. The existing bank
account of the candidate should not be used for this purpose as it has to be a
separate bank account for election purpose.

(iv) All election expenditures shall be met by the candidate from this bank account
only. All receipts meant for monetary expenses to be incurred by the candidate on
electioneering shall be deposited in this bank account, irrespective of its source of
funding including candidate‘s own funds.

(v) Bank shall allow withdrawal and deposits from such accounts on priority basis
during the election period.

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Directions of Election Commission of India:

(i) Bank should keep sufficient stock of cheque books for issue to the candidates
in case they approach for opening of current accounts during the election
process.

(ii) Bank should obtain specific mandate from the account holders (candidates and
their relatives) for disclosure of information of their accounts.

(iii) Banks to strictly follow the RBI guidelines regarding Enhanced Due Diligence
(EDD)/Politically Exposed Persons (PEPs).

@@@

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 02. Operational Aspects of Deposit Accounts
Topics covered in this Chapter are ----

Operational Aspects of Deposit Accounts, Operational Aspects of Handling

Clearing/Collection/Cash, Banker’s Special Relationship.

###

In the case of deposit accounts, the relation between the banker and a customer
is that of a debtor and creditor, with an added obligation on the part of the
banker to honour customer‘s cheques if the account is in credit.

Customer Identification and Address Proof :

As part of KYC norms it is required to undertake due diligence in respect of

proper identification of customers as well as unusual transactions in the accounts.

Cheque

A Cheque is a Bill of Exchange drawn on a specified banker and not expressed to

be payable otherwise than on demand and it includes the electronic image of a
truncated cheque and a cheque in the electronic form.

Crossing of Cheques:

There are two types of crossing viz., (i) General Crossing and (ii) Special Crossing.

General Crossing :

General Crossing consists of two parallel transverse lines drawn across the face of
a cheque with or without the words ‘ & Company‘ or ‘ & Co.,‘ or ‘Not Negotiable‘
between two parallel transverse lines.

General crossing ensures safety of a cheque by making it difficult for a wrong

person to receive payment of a crossed cheque, as the paying banker is required
to pay the crossed cheque only to another banker and not to the holder across
the counter. As another banker will collect a crossed cheque only for a customer,
the wrong person would find it difficult to receive payment of the crossed cheque.

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Special Crossing : Special Crossing means the name of a bank written across the
face of a cheque with or without two parallel transverse lines, and with or without
words such as ‘Not Negotiable‘ and the cheque is deemed to be crossed specially
to the bank so mentioned. The paying banker is required to pay the amount of a
specially crossed cheque only to the banker named in the crossing or his agent for
collection i.e., another banker to whom it is sent for collection by that banker to
whom it is crossed. Special crossing of a cheque further enhances the safety of a
cheque.

Cheque crossed ‘Not Negotiable‘ : The crossing of a cheque ‘Not Negotiable‘

does not render the instrument not transferable. The effect of such crossing is to
deprive the cheque of the important characteristic of negotiability viz., protection
to the holder in due course for value. A ‘Not Negotiable‘ cheque may be
transferred as freely as any other cheque. But if the transferor has no title to the
cheque, a transferee cannot obtain, even if he gives value for it, a better title to it
than the transferor had. The words, ‘Not Negotiable‘ act as a warning to anyone
to whom the cheque is offered, that if he takes it, he takes it subject to any defect
there may be in the title of the transferor.

Payment of cheque crossed specially to more than one Bank:

Where a cheque is crossed specially to more than one banker, except when
crossed to an agent for the purpose of collection, its payment should be refused.
(Section 127 of N.I. Act). In such cases the reason to be given is ‗Cheque crossed
to two banks‘. Further, if a cheque bears a general crossing as well as special
crossing, the cheque can be paid only to the bank mentioned in the special
crossing.

To enable the paying bank to know that one bank is collecting the payment for
the other, it is the practice to give direction to pay the cheque to the other bank,
on the reverse of the cheque such as:

Pay to State Bank of India for Punjab National Bank Manager.

Or

Pay to State Bank of India as agent for collection

For Punjab National Bank Manager

Page 47 of 140
Payment of cheques - some guidelines :

a) When an uncrossed cheque marked ‘Account Payee‘ without the parallel lines is
presented across the counter for payment, the same should not be paid except to
another banker.

b) If a bearer cheque is received in clearing, it can be paid:

i) even if there is no endorsement

ii) even if there is no certificate of the collecting bank

iii) if there is any endorsement on it, it need not be taken note of, and even
if the endorsement is irregular it can be paid.

c) If an order cheque is received in clearing, and if there is no endorsement on it,

legally the branch as paying banker can refuse its payment. But in practice it is
paid if the collecting bank has given certificate as:

‘Payee‘s account credited‘

Or
‘Payee‘s account will be credited on realisation‘
Or
‘Want of payee‘s endorsement guaranteed‘

d) Where the cheque bears an endorsement, as paying banker, it is the duty of the
branch, to verify that it is regular. The paying banker is not concerned whether the
endorsement is genuine. However, in practice the paying banker verifies not only
whether the payee‘s endorsement is regular but also whether the collecting bank
has either confirmed the endorsement or has certified that it is collecting the
cheques for the payee. The collecting bank‘s confirmation of endorsement or the
certificate that it is collecting the cheque for the payee may Be as under:

‘Payee‘s account credited‘

Or
‘Payee‘s account will be credited on realisation‘
Or
‘Endorsement/s confirmed‘

Page 48 of 140
It may be noted that legally the collecting banker is not bound to confirm
endorsements or give certificate that it is collecting the cheque for payee‘s
account or endorsee‘s account. If the endorsements are prima facie correct the
paying banker can pay the cheques and it cannot insist on such certificates.

However, in most of the places there is a practice of confirming endorsements

and/or giving such certificates by collecting bankers. Branches should be guided
by the practice prevalent at their centres.

Payment of ‘Account Payee‘ cheques through Private Bankers:

Private bankers (like multani bankers, partnership firms etc., doing banking
business) cannot be treated as ‘bankers‘ for the purpose of Section 129 of the N.I.
Act and payments made to them cannot be treated as payment in due course for
the purpose of Section 85 of the N.I. Act.

If such cheques drawn on us are received for collection from other banks and/or
our branches, they should be returned with the reason that ;Endorsement of the
private banker is not acceptable‘.

However, there is no bar in accepting third party cheques not crossed ‘Account
Payee only‘ for credit of accounts of private bankers if the endorsements are
otherwise in order.

Payment of crossed cheques not in due course - Banker‘s Liability:

Any bank paying a cheque crossed generally except to another bank, or a cheque
crossed specially except to the bank to whom it is crossed or to its agent for
collection, who should be a banker, runs the following risks:

i) cannot debit the drawer‘s account if the amount is not received by the true
owner of the cheque.

ii) is liable to the true owner of the cheque for any loss he may sustain owing to
the cheque having been so paid wrongly even though there is no privity of
contract between the banker and such true owner of the cheque.

iii) loses the statutory protection given to the paying banker, as the payment is
not payment in due course.

Page 49 of 140
Opening of Crossing :

The crossing on a cheque may be opened (i.e., crossing can be cancelled) only by
the drawer. He can do so by writing the words ‘Pay Cash‘ at the place where the
cheque is crossed and by affixing his full signature.

The words ‘Crossing cancelled‘ are also sometimes used by customers.

Cheque, on which the crossing is opened may be paid only to the drawer or to his
recognised agent or attorney. Due care should be exercised when such a cheque
is paid.

Provisions regarding collection of Account Payee Cheques crediting

proceeds to Third Party Account/S.

Banks should not collect account payee cheques for any person other than the
payee constituent.

Where the drawer/payee instructs the bank to credit the proceeds of collection to
any account other than that of the payee, the instruction being contrary to the
intended inherent character of the ―account payee‖ cheque, bank should ask the
drawer/Payee to have the cheque or the account payee mandate thereon
withdrawn by the drawer.

Instruments payable to third party but endorsed in favour of the account holder
should not be accepted for collection in SB accounts. Some public sector
undertakings issue pre-printed post dated cheques in respect of periodical
interest on bonds issued by them, which are transferable by endorsement.

Purchasers of bonds from public also acquire such endorsed post dated cheques.

In such exceptional and/or deserving cases, banks may use discretion to collect
third party instruments of the above nature provided

(i) instrument so tendered is not crossed ‘Account Payee‘ ;

(ii) Bank is satisfied that the account holder has come in possession of the
instrument not by virtue of any commercial transaction.

Branches should not collect the instruments (cheques / Refund Orders/ Dividend /
Interest Warrants) for societies Accounts unless the society is itself the payee.

Page 50 of 140
Co-operative credit societies can collect their customers‘ account payee cheques
through the member bank of the clearing house by submitting an undertaking to
credit the proceeds of the cheque to the payee‘s account only, upon realisation.

Banks may collect account payee cheques drawn for an amount not exceeding Rs
50,000/- to the account of their customers who are co-operative credit societies, if
the payees of such cheques are the constituents of such co-operative credit
societies.

While collecting the cheques as aforesaid, branches should have a clear

representation in writing given by the co-operative credit societies concerned
that, upon realization, the proceeds of the cheques will be credited only to the
account of the member of the co-operative credit society who is the payee named
in the cheque.

Collecting branch shall also carry out proper due diligence with respect to such
co- operative credit societies and ensure that KYC documents of the customers
are preserved in the society‘s records and are available to the bank for scrutiny.

To abide by the aforesaid requirements stipulated by RBI, banks have to obtain an

undertaking letter in prescribed format.

Endorsement

Section 15 of Negotiable Instruments Act, 1881 defines endorsement.

Endorsement consists of Signature of the maker or drawer of Negotiable

instrument or any holder thereof.

Intention of signing the instrument must be for negotiation.

The person who signs the instrument with the purpose of negotiation is called the
‘Endorser‘.

The person in whose favour instrument is transferred is called the ‘Endorsee‘.

The endorser may sign either on the face or on the reverse of the negotiable
instrument but according to the common usage, endorsements are made on the
reverse of the instrument.

If the space on the reverse is insufficient, a piece of paper known as ‘allonge‘ may
be attached thereto for the purpose of recording the endorsement.

Page 51 of 140
Types of Endorsements:

Endorsement in Blank

The endorser does not specify the name of the endorsee with the effect that an
instrument endorsed in blank becomes payable to bearer even though originally
payable to order and no further endorsement is required for its negotiation.

Endorsement in Full

If in addition to his signature, the endorser adds a direction to pay the amount
mentioned in the instrument to, or to the order of a specified person, the
endorsement is said to be ‘in Full‘ .

Conditional Endorsement

If the endorser of a negotiable instrument, by express words in the endorsement,

makes his liability or the right of the endorsee to receive the amount due thereon,
dependent on the happening of a specified event, although such event may never
happen, such endorsement is called a Conditional Endorsement. Conditional
endorsement does not make the instrument non-transferable. However, such
endorsements are generally not used.

Restrictive Endorsement:

Generally, an endorsee of a negotiable instrument is fully competent to negotiate

it further but Section 50 of N I Act permits restrictive endorsement which takes
away negotiability of such instrument. ―The endorsement may, by express words,
restrict or exclude the right to negotiate or may merely constitute the endorsee
an agent to endorse the instrument or to receive its contents for the endorser or
some other specified person‖. Such an endorsement prohibits further
endorsement and is called ‘Restrictive Endorsement‘.

Facultative Endorsement

In the event of dishonour of the instrument, endorsee must give notice of

dishonour to endorser to make him (endorser) liable on the instrument but
endorser may waive this duty of the endorsee by writing in the endorsement
‘Notice of dishonour waived‘. Such endorsement is called Facultative
Endorsement. By such an endorsement, endorser remains liable to the endorsee
for the non-payment of the instrument.

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Sans Recourse Endorsement

The French term ‘sans recourse‘ means without recourse. The words ‘sans
recourse‘ may be added by an endorser to his signature to free himself from his
own liability to the holder in the event of the bill or cheque being dishonoured.
When a cheque bearing a ‘sans recourse‘ endorsement is presented, the banker
cannot refuse payment of the cheque on the ground that unconditional
endorsement should be obtained. The only person who would be prejudiced by
such an endorsement would be those who became endorsers after ‘sans recourse‘
endorsement. By presenting the cheque for payment, they must be assumed to
have waived their objection, if any.

Allonge

The endorsements on a cheque/bill may be so numerous that the space on the

reverse of the cheque/bill may be insufficient to contain all the signatures.

In such a case, a slip of paper may be pasted on the cheque/bill for making any
further endorsements, which is known as allonge. The first person to endorse on
the allonge should write his signature partly on the cheque/bill and partly on the
allonge in order to take care of the risk of the two being separated. The
endorsement on the allonge is equivalent to endorsement on the cheque / bill
itself.

Collection of Cheques

It is necessary to examine these instruments as soon as they are received to find

out whether they are in order. For, if they are later returned on the ground of any
irregularity, this will unnecessarily lengthen the period of collection causing
inconvenience to the customer.

Cheques received for collection should be crossed and should be drawn in favour
of our customer or duly endorsed to him. They should be stamped with the
special crossing stamp (With Bank‘s name) immediately after they are received for
collection.

Page 53 of 140
Protection to Collecting Bankers

Section 131 of the Negotiable Instruments Act reads as follows:

‘A banker who has in good faith and without negligence received payment for a
customer of a cheque crossed generally or specially to himself shall not, in case
the title to the cheque proves defective, incur any liability to the true owner of the
cheque by reason only of having received such payment‘.

Explanation:

A banker receives payment of a crossed cheque for a customer within the

meaning of this Section notwithstanding that he credits his customer‘s account
with the amount of the cheque before receiving payment thereof‘

Thus this Section protects the collecting banker against defective title or want of
title of any previous holder of a cheque in case:

i) The cheque is crossed - crossed generally or to the Bank and

ii) The Bank has collected it for a customer in good faith and without
negligence.

Hence, to get protection, it should be seen that cheques when lodged for
collection are -

i) Crossed - The crossing must be made before the cheque gets into the
hands of the collecting banker. A banker cannot by crossing to himself an
uncrossed cheque, claim protection under the Negotiable Instruments Act.

ii) That the endorsements are apparently in order.

iii) That the collection is made for a customer. In good faith and without
negligence.

Protection to Paying Bankers

Section 85 of the Negotiable Instruments Act gives protection to the paying

banker as follows:

Where a cheque payable to order purports to be endorsed by or on behalf of the

payee the drawer is discharged by payment in due course.

Page 54 of 140
Where a cheque is originally expressed to be payable to bearer, the drawer is
discharged by payment in due course to the bearer thereof, notwithstanding any
endorsement whether in full or in blank appearing thereon, and notwithstanding
that any such endorsement purports to restrict or exclude further negotiation.

As per Section 10 of the Negotiable Instruments Act, ‘payment in due course‘

means payment in accordance with the apparent tenor of the instrument in good
faith and without negligence to any person in possession thereof under
circumstances which do not afford a reasonable ground for believing that he is
not entitled to receive payment of the amount mentioned therein.

Bearer Cheques payable to Partnership Firms:

Cash payment of an open (uncrossed) bearer cheque can be made to any person.
However, cheques favouring Partnership firms, even if they are open bearer
cheques should not be given credit to the personal account of a partner.

Payment of Order Cheques :

Where an Order Cheque endorsed in blank by the first payee has been verified or
attested by a person whose signature is known to the Bank, it can be paid to the
bearer against his acknowledgement on the reverse of the cheque.

Payment of cheques when amount in words and figures differs.

Where amount in words and figures mentioned in a cheque differs, the amount
written in words is to be paid. The amount written in figures has to be rounded off
and the correct amount debited to the account has to be noted in red ink just
above the amount written in figures.

Where such cheques are received as inward cheques for collection, the following
details should be noted in the realisation advice - ‘Amount written in figures `
differs with the amount in words. Therefore, the amount written in words is paid‘.
Where such cheques are received in clearing, the differential amount should be
reimbursed to/claimed from the concerned branch of the bank.

Where such cheques are presented across the counter, either by individuals or
banks, if the amount written in words and figures differs, the same may be
brought to the notice of the person presenting the instrument, informing him that
the amount written in words is only payable. If the presenter is not prepared to
accept the amount written in words, he may take back the cheque.

Page 55 of 140
Cheque Truncation System- Prohibiting alterations/ corrections on cheques-

The Accounts Section/ Branch Accounts Section (BAS) Departments/Clearing

Sections are passing the instruments based on the truncated images and it is
possible that during ‘imaging‘ the instruments, the alterations may not be
reflected, exposing the Bank to fraud risk.

As advised by RBI, no changes/corrections should be carried out on the cheques

(other than for date validation purposes, if required). For any change in the
payee‘s name, courtesy amount (amount in figures) or legal amount (amount in
words) etc., fresh cheque forms should be used by customers. This would help
Banks to identify and control fraudulent alterations.

Payment of Cheques bearing Non-Existent Date

Cheques bearing non-existent date such as 31st April or 30th February etc., if
otherwise in order may be paid on the preceding date. If such preceding date
happens to be a weekly holiday or a public holiday under the NI Act, payment
should not be made on the previous working day. It should be honoured only on
the 1st day of the succeeding month. They need not be returned only for the
reason that the date is non-existent.

Payment of Cheques after Business Hours

As a rule, cash payments should not be made after business hours or on holidays
under any circumstances, as such payments will be irregular under the Negotiable
Instruments Act.

However, as a special case, to extend service to customers in times of urgency, the

facility of encashing personal cheques to the drawer, even after business hours
can be provided subject to the certain precautions.

Marking of Cheques - Good for Payment

Some of the constituents may approach branches to mark their cheques ‘good for
payment‘. It should be noted that marking of cheques ‘good for payment‘ is
strictly prohibited.

Page 56 of 140
Payment of Cheques of Limited Companies and Others - Precautions :

Joint stock companies usually do not issue bearer uncrossed cheques for large
amounts. Hence whenever such cheques are presented for encashment at the
counter, branches should make proper enquiry. There have been cases of such
cheques being fraudulently altered by erasing the original figure, name of the
payee, etc., by chemical process. Hence the following precautions should be
taken:

Whenever branches have been provided with ultra violet lamps, such cheques
should be verified under the lamp.

As a matter of precaution, banks should recommend to companies who are

account holders to use only crossed cheques for issue to third parties.

Unless the company specifically requests otherwise, for any special reason such as
for cash drawings for office use, mostly printed crossed cheque leaves may be
issued to them. This will obviate the possibility of uncrossed cheques being issued
even by oversight.

It is advisable to take the above precaution in the case of other uncrossed

cheques for large amounts presented across the counter also.

Operation of Joint Account

The Joint Account opened by more than one individual can be operated by single
individual or by more than one individual jointly.

The mandate for operating the account can be modified with the consent of all
account holders.

The Savings Bank Account opened by minor jointly with natural

guardian/guardian can be operated by such guardian only.

The joint account holders can give any of the following mandates for the disposal
of balance in the above accounts:

Either or Survivor: if the account is in the name of two individuals says, A & B,
the final balance along with interest, if applicable, will be paid to either of account
holders i.e. A or B, on date of maturity or to the survivor on death of any one of
the account holders.

Page 57 of 140
Anyone or Survivor: If the account is in the name of two or more individuals say,
A, B & C, the final balance along with applicable interest (if any) , will be paid to
any of accountholders i.e. A or B or C, on the date of maturity.

On the death of any one of account holder say A, the final balance along with
interest if applicable, will be paid to any two of the surviving accountholders i.e. B
or C. On the death of any two of account holder say A and B, the final balance
along with interest if applicable, will be paid to surviving accountholder i.e. C.

Former or Survivor: If the account is in the name of two individuals say, A & B, the
final balance along with interest, if applicable, will be paid to the former i.e. A on
date of maturity and to the survivor on death of anyone of the account holders.

Later or Survivor: If the account is in the name of two individuals say, A & B, the
final balance along with interest, if applicable, will be paid to the latter i.e. B on
date of maturity and to the survivor on death of anyone of the account holders.

The above mandates will be applicable to or become operational only on or after

the date of maturity of term deposits. This mandate can be modified by the
consent of all the account holders.

If the joint depositors prefer premature withdrawal of deposits in accordance with

the mandate of ‘Either or Survivor’, ‘Anyone or Survivor’ , ‘Former or Survivor’, or
Later or Survivor, bank may allow premature withdrawal of term deposits to the
surviving depositor/s without seeking concurrence of legal heirs of the deceased
deposit holder, provided all the depositors have given a specific joint mandate for
the said purpose at the time of opening the account or any time subsequently
during the tenure of the deposit.

At the request of the depositor, the bank will register mandate/power of attorney
given by him authorizing another person to operate the account on his behalf.

The term deposit account holders at the time of placing their deposits can give
instructions with regard to closure of deposit account or renewal of deposit for
further period on the date of maturity.

In case of absence of any instructions deposits will be treated as an auto renewal

deposit and would be renewed for a similar period as that of matured deposit at
the prevailing rate on due date.(Except certain specified deposits like Tax Saver
deposits etc)

Page 58 of 140
Inoperative Accounts

A Savings as well as Current account should be treated as inoperative / dormant if

there are no transactions in the account for a period over two years.

For the purpose of classifying an account as ‘inoperative‘ both the type of

transactions i.e. debit as well as credit transactions induced at the instance of
customers as well as third party should be considered. However, the service
charges levied by the Bank or interest credited by the Bank should not be
considered.

There may be instances where the customer has given a mandate for crediting the
interest on Fixed Deposit account to the Savings Bank account and there are no
other operations in the Savings Bank account. In this connection, since the interest
on Fixed Deposit account is credited to the Savings Bank account as per the
mandate of the customer, the same should be treated as a customer induced
transaction. As such, the account should be treated as operative account as long
as the interest on Fixed Deposit account is credited to the Savings Bank account.
In such cases, the Savings Bank account can be treated as inoperative account
only after two years from the date of the last credit entry of the interest on Fixed
Deposit account.

At the time of review of the account where it is observed that there are no
operations except interest credits and debits towards charges in any account for a
period of one and a half years from the last date of operation, a letter requesting
for revival of the account should be sent to the account holder.

Above will provide an opportunity to the branch to get the account revived within
the next six months, thus obviating the need to transfer the accounts to
inoperative state and also accord a chance to the depositors to revive their
accounts under ‘operative‘ category.

On transfer to inoperative category, another request letter for revival should be

sent to the account holder.

Operations in the Inoperative accounts

Debits other than service charges, excess interest credited etc., in inoperative
accounts are to be permitted only after reactivating inoperative accounts to
operative account.

Page 59 of 140
Such accounts should be transferred to operative after obtaining a suitable letter,
identity proof and address proof afresh to make the account KYC compliant, from
the account holder.

Whenever such letters could not be obtained, for example, when a cheque is
received in clearing, or when a cheque issued favouring third party is presented
by other than the account holder, etc., operations in the account may be
permitted and bank has to send invariably a suitable letter to the customer
thanking him for reviving the inoperative account and inform him that the
account has been transferred to operative status from in-operative status. The
Thanks giving letter should be sent under Registered Post acknowledgement due.
The acknowledgement so received shall be preserved safely.

When inoperative accounts are reactivated all precautionary measures as

applicable to operations in New Accounts shall also be made applicable to such
reactivated accounts. Further operations in such accounts may be allowed after
due diligence as per risk category of the customers and also by ensuring
genuineness of the transactions, verification of the signature and identity etc.

While issuing cheque books/loose cheque leaves to inoperative account holders,

it should be ensured that the account holder is properly identified.

Garnishee Orders

Garnishee is a debtor of the judgement-debtor. When a creditor has obtained a

judgement against a debtor for the payment of the debt, he may obtain from the
Court an order attaching money owing to the debtor from a third person (here
the Bank). Such order is called a Garnishee Order.

The bank receiving a Garnishee Order should ensure that it is correctly addressed
to it. If it is addressed to the Bank‘s Head Office or any other office in the same
town, it should not be accepted duly explaining the position to the person serving
the Order and endorsing the notice to the above effect.

The bank should first check up whether it has any account in the name of the
judgement-debtor mentioned in the Order and satisfy that the name and address
given in the Order tally with the name and address of the account holder in the
system. If there is any discrepancy, the branch should write to the Court which
had issued the Order, seeking clarification pointing out the discrepancy.

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When a Garnishee Order is served by a Court on a banker, it attaches the credit
balance in the account/s of the judgement-debtor (customer) named, to the
extent specified in the Order. If no specific amount is mentioned in it, the
Garnishee Order attaches all sums (owing and accruing) due to the customer from
the Bank on the date on which the Order is served and no payment should be
made to the customer unless the Order is modified, withdrawn or cancelled.

Where the Garnishee Order specifies the amount which is attached, the branch
may allow the customer to operate on the account to the extent of the balance in
excess of the amount attached, after earmarking the amount as hold funds
specified in the Garnishee order, a note should be made in the system recording
these facts.

The Order does not affect future debts, i.e., debts which did not exist when the
Order was served and it is the usual practice of Banks to open a fresh account
through which all subsequent transactions are put through.

Debts due to the Bank can be adjusted towards credit balance before informing
the Court. If there is any indebtedness or obligation of the customer against which
the Bank has a right to set off credit balance in the account, such accounts should
be immediately adjusted and then the Court should be informed of the balance, if
any, as being held in credit in the account.

Term Deposit accounts of a person also stand attached by the Order even though
the Order is served before the due date of the Fixed Deposit/other term deposit.
In such cases the attachment should be noted but the payment should be made
only on the maturity of the term deposit.

Where amount of clearing cheques have been credited before realisation, on

receipt of the Order, while advising the credit balance to the authorities
concerned, a separate list be attached by showing (i) the actual credit balance in
the account and (ii) the amount representing the uncleared cheques.

A Garnishee Order served on the Bank on the account of a customer does not
attach the balance in the account standing in his name jointly with another
customer whether the account is operated severally or jointly.

To attach a joint account, the Order should be in the name of all the joint account
holders. But a Garnishee Order specifying two or more joint account holders
attaches the individual accounts of anyone of them.

Page 61 of 140
A Garnishee Order in the name of a partnership firm attaches the partnership
account as well as the private accounts of any of the partners. But an Order in the
name of one of the partners does not attach the account in the name of the firm.

In the case of proprietorship account any account in the proprietorship name

(trade name) is attached if a Garnishee Order states the name of the proprietor as
the judgement-debtor.

Lunacy of a Customer

On receipt of notice of lunacy of a customer, the bank should satisfy itself

regarding the customer‘s lunacy. A banker cannot rely on mere hearsay evidence
regarding insanity of a customer, but should have sufficient proof like Court‘s
order detaining a customer in a lunatic asylum, or confirmation of lunacy by a
physician etc.

On receipt of notice of proved lunacy of a customer, the operations in the account

should be stopped immediately and the fact should be noted in the bank’s
records. No cheque should be honoured thereafter and any cheque presented
subsequently (even if dated prior to the date on which insanity of the customer
came to the notice) should be returned with the reason ‘Mandate terminated‘ or
‘Insufficient mandate‘ and not ‘Customer insane‘.

Much care should be exercised while returning cheques to avoid any

unpleasantness as the same may lead to an action against the Bank for damages.
If any Court order is passed, it shall be complied with.

Customer should not be allowed to operate the account unless he is certified to

be sane again by the physician or by the Court.

In the case of joint accounts, on the insanity of one of the joint account holders,
the joint relationship stands cancelled. No operation in the account should be
allowed even by the sane account holder. No cheques in the account should be
paid whether signed by the sane or the insane account holder, even though
signed before insanity - irrespective of the fact whether the joint account is
payable jointly or payable to either or survivor or the account is to be operated
severally.

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In the case of partnership account, lunacy of a partner does not by itself bring
about dissolution of partnership unless so provided in the partnership deed. The
sane partners can be allowed to continue to operate the account. A cheque
signed by the insane partner should not be passed unless confirmed by all the
sane partners.

In the case of a Hindu Undivided Family (HUF), in the event of insanity of the
Kartha, the coparcener next in seniority automatically becomes the Kartha to
manage its affairs, and therefore the account can be continued undisturbed
provided, a fresh letter duly signed by all the other coparceners is obtained.

Cheques drawn by the Kartha who is insane, presented after receipt of notice of
his insanity should be paid only after getting the signature of the new Kartha.

In the case of Trust accounts, in the absence of any specific provision in the Trust
Deed authorising the other trustee/s to act and operate on the account in the
event of insanity of a trustee, the branch should not allow the sane trustee/s to
operate on the account.

In the case of accounts of Joint Stock Companies, on receipt of notice of insanity

of a person authorised to operate on an account of Joint Stock Company, the
outstanding cheques drawn by such a person on behalf of the Company before
his becoming insane can still be paid.

But if the Bank has any reason to suspect that the cheque was in fact drawn
subsequent to his becoming insane, it should be returned with the reason
‘Drawer‘s signature requires confirmation‘.

In the case of accounts of Associations, Societies and Clubs the same guidelines
may be followed as stated for accounts of Joint Stock Companies, above.

In the case of accounts operated by a Holder of Power of Attorney or Letter of

Authority, the guidelines given below may be followed:

a) On the insanity of the Principal, the authority in favour of the Attorney or the
person authorised under a Letter of Authority stands cancelled. Further operation
on the account should be stopped and cheque signed by Attorney or the person
authorised by a Letter of Authority should not be passed.

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 b) In case the Attorney or the holder of Letter of Authority becomes insane, the
cheques drawn by him and received subsequent to the notice of his insanity
should not be passed.

Insolvency of a Customer

When the Bank has notice of insolvency of a customer or of insolvency

proceedings instituted against any customer or of insolvency petition filed or
when an appointment of an Official Receiver or Official Assignee has been passed
against a customer, the banker should stop all operations in the account.

On demand by the Official Receiver/Assignee, the Bank should hand over to the
Official Receiver/Assignee all assets held. Subject to instructions given below, even
if a cheque dated prior to the drawer‘s bankruptcy is presented, such cheque
should be returned with the remarks ‘Refer to drawer‘ and not ‘Drawer is
Bankrupt/Insolvent‘. The bank, however, has the right to exercise its right of set off
or any other claim that it may have against the insolvent customer or his assets.

If any securities are held by the banker against a loan or overdraft, then, as a
secured creditor, the banker may proceed in any one of the following ways:

a) The Bank may rely on the security and not prove in the bankruptcy.

b) The Bank may realise the security and prove for the balance of any debt.

c) The Bank may estimate the value of the security and prove for the balance but
in such a case the Receiver has the right to redeem the security at the estimated
value.

d) The Bank may surrender the security and prove for the whole debt.

In case the bank remains out of insolvency proceedings, as a secured creditor it

has the right to dispose of the assets after giving notice to the Court or the
Receiver as the case may be, of the amount due and the particulars of the security
held by it. The bank should realise the security and thereafter sell the assets and
appropriate the net proceeds towards discharge of debt of the customer. Any
surplus remaining after adjusting the Bank‘s debts, vests in the Court (or Receiver).

Page 64 of 140
Insolvency - Joint Accounts :

On insolvency of a joint account holder, the joint relationship stands cancelled. No

operation in the account should be allowed whether by the solvent or the
insolvent account holder. No cheque should be paid whether signed by the
solvent or the insolvent account holder even though signed prior to his
insolvency.

Insolvency - Partnership Firms :

Insolvency of one of the partners:

In the case of insolvency of a partner, the partnership comes to an end if an

agreement to the contrary is not found in the Partnership Deed. The insolvent
partner ceases to be a partner and therefore does not remain competent to
operate the firm‘s account. The authority of the other solvent partners continues
notwithstanding the dissolution, for purposes of winding up of the affairs of the
firm but not otherwise. Cheques signed by a partner presented after he has been
adjudicated insolvent should not be honoured. The solvent partners should be
asked to close the existing account by drawing a cheque by all of them and open
a new account for subsequent transactions. In the case of continuation of the firm
also, the branch should request the continuing partners to close the existing
account and open a new account in the name of the firm to which the balance in
the existing account may be transferred.

Insolvency of a Firm :

An order of adjudication made against a firm has the same effect as if it were
made against each of the persons who at the date of the order is a partner in that
firm. All the property of the insolvent, whether property of the firm or their
separate property vest in the Official Receiver (or official Assignee in the case of a
Presidency Town). As such, in case of insolvency of the firm the authority of its
partners to act on behalf of the firm ceases. The operations in the account should
be stopped and cheques presented should not be honoured. Further, operations
in all the private accounts of individual partners also should be stopped as
insolvency of firm is in effect insolvency of all its individual partners.

Page 65 of 140
Insolvency - Hindu Undivided Family (HUF) :

An order of adjudication against a Hindu Undivided Family firm has the effect of
adjudicating as insolvents all the adult members of the family and all the assets of
the joint family firm vest in the Official Receiver/ Assignee.

In case the Kartha or the Manager of the HUF is adjudicated as insolvent in his
representative capacity, the position is the same as stated under clause above.

If the Kartha or other coparcener is adjudicated as insolvent in his individual

capacity, his separate property as well as the undivided share of the coparcener in
the HUF vest in the Official Receiver/Assignee.

Insolvency - Joint Stock Companies :

On receipt of notice of winding up of a company, the branch should stop

operation on the account and should not pass any cheque/s in the account.

DICGC Cover for Deposits

Deposit Insurance cover up-to Rs 500000/- is available in respect of amount due

to a depositor under DICGC Scheme.

Death of a Customer

On receiving notice of death of a customer other than an impersonal body like a

company, club etc., such as an announcement of death in newspapers, production
of a death certificate or a report from a reliable person etc., the fact should be
recorded in the records. Any cheque/s issued on the said account should not be
honoured subject to the position with regard to different types of accounts stated
below. However, if any credits are received, the same may be credited to the
account.

Death of a Customer - Individuals and Proprietorships :

If any cheque/s is/are presented across the counter or in clearing after the receipt
of the authentic information of death of the customer, they should not be paid
under any circumstances even though they bear a date prior to the date of death.

Page 66 of 140
Death of a Customer - Joint Accounts :

If a cheque is drawn by the party to the joint account who dies subsequently and
the said cheque is presented for payment, it should be returned unpaid whether
he has signed singly or jointly with another party to the joint account.

In case of a joint account, where operational instruction is ―Either or survivor or

No.1/Former/Later or survivors and where the joint depositor/s opted for
survivorship clause and authorised the bank to pay the deposit amount to the
surviving/any one of the surviving depositors and there is no order from the
competent court restraining the bank from making such payment:

(i) The balance will become payable to the survivor or survivors without reference
to the legal representatives of the deceased person/s. Hence account need not be
ruled off and no claim need to be preferred.

(ii) The name of the deceased should be deleted and any additions of one or
more names can also be permitted by obtaining Application and Specimen
Signature card, duly adhering to the extant procedure as applicable to new
customers.

However, the above provisions are not applicable in case of joint account where
operational condition is ―jointly, in such cases account should be ruled off and a
claim should be preferred by surviving depositors. Though the survivors may
continue the account, it is advisable to ask the surviving account holder/s to
withdraw the balance and deposit in a new account opened in the name of
surviving depositors.

Death of a Customer - Partnership Firms :

The death of a partner, ordinarily, has the legal effect of dissolving the firm. The
surviving partner/s can however operate the account for the purpose of winding
up the affairs of the partnership firm. If cheques drawn by the deceased partner
are presented after his death, they should not be paid without confirmation from
the surviving partners. The surviving partners should be asked to close the
account by drawing a cheque signed by all the surviving partners. A new account
may be opened for further transactions to be carried. A fresh mandate should be
obtained from the surviving partners to operate the fresh account.

Page 67 of 140
Where the firm has a debit balance at the time of a partner‘s death, operation in
the account should be stopped to fix the liability of the deceased partner and to
avoid the operation of the rule in Clayton‘s case.

Death of a Customer - Hindu Undivided Family - (HUF):

In the case of death of the Kartha, no cheques on the account should be

honoured from the time of notice of death as aforesaid.

Death of a Customer - Trusts :

On receipt of notice of death of any trustee, it should be ascertained from the

Trust Deed whether the remaining trustees can operate the account or a new
trustee is to be appointed in the place of the deceased Trustee. In the absence of
any specific provision in the Trust Deed, operations by the surviving trustees
should not be allowed. When all the trustees are dead, new trustees may be
appointed by the Court.

Death of a Customer - Executors and Administrators :

On the death of an executor or an administrator where there are more than one
executor or administrator, unless otherwise provided for in the Will or Probate, or
letter of administration, all the powers of the office become vested in the
surviving executors or administrators. The account should be allowed to be
operated by co-executor (s) or co-administrator (s).

Cheques signed by the deceased executor or administrator and presented after

notice of his death should not be paid. In the case of death of a sole executor or
administrator, a fresh order of the Court appointing a new administrator should
be obtained.

Death of a Customer - Joint Stock Companies ; Associations/Societies/Clubs :

Where notice of death of a person authorised to operate on the account of a Joint

Stock Company is received, outstanding cheques drawn by such person on behalf
of the Company can still be paid. The Board Resolution governing operation on
the account of the Company should be examined to see whether any amendment
or new resolution is necessary.

Page 68 of 140
Death of a Customer - Accounts operated by a P A or Letter of Authority

On the death of the Principal, the authority or Attorney or the person authorised
under the Letter of Authority stands cancelled. On receipt of notice of death of
the Principal, the operation of the account should be immediately stopped and
thereafter no cheque signed by the Attorney/the person authorised should be
paid as he ceases to act as an agent of the Principal.

On the death of the Attorney or the holder of the Letter of Authority, cheque
drawn by him and presented subsequent to the date of notice of death should be
returned.

Current Accounts

Current Accounts are designed to meet the needs of such sections of the public
who operate their accounts regularly and frequently. Traders, businessmen,
corporate bodies or the like receive money and make payments, very often.
Current Accounts are suitable to such categories of customers as there are no
restrictions on the number of withdrawals or deposits.

Savings Bank Account

Savings Bank account, as the very name suggests, is intended for savings for the
future. There are no restrictions on the number and amount of deposits that can
be made on any day.

The advantages of a Savings Bank account are :

It provides the facility to set apart a portion of one‘s earnings at reasonably good
rates of interest and helps in inculcating the habit of savings and thrift among
people.

It facilitates making payments by cheques and making recurring payments

through the account by giving standing instructions to the Bank.

It provides instant credit of outstation / local cheques up-to Rs 15,000/- to the

eligible account holders.

Collection of bills/ cheques

Collection of bills/ cheques and other such instruments is one of the subsidiary
functions of commercial banks.

Page 69 of 140
As Agents for Collection, the Bank is expected to exercise utmost care and
diligence in collecting bills / cheques, such as, keeping itself informed of the latest
position regarding presentation of such bills by the collecting branch / bank,
ascertaining the fate of the bill / cheque and communicating the same to the
lodger, etc. Failure or negligence in this regard if results in loss to the customer,
the bank may be called upon to make good the loss apart from getting adverse
publicity.

Banks should exercise proper care while collecting cheques for newly opened
accounts.

An Outward Sight for Collection (OSC) is a cheque, or a bill of exchange, or non-

negotiable instrument, drawn payable on demand, at an outstation place and
lodged for collection with the branch. The proceeds of such instruments are
credited / remitted to the party (lodger) after realisation of the same. Even
pension bills /grant bills / treasury bills / sub-treasury bills drawn or payable
outstation are to be treated as OSCs.

The cheques / instruments drawn on local banks who are not participating in
clearing, Post Offices, Treasuries, etc., should be treated as local OSCs - “LOSCs”.
Eg., cheques drawn on co-operative urban banks, Postal Orders, Post Office SB
cheques, Treasury bills, etc. For all practical purposes, LOSCs should be treated as
OSCs.

Bills are of two types, viz., `Documentary‟ bills and `Clean‟ bills. If a bill is
accompanied by documents of title to goods, such as, Railway Receipt, Lorry
Receipt, Bill of Lading, Boat Note, inland way bill etc., it is known as
`Documentary‟ bill. A `Clean‟ bill is a bill not accompanied by any documents of
title to goods.

If uncrossed cheques are collected, or if cheques are collected for noncustomers

(except for Banks), statutory protection for collection of cheques as per Section
131 of the Negotiable Instruments Act will not be available to the Bank.

Indian Banks‟ Association (IBA) has advised that banks should affix the date stamp
on Railway Receipts received for collection. Besides, they should affix their date
stamp also later when they are released / discharged.

However, care should be taken not to deface or disfigure any material information
in the Railway Receipts.

Page 70 of 140
Date Stamp should not be affixed on documents, such as, Share Certificates,
Cheques, National Plan Certificates, Postal Orders, National Savings Certificate,
etc., or on other documents of title to goods, such as, Bills of Lading, Lorry
Receipts etc.

The branch shall ensure that ‘Special crossing stamp’ is affixed on all cheques
tendered for collection.

Clearing

While exchanging the clearing instruments and settling the accounts at the
clearing house, the validity, legality or otherwise of the instruments is of no
consequence. Only amount payable/receivable to/from the banks is verified with
reference to the number of instruments and total amount mentioned in the
schedule/each instrument.

When the clearing is adverse i.e., the amount payable by us is more than the
amount received on a day, the bank conducting the clearing will debit the
difference to our account and when it is favourable, credit the difference to our
account.

If the balance in our account is not sufficient to meet the clearing deficit, we have
to remit cash/ request for funds transfer through RTGS/immediately to meet the
obligation. If there is substantial balance in our account due to favourable
clearing, the surplus should be transferred to our account of the pooling centre
with the RBI by way of RTGS/NEFT etc.,

@@@

Page 71 of 140
 03. Forex
Topics covered in this Chapter …….>

Foreign Exchange Remittance Facilities for Individuals, Operational Aspects

of NRI Business, Foreign Currency Accounts for Residents and Other Aspects
(Accounts in the name of NRIs)

###

Liberalised Remittance Scheme (LRS)

01. Under the Liberalised Remittance Scheme, all resident individuals, including
minors, are allowed to freely remit up to USD 2,50,000 per financial year (April –
March) for any permissible current or capital account transaction or a combination
of both.

02. The Scheme was introduced on February 4, 2004, with a limit of USD 25,000.
The LRS limit has been revised in stages consistent with prevailing macro and
micro economic conditions.

03. In case of remitter being a minor, the LRS declaration form must be
countersigned by the minor’s natural guardian.

04. The Scheme is not available to corporates, partnership firms, HUF, Trusts etc.

05. It is mandatory for the resident individual to provide his/her Permanent

Account Number (PAN) for all transactions under LRS made through Authorized
Persons.

06. The remittances can be made in any freely convertible foreign currency.

Page 72 of 140
07. Bankers should not open foreign currency accounts in India for residents
under LRS.

08. Banks including those not having operational presence in India are required to
obtain prior approval from Reserve Bank for soliciting deposits for their
foreign/overseas branches or for acting as agents for overseas mutual funds or
any other foreign financial services company.

09. The following are the prohibited items under the LRS.

a) Remittance for any purpose specifically prohibited under Schedule-I (like

purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item
restricted under FEMA.

b) Remittance from India for margins or margin calls to overseas exchanges /

overseas counterparty.

c) Remittances for purchase of FCCBs issued by Indian companies in the overseas

secondary market.

d) Remittance for trading in foreign exchange abroad.

e) Capital account remittances, directly or indirectly, to countries identified by the

Financial Action Task Force (FATF) as “non- cooperative countries and territories”,
from time to time.

f) Remittances directly or indirectly to those individuals and entities identified as

posing significant risk of committing acts of terrorism as advised separately by the
Reserve Bank to the banks.

10. Resident individuals (but not permanently resident in India) can remit up to
net salary after deduction of taxes. However, if he has exhausted the limit of USD
2,50,000 as net salary remittance and desires to remit any other income under LRS
and wish to further remit ‘other income’ may approach RBI with documents
through their AD bank for consideration.

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11. Individuals can avail of foreign exchange facility for the following purposes
within the LRS limit of USD 2,50,000 on financial year basis:

Private visits to any country (except Nepal and Bhutan); Gift or donation; Going
abroad for employment ; Emigration ; Maintenance of close relatives abroad ;
Travel for business, or attending a conference or specialised training or for
meeting expenses for meeting medical expenses, or check-up abroad, or for
accompanying as attendant to a patient going abroad for medical treatment/
check-up ; Expenses in connection with medical treatment abroad ; Studies
abroad. Any other current account transaction which is not covered under the
definition of current account in FEMA 1999. The AD bank may undertake the
remittance transaction without RBI’s permission for all residual current account
transactions which are not prohibited/ restricted transactions under FEMA. It is for
the AD to satisfy themselves about the genuineness of the transaction.

12. There are no restrictions on the frequency of remittances under LRS. However,
the total amount of foreign exchange purchased from or remitted through, all
sources in India during a financial year should be within the cumulative limit of
USD 2,50,000. Once a remittance is made for an amount up to USD 2,50,000
during the financial year, a resident individual would not be eligible to make any
further remittances under this scheme, even if the proceeds of the investments
have been brought back into the country.

13. Banks including those not having operational presence in India are required to
obtain prior approval from Reserve Bank for soliciting deposits for their
foreign/overseas branches or for acting as agents for overseas mutual funds or
any other foreign financial services company.

14. No ratings or guidelines have been prescribed under LRS of USD 2,50,000 on
the quality of the investment an individual can make. However, the individual
investor is expected to exercise due diligence while taking a decision regarding
the investments which he or she proposes to make.

Page 74 of 140
15. LLP is a body corporate and has a legal entity separate from its partners.
Therefore, if the LLP incurs/sponsors the education expense of its partners who
are pursuing higher studies for the benefit of the LLP, then the same shall be
outside the LRS limit of the individual partners and would instead be deemed as
residual current account transaction undertaken by the LLP without any limits.

16. If a sole proprietorship firm intends to remit the money under LRS by debiting
its current account then the eligibility of the proprietor in his individual capacity
has to be reckoned. Hence, if an individual in his own capacity remits USD 250,000
in a financial year under LRS, he cannot remit another USD 250,000 in the capacity
of owner of the sole proprietorship business as there is no legal distinction.

17. The following requirements to be complied with by the remitter :

a) The individual will have to designate a branch of an AD through which all the
capital account remittances under the Scheme will be made.

b) The applicants should have maintained the bank account with the bank for a
minimum period of one year prior to the remittance.

c) For remittances pertaining to permissible capital account transactions, if the

applicant seeking to make the remittance is a new customer of the bank,
Authorised Dealers should carry out due diligence on the opening, operation and
maintenance of the account.

d) Further, the AD should obtain bank statement for the previous year from the
applicant to satisfy themselves regarding the source of funds. If such a bank
statement is not available, copies of the latest Income Tax Assessment Order or
Return filed by the applicant may be obtained. He has to furnish Form A-2
regarding the purpose of the remittance and declare that the funds belong to him
and will not be used for purposes prohibited or regulated under the Scheme.

18. LRS does not envisage extension of fund and non-fund based facilities by the
AD banks to their resident individual customers to facilitate remittances for capital
account transactions under LRS. However, AD banks may extend fund and non-
fund based facilities to resident individuals to facilitate current account
remittances under the Scheme.

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19. No need to obtain prior approval to open, maintain and hold foreign
currency account with a bank outside India for making remittances under the LRS.

20. Under LRS we can not treat an Offshore Banking Unit (OBU) in India on par
with a branch of the bank outside India for the purpose of opening of foreign
currency accounts by residents.

21. The following facilities are available to persons other than individuals :

A) Donations up-to one per cent of their foreign exchange earnings during the
previous three financial years or USD 5,000,000, whichever is less, for-

(a) creation of Chairs in reputed educational institutes,

(b) contribution to funds (not being an investment fund) promoted by

educational institutes; and

(c) contribution to a technical institution or body or association in the field

of activity of the donor Company.

B) Commission, per transaction, to agents abroad for sale of residential flats or

commercial plots in India up to USD 25,000 or five percent of the inward
remittance whichever is less.

C) Remittances up to USD 10,000,000 per project for any consultancy services in

respect of infrastructure projects and USD 1,000,000 per project, for other
consultancy services procured from outside India.

D) Remittances up to five per cent of investment brought into India or USD

100,000 whichever is less, by an entity in India by way of reimbursement of pre-
incorporation expenses.

Anything in excess of above limits requires prior approval of the Reserve Bank of
India.

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22. A resident individual make a rupee loan to a NRI/PIO who is a close relative of
resident individual, by of crossed cheque/ electronic transfer subject to the
following conditions:

(i) The loan is free of interest and the minimum maturity of the loan is one year.

(ii) The loan amount should be within the overall LRS limit of USD 2,50,000, per
financial year, available to the resident individual. It would be the responsibility of
the lender to ensure that the amount of loan is within the LRS limit of USD
2,50,000 during the financial year.

(iii) The loan shall be utilised for meeting the borrower's personal requirements or
for his own business purposes in India.

(iv) The loan shall not be utilised, either singly or in association with other person,
for any of the activities in which investment by persons resident outside India is
prohibited, namely; the business of chit fund, or Nidhi Company, or agricultural or
plantation activities or in real estate business, or construction of farmhouses, or
trading in Transferable Development Rights (TDRs).

Explanation: For the purpose of item (c) above, real estate business shall not
include development of townships, construction of residential / commercial
premises, roads or bridges.

(v) The loan amount should be credited to the NRO a/c of the NRI /PIO. Credit of
such loan amount may be treated as an eligible credit to NRO a/c.

(vi) The loan amount shall not be remitted outside India.

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(vii) Repayment of loan shall be made by way of inward remittances through
normal banking channels or by debit to the Non-resident Ordinary (NRO)/ Non-
resident External (NRE) / Foreign Currency Non-resident (FCNR) account of the
borrower or out of the sale proceeds of the shares or securities or immovable
property against which such loan was granted.

23. A resident individual make a rupee gift to a NRI/PIO who is a close relative of
resident individual, by of crossed cheque/ electronic transfer subject to the
following :

a) The amount should be credited to the Non-Resident (Ordinary) Rupee Account

(NRO) a/c of the NRI / PIO and credit of such gift amount may be treated as an
eligible credit to NRO a/c.

b) The gift amount would be within the overall limit of USD 250,000 per financial
year as permitted under the LRS for a resident individual.

(Source : RBI’s FAQ dated 21st October, 2021)

Foreign Currency Account Opened in India

A Foreign Currency Account is an account held or maintained in currency other
than the currency of India or Nepal or Bhutan.

Cross-border transactions, being business or personal, involve payment and

receipts in foreign exchange across countries and India is a major participant in
the international environment. Persons resident in India may require foreign
currency at their disposal for various purposes as well as receive foreign currency
from overseas sources. Holding and spending of foreign currency is monitored
under Foreign Exchange Management Act (FEMA) and its relevant regulations
under the said Act. Under FEMA, since there is a cap on retention of foreign
currency, RBI has provided flexibility of holding foreign currency in specified bank
accounts in India.

A resident of India can open, hold and maintain foreign currency accounts in and
outside India. The Foreign Exchange Management (Foreign currency accounts by
a person resident in India) Regulations, 2015 regulates the foreign currency
accounts opened in India.

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A person resident in India can open a foreign currency account in India with an
authorised dealer. It is opened, held and maintained in the form of a current or
savings or term deposit account. The account can be held either singly or jointly
in the name of the person eligible to open, hold and maintain such an account.

Foreign Currency Account

A ‘Foreign Currency Account’ means an account held or maintained in a currency

that is not the currency of India or Bhutan, or Nepal. Any person who is residing in
India can open, hold and maintain a foreign account. ‘Person Resident in India’ is
defined under Section 2(v) of the Foreign Exchange Management Act, 1999
(FEMA).

‘Person resident in India’ means …….>

Every person residing in India for more than one hundred and eighty-two days
during the preceding financial year but does not include…..>

a person who has gone or stays outside India for taking up employment or
carrying a business or vocation outside India or any other purpose where he/she
indicates their intention to stay outside India for an uncertain period,

a person who has come to or stays in India, otherwise than for taking up
employment or carrying on business or vocation in India or any other purpose
where he/she indicates their intention to stay for an uncertain period in India.

Every person or body corporate incorporated or registered in India,

An office, agency or branch in India that is owned or controlled by a person

resident outside India,

An office, agency or branch outside India that is owned or controlled by a person

resident in India.

Foreign Currency Accounts Opened In India

The major foreign currency accounts which a person resident in India can open
are as follows –

a) Exchange Earners Foreign Currency (EEFC)

b) Resident Foreign Currency (RFC)
c) Resident Foreign Currency (Domestic) [RFC(D)]

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Exchange Earner’s Foreign Currency (EEFC) Account:
Exchange Earners can open the account.

Only Current Account can be opened under this Scheme (EEFC)

Balances in this account do not earn interest.

Joint Account can be opened under EEFC Scheme with eligible persons or with
resident relative(s) on former or survivor' basis.

Relative as defined under Companies Act, 2013 (viz. members of HUF, spouse,
parents, step-parents, son, step-son, daughter-in-law, daughter, son-in-law,
brother/sister, step-brother/step-sister)

Relative joint account holder cannot operate the account during the life time of
the account holder.

Permitted Credits to EEFC Account

a) 100% of foreign exchange received on account of export transactions

b) advance remittance received by an exporter towards export of goods or

services

c) Repayment of loans given to foreign importers

d) Disinvestment proceeds on conversion of American Depositary Receipt

(ADR)/Global Depositary Receipt (GDR)

e) professional earnings like director's/consultancy/lecture fees, honorarium and

similar other earnings received by a professional by rendering services in his
individual capacity

f) Interest earned on the funds held in the account

g) Re-credit of unutilised foreign currency earlier withdrawn from the account

h) Payments received in foreign exchange by an Indian startup arising out of

sales/export made by the startup or its overseas subsidiaries

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Permitted Debits to EEFC Account

a) Any permissible current or capital account transaction

b) Cost of goods purchased

c) Customs duty

d) Trade related loans and advances

Special Economic Zones (SEZ) developers can open, maintain and hold EEFC
accounts and credit their foreign exchange earnings to this account.

The claims which are settled in rupees by the Insurance companies or the Export
Credit Guarantee Corporation of India is not construed as the export realisation in
foreign exchange, and thus, the claim amount cannot be credited to this account.

The sum total of the accruals during the current month in the account should be
converted into Indian Rupees before the last day of the next month after
adjusting for utilisation of the balances for forward commitments or approved
purposes.

Credit facilities, both non-fund and fund-based, are not granted against the
balances held in this account.

The exporters can repay the packing credit advances, whether obtained in foreign
currency or Rupee from the balances in their EEFC account up to the extent of
exports that have actually taken place.

The balances in EEFC accounts can be credited to Non-Resident External (NRE)

account or Foreign Currency Non-Resident (Bank) [FCNR (B)] account at the
request or option of the account holders upon the change in the residential status
from resident to non-resident.

This account is useful for exporters who receive and keep foreign exchange
payments in the banks in India.

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Resident Foreign Currency Account (RFC)
Resident Foreign Currency (RFC) account can be opened by a person resident in
India with an Authorised Dealer (AD) bank in India out of foreign exchange
acquired or received by him/her from the following –

Foreign Exchange received as superannuation benefits, pension or any other

monetary benefits received from his employer outside India.

By converting assets acquired by a person when he/she was a non-resident or

through gift or inherited by a person resident outside India and repatriated to
India.

Received as the proceeds of the life insurance policy claims or maturity or

surrender values that are settled in foreign currency from an insurance company
permitted by the Insurance Regulatory and Development Authority for
undertaking the life insurance business in India.

The RFC account can be in the form of current or savings or term deposit.

Balance in RFC Accounts earn interest as per related scheme.

The funds in this account will be free from all restrictions regarding the utilisation
of foreign currency balances, including any restrictions on investments in any form
outside India.

The balances in the NRE account and FCNR (B) account can be credited to the RFC
account upon a change in the residential status of the Non-resident Indian (NRI)
to that of a Resident.

Joint Account can be opened under RFC Scheme with eligible persons or with
resident relative(s) on former or survivor' basis.

Relative as defined under Companies Act, 2013 (viz. members of HUF, spouse,
parents, step-parents, son, step-son, daughter-in-law, daughter, son-in-law,
brother/sister, step-brother/step-sister)

Relative joint account holder cannot operate the account during the life time of
the account holder.

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Permitted Credits to RFC Account

a) Foreign exchange received by him as superannuation/other monetary benefits

from overseas employer

b) Foreign exchange realised on conversion of the assets referred to in Sec 6(4) of

FEMA

c) Gift/inheritance received from a person referred to in Sec 6(4) of FEMA

d) Foreign exchange acquired before the July 8, 1947 or any income arising on it
held outside India with RBI permission

e) Foreign exchange received as earnings of LIC claims/maturity/surrendered

value settled in forex from an Indian insurance company

f) Balances in NRE/FCNR(B) accounts on change in residential status

Permitted Debits to RFC Account

No restrictions on utilisation in/outside India.

Resident Foreign Currency (Domestic) RFC-D Account

A person resident in India can open the Resident Foreign Currency (Domestic)
Account [RFC (D)] account in India out of the foreign exchange acquired him/her
in the form of banknotes, currency notes and travellers’ cheque from overseas
sources.

Only Current Account can be opened under RFC (D) Scheme.

Balance in RFC (D) Scheme does not earn any interest.

RFC(D) account is a current non-interest earning account with no ceiling on

balances in this account.

Permitted Credits to RFC (D) Account

a) Foreign exchange received as payment/service/gift/honorarium while on visit

abroad or from a non-resident who is on a visit to India

b) Unspent amount of foreign exchange acquired from AD for travel abroad

c) Gift from close relative

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d) Earning through export of goods/services, royalty

e) Disinvestment proceed on conversion of shares into ADR/GDR

f) Received as the proceeds of the life insurance policy claims or maturity or

surrender values that are settled in foreign currency from an insurance company
permitted by the Insurance Regulatory and Development Authority for
undertaking the life insurance business in India.

Permitted Debits to RFC (D) Account

Can be used for any permissible current/capital account transactions.

The balances in this account can be credited to the NRE account, or FCNR(B)
account at the account holders’ request or option upon the change in their
residential status from resident to non-resident.

The sum total of the accruals during the present month in the account should be
converted into Indian Rupees before the last day of the next month after
adjusting for utilisation of the balances for forward commitments or approved
purposes.

Accounts in India by Non-residents

A 'Non-resident Indian' (NRI) is a person resident outside India who is a citizen
of India.

A 'Person of Indian Origin (PIO)' is a person resident outside India who is a

citizen of any country/region other than Bangladesh or Pakistan or such other
country/region as may be specified by the Central Government, satisfying the
following conditions:

Who was a citizen of India by virtue of the Constitution of India or the

Citizenship Act, or Who belonged to a territory that became part of India
after the 15th day of August, 1947, or Who is a child or a grandchild or a
great grandchild of a citizen of India or of a person, or Who is a spouse of
foreign origin of a citizen of India or spouse of foreign origin of a person.

A PIO will include an 'Overseas Citizen of India' cardholder within the meaning of
Section 7(A) of the Citizenship Act, 1955. Such an Overseas Citizen of India (OCI)
cardholder should also be a person resident outside India.

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The major accounts that can be opened in India by a non-resident are

a) Non-Resident (External) Rupee Account Scheme [NRE Account]

b) Foreign Currency (Non-Resident) Account (Banks) Scheme [FCNR(B) Account]

c) Non-Resident Ordinary Rupee Account Scheme [NRO Account]

NRE Account
NRIs and PIOs can open NRE Account.

For opening NRE Account to Individual/entities of Pakistan and Bangladesh shall

requires prior approval of the Reserve Bank of India.

Joint NRE Account

NRE Accounts may be held jointly in the names of two or more NRIs/PIOs.

NRIs/PIOs can hold jointly with a resident relative on 'former or survivor' The
resident relative can operate the account as a Power of Attorney holder during
the life time of the NRI/PIO account holder.

NRE account is in Indian Rupees only.

NRE accounts can be opened as Savings, Current, Recurring, Fixed Deposit.

In case of Fixed Deposit, the term of deposit is one to three years, However,
banks are allowed to accept NRE deposits above three years from their Asset-
Liability point of view.

Permissible Credits to NRE Account

Credits permitted to this account are inward remittance from outside India,
interest accruing on the account, interest on investment, transfer from other
NRE/FCNR(B) accounts, maturity proceeds of investments (if such investments
were made from this account or through inward remittance).

Current income like rent, dividend, pension, interest etc. will be construed as a
permissible credit to the NRE account.

Care: Only those credits which have not lost repatriable character.

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Permissible Debits to NRE Account

Permissible debits are local disbursements, remittance outside India, transfer to

other NRE/FCNR(B) accounts and investments in India.

Balances in NRE Account are Repatriable.

Loans in India to NRE Depositors

Banks can sanction loans in India to the account holder/third parties without any
limit, subject to usual margin requirements. These loans cannot be repatriated and
can be used in India only for the purposes specified in the regulations. In case of
the loan sanctioned to the account holder, it can be repaid either by adjusting the
deposits or through inward remittances from outside India through banking
channels or out of balances held in the NRO account of the account holder.

NRE Account - Operations by Power of Attorney in favour of a Resident

Operations in the account in terms of Power of Attorney is restricted to

withdrawals for permissible local payments or remittance to the account holder
himself through normal banking channels.

NRE Account - Change in residential status from Non-Resident to Resident

NRE accounts should be designated as resident accounts or the funds held in

these accounts may be transferred to the Resident Foreign Currency (RFC)
accounts, at the option of the account holder, immediately upon the return of the
account holder to India for taking up employment or on change in the residential
status.

NRO Account
NRO Account can be opened by….

Any person resident outside India for putting through bonafide transactions in
rupees.

Individual/entities of Pakistan and Bangladesh shall requires prior approval of the

Reserve Bank of India.

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Citizen of Bangladesh/Pakistan belonging to minority communities in those
countries/regions i.e. Hindus, Sikhs, Buddhists, Jains, Parsis and Christians residing
in India and who has been granted Long Term Visa (LTV) or whose application for
LTV is under consideration, can open only one NRO account.

Joint NRO Accounts

NRO Accounts may be held jointly in the names of two or more NRIs/PIOs.

NRO Accounts may be held jointly with residents on 'former or survivor' basis.

NRO Accounts – Other Points

NRO account is in Indian Rupees only.

NRO accounts can be opened as Savings, Current, Recurring, Fixed Deposit.

Period of NRO Term Deposits is as applicable for Resident Deposits.

Balances in NRO Accounts are not repatriable except for all current income.
Balances in an NRO account of NRIs/PIOs are remittable up to USD 1 (one) million
per financial year (April-March) along with their other eligible assets.

Permissible Credits to NRO Account

Inward remittances from outside India, legitimate dues in India and transfers from
other NRO accounts are permissible credits to NRO account.

Rupee gift/loan made by a resident to a NRI/PIO relative within the limits

prescribed under the Liberalised Remittance Scheme may be credited to the
latter's NRO account.

Permissible Debits to NRO Account

The account can be debited for the purpose of local payments, transfers to other
NRO accounts or remittance of current income abroad.

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Apart from these, balances in the NRO account cannot be repatriated abroad
except by NRIs and PIOs up to USD 1 million, subject to conditions specified in
Foreign Exchange Management (Remittance of Assets) Regulations, 2016.

Funds can be transferred to NRE account within this USD 1 Million facility.

NRO Account - Operations by Power of Attorney in favour of a Resident

Operations in the account in terms of Power of Attorney is restricted to

withdrawals for permissible local payments in rupees, remittance of current
income to the account holder outside India or remittance to the account holder
himself through normal banking channels. While making remittances, the limits
and conditions of repatriability will apply.

NRO Account - Change in residential status from Non-Resident to Resident

NRO accounts may be designated as resident accounts on the return of the

account holder to India for any purpose indicating his intention to stay in India for
an uncertain period. Likewise, when a resident Indian becomes a person resident
outside India, his existing resident account should be designated as NRO account.

Loans in India to NRO Depositors

Loans against the deposits can be granted in India to the account holder or third
party subject to usual norms and margin requirement. The loan amount cannot be
used for relending, carrying on agricultural/plantation activities or investment in
real estate.

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FCNR(B) Account
NRIs and PIOs can open FCNR (B) Account.

FCNR (B) Accounts can be opened by Individual/entities of Pakistan and

Bangladesh shall requires prior approval of the Reserve Bank of India.

Joint FCNR (B) Accounts

FCNR (B) Accounts may be held jointly in the names of two or more NRIs/PIOs.

NRIs/PIOs can hold jointly with a resident relative on 'former or survivor' The
resident relative can operate the account as a Power of Attorney holder during
the life time of the NRI/PIO account holder.

FCNR (B) Accounts – Other Points

FCNR (B) Accounts can be opened in any permitted currency i.e. a foreign
currency which is freely convertible.

Under FCNR (B) only Term Deposits can be opened.

Period of Term Deposit – Minimum 1 year and not more than 5 years.

Balance in FCNR (B) is Repatriable.

Permissible Credits to FCNR (B) Account

Credits permitted to this account are inward remittance from outside India,
interest accruing on the account, interest on investment, transfer from other
NRE/FCNR(B) accounts, maturity proceeds of investments (if such investments
were made from this account or through inward remittance).

Current income like rent, dividend, pension, interest etc. will be construed as a
permissible credit to the NRE account.

Care: Only those credits which have not lost repatriable character.

Permissible Credits to FCNR (B) Account

Permissible debits are local disbursements, remittance outside India, transfer to

other NRE/FCNR(B) accounts and investments in India.

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Loans against FCNR (B) Deposits

AD can sanction loans in India to the account holder/third parties without any
limit, subject to usual margin requirements. These loans cannot be repatriated
outside India and can be used in India only for the purposes specified in the
regulations.

In case of the loan sanctioned to the account holder, it can be repaid either by
adjusting the deposits or through inward remittances from outside India through
banking channels or out of balances held in the NRO account of the account
holder.

FCNR (B) - Operations by Power of Attorney in favour of a resident

Operations in the account in terms of Power of Attorney is restricted to

withdrawals for permissible local payments or remittance to the account holder
himself through normal banking channels.

FCNR (B) - Change in residential status from Non-resident to resident

On change in residential status, FCNR(B) deposits may be allowed to continue till

maturity at the contracted rate of interest, if so desired by the account holder.

Bank should convert the FCNR(B) deposits on maturity into resident rupee deposit
accounts or RFC account (if the depositor is eligible to open RFC account), at the
option of the account holder.

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Diamond Dollar Account (DDA)
The firms and companies may open and maintain Diamond Dollar Account (DDA)
with the authorised dealer banks, subject to the following conditions:

The exporters must comply with the eligibility criteria laid down in the Foreign
Trade Policy of the Government of India, issued from time to time.

The DDA will be opened in the exporters’ name and maintained only in US
Dollars.

The account can be only in the form of a current account, and there is no interest
paid on balance held in the account.

No intra-account transfer is allowed between the DDAs maintained by the

account holder.

An exporter firm or company is permitted to open and maintain five or less than
five DDAs.

The balances held in the accounts are subject to Statutory Liquidity Ratio (SLR)
and Cash Reserve Ratio (CRR) requirements.

The exporter firms and companies holding and maintaining foreign currency
accounts, except EEFC accounts, with banks in India or abroad will not be eligible
to open DDAs.

The sum total of the accruals during the present month in the DDA should be
converted into Indian Rupees before the last day of the next month after
adjusting for utilisation of the balances for forward commitments or approved
purposes.

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Miscellaneous Points related to Non Residents
01. Persons resident in Nepal and Bhutan can open Indian rupee accounts with an
authorised dealer in India.

02. Accounts of a Tourist visiting India

An NRO (current/savings) account can be opened by a foreign national of non-

Indian origin visiting India, with funds remitted from outside India through
banking channel or by sale of foreign exchange brought by him to India. The
balance in the NRO account may be paid to the account holder at the time of his
departure from India provided the account has been maintained for a period not
exceeding six months and the account has not been credited with any local funds,
other than interest accrued thereon.

03. Accounts of Pakistan Nationals

Opening of accounts by individuals/entities of Pakistan nationality/ownership and

entities of Bangladesh ownership requires prior approval of the Reserve Bank.

However, individuals of Bangladesh nationality can open an NRO account subject

to the individual(s) holding a valid visa and valid residential permit issued by
Foreigner Registration Office (FRO)/Foreigner Regional Registration Office (FRRO)
concerned.

Further, citizens of Bangladesh/Pakistan belonging to minority communities in

those countries/regions, namely, Hindus, Sikhs, Buddhists, Jains, Parsis and
Christians residing in India and who have been granted Long Term Visa (LTV) or
whose application for LTV is under consideration, are permitted to open only one
NRO account with an AD bank in India subject to certain the conditions.

04. The residents can hold foreign coins without any limit.

05. A person resident in India is free to make any payment in Indian Rupees
towards meeting expenses, on account of boarding, lodging and services related
thereto or travel to and from and within India, of a person resident outside India,
who is on a visit to India.

06. Not permanently resident means a person resident in India for employment
of a specified duration (irrespective of length) or for a specific job duration which
does not exceed three years.
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07. A person resident in India may maintain a foreign currency account outside
India if he had opened it when he was resident outside India or inherited it from a
person resident outside India.

08. Status of the account held outside India on the demise of the account
holder.

A resident nominee of an account held outside India has to close the account and
bring back the proceeds to India through banking channels.

@@@

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 04 Cash Management Services and its Importance
In banking, both “Cash Management” and “Treasury Management” are terms for
certain services related to cash flow. Though these terms are commonly used
interchangeably, the scope of Treasury Management is much larger and includes
a company’s funding and investment activities.

Cash Management has changed significantly during the last two decades for Two
Reasons.

First: Over the years there was an upward trend in interest rates that increased the
opportunity cost of holding cash. This encouraged financial managers to search
for more efficient ways of managing cash.

Second: Technological developments, particularly computerized electronic funds

transfer mechanism changed the way cash is managed.

When finance professionals discuss services under the “cash management”

umbrella, they’re usually referring to services such as wire transfers, sweep
accounts, merchant services, and business credit options.

Running a business entails numerous parameters, including smooth operations

and administration, along with the ability to generate profits. At every step, we
need to have sufficient cash flows to manage our various expenses to ensure our
business runs like a well-oiled machine. We need cash to pay our employees,
vendors, utility bills, and more. We can manage all these expenses through Cash
Management Services.

Cash Management Services – Meaning

In banking, Cash Management Service is a marketing term for certain services

related to cash flow offered primarily to larger business customers.

Banks offer businesses a wide range of cash management services for smooth
cash inflow and outflow. Cash management services include managing incoming
money from customers with receivable solutions and at Point-of-Sale terminals.
Services covered under cash management include paying vendors, investors, and
employees.

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Types of Cash Management Services in Banking.

Products Offered by Banks Under Collections (Paper and Electronic)

Local cheque collections

High value (0 Day clearing)

Outstation cheque collections

Cash collections

ECS-Debit

Invoice collections

Products Offered by Banks Under Payments (Paper and Electronic)

Demand drafts/banker’s cheques

Customer cheques

Payable at par

RTGS/NEFT/ECS

Cash disbursement

Payments within bank

Capital market payments

Cash Management Services at POS Terminals

Businesses can receive payments at Point-of-Sale (POS) Terminals like merchant

stores.

Mobile POS: An MPOS is a smartphone device where customers can make

payments using bank cards.

ECD Terminal: These machines enable the swiping of credit and debit cards at
merchant stores.

QR Codes: Businesses can use digital payment apps and set up Quick Response
(QR) codes which customers can scan to make payments.

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Cash Management Services for Receivables

Businesses can receive payments from customers, banks, investors, shareholders,

etc. Banks typically provide the following cash management services to businesses
looking to accept payments in India.

Cash & Cheque Pick-up: Some banks offer multi-location cash pick-up, counting
and verification facilities, along with local and outstation cheque collection
services.

National Automated Clearing House (NACH): NACH is a National Payments

Corporation of India (NPCI)-backed service. It allows a business to debit low-value
transactions of larger volumes set up at uniform intervals, for example, Mutual
Fund SIPs paid by investors.

E-Collections: Through e-collection, your customers can get your business’

payment details and make recurring inward payments via Real Time Gross
Settlement (RTGS) and National Electronic Funds Transfer (NEFT).

Cash Deposit Machines (CDM): You can request your bank to set up
customisable CDMs in your business premises enabling high-value cash
collection.

Cash Management Services for Payables

Running a business also entails paying your vendors and stakeholders. Payable
cash management services in banking are as follows:

Cheque Printing: You can issue bulk cheques at the bank or your business
premises. The digital signature facility allows vendors to receive payments
instantly.

Bulk Fund Transfer: Through bulk payments, you can pay your employees and set
up multiple debits for vendors using NEFT and RTGS.

Cash Delivery: Banks also offer safe delivery of cash to your doorsteps as well as
to authorised recipients.

The key to running a business smoothly is systematically managing it. Banks can
help streamline our cashflows through effective cash management services.

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RTGS

The acronym “RTGS” stands for Real Time Gross Settlement. RTGS system is a
funds transfer mechanism where transfer of money takes place from one bank to
another on a “real time” and on “gross” basis. This is the fastest possible money
transfer system through the banking channel.

RTGS is primarily designed for high transaction amounts. As such, while there is
no maximum limit on the transfer amount, we need to transfer a minimum of INR
2 lakhs at a time.

RTGS is especially useful when the transaction amount is high, and payment
needs to be processed immediately.

The details required for a typical RTGS transfer are the name of the beneficiary,
account number and account type, name of the bank, and Indian Financial System
Code (IFSC) of the bank.

NEFT

NEFT stands for National Electronic Funds Transfer. It is a payment system where
the settlement of funds takes place in half-hourly batches.

It is a 24*7 vailable service of funds transfer wherein the transaction gets

processed in batches of half an hour. The RBI has not specified any minimum or
maximum limit on the transfer amount. All you need to provide is a few details of
the beneficiary to initiate an NEFT transfer.

The details required for a typical NEFT transfer are the name of the beneficiary,
account number and account type, name of the bank, and the Indian Financial
System Code (IFSC) of the bank.

RTGS vs. NEFT

The RTGS and NEFT difference can be best understood by the way each payment
system processes its transactions. While NEFT processes the transactions in half-
hourly batches, the transfers via RTGS are processed in real-time on a transaction-
by-transaction basis. One can say that the fundamental difference between NEFT
and RTGS is that while RTGS payments are based on gross settlement, NEFT
payments are based on net settlement.

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Similarly, NEFT transactions take around 2 hours to be processed, while RTGS
transactions are processed immediately.

While NEFT has no minimum or maximum limit on the amount to be transferred,

RTGS transactions can only be performed if the amount to be transferred is equal
to or more than Rs. 2 lakh.

IMPS (Immediate Mobile Payment Service)

While NEFT and RTGS payment processes have been initiated by the RBI or
Reserve Bank of India, IMPS was started by the National Payments Corporation of
India or NPCI.

IMPS is a very quick real-time inter-bank funds transfer system that is available
round the clock 365 days a year including bank holidays. Furthermore, this system
offers a real-time fund transfer facility on banks’ online channels such as mobile
banking, net banking, via SMS, and through ATMs.

The fund transfer from our account to our supplier’s account through IMPS is
done in a fraction of a second. All we need to do is to input the account number
along with the IFSC code of the beneficiary in order to complete the transaction.

The minimum limit for transactions through IMPS fund transfers is one rupee
whereas the maximum amount is capped to Rs. two lakhs. That is the reason why
retail customers across India prefer this fund transfer method over other systems
even for a small-value transaction.

Whenever an IMPS transaction is done, be it in banking or non-banking hours

whatever may be amount it gets transferred immediately.

The window of IMPS is open always

IMPS transactions can be done online only without visiting Bank Branch.

IMPS has the fastest transaction process among NEFT, RTGS and IMPS.

ECS

The Electronic Clearance Service (ECS) scheme provides an alternative method of

effecting bulk payment transactions like periodic (monthly/ quarterly/ half-yearly/
yearly) payments of interest/ salary/ pension/ commission/ dividend/ refund by
Banks/Companies /Corporations /Government Departments.

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ECS is a mode of electronic funds transfer from one bank account to another bank
account using the services of a Clearing House. This is normally for bulk transfers
from one account to many accounts or vice-versa. This can be used both for
making payments like distribution of dividend, interest, salary, pension etc. by
institutions or for collection of amounts for purposes such as payments to utility
companies like telephone, electricity, or charges such as house tax, water tax, etc.
or for loan installments of financial institutions/banks or regular investments of
persons.

Types of ECS

There are two types of ECS called ECS (Credit) and ECS (Debit).

ECS (Credit) is used for affording credit to a large number of beneficiaries by

raising a single debit to an account, such as dividend, interest or salary payment.

ECS (Debit) is used for raising debits to a number of accounts of

consumers/account holders for crediting a particular institution.

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 05 Protection & Responsibilities of Banks
(Collection and Payment of Cheques and Other Negotiable Instruments)

The paying banker gets protection under the Negotiable Instrument Act section
85, and the collecting banker gets protection under section 131.

If a banker plays both roles at the same time, then the banker can be called a
collecting banker but not liable as a paying banker.

Protection of Paying Banker

Section 10 - The paying banker can claim protection under the Negotiable
Instruments Act; the condition the banker has got to satisfy is that the payment is
in due course.

‘Payment in due course’ means payment following the apparent tenor of the
instrument in straightness and without negligence to someone in possession
thereof under circumstances which doesn’t afford an inexpensive ground for
believing that he is not entitled to receive payment of the quantity therein
mentioned.

Section 85 - This acts as the statutory protection of the paying banker.

Section 85(1) - In the case of an order cheque, this section implies that the
payment must be in due course; otherwise, the banker will be deprived of
statutory protection, and the banker must confirm the endorsements are regular.

Section 85(2) - This is the protection in the case of bearer cheque; this section
implies that even if any endorsements restrict further negotiation, the cheque will
retain the bearer character if it is originally issued as a bearer cheque.

Section 128 - This is the protection in case of a crossed cheque. This section
implies that the banker has made the payment in due course with good faith and
without negligence, as per section 10. The banker can cross the payment
following the requirement (section 126), that is, any banker through the general
crossing and specified banker in case of special crossing.

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Obligations of Paying Banker

The obligatory role of the paying banker while honouring cheques is-

Crossed cheque and open cheque- If a cheque is crossed, the banker must
check whether it is generally crossed or special crossed. In general crossing, the
owner needs to bring the cheque to the banker, and during the special crossing,
the banker will pay for the bank.

In an open cheque, the cash will be paid by the banker across the counter.

Proper form- A banker should check whether the cheque is in the proper form.

Cheque presentation and date of cheque- The cheque should consist of the
correct format and location. The banker must also check for the correct cheque
date; it should not be a post-dated or stale-dated cheque.

Words and figures- The sum of the amount needed must be written correctly,
and if it varies, the banker needs to deny the cheque.

Alterations and overwriting- The banker should take care of extra modifications
or changes made on the cheque.

Endorsements- The bearer cheque is not legally endorsed; thus, while making
payment, the banker should check all endorsements on the cheque.

Collecting Banker

A banker receives cheques from his client and behaves

as a holder for value, or

as his agent,

Banker as a holder for value

A banking entity becomes the holder for value in the below mentioned ways:

(a) by lending further with the same value of the cheque;

(b) By paying the amount of the cheque or any share of it in cash or in the
account before being sent for clearing

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(c) by committing to that client, either at the time or earlier , that he may draw the
cheque before it is cleared;

(d) by approving a current overdraft in avowed reduction of the check; and

(e) by providing cash for the cheque over the counter while it is in for collection.

Collecting Banker as an Agent

A collecting banker acts as the customer’s agent when he credits the check to the
latter’s account after a drawee’s banker actually pays the money. He then will be
permitted to take the sum of the cheque.

Conversion by the Collecting Banker

Often a banker is charged incorrectly converting checks to which his customer has
no title or defective title. It means an improper or morally wrong interference (i.e.,
use, sale, invading or taking) with the property of another person that is not
coherent with the owner’s right of possession. Negotiable instruments come
under ‘property’ so a banker could be responsible for conversion if he receives
cheques for a client who does not have a title or faulty instrument title.

Statutory Protection to Collecting Bank

As per Section 131 of the NI Act the collection banker is secured as under:

A banker who, in reasonable care and without fault, has accepted money for the
customer of a cheque crossed in particular or expressly for himself shall not incur
any liability for the true owner of the cheque, in the event that the title to the
cheque appears to be faulty, solely on the ground that he has received such
payment.

Duties of the collecting bank

The Negotiable Instruments Act, in Section 131 which offers immunity to the
collecting bank, specifies that the bank should not have been negligent amid
other conditions. The bank will have to prove that it has taken all the steps that
would be expected of a responsible banker to obtain a cheque to demonstrate
that the bank has not been careless. Over the years, these protections have been
developed based on practices and judicial declarations as duties placed on
bankers, which the bank can be responsible for failure to comply on the grounds
of negligence.

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The duties are given as below:

Obligation to open an account with references and sufficient documentary

evidence (Compliance with KYC and ALM Guidelines)

Obligations relating to Crossing and Special Crossing

The banking officer’s responsibility is to ensure the check is clearly crossed and to
deny collection if the cheque is handed over to another banker. Likewise, when
the check is moved into a certain account, the credit of the check will render him
liable for negligence without requiring any required inquiries.

Obligation to check the instruments or any obvious flaws in it

The instrument presented for collection will sometimes send a notice to the
banker that a customer who submitted the instrument is either committing a
breach of trust or mismanaging the money belonging to someone else. In the
event that a banker does not heed the warning requested by a prudent banker, he
could be held liable for negligence.

The obligation to know the status of the customer’s account

The collecting banker is required to know the status of the customer and different
dealings that have taken place in the customer’s account. It will be the banker’s
duty to take the necessary precautions if there are any amounts coming into the
account that are unlikely to be received by him and when collecting such cheques.

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 06 Ancillary Services of a Commercial Bank
Now a days along with basic banking functions like deposit and lending facilities
banks are rendering various other types of financial services to its customers.
These expansion in products and services are due to various factor such as high
competition among public, private and foreign banks, advancement of
technology, openness to national economies for business transitions and many
more. As time value of money is commonly known concept among public now a
days and they know the future opportunities for their money. They don’t just rely
only on saving accounts investment and investing in other investment schemes.
Thus, for the existence banks can not depend on the money being deposited by
the customers in the bank and had to venture in other financial services to earn
profit.

These banking services other than lending and deposit are known as Ancillary
Services. Some Ancillary Services are as following:

· Bank draft
· Mail/ telex transfer
· Fund Transfer (NEFT/RTGS)
· Travelers cheque
· Custodial Services
· Pension
· Merchant banking
· Retail banking
· Factoring
· Bank assurance/ Guaranty
· Mutual funds
· Sale and purchase of gold
· Insurance
· Foreign exchange / Forex services
· Notary services
· Bank cards
· Venture capitalist
· Internet banking
· Mobile banking

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1. Bank Drafts: Negotiable investment Act, Section 85 (A) says that a bank draft is
an order to pay money drawn by one office to the bank upon other offices of the
same bank for a sum of money payable to order on demand. In other words, a
bank draft is a payment on behalf of a payer that is guaranteed by the issuing
bank. Bank draft provide assurance to the payee for the payment. A bank draft is
kind of cheque where payment is guaranteed by issuer bank which is issues after
confirming enough in the payers’ account. With the introduction of RTGS and
NEFT, usage of this facility has come down drastically.

2. Mail/ Telex transfer: Mail transfer means transfer of money form one account
to another account of the same bank situated at different location. A mail transfer
is an internal message sent through ordinary postal channel advising the payee
branch or bank to pay the amount to a specific payee. When message is sent
through telex machine instead of postal channel then it is known as telex transfer
service. With the introduction of CBS, this has become redundant.

3. Fund Transfer (NEFT/RTGS): These are discussed in earlier Chapter in detail.

4. Travelers cheque: Traveller’s cheque is for a prepaid fixed amount and

operates like cash, so a purchaser can use it to buy goods or services when
traveling. A customer can also exchange a traveller’s check for cash. These
cheques are used by the traveller as they are safer and more convenient to travel
with instead of currency notes. Now a days these cheques are not common as we
have other convenient methods like plastic money.

5. Custodial Services: These services are commonly known a bank locker services.
Customer can keep your valuables like jewels, documents, etc in these lockers.
These lockers can be availed based on availability in the bank and after paying
some charges to the bank as fee for locker. In case of theft or loos bank only pay
insured money to the customers instead of real value of the articles were placed
in the locker.

6. Pension services: Pension is a social security scheme where a fixed sum

amount is paid to the retired and superannuated employees. Banks have
responsibilities to distribute the pension for different organizations. Pensioner is
supposed to open an account with the nearest bank branch and this amount
number is forwarded to the concerned pension department for direct credit to the
pension amount of the pensioner.

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7. Merchant banking: The corporate houses which generate capital by issuing
financial securities such as shares, bonds, debentures, mutual funds etc must face
disputes and problems related to it. To overcome such problems various financial
and nonfinancial institutions are providing specialized services of merchant
banking.

Basically, it is consultancy services which provides advices to its clients for

financial, marketing, managerial and legal matters related to financial and banking
services.

8. Retail banking: Retail banking, also recognised as consumer banking or

personal banking, is banking that offers financial services to the general public.
Services provided by retail banks include checking and savings accounts,
mortgages, personal loans, credit cards, and certificates of deposit. Most of the
customers of the banks visit to the local branch office where representatives and
managers provide customer services and financial advices.

9. Factoring: This is a financial service where all the services are provided which
starts form sale of goods and services and end with collection of receivables. A
factor is known as intermediary agent the finances receivables. A factor is
essentially a funding source that agrees to pay the company the value of an
invoice less a discount for commission and fees.

10. Bank assurance: Bank assurance is also known as bank guaranty. It means the
lending institution ensures that the liabilities of debtor will be met. Bank assures
another party on the behalf of a party that it will not fail to mitigate the promises.
If that party fails to keep its promises bank compensate another party and recover
its losses latter form the party which took bank guaranty from the bank.

11. Mutual funds: The basic purpose of mutual funds is to collect investment
form large number of the investors and depositors, then invent the capital in
diversified manner. These investment schemes reduce the risk of loss like equity
investments. These services are very beneficial for the investors who have little or
no knowledge of the investment and equity market.

12. Sale and purchase of gold: Commercial banks also deal in sale and purchase
of gold. Now a days all the banks are providing goad bonds on regular basis.
Apart form that bank also deals in purchasing and selling of cold coins and bars.
Customer purchase and sell gold through banks to avoid any chances or
fraudulent.
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13. Insurance: Commercial banks provide wide variety of the insurances like life
insurance, health insurance, vehicle insurance, insurance on loans etc. Banks are
providing insurance with the help of joint ventures with insurance companies like
PNB MetLife, SBI life etc.

14. Foreign exchange / Forex services: Commercial banks also deal with foreign
currency. These banks provide wide range of forex services mainly conversion of
currency. They also help the customers in selling and purchasing of foreign
exchange.

15. Notary services: A notary is an impartial witness to the signing or

authentication of a legal document. Banks in India extending Notary services such
as issuing life certificate (for Pensioners) and ID Proof which can be used in
government schemes.

16. Bank cards: Banks provide various types of cards to the customers like debit
cards, credit cards, gift cards etc. With the help of these cards the card holder can
transact without the help of hard cash currency. These cards are also known as
plastic money.

17. Venture capitalist: Venture is a concept where a new high-risk project is dealt
by an entrepreneur. Making the availability of fund for high risk project is known
as venture capital. These ventures have high risk with high returns. After
calculating the risk bank provide capital for such projects for higher returns.

18. Internet Banking: Such types of banking services provide the customer
facility to complete all the banking transactions without even visiting to the bank
physically. Sometimes bank charge nominal maintenance fee for availing the
internet services to the customers.

19. Mobile banking: As name says such services can be enjoyed with the help of
a smart phone and banking applications. Such services are similar like internet
banking with some limitations. Usually such applications can be installed in the
smart phone for free of cost.

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 07 Financial Inclusion & Financial Literacy
Financial Inclusion is described as the method of offering banking and financial
solutions and services to every individual in the society without any form of
discrimination.

It primarily aims to include everybody in the society by giving them basic financial
services without looking at a person’s income or savings.

Financial inclusion chiefly focuses on providing reliable financial solutions to the

economically underprivileged sections of the society without having any unfair
treatment.

It intends to provide financial solutions without any signs of inequality.

It is also committed to being transparent while offering financial assistance

without any hidden transactions or costs.

Financial inclusion wants everybody in the society to be involved and participate

in financial management judiciously.

The economically underprivileged people of the society may also not have proper
documents to provide to the banks for verification of identity or income. Financial
inclusion aims to eliminate these barriers and provide economically priced
financial services to the less fortunate sections of the society so that they can be
financially independent without depending on charity or other means of getting
funds that are actually not sustainable.

Financial inclusion also intends to spread awareness about financial services and
financial management among people of the society.

Moreover, it wants to develop formal and systematic credit avenues for the poor
people.

Financial Inclusion Schemes in India

The Government of India has been introducing several exclusive schemes for the
purpose of financial inclusion. These schemes have been launched

Pradhan Mantri Jan Dhan Yojana (PMJDY)

Atal Pension Yojana (APY)

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 Pradhan Mantri Vaya Vandana Yojana (PMVVY)

Stand Up India Scheme

Pradhan Mantri Mudra Yojana (PMMY)

Pradhan Mantri Suraksha Bima Yojana (PMSBY)

Sukanya Samriddhi Yojana

Jeevan Suraksha Bandhan Yojana

Credit Enhancement Guarantee Scheme (CEGS) for Scheduled Castes (SCs)

Venture Capital Fund for Scheduled Castes under the Social Sector
Initiatives

Varishtha Pension Bima Yojana (VPBY)

Financial Inclusion for Women Empowerment

Financial inclusion is very particular about including women in financial

management activities of a household. Financial inclusion believes that women
are more capable of handling finances efficiently when compared to men of a
house. Hence, financial inclusion activities target women by helping them get
started engaging in financial management.

Financial Inclusion with the Help of Financial Technology (Fintech)

With the introduction of financial technology or fintech, financial inclusion is

improving extensively across the whole world. Fintech companies have also been
successful in offering financial services and products at minimal costs. This is very
helpful to customers as their expenses are low and they can distribute their
savings to their other needs also. The evolvement of such processes will help in
including the underbanked or unbanked people of the society.

Financial Inclusion through Digital Payment Systems

They can also make payments for products and services in their residential regions
with the help of electronic payment wallet systems. The Government of India has
launched several electronic wallet systems through smartphone apps such as
Bharat Interface for Money (BHIM), Aadhaar Pay, and lots more!

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Impact of Demonetisation on Financial Inclusion

With the implementation of the demonetisation process in India in the year 2016,
the need for digital financial services has risen. Many people belonging to low-
income groups also started to utilise electronic wallet options as they did not
have any other choice. Many of them struggled initially due to the demonetisation
process.

Several low-income people, unemployed people (including people who were

illiterates) living in both rural and urban areas started to learn about how to open
a bank account, how to apply for credit, how to use technology for banking
services, how to avail financial services without standing in long lines, and how to
carry out transactions without carrying cash in hand.

Financial Inclusion Programmes - Reserve Bank of India (RBI)

The Reserve Bank of India works on exclusive programmes and plans in order to
have financial inclusion in the nation effectively. It applies a bank-led strategy in
order to attain financial inclusion smoothly. The RBI also is offering qualified
assistance to every bank in the nation in order to attain its financial inclusion
objectives.

The RBI instructed every bank to have Basic Saving Bank Deposits (BDSD)
accounts for the economically weaker sections of the society. These are no-frill
accounts where account holders do not have to maintain any minimum balance or
minimum deposit. These account holders can withdraw cash at any ATM or at the
bank branch. They should also be given the opportunity to make use of electronic
payment channels for receiving and transferring money to others.

Banks have been asked to accept Aadhaar Card as identity proof as well as
address proof since most people belonging to low-income groups have made
Aadhaar card in their names.

The RBI also asked banks to have simple Know Your Client (KYC) regulations for
the less fortunate people of the society. There are many people in rural areas who
are unable to open bank accounts due to strict KYC norms. Hence, the RBI wants
banks to have simplified KYC requirements particularly if a low-income individual
is interested in opening a bank account with an amount not above Rs.50,000. It
also wants minimal KYC norms if the overall credit in the accounts does not go
above Rs.1 lakh for 1 year.

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Keeping in mind about the lack of bank branches in rural areas, the RBI has asked
all banking institutions to open more and more branches in villages across the
nation in order to provide good banking services to the villagers. There are many
remote villages where there are no banks and also no good transportation
services. It is very difficult for residents of these areas to commute to a far-off
bank branch for availing banking services. Hence, with the compulsory rule of the
RBI, banks are distributing the ratio of banks in villages and cities to have a
balance.

Operations of Financial Inclusion

Under financial inclusion, the main aspect is access to financial sources. This can
be broadly divided into credit, wealth creation, and contingency planning.

According to the concept of financial inclusion, under the credit aspect, a low-
income individual needs proper access to emergency loans, consumer loans,
housing loans, and business livelihood loans at affordable rates.

Under the wealth creation aspect, a poor individual should be able to make
excellent savings and have access to reliable investment options that generate
good returns. Every low-income household should also have basic financial
literacy and understand the concept of risk in finance clearly.

Under the contingency planning segment of the financial inclusion system, a poor
person should have access to funds that can be utilised exclusively in the future. It
is not enough if these people have only means to improve their income and
enhance their lifestyle. They should also have the right resources to be prepared
for the future, especially when they get old. Many of the poor people may not be
aware of retirement plans. They should be provided with affordable retirement
plans that will give them good returns in the later stages of their lives.

They should also be given insurable contingencies to keep themselves safe and
secure. Many less fortunate people do not even think of taking a life insurance
policy or a vehicle insurance policy due to the high costs involved. Insurers should
offer insurance options at subsidised premiums to the economically weaker
sections. These insurance policies will give them coverage and prevent them from
paying exorbitant compensation costs when something unforeseen or
unfortunate happens to them or their family.

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They should also be given buffer savings in order to be prepared and ready for
unforeseen or emergency expenses. This way, they would not have to go to their
relatives or friends or moneylenders for monetary support. They can be financially
ready always.

The Reserve Bank of India is promoting the establishment of Financial Literacy

Centres (FLCs). It has made many modifications and revisions regarding the
functioning of Financial Literacy Centres (FLCs). The rural branches of various
scheduled commercial banks and financial literacy centres are now required to
improve financial awareness on a larger scale and enhance their financial literacy
activities by organising catchy and simple financial literacy camps. These camps
can be held outdoors under a tree or in some other open space by having
financial awareness camps on a monthly basis or more frequently. Financial
literacy camps work towards imparting financial literacy and offering convenient
financial access to low-income people of the society.

With the objective of distributing the branches of scheduled commercial banks

(SCBs), the RBI has instructed banks to establish their branches in Tier 2 to Tier 6
centres that have less than 1 lakh people. These branches can be opened with a
general permission from the RBI. In Sikkim and North-Eastern states, scheduled
commercial banks can set up branches without even getting any approval from
the RBI. They are free to open any branch in these states. The RBI is also working
to liberalise the functioning of commercial banks apart from regional rural banks
(RRBs) so they can open branches in Tier 1 centres with a general permission.

The scheduled commercial banks have been asked to utilise information and
communications technology (ICT) to offer affordable digital banking services.
Banks have also started to offer door-step delivery of bank accounts, loans, and
other financial services with the help of technology. Moreover, with the
introduction of technology in banking, it is okay if customers are illiterates. They
can make use of technological devices and operate through biometrics. This also
makes sure that customers have safe and secure transactions without any scope
for scams or frauds.

The Reserve Bank of India enabled scheduled commercial banks to get business
correspondents (BCs) as well as business facilitators (BF). These BCs and BFs will
play the role of intermediaries for the purpose of offering banking services to
customers across the nation.

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The business correspondent strategy promotes delivery of banking products at
the doorstep of the customers. They also offer cash transactions and hence, this
makes it easier for people who live in rural areas where there are not too many
banking branches and not proper modes of transport for them to commute to
nearby towns or cities.

These business correspondents can be individuals as well as organisations or

entities that serve as intermediaries between banks and customers. There are
many people and entities that are ready to take up the role of a business
correspondent. Both non-profit organisations and for-profit companies are
allowed to serve as business correspondents. This is a great milestone in the field
of banking.

Financial Inclusion in India

In the year 2005, the Khan Committee Report was released which mainly
discussed rural credit and microfinance.

The Khan Committee report laid an emphasis on providing access to essential

financial services by helping them to open a bank account that does not come
with any frills or complicated elements. All banks were asked to minimise
regulations regarding account creation processes for the economically weaker
sections of the society. Several banks were asked to work together towards 100%
financial inclusion by taking part in campaigns started by the RBI.

Chief Aspects of an Integral Financial Integral Strategy

Every country has a financial integral strategy in order to build its financial sector
comprehensively and sustain its condition consistently for several years. The
strategy also works towards strengthening the financial system of the economy
whenever there are fluctuations in the financial market.

The 3 main elements of an integral financial strategy are financial literacy or

education, financial stability, and financial inclusion.

Special Financial Products Offered for attaining Financial Inclusion

Keeping in mind that low-income people living in rural and urban areas have very
limited access to financial products and services, scheduled commercial banks
(SCBs) have been asked by the Reserve Bank of India to design and offer exclusive
financial products to the economically weaker sections of the society.

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Some of the special financial products provided to them include:

General Credit Cards (GCC)

Kissan Credit Cards (KCC)

ICT-Based Accounts via BCs

Increase in ATMs

Financial Inclusion through Microfinance

Microfinance is a very effective way of offering funds to the economically

underprivileged sections of the society. Microfinance refers to giving micro loans
or micro credit to the less fortunate entrepreneurs and small-scale business
enterprises. This mode of financing has helped India extensively in achieving
financial inclusion in a cost-effective manner. It has impacted the lives of the
poorest people in the nation. It includes the provision of loans, savings
instruments, and other financial instruments for the purpose of making more
money and saving it proficiently for multiple purposes.

Financial Inclusion with the Help of Private Companies

Private companies have also initiated programmes in order to contribute towards

achieving financial inclusion in the nation. These private companies planned and
implemented projects in order to make the low-income groups of people be
engaged in developmental projects.

Over the past few years, financial inclusion has become a very prominent public
policy aspect in order to develop the economy in a sustainable manner. It plays a
significant role in keeping institutions that provide finance in a very steady and
firm condition. Banks can enjoy excellent stability when financial inclusion is
attained. With financial inclusion, every economic agent in the nation will have the
ability to make use of formal financial services and move towards the overall
development of the economy.

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Financial Literacy in India
The Organization for Economic Cooperation and Development (OECD) defines
financial literacy as "A combination of awareness, knowledge, skill, attitude and
behaviour necessary to make sound financial decisions and ultimately achieve
individual financial wellbeing."

Simply put, financial literacy allows a person to make a robust and viable financial
plan, in keeping with his resources & income, to meet his present and future
needs.

In consonance with the OCED’s global paradigm, the National Strategy for
Financial Education aims at:

Spreading awareness about basic financial products, such as bank accounts,

in order to link new users to the financial sector.

Educating the existing users in the financial sector to make informed

decisions.

Ensuring customer protection from risks and frauds by making them

vigilant.

In order to promote financial literacy in India, individuals should be imparted with

relevant skills and knowledge at various levels, but mainly in school and college.
The basic financial education at the intermediate and college level must include:

A robust understanding of financial planning

Knowledge of usage of basic financial products
Effective money management
Debt management
Prioritizing needs over wants
Understanding effective investment instruments, like SIP
Understanding terms of EMI

Mere access to financial services does not ensure promoting financial literacy. It is
the knowledge of financial products, and its regular application that will bring
about the desired change.
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 08 Customer Service
(Guidelines, Duties & Rights of a Banker and Customer Rights, Grievance
Redressal & RBI Integrated Ombudsman Scheme 2021, The Consumer
Protection Act, 2019)

Customer service is the service provided in support of a bank’s core products.

Customer service often includes answering questions; handling complaints.
Customer service can occur on site (as when an onstage employee helps a
customer or answers a question) or it can occur over the phone or the Internet.
Quality customer service is essential to building cordial customer relationship.

Banking being a service industry, a lot depends on efficient and prompt customer
service. Customer service is the most important duty of the banking operations.
Prompt and efficient service with smile will develop good public relations reduce
complaints and increase business.

Importance of Customer Service

Changing customer expectations: Today the customer is more demanding and

more sophisticated than he or she was thirty years ago.

With changing customer expectations, competitors are seeing customer service as

a competitive weapon with which they differentiate their products and services.

The need for a relationship strategy: To ensure that a customer service strategy
that will create a value preposition for customers should be formulated
implemented and controlled. It is necessary to give it a central role and not one
that is subsumed in the various elements of the marketing mix.

The customer is the kingpin in growth organizations like commercial banks. Only
those institutions which work according to his dictates will flourish.

Quality, Consistency and Durability at low price are the final expectations of a
customer.

Quality will have to be unambiguous, of world class quality. Quality cannot be of

minimum acceptable standards. Customer responsiveness must be quick and also
competent. Speed, performance and cost will be the new values “mantra” for
success.

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The ten key areas of customer’s services to be attended timely and regularly are:

Submission of statement of A/Cs to customers

Updating of savings pass books.

Teller system efficiency.

Cleanliness and Upkeep of premises.

Intermediate Credit for institution cheques/land bills.

Advance intimation to customers for rewards of Term Deposits Receipts on

maturity.

Advance for Debit/credit to accounts.

Punctuality of staff.

Handling of complaint register.

Maintain a complaint register.

Customer’s dissatisfaction in the banking industry is neither recent nor unknown.

This is mainly due to delays in handling transactions across the counter in
collections, update of passbooks supply of statements of accounts, etc.

Failure to provide prompt and efficient customer service is likely to lead to

reduction in the number of customers and they may have to face closure. To
event such situation the following improvements in the customer services may be
carried out:

Personal relations of the bank employee with customers will improve customer
satisfaction. Service with smile should be the motto of every bank employee.

Rapid customer services should be provided through automation of work and

simplification of procedures.

ATM’s may be introduced in all the branches of the banks, based upon the
volume of transactions. This shall facilitate non-stop banking.

Credit Cards Services, Debit Card Services, which should be provided to the
customers, must a link service with all the banks and branches if possible to
facilitate the customer and the business organizations.

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E-mail service made freely available at all banking centers.

Foreign Exchange transactions are to be extended to all the branches to facilitate

trade and industries.

All the customers are not homogenous in their needs. Hence need based schemes
may be introduced.

Totally deregulated interest rate structure should be there.

The banking staff must be trained to understand the customer’s psychology, so

they may provide customer service in a qualified manner.

Educating the customers will increases better utilisation of banking services.

The vast network of branches spread over the entire country with millions of
customers, a complex variety of products and services offered, the varied
institutional framework – all these add to the enormity and complexity of banking
operations in India giving rise to complaints for deficiencies in services. This is
evidenced by a series of studies conducted by various committees such as the
Talwar Committee, Goiporia Committee, Tarapore Committee, etc., to bring in
improvement in performance and procedure involved in the dispensation of
hassle-free customer service.

Broadly, a customer can be defined as a user or a potential user of bank services.

So defined, a ‘Customer’ may include:

• a person or entity that maintains an account and/or has a business

relationship with the bank;

• one on whose behalf the account is maintained (i.e. the beneficial owner);

• beneficiaries of transactions conducted by professional intermediaries,

such as Stock Brokers, Chartered Accountants, Solicitors, etc., as permitted
under the law, and

• any person or entity connected with a financial transaction which can pose
significant reputational or other risks to the bank, say, a wire transfer or
issue of a high value demand draft as a single transaction.

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RBI has suggested the following for implementation without fail.

(a) providing infrastructure facilities by branches by bestowing particular attention

to providing adequate space, proper furniture, drinking water facilities, with
specific emphasis on pensioners, senior citizens, disabled persons, etc.

(b) providing entirely separate enquiry counters at their large / bigger branches in
addition to a regular reception counter.

(c) displaying indicator boards at all the counters in English, Hindi as well as in the
concerned regional language. Business posters at semi-urban and rural branches
of banks should also be in the concerned regional languages.

(d) posting roving officials to ensure employees' response to customers and for
helping out customers in putting in their transactions.

(e) providing customers with booklets consisting of all details of service and
facilities available at the bank in Hindi, English and the concerned regional
languages.

(f) use of Hindi and regional languages in transacting business by banks with
customers, including communications to customers.

(g) reviewing and improving upon the existing security system in branches so as
to instil confidence amongst the employees and the public.

(h) wearing on person an identification badge displaying photo and name thereon
by the employees.

(i) Periodic change of desk and entrustment of elementary supervisory jobs.

(j) Training of staff in line with customer service orientation. Training in Technical
areas of banking to the staff at delivery points. Adopting innovative ways of
training / delivery ranging from job cards to roving faculty to video conferencing.

(k) visit by senior officials from Controlling Offices and Head Office to branches at
periodical intervals for on the spot study of the quality of service rendered by the
branches.

(l) rewarding the best branches from customer service point of view by annual
awards/running shield.

(m) Customer service audit, Customer surveys.

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(n) holding Customer relation programmes and periodical meetings to interact
with different cross sections of customers for identifying action points to upgrade
the customer service with customers.

(o) clearly establishing a New Product and Services Approval Process which should
require approval by the Board especially on issues which compromise the rights of
the Common Person.

(p) appointing Quality Assurance Officers who will ensure that the intent of policy
is translated into the content and its eventual translation into proper procedures.

Important Committees on Customer Service in Banks

The important committees set up by RBI on customer service over the years
include

a) Talwar Committee on Customer Service (1975),

b) Goiporia Committee (1990),

c) Tarapore Committee on Procedures and Performance Audit on Public

Services (CPPAPS, 2004)

d) Damodaran Committee on Customer Service (2010).

Talwar Committee (1975)

In 1975 the Government of India appointed a Working Group, under the

Chairmanship of Shri R. K. Talwar, to study the quality of customer service in
banks, to recommend steps, to bring improvements, to meet the aspirations of
customers

Some important recommendations made by committee were instant credit to the

outstation cheques up to Rs.2,500, reimbursement loss of interest on
unreasonable delay made by the banker and starting of inquiry counter at the
entrance of the bank attended to customer.

Talwar Committee believed that customer service is a dynamic concept and

recommended that banks to evaluate and re-evaluate customers' perceptions of
services.

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Goiporia Committee (1990)

The Reserve Bank of India (RBI) established the Goiporia Committee in 1990 under
the chairmanship of M.N, Goiporia. The Goiporia group made recommendations
to improve bank customer service.

Some of the important recommendations are given below:

a) The commencement of work of the employees will always be 15 minutes before

the general business hours so that banks can be made operational for the
customers and there is no waste of time

b) It is compulsory to address all the customers who come before dear closing
hours inside the bank

c) Employees should ensure that counters during business hours and

uninterrupted services are being provided to the customers that come into the
bank

d) There is specific guidance given in the bank that there must be a counter of
‘Enquiry’, or ‘May I help You’ so that if the person coming to the bank is confused,
then they can go today at the counter and ask for the help they are looking for

e) The counter should be near the entry of the banking office

f) There were several recommendations about the passbooks/statements about

the savings account:

g) The customer must be educated so that they keep their passbooks updated
regularly.

h) There should be an education drive launched for the customers so that the
advantages of keeping the passbook updated should be got into focus.

i) Every employee should wear their identity batches which should have their
name and photograph properly displayed so that it is better for the customers to
rapport with the officials

j) There should be induction training given to the recruits, after the training
process the banks should distribute them to their desired positions at once.

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Banks are required to form a Customer Service Committee of the Board, which
must include experts and customer representatives as invitees.

M.N. Goiporia, as a Chairman of the Goiporia Committee had made several crucial
recommendations to bring change in the customer services of India in different
banks, and these be improved efficiently. M.N.Goiporia was the 14th chairman of
the SBI (State Bank of India).

Due to the scam that took place in 1992, M.N. Goiporia had played an excessively
significant role in that scam which is why there were several allegations made
against him during his period of being a chairperson. In view of his involvement in
the scam , the Indian Government asked him to leave his position as the
chairperson of the State Bank of India.

Tarapore Committee on Procedures and Performance Audit of Public

Services

In November 2003, Reserve Bank of India (RBI) constituted the Committee on

Procedures and Performance Audit of Public Services under the Chairmanship of
Shri S.S. Tarapore (former Deputy Governor) to address the issues relating to
availability of adequate banking services to the common person.

Based on the recommendation made by the Committee on Procedures and

Performance Audit on Public Services (Tarapore Committee), The Banking Codes
and Standards Board of India (BCSBI) was established.

The Banking Codes and Standards Board of India (BCSBI)

The Banking Codes and Standards Board of India (BCSBI) is an independent

banking industry watchdog that protects consumers of banking services in India.
The board oversee compliance with the "Code of Bank's Commitment to
Customers".

It is not a compensation mechanism and looks into an individual complaint only

to the extent it points to any systemic compliance failure. It is an independent and
autonomous body, registered as a separate society under the Societies
Registration Act, 1860 on 18 February 2006. The Reserve Bank of India extended
financial support to the Board, meeting its expenses for the first five years.

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However, on 28 September 2021, the member banks passed resolutions
approving BCBSI dissolution. Accordingly it has stopped its operations and is
under dissolution.

The Damodaran Committee on Banking Customer Service

The committee, headed by former SEBI chief M Damodaran, has proposed a slew
of consumer-friendly measures. Here are the recommendations:

a) A guaranteed payment of up to Rs 5 lakh (raised from Rs 1 lakh) under deposit

insurance to an account holder if a bank fails.

b) No liability on customer for losses in ATM and online transactions

c) Instant blocking of ATM card through SMS for lost/misused cards

d) Transition to chip-based card with a photograph

e) Automatic update of senior citizen status in core banking solution branch

f) Pensioners to be allowed to submit life certificate in any bank branch

g) A common toll-free number for all banks, like 100 for police

h) A third-party Know Your Customer data bank

i) A detailed break-up of service charges for basic services

j) Small remittances at reasonable price

k) Compensation for delayed return or loss of title deeds in the custody of banks

l) Plain vanilla savings account without a minimum balance requirement

m) Prepaid instruments worth up to Rs 50,000 for frequent travellers

n) A chief customer service officer for grievance redressal in every bank

The Damodaran Committee on bank customer services has recommended active

involvement of the boards of banks to guarantee customer satisfaction.

The committee has said that customer service and grievance redressal should be
included as a mandatory parameter in the performance appraisal report of all
employees.

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The report suggested that an agenda on the level of implementation of the Bank's
Code of Commitments to Customers and an overview on the grievance redressal
mechanism in the bank should be placed before the bank every quarter before
the Customer Service Committee.

The committee said that every board should ensure they have comprehensive
policies for customer acceptance, care and severance.

Emphasising on 'customer centricity', the committee recommended that bank

boards should evolve human resources policies which will recruit for attitude and
train for skills.

The report also suggested that Branch Level Customer Committee meetings may
be replaced with a meeting of customers of all banks of that area (say district-
wise, block-wise) and be held in the presence of representatives of banks at
periodic intervals (monthly/quarterly). The responsibility of organising such
meetings may be entrusted to eminent consumer organisations in the region and
expenses of such meetings can be shared by the bankers of that jurisdiction. The
proceedings of the meetings should be recorded (CCTV) for the purpose of review
of the same in higher fora.

Nachiket Mor Committee

In September 2013, the RBI established the “Committee on Comprehensive

Financial Services for Small Businesses and Low-Income Households,” which
Nachiket Mor, a member of the RBI board, served as chairman. In January 2014,
RBI published an extensive and detailed Report of this committee.

Even though some have criticised the report’s recommendations as being overly
ambitious and unrealistic, they have nonetheless sparked a thoughtful discussion
about how to build India a modern, inclusive financial system.

Recommendations of the Nachiket Mor Committee

Several recommendations were made by the Nachiket Mor Committee, one of

which was to provide a universal bank account to all Indians above 18 years of
age by January 01, 2016.

Emphasised the importance of Aadhaar as the main force behind the process of
increasing the number of bank accounts. Monitoring at the district level, such as
deposits and advances as a percentage of GDP.

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Integrated Ombudsman Scheme 2021
(One Nation One Ombudsman Scheme)

One Nation One Ombudsman Scheme was announced by the Reserve Bank Of
India – RBI on 5th February 2021.

There are dedicated ombudsman schemes devoted to consumer grievance

redressal in banking, non-bank finance companies and digital transactions,
respectively, are in operation from 22 ombudsman offices of the RBI located
across the country.

In line with the global initiatives on consumer protection, RBI has taken various
initiatives to strengthen the Grievance Redress Mechanism of regulated entities.

The adoption of the ‘One Nation One Ombudsman is an approach to make the
alternate dispute redressal mechanism simpler and more responsive to the
customers of regulated entities, it has been decided to implement, inter alia,
integration of the three Ombudsman schemes in one.

The RBI had operationalised the complaint management system portal as a one-
stop solution. This portal will be used for the alternate dispute resolution of the
customer complaints which are not resolved by regulated entities.

The Scheme is intended to make the process of redress of grievances easier by

enabling the customers of the banks, NBFCs and non-bank issuers of PPIs to
register their complaints under the integrated scheme, with one centralised
reference point.

An ombudsman is a government official who deals with complaints made by

ordinary people against public organizations.

This concept came from Sweden. It means an officer appointed by the Legislature
to handle complaints against a service or administrative authority.

In India, the Government has appointed an Ombudsman to resolve grievances in

the following sectors.

Insurance Ombudsman
Income Tax Ombudsman
Banking Ombudsman

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One Nation One Ombudsman Scheme Significance

It will help in easy lodging of customer grievances and redressal..

It is a step in the right direction for improving the customer service in banks,
NBFCs and Non-Bank Prepaid Payments Issuers.

Through One nation One Ombudsman, RBI aims to integrate consumer

grievances redressal under a single ombudsman as against three schemes.

The Consumer Protection Act, 2019

The new Consumer Protection Act was passed by Parliament in 2019. It came into
force in July 2020 and replaced the Consumer Protection Act, 1986.

It is an Act to provide for protection of the interests of consumers and for the said
purpose, to establish authorities for timely and effective administration and
settlement of consumers’ disputes and for matters connected therewith or
incidental thereto.

Need for the new act:

The Digital Age has ushered in a new era of commerce and digital branding, as
well as a new set of customer expectations. Digitisation has provided easy access,
a large variety of choices, convenient payment mechanisms, improved services
and shopping as per convenience. However, there are also associated challenges
related to consumer protection.

To help address the new set of challenges faced by consumers in the digital age,
the Indian Parliament passed the landmark Consumer Protection Bill, 2019 which
aims to provide timely and effective administration and settlement of consumer
disputes.

Details:

Consumer Protection Act, 2019 is a law to protect the interests of the consumers.
This Act provides safety to consumers regarding defective products,
dissatisfactory services, and unfair trade practices.

The basic aim of the Consumer Protection Act, 2019 is to save the rights of the
consumers by establishing authorities for timely and effective administration and
settlement of consumers’ disputes.

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Rights of the consumers:

Consumers have the right to information on various aspects of goods and

services. This could be information about the quantity, quality, purity, potency,
price, and standard of goods or services.

To be protected from hazardous goods and services. Right to protection against

goods and services that can be dangerous to life and property.

To be protected from unfair or restrictive trade practices.

Consumers have the right to access a variety of goods and services at competitive
prices.

Consumers should have the right to redressal.

Salient Provisions of the Consumer Protection Act

The new Act has widened the definition of ‘consumer’.

Definition of consumer:

As per the Act, a person is called a consumer who avails the services and buys any
good for self-use. Worth to mention that if a person buys any good or avails any
service for resale or commercial purposes, he/she is not considered a consumer.
This definition covers all types of transactions i.e. offline and online through
teleshopping, direct selling or multi-level marketing.

Central Consumer Protection Authority:

The Act proposes the establishment of the Central Consumer Protection Authority
(CCPA) as a regulatory authority. The CCPA will protect, promote and enforce the
rights of consumers and regulate cases related to unfair trade practices,
misleading advertisements, and violation of consumer rights.

CCPA would be given wide-ranging powers.

The CCPA will have the right to take suo-moto actions, recall products, order
reimbursement of the price of goods/services, cancel licenses, impose penalties
and file class-action suits.

The CCPA will have an investigation wing to conduct independent inquiry or

investigation into consumer law violations.

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Consumer Disputes Redressal Commission:

The Act has the provision of the establishment of Consumer Disputes Redressal
Commissions (CDRCs) at the national, state and district levels to entertain
consumer complaints.

As per the notified rules, the State Commissions will furnish information to the
Central Government on a quarterly basis on vacancies, disposal, the pendency of
cases and other matters.

The CDRCs will entertain complaints related to:

Overcharging or deceptive charging

Unfair or restrictive trade practices
Sale of hazardous goods and services which may be hazardous to life.
Sale of defective goods or services

As per the Consumer Disputes Redressal Commission Rules, there will be no fee
for filing cases up to Rs. 5 lakh.

E-Filing of Complaints:

The new Act provides flexibility to the consumer to file complaints with the
jurisdictional consumer forum located at the place of residence or work of the
consumer. This is unlike the earlier condition where the consumer had to file a
complaint at the place of purchase or where the seller has its registered office
address.

The new Act also contains enabling provisions for consumers to file complaints
electronically and for hearing and/or examining parties through video-
conferencing.

Consumers will also not need to hire a lawyer to represent their cases.

Product Liability & Penal Consequences:

The Act has introduced the concept of product liability.

A manufacturer or product service provider or product seller will now be

responsible to compensate for injury or damage caused by defective products or
deficiency in services.

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This provision brings within its scope, the product manufacturer, product service
provider and product seller, for any claim for compensation. The term ‘product
seller’ would also include e-commerce platforms.

Penalties for Misleading Advertisement:

The CCPA may impose a penalty on a manufacturer or an endorser, for a false or

misleading advertisement. The CCPA may also sentence them to imprisonment.

Provision for Alternate Dispute Resolution:

The new Act provides for mediation as an Alternate Dispute Resolution

mechanism. For mediation, there will be a strict timeline fixed in the rules.

As per the recently notified rules, a complaint will be referred by a Consumer

Commission for mediation, wherever scope for early settlement exists and parties
agree for it. The mediation will be held in the Mediation Cells to be established
under the aegis of the Consumer Commissions. There will be no appeal against
settlement through mediation.

Unfair Trade Practices:

The new Act has armed the authorities to take action against unfair trade
practices too.

The Act introduces a broad definition of Unfair Trade Practices, which also
includes the sharing of personal information given by the consumer in confidence
unless such disclosure is made in accordance with the provisions of any other law.

The Central Consumer Protection Council:

The Consumer Protection Act empowers the Central Government to establish a

Central Consumer Protection Council. It will act as an advisory body on consumer
issues.

The Council, which has a three-year tenure, will have a Minister-in-charge of

consumer affairs from two States from each region – North, South, East, West, and
NER. There is also a provision for having working groups from amongst the
members for specific tasks.

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Applicability:

This Act is applicable to all the products and services, until or unless any product
or service is especially debarred out of the scope of this Act by the Central
Government.

Significance of the Act:

Empowering consumers:

The new Act will empower consumers and help them in protecting their rights
through its various rules and provisions. The new Act will help in safeguarding
consumer interests and rights.

Consumer-driven businesses such as retail, e-commerce would need to have

robust policies dealing with consumer redressal in place.

The new Act will also push the consumer-driven businesses to take extra
precautions against unfair trade practices and unethical business practices.

Inclusion of the e-commerce sector:

The earlier Act did not specifically include e-commerce transactions, and this
lacuna has been addressed by the new Act.

E-commerce has been witnessing tremendous growth in recent times.

The Act also enables regulations to be notified on e-commerce and direct selling
with a focus on the protection of interest of consumers. This would involve rules
for the prevention of unfair trade practices by e-commerce platforms.

As per the notified rules, every e-commerce entity is required to provide

information relating to return, refund, exchange, warranty and guarantee, delivery
and shipment, modes of payment, grievance redressal mechanism, payment
methods, the security of payment methods, charge-back options, etc. including
country of origin which are necessary for enabling the consumer to make an
informed decision at the pre-purchase stage on its platform.

The e-commerce platforms will have to acknowledge the receipt of any consumer
complaint within forty-eight hours and redress the complaint within one month
from the date of receipt under this Act. This will bring e-commerce companies
under the ambit of a structured consumer redressal mechanism.

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Time-bound redressal:

A large number of pending consumer complaints in consumer courts have been

common across the country. The new Act by simplifying the resolution process
can help solve the consumer grievances speedily.

A main feature of the Act is that under this, the cases are decided in a limited time
period.

Responsible endorsement:

The new Act fixes liability on endorsers considering that there have been
numerous instances in the recent past where consumers have fallen prey to unfair
trade practices under the influence of celebrities acting as brand ambassadors.

This will make all stakeholders – brands, agencies, celebrities, influencers and e-
commerce players – a lot more responsible. The new Act would force the endorser
to take the onus and exercise due diligence to verify the veracity of the claims
made in the advertisement to refute liability claims.

Upholding consumer interests:

For the first time, there will be an exclusive law dealing with Product Liability.

Product liability provision will deter manufacturers and service providers from
delivering defective products or deficient services.

The new legislation empowers the National Consumers Dispute Redressal

Committee as well as the State Commission to declare null and void any terms of
a contract while purchasing a product. This will go a long way in protecting
consumers, who are often subject to contract conditions that favour a seller or
manufacturer.

Alternate dispute redressal mechanism:

The provision of Mediation will make the process of dispute adjudication simpler
and quicker.

This will provide a better mechanism to dispose of consumer complaints in a

speedy manner and will help in the disposal of a large number of pending cases in
consumer courts across the nation.

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Simplified process for grievance redressal:

The new Act would ease the overall process of consumer grievance redressal and
dispute resolution process. This will help reduce inconvenience and harassment
for the consumers.

The enhanced pecuniary jurisdiction and provisions providing statutory

recognition to mediation processes, enabling filing of complaints from any
jurisdiction and for hearing parties through video-conferencing will increase
accessibility to judicial forums and afford crucial protection in times when
international e-commerce giants are expanding their base.

State regulation:

As part of the Consumer Protection Act, 2019, the Ministry of Consumer Affairs
will compile a code of conduct for advertisers and agencies, a move designed to
curb unfair practices and misleading claims. The planned code will detail penalties
for advertisers and their agencies and publishers if misleading advertising and
false claims are found.

There have been concerns that this approach would mark a move from self-
regulation to a more federated oversight.

Lack of differentiated approach:

As per the proposed rules for the e-commerce businesses, companies are not
allowed to “manipulate the price” of goods and services offered on their platforms
to gain unreasonable profit or discriminate between consumers of the same class
or make any arbitrary classification of consumers affecting their rights under the
Act.

The clause on the manipulation of price by e-commerce companies appears

irrelevant as sometimes, the e-commerce companies would want to reduce the
price to enhance sales volume. For a country with market size of around $25
billion, the guidelines should have taken a deeper view of the e-commerce
ecosystem, covering all prevailing business models between consumers,
marketplaces and sellers.

@@@

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 09 The Right to Information Act, 2005
The right to information is a fundamental right under Article 19 (1) of the Indian
Constitution. In 1976, in the Raj Narain vs the State of Uttar Pradesh case, the
Supreme Court ruled that Right to information will be treated as a fundamental
right under article 19. The Supreme Court held that in Indian democracy, people
are the masters and they have the right to know about the working of the
government. Thus the government enacted the Right to Information act in 2005
which provides machinery for exercising this fundamental right.

The act is one of the most important acts which empowers ordinary citizens to
question the government and its working. This has been widely used by citizens
and media to uncover corruption, progress in government work, expenses-related
information, etc.

The primary goal of the Right to Information Act is to empower citizens, promote
openness and accountability in government operations, combat corruption, and
make our democracy truly function for the people. It goes without saying that an
informed citizen is better equipped to keep a required track on governance
instruments and hold the government responsible to the governed.

All constitutional authorities, agencies, owned and controlled, also those

organisations which are substantially financed by the government comes under
the purview of the act. The act also mandates public authorities of union
government or state government, to provide timely response to the citizens’
request for information.

The act also imposes penalties if the authorities delay in responding to the citizen
in the stipulated time.

Type of information can be requested through RTI

The citizens can seek any information from the government authorities that the
government can disclose to the parliament.

Some information that can affect the sovereignty and the integrity of India is
exempted from the purview of RTI.

Information relating to internal security, relations with foreign countries,

intellectual property rights (IPR), cabinet discussions are exempted from RTI.

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Objectives of the RTI Act

Empower citizens to question the government.

The act promotes transparency and accountability in the working of the

government.

The act also helps in containing corruption in the government and work for
the people in a better way.

The act envisages building better-informed citizens who would keep

necessary vigil about the functioning of the government machinery.

Important provisions under the Right to Information Act, 2005

Section 2(h): Public authorities mean all authorities and bodies under the union
government, state government or local bodies. The civil societies that are
substantially funded, directly or indirectly, by the public funds also fall within the
ambit of RTI.

Section 4 1(b): Government has to maintain and proactively disclose information.

Section 6: Prescribes a simple procedure for securing information.

Section 7: Prescribes a time frame for providing information(s) by PIOs.

Section 8: Only minimum information exempted from disclosure.

Section 8 (1) mentions exemptions against furnishing information under the RTI
Act.

Section 8 (2) provides for disclosure of information exempted under the Official
Secrets Act, 1923 if the larger public interest is served.

Section 19: Two-tier mechanism for appeal.

Section 20: Provides penalties in case of failure to provide information on time,

incorrect, incomplete or misleading or distorted information.

Section 23: Lower courts are barred from entertaining suits or applications.
However, the writ jurisdiction of the Supreme Court of India and high courts
under Articles 32 and 226 of the Constitution remains unaffected.

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Significance of the RTI Act

The RTI Act, 2005 empowers the citizen to question the secrecy and abuse of
power practised in governance.

It is through the information commissions at the central and state levels that
access to such information is provided.

RTI information can be regarded as a public good, for it is relevant to the interests
of citizens and is a crucial pillar for the functioning of a transparent and vibrant
democracy.

The information obtained not only helps in making government accountable but
also useful for other purposes which would serve the overall interests of the
society.

Every year, around six million applications are filed under the RTI Act, making it
the most extensively used sunshine legislation globally.

These applications seek information on a range of issues, from holding the

government accountable for the delivery of basic rights and entitlements to
questioning the highest offices of the country.

Using the RTI Act, people have sought information that governments would not
like to reveal as it may expose corruption, human rights violations, and
wrongdoings by the state.

The access to information about policies, decisions and actions of the government
that affect the lives of citizens is an instrument to ensure accountability.

The Supreme Court has, in several judgments, held that the RTI is a fundamental
right flowing from Articles 19 and 21 of the Constitution, which guarantee to
citizens the freedom of speech and expression and the right to life, respectively.

Recent Amendments to RTI Act

The RTI amendment Bill 2013 removes political parties from the ambit of the
definition of public authorities and hence from the purview of the RTI Act.

The draft provision 2017 which provides for closure of case in case of death of
applicant can lead to more attacks on the lives of whistle-blowers.

Page 135 of 140

The proposed RTI Amendment Act 2018 is aimed at giving the Centre the power
to fix the tenures and salaries of state and central information commissioners,
which are statutorily protected under the RTI Act. The move will dilute the
autonomy and independence of CIC.

The Act proposes to replace the fixed 5-year tenure with as much prescribed by
the government.

Criticism of RTI Act

One of the major set-back to the act is that poor record-keeping within the
bureaucracy results in missing files.

There is a lack of staffing to run the information commissions.

The supplementary laws like the Whistle Blower’s Act are diluted, this reduces the
effect of RTI law.

Since the government does not proactively publish information in the public
domain as envisaged in the act and this leads to an increase in the number of RTI
applications.

There have been reports of frivolous RTI applications and also the information
obtained have been used to blackmail the government authorities.

@@@

Page 136 of 140

 List of Books compiled by The Banking Tutor
So far the following Books are compiled by me which can be shared by any one
free of cost, without any permission from me or without any intimation to me.

Book Title
No

01 Banking Jargon - Vol 01

02 Alerts - Vol 01

03 Forex - Vol 01

04 Banker and Legal Enactments - Vol 01

05 Banker and Financial Statements

06 Confusables – Vol 01

07 Banking Jargon - Vol 02

08 ABC (Awareness of Basics of Credit)

09 The Can Support_2020

10 The Core Support_2020

11 The Sundries_2020

12 The Soft Support

13 Management of W C Limits

14 The Notes_2021 (for Promotion Test)

15 Confusables - Vol 02

16 Banking Information

17 Banking Jargon - Vol 03

18 Bankers and Court Verdicts - Vol 01

19 Inland Bank Guarantees

Page 137 of 140

20 The Dirty Dozen

21 SPA (Not related to Banking)

22 Banks - Supporting Agencies - Vol 01

23 Banking Jargon - Volume 4

24 Banks - Supporting Agencies - Vol 2

25 Banks - Supporting Agencies - Vol 3

26 JAIIB Notes - PPB

27 JAIIB Notes - LRB

28 JAIIB Notes – AFB

29 CAIIB Notes – ABM

30 CAIIB Notes – BFM

31 Confusables - Vol 03

32 Banking Jargon - Vol 05

33 The Banking Regulations & Business Laws (BRBL)

34 Accounting & finance for Bankers

35 Bank Financial Management

36 Retail Banking & Wealth Management

37 Concepts for Credit Professional - OT

38 Advance Business Management

39 Principles & Practice of Banking

40 Indian Economy & Indian Financial System - OT

41 Concepts for Credit Professional - Notes

42 Less Known Forex Terminology

Page 138 of 140

43 KYC & AML – Notes & MCQ

44 Treasury Management - Objective Type

45 Treasury Management - Notes

46 Indian Economy & Indian Financial System - Notes

47 MSME -Notes

48 MSME – Objective Type

49 Banking Jargon – Volume 06

50 50 Essays in Practical Banking

51 Promotion 2022

52 Basics of Bank Audits

53 The Shortens

54 Recap TIN 2022

55 NumLogEx

56 Basic Statistics for Bankers

57 JAIIB IE & IFS - Module A : Indian Economic Architecture

58 JAIIB IE & IFS - Module B : Economic Concepts Related to Banking

59 JAIIB IE & IFS - Module C : Indian Financial Architecture

60 JAIIB IE & IFS - Module D : Financial Products and Services

61 Banking Jargon – Volume 07

62 JAIIB – PPB – Module A - General Banking Operations

Page 139 of 140

 My Activity
I am sharing the following in my WhatsApp Groups (The Banking
Tutor), Telegram Group of The Banking Tutor ; TBT Exam Corner
and Blog (The Banking Tutor - TBT).

1. One Point related to Banking & Finance Daily (Daily Point).

Started on 16-09-2019, so far shared 1297 points without any
break.

2. Once 3 days (on 3rd, 6th, 9th ,12th….) one Lesson on Banking
& Finance (Banking Tutor’s Lessons - BTL), started on 06-09-
2018, so far shared 530 lessons.

3. Monthly Last day - TIN - Terms in News (related to Banking &

Finance). Started on 28-02-2021, so far shared 26 issues.

4. Monthly First Day – Recap of Daily Points shared during the

previous month.

5. Sharing lessons for IIB Exams and Promotion tests of various

Banks daily in Telegram Group “TBT- Exam Corner” (earlier Name
of this Group is “TBT JACA”)

My mail id – [email protected] ;
WhatsApp +91 94406 41014
Banking Tutor Blog – https://thebankingtutor.blogspot.com/

04-04-2023 Sekhar Pariti

+91 9440641014

Page 140 of 140

 Notes for JAIIB

Compiled by Sekhar Pariti

Book No 64 from The Banking Tutor

Page 1 of 212
 Preface
With a view to help the young Bankers in preparation for Promotion Tests or
Professional Examinations conducted by various Institutes, I am sharing Notes
related to Principles and Practices of Banking (PPB) which is prepared based on
the revised syllabus, 2023 of IIBF.

IIBF Syllabus consists the following 4 Modules –

Module A: General Banking Operations

Module B: Functions of Banks

Module C: Banking Technology

Module D: Ethics in Banks and Financial Institutions

In this Notes, I am covering topics related to only Module B – Functions of Banks. I

will share Notes related to other 2 Modules soon. After sharing Notes related to
all the Modules I will share Objective Type Points related to entire paper in one
Book.

I hope this Book may be useful to those Bankers who are appearing for Promotion
Tests, Certificate/Diploma Examinations conducted by various Institutes.

07-04-2023 Sekhar Pariti

+91 94406 41014

Page 2 of 212
 Syllabus 2023

Principles and Practices of Banking (PPB)

Module A: General Banking Operations

Banker-Customer Relationship, AML- KYC Guidelines, Operational Aspects of KYC,

Opening Accounts of Various Types of Customers, Operational Aspects of Deposit
Accounts, Operational Aspects of Handling Clearing/Collection/Cash, Banker’s
Special Relationship, Foreign Exchange Remittance Facilities for Individuals,
Operational Aspects of NRI Business, Foreign Currency Accounts for Residents and
Other Aspects, Cash Management Services and its Importance, Payment and
Collection of Cheques and Other Negotiable Instruments, Responsibility of Paying
Bank, Responsibility of Collecting Bank, Ancillary Services, Financial Inclusion &
Financial Literacy, Customer Service Guidelines, Duties & Rights of a Banker and
Customer Rights, Grievance Redressal & RBI Integrated Ombudsman Scheme
2021, The Consumer Protection Act, 2019: Preamble, Extent and Definitions, The
Right to Information Act, 2005.

Module B: Functions of Banks

Principles of Lending, Different Types of Borrowers, and Types of Credit Facilities,

Appraisal and Assessment of Credit Facilities, Operational Aspects of Loan
Accounts, Types of Collaterals and their Characteristics, Different Modes of
Charging Securities, Documentation, Non-Performing Assets/ Stressed Assets,
Important Laws Relating to Recovery of Dues, Contracts of Indemnity, Contracts of
Guarantee & Bank Guarantee, Letters of Credit, Deferred Payment Guarantee,
Laws Relating to Bill Finance, Personal Finance, Priority Sector Advances,
Agricultural Finance, Finance to MFIs/Co-Lending Arrangements with NBFCs,
Micro, Small and Medium Enterprises in India, Government Sponsored Schemes,
Self-Help Groups.

Page 3 of 212
Module C: Banking Technology

Essentials of Bank Computerisation, Operational Aspects of CBS Environment,

Alternate Delivery Channels Digital Banking, Data Communication Network and
EFT Systems, Digital Payment Systems-NPCI, Impact of Technology Adoption and
Trends in Banking Technology, Security Considerations and Mitigation Measures
in Banks, Operational Aspects of Cyber Crimes/Fraud Risk Management in Cyber
Tech, Technology Trends in Banking, e-RUPI, Fintech – RegTech, Sup Tech,
Hashtag Banking etc.

Module D: Ethics in Banks and Financial Institutions

Ethics, Business Ethics & Banking: An Integrated Perspective, Ethics at the

Individual Level, Ethical Dimensions: Employees, Work Ethics and the Workplace,
Banking Ethics: Changing Dynamics.

@@@

Page 4 of 212
 Index
Principles and Practices of Banking (PPB)
Module B: Functions of Banks

Chapter No Topics covered

01 Principles of Lending, Different Types of Borrowers, and Types of

Credit Facilities, Appraisal and Assessment of Credit Facilities,
Operational Aspects of Loan Accounts

02 Types of Collaterals and their Characteristics, Different Modes of

Charging Securities

03 Documentation

04 Non-Performing Assets/ Stressed Assets, Important Laws Relating to

Recovery of Dues

05 Contracts of Indemnity, Contracts of Guarantee & Bank Guarantee

06 Letters of Credit

07 Deferred Payment Guarantee & Bills Co-acceptance

08 Bill Finance

09 Personal Finance

10 Priority Sector Advances

11 Agricultural Finance

12 Finance to MFIs/Co-Lending Arrangements with NBFCs

13 Micro, Small and Medium Enterprises in India

14 Government Sponsored Schemes

15 Self-Help Groups

@@@
Page 5 of 212
 Chapter 1- Aspects of Lending
Topics covered in this Chapter are…….>

Principles of Lending, Different Types of Borrowers, and Types of Credit

Facilities, Appraisal and Assessment of Credit Facilities, Operational Aspects
of Loan Accounts

###

Principles of Lending

Lending of money to different kinds of borrowers is one of the most important

functions of commercial bank. This is the major sources of bank‘s income.
However, lending is not without risk.

The borrowers of a bank range from individuals to partnership, companies,

institutions, societies etc.

The nature of their activities, the location of business, financial stability, earning
and repaying capacity, purpose of advance, securities all differ and their degree of
risks also differ.

Precautions to be taken by Banker

Some of the important considerations to be kept in mind by a banker in this

respect are discussed below:

The Reserve Bank of India detailed down the Fair Practices Code for Lenders.

According to the principles of bank lending, the banks must give a timeline within
which loans of up to Rs. 2 lakh will be disposed off.

According to the principles of bank lending, the banks must provide

acknowledgement for the receipt of loan applications.

According to the principles of bank lending, the banks should give appropriate
reason in writing in case of rejection of the loan application that amounts up to
Rs. 2 lakhs.

The lenders must do a proper credit assessment of the borrower.

Page 6 of 212
The lenders must conduct due diligence.

The lender must convey credit limits, terms and conditions and seek acceptance
of the borrower in writing for the same.

The rules stipulate that lenders must timely disburse the loan amount in their loan
accounts.

The lender must intimate to the borrower & Guarantor all the terms and
conditions, changes (if any), interest rates, etc.

The lender should not engage in any sort of discrimination based on the sex,
caste and religion.

Lenders should not resort to undue harassment to recover loans such as

bothering borrowers at odd hours, use of muscle power for recovery of loans, etc.

The lending process in any banking institutions is based on some core principles
such as safety, liquidity, diversity, stability and profitability.

Safety - While giving out loans, the lender, i.e. banks look at the capacity of the
borrower to repay the loan. Hence, they do a thorough check on them to
determine whether they will be able to repay loan and interest in time at regular
intervals or not.

As such the first and foremost principle of lending is to ensure safety of funds
lent. Further, it is just not the capacity of the borrower to repay but also his
willingness to repay. The former depends on his tangible assets and the success of
his business. The latter depends on the borrower‘s character.

To ensure the safety of lending the following factors may be considered:

a) Five Cs – Character/ Conduct ; Capacity; Capital; Condition; Collateral

b) Five Ps – Person ; Purpose; Product; Place; Profit

c) Five Ms – Man; Management ; Money ; Materials ; Market

d) Five Rs - Reliability; Responsibility ; Resources ; Respectability; Returns

Page 7 of 212
Liquidity - The term liquidity refers to the extent of availability of funds with the
banker for providing credit to borrowers. It is to be seen that money lent is not
going to be locked up for a long time. Before providing loans to the borrowers,
banks ensure that they have sufficient liquid funds available. Therefore, they
choose securities that can be sold off without impacting their market price to
meet urgent needs of their customers. The securities usually belong to
government, state and local government bonds.

A bank‘s inability to meet the demand of its depositors can lead to a run on the
bank which is a threat to its basic survival. Hence the banker has to always
monitor the cash flows and carry out the exercise of ensuring liquidity with the
borrower as this in turn means liquidity with the banker.

Liquidity would also refer to the quality of assets, which should be easily
convertible into cash without any loss of value. Thus the concept of liquidity
entails the banker to look for easy saleability and absence of risk of loss on sale of
asset, which has been taken as collateral.

Diversification - Banks follow the principle of diversity when giving out loans. If
the bank lends large amounts to a single industry or borrower, then the default by
that customer can affect the banking industry as a whole and will affect the basic
survival of the industry. To safeguard his interest against all such risks, the banker
follows the principle of diversification of risks based on the famous maxim ‘never
keep all the eggs in one basket‘. By lending funds to different sectors, a bank can
save itself from the slump in some sectors by way of prosperity in the others.
Banks have to lend to a large number of industries and borrowers so that the risk
gets diversified.

Stability - Along with providing its customers with safety and security, the banks
have to ensure stability into its system. Hence they prefer investing in government
bonds and debentures to minimize risks and maintain a stable stance when there
is a need for cash in the middle of a financial crisis. The government debentures
provide stability for the market rate and interest rates are less likely to change in
them.

Page 8 of 212
Profits - Banks are not charitable institutions. All banks are profit earning
institutions. The ultimate objective of lending is to earn profits.

Banks receive interest on loans and advances lent, and they pay interest to their
depositors. This difference between the receipts and payments will be the bank‘s
gross profit. Banks further incur various expenses as any organization does. After
accounting for all such expenses and provisions, banks have to earn reasonable
amount as net profit (NIM) so that dividends can be paid to its shareholders.

The trust and confidence level of the customer and investor will be high with a
bank that has a good track record of profits and dividend rates.

Hence it is important that whatever the business the bank engages itself with, the
business be profitable enough not just to cover its costs but to ensure generation
of surplus funds or margin. It is prudent for the banker to consider overall
profitability of the entire business that is undertaken rather than the profitability
against each component of business or service offered.

Purpose: The purpose should be productive so that the money not only remain
safe but also provides a definite source of repayment. Loans may be required for
productive purposes, trading purposes, agriculture, transport, self-employment
etc. If a loan is required for a non-productive or speculative purpose, the banker
should be very much cautious in entertaining such proposals. It is very difficult to
ensure that the loan has been utilized for the purpose for which it was sanctioned.
Banker should take follow-up measures to ensure end use of fund exactly for the
same purpose for which it is borrowed.

Security: The security offered by a borrower for an advance is as like as the

insurance to the banker. So another principle of sound lending is the security of
lending. Security offered against loan may be a plot of land, building, flat,
insurance policies; term deposits etc. There may even be cases where there is no
security at all. The banker must realize that is it only a cushion to fall back upon in
case of need.

The security if accepted must be adequate and readily marketable, easy to handle
and free from encumbrance. It is the duty of the banker to check the nature of the
security and assess whether it is adequate for the loan granted.
Page 9 of 212
The security and its adequacy alone should not form the sole consideration for
judging the viability of a loan proposal.

National Interest: Even when an advance satisfies all the aforesaid principles, it
may still not be suitable. The advance may run counter to national interest. Bank
has a significant role in the economic development process of a country. They
should keep in mind the national development plan/program while going for
lending but maintaining safety, liquidity and profitability.

Working Capital Facilities (Fund Based)

Banks extend support to entrepreneurs to meet working capital needs in two

forms – Fund Based and Non Fund Based.

In case of Fund Based facilities Bank part with money from the beginning.
However, in case of Non Fund Based facility, Bank will not part with funds but
assures payment in case of any eventuality. OD/OCC and Bills Purchased are
examples for Fund Based Credit facilities. Bank Guarantees for procurement of
Raw Material on credit basis etc and Letters of Credit for purchase raw material
etc on credit basis are examples of Non Fund Based W C facilities.

A working capital loan is a short term loan with the aim of financing the day to
day business operations of a company.

Working capital loans are not used to inject capital into the business or to
purchase long-term assets or investments.

Working Capital Requirement = Inventory+ Accounts Receivables – Accounts

payable

Term loan is a form of borrowing where the payments can be made over a
predetermined period of time in regular intervals.

Working capital loan is a loan taken out to finance routine business operations to
minimize shortfalls in working capital.

Term loans may be short, medium or long term.

Working capital loans are short term loans.

Page 10 of 212
Repayment of a term loan is done by many instalments.

Repayment of a working capital loan is done by a limited number of instalments.

Working Capital (WC) is the life blood of every business concern. Business firms
cannot progress without sufficient WC.

Inadequate WC for any entity denotes shortage of inputs, whereas excess of WC

results in extra cost. Hence, the quantum of WC in every business firm should be
neither more nor less than what is actually required. In this context, proper
assessment of WC requirement and monitoring of the functioning of the unit on a
regular basis play an important role.

Fixed Capital and Liquid Capital

For running an Industry or a Business, two types of capital – Fixed Capital and
Liquid Capital are needed.

Fixed Capital is utilised for acquiring the fixed assets such as land, building, plant
and machinery, etc. But by themselves, these fixed assets can not produce/earn
anything. They have to be run/worked for production. This requires enough liquid
sources, viz., working capital to keep the wheels moving.

WC represents the money that is required for purchase/stocking of raw materials,

payment of salary, wages, power charges etc, and also for financing the interval
between the supply of goods and the receipt of payment thereafter. In other
words, the working capital is the finance required to meet the costs involved
during the operating cycle or working capital cycle.

WC Cycle (Operating Cycle)

The process involved in the utilisation of WC is cyclic one. What is at one stage a
raw material, gets converted into goods-in-process in the next stage and then
into finished goods, then book debts and then cash and again back to the state of
raw materials.

In respect of trading concerns, operating cycle represents the period involved

from the time the goods and services are purchased and the same are sold and
realised.

Page 11 of 212
In the case of manufacturing concerns, it is the time involved in the purchasing of
raw materials, converting them into finished goods and the same are finally sold
and proceeds are realised.

The Working Capital Cycle is fast in consumer goods industries and slow in capital
goods industries.

The Working Capital Cycle is short in case of perishables such as food articles,
fruits. Cycle is long in the case of tobacco, timber, steel.

Seasonal industries like manufacturers of umbrella, woollen fabrics require higher

stocks in some months and bare minimum in remaining months.

During the Working Capital cycle, funds are blocked in various stages of current
assets, viz., cash itself, inventory (consisting of raw materials, stock in process,
finished goods) and receivables. These require finance. Quicker the cycle, more is
the turnover normally and longer the cycle, the less is the turnover.

Management of WC means management of two things – Current Assets, Current

Liabilities.

Current liabilities are short- term liabilities which are repayable within a year.
They are normally raised for meeting the WC needs and to acquire current assets.
Current liabilities are the main source of finance for WC and are normally
identified with the operating cycle of the business

Current Liabilities normally consists of:

a) Bank Borrowings for working capital (OCC, Bills)

b) Other short term borrowings like Unsecured Loans.

c) Sundry Creditors – (Purchase of goods on credit basis)

d) Term Loan instalments repayable within a period of one year

e) Other current liabilities and provisions.

While making assessment of WC needs, we keep Bank Borrowings away from total
CL and we denote the balance as Current Liabilities Other than Bank Borrowings
(CLOBB)

Page 12 of 212
Current Assets are also called convertible assets, liquid assets or floating assets.
They change their form every now and then and ultimately are converted into
cash. Current assets in the form of finished goods, are meant for sale and
conversion into cash in a period not exceeding one year.

Current Assets mainly consist of: (a) Cash (b) Inventory (c) Book debts; and (d)
Other loans and advances, etc.

Inventory means Raw Material, Work-in-process (also called Semi Finished Goods
or Stock-in process), Finished Goods, Stores, Packing Material.

Any asset held in excess, burdens the business with unnecessary interest and costs
on such borrowings.

For individual who has taken running Auto Service as his line of livelihood, the
Auto is a fixed asset, as by using the Auto, he is getting income. The Auto ,
though moving and not fixed at a particular place, is a fixed asset to that
particular individual.

Suppose, there is a Dealer in Automobiles and buying Autos from Distributor /

Company is his business. In his case, the Auto is a current asset, as that is the
product in his business.

In both the above cases, Auto is common. In case of individual is using the Auto
for long time, whereas, the Auto Dealer is not using the Auto, and he wants to sell
the same. For him the particular auto will be with him for short time, till it is sold.

In case of individuals, a house/flat purchased is a fixed asset, whereas the same

house/flat is a current asset to the Builder who is in the line of selling houses.

Working Capital Gap (WCG) represents excess of current assets over current
liabilities excluding bank borrowings. A part of the Current Assets are financed by
Current Liabilities (other than bank borrowings). The remaining portion of current
assets which requires financing is called as working capital gap.

General rule is that the Entrepreneur has to finance a part of working capital gap
out of either capital or long term sources. This part which is to be met from long
term own funds is called Margin.

WCG = CA – CLOBB (Where WCG is Working Capital Gap, CA is Current Assets

and CLOBB is Current Liabilities other than Bank Borrowings)

Page 13 of 212
Net Working Capital (NWC) is the net surplus of long term sources minus long
term uses. ( Long Term Sources – Long Term Uses). This is known as technical
definition of NWC.

NWC also represents excess of current assets over current liabilities (including
bank finance). NWC = (CA – CL)

NWC indicates the margin or long term sources provided by the borrower for
financing a part of the current assets.

Current Ratio.

The ratio of current assets to current liabilities is known as Current Ratio.

Current Ratio indicates the liquidity position .

If the current ratio is less than 1, it is generally considered adverse.

The assessment of working capital requirement of a borrower shall generally be

made under any one of the following 3 methods:

a) Turnover method

b) MPBF System

c) Cash Budget System

Turnover method - The idea of the turnover method is originated in the P R

Nayak Committee Recommendations which was again reviewed by the Vaz
Committee. Under this method, the working capital limit shall be computed at
20% of the projected gross sales turnover accepted by the Bank, ensuring
maintenance of minimum margin of 5% on the projected gross annual sales
turnover accepted by the Bank.

If the available NWC in the system exceeds stipulated 5% minimum margin, the
same shall be reckoned for assessing the extent of Bank finance and limits will be
determined accordingly.

Page 14 of 212
The Turnover method of assessment shall be applicable for the WC limits as
under:

Classification of the Applicant Fund Based WC Exposure

MSME(Manufacturing & Services) Up to Rs. 5 Crore

Non MSME Up to Rs. 2 Crore

Traders, Merchants, Exporters, others etc., who are Up to Rs. 2 Crore

not having a pre-determined manufacturing /
trading cycle.

Borrowers can opt for MPBF/Cash budget system and Bank can employ it if the
same is more suitable and appropriate for assessing their working capital needs.

Actual drawings will be based on drawing power computed.

As the working capital requirements are linked to projected turnover, we should

verify the reasonableness of the projected annual turnover of the applicant.

In case of SME, RBI has advised the banks to sanction up to 25% of PAT as limits
with proportionate increase in margin. Also in case of digital portion of sale, the
limit can be 30 % of PAT with proportionate margin.

MPBF (Maximum Permissible Bank Finance) Method

Under this method, the assessment of Working Capital finance requirement is

made based on the overall study of the borrower’s business operation, the
operating cycle of the industry which results in estimation of a reasonable build
up of current assets supported by Bank finance. Here, proper classification of
current assets and current liabilities shall be made on the lines given in the CMA
(Credit Monitoring Arrangement) data format and Method II of lending will be
applied .

Current ratio of 1.33 shall be insisted subject to specific relaxations.

The levels of inventory and receivables shall be based on past trend, operational
needs, ability to absorb the carrying costs, inter-firm comparisons, industry trend
and related market developments, etc.

Page 15 of 212
Limits over Rs. 25 crore can be assessed on the basis of MPBF system or cash
budget system at the option of the borrower.

Borrowers can opt for MPBF/Cash budget system and Bank can employ it if the
same is more suitable and appropriate for assessing their working capital needs.

The levels of inventory and receivables shall be based on industry trend and
closely related market developments. Projected level of inventory and receivables
shall be examined in relation to the past trend and based on inter-firm
comparisons.

The tolerance level of 10% is permissible on the assessed MPBF.

Cash Budget System - Under this method, the Working Capital needs of the
borrowers are assessed on the basis of projected cash flow and the estimate of
cash deficit.

Cash Budget Method is applicable to those ....

a) Borrowers seeking / enjoying Fund based credit facilities of over Rs. 25 crore.

b) Specific industries / seasonal activities such as software development,

construction, tea and sugar.

c) Traders, Merchants, Exporters, others etc., who are not having a predetermined
manufacturing / trading cycle if the same is found to be more appropriate.

Permissible Bank Finance (PBF) is only outer limit. However, drawings in the OCC
account to be monitored based on the Drawing Power which is arrived based on
actual inventory (Stock, WiP , FG, Book debts etc) holding at monthly intervals,
normally.

If NWC is positive (Current Assets are more than Current Liabilities), then Current
Ratio will be more than 1.

If NWC is Negative (Current Assets are less than Current Liabilities), then Current
Ratio will be less than 1.

If NWC is Zero (Current Assets are equal to Current Liabilities), then Current Ratio
will be 1.

Page 16 of 212
If limits are assessed in Turnover Method, Current Ratio will be near to 1.25%.

If limits are assessed in MPBF Method, Current Ratio will be near to 1.33%

Monitoring and Follow-up

Monitoring and follow-up are closely related. Monitoring gives more emphasis on
ensuring proper end-use and follow-up gives more emphasis on timely recovery
of advances.

By Monitoring we mean to have a proper control over the borrowers‘ operation to

ensure the end use of funds. It includes adequate arrangement by bank for
maintaining close contact with the borrower and his activities in order to remain
well informed about the position and progress of the project financed and to offer
appropriate guidance to the borrower, where necessary.

Follow-up includes efforts to ensure compliance with terms and conditions at

different stages (Pre-disbursement, Disbursement, Post disbursements and
Recovery stages) and repayments are made as per schedule. It also includes
efforts to regularize the irregular advances.

Recovery of advances largely depends on effective follow-up. Follow-up is the

systematic process through which these activities are carried out.

Important Credit Monitoring Tools :

a) Balance Sheet;

b) Stock Statements,

c) Unit Visits,

d) Monthly Select Operational Data (MSOD),QOS, HOS,

e) Progress Reports in case of Bank Guarantees;

f) PIPR in case of Term Loans.

Page 17 of 212
Important Follow up Tools :

a) Unit Visits,

b) Reminders for submission of feedback data, for repayment, for compliance

with Terms & Conditions.

Importance of Turnover & Operations in OCC Account

Turnover in a running credit account - cash credit/overdraft account – is very

important for banks. Through this, we want to see whether the account is being
operated adequately or not. Lack of turnover in an account indicates that the
account is showing sticky tendencies.

Along with Monthly Stock Statements, units engaged in Manufacturing Activity

have to submit SOD (Select Operational Data). This is known as MSOD – Monthly
Select Operational Data. MSOD need not be submitted by the Units engaged in
Trading Activity. Also, MSOD is not applicable for the Units enjoying W C Limit of
less than Rs 10 lacs.

Review of QOS & HOS

QOS stands for Quarterly Operating Statement and HOS stands for Half-yearly
Operating Statement.

The data under QOS /HOS gives information on the operational results of the
borrower enterprise, utilization of funds, liquidity position and can be used as an
important monitoring tool.

QOS contains the following information :

a) Para 1 - Estimates of Production, Gross Sales and Net Sales made for the CFY.

We have to verify whether the same are in conformity with CMA data used at the
time of appraisal. If any difference is observed we have to ensure the same is
done with the knowledge of the Bank.

b) Para 2 -Actuals of Production, Gross Sales and Net Sales will be furnished
Quarter-wise. Also cumulative amounts of Production, Gross Sales and Net Sales
will be furnished.

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In this regard, we have to counter-check the data with that of MSOD related to
respective quarter. In MSOD (Monthly Select Operational Data) , details of
Production and Sales related to related month are available. If wide variations are
noticed , call for justification from the Borrower.

c) Para 3 contains position of Current Assets and Current Liabilities.

Compare each item with that of stock statement and MSOD of respective period.
If any wide variation is noticed, call for justification.

From QOS, we observe the position of NWC. Compare NWC of current quarter
with that of previous quarter and in case the movement of NWC is not favourable,
call for steps taken by the Unit to improve NWC.

HOS contains two parts – Operating Statement related to respective Half-year

and Funds Flow Statement.

In Operating Statement the following major items need to be analysed by us.

a) Gross Sales & Net Sales

b) Cost of Goods Sold

c) Operating Profit (or loss)

d) PBT (Profit Before Tax)

Compare them with data related to previous Year / quarter and also with CMA
data.

In Funds Flow part, how long term funds are generated (sources) and how they
are used will be available. From this we know whether Long Term Uses are funded
only by Long Term Sources or not. If the data tells that LT Uses are more than LT
Sources, it implies that Short Term Sources are used to meet Long Term Purposes,
which is not acceptable to Bank. This is known as Diversion of Working Capital.

From study of HOS we are able to know the following two important points :

a) whether the Operations generate profits on estimated lines

b) whether the Unit is resorting to Diversion of WC funds to meet LT Uses.

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While reviewing QOS the following points to be kept in mind :

a) Abnormal increase in Inventory (or accumulation of Inventory) may be due to

declining sales.

b) Abnormal increase in debtors may mean poor recovery steps adopted.

c) Compare receivables in proportion to sales. If the debtors share is increasing, it

may be due to declining demand for the Unit‘s product and the Unit is forced to
sell the product on longer credits.

d) Creditors for purchase is not increasing in tune with purchases – may mean that
the Unit may be losing its creditworthiness. If share of Creditors is coming down,
make proper market enquiries regarding standing of the Unit in the Market.

Inconsistent Data

Units may be furnishing different data in different statements. Value of Inventory

what is stated in Monthly Stock Statements may differ from what is stated in QOS.
Sales furnished in MSOD may not agree with what is stated in QOS. When the
Unit is not consistent in furnishing data, we have to doubt the quality of the Data
itself.

When we observe serious inconsistencies in the data furnished, we should keep

the Unit under scanner.

Both QOS and HOS are beautiful tools for monitoring Borrowers enjoying WC
limits.

Insurance of Assets charged to Bank

All securities pledged/hypothecated need to be adequately insured against the

following risks.

a) Fire

b) Strike & Riot/Malicious Damage, terrorism

c) Burglary

d) Risk against self combustion in respect of goods which are self

combustible like copra, tobacco.

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All other goods stored in the go-down/s are also to be insured as otherwise the
―Average Clause incorporated in all the fire policies will operate to the
disadvantage of the bank in the event of a claim.

As per Average Clause, in case of under insurance, the claim will be settled only
proportionately in the same proportion between the amount of insurance and
total value of goods.

Amount of insurance
i.e., Amount settled = Loss x —————————————-
Total value of goods

All securities under inventory limits have to be insured for the market value or
cost price whichever is more.

Cover notes initially issued are valid for a period of 15 days only. Hence it should
be ensured by branches that the cover note is replaced by a regular policy within
a fortnight.

In the case of the policies in the name of the borrower/s, bank‘s interest is to be
noted in the policy by way of an endorsement in the name of the bank. For
safeguarding the Bank‘s interest, it is necessary to stipulate that the ‘Bank clause‘
should be got inserted in the policy at the time of inception/attachment of the
risk itself and the policy should be lodged with the branch by the borrower.

Bank clause enable Insurance Company to pay Moneys payable under the Policy
to the Bank directly as Agents of the Borrowers.

First Loss Policies – A first-loss policy is an insurance policy for goods in which a
total loss is unlikely and the insurer provides cover for a sum less than the total
value of the goods. With large warehouses and stores where the value of stocks is
considerable and of bulky nature rendering a full loss very unlikely, a first-loss
policy may be given.

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A first-loss policy is used when it is inconceivable that all property would be lost in
a single claim. A first-loss policy is an insurance policy for goods in which a total
loss is unlikely and the insurer provides cover for a sum less than the total value of
the goods. A first-loss policy provides only partial insurance. In the event of a
claim, the policyholder agrees to accept an amount less than the full value of
damaged, destroyed or stolen items or property. In return, the insurer agrees to
not penalize the policyholder for under-insuring their goods or property.

Floater Policies - In certain instances the Insurance Companies provide floating

cover where the goods are stored in more than one go-down. Wherever possible,
the branches can request the borrower to go in for such floating cover in case the
borrower has held the stocks in more than one go-down, as in such cases the
branch need not monitor the quantum of stock held in each go-down vis-a-vis
the insured amount pertaining to each go-down.

Floater policies will help to cover your whole stock irrespective of the locations of
your shops / warehouses. Single sum insured is applicable for all stocks in all
locations. However, Borrower has to declare all the different locations. Unspecified
locations are not allowed. If you want to add a location to your policy, you should
inform the insurance company and you will have pay the additional floater as
premium

Margin :

The margin is the amount that a borrower need to pay from his own funds. For
example, Mr X wants to purchase one Sofa Set whose cost is Rs 50,000. In this
case, the bank is ready to finance 70% (Rs 35,000) of the price of the Sofa Set. The
balance of 30% (Rs.15,000) has to be provided by Mr X. This money of (Rs 15,000),
which Mr X puts into this transaction is called margin money.

Margin is insisted because the borrower will take interest in the business if he
invests his own money also. Otherwise, there is a likely hood of his mismanaging
or misusing the entire amount of the loan given by the bank.

In case of Inventory Finance, we arrive at Drawing Power based on the Stock

Holding as furnished in periodical stock statements. As the Borrower has to keep
his own amount also in business, while arriving at Drawing Power we reduce the
amount to be brought in by the borrower by way of Margin.

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It is common practice in Banking to stipulate Margin differently for different types
of products. While deciding the Margin, we take ―The nature of security,
fluctuations in the market price, durability, marketability, risk of deterioration,
difficulty in ascertaining the correct value etc‖ into consideration.

If the Good is of perishable nature, we stipulate higher margin.

If the goods financed are easily saleable we can stipulate lower margin.

In cases, where it is difficult to assess value of the goods in question, we stipulate

higher margin.

For goods covered under the directives of RBI selective credit control margin
advised by R B I from time to time should be stipulated.

Concessional margins may also be considered for weaker sector advances and
for unemployed persons for getting self employed except in cases where RBI
directive is applicable.

Margin versus Promoters’ Contribution :

Any Business owner or promoter should bring part of total project cost which is
called Promoter‘s Contribution. Margin is part of Promoter‘s Contribution. In
certain cases, both Promoter‘s Contribution and Margin are one and the same,
but it is not so in all cases. Following examples are furnished to make the
concepts clear.

Example: When Applicant want to purchase a Car for Rs 10 lacs (inclusive of

Purchase Price, Registration Expenses and Cost of Insurance), we insist him to
bring 20% (i.e. Rs 2 lacs) and we extend finance to the extent of Rs 8 lacs. In this
case, both promoter‘s contribution and Margin are one and the same (20% or Rs
2lacs)

In case the Applicant approached for Loan to meet cost of construction of

residential building in the site purchased by him two months back for Rs 5 lacs.
Now he has approached for a loan of Rs 9 lacs to meet cost of construction and
to provide other amenities like electricity, which is estimated at Rs 12 lacs. In this
case, Total Project Cost is Rs 17 lacs (Cost of Site + Cost of Construction). Already
he has invested Rs 5 lacs (towards purchase of site from his own sources) and he
is ready to bear Rs 3 lacs ( difference between Cost of Construction and Amount
of the Loan sought).

Page 23 of 212
As such total amount brought by the Borrower is Rs 8 lacs. This Rs 8 lacs is known
as Promoter‘s Contribution.

Though he had already invested his own funds of Rs 5 lacs towards purchase of
site, we will not sanction Rs 12 lacs to meet cost of construction. We stipulate
minimum percentage of estimated cost to be brought in by Applicant, which is
known as Margin. In the above case, Rs 3 lacs, which he is ready to bring-in from
own sources to meet the part of construction, is known as Margin.

Thus, Margin is different from the promoter's contribution. While the promoter's
contribution is calculated with reference to project as a whole, margin is in respect
of each asset acquired out of each loan.

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 02. Collaterals and Modes of Charging Securities
Topics covered in this Chapter are ----

Types of Collaterals and their Characteristics, Different Modes of Charging

Securities

###

Bank insist on securities while lending to safeguard their advances. The main
purpose of taking a security is to fall back on it in case the loan is defaulted.

Bank take movable properties immovable properties or a debt as securities for a

loan.

The method of creating charge over a property depends upon the nature of
property and nature of charge.

Creation of Charge is a mode of providing securities to a banker for an advance .It

is transfer of a right, property or a debt .

The transfer is called assignor and the transferee assignee.

By “Charge” we mean “transfer or creation of interest in the Asset”. Depending on

the nature of Asset and possession of the Asset, Charges are named differently -
Mortgage ; Hypothecation ; Pledge ; Lien ; Assignment.

Types of charges

Bank charge over property confines itself to one or more of the following types of
charges.

a) Set-off

b) Hypothecation

c) Pledge

d) Mortgage

e) Appropriation

f) Assignment

e) Lien
Page 25 of 212
Set off

Set off means total or partial merging of a claim of one person against another in
a counter claim by the latter against the former. It is in effect, the combining of
accounts of the debtor and creditor, to arrive at the former. It is in effect, the
combining of accounts of the debtors and creditors, to arrive at the met balance
payable to one or the other .The right of set off is a statutory right and can also
arise out of an agreement between parties.

Salient features of Set off

a) Both debts must be for certain sums. A debt accruing due to cannot be set off
against the debt already due.

b) The banker cannot set off the credit balance in the account of guarantor till the
liability of the guarantor is determined.

c) The credit balance in the current account cannot be set off against a contingent
liability of a bill discounted but not yet due.

d) A banker cannot set off a debt due to him upon a loan account repayable on
demand or at a specified date against a credit balance in the current account until
the demand is made or due date arrives

e) The parties must be mutually indebted in the same right.

f) The credit balance in the partner‘s account can be set off against the debit
balance of a partnership account since the liability of the partner is joint and
several.

g) Right of set- off is exercisable between two firms , which have separate names
but are composed of same set off is exercisable between two firms, which have
separate names but are composed of same set of partners.

h) The credit balance in the personal account of a sole proprietor can be set off
against the debit balance of the sole proprietary concern and vice versa.

i) When the right set off is available to the bank , lien right cannot apply .These
two different rights cannot be exercised simultaneously at the same time.

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Automatic right of set off arises in the following circumstances

• On the death, insanity or insolvency of the customers.

• On the insolvency of a partner of a firm or winding up of a company

• On receipt of a garnishee order.

• On receipt of notice of assignment of a customer‘s credit balance.

Hypothecation is transfer of interest in floating assets. Under hypothecation, the

possession of the security remains with the borrower itself. If the borrower
defaults on payments, the lender would have to first take possession of the
security (asset under hypothecation) and then sell the asset to recover dues.

In case of OCC, Kisan Credit Card (KCC), Vehicle Loans charge is created on assets
by way of hypothecation.

Pledge :

Bailment of goods as security is known as the pledge.

In case of KCC (Key-shut Cash Credit), the stocks given as security will be stored in
go-down and the go-down keys will be with Bank. In such cases, the charge is
known as Implied Pledge. In case of loans against gold jewellery, the charge is
known as Pledge.

Pledge means bailment of goods for purpose of providing security for payment of
debt or performance of promise. (As per the section 172 of Indian Contract Act
1872).

The person, whose goods are bailed is called the Pawnor, the person who takes
the goods as security is called the Pawnee.

The followings are the legal implications of a pledge:

• The ownership of the property is retained by the pawnor, which is subject only
to the qualified interest which passes to the pawnee by the bailment.

• One of the main and most essential requirements of a pledge is the actual or
constructive delivery of the goods to the pawnee. By constructive delivery, it is
meant that there need be no physical transfer of goods from the custody of the
pawnee or of the any person authorized to hold them on his behalf.

Page 27 of 212
Goods may be delivered by one of the following ways

• By handling over the key of the godown, in which the goods are kept.

• By attornment I e if goods are in public warehouse, the warehouseman

acknowledges to the pawnee that he will hold the goods thereafter on behalf of
the pawnee.

• Handling over the document of title to goods such as railway receipt, bill of
lading, warehouse receipts etc.

• Even if goods are in possession of the pawnor , he may acknowledge that he

holds them thereafter for and on behalf of the pawnee.

• An agreement of pledge may be implied from the nature of the transaction or

the circumstances of the case .However, an agreement in writing clearly laying
down the terms and conditions leaves no ambiguity.

Mortgage : is the transfer of an interest in specific immovable property ( Land

and Building) to secure an advance loan or an existing debt or a debt or
performance of an obligation.

In a mortgage transaction instrument by which the transfer is effected is called a

mortgage deed.

Essentials of a mortgage –

a) Transfer of interest.

b) Immovable property should be specifically mentioned.

c) To secure the payment of a loan

The Transfer of Property Act

The Transfer of Property Act 1882 (TP Act) regulates the Transfer of Property in
India.

The TP Act is limited to the transfer of property by the act of parties that is,
through sale, exchange, gift, actionable claim, mortgage and lease. It does not
cover the transfer of property by the operation of law.

The TP Act deals with the transfer of immovable property inter vivos that is,
between living persons.

Page 28 of 212
The TP Act pertains to voluntary transfers executed by the act of parties and does
not cover transfers by the operation of law in form of inheritance, insolvency,
forfeiture or sale in execution of a decree.

The Transfer of Property Act 1882 deals with the immovable properties. The
transactions governing sale, lease, mortgage, gift of immovable properties are
covered.

The TP Act has no application to the disposal of property by will and does not
deal with cases of succession of property.

There are various types of mortgages as under:

a) Simple mortgage
b) Mortgage by conditional sale
c) Usufructuary mortgage
d) English mortgage
e) Equitable mortgage
f) Anomalous mortgage

Simple mortgage:

It is a transaction where without delivering possession of mortgaged property, the

mortgagor binds himself personally, to pay the mortgage money and agrees
expressly or impliedly that mortgagee shall have the right to sell the property
through court and adjust the proceeds as far as necessary.

Mortgage by conditional sale:

It is a transaction wherein the mortgagor ostensibly sells the mortgaged property

on the condition that -

a) The sale shall become absolute on default of the payment of the mortgaged
money on a certain date or

b) shall become void on such payment being made or

c) that the buyer (mortgagee) shall transfer the property to the seller (mortgagor)
on such payment.

The process of transforming the ‘mortgage‘ into ‘sale‘ can be enforced by

foreclosure suit.

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Usufructuary mortgage:

i) Usufructuary mortgage as the name implies, is one where the creditor is placed
in possession of the property to enjoy the rents and profits until his claim is
satisfied. There is transfer of one of the incidents of ownership viz., the right of
possession and enjoyment of the usufruct.

ii) The essence of a usufructuary mortgage is - rents and profits of the property
are appropriated in lieu of interest or they are applied in payment of mortgage
money or they are received in lieu of interest and partly in payment of mortgage
money.

English mortgage:

Under the English mortgage, the mortgagor personally binds himself to repay the
mortgaged money on a certain day. The property mortgaged is transferred
absolutely to the mortgagee. This transfer is, however, subject to the proviso that
the mortgagee will reconvey the property to the mortgagor upon payment of the
mortgage money on the date fixed for repayment.

Equitable Mortgage: (Mortgage by deposit of title deeds)

i) Mortgage by deposit of Title Deeds is one where a person in any one of the
metropolitan cities, namely Delhi, Kolkata, Chennai and Mumbai or in any other
town which the local government notifiesin the Official Gazzette, delivers to a
creditor or to his agent, documents of title to immovable property, with an
intention to create a security thereon.

ii) By deposit of title deeds followed by registered memorandum of deposit: There

may be instances where the parties are in possession of only some of the material
documents of title to the property. In such cases, after satisfying about the
creditworthiness of the borrower and that the other material documents are not
traceable in spite of best efforts put by the borrowers, equitable mortgage by
getting the Memorandum of deposit of title deeds registered with the Registrar
can be followed.

Anomalous Mortgage:

Anomalous mortgage is one which does not fall within any classes enumerated
above.

Page 30 of 212
The bankers opt for equitable mortgage by deposit of title deeds looking at
simplicity of procedure. In case of default in paying mortgage debt in prescribed
manner, a mortgagee can sell the property. The mortgager however is entitled to
equity of redemption, i.e. A right to repay the dues and take back the property.

In case of failure to make such payment, the mortgagee is entitled to ‘foreclose’

property which debars the mortgager from redeeming the property.

Mortgage by Conditional Sale Vs English Mortgage :

There are two major differences between Mortgage by Conditional Sale and
English Mortgage (Mortgage with condition of retransfer) as under :

1) In case of Mortgage by Conditional Sale , the existence of debt between seller

(mortgagor) and buyer (mortgagee) is necessary. However, in case of English
Mortgage (Mortgage with condition of Re-transfer) there is no relation of debtor
and buyer.

2) In the Mortgage by Conditional Sale, only some interest in the property is

transferred to the mortgagee while in case of English Mortgage (Motgage with
condition of retransfer) all the interest in the property is transferred except a
personal right of repurchase.

Reverse Mortgage

A Reverse Mortgage is a loan where the lender pays the monthly instalments to
the Borrower instead of the borrower paying the lender. The payment stream is
reversed. A reverse mortgage allows people to get tax-free income from the value
of their home. They are mainly to improve older people's personal and financial
independence.

Foreclosure

In case of loans backed by Mortgage, . If the debtor does not pay the loan, the
creditor may take the mortgaged property in place of the loan. This is called
Foreclosure.

Page 31 of 212
Assignment :

Transfer of ownership of a property, or of benefits, interests, rights under a

contract (such as an insurance policy or Receivables), by one party (the
assignor) to another (the assignee) by signing a document called deed of
assignment.

The charge in case of loans against book-debts (Receivables) and against

amounts covered under Insurance Policies, Shares known as Assignment.

Right of Appropriation :

In case of his usual business, a banker receives payments from his customer. If the
latter has more than one account or has taken more than one loan from the
banker, the question of the appropriation of the money subsequently deposited
by him naturally arises. Section 59 to 61 of the Indian Contract Act, 1872 contains
provisions regarding the right of appropriation of payments in such cases.
According to Section 59 such right of appropriation is vested in the debtor, who
makes a payment to his creditor to whom he owes several debts. He can
appropriate the payment by

(i). an express intimation or

(ii) under circumstances implying that the payment is to be applied to the

discharge of some particular debt.

If the creditor accepts such payment, it must be applied accordingly. For example,
A owes B several debts, including Rs. 1,000 upon a promissory note which falls
due on 1st December, 1986. He owes B no other debt of that amount. On 1-12-
1986 A pays B Rs. 1,000. The payment is to be applied to the discharge of the
promissory note.

If the debtor does not intimate or there is no other circumstances indicating to

which debt the payment is to be applied, the right of appropriation is vested in
the creditor. He may apply it as his discretion to any lawful debt actually due and
payable to him from the debtor (Section 60) Further, where neither party makes
any appropriation, the payment shall be applied in discharge of each
proportionately (Section 61).

Page 32 of 212
In case a customer has a single account and he deposits and withdraws money
from it frequently, the order in which the credit entry will set off the debit entry is
the chronological order, as decided in the famous Clayton’s Case. Thus the first
item on the debit side will be the item to be discharged or reduced by a
subsequent item on the credit side. The credit entries in the account adjust or set-
off the debit entries in the chronological order.

In a case of death, retirement or insolvency of a partner of a firm, the then existing

debt due from the firm is adjusted or set-off by subsequent credit made in the
account. The banker thus loses his right to claim such debt from the assets of the
deceases, retired or insolvent partner and may ultimately suffer the loss if the debt
cannot be recovered from the remaining partners. Therefore, to avoid the
operation of the rule given in the Clayton’s case the banker closes the old account
of the firm and opens a new one in the name of the reconstituted firm. Thus the
liability of the deceased, retired or insolvent partner, as the case may be, at the
time of his death, retirement or insolvency is determined and he may be held
liable for the same. Subsequent deposits made by surviving/ solvent partners will
not be applicable to discharge the same.

Where a debtor has several debts with a creditor with the appropriation of
payments made by the debtor to the creditor

Express Instruction by Debtor

Where the debtor, owes more than one debts to one person and he makes
payment, either with express intimation or under circumstances, implying that the
payment is to be applied to the discharge of some particular debt, the payment, if
accepted, must be applied accordingly by the creditor.

Omission by Debtor to Intimate

Where the debtor has not indicated the account and circumstances also do not
indicate to which debt, the payment is to be applied, the creditor at his discretion,
can apply the payment to any lawful debt, actually due and payable to him from
the debtor, whether its recovery is or is not barred by the law of limitation of suits.

Page 33 of 212
Non-Appropriation

Where neither the debtor indicates nor the creditor party appropriates, the
payment shall be applied in discharge debts, in order of time, whether they are or
are not barred by the law of limitation. If the debts are of equal standing, the
payment shall be applied in discharge of each proportionately.

Banker’s Right 0f Appropriation

The above principle of appropriation also applies to the loans obtained from
bank, when there are two or more debts due to a single customer.

The general principle is that in case of a debt due with interest, any payment
made by the debtor should be first applied by the bank to the interest and
thereafter to the principal amount, unless there is agreement to the contrary.

Bank is not bound to accept the payment from the burrower on the condition
proposed by him. But where the condition is accepted, it has to be fulfilled.

For example: Where the customer deposits money to meet the payment of a
particular bill payable by him, bank cannot utilise this money against any other
loan/advance account.

Right can be exercised only at the time of a payment. Bank cannot unilaterally
combine all the accounts of customer

Where the bank decides to appropriate the payment it has to send a notice to the
customer. When appropriation comes to the notice of the customer, it becomes
irrevocable

Where the customer has one single overdraft account and he makes frequent
transactions by way of deposits and withdrawals, each credit entry is deemed to
be appropriated against debit entries in chronological order.

Lien

A Lien is the creditor’s right over the asset used as collateral for securing
payments on debts. A Lien can be established either through a creditor’s
judgement or court order. Lenders or creditors have the legal right to seize the
asset if the borrower fails to meet the terms of the underlying obligation, such as
repayment of the loan.

Page 34 of 212
Despite high-interest rates, collateral and liens are necessary for favourable loans
to businesses, depending on their financial situation and collateral availability. A
lien ensures that an underlying obligation will be met, such as loan repayment.
This is because, in the event of nonpayment of the underlying obligation, the
creditor has the right to seize the collateral and sell it to recover the lent amount.

Liens give creditors the legal right to seize or sell collateral when borrowers fail to
meet their obligations on a loan or contract. Property subject to liens may not be
sold without the lienholder’s consent. If the property is leased, a lien may be
deposited voluntarily or with consent, for example, as part of an agreement to
lend the property.

Non-payment of a loan may result in an involuntary lien or statutory lien. An asset

such as a property or a bank account will record a lien at the end of the process.
Some liens are filed with the government to demonstrate a claim to assets or
property held by the lien holder. The lien record informs anyone interested in
purchasing an asset or collateral that the lien has to be released before the asset
can be sold.

Say you acquire a lien on a property for business purposes. You could purchase
the property from a dealer with a bank loan, and the bank would take title to it as
well as hold a lien on it. In the event that the borrower defaults, the bank has the
right to sell the property to recoup the loan amount. The bank owns the property
as a security interest, so property ownership remains with them.

It is a lien that accompanies the loan taken out by an individual to purchase an

asset. For example, you take out a loan to buy a car. The amount you borrow will
cover the price of the vehicle. By doing so, the bank becomes a lienholder on the
car. In the event that you fail to repay the loan and interest, the bank could put
the car into their possession. When the loan is paid off in due time, the lien is
released and you become the rightful owner of the vehicle.

Fixed Charge and Floating Charge

Fixed Charge is the kind of charge created on properties/assets the identity /

nature/ownership of which does not change. For example, a fixed charge would
be created on Land & Building, Plant & Machinery.

Page 35 of 212
Floating Charge is created on assets which undergo change of ownership – like
stocks of goods of a shop. A trading concern may take a loan, against its stock as
security. Such a stock may be used for business, i.e., it can be sold in the ordinary
course of its business. Thus the charge on the stock, which keeps changing, is
known as Floating Charge.

Actionable claim

Actionable claim is defined in Section 3 of the Transfer of Property Act, which was
included in the Act by the Amending Act II of 1990. Actionable claim is an
intangible movable property, and its transfer is dealt with in Chapter VIII of the
Act. According to Section 3 of the Act, actionable claim means:

Claim to an unsecured debt

Beneficial interest in a movable property

The term actionable claim only covers the above mentioned two types of claims.

Actionable claims are claims, to unsecured debts.

The charge on Actionable Claims is known as Assignment.

Registration is an essential legal formality to effect a valid transfer in certain

cases. The advantage of registering a document is that any person who deals with
the property would be bound by the rights that are created in earlier registered
document.

Doctrine of Lis Pendens – Section 52 – Lis means dispute, Lis pendens means a
pending suit, action or petition. During the pendency of a suit in a Court of Law,
property which is subject to a litigation cannot be transferred.

For example, A and B are litigating in a Court of law over property X and during
the pendency of the suit A transfers the property X to C. The suit ends in B‘s
favour. Here C who obtained the property during the time of litigation cannot
claim the property. He is bound by the decree of the Court wherein B has been
given the property. A suit in foreign Court cannot operate as lis pendens.

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 03. Documentation
Topics covered in this Chapter are ----

Importance of Documentation – Dos and Don’ts – Renewal of Documents

###

One of the foremost and major functions of Banks is lending money to

constituents. This results in contractual relationship between the banker and the
customer which needs to be supported by proper evidence. Besides, banks have
to get all their operations and transactions duly backed by requisite documents
and also maintain a proper record evidencing the fact of transactions. In this
context, obtention of correct ‘Documentation‘ assumes greatest importance.

Meaning and Purpose of Documentation:

Documentation means any matter expressed or described upon any substance by

means of letters, figures or marks or by more than one of these means, intended
to be used or which may be used, for the purpose of recording that matter.
(Section 3, of the Indian Evidence Act, 1872 ). This means obtaining proper
documents in appropriate form in accordance with law, executed by relevant
party/ies. The documentation establishes a legal relationship between the lending
banker and the borrower. The terms and conditions of loans/advances, the
securities offered and rights and liabilities of the parties are reduced into writing
which avoids ambiguity. The documents are of primary importance in any
litigation and proper documentation not only helps the bank in litigation but also
ensures that the borrowers do not contest on technical grounds. Documentation
is necessary to ensure due repayment of the loan by the borrower and in case of
default by him, entitles the Bank to legal recourse for recovery of loans.
Documents are the primary evidence that can be produced in a court of law to
establish right, claim or interest of the bank in the security and unless these are
properly drawn/ executed, the bank may not be able to secure an order for
decree. Hence, the purposes of documentation are:

a) to create a record of transaction

b) to create a valid and effective charge on securities in favour of the bank.

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Execution of Documents:

Utmost attention and great care must be bestowed upon for proper execution of
the loan documents. Any discrepancy in the documentation adversely affects the
rights of the bank in the event of initiating legal proceedings to recover the dues.

Examples of defective documents:

a) Inappropriate documents;

b) Documents not in complete sets as prescribed by the Bank;

c) Documents which are left partially blank;

d) Obtention of photocopies of loan agreements as part of the prescribed

documentation.

e) Obtention of copies of Typed Agreements (other than the one originally typed).

f) Over writings/erasings / corrections without proper authentication by the

borrower;

g) Unstamped or inadequately stamped or improperly stamped documents;

h) Documents executed wherein all the parties have not joined the execution;

i) the person has no proper authority.

Example: Documents executed by agent in the absence of power of attorney.

j) the person does not have the capacity to enter into a contract.

Example: Minor, lunatic during lunacy etc.

Valid and legally enforceable documents are necessary to have a recourse to court
of law to recover the dues in case of necessity. The importance of accurate
documentation need not be over emphasised. On account of defects in
documentation, the bank may incur loss.

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Date: The date and place must be correctly mentioned in the document. If a
document is to be made effective retrospectively, a clause to that effect can be
inserted in the document. The dates mentioned in the Pro-note and also on all
other relevant documents should be one and the same. The importance of date
mentioned in the document can be understood while computing the period of
limitation. When different persons have executed the documents on different
dates, they are required to mention the date below their signature. In such cases,
even though the last date will be treated as the date of completion of
documentation, for computation of limitation, the date of first execution may be
reckoned.

Filling up of particulars in the documents:

No space should be left blank in any document. The documents should be

complete in all respects. All blanks relating to details, such as, rate of interest,
nature, amount of advance, security etc., are to be carefully and accurately filled
up. All loan papers should be filled up then and there before disbursing the loan
proceeds. In the suits filed by the Bank, there were many instances when the
defendants advanced the plea that the loan documents are not binding on them
because material alterations have been made by the bank without their
knowledge or consent and that the documents were executed by them in blank.

The documents should be got completed in one sitting in the same handwriting
using the same ink and pen. Any infirmity in this regard may lead to avoidable
doubts regarding fair execution of the document.

The full name of the party, age and parentage (or husband‘s name) and full
address of the borrower and the co-borrower should be clearly mentioned failing
which in future there will be difficulty in locating the party. If there are co-
obligants, they should not be named as co-obligants in the Pro-note. In law, a co-
obligant is a co-borrower and there is no difference between the co-borrower and
the main borrower. If any document is filled up subsequent to its execution, it may
be construed as being at variance without the consent of the party, amounting to
material alteration.

As far as possible, the documents should be hand written and should not be
typed. The execution of all documents should always be done in the presence of
the officer responsible for obtaining them.

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The borrower should not be allowed to take away the documents for obtaining
the signatures of other co-borrowers/co-obligants/guarantors under any
circumstances.

Where a bank obtained a Guarantee Agreement and did not duly fill it up with
particulars, such as, the amount for which the person stands as a guarantor, date
of instrument, rate of interest, etc., at the time of execution but subsequently filled
up the particulars, such filling up amounted to substantial and material alterations
which were to the detriment of the surety and the material alterations discharged
the surety from liability. The contract of the surety cannot be altered without his
consent and filling up the particulars unilaterally by the bank amounted to
alteration of the contract without the consent of the surety. Branches may
therefore note that a Guarantee Agreement or any other loan document which is
not filled up and which contains blank spaces cannot be completed by the bank
without the authorisation/authentication by the other executant/s and if the
document with such blank spaces is produced before the court, it will be treated
as invalid or incomplete document. It is, therefore, imperative that all loan
documents including Guarantee Agreements are filled up and completed in all
respects before execution and any alterations are duly authenticated.

Signature of Executants:

All loan documents should be signed on every page at the end by the executant
for having read the contents of the pages. Initials must not be allowed to be put
in place of full signature. This is the universal practice with justifiable reasons. The
obvious advantage of getting signature on each and every page of an agreement
is that a borrower will be fully and completely bound by such execution. If it is not
so signed, the borrower may allege that the bank has substituted the relevant
pages of the agreement and that the documents executed by him contained
some other matter or that the matter contained in the pages not signed by him is
not binding on him. In order to avoid all risks and to safeguard bank‘s interest, the
signature of the executant has to be obtained on every page of the documents.

The borrowers must be asked to affix full signature in the same style throughout
the documents. Verify the signature with specimen signature already lodged for
operative account.

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All types of additions, alterations, insertions, strikings, over writings, erasings,
interlining, deletions etc., in the documents must be authenticated by the
borrower under his full signature in the same style as he has signed elsewhere in
the documents. All blanks must be filled in correctly as to spellings of the names
of the borrowers, the firm, company etc. Keeping the document blank or even one
or more columns blank may invalidate the whole document.

When a document is to be executed by an illiterate person, his/her Left Thumb

Impression should be obtained. If the Borrower is not having the left thumb or if
the practice in the area is to obtain the Right Thumb Impression, the same may be
obtained. Thumb impression of a person once affixed to a document cannot be
disputed as not belonging to him/her and therefore it can be treated as proper
mode adopted for binding a party to a document. However, the words
―identified by me need not be written in the loan documents nor the identifier
affix his signature on every place/ page where the thumb impressions are affixed.

In case the borrower does not know the language of the document, it is necessary
to explain the contents thereof to him and obtain a declaration to the effect by a
person knowing the language of the document.

Wherever the loan documents are executed by illiterate person/s the narration
such as ―LTI / RTI of Mr/Mrs…………………………. has to be written wherever thumb
impressions are obtained/affixed.

While obtaining documents from Purdanishin ladies, branches must ensure that
the lady/ladies executing the documents freely understands/ understand the
nature and contents of the documents. Hence, this extra precaution is called for.
In such cases, a declaration in to be obtained by a person knowing the language
of the document.

Identification of the purdanishin lady and interpretation of the document should

be done by a female declarant not related to the borrower.

Place of execution (Jurisdiction):

Generally documents mention the place of the branch where the advance is
disbursed and this will determine the jurisdiction within which the suit can be
filed.

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Sometimes one or more parties execute the documents in different States. In such
cases, the following points are to be noted.

a) No further stamps be affixed if the stamp duty is same in all States.

b) Difference in stamp duty is payable if the documents travel to the higher stamp
duty area from lower stamp duty area.

c) If the document travels to the State of Jammu & Kashmir from another State or
vice versa, the full stamp duty as applicable in the State to which the document is
taken has to be paid in addition to the stamp duty already paid in the other State.

d) However, where a document which has been originally stamped in any State of
India other than Jammu and Kashmir, subsequently travels from J & K to another
State, not being the State where it was originally stamped, then only differential
stamp duty on the original stamp, if any, need be paid. This differential stamp
duty is to be paid irrespective of the stamp duty paid at J&K.

The borrowers should be asked to write the name of the place below their
signatures if they are executing the documents in different States.

If execution of guarantee agreements takes place outside the place/State where

the lending branch is situated, it should be signed in the presence of a branch
manager of our Bank at such place. In the guarantee agreement on the last page,
just below the guarantor‘s signature, branch manager in whose presence the
agreement was executed, has to certify the same by affixing his signature.

Attestation:

The document must be executed first by the executant and then only it must be
signed by attesting witness. The attesting witness should sign in the presence of
the executant. He should sign to attest the signature of the executant. He is not
expected to be aware of the contents of the document. He is only attesting the
signature of the executant.

A person who is a party to the document/deed cannot be attesting witness.

Attestation of document should be done only on those documents which

compulsorily require attestation.

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In case a document not requiring attestation is attested, the document attracts
ad-valorem stamp duty (Agreements should not be attested. A bond must be
attested and it attracts ad-valorem stamp duty).

Example: Mortgage deed requires to be attested.

The attesting witness must have witnessed either the actual execution or received
an acknowledgement of execution from the executant.

There must be minimum two witnesses. But it is not necessary that both should be
present at the same time.

If a document requiring attestation is not attested but executed by the executant,

the document will be treated as not duly executed.

If the attesting witness denies or does not recollect the execution of the
document, it‘s execution may be proved by some other evidence.

If no attesting witness can be found, it is enough if proved that the attestation of

at least one attesting witness is in his own handwriting and that the signature of
the person executing the document is in the handwriting of that person.

Stamping of the instruments:

a) All instruments chargeable with duty and executed by any person in India shall
be stamped before or at the time of execution as per the provisions of the Indian
Stamp Act or the State Stamp Act, as the case may be.

b) To be on the safer side, documents should be stamped before execution. The

primary duty of payment of stamp duty is that of the borrower.

c) Printed forms of documents generally used by bankers attracting stamp duty

are to be sent to stamp office who affix the stamps known as ―Special Adhesive
Stamps.

In certain States, Branch Managers of Nationalized Banks are empowered to affix

stamps, in which case affixing stamp on documents by stamp office is not
necessary.

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d) Hypothecation agreements, power of attorney, Guarantee agreements etc., are
instances of documents affixed with special adhesive stamps. The executant need
not cancel these stamps. They are cancelled by the Treasury itself. Even if the
Treasury impress or emboss the stamp value on the documents, it would amount
to stamping the documents and no cancellation is required.

e) It should be ensured that execution/dating of the instrument should be on or

subsequent to the issue of non- judicial stamp paper/affixation of special adhesive
stamps, as the case may be.

Cutting of stamped portion from the non-judicial stamp paper and pasting the
same on the document should not be done as it would be a violation of the
Indian Stamp Act.

f) There is no bar in procuring revenue stamps from neighbouring States.

The revenue stamps come under the purview of the Central Government and
unless Central Government issues any ban on the same there will be no restriction
on the usage of the same procured from other states. Postal stamps cannot be
used in place of revenue stamps.

Stamp Duty:

a) Branches to exercise caution and shall not involve any intermediaries/ private
agencies for getting embossing done on documents. Branches shall directly take
up with the treasury / respective office of the Government / authorised bank or
other authorized authorities for such requirements.

b) The stamp duties on the following instruments fall under the Union list of the
constitution of India (Indian Stamp Act) and duty is common throughout India
(except the State of Jammu & Kashmir). Reduction, remission or alteration with
regard to stamp duty on these instruments could be effected by the Central
Government only.

a) Promissory Notes (b) Transfer of shares

c) Debentures (d) Proxy
e) Insurance Policy (f) Letter of Credit
g) Bill of lading (h) Receipts
i) Bills of Exchange (only on Usance bills. No stamp duty on demand bills)

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d) On all other documents such as Agreement, Power of Attorney, AOD, Mortgage
Bond etc., the appropriate State Government has a right to levy the stamp duty
because it falls under the State list of the Constitution of India. Therefore, duties
on these instruments differ from State to State.

Cancellation:

a) The criterion for determining whether a stamp has been effectually cancelled is
whether, on seeing the stamp, an ordinary prudent man would come to the
conclusion that the stamp has been used and cannot be re-used.

b) It is to be ensured that the signature starts on the document, goes over the
stamp and may extend beyond the stamp on the document.

Getting the signature of the borrower in this manner is the most effective method
of cancellation.

c) If the entire signature of the party is on the stamp and not extending on to the
document or a single line drawn on the stamp, it may be treated as ineffective
cancellation and capable of being re-used as the stamp can be taken out and
pasted on another document.

d) When there are more than one borrower, it is enough if one of them signs
across the stamp. It is not necessary that all the borrowers should sign across the
stamp.

Under stamping/Non-stamping:

An under stamped document cannot be the basis of a suit in a Court of Law as it

cannot be accepted in evidence.

Any such instrument shall be admitted in evidence on payment of the duty with
which the same is chargeable, or, in the case of an instrument insufficiently
stamped, of the amount required to make up such duty, together with a penalty
of five rupee or, when ten times the amount of the proper duty or deficient
portion thereof exceeds five rupees, of a sum equal to ten times such duty or
portion.

Page 45 of 212
Precautions while using (pre-gummed) Adhesive Stamps (Revenue Stamps)

Normally, we make use of watered sponge (or our tongue) while affixing Revenue
Stamps on the documents. However, to avoid any problems in future, the
following are suggested in this regard :

1. Avoid using watered sponge or tongue to wet the pre-gummed stamp.

2. Use fresh gum again before affixing Revenue Stamps, to avoid its easy removal
over a period of time by accident or by intention.

3. As an abundant precaution, obtain one more signature of executant away from

the Revenue Stamp (in addition to signature across the Stamp). This helps in
proving the fact that the document in question is signed by the executant.
Further, in case the Stamp somehow gets removed from the document in the
course of time, the blank space of the exact size matching with the size of the
missing part of the signature will help us to prove that the document is duly
stamped and signed.

4. As Revenue Stamp consists the State Emblem of India ( the Lion Capital of
Ashoka), please ensure that it is affixed in a proper way, as we have to honour our
State Emblem.

Miscellaneous Points regarding Stamping.

Incorporation of clauses in Loan/Guarantee/Security Agreement giving consent

for submitting and authentication of Financial Information to Information Utilities.

Renewal / Revival of Documents

It is imperative that besides obtention of appropriate documents, branches should

ensure that the documents are kept alive at all times. Necessary steps should be
taken to renew/revive the documents before the expiry of the limitation period.

Acknowledgement of Debt(AOD)/Acknowledgement of Security (AOS)/ Letter of

Revival (LOR) are obtained after 24 months but before completion of 36 months
from the date of loan papers/commencement of limitation period.

Failure to renew the documents or to obtain AOD/AOS/ LOR from the parties will
result in loan documents getting time barred and the Bank‘s right to take legal
action/suit against the borrower will be lost.

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Law of limitation prescribes the period within which the existing rights can be
enforced in a court of law. According to Section (3) of the Limitation Act, 1963,
any suit instituted, appeal preferred and application made after the prescribed
period shall be dismissed although limitation has not been set up as a defence.
Therefore, it is necessary to keep watch on the period of limitation and before
expiry of such period, every effort should be made to recover the dues or decision
should be taken to file a suit or get the limitation period extended by obtaining
AOD/AOS /LOR from the borrower.

For the purpose of computing the period of limitation for any suit, the date from
which such period is to be reckoned shall be excluded. Example: If a pro-note is
dated 29.04.2020, it will complete 3 years on 28.04.2023. Since the first date is to
be excluded, the suit can be filed latest on 29.04.2023.

Education Loans and AOD

In respect of education loans, limitation commences from the date of

commencement of repayment. Hence, AOD/LOR must be obtained after
completion of 24 months but before completing 27 months from the date of
commencement of repayment.

In case of education loans to minors, an undertaking letter should be obtained

from the student once he/she attains majority. Besides, AOD/LOR is to be
obtained both from the student as well as the parent / guardian who has
executed the loan documents representing the minor student, within the
limitation period. This is required as the loan agreement is executed by the
parent/guardian representing the minor in that capacity and also in his personal
capacity.

Where the borrower/co-obligant resides abroad:

a) For the purpose of computing limitation period for filing suit, the period during
which the borrower stays abroad is to be excluded.

b) Wherever circumstances necessitate obtention of AOD, it should be got

executed and stamped as per the law in force at the place the borrower resides.

c) AOD may be got through postal correspondence by addressing a letter to the

borrower. The signature on the AOD should be witnessed by his/her banker
abroad or by any other non-resident maintaining account with us or by the
Consulate Officer of the Embassy/Consulate of India in that country.
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d) When AOD is received in India, the same shall be stamped as per the law in
force in the place where the branch is situated, within 3 months from the date of
its receipt in India.

Payments made under Guarantees/DPGs/Co-acceptance:

The limitation period commences from the date of payment by the bank, i.e., 3
years from the date of payment by the bank. Branches should obtain
AOD/AOS/LOR after 24 months but within 36 months from the date of
commencement of limitation period. Wherever AOD/AOS/LOR is obtained for the
first time, reference is to be made about Guarantee/LC agreement etc.

AOD/AOS/LOR must be obtained for the amount paid by the bank and not
reimbursed by the borrower, if any.

While obtaining AOD/AOS/LOR for subsequent defaulted instalments, the amount

covered under earlier AOD/AOS/LOR may be included and reference to earlier
AOD/AOS/LOR may be given, which would enable obtaining AOD/AOS/LOR for
consolidated amounts.

Branches should note that in cases where pro-note is taken apart from the
hypothecation, AOD/AOS/LOR should be obtained after 24 months from the date
of execution of pro-note.

Third party guarantee and AOD

In case of third party guarantee the limitation period commences from:

a) the date on which the bank receives a notice in writing from the guarantor
revoking the guarantee; or

b) the date on which a demand is made by the bank for repayment on the
guarantor; or

c) where the guarantee is obtained for a specific period - on the date when such
specific period comes to an end and there is no renewal.

Hence, the period of limitation is to be reckoned 3 years from the date of

happening of any one of the above events.

AOD/AOS/LOR should be obtained after expiry of 24 months but well before

expiry of limitation period from the date of such events.

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For obtention of AOD from the legal heirs of guarantor in the case of the death of
the guarantor, the following guidelines may be referred to :

a) Since the guarantee is obtained in the personal capacity, the question of

binding the legal heirs will arise only if the deceased guarantor has bequeathed
property asset to his legal heir and the bank is in a position to prove that a
particular property asset possessed by the legal heirs was the property of the
guarantor at the time of his death.

b) In such cases, it is therefore advisable to obtain a fresh guarantee of a third

party adequate to cover the liability and acceptable to the Bank in consultation
with the sanctioning authority.

c) However, in the case of sticky accounts, where the borrower is not able to
provide alternate guarantee acceptable to the Bank, the Bank should obtain the
AOD from all the legal heirs of the deceased guarantor. Such AOD should be
obtained from the legal heirs immediately after the death of the guarantor and in
any case before the expiry of the period of limitation.

AOD/AOS/LOR by illiterate borrowers:

In case of an illiterate borrower who has subsequently acquired the knowledge of

writing and signing, he/she should be asked to affix his/her LTI/RTI and put
his/her signature simultaneously on NF.760 or NF.761/LOR.

If the borrower / Co -obligant/Guarantor signs in any language other than English,

declaration to be obtained from attester.

b) In case of a borrower who has executed the loan papers in vernacular language
and later on wishes to sign in English or in a language other than the language of
the original signature affixed earlier, signatures in both the languages should be
obtained.

Obtention of AOD / AOS /LOR from legal heirs of the deceased borrower /
co- obligant:

a) On getting the information about the death of a borrower/ co-obligant, a

suitable condolence letter may be sent to the legal heirs. Indirect reference may
be made in the letter about the loan availed by the deceased borrower or co-
extensive liability of the coobligant, as the case may be. However, detailed
particulars of the loan account need not be furnished in the letter.

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b) Immediately thereafter, within a week‘s time, a detailed letter regarding the
loan account has to be addressed to the legal heirs. This letter should be sent by
registered post AD.

c) In a situation where AOD/AOS/LOR is required to be obtained from the

borrower / co-obligant and legal heirs of the borrower/co-obligant, then separate
AOD/AOS/LOR is to be obtained.

In many cases signatures of the borrower/co-obligant undergo significant change.

Under such circumstances, branches are required to obtain a letter from the party
to the effect that his/her signature has undergone significant change. In addition
to this, LTI/RTI of the borrower may be obtained along with signature, so that it
will be easier to substantiate it at a later date.

AOD/AOS in case of loans against gold jewellery: Letter of Revival should be

obtained in case of gold loans which remain outstanding beyond 24 months.

Period of limitation for certain documents :

Nature Of Documents Limitation Period

A Demand Promissory Note . Three years from the date of DP Note

A Bill of exchange payable at sight or Three years when the bill is presented
upon presentation.

An Usance Bill of exchange Three years from the due date

A guarantee Three years from the date of invocation

of the guarantee.

A mortgage – enforcement of payment Twelve years from the date the money
of money sued becomes due

A mortgage – foreclosure Twelve years from the money secured

by the mortgage becomes due.

A mortgage – possession of Immovable Thirty years when the mortgagee

property becomes entitled to possession.

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Other Points relevant to Law of Limitation :

If Courts are closed on the date of expiration of limitation period, suit, the suit
appeal or application may be made, on the day when the court reopens.

Cash Credit Accounts being mutual, open, running and continuous accounts, the
period of limitation will be further extended up to three years from the date of
last credit/debit entries (Article 1, Limitation Act 1963). However, a debit entry of
interest due on loans would not be considered for such purposes.

Balance Sheet Entries : A debit entry shown on the Liability side of a borrower’s
balance sheet i.e., of a Limited Company, signed by its agents is considered an
acknowledgement of debt. If such acknowledgement is recorded within the
prescribed limitation period, it extends the limitation for a further prescribed
period.

AOS (Acknowledgement of Security) to be obtained to extend limitation period

in case of Mortgages.

A debtor may pay the time barred debt to the creditor. He cannot claim it back on
the plea that it was time barred.

A debtor who owes several debts to a creditor may pay a sum of money to the
Creditor.

If there is no specific mention, then the creditor can adjust the payment towards
any of the debts, including the one whose recovery is barred by limitation.

Similarly, an agreement in writing undertaking to pay a time barred debt is lawful

and binding.

@@@

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 04. Non-Performing Assets
Topics covered in this Chapter are ----

Non-Performing Assets/ Stressed Assets, Important Laws Relating to

Recovery of Dues.

###

In line with the international practices and as per the recommendations made by
the Committee on the Financial System (Chairman Shri M. Narasimham), the RBI
has introduced, in a phased manner, prudential norms for income recognition,
asset classification and provisioning for the advances portfolio of the banks so as
to move towards greater consistency and transparency in the published accounts.

The policy of income recognition should be objective and based on record of

recovery rather than on any subjective considerations. Likewise, the classification
of assets of banks has to be done on the basis of objective criteria which would
ensure a uniform and consistent application of the norms. Also, the provisioning
should be made on the basis of the classification of assets based on the period for
which the asset has remained non-performing and the availability of security and
the realisable value thereof.

Banks are urged to ensure that while granting loans and advances, realistic
repayment schedules may be fixed on the basis of cash flows with borrowers. This
would go a long way to facilitate prompt repayment by the borrowers and thus
improve the record of recovery in advances.

Non-performing Assets - An asset becomes non performing when it ceases to

generate income for the bank.

A non performing asset (NPA) is a loan or an advance where;

a) interest and/ or instalment of principal remains overdue for a period of more

than 90 days in respect of a term loan,

b) the account remains ‗out of order‘ in respect of an Overdraft/Cash Credit

(OD/CC),

c) the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,

Page 52 of 212
d) the instalment of principal or interest thereon remains overdue for two crop
seasons for short duration crops,

e) the instalment of principal or interest thereon remains overdue for one crop
season for long duration crops,

In case of interest payments in respect of term loans, an account will be classified

as NPA if the interest applied at specified rests remains overdue for more than 90
days.

‘Out of Order‘ status - An account should be treated as 'out of order' if the

outstanding balance remains continuously in excess of the sanctioned
limit/drawing power for 90 days. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit/drawing power, but
there are no credits continuously for 90 days as on the date of Balance Sheet or
credits are not enough to cover the interest debited during the same period,
these accounts should be treated as 'out of order'.

‘Overdue‘ - Any amount due to the bank under any credit facility is ‘overdue‘ if it
is not paid on the due date fixed by the bank.

Income Recognition Policy has to be objective and based on the record of

recovery. Therefore, the banks should not charge and take to income account
interest on any NPA. This will apply to Government guaranteed accounts also.
However, interest on advances against Term Deposits, National Savings
Certificates (NSCs), Indira Vikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life
policies may be taken to income account on the due date, provided adequate
margin is available in the accounts.

Fees and commissions earned by the banks as a result of renegotiations or

rescheduling of outstanding debts should be recognised on an accrual basis over
the period of time covered by the renegotiated or rescheduled extension of
credit.

Reversal of income - If any advance, including bills purchased and discounted,

becomes NPA, the entire interest accrued and credited to income account in the

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past periods, should be reversed if the same is not realised. This will apply to
Government guaranteed accounts also.

In respect of NPAs, fees, commission and similar income that have accrued should
cease to accrue in the current period and should be reversed with respect to past
periods, if uncollected.

Appropriation of recovery in NPAs - Interest realised on NPAs may be taken to

income account provided the credits in the accounts towards interest are not out
of fresh/ additional credit facilities sanctioned to the borrower concerned.

In the absence of a clear agreement between the bank and the borrower for the
purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest
due), banks should adopt an accounting principle and exercise the right of
appropriation of recoveries in a uniform and consistent manner.

Interest Application - On an account turning NPA, banks should reverse the

interest already charged and not collected by debiting Profit and Loss account
and stop further application of interest. However, banks may continue to record
such accrued interest in a Memorandum account in their books. For the purpose
of computing Gross Advances, interest recorded in the Memorandum account
should not be taken into account.

Asset Classification - Categories of NPAs - Banks are required to classify non

performing assets further into the following three categories based on the period
for which the asset has remained non performing and the realisability of the dues

a) Substandard Assets

b) Doubtful Assets

c) Loss Assets

Substandard Assets - A substandard asset would be one, which has remained NPA
for a period less than or equal to 12 months. Such an asset will have well defined
credit weaknesses that jeopardise the liquidation of the debt and are
characterised by the distinct possibility that the banks will sustain some loss, if
deficiencies are not corrected.

Doubtful Assets - An asset would be classified as doubtful if it has remained in the

substandard category for a period of 12 months. A loan classified as doubtful has

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all the weaknesses inherent in assets that were classified as substandard, with the
added characteristic that the weaknesses make collection or liquidation in full, –
on the basis of currently known facts, conditions and values – highly questionable
and improbable.

Loss Assets - A loss asset is one where loss has been identified by the bank or
internal or external auditors or the RBI inspection but the amount has not been
written off wholly. In other words, such an asset is considered uncollectible and of
such little value that its continuance as a bankable asset is not warranted although
there may be some salvage or recovery value.

Guidelines for Classification of Assets

Classification of assets into different categories should be done taking into

account the degree of well-defined credit weaknesses.

The availability of security or net worth of borrower/ guarantor should not be

taken into account for the purpose of treating an advance as NPA or otherwise,
except to exempted categories.

The classification of an asset as NPA should be based on the record of recovery.

Bank should not classify an advance account as NPA merely due to the existence
of some deficiencies which are temporary in nature such as non-availability of
adequate drawing power based on the latest available stock statement, balance
outstanding exceeding the limit temporarily, non-submission of stock statements
and non-renewal of the limits on the due date, etc.

In the matter of classification of accounts with such deficiencies banks may follow
the following guidelines:

a) Banks should ensure that drawings in the working capital accounts are covered
by the adequacy of current assets, since current assets are first appropriated in
times of distress. Drawing power is required to be arrived at based on the stock
statement which is current. However, considering the difficulties of large
borrowers, stock statements relied upon by the banks for determining drawing
power should not be older than three months. The outstanding in the account
based on drawing power calculated from stock statements older than three
months, would be deemed as irregular.

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b) A working capital borrowal account will become NPA if such irregular drawings
are permitted in the account for a continuous period of 90 days even though the
unit may be working or the borrower's financial position is satisfactory.

c) Regular and ad hoc credit limits need to be reviewed/ regularised not later than
three months from the due date/date of ad hoc sanction. In case of constraints
such as nonavailability of financial statements and other data from the borrowers,
the branch should furnish evidence to show that renewal/ review of credit limits is
already on and would be completed soon. In any case, delay beyond six months is
not considered desirable as a general discipline. Hence, an account where the
regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days
from the due date/ date of ad hoc sanction will be treated as NPA.

Upgradation of loan accounts classified as NPAs - If arrears of interest and

principal are paid by the borrower in the case of loan accounts classified as NPAs,
the account should no longer be treated as nonperforming and may be classified
as ‗standard‘ accounts.

Accounts regularised near about the balance sheet date The asset classification of
borrowal accounts where a solitary or a few credits are recorded before the
balance sheet date should be handled with care and without scope for
subjectivity.

Where the account indicates inherent weakness on the basis of the data available,
the account should be deemed as a NPA. In other genuine cases, the banks must
furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about
the manner of regularisation of the account to eliminate doubts on their
performing status.

Asset Classification to be borrower-wise and not facility-wise - It is difficult to

envisage a situation when only one facility to a borrower/one investment in any of
the securities issued by the borrower becomes a problem credit/investment and
not others. Therefore, all the facilities granted by a bank to a borrower will have to
be treated as NPA/NPI and not the particular facility/investment or part thereof
which has become irregular.

If the debits arising out of devolvement of letters of credit or invoked guarantees

are parked in a separate account, the balance outstanding in that account also
should be treated as a part of the borrower‘s principal operating account for the

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purpose of application of prudential norms on income recognition, asset
classification and provisioning.

The bills discounted under LC favouring a borrower may not be classified as a

Nonperforming assets (NPA), when any other facility granted to the borrower is
classified as NPA. However, in case documents under LC are not accepted on
presentation or the payment under the LC is not made on the due date by the LC
issuing bank for any reason and the borrower does not immediately make good
the amount disbursed as a result of discounting of concerned bills, the
outstanding bills discounted will immediately be classified as NPA with effect from
the date when the other facilities had been classified as NPA.

Advances under consortium arrangements - Asset classification of accounts under

consortium should be based on the record of recovery of the individual member
banks and other aspects having a bearing on the recoverability of the advances.

Where the remittances by the borrower under consortium lending arrangements

are pooled with one bank and/or where the bank receiving remittances is not
parting with the share of other member banks, the account will be treated as not
serviced in the books of the other member banks and therefore, be treated as
NPA. The banks participating in the consortium should, therefore, arrange to get
their share of recovery transferred from the lead bank or get an express consent
from the lead bank for the transfer of their share of recovery, to ensure proper
asset classification in their respective books.

In respect of accounts where there are potential threats for recovery on account
of erosion in the value of security or non-availability of security and existence of
other factors such as frauds committed by borrowers it will not be prudent that
such accounts should go through various stages of asset classification. In cases of
such serious credit impairment, the asset should be straightaway classified as
doubtful or loss asset as appropriate:

a) Erosion in the value of security can be reckoned as significant when the

realisable value of the security is less than 50 % of the value assessed by the bank
or accepted by RBI at the time of last inspection, as the case may be. Such NPAs
may be straightaway classified under doubtful category.

b) If the realisable value of the security, as assessed by the bank/ approved

valuers/ RBI is less than 10 % of the outstanding in the borrowal accounts, the

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existence of security should be ignored and the asset should be straightaway
classified as loss asset.

Provisioning norms in respect of all cases of fraud:

a) Banks should normally provide for the entire amount due to the bank or for
which the bank is liable (including in case of deposit accounts), immediately upon
a fraud being detected.

b) Banks shall make suitable disclosures with regard to number of frauds

reported, amount involved in such frauds, quantum of provision made during the
year and quantum of unamortised provision debited from ‗other reserves‘ as at
the end of the year.

Advances to Primary Agricultural Credit Societies (PACS)/Farmers‘ Service

Societies (FSS)

In respect of agricultural advances as well as advances for other purposes granted

by banks to PACS/ FSS under the on-lending system, only that particular credit
facility granted to PACS/ FSS which is in default for a period of two crop seasons
in case of short duration crops and one crop season in case of long duration
crops, as the case may be, after it has become due will be classified as NPA and
not all the credit facilities sanctioned to a PACS/ FSS. The other direct loans &
advances, if any, granted by the bank to the member borrower of a PACS/ FSS
outside the on-lending arrangement will become NPA even if one of the credit
facilities granted to the same borrower becomes NPA.

Advances against Term Deposits, NSCs, KVPs/IVPs, etc.

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life
policies need not be treated as NPAs, provided adequate margin is available in
the accounts. Advances against gold ornaments, government securities and all
other securities are not covered by this exemption.

Loans with moratorium for payment of interest

a) In the case of bank finance given for industrial projects or for agricultural
plantations etc. where moratorium is available for payment of interest, payment of
interest becomes 'due' only after the moratorium or gestation period is over.
Therefore, such amounts of interest do not become overdue and hence do not

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become NPA, with reference to the date of debit of interest. They become
overdue after due date for payment of interest, if uncollected.

b) In the case of housing loan or similar advances granted to staff members where
interest is payable after recovery of principal, interest need not be considered as
overdue from the first quarter onwards. Such loans/advances should be classified
as NPA only when there is a default in repayment of instalment of principal or
payment of interest on the respective due dates.

Agricultural advances

A loan granted for short duration crops will be treated as NPA, if the instalment of
principal or interest thereon remains overdue for two crop seasons. A loan
granted for long duration crops will be treated as NPA, if the instalment of
principal or interest thereon remains overdue for one crop season. Depending
upon the duration of crops raised by an agriculturist, the above NPA norms would
also be made applicable to agricultural term loans availed of by him.

While fixing the repayment schedule in case of rural housing advances granted to
agriculturists under Indira Awas Yojana and Golden Jubilee Rural Housing Finance
Scheme, banks should ensure that the interest/instalment payable on such
advances are linked to crop cycles.

Government guaranteed advances

The credit facilities backed by guarantee of the Central Government though

overdue may be treated as NPA only when the Government repudiates its
guarantee when invoked. This exemption from classification of Government
guaranteed advances as NPA is not for the purpose of recognition of income.

The requirement of invocation of guarantee has been delinked for deciding the
asset classification and provisioning requirements in respect of State Government
guaranteed exposures.

With effect from the year ending March 31, 2006 State Government guaranteed
advances and investments in State Government guaranteed securities would
attract asset classification and provisioning norms if interest and/or principal or
any other amount due to the bank remains overdue for more than 90 days.

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Post-shipment Supplier's Credit

In respect of post-shipment credit extended by the banks covering export of

goods to countries for which the ECGC cover is available, EXIM Bank has
introduced a guarantee-cum-refinance programme whereby, in the event of
default, EXIM Bank will pay the guaranteed amount to the bank within a period of
30 days from the day the bank invokes the guarantee after the exporter has filed
claim with ECGC. Accordingly, to the extent payment has been received from the
EXIM Bank, the advance may not be treated as a non performing asset for asset
classification and provisioning purposes.

Export Project Finance

In respect of export project finance, there could be instances where the actual
importer has paid the dues to the bank abroad but the bank in turn is unable to
remit the amount due to political developments such as war, strife, UN embargo,
etc. In such cases, where the lending bank is able to establish through
documentary evidence that the importer has cleared the dues in full by depositing
the amount in the bank abroad before it turned into NPA in the books of the
bank, but the importer's country is not allowing the funds to be remitted due to
political or other reasons, the asset classification may be made after a period of
one year from the date the amount was deposited by the importer in the bank
abroad.

Credit Card Accounts

In credit card accounts, the amount spent is billed to the card users through a
monthly statement with a definite due date for repayment.

Banks give an option to the card users to pay either the full amount or a fraction
of it, i.e., minimum amount due, on the due date and roll-over the balance
amount to the subsequent months‘ billing cycle.

A credit card account will be treated as non-performing asset if the minimum

amount due, as mentioned in the statement, is not paid fully within 90 days from
the payment due date mentioned in the statement.

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Provisioning Norms

The primary responsibility for making adequate provisions for any diminution in
the value of loan assets, investment or other assets is that of the bank
managements and the statutory auditors. In conformity with the prudential
norms, provisions should be made on the non performing assets on the basis of
classification of assets into prescribed categories. Taking into account the time lag
between an account becoming doubtful of recovery, its recognition as such, the
realisation of the security and the erosion over time in the value of security
charged to the bank, the banks should make provision against substandard assets,
doubtful assets and loss assets as below.

Loss assets - Loss assets should be written off. If loss assets are permitted to
remain in the books for any reason, 100 % of the outstanding should be provided
for.

Doubtful assets - 100 % of the extent to which the advance is not covered by the
realisable value of the security to which the bank has a valid recourse and the
realisable value is estimated on a realistic basis.

In regard to the secured portion, provision may be made on the following basis, at
the rates ranging from 25 % to 100 % of the secured portion depending upon the
period for which the asset has remained doubtful :

Period for which the advance has remained in Provisioning requirement

‘doubtful‘ category (%)

Up to one year 25

One to three years 40

More than three years 100

In cases of NPAs with balance of ₹5 crore and above stock audit at annual
intervals by external agencies would be mandatory in order to enhance the
reliability on stock valuation.

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In cases of NPAs with balance of ₹5 crore and above Collaterals such as
immovable properties charged in favour of the bank should be got valued once in
three years by valuers.

Substandard Assets

A general provision of 15 % on total outstanding should be made without making

any allowance for ECGC guarantee cover and securities available.

The ‘unsecured exposures‘ which are identified as ‘substandard‘ would attract

additional provision of 10 %, i.e., a total of 25 % on the outstanding balance.
However, in infrastructure lending, if Escrow mechanism is available loan accounts
which are classified as substandard will attract a provisioning of 20 % instead of
the aforesaid prescription of 25 %.

The provisioning requirement for unsecured ‗doubtful‘ assets is 100 %.

Unsecured exposure is defined as an exposure where the realisable value of the

security, as assessed by the bank/approved valuers/Reserve Bank‘s inspecting
officers, is not more than 10 %, ab-initio, of the outstanding exposure. ‘Exposure‘
shall include all funded and nonfunded exposures (including underwriting and
similar commitments).

‘Security‘ will mean tangible security properly charged to the bank and will not
include intangible securities like guarantees (including State government
guarantees), comfort letters etc.

Standard assets

Banks should make general provision for standard assets at the following rates for
the funded outstanding on global loan portfolio basis:

a) Farm Credit to agricultural activities, individual housing loans and Small and
Micro Enterprises (SMEs) sectors at 0.25 %;

b) advances to Commercial Real Estate (CRE)1 Sector at 1.00 %;

c) advances to Commercial Real Estate – Residential Housing Sector (CRE - RH) at

0.75 %

d) housing loans extended at teaser rates - the standard asset provisioning on the
outstanding amount of such loans has been increased from 0.40 per cent to 2.00

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per cent in view of the higher risk associated with them. The provisioning on these
assets would revert to 0.40 per cent after 1 year from the date on which the rates
are reset at higher rates if the accounts remain ‗standard‘.

e) restructured advances – as stipulated in the prudential norms for restructuring

of advances.

f) Advances restructured and classified as standard - at 5%.

g) All other loans and advances not included in (a) – (f) above at 0.40 %.

The provisions on standard assets should not be reckoned for arriving at net
NPAs.

The provisions towards Standard Assets need not be netted from gross advances
but shown separately as 'Contingent Provisions against Standard Assets' under
'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet.

The Medium Enterprises will attract 0.40% standard asset provisioning.

Accounting

Floating provisions cannot be reversed by credit to the profit and loss account.
They can only be utilised for making specific provisions in extraordinary
circumstances as mentioned above. Until such utilisation, these provisions can be
netted off from gross NPAs to arrive at disclosure of net NPAs. Alternatively, they
can be treated as part of Tier II capital within the overall ceiling of 1.25% of total
risk weighted assets.

Disclosures

Banks should make comprehensive disclosures on floating provisions in the

―notes on accounts‖ to the balance sheet.

Additional Provisions at higher than prescribed rates

For NPAs: The regulatory norms for provisioning represent the minimum
requirement. A bank may voluntarily make specific provisions for advances at
rates which are higher than the rates prescribed under existing regulations, to
provide for estimated actual loss in collectible amount, provided such higher rates

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are approved by the Board of Directors and consistently adopted from year to
year. Such additional provisions are not to be considered as floating provisions.

The additional provisions for NPAs, like the minimum regulatory provision on
NPAs, may be netted off from gross NPAs to arrive at the net NPAs.

For standard assets: The provisioning rates prescribed are the regulatory
minimum and banks are encouraged to make provisions at higher rates in respect
of advances to stressed sectors of the economy.

Guidelines for Provisions under Special Circumstances

Advances against deposits/specific instruments Advances against term deposits,

NSCs eligible for surrender, IVPs, KVPs, gold ornaments, government & other
securities and life insurance policies would attract provisioning requirements as
applicable to their asset classification status.

Treatment of interest suspense account

Amounts held in Interest Suspense Account should not be reckoned as part of

provisions. Amounts lying in the Interest Suspense Account should be deducted
from the relative advances and thereafter, provisioning as per the norms, should
be made on the balances after such deduction.

Advances covered by ECGC guarantee

In the case of advances classified as doubtful and guaranteed by ECGC, provision

should be made only for the balance in excess of the amount guaranteed by the
Corporation. Further, while arriving at the provision required to be made for
doubtful assets, realisable value of the securities should first be deducted from
the outstanding balance in respect of the amount guaranteed by the Corporation
and then provision made.

In case the advance covered by CGTMSE or CRGFTLIH guarantee becomes

nonperforming, no provision need be made towards the guaranteed portion. The
amount outstanding in excess of the guaranteed portion should be provided for
as per the extant guidelines on provisioning for non-performing assets.

Reserve for Exchange Rate Fluctuations Account (RERFA)

When exchange rate movements of Indian rupee turn adverse, the outstanding
amount of foreign currency denominated loans (where actual disbursement was

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made in Indian Rupee) which becomes overdue, goes up correspondingly, with its
attendant implications of provisioning requirements. Such assets should not
normally be revalued. In case such assets need to be revalued as per requirement
of accounting practices or for any other requirement, the following procedure
may be adopted:

a. The loss on revaluation of assets has to be booked in the bank's Profit & Loss
Account.

b. In addition to the provisioning requirement as per Asset Classification, the full

amount of the Revaluation Gain, if any, on account of foreign exchange
fluctuation should be used to make provisions against the corresponding assets.

Provisioning for country risk

Banks are required to make provision for country risk in respect of a country
where its net funded exposure is one % or more of its total assets.

The provision for country risk shall be in addition to the provisions required to be
held according to the asset classification status of the asset.

In the case of ‗loss assets‘ and ‗doubtful assets‘, provision held, including
provision held for country risk, may not exceed 100% of the outstanding.

Banks may not make any provision for ‗home country‘ exposures i.e. exposure to
India. The exposures of foreign branches of Indian banks to the host country
should be included. Foreign banks shall compute the country exposures of their
Indian branches and shall hold appropriate provisions in their Indian books.
However, their exposures to India will be excluded.

Banks may make a lower level of provisioning (say 25% of the requirement) in
respect of short-term exposures (i.e. exposures with contractual maturity of less
than 180 days).

Provisioning Coverage Ratio

Provisioning Coverage Ratio (PCR) is the ratio of provisioning to gross non-

performing assets and indicates the extent of funds a bank has kept aside to cover
loan losses.

From a macro-prudential perspective, banks should build up provisioning and

capital buffers in good times i.e. when the profits are good, which can be used for

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absorbing losses in a downturn. This will enhance the soundness of individual
banks, as also the stability of the financial sector.

Banks should augment their provisioning cushions consisting of specific

provisions against NPAs as well as floating provisions, and ensure that their total
provisioning coverage ratio, including floating provisions, is not less than 70 %.

(i) the PCR of 70 % may be with reference to the gross NPA position in banks as
on September 30, 2010;

(ii) the surplus of the provision under PCR vis-a-vis as required as per prudential
norms should be segregated into an account styled as ―countercyclical
provisioning buffer‖.

(iii) this buffer will be allowed to be used by banks for making specific provisions
for NPAs during periods of system wide downturn, with the prior approval of RBI.

The PCR of the bank should be disclosed in the Notes to Accounts to the Balance
Sheet.

Writing off of NPAs

In terms of Section 43(D) of the Income Tax Act 1961, income by way of interest in
relation to such categories of bad and doubtful debts as may be prescribed
having regard to the guidelines issued by the RBI in relation to such debts, shall
be chargeable to tax in the previous year in which it is credited to the bank‘s profit
and loss account or received, whichever is earlier. This stipulation is not applicable
to provisioning required to be made as indicated above.

In other words, amounts set aside for making provision for NPAs as above are not
eligible for tax deductions.

Therefore, the banks should either make full provision as per the guidelines or
write-off such advances and claim such tax benefits as are applicable, by evolving
appropriate methodology in consultation with their auditors/tax consultants.

Recoveries made in such accounts should be offered for tax purposes as per the
rules.

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Write-off at Head Office Level

Banks may write-off advances at Head Office level, even though the relative
advances are still outstanding in the branch books. However, it is necessary that
provision is made as per the classification accorded to the respective accounts. In
other words, if an advance is a loss asset, 100 % provision will have to be made
therefor.

Banks are resorting to technical write off of accounts, which reduces incentives to
recover. Banks resorting to partial and technical write-offs should not show the
remaining part of the loan as standard asset. With a view to bring in more
transparency, henceforth banks should disclose full details of write offs, including
separate details about technical write offs, in their annual financial statements.

NPA Management – Requirement of Effective Mechanism and Granular Data

Asset quality of banks is one of the most important indicators of their financial
health. Banks should put in place a robust MIS mechanism for early detection of
signs of distress at individual account level as well as at segment level (asset class,
industry, geographic, size, etc.).

The banks' IT and MIS system should be robust and able to generate reliable and
quality information with regard to their asset quality for effective decision making.
There should be no inconsistencies between information furnished under
regulatory / statutory reporting and the banks' own MIS reporting.

Lenders shall recognise incipient stress in loan accounts, immediately on default ,

by classifying such assets as Special Mention Accounts (SMA) as per the following
categories:

SMA Sub-categories Basis for classification – Principal or interest payment or

any other amount wholly or partly overdue between

SMA-0 1-30 days

SMA-1 31-60 days

SMA-2 61-90 days

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In the case of revolving credit facilities like cash credit, the SMA subcategories will
be as follows:

SMA Sub-categories Basis for classification – Outstanding balance remains

continuously in excess of sanctioned limit or drawing
power, whichever is lower, for a period of:

SMA-1 31-60 days

SMA-2 61-90 days

The borrower accounts shall be flagged as overdue by the lending institutions as

part of their day-end processes for the due date, irrespective of the time of
running such processes.

Similarly, classification of borrower accounts as SMA as well as NPA shall be done

as part of day-end process for the relevant date and the SMA or NPA classification
date shall be the calendar date for which the day end process is run. In other
words, the date of SMA/NPA shall reflect the asset classification status of an
account at the day-end of that calendar date.

Example: If due date of a loan account is March 31, 2021, and full dues are not
received before the lending institution runs the day-end process for this date, the
date of overdue shall be March 31, 2021. If it continues to remain overdue, then
this account shall get tagged as SMA- 1 upon running day-end process on April
30, 2021 i.e. upon completion of 30 days of being continuously overdue.
Accordingly, the date of SMA- 1 classification for that account shall be April 30,
2021.

Similarly, if the account continues to remain overdue, it shall get tagged as SMA-2
upon running day-end process on May 30, 2021 and if continues to remain
overdue further, it shall get classified as NPA upon running day-end process on
June 29, 2021.

It is clarified that the instructions on SMA classification of borrower accounts are

applicable to all loans , including retail loans, irrespective of size of exposure of
the lending institution.

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Banks shall report credit information, including classification of an account as
SMA to Central Repository of Information on Large Credits (CRILC), on all
borrowers having aggregate exposure of ₹5 crore and above with them.

The CRILC-Main Report shall be submitted on a monthly basis.

Banks shall submit a weekly report of instances of default by all borrowers (with
aggregate exposure of ₹5 crore and above) by close of business on every Friday,
or the preceding working day if Friday happens to be a holiday.

In order to avoid any ambiguity regarding determination of ’out of order‘ status

of CC/OD accounts on a continuous basis, it is clarified that an account shall be
treated as ’out of order‘ if:

a) the outstanding balance in the CC/OD account remains continuously in excess

of the sanctioned limit/drawing power for 90 days, or

b) the outstanding balance in the CC/OD account is less than the sanctioned
limit/drawing power but there are no credits continuously for 90 days, or the
outstanding balance in the CC/OD account is less than the sanctioned
limit/drawing power but credits are not enough to cover the interest debited
during the previous 90 days period.

Implementation of Resolution Plan

Since default with any lender is a lagging indicator of financial stress faced by the
borrower, it is expected that the lenders initiate the process of implementing a
Resolution Plan ((RP) even before a default. In any case, once a borrower is
reported to be in default by any of the lenders, lenders shall undertake a prima
facie review of the borrower account within thirty days from such default (Review
Period). During this Review Period of thirty days, lenders may decide on the
resolution strategy, including the nature of the RP, the approach for
implementation of the RP, etc. The lenders may also choose to initiate legal
proceedings for insolvency or recovery.

In cases where RP is to be implemented, all lenders shall enter into an Inter-

Creditor Agreement (ICA), during the above-said Review Period, to provide for
ground rules for finalisation and implementation of the RP in respect of borrowers
with credit facilities from more than one lender.

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The ICA shall provide that any decision agreed by lenders representing 75 % by
value of Aggregate Exposure and 60 % of lenders by number shall be binding
upon all the lenders. The ICA may provide for rights and duties of majority
lenders, duties and protection of rights of dissenting lenders, treatment of lenders
with priority in cash flows/differential security interest, etc. In particular, the RPs
shall provide for payment not less than the liquidation value due to the dissenting
lenders.

Aggregate exposure would include all fund based and non-fund based exposure,
including investment exposure with the lenders.

In respect of accounts with aggregate exposure above a threshold with the

lenders, as indicated below, on or after the ‗reference date‘, RP shall be
implemented within 180 days from the end of Review Period.

The Review Period shall commence not later than:

a. The reference date, if in default as on the reference date; or

b. The date of first default after the reference date.

The RP may involve any action / plan / reorganization including, but not limited
to, regularisation of the account by payment of all over dues by the borrower
entity, sale of the exposures to other entities / investors, change in ownership and
restructuring. The RP shall be clearly documented by the lenders concerned (even
if there is no change in any terms and conditions).

Implementation Conditions for RP

Restructuring is an act in which a lender, for economic or legal reasons relating to

the borrower's financial difficulty, grants concessions to the borrower.
Restructuring would normally involve modification of terms of the advances,
enhancement of existing credit limits; compromise settlements where time for
payment of settlement amount exceeds three months.

RPs involving restructuring / change in ownership in respect of accounts where

the aggregate exposure of lenders is ₹100 crore and above, shall require
independent credit evaluation (ICE) of the residual debt10 by credit rating
agencies (CRAs) specifically authorised by the Reserve Bank for this purpose.
While accounts with aggregate exposure of ₹5 billion and above shall require two
such ICEs, others shall require one ICE. Only such RPs which receive a credit

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opinion of RP4 or better for the residual debt from one or two CRAs, as the case
may be, shall be considered for implementation. Further, ICEs shall be subject to
the following:

a) The CRAs shall be directly engaged by the lenders and the payment of fee for
such assignments shall be made by the lenders.

b) If lenders obtain ICE from more than the required number of CRAs, all such ICE
opinions shall be RP4 or better for the RP to be considered for implementation.

A RP in respect of borrowers to whom the lenders continue to have credit

exposure, shall be deemed to be ‘implemented‘ only if the following conditions
are met.

a) A RP which does not involve restructuring/change in ownership shall be

deemed to be implemented only if the borrower is not in default with any of the
lenders as on 180th day from the end of the Review Period. Any subsequent
default after the 180 day period shall be treated as a fresh default, triggering a
fresh review.

b) A RP which involves restructuring/change in ownership shall be deemed to be

implemented only if all of the following conditions are met:

a) all related documentation, including execution of necessary agreements

between lenders and borrower / creation of security charge / perfection of
securities, are completed by the lenders concerned in consonance with the
RP being implemented;

b) the new capital structure and/or changes in the terms of conditions of the
existing loans get duly reflected in the books of all the lenders and the
borrower; and,

c) borrower is not in default with any of the lenders.

A RP which involves lenders exiting the exposure by assigning the exposures to

third party or a RP involving recovery action shall be deemed to be implemented
only if the exposure to the borrower is fully extinguished.

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Delayed Implementation of Resolution Plan

Where a viable RP in respect of a borrower is not implemented within the

timelines given below, all lenders shall make additional provisions as under:

Timeline for implementation of viable Additional provisions to be made as a %

RP of total outstanding (funded +
nonfunded), if RP not implemented
within the timeline

180 days from the end of Review Period 20%

365 days from Commencement of 15% (i.e. total additional provisioning of

Review Period 35%)

The additional provisions shall be made over and above the higher of the
following, subject to the total provisions held being capped at 100% of total
outstanding:

a) The provisions already held; or,

b) The provisions required to be made as per the asset classification status of the
borrower account.

The additional provisions shall be made by all the lenders with exposure to such
borrower.

The additional provisions shall also be required to be made in cases where the
lenders have initiated recovery proceedings, unless the recovery proceedings are
fully completed.

The additional provisions may be reversed as under:

a) Where the RP involves only payment of overdues by the borrower – the

additional provisions may be reversed only if the borrower is not in default for a
period of 6 months from the date of clearing of the overdues with all the lenders;

b) Where RP involves restructuring/change in ownership outside IBC – the

additional provisions may be reversed upon implementation of the RP;

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c) Where resolution is pursued under IBC – half of the additional provisions made
may be reversed on filing of insolvency application and the remaining additional
provisions may be reversed upon admission of the borrower into the insolvency
resolution process under IBC; or,

d) Where assignment of debt/recovery proceedings are initiated – the additional

provisions may be reversed upon completion of the assignment of debt/recovery.

Supervisory Review

Any action by lenders with an intent to conceal the actual status of accounts or
evergreen the stressed accounts, will be subjected to stringent supervisory /
enforcement actions as deemed appropriate by the Reserve Bank, including, but
not limited to, higher provisioning on such accounts and monetary penalties.

During the period when the RP is being finalised and implemented, the usual
asset classification norms would continue to apply subject to additional
provisioning requirements of this circular. The process of reclassification of an
asset should not stop merely because RP is under consideration.

Disclosures

Lenders shall make appropriate disclosures in their financial statements, under

‘Notes on Accounts‘, relating to RPs implemented.

Prudential Norms Applicable to Restructuring

A default, as per the definition provided in the framework, shall be treated as an

indicator for financial difficulty, irrespective of reasons for the default.

A borrower not in default, but it is probable that the borrower will default on any
of its exposures in the foreseeable future without the concession, for instance,
when there has been a pattern of delinquency in payments on its exposures.

a) A borrower‘s outstanding securities have been delisted, are in the process of

being delisted, or are under threat of being delisted from an exchange due to
noncompliance with the listing requirements or for financial reasons.

b) On the basis of actual performance, estimates and projections that encompass

the borrower‘s current level of operations, the borrower‘s cash flows are assessed
to be insufficient to service all of its loans or debt securities in accordance with
the contractual terms of the existing agreement for the foreseeable future.

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c) A borrower‘s credit facilities are in non-performing status or would be
categorised as nonperforming without the concessions.

Lenders need to complement the key financial ratios and operational parameters
which may include quantitative and qualitative aspects.

Financial difficulty can be identified even in the absence of arrears on an

exposure.

Prudential Norms - Asset Classification - Restructured Accounts

In case of restructuring, the accounts classified as 'standard' shall be immediately

downgraded as non-performing assets (NPAs), i.e., ‗substandard‘ to begin with.
The NPAs, upon restructuring, would continue to have the same asset
classification as prior to restructuring.

Conditions for Upgrade

For MSME accounts where aggregate exposure of the lenders is less than ₹25
crores - An account may be considered for upgradation to ‗standard‘ only if it
demonstrates satisfactory performance during the specified period. ‗Specified
Period‘ means a period of one year from the commencement of the first payment
of interest or principal, whichever is later, on the credit facility with longest period
of moratorium under the terms of restructuring package.

‘Satisfactory Performance‘ means no payment (interest and/or principal) shall

remain overdue for a period of more than 30 days. In case of cash credit /
overdraft account, satisfactory performance means that the outstanding in the
account shall not be more than the sanctioned limit or drawing power, whichever
is lower, for a period of more than 30 days.

For all other accounts (Other than MSME with exposure below Rs 25 Crores) -
Standard accounts classified as NPA and NPA accounts retained in the same
category on restructuring by the lenders may be upgraded only when all the
outstanding loan facilities in the account demonstrate ‗satisfactory performance‘
during the period from the date of implementation of RP up to the date by which
at least 10 % of the sum of outstanding principal debt as per the RP and interest
capitalisation sanctioned as part of the restructuring, if any, is repaid (‘monitoring
period‘). Provided that the account cannot be upgraded before one year from the
commencement of the first payment of interest or principal (whichever is later) on
the credit facility with longest period of moratorium under the terms of RP.
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For accounts where the aggregate exposure of lenders is ₹100 crores and above
at the time of implementation of RP, to qualify for an upgrade, in addition to
demonstration of satisfactory performance, the credit facilities of the borrower
shall also be rated as investment grade (BBB- or better), at the time of upgrade,
by CRAs accredited by the Reserve Bank for the purpose of bank loan ratings.

While accounts with aggregate exposure of ₹500 crores and above shall require
two ratings, those below ₹500 crores shall require one rating. If the ratings are
obtained from more than the required number of CRAs, all such ratings shall be
investment grade for the account to qualify for an upgrade.

If the borrower fails to demonstrate satisfactory performance during the

monitoring period, asset classification upgrade shall be subject to implementation
of a fresh restructuring/change in ownership. Lenders shall make an additional
provision of 15% for such accounts at the end of the Review Period.

This additional provision, along with other additional provisions, may be reversed
as per the norms laid down.

Provisions held on restructured assets may be reversed when the accounts are
upgraded to standard category.

Any default by the borrower in any of the credit facilities with any of the lenders
(including any lender where the borrower is not in ―specified period‖)
subsequent to upgrade in asset classification as above but before the end of the
specified period, will require a fresh RP to be implemented within the above
timelines as any default would entail.

However, lenders shall make an additional provision of 15% for such accounts at
the end of the Review Period. Satisfactory performance means that the borrower
entity is not in default at any point of time during the period concerned.

‘Specified period’ means the period from the date of implementation of RP up to

the date by which at least 20 % of the sum of outstanding principal debt as per
the RP and interest capitalisation sanctioned as part of the restructuring, if any, is
repaid.

Accounts restructured under the revised framework shall attract provisioning as

per the general asset classification category.

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Restructured Accounts - Additional Finance

Any additional finance approved under the RP may be treated as 'standard asset'
during the monitoring period under the approved RP, provided the account
demonstrates satisfactory performance during the monitoring period. If the
restructured asset fails to perform satisfactorily during the monitoring period or
does not qualify for upgradation at the end of the monitoring period, the
additional finance shall be placed in the same asset classification category as the
restructured debt.

Any interim finance extended by the lenders to debtors undergoing insolvency

proceedings under IBC may be treated as ‘standard asset‘ during the insolvency
resolution process period. During this period, asset classification and provisioning
for the interim finance shall be governed by the general norms. Subsequently,
upon approval of the resolution plan by the Adjudicating Authority, treatment of
such interim finance shall be as per the norms applicable to additional finance.

Restructured Accounts - Income Recognition Norms

Interest income in respect of restructured accounts classified as 'standard assets'

may be recognized on accrual basis and that in respect of the restructured
accounts classified as 'non-performing assets' shall be recognised on cash basis.

In the case of additional finance in accounts where the pre-restructuring facilities

were classified as NPA, the interest income shall be recognised only on cash basis
except when the restructuring is accompanied by a change in ownership.

Conversion of Principal into Debt / Equity and Unpaid Interest into FITL, Debt or
Equity Instruments

An act of restructuring might create new securities issued by the borrower which
would be held by the lenders in lieu of a portion of the pre-restructured exposure.
The FITL / debt / equity instruments created by conversion of principal / unpaid
interest, as the case may be, shall be placed in the same asset classification
category in which the restructured advance has been classified.

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The provisioning applicable to such instruments shall be higher of:

a) The provisioning applicable to the asset classification category in which such

instruments are held;

or

b) The provisioning applicable based on the fair valuation of such instruments as

provided in the following paragraphs.

Valuation of Debt/quasi-debt/equity instruments acquired by the lenders as part

of a RP shall be valued as under:

Debentures/bonds shall be valued as per the special instructions.

Conversion of debt into Zero Coupon Bonds (ZCBs)/low coupon bonds (LCBs) as
part of RP shall be subject to the following conditions :

a) Where the borrower fails to build up the sinking fund as required ZCBs/LCBs of
such borrower shall be collectively valued at Re.1

b) Instruments without a pre-specified terminal value would be collectively valued

at Re.1

Equity instruments, where classified as standard, shall be valued at market value, if

quoted, or else, should be valued at the lowest value arrived using the following
valuation methodologies:

a) Book value (without considering 'revaluation reserves', if any) which is to be

ascertained from the company's latest audited balance sheet. The date as on
which the latest balance sheet is drawn up should not precede the date of
valuation by more than 18 months. In case the latest audited balance sheet is not
available the shares are to be collectively valued at Re.1 per company.

b) Discounted cash flow method where the discount factor is the actual interest
rate charged to the borrower on the residual debt post restructuring plus a risk
premium to be determined as per the board approved policy considering the
factors affecting the value of the equity.

Page 77 of 212
The risk premium will be subject to floor of 3 % and the overall discount factor will
be subject to a floor of 14 %. Further, cash flows (cash flow available from the
current as well as immediately prospective (not more than six months) level of
operations) occurring within 85 % of the useful economic life of the project only
shall be reckoned.

Equity instruments, where classified as NPA shall be valued at market value, if

quoted, or else, shall be collectively valued at Re.1. Preference Shares shall be
valued on discounted cash flow (DCF) basis subject to the following:

a) The discount rate shall be subject to a floor of weighted average actual interest
rate charged to the borrower on the residual debt after restructuring plus a mark-
up of 1.5 %.

b) Where preference dividends/coupons are in arrears, no credit should be taken

for accrued dividends/coupons and the value determined as above on DCF basis
should be discounted further by at least 15 % if arrears are for one year, 25 % if
arrears are for two years, so on and so forth (i.e., with 10 % increments).

The overarching principle should be that valuation of instruments arising out of

resolution of stressed assets shall be based on conservative assessment of cash
flows and appropriate discount rates to reflect the stressed cash flows of the
borrowers.

In case lenders have acquired unquoted instruments on conversion of debt as a

part of a RP, and if the RP is not deemed as implemented, such unquoted
instruments shall collectively be valued at Re. 1 at that point, and till the RP is
treated as implemented.

The unrealised income represented by FITL / Debt or equity instrument should

have a corresponding credit in an account styled as "Sundry Liabilities Account
(Interest Capitalization)".

The unrealised income represented by FITL / Debt or equity instrument can only
be recognised in the profit and loss account as under:

a) FITL/debt instruments: only on sale or redemption, as the case may be;

b) Unquoted equity/ quoted equity (where classified as NPA): only on sale;

Page 78 of 212
c) Quoted equity (where classified as standard): market value of the equity as on
the date of upgradation, not exceeding the amount of unrealised income
converted to such equity. Subsequent changes to value of the equity will be dealt
as per the extant prudential norms on investment portfolio of banks.

Change in Ownership

In case of change in ownership of the borrowing entities, credit facilities of the

concerned borrowing entities may be continued/ upgraded as ‘standard‘ after the
change in ownership is implemented, either under the IBC or under this
framework. If the change in ownership is implemented under this framework, then
the classification as ‘standard‘ shall be subject to the following conditions:

a) Lenders shall conduct necessary due diligence in this regard and clearly
establish that the acquirer is not a person disqualified in terms of Section 29A of
the IBC. Additionally, the ‘new promoter‘ should not be a person/entity/
subsidiary/associate etc. (domestic as well as overseas), from the existing
promoter/promoter group.

Lenders should clearly establish that the acquirer does not belong to the existing
promoter group as per SEBI Norms.

b) The new promoter shall have acquired at least 26 % of the paid up equity
capital as well as voting rights of the borrower entity and shall be the single
largest shareholder of the borrower entity.

c) The new promoter shall be in ‗control‘ of the borrower entity as per the
definition of ‘control‘ in the Companies Act, 2013 / regulations issued by the
Securities and Exchange Board of India/any other applicable regulations /
accounting standards as the case may be.

Upon change in ownership, all the outstanding loans/credit facilities of the

borrowing entity need to demonstrate satisfactory performance during the
monitoring period. If the account fails to perform satisfactorily at any point of
time during the monitoring period, it shall trigger a fresh Review Period.

The quantum of provisions held (excluding additional provisions) by the bank

against the said account as on the date of change in ownership of the borrowing
entities can be reversed only after the end of monitoring period subject to
satisfactory performance during the same.

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Exemptions from RBI Regulations

Acquisition of non-SLR securities by way of conversion of debt is exempted from

the restrictions and the prudential limit on investment in unlisted non-SLR
securities prescribed by the RBI.

Acquisition of shares due to conversion of debt to equity during a restructuring

process will be exempted from regulatory ceilings/restrictions on Capital Market
Exposures, investment in Para-Banking activities and intra-group exposure.

However, these will require reporting to RBI and disclosure by banks in the Notes
to Accounts in Annual Financial Statements. Nonetheless, banks will have to
comply with the provisions of the BR Act, 1949.

Restructuring of frauds/wilful defaulters

Borrowers who have committed frauds/ malfeasance/ wilful default will remain
ineligible for restructuring. However, in cases where the existing promoters are
replaced by new promoters, and the borrower company is totally delinked from
such erstwhile promoters/management, lenders may take a view on restructuring
such accounts based on their viability, without prejudice to the continuance of
criminal action against the erstwhile promoters/management.

Wilful Defaulter/Non-Cooperative Borrower – Provisions

The provisioning in respect of existing loans/exposures of banks to companies

having director/s (other than nominee directors of government/financial
institutions brought on board at the time of distress), whose name/s appear more
than once in the list of wilful defaulters, will be 5% in cases of standard accounts;
if such account is classified as NPA, it will attract accelerated provisioning.

Since the expected losses on exposures to wilful defaulters and noncooperative

borrowers are likely to be higher, no additional facilities should be granted by any
bank/FI to the listed wilful defaulters.

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With a view to discouraging borrowers/defaulters from being unreasonable and
noncooperative with lenders in their bonafide resolution/recovery efforts, banks
may classify such borrowers as noncooperative borrowers, after giving them due
notice if satisfactory clarifications are not furnished. Banks will be required to
report classification of such borrowers to CRILC.

If any particular entity is reported as non-cooperative, any fresh exposure to such

a borrower will, by implication, entail greater risk necessitating higher
provisioning.

Dissemination of Information

In order to make the current system of banks/FIs reporting names of suit filed
accounts and non-suit filed accounts of Wilful Defaulters and its availability to the
banks by CICs as current as possible, banks have to forward data on wilful
defaulters to the CICs at the earliest but not later than a month from the reporting
date and they must use/ furnish the detailed information.

In case any falsification of accounts on the part of the borrowers is observed by

the banks / FIs, and if it is observed that the auditors were negligent or deficient
in conducting the audit, banks should lodge a formal complaint against the
auditors of the borrowers with the Institute of Chartered Accountants of India
(ICAI) to enable the ICAI to examine and fix accountability of the auditors. Pending
disciplinary action by ICAI, the complaints may also be forwarded to the RBI and
IBA for records.

A non-cooperative borrower is one who does not engage constructively with his
lender by defaulting in timely repayment of dues while having ability to pay,
thwarting lenders‘ efforts for recovery of their dues by not providing necessary
information sought, denying access to assets financed / collateral securities,
obstructing sale of securities, etc. In effect, a noncooperative borrower is a
defaulter who deliberately stone walls legitimate efforts of the lenders to recover
their dues.

Banks may seek explanation from advocates who wrongly certify as to clear legal
titles in respect of assets or valuers who overstate the security value, by
negligence or connivance, and if no reply/satisfactory clarification is received from
them within one month, they may report their names to IBA.

Page 81 of 212
Bank Loans for Financing Promoters’ Contribution

The promoters' contribution towards the equity capital of a company should

come from their own resources and banks should not normally grant advances to
take up shares of other companies. It has been decided that banks can extend
finance to ‘specialized‘ entities established for acquisition of troubled companies
subject to the general guidelines applicable to advances against
shares/debentures/bonds and other regulatory and statutory exposure limits. The
lenders should, however, assess the risks associated with such financing and
ensure that these entities are adequately capitalized, and debt equity ratio for
such entity is not more than 3:1.

In the context of Financing Promoters‘ Contribution, a ‘specialized‘ entity will be a

body corporate exclusively set up for the purpose of taking over and turning
around troubled companies and promoted by individuals or/and institutional
promoters (including Government) having professional expertise in turning
around ‘troubled companies‘ and eligible to make investments in the
industry/segment to which the target asset belonged.

Banks should carry out their independent and objective credit appraisal in all
cases and must not depend on credit appraisal reports prepared by outside
consultants, especially the in-house consultants of the borrowing entity.

Banks should carry out sensitivity tests/scenario analysis, especially for

infrastructure projects, which should inter alia include project delays and cost
overruns. This will aid in taking a view on viability of the project at the time of
deciding on deferment of DCCO/restructuring.

Banks should ascertain the source and quality of equity capital brought in by the
promoters /shareholders. Banks have to ensure at the time of credit appraisal that
debt of the parent company is not infused as equity capital of the subsidiary/SPV.

In order to ensure that directors are correctly identified and in no case, persons
whose names appear to be similar to the names of directors appearing in the list
of wilful defaulters, are wrongfully denied credit facilities on such grounds,
banks/FIs have been advised to include the Director Identification Number (DIN)
as one of the fields in the data submitted by them to Reserve Bank of India/Credit
Information Companies.

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While carrying out the credit appraisal, banks should verify as to whether the
names of any of the directors of the companies appear in the list of defaulters/
wilful defaulters by way of reference to DIN/PAN etc. Further, in case of any doubt
arising on account of identical names, banks should use independent sources for
confirmation of the identity of directors rather than seeking declaration from the
borrowing company.

With a view to monitoring the end-use of funds, if the Banks desire a specific
certification from the borrowers‘ auditors regarding diversion /siphoning of funds
by the borrower, the Bank should award a separate mandate to the auditors for
the purpose. To facilitate such certification by the auditors the banks will also
need to ensure that appropriate covenants in the loan agreements are
incorporated.

Banks may engage own auditors for specific certification purpose to ensure
proper end-use of funds and preventing diversion/siphoning of funds by the
borrowers, without relying on certification given by borrower‘s auditors. However,
this cannot substitute bank‘s basic minimum own diligence in the matter.

Registration of Transactions with CERSAI

Banks are required to register, on an ongoing basis, the transactions relating to

securitization and reconstruction of financial assets on the CERSAI portal. Banks
also need to file, on an ongoing basis, the following types of security interest on
the CERSAI portal to secure any loans or advances:

a) Particulars of creation, modification, or satisfaction of security interest in

mortgage by deposit of title deeds & mortgage other than mortgage by deposit
of title deeds;

b) Particulars of creation, modification, or satisfaction of security interest in

hypothecation of plant and machinery, stocks, debts including book debts or
receivables, whether existing or future.

c) Particulars of creation, modification, or satisfaction of security interest in

intangible assets, being know how, patent, copyright, trademark, licence, franchise
or any other business or commercial right of similar nature.

d) Particulars of creation, modification, or satisfaction of security interest in any

‘under construction‘ residential or commercial or a part thereof by an agreement
or instrument other than mortgage.
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The Board of Directors of banks should take all necessary steps to arrest the
deteriorating asset quality in their books and should focus on improving the
credit risk management system.

Early recognition of problems in asset quality and resolution envisaged requires

the Banks to be proactive and make use of CRILC.

The boards of banks should put in place a system for proper and timely
classification of borrowers as wilful defaulters or/and noncooperative borrowers.
Further, Boards of banks should periodically review the accounts classified as such,
say on a half yearly basis.

Monitoring period in Restructuring

This period begins from the date of implementation of RP till the point in time
when the borrower pays back at least 10% of the residual debt. In case a borrower
is in default with any of the lending institutions during the monitoring period, a
review period of 30 days gets triggered.

NPA Provisioning – Numerical Examples

In this Notes, Doubtful Loans are indicated by following notations :

Doubtful upto 1 year – D1

Doubtful above 1 year upto 3 year – D2

Doubtful above 3 years – D3

01. Advances covered by ECGC guarantee

In the case of advances classified as doubtful and guaranteed by ECGC, provision

should be made only for the balance in excess of the amount guaranteed by the
Corporation. Further, while arriving at the provision required to be made for
doubtful assets, realisable value of the securities should first be deducted from
the outstanding balance in respect of the amount guaranteed by the Corporation
and then provision made as illustrated hereunder:

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Outstanding Balance Rs.4 lakhs

ECGC Cover 50 %

Period for which the advance has More than 2 years remained doubtful
remained doubtful (say as on 31-03-2018)

Value of security held Rs.1.50 lakhs

Provision required to be made

Outstanding balance Rs.4.00 lakhs

Less: Value of security held Rs.1.50 lakhs

Unrealised balance Rs.2.50 lakhs

Less: ECGC Cover (50% of Rs.1.25 lakhs

unrealisable balance)

Net unsecured balance Rs.1.25 lakhs

Provision for unsecured portion of Rs.1.25 lakhs (@ 100 % of Unsecured

portion)
advance

Provision for secured portion of Rs.0.60 lakhs (@ 40 per cent of the

advance (as on 31-03-2016)
secured portion)

Total provision to be made Rs.1.85 lakhs (as on 31-03-2018)

02. Advance covered by CGTMSE or CRGFTLIH In case the advance covered by

CGTMSE or CRGFTLIH guarantee becomes nonperforming, no provision need be
made towards the guaranteed portion. The amount outstanding in excess of the
guaranteed portion should be provided for as per the extant guidelines on
provisioning for non-performing assets. An illustrative example is given below:

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Outstanding Balance Rs.10 lakhs

CGTMSE/CRGFTLIH Cover 75% of the amount outstanding or 75%

of the unsecured amount or Rs.37.50
lakh, whichever is the least

Period for which the advance has More than 2 years remained doubtful
remained doubtful (say as on 31-03- 2016)

Value of security held Rs.1.50 lakhs

Provision required to be made

Balance outstanding Rs.10.00 lakh

Less: Value of security Rs.1.50 lakh

Unsecured amount Rs.8.50 lakh

Less: CGTMSE/CRGFTLIH cover (75%) Rs.6.38 lakh

Net unsecured and uncovered portion Rs.2.12 lakh

Provision for Secured portion @ 40% of Rs.0.60 lakh

Rs.1.50 lakh

Provision for Unsecured & uncovered Rs.2.12 lakh

portion @ 100% of Rs.2.12 lakh

Total provision required Rs.2.72 lakh

Page 86 of 212
03. The following is the data related to M/s Cunning Bank (related to its loans and
advance portfolio, as of March 31, 2021).(Rs in Crores)

Total loans Rs 200000 Cr

Standard - Direct Agriculture Rs 50000 Cr

Others Rs 140000 Cr

Total Standard Rs 190000 Cr

Unsecured Substandard Rs 1000 Cr

Secured Substandard Rs 3000 Cr

Total Substandard Rs 4000 Cr

D1 Rs 4000 Cr

D2 Rs.1000 Cr

D3 Rs 600 Cr

Total Doubtful Rs 5600 Cr (all doubtful loans are secured loans)

Loss Accounts Rs.400 Cr

Based on the above data the following are solved.

a) The provision of standard accounts

For provision for direct advance to agriculture or small and micro enterprise is
0.25%, for other standard assets 0.40%

140000 @ 0.40%= Rs 560 Cr, 50000 @ 0.25%= Rs 125 Cr

Ans.: Total Rs 560+125= Rs 685 Cr

b) The amount of provisions made on substandard loan accounts 15% of

outstanding amount in case of Secured loans, 25% of outstanding amount in case
of Unsecured loans.

Secured loans Rs 3000 Cr and Unsecured Rs.1000 Cr

Rs 3000 Cr @ 15% + Rs 1000 Cr @ 25% = 450+250= Rs 700 Cr

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c) The Amount of provision on doubtful loan accounts (all doubtful loans are fully
secured)

D1 Rs 4000 Cr - Provision @ 25% = Rs 1000 Cr

D2 Rs1000 Cr @ 40% = Rs 400 Cr

D3 Rs 600 Crore @ 100% = Rs 600 Cr

Provision for Total Doubtful Advances Rs 2000 Cr

d) Provision for Loss Advances @ 100% = Rs 400 Cr Rs 400 Cr

e) Total provision on NPA =

Provision made on Substandard + Doubtful + Loss Assets

= Rs 700+2000+ 400= 3100 Cr

f) Total provision on Advances = Prov for Standard + Prov for NPA

= 3100+ 685= 3785 Cr

g) The Provision Coverage Ratio of the Bank (PCR)

Gross NPA= Total advance - Std assets = 200000 - 190000 = 10000

Total Provision for NPA 3100

PCR % = ----------------------------- x 100 = ----------- x 100
Gross NPAs 10000

h) Net NPA = Total NPA- Total provision for NPA = 10000-3100= 6900

Cr

Net NPA 6900

i) The % of Net NPA = ---------------- = ------------ = 3.45%
Total Advance 200000

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04. The Nice Bank details of NPA accounts as at 31-03-2019 are as under.

Total Advances Rs 200000 Cr

Standard Advances Rs.190000 Cr (Standard Advances include Direct

Agriculture & SME loans of Rs 50000 Cr)

Substandard Rs 4000 Cr out of which Unsecured Advances amount to Rs.1000 Cr

D 1 - Rs.4000 Cr

D 2 - Rs.1000 Cr

D 3 - Rs 600 Cr

Loss advances Rs 400 Cr

a) The provision for D1 category accounts

Doubtful upto 1 year is Rs.4000 Cr

Secured Rs 3000 Cr

Unsecured Rs 1000 Cr

Provision for Secured D1 is 25% = 3000 x 25% = 750

Provision for Unsecured D1 is 100% = 1000 x 100% = 1000 Cr

Total Provision for D1 = Rs 750 Cr +Rs 1000 Cr= Rs 1750 Cr

b) If the security value is Rs.300 Crore in Doubtful -2 category account,

the provision will be as under.

D2 Rs 400 Cr , Secured Rs 300 Cr, therefore Unsecured Rs 100 Cr

Provision for D2 Secured - 300 @ 40%= 120 Cr

Provision for D2 Unsecured = 100 @ 100% = 100 Cr

Total Provision for D2 = Rs 120 + 100 = Rs 220 Crore

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05. Outstanding of a loan account is Rs.10 lac, value of security held is Rs 4 lakh,
ECGC cover is 50%, the account remained doubtful for more than 2 years.

Outstanding Rs 10 lac – Less Value of security held Rs. 4 lac = Rs.6 lac

Unrealisable balance Rs. 6 lakh Less 50% ECGC Cover Rs. 3 lakh = Rs 3

lac (this is the net unsecured balance)

Provision for unsecured portion of advance Rs 3 lac (@ 100 percent of

unsecured portion = Rs 3 lakh

Provision for secured portion of advance Rs 4 lac @ 40% is Rs.160000/-

Total provision Rs.300000 + Rs160000= Rs.460000/-

@@@

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 05. Indemnity & Guarantee
Topics covered in this Chapter are ----

Contracts of Indemnity, Contracts of Guarantee & Bank Guarantee

###

Bank Guarantee – It’s Benefits.

According to Section 126 of the Indian Contract Act, a contract of guarantee is a

contract to perform the promise, or discharge the liability of a third person in case
of his default. A bank guarantee is a contractual assurance that is given by the
bank to a third party creditor. By virtue of this commercial instrument, the
concerned bank undertakes liability on behalf of the principal debtor to fulfill his
contractual obligation in the event of default. This secures the transaction by
ensuring that no detriment is caused to the creditor.

A “Contract of guarantee” is also known as contract of surety ship. There are three
parties to a guarantee. The person who gives the guarantee is called the “Surety”
or “Guarantor”, the person on whose behalf the guarantee is given is called the
“Principal Debtor” and the person in whose favour the guarantee is given is called
the “Creditor “ or “Beneficiary”.

The nature of obligations of the principal debtor is primary while the obligations
of the bank are secondary.

By issuing a guarantee, a bank ordinarily undertakes to pay the amounts specified

in the guarantee agreement to the beneficiary on demand made by him in
accordance to predetermined terms and conditions.

The object of a bank guarantee is to ensure the due performance of certain works
contracts. It is an act of trust with full faith to facilitate free flow of trade and
commerce in domestic or international trade or business. It creates an irrevocable
obligation to perform the contract in terms thereof.

Suppose , you are manager of a Branch of “Our Bank”. One of your valuable
customers, M/s Venkat Engineers engaged in selling Electric Motors. M/s Venkat
Engineers purchase Electric Motors from M/s Nav Bharat Company. Based on their
previous experience, Nav Bharat Company agree to sell Motors costing Rs 10 lacs
on 90 days credit provided Venkat Engineers arrange for a Bank Guarantee of Rs

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10 lacs. Suppose, at the request of Venkat Engineers, complying with other
guidelines, you have issued a

Guarantee on behalf of Venka Engineers favouring Nav Bharat Company. In this

transaction “Our Bank” is called “Guarantor” or “Surety”. Venkat Engineers are
called the “Principal Debtor” and Nav Bharat Company is called “Creditor” or
“Beneficiary”.

As such, the three parties to a Bank Guarantee in above case –

Guarantor - Our Bank ;

Debtor - Venkat Engineers – Our Bank’s Customer

Creditor - Nav Bharat Company - The Beneficiary

Nature of BG – Non Fund Based :

While issuing Bank Guarantee, Bank is not parting with money upfront. Only in
case of any eventuality (invocation) only Bank parts with money. Till such time,
this facility is not having any cash disbursement from Bank side. That’s why BGs
are called Non Fund Based Credit Facilities.

The liability of the surety/guarantor is co-extensive with that of the principal

debtor, unless it is otherwise provided in the Agreement of Guarantee itself.
Bearing this in mind our guarantees are drafted in such a way that the guarantor
and the principal debtor are jointly and severally liable in the ordinary course at all
times.

Benefits to the applicant:

1) Small companies can secure loans or conduct business that would otherwise
not be possible due to the potential riskiness of the contract for their
counterparty. It encourages business growth and entrepreneurial activity.

2) Compared to loans and advances (where Bank parts with money) the interest
charged, the fee charged in respect of BGs is very less. As such, it is a cost saving
product for Applicant.

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Benefits to the Beneficiary:

1) The beneficiary can enter the contract knowing due diligence’s been done on
their counterparty.

2) The bank guarantee adds credit worthiness to both the applicant and the
contract.

3) There is a risk reduction due to the bank’s assurance that they will cover the
liabilities should the applicant default.

4) There is an increase in confidence in the transaction as a whole.

Benefits to the Bank:

1) As it is a Non Cash Transaction at the time of Issuance, Bank need not worry
about availability of Funds. It is not affecting Bank’s Credit-Deposit Ratio.

2) The fee earned (normally collected upfront) can be recognised as Income as

Income Recognition Norms are not applicable, even if the BG is invoked at a later
date.

Disadvantages of Bank Guarantees

1) The involvement of a bank in the transaction can bog down the process and
add an unnecessary layer of complexity and bureaucracy.

2) While Issuing B G, Bank is carrying Risk. So the bank may require assurance on
the part of the applicant in the form of collateral.

Instances where BGs are needed - in following cases, need for BG arises.

1) Guarantees for due performance of a contract.

2) Guarantees for supply of materials (Current Assets) on credit.

3) Guarantees favouring Tax Authorities to clear goods pending payment of duty.

4) Bid bonds and tender guarantees in lieu of earnest money/security deposit.

5) Guarantees for supply of machinery (Fixed Assets)

6) Guarantees, for getting Advance for execution of Contract.

7) Guarantees to Banks/ Financial Institutions for extending guarantee facilities.

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Guarantees for due performance of a contract – Performance Guarantees

These guarantees are issued for the performance of a contract or an obligation. In

case, there is a default in the performance, non-performance or short
performance of a contract, the beneficiary's loss will be made good by the bank.
These are known as Performance Guarantees. Although these guarantees are for
performance, in the event of non-performance of the obligations, the Bank
assumes only monetary liability up to a specified amount, and for a specified
period and not due performance of the contracts like construction of a building.

Guarantees for supply of materials (Current Assets) on credit

Please see the example given in Page 2 related to Our Bank issuing BG of Rs 10
lacs on behalf of its customer M/s Venkateswara Enterprises in favour of M/s Nav
Bharat Company for sale of material on credit. These guarantees are classified as
Financial Guarantees.

Guarantees favouring Tax Authorities to clear goods pending payment of

duty.

Customs and Central Excise Departments will insist Bank Guarantees to release the
Goods pending payment of tax/duty. In some cases, when the issue is in Court of
Law or under Arbitration, our customer may be required to submit Bank
Guarantee.

Bid bonds and tender guarantees in lieu of earnest money/security deposit.

While calling for / awarding Contracts, the Principal may insist on submission of
Bank Guarantees from the Contractors in lieu of EMD and Security Deposit.

Earnest Money Deposit (EMD) : To ensure that a Bidder does not submit a dummy
bid or back out at time of tender opening, Department collects a small refundable
fee from each bidder, which is called EMD.

EMD is returned when all Bids are opened & tender is awarded to other firm. In
case Tender is cancelled, the EMD is returned.

In case, a Firm is the winning bidder, the said EMD shall be returned to the said
Firm only after completion the supply or on submission security deposit.

After Bid is opened, if a Bidders refuses to take the contract, then his EMD is
forfeited. EMD is generally less than 5% of the Tender Value.

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Security Deposit: Once it is decided that a Tender is awarded to a Bidder, he has
to deposit a Security Deposit with the Buyers such that if he does not complete
the task as per the work order, the Buyer can recover the loss by forfeitting his
Security Deposit. For e.g. If a Bidders gets Rs.10 Cr contract to construct a flyover
within 10 months , than he has to deposit a Security deposit of 10% i.e. Rs 1 Crore
with the Department. Now if he does not complete the bridge on time or leaves it
incomplete, the Department can forfeit his 1 Cr as penalty.

Security Deposit can be in form of Bank Guarantee, National Saving certificates,

Cash, etc. Only when the Winning Bidders makes the Security Deposit, he gets his
EMD Back.

Guarantees for supply of machinery (Fixed Assets) -DPG & BCA

DPG is a Non-Fund Based Credit facility to acquire Fixed Assets, mainly machinery.

Issuance of deferred payment guarantees favouring suppliers arise where

machineries are supplied on credit and the payment is to be made by way of
instalments. The manufacturers will agree to supply the same only if such
instalments are guaranteed by the bank.

In the event of non-payment of instalment dues by the buyer, i.e., principal

debtor, banker issuing the deferred payment guarantee will have to make the
payment.

Normally Banks hesitate to extend DPG facility for new units.

6) Guarantees for getting Advance for execution of Contract. - Advance Payment

Guarantees.

Such type of guarantees are issued where the Contractors (borrowers) seek
advance payment from their Principals to meet part of the expenses for execution
of contracts. In such cases, the Principal may insist guarantee from the Bank
against such advance payment and guarantees of this type are known as Advance
Payment Guarantees.

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Guarantees to Banks/Financial Institutions for extending credit facilities.

Bank provides guarantee favouring other Banks/Other lending agencies for the
loans extended by the latter. However, no guarantee to be issued on behalf of
corporate entities for issuing non-convertible debentures. This facility applies only
to the loans and not to bonds or debt instrument. This facility to be extended only
in respect of borrower constituents to enable them to avail of additional credit
facility from other banks /other lending agencies.

Classification of Guarantees

Bank Guarantees are classified in three different ways based on (1) Purpose; (2)
Security and (3) Condition for Invocation.

1) Based on purpose, Bank Guarantees are classified as under:

a. Financial Guarantees : All guarantees issued guaranteeing repayment of a loan

or a debt are considered as Financial Guarantees.

b. Performance Guarantees

c. Advance Payment Guarantees

d. Deferred Payment Guarantees

Based on security Bank Guarantees are classified as under :

a) Secured Bank Guarantee means a guarantee made on the security of assets

(including cash margin), the market value of which will not at any time be less
than the amount of the contingent liability on the guarantee, or a guarantee fully
covered by counter guarantee/s of the Central Government, State Governments,
public sector financial institutions and / or insurance companies.

b) Unsecured Bank Guarantee

Unsecured Bank Guarantee is one where the realisable value of security, as

assessed by the Bank / approved valuers / the RBI is not more than 10% ab-initio,
of the outstanding guarantee exposure.

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Conditions for Invocation -

a) The Guarantees which can be invoked by Beneficiary only after compliance with
certain conditions are called Conditional Guarantees.

b) The Guarantees which can be invoked with in the period mentioned in the
Guarantee, however without compliance of any other condition are called
Unconditional Guarantees. These are also known as Demand Guarantees.

Assessment & Issue of Guarantees

While appraising the Proposal for Bank Guarantees, we have to comply with all
guidelines what we ensure at pre-sanction stage while sanctioning Fund Based
Credit Limits , such as – Verification of CIR obtained from Credit Rating Agencies
like CIBIL, Risk Rating of the Applicant/Proposal, ensuring ability of the Applicant
to execute the order/contract, Track record of the Applicant, ensuring whether the
Applicant will be in a position to meet the demand in case of invocation, security
offered to proposed Bank Guarantee Limit. Apart from the above ensure whether
statutory guidelines applicable, if any, are complied.

Assessment of BG requirement under two heads – Single Transaction Bank

Guarantee and Regular Limit to issue multiple guarantees over a specified period.

Single Transaction BG

Strictly speaking there is no additional assessment, apart from what we have

discussed in first para of this Chapter. Suppose, your customer has got one Order
of Rs 5 Crores from One Corporate. To ensure timely completion of the project
the Corporate may insist a Bank Guarantee for the amount equivalent to 5% of
the Contract, i.e. Rs 25 lacs for a period of 2 years.

In above case, obtain minimum margin 25% of the proposed BG (Rs 6.25 lacs).
Margin to be obtained, keeping the risk involved, by way of cash or by way of
Deposits of your Bank (which can be easily encashable). Apart from Margin (by
way of Cash or by way of Deposit), to secure your commitment obtain suitable
security approved by Bank like land & Building.

In above cases obtain following documents. and issue B G in the prescribed

format.

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1. Application for issuing Guarantee - signed by persons authorised.

2) Stamped counter indemnity.

3) In case of Margin is obtained by way of Deposits of your Bank, mark lien on the
said Deposit (in CBS also) and obtain Pledge Letter.

4) Based on Security, obtain all necessary documents at pre sanction as well as

post disbursement stage such as Search Report from CERSAI, Legal Report,
Valuation Report, Registration of Mortgage with CERSAI, Obtention of ECs etc.

Regular Bank Guarantee Limit :

Firms & Individuals who need Guarantees on regular basis to ensure smooth
functioning of the Business may request for a Limit within which you have to issue
BGs whenever they need. In such cases, the Requirement may be assessed as
under :

Suppose the Applicant’s present Sales are at Rs 800 lacs. He has estimated Sales
at Rs 1200 lacs. Increase is estimated sales is Rs 400 lacs. He wants to participate
in Bids worth Rs 300 lacs in present FY . Requirement of raw material is 65% of
Sales. Length of Working Capital Cycle is 2 months.

a. BG in lieu of EMD

b. BG in lieu of Security Deposits

c. BG to get raw material on credit basis (60 days DA basis)

d. BG to get Advance from the Principals.

e. BG towards timely performance.

Now we will discuss requirement of B G Limit based on above data.

1) EMD: Value of Estimated Bids is Rs 300 lacs. Please note that all bids worth Rs
300 lacs not appear at once. This value of Rs 300 lacs is total of all bids over a
period of one year. On average it may be Rs 25 lacs per month. As the BG in lieu
of EMD is for very short period, we may take value of monthly average bid of Rs
25 lacs into account. If the value of Bid is Rs 25 lacs, BG may be required for 5% of
the said Bid Value i.e. Rs 1.25 lacs. To give a comfort, we may consider need for
BG towards EMD as Rs 2 lacs.

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2) Security Deposit : Once our Customer gets the Contract of Rs 25 lacs, he may
need BG in lieu of Security Deposit. In this case, period may be more than one
month. For our understanding purpose, I am taking the period of BG needed
towards Security Deposit as 3 months. As such, we have to sanction BG towards
Security keeping 3 months value of Bids i.e. Rs 75 lacs. Normally, Principal may
insist for Security Deposit @ 10% of the Bid. In that case our Customer need Rs
7.50 lacs towards BG for Security Deposit. Rounding off this requirement we may
sanction Rs 8 lacs towards BG for Security Deposit.

3) BG to get raw material on credit basis (60 days DA basis)

In above case we have agreed value of raw material is 65% of Sales and the
Length of Working Capital Cycle as 2 months. As such at any time he has to keep
Raw Material needed for 3 months’ sales (two months in Working Capital Cycle
and raw material for one more month’s sales as buffer). 3 months’ sales are Rs 300
lacs for which he need raw material of Rs 195 lacs. Out of requirement of raw
material worth Rs 195 lacs, Customer may get raw material to the extent of Rs 100
lacs (50% of requirement) on Credit, for which he has to submit BG to the
Suppliers. Supplier may insist for down payment of minimum 25% of the Invoice
Value and balance to be paid within 60 days. Customer need to submit BG for
75% of the Invoice Value for 2 months. Keeping the above we arrive at BG Limit as
under .

Value of Raw Material made available by Supplier Rs 100 lacs

Down payment made Rs 25 lacs

Material Supplied on Credit Rs 75 lacs

Based on past experience Supplier may insist BG for Rs 45 lacs (60% of credit)

In above case if we permit BG limit Rs 45 lacs towards getting raw material on

credit basis, the Unit runs smoothly.

Please note to reduce the MPBF arrived at for Working Capital Limits to the extent
of BG Limit for getting raw material on credit, to avoid double finance.

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BG to get Advance from the Principals.

In some commercial transactions Principal may agree to extend some amount of

the Contract as Advance against Bank Guarantee. Such Guarantees are called APG
(discussed in earlier Chapters).

In above case Sales estimated for present FY are Rs 1200 lacs. Out of Rs 1200 lacs,
there may be new clientele to the extent of Rs 300 lacs, who may be ready to
extend Advance. Advance, normally, be extended 10% to 15% of the Bid Amount.
Clients who are willing to extend are accounting for Rs 300 lacs and if Advance is
extended at 15% as the amount of Advance the Customer may receive will be Rs
45 lacs in one year and on average it is Rs 12 lacs for 3 months. To give more
relaxation, we may sanction Limit of Rs 15 lacs towards issue of APG.

BG towards timely and due performance.

While awarding Contracts, the Principal may insist on Bank Guarantee towards
proper and timely performance of the Contract by the Contractor. In such cases,
the Guarantees issued by Bank on behalf of their Customer (in this case
Contractor to supply Finished Goods) favouring the Principal are called
Performance Guarantees. Normally the amount of such guarantees may be about
10% or 15% of the Contract Value.

In above example, if we take Rs 300 lacs as the amount of contracts where

Principals may insist for Performance Guarantee, we may sanction Limit of Rs 15
lacs (calculations made as per para 4 above).

Assessment of Total Bank Guarantee Limit in above example is as under.

1. Towards EMD Rs 2.00 lacs

2. Towards Security Deposits Rs 8.00 lacs

3. For purchases on Credit Rs 45.00 lacs

4. For APG Rs 15.00 lacs

5. For Performance Guarantee Rs 15.00 lacs

Total Rs 8 5.00 lacs.

As such we may sanction BG limit of Rs 85 lacs to meet his various needs of Bank
Guarantee.

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In above case obtain following documents and issue B G in the prescribed format.
(Precautions to be taken at the time of Issuing Guarantees are furnished in next
Chapter).

1. Application for Full Limit of Rs 85.00 lacs

2. Stamped counter indemnity for full limit of Rs 85.00 lacs

3. Separate request letter should be obtained as and when guarantees are issued
under the regular limit.

4. In case of Margin is obtained by way of Deposits of your Bank, mark lien on the
said Deposit (in CBS also) and obtain Pledge Letter. You may obtain Margin for
entire limit of Rs 85 lacs at once or you may obtain Margin for each BG as and
when issued, depending on the liquidity position of the Applicant.

5) Obtain nature of Charge in respect of Security, obtain appropriate

documentation. If the Charge is by way of Mortgage, ensure compliance with
guidelines such as obtention of Search Report from CERSAI, Legal Report,
Valuation Report, Encumbrance Certificate (before and after mortgage also).

6) Issue B G in appropriate approved format duly incorporating various clauses

which we will discuss in next Chapter. Ensure that the B G is issued on a Paper
duly stamped, it is numbered, It is dated and signed by appropriate
authority/authorities.

Assessment of DPG requirement:

DPG (Deferred Payment Guarantee) is a Non Fund Based Term Loan, which is
needed to procure heavy machinery etc. If Bank sanctions Term Loan and part
funds it is called Fund Based Term Loan. However, in case of DPG, Bank is not
parting funds, but assures timely repayment of instalments. So the assessment of
DPG is similar to Term Loan. All parameters such as DER, Margin, and DSCR are to
be seen as applicable to Fund Based Term Loans.

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Other points to be kept in mind during Sanction of BG Limits :

1. Reserve Bank of India has imposed specific prohibition on issuance of

guarantees on behalf of non-banking companies for repayment of their
loans/deposits secured by them from other non-banking companies or from the
public in general. Banks should not execute guarantees covering inter-company
deposits/loans thereby guaranteeing refund of deposits/loans accepted by
NBFC/firms from other NBFC/firms.

2. The purpose of the Bank Guarantee should be incidental to the business of the
Constituent.

3. Avoid issuing guarantees on behalf of customers who enjoy credit facilities with
other bank. However, for accounts under Consortium, MBA etc this is not
applicable.

4. Ensure that the customer would be in a position to reimburse the bank in case
the bank is required to make the payment under the guarantee.

5. The guidelines on liquidity norms (Current Ratio) shall be applicable to

borrowers provided with working capital limits assessed under any of the three
methods viz., Turnover method/ MPBF system/ Cash Budget system.

6. Generally Guarantees issued on behalf of building contractors should not cover

progress payments under contracts for building and/or other constructions.

7. 100% margin in Cash / Term Deposit of the Bank should normally be insisted
upon in respect of guarantees issued covering payment of dues such as (a)
Payment of Insurance premium (b) Payment of Sales Tax (c) Payment of Income
Tax (d) Guarantees issued in favour of DGS&D.

8. Banks should not execute guarantees covering inter-company deposits/ loans.

Guarantees should not be issued for the purpose of indirectly enabling the
placement of deposits with non-banking institutions.

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Issuing Bank Guarantee – Precautions.

In this Chapter, we will discuss important concepts (other than what is discussed
in previous chapters) related to Inland Bank Guarantees.

Guarantees must be for specific amounts and for specific periods.

Ensure that the BG issued is properly stamped (with stamp duty).

As per RBI directives Bank guarantees issued for Rs.50,000/- and above should be
signed by two officials jointly. Such a system will reduce the scope for
malpractices/ losses arising from the wrong perception/ judgement or lack of
honesty/ integrity on the part of a single signatory.

Ensure that the BG is issued in the Format advised by respective Banks. If the BG
needs to be issued in a different format or with addition of new clauses or
deletion of existing clauses to Approved Format, get the draft of such modified
format Approved from appropriate authority before issuing BG.

Standard Protective Clause

Ensure that the BG contains Standard Protective Clause. A protective clause is

one that determines and restricts the amount of guarantee and period of
enforceability of the claim against Bank. All the guarantees to be issued by the
branches shall invariably contain the following protective clause:

“Notwithstanding anything contained herein:-

i. Our liability under this Bank Guarantee shall not Exceed Rs....................... (Rupees.
...................................only).

ii. This Bank Guarantee shall be valid upto ...............................

iii. We are liable to pay the guaranteed amount or any part thereof under this
Bank Guarantee only and only if you serve upon us a written claim or demand on
or before .....................( Date of expiry of Guarantee as stated in para ii above plus
claim period).

If the Claim Period is not mentioned in the protective clause after the words, on or
before...........‘ in the guarantee, the beneficiary will have right to claim the amount
by taking legal action within 3/30 years from the date on which the cause of
action arises.

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Onerous Terms

Guarantees containing onerous terms should not be issued. Condition which is

difficult to comply or without any certainty are called Onerous Clause. Example: a
clause as per which the Guarantee may be invoked only on 1st day of the month,
if the day happens to be Thursday and also it is raining. It is difficult to comply
with such clauses as it put hurdles in making claims under the Guarantee, in case
of need.

Claim Period

All BGs should contain a separate Claim Period. The claim period is only a facility
to the beneficiary enabling him to claim, within a specified period, the
loss/damage caused to him during the validity period of the guarantee. Hence in
the normal circumstances should not provide unduly long claim period. Only a
reasonable claim period, taking into account the purpose of the guarantee, the
nature of activity, availability of margin etc., should be permitted.

Normally, the claim period in the guarantees issued by the branches should not
exceed 6 months.

While computing the ―guarantee period, the claim period should be excluded.
The normal period of limitation for preferring the claims under guarantee is 30
years from the date of expiry of the guarantee in the case of Govt. and 3 years in
other cases.

Implications of Claim Period and recent court verdicts are discussed at length in
later Chapters of this Book.

In case of APGs ensure compliance with the following :

a) In case of APG, the goods covering such guarantees are to be pledged /

hypothecated to the Bank and in such cases guidelines relating to Fund Based
Working Capital limits such as PL/KCC/OCC is to be followed.

b) As the nature of commitment under APG is similar to performance of a contract

or an agreement, APG is to be treated as Performance guarantee and accordingly,
the commission as applicable to performance guarantee be charged. Also APG
may be treated as performance guarantee for the purpose of Balance Sheet
classifications.

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c) If the party is already enjoying inventory limits like OCC/PC etc. the goods
received under APG is to be deducted for the purpose of arriving drawing limit.

d) If advance payment guarantees are issued on behalf of joint stock companies,

our charges on the hypothecated goods should be got registered under Section
125 of the Indian Companies Act.

In case of Performance Guarantees - Guarantee liability cannot be reduced in

proportion to the work carried out partially. However, this may be considered if
the beneficiary gives in writing that they are not having any claim on the bank and
the guarantee liability is reduced to that extent.

In the case of guarantees covering contracts, it must be ensured that the clients
have the requisite technical skills, experience and means to execute the contracts.

Guarantees with Interest Clause

Interest should be ascertainable and quantified. Notional interest for the specified
period should be calculated and specified in the guarantee itself to avoid
ambiguity. Eg. ―interest @ ....% not exceeding a sum of Rs..........

While limiting the liability of the Bank in the protective clause, notional interest
should also be taken into account and commission should be charged on the
amount including the interest component specified in protective clause. For all
purposes guarantee amount and interest constitute guarantee liability.

Automatic Renewal Clause

Automatic renewal clause is considered to be onerous. Normally, guarantees

containing automatic renewal clause carry an additional risk of being required to
be renewed at the request of the beneficiary with or without specific request from
the borrower. Guarantees containing onerous clauses may be issued only after
obtaining permission from the competent authority. Automatic Renewal Clause
also known as SRC – Self Renewal Clause.

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Arbitration Clause

While issuing the guarantees in favour of Government Department / Public Sector

Undertaking, Arbitration clause need not be incorporated in the guarantee.
However, if the beneficiary specifically requests for inclusion of the arbitration
clause in the guarantee, the same may be incorporated.

An Arbitration Clause is a clause in a contract that requires the parties to resolve

their disputes through an arbitration process. Although such a clause may or may
not specify that arbitration occur within a specific jurisdiction, it always binds the
parties to a type of resolution outside the courts, and is therefore considered a
kind of forum selection clause. It is also known as the "Scott v. Avery clause."

As per the guidelines issued by Ministry of Finance, in case of disputes where the
amount involved is upto Rs.50,000/-, it should be settled by the concerned Banks
through Reserve Bank of India. Disputes involving amounts upto Rs.5,00,000/-
should have the approval of Chairman and Managing Director before referring the
matter to the arbitration and in respect of disputes involving amounts more than
Rs.5,00,000/-, reference should be made to the Government for appointment of
an arbitrator after seeking the approval of Bank‘s Board of Directors.

Jurisdiction Clause

If any of the parties to Bank Guarantee wants, inclusion of Jurisdiction Clause, we

may include the same. Normally, such situations occur only in international
transactions. However, we may incorporate Jurisdiction Clause in Inland Bank
Guarantees also at the option of any party to the Guarantee.

The laws in India have prescribed certain set of rules by which an aggrieved party
can institute a suit in Court of law. The general scenario to refer the disputes to
the Courts is provided under Code of Civil Procedure, 1908 (CPC). One of the
provision is enumerated in section 20 of the CPC which provides that a suit may
be instituted either at the place where the defendant ordinarily resides or carries
on business or where any part of the cause-of-action-arises.

The parties to a contract may mutually agree to refer the disputes to a particular
Court or Courts. Such a clause in a contract is called as exclusive jurisdiction
clause. The parties agree to exclusively refer the disputes arising from the
contract, if any, to a particular Court or Courts.

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A jurisdiction clause should be included where the parties want all disputes arising
under their agreement to be determined by a particular national court or courts.

In some cases , guarantees may be required in compliance with interim orders

issued by courts in favour of customs and central excise authorities to cover
differential duty amounts. In such cases, branches are bound to pay the amounts
as and when the courts vacate the relative orders, issuing final orders and the
guarantees are invoked. Hence , take note of the implications involved in granting
such guarantee limits without full cash margin.

In case of guarantees issued without expiry period, liability cannot be reversed till
the original guarantee bond is received. Guarantees without expiry period should
be issued only under exceptional circumstances and not as a matter of routine.

Guarantee issued on behalf of Joint Stock Companies should be supported by

appropriate resolutions of the Board of Directors. It should also be verified that
the company has the necessary authority under its Memorandum and Articles of
Association to execute counter guarantees / indemnities. The counter guarantee /
indemnity obtained should be signed by the person/s authorised in the
resolution.

As per RBI directives no bank guarantee should normally have a maturity of more
than 10 years. However, in view of the changed scenario of the banking industry
where banks extend long term loans for periods longer than 10 years for various
projects, it has been decided to allow banks to also issue guarantees for periods
beyond 10 years.

While issuing such guarantees, banks are advised to take into account the impact
of very long duration guarantees on their Asset Liability Management. Further,
banks may evolve a policy on issuance of guarantees beyond 10 years as
considered appropriate with the approval of their Board of Directors.

SFMS Clause – Confirmation of Issue of BG

In addition to sending Bank Guarantee in paper form, a separate advice of the

Bank Guarantee shall be sent to the advising bank through SFMS by interfacing
Flexcube Corporate through Middleware i. e. XMM package, after which the paper
Bank Guarantee could become operative.

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While processing the Application to Issue BG, obtain the details of advising bank
(bank of beneficiary) to transmit BG Advice through SFMS to the advising bank. As
a fraud prevention method, we have to include the following clause in all the Bank
Guarantees as last para :

“this Bank Guarantee shall be effective only when the BG message is transmitted
by the issuing bank through SFMS to ...... bank ...........branch (bank of beneficiary)
and written confirmation to that effect is issued by bank of beneficiary."

Ghosh Committee Recommendations

Banks should implement the following recommendations made by the High Level
Committee constituted in October 1991 (Chaired by Shri A. Ghosh, the then Dy.
Governor of RBI):

(i) In order to prevent unaccounted issue of guarantees, as well as fake

guarantees, as suggested by IBA, bank guarantees should be issued in serially
numbered security forms.

(ii) Banks should, while forwarding guarantees, caution the beneficiaries that they
should, in their own interest, verify the genuineness of the guarantee with the
issuing bank.

Ensure copy of the BG issued sent directly to the Beneficiary under Registered
Post with acknowledgement due with a request to verify the genuineness of the
guarantee submitted by the Contractor.

Bank Guarantee Scheme:

The Government of India have formulated a scheme in consultation with the

Reserve Bank of India, in terms of which the guarantees furnished by Banks on
behalf of their customers will be accepted by Government Departments, State
Governments, Government Bodies, Public sector undertakings and others who
have adopted this Bank Guarantee Scheme.

Under this Scheme, contractors who take up contract work may furnish (towards
earnest money/security deposit) a Bank guarantee or tender deposit receipts
issued by the Banks to the concerned Government Department/Body, in lieu of
depositing with them cash or government securities.

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Guarantees to be issued in favour of Central Government should be addressed to
the President of India. It must be noted that any correspondence with regard to
issuance of guarantee should be addressed to the concerned officer who
accepted the guarantee and not to the President of India or President‘s
Secretariat. The correct name and address of the beneficiary, wherever not known
should be ascertained from the party on whose behalf the guarantee is issued.

While issuing guarantees in favour of State Governments, they have to be

addressed to the Governor of the State, but while corresponding with the
concerned State Government, branches must mention the name of beneficiary,
department and purpose for which guarantee has been executed.

Payment of invoked guarantees

Where guarantees are invoked, payment should be made to the beneficiaries

without delay and demur. There should not be any delay on the pretext that legal
advice or approval of higher authorities is being obtained.

Delays on the part of banks in honouring the guarantees when invoked tend to
erode the value of the bank guarantees, the sanctity of the scheme of guarantees
and image of banks. It also provides an opportunity to the parties to take
recourse to courts and obtain injunction orders. In the case of guarantees in
favour of Government departments, this not only delays the revenue collection
efforts but also gives an erroneous impression that banks are actively in collusion
with the parties, which tarnishes the image of the banking system.

Renewal / Extension of Bank Guarantees

The period of guarantee may be extended on the same terms and conditions, at
the request of the party on whose behalf the guarantee is issued. The request
should normally be made on or before the expiry date.

Do not to entertain extension of guarantees after the expiry of the guarantees as,
validity of such extension would be doubtful in view of the guarantee not being in
force as on the date of such extension. However, where the party insists to have
the guarantee renewed after expiry at the instance of the beneficiary for any
reason, branches may issue the guarantee afresh with an additional clause stating
―This guarantee is deemed to have come into force and effective from .........
(Date). After issuing fresh guarantee, the old guarantee has to be liquidated.
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Monitoring :

In the case of all performance guarantees / advance payment guarantees, the

Bank undertakes an obligation towards the beneficiary to indemnify in case of
non- performance of the promise within a specific time on behalf of the borrower.
Therefore, it will be obligatory for the Bank to know the position of the
performance by the borrower at periodical intervals, especially where the
guarantees are issued for large value and for longer period. Therefore, especially
in case of guarantees issued for construction work to large machinery
manufacturers for supply of machinery, etc., the Bank should ascertain the status
of the contract / supply schedule such as to what extent the contract is completed
and to what extent the work is pending etc.

In view of the above there is a need to monitor the progress of all performance /
advance payment guarantees of Rs. 5 lac or more and the period of the guarantee
is more than 6 months. The cut off limit of Rs. 5 lac is per guarantee and not the
limit.

The monitoring shall be done on an ongoing basis at half yearly intervals after
completion of 6 months from the date of issue of the guarantees. For this
purpose, we should diarise the due dates of the guarantees and due date on
which progress report has to be obtained. We should obtain the progress report
from the borrowers on due dates.

Reversal of Entries - BG with Protective Clause

All the expired guarantees to be reversed in the books of the bank against which
no claim is pending with the bank as non-reversal of such liability has an adverse
impact on the capital adequacy of the Bank.

IBA has suggested uniform procedure to be followed in respect of guarantees

issued with the protective clause. Comply with the following guidelines for
reversal of the liability in respect of expired guarantees.

a) The expiry period of the guarantee is to be diarised taking into account the
claim period, if any.

b) If no claim or demand is received from the beneficiary on or before the validity

period/ claim period of the guarantee on the due date, an intimation is to be sent
to the beneficiary by a registered AD letter to the effect that the guarantee has
expired and request them to return the original guarantee bond.
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iii) In the letter itself it must be made clear that the beneficiary is not entitled to
invoke the guarantee as the guarantee has already expired.

iv) If in spite of this notice the expired guarantee bond is not returned by the
beneficiary within one month from the date of notice, the liability under the
guarantee may be reversed (without waiting for original guarantee).

Reversal of Entries - BG without Protective Clause

In the cases of BG which do not contain Standard Protective Clause, the guarantee
can be reversed only after return of guarantee or a letter from the beneficiary
stating that the beneficiary has no claim under the guarantee.

Reversal of Entries - Guarantees issued in Judicial Proceedings

The Bank Guarantees issued in Judicial Proceedings are to be kept valid ,

subsisting and alive till the disposal of the proceedings and till discharge by the
Hon‘ble Court.

Settlement of claims - Court Orders:

Wherever such claims are subject matter of court orders bank has to settle the
claim / make payment after the court delivers its final judgement/order directing
the Bank to pay or vacating the injunction order earlier granted.

Where the Bank is a party to the proceeding initiated by Government for

enforcement of the Bank Guarantee and the case is decided in favour of the
Government by the court, Bank should not insist on production of certified copy
of judgement as the judgement/order is pronounced in open court in the
presence of the parties/their counsels and the judgement is known to the Bank.

In case the Bank is not a party to the proceedings a signed copy of the minutes of
the order certified by the Registrar / Deputy or Assistant Registrar of the court or
the ordinary copy of the judgement /order of the court duly attested to be true
copy by Government counsel should be sufficient for honouring the obligation
under the Guarantees unless the Guarantor Bank decides to file any appeal
against the order.

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Bank Guarantee vs. Letter of Credit

Bank Guarantee and Letter of Credit – both are promises from a financial
institution that a borrower will be able to repay a debt to another party, no matter
what the debtor's financial circumstances.

By providing financial backing for the borrowing party (often at the request of the
other one), these promises serve to reduce risk factors, encouraging the
transaction to proceed. But they work in slightly different ways and in different
situations.

Both bank guarantees and letters of credit work to reduce the risk in a business
agreement or deal. Parties are more likely to agree to the transaction because
they have less liability when a letter of credit or bank guarantee is active. These
agreements are particularly important and useful in what would otherwise be risky
transactions such as certain real estate and international trade contracts.

Letters of credit are especially important in international trade due to the distance
involved, the potentially differing laws in the countries of the businesses involved,
and the difficulty of the parties meeting in person. While letters of credit are
primarily used in global transactions, bank guarantees are often used in real
estate contracts and infrastructure projects.

Another key difference between bank guarantees and letters of credit lies in the
parties that use them. Bank guarantees are normally used by contractors who bid
on large projects. By providing a bank guarantee, the contractor provides proof of
its financial credibility. In essence, the guarantee assures the entity behind the
project it is financially stable enough to take it on from beginning to end. Letters
of credit, on the other hand, are commonly used by companies that regularly
import and export goods.

Purpose of Letters of Credit is reducing the Risk involved, whereas the purpose of
Bank Guarantees work as buffer in case of failure of Contractual Obligations.

Another distinctive difference between the two instruments is that Bank

Guarantees are more costly than Letter of Credit. This is due to its ability to
protect both parties in the transaction, and also due to the Bank Guarantee
covering a wider range of higher value transactions.

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Bank Guarantee and Standby LC

After Second World War, Banks in the US were not allowed to issue guarantees.

Then they found that if they changed the format of the guarantee slightly they
could adapt a Letter of Credit in such a way it became de facto a “bank
guarantee”. Japanese Banks also issue Standby Credits for similar reasons. In short
Standby LC is a bank guarantee in LC format.

A Standby Letter of Credit (SBLC / SLOC) is a guarantee that is made by a bank on

behalf of a client, which ensures payment will be made if their client cannot fulfill
the payment.

SBLC covers the beneficiary (/seller) and offers financial compensation in case of
the applicant (/buyer) defaulting on its named obligation (financial or otherwise)
i.e. it guarantees financial compensation in case of a claim in conformity with the
instrument and the underlying rules. So contrary to a “normal” LC you would only
draw under the SBLC in case something goes wrong

An SBLC is frequently used as a safety mechanism for the beneficiary, in an

attempt to hedge out risks associated with the trade.

It is also perceived as a “payment of last resort” due to the circumstances under

which it is called upon.

Furthermore, the presence of an SBLC is usually seen as a sign of good faith as it

provides proof of the buyer’s credit quality and the ability to make payment.

Essentially, it is an insurance mechanism to the company that is being contracted

with.

Level playing field - Bank Guarantees (except for those under UDRG 758 ) are
subject to a certain law and jurisdiction, which is either that of the applicant or the
beneficiary. However, in case of SBLC, the underlying rules are either UCP or ISP.

Expiry date - a guarantee can be open ended, a SBLC cannot be open ended.

ICC (International Chamber of Commerce) formulated a separate set of rules

relating to SBLC in 1998 known as International Standby Practices (ISP-98), ICC
Publication

No 590 which has come into force on 01-01-1999.

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ISP- 98 reflects the generally accepted practices, customs and usage of Standby
LCs.

Standby LC can perform the functions of various guarantees like Advance

Payment Guarantee, Performance Guarantee etc. by suitably amending the
wordings.

Banks in India are allowed to issue only Commercial SBLCs for importing goods
into India.

Difference between SBLC and LC

A Standby Letter of Credit is different from a Letter of Credit.

An SBLC is paid when called on when conditions have not fulfilled.

However, a Letter of Credit is the guarantee of payment when certain conditions

are fulfilled and documents received from the selling party. In the event that there
is non-payment, the seller will present the SBLC to the buyer’s bank so that
payment is received.

A letter of credit is a short-term instrument, where the expiry is usually 90 days.

A standby letter of credit is a long-term instrument, (validity is usually one year or

so.)

Indemnity & Guarantee

Indemnity and Guarantee are a type of contingent contracts.

The Indemnity implies protection against loss, in terms of money to be paid for
loss. Indemnity is when one party promises to compensate the loss occurred to
the other party, due to the act of the promisor or any other party.

The guarantee is when a person assures the other party that he/she will perform
the promise or fulfil the obligation of the third party, in case the third party
default.

The differences between guarantee and indemnity:

1.) In case of Indemnity, there are only two parties - indemnifier and indemnified.
In case of Guarantee, there are three parties - Creditor, Principal Debtor and
Surety.

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2.) In case of Indemnity, there is only one contract – between indemnifier and
indemnified. In case of Guarantee, there are 3 Contracts – Between Creditor and
Principal Debtor; between Creditor and Surety and between Surety and Principal
Debtor.

3.) Purpose of Indemnity is to compensate for the loss. Purpose of Guarantee is to

give assurance to the promise

4.) In case of Indemnity, liability of the Promisor (Indemnifier) is Primary. In case of

Guarantee, liability of the Surety is Secondary.

5.) In the contract of indemnity, the liability arises when the contingency occurs
while in the contract of guarantee, the liability already exists.

In indemnity, the promisor cannot sue the third party, but in the case of
guarantee, the promisor can do so because after discharging the creditor’s debts
he gets the position of the creditor.

Bank Guarantee and Letter of Undertaking (LoU)

Letter of Undertaking (hereinafter referred to as LoU) can said to be a sort of

guarantee that is issued by a banking entity to the concerned person for attaining
short term credit from the overseas branch of an Indian bank. Such LoUs are not
issued against retail transactions, but are employed in business or trade
transactions.

As mentioned above, the LoU that is issued in favour of the customer of the
Indian bank is a guarantee to the overseas branch of the said Indian bank for the
repayment in foreign currency.

Generally, the LoUs which are applied for securing credit line are supported by
margin money or sanctioned credit limit by the concerned banking entity. Owing
to this, it can be inferred that the borrower of funds of the customer of the bank
needs to pay margin money to the bank issuing the LoU, which subsequently
sanctions a credit limit.

Moreover, the issuing of LoUs are in accordance to the foreign trade policy (FTP),
which co-ordinate the import of goods and services.

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Subsequent to the completion of all the necessary formalities to procure a LoU i.e.
after the bank is reasonably convinced with the collateral received against the
credit sought from the Indian bank branch, the former will then process the LoU
to the latter.

Markedly, it is to be considered that the margin money which is backing the credit
may be higher in value than the credit amount required for. This could depend
upon the relation of the bank and customer.

Further, the amount is released by the foreign branch of the Indian bank in
foreign currency. It must be considered that the amount is credited to the
customer’s bank account back home, which is known as the Nostro account.
Thereafter, the customer can decide upon the beneficiary to whom the payment is
to be made.

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 06. Letters of Credit
Topics covered in this Chapter are ----

Inland LC and Foreign LCs

###

Letters of Credit

A Letter of Credit (LC) is a written instrument issued by a banker (opening Bank),

at the request of a buyer (applicant) in favour of a seller (beneficiary), undertaking
to honour drafts drawn by the seller in accordance with the terms and conditions
specified in the letter of credit.

An Inland letter of credit is one, which is opened by a Bank at the request of its
customer (buyer) in favour of the seller within the same country.

Inland Documentary Letter of Credit

An Inland Documentary Letter of Credit is one in which the beneficiary should

tender documentary bills i.e. bills accompanied by documents of title to goods,
apart from other documents, if any, stipulated therein, for obtaining payment in
terms of the letter of credit.

Inland LCs are governed by Uniform Customs and Practices – UCP 600.

UCP 600 came into effect on 01 07 2007. The 39 Articles of UCP 600 are a
comprehensive and practical working aid to everyone involved in letter of credit
transactions worldwide.

Inland Clean Letter of Credit

If the seller is not required to tender documents of title to goods for obtaining
payment under the terms of the letter of credit, such letter of credit is termed as
Clean Letter of Credit.

Branches should not issue Clean LCs.

LCs opened by our branches should stipulate drawings by sight / usance drafts
accompanied by documents of title to goods, such as railway receipts, bills of
lading or lorry receipts of approved transport operators, inland way bills, invoices
and other documents.

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In undertaking the responsibility to pay bills drawn under the LC, the opening
Bank assumes contingent liability.

Irrevocable Letter of Credit

An irrevocable letter of credit is one which cannot be revoked, cancelled or

amended without the consent of all the parties thereto. The LC opening Bank
irrevocably commits itself to pay the beneficiary upon presentation of specified
documents, provided the terms and conditions of the letter of credit are complied
with.

Revocable Letter of Credit

A Revocable Letter of Credit is one which can be revoked or cancelled at any time
by the opening bank.

Revolving Letter of Credit

A revolving letter of credit is one which provides that the amount of drawings
made under the credit will be reinstated after the bill is paid and made available
to the beneficiary again for further drawings during the currency of the credit,
subject to certain conditions specified therein. A revolving letter of credit obviates
the need to establish a fresh LC each time the credit is fully utilized by
negotiation.

Confirmed Irrevocable Letter of Credit

The seller, for various reasons, may ask for the Letter of credit to be guaranteed
for payment by another Bank. In such circumstances, the opening bank requests
the some other bank to add its confirmation to the credit.

When the confirmation is added to a Credit by confirming bank at the specific

request of issuing bank, it constitutes a definite, equitable undertaking on the part
of confirming bank in addition to the undertaking of the issuing bank.

In short confirmed credit is a credit to which another bank ( the bank other than
the issuing bank) has added its confirmation.

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Transferable Letter of Credit

Transferable Documentary Credit is one that can be transferred at the request of

the original beneficiary to one or more second beneficiaries. Such Credits can be
transferred only if it is specifically stated as “transferable” in the LC.

Back to Back LC

Where the seller is not a manufacturer or producer of the goods and does not
wish to get transferable letter of credit due to various reasons, he may request his
bank to open a letter of credit in favour of his supplier on the strength of the LC
already received in his favour. Such a letter of credit is referred to as a ‘Back to
Back’ letter of credit.

Deferred Payment Credit

It is an usance Credit where payment will be made by the designated bank on

respective due dates as per the terms of the credit without drawing of the Drafts.

Under Deferred payment Credit, no draft will be called upon but Credit must
specify the maturity at which the payment is to be made and how to arrive at the
maturity.

Acceptance Credit

It is similar to Deferred Payment Credit, except for the fact that in this credit
drawing of the usance Draft is a must and the designated bank will accept the
Draft and honour the same by making the payment on due date.

Parties to a Letter of Credit

A letter of credit has the following parties:

a) Applicant (Opener / Buyer) -the party on whose behalf the letter of credit is
opened.

b) Opening Bank / Branch (Issuing Bank/Branch) - the Bank/branch which

establishes the letter of credit and undertakes to pay on behalf of the applicant.

c) Beneficiary (Seller) - the party in whose favour the letter of credit is opened .

d) Advising Bank / Branch-the Bank/branch whose services are utilized for

advising (transmitting) the letter of credit to the beneficiary.

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e) Negotiating Bank / Branch - the Bank / branch which is designated in the letter
of credit, to negotiate the documents drawn under the letter of credit and to
make payment to beneficiary.

f) Reimbursing Bank / Branch - the Bank / Branch from which the Negotiating
Bank / Branch has to claim reimbursement as per LC.

Risk rating shall be one of the factors reckoned while taking decision to stipulate
terms of sanction like margin, pricing etc.

Original LC should be stamped with revenue stamps of requisite value.

The LC should be advised to the beneficiary through the negotiating branch.

Amendments to an irrevocable LC become effective only if the amendments are

acceptable to the beneficiary.

LC should call for drafts drawn on the Bank (and not on the applicant) in terms of
Article 6 of UCP 600.

Amendment / Revival / Extension / Reinstatement of Letters of Credit

The expired LC can be revived / reinstated / extended only at the specific request
of the opener. It should not be extended / revived / reinstated at the request of
the beneficiary or any other party.

The reinstatement/revival/extension of LC should be considered as an

amendment of the LC. Since the revival / reinstatement / extension is considered
as an amendment, no fresh documentation is necessary, except the prescribed
application for amendment.

Liability in respect of expired LCs may be reversed after the period of 3 weeks
from the date of expiry of LCs.

The following protective clause should invariably be incorporated in the Revolving

LC - “The amount utilised under this credit shall be again available for utilisation
only on receipt by the negotiating branch/bank of the advice that the draft
already drawn by the beneficiary has been reimbursed by the opener”.

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Advising / Negotiation and Payment of Documents

On receipt of the LC, the advising / negotiating branch should send an

acknowledgement to the LC opening branch/Bank.

In case of LCs issued by our branches, the Officer/Manager should verify the
signatures of the signatories who issued the LC.

In the case of ILCs issued by other banks, before advising the LC/negotiation of
bills drawn thereunder, branches have to note the following.....>

Signature may be got verified from the local branch, if any, of that Bank, which
has issued the ILC.

Alternatively branches may also obtain such confirmation through our branch, if
any at the place of other bank’s branch which has issued the ILC.

In case of high value LCs of other banks, it is advisable to obtain confirmation

from the Regional / Zonal office of their bank before negotiating/discounting of
bills under such LCs .

In any case the negotiating branches shall not seek confirmation directly from the
LC issuing branch of that Bank.

The original LC (beneficiary’s copy) should be immediately delivered to the

beneficiary against acknowledgement after necessary identification.

Immediately on presentation of the bills for negotiation, branches shall scrutinise

the documents and ensure that the documents presented are strictly in terms of
the terms and conditions of the ILC and no discrepancies are noticed.

Bills discounted under the LCs should be sent by Registered post AD only and be
followed up with LC opening Branch till the acknowledgement is received.

Bills negotiated under LCs should be classified as Secured Demand Bills (SDBs)
under Bills Purchased.

The negotiating branch should insist on the production of the original LC along
with the documents at the time of negotiation.

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If the documents are in order, the opening branch should reimburse the
negotiating branch/ Bank, in terms of its obligations under the LC, within 24 hours
of receipt of the bill, irrespective of whether the drawee (buyer) has paid it or not.

As per the Basel II guidelines, Non-fund based limits, constitutes contingent

liability of the Bank attracting Capital Charge for maintaining regulatory capital
Requirements.

As and when bills drawn under LCs are paid, LC liability of the party has to be
reduced / reversed. Debiting to operative account without sufficient balance will
not amount to payment of bills and hence branches shall not reverse the
contingent liability till the bills are paid.

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 07. Non Fund Based Term Loans
Topics covered in this Chapter are ----

Deferred Payment Guarantee & Bill Co-acceptance

###

Banks, normally, extend credit facilities both by way of Fund Based (FB) and Non
Fund Based (NFB).

In case of FB Limits Banks part with Funds immediately and in case of NFB Limits,
in case of any eventuality (invocation or devolvement) only Banks may part with
Funds.

Credit limits extended by Banks may be grouped under two major categories –
Working Capital Limits (towards current assets) and Term Loans (to acquire fixed
assets).

With regard to Non-Fund Based Credit Limits to acquire Fixed Assets, mainly
machinery, there are two different Products – Deferred Payment Guarantees (DPG)
and Bills Co-acceptance (BCA).

DPG and BCA are normally involved in purchase of heavy plant and machinery
only. As it is not possible for industries to make bulk investments for purchase of
plant and machinery, DPG & BCA almost similar methods of purchasing them in
instalments.

These two products help the industrial sector in acquiring machinery with upto
date technology. The second advantage of the scheme is that since it helps sales
of machinery, the manufacturers can market their product easily.

This system is also advantageous to the Bank as no outflow of funds is involved.

These two products are of much helpful to Banks in adverse Credit-Deposit Ratio
(CD Ratio) situations.

Deferred Payment Guarantees (DPG)

Issuance of deferred payment guarantees favouring suppliers arise where

machineries are supplied on credit and the payment is to be made by way of
instalments. The manufacturers will agree to supply the same only if such
instalments are guaranteed by the bank.

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In the event of non-payment of instalment dues by the buyer, i.e., principal
debtor, banker issuing the deferred payment guarantee will have to make the
payment.

Bills Co-acceptance (BCA) means “an undertaking from the third party (Bank)
to make payment to the drawer of the bill (seller) on due date even if the buyer
fails to make the payment on that date”.

Thus, in the Co-acceptance of the bills, the bank which stands as co-accepter
undertakes to make timely payment to the seller even if the buyer fails to make
payment on due date.

In terms of RBI regulations, the co-acceptance limits should be sanctioned only to

the borrowers of the bank who enjoy other credit facilities with the bank.

The facility of BCA is applicable even to acquire current assets. However, as Banks
prefer this facility only in case of Fixed Assets, we will confine our discussion only
to BCA applicable for Fixed Assets such as machinery.

Main Difference between DPG & BCA :

In case of both DPG & BCA, Suppliers are sure of receipt of payments. However,
Suppliers who are cash rich may prefer DPG as yhey may not in need of funds
immediately. In case of BCA, since Coaccepted Bill is available, Suppliers who are
in need of funds, can get them discounted with their Bank. As such, Cash Rich
Suppliers may prefer DPG and Suppliers who need immediate funds may prefer
BCA.

As both DPG & BCA are to get fixed assets, we have to assess the need of these
NFB limits on the lines similar to Term Loan Appraisal.

As per RBI guidelines, Banks should ensure that the total credit facilities including
the proposed DPG or BCA do not exceed the prescribed exposure ceilings.

Normally Banks hesitate to extend DPG facility for new units.

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 08. Bill Finance
Topics covered in this Chapter are ----

Demand Bills, Usance Bills, Supply Bills, LSDB

###

Bills finance is essentially short term finance and is self liquidating in nature. While
Demand Bills are purchased, Usance Bills are discounted by the Bank. Further, the
bills under Letter of Credit are negotiated by the Bank. The seller of goods gets
immediate money from the Bank for the goods sold irrespective, whether it is
purchased, discounted or negotiated. The bank, in turn, will earn interest,
commission, handling charges etc.

Certain advances are classified under Bills Purchased for convenience and follow
up, even though no negotiable instrument is purchased or discounted. These are
LSDBs, where advance is made against RR / BL to the buyer and Supply Bills,
where advance is made against the receivables arising out of supply made to
certain types of buyers.

Bill financing facility as a part of working capital finance. Accordingly, the bills limit
shall be assessed and appraised within the overall working capital limits
sanctioned to the borrower.

A Demand Bill is a Bill of Exchange which is either so expressed as payable on

demand or at sight or on presentment or when no time for payment is
specified in it.

A demand bill does not attract stamp duty.

A demand bill may either be a clean bill or a documentary bill.

Clean Demand Bills : Clean Demand Bill (CDB) is a cheque or a clean bill of
exchange (i.e., not accompanied by a document of title to goods), drawn payable
on demand, and purchased by the branch. A Clean Demand Bill is an unsecured
bill.

Secured Demand Bills : A Secured Demand Bill (SDB) is a bill of exchange

accompanied by documents of the title to goods, drawn payable on demand at an
outstation place and purchased by the branch.

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In the case of Railway Receipt, the goods should have been consigned to self or
order of the consignor and endorsed in favour of the Bank or order. This would
avoid the consignee taking delivery of the goods against an indemnity.

The Lorry Receipt should be in the Special Form and layout prescribed under the
Scheme. Branches / Offices should not accept any other form of LRs for discount.
The discounting Bank should be named as the consignee in the Lorry Receipt. The
address of the discounting Branch should also be given therein to enable the
transport operator to notify the Bank in all cases where the consignments are
lying unclaimed. Lorry receipt carrying the name of any other bank or party or
having unfilled space should not be accepted.

Only the Consignee Copy of the Lorry Receipt should be accepted for discount.

Insurance of Consignment and Carriers’ Risk Clause

The Lorry receipt should be issued at Carrier’s risk. Carriers‘ risk clause extends
protection to the Bank only in the cases of criminal acts and negligence by the
operator. As such, it should be ensured that, while purchasing / discounting bills,
the consignments are adequately insured wherever necessary, in bank/s favour till
full and final realization / acceptance of the bill. We have to note that insurance of
consignment is independent of the risk clause.

The customer is required to have the consignments adequately insured, where

insurance is necessary and for such risks as may be required.

In the case of Bills of Lading, all the sets of the bills of lading should accompany
the bill. The bill of lading should be clean and on board and signed by the
authorized person and should not contain any adverse remarks about the
condition of the goods. Bills of Lading marked received for shipment should not
be accepted for discount / negotiation

Usance Bill

A Usance Bill is one which is not payable on demand, but is expressed to be

payable after a specified period (usance) mentioned in the bill.

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A usance bill attracts stamp duty. It should be drawn on Hundi paper of
adequate stamp value.

A usance bill may be either a clean bill or a documentary bill. It may be payable
locally or outside the place on which it is drawn.

A bill of exchange may be either D/A (documents to be delivered against

acceptance) or D/P (documents to be delivered against payment).

In a D/A Bill, the accompanying documents are to be delivered to the drawee

against acceptance of the bill.

In a D/P Bill the accompanying documents are to be delivered against payment of

the bill.

D/A Bill is treated as an unsecured bill.

D/P Bill is treated as a secured bill.

Remission of stamp duty on usance bill of exchange for following bills:

(a) such Bills of exchange are payable not more than 90 days after date or sight

(b) such bills of exchange are drawn on or made by or in favour of a

commercial bank or a co-operative bank, and

(c) such bills of exchange arise out of bonafide commercial transaction.

Bills are of two types, viz., `Documentary’ bills and `Clean’ bills.

If a bill is accompanied by documents of title to goods, such as, Railway

Receipt, Lorry Receipt, Bill of Lading, Boat Note, inland way bill etc., it is known
as `Documentary’ bill.

A `Clean’ bill is a bill not accompanied by any documents of title to goods.

Local Secured Demand Bills (Applicable to Commodities Covered under SCC

directives):

The selective credit control directives of the Reserve Bank of India have imposed
certain restrictions on advances against commodities stipulated in the directives.
However, advances granted by way of demand documentary bills drawn in
connection with movement of commodities covered by the directives are
completely exempted from the purview of the directives.

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Advances could be considered to the buyers of such commodities, by purchase of
bills accompanied by documents of title to goods viz., Railway Receipts and Bills
of Lading.

Such advances should be classified as Local Secured Demand Bills (LSDBs) under
Bills Purchased Account. Though such advances are classified under Bills
Purchased Account, the terms / guidelines applicable to them are the same as
those applicable to PL / KCC against documents of title to goods. Loans / LSDBs
cannot be sanctioned against lorry receipts covering any commodity.

Bill Culture

In respect of borrowers having fund based working capital limits of Rs. 5 crore or
more from the banking system, the extent of finance towards inland credit sale is
confined to -

a) Not more than 75% of the aggregate limits in respect of book debts and supply
bills etc. ,

b) The level of financing inland credit sales by way of BEs should not be less than
25% of aggregate limits.

Advances against Supply Bills

Advances against Supply Bills‘ is a form of credit facility extended to well known
customers having satisfactory dealings against their Supply Bills relating to goods
supplied / services extended only to Government or Semi- Government
Departments / Bodies or first rate Joint Stock Companies.

Supply Bills are accompanied by either documents of title to goods or

acknowledgement from the concerned Department / Bodies for goods received
by them. Contract Bills arise in respect of work done or completed by Contractors.
Unlike in the case of Supply Bills, Contract Bills for work done are neither
accompanied by documents of title to goods nor any certificate from the Public
Works Department regarding amount of work done or completed or the amount
due or payable by the said Department to the Contractor.

We may discount the Supply Bills covering the receivables arising out of genuine
commercial transactions such as professional charges, transportation charges, job
work charges, etc., tendered by the borrowers who enjoy appropriate Bills limits,
subject to the following safeguards.

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Bills should arise out of genuine commercial transactions and branch should verify
and ensure itself of the underlying commercial transactions.

No Accommodation bills shall be discounted.

In the case of ancillary units / processing units, bills shall cover only the
processing charges / job work charges and should not cover the full value of the
product, as the raw materials would have been received by the processing unit
from the supplier.

The bill financing should form part of a Working Capital facilities provided to the
borrower after proper appraisal based on established credit norms.

Branches should be circumspect while discounting the bills drawn by allied

concerns set up by industrial groups on other group Companies.

Prime security in this type of advance is Book Debts arising out of sale of goods /
services.

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 09.Personal Finance
Topics covered in this Chapter are ----

Personal Loans; Housing Loans, Vehicle Loans, Education Loans.

###

In the category of Personal Finance we study the following.

Personal loan

Vehicle Loan

Housing Loan

Education Loan

The guidelines furnished here are more general in nature. Each Bank has
formulated it’s own policy and various relaxations may be permitted at
various level of Authorities in each Bank.

Personal loan
Today, an increasing number of people are applying for Personal Loans to meet
their larger expenses.

One of the reasons for the significant rise in the growing popularity of Personal
Loan is that being an unsecured loan, it does not require any collateral and the
processing time is quick.

we can easily avail of a Personal Loan from any bank or a non-banking financial
company of our choice. With the advent of the online services offered by the
financial institutions, we can get the money within 48 hours.

Personal Loan is an unsecured credit provided by financial institutions based on

criteria like employment history, repayment capacity, income level, profession and
credit history. Personal Loan, which is also known as a consumer loan is a multi-
purpose loan, which you can use to meet any of your immediate needs.

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Unlike other types of loans like Home Loan or Gold Loan, where you must provide
several documents, Personal Loans require minimum documents and the approval
process is quick.

With various financial institutions offering Personal Loan online services, the loan
amount is disbursement within a few hours provided the lender is convinced of
your repayment capacity.

Another significant feature of Personal Loan is that the lenders offer you the
flexibility to choose your loan tenure. Usually, Personal Loan tenure ranges from
one to five years. So, you can select the loan term based on your repayment
capacity. You should opt for a shorter loan, so that you can save on the interest
payment and repay the amount faster.

The maximum amount that we can avail depends on our income level, your
profession and the lender’s assessment of your loan application. Generally, the
lenders sanction the loan based on their calculation, so that the EMI is not more
than 40% - 50% of our monthly income. Also, the lenders consider if we have any
dues while calculating the loan amount.

One can apply for a Personal Loan jointly with One’s spouse, or any other family
members like parents or siblings. One of the benefits of applying for a Personal
Loan with a co-borrower is that the lenders will consider both the applicants’
income while determining the loan amount. This means that we can apply for a
higher loan. However, we must know that if the co-borrower has a poor credit
history, there is a risk that the lender might reject our loan application.

Documents required for Personal Loan application

Although the documentation varies from lender to lender, some of the essential
documents you must provide along with your application form include:

Proof of income (salary slip, bank account statement, ITR forms)

Proof of residence and identity proof

Certified copy of your degrees and licence (this is applicable only for self-
employed applicants).

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Housing Loans
Purpose : For construction / purchase / repairs / additions / renovations of
residential house / flat including the purchase of land and construction thereon.

For taking over of the Housing Loan liability with other recognized Housing
Finance Companies, Housing Boards, Co- operative Banks, Co-operative Societies
and Commercial Banks, RRBs at our prevailing low rate of interest.

Eligibility Salaried individual with two years aggregated regular, continuous and
confirmed service. [NHA can reduce it upto one year].

Age of the borrower –relaxations permitted as per delegation of authority based

on risk rating.

Quantum : Six years gross income by respective sanctioning authority.

Agriculture Income can be considered for both salaried and non-salaried

individuals if land records support it and income is reported in Income tax return
though not taxed.

Income of Spouse/Father/ Mother/Son/Unmarried Daughter may be added for

computing the quantum of eligible amount of Housing Loan and also to
determine repayment capacity (NTH) subject to their joining as Co-borrowers and
fulfilling the eligibility norms.

Income of brother/sister MAY NOT be added for this purpose.

Depreciation can be added back to the total income for arriving loan quantum.

Margin 10% to 25%

Security Mortgage of the House/Flat.

Facility Long Term Loan – Retail.

Rate of interest Linked to EBLR (RLLR) and is based on Risk Rating of the
borrower.

In case of construction of a house, Builders All Risk Insurance should be obtained

till completion of construction, followed by comprehensive insurance after
completion.

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Inspection of house property to be completed within one month from the date of
mortgage and thereafter once in a year.

Photograph of building to be obtained at the each stage of construction and to

be countersigned by Officer/Manager who visited with site, with date seal.

Do not accept PDCs for recovery of Retail Loans.

Where housing loan is granted for purchase of site and construction of house
there on, the borrower should start construction of the house within a maximum
period of twelve months from the date of disbursement of the housing loan.

In case of Composite Housing Loans i.e., Loan for purchase of plot and
construction of residential house thereon, utilization of loan amount for purchase
of plot to be restricted to 60% of eligible/sanctioned loan amount.

Repayment :Maximum of 30 years.

The residual life of the property must be 10 years more than the repayment end
date in all the cases.

The repayment period in respect of Housing Loans, can be decided based on the
age of the earning youngest borrower /legal heir who is joining the loan as joint
borrower, provided he/she has sufficient income to service the EMI with maximum
repayment period up to 30 years.

NTH for the youngest borrower/legal heir whose age is below 60 years, respective
sanctioning authority to ensure minimum NTH of 25% or Rs.10000/- p.m.
whichever is higher. However, the exit age of the youngest borrower should not
exceed 75 years. Loan has to be availed jointly with the earning Legal heir only.

Commencement of repayment :

Ready built house/flat: Two Months from the date of first disbursement.

Construction of House: 2 months after completion of House OR 24 months from

the date of first disbursement whichever is earlier.

Flat under construction: 2 months from completion of construction or 36 months

from the date of first disbursement, whichever is earlier.

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Vehicle Loan
Purpose : Purchase of Cars, Vans, Jeeps like Tempo, Armada, New/Old and also
two wheelers.

Eligibility : All individual borrowers/ professionals/reputed firms/ companies

meeting the following eligibility criteria.

HUF is not eligible for Canara Vehicle Loan.

Salaried Class: Rs.3.0 lac p.a (for Four Wheelers).

Other income declared by the borrower like rental income / income from
investment & income of the father, mother, son, spouse or unmarried daughter,
subject to production of documentary evidence can be considered for loan.

Non salaried class:

Gross annual incomes. Rs.3.0 lacs as per latest ITR/ITAO subject to 3 years gross
average annual income of not less than Rs.2.5 Lacs. (Four wheeler).

Salaried class:

Rs.1.75 lac p.a., NTH 40% on gross salary.

Other than salaried individual:

Annual income Rs.2.00 lac and above evidenced by ITAO/ITR (for two wheeler).

Minimum NTH after proposed loan should not be less than 25% or Rs.12000,
whichever is higher.

Pensioners- Net Take Home should be 50%.

Agriculturist:

Agriculturist owing agriculture land more that 5 acre of irrigated and 10 acre of
dry land. Existing customer with 2 years satisfactory dealing.

Loans to agriculturist engaged in Dairy farming, Poultry Farming, Plantation crops

and Horticultural produce, the minimum land holding is not applicable provided
their minimum gross annual income is Rs.4.00 lakh.

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In case of loan up to Rs.10.00 lakh though it is desirable to obtain latest ITR to
ascertain the income, income certificate issued by Tahsildar/Mandal Revenue
Officer/District Revenue Authorities or any competent authority may be accepted
as a profit of income for reckoning the eligibility/NTH.

However, in case of loan above Rs.10.00 lakh, ITR is mandatory.

NTH -40% of gross annual income with a minimum of Rs.1.50 lakh/p.a.

Quantum : For new vehicles, 4 wheelers: The loan quantum will be up to 90% on
total value inclusive of invoice value, life tax, registration charges, insurance
premium and other accessories.

Old Vehicles Only 4 wheeler: 60% of assessed value/original purchase price. Old
vehicles not more than 3 years old.

Old vehicles (4 wheeler only) maximum loan amount as below:

Vehicles upto –Rs.15.00 lakhs (Margin -40%)

For Two Wheelers:

Salaried Persons-Loan may be granted upto 85% of the total value inclusive of
invoice value, life tax, registration charges, insurance premium and other
accessories. Or to the extent of 50% of their annual net income in the immediate
previous year, whichever is less. New customer 80% of invoice.

Professional and other non-salaried individuals- Loan may be granted upto 75%
of the total value or to the extent of 50% of their annual net income in the
immediate previous year, whichever is less.

Disbursement through DD only and DD to be delivered through Bank officer/

Manager.

Security Hypothecation of vehicle. Suitable guarantor good for the amount may
be insisted upon.

Repayment : New Vehicle: Four wheelers–84EMIs

Second hand Four wheelers-the repayment should be restricted up to 60 months

OR the future life specified, whichever is less.

Two Wheelers – 60EMI s

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Education loan
For Studies in India and Abroad.

Eligibility : Should be an Indian National.

NRIs can be considered if student is an Indian passport holder and meets other
eligibility requirements.

OCI/PIO category (For Inland studies): Loans can be extended to non-resident

Overseas Citizens in India (OCI)/ Persons of Indian Origin (PIO) for pursuing
education in India

Secured admission to professional / technical courses in India , through Entrance

Test/ Merit Based Selection process.For merit based (or directly getting admission
without any Selection process) selection minimum 60% marks in the previous
qualifying exam.For SC/ST,Girls -50%.Direct admission Abroad-in such cases
submission of offer/invite/admission letter of the course will be considered for
eligibility of the Education Loans.

In case of other courses, student should have secured admission for the course.

UID/Aadhar number compulsory or undertaking to submit same.

Parents would be co-borrower, both in case of minor and major students.

Where parents are not available, legally appointed guardians may be accepted as
co-borrower.

Repayment :EMI for a period of 15 years (Excluding Repayment Holiday)

Uniform one-year moratorium period after completion of studies. However, for

deserving cases, additional three spells of moratorium period (maximum 6
months at a time) may be permitted on case to case basis, taking into account
spells of unemployment/under-employment, during the life cycle of the Education
loan without treating the exercise as restructuring.

Interest : Simple Interest during moratorium period. In genuine cases Sanctioning

Authority may permit extension of moratorium period for one year from the date
of expiry of original moratorium period.

ROI as applicable from time to time

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Security For the students secured seat under Merit Quota:

Upto 7.5 lakhs – no security. Loan shall be given jointly with Parent/guardian and
assignment of future income of the student.

All such loans are to be covered Credit Guarantee Fund Scheme for Education
Loan (CGFSEL) of NGCTC. Premium payable to M/s NGCTC for coverage of all
eligible loans, will be borne by Bank, and will be taken care of at HO level.

Above 7.5 lacs – 100% Tangible collateral security

For the students secured seat under Management Quota:

Upto Rs. 4 lakhs: Suitable third party guarantee which shall be acceptable to the
Bank OR Tangible collateral security shall be 50% of the limit.

Above Rs.4 lakhs: Tangible collateral security to cover at least 100% of the loan
amount.

Margin • Upto 4 lakhs: NIL.

Above 4 lakhs – studies in India : 5% Abroad : 15%

Other Features

Loans to individuals for educational purpose including vocational courses upto Rs

20 lakh (both inland and abroad studies) irrespective of sanctioned amount will
are considered as priority sector.

Limit: Need Based/ No Maximum Limit

The expenses other than tuition fees, should not exceed 50 % of the total cost of
the course.

Where student has secured free seats i.e. no tuition fee is required to be paid by
student, sanctioning authority/ branches may consider reasonable amount of
living expenses/ other expenses while sanctioning such loans.

Top up loan can also be considered.

Second Loan & Subsequent Loan can also be considered for higher studies.

Service area norms are not applicable in education loan.

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If parent is in Govt Job: If parent/s is in transferable jobs (in Govt. PSU, Reputed
corporate), loan can be sanctioned at place of work /place of permanent
residence at the option of borrower.

Rented House: Persons staying in a rented house for a minimum period of 2 years
in aplace without owning a house in the present place of stay may also be treated
as a permanent resident of the place.

Age Limit: There is no specific restriction with regard to the age of the student to
be eligible for education loan.

Disposal of El Loan Application: With in a period of 15 days to 1 month as per the

priority Sector application disposal norms.

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 10 Priority Sector Advances
Topics covered in this Chapter are ----

Definition of Priority Sector – Components of Priority Sector ; Targets;

Shortfalls in Achievements – Penalties. RBI’s Clarifications.

###

(In this Notes guidelines related to Commercial Banks only covered.)

On 4th September, 2020, RBI has advised revised guidelines related to Priority
Sector Lending. These guidelines aim to encourage and support environment
friendly lending policies to help achieve Sustainable Development Goals (SDGs).

This Revision/Review took into account the recommendations made by the ‘Expert
Committee on Micro, Small and Medium Enterprises (Chairman: Shri U.K. Sinha)
and the ‘Internal Working Group to Review Agriculture Credit’ (Chairman: Shri M.
K. Jain) apart from discussions with all stakeholders.

“On-lending” means loans sanctioned by banks to eligible intermediaries for

onward lending for creation of priority sector assets. The average maturity of
priority sector assets thus created by the eligible intermediaries should be co-
terminus with maturity of the bank loan.

Contingent liabilities/off-balance sheet items do not form part of priority sector

achievement. However, foreign banks with less than 20 branches have an option
to reckon the Credit Equivalent of Off-Balance Sheet Exposures (CEOBE) extended
to borrowers for eligible priority sector activities for achievement of priority sector
target, subject to the condition that the CEOBE (both priority sector and non-
priority sector excluding interbank exposure) should be added to the Adjusted
Net Bank Credit (ANBC) in the denominator for computation of PSL targets.

Banks must ensure that loans extended under priority sector are for approved
purposes and the end use is continuously monitored. The banks should put in
place proper internal controls and systems in this regard.

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The categories under priority sector are as follows:

a) Agriculture
b) Micro, Small and Medium Enterprises
c). Export Credit
d) Education
e) Housing
f) Social Infrastructure
g) Renewable Energy
h) Others

Targets /Sub-targets for Priority sector

The targets and sub-targets set under priority sector lending, to be computed on
the basis of the ANBC/ CEOBE as applicable as on the corresponding date of the
preceding year, are as under :

Categories Domestic Commercial Banks

Total Priority Sector 40% of ANBC or CEOBE whichever is higher

Agriculture 18 per cent of ANBC or CEOBE, whichever is higher; out of

which a target of 10 percent# is prescribed for Small and
Marginal Farmers (SMFs)

Micro Enterprises 7.5% of ANBC or CEOBE, whichever is higher

Advances to Weaker Sections -12 % of ANBC or CEOBE, whichever is higher #

# Revised targets for SMFs and Weaker Section will be implemented in a phased
manner.

The term “all-inclusive interest” includes interest (effective annual interest),

processing fees and service charges.

For the purpose of priority sector computation only. Banks should not deduct /
net any amount like provisions, accrued interest, etc. from NBC.

Off-balance sheet interbank exposures are excluded for computing CEOBE for the
priority sector targets.

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Computation of Adjusted Net Bank Credit (ANBC)

For the purpose of priority sector lending, ANBC denotes the outstanding Bank
Credit in India and computed as follows:

Bank Credit in India as prescribed in the RBI Act, 1934 I

Bills Rediscounted with RBI and other approved Financial II

Institutions

Net Bank Credit (NBC) III (I - II)

Outstanding Deposits under RIDF and other eligible funds with IV

NABARD, NHB, SIDBI and MUDRA Ltd in lieu of non-
achievement of priority sector lending targets/sub-targets +
outstanding PSLCs

Eligible amount for exemptions on issuance of long-term bonds V

for infrastructure and affordable housing.

Advances extended in India against the incremental FCNR VI

(B)/NRE deposits, qualifying for exemption from CRR/SLR
requirements.

Investments made by public sector banks in the Recapitalization VII

Bonds floated by Government of India

Other investments eligible to be treated as priority sector (e.g. VIII

investments in securitised assets)

Face Value of securities acquired and kept under HTM category IX

under the TLTRO 2.0 and also Extended Regulatory Benefits
under SLFMF Scheme

Bonds/debentures in Non-SLR categories under HTM category X

ANBC (Other than UCBs) III + IV-

(V+VI+VII) +VIII
- IX + X

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The target for lending to the non-corporate farmers for FY 2021-22 will be 12.73%
of ANBC or CEOBE whichever is higher.

The targets for lending to SMFs and for Weaker Sections shall be revised upwards
from FY 2021-22 onwards as follows:

Financial Year Small and Marginal Farmers target Weaker Sections target

2020-21 8% 10%

2021-22 9% 11%

2022-23 9.5% 11.5%

2023-24 10% 12%

While calculating Net Bank Credit as above, if banks subtract prudential write off
at Corporate/Head Office level, it must be ensured that the credit to priority
sector and all other sub-sectors so written off should also be subtracted category
wise from priority sector and sub-target achievement. Wherever, investments or
any other items which are treated as eligible for classification under priority sector
target/sub-target achievement, the same should also form part of Adjusted Net
Bank Credit.

Agriculture - The lending to agriculture sector will include Farm Credit (Agriculture
and Allied Activities), lending for Agriculture Infrastructure and Ancillary Activities.

Farm Credit - Individual farmers

Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability
Groups (JLGs) i.e. groups of individual farmers, provided banks maintain
disaggregated data of such loans] and Proprietorship firms of farmers, directly
engaged in Agriculture and Allied Activities, viz. dairy, fishery, animal husbandry,
poultry, bee-keeping and sericulture.

This will include:

i. Crop loans including loans for traditional/non-traditional plantations,

horticulture and allied activities.

ii. Medium and long-term loans for agriculture and allied activities (e.g. purchase
of agricultural implements and machinery and developmental loans for allied
activities).
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iii. Loans for pre and post-harvest activities viz. spraying, harvesting, grading and
transporting of their own farm produce.

iv. Loans to distressed farmers indebted to non-institutional lenders.

v. Loans under the Kisan Credit Card Scheme.

vi. Loans to small and marginal farmers for purchase of land for agricultural
purposes.

vii. Loans against pledge/hypothecation of agricultural produce (including

warehouse receipts) for a period not exceeding 12 months subject to a limit up to
₹75 lakh against NWRs/eNWRs and up to ₹50 lakh against warehouse receipts
other than NWRs/eNWRs.

viii. Loans to farmers for installation of stand-alone Solar Agriculture Pumps and
for solarisation of grid connected Agriculture Pumps.

ix. Loans to farmers for installation of solar power plants on barren/fallow land or
in stilt fashion on agriculture land owned by farmer.

Farm Credit –

a) Loans for the following activities will be subject to an aggregate limit of ₹2

crore per borrowing entity:

(i) Crop loans to farmers which will include traditional/non-traditional plantations

and horticulture and loans for allied activities.

(ii) Medium and long-term loans for agriculture and allied activities (e.g. purchase
of agricultural implements and machinery and developmental loans for allied
activities).

(iii) Loans for pre and post-harvest activities viz. spraying, harvesting, grading and
transporting of their own farm produce.

(b) Loans up to ₹75 lakh against pledge/hypothecation of agricultural produce

(including warehouse receipts) for a period not exceeding 12 months against
NWRs/eNWRs and up to ₹50 lakh against warehouse receipts other than
NWRs/eNWRs.

(c) Loans up to ₹5 crore per borrowing entity to FPOs/FPCs undertaking farming

with assured marketing of their produce at a pre-determined price.

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Agriculture Infrastructure - Loans for agriculture infrastructure will be subject to
an aggregate sanctioned limit of ₹100 crore per borrower from the banking
system.

Ancillary Services - loans under ancillary services will be subject to limits

prescribed as under:

i. Loans up to ₹5 crore to co-operative societies of farmers for purchase of the

produce of members.

ii. Loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce

and Industry, Govt. of India that are engaged in agriculture and allied services.

iii. Loans for Food and Agro-processing up to an aggregate sanctioned limit of

₹100 crore per borrower from the banking system.

Outstanding deposits under RIDF and other eligible funds with NABARD on
account of priority sector shortfall.

Small and Marginal Farmers (SMFs)

For the purpose of computation of achievement of the sub-target, Small and

Marginal Farmers will include the following:

i. Farmers with landholding of up to 1 hectare (Marginal Farmers).

ii. Farmers with a landholding of more than 1 hectare and up to 2 hectares (Small
Farmers).

iii. Landless agricultural labourers, tenant farmers, oral lessees and sharecroppers
whose share of landholding is within the limits prescribed for SMFs.

iv. Loans to Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of
individual SMFs directly engaged in Agriculture and Allied Activities, provided
banks maintain disaggregated data of such loans.

v. Loans up to ₹2 lakh to individuals solely engaged in Allied activities without any

accompanying land holding criteria.

vi. Loans to FPOs/FPC of individual farmers and co-operatives of farmers directly

engaged in Agriculture and Allied Activities where the land-holding share of SMFs
is not less than 75%, subject to loan limits prescribed.

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Lending by banks to NBFCs and MFIs for on-lending in agriculture

(i) Bank credit extended to registered NBFC-MFIs and other MFIs (Societies, Trusts
etc.) which are members of RBI recognised SRO for the sector, for on-lending to
individuals and also to members of SHGs / JLGs will be eligible for categorisation
as priority sector advance under respective categories of agriculture subject to
conditions specified.

(ii) Bank credit to registered NBFCs (other than MFIs) towards on-lending for
‘Term lending’ component under agriculture will be allowed up to ₹ 10 lakh per
borrower subject to conditions specified.

Micro, Small and Medium Enterprises (MSMEs)

MSMEs should be engaged in the manufacture or production of goods, in any

manner, pertaining to any industry specified or engaged in providing or rendering
of any service or services. All bank loans to MSMEs conforming to the guidelines
qualify for classification under priority sector lending.

Factoring Transactions.

(i) ‘With Recourse’ Factoring transactions by banks which carry out the business of
factoring departmentally wherever the ‘assignor’ is a Micro, Small or Medium
Enterprise would be eligible for classification under MSME category on the
reporting dates.

(ii) The ‘factors’ must intimate the limits sanctioned to the borrower and details of
debts factored to the banks concerned, taking responsibility to avoid double
financing.

(iii) Factoring transactions pertaining to MSMEs taking place through the Trade
Receivables Discounting System (TReDS) shall also be eligible for classification
under priority sector.

Khadi and Village Industries Sector (KVI)

All loans to units in the KVI sector will be eligible for classification under the sub-
target of 7.5% prescribed for Micro Enterprises under priority sector.

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Other Finance to MSMEs

(i) Loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce

and Industry, Govt. of India that confirm to the definition of MSME.

(ii) Loans to entities involved in assisting the decentralized sector in the supply of
inputs and marketing of output of artisans, village and cottage industries.

(iii) Loans to co-operatives of producers in the decentralized sector viz. artisans,

village and cottage industries.

(iv) Loans sanctioned by banks to NBFC-MFIs and other MFIs (Societies, Trusts
etc.) which are members of RBI recognised SRO for the sector for on-lending to
MSME sector as per the conditions specified.

(v) Loans to registered NBFCs (other than MFIs) for on-lending to Micro & Small
Enterprises as per conditions specified.

(vi) Credit outstanding under General Credit Cards (including Artisan Credit Card,
Laghu Udyami Card, Swarojgar Credit Card and Weaver’s Card etc. in existence
and catering to the non-farm entrepreneurial credit needs of individuals).

(vii) Overdraft to Pradhan Mantri Jan-Dhan Yojana (PMJDY) account holders as per
limits and conditions prescribed by Ministry of Finance from time to time, will
qualify as achievement of the target for lending to Micro Enterprises.

(viii) Outstanding deposits with SIDBI and MUDRA Ltd. on account of priority
sector shortfall.

Export Credit

Export Credit under agriculture and MSME sectors are allowed to be classified as
PSL in the respective categories viz. agriculture and MSME.

Export Credit (other than in agriculture and MSME) will be allowed to be classified
as priority sector as under -“ Incremental export credit over corresponding date of
the preceding year, up to 2 per cent of ANBC or CEOBE whichever is higher,
subject to a sanctioned limit of up to ₹ 40 crore per borrower”.

Export credit includes pre-shipment and post-shipment export credit (excluding

off-balance sheet items).

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Education

Loans to individuals for educational purposes, including vocational courses, not

exceeding ₹ 20 lakh will be considered as eligible for priority sector classification.

Loans currently classified as priority sector will continue till maturity.

Housing

Bank loans to Housing sector as per limits prescribed below are eligible for
priority sector classification:

(i) Loans to individuals up to ₹35 lakh in metropolitan centres (with population of

ten lakh and above) and up to ₹25 lakh in other centres for purchase/construction
of a dwelling unit per family provided the overall cost of the dwelling unit in the
metropolitan centre and at other centres does not exceed ₹45 lakh and ₹30 lakh
respectively. Existing individual housing loans of UCBs presently classified under
PSL will continue as PSL till maturity or repayment.

(ii) Housing loans to banks’ own employees will not be eligible for classification
under the priority sector.

(iii) Since Housing loans which are backed by long term bonds are exempted from
ANBC, banks should not classify such loans under priority sector.

Loans up to ₹10 lakh in metropolitan centres and up to ₹6 lakh in other centres

for repairs to damaged dwelling units conforming to the overall cost of the
dwelling unit as prescribed.

Bank loans to any governmental agency for construction of dwelling units or for
slum clearance and rehabilitation of slum dwellers subject to dwelling units with
carpet area of not more than 60 sq.m.

Bank loans for affordable housing projects using at least 50% of FAR/FSI for
dwelling units with carpet area of not more than 60 sq.m.

Bank loans to HFCs for on-lending, up to ₹20 lakh for individual borrowers, for
purchase /construction/ reconstruction of individual dwelling units or for slum
clearance and rehabilitation of slum dwellers, subject to conditions specified.

Outstanding deposits with NHB on account of priority sector shortfall.

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Social Infrastructure

Bank loans to social infrastructure sector as per limits prescribed below are
eligible for priority sector classification

a) Bank loans up to a limit of ₹5 crore per borrower for setting up schools,

drinking water facilities and sanitation facilities including construction/
refurbishment of household toilets and water improvements at household level,
etc. and loans up to a limit of ₹10 crore per borrower for building health care
facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres.

b) Bank loans to MFIs extended for on-lending to individuals and also to members
of SHGs/JLGs for water and sanitation facilities subject to the criteria laid down.

Renewable Energy

Bank loans up to a limit of ₹30 crore to borrowers for purposes like solar based
power generators, biomass-based power generators, wind mills, micro-hydel
plants and for non-conventional energy based public utilities, viz., street lighting
systems and remote village electrification etc., will be eligible for Priority Sector
classification. For individual households, the loan limit will be ₹10 lakh per
borrower.

Others

The following loans as per the prescribed limits are eligible for priority sector
classification:

a) Loans not exceeding ₹1.00 lakh per borrower provided directly by banks to
individuals and individual members of SHG/JLG, provided the individual
borrower’s household annual income in rural areas does not exceed ₹1.00 lakh
and for non-rural areas it does not exceed ₹1.60 lakh, and loans not exceeding
₹2.00 lakh provided directly by banks to SHG/JLG for activities other than
agriculture or MSME, viz., loans for meeting social needs, construction or repair of
house, construction of toilets or any viable common activity started by the SHGs.

b) Loans to distressed persons [other than distressed farmers indebted to

noninstitutional lenders] not exceeding ₹1.00 lakh per borrower to prepay their
debt to non-institutional lenders.

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c) Loans sanctioned to State Sponsored Organisations for Scheduled Castes/
Scheduled Tribes for the specific purpose of purchase and supply of inputs and/or
the marketing of the outputs of the beneficiaries of these organisations.

d) Loans up to ₹50 crore to Start-ups that are engaged in activities other than
Agriculture or MSME.

Weaker Sections

Priority sector loans to the following borrowers will be considered as lending

under Weaker Sections category:

(i) Small and Marginal Farmers

(ii) Artisans, village and cottage industries where individual credit limits do not
exceed ₹1 lakh

(iii) Beneficiaries under Government Sponsored Schemes such as National Rural

Livelihood Mission (NRLM), National Urban Livelihood Mission (NULM) and Self
Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)

(iv) Scheduled Castes and Scheduled Tribes

(v) Beneficiaries of Differential Rate of Interest (DRI) scheme

(vi) Self Help Groups

(vii) Distressed farmers indebted to non-institutional lenders

(viii) Distressed persons other than farmers, with loan amount not exceeding ₹1
lakh per borrower to prepay their debt to non-institutional lenders

(ix) Individual women beneficiaries up to ₹1 lakh per borrower.

(x) Persons with disabilities

(xi) Minority communities as may be notified by Government of India from time to

time.

Overdraft availed by PMJDY account holders as per limits and conditions

prescribed may be classified under Weaker Sections.

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In States, where one of the minority communities notified is, in fact, in majority,
item (xi) will cover only the other notified minorities. These States/Union
Territories are Punjab, Meghalaya, Mizoram, Nagaland, Lakshadweep and Jammu
& Kashmir.

Investments by banks in securitised assets Investments by banks in ‘securitised

assets’, representing loans to various categories of priority sector, except 'others'
category, are eligible for classification under respective categories of priority
sector depending on the underlying assets provided:

(i) The assets are originated by banks and financial institutions and are eligible to
be classified as priority sector advances prior to securitisation and fulfil the
Reserve Bank of India guidelines on securitisation .

(ii) The all-inclusive interest charged to the ultimate borrower by the originating
entity should not exceed the investing bank’s MCLR + 10% or EBLR + 14%.

(iii) The investments in securitised assets originated by MFIs, which comply with
the guidelines in Paragraph 21 of these Master Directions are exempted from this
interest cap as there are separate caps on margin and interest rate for MFIs.

(iv) Purchase/ assignment/investment transactions undertaken by banks with

NBFCs, where the underlying assets are loans against gold jewellery, are not
eligible for priority sector status.

Inter Bank Participation Certificates (IBPCs)

(i) IBPCs bought by banks, on a risk sharing basis, are eligible for classification
under respective categories of priority sector, provided the underlying assets are
eligible to be categorized under the respective categories of priority sector and
the banks fulfil the RBI guidelines on IBPCs.

(ii) IBPCs bought by banks on risk sharing basis relating to ‘Export Credit’ may be
classified from purchasing bank’s perspective for priority sector categorization.
However, in such a scenario, the issuing bank shall certify that the underlying
asset is ‘Export Credit’, in addition to the due diligence required to be undertaken
by the issuing and the purchasing bank.

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Priority Sector Lending Certificates (PSLCs)

The outstanding PSLCs bought by banks will be eligible for classification under
respective categories of priority sector provided the underlying assets originated
by banks are eligible to be classified as priority sector advances and fulfil the
Reserve Bank of India guidelines on Priority Sector Lending Certificates.

Bank loans to MFIs (NBFC-MFIs, Societies, Trusts, etc.) for on-lending

Banks are allowed to extend credit to registered NBFC-MFIs and other MFIs
(Societies, Trusts etc.) which are members of RBI recognised SRO for the sector,
for on-lending to individuals and also to members of SHGs / JLGs.

Bank loans to NBFCs for on-lending

Bank credit to registered NBFCs (other than MFIs) for on-lending will be eligible
for classification as priority sector under respective categories subject to the
following conditions:

(a) Agriculture: On-lending by NBFCs for ‘Term lending’ component under

Agriculture will be allowed up to ₹ 10 lakh per borrower.

(b) Micro & Small enterprises: On-lending by NBFC will be allowed up to ₹ 20 lakh
per borrower.

The above dispensation shall be valid upto March 2022. However, loans disbursed
under the on-lending model will continue to be classified under Priority Sector till
the date of repayment/maturity.

Bank loans to HFCs for on-lending

Bank credit to Housing Finance Companies (HFCs), approved by NHB for their
refinance, for on-lending for the purpose of purchase/construction/
reconstruction of individual dwelling units or for slum clearance and rehabilitation
of slum dwellers, subject to an aggregate loan limit of ₹20 lakh per borrower.

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Cap on On-lending

Bank credit to NBFCs (including HFCs) for on-lending will be allowed up to an

overall limit of 5% of individual bank’s total priority sector lending. Banks shall
compute the eligible portfolio under on lending mechanism by averaging across
four quarters, to determine adherence to the prescribed cap.

Co-lending by Banks and NBFCs to priority sector

All Scheduled Commercial Banks are permitted to co-lend with all registered Non-
Banking Financial Companies (including Housing Finance Companies) for lending
to the priority sector.

Monitoring of Priority Sector Lending targets

To ensure continuous flow of credit to priority sector, the compliance of banks will
be monitored on ‘quarterly’ basis. The data on priority sector advances is required
to be furnished by banks to FIDD, Central Office at quarterly and annual intervals
as per the reporting format (quarterly and annual).

Non-achievement of Priority Sector targets

(i) Banks having any shortfall in lending to priority sector shall be allocated
amounts for contribution to the Rural Infrastructure Development Fund (RIDF)
established with NABARD and other funds with NABARD /NHB/ SIDBI/ MUDRA
Ltd., as decided by the Reserve Bank from time to time.

(ii) While computing priority sector target achievement, shortfall / excess lending
for each quarter will be monitored separately. A simple average of all quarters will
be arrived at and considered for computation of overall shortfall / excess at the
end of the year. The same method will be followed for calculating the
achievement of priority sector sub-targets.

(iii) The interest rates on banks’ contribution to RIDF or any other funds, tenure of
deposits, etc. shall be fixed by Reserve Bank of India from time to time.

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(iv) The mis-classifications reported by the Reserve Bank’s Department of
Supervision (DoS) (NABARD in respect of RRBs) would be adjusted/ reduced from
the achievement of that year, to which the amount of misclassification pertains,
for allocation to various funds in subsequent years.

(v) Non-achievement of priority sector targets and sub-targets will be taken into
account while granting regulatory clearances/approvals for various purposes.

Common Guidelines for Priority Sector Loans

Banks should comply with the following common guidelines for all categories of
advances under the priority sector.

(i) Rate of interest: The rates of interest on bank loans will be as per directives
issued by Department of Regulation (DoR), RBI from time to time.

(ii) Service charges: No loan related and ad hoc service charges/inspection

charges should be levied on priority sector loans up to ₹25,000. In the case of
eligible priority sector loans to SHGs/ JLGs, this limit will be applicable per
member and not to the group as a whole.

(iii) Receipt, Sanction/Rejection/Disbursement Register: A register/ electronic

record should be maintained by the bank wherein the date of receipt,
sanction/rejection/disbursement with reasons thereof, etc. should be recorded.
The register/electronic record should be made available to all inspecting agencies.

(iv) Issue of acknowledgement of loan applications: Banks should provide

acknowledgement for loan applications received under priority sector loans. Bank
Boards should prescribe a time limit within which the bank communicates its
decision in writing to the applicants.

(Source – RBI’s Master Directions updated on 26th October, 2021)

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Priority Sector Lending – RBI’s Clarifications

01. Whether the deposits with DFIs viz., NABARD, SIDBI, MUDRA & NHB on
account of PSL shortfall can be counted towards achievement of PSL / targets/
sub-targets and ANBC?

Clarification: Banks can reckon outstanding deposits with NABARD under

Agriculture and overall PSL achievement, while deposits with SIDBI, MUDRA and
NHB can be reckoned only for overall PSL achievement. Banks should also add
these deposits to Net Bank Credit (NBC) for computation of Adjusted Net Bank
Credit (ANBC).

However, deposits with NABARD, SIDBI, MUDRA and NHB cannot be reckoned for
sub-target achievement viz. SMF, NCF, Micro and weaker section.

02. Are banks permitted to exclude bills purchased/ discounted /negotiated

(payment to beneficiary not under reserve) while calculating the ‘Bank Credit in
India’?

Clarification: The bills purchased/ discounted/ negotiated (payment to beneficiary

not under reserve) under LC is allowed to be treated as Interbank exposure only
for the limited purpose of computing exposure and capital requirements. It should
not be excluded from the computation of ‘bank credit in India’ which allows for
exclusion of interbank advance. While exposure may be to the LC issuing bank,
the bills purchased/ discounted amounts to bank credit to its borrower
constituent. If this advance is eligible for priority sector classification, then bank
can claim it as PSL. Banks have to take note of the above aspect while reporting
Net Bank Credit in India as well as computing the Adjusted Net Bank Credit for
PSL targets and achievement.

03. What is the criteria for mapping credit to a particular district?

Clarification: For mapping a credit facility to a particular district, the ‘Place of

utilization of Credit’ shall be the qualifying criteria.

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04. Can bank loans against gold be classified under priority sector?

Clarification: The PSL guidelines are activity and beneficiary specific and are not
based on type of collateral. Therefore, bank loans given to individuals/ businesses
for undertaking agriculture activities do not automatically become ineligible for
priority sector classification, only on account of the fact that underlying asset is
gold jewellery/ornament etc. Banks may waive margin requirements for
agricultural loans upto ₹1.6 lakh. Therefore, bank should have extended the loan
based on scale of finance and assessment of credit requirement for undertaking
the agriculture activity and not solely based on available collateral in the form of
gold. Banks should ensure that the loans extended under priority sector are for
approved purposes and the end use is continuously monitored.

05. Can loans given to landless individuals engaged in allied activities be classified
under priority sector lending (SMF category)?

Clarification: Bank loans up to Rs 2 lakh to individuals solely engaged in allied

activities without any accompanying land holding criteria are entitled for
classification under SMF category of priority sector lending. Further, farmers
availing loans under SMF (based on land holding) are also eligible for loans under
allied activities upto Rs 2 lakhs and the same can be also be classified under SMF
category.

06. How should the banks ensure adherence to the credit cap of ₹100 crore from
banking system, while extending credit to activities under ‘Agriculture
Infrastructure’ or ‘Food & Agro-Processing’ categories?

Clarification: As per extant guidelines, loans for Agriculture Infrastructure or loans

for Food & Agro-processing activity are each subject to an aggregate sanctioned
limit of ₹100 crore per borrower from the banking system.

In case aggregate exposure across the banking industry exceeds the limit of ₹100
crore, then total exposure will cease to be classified under PSL category. The
sanctioned limit of ₹100 crore has to be ascertained facility wise for a particular
entity and is exclusive of the other borrowings of the entity for PSL / non-PSL
purposes.

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However, it needs to be ensured that the bank has assessed and sanctioned
separate limits for the specific purpose of Agriculture Infrastructure or Food &
Agro Processing activities of the entity to qualify as PSL. Banks should take a
declaration from the borrower regarding loan sanctioned by any other bank/s for
the same activity and also independently seek confirmation from those banks. In
the scenario, where new sanction by the bank leads to overall limit across banks
to more than ₹100 crore, it needs to inform other banks too about the same.
Accordingly, all other banks need to declassify the same from PSL.

07. Loans are extended to Cargo Companies, Shipping Companies, Road lines Co.,
Transport Cos, Logistic Cos., Movers and Carriers etc. for purchasing Commercial
Vehicles. These transport and shipping companies act as a Carrier (‘Transporter’)
for such Enterprises which are into food and agro processing business. Whether
bank loans to such a transporter who acts as a ‘carrier’ and does not have any
food and agro processing set-up themselves, are eligible for classification under
priority sector.

Clarification: Transportation is an eligible activity under indicative list of

permissible activities under Food Processing Sector. However, while classifying
any facility to transporters for purchasing Commercial Vehicles under “Food &
Agro-processing” category, it needs to be ensured that the transporter is using
the vehicle exclusively for transportation of food & agro-processed products or is
a type of vehicle which is specifically used for “Food & Agro-processing” e.g. cold
storage trucks, vans etc. If the commercial vehicle is also used for transportation
of products other than those related to food & agro processing, the facility shall
not be eligible for classification under ‘Food & Agro-processing’ category.

In such cases, the same may be classified under MSME (Services), if it meets the
conditions prescribed for the same.

08. Can bank loans extended to companies for buying commercial vehicles be
eligible for classification under “Agriculture Infrastructure” category of priority
sector?

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Clarification: While classifying any facility to transporters for purchasing
Commercial Vehicles under “Agriculture Infrastructure” category, it needs to be
ensured that the transporter/ sub-contractor is using the vehicle exclusively for
activities that are ancillary to “Agriculture Infrastructure”. If the commercial vehicle
is also used for transportation for purposes under non-agriculture infrastructure
category, the facility shall not be eligible for classification under ‘Agriculture
Infrastructure’. In such cases, the same may be classified under MSME (Services), if
it meets the conditions prescribed for the same.

09. Whether the continuity of the PSL status for 3 years is still applicable to
MSMEs that have breached the threshold limit as per the new definition of
MSMEs?

Clarification: Government of India has notified the new composite criteria of

investment in plant & machinery as well as turnover for classification of an
enterprise under MSME. Under the composite criteria, if an enterprise crosses the
ceiling limits specified for its present category in either of the two criteria of
investment or turnover, it will cease to exist in that category and be placed in the
next higher category but no enterprise shall be placed in the lower category
unless it goes below the ceiling limits specified for its present category in both the
criteria of investment as well as turnover. Based on the new definition, the earlier
criteria regarding continuity of PSL status for three years even after an enterprise
grows out of the MSME category concerned, is no longer valid.

10. What is the permissible cap for export credit under PSL ?

a) Bank lending to export credit under agriculture and MSME sectors is classified
as PSL under the respective categories viz, agriculture and MSME and there is no
cap on credit for the same.

b) In respect of Export Credit (other than in agriculture and MSME) Incremental

export credit over corresponding date of the preceding year, up to 2 % of ANBC
or CEOBE whichever is higher, subject to a sanctioned limit of up to ₹40 crore per
borrower is classified as priority sector.

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11. In the revised PSL guidelines, ₹20 lakh is referred to Outstanding Limit or
Sanctioned Limit?

Clarification: Only such loans that are within the sanctioned limit of ₹20 lakh shall
be eligible for priority sector classification.

12. If the same borrower is having multiple education loans with different opening
dates before and after 04-09-20, which value is required to be considered under
PSL (0/s of ₹10 lakhs per borrower or Limit of ₹20 lakhs per borrower). For
instance, Student had an education loan of ₹12 Lakhs prior to 04.09.2020, then
avails second education loan of ₹18 Lakhs after 04.09.2020, how PSL outstanding
will be calculated for this particular customer?

Clarification: For the loans sanctioned before September 4, 2020, outstanding

value up to ₹10 lakh, irrespective of the sanctioned limit, shall continue to be
classified under priority sector till maturity. However, while reckoning any fresh
loan under PSL to a borrower who had already availed education loan from the
bank prior to September 4, 2020, it needs to be ensured that the aggregate
sanctioned limit does not exceed ₹20 lakh for classification of the loans under PSL.

In the mentioned scenario, as the combined sanctioned limit becomes ₹30 lakh,
the ₹18 lakh loan extended after September 4, 2020 shall not be eligible for PSL
classification. However, with regard to the ₹12 lakh loan, which was already PSL as
per earlier guidelines, the outstanding value under the facility, up to ₹10 lakh shall
continue to be eligible under PSL till maturity.

13. Under revised PSL guidelines, sanctioned limit has been capped at ₹ 20 lakhs.
If a customer is sanctioned a loan of ₹20 lakhs and the outstanding amount
becomes ₹22 Lakhs, in such a scenario whether entire outstanding will be
reckoned for PSL?

Clarification: The outstanding value may exceed ₹20 lakh on account of accrued
interest due to moratorium on repayment during study period. Accordingly, the
entire outstanding amount shall be reckoned for priority sector provided the
sanctioned limit does not exceed ₹20 lakh.

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14. If a student avails two education loans after September 4, 2020 for ₹12 lakhs
and ₹18 lakhs, how PSL will be calculated for this particular customer?

Clarification: Post September 4, 2020, if the aggregate sanctioned limit of multiple

education loans either from a bank or across banks to a single borrower exceeds
₹20 lakh limit, all loans of the borrower sanctioned after September 4, 2020 shall
become ineligible for PSL classification. In this regard, banks should take a
declaration from the borrower regarding education loan sanctioned by any other
bank/s and also independently seek confirmation from those banks.

15. How is PSL classification considered for lending to Social Infrastructure

activities viz. Schools etc. (prescribed limit of ₹5 crore) and Health Care Facilities
(prescribed limit of ₹10 crore) which can also be classified as MSME (Service)
based on definition as per MSME Act.

Clarification: As per Udyam Registration Portal- NIC Codes, under Services as

‘Major Activity’, ‘Education’ & ‘Health Activities’ are eligible activities for
classification under MSME (Services). Therefore, bank loans for above purposes
can be classified under MSME (Services), wherein no cap on credit has been
prescribed. However, banks can classify such activities either under MSME
(Services) or Social Infrastructure, and not under both. It may be noted that for
classification under Social Infrastructure, the associated cap on credit shall be
applicable.

16. In case of Partnership Firms/ Pvt. Limited, can the loan granted be tagged as
SMF and Weaker Section, if any of the Partner/ Director is holding Agriculture
land upto 2 hectares / 5 acres.

Clarification: SMF includes individuals, SHGs, JLGs, Farmers’ Producer Companies

(FPC) and Cooperatives of farmers with the accompanying criteria of membership
by number and land-holding. Therefore, loans to partnership firms/ co-borrowers
or any director of a Company holding Agriculture land upto 2 hectares / 5 acres
are not eligible to be classified under the Small and Marginal farmers category of
PSL

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17. In case of a Partnership firm, if majority of the partners belong to one or the
other of the specified minority communities, whether advances granted to such
partnership firms can be treated as advances granted to minority communities.
Further, in case of Private / Public Ltd. Company, if any of the borrowers belong to
Minority Community, can the loan be classified under weaker section category?

Clarification: In the case of a partnership firm, if the majority of the partners

belong to one or the other of the specified minority communities, advances
granted to such partnership firms may be treated as advances granted to minority
communities.

Further, if the majority beneficial ownership in a partnership firm belongs to the

minority community, then such lending can be classified as advances to the
specified communities.

A company has a separate legal entity and hence advances granted to it cannot
be classified as advances to the specified minority communities.

18. Can banks rely on customer’s declaration for Minority / SC / ST category to be

included under Weaker section?

Clarification: Our guidelines do not mandate banks to obtain documentary

evidence for classifying credit facilities to Minorities and SCs/STs under weaker
section. Therefore, declaration by the customer in the application form would
suffice. However, it needs to be ensured that for classification under weaker
sections, the loans should first be eligible for classification under priority sector
lending as per underlying activity.

19. What is the expiry date of PSLC?

Clarification: All PSLCs will be valid till end of FY i.e. March 31st and will expire on
next day i.e. April 1st.

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20. Whether PSLCs can be issued for a limited period i.e., for one reporting
quarter and multiples thereof?

Clarification: The duration of the PSLCs will depend on the date of issue with all
PSLCs being valid till end of FY i.e. March 31st and expiring on next day i.e. April
1st.

21. Whether service tax/ stamp duty/ transaction tax will be applicable while
paying fee for PSLC?

Clarification: PSLCs may be construed in the nature of 'goods' in the course of

inter-state trade or commerce, dealing in which has been notified as a permissible
activity.

GST on PSLCs for the period July 01, 2017 to May 28, 2018 has to be paid by the
seller bank on forward charge basis at the rate of 12%. With effect from May 28,
2018, GST has to be paid by the buyer bank under Reverse Charge Mechanism
(RCM) at the rate of 18%.

Further, IGST is payable on the supply of PSLC traded over e-kuber portal. If a
bank which was liable to pay GST had already paid CGST/SGST or CGST/UGST, the
bank is not required to pay IGST towards such supply. Further, as per the extant
guidelines, no transaction charge/ fees is applicable on the participating banks
payable to RBI for usage of the PSLC module on e-Kuber portal.

22. Whether PSL – Weaker Sections or PSL – Export Credit can be traded as
PSLCs?

Clarification: There are only four eligible categories of PSLCs i.e. PSLC General,
PSLC Small and Marginal Farmer, PSLC Agriculture & PSLC Micro Enterprises.

23. Whether Export Credit may form a part of PSLC 'General' and whether banks’
surplus in Export Credit can be sold as PSLC 'General’?

Clarification: 'Export Credit' can form a part of underlying assets against the PSLC
- General. However, any bank issuing PSLC General against 'Export Credit' shall
ensure that the underlying ''Export Credit' portfolio is also eligible for priority
sector classification by domestic banks.

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24. Are Foreign Banks with less than 20 branches permitted to buy PSLC-General
for achieving the target of 8% of lending to ‘other than exports’?

Clarification: Foreign banks with less than 20 branches are not allowed to buy
PSLC General for achieving their 8% target of lending to sectors other than
exports. However, such banks are allowed to buy PSLC Agriculture, PSLC Micro
Enterprises and PSLC Small and Marginal Farmer for the same.

25. Can a purchasing bank re-sell PSLCs? Will only the net PSLC position be
reckoned for ascertaining the underlying asset?

Clarification: A bank can purchase PSLCs as per its requirements. Further, a bank is
permitted to issue PSLCs upto 50% of previous year’s PSL achievement without
having the underlying in its books. This is applicable category-wise. The net
position of PSLCs (PSLC Buy – PSLC Sell) has to be considered while reporting the
quarterly and annual priority sector returns. However, with regard to ascertaining
the underlying assets, as on March 31st, the bank must have met the priority
sector target by way of the sum of outstanding priority sector portfolio and net of
PSLCs issued and purchased.

26. What happens if the RBI inspection team, at a later date, de-classifies a
particular PSLC (which has been already traded by the bank as PSLC) ineligible?

Clarification: The misclassifications, if any, will have to be reduced from the

achievement of PSLC seller bank only. There will be no counterparty risk for the
PSLC buyer, even if, the underlying asset of the traded PSLC gets misclassified.

27. The buyer would pay a fee to the seller of the PSLC which will be market
determined. Is there any standard/ minimum fee prescribed by the RBI, for
purchase of any PSLC?

Clarification: The premium will be completely market determined. No floor/ ceiling

has been prescribed by RBI in this regard.

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28. While lending to intermediaries for on-lending to priority sector, can the bank
reckon the total outstanding loan to the NBFCs / MFIs / HFCs towards its priority
sector achievement ?

Clarification: In the case of bank’s lending to NBFCs / MFIs / HFCs for on-lending,
only that portion of the portfolio should be reckoned for PSL classification that
has been disbursed by the NBFC / MFI / HFC to the ultimate borrower/s as on the
reporting date. The reckoning of residual portfolio, if any, can be done on
subsequent reporting dates, based on the disbursement of eligible loans and
reported by the NBFC / MFI / HFC to the bank.

29. What is the cap for bank lending to NBFCs and HFCs for on-lending?

Clarification: Bank lending to NBFCs (other than MFIs) and HFCs are subjected to a
cap of 5% of average PSL achievement of the four quarters of the previous
financial year. In case of a new bank the cap shall be applicable on an on-going
basis during its first year of operations. The prescribed cap is not applicable for
bank lending to registered NBFC-MFIs and other MFIs (Societies, Trusts, etc.)
which are members of RBI recognised ‘Self-Regulatory Organisation’ of the sector.
Bank lending to such MFIs can be classified under different categories of PSL in
accordance with conditions specified.

30. Does the term "Mandatorily" in CLM guidelines means that the bank must take
all the loans originated by NBFC or a cap can be affixed on the number and
amount in the Master Agreement.

Clarification: Both entities, the bank & the NBFC shall be guided by the bilateral
Master Agreement entered by them for implementing the Co-lending Model
(CLM). The agreement may state any cap on the number and amount of loans that
can be originated by the NBFC under the Co-lending model.

31. Does the term back-to-back mean loan accounts will first be opened by NBFC
and thereafter bank will open loan accounts in its books or both will open loan
accounts and fund them simultaneously based on the loan agreement signed by
the borrower with the NBFC ?

Clarification: Back-to-back basis implies that the loans will be first opened by
NBFC and then bank will open loan accounts subsequently.

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32. Based on the loan documents executed, will the NBFC sanction and disburse
the whole amount and thereafter approach the bank for reimbursement or will it
sanction/ disburse its part of the loan and then approach the bank to sanction/
disburse its part.

Clarification: The bank and the NBFC can decide on this aspect as per the Master
agreement between them.

(Source – RBI’s FAQ updated as on 9th November, 2021)

@@@

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 11. Agricultural Finance
Kisan Credit Card; Investment loans, development loans, PMKBY

###

Agriculture is broadly divided into three categories based on repayment period –

Short term, Medium Term and Long Term

Short Term:

The short term loans are generally advanced for meeting annual recurring
purchases such as seed, feed, fertilizers, hired labour expenses, pesticides,
weedicides and hired machinery charges which are termed as seasonal loans
/crop loans/production loans. These are expected to be repaid after harvest of
crops. It is expected that the loan plus interest and other charges would be repaid
from the income received through the enterprise in which it was invested. These
credit facilities repayable within a period of 6 months to 18 months.

Medium Term (from 36 months up to 5 years):

Medium term loans are advanced for comparatively longer lived assets such as
machinery, diesel engine, wells, irrigation structure, threshers, shelters, crushers,
draught and milch animals, dairy/poultry sheds, etc., where the returns accruing
from increase in farm assets is spread over more than one production period. The
usual repayment period for such type of loan is from 36 months up to 5 years.

Long Term (above 5 years):

Loans repayable over a longer period (i.e. above 5 years) are classified as long
term loans. Long term loans are related to the long life assets such as heavy
machinery, land and its reclamation, erection of farm buildings, construction of
permanent –drainage or irrigation system, Horticulture, Plantation, development
loans etc. which require large sums of money for initial investment. The benefits
generated through such assets are spread over the entire life of the asset. The
normal repayment period for such loans ranges from five to fifteen or even upto
20 years.

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Tenability for OD accounts:

The tenability for Canara Kisan OD/ working capitals limits shall be fixed at 12
months irrespective of the rating/category excluding KCC limits and any other
area specific activities.

Eligibility:

Individuals (owner cultivators, tenant farmers or landless laborers), Association of

persons, Firms, Companies, Self Help Groups/Joint Liability Groups, HUFs, LLPs
Proprietorship Concern, Partnership, Cooperative Societies, FPOs, etc. having
necessary resources, skills, capacity, Receptive to modern technology and
willingness to undertake any productive activity in agriculture are eligible for
loans.

Obtaining Document proof for sanctioning loans for Agriculture allied

activities

Obtention of copies of land records regarding lands owned /leased as certified by

revenue authorities to be waived for loans up to Rs 1.60 lakhs wherever only
movable assets are created, such as purchase of Cross Breed Cow/
Goat/Sheep/Pig/Feed/Fodder/Utensils/Equipment etc.

While granting agricultural loans the following guidelines are to be noted:

a) The branches can finance up to 30 Kms in their command area for all Priority
Sector Advances.

b) The applicant however should not be a defaulter to any other bank or financial
institution.

c) In respect of Govt. sponsored Schemes Branches have to be guided by service

area guidelines wherein specific villages, generally in geographical contiguous
areas, are allotted to Rural and Semi Urban branches.

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Margin:

Margin is the contribution made by the borrower towards the total project cost
for which he has applied for a loan. The project cost minus the margin constitutes
the loan component which will be financed by the Bank. Generally, the applicant
shall bring in Margin as under:

For Crop Production Loans/KCCs: Loan amount is as per Scale of Finance decided
by the District Level Technical Committee. No separate margin is insisted as it is
already factored while fixing the scale of finance for each crop.

For other than Crop Production Loans/KCCs, generally the applicant has to bring
in margin as under.

Loan Amount Margin

Upto and including Rs 1. 60 lacs Nil

Above Rs 1.60 lacs 15% to 25% of the project cost depending

upon purpose and quantum of loan

Particulars Margin

Subsidy and borrower’s contribution (as specified in the respective schemes)

together will constitute the margin.

Security:

i) Credit proposals will have to be considered primarily having regard to their

economic viability and technical feasibility. However, security is stipulated in order
to create a binding on the borrower in the project and to prevent him/her from
the possibility of availing financial assistance by charging the assets to other
sources.

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ii) Specific Scheme guideline on security norms advised by the Govt. of India/State
Government to be adhered. In other cases, or if the same is not specified in the
Scheme guidelines, actual loan component should be taken into account
including subsidy amount receivable.

Purpose Based Classification of Loans

Loans are broadly categorized as under for the purpose of applying security
norms)

Working Capital (WC) loans like crop production loans which shall include KCCS,
Crop loans etc.,

Investment loans-where moveable assets are created.

Development loans-where assets are created on immoveable properties or result

in improvement of the immoveable assets on which development is taken up.

Loan sanctioned for construction of Farm House to be classified under Priority-

Agriculture, irrespective of loan sanctioned, since it is a part of Agriculture
Development loan.

Security shall be obtained as under:

*Primary - - Hypothecation of crops/dairy animals/fisheries/poultry birds/other

small ruminants and other assets created out of bank's finance.

* Collateral - - No collateral for limit upto Rs 1.60 Lakh.(In tie ups-up to Rs.3.00
Lakh- No security required)

- For limits above Rs 1.60 Lakh, collateral security is required.

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Loans extended to allied activities under agriculture upto Rs.10.00 lakhs are
eligible for guarantee cover. under Pradhan Mantri Mudra Yojana (PMMY) as
under.

Loan Amount Security

Upto Rs 2 lacs Hypothecation of ACL + CGFMU

Above Rs 2 lacs upto Rs 10 lacs Hypothecation of ACL + Mortgage + CGFMU

Above Rs 10 lacs Hypothecation of ACL + Mortgage

(ACL = Assets Created out of Loan proceeds)

Kisan Credit Card (KCC) (Revised ) Scheme

The Kisan Credit Card (KCC) Scheme was introduced in 1998.

KCC was introduced to enable the farmers to purchase agricultural input and draw
cash for their production needs.

In 2004, the scheme was further revised to cover long-term loans as well as the
working capital load for agriculture and allied activities.

Further, the Reserve Bank of India has recently extended the KCC facility to
farmers engaged in Animal Husbandry and Fisheries for their working capital
requirements.

Aim of KCC

Kisan Credit Card aims to provide credit support for the following needs:

To meet the short-term credit requirement for cultivation

to manage post-harvest expenses

to meet the consumption requirement of farmer’s household

working capital for maintaining the farm assets and activities allied to
agriculture

Investment credit requirement for agriculture allied activities

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Implementing Agency of KCC

The scheme is implemented in the entire country with the help of a vast network
of financial institutions’ credit frameworks involving:

Commercial banks ; Regional Rural Banks (RRBs) ; Small Financial Banks, and
Cooperative banks.

The interest rate is fixed as per the RBI guidelines.

Eligibility for KCC Benefits

KCCS aid all types of farmers, but they are particularly beneficial to those who are
categorized as marginal and small farmers (those with landholdings of up to 2
hectares).

Eligibility extended to:

Individual Farmers ; Joint Borrowers ; Tenant Farmers ; Oral lessees ;

Sharecroppers ; Self Help Groups ; Joint Liability Group of Farmers ;

Salient Features of Kisan Credit Card

The KCC plan offers a number of features, including an ATM-enabled RuPay Card,
one-time documentation, built-in cost escalation in the limit, and any number of
withdrawals within the limit.

The National Payments Corporation of India (NPCI) developed and introduced the
RuPay. It was developed to satisfy the Reserve Bank of India’s demand for an
open-loop, domestic, and multilateral payments system in India.

Under the Kisan Credit Card (KCC) Scheme, marginal farmers have been given a
flexible limit of Rs 10,000 to Rs 50,000 (as Flexi KCC) based on the amount of land
owned and the crops grown, as well as post-harvest warehouse storage-related
credit needs, other farm expenses, consumption needs, etc., plus small term loan
investments without taking land value into account.

Interest Subvention Scheme and KCC

The Government of India is implementing the Interest Subvention Scheme to

provide short-term Agri-loans to farmers at a concessional interest rate.

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Under Interest Subvention Scheme, farmers involved in agriculture and other
related activities are eligible for a short-term crop loan up to Rs. 3.00 lakh at a
benchmark rate of 9%.

Along with this, an interest subvention (IS) of 2% and a Prompt Repayment

Incentive (PRI) of 3% are also given to farmers on Short Term Agri Loan up to 3
lakh. Thus, the effective rate of interest comes down to 4% per annum.

Benefits of Interest Subvention Scheme

The sustainability of credit flows in the agricultural sector, as well as the financial
health and viability of the lending institutions, particularly Regional Rural Banks &
Cooperative Banks, will be ensured by an increase in interest subsidy. This will
assure adequate farm credit in rural economies.

Banks will be able to bear the increase in funding costs and be encouraged to
lend to farmers for short-term agricultural needs, allowing more farmers to
benefit from agricultural credit.

Since short-term agri-loans are available for all activities, including animal
husbandry, dairying, poultry farming, and fisheries, this will also result in the
creation of employment.

Farmers will continue to be able to access short-term agricultural finance at an

interest rate of 4% annually as long as they repay the loan on time.

Digitization of Kisan Credit Card

The Reserve Bank has decided to undertake pilot projects to digitize the Kisan
Credit Card (KCC) in Madhya Pradesh and Tamil Nadu and expand it gradually.
The step was taken in order to change the rural credit delivery system.

The digitalization of the KCC loan process will increase its effectiveness, lower
costs for borrowers, and significantly reduce turn-around-time (TAT).

Pradhan Mantri Fasal Bima Yojana, (PMFBY)

Launched in 2016 and is being administered by the Ministry of Agriculture and

Farmers Welfare.

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It replaced the National Agricultural Insurance Scheme (NAIS) and Modified
National Agricultural Insurance Scheme (MNAIS).

Eligibility:

Farmers including sharecroppers and tenant farmers growing notified crops in the
notified areas are eligible for coverage.

Objectives:

To provide insurance coverage and financial support to the farmers in the event of
failure of any of the notified crops as a result of natural calamities, pests &
diseases.

To stabilize the income of farmers to ensure their continuance in farming.

To encourage farmers to adopt innovative and modern agricultural practices.

To ensure the flow of credit to the agriculture sector.

Premium:

There will be a uniform premium of only 2% to be paid by farmers for all Kharif
crops and 1.5% for all Rabi crops.

In the case of annual commercial and horticultural crops, the premium to be paid
by farmers will be only 5%.

The premium rates to be paid by farmers are very low and the balance premium
will be paid by the Government to provide full insured amount to the farmers
against crop loss on account of natural calamities.

There is no upper limit on Government subsidies. Even if the balance premium is

90%, it will be borne by the Government.

Earlier, there was a provision of capping the premium rate which resulted in low
claims being paid to farmers.

This capping was done to limit Government's outgo on the premium subsidy.

This capping has now been removed and farmers will get a claim against the full
sum insured without any reduction.

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Latest Technological Tools: To assess crop losses, satellite imagery, remote-
sensing technology, drones, artificial intelligence and machine learning are used.

PMFBY Portal: For integration of land records.

Recent Changes:

The scheme was once mandatory for loanee farmers, but 2020, the Centre
changed it to make it optional for all farmers.

Earlier the rate of average premium subsidy including the difference between the
actuarial premium rate and the rate of the insurance premium payable by the
farmer was shared by the state and center, further states and UTs were free to
extend additional subsidies over and above the average subsidy from their
budgets.

The Centre decided in February 2020 to limit its premium subsidy to 30% for
unirrigated areas and 25% for irrigated ones (from the existing unlimited).
Previously, the central subsidy had no upper limit.

Issues Related to the Scheme

Financial Constraints of States: The financial constraints of the state governments

and low claim ratio during normal seasons are the major reasons for non-
implementation of the Scheme by these States.

States are unable to deal with a situation where insurance companies compensate
farmers less than the premium they have collected from them and the Centre.

The State governments failed to release funds on time leading to delays in

releasing insurance compensation.

This defeats the very purpose of the scheme which is to provide timely financial
assistance to the farming community.

Claim Settlement Issues: Many farmers are dissatisfied with both the level of
compensation and delays in settlement.

The role and power of Insurance companies is significant. In many cases, it didn't
investigate losses due to a localised calamity and, therefore, did not pay the
claims.

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Implementation Issues: Insurance companies have shown no interest in bidding for
clusters that are prone to crop loss.

Further, it is in the nature of the insurance business for entities to make money
when crop failures are low and vice-versa.

There is a need for comprehensive rethinking among states and the central
governments to further resolve all the pending issues around the scheme so that
the farmers could get benefit from this scheme.

Further, rather than paying subsidies under this scheme, the state government
should invest that money in a new insurance model.

Restructured Weather Based Crop Insurance Scheme

Restructured Weather Based Crop Insurance Scheme (RWBCIS) was launched in

2016 and is being administered by the Ministry of Agriculture and Farmers
Welfare.

It aims to mitigate the hardship of the insured farmers against the likelihood of
financial loss on account of anticipated crop loss resulting from adverse weather
conditions relating to rainfall, temperature, wind, humidity etc.

WBCIS uses weather parameters as “proxy‟ for crop yields in compensating the
cultivators for deemed crop losses.

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 12 Finance to MFIs/Co-Lending with NBFCs

A microfinance loan is defined as a collateral-free loan given to a household

having annual household income up to ₹3,00,000. For this purpose, the household
shall mean an individual family unit, i.e., husband, wife and their unmarried
children.

All collateral-free loans, irrespective of end use and mode of application/

processing/ disbursal (either through physical or digital channels), provided to
low-income households, i.e., households having annual income up to ₹3,00,000,
shall be considered as microfinance loans.

To ensure collateral-free nature of the microfinance loan, the loan shall not be
linked with a lien on the deposit account of the borrower.

The REs shall have a board-approved policy to provide the flexibility of repayment
periodicity on microfinance loans as per borrowers’ requirement.

Assessment of Household Income

Each RE shall put in place a board-approved policy for assessment of household

income.

Self-regulatory organisations (SROs) and other associations/ agencies may also

develop a common framework based on the indicative methodology. The REs may
adopt/ modify this framework suitably as per their requirements with approval of
their boards.

Each RE shall mandatorily submit information regarding household income to the

Credit Information Companies (CICs). Reasons for any divergence between the
already reported household income and assessed household income shall be
specifically ascertained from the borrower/s before updating the assessed
household income with CICs.

Limit on Loan Repayment Obligations of a Household

Each RE shall have a board-approved policy regarding the limit on the outflows
on account of repayment of monthly loan obligations of a household as a

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percentage of the monthly household income. This shall be subject to a limit of
maximum 50 per cent of the monthly household income.

The computation of loan repayment obligations shall take into account all
outstanding loans (collateral-free microfinance loans as well as any other type of
collateralized loans) of the household. The outflows capped at 50 per cent of the
monthly household income shall include repayments (including both principal as
well as interest component) towards all existing loans as well as the loan under
consideration.

Existing loans, for which outflows on account of repayment of monthly loan

obligations of a household as a percentage of the monthly household income
exceed the limit of 50 per cent, shall be allowed to mature. However, in such
cases, no new loans shall be provided to these households till the prescribed limit
of 50 per cent is complied with.

Each RE shall provide timely and accurate data to the CICs and use the data
available with them to ensure compliance with the level of indebtedness. Besides,
the RE shall also ascertain the same from other sources such as declaration from
the borrowers, their bank account statements and local enquiries.

Pricing of Loans

Each RE shall put in place a board-approved policy regarding pricing of

microfinance loans which shall, inter alia, cover the following:

a) A well-documented interest rate model/ approach for arriving at the all

inclusive interest rate;

b) Delineation of the components of the interest rate such as cost of funds, risk
premium and margin, etc. in terms of the quantum of each component based on
objective parameters;

c) The range of spread of each component for a given category of borrowers; and

d) A ceiling on the interest rate and all other charges applicable to the
microfinance loans.

Interest rates and other charges/ fees on microfinance loans should not be
usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank.

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Each RE shall disclose pricing related information to a prospective borrower in a
standardised simplified factsheet.

Any fees to be charged to the microfinance borrower by the RE and/ or its

partner/ agent shall be explicitly disclosed in the factsheet. The borrower shall not
be charged any amount which is not explicitly mentioned in the factsheet.

The factsheet shall also be provided for other loans (i.e., collateralized loans)
extended to borrowers from low-income households.

There shall be no pre-payment penalty on microfinance loans. Penalty, if any, for

delayed payment shall be applied on the overdue amount and not on the entire
loan amount.

Each RE shall prominently display the minimum, maximum and average interest
rates charged on microfinance loans in all its offices, in the literature (information
booklets/ pamphlets) issued by it and details on its website. This information shall
also be included in the supervisory returns and subjected to supervisory scrutiny.

Any change in interest rate or any other charge shall be informed to the borrower
well in advance and these changes shall be effective only prospectively.

As part of their awareness campaigns, SROs/ other industry associations may

publish the range of interest rates on microfinance loans charged by their
members operating in a district. SROs/ other industry associations may also
sensitize their members against charging of usurious interest rates.

RBI would also make available information regarding interest charged by REs on
microfinance loans.

Guidelines on Conduct towards Microfinance Borrowers

A fair practices code (FPC) based on these directions shall be put in place by all
REs with the approval of their boards. The FPC shall be displayed by the RE in all
its offices and on its website. The FPC should be issued in a language understood
by the borrower.

There shall be a standard form of loan agreement for microfinance loans in a

language understood by the borrower.

Each RE shall provide a loan card to the borrower which shall incorporate the
following:

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a) Information which adequately identifies the borrower;

b) Simplified factsheet on pricing;

c) All other terms and conditions attached to the loan;

d)Acknowledgements by the RE of all repayments including instalments received

and the final discharge; and

e) Details of the grievance redressal system, including the name and contact
number of the nodal officer of the RE.

All entries in the loan card should be in a language understood by the borrower.

Issuance of non-credit products shall be with full consent of the borrowers and
fee structure for such products shall be explicitly communicated to the borrower
in the loan card itself.

Training, if any, offered to the borrowers shall be free of cost.

Guidelines related to Recovery of Loans

Recovery shall be made at a designated/ central designated place decided

mutually by the borrower and the RE. However, field staff shall be allowed to
make recovery at the place of residence or work of the borrower if the borrower
fails to appear at the designated/ central designated place on two or more
successive occasions.

RE or its agent shall not engage in any harsh methods towards recovery. Without
limiting the general application of the foregoing, following practices shall be
deemed as harsh:

(i) Use of threatening or abusive language

(ii) Persistently calling the borrower and/ or calling the borrower before 9:00 a.m.
and after 6:00 p.m.

(iii) Harassing relatives, friends, or co-workers of the borrower

(iv)Publishing the name of borrowers

(v) Use or threat of use of violence or other similar means to harm the borrower or
borrower’s family/ assets/ reputation

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(vi)Misleading the borrower about the extent of the debt or the consequences of
non-repayment

Each RE shall have a dedicated mechanism for redressal of recovery related

grievances. The details of this mechanism shall be provided to the borrower at the
time of loan disbursal.

Both entities, the bank & the NBFC shall be guided by the bilateral Master
Agreement entered by them for implementing the Co-lending Model (CLM). The
agreement may state any cap on the number and amount of loans that can be
originated by the NBFC under the Co-lending model.

"back-to-back loan in the context of co-lendig with NBFC implies that the loans
will be firstopened by NBFC and then bank will open loan accounts subsequently.

Master agreement between The bank and the NBFC they can decide whether
NBFC can sanction and disburse the whole amount and thereafter approach the
bank for reimbursement.

NBFC

An NBFC-MFI is defined as a non-deposit taking NBFC (other than a company

licensed under Section 25 of the Indian Companies Act, 1956 or Section 8 of the
Indian Companies Act, 2013.) with Minimum Net Owned Funds of Rs.5 crore (for
NBFC-MFIs registered in the North Eastern Region of the country, it will be Rs. 2
crore) and having not less than 85% of its net assets as “qualifying assets”.

“Net assets” are defined as total assets other than cash and bank balances and
money market instruments.

“Qualifying Asset” shall mean a loan which satisfies following criteria:-

A microfinance loan is defined as a collateral-free loan given to a household

having annual household income up to ₹3,00,000. All collateral-free loans,
irrespective of end use and mode of application/processing/ disbursal (either
through physical or digital channels), provided to such households shall be
considered as microfinance loans.

Limit on Loan Repayment Obligations of a Household – The repayment

obligations (towards all existing as well as proposed loan instalments) shall be
subject to a limit of maximum 50% of the monthly household income.

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Features of MFI:-

MFI go to clients rather than Clients going to MFI(s) Small size of loan and make it
easy for re-payment

Generally, it is collateral free

It is a tool for social change, specially for women.

Advantage of MFI:-

Micro Finance is a powerful instrument for society. It helps the needy person to
do business or generate income.

MFI(s) trying to eliminate the poverty by providing loan for doing new business or
funding to existing business.

It generates employment in the country.

It improves the quality of education in the society

Disadvantage of MFI:-

More man power required Borrowers are mainly poor people and many of them
are not educated and it may require a lot of tutoring.

The deal is too small for lender and it requires more time and money for due
diligence.

As the Capital is low the profits is also low.

Progress of MFI(s) depends on number of borrowers.

Fair Practices in Lending Transparency in Interest rates

There should be a standard form of loan agreement

There shall be only three components in the pricing of the loan :- Interest charge
Processing Charge Insurance premium includes administrative charge

No penalty charged on delay payment

No requirement to collect any security/margin from the borrower

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Every NBFC-MFI should provide to the borrower a loan card reflecting:- Effective
rate of interest charged Information which adequate identifies the borrower
Information which identifies the borrower Acknowledgement by the NBFC-MFI of
all repayment including installments received and the final discharge.

All entries in the Loan Card should be in the vernacular language.

Statutory Auditors Certificate In terms of paragraph 15 of the Non Banking

Financial (Non-Deposit accepting or holding) Companies Prudential Norms
(Reserve Bank) Directions, 2007 all NBFCs are required to submit Statutory
Auditors Certificate with reference to the position of the Company as at end of
the financial year ended 31st March every year.

Geographical Diversification NBFC-MFIs may approach their Board for fixing

internal exposure limits to avoid any undesirable concentration in specific
geographical locations.

Formation of SRO

The Malegam Committee has recommended greater responsibility to be placed

on industry associations for monitoring of regulatory compliance.

All NBFC-MFIs are encouraged to become member of atleast one Self Regulatory
Organization (SRO) which is recognized by the Reserve Bank of India and will also
have to comply with the Code of Conduct prescribe by the SRO.

Monitoring of Compliance The responsibility for compliance to all regulations

prescribes for MFIs lies primarily with the NBFC-MFIs themselves.

The industry associations/SROs will also play a key role in ensuing with the
regulatory framework.

India's socio-economic growth is significantly enhanced and ensured by the

Micro, Small Medium Enterprises (MSMEs) sectors due to its contribution to the
GDP and exports of the nation.

Co-lending models allow traditional banks to lend significantly more money while
utilizing the fintech business model for digital reach.

For both banks and NBFCs, a co-lending model seems beneficial because it will
help close the lending segment's disparities.

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It is a successful model because it enables reliable technology to ease the
operational difficulties associated with conventional lending methods. The joining
of two lending companies to offer joint loans to clients is referred to as co-
lending or co-origination.

It is a structure where the banking and non-banking sectors work together in an

arrangement for the combined provision of credit for priority sector loans. It is a
major component of the co-financing structure. This arrangement grants
companies the authority to find clients, evaluate credit, and disburse a tiny
portion of the loan amount. Following this structure, banks and NBFCs split risk
80:20, with banks bearing a minimum of 20 percent of the loan and non-banks
such as NBFCs, HFCs, Fintech, etc. bearing a minimum of the remaining 80
percent.

Benefits of Co-lending Model

Better Technology

Financial institutions have gone digital to enhance the quality of operations and
guarantee that funds reach those who need them at the appropriate moment. By
utilizing reliable technology, practically all processes—from application through
disbursal and service delivery—have seen faster turnaround times.

Lower Prices

The co-lending model is typically formed to meet the demands of the priority
sector and spread credit throughout the economy. These consumers can receive a
choice of items at cheaper interest rates.

The cost of attracting consumers and meeting their needs is also significantly
reduced thanks to technology-driven algorithms introduced by digital lenders.

Additionally, the lower cost of capital that banks bring in decreases the entire cost
even more, which allows borrowers to profit.

Simple Access to Money

Lending processes are made easier for those who need money the most by using
a digital strategy. Loans are now accessible through user-friendly, convenient, and
customer-focused personal loan apps, which are only a few clicks away.

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One only needs a smartphone and five minutes of free time. Therefore, when a
digital borrower and bank work together under a co-lending model, customers
get the best of both worlds because both digital channels and physical facilities
are available. A co-lending contract outlines the obligations and duties of both
parties in detail. The NBFC is typically in charge of sourcing, customer satisfaction
and management, product development, quick paperwork, and quick turnaround,
while the banks are in charge of bringing in cheap money and building a
reputation.

Processes without Paper

Borrowers can obtain funds from the convenience of their homes because the
entire procedure is automated. Everything from application to disbursal is
available at your fingertips. Initial verification procedures required human labour,
but modern lenders have embraced eKYC and Video KYC to streamline the
procedure. It significantly cuts down on time and labour.

This methodology guarantees borrower convenience. The program seeks to offer

clients who want to apply for a loan to finance their businesses with an MSME
loan a simple and hassle-free process.

Enhanced Range

FinTechs employ digital channels to increase their reach to prospective consumers

in contrast to traditional lending methods. It makes it easier to meet the needs of
borrowers from various geographical areas. A co-lending approach provides the
necessary funding to the economically disadvantaged strata.

The co-lending sector has grown significantly in prominence. Additionally, the

pandemic's prolonged nature contributed to a global recession and historically
high inflation rates. Here are some ways co-lending can benefit you.

Increased Funding Access

By giving people and small businesses with no credit history before easy access to
finance, NBFCs serve as a link- between the financially excluded and established
banks. NBFCs provide the remaining 20% of the approved loan amount, with
traditional banks providing the remaining 80%.

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Greater Reach and Quicker Turnaround

Through NBFCs, co-lending enables financial institutions to access international

markets and previously unbanked sectors and churn through more loan
applications and disbursements, improving profitability through automation and
instruments like substitute credit scoring that significantly cut underwriting costs
and time.

Shared Risk and Return

Collaboration would entail sharing different risks and returns between the
institutions and NBFC, improving lending techniques, and developing
technologies. This will also aid in a more efficient and financially sound flow of
money in the system.

Reduced loan costs

Banks and NBFCs have been able to pass on the cost-benefit in the guise of lower
interest rates because of their capacity to streamline the loan origination process.
It implies that they can expand their market share, process and issue more loans,
and increase the amount of credit flowing into the economy.

Given the involvement of two or more highly distinct business entities, each with
its own processes, regulations, technology, and risk management strategy, co-
lending may provide difficulties. It could take a long time for screening,
disbursement, and receivables processes to fully integrate and still leave gaps.
Lenders must work together more closely to accomplish the program's objectives
and give customers a positive experience, particularly by seamlessly integrating
their information systems. To tackle the operational difficulties brought on by co-
lending, financial firms require a specialized and cutting-edge technology
platform.

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 13 Micro, Small and Medium Enterprises (MSME)
Topics covered in this chapter……>

Revised definition, Targets, Facilities to MSME

###

New definition of MSME effective from 01-07-2020. As per new definition, a

composite criterion of investment and turnover shall apply for classification of an
enterprise as micro, small or medium.

Micro enterprise is an enterprise where the investment in plant and machinery or

equipment does not exceed ₹1 crore and turnover does not exceed ₹5 crore;

A small enterprise is an enterprise where the investment in plant and machinery or

equipment does not exceed ₹10 crore and turnover does not exceed ₹50 crore;
and

machinery or equipment does not exceed ₹50 crore and turnover does not
exceed ₹250 crore.

To be recognised as a Micro, Small or Medium Enterprise (MSME) :

(a) Any person who intends to establish a MSME may file Udyam Registration
online in the Udyam Registration portal, based on self-declaration with no
requirement to upload documents, papers, certificates or proof.

(b) On Registration, an enterprise ( referred to as “Udyam in the Udyam

Registration portal) will be assigned a permanent identity number to be known
as Udyam Registration Number (URN).

(c) An e-certificate, namely, “Udyam Registration Certificate”(URC) shall be issued

on completion of the registration process.

If an enterprise crosses the ceiling limits specified for its present category in either
of the two criteria of investment or turnover, it will cease to exist in that category
and be placed in the next higher category but no enterprise shall be placed in the
lower category unless it goes below the ceiling limits specified for its present
category in both the criteria of investment as well as turnover.

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All units with Goods and Services Tax Identification Number (GSTIN) listed against
the same Permanent Account Number (PAN) shall be collectively treated as one
enterprise and the turnover and investment figures for all of such entities shall be
seen together and only the aggregate values will be considered for deciding the
category as micro, small or medium enterprise.

The calculation of investment in plant and machinery or equipment will be linked

to the Income Tax Return (ITR) of the previous years filed under the Income Tax
Act, 1961.

In case of a new enterprise, where no prior ITR is available, the investment will be
based on self-declaration of the promoter of the enterprise and such relaxation
shall end after the 31st March of the financial year in which it files its first ITR.

The expression ‘’plant and machinery or equipment’’ of the enterprise, shall

include all tangible assets (other than land and building, furniture and fittings).

The purchase (invoice) value of a plant and machinery or equipment, whether

purchased first hand or second hand, shall be taken into account excluding Goods
and Services Tax (GST), on self-disclosure basis, if the enterprise is a new one
without any ITR.

The cost of certain items specified in the Act shall be excluded from the
calculation of the amount of investment in plant and machinery.

Calculation of turnover

Exports of goods or services or both, shall be excluded while calculating the

turnover of any enterprise whether micro, small or medium, for the purposes of
classification.

Information as regards turnover and exports turnover for an enterprise shall be

linked to the Income Tax Act or the Central Goods and Services Act (CGST Act)
and the GSTIN.

The turnover related figures of such enterprise which do not have PAN will be
considered on self-declaration basis for a period up to 31st March, 2021 and
thereafter, PAN and GSTIN shall be mandatory.

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In case of an upward change in terms of investment in plant and machinery or
equipment or turnover or both, and consequent re-classification, an enterprise will
maintain its prevailing status till expiry of one year from the close of the year of
registration.

In case of reverse-graduation of an enterprise, whether as a result of re-

classification or due to actual changes in investment in plant and machinery or
equipment or turnover or both, and whether the enterprise is registered under the
Act or not, the enterprise will continue in its present category till the closure of
the financial year and it will be given the benefit of the changed status only with
effect from 1st April of the financial year following the year in which such change
took place.

As per Nayak Committee Report, working capital limits to SSI units is computed
on the basis of minimum 20% of their estimated turnover up to credit limit of ₹5
crore.

A composite loan limit of ₹1 crore can be sanctioned by banks to enable the

MSME entrepreneurs to avail of their working capital and term loan requirement
through Single Window.

Cluster based approach to lending is intended to provide a full-service approach

to cater to the diverse needs of the MSE sector which may be achieved through
extending banking services to recognized MSE clusters.

A cluster-based approach may be more beneficial (a) in dealing with well-defined

and recognized groups (b) availability of appropriate information for risk
assessment (c) monitoring by the lending institutions and (d) reduction in costs.

To improve the transmission of monetary policy rates, it has been decided that
with effect from April 01, 2020, loans to Medium Enterprises shall be linked to
external benchmark.

Banks are mandated not to accept collateral security in the case of loans upto Rs
10 lakh extended to units in the MSE sector.

The CGTMSE would provide cover for credit facility up to ₹200 lakh which have
been extended by lending institutions without any collateral security and /or
third-party guarantees.

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The credit rating by external rating agencies is not compulsory from regulatory
capital perspective, if the maximum aggregate exposure to one counterparty does
not exceed the threshold limit of Rs 7.5 crore, subject to meeting certain other
conditions.

With the enactment of the MSMED Act 2006, for the goods and services supplied
by the MSME units, payments have to be made by the buyers as under:

(i) The buyer is to make payment on or before the date agreed on between him
and the supplier in writing or, in case of no agreement, before the appointed day.
The agreement between seller and buyer shall not exceed more than 45 days.

(ii) If the buyer fails to make payment of the amount to the supplier, he shall be
liable to pay compound interest with monthly rests to the supplier on the amount
from the appointed day or, on the date agreed on, at three times of the Bank Rate
notified by Reserve Bank.

To take care of the payment obligations of large corporate borrowers to MSEs,

banks have been advised that while sanctioning/renewing credit limits to their
large corporate borrowers (i.e. borrowers enjoying working capital limits of ₹10
crore and above from the banking system), to fix separate sub-limits, within the
overall limits, specifically for meeting payment obligations in respect of purchases
from MSEs either on cash basis or on bill basis.

Rural Self Employment Training Institutes (RSETIs) have been set up by various
banks all over the country to conduct various short duration (ranging preferably
from 1 to 6 weeks) skill upgradation programmes to help the existing
entrepreneurs compete in this ever-changing global market.

Financial Literacy Centres (FLCs) are set up by Banks to provide assistance to the
MSE entrepreneurs in regard to financial literacy, operational skills, including
accounting and finance, business planning etc.

Guidelines on ‘Streamlining flow of credit to Micro and Small Enterprises (MSEs)

for facilitating timely and adequate credit flow during their ‘Life Cycle’

(i) To extend standby credit facility in case of term loans

(ii) Additional working capital to meet with emergent needs of MSE units

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(iii) Mid-term review of the regular working capital limits, where banks are
convinced that changes in the demand pattern of MSE borrowers require
increasing the existing credit limits of the MSEs, every year based on the actual
sales of the previous year.

(iv) Timelines for Credit Decisions.

Trade Receivables Discounting System (TReDS)

The objective of TReDS is to create Electronic Bill Factoring Exchanges which could
electronically accept and settle bills so that MSMEs could encash their receivables
without delay. This will not only give them greater access to finance but will also
put greater discipline on corporates to pay their dues on time.

Certified Credit Counsellors (CCC) Scheme

As per the scheme, Certified Credit Counsellors are institutions or individuals

registered with SIDBI who shall assist MSMEs in preparing project reports in a
professional manner which would, in turn, help banks make more informed credit
decisions.

All enterprises are required to register online on Udyam Registration Portal and
obtain ‘Udyam Registration Certificate’.

Vide Notification dated 7th July 2021, RBI included Retail Trade and Wholesale
Trade as MSME for Priority Sector Classification (except Vehicles and Motor
Cycles) and they would be allowed to be registered on Udyam Registration Portal.

Based on the new definition, the earlier criteria regarding continuity of PSL status
for three years even after an enterprise grows out of the MSME category
concerned, is no longer valid.

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Though there is no specific target for MSME as such, target for Micro Enterprises
7.5 % of ANBC or CEOBE, whichever is higher is fixed.

No enterprise shall file more than one Udyam Registration: Provided that any
number of activities including manufacturing or service or both may be specified
or added in one Udyam Registration.

The Champions Control Rooms functioning in various institutions and offices of

the Ministry of Micro, Small and Medium Enterprises including the Development
Institutes (MSME-DI) shall act as Single Window Systems for facilitating the
registration process and further handholding the micro, small and medium
enterprises in all possible manner.

(Source – The Gazette of India dated 26th June 2020 & RBI’s FAQ on MSME
Updated as on October 1, 2021)

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 14. Government Sponsored Schemes
PMEGP, PMMY, PMAY, DIR,

Prime Minister’s Employment Generation Programme (PMEGP)

PMEGP is formulated by merging the two schemes namely Prime Minister‘s Rojgar
Yojana (PMRY) and Rural Employment Generation Programme (REGP), for
generation of employment opportunities through establishment of micro
enterprises in rural as well as urban areas.

PMEGP is a Central Sector Scheme administered by the Ministry of Micro, Small

and Medium Enterprises (MoMSME).

Implementing Agencies:

National Level: Khadi & Village Industry Commission (KVIC).

State Level: In Rural Areas: Through State Directorates of KVIC , State Khadi &
Village Industries Boards(KVIB) and District Industries Center (DICs).

In Urban Areas: State District Industries Center (DICs) only.

Scheme is operational both in Rural and Urban Areas. Rural & Urban Areas :

Any area with population not exceeding exceeds 20000 persons is called as Rural
area. Other Areas are classified as Urban Areas.

Maximum Project cost Rs.25 lakhs for manufacturing sector and Rs.10 lakhs for
service activities.

Self Help Group is eligible for getting financial assistance under PMEGP.

Without Capital Expenditure, Loan is not eligible.

Finance under PMEGP is only for new projects.

Business/ Trading activities in the form of sales outlets may be permitted in

North-East Regions (NER), Left Wing Extremist (LWE) affected Districts and
Andaman & Nicobar Islands.

Retail outlets backed by Manufacturing (including Processing) / Service facilities

may be permitted (across the country).

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Individuals, SHGs, Societies, Trusts are eligible. Only one person from family
eligible. (Family includes, self and spouse).

Loan Sanction: Up to 90% of project cost including subsidy (95% in case of special
category borrowers) without any Income Criteria.

Identification of Borrower is by task force consisting of KVIC/KVIB representative,

DIC and banks representatives.

Persons of age above 18 years are only eligible for loan under PMEGP.

For setting project above Rs.10 lakhs in manufacturing sector and above Rs.5
lakhs in business/service sector, beneficiary under PMEGP should pass at least 8th
standard.

Persons who have undergone at least 2 weeks Entrepreneurship Development

training can submit applications directly to Banks for loan under PMEGP.

For loan under PMEGP , EDP training of 2 to 3 weeks compulsory before

disbursement of loan. However, those who undergone training earlier are
exempted from Training again.

Margin: General Category minimum 10% of project cost and Special category
beneficiary: 5%of project cost.

Project cost: Cost of land should not be included in the Project cost.

Project cost will include Capital Expenditure and one cycle of Working Capital.

Projects without Capital Expenditure are not eligible for financing under the
PMEGP Scheme.

Projects costing more than ₹ 5 Lakh, which do not require working capital, need
clearance from the next higher authority.

Subsidy (as a percentage of project cost) under PMEGP Scheme General

Category: Urban 15%, Rural 25%.

Special category beneficiary ) Urban: 25%, Rural 35%

Special category means persons belonging to SC/ST/OBC/ Minorities /Women, Ex

SM, OPH, NER, Hill & Border areas.

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The proportionate margin money to be refunded to KVIC for nonadherence of
scheme guidelines are as under:

a) If Bank finance working capital expenditure is in the form of cash credit, the
working capital component should be utilized in such a way that at one point of
time within three years of lock in period of margin money, the cash credit
utilisation touches 100% of the limit of the sanctioned cash credit and never falls
below 75% of the said limit.

b) If it does not touch 100% limit, proportionate amount of the margin money
subsidy is to be recovered and refunded to KVIC at the end of the third year.

In case the account becomes NPA before the three year lock-in period, due to
reasons, beyond the control of the beneficiary, the Margin Money (subsidy) will be
returned to KVIC along with interest.

Repayment : 3 to 7 years, with repayment holiday up to 6 months.

Area Targets: 50% should be Rural Area Projects.

Social Target - SC-15%, ST-7.5 %,Women-30 % ,Minority -5 %

Village Industry: Fixed Capital Investment per Artisan/worker not to exceed Rs.1
lakh in plain areas and Rs.1.5 lakhs in Hill Areas.

Collateral Security: No collateral security/Third Party Guarantee for loans upto

Rs.10 lakhs to MSEs including units financed under the Prime Minister
Employment Generation Programme (PMEGP) of KVIC. However, such loans shall
invariably be covered under appropriate credit guarantee scheme, as per extant
guidelines, to safeguard the interest of the Bank. CGMSE coverage to be ensured
wherever applicable.

Moreover, the PMEGP beneficiaries can also avail loans up to Rs. 25 lakhs without
furnishing collateral securities. However, such loans shall be invariably covered
under the credit guarantee scheme of CGTMSE.

Disposal of loan applications under PMEGP scheme to be ensured within the

stipulated time frames of 30 days in respect of loan quantum above Rs. 5 lakhs
and within 15 days for loan quantum up to Rs. 5 lakhs.

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Decision for rejection of credit proposals under the scheme shall be taken by
appropriate Authorities.

Applications for credit facilities from SC / ST customers shall not be rejected at

branch level and such rejections shall be by the next higher authority.

Whenever applications for loans under govt. sponsored schemes are rejected by
the Branch Manager for valid reasons, the same has to be recorded in a register
maintained to this effect which shall be examined by the controlling authorities
during their branch visits.

Rejection of credit proposals from MSMEs is subject to concurrence of the next

higher authority.

Turn Around Time (TAT) within 30 days for loan quantum above Rs. 5 lakhs and
within 15 days for loan quantum uptoRs.5 Lacs.

Online applications will be mandatory and no manual applications will be allowed.

There will be two separate online application forms for individuals and
institutional applicants available on the portal.

Sanction will be issued based on the online sanction letter and copies of the
sanction order will be sent to the applicant (by e-mail/hard copy) as well as to
KVIC/ KVIB/ DIC within 30 days from the receipt of District Level Task Force
committee (DLTFC) recommended application from the District Agencies.

The applicant will deposit his own contribution and copy of EDP training
certificate to the financing bank within 10 working days of receiving the
communication of sanction of loan.

Banks should ensure that PMEGP applications are received through the e-tracking
system of KVIC.

Negative List of activities (Not to be financed under PMEGP):

Business activities like opening of grocery and stationery shops etc., involving no
manufacturing process and value addition; Farm related activities like Goat
rearing, Piggery, Poultry etc., Business connected with meat, intoxicated items,
animal husbandry; Manufacturing of polythene carry bags of less than 5 micron
thickness and manufacturing of carry bags/containers of recycled plastic are not
permitted.

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Urban / Rural transport activities except: (a) Auto Rickshaw, Tourist boat and
house boat in A & N Islands. (b) The House boat, Shikara and tourist boat in J & K.
(c) Cycle rickshaw.

Any industry / business connected with cultivation of crops/plantation like Tea,

Coffee, Rubber etc., Sericulture (Cocoon rearing), Horticulture, and Floriculture.
Value addition under these will be allowed under PMEGP.

Ministry of MSME has introduced an online system for quick disposal of the
margin money subsidy claims.

The online claim form will be automatically checked for the fulfilment of two
conditions:

a) The date of release of first instalment is prior to the date of filing of Margin
Money subsidy claim and

b) The amount of first instalment released is more than the Margin Money subsidy
amount claimed.

On receipt of Margin Money (subsidy) in favour of the loanee on the same day,
branch should keep it in Zero Interest Term Deposit for a period of three years
(Lock-in period) in the name of the beneficiary/Institution, duly noting Bank‘s lien
on the deposit to the loan account in the CBS system.

PMEGP 2nd Loan Norms

Objectives of PMEGP Second Loan

a) to fulfil the need of additional financial assistance for upgrading and expansion
to the successful / well-performing units.

b) to cater to the need of the entrepreneurs for bringing new

technology/automation so as to modernize the existing unit.

c) to enhance the productivity of the existing units with the inclusion of additional
dose of funding.

d) to enhance the capacity of the existing unit with the additional financial
assistance assuring additional wage employment.

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Quantum and Nature of financial assistance:

a) Beneficiary Contribution - All categories 10% (of proposed expansion/up-

gradation cost)

b) Rate of Subsidy (Project Cost) - All categories 15% (20% in NER and Hill States)

The maximum cost of the project / unit admissible under manufacturing sector for
up-gradation is Rs.1.00 Crore, and the maximum subsidy would be Rs.15 lakhs
(Rs.20 lakhs for NER and Hill States).

The maximum cost of the project/unit admissible under Service /Trading sector
for up-gradation is Rs.25 lakhs, and the maximum subsidy would be Rs. 3.75 lakhs
(Rs. 5 lakhs for NER and Hill States).

Assistance under PMEGP 2nd Loan will be provided by bank as term loan. The
applicant can utilize the loan amount for investment on fixed assets i.e. for
construction of building/purchase of required new machineries/Installation of
machinery etc.

Under the term loan component (construction of building/industrial shed,

machinery & equipment etc.), the construction of own building may be included
and ceiling of construction should not usually exceed 25% of the ) The capital
expenditure component including cost of construction should be up to 60% of
the total project cost.

The working capital cost would be up to 40%. However, the financing bank can
decide the criteria at the time of sanction of loan based on the nature of the
project.

All existing units financed under PMEGP/MUDRA Scheme whose margin money
claim has been adjusted and the first loan availed should have been repaid in
stipulated time are eligible to avail the benefits under PMEGP 2nd Loan Scheme.

The unit should have been making profit for the last three years to be eligible for
loan under PMEGP 2nd Loan Scheme.

Beneficiary may apply to the same financing bank, which provided first loan, or to
any other bank, which is willing to extend credit facility for second loan, in respect
of PMEGP 2nd Loan Scheme.

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Registration of Udyog Aadhaar Memorandum (UAM) is mandatory for loan under
PMEGP 2nd Loan Scheme.

The PMEGP 2nd loan should lead to additional employment generation.

Differential Rate of Interest Scheme

The DRI scheme was introduced by public sector banks in 1972 as per the
recommendation of the Hazari Committee (1971).

Under the DRI scheme banks provide loans to the weaker sections of both rural
and urban areas, both directly and indirectly through RRBs.

Under the DRI scheme, Maximum Loan Quantum is Rs.15,000/- (For physically
handicapped additional loan of Rs.5000/- for artificial limbs/Braille typewriter)

Under the DRI scheme, loan Repayment Period is 5-7 years fixed based on the
income generation of the borrower on instalment or EMI basis.

Housing Loans under DIR Rs.20,000/- for SC/STs and Rs.15,000/- for others

Under the DRI scheme, for EL, as per Model IBA Educational Loan Scheme
guidelines.

Eligibility for loans under DRI Scheme

a) Annual family income Rs.18,000/- in Rural and Rs.24,000/- in Urban and Semi-
Urban areas

b) Individual whose land holding does not exceed 1 acre of irrigated and 2.5 acres
of unirrigated land. No Ceiling for SC/ST engaged in Agriculture and Allied
activities.

Target for lending under DRI Scheme.

a) 1% of previous years Total Bank Credit.

b) 2/3rd of DIR loans in Rural & Semi Urban.

c) Minimum 40 % to SC/ST beneficiaries.

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DRI Scheme is operated through the following institutions:

a) Orphanage and Women‘s home

b) Institutions for physically handicapped.

c) State Corporations for SC/ST.

d) State Minority Finance/Development Corporation.

In respect of loans under DIR Scheme no Margin to be insisted.

Stand-up India Scheme

The objective of the Stand-Up India scheme is to facilitate bank loans between Rs
10 lakh and Rs 1 Crore to at least one Scheduled Caste (SC) or Scheduled Tribe
(ST) borrower and at least one woman borrower per bank branch for setting up a
greenfield enterprise.

The enterprise that is supported under Stand-up India Scheme may be in

manufacturing, services or the trading sector. In case of nonindividual enterprises
at least 51% of the shareholding and controlling stake should be held by either an
SC/ST or Woman entrepreneur.

The Stand-up India Scheme is for setting up a new enterprise in manufacturing,

trading or services sector by SC/ST/Women entrepreneur. To give thrust on
reaching out to hitherto underserved segment of society and seek to strengthen
the growth environment.

The Target Group under Stand-Up India Scheme is SC/ST and/or Women
entrepreneurs setting up new enterprises are eligible for availing loans under
Stand-Up India Scheme.

Under Stand-up India Scheme loan by way of Composite loan (combination of

term loan and working capital) between Rs 10 lakh and Rs 100 lakh will be
sanctioned.

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For loans under Stand-up India Scheme, in addition to mortgage/hypothecation
of Primary Asset acquired out of loan, the loan may also be secured by collateral
security or guarantee of Credit Guarantee Scheme for Stand-Up India Loans
(CGSSI) as decided by the banks.

For loans under Stand-up India Scheme, the repayment period of the composite
loan is to be fixed depending upon nature of activity and useful life of assets
purchased with bank loan but not to exceed 7 years with a maximum moratorium
period of 18 months.

Stand-Up India Loans are eligible for coverage under CGFSIL of NCGTC. Annual
Guarantee Fee (AGF) of 0.85% p.a. on the credit facility sanctioned (composite
loan). Guarantee Fee shall be paid upfront to the Trust by the eligible institution
availing of the guarantee and to be shared equally between bank and the
borrower.

Under Stand-up India Scheme, apart from linking prospective borrowers to banks
for loans , the web portal designed by SIDBI for Stand-Up India Scheme also
provides handholding support.

Under Stand-up India Scheme the beneficiaries could be walk-in customers for a
bank, online applicants or trainees from, various government and non-
government agencies engaged in providing vocation training Entrepreneurship
Development Programs, Financial training etc.

Under Stand-up India Scheme, the Applicants for the loan has to furnish details in
the Portal created by SIDBI. The approach of this StandUp India Portal, for
handholding is based on obtaining answers to a set of relevant questions at the
initial stage. Based on the response, the applicants (prospective borrowers) are
categorised as Ready Borrower or Trainee Borrower.

The Applicant who needs handholding support he is known as Trainee Borrower

and the one who does not require handholding support is known as Ready
Borrower.

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Start-up India Campaign
Start-up India is a flagship initiative of the Government of India, intended to
catalyse start-up culture and build a strong and inclusive ecosystem for
innovation and entrepreneurship in India. Start-up India was a campaign that was
first addressed by the PM Narendra Modi on 15th August 2015 at Red Fort, New
Delhi. Start-up India campaign was launched on 16th January, 2016.

Stand-Up India Scheme is intended to support SC/ST/Women entrepreneurs to

set up a green field projects through bank branches in India while Start Up India
Scheme aims to boost innovative and technology led enterprises for new/existing
enterprises.

Main objective of Start-up India Campaign is to support entrepreneurs, and

transforming India into a country of job creators instead of job seekers. Start-up
India Campaign was introduced as an initiative to develop over 75 start-up
support hubs in the country.

The Start-up India scheme is based majorly on three pillars which are mentioned
below:

a) Providing funding support and incentives to the various start-ups of the

country.

b) To provide Industry-Academia Partnership and Incubation.

c) Simplification and Handholding.

The broad scope of Start-up India‘s programs is managed by a dedicated Start-up

India Team, which reports to the Department for Industrial Policy and Promotion
(DPIIT).

The 19-Point Action Plan envisages the following forms of support for Start-ups,
and more:

a) Enhanced infrastructure including incubation centres

b) Easier IPR facilitation, including easier patent filing

c) A better regulatory environment including tax benefits, easier compliance,

improved of setting up a company, faster exit mechanisms and more

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d) An economic stimulus in the form a INR 10,000 crore Fund of Funds managed
by SIDBI, with the goal of increasing funding opportunities.

The Start-up India Portal is an online platform for start-ups and entrepreneurs. It
houses one of the largest networks in the Indian Startup Ecosystem, connecting
tens of thousands of key stakeholders such as start-ups, investors, incubators) on
a single platform and allowing them to discover and collaborate with each other.

The Portal also aims to reduce knowledge asymmetry and better equip
entrepreneurs for success by providing them with essential information, online
courses, a database of government schemes, market research reports, free
software applications and other useful resources.

The portal is one of the programs mandated under the Start-up India Initiative.

PM SVANidhi (CGS-PMS)
PM SVANidhi is a Scheme of Ministry of Housing & Urban Affairs (MoHUA) for
sanction of working capital loan upto Rs. 10,000 to street vendors through the
Lending Institutions.

Credit Guarantee Scheme for PM SVANidhi is the graded guarantee scheme under
which the credit product / loan would be guaranteed by CGTMSE. The CGS-PMS is
a portfolio guarantee provided by CGTMSE to Member Lending Institutions (MLIs)
for facilitating sanction of Working Capital (WC) loan of upto Rs.10,000/- to
individual street vendors.

The objective of the PM SVANidhi Scheme is to provide portfoliobased guarantee

coverage to the Member Lending Institutions (MLIs) of CGTMSE to facilitate
sanction of working capital loan up to Rs.10,000/-

Under PM SVANidhi Scheme, beneficiary is eligible for Initial working capital loan
up-to Rs.10,000/- (Rupees Ten Thousands only).

Under PM SVANidhi Scheme, beneficiary is eligible subsequent loan on timely or

early repayment of initial loan, with an enhanced limit of a maximum of 200% of
the earlier loan, subject to a ceiling of Rs 20,000/- (Rs Twenty Thousands only).

Under PM SVANidhi Scheme tenure of the loan will be maximum of 1 year.

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PM SVANidhi Scheme is available to all street vendors engaged in vending in
urban areas as on or before March 24, 2020.

Loans sanctioned to Street Vendors loans sanctioned on and after July 02, 2020
under PM SVANidhi Scheme are eligible for guarantee coverage. Other loans to
Vendors are not eligible for Guarantee cover.

The eligible vendors to avail loan under PM SVANidhi Scheme will be identified as
per following criteria:

a) Street vendors in possession of Certificate of Vending / Identity Card issued by

Urban Local Bodies (ULBs);

b) The vendors, who have been identified in the survey but have not been issued
Certificate of Vending / Identity Card;

c) Street Vendors, left out of the ULB led identification survey or who have started
vending after completion of the survey and have been issued Letter of
Recommendation (LoR) to that effect by the ULB / Town Vending Committee
(TVC); and

d) The vendors of surrounding development/ peri-urban / rural areas vending in

the geographical limits of the ULBs and have been issued Letter of
Recommendation (LoR) to that effect by the ULB / TVC.

The CGTMSE Trust issue Guarantee based on the disbursement data available on
the PMSVANIDHI portal. CGTMSE would be issuing guarantees for all the loans
sanctioned and disbursed under PM SVANidhi Scheme basis PMSVANIDHI portal
and the MLIs will not be required to submit application for guarantee cover to
CGTMSE.

Accordingly, MLIs will have to approach CGTMSE only at the time of claim
lodgement, in case of default in loans, by lodging the claim on CGTMSE portal.
(The Trust Cir 179 dated 27th April,2021)

CGTMSE will not charge any guarantee fee under the Scheme.

The Scheme has a provision of Graded Guarantee Cover for the loans sanctioned,
as indicated below, which will be operated on portfolio basis:

a) First Loss Default (Up to 5%): 100%

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b) Second Loss (beyond 5% up to 15%): 75% of default portfolio

c) Maximum guarantee coverage will be 15% of the year portfolio

MLIs are required to invoke the guarantee once the accounts turns into NPA. MLIs
to pool all the accounts in a particular quarter and lodge for claim during the next
quarter. (MLI – Member Lending Institute)

Initiation of legal proceedings is not necessary for loans under PM SVANidhi

Scheme .

The lending institution may invoke the guarantee / lodge claim application in
respect of credit facilities under a portfolio within a maximum period of 1 year
from the NPA date.

On lodgement of claim application by MLI on quarterly basis, CGTMSE would

settle the claim. Trust shall pay in one instalment 100% of the portfolio
guaranteed amount on preferring of eligible claim by the lending institution
within 30 days. Claim settlements would be carried out quarterly subject to
maximum guarantee coverage of 15% of the year portfolio.

Any recovery made from the NPA portfolio against which claim has been settled
by CGTMSE will be allowed to be adjusted against future claim, if any, else will be
returned to CGTMSE by the concerned lending institutions.

CGTMSE reserves the right to inspect cases covered under the PM SVANidhi
Scheme at any given time.

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 15. Self-Help Groups
SHG is a small group consists of 10-20 members. A self-help group is a financial
intermediary committee usually composed of 10 to 25 local women between the
ages of 18 and 40. Self-help Groups (SHGs) are informal associations of people
who come together to find ways to improve their living conditions. They are
generally self-governed and peer-controlled. People of similar economic and
social backgrounds associate generally with the help of any NGO or government
agency and try to resolve their issues, and improve their living conditions.

The origin of SHGs in India can be traced back to the establishment of the Self-
Employed Women‘s Association (SEWA) in 1972. Ela Bhatt,

who formed SEWA, organised poor and self-employed women workers such as
weavers, potters, hawkers, and others in the unorganised sector, with the
objective of enhancing their incomes.

NABARD, in 1992, formed the SHG Bank Linkage Project, which is today the
world‘s largest microfinance project.

From 1993 onwards, NABARD, along with the Reserve Bank of India, allowed SHGs
to open savings bank accounts in banks.

The Swarn Jayanti Gram Swarozgar Yojana was introduced in 1999 by GOI with
the intention of promoting self-employment in rural areas through formation and
skilling of such groups. This evolved into the National Rural Livelihoods Mission
(NRLM) in 2011.

Every Self-help group usually goes through 3 stages of evolution stated below:

a) Formation of group

b) Funding or Formation of Capital

c) Development of required skills to boost income generation.

Many self-help groups are formed with the assistance of Self- help to promote
agencies.

Group should be in active existence for at least 6 months

Page 204 of 212

Group should have successfully undertaken savings and credit operations from its
own resources.

Group should work democratically.

Group to maintain proper records and accounts

Group members should have homogenous background and common interest.

The NGOs should train SHG members to attain skill up gradation and proper
functioning.

The savings /Own Funds / Corpus of the SHG include the following:

a) SHG‘s amount kept in SB & other accounts

b) Cash Balance

c) Loan amount receivable from members

d) Interest / fine collected

e) Grant / donations received.

The proportion of savings/corpus to loan should gradually increase from 1:1 to

1:4 depending on the assessment of the SHG by the Branch. It may go beyond 1:4
provided SHGs have submitted micro credit plans.

Quantum of loan under SHG

a) Total savings of the group for 5 years to be worked out based on the regular
savings by the members.

b) Limit at the rate of 1: 4 of the savings be fixed as the limit for five years.

c) Drawing limit be fixed based on the present savings.

d) Drawing limit to be reviewed every year and enhanced if eligible, based on

savings.

e) The interest to be recovered from the group savings every month.

f) The documentation to be obtained for full limit as arrived as above.

g) The letter of revival or Acknowledgement of Debt to be obtained as and when

required as per the rules.
Page 205 of 212
Disbursement limit/Drawing limit: The disbursement limit would be reviewed
thereafter every year and enhanced in the ratio of savings as prescribed by RBI.
The maximum limit can be sanctioned to the SHGs would be 1:4.

Beyond this, the Group should submit Micro credit plan for considering loans
beyond the ratio of 1:4

The SHGs will not be in a position to offer any collateral security.

Where assets are created out of SHG finance, the same can be taken as prime
security.

Individual Member details of SHGs is to be collected at the time of SB account

opening for SHG and extending credit facilities and report the same to CICs.
Credit information for SB account holders and Credit & Non credit information for
loan account to be collected for individual members of SHG.

SHGs / Individual Members should not be denied loans merely because of

defaults reported by the CICs.

Functions of Self Help Groups

a) They try to build the functional capacity of poor and marginalised sections of
society in the domain of employment and income-generating activities.

b) They offer collateral-free loans to sections of people that generally find it hard
to get loans from banks.

c) They also resolve conflicts via mutual discussions and collective leadership.

d) They are an important source of microfinance services to the poor.

e) They act as a go-through for formal banking services to reach the poor,
especially in rural areas.

f) They also encourage the habit of saving among the poor.

One of the chief reasons for rural poverty is the lack of access or limited access to
credit and financial services.

Page 206 of 212

The Rangarajan Committee Report highlighted four major reasons for lack of
financial inclusion in India. They are:

a) Inability to give collateral security

b) Weak credit absorption capacity

c) The insufficient reach of institutions

d) Weak community network

SHG is being recognised that one of the most important elements of credit
linkage in rural areas is the prevalence of sound community networks in Indian
villages.

SHGs play a vital role in giving credit access to the poor and this is extremely
crucial in poverty alleviation.

SHGs play a great role in empowering women because SHGs help women from
economically weaker sections build social capital.

Financial independence through self-employment opportunities also helps

improve other development factors such as literacy levels, improved healthcare
and better family planning.

The SHGs work on mutual trust.

SHGs incentivise banks to lend to poor and marginalised sections of society

because of the assurance of returns.

SHGs have given a voice to the otherwise underrepresented and voiceless

sections of society.

SHGs help eradicate many social ills such as dowry, alcoholism, early marriage, etc.

By empowering women SHGs help steer the nation towards true gender equality.

SHGs act as pressure groups through which pressure can be mounted on the
government to act on important issues.

SHGs help implement and improve the efficiency of government schemes. They
also help reduce corruption through social audits.

Page 207 of 212

SHGs help people earn their livelihood by providing vocational training, and also
help improve their existing source of livelihood by offering tools, etc. They also
help ease the dependency on agriculture.

Financial inclusion due to SHGs has led to better family planning, reduced rates of
child mortality, enhanced maternal health and also helped people fight diseases
better by way of better nutrition, healthcare facilities and housing.

SHGs encourage people to save and promote banking literacy among the rural
segment.

Self Help groups is related to Indian Microfinance Model.

Self help groups are also known as Mutual Aid Groups, Support Groups and
Groups of People.

The microfinance movement was started off by one man Muhammad Yunus, with
one vision: to eradicate poverty from the world.

Muhammad Yunus, the Bangladeshi economist, widely known as the Father of

Microfinance founded the Grameen Bank to make small loans to the poor in
Bangladesh.

Muhammad Yunus, began experimenting with innovative ways to provide capital

to women at the Bottom of the Pyramid (BOP).

In India three different models of linkage of SHGs to the financial institutions have
emerged. They are:

a) Banks, themselves, form and finance the SHGs.

b) SHGs are formed by NGOs and other agencies but financed by banks.

c) Banks finance SHGs with NGOs and other agencies as financial intermediaries.

The second model is the most popular model.

@@@

Page 208 of 212

 List of Books compiled by The Banking Tutor
So far the following Books are compiled by me which can be shared by any one
free of cost, without any permission from me or without any intimation to me.

Book Title
No

01 Banking Jargon - Vol 01

02 Alerts - Vol 01

03 Forex - Vol 01

04 Banker and Legal Enactments - Vol 01

05 Banker and Financial Statements

06 Confusables – Vol 01

07 Banking Jargon - Vol 02

08 ABC (Awareness of Basics of Credit)

09 The Can Support_2020

10 The Core Support_2020

11 The Sundries_2020

12 The Soft Support

13 Management of W C Limits

14 The Notes_2021 (for Promotion Test)

15 Confusables - Vol 02

16 Banking Information

17 Banking Jargon - Vol 03

18 Bankers and Court Verdicts - Vol 01

19 Inland Bank Guarantees

Page 209 of 212

20 The Dirty Dozen

21 SPA (Not related to Banking)

22 Banks - Supporting Agencies - Vol 01

23 Banking Jargon - Volume 4

24 Banks - Supporting Agencies - Vol 2

25 Banks - Supporting Agencies - Vol 3

26 JAIIB Notes - PPB

27 JAIIB Notes - LRB

28 JAIIB Notes – AFB

29 CAIIB Notes – ABM

30 CAIIB Notes – BFM

31 Confusables - Vol 03

32 Banking Jargon - Vol 05

33 The Banking Regulations & Business Laws (BRBL)

34 Accounting & finance for Bankers

35 Bank Financial Management

36 Retail Banking & Wealth Management

37 Concepts for Credit Professional - OT

38 Advance Business Management

39 Principles & Practice of Banking

40 Indian Economy & Indian Financial System - OT

41 Concepts for Credit Professional - Notes

42 Less Known Forex Terminology

Page 210 of 212

43 KYC & AML – Notes & MCQ

44 Treasury Management - Objective Type

45 Treasury Management - Notes

46 Indian Economy & Indian Financial System - Notes

47 MSME -Notes

48 MSME – Objective Type

49 Banking Jargon – Volume 06

50 50 Essays in Practical Banking

51 Promotion 2022

52 Basics of Bank Audits

53 The Shortens

54 Recap TIN 2022

55 NumLogEx

56 Basic Statistics for Bankers

57 JAIIB IE & IFS - Module A : Indian Economic Architecture

58 JAIIB IE & IFS - Module B : Economic Concepts Related to Banking

59 JAIIB IE & IFS - Module C : Indian Financial Architecture

60 JAIIB IE & IFS - Module D : Financial Products and Services

61 Banking Jargon – Volume 07

62 JAIIB – PPB – Module A - General Banking Operations

63 JAIIB 2023 IE & IFS – Objective Type

64 JAIIB – PPB – Module B – Functions of Banks

Page 211 of 212

 My Activity
I am sharing the following in my WhatsApp Groups (The Banking
Tutor), Telegram Group of The Banking Tutor ; TBT Exam Corner
and Blog (The Banking Tutor - TBT).

1. One Point related to Banking & Finance Daily (Daily Point).

Started on 16-09-2019, so far shared 1300 points without any
break.

2. Once 3 days (on 3rd, 6th, 9th ,12th….) one Lesson on Banking
& Finance (Banking Tutor’s Lessons - BTL), started on 06-09-
2018, so far shared 531 lessons.

3. Monthly Last day - TIN - Terms in News (related to Banking &

Finance). Started on 28-02-2021, so far shared 26 issues.

4. Monthly First Day – Recap of Daily Points shared during the

previous month.

5. Sharing lessons for IIB Exams and Promotion tests of various

Banks daily in Telegram Group “TBT- Exam Corner” (earlier Name
of this Group is “TBT JACA”)

My mail id – [email protected] ;
WhatsApp +91 94406 41014
Banking Tutor Blog – https://thebankingtutor.blogspot.com/

07-04-2023 Sekhar Pariti

+91 9440641014

Page 212 of 212

 Notes for JAIIB

Compiled by Sekhar Pariti

Book No 65 from The Banking Tutor

Page 1 of 149
 Preface
With a view to help the young Bankers in preparation for Promotion Tests or
Professional Examinations conducted by various Institutes, I am sharing Notes
related to Principles and Practices of Banking (PPB) which is prepared based on
the revised syllabus, 2023 of IIBF.

IIBF Syllabus consists the following 4 Modules –

Module A: General Banking Operations

Module B: Functions of Banks

Module C: Banking Technology

Module D: Ethics in Banks and Financial Institutions

In this Notes, I am covering topics related to only Module C: Banking Technology

and Module D: Ethics in Banks and Financial Institutions. With this Notes related
to all the 4 Modules of PPB is completed. I will share Objective Type Points related
to entire paper on PPB in one Book shortly

I hope this Book may be useful to those Bankers who are appearing for Promotion
Tests, Certificate/Diploma Examinations conducted by various Institutes.

11-04-2023 Sekhar Pariti

+91 94406 41014

Page 2 of 149
 Syllabus 2023

Principles and Practices of Banking (PPB)

Module A: General Banking Operations

Banker-Customer Relationship, AML- KYC Guidelines, Operational Aspects of KYC,

Opening Accounts of Various Types of Customers, Operational Aspects of Deposit
Accounts, Operational Aspects of Handling Clearing/Collection/Cash, Banker’s
Special Relationship, Foreign Exchange Remittance Facilities for Individuals,
Operational Aspects of NRI Business, Foreign Currency Accounts for Residents and
Other Aspects, Cash Management Services and its Importance, Payment and
Collection of Cheques and Other Negotiable Instruments, Responsibility of Paying
Bank, Responsibility of Collecting Bank, Ancillary Services, Financial Inclusion &
Financial Literacy, Customer Service Guidelines, Duties & Rights of a Banker and
Customer Rights, Grievance Redressal & RBI Integrated Ombudsman Scheme
2021, The Consumer Protection Act, 2019: Preamble, Extent and Definitions, The
Right to Information Act, 2005.

Module B: Functions of Banks

Principles of Lending, Different Types of Borrowers, and Types of Credit Facilities,

Appraisal and Assessment of Credit Facilities, Operational Aspects of Loan
Accounts, Types of Collaterals and their Characteristics, Different Modes of
Charging Securities, Documentation, Non-Performing Assets/ Stressed Assets,
Important Laws Relating to Recovery of Dues, Contracts of Indemnity, Contracts of
Guarantee & Bank Guarantee, Letters of Credit, Deferred Payment Guarantee,
Laws Relating to Bill Finance, Personal Finance, Priority Sector Advances,
Agricultural Finance, Finance to MFIs/Co-Lending Arrangements with NBFCs,
Micro, Small and Medium Enterprises in India, Government Sponsored Schemes,
Self-Help Groups.

Page 3 of 149
Module C: Banking Technology

Essentials of Bank Computerisation, Operational Aspects of CBS Environment,

Alternate Delivery Channels Digital Banking, Data Communication Network and
EFT Systems, Digital Payment Systems-NPCI, Impact of Technology Adoption and
Trends in Banking Technology, Security Considerations and Mitigation Measures
in Banks, Operational Aspects of Cyber Crimes/Fraud Risk Management in Cyber
Tech, Technology Trends in Banking, e-RUPI, Fintech – RegTech, Sup Tech,
Hashtag Banking etc.

Module D: Ethics in Banks and Financial Institutions

Ethics, Business Ethics & Banking: An Integrated Perspective, Ethics at the

Individual Level, Ethical Dimensions: Employees, Work Ethics and the Workplace,
Banking Ethics: Changing Dynamics.

@@@

Page 4 of 149
Principles and Practices
of
Banking
(PPB)
Module C: Banking Technology

Page 5 of 149
 Index
Principles and Practices of Banking (PPB)
Module C: Banking Technology

Chapter No Topics covered

01 Essentials of Bank Computerisation

02 Operational Aspects of CBS Environment

03 Alternate Delivery Channels

04 Digital Banking

05 Data Communication Network and EFT Systems

06 Digital Payment Systems-NPCI

07 Impact of Technology Adoption and Trends in Banking Technology

08 Security Considerations and Mitigation Measures in Banks

09 Operational Aspects of Cyber Crimes/Fraud Risk Management in

Cyber Tech

10 Technology Trends in Banking, e-RUPI, Fintech – RegTech, Sup Tech,

Hashtag Banking etc.

@@@

Page 6 of 149
 Chapter 1- Essentials of Bank Computerisation
The Concept of Bank Computerisation Practically stated after 1980-81 and more
precisely gained pace in the year 1983-84, after setting up a committee in the
year 1983 under the chairmanship of the then Deputy Governor of RBI, Dr. C.
Rangarajan.

This Committee was set up to study the possibilities and stages involved in bank
computerisation and to prepare guidelines for the same. The report submitted by
the committee in the year 1984 was known as First Rangarajan Committee Report
on bank mechanization.

Committees on Computerisation

Working Group to consider feasibility of introducing MICR/OCR Technology

for Cheque Processing (1982)

Convenor : Dr.Y.B.Damle, Adviser, Management Services Department, Reserve

Bank of India.

Recommendations :

Introduction of 'item processing' (sorting and listing of cheques with the help of
computers) in three phases.

In the first phase at the four metropolitan cities viz. Mumbai, New Delhi, Chennai
and Calcutta, with the help of MICR technology.

In the second phase all state capitals and important commercial centres.

In the final phase national clearing to be introduced by dividing the country into
four Regional Grids with headquarters at Mumbai, New Delhi, Chennai and
Calcutta. Each Regional Centre was to perform two functions:

(i) to act as a clearing house for intra-grid instruments, and

(ii) participate in national clearing on behalf of the grid for extra-grid

outstation cheques.

Page 7 of 149
Committee on Mechanisation in the Banking Industry (1984)

Chairman : Dr.C.Rangarajan, Deputy Governor, Reserve Bank of India.

Recommendations :

Banks should set up service branches at centres where they have more than 10
branches. The service branch so set up would exclusively be devoted to clearing
operations of the bank at that particular centre.

Banks to be in readiness for the introduction of MICR Clearing at the four

metropolitan cities by assessing their requirements for encoders, adopting
standardised cheque forms and reorganising work procedures where necessary,
and training staff down to the branch level.

Committees on Communication Network for Banks and SWIFT

implementation (1987)

Chairman : Shri T.N.A.Iyer, Executive Director, Reserve Bank of India.

Recommendations :

Setting up of X.25 based packet switching network called 'BANKNET' to be jointly

owned by the Reserve Bank and the public sector banks. It suggested that the
computer system resources of the four IBM Mainframes (installed at the four
metros for cheque processing operations) could be made use of during the day
time by BANKNET for data communication with additional equipment.

BANKNET to be implemented in two phases. In Phase I the computer systems

available in the Head Offices of the Public Sector Banks in the four metropolitan
cities would be connected to the four IBM Mainframe servers. In the second phase
connectivity could be gradually extended to eight to ten banking intensive
centres, and to a hundred centres over a three year period. The applications that
were identified were:

· inter-bank fund transfers on banks' own account and on customers' account;

· inter-branch funds transfers on banks' own account and on customers' account;

· currency chest transactions;

· government transactions;

Page 8 of 149
· improvements in payment systems by facilitating automated clearing services
(similar to BACS);

· any branch banking, etc.

India should join the SWIFT (Society for Worldwide Interbank Financial
Telecommunication) Network for the transmission and reception of international
financial messages. BANKNET should strive to emulate SWIFT in matters of data
security, encryption, and authentication and SWIFT message standards which are
internationally accepted should be adopted by BANKNET.

Committee on Computerisation in Banks (1988)

Chairman : Dr. C. Rangarajan, Deputy Governor, Reserve Bank of India

Recommendations :

Computerisation of the settlement operations in the clearing houses managed by

Reserve Bank of India at Bhubaneshwar, Guwahati, Jaipur, Patna and
Thiruvananthapuram.

Operationalisation of MICR technology and the National Clearing of inter-city

cheques at the four metropolitan cities.

Introduction of one-way collection of cheques drawn on the 4 metros received

from Ahmedabad, Bangalore, Nagpur and Hyderabad.

Framing of Uniform Regulations and Rules of Clearing Houses.

Branch level computerisation and the establishment of connectivity between

branches.

Improvements in customer service - introduction of on-line banking.

Standardisation and rigorous security features to ensure an efficient and risk free
transfer of funds electronically.

Setting up a network of Automated Teller Machines (ATMs) in Mumbai. ATMs to

be strategically located at airports, railway stations, hospitals, important
commercial centres, as well as bank branches, to be used by the customers to
perform a variety of functions such as deposits, withdrawals, balance enquiries,
statement of accounts etc., at any point of time during the day.

Page 9 of 149
Introduction of a single 'All Bank' credit card and advocated the need for its
widespread acceptance by merchant establishments and usage by customers to
reduce the load on cash and cheque transactions.

Committee on Technology Issues relating to Payments System, Cheque

Clearing and Securities Settlement in the Banking Industry (1994)

Chairman : Shri W.S.Saraf, Executive Director, Reserve Bank of India

Recommendations :

Establishment of an Electronic Funds Transfer (EFT) system, with the BANKNET

communications network as its carrier. The message transfers would be in a batch

mode with high value institutional funds transfers being batched every one hour
and the transactions of retail customers being batched at the end of the day.
Starting with the 4 metropolitan cities, the scheme to be extended in a phased
manner to all important centres.

Enactment of suitable legislation on the lines of the Electronic Funds Transfer Act
1978, USA and Data Protection Act 1984, UK.

MICR clearing be introduced at all centres with more than 100 bank branches.
Priority should be given to centres such as Ahmedabad, Bangalore, Hyderabad,
Pune and Surat which have relatively large volumes.

Introduction of a Delivery versus Payment (DvP) system for SGL transactions, with
settlement on gross basis both for securities transactions in PDO and funds
transactions in current accounts at DAD.

Introduction of Electronic Clearing Service Credit for low value repetitive

transactions such as interest, dividend, salary, pension payments and an Electronic
Debit Clearing for payments to utility companies.

A uniform size for MICR instruments.

Geographical expansion of the BANKNET network with nodes in all important

branches of banks and modifications in COMET software to enable dial-up
connectivity, file transfer facility, encryption etc.

Switch over to on-line inter-bank clearing on a gross basis.

Introduction of 'Clearing Bank' concept for decentralised cheque processing.

Page 10 of 149
Truncation of cheques upto the value of Rs.5,000/-

Large scale induction of computers and communication technology in service

branches

Optimal usage of SWIFT.

NICNET, to be used for the reporting of currency chest transactions by the chest
branches to their Link Offices and Issue Departments of the RBI.

Promotion of a card culture, as well as enhanced training facilities.

Committee for proposing Legislation On Electronic Funds Transfer and other

Electronic Payments (1995)

Chairperson : Smt.K.S.Shere, Principal Legal Adviser, Reserve Bank of India.

Recommendations :

EFT system could be introduced immediately by framing regulations under

Section 58 of the RBI Act. A Model Customer Contract agreement to govern the
banker-customer relationship with regard to EFT should be adopted by all banks
participating in the system.

As a long term measure, a new legislation needed for regulating, defining and
determining the rights and obligations of the system providers and users.

Need for Computerisation

The four Major objectives of computerization in banking are to improve

Customer Service

Housekeeping

Decision- making

Productivity and profitability

Page 11 of 149
Stand- Alone Computer System

Using the stand- Alone computer system is normally the initial stage of
computerization at a bank. The single user- computer system is a small system,
which as its name implies, is used by only one person at a time.

Multi- user System

The Multi-user systems, as their names signify, are computers to which several
people can access at the same time. Mini computers, Main Frame Computers,
Micro- Computers and the more powerful Super Computers all fall under this
category.

Networks
Local Area Network (LAN)

A Local Area Network (LAN) is a group of computer and peripheral devices which
are connected in a limited area such as school, laboratory, home, and office
building. It is a widely useful network for sharing resources like files, printers,
games, and other application. The simplest type of LAN network is to connect
computers and a printer in someone’s home or office. In general, LAN will be used
as one type of transmission medium.

It is a network which consists of less than 5000 interconnected devices across

several buildings.

Characteristics of LAN

It is a private network, so an outside regulatory body never controls it.

LAN operates at a relatively higher speed compared to other WAN systems.

There are various kinds of media access control methods like token ring and
ethernet.

Page 12 of 149
Advantages of LAN

Computer resources like hard-disks, DVD-ROM, and printers can share local area
networks. This significantly reduces the cost of hardware purchases. We can use
the same software over the network instead of purchasing the licensed software
for each client in the network. Data of all network users can be stored on a single
hard disk of the server computer. We can easily transfer data and messages over
networked computers. It will be easy to manage data at only one place, which
makes data more secure. Local Area Network offers the facility to share a single
internet connection among all the LAN users.

Disadvantages of LAN

LAN will indeed save cost because of shared computer resources, but the initial
cost of installing Local Area Networks is quite high. The LAN admin can check
personal data files of every LAN user, so it does not offer good privacy.
Unauthorized users can access critical data of an organization in case LAN admin
is not able to secure centralized data repository. Local Area Network requires a
constant LAN administration as there are issues related to software setup and
hardware failures

Network Device and LAN

The basic network devices used in a LAN are

NICs (Network Interface Cards)

Hubs
Switches
Bridges
Routers
Gateways
Firewalls
WAPs
Modems etc.

Page 13 of 149
Wide Area Network (WAN)

WAN (Wide Area Network) is another important computer network that which is
spread across a large geographical area. WAN network system could be a
connection of a LAN which connects with other LAN’s using telephone lines and
radio waves. It is mostly limited to an enterprise or an organization.

Characteristics of WAN:

The software files will be shared among all the users; therefore, all can access to
the latest files.

Any organization can form its global integrated network using WAN.

Benefits of WAN

WAN helps you to cover a larger geographical area. Therefore business offices
situated at longer distances can easily communicate.

Contains devices like mobile phones, laptop, tablet, computers, gaming consoles,
etc.

WLAN connections work using radio transmitters and receivers built into client
devices.

Disadvantage of WAN

The initial setup cost of investment is very high.

It is difficult to maintain the WAN network. You need skilled technicians and
network administrators.

There are more errors and issues because of the wide coverage and the use of
different technologies.

It requires more time to resolve issues because of the involvement of multiple

wired and wireless technologies.

Offers lower security compared to other types of networks.

Page 14 of 149
Uninterruptible Power Supply (UPS)

An uninterruptible power supply (UPS) is a device that allows a computer to keep

running for at least a short time when the primary power source is lost. UPS
devices also provide protection from power surges.

A UPS contains a battery that “kicks in” when the device senses a loss of power
from the primary source. If an end user is working on the computer when the UPS
notifies of the power loss, they have time to save any data they are working on
and exit before the secondary power source (the battery) runs out. When all
power runs out, any data in your computer’s random access memory (RAM) is
erased. When power surges occur, a UPS intercepts the surge so that it does not
damage the computer.

Core Banking Solution

Core Banking solutions are vital to the day-to-day functioning of any bank. It is an
integral part of the banking technology which aims to serve their clients and
customer with the best services. In simple words, core banking solutions are
account-management back-end and front-end processes.

Core is short for “Centralized Online Real-time Exchange.” As the name suggests,
it is a centralized system or a network created by a bank and its branches. This
allows the customers of the bank to access, manage and perform basic
transactions from any branch of the bank they hold an account in. Thus, core
banking software allows the banks to create a centralized data center.

Core Banking Solutions offer the following advantages to the bank:

Improved operations which address customer demands and industry

consolidation Errors due to multiple entries eradicated.

Easy ability to introduce new financial products and manage changes in existing
products Seamless merging of back office data and self-service operations.

Page 15 of 149
Multi-user Computer Networking

In Multi-user Computer Networking system computers are based on the

centralised processing concept. All information is kept and processed at the main
central machines and various terminals are attached to the main computer. The
main computer can store a huge amount of information and possesses high-
processing speeds enabling a large number of users to be connected to the main
central computer. Each user has his/her own terminal. Most of the banking
systems are developed using the centralized computing concept.

Benefits of Centralised Data Processing System :

(a) availability of corporate level information at one location is possible

(b) cost of acquiring hardware, software and other infrastructure is more

profitable than acquiring the same for individual departments

(c) due to the high volume of data processing the computing resources can be
fully utilised

(d) technical manpower can also be efficiently managed at a central level

(e) costly resources like leased telephone lines, satellite links, etc., can be shared
among the various departments Branch-level Computerisation

Computerisation at the branch level can be used to:

(a) Provide better and speedy customer service

(b) Improve housekeeping services

(c) Analyse the branch-level data for decision making

(d) Generation of various reports.

Total Branch Automation

This is a real time online banking.

Whenever a transaction is entered through a terminal, the transaction is recorded,

verified and authenticated and all corresponding updates are reflected instantly.

Page 16 of 149
Various outputs such as ledger extracts, passbooks, vouchers, statements of
accounts of customers, etc., are generated online.

It is possible to provide the 'single window' transactions concept. That means a

customer can approach any counter for completing all his or her transactions.

Off-site ATMs are also linked to the branch system to enable the customer to
bank anytime/anywhere.

Software and hardware requirements depend upon the size of the branch.

Computerisation at Regional/Circle/Zonal Office

RO/ZO acts in between branches and the head office. The most common tasks
performed by the regional office/zonal office are:

(a) branch profile

(b) inter-branch reconciliation

(c) credit monitoring

(d) personnel data management, etc.

Computerisation at Head Office Level

The head office of a bank is responsible for bank level planning, and control
functions, policy decisions. The head office activities are divided into different
functional areas like:

(a) operations

(b) planning

(c) personnel

(d) international business

(e) services, etc.

Page 17 of 149
The computerisation at various functional areas may include application areas:

(a) personnel management and administrative support

(b) funds management

(c) investment portfolio management

(d) branch profiles

(e) credit information system, etc.

Topology (Layout)

The way in which the devices are interconnected is known as topology

Bus Topology

All devices on the network are connected to a single continuous cable.

Transmission from any station travels the length of the bus in both directions and
is received by all other stations. The main advantage of bus topology is that it is
quite easy to set up. Further, if one station on the LAN fails, it will not affect the
rest of the network. Data transmission is possible in one direction only. The
breakdown of any one station on the ring can disable the entire LAN.

Star Topology

In a star topology, the central node is often the master. Each of the other nodes is
joined to the master by separate links. It cannot handle large traffic as every
transaction has to pass through the central node. However, if one node fails, it will
not affect the network.

Protocols

The protocols are the rules for communication between similar modules of
processes, usually in different nodes. Protocols define message formats and the
rules for message exchange. It controls priority and sequence of transmission,
errors in transmission, and the process of beginning and concluding conversion.
The network protocols depend on the adapters. Some of the commonly used
types of adapters are Ethernet and Token-Ring. A multiplexer is used to receive
signals from several communication lines and pass on to one communication line
and vice versa.

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Network Operating System:

The function of the networking software is to set up some computers as hosts, or

servers, and some computers as clients to those hosts. The servers manage the
printer sharing, file sharing and communications link sharing to their clients.

Business Components

(a) To have retail customer banking modules

(b) Deposits, loans, bills, remittances, locker, clearing, etc.

(c) Trade finance/forex modules

(d) Government business modules

(e) To have corporate finance and service branch modules

(f) To have enhanced MIS modules

(g) To have modules for business intelligence

(h) To integrate with the existing ATMs, tele-banking, debit card, kiosks and other
delivery Channels

(i) To have any branch banking, Internet banking and call centre

(j) To interface with existing corporate systems like treasury, IBR, centralised
accounting system, HRMS, ALM, credit appraisal and management, credit
monitoring and NPA management, etc.

(k) To interface with systems like NDS, SFMS, RTGS, CFMS, etc.

Benefits of Business Components

(a) Enables the establishment of a reliable centralised data repository for the bank

(b) Facilitates data warehousing and data mining technologies for business
intelligence

(c) Easy implementation of integrated customer centric services like online ATMs,
telebanking, internet banking, any branch banking, kiosk banking, cash
management services, etc.

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(d) Enables centralised management information, decision support and executive
information systems

(e) Efficient and effective MIS, ALM, risk management, etc., using the central data
pool

(f) Enables centralised management and control with centralised data

(g) Standardisation of the branch automation software using a single version.

Quick adoption of software changes as changes are done only at the central site

(h) Facilitates business process re-engineering (BPR) to streamline the existing

processes

(i) Relieves branches of jobs like data backup, MIS generation, etc.

(j) Requires infrastructure at the central location, backup location and at branches

(k) Servers are not mandatory at branch locations

(l) Attracts higher investment in the beginning

(m) Cost of implementation for further branches and delivery channels relatively
cheaper

(n) Core infrastructure can be used for future expansions

(o) No extra cost for implementation of SFMS, RTGS, CFMS, etc.

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 02. Operational Aspects of CBS Environment
Core Banking Solution (CBS) is networking of bank branches, which allows
customers to manage their accounts, and use various banking facilities from any
part of the world. In simple term, there is no need to visit own branch to do
banking transactions. We can do it from any location, any time.

Core Banking Solutions (CBS) is a platform where Communication Technology and

Information Technology merge to suit core banking needs.

Function of CBS

Opening new Account

Recording of transactions

Passbook maintenance

Interest calculations on loans and deposits,

Processing cash deposits and withdrawals,

Processing cash deposits and cheques,

Maintaining records of all the transactions,

Customer relationship management activities

Managing customer accounts

Customers find core banking advantageous since

The entire range of banking products including savings, deposit accounts etc
are available from any location

Accessibility through multiple channels, including mobile banking and web

Accurate, timely and actionable information about customer relations

Single view between bank and customers

Redefining the concept of ‘anywhere, anytime’ banking.

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Need for CBS

To enhance efficiency and effectiveness

To increase customer satisfaction and convenience

To enhance bank’s competitiveness

To simplify processes for the staff

To make available more time for branch staff to focus on sales and marketing

To meet the compliance requirements

To meet the intense competition

To meet the demands of customers who have become more demanding and
less loyal.

Application of minimum balance charges, transaction charges, cheque book

charges etc.

Asset Classification and Income recognition, NPA Management

Customer relationship management (CRM) activities

Interfaces with payment systems, Regulators, Third-party service providers

Generation of Reports, multi-currency Balance sheets, P&L statements.

Flow Of Transactions in CBS

In any Core banking Solution, there are three types of Transactions:

Cash

Clearing

Transfer

Transactions made by Users at Branches, Customers through Alternate Delivery

channels or Third Party trusted vendors are ultimately reflected in the Central
Database of the Bank. The transaction workflows are different for different
channels of Banking.

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The branch user has to log in to the system with his user id and password along
with biometric authentication at the CBS terminal. Customers log in through
various delivery channels using their credentials.

Once the transaction hits the Central Data Base, the system will validate the
transaction and debit or credit the particular account, and a message is sent back
to the user at the Branch as to whether the transaction is complete or not.

The system validates the account number, balance in the account, the authority of
the teller (Maker) who does the transaction, authority of the officer (Checker) who
authorizes the transaction, and other validations parameterized at the product
level if required to be done.

Apart from this, transactions also flow from various alternate delivery channels,
Treasury systems etc., into the core banking system.

End of Day (EOD) and Begin of Day (BOD) Operations

Begin of the day by Data Centre

Transactions input and Authorisation by Branches

Closure of Branch Operations by Branches

End of Day Operations by Data Centre

Back up Operations by Data Centre and Branches.

Begin Of Day (BOD) Operations

BOD process opens a new transaction day for the Bank. BOD depends on the EOD
process for the previous working day. If the EOD is not completed for a day BOD
can not be done. Days are always business days specified in Branch Calendars.

Following functions are carried in BOD operations:

Starts a new day

Time Deposit processing related to interest and maturity

Standing instructions execution

Value date processing of cheques Salary Processing

Expiry of Overdraft Limits.

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End of Day (EOD) Operations

Most of the following activities are carried out at the Data Centre or Branch,
depending on the architecture of the Core Banking Solution.

Day-end activities carried out by the authorised personnel are properly

documented and monitored through a checklist.

Minimum balances are calculated.

Products are calculated for the Current Account (Debit balances).

Mandatory reports are generated.

Recording of entries in the Backup Register

Recording in Log Books

Filing of reports

Shutting down of complete computer system

The data back-ups taken are properly documented and kept in safe custody

The following documents are generated:

Access log

Audit Trail

A transaction number is given for each transaction entered.

After business hours of the Bank, the following functions are performed:

Supplementary Report is printed by either Branch Manager or System

Administrators and filed.

Cash Denomination Report is printed and filed.

Vouchers are tallied and signed by either the Branch Manager or System
Administrator.

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Basic Operational Controls in Core Banking operations include:

Segregation of Duties

Four Eye Principle/Maker Checker

Rotation of Duties

Ownership of systems for granting accesses rights.

Core banking solutions supports strong passwords access control mechanisms by

enforcing the following controls in Password:

Minimum length eight characters—the more characters, the better

Should contain both uppercase and lowercase letters

Must be a mixture of letters and numbers.

The password must include at least one special character.

Dictionary word avoided

Prevent reusing of previous Password/s

Enforce periodical password changes

Passwords are disabled during the employees’ leave of absence.

For certain critical modules, enforce multi-user or multi-factor authentication

Passwords are stored in the system in encrypted form only.

Integrity of the Password:

The operational staff should ensure the following practices to establish the
integrity of the Password:

All the employees and Users should maintain password secrecy in the system/s.

The critical passwords for accepting sensitive jobs should be known only to the
Branch Manager or System Administrator.

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The Operating System Password should be kept under Dual Control of Branch
Manager and System Administrator. The Password should be protected in a
sealed cover and opened in the presence of at least two persons. It should be
changed at once on being opened.

Parameter/Master Files

In a Parameter/Master File, all the relevant information related to a particular

account should be fed and stored. The information may relate to the Rate of
Interest to be applied, Penal Interest to be charged, Commission Rates, Operation
Limits in case of loans, nature of account operation, single/jointly etc.

It is important to check that the Parameter/Master File accessible to the operators

should only be read only. Otherwise, it would invite undesirable modifications,
which would lead to revenue leakage and misuse of funds. Whenever any
alterations are to be made in the Parameter/Master File, printouts of the file
before and after the changes should be taken and documented in the safe
custody of the Branch

The Bank should ensure the following:

Authorised personnel mark all the Bank Holidays into the software before the
beginning of the Financial Year.

Operation limits and authorisation levels are defined clearly for the operators and
supervisors.

The parameters for Interest and Bank Charges are defined in accordance with the
applicable rates and guidelines. The file is updated as and when changes are
announced.

Parameter files are printed before and after changes are given effect and
documented.

The safe custody of the printouts should be ensured, and alterations are captured
into the “Parameter Register”.

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Some important Master files for a core banking solution are.

Master Data of Accounts

General-purpose parameter files

Account types and structure for the General Ledger

Advances interest rates applicable for various schemes.

Deposit interest rates applicable for various tenors

List of holidays

Authorization rights for exceptional transactions

Types of users and their work classes.

Logical Access Control

To safeguard the assets and the computer system and to maintain data integrity,
the following should be ensured:

The security policy addresses specific capabilities of operating systems and ensure
that the available security features are implemented.

The Chief information security officer should ensure that available features have
been implemented.

Process for granting access levels.

Users should have the minimum access level needed to do their job.

Users’ access should be restricted to specific applications, menus within

applications, files, and Servers.

File maintenance should be a separate access privilege.

Maintenance should be restricted to a minimum number of persons, and it should

be properly approved and reviewed.

The password file should be encrypted.

Methods to detect security violations.

Access levels should be periodically reviewed by the internal auditor.

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Procedures to limit access to workstations after normal working hours.

Modem access should be restricted.

Modem passwords should be changed periodically

Operational Aspects of Security Control In CBS

The key security control aspects in a computerised bank include:

Ensure that authorised, accurate and complete data are made available for
processing.

Ensure that in case of interruption due to power, mechanical or processing

failures, the system restarts without distorting the completion of the records.

Ensure that the system prevents unauthorised amendments to the programmes.

Ensure that the “access controls” assigned to the staff-working matches with the
responsibilities, as per manual.

Ensure the segregation of duties while granting system access to users and
monitor user activities by reviewing Logs

Ensure that changes made in the parameters or user levels are authenticated

Ensure that charges calculated manually for accounts when a function is not
regulated through parameters are properly accounted for and authorised.

Ensure that all modules in the software are implemented.

Ensure that the exceptional transaction reports are being authorised and verified
regularly by the officials concerned.

Ensure that the account master and balance cannot be modified/amended/altered

except by the authorised personnel.

Ensure that all the general ledger accounts codes authorised by Head Office exist
in the system.

Ensure that balance in general ledger tallies with the balance in the subsidiary
book.

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Ensure that important passwords, like database administrator and branch
manager’s Passwords, are kept in a sealed cover with the branch manager so that
in case of emergency and the absence of any of them, the passwords could be
used to run the system properly.

Ensure that the Bank takes daily and monthly backups. The backup media should
be duly labelled, properly indexed and maintained under joint custody.

Ideally, a daily backup should be taken in 6 sets, one for each weekday and 12
sets for each month. The backup Register should be maintained and updated.

Ensure that the backup media is stored in a fireproof cabinet secured with lock
and key and that the off-site backups are preserved for an emergency.

Ensure that the anti-virus software of the latest version is installed in servers/PCs
of branches.

Ensure that security patches are applied to systems as and when released by the
vendors/ developers.

Ensure that access to the computer room is restricted to authorised persons

Role and Responsibilities of The Bank Under CBS

To deal with the increasing incidences of cyber-attacks and misuse of the

electronic payment system, the banks must introduce certain minimum checks
and balances to minimise the impact of such attacks and to arrest/minimise the
damage.

Bank must have:

IT Policy

Data processing and data interface under various systems.

Data integrity and data security.

Business Continuity Plans and Disaster Recovery Plans.

Accounting manual and critical accounting entries and the processes and
involvement of IT Controls over key aspects

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 Documentation of Controls and various e-banking and internet banking
products.

Manual processing of key transactions.

MIS reports being generated and the periodicity thereof.

Hard copies being generated and the periodicity thereof.

Process of generating information related to various disclosures in the

financial statements and the involvement of the IT systems.

Generation of major exceptional reports and the actionable.

Major IT related issues faced and resolved/unresolved during the year, such
as data/system corruption, system break-down, etc., having a bearing on the
preparation and presentation of financial statements

Significant observations of internal auditors, concurrent auditors, system

auditors, RBI inspection and internal inspection, etc., related to computerised
accounting and overall IT systems.

Customer complaints related to errors in transactions

System Audit

In order to ensure that the technology deployed to operate the payment system/s
authorised is being operated in a safe, secure, sound and efficient manner and as
per the process flow submitted by the Bank for which authorisation has been
issued; banks are required to get a System Audit done by a firm of Chartered
Accountants.

The scope of the System audit would include evaluation of the hardware structure,
operating systems and critical applications, security and controls in place,
including access controls on key applications, disaster recovery plans, training of
personnel managing systems and applications, documentation, etc.

The system auditor must also comment on the deviations in the processes
followed from the process flow submitted to RBI while seeking authorisation.

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 03. Alternative Delivery Channels (ADC)
Alternative Delivery Channel (ADC) means that channels which act as
intermediaries between bank and customer and leads to expand movement and
execution of banking services.

Traditionally, banks and other financial institutions deliver services to customers

through branches, where it’s possible to physically perform operations like
opening accounts, deposit and withdraw cash, apply for loans, etc. However, to
reach the unbanked, banks need to adapt their products and services, their
communication and, more importantly, their delivery strategy. For unbanked
consumers, a branch can be located many kilo-meters away from his or her home;
this prohibits access to many who might need it due to time and transportation
costs to reach the nearest branch.

This is why it is critical for banks to have low cost and easily scalable channels to
efficiently address the unbanked. These channels are the so-called Alternative
Delivery Channels (ADCs): they include all the ways of serving customers outside
of physical branches and are often enabled by technology:

Alternative Deliver Channels are strategic for banks and other DFS providers, as
they enable ……>

reduced operating costs – branch costs are much higher than any ADC
improved client convenience –

enabling access to financial services nearby or locally exploration of new

market segments (low-income segments)

These channels may be media, tools or any application through which customer
can perform their banking operations. From banks point of view these Alternative
Delivery channels will help bank to reach wild range of customer across the
country. Also banks get higher points with lower operational and transaction cost.
Digital banking and electronic banking are the most performing area of this
Alternative Delivery Channel (ADC). With the help of these alternative delivery
channels in banking sector, all the banks try to bring the banking service to every
individual with object to provide 24×7 banking and providing banking system to
unbanked.

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Different Types of Alternative Delivery Channels in Banking Sector:

Now a day most of the customers are moving out of branch banking to other
channels. Considering the use of internet, smartphone and mobiles provides
suitable options for online purchase which encourages customer to use online
banking facilities. Using these channels customer can do his banking transaction
from his home, office and any other place. All the channels are contributing to
increase productivity of banking system. The alternative delivery channels in
banking sector includes-

Internet Banking
Mobile Banking
UPI –Unified Payment Interface
E-Wallet
ATM Card, Debit Card and Credit Card.

There was a need for alternative delivery channels in banking sector to properly
handle the scattered banking products and services that were not in a particular
stream. Hence all banks have decided to deliver all these alternative delivery
channels to their customers. Keeping all these things in mind we can use all these
alternative delivery channels in banking sector to carry out our financial
operations in easier manner.

Internet Banking:

In simple way internet banking is nothing but use of banking facility on your
computer or mobile with the help of internet. It is considered as modern form of
banking. Internet banking is a complete online banking system itself and
facilitates you to do all banking operations setting at your home. It also help you
to transfer your fund or make bill payment from any were at home.

By internet banking customer can avail all banking facilities. Here are some uses of
internet banking-

Reduce frequent visit to branch: As internet banking makes the banking

transaction at your finger-tip, it reduces frequent visit of bank branch.

Fund Transfer: It allows you to transfer fund from your own account to others
account as well as to your own other bank account.

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Online account opening: Through internet banking you can open new saving
account, fix deposit, RD PPF account as well as Demat account online to invest in
the shear market. Also you need not to deposit required documents in bank as
the bank representative visits your home and complete the documentation
process.

Utility Bill Payment: You can pay all your daily utility bill online like light bill, gas
bill, mobile and dish TV recharge etc.

New Cheque Book Request: Now ordering new cheque book has become easy
through internet banking. Using this you can request new cheque book for your
account with one click.

Easy to monitor transactions in account: It allows you to monitor the ongoing

transactions in your account. You can also extract account balance and statement
of account

Others: It also used to make online purchase and payment, request any other
banking facilities from the bank, payment of income tax, online DD and you can
register any complaint online. The other uses include collection of information
about your loan and other accounts, life insurance, auto insurance and other
online services as well as purchasing product.

To activate Internet Banking you have to do following things –

It most important to visit branch and update your Email and mobile number in
your account.

First you have to fill the application form then you will receive net banking kit
from bank which contain your user ID and password.

With the help of this ID and password you can login to website or banks app.
When your login done, you have to change your login password for your safety.

This will activate your net banking now you can take the advantage of this
banking facility.

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Tips for using Internet Banking facility:

While using internet banking you should have to take following precautions so as
to safe your account –

Regular change your login ID and password for your account

Don’t shear any detail of your account with any other. Bank will never ask you for
any detail through phone or email.

Avoid login through cyber cafe or any other organizations computer.

Mobile Banking:

Mobile banking is most popular method of banking, which assists you to initiate
the banking operations on your mobile phone. All banks are providing their
mobile banking application to their customer. You can use mobile banking for
instant fund transfer, payment of bill, view account balance etc.

At the time of demonetization when the banks were crowded mobile banking was
the first preference from people for cashless transaction. In the view of this
change and need for cash, the present Prime Minister Shri Narendra Modi
appealed people to increase digital transaction under Digital India. People also
responded and mobile banking got a new impetus from demonetization. Mobile
banking is considered to be simpler and more convenient method than any other
method of transaction.

Compare to online banking mobile banking is considered to be easy and safe.

Following are the services available with mobile banking –

Easy to access account information: This is the primary service provided

through mobile banking. Thus with the app available in your mobile you can
better manage your fund. With mobile app you can view your account balance,
your transaction history, get e-statement i.e. your loan statement or credit card
statement.

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Fund transfer: this is most used and in demand facility available with the mobile
banking. You can transfer fund by just adding the beneficiary or by UPI (Unified
Payment Interface). This fund transfer include – fund transfer to self or bank to
bank fund transfer, third party fund transfer like rent payment , standing
instruction to loan or other accounts, fund transfer through NEFT, RTGS/IMPS
/MMID etc.

Other Services: opening of deposit account like SB/CD/FD and RD accounts

investment in mutual funds, Bill payments, login your complaint, queries or
suggestions, tracking your complaint. It also provides facility to order new cheque
book, cancelling or stop payment of cheque etc.

Precautions while using Mobile Banking:

As compare to online banking, mobile banking can lead to more phishing or

fraud. Hence keeping safety of customers all banks have comes up with some
important tips for secure mobile banking.

While using mobile banking set PIN or password to open app.

To receive banking transaction alert register your mobile number and email Id in
account. If both are not updated since long, see it is updated.

Do not open any URL in the mobile massage, unless you sure.

If you are going to repair your mobile or let someone use it, first you have to
delete browsing history, clear cache and delete temporary file from your mobile.
This is because detail of your account may be saved in these files.

Do not save any important information received from your bank on mobile.

Link mobile anti-malware or antivirus software to your smart phone.

Never use auto fill option. Do not save your ID and password any were in the
mobile.

Enable more feature on your mobile like encryption enabled, remote wipe and
location tracking.

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Unified Payments Interface ( UPI)

Deliberate efforts are being made at the government level to promote alternative
delivery channels in the banking sector. Due to the complexities in the use of
internet banking and mobile banking the use of these alternative delivery
channels in the banking sector has been limited to few people. Due to this simple
methods like UPI and Bhim have been made available to the customers by the
Government of India in the form of Mobile Banking.

UPI is real type system of payment developed by NPCI (National Payment

Corporation of India) and controlled by RBI and Indian Bank Association. UPI is a
multi-banking system through which customer can not only transfer money but
also send request for money. To use UPI, the customer has to create his own UPI
virtual ID (payment address) therefore; this UPI ID can be easily identified by
another transferor.

UPI is a digital platform and allows you to instant transfer of fund from one
account to another via your mobile. As it is real time instant transfer system takes
very less time than NEFT. While instant transfer IFSC Code, mobile number and
virtual Id should have to be correctly mention. The four digits MPIN is used for
confirmation of each transaction thus increase the security of the transaction.

Steps to setup and generate virtual ID in UPI –

1st Step: You have to download and install your banks UPI app through Google
pay.

2nd Step: Fill required bank detail in your app like selection of preferred language,
SIM card number registered with bank account, set your Four digit MPIN, link
your account number etc.

3rd Step: To verify your account, verify the OTP received from your bank.

4th Step: This verification will authorize your identity and generate your Virtual ID.

This will complete your registration process and you can send or request for
money to be transferred. More than one bank account can be linked with your
UPI. You cannot link your mobile wallet to your UPI only bank account can be
linked.

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Maximum limit on transfer of money under UPI:

The maximum limit for transfer under UPI as decided by NPCI is Rs. 1.00 lakh per
day. But as advised banks can decide there sub limit, hence you should cheque
banks web-side or contact branch to know the sub limit of your UPI.

E-Wallet:

In today’s age of smart phones, young generation is preferring e-wallet instead of

their ATM and Debit card. E-wallet has become a great option for cashless
payment. E-wallet is also known as Digital wallet and it is electronic software or
online service that allows you to transfer fund electronically to other. It also
facilitates storage of entire information of your bank account and reduces the
need to enter account detail at the time of online payment.

For this, the customer has to install the e-wallet application and link it with his
own bank account, after which the customer can make any type of payment
through that wallet.

If the customer does not want to link his bank account to wallet, then he can use
the option of cash deposit. Most companies have a cash deposit limit of Rs.
10000/ – but as per RBI instructions, this limit is increased to Rs100000/- if the
customer uploads his KYC in this wallet.

Types of E-wallet:

Closed wallet: In this case, if you return the product to a company, the company
deposits the money of the product in your close wallet. This money cannot be
spent by you but the money is used only to buy other products of the same
company.

Semi closed wallet: In this wallet you can neither deposit nor withdraw money
but this money is used to pay for the purchase of any company’s product.

Open wallet: In this type of wallet you can deposit money as well as withdraw
money. The wallet is linked to your bank account and such wallets are given to the
customer by the banks. The biggest advantage of this wallet is that if you return
an item to the company, the company immediately deposits your money in your
bank account.

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ATM, Debit card and Credit Card

Now a day’s plastic money becomes more popular among the younger
generation. This plastic money includes ATM card, debit card and credit card.
These cards are also known as payment card that every financial institution issues
to their customer. Plastic money is mainly used for online transactions. These
cards are most commonly used alternative delivery channels in banking sector.
These cards allow cardholder to transfer money electronically from there account
and also help to complete the payment transaction at the time of shopping.

Benefits of Debit Cards:

Help in planning and budgeting: Payment done through this card gets cleared
instantly. This helps you to know the how much amount is left in your account
and helps you to restrict or plan your expenses.

More Secure: This card provide security of money, as no one can use your card
without knowing your PIN. Also this card provides facility of OTP on your mobile
which secure your transaction. Recently the addition of EMV chips in this card
provides additional security.

Rewards on Transactions: As we know while transaction by using credit card you

get reward. To increase cashless transaction now all banks have included debit
card in this reward program. This rewards you get is based on how you have done
your transaction. It excludes your PIN based transaction.

You don’t have to pay any interest on debit card based transaction done as the
card is linked to your account, instantly your account gets debited.

Difference between ATM card, Debit Card and Credit Card

In this digital era, all financial institutions offers card based transaction to their
customer. Under this people do there transaction by using alternative delivery
channels in banking sector like ATM Card, Debit Card and Credit cards. As per
there usage they are differ from each other.

ATM card: With this card, the customer can only withdraw money from the ATM
machine. This card does not have any kind of logo like Master, Visa or Rupay. As
this card is linked with the customer’s bank account, he can withdraw only the
amount available in the account. The customer cannot use this card anywhere
other than just ATM machine.

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Debit card: The debit card is linked to the customer’s bank account and has the
Visa, Master and Rupay logo on it. This card is used for depositing and
withdrawing money and at the place where debit card is accepted, the customer
can complete his transaction by swap of debit card.

Credit card: This card looks like a debit card and has a company logo on it. Credit
card is not issued on behalf of customers account on behalf of debit card. Each
bank charges customers a certain amount each year in exchange for a credit card.
This card gives the customer a limit to use every month. This limit has to be repaid
within a specific time period. If the customer is not able to repay on time, it affects
the customer’s CIBIL report.

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 04. Digital Banking
Banking that is done through the digital platform without any paperwork is
referred to as digital banking

Digital banking means the availability of banking services online.

Digital Banking is the automation of traditional banking services. Digital banking

enables a bank’s customers to access banking products and services via an
electronic/online platform. Digital banking means to digitize all of the banking
operations and substitute the bank’s physical presence with an everlasting online
presence, eliminating a consumer’s need to visit a branch.

Benefits of Digital Banking

Advancing to a more technologically sophisticated way of doing things, it goes

without saying that the benefits long outweigh the costs. Similarly, digital banking
as a technological by-product aims to make life easier for the customers of a
bank. Digital banking has the following benefits:

Digital banking enables consumers to perform banking functions from the

comfort of their homes, be it an elderly person who is tired of waiting in lines or a
working-class professional who is caught up with work, or a regular person who
does not want to visit the bank’s branch to run a single errand. It also offers
convenience.

Elaborating on the convenience offered, digital banking lets a user carry out
banking work around the clock, with 24*7 availability of access to banking
functions.

One of the biggest drawbacks of traditional banking was the overly placed
importance on paper. Banking has become paperless with the development of
digital banking as a service. A user can log into their account at any point in time
to monitor records.

Digital banking allows a user to set up automatic payments for regular utility bills
such as electricity, gas, phone, and credit cards. The customer no longer has to
make a conscious effort of remembering the due dates. The customer can opt for
alerts on upcoming payments and outstanding dues.

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Online shopping has become a cakewalk with payment channels becoming well-
integrated with the online shopping portals. Internet banking has significantly
contributed to online payments.

Digital banking extending services to remote areas is seemingly a step toward

holistic development. With smartphones at affordable prices and internet access
in remote areas, the rural population can make the most out of digital banking
services.

Digital banking-enabled fund transfers reduce the risk of counterfeit currency.

With the help of digital banking, a user can report and block misplaced credit
cards at the click of a button. This benefit greatly strengthens the privacy and
security available to a bank’s customer.

By promoting a cashless society, digital banking restricts the circulation of black

money as the Government can keep a track of fund movements. In the long run,
digital banking is expected to lower the minting demands of a currency.

Digital Banking products

If an individual has access to a stable internet connection and an internet-enabled

smart device, digital banking has a lot to offer.

Digital Product services

Digital Banking Services

Types of Digital banking payments

Banking cards: Cards are not only used to withdraw cash but also enable other
forms of digital payment. Cards can be used for online transactions and on Point
of Sale (PoS) machines. Prepaid cards can also be issued by the banks; such cards
are not linked to the bank account but function through the money loaded onto
them.

Unstructured Supplementary Service Data (USSD): By dialing the number *99#,

mobile transactions can be carried out without an application and internet
connection.

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The number holds nationwide applicability and promotes greater financial
inclusion on the ground level. The service lets the caller surf through an interactive
voice menu and chooses the desired option on the mobile screen. The only catch
is the mobile number of the caller should be the one linked to the particular bank
account.

Aadhaar enabled Payment System (AePS): AePS lets the client initiate banking
instructions following the successful verification of the Aadhaar number.

Unified Payments Interface (UPI): UPI is the most trending form of digital
banking presently. UPI makes use of a virtual payment address (VPA) so the user
can transfer funds without entering bank account details or IFSC code. Another
striking feature of UPI is that the applications let you consolidate all your bank
accounts in one place. Funds can be transferred and received around the clock
with no time restrictions. UPI-based apps in India are BHIM, PhonePe, and Google
Pay. BHIM application, in addition to the transfer of funds to other virtual
addresses and bank accounts, also lets the user transfer funds to another Aadhaar
number. More importantly, UPI-based payments are free of cost.

Mobile Wallets: Mobile wallets have eliminated the need to remember four-digit
card pins or enter CVV details or carry loose cash. Mobile wallets store bank
account and card credentials to easily add funds to the wallet and make payments
to other merchants with similar applications. Popular mobile wallets are Paytm,
Freecharge, Mobiwik, etc. Mobile wallets, however, generally have a limit on how
much can be deposited in the wallet. A small fee may also be charged on
depositing the funds from the mobile wallet back into the bank account.

PoS terminals: Typically, PoS machines are portable devices that read a card to
authorize and complete the payment. Supermarkets and gas stations opt for this
method of payment. However, with digital banking thriving, PoS terminals have
evolved into more than physical PoS devices. Virtual and Mobile PoS terminals
have surfaced, which makes use of the mobile phone’s NFC feature and web-
based applications to initiate payment.
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Internet and Mobile Banking: Commonly known as e-banking, internet banking
refers to obtaining certain banking services over the internet, such as fund
transfers, and opening and closing accounts. Internet banking is a subset of digital
banking because internet banking is only limited to core functions. Similarly,
mobile banking is availing banking services through mobile-based applications.

Difference between Digital Banking and Online banking

More often than not, the terms of digital banking and online banking are used
interchangeably. However, there exists a fine line between the meaning of the
terms.

Online Banking deals with everyday essentials, such as checking balances,

reviewing transactions, and transferring funds. This is the core operation of the
bank, which is shifted to online presence with the help of online banking. Online
banking is a means to an end.

However, digital banking is an end in itself. Digital banking is aimed at digitizing

all the operations of the bank, core, or non-core. Basically, starting from
onboarding of clients to servicing of the accounts, to closure of accounts is digital
banking’s primary objective. Digital banking’s agenda is to make the physical
presence of a bank’s branch redundant for its customers so that the customers
can handle all banking operations from their place of convenience. Therefore,
online banking is a subset of the master set, digital banking.

Disadvantages of Digital Banking

Is digital banking safe? Contrary to popular opinion that digital banking poses
security concerns, most readers will be surprised to know that digital banking is
safer as compared to traditional branch banking. While digital banking forums are
prone to vulnerabilities and hacks such as phishing, pharming, identity theft, and
keylogging, banking institutions are investing a lot in their security systems.
Security is at the forefront when considering a service such as digital banking. If
security were to be compromised, banks would lose a crucial selling factor, and
more so than risking user data and resources, banking institutions cannot afford
negative publicity.

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In a hypothetical scenario where banks do, in fact, lose your money to a hacker,
you will be entitled to receiving the due amount of your bank balance for the sole
reason that your money is protected. Therefore, to avoid massive public liability
and bad publicity, banks are bound to invest heavily in reinforcing the security of
digital banking platforms.

However, a digital banking user must do their part by following certain practices
that act as a safeguard:

Follow prompts to change your passwords regularly and keep your passwords
confidential.

Avoid using public networks and devices to access digital banking – if you must
use a public device, remember to clear cache and browsing data. It is good
practice to not allow the browser to save your username and passwords for bank
details.

Banks never ask for confidential information so refrain from sharing it with anyone
who asks for it.

Anti-virus protected systems offer another layer of security to your systems.

The URL address MUST begin with ‘https’, or a padlock must appear next to the
website address. The padlock is a security certificate. The address bar turns green
when the site is secured with an SSL certificated, which is an additional validation
for the security of the website. Therefore, use the bank’s URL and refrain from
clicking on other links. Banks generally use minimum SSL/128-bit encryption.

Lastly, disconnect from the internet when the system is left idle.

Digital Banking in India

In India, digital banking started taking shape in the late 1990s with ICICI Bank
being the first one to bring the service to their retail clients. Digital banking
became mainstream only in 1999 as internet charges were reduced and there was
increased awareness and trust with respect to the internet. It was only after the
internet further developed and the costs came down, banks started serving a
broader basket of products online.

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For any individual to do digital banking in India, you need to first open a checking
or savings account with the bank. This can be done by visiting the branch in
person, or by using the online account opening options on bank websites where
you just have to upload a few documents from the comfort of your home.

Once you have an account ready with a bank, most banks will provide you with
your digital banking credentials which can be used to do seamless transactions
24*7. If you do not receive your credentials in the welcome kit, you can always
contact your bank to provide net banking free of cost.

To create a digital banking account in India, the individual must:

Be over 18 years of age

Have both PAN and Aadhaar Card

Complete KYC, i.e., paper-based verification of details within twelve months

of opening the digital bank account. Failure to comply with the norm will take
away the individual’s right to open a digital bank account with the same
Aadhaar and PAN in the future

As an improvisation to physical verification for KYC, the market regulator may

allow video-based verification in the future to improve the process from a
digital point of view.

Digital banking comes in handy for recurring banking essential functions.

However, customers prefer human interaction for more important and irregular
decisions, such as while taking a loan or negotiating the terms of the loan.

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 05. Data Communication Network and EFT Systems
Various data transmission components are usually used in data communications.
The components are considered to create a network when they work together to
share resources.

Different data communication components make up data communication, and

there are parts of them.

Data communications helps in drastically cutting and the time involved in

transferring data from the point of origin to the computer and information from
the computer to the point of use.

Data Communication Networks

Data communications reduce the time it takes to move data from a place of origin
to a computer and data from the computer to the site of use.

Components of Data Communications Networks

Various data transmission components are usually used in data communications.

The components are considered to create a network when they work together to
share resources. Different data communication components make up data
communication, and it is made up of three parts.

Data communications consists of various data communication components. When

the components operate together for the sharing of resources, they are said to
form a network. It has three basic components.

a) Transmission Devices and Interface Equipment

b) Transmission Medium
c) Transmission Processors

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Transmission Devices and Interface Equipment

The data is transmitted along the communication path between computer devices
using electrical signals and bit sequences to represent number and characters.

Modem: A modem is a device or program that enables a computer to transmit

data over, for example, telephone or cable lines. Computer information is stored
digitally, whereas information transmitted over telephone lines is transmitted in
the form of analog waves. A modem converts between these two forms.

Transmission Medium

For Communications between computers, the data has travel through some
medium during its transmission. The prevalent technologies for data
communications media are terrestrial, microwave and satellites.

(a)Terrestrial Cables (Three types)

Twisted Pair
Coaxial Cable
Optical fibre

Twisted-wire Pair: Two insulated copper wires are twisted together to form a
twisted pair.

Coaxial cable is made up of an inner copper conductor that is kept in place by

round spacers.

Optical Fibre: Optical fibre has revolutionised communications technology. It has

a data throughput of 2 gigabits per second. Fibre Optics allows for high-speed,
high-quality signal transmission. Electromagnetic interference has no effect. Data
is sent by a laser beam through very thin glass or plastic fibres. The laser beam is
the light source, which is powered by a high-speed, high-current driver.

(b)Microwave systems: A microwave system is a system of gear used for

microwave data transmission. The microwave system includes radios located high
atop microwave towers, which are used for the transmission of microwave
communications using line of sight microwave radio technology.

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(c) Communication satellite: A satellite is a body that moves around another
body in a mathematically predictable path called an Orbit. A communication
satellite is nothing but a microwave repeater station in space that is helpful in
telecommunications, radio, and television along with internet applications.

A repeater is a circuit which increases the strength of the signal it receives and
retransmits it. But here this repeater works as a transponder, which changes the
frequency band of the transmitted signal, from the received one.

The frequency with which the signal is sent into the space is called Uplink
frequency, while the frequency with which it is sent by the transponder is
Downlink frequency.

Transmission Processors

Transmission processors are designed to improve data communication between

two places. The Purpose of communication processors is to enhance is to data
communication between two points.

The following are some examples of communications processors:

A message switcher is a device that stores and forwards data to several terminals
over a single communication channel.

A multiplexer sends several signals across a single communication channel at the

same time.

The front end Processors for the host computer that intercept and manage
communication activity.

Communications processors can be broadly categorized as:

Message Switches
Multiplexers
Front end processors
Modes of transmission
Simplex
Half- Duplex
Full Duplex

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Modes of transmission

Simplex – data is sent in only one direction (commercial radio)

Half-duplex transmission sends data in both directions at the same time. Walky
Talky Walky

Network Scenario in India: Major Networks

The Committees on communication networks for banks, set up in 1987 under the
chairmanship of “T.N Anantharam Lyer” executive director, RBI, had strongly
recommended for the establishment of a cooperative communication network
especially for the banking industry.

INET

INET was set up by the department of telephones in the year 1991. It is a fast,
reliable, flexible and quite cost effective data communication network.

NICNET

NICNET has been set up by the National Informatics Centre (NIC), a Government
of India organization. It is India’s largest Wide Area Network (WAN). The Master
Earth station is installed in New Delhi, to provide access to satellites and operates
from around 2000 VSAT terminals.

INDONET

It was set up by CMC Ltd. In the 1980 and was among the first countrywide
networks in India.

RBINet

After recognising the pressing need to harness information technology for intra-
bank and inter-bank communications in the 1980s, RBI commissioned the
BANKNET in 1991.

RBI Net is also being used by several departments of banks for various
applications such as:

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Transmission of section 42(2) o the RBI Act, 1934, data by commercial banks to
regional offices of department of banking operations and development (DBOD)
and furnishing of consolidated data by the regional offices of DBOD to central
DBOD.

Press relations division daily news summary of important financial matters.

Department of economic analysis and policy macroeconomic indicators on a

weekly basis.

Emerging Trends in Communications Networks for Banking

RBI’s VSAT Network

The Indian Financial Network (INFINET) is a Closed User Group (CUG) Network for
the exclusive use of Member Banks and Financial Institutions. It was set up by the
Reserve Bank in 1999 through the Institute for Development and Research in
Banking and Technology (IDRBT) Hyderabad. The Institute explored capability,
methods, procedure to expand the network using a blend of communication
technologies such as VSATs and Terrestrial Leased Lines. In order to have a
careful combination of technologies in the INFINET, a Leased Line Network (LLN),
connecting 21 major cities has been seamlessly integrated with it. The LLN is a mix
of 2 Mbps and 64 Kbps lines. The LLN provides gateways to banks from each of
these 21 cities. The Network Management System (NMS) of the LLN is located at
the INFINET Hub at Hyderabad. The Backup NMS is located in the Main Office of
RBI in Mumbai

Among various inter-bank and intra-bank applications ranging from simple

messaging, MIS, EFT (Retail), Electronic Clearing Service (ECS) for both Credits and
Debits, online dealing and trading in Government securities, Centralized Funds
Management System(CFMS) for Banks and Financial Institutions, Anywhere
banking/Anytime Banking (ATM), Inter-Branch Reconciliation, Structured Financial
Messaging System (SFMS) and Electronic Funds transfer (RTGS/NEFT) System,
transmission of Inter-city Cheque Realisation advices, government securities
trading, and currency chest accounting are done through this service. VSAT
technology service can also be used for one-way and/or interactive
communications via satellite. Presently, the network consists of over 950 VSATs
located in 127 cities of the country. All Banks and financial institutions in the
country are eligible to become members of the INFINET.

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Internet

The Internet is a global network of networks. It is a system of computers which

allows user computers exchange data, message, files etc.

The Internet is a global network of networks. It is a system of computers which

allows user computers exchange data, message, files etc.

Serial Line Protocol (SLIP)

Point to Point Protocol (PPP)

Internet Access Service

E-mail

Usenet

Gopher

File Transfer Protocol (FTP)

World Wide Web (WWW)

SWIFT (Society for Worldwide Interbank Financial Telecommunication)

SWIFT message types are the format or schema used to send messages to
financial institutions on the SWIFT (Society for Worldwide Interbank Financial
Telecommunication) network. The original message types were developed by
SWIFT and retrospectively made into an ISO standard, ISO 15022. In many
instances, SWIFT message types between custodians follow the ISO standard. This
was later supplemented by a XML based version under ISO 20022.

SWIFT India Domestic Services Pvt Ltd (“SWIFT India” or “the Company”), founded
on similar principles, is a financial messaging services provider formed by SWIFT
SCRL and Indian banks, for the domestic Indian financial community and by the
community.

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Through shared resources and capital, SWIFT India functions with the objective of
enabling harmonised exchange of structured financial information between
domestic participants in the domestic Indian community, thereby

(a) Reducing costs and risks,

(b) Expanding the reach of automated, standardised and secure exchange of

information across the industry,

(c) Enabling new instruments, opportunities and markets for the industry.

Message types:

Real-time and bulk messages

File transfer of structured and unstructured information

Security:

Role-based access control

Maker-checker controls

3 layers of asymmetric encryption to ensure integrity, authenticity and

confidentiality

Hardware security modules

Support for local Controller of Certifying Authorities (CCA) licensed public

key infrastructure (PKI)

International and domestic standards:

Support for international ISO 15022 (MT) and ISO 20022 (MX) message formats,
including domestic to international message transformation

Support for local market practices and flows

Support for local addressing schemes such as the Indian Financial System Codes
(IFSC)
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Value added message features:

Guaranteed delivery

Delivery confirmation and non-delivery warning

Broadcast messages

Syntax and rule-book message validation

Non-repudiation proof of message transmission in case of dispute

Message retrieval for 124 days in case of messages lost or corrupted by

either sender or receiver

Store-and-forward for when counterparties are not online

Back-office integration for straight-through-processing

Message transformation

Multiple protocols (including SOAP, MQ, file transfer, etc)

Custom workflows

Premium support

Standard 24/7 online and phone support

Native support by back-office certified partners and services providers across Core
Banking System, Treasury System, Cash Management Systems, Retail and
Corporate Banking Systems. Payments Middleware and Enterprise Resource
Planning Systems.

Other premium support features such as onsite support, pro-active network

monitoring and health checks, coordinated business continuity exercises, and
others.

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Automated Clearing System

Most of the large banks in the European countries and the USA have independent
communication networks. Other banks are also members of some of the
networks on a sharing basis. These banks uses distributed data processing
techniques with a central system acting as the main database server. This has
helped them to provide certain specialised functions like transfer of funds,
automated teller systems, and credit card systems in an online mode. CHIPS,
CHAPS, CHATS are some of these networked systems which allow direct funds
transfer facilities in the USA, UK and Hong Kong, respectively and are largely
responsible for bringing about the true concept of Electronic Funds Transfer in
these countries.

Clearing House Inter-Bank Payment System (CHIPS)

The CHIPS started operating in 1970, run by a New York clearing house, the
world’s premier system for transfer of payments internationally. Settlement
failures in the history of CHIPS operation have never been reported, and the
operational time is claimed to be 99.9 to 100 per cent.

Most of the international fund transfers go through CHIPS, as most of the

international trade is transacted in US dollars.

Clearing House Automated Payment System (CHAPS)

CHAPS is a sterling same-day system that is used to settle high-value wholesale

payments as well as time-critical, lower-value payments. The CHAPS system set-
up in the UK provides almost instantaneous service for the settlement of
payments, and the payments are guaranteed on receipt and cannot be recalled.

CHAPS is one of the largest high-value payment systems in the world, providing
efficient, settlement risk-free and irrevocable payments.

Clearing House Automated Transfer System (CHATS)

CHATS provide inter-bank funds’ transfer facilities in Hong Kong, which has long
been regarded as the hub of financial activities the world over. The success of this
system depends largely on reliable communication networks.

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CHATS provide the same day inter-bank settlement, instant online confirmation
and enquiry facilities. All the inter-bank entries are first validated at entry before
transmission to the CHATS central system for settlement.

Two-Level Funds Transfer System

In USA, Fedwire, Bankwire and POS have established themselves as some of the
major systems for electronic funds transfer and settlement facilities as well.

Fedwire

The Federal Reserve Wire System, in operation since 1956, is used by the member
banks for EFT and is the main funds transfer system in the USA. Presently, about
800 banks are linked together over computer-based telecommunications
networks to transmit funds and statements. It is used primarily for transferring
reserve account balances of depository institutions and Government securities,
high-value domestic payments, bank to bank and third-party transfers and
corporate-to-corporate payments made through banks.

The inter-region funds are transferred through FEDWIRE access is made through
three modes:

Direct access computer-to-computer connectivity for major banks.

Direct terminal access through leased lines for online transmissions.

Dial-up terminal facility for transmission as per requirements and needs.

Bankwire

Bankwire is the pioneer private sector electronic telecommunication network

owned by an association of banks in the USA and used to transfer messages
between the subscribing banks. It was originally conceived for reducing the cost
of transmitting messages between participating banks.

Point of Sale (POS) Systems

The POS system allows payments to be made at the point of sales through EFT.
With the advent of cards, the concept of POS has become synonymous with the
EFT Point of Sales (EFTPOS).

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The system can handle not only the records of the sales, inventory level,
accounting entries and related functions of the retailers but also are connected to
the financial institution for effecting a transfer of funds to make In POS, the
retailer’s terminal is directly connected to the bank’s network, and the transaction
can be communicated online.

Emergence of Electronic Payment Systems in India

The introduction of MICR clearing was the first step towards the process of
automated settlement. The use of electronic media is one of the prerequisites for
a true EFT system. Phenomenal progress has been made with the introduction of
various EFT systems in the country, as described below.

Types of Electronic Funds Transfer in India

The popularity of electronic payment options is sharply increasing as it allows

users to transfer funds online using their mobiles and laptops, from the comfort
of their homes and offices. Moreover, it eliminates geographical barriers and
helps them transfer money in a hassle-free manner by simply using the IFSC
Codes.

But it can be confusing to decide the best method of transferring the money.
Taking into the consideration factors like transfer limit, time, cost etc. you can
make the right choice.

Listed below are some of the electronic methods, which can be used to transfer
money between two accounts -

The Transaction between your own linked accounts of the same bank

The Transaction between different accounts of the same bank.

Transferring money through NEFT into a different bank’s accounts

Transferring money through RTGS into other bank accounts

Transferring money through IMPS into various accounts

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NEFT

National Electronic Funds Transfer or NEFT is the most commonly used online
payment option to transfer money from one bank account to another. Usually,
salary transfers by companies are done using NEFT.

The funds are transferred on a deferred settlement basis, which implies that the
money is transferred in batches. There is no maximum limit but this depends from
one bank to another. For instance, the retail banking limit set by SBI is Rs. 10
lakhs.

Cost Involved

For transferring money to a different bank, Rs 2.50 to Rs 25 can be charged, based

on the amount being transferred.

Constraints

The money can be transferred only during the bank working days. The
transactions cannot be completed over the weekends and on bank holidays. It will
be completed on the next working day. Thus, you cannot make instant
transactions using NEFT.

Requirements-

Recipient’s name

Recipient’s bank name

Recipients’ account number

IFSC code of the beneficiary bank

RTGS

You can transfer money from one bank to another on a real-time basis using Real
Time Gross Settlement or RTGS method. There is no maximum transfer limit, but
the minimum is Rs. 2 lakhs. The transactions are processed throughout the RTGS
business hours. Usually, the amount is remitted within 30-minutes.

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To be able to transfer money through RTGS, it is required for the sender and the
receiver bank branch to be RTGS enabled. You can find the list of RTGS authorized
banks on the RBI website.

Cost Factor-

It costs a little more than NEFT. But still, it will not cost you more than Rs. 30 for
transactions up to Rs. 5 lakhs. The fee varies from one bank to another.

Requirements-

Amount to be sent
Account number of the remitter or sender
Name of the recipient or beneficiary
Account number of the beneficiary
Beneficiary’s bank and branch name
IFSC code of the receiving branch
Sender to receiver information, if any

IMPS or Immediate Payment Service

For instant payments, send money through IMPS. The money is transferred
instantaneously through mobile phones using this interbank electronic fund
transfer service.

You can make the transactions 24X7X365 across banks including all weekends and
bank holidays. The money can be transferred using phones, ATMs, Mobile Money
Identifier (MMID) and internet banking. The idea is simple – to allow users to
make payments with the mobile number of the beneficiary.

Requirements -

MMID of the Recipient

7 Digit MMID Number
MMID of the receiver
Name of the beneficiary
Beneficiary’s mobile number
Account Number of the recipient
IFSC Codes of the beneficiary bank

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Unified Payments Interface (UPI)

UPI-enabled apps allow you to make transactions (up to Rs 1 lakh) with any
smartphone using a VPA (Virtual Payment Address). The steps are comparatively
fewer and the apps enable users to transfer money in much faster. It doesn’t
require users to share personal details like credit/debit card number or bank
account.

Moreover, it is possible to transfer the funds round the clock; and the transactions
are done on a real-time basis.

The Cost Factor

There are no charges attached to using the UPI platform for transferring money
from one person to another. Earlier, if a person transferred money to a merchant,
about Rs. 15 used to be charged from the merchant, but after demonetization,
this fee has been waived-off.

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 06. Digital Payment Systems - NPCI
Digital payments are transactions that take place via digital or online modes, with
no physical exchange of money involved. This means that both parties, the payer
and the payee, use electronic mediums to exchange money.

The Government of India has been undertaking several measures to promote and
encourage digital payments in the country. As part of the ‘Digital India’ campaign,
the government has an aim to create a ‘digitally empowered’ economy that is
‘Faceless, Paperless, Cashless’. There are various types and methods of digital
payments.

Please note that digital payments can take place on the internet as well as on
physical premises. For example, if you buy something from Amazon and pay for it
via UPI, it qualifies as a digital payment. Similarly, if you purchase something from
your local Kirana store and choose to pay via UPI instead of handing over cash,
that also is a digital payment.

Different Methods of Digital Payments

After the launch of Cashless India, we currently have ten methods of digital
payment available in India. Some methods have been in use for more than a
decade, some have become popular recently, and others are relatively new.

Bank Cards

Indians widely use Bank cards, or debit/credit cards, or prepaid cards, as an

alternative to cash payments. Andhra Bank launched the first credit card in India in
1981.

Cards are preferred because of multiple reasons, including, but not limited to,
convenience, portability, safety, and security. This is the only mode of digital
payment that is popular in online transactions and physical transactions alike.
Nowadays, many apps are being launched with the sole purpose of managing
card transactions like Cred, Square, etc.

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Unstructured Supplementary Service Data (USSD)

USSD was launched for those sections of India’s population which don’t have
access to proper banking and internet facilities. Under USSD, mobile banking
transactions are possible without an internet connection by simply dialing *99# on
any essential feature phone.

This number is operational across all Telecom Service Providers (TSPs) and allows
customers to avail of services including interbank account to account fund
transfer, balance inquiry, and availing mini statements. Around 51 leading banks
offer USSD service in 12 different languages, including Hindi & English.

Aadhaar Enabled Payment System (AEPS)

AEPS is a bank-led model for digital payments that was initiated to leverage the
presence and reach of Aadhar. Under this system, customers can use their
Aadhaar-linked accounts to transfer money between two Aadhaar linked Bank
Accounts. As of February 2020, AEPS had crossed more than 205 million as per
NPCI data.

AEPS doesn’t require any physical activity like visiting a branch, using debit or
credit cards or making a signature on a document. This bank-led model allows
digital payments at PoS (Point of Sale / Micro ATM) via a Business
Correspondent(also known as Bank Mitra) using Aadhaar authentication. The
AePS fees for Cash withdrawal at BC Points are around Rs.15.

Unified Payments Interface (UPI)

UPI is a payment system that culminates numerous bank accounts into a single
application, allowing the transfer of money easily between any two parties. As
compared to NEFT, RTGS, and IMPS, UPI is far more well-defined and
standardized across banks. You can use UPI to initiate a bank transfer from
anywhere in just a few clicks.

The benefit of using UPI is that it allows you to pay directly from your bank
account, without the need to type in the card or bank details. This method has
become one of the most popular digital payment modes in 2020, with October
witnessing over 2 billion transactions.

What took credit cards a decade or so to achieve in India, UPI had accomplished
in a matter of just two years.

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Mobile Wallets

Mobile Wallets, as the name suggests, are a type of wallet in which you can carry
cash but in a digital format. Often customers link their bank accounts or banking
cards to the wallet to facilitate secure digital transactions. Another way to use
wallets is to add money to the Mobile Wallet and use the said balance to transfer
money.

Nowadays, many banks have launched their wallets. Additionally, notable private
companies have also established their presence in the Mobile Wallet space. Some
popularly used ones include Paytm, Freecharge, Mobikwik, mRupee, Vodafone M-
Pesa, Airtel Money, Jio Money, SBI Buddy, Vodafone M-Pesa, Axis Bank Lime, ICICI
Pockets, etc.

Bank Prepaid Cards

A bank prepaid card is a pre-loaded debit card issued by a bank, usually single-
use or reloadable for multiple uses. It is different from a standard debit card
because the latter is always linked with your bank account and can be used
numerous times. This may or may not apply to a prepaid bank card.

A prepaid card can be created by any customer who has a KYC-complied account
by merely visiting the bank’s website. Corporate gifts, reward cards, or single-use
cards for gifting purposes are the most common uses of these cards.

PoS Terminals

PoS(Point of Sale) is known as the location or segment where a sale happens. For
a long time, PoS terminals were considered to be the checkout counters in malls
and stores where the payment was made. The most common type of PoS machine
is for Debit and Credit cards, where customers can make payment by simply
swiping the card and entering the PIN.

With digitization and the increasing popularity of other online payment methods,
new PoS methods have come into the picture. First is the contactless reader of a
PoS machine, which can debit any amount up to Rs. 2000 by auto-authenticating
it, without the need of a Card PIN.

Mobile PoS terminals are those which work through a tablet or smartphone and
Virtual PoS systems are those that use web-based applications to process
payments.

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Internet Banking

Internet Banking, also known as e-banking or online banking, allows the

customers of a particular bank to make transactions and conduct other financial
activities via the bank’s website. E-banking requires a steady internet connection
to make or receive payments and access a bank’s website, which is called Internet
Banking.

Today, most Indian banks have launched their internet banking services. It has
become one of the most popular means of online transactions. Every payment
gateway in India has a virtual banking option available. NEFT, RTGS, or IMPS are
some of the top ways to make transactions via internet banking.

Mobile Banking

Mobile banking refers to the act of conducting transactions and other banking
activities via mobile devices, typically through the bank’s mobile app. Today, most
banks have their mobile banking apps that can be used on handheld devices like
mobile phones and tablets and sometimes on computers.

Mobile banking is known as the future of banking, thanks to its ease, convenience,
and speed. Digital payment methods, such as IMPS, NEFT, RTGS, IMPS,
investments, bank statements, bill payments, etc., are available on a single
platform in mobile banking apps. Banks themselves encourage customers to go
digital as it makes processes easier for them too.

Micro ATMs

Micro ATM is a device for Business Correspondents (BC) to deliver essential

banking services to customers. These Correspondents, who could even be a local
store owner, will serve as a ‘micro ATM’ to conduct instant transactions. They will
use a device that will let you transfer money via your Aadhaar linked bank account
by merely authenticating your fingerprint.

Essentially, Business Correspondents will serve as banks for the customers.

Customers need to verify their authenticity using UID(Aadhaar). The essential
services that will be supported by micro ATMs are withdrawal, deposit, money
transfer, and balance inquiry. The only requirement for Micro ATMs is that you
should link your bank account to Aadhaar.

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Benefits of Digital Payments

In a country like India, where disparities are sometimes poles apart, ensuring
financial equality becomes an issue of prime importance. One of the reasons why
our government started vocalizing Cashless Economy and Digital India was to
improve access to financial resources. There are multiple benefits that digital
payments bring to the table.

Ease and convenience

One of the most significant advantages of digital payment is the seamless

experience they provide to customers. Reduced dependency on cash, fast transfer
speed, and the ease of transacting make online payments a preferred option.
Traditional payment methods like cash and cheques add to factors like risk, steps,
and physical presence. With digital payment, you can send and receive funds from
anywhere in the world at the click of a button.

Economic progress

Customers transact more online when they see the ease, convenience, and
security of online payments. This means that more and more people feel
comfortable buying online, investing digitally, and transferring funds via electronic
mediums. The increase in money movement and online business contributes to
the progress of the economy. This is why online ventures are being launched
every day and even more are making profits daily.

Safety and efficient tracking

Handling and dealing in cash is a cumbersome and tedious task. Along with the
risk of losing money, there is the hassle of carrying cash everywhere you go and
keeping it safe. With digital payments, one can keep their funds secured in online
format effortlessly. Nowadays, your mobile phone alone is enough to make and
receive payments – thanks to UPI, net banking, and mobile wallets. Additionally,
most digital payment channels provide regular updates, notifications, and
statements for a customer to track his funds.

A payment gateway is like a portal connecting your bank account to the platform
where your transactions occur. This third-party addition is the simplest way for a
business to collect online payments via their website.

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Frequently Asked Questions – Digital Payments

What are digital payment services?

Digital payment services are the entities that provide transactions via digital or
online modes, with no physical exchange of money involved. This means that both
parties, the payer and the payee, use electronic mediums to exchange money.

Why is a cashless society good?

Cashless payments eliminate several business risks such as theft of cash,

counterfeiting money, and robbery of cash. Moreover, it also reduces costs of
security, and it allows you to buy whatever you want and whenever you want
without the need of withdrawing cash.

How does a digital payment system work?

A digital payment system usually converts a traditional cash-operational society to

a cashless one. It can be anything from paying for goods and services at a brick-
and-mortar store, transferring money to other individuals online, to making
investment trades.

What are digital payment methods?

After the launch of Cashless India, we currently have ten methods of digital
payment available in India. Some methods have been in use for more than a
decade, some have become popular recently, and others are relatively new.

Is electronic payment safe to use?

Thanks to advancements in digital payments technology, demographic shifts, and

the evolving cyber-security landscape, online transactions are more popular and
secure than ever before.

What is the purpose of digital payments?

The main objectives of digital transactions are to reduce the costs and risks of
handling cash, increase the ease of conducting online transactions, and increase
transparency among monetary transactions among people.

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The National Payments Corporation of India (NPCI)
The National Payments Corporation of India is an umbrella organization for
operating retail payments and settlement systems in India, is an initiative of the
Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the
provisions of the Payment and Settlement Systems Act, 2007, for creating a robust
Payment & Settlement Infrastructure in India. It was created by RBI for operating
retail payments and settlement systems in India.

Objectives of NPCI:

The main objective of NPCI is to provide common people with an affordable and
robust payment system. Apart from this, NPCI is also responsible for bringing
together and integrating various systems into nationwide uniform and standard
business processes that can be used as a retail payment system.

Organisation

Founded in December 2008, the NPCI is a not-for-profit organisation registered

under Section 8 of the Companies Act 2013, established by the Reserve Bank of
India and Indian Banks' Association. The organisation is owned by a consortium of
major banks, and has been promoted by the country's central bank, the Reserve
Bank of India. The NPCI was incorporated in December 2008 and the Certificate of
Commencement of Business was issued in April 2009.

The authorised capital has been pegged at ₹3 billion (US$38 million) and paid-up
capital is ₹1 billion (US$13 million).

Initially, there were ten promoter banks viz. State Bank of India, Punjab National
Bank, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank,
HDFC Bank, Citibank and HSBC. In 2016, the shareholding was diluted to include
13 additional public sector banks, 15 additional private sector banks, 1 additional
foreign bank, 10 multi-state co-operative banks and 7 regional rural banks.

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The following are the products of NPCI:

RuPay: RuPay is India's domestic card scheme and comes with magnetic strip
along with an EMV chip. This card can be issued by 300 cooperative banks and
Regional Rural Banks (RRBs) in India and can used at almost all ATMs.

Unified Payments Interface (UPI): Unified Payments Interface (UPI) was

launched on 11th April 2016 as an instant inter-bank payment system. This
payment system was developed to provide a mobile platform for instant transfer
of funds between two bank accounts.

Bharat Interface for Money: Bharat Interface for Money (BHIM) was developed
based on NPCI's Unified Payments Interface (UPI). It is a mobile application that
allows the user to easily send or receive money from other customers using the
UPI.

National Automated Clearing House (NACH): NACH was designed to push and
pull transactions in bulk. It is an offline system and provides an electronic platform
to register to avoid paper wastage in banks and corporates. It can be used for
both Aadhar based and account-based transactions.

National Financial Switch (NFS): NFS is the largest network of Automated Teller
Machines (ATMs) in India and is responsible for card-to-card funds transfer,
interoperable cash withdrawal, and many other services.

NPCI International Payments Limited (NIPL)

NPCI has created a separate subsidiary to take its product to global market. The
organization is getting offers from nations around Asia, Africa and the Middle East
to improve their payment infrastructure. Internationalization of RuPay and Unified
Payment Interface (UPI) are the primary focus of the NPCI International Payments
Limited (NIPL).

In 2021, Malaysian company Merchantrade Asia partnered with NIPL to send

remittance in India through UPI infrastructure.

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NPCI Bharat BillPay Limited (NBBL)

From April 2021, NPCI created a new subsidiary for Bharat Bill Payment System
(BBPS) to increase growth especially in business to consumer segment for small
businesses. This is done in view of growing traffic and workload from UPI, IMPS,
Aadhaar Enabled Payment System and National Electronic Toll Collections. NBBL
is a public company registered in December 2020.

‘UPI One World’ launched at G20 for foreign nationals

The Reserve Bank of India (RBI) and National Payments Corporation of India
(NPCI) permitted Transcorp to issue the ‘UPI One World’ wallet for foreign
nationals visiting India. Through this initiative, Transcorp targets over ten million
foreign nationals visiting India who are unable to pay merchants accepting 50
million UPI QR. The Transcorp UPI One World wallet will be provided to all the
Non-Resident Indians (NRIs) and G20 nationals through the Transcorp Cheque
app by completing KYC based mobile registration process. Users can pay via the
‘@trans’ handle, which is interoperable on the interoperable UPI 2.0 rails.

NPCI Internationalising Indian Rupee

A slow de-dollarization process has started with nations such as Russia switching
its trade from the US dollar to the Ruble, China promoting its trade in yuan, and
now India commencing payments and receipts in the Indian rupee.

FAQs on National Payments Corporation of India (NPCI)

Is NPCI a government organisation?

NPCI runs under the jurisdiction of the Reserve Bank of India and is a non-profit
organisation.

Who developed the UPI system?

UPI system was developed by NPCI.

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What is the role of NPCI in banking?

NPCI enables the banks participating in UPI access to system where they can raise
chargebacks, download reports, update the status of UPI transactions etc.

How does NPCI earn money?

NPCI earns one-third of its revenues from interchange fees, switching fees and
other charges.

What is NPCI limit?

A user can send up to Rs 100,000 per transaction and a maximum of Rs 100,000

per day for one bank account. This limit is available per bank account linked on
BHIM.

Why was NPCI formed?

NPCI was formed to create a robust settlement and electronic payment system in
the country.

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 07 Impact of Technology Adoption and Trends in
Banking Technology
Emerging technologies like AI, robotics, IoT, blockchain, cybersecurity, and big
data could make products and services more accessible, to individuals who
struggle to utilize them. For example, people who live in rural areas can benefit a
lot from online banking. Online shopping or voting can help people who have
trouble getting around. Online learning or teleworking could be a solution for
parents looking for their kids at home or other people who have to take care of
others. Technological innovation will also improve our quality of life and help us
to make more environmentally conscientious decisions.

Technologies are a critical part of the Indian economy and have been responsible
for its growth. They include everything from transportation and communication to
manufacturing and agriculture. Emerging technologies are those that are currently
being developed and are not yet widely available. They have the potential to
revolutionize industries and change the way we live.

The internet, mobile phones, and other digital technologies have brought about a
revolution in the Indian economy. They have created new opportunities for
businesses and entrepreneurs and have empowered consumers. Digital
technologies are transforming traditional businesses and creating new business
models. They are also changing the way government works and improving service
delivery. Some of the emerging technologies in the Indian economy are:

Blockchain: Blockchain is a distributed database that enables secure, transparent

and tamper-proof transactions. It has the potential to disrupt many industries
such as banking, healthcare, logistics, and real estate.

Internet of Things (IoT): IoT refers to the interconnectedness of physical devices

and objects that are equipped with sensors and software. It is enabling new
applications in areas such as smart cities, connected homes, and wearables.

Augmented Reality (AR): AR is a live direct or indirect view of a physical, real-

world environment whose elements are augmented by computer-generated
sensory input such as sound, video, graphics or GPS data. AR is being used in a
variety of applications such as gaming, retail, education, and automotive.

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Artificial Intelligence (AI): AI involves machines that can learn and work on their
own without human intervention. It is being used in a number of sectors such as
healthcare, finance, manufacturing, and agriculture.

Importance of Emerging Technologies

Emerging technologies are important because they drive economic growth. India
has experienced rapid economic growth in recent years, and a key factor behind
this has been the adoption of new technologies. By using new technologies,
businesses can increase productivity and efficiency, which leads to higher profits
and more jobs. In addition, new technologies often lead to new industries and
markets, which create even more opportunities for economic growth.

How have technologies fuelled the growth of the Indian economy?

Technology has played a pivotal role in the growth of the Indian economy. From
the agricultural sector to the manufacturing sector, technology has helped
improve productivity and efficiency. In the agricultural sector, for instance,
technology has helped farmers increase yield and decrease input costs. In the
manufacturing sector, technology has helped reduce production costs and
improve quality control. As a result, India has been able to attract foreign
investment and create jobs.

Impact on Entrepreneurship in India

Emerging technologies are playing a big role in the growth of entrepreneurship in

India. Hence, the country has seen a tremendous increase in the number of
startups in recent years. Now many of them are using cutting-edge technologies
to solve problems and create innovative products and services.

One of the main reasons for the rise of entrepreneurship in India is the increasing
availability of funding. There are now more investors looking to invest in Indian
startups, and they’re willing to put more money into high-growth companies. This
has given entrepreneurs the resources they need to start and grow their
businesses.

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Another factor that’s driving the growth of entrepreneurship in India is the
country’s large population. With over 1.3 billion people, there’s a huge market for
products and services. This provides a big opportunity for entrepreneurs who can
tap into this market and provide solutions that people need.

The government is also playing a role in promoting entrepreneurship in India. The

government has introduced initiatives like Make in India, which are aimed at
making the country more attractive for investment. These initiatives are helping to
create an environment that’s conducive to business growth.

All of these factors are coming together to create a perfect environment for
entrepreneurship in India.

The economic boom of the IT industry in India in the 1990s and 2000s

In the past decade or so, India has undergone a remarkable economic

transformation. One of the key drivers of this growth has been the rise of the
country’s IT industry.

Emerging technologies have played a major role in fuelling the growth of the
Indian economy. The use of big data, cloud computing, and artificial intelligence
has helped businesses in India to become more efficient and productive. As a
result, the country’s GDP has grown at a rapid pace.

The Indian government has also been supportive of the IT industry’s growth. It has
introduced various initiatives to promote the use of technology in businesses. So,
the Make in India initiative is one such initiative that has helped to attract foreign
investment into the country.

The IT industry is expected to continue to grow in India in the coming years. This
will result in more job opportunities and higher incomes for the people of India.

The healthcare industry in India has been growing rapidly in recent years, fuelled
by emerging technologies. Agricultural production has also been boosted by new
technologies, such as precision farming and irrigation systems. The manufacturing
and retail sectors have also benefited from the adoption of new technologies,
such as 3D printing and robotics.

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Conclusion:

Emerging technologies have had an immense impact on the economic

development of India.

Technologies such as the Internet, mobile phones, and cloud computing have
allowed India to leapfrog traditional development models and emerge as a
leading economic power.

The growth of the Indian economy has been fuelled by the adoption of emerging
technologies, which has led to increased productivity and efficiency.

Emerging technologies have also contributed to the creation of new jobs and
businesses in India.

The Indian economy is quite well to take advantage of emerging technologies.

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08. Security Considerations and Mitigation Measures
in Banks
Risk Concern Areas

The Customer Demands have triggered a fierce competition among banks and
financial companies for the application of information technology in their
operations to help them offer innovative products and services at reduced costs.
This also helps those entering new geographical areas.

Data and software: Data is critical resource, necessary for an organisation’s

continuing operations. Incorrect data can have serious implications in decision
making, as well. The increasing availability and use of expert system and the
potential impact erroneous data can result in playing havoc with an organisation’s
business.

Infrastructure: Banks have to invest heavily for implementing technology- based

tools and solutions. In addition to software and data, same hardware components
are required for operations of the computer and communication systems.

Peopleware: Peopleware refers to the group of persons directly or indirectly

involved in managing and running the computerized systems.

Different types of Threats

The threats to computerized system manifests in the form of business

interruptions as under:

Errors and omissions in data and software

Unauthorised disclosure of confidential information

Computer abuse and mis-utilisation of banks assets

Computer/cyber frauds

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Accidental Damages

Computers and communications systems have found their applications to be

quite extensive in banking and other financial organisations. However, at the same
time, these systems are vulnerable to damages caused accidentally, both due
human failures and natural calamities.

Environmental Hazards

Human Error and Omissions

Unreliable systems

Malicious Damages

Risk of malicious damages to computerized systems can be from disgruntled

employees who wish to disrupt the services or from individuals with malafide
intentions, using the technology for perpetrating fraud for financial gains.

Interruptions in Services

Frauds

Control Mechanism

Implementation of effective control mechanism is required management of risks

associated with the use of IT tools.

Physical Control

Internal Control

Accounting Control

Administrative Control

Operational Control

Audit Trails (i)Accounting Audit Trail (ii) Operations Audit Trail

Checksum

Data Encryption

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Computer Audit

Banks can achieve effective, secure and reliable computer systems only through
the use of appropriate control techniques discussed above. The control
techniques selected, varies from bank to bank, reflecting the particular risks within
each bank and the costs of related security and control procedures.

A regular programme of independent tests of security and control procedures by

auditors help in in identifying lapses before the banking operations land into
serious risk. The generic organizational function aimed at evaluation of the asset
safeguarding, data integrity, system effectiveness, and system efficiency in
computerized systems is termed as “Computer Audit”.

Information System Audit (IS Audit)

An information system (IS) audit or information technology(IT) audit is an

examination of the controls within an entity’s Information technology
infrastructure. These reviews may be performed in conjunction with a financial
statement audit, internal audit, or other form of attestation engagement. It is the
process of collecting and evaluating evidence of an organization’s information
systems, practices, and operations. Obtained evidence evaluation can ensure
whether the organization’s information systems safeguard assets, maintains data
integrity, and are operating effectively and efficiently to achieve the organization’s
goals or objectives.

Information Systems Audit Methodology

PHASE 1 : Audit Planning

PHASE 2 : Risk Assessment and Business Process Analysis

PHASE 3 : Performance of Audit Work

PHASE 4 : Reporting

Benefit of IS Audit

It would identify the risks of exposure to an existing computerized environment.

On Identification of the risks, remedial measure can be taken to protect the
interests of an organisation.

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It would deter people/employees/ users from indulging in corruption/
manipulation of data, frauds etc. An undesired activity will be detected through
implementation of IS audit.

Information System Security (IS Security)

Information systems security, also known as INFOSEC, is a broad subject within

the field of information technology (IT) that focuses on protecting computers,
networks, and their users. Almost all modern companies, as well as many families
and individuals, have justified concerns about digital risks to their well-being.

Need for IS Security

To Comply with law of the land and regulator’s guidelines.

To comply with business policy.

To comply with business partner’s requirements.

IS Security in Banking

Banks must meet their customers requirement for security aspects in special way
on many levels, whether it is with their saving, taking advantage of over-the
counter services at a branch office, withdrawing money from the teller machines,
making deposits via the cash recycling system, online banking etc.

Threats to IS Security

E-mail Viruses

Phishing Attacks

Hackers Attack

Vishing

Smishing

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Modus Operandi Of Online Frauds and Cyber Security Awareness

Cyber Fraud

The goal of cybercriminals is to steal user credentials and introduce fraudulent

transactions into back office systems. Criminals hide their tracks and destroy any
proof they may have left behind after sending fraudulent funds.

Doing so, they erase or alter records and disrupt computer systems to thwart
investigators. This puts the back office at risk and undermines the very business
controls that are supposed to keep fraud at bay.

Modus Operandi of a Cyber-Attack

The modus operandi of Cyber fraud comprises the following steps.

Reconnaissance and Compromise

Obtain credentials

Send fraudulent messages

Hide/cover up evidence

The common modus Operandi followed by cyber attackers are…..>

ATM card skimming

Phishing/Vishing/Smishing Payment Fraud

Lottery Fraud/Fake Prize Fraud

Frauds due to using Unknown/Unverified Mobile Apps

Account takeover Fraud

Online Marketplaces Fraud

Card fraud

Sim Swapping

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Evaluation Requirements

The IT resources continuously undergo changes in the form of development of

new applications, acquisition of new hardware, turnover of trained employees etc.

Computer Hardware

Computer Software

Data

Communication channels

Disaster Recovery Management

System Development Process

Legal Framework for Electronic Transactions

At present, many legal provisions recognize the paper-based records and

documents that should bear signature. Since, electronic commerce eliminates the
need for paper-based transactions. Therefore to facilitate e-commerce, there was
a need for enactment/amendment of necessary Law.

Indian Parliament enacted a comprehensive information Technology Bill, which

received the Present’s assent on 9 June 2000.

Consequent upon the recognition given to the electronic records, electronic

documents and electronic signatures, incidental amendments have also been
made in the following Acts:

The Indian Penal Code, 1860

The Indian Evidence Act, 1872

The Banker’s Bank Evidence Act, 1891

The Reserve Bank of India Act, 1934

The Act purports to include the work “electronic record” along with the word
“record”/”document” appearing generally in various sections of these act.

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The amendment to Indian Penal Code, 1860, also states that for the purpose of
the Section 466 (dealing with forgery of records) a “register” shall include any list,
data or record of any entries maintained in the electronic form as defined in the IT
Act 2000.

Bankers Books Evidence Act, 1891 redefines banker’s books as ledgers, daybooks,
cash books and account Books used in the ordinary business of the Bank.

The RBI act, 1934 has been amended by the IT act, 2000, empowering the central
board to make regulations for fund transfers through electronic means between
the banks or between the banks and other financial institutions.

Working Group on Information Security, Electronic Banking, Technology

Risk Management and Tackling Cyber Fraud

Keeping in view the changing threat milieu and the latest international standards,
it was felt that there was a need to enhance RBI guidelines relating to the
governance of IT, information security measures to tackle cyber fraud apart from
enhancing independent assurance about the effectiveness of IT controls. To
consider these and related issues, RBI announced the creation of a Working
Group on Information Security, Electronic Banking, Technology Risk Management
and Tackling Cyber Fraud in April, 2010. The Group was set up under the
Chairmanship of the Executive Director Mr. G. Gopala Krishna.

The Group delved into various issues arising out of the use of Information
Technology in banks and made its recommendations in nine broad areas. These
areas are IT Governance, Information Security, IS Audit, IT Operations, IT Services
Outsourcing, Cyber Fraud, Business Continuity Planning, Customer Awareness
programmes and Legal issues.

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 09.Operational Aspects of Cyber Crimes/Fraud Risk
Management in Cyber Tech

Cyber-crimes in the 21st Century has emerged to be one of the most lethal
revengeful weapon that any person can use to threaten or cheat someone. The
active internet users as per the latest reports of January 2021, were around 4.66
billion and this growth has led to the increase in the chances of a user being
trapped in this malicious method of crimes which has been in surge during the
past few decades.

Although it is understandable that computers have become an essential part of

one's existence, they have also developed an environment conducive to cyber-
crime. Cyber-crimes pose a major challenge in light of the fast-changing
environment and the significant contribution of the IT industry. Cybercrime is
typically carried out by offenders who have technological skills who can outstrip
and think one step ahead of the law in order to gain access to computers and
commit crimes.

The economy is among the foundations that determines a country's development

and growth. The banking sector is regarded as the economy's backbone. We use
cash, cheques, and demand draughts to conduct our daily business. This pattern,
however, has paved the way for a new payment system based on swiping debit or
credit cards. The Narasimha Committee (1991-1998) which was for the
recommendation on financial matters, suggested that IT shall be used in the
banking sector as well to make it more efficient in the functioning.

While the banking sector has expanded its services and aims to provide excellent
customer service via innovation, cyber-crime continues to be a problem. Cyber
criminals can easily get in touch that is accessible on the internet. Cyber-crime
causes massive monetary losses, that are borne not only by customers, but also by
banks, affecting a country's economy. When viruses are produced and spread on
other devices, or when sensitive business information is posted on the Internet,
non-monetary cybercrime exists. Phishing and pharming are the most popular
examples.

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Due to enhanced online recognition through alternative platforms such as the
internet, ATMs, and mobile banking, India has seen an increase in the amount of
debit/credit cards. This amount will gain momentum in the coming days as the
young generations enters the financial tumult.

Cyber Crime in Banking Industry

Cybercrime refers to any criminal activity carried out on a computer or over the
internet. In other words digital misconduct is referred to as cybercrime where the
criminal exercises a number of wrongdoings such as money transfers and
withdrawals via unauthorized access by using the computer or any other
electronic devices and the internet.

To narrow down the landscape in today's globalised world, the banking industry
offers many services to their clients and consumers, such as online banking and
credit card services. "Online payment with a debit card Customers can access all
types of bank facilities 24 hours a day, and they can conveniently transact and run
their accounts from anywhere in the world using the internet and cell phones." As
we all know, these services are useful to customers, but they also have a dark side,
which includes hackers and robberies.

They take advantage of those services by breaking into banking websites and
customers' accounts, causing chaos in accounts and theft of money from
customers' accounts, the best example was "in which one hacker took one rupee
from each account but received a large sum of money with that one rupee."

Effects of cyber crimes

Cybercrime may have long-term consequences on those who are attacked. Cyber
attackers carry out cyber threats such as taking out loans, incurring credit,
hacking, and so on, which may have devastating effects in the banking business.
The effects are as under:

Financial loss
Infringement of confidential information
Legal consequences
Sabotage and theft to identifiable information
Exposed to reputation risks
Operational risks
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Reasons for cyber crimes:

Easy access to data:

Once a cyber attacker is able to gain access into a computer system, they may
have access to personal data, including private financial documents from
customers, which can be copied or transferred into a small removable device.
Since information technology powers the operations of banks, individuals,
corporations, government agencies, etc., the insecure storing of confidential data
and information processed on their computers presents a serious danger.

User's Negligence:

All the authorities who use computer systems should remain very careful and
cautious in order to safeguard their confidential data and information stored in
the computers. Through proper usage of Passwords and Personal Identification
Numbers (PIN) they can limit the access. Any negligence on their part will facilitate
cybercriminals' easy access to certain devices and records.

Lack of internal control in organizations and banks:

Banks use a variety of operating systems for their day-to-day activities; hence
banks must ensure that they have in place ongoing internal control and IT audit
systems otherwise it can result in computerized environment lapses due to the
availability of inefficient software and hardware systems.

Types of cybercrimes connected with banking sector:

Hacking

Hacking is a cybercrime that involves a person gaining illegal access to a system

or attempting to circumvent security mechanisms by hacking into customers'
accounts or banking sites. ''A hacker, however, can be prosecuted under Sections
379 and 406, and also u/s 43(a) read with Section 66 of the Information
Technology (Amendment) Act, 2008.'' If the crime of hacking is proven, the
convicted may be sentenced to three years in prison or a fine of up to five lakh
rupees, or both, under the IT Act.

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Key logging

It is referred to as ''keystroke logging or keyboard capturing''. It is the process of

secretly recording (logging) the keys pressed on a keyboard so that the person
using it is oblivious that their activities are being tracked and these are incredibly
harmful for stealing confidential information such as banking details etc.

Viruses

It is a kind of self replicating program that infects executable code or documents

by inserting copies of itself. A virus is a programme that afflicts an executable file
and causes the file to behave abnormally after infection. It spreads by linking itself
to executable files such as programme files and operating systems. Loading the
executable file could result in new copies of the virus being created. Worms, on
the other hand, are programmes that can replicate themselves and send copies to
other computers from the victim's computer. Worms do not change or remove
any files; instead, they multiply and send copies to other computers from the
user's computer.

Spyware

Spyware is the most common approach of stealing online banking credentials and
using them for fraudulent purposes. Spyware operates by collecting or
transmitting information between computers and websites. It is mostly installed
by bogus 'pop up' advertisements to have software downloaded. Industry
standard Antivirus products detects and removes this type of software, primarily
by blocking the download and installation before it infects the PC.

Phishing

Phishing is a kind of swindle in which private information such as Debit/Credit

Card number Customer ID, IPIN, CVV number, Card expiry date, and so on is
stolen via emails that seem to be from a genuine source. Phishing is accomplished
through the use of instant messaging and email spoofing.

In this type of crime, hoaxers act like officials of banks and they create a direct link
that directs the targeted customers to a fake page which looks alike to the actual
bank website. The acquired confidential information is then used to commit
deceitful transactions on the customer's account. Phishers these days also use
SMS (Smishing) and mobile (voice phishing) to commit such crimes.

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Pharming

Pharming is carried out through the internet. When a customer logs in to a bank's
website, the attackers hijack the URL in such a way that they are routed to another
website that is false but appears like the bank's original website.

ATM Skimming and Point of Sale Crimes

Installing a skimming device atop the machine keypad to appear as a real keypad
or a device made to be affixed to the card reader to appear as a part of the
machine is a tactic for compromising ATM machines or POS systems. Malware
that directly steals credit card data may also be installed on these devices.
Skimmers that are successfully installed in ATM machines retrieve personal
identification number (PIN) codes and card numbers, which are then copied to
perform deceitful transactions.[16]

DNS Cache Poisoning

DNS servers are used in a company's network to increase resolution response

times by caching query results previously received.[17] Poisoning attacks on DNS
servers are carried out by exploiting a flaw in DNS software. As a result, the server
validates DNS responses mistakenly to ensure that they are from an authoritative
source. Incorrect entries will be cached locally by the server and served to all users
who make the same request. Bank customers could be routed to a server
controlled by criminals, which could be used to serve malware or trick bank
customers into providing their credentials to a spoof of a legitimate website. An
attacker can hijack clients by spoofing an IP address; DNS entries for a bank
website on a given DNS server and replacing them with the IP address of a server
they control.

Malware based-attacks

One of the most dangerous cyber threats to electronic banking services is

malware-based attacks. A malicious code is created in such attacks. The number
of malware attacks in the banking industry is on the rise these days. Zeus, Spyeye,
Carbep, KINS, and Tinba, are some of the most well-known banking malware.
Nearly every virus has two characteristics: one, it secures a backdoor entry into the
system, and the other, it steals a user's credential information.

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Impact Of Cybercrime On Banks

Due to geopolitical and global macroeconomic conditions, the banking industry in

the world is facing a difficult situation that is thought-provoking. In order to
better analyse and mitigate risks, the banking industry is being forced to review its
existing practices. For risk management, technology-driven approaches have been
used.

Financial services have been expanded to the masses as a result of the

development of information and technology (IT), as well as the penetration of
mobile networks in daily life. However, technology advancement has made the
banking services accessible and affordable but this in turn has augmented the
likelihood of being a target of cyber-attacks.

Cyber thieves have developed sophisticated methods to not only steal money, but
also to spy companies and gain access to vital business information, which has an
indirect effect on the bank's finances. To combat such cybercrimes, the banking
industry must work with national authorities and watchdog organizations to
create a model that will aid in control.

The major source of interest here is the lack of an efficient compilation service in
the banking industry that can detect patterns in cybercrime and compile a model
based on them.

Steps to Prevent Cybercrime

The crimes in the banking industry have alarmingly increased which have resulted
in significant economic losses. As we all know that banking is the most important
mainstay of our economy, so it must be prevented from cyber-attacks. Awareness
should be made to the banks and the customers regarding the risk involved and
also the safety measures to combat the cyber-attack.

For the effective implementation of all the matters of cyber security policy, the
government has established an ''Inter-Departmental Information Security Task
Force (ISTF)'' with the National Security Council as the nodal agency. The national
nodal agency is the ''Indian Computer Emergency Response Team (CERT-In)''
which is entrusted to check the computer security incidents as they happen.

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The main problem related with cybercrime is jurisdiction. Cybercrime happens in
every state so any person, regardless of where they live, should be able to
recognise and monitor cybercrimes. In certain cases, victims of cybercrime may be
impotent to report a cybercrime for a variety of reasons, like living in a distant
area, being unsure of where to report, and privacy concerns. As a result of the
nonexistence of a centralized online cybercrime monitoring system, many
cybercrime incidents go unreported.

The IT Act should be revised to include a definition of cybercrime as well as a list

of instances in which the Act would have extraterritorial authority. The scope of
the IT Act should be expanded to include the legislative basis for cyber regulation
in India. The intermediaries' responsibilities are ambiguous but that should me
made explicit.

Every single employee should have their own user account, with a policy requiring
password changes in every three months. Employees must not be allowed to
download or install unauthorized software.

All employees must be informed about the dangers of opening or uploading

email attachments from unidentified sources. Educate personnel about the
importance of not leaking or sharing sensitive information about the institute.

The IT department of a bank must ensure that a firewall is enabled on every

workstation and Internet-connected device in the organization because firewall
blocks all communication from unauthorized sources.

Banks must use 'two-factor authentication (2FA)' apps or physical security keys
and, wherever possible, enable 2FA on all online accounts.

The Department would make sure that all PCs' operating systems receive regular
security updates.

To find out if there is any ransomware or malicious software on the network, anti-
spyware and anti-virus software must be installed on all PCs. All passwords and
wireless networks must be kept secured and well-protected.

Banks must employ verification methods such as dynamic device authentication

and web-based transaction verification as more consumers use mobile devices.

Customers must receive notifications and automated messages from their banks
confirming the validity of their transactions.

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Customers must be given instructions on how to verify the legitimacy of any
sources that are asking information of personal accounts. Customers must also be
given instructions on how to stay safe when using the bank's websites.

When using banking application or internet banking, use a secure network.

Conclusion

Due to the extreme ease, cost savings, and speed of online transactions, Indian
consumers are increasingly preferring online services. Furthermore, financial
institutions are presenting consumers with exciting deals in the hopes of
increasing the number of cashless transactions due to lower operating costs. That
being said, this can be indicated that economic institutions' cyber security
initiatives to combat cybercrime are being outpaced by a dynamic technical
environment and increased attacker skills.

The financial system's backbone has been information technology. It supports the
growing difficulties and banking requirements tremendously. Currently, banks
cannot consider introducing financial products in the absence of Information
Technology. Information Technology, on the other hand, has had a negative effect
on our financial industry, where crimes such as stealing, hacking, phishing and
forgery are perpetrated.

When an individual engages in any type of electronic banking transaction, it is

necessary to ensure authentication, identification, and verification techniques to
deter cybercrime. The rise of cybercrime and the sophistication of the
investigative process necessitates the adoption of adequate steps. In order to
combat cybercrime, it is important to improve stakeholder collaboration.

As part of their overall operational risk management mechanism, banks must keep
up with the latest changes in the IT Act, 2000, and the orders, laws, notices and
regulations issued thereunder relating to bank transactions, as well as embryonic
legal requirements on electronic fund transfers, electronic signatures, data
security, digital signatures and cheque truncation.

During the continual improvement of the technologies used at the financial

institution's backend, certain critical aspects were ignored, which now require
immediate attention. Cybercrime has its own range of appealing characteristics
that have increasingly begun to overshadow conventional crimes.

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Cybercriminals are attracted to the level of anonymity, global victim reach, and
quick outcomes, to name a few. Cyber criminals' job is made easier by the lack
of/inadequate awareness campaigns. Owing to a lack of knowledge about the
most recent attack methodologies and documented preventive steps, unaware
customers are easily fooled.

With the growing influence of cybercrime, it is becoming increasingly clear that

local law enforcement agencies lack the requisite skills and resources to
investigate incidents involving cybercrime. Using trained cyber security experts
takes it a step further in terms of obtaining faster and more accurate cybercrime
investigation results.

It is believed that after ensuring and estimating upon the proper checks on all the
problems and involving all the stakeholders to solve this major problems relating
to the technological growth in the developing countries like India, these kind of
risks as mentioned in the research work can be minimised to a certain extent and
we can in a way ensure India to be digitally safe and secure.

@@@

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 10 Technology Trends in Banking
Technological advances in the banking industry enhance security and operational
efficiency while improving overall customer experience. For example, artificial
intelligence (AI)-powered anti-money laundering (AML) and know-your-customer
(KYC) solutions make customer profile screening faster and more accurate. On the
other hand, blockchain-enabled smart contracts streamline financial transactions
and increase transparency.

Top 10 Banking Technology Trends in 2023

Artificial Intelligence

Open Banking

Hyper-Personalized Banking

Blockchain

Banking of Things

Cybersecurity

Immersive Technologies

Banking Process Automation

Neobanking

Quantum Computing

AI allows banks to automate customer interactions using chatbots and virtual

assistants.

Open banking and hyper-personalized banking deliver unique customer

experiences.

Additionally, blockchain enhances the integrity of financial systems, whereas the

internet of things (IoT) enables real-time response to financial transactions.

Cybersecurity solutions further protect banking systems from malicious hacks,

viruses, data thefts, and unauthorized access.

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Besides, immersive technologies bring banks into the metaverse and improve
customer engagement. Startups also offer robotic process automation (RPA)
platforms that streamline banking processes.

Lastly, neobanks offer digital, mobile-first financial services while quantum

computing strengthens cybersecurity and forecasting accuracy.

Artificial Intelligence (AI)

AI enables banks to provide high-quality banking services to their customers and

save operating costs. AI-powered tools, such as virtual assistants and chatbots,
automate customer service interactions. Additionally, they provide customers with
account information and resolve account-related queries. AI-based biometrics
detect fraud and improve security, as well as enhance AML applications and KYC
checks. Further, machine learning (ML) algorithms power alternate credit score
modeling that aids banks in making better lending decisions. Computer vision-
enabled tools also simplify document analysis, which assists banks in customer
onboarding and compliance management. Moreover, AI analyzes massive
financial datasets to improve risk assessment and financial forecasting, improving
investing decisions.

Open Banking

Open banking connects non-banking financial companies (NBFCs) and banks to

provide customers with custom and more accessible financial services. Banking
application programming interfaces (APIs) enable third-party developers to
securely access customer financial data without compromising data compliance.
Open banking also includes account aggregators that allow customers to manage
all their banking accounts through a single platform. Additionally, APIs from banks
allow NBFCs to integrate banking functionality into their apps and services. This
embedded banking enables NBFCs to verify customer information automatically,
reducing the need for manual verification and accelerating customer verification.
Moreover, open banking enables banking-as-a-service (BaaS) that allows banks to
reach new customers through third parties and increase their revenue.

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Hyper-Personalized Banking

Providing a personalized banking experience improves customer retention. That is

why banks now leverage various strategies and technologies, such as buy now pay
later (BNPL), omnichannel banking, and financial advisory tools, to tailor their
offerings. For instance, omnichannel banking provides a unified, customer-centric
view of their financial information while allowing them to interact with banks via
multiple channels. Additionally, wealth management and financial advisory tools
provide customized advice and investment guides, improving investor and
customer satisfaction. Banks thus leverage AI and machine learning to provide
such real-time personalized financial recommendations.

Blockchain

Blockchain provides tamper-proof records of all financial transactions and

improves transactional transparency and security. Further, it improves trade
efficiency through transaction automation as well as streamlines manual and
paper-based operations. Smart contracts automate financial transactions and
improve the performance of financial contracts. They also eliminate the need for
intermediaries and enable peer-to-peer (P2P) payments. This greatly enhances the
speed and efficiency of transactions, especially cross-border payments. Moreover,
decentralized finance (DeFi) leverages blockchain to make financial services more
accessible while lowering transaction fees.

Banking of Things

The banking industry is adopting IoT for efficient data collection. This automates
data acquisition for streamlining banking processes, such as KYC and lending, to
enable real-time event response. For example, IoT-enabled smart automated teller
machines (ATMs) send alerts for low cash levels and malfunctions, ensuring timely
maintenance. Also, IoT-enabled digital wallets integrated into mobile phones and
smartwatches enable customers to make purchases. Since IoT devices deliver
customer-specific data in real-time, they enable banks to detect fraud and
mitigate loss.

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Cybersecurity

The banking industry handles massive amounts of sensitive customer and

transactional data. This makes its IT infrastructure a popular target for
cybercriminals. To tackle this, startups provide security protocols and data
compliance management tailored for banking systems. Such cybersecurity
solutions enable banks to safeguard sensitive data. Data encryption tools further
extend this, reducing the risks of data leaks. AI-powered fraud detection identifies
and prevents suspicious activities such as identity theft and phishing scams. Banks
also leverage anti-hacking software to protect networks from unauthorized
access. These features help banks in improving threat detection and response.

Immersive Technologies

Immersive technologies deliver personalized and interactive customer experience.

Augmented reality (AR) and virtual reality (VR) optimize the interactions between
banks and customers. VR allows banks to train employees on various banking
procedures, products, and regulations in interactive environments. For instance,
these technologies power virtual showrooms, where customers explore vehicles in
a virtual environment and banks streamline the loan application process.
Moreover, metaverse banks allow customers to interact with banks in virtual
environments. By leveraging immersive technologies, banks thus ensure a more
engaging customer experience to increase customer satisfaction and loyalty.

Banking Process Automation

Banks automate repetitive and time-consuming tasks through the use of software
robots. They provide a competitive advantage to banks as their employees are
able to focus on more critical tasks. Further, RPA-based accounts payable
solutions automate tasks like invoice processing, payment approvals, and
reconciliation. Banking process automation (BPA) also involves automating
mortgage processing, including evaluating and disbursing loans to customers.
Banks use RPA to process credit cards to identify fraud and detect suspicious
transactions. This reduces application processing times while improving
compliance and security. Moreover, RPA streamlines data collection and improves
data-driven decision-making.

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Neobanking

Neobanking enables a digital-only presence for banks, minimizing capital and

operating expenses. It offers a seamless and integrated banking experience to
customers through cloud computing, open API, and more. Additionally, neobanks
support a range of services from automated reconciliation and payroll
management to integrated workflow management. They ensure customer
convenience by enabling them to access services on-demand and across
platforms. Neobanks also feature lower fees as they require less capital and
operational expenses compared to traditional banks.

Quantum Computing

With traditional computing, processing huge amounts of data is resource and

time-intensive. Quantum computing solves this problem by offering faster, more
efficient, and more secure computing. It assists banks in optimizing their
portfolios and making accurate financial predictions. Startups are thus developing
cost-effective quantum computers. They assist banks in derivative pricing and
improving their cybersecurity programs.

The trends discussed above along with big data and analytics are accelerating
innovations in the banking industry. These technologies mitigate security
breaches, improve customer satisfaction, and enhance regulatory compliance.
Banks are also implementing cloud banking for improving operational speed and
enhancing data security.

e-RUPI

Prime Minister Shri Narendra Modi on August 2nd launched digital payment
solution e-RUPI, a cashless and contactless instrument for digital payment. Prime
Minister said that the eRUPI voucher is going to play a huge role in making Direct
Benefit Transfer (DBT) more effective in digital transactions in the country and will
give a new dimension to digital governance. He said e-RUPI is a symbol of how
India is progressing by connecting people’s lives with technology.

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e-RUPI is basically a digital voucher which a beneficiary gets on his phone in the
form of an SMS or QR code. It is a pre-paid voucher, which he/she can go and
redeem it at any centre that accepts its.

For example, if the Government wants to cover a particular treatment of an

employee in a specified hospital, it can issue an e-RUPI voucher for the
determined amount through a partner bank. The employee will receive an SMS or
a QR Code on his feature phone / smart phone. He/she can go to the specified
hospital, avail of the services and pay through the e-RUPI voucher received on his
phone.

Thus e-RUPI is a one time contactless, cashless voucher-based mode of payment

that helps users redeem the voucher without a card, digital payments app, or
internet banking access.

e-RUPI should not be confused with Digital Currency which the Reserve Bank of
India is contemplating. Instead e-RUPI is a person specific, even purpose specific
digital voucher.

Advantages of e-RUPI to the Consumer

e-RUPI does not require the beneficiary to have a bank account, a major
distinguishing feature as compared to other digital payment forms. It ensures an
easy, contactless two-step redemption process that does not require sharing of
personal details either.

Another advantage is that e-RUPI is operable on basic phones also, and hence it
can be used by persons who do not own smart-phones or in places that lack
internet connection.

Benefits of e-RUPI for the Sponsors.

e-RUPI is expected to play a major role in strengthening Direct-Benefit Transfer

and making it more transparent. Since, there is no need for physical issuance of
vouchers, it will also lead to some cost savings as well.

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Benefits of e-RUPI to the Service Providers.

Being a prepaid voucher, e-RUPI would assure real time payments to the service
provider.

The National Payments Corporation of India (NPCI), which oversees the digital
payments ecosystem in India, has launched e-RUPI, a voucher-based payments
system to promote cashless transactions.

It has been developed in collaboration with the Department of Financial Services,

Ministry of Health & Family Welfare and National Health Authority.

NPCI has partnered with 11 banks for e-RUPI transactions. They are Axis Bank,
Bank of Baroda, Canara Bank, HDFC Bank, ICICI Bank, Indian Bank, IndusInd Bank,
Kotak Mahindra Bank, Punjab National Bank, State Bank of India and Union Bank
of India.

The acquiring Apps are Bharat Pe, BHIM Baroda Merchant Pay, Pine Labs, PNB
Merchant Pay and YoNo SBI Merchant Pay.

More banks and acquiring Apps are expected to join the e-RUPI initiative soon.

To begin with NPCI has tied up with more than 1,600 hospitals where e-RUPI can
be redeemed.

Experts say, in the days to come the user base of e-RUPI is expected to widen,
with even private sector using it to deliver employee benefits and MSMEs
adopting it for Business To Business (B2B) transactions.

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FinTech
Recently, India has overtaken China as Asia’s top financial technology (FinTech)
market. Having emerged as the world’s second-largest fin-tech hub (trailing only
the US), India is experiencing the ‘FinTech Boom’.

Fintech is used to describe new technology that seeks to improve and automate
the delivery and use of financial services. The key segments within the FinTech
space include Digital Payments, Digital Lending, BankTech, InsurTech and
RegTech, Cryptocurrency.

FinTech now includes different sectors and industries such as education, retail
banking, fundraising and non-profit, and investment management to name a few.
FinTech is amongst the most thriving sectors at present in terms of both business
growth and employment generation. Apart from this, FinTech can also help in the
furtherance of the goal of financial inclusion.

Active Areas of FinTech Innovation

Cryptocurrency and digital cash.

Blockchain technology, that maintains records on a network of computers, but has

no central ledger.

Smart contracts, which utilize computer programs (often utilizing the blockchain)
to automatically execute contracts between buyers and sellers.

Open banking, a concept that leans on the blockchain and posits that third-
parties should have access to bank data to build applications that create a
connected network of financial institutions and third-party providers.

Insurtech, which seeks to use technology to simplify and streamline the insurance
industry.

Regtech, which seeks to help financial service firms meet industry compliance
rules, especially those covering Anti-Money Laundering and Know Your Customer
protocols which fight fraud.

Cybersecurity, given the proliferation of cybercrime and the decentralized

storage of data, cybersecurity and fintech are intertwined.

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Key Growth Drivers of FinTech in India

Widespread identity formalisation (Aadhar): 1.2 bn enrolments.

High level of banking penetration through the Jan Dhan Yojana: 1+ bn bank
accounts.

High smartphone penetration: 1.2 bn mobile subscribers.

India Stack: Set of APIs for businesses and startups.

Growing disposable income of Indians.

Key government initiatives such as UPI and Digital India.

Wide middle-class expansion: By 2030, India will add 140 mn middle-income and
21 mn high-income households which will drive the demand and growth in the
Indian FinTech space.

Opportunities Related to FinTech

Driving Financial Inclusion in India: A significant number of people in India

remain outside the purview of the formal financial system.

Use of financial technologies can help address the gaps in financial inclusion left
by the traditional models of banking and finance.

Providing Financial Assistance to the MSMEs: Lack of capital is one of the

biggest threats to their existence. According to the IFC Report, the total
addressable credit gap in the MSME segment is estimated to USD 397.5 billion.

This is where FinTech comes into the picture, and has the potential to solve the
credit availability issues.

With several FinTech start-ups offering easier and quicker access to loans, MSMEs
are no longer required to go through the tedious process of documentation,
paperwork and multiple visits to a bank.

Enhancing Customer Experience and Transparency: FinTech start-ups offer

convenience, personalisation, transparency, accessibility and ease of use – factors
that empower customers to a great extent.

The FinTech industry will develop unique and innovative models for assessing
risks.

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Leveraging big data, machine learning, and alternative data to underwrite credit
and develop credit scores for customers with a limited credit history will improve
the penetration of financial services in India.

Associated Challenges

Cyber-Attacks: Automation of processes and digitization of data makes fintech

systems vulnerable to attacks from hackers.

Recent instances of hacks at debit card companies and banks are illustrations of
the ease with which hackers can gain access to systems and cause irreparable
damage.

Data Privacy Issue: The most important questions for consumers pertain to the
responsibility for cyber attacks as well as misuse of personal information and
important financial data.

Difficulty in Regulation: Regulation is also a problem in the emerging world of

FinTech, especially cryptocurrencies.

In most countries, they are unregulated and have become fertile ground for scams
and frauds.

Due to the diversity of offerings in FinTech, it is difficult to formulate a single and

comprehensive approach to these problems.

Guarding Against Cybercriminals: Currently, India majorly relies on import of

offensive as well as defensive cybersecurity capabilities. Given the growing scale
of adoption of technology, it is imperative for India to attain Atma-Nirbharta (Self-
Sufficiency) in this domain.

Educating Consumers: Apart from establishing technological safeguards,

educating and training customers to spread awareness about the benefits of
fintech and guard against cyberattacks will also help in democratisation of
FinTech.

Data Protection Law: Established fintech sandboxes by RBI to evaluate the

implications of technology in the sector is a step in the right direction.

However, there is a requirement for a strong data protection framework in India.

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In this context, the personal data protection bill, 2019, must be passed after
thorough debate and deliberation.

Fintech has the potential to transform other financial services like insurance,
investment, remittances. However, regulation must help, not hinder its evolution.

Development of financial technology (FinTech) in India can help in the furtherance

of the goal of financial inclusion.

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RegTech
RegTech, also called regulatory technology, helps banks, credit unions, and
financial institutions by using technological advancements in artificial intelligence
(AI), data mining, blockchain, machine learning, and automation to optimize
processes, solve problems, and manage risks for regulatory compliance.

A RegTech helps a regulatory body, the Reserve Bank of India (RBI), use the latest
technology solutions to see if the financial institutions are meeting regulatory
compliance.

RegTech is the management of regulatory processes within the financial industry.

Major functions are regulatory reporting, monitoring, and compliance.

It is a group of companies that help financial institutions comply with regulations

at lesser prices and more efficiently.

Role of RegTech in transforming the financial services:

Maintain compliance as per regulatory guidelines

Simplified data management

Real-time reporting

Better insights for decision-making and data analysis

New governance established and reframed regulations

Risk and fraud control

Following are the technologies supporting RegTech solutions:

Blockchain

Machine learning

Artificial Intelligence

Cloud computing

Data mining and analytics

API

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Benefits of using RegTech:

Client onboarding time is reduced

Helps in fraud identification.

New regulations adopted faster

Improved data collection and data analysis

RegTech Innovations for Financial Institutions (FI)

Regulatory Sandbox:

Sandbox is an innovation for customized reporting platforms. This enables

decision-makers to make better-informed and calculated data-driven business
decisions by providing instant access to business insights based on data. Sandbox
helps to manage risks, increase efficiency, and reduce the time spent collecting
data from the market. In the world, there are 20 regulatory sandboxes and 20
countries implementing or proposing a financial segment sandbox.

RaaS (RegTech as a Service):

RaaS helps financial institutions see RegTech as a path for improving processes
for increasing efficiency and regulatory compliance.

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SupTech
SupTech, or supervisor technology, is the technology used by the regulatory
authority for monitoring and ensuring regulatory compliance by the regulated
entities. The regulators receive data feeds directly from the institutions they are
regulating. Earlier, they had to go out and collect data, then data feed into their
systems and later analyze it using machine learning to identify suspicious activities
like transactions or behaviours.

The two major initiatives being implemented by the Reserve Bank of India are the
Centralized Information Management System (CIMS) and An Integrated
Compliance Management and Tracking System (ICMTS).

SupTech initiatives are implemented between RBI and Supervisory Entities (SEs)
for seamless reporting, enhancing data management, and data analytics
capabilities.

How Fintech, Regtech, and Suptech Compliment Each Other

The relationship between all three of these can be a bit confusing. A good way to
remember how they relate is to keep in mind that both Regtech and Suptech refer
to two types of technology that span across a variety of different industries - one
of which is financial services.

Alternatively, Fintech refers to technology related specifically to the financial

services industry - and only that industry. This means that both Regtech and
Suptech solutions within the financial services space are also technically Fintech
solutions; similarly, Fintech solutions that perform regulatory or supervisory
functions would be classified within Regtech and Suptech (respectively).

Since financial services are subject to intense regulation and oversight, both
Regtech and Suptech solutions are ideally suited for the Fintech space, and are
therefore commonly used by Fintechs like neobanks and crypto exchanges.

They go hand in hand, with Fintech solutions pushing the boundaries of financial
service capabilities and options, and Regtech stepping in to ensure these tools
meet necessary regulatory requirements. Since their creation, Fintech, Regtech,
and Suptech have been used together, and it seems that will be the case for
several decades.

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Hasgtag Banking
In Social Media Hashtag is used before a phrase or keyword so that you can
categorize tweets and it will show up on Twitter search. If you click on a word that
is hashtagged, you will be able to see all other tweets marked with that keyword.
Some Indian banks have now started using the hashtag to provide services such
as fund transfer, balance enquiry and feedback on your personalized Twitter
handle. This type of banking is known as hashtag or Twitter banking.

Banks look at hashtag banking in two ways—to provide basic banking services,
and to give information. Basic banking services include fund transfer, prepaid
mobile recharge, checking account balance and requesting for bank statements.

To use this facility, you have to ‘follow’ your bank on Twitter. This is because you
will have to send direct or private messages to the bank, which is only possible if
you and your bank are following each other. For the facility, banks have a format
for every service. For instance, a Kotak Mahindra Bank Ltd customer will have to
send #Bal as a direct message to @KotakBankLtd. The response is generated
automatically. Some banks allow fund transfer to any customer who has a Twitter
account. For example, an ICICI Bank Ltd customer will have to use the hashtag,
#pay, followed by the receiver’s Twitter handle and the amount to be sent. The
bank will then send you a four-digit passcode (to be shared with the recipient),
and the person who the money is to be transferred to will get a tweet from the
bank on her timeline. There will be a link in the tweet to authenticate the
recipient’s Twitter account. She will then have to use the four-digit passcode to
redeem the amount.

If your bank allows fund transfer through hashtag banking, there will usually be a
transaction limit. ICICI Bank allows up to 10,000 transaction per day. And though
the front-end for fund transfer may vary for each bank, at the back-end, the
infrastructure used will either be national electronic funds transfer (NEFT) or
immediate payment service (IMPS).

Since this is a relatively new concept, most of the banks are offering these services
for free. At a later stage, if they start charging a fee for transferring money via
hashtag banking, you can expect the charges to range between 2.5 and 5 per
transaction depending on the amount and platform used. In the next couple of
months, you can expect more banks to launch similar services on Twitter. Some
banks are testing their hashtag banking pilots.
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With regards to safety, the transactions are not visible to others as it is sent by the
bank through the direct messaging option. But since these are initial days, you
could encounter technical glitches. So, use this facility only if you are comfortable
with it.

###

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Central Bank Digital Currency (CBDC)
CBDCs are a digital form of a paper currency and unlike cryptocurrencies that
operate in a regulatory vacuum, these are legal tenders issued and backed by a
central bank.

It is the same as a fiat currency and is exchangeable one-to-one with the fiat
currency.

A fiat currency is a national currency that is not pegged to the price of a

commodity such as gold or silver.

The digital fiat currency or CBDC can be transacted using wallets backed by
blockchain.

Though the concept of CBDCs was directly inspired by Bitcoin, it is different from
decentralised virtual currencies and crypto assets, which are not issued by the
state and lack the ‘legal tender’ status.

Objectives:

The main objective is to mitigate the risks and trim costs in handling physical
currency, costs of phasing out soiled notes, transportation, insurance and logistics.

It will also wean people away from cryptocurrencies as a means for money
transfer.

Benefits:

A Combination of Traditional and Innovative:

CBDC can gradually bring a cultural shift towards virtual currency by reducing
currency handling costs.

CBDC is envisaged to bring in the best of both worlds:

The convenience and security of digital forms like cryptocurrencies

The regulated, reserved-backed money circulation of the traditional banking

system.

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Easier Cross-Border Payments:

CBDC can provide an easy means to speed up a reliable sovereign backed

domestic payment and settlement system partly replacing paper currency.

It could also be used for cross-border payments, it could eliminate the need for an
expensive network of correspondent banks to settle cross-border payments.

Financial Inclusion:

The increased use of CBDC could be explored for many other financial activities to
push the informal economy into the formal zone to ensure better tax and
regulatory compliance.

It can also pave the way for furthering financial inclusion.

Challenges:

Privacy Concerns:

The first issue to tackle is the heightened risk to the privacy of users—given that
the central bank could potentially end up handling an enormous amount of data
regarding user transactions.

This has serious implications given that digital currencies will not offer users the
level of privacy and anonymity offered by transacting in cash.

Compromise of credentials is another major issue.

Operational risks of intermediaries as the staff will have to be retrained and

groomed to work in the CBDC environment.

Elevated cyber security risks, vulnerability testing and the costs of protecting the
firewalls.

Operational burden and costs for the central bank in managing CBDC.

In order to obviate some weaknesses of CBDCs, the usage should be payment-

focused to improve the payment and settlement system.

Then it can steer away from serving as a store of value to avoid the risks of
disintermediation and its major monetary policy implications.

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The data stored with the central bank in a centralised system will hold grave
security risks, and robust data security systems will have to be set up to prevent
data breaches.

Thus, it is important to employ the right technology that will back the issue of
CBDCs.

The sizing of the infrastructure required for the CBDC will remain tricky if payment
transactions are carried out using the same system.

The RBI will have to map the technology landscape thoroughly and proceed
cautiously with picking the correct technology for introducing CBDCs.

The financial data collected on digital currency transactions will be sensitive in

nature, and the government will have to carefully think through the regulatory
design.

This would require close interaction between the banking and data protection
regulators.

###

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Blockchain Technology
A blockchain is a form of public ledger, which is a series (or chain) of blocks on
which transaction details are recorded and stored on a public database after
suitable authentication and verification by the designated network participants. A
public ledger can be viewed but cannot be controlled by any single user.

The blockchain is not only about the cryptocurrency but it turns out that
blockchain is actually a pretty reliable way of storing data about other types of
transactions, as well.

In fact, blockchain technology can be used in property exchanges, bank

transactions, healthcare, smart contracts, supply chain, and even in voting for a
candidate.

Although cryptocurrency is regulated and needs approval of the central

authorities, blockchain technology is not only about cryptocurrency. It can have
various uses, and applications based on basic features of the technology can be
developed without anybody’ approval.

@@@

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Principles and Practices
of
Banking
(PPB)
Module D : Ethics in Banks

Page 110 of 149

 Index

Principles and Practices of Banking (PPB)

Module D : Ethics in Banking

Chapter No Topics covered

01 Ethics, Business Ethics & Banking: An Integrated Perspective

02 Ethics at the Individual Level

03 Ethical Dimensions: Employees

04 Work Ethics and the Workplace

05 Banking Ethics: Changing Dynamics

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 01. Ethics, Business Ethics & Banking -
An Integrated Perspective

Ethics is a subject of social science that is related with moral principles and social
values.

Ethics is the branch of philosophy that deals with values relating to human
conduct. Specifically, that human conduct that deals with the rightness and
wrongness of certain actions and the goodness and badness of the motives and
outcomes of such actions

Ethics is the study of right and wrong; ‘the moral choices people make and the
way in which they seek to justify them. Ethics involves judgments as to good and
bad, right and wrong, and what ought to be.

Ethics can be distinguished from “morals”, which are rules or duties that govern
our behaviour as persons to persons (such as “do not tell lies” or “do not hurt
another person”) and “values”, which are ends or goals sought by individuals
(such as health or happiness)

Ethical theories may be divided in to two categories:

Consequentialist

Deontological.

The distinction between two theories is actually based on the way they define the
very sense, objective and principles of morality, for instance, consequentialist
theories determine the ethics of an act by looking to consequences of decision
(the ends), while deontological theories determine the ethics of an act by looking
to very sense of duty and the process of the decision (the means).

Consequentialist Ethical System

The key points, which actually build the structure of Consequentialist Ethical
system, are as follows:

Principle of Utility

Psychological Hedonism

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Types of Utilitarianism:

Act Based, Rule Based, and Preference Based Quantitative and Qualitative Notion
of Pleasure (Utility)

Utilitarianism: Based on the utilitarian account we can extract some important

features for a standpoint, as follows:

An ethical principle should be practical as well as it should take the human nature,
conditions, and consequences in the account of morality An ethical principle
should work for the general maximization of good An ethical principle should give
importance to quality of good as well as it should take rules and preferences in
the account of morality

Deontological Ethical System

The key points, which actually build the structure of deontological (Kantian)
ethical system, are as follows:

Reason: Theoretical and Practical Reason

Apriority: Necessity and Universality
Imperative: Categorical and Hypothetical, Supreme Moral Principle
Good Will: Duty and Inclination
Phenomenal World and Noumenal World
Kantianism: Based on the Kantian account we can extract some important
features for a
standpoint, as follows:

An ethical principle should be based on objective and rational reasons

An ethical principle should provide freedom to agent to perform the actions

An ethical principle should treat humanity (society) as well as environment as ends

in themselves

Business Ethics

Business Ethics' can be termed as a study of proper business policies and practices
regarding potentially controversial issues, such as corporate governance, insider
trading, bribery, discrimination, corporate social responsibility, and fiduciary
responsibilities.

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Businesses must abide by some basic principles. It should provide quality goods
and services at reasonable prices to their consumers. It must also avoid
adulteration, misleading advertisements, and other unfair malpractices.

A business must also perform other duties such as distributing fair wages,
providing good working conditions, not exploiting the workers, encouraging
competition, etc.

Business ethics/corporate ethics are practically concerned with the entire gamut
of functions of an organization which scrutinizes and sets the codes related to the
moral/ethical principle to find the solutions to the problems faced by an
employee in specific and the organization in general.

Business ethics are related to-morally right and wrong behaviour, in the
business context, including questions of fairness, justice, and equity, that which
require application of moral standards by persons in the organizations the moral
standards that are not separate, but derived from society

Features of Business Ethics

There are eight major features of business ethics:

Code of Conduct: Business ethics is actually a form of codes of conduct. It lets us

know what to do and what not to do. Businesses must follow this code of
conduct.

Based on Moral and Social Values: Business ethics is a subject that is based on
moral and social values. It offers some moral and social principles (rules) for
conducting a business.

Protection to Social Groups: Business ethics protect various social groups

including consumers, employees, small businesspersons, government,
shareholders, creditors, etc.

Offers a Basic Framework: Business ethics is the basic framework for doing
business properly.

It constructs the social, cultural, legal, economic, and other limits in which a
business must operate.

Voluntary: Business ethics is meant to be voluntary. It should be self-practiced and

must not be enforced by law.

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Requires Education & Guidance: Businessmen should get proper education and
guidance about business ethics. Trade Associations and Chambers of Commerce
should be active enough in this matter.

Relative Term: Business ethics is a relative term. It changes from one business to
another and from one country to another.

New Concept: Business ethics is a relatively newer concept. Developed countries

have more exposure to business ethics, while poor and developing countries are
relatively backward in applying the principles of business ethics.

Principles of Business Ethics

The principles of business ethics are related to social groups that comprise of
consumers, employees, investors, and the local community. The important rules or
principles of business ethics are as follows:

Avoid Exploitation of Consumers: Do not cheat and exploit consumer with

measures such as artificial price rise and adulteration.

Avoid Profiteering: Unscrupulous business activities such as hoarding, black

marketing, selling banned or harmful goods to earn exorbitant profits must be
avoided.

Encourage Healthy Competition: A healthy competitive atmosphere that offers

certain benefits to the consumers must be encouraged.

Ensure Accuracy: Accuracy in weighing, packaging and quality of supplying goods

to the consumers has to be followed.

Pay Taxes Regularly: Taxes and other duties to the government must be honestly
and regularly paid.

Get the Accounts Audited: Proper business records, accounts must be managed.
All authorized persons and authorities should have access to these details.

Fair Treatment to Employees: Fair wages or salaries, facilities and incentives must
be provided to the employees.

Keep the Investors Informed: The shareholders and investors must know about
the financial and other important decisions of the company.

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Avoid Injustice and Discrimination: Avoid all types of injustice and partiality to
employees.

Discrimination based on gender, race, religion, language, nationality, etc. should

be avoided.

No Bribe and Corruption: Do not give expensive gifts, commissions and payoffs to
people having influence.

Discourage Secret Agreement: Making secret agreements with other business

people to influence production, distribution, pricing etc. are unethical.

Service before Profit: Accept the principle of "service first and profit next."

Practice Fair Business: Businesses should be fair, humane, efficient and dynamic to
offer certain benefits to consumers.

Avoid Monopoly: No private monopolies and concentration of economic power

should be practiced.

Fulfil Customers’ Expectations: Adjust your business activities as per the demands,
needs and expectations of the customers.

Respect Consumers Rights: Honour the basic rights of the consumers.

Accept Social Responsibilities: Honour responsibilities towards the society.

Satisfy Consumers’ Wants: Satisfy the wants of the consumers as the main
objective of the business is to satisfy the consumer’s wants. All business
operations must have this aim.

Service Motive: Service and consumer's satisfaction should get more attention
than profit maximization.

Optimum Utilization of Resources: Ensure optimum utilization of resources to

remove poverty and to increase the standard of living of people.

Intentions of Business: Use permitted legal and sacred means to do business.

Avoid Illegal, unscrupulous and evil means.

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Woodrow Wilson's rules: There are four important principles of business ethics.
These four rules are as follows:

Rule of publicity: According to this principle, the business must tell the people
clearly, what it tends to do.

Rule of equivalent price: The customer should get proper value for their money.
Below standard, outdated and inferior goods should not be sold at high prices.

Rule of conscience in business: The businesspersons must have conscience while

doing business, i.e. a morale sense of judging what is right and what is wrong.

Rule of spirit of service: The business must give importance to the service
motive.

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 02 Ethics at the Individual Level
Ethics

Ethics is the science of morals; it is that branch of philosophy that deals with
human character and conduct. It is treaties on morals distinguished between right
and wrong. The ethical conduct confirms with what a group or a society considers
“right behaviour”. It is a set of moral choices, rules and codes of conduct that
governs behaviour.

Theoretical ethics, sometimes called normative ethics, is about discovering and

delineating right from wrong; it is the consideration of how we develop the rules
and principles (or norms) used to judge and guide meaningful decision-making.
Theoretical ethics is supremely intellectual in character, and, being a branch of
philosophy, is also rational in nature. Theoretical ethics is the rational reflection on
what is right, what is wrong, what is just, what is unjust, what is good, and what is
bad in terms of human behaviour.

Business ethics (also corporate ethics) is a form of applied ethics or professional

ethics that examines ethical principles and moral or ethical problems that arise in
a business environment. It applies to all aspects of business conduct and is
relevant to the conduct of individuals and entire organizations.

Norms

Norms are expectation of proper behaviour not the requirement of that

behaviour. Norms are the ways an individual expects all the people to act in a
given situation. They are inconsistent and universal.

Norms are not published, may not be obeyed and cannot be enforced except by
sanctions of a group who use penalties as disapproval or exclusion.

Norms are informal guidelines about what is considered normal (what is correct or
incorrect) social behaviour in a particular group or social unit. Norms form the
basis of collective expectations that members of a community have from each
other, and play a key part in social control and social order by exerting a pressure
on the individual to conform.

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Values

Values are collective representations of what constitutes a good life or a good

society. For e.g. health, self respect, tolerance, freedom etc. values is a term
referring to things that people consider good or bad, right or wrong, desirable
etc. Values are the potent source of conflict and cooperation.

Values are important and lasting beliefs or ideals shared by the members of a
culture about what is good or bad and desirable or undesirable. Values have
major influence on a person’s behaviour and attitude and serve as broad
guidelines in all situations.

Belief

Beliefs in an ethical code are standards of thought. Beliefs are criteria of abstract
thought that does not necessarily evoke action. It may instigate or forces certain
quest in the environment that coheres one to behave in a certain manner. Beliefs
are among the most primitive and central of mental constructs, and yet there is
little agreement as to what they are or how they should be construed.

They are basic to our understanding of a wide range of central phenomena in

modern psychology.

For example our beliefs are key components of our personalities and senses of
identity, and our expressions of beliefs often define us to

Integrity

Integrity, said author C.S. Lewis, “is doing the right thing, even when no one is
looking.” Integrity is a foundational moral virtue, and the bedrock upon which
good character is built. Acting with integrity means understanding, accepting, and
choosing to live in accordance with one’s principles, which will include honesty,
fairness, and decency. A person of integrity will consistently demonstrate good
character by being free of corruption and hypocrisy.

Integrity is revealed when people act virtuously regardless of circumstance or

consequences. This often requires moral courage. Indeed, integrity is the critical
connection between ethics and moral action.

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Honesty

Ethical executives are honest and truthful in all their dealings and they do not
deliberately mislead or deceive others by misrepresentations, overstatements,
partial truths, selective omissions, or any other means.

Promise-Keeping & Trustworthiness

Ethical executives are worthy of trust. They are candid and forthcoming in
supplying relevant information and correcting misapprehensions of fact, and they
make every reasonable effort to fulfil the letter and spirit of their promises and
commitments. They do not interpret agreements in an unreasonably technical or
legalistic manner in order to rationalize non-compliance or create justifications for
escaping their commitments.

Loyalty

Ethical executives are worthy of trust, demonstrate fidelity and loyalty to persons
and institutions by friendship in adversity, support and devotion to duty; they do
not use or disclose information learned in confidence for personal advantage.

They safeguard the ability to make independent professional judgments by

scrupulously avoiding undue influences and conflicts of interest. They are loyal to
their companies and colleagues and if they decide to accept other employment,
they provide reasonable notice, respect the proprietary information of their
former employer, and refuse to engage in any activities that take undue
advantage of their previous positions.

Fairness

Ethical executives and fair and just in all dealings; they do not exercise power
arbitrarily, and do not use overreaching nor indecent means to gain or maintain
any advantage nor take undue advantage of another’s mistakes or difficulties.

Fair persons manifest a commitment to justice, the equal treatment of individuals,

tolerance for and acceptance of diversity, the they are open-minded; they are
willing to admit they are wrong and, where appropriate, change their positions
and beliefs.

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Concern for Others

Ethical executives are caring, compassionate, benevolent and kind; they like the
Golden Rule, help those in need, and seek to accomplish their business objectives
in a manner that causes the least harm and the greatest positive good.

Respect for Others

Ethical executives demonstrate respect for the human dignity, autonomy, privacy,
rights, and interests of all those who have a stake in their decisions; they are
courteous and treat all people with equal respect and dignity regardless of sex,
race or national origin.

Law Abiding

Ethical executives abide by laws, rules and regulations relating to their business
activities.

Commitment to Excellence

Ethical executives pursue excellence in performing their duties, are well informed
and prepared, and constantly endeavour to increase their proficiency in all areas
of responsibility.

Leadership

Ethical executives are conscious of the responsibilities and opportunities of their

position of leadership and seek to be positive ethical role models by their own
conduct and by helping to create an environment in which principled reasoning
and ethical decision making are highly prized.

Accountability

Ethical executives acknowledge and accept personal accountability for the ethical
quality of their decisions and omissions to themselves, their colleagues, their
companies, and their communities.

Morals

Morals are the prevailing standards of behaviour that enable people to live
cooperatively in groups.

Moral refers to what societies sanction as right and acceptable.

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Most people tend to act morally and follow societal guidelines. Morality often
requires that people sacrifice their own short-term interests for the benefit of
society. People or entities that are indifferent to right and wrong are considered
amoral, while those who do evil acts are considered immoral.

While some moral principles seem to transcend time and culture, such as fairness,
generally speaking, morality is not fixed. Morality describes the particular values
of a specific group at a specific point in time. Historically, morality has been
closely connected to religious traditions, but today its significance is equally
important to the secular world. For example, businesses and government agencies
have codes of ethics that employees are expected to follow.

Some philosophers make a distinction between morals and ethics. But many
people use the terms morals and ethics interchangeably when talking about
personal beliefs, actions, or principles. For example, it’s common to say, “My
morals prevent me from cheating.” It’s also common to use ethics in this sentence
instead.

So, morals are the principles that guide individual conduct within society. And,
while morals may change over time, they remain the standards of behaviour that
we use to judge right and wrong.

Conflict of Interest

A conflict of interest arises when what is in a person’s best interest is not in the
best interest of another person or organization to which that individual owes
loyalty. For example, an employee may simultaneously help himself but hurt his
employer by taking a bribe to purchase inferior goods for his company’s use.

A conflict of interest can also exist when a person must answer to two different
individuals or groups whose needs are at odds with each other. In this case,
serving one individual or group will injure the other.

In business and law, having a “fiduciary responsibility” to someone is known as

having a “duty of loyalty.” For example, auditors owe a duty of loyalty to investors
who rely upon the financial reports that the auditors certify. But auditors are hired
and paid directly by the companies whose reports they review. The duty of loyalty
an auditor owes to investors can be at odds with the auditor’s need to keep the
company – its client – happy, as well as with the company’s desire to look like a
safe investment.

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So, those of us who wish to be ethical people must consciously avoid situations
where we benefit ourselves by being disloyal to others.

Dilemma

A dilemma is a tough choice. When you're in a difficult situation and each option
looks equally bad, you're in a dilemma.

Dilemma is from a Greek for "double proposition." It was originally a technical

term of logic, but we use it now for any time you have a problem with no
satisfactory solution. If you're at the mall choosing between red or blue socks,
that's not really a dilemma. But if you have to choose whether to save your cat or
your dog from a burning building, that's an awful dilemma.

Decision-Making Models: The Golden Rule

The most familiar version of the Golden Rule says, “Do unto others as you would
have them do unto you.” The Golden Rule is valid for a great range of decisions,
personal or professional. Even in the most difficult situation, application of the “do
unto others” standard often reveals what actions are ethical and which are not. If
you don’t want to be deceived, don’t deceive others. If you want others to keep
their commitments to you, keep your commitments to them.

Treating others Better Than They Treat You

Cynics claim that the Rule will not work in the “real world.” They suggest that to
survive one must “do unto others before they do unto you.” This, of course,
becomes a self-fulfilling prophesy fuelling an anti-ethical, everyone-for-himself
ethos. Of course, many people do not live by the Golden Rule; they do not treat
others fairly, honestly or with compassion. The challenge to an ethically
committed person is to overcome this fact of life and do what is right in spite of,
even because of, the failure of others to do so.

Shortcomings

The Golden Rule, however, falters in situations that involve a complex network of
stakeholders with conflicting interests. It provides no guidance on how to choose
among them.

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 03 Ethical Dimensions: Employees
Employees frequently need to make numerous moral decisions in the workplace.
Though numerous of these workplace choices have to be made depending on
moral duties, some ethically tolerable choices may require bravery and need to be
performed beyond the usually accepted norms.

While discussing workplace ethics, six predominant subjects are of primary

importance. These are −

Obligations to the firm

Abuse of one’s position

Bribery and kickbacks

The obligations to third parties

Whistleblowing

Employee’s self-interest

Obligations to the Firm

Employees are appointed for the company’s tasks. The employees may obligate
themselves to do the work of the specific company for financial gains. The
employers frequently have many conditions to employment which the employee
has to follow. These may include dress codes and respectful behaviour.

Loyalty to the Company

Maximum people have a standpoint that employees must have some moral duties
to stay loyal to their organizations. It is true that employees are obligated to do
the tasks offered to them, but is it satisfactory to have an obligation to work for
the company in a manner that is beyond the assigned jobs?

Many employers may think so, but is not stated wherever. The employees are not
bound or obligated to have any kind of loyalty to the employers. But on a moral
ground, loyalty to the company is often considered to be a good thing and it is
plausible that the loyalty is rewarded through pay-raises, promotions, and good
recommendations etc.

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Conflicts of Interest

Employees can have a battle of interest with the company. Some of these fights of
interest are trivial and include general workplace conditions or situations. Though,
some other fights may be serious and can let the employees to show disloyalty.

Usually, employees must avoid important battles of interest by not involving

themselves in disloyal activities. Though, it is difficult enough to decide when a
conflict is significant and it may not always clear what employees should do
besides resisting the temptation to be disloyal.

Abuse of Official Position

By means of the official position for private or personal gains is often measured as
an abuse of power. Such abuse can result from unfaithfulness.

Insider Trading

Insider trading happens when a member has admission to company information

that’s typically unavailable to the public and can have an impact on the stock
prices. For instance, certain employees may come to know that their company is
going to be broke before general public and they can sell all their stock. People
who tend to buy the stocks will be betrayed. It is also a kind of insider trading to
encourage near ones to sell their stock having such “insider information.”

Proprietary Data

Companies can frequently have “trade secrets” which they don’t want to share
with other organizations, and a small number of employees may divulge such
information to the benefit of competing organizations which is unethical.

Three main arguments why trade secrets should be protected by the law are −

These are intellectual property.

Trade secrets theft is wrong.

Stealing trade secrets is a violation of the confidentiality terms.

Sharing trade confidences and following privacy information is a difficult moral

issue. People have the right to seek and advance employment and it is not easy to
separate proprietary information from a worker’s own skills and technical
knowledge.

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Bribes and Kickbacks

Corruption is aimed to letting somebody to act against their duties. Bribes can be
very thoughtful when it can injure people. Kickbacks are also a form of bribery
that involves a person to uses his/her position to benefit a party or someone.

Bribing foreign officers for favours could harm people. Though, examples of
bribing are many and they comprise both large and small organizations.

Gifts and Entertainment

Gifts and entertainment may be used to prize and inspire certain behaviour from
workers. This can outcome in a conflict of interest. Entertainment isn’t as likely to
be ethically wrong if allowed to be used according to ethical standards.

The resulting considerations may be considered while judging the ethics of gifting

The Price of the Gift − Gifts of huge prices are more likely a bribe.

The Purpose of the Gift − Gift can be used to encourage, for advertising, or as a
bribe.

The Circumstances − A gift given at a special occasion is different than a gift on

non-special occasions, and a gift given openly is more ethical.

The Position of the Person Receiving the Gift − A person in a position to

reciprocate is more likely to be taking a bribe.

The Accepted Practices − Gifts as “tips” for a waiter or waitress is norm, but to a
CEO; it is clearly unethical.

The Company’s Policy − Some companies may have stricter rules about gifts than
others.

The Law − Gifts against the law are usually unacceptable.

Obligations to Third Parties

A person is ethically grateful to let others know about unsafe and misleading
business practice.

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Though, employees should match and judge the significance of their job duties
and personal interests with the importance of the interests of others. It can be
ethically preferable to let the third parties know about wicked and illegal business
practices, even when it is not a moral obligation to do so.

Whistleblowing

Whistleblowing is the act of going public with meaningfully immoral or illegal acts
of an organization one is part of. Nevertheless, someone is not a whistle blower
for discussing the awkward or rude behaviour with public, and a whistle blower
doesn’t need to involve in sabotage or violence.

The reasoning given to judge whistle-blowing activity may include the following −

The reason must be ethical. The worker must act in contradiction of the
organization that committed a significant immoral or illegal act.

The whistle-blower should look for less harmful ways to resolve the issue first.
Employees should tell the management and executives of wrong-doing before
making the information public.

The whistle-blower should have enough evidence. It is unethical to accuse a

company when there’s a possibility of company being innocent.

The company’s fault must be specific and significant. The wrong-doing must have
specific and significant reasons.

Self-Interest

Are the people obligated to save the interests of others by making misconducts
known to the management or by alerting the public by making significant
immoral acts committed by companies publicly?

It is always preferable to think rationally and impartially regarding morality. It is

important to think about our life and ask the following questions −

Are we following authorities blindly?

Are we suffering from a moral tunnel vision?

Are we mindlessly doing what is asked from us, without considering the impact on
outside parties?

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Are we considering about our possible roles as accomplices in the immoral
activities?

Are we having a proper view of our interests against those of others?

Is there any substantial evidence for acting against the norms?

Ethics frequently wants us to reflect the interests of everyone who can be affected
by our decisions and also about the situations we are in. We can have serious
social and personal duties and depends

To be unprincipled in the workplace may comprise taking individual phone calls

during your duty time; declaring that the "check is in the mail," when it is still in
the making; and even stealing office supplies for personal use.

Organizations typically create an ethical standards’ code or a manual is handed

over when a new employee joins, which usually lists the rules and strategies which
needs to be followed at all times.

Many problems prevent business people from being totally ethical, consistent,
and fair. Ethics is a lively issue and occasionally it is difficult to decide at the
specific moment what is considered ethical and what is not.

Ethical Lapses and Organizational Culture

Business ethics comprises human abilities of, and it does not offer the good
qualities. So, if a businessman is overwhelmed, there is a chance that ethical rules
will be abnormal. It is known as "ethical lapse," which is a short-term and quite
rare occurrence.

Ethics at an individual level may seem to involve only the individual but it is a
holistic process. There may be high pressure from co-workers, managers, or any
other constituent of business culture to be unethical.

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Basic Attributes of Ethical Workers

To be moral in the workplace, the workers must have some common attributes.
The most powerful attributes are the resulting −

Dedication

Dedication is one of the most significant qualities of an ethical worker. Companies

do seek consequences, but most companies look for an truthful effort from
employees who can be considered a “natural” at the job. When an employee joins
the workforce, he/she is agreeing to offer the best for helping the company to
flourish.

Integrity

Integrity, or showing truthful behaviour at all times, is a very significant attribute.

Honesty might mean, being honest in reporting or being transparent while
reporting cash transactions.

Accountability

Accountability worth to be responsible towards the time and duty during working
hours. It also means tolerant responsibility, gathering yourself and willingly
working towards an acceptable resolution. Taking initiative and being punctual
also comes under this purview.

Collaboration

Teamwork and collaboration are appreciated attributes. As greatest companies

believe that if confidence is high and everyone co-works, success will follow. So, it
is important for employees to be team players.

Conduct

Employee conduct is a exact significant value in ethics. Workers must treat others
with respect, and show suitable behaviour. Wearing proper attire, using fine
language and conducting them with professionalism are part of the job.

Being a Better Worker

Understanding how to be a healthier person in the workplace is a good starting

point for a commitment to always doing the right thing.

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Trusting Relationships

It is vital to build trust in office relationships. By letting people to open up, share
info and feel relaxed in communicating are signs of a trustworthy employee.
Morality, fairness and avoiding rumours are some basic qualities.

Team Cohesiveness

The ethical promises of workers have a optimistic effect on team and section
performance apart from enhancing individual performance. An ethical worker is a
better team player, who continuously makes positive aids for teams and never
hinders the group progress.

Value to Employers

Trust in their workers is a very significant excellence of companies. An unethical

employee can drive entire company in legal trouble, or it can destroy the hard-
earned reputation. Ethical employees working for any company are the employees
who adhere to ethics policies and use ethical reasoning in making decisions.

Personal Wellness

Ethical employees continuously raise value of an employer in public domain.

Unethical acts can weigh people down with guilt and paranoia, making them
hostile and fearful. Workers who spread unethical rumours or lies about others
can have a paranoia as they try to remember which lies they told to whom and
when.

Core Values

Some core good values influence ethical behaviour and appear to have universal
appeal. These are −

Wisdom and Knowledge

The aptitude to gather information and change it to something valuable is a great

quality. Wisdom is exploiting one’s knowledge to interpret information and being
knowledgeable to produce wise decisions. A prerequisite to be knowledgeable is
knowing what to do and being able to differentiate between the right and wrong.

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Self-Control

It is significant to have the aptitude to avoid unethical temptations. The choice to

take the ethical path needs sufficient commitment to the value of good ethics.
Ethical people usually say “no” to the individual gain if it is irrelevant to
institutional benefit and goodwill.

Justice and Fair Guidance

Fair action of people is significant. Justice is helped when a fair return is increased
in return for the energy and effort expended. Certain persons give special
treatment without regard to objective criteria by which to judge fairness.

Transcendence

It is the credit of to some degree beyond oneself more permanent and powerful
than the self. When one lacks perfection, he may tend towards self-absorption.
Leaders driven by self-interest and the exercise of personal power have limited
effectiveness and authenticity.

Love and Kindness

The appearance of love and kindness is all the time productive. Research shows
that there are different types of “love.” In an organizational context, love means
intense positive reaction to co-workers, groups and/or situations. An organization
“with heart” allows love, compassion and kindness among and between people.

Courage and Integrity

It is vital to have the bravery to act morally and with honesty. These values let us
choose right from wrong and acting consequently. They urge one to act in the
right manner without seeing personal consequences, even when it is tough and
needs kindness.

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 04. Work Ethics and the Workplace
There are genuine virtues such as hard work, frugality, honesty, perseverance and
integrity that form the core of work ethic. All the values included in the set of
‘work ethic’ require us to have a degree of self sacrifice, or dedicating ourselves to
the task.

Something Bigger Than the Self

When an association wants to talk about the matters around work ethic, they will
first need to ask how the structural culture is contributing. People will only offer
their best when they bestow them to a cause which they believe in. They must see
somewhat, which is bigger than they are.

Administrations will need to comprehend this unspoken need of employees for

something bigger, if they really want to see people come to work and give their
best unconditionally. Therefore, administrations need to define their vision,
mission and strategies, which motivate the people. It is known as the benevolent
intent of the organization.

People, who are interested, often find desire to work for their corporations. These
people come to work with intent to let their organization achieve its goals, to
support their peers and the organization for success, to empower their juniors and
to grow them.

When workers feel that they are working for a better purpose, they will
mechanically seek to exploit their own contribution. They feel their importance of
their contribution to the organization. They will not feel that they are just working
for the sake of compensation and it is a big achievement for the organization.

Conducting Personal Business during Office Time

Workers frequently spend most of their weekday hours on the office job.
Occasionally, they often may be attracted to do personal business during office
hours. Such performs can include setting up doctor's appointments using
company phones, making tour-package bookings using their employer's
computers or occasionally arranging calls for a side freelance business during
office time.

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The coming up ethical problem is quite clear – the employees are ill-treating their
employer to conduct own business on company time. Though, what if you know
that your children are ill? Is it then fine for you to go for a doctor's selection using
company lines? The most common rule of thumb is, so, to check with the HR
managers or managers to get an idea of what counts as an offense according to
the company policies.

Taking Credit for Others' Work

Workers often have to work in teams to make up marketing operations, or

develop new products for sale or fine-tune creative services, yet everybody in a
group do not donate equally to the final product. If two members of a three-
person team did all the work, will this mean that, these two people need to
demand to receive proper credit while pointing out that the particular member
did not do anything.

This is a precise simple yet a sharp question. Singling out co-workers in a negative
light could stimulate dislike. A parallel thing could happen if all employees receive
equal share of honour even when only a select few did the real work.

The best way to decide this kind of issues is not to let it occur in the first place.
Team fellows should ensure that all members of a team perform some tasks to
help complete a project.

Harassing Behaviour

Employees often do not appreciate what they must do if they see one of their co-
workers irritating another, either spiritually, sexually or physically.

Employees have to concern for their jobs while trying to report a superior for
harassment. They may fear that they might be labelled a troublemaker if they
report inappropriate behaviour.

The best way rests with the staff members who usually develop the company's
employee handbook.

It is their job to tell workers that, they will not be penalized for reporting the
harassing behaviour or inappropriate actions.

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The Solutions to Workplace Dilemmas

Ethics and value-based concerns in the office are often hard to handle when the
employees need to choose between the right and wrong by their own principles.
Smart companies who know how to implement workplace ethics policies are
typically well ready for the potential conflicts of interest of opinion, values and
culture in the workforce.

Though, managing ethical issues needs a steady and cautious approach to

matters, which can potentially be dangerous or illegal.

Step 1: Documenting the Issues

Grow a workplace policy liable on your company’s philosophy, mission statement

and conduct guidance.

Include the policy into your performance management program to hold

employees accountable for their actions.

Alert the employees to their everyday jobs to follow skilled standards in their job
performance and interaction with peers and supervisors.

Study the employee manual to include any missing policy and provide revised
handbook to employees.

Obtain written acknowledgement from employees that they have received and
understood the workplace ethics policy.

Step 2: Training and Guidance for Up-Keeping Values

Offer ethics training to employees.

Offer instructions in learning how to address and resolve ethical dilemmas.

Experiential learning, or role-play, may be used as an effective way to facilitate

workplace ethics training.

Offer instances of workplace ethics simulations, such as misappropriation of

company funds, improper workplace relationships etc.

Step 3: Taking Effective Measures

Designate an executive in-charge of handling employees’ concerns pertaining to

workplace ethics.

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Consider whether your organization also needs an ethics hotline, a confidential
benefit service for employees to contact whenever they need.

Confidential hotlines assure employees’ anonymity, which is a concern for “whistle

blowing” actions.

Step 4: The Legal and Private Angle

Investigation and apply federal, state and municipal labour and employment laws
pertaining to whistle blowing.

Refrain from making suspension, termination decisions, in connection with whistle

blowing or when employee’s right is protected under whistle blowing laws or
public policy.

Look for legal advice for the employee reports of workplace ethics issues that may
increase your organization’s legal liability.

Step 5: Keeping the Standard Intact

Apply office policy reliably while addressing employee concerns about workplace
ethics.

Use the similar standard in every condition, irrespective of the apparent intention,
seriousness or the position of employees involved.

Connect the same rules for all employees – whether executive or front-line
production roles.

Approach every issue with equal interpretation of the company policy.

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 05. Banking Ethics: Changing Dynamics
The major issues of Business (Cyber) Ethics can be broadly divided into five
sections −

Privacy

Property

Security

Accuracy

Accessibility

Privacy Angle

In an 1890 Harvard Law Review seminar in, Warren and Brande said the golden
words about privacy.

It is an ethical and moral concept.

The Constituents of Privacy

Privacy can be broken down to limiting others' access to an individual or business

organizations’ information with "three elements of secrecy, anonymity, and
solitude."

Anonymity is related with the right to protection from undesired attention.

Solitude refers to the deficiency of physical proximity of a business or an

individual.

Secrecy is the protection of personalized information from being freely accessed.

Protection of Private Information

Direct or indirect misuse of private information can lead to fake and impression.
Individuality theft is a growing issue of discussion due to the availability of
personal and private information on the web.

Identity Theft

Millions of people were subject to identity theft. Public records, search engines,
and databases are the main culprits contributing to the rise of cybercrime.
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To restrict and limit online databases from proliferating sensitive personnel
information, the following commandments may be useful.

Do not comprise delicate unique identifiers, such as social security numbers, birth
dates, hometown and mothers' maiden names in the database records.

Reject those phone numbers, which are normally unlisted.

There must be simple and clear provision for people to remove their names from
a database.

Reverse social security number lookup services should be banned.

Private Data Collection

Individuals frequently surrender private information for numerous online services.

Ethical business practice would be to defend this information, which may lead to
the loss of privacy, anonymity, and solitude.

Additionally, data warehouses now collect and store enormous amounts of

personal and consumer transactions data. Preserving large volumes of consumer
and business information is likely for an unlimited amount of time. Erosion of
confidentiality can be done with these databases, cookies and spyware.

There is a lookout that data warehouses are destined to stand-alone and need to
be protected.

Though, private information can be collected from corporate websites and social
networking sites to initiate a malicious reverse lookup. So, how public domains
should use information is an ethical debate.

Property Issues

The concept of property is a dispute of ethical debate for a long time. Some
persons contend that the internet is based around the concept of freedom of
information. Though, disagreement over ownership has frequently occurred when
the property of information is infringed upon.

Intellectual Property Rights

The aggregate speed of the internet facilities and the emergence of file
compression technology, such as mp3 have led to Peer-to-peer file sharing, which
is an expertise that permits users to secretly transfer and share files to each other.

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Facilities offered by Napster or Bit Torrent fall under the issue of file transfer and
sharing. These sites offer copyrighted music and content which are illegal to
transfer to other users.

Intellectual property rights include a host of rights that belong to businesses of

individuals, such as patents, copyright, industrial design rights, trademarks, plant
variety rights, trade dress, and in some jurisdictions trade secrets. We take up the
most important constituents that having an ethical dilemma associated with them.

Patent Rights

A patent is a form of right decided by the government to an inventor, so that he

may advantage financially from his/her invention. Many businesses have their
R&D departments and their patents bring a source of revenue for them. It is
continually supposed that patent breach is common in the cyber age and that it
should be dealt legally and ethically with the strictest norms.

Copyright Violation

A copyright offers the maker of original work high-class rights to it, typically for a
limited time. Copyright is usually appropriate to creative, intellectual, or artistic
forms, or "works". As is clear, copying and re-creating the matter is quite
effortlessly possible in the age of information. This increases the business ethics
queries whether copyright protection should be made mandatory for all creative
productions. The limit of copying and re-creation is also an ethical issue.

Trademarks

A trademark is a familiar and sole sign, design or expression, which differentiates

products or services. It has been quite informal to duplicate trademarks in the age
of computers and internet. It raises the concerns whether there should be any
mercy to those who use trademarks unethically or illegally.

Trade Secrets

A trade secret is a formula, practice, process, design, instrument, pattern,

information which is secret and by which a business can obtain an economic
advantage over competitors or customers. Trade secrets theft can be considered
unethical because it may be tough to create or ideate a unique formula, but quite
easy to replicate it.

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Digital Rights Management (DRM)

The outline and use of digital rights management software, has elevated the
question of whether the subverting of DRM is ethical. Some see DRM to be an
ethical step; others trust that, this is incorrect because the costs of products or
services may go up due to DRM.

DRM is also depicted as defenders of users' rights. This lets, for instance, making
copies of audio books of PDFs they receive; also letting people to burn music they
have legally bought to CD or to transfer it to a new computer is an issue. It looks
like a defilement of the rights of the intellectual property holders, leading to
uncompensated use of copyrighted media.

Security Concerns

Security, in business domains, has long been an issue of moral debate. Is it

significant to protect the common good of the public or we should safeguard the
rights of the individual? There is a repeated and growing argument over the
boundaries of these two ideas. This raises the question whether making
compromises are right.

As uncountable people connect to the internet and the amount of personal data
that is obtainable online goes on to increase forever, there is vulnerability to
identity theft, cyber-crimes and computer hackings.

There is also an quarrel over ownership of the internet. People tend to ask who
has the right to control the internet in the interest of security. This is a very
complex issue because huge amounts of data and uncountable people are
associated with the internet.

Responsibility of Accuracy

The concern of correctness is evident. We must ask queries like, who is

accountable for the genuineness and loyalty of the information available online.
Morally, the concept comprises a debate over who can contribute content and
who should be held answerable when the content is mistaken or false. This also
has a legal angle for recompense for the injured party due to wrong information
and loss of capital due to these accuracy defects.

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Accessibility, Censorship, and Filtering

The opinions that apply to offline restriction and filtering apply to online
censorship and filtering. Is it superior to have free access to information or should
be endangered from what is considered by a governing body as harmful, indecent
or illicit. The issue of access by minors is also a major concern.

Many corporations limit their employees' access to cyberspace by blocking some

sites, which are related only to personal usage and therefore destructive to
productivity. On a superior scale, governments also create large firewalls, which
censor and filter access to certain information available online which is often from
foreign countries to their citizens and anyone within their borders.

Enhancing Ethical Codes

Anyone who has been involved in corporate governance of some sort, in financial
and non-financial institutions alike, either public or private, has experience with
ethical codes. Typically that experience gives rise to mixed feelings. In principle,
everybody thinks they are important and supports them. In practice, codes are
often so general and high level, and difficult to implement and enforce, that their
practical impact remains limited. They almost never play a central role in
corporate board agendas.

This is still true recently, I believe, even though attempts have been made to make
ethical practices more systematic.

Useful elements to move forward can be derived by combining inputs from

corporate experience, behavioural research and concrete cases from the recent
crisis. Based on them, as well as, once again, on a fundamental intuition by Adam
Smith, I think we can say that at the root of much unethical or fraudulent
corporate behaviour is a mix of two partly conflicting sentiments: self justification
and opaqueness.

Self-justification is the array of reasons that people typically give themselves when
they are about to violate laws or ethical rules. Here are some examples:

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The Role of Banking Supervision

The current process of reform aims at changing not only regulations but also the
supervisory approach. This suggests in principle a change relative to the reactive
and hands-off approach of the past, and asks supervisors to use their judgement
and engage in a dialogue scrutinising and probing senior management and board
members. The intrusive questions listed in the last section can also play a role
here. That said, assessing whether a bank has a sound risk culture and proper
internal controls to promote it is not easy, as it is a broad concept. Supervisors
should check that mechanisms are in place and ensure that the necessary checks
and balances are in place throughout the organisation, as well as proper
accountability and transparency provisions.

Ethics are inextricably connected to the financial world as they form the basis for
trust. Without trust the system is either dysfunctional or unstable or both, as the
recent experience have shown.

Regulatory and supervisory reform can contribute to strengthening trust, by

placing the emphasis on robust risk management systems, strong corporate
governance frameworks and a sound risk culture.

But in itself regulation is not sufficient, if not complemented by a sound ethical

framework. As “trust comes by foot, but leaves on horseback”, it may take a while
before we see results, but I am confident results can be achieved. Banking
supervisors should be aware of these issues and contribute to the process.

Ethics and Technology

Businesses today are technology and innovation driven. There is huge

competition in the sphere and therefore like other industry or business function
ethics is essential here also. Specially because ethics by itself is only a tool to
create and doesn’t know ethics or morals!

Every day we have innovative products and services that announce their arrival in
the market place and others that go obsolete. It is this technology and innovation
that leads to ethical issues, considering the competition to stay ahead by
innovating is immense. Issues like data mining, invasion to privacy, data theft and
workplace monitoring are common and critical.

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In technology we speak of ethics in two contexts; one is whether the pace of
technological innovation is benefiting the humankind or not, the other is either
severely empowering people while choking others for the same. Technology, for
example, has drastically replaced people at work.

In the first case we are compelled to think about the pace at which technology is
progressing. There are manifold implications here, be it things like computer
security or viruses, Trojans, spam’s that invade the privacy of people or the fact
the technology is promoting consumerism.

Nowadays data storage is primarily on computer systems. With the advent of

internet technology the world has got interconnected and data can be accessed
remotely by those who are otherwise unauthorized to do the same. This is one of
the pitfalls of innovation. The other one i.e. the pace of technological change also
raises the question of ethics.

New products make their way and leave the existing ones obsolete. In fact
technological change and innovation is at the heart of consumerism, which is bad
for economy and environment in general.

The recent economic downturn makes up for a very good example.

Increasingly technological products are adding up to environmental degradation.

Computer screens, keyboards, the ink used in the printers are some of the ways in
which technology is polluting the environment. All these produce toxins that
cannot be decomposed easily.

The other major issue in technology that brings in ethics is interface between
technology and the computers. Many scientists are of the opinion that the world
will come to an end with a war between the humankind and the technology.
Technology they say will advance to an extent beyond the control of those who
have made it!

No doubt technology has replaced people at work and made certain others
redundant. On the flip side many people have been raised to power while others
have been severely handicapped. The latter is especially true for third world
countries. New manufacturing processes that are outsourced either replace
manpower there or either exploits the latter in the name of employment by
engaging them cheaper prices.

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Technology has also made inroads into the field of medicine and life care. New
cloning techniques, genetic modifications or other life saving drugs need
continuous monitoring and surveillance.

Bioethics has thus emerged as ethics in the field of medical technology.

Whereas we cannot talk of controlling technology and innovation, the better way
is to adapt and change. The role of ethics in technology is of managing rather
controlling the same. Continuous monitoring is required to keep track of latest
innovations and technological changes and for ensuring fair practices.

Intellectual Property

Intellectual property (IP) is any unique product of the mind or human intellect.
Examples of IP include: music, movies, books, software, paintings, words, phrases,
symbols, designs, chemical formulas, etc.

Intellectual property rights protect the interests of creators by giving them

property rights over their creations. IP is protected with laws (copyrights, patents,
etc.) which enable people to earn recognition or financial benefit from what they
invent or create. By striking the right balance between the interests of innovators
and the wider public interest, the IP system aims to foster an environment in
which creativity and innovation can flourish.

Intellectual property relates to items of information or knowledge, which can be

incorporated in tangible objects at the same time in an unlimited number of
copies at different locations anywhere in the world. The property is not in those
copies but in the information or knowledge reflected in them.

In other words, intellectual property is distinguished from the media on which it is

expressed. The physical pages of a book aren't the intellectual property. The
intellectual property is in the words and their order no matter how they are
expressed. You can't transcribe the contents of a book by hand and sell your
notes.

Rational for Intellectual Property Rights

There is a question about whether or not there is a natural right to intellectual

property. Regardless, in order to encourage its creation, most societies choose to
grant intellectual property rights (legal monopolies) to people through laws.
These laws recognize a form of property called intellectual property (IP).

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Intellectual property rights are like any other property right. They give people the
right to own and profit from their artistic, scientific and technological creations for
a designated period of time.

IP can be easily copied so it is hard to control. IP laws give creators more control
over their work.

Countries with strong IP laws tend to be sources of most inventions and creative
work. IP laws promote creativity and the dissemination and application of its
results There is a balance, sometimes tension, between wanting to (1) reward
creators of intellectual property, and (2) the need for the public to benefit from
the IP. The constitution specifically mentions this balance with the mention of (1)
"exclusive right", (2) "for limited times". IP laws are supposed to reflect the need
for this compromise. If IP laws are too weak, there would be less incentive for
some people to create valuable intellectual property. If IP laws are too strong, the
public misses out on the beneficial consequences of creative work.

Special Challenges of the Digital Age

Everything in cyberspace is composed of bits. If those bits are viewable on a

general purpose computer, those bits are capable of being copied. In their digital
form, images, music, video, and text are perfectly reproducible (perfect copies). As
long as it's legal to send an encrypted message from one person to another on
the Internet, it will be possible to easily share copyrighted material (easily
distributable). Consequently there is no easy answer to thwarting the pirating of
digital content.

Fair Use

The fair use provision allows limited use of copyrighted materials under certain
circumstances. Fair use applies mainly when the work is used for the purpose of
criticism, parody, comment, news reporting, teaching (including multiple copies
for classroom use), scholarship, or research. The fair use clause isn't specific and
requires interpretation.

The factors to be considered are:

a) the purpose and character of the use, including whether such use is of a
commercial nature or is for news reporting and/or non profit educational
purposes;

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 b) the nature of the copyrighted work (fiction has more protection than
factual work) the amount and substantiality of the portion used in relation
to the copyrighted work as a whole;

c) the effect of the use upon the potential market for or value of the
copyrighted work.

The last item carries the most weight. For example, if a substantial portion of a
book was copied and distributed in a classroom it would likely not be considered
fair use because it would potentially hurt sales of the book.

Note, Fair Use isn’t a right or entitlement, but rather a legal defence against a
claim of infringement.

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 List of Books compiled by The Banking Tutor
So far the following Books are compiled by me which can be shared by any one
free of cost, without any permission from me or without any intimation to me.

Book Title
No

01 Banking Jargon - Vol 01

02 Alerts - Vol 01

03 Forex - Vol 01

04 Banker and Legal Enactments - Vol 01

05 Banker and Financial Statements

06 Confusables – Vol 01

07 Banking Jargon - Vol 02

08 ABC (Awareness of Basics of Credit)

09 The Can Support_2020

10 The Core Support_2020

11 The Sundries_2020

12 The Soft Support

13 Management of W C Limits

14 The Notes_2021 (for Promotion Test)

15 Confusables - Vol 02

16 Banking Information

17 Banking Jargon - Vol 03

18 Bankers and Court Verdicts - Vol 01

19 Inland Bank Guarantees

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20 The Dirty Dozen

21 SPA (Not related to Banking)

22 Banks - Supporting Agencies - Vol 01

23 Banking Jargon - Volume 4

24 Banks - Supporting Agencies - Vol 2

25 Banks - Supporting Agencies - Vol 3

26 JAIIB Notes - PPB

27 JAIIB Notes - LRB

28 JAIIB Notes – AFB

29 CAIIB Notes – ABM

30 CAIIB Notes – BFM

31 Confusables - Vol 03

32 Banking Jargon - Vol 05

33 The Banking Regulations & Business Laws (BRBL)

34 Accounting & finance for Bankers

35 Bank Financial Management

36 Retail Banking & Wealth Management

37 Concepts for Credit Professional - OT

38 Advance Business Management

39 Principles & Practice of Banking

40 Indian Economy & Indian Financial System - OT

41 Concepts for Credit Professional - Notes

42 Less Known Forex Terminology

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43 KYC & AML – Notes & MCQ

44 Treasury Management - Objective Type

45 Treasury Management - Notes

46 Indian Economy & Indian Financial System - Notes

47 MSME -Notes

48 MSME – Objective Type

49 Banking Jargon – Volume 06

50 50 Essays in Practical Banking

51 Promotion 2022

52 Basics of Bank Audits

53 The Shortens

54 Recap TIN 2022

55 NumLogEx

56 Basic Statistics for Bankers

57 JAIIB IE & IFS - Module A : Indian Economic Architecture

58 JAIIB IE & IFS - Module B : Economic Concepts Related to Banking

59 JAIIB IE & IFS - Module C : Indian Financial Architecture

60 JAIIB IE & IFS - Module D : Financial Products and Services

61 Banking Jargon – Volume 07

62 JAIIB – PPB – Module A - General Banking Operations

63 JAIIB – PPB – Module B – Functions of Banks

64 JAIIB Notes 2023 - PPB - Mod B - Functions of Banks

65 JAIIB Notes 2023 - PPB - Mod C - Technology and Mod D - Ethics

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 My Activity
I am sharing the following in my WhatsApp Groups (The Banking
Tutor), Telegram Group of The Banking Tutor ; TBT Exam Corner
and Blog (The Banking Tutor - TBT).

1. One Point related to Banking & Finance Daily (Daily Point).

Started on 16-09-2019, so far shared 1304 points without any
break.

2. Once 3 days (on 3rd, 6th, 9th ,12th….) one Lesson on Banking
& Finance (Banking Tutor’s Lessons - BTL), started on 06-09-
2018, so far shared 532 lessons.

3. Monthly Last day - TIN - Terms in News (related to Banking &

Finance). Started on 28-02-2021, so far shared 26 issues.

4. Monthly First Day – Recap of Daily Points shared during the

previous month.

5. Sharing lessons for IIB Exams and Promotion tests of various

Banks daily in Telegram Group “TBT- Exam Corner” (earlier Name
of this Group is “TBT JACA”)

My mail id – [email protected] ;
WhatsApp +91 94406 41014
Banking Tutor Blog – https://thebankingtutor.blogspot.com/

11-04-2023 Sekhar Pariti

+91 9440641014

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