Banking and Insurance

UNIT I
Banking: Meaning and definition

Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector
acts as the backbone of modern business. Development of any country mainly depends
upon the banking system. A bank is a financial institution which deals with deposits and
advances and other related services. It receives money from those who want to
save in the form of deposits and it lends money to those who need it. It deals with
deposits and advances and other related services like lending money to grow the
economy. Banks act as bridge between the people who save and people who want to
borrow i.e., It receives money from those people who want to save as deposits and it
lends money to those who want to borrow it. The money you deposited in bank will not
be idle. It will grow by means of interest to your bank account they will earn interest in
return for lending out the same money to borrowers. This would ensure smooth money
flow to develop our economy.

Chamber‟s Twentieth century Dictionary defines a bank as, “an institution for the
keeping, lending and exchanging etc. of money”.

According to Banking Regulation Act, “Banking means the accepting for the purpose of
lending or investment of deposits of money from the public, repayable on
demand or otherwise and withdrawable by cheque, draft, and an order or otherwise”.

Oxford Dictionary defines a bank as "an establishment for custody of money, which it
pays out on customer's order."

Prof. Kent defines a bank as, “an organization whose principal operations are
concerned with the accumulation of the temporarily idle money of the general public for
the purpose of advancing to others for expenditure”.

Evolution (Origin) of Banking

The term bank is either derived from Old Italian word banca or from a
French word banque both mean a Bench or money exchange table. In olden days,
European money lenders or money changers used to display (show) coins of different
countries in big heaps (quantity) on benches or tables for the purpose of lending or
exchanging. According to some authorities, the work “Bank” itself is derived from the
words “bancus” or “banqee,” that is, a bench. The early bankers, the Jews in
Lombardy, transacted their business on benches in the market place. There are
others, who are of the opinion that the word “bank” is originally
derived from the German word “back” meaning a joint stock fund, which was Italianized

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into “banco” when the Germans were masters of a great part of Italy. This appears to
be more possible. But whatever is the origin of the word „bank‟, “It would trace the
history of banking in Europe from the Middle Ages.”

Early History of Banking

As early as 2000 B.C., the Babylonians had developed a banking system. There
is evidence to show that the temples of Babylon were used as banks and such great
temples as those of Ephesus and of Delbhi were the most powerful of the Greek
banking institutions. But the spread of irreligion soon destroyed the public sense of
security in depositing money and valuables in temples, and the priests were no longer
acting as financial agents. The Romans did not organize State Banks as did the
Greeks, but their minute regulations, as to the conduct of private banking, were
calculated to create the utmost confidence in it. With the end of the civilization of
antiquity, and as a result of administrative decentralization and demoralization of the
Government authority, with its inevitable counterpart of commercial insecurity, banking
degenerated for a period of some centuries into a system of financial make shifts. But
that was not the only cause. Old prejudices die hard, and Aristotle‟s dictum, that the
charging of interest was unnatural and consequently immoral was adhered to
fanatically. Even now some Mohammedans, in obedience to the commands contained
in that behalf in their religious books, refuse to accept interest on money loans. The
followers of Aristotle‟s dictum forgot that the ancient world, the Hebres included,
although it had to system of banks that would be considered adequate from the
modern point of view, and maintained moneylenders and made no sin of interest, but
only of usury. However, upon the revival of civilization, growing necessity forced the
issue in the middle of the 12th century, and banks were established at Venice and
Genoa, though in fact they did not become banks as we understood them today, till
long after. Again the origin of modern banking may be traced to the money dealers in
Florence, who received money on deposit, and were lenders of money in the 14th
century, and the names of the Bardi, Acciajuoli, Peruzzi, Pitti and Medici soon became
famous throughout Europe, as bankers. At one time, Florence is said to have had
eighty bankers, though it could boast of no public bank.

Some experts briefed the history of modern banking as: The first public banking
institution was The Bank of Venice, founded in 1157. The Bank of Barcelona and the
bank of Genoa were established in 1401 and 1407 respectively. These are the
recognized forerunners of modern commercial banks. Exchange banking was
developed after the installation of the Bank of Amsterdam in 1609 and Bank of
Hamburg in 1690. The credit for laying the foundation of modern banking in England
goes to the Lombard‟s of Italy who had migrated to other European countries and
England. The bankers of Lombardy developed the money lending business in England.
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The Bank of England was established in 1694. The development of joint stock
commercial banking started functioning in 1833. The modern banking system actually
developed only in the nineteenth century.

Growth and developments of banks in India

We cannot have a healthy economy without a sound and effective banking

system. The banking system should be hassle free and able to meet the new
challenges posed by technology and other factors, both internal and external.

In the past three decades, India's banking system has earned several
outstanding achievements to its credit. The most striking is its extensive reach. It is no
longer confined to metropolises or cities in India. In fact, Indian banking system has
reached even to the remote corners of the country. This is one of the main aspects of
India's growth story.

The government's regulation policy for banks has paid rich dividends with the
nationalization of 14 major private banks in 1969. Banking today has become
convenient and instant, with the account holder not having to wait for hours at the bank
counter for getting a draft or for withdrawing money from his account.

History of Banking in India

The first bank in India, though conservative, was established in 1786. From
1786 till today, the journey of Indian Banking System can be segregated into three
distinct phases:

Phase 1 (1786 to 1969)

The first bank in India, the General Bank of India, was set up in 1786. Bank of
Hindustan and Bengal Bank followed. The East India Company established Bank of
Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843) as independent
units and called them Presidency banks. These three banks were amalgamated in
1920 and the Imperial Bank of India, a bank of private shareholders, mostly
Europeans, was established. Allahabad Bank was established, exclusively by Indians,
in 1865. Punjab National Bank was set up in 1894 with headquarters in Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara
Bank, Indian Bank, and Bank of Mysore were set up. The Reserve Bank of India came
in 1935.

During the first phase, the growth was very slow and banks also experienced

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periodic failures between 1913 and 1948. There were approximately 1,100 banks,
mostly small. To streamline the functioning and activities of commercial banks, the
Government of India came up with the Banking Companies Act, 1949, which was later
changed to the Banking Regulation Act, 1949 as per amending Act of 1965 (Act No. 23
of 1965). The Reserve Bank of India (RBI) was vested with extensive powers for the
supervision of banking in India as the Central banking authority. During those days, the
general public had lesser confidence in banks. As an aftermath, deposit mobilization
was slow. Moreover, the savings bank facility provided by the Postal department was
comparatively safer, and funds were largely given to traders.
Phase 2 (1969 to 1991)

The government took major initiatives in banking sector reforms after

Independence. In 1955, it nationalized the Imperial Bank of India and started offering
extensive banking facilities, especially in rural and semi-urban areas. The government
constituted the State Bank of India to act as the principal agent of the RBI and to
handle banking transactions of the Union government and state governments all over
the country. Seven banks owned by the Princely states were nationalized in 1959 and
they became subsidiaries of the State Bank of India. In 1969, 14 commercial banks in
the country were nationalized. In the second phase of banking sector reforms, seven
more banks were nationalized in 1980. With this, 80 percent of the banking sector in
India came under the government ownership.

Phase 3 (1991 onwards)

This phase has introduced many more products and facilities in the banking
sector as part of the reforms process. In 1991, under the chairmanship of M
Narasimham, a committee was set up, which worked for the liberalization of banking
practices. Now, the country is flooded with foreign banks and their ATM stations.
Efforts are being put to give a satisfactory service to customers. Phone banking and
net banking are introduced. The entire system became more convenient and swift.
Time is given importance in all money transactions.

The financial system of India has shown a great deal of resilience. It is sheltered
from crises triggered by external macroeconomic shocks, which other East Asian
countries often suffered. This is all due to a flexible exchange rate regime, the high
foreign exchange reserve, the not-yet fully convertible capital account, and the limited
foreign exchange exposure of banks and their customers.

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Indian Banking Structure or Types of Banks

The structure of banking in India consists of following components:

1. Central Bank – Reserve Bank of India (RBI)

2. Commercial Banks
a. Public sector Banks
b. Private Banks
c. Foreign Banks
3. Co-operative Banks
a. Primary Credit Societies
b. Central Co-operative Banks
c. State Co-operative Banks
4. Regional Rural Banks
5. Development Banks
6. Specialized Banks
a. Export Import Bank of India
b. Small Industries Development Bank of India
c. National Bank for Agricultural and Rural Development
7. Microfinance institutions
8. Development financial institutions

Payments Bank is a new introduction to the category.

Reserve bank of India, commercial banks, co-operative banks and regional rural banks
broadly make up the banking system in India. There are two more types of banks,
namely development banks and specialized banks for some particular purposes.

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1. Central Bank – Reserve Bank of India (RBI)

The Reserve Bank of India (RBI), the central bank of India, which was established in
1935, has been fully owned by the government of India since nationalization in 1949.
Like the central bank in most countries, Reserve Bank of India is entrusted with the
functions of guiding and regulating the banking system of a country.

2. Commercial Banks
There are three types of commercial banks in India
1. Public sector banks
2. Private Banks
3. Foreign banks

3. Co-operative banks
Co-operative banks are banks incorporated in the legal form of cooperatives. Any
cooperative society has to obtain a license from the Reserve Bank of India before
starting banking business and has to follow the guidelines set and issued by the
Reserve Bank of India. Currently, there are 68 co-operatives banks in India.
There are three types of co-operatives banks with different functions:
a. Primary Credit Societies:
Primary Credit Societies are formed at the village or town level with borrower and non-
borrower members residing in one locality. The operations of each society are restricted
to a small area so that the members know each other and are able to watch over the
activities of all members to prevent frauds.
b. Central Co-operative Banks:
Central co-operative banks operate at the district level having some of the primary credit
societies belonging to the same district as their members. These banks provide loans to
their members (i.e., primary credit societies) and function as a link between the primary
credit societies and state co-operative banks.
c. State Co-operative Banks:
These are the highest level co-operative banks in all the states of the country. They
mobilize funds and help in its proper channelization among various sectors. The money
reaches the individual borrowers from the state co-operative banks through the central
co- operative banks and the primary credit societies.

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4. Regional rural Banks

The regional rural banks are banks set up to increase the flow of credit to smaller
borrowers in the rural areas. These banks were established on realizing that the
benefits of the co-operative banking system were not reaching all the farmers in rural
areas. Currently, there are 196 regional rural banks in India.
Regional rural banks perform the following two functions:
1. Granting of loans and advances to small and marginal farmers, agricultural
workers, co- operative societies including agricultural marketing societies and primary
agricultural credit societies for agricultural purposes or agricultural operations or related
purposes.
2. Granting of loans and advances to artisans small entrepreneurs engaged in
trade, commerce or industry or other productive activities.

5. Development Banks
Development Banks are banks that provide financial assistance to business that
requires medium and long-term capital for purchase of machinery and equipment, for
using latest technology, or for expansion and modernization. A development bank is a
multipurpose institution which shares entrepreneurial risk, changes its approach in tune
with industrial climate and encourages new industrial projects to bring about speedier
economic growth.
These banks also undertake other development measures like subscribing to the shares
and debentures issued by companies, in case of under subscription of the issue by the
public.
There are three important national level development banks. They are;

Industrial Development Bank of India (IDBI)

The IDBI was established on July 1, 1964 under an Act of Parliament. It was set up as
the central co-ordinating agency, leader of development banks and principal financing
institution for industrial finance in the country. Originally, IDBI was a wholly owned
subsidiary of RBI. But it was delinked from RBI w.e.f. Feb. 16, 1976.
IDBI is an apex institution to co-ordinate, supplement and integrate the activities of all
existing specialised financial institutions. It is a refinancing and re-discounting institution
operating in the capital market to refinance term loans and export credits. It is in charge
of conducting techno-economic studies. It was expected to fulfil the needs of rapid
industrialisation.

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The IDBI is empowered to finance all types of concerns engaged or to be engaged in

the manufacture or processing of goods, mining, transport, generation and distribution
of power etc., both in the public and private sectors.
Industrial finance Corporation of India (IFCI)
The IFCI is the first Development Financial Institution in India. It is a pioneer in
development banking in India. It was established in 1948 under an Act of Parliament.
The main objective of IFCI is to render financial assistance to large scale industrial
units, particularly at a time when the ordinary banks are not forth coming to assist these
concerns. Its activities include project financing, financial services, merchant banking
and investment.
Till 1993, IFCI continued to be Developmental Financial Institution. After 1993, it was
changed from a statutory corporation to a company under the Indian Companies Act,
1956 and was named as IFCI Ltd with effect from October 1999.
Industrial Credit and Investment Corporation of India (ICICI)
ICICI was set up in 1955 as a public limited company. It was to be a private sector
development bank in so far as there was no participation by the Government in its share
capital. It is a diversified long term financial institution and provides a comprehensive
range of financial products and services including project and equipment financing,
underwriting and direct subscription to capital issues, leasing, deferred credit,
trusteeship and custodial services, advisory services and business consultancy.
The main objective of the ICICI was to meet the needs of the industry for long term
funds in the private sector.

Apart from this the Industrial Reconstruction Corporation of India (IRCI) established in
1971 with the main objective of revival and rehabilitation of viable sick units and was
converted in to the Industrial Reconstruction Bank of India (IRBI) in 1985 with more
powers

Development banks have been established at the state level too. At present in India, 18
State Financial Corporation‟s (SFCs) and 26 State Industrial investment/Development
Corporations (SIDCs) are functioning to look over the development banking in
respective areas /states.

6. Specialized Banks
In India, there are some specialized banks, which cater to the requirements and provide
overall support for setting up business in specific areas of activity. They engage
themselves in some specific area or activity and thus, are called specialized banks.
There are three important types of specialized banks with different functions:

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a. Export Import Bank of India (EXIM Bank):

The Export-Import (EXIM) Bank of India is the principal financial institution in India for
coordinating the working of institutions engaged in financing export and import trade. It
is a statutory corporation wholly owned by the Government of India. It was established
on January 1, 1982 for the purpose of financing, facilitating and promoting foreign trade
of India. This specialized bank grants loans to exporters and importers and also
provides information about the international market. It also gives guidance about the
opportunities for export or import, the risks involved in it and the competition to be
faced, etc.

b. Small Industries Development Bank of India

This specialized bank grant loan to those who want to establish a small-scale business
unit or industry. Small Industries Development Bank of India (SIDBI) was established in
October 1989 and commenced its operation from April 1990 with its Head Office at
Lucknow as a development bank, exclusively for the small scale industries. It is a
central government undertaking. The prime aim of SIDBI is to promote and develop
small industries by providing them the valuable factor of production finance. Many
institutions and commercial banks supply finance, both long-term and short-term, to
small entrepreneurs. SIDBI coordinates the work of all of them.

c. National Bank for Agricultural and Rural Development

It was established on 12 July 1982 by a special act by the parliament. This specialized
bank is a central or apex institution for financing agricultural and rural sectors. It can
provide credit, both short-term and long-term, through regional rural banks. It provides
financial assistance, especially, to co-operative credit, in the field of agriculture, small-
scale industries, cottage and village industries handicrafts and allied economic activities
in rural areas .

Indian Bank-like financial institutions

In India, there are some Bank-like financial institutions that provide financial services.

There are two types of such institution that are important to the development on India:

7. Microfinance Institutions
Microfinance Institutions are Bank-like financial institutions that providing financial
services, such as microcredit, micro savings or micro insurance to poor people.

8. Development financial institutions (DFIs)

DFIs are specialized financial institutions the Government established to promote
investments in the manufacturing and agricultural sectors.

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Banker and Customer Relationship

The relationship between banker and customer is mainly that of a debtor and creditor.
However, they also share other relationships.

Some of the important relationships they share are depicted below.

Discussed below are important banker-customer relationships.

1. Relationship of Debtor and Creditor

When a customer opens an account with a bank and if the account has a credit
balance, then the relationship is that of debtor (banker / bank) and creditor (customer).

In case of savings / fixed deposit / current account (with credit balance), the banker is
the debtor, and the customer is the creditor. This is because the banker owes money to
the customer. The customer has the right to demand back his money whenever he
wants it from the banker, and the banker must repay the balance to the customer.

In case of loan / advance accounts, banker is the creditor, and the customer is the
debtor because the customer owes money to the banker. The banker can demand the
repayment of loan / advance on the due date, and the customer has to repay the debt.

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A customer remains a creditor until there is credit balance in his account with the
banker. A customer (creditor) does not get any charge over the assets of the banker
(debtor). The customer's status is that of an unsecured creditor of the banker.

The debtor-creditor relationship of banker and customer differs from other commercial
debts in the following ways:

The creditor (the customer) must demand payment. On his own, the debtor (banker)
will not repay the debt. However, in case of fixed deposits, the bank must inform a
customer about maturity.

The creditor must demand the payment at the right time and place. The depositor or
creditor must demand the payment at the branch of the bank, where he has opened the
account. However, today, some banks allow payment at all their branches and ATM
centres. The depositor must demand the payment at the right time (during the working
hours) and on the date of maturity in the case of fixed deposits. Today, banks also allow
pre-mature withdrawals.

The creditor must make the demand for payment in a proper manner. The demand
must be in form of cheques; withdrawal slips, or pay order. Now-a-days, banks allow e-
banking, ATM, mobile-banking, etc.

2. Relationship of Pledger and Pledgee

The relationship between customer and banker can be that of Pledger and Pledgee.
This happens when customer pledges (promises) certain assets or security with the
bank in order to get a loan. In this case, the customer becomes the Pledger, and the
bank becomes the Pledgee. Under this agreement, the assets or security will remain
with the bank until a customer repays the loan.

3. Relationship of Licensor and Licensee

The relationship between banker and customer can be that of a Licensor and Licensee.
This happens when the banker gives a sale deposit locker to the customer. So, the
banker will become the Licensor, and the customer will become the Licensee.

4. Relationship of Bailor and Bailee

The relationship between banker and customer can be that of Bailor and Bailee.

Bailment is a contract for delivering goods by one party to another to be held in trust
for a specific period and returned when the purpose is ended.

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Bailor is the party that delivers property to another.

Bailee is the party to whom the property is delivered.

So, when a customer gives a sealed box to the bank for safe keeping, the customer
became the bailor, and the bank became the bailee.

5. Relationship of Hypothecator and Hypothecatee

The relationship between customer and banker can be that of Hypothecator and
Hypotheatee. This happens when the customer hypothecates (pledges) certain movable
or non-movable property or assets with the banker in order to get a loan. In this case,
the customer became the Hypothecator, and the Banker became the Hypothecatee.

6. Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary, and the profit earned from this property
belongs to the beneficiary. If the customer deposits securities or valuables with the
banker for safe custody, banker becomes a trustee of his customer. The customer is the
beneficiary so the ownership remains with the customer.

7. Relationship of Agent and Principal

The banker acts as an agent of the customer (principal) by providing the following
agency services:

Buying and selling securities on his behalf,

Collection of cheques, dividends, bills or promissory notes on his behalf, and

Acting as a trustee, attorney, executor, correspondent or representative of a

customer.

Banker as an agent performs many other functions such as payment of insurance

premium, electricity and gas bills, handling tax problems, etc.

8. Relationship of Advisor and Client

When a customer invests in securities, the banker acts as an advisor. The advice can
be given officially or unofficially. While giving advice the banker has to take maximum
care and caution. Here, the banker is an Advisor, and the customer is a Client.

9. Other Relationships

Other miscellaneous banker-customer relationships are as follows:

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Obligation to honour cheques : As long as there is sufficient balance in the account of

the customer, the banker must honour all his cheques. The cheques must be complete
and in proper order. They must be presented within six months from the date of issue.
However, the banker can refuse to honour the cheques only in certain cases.

Secrecy of customer's account : When a customer opens an account in a bank, the

banker must not give information about the customer's account to others.

Banker's right to claim incidental charges : A banker has a right to charge a

commission, interest or other charges for the various services given by him to the
customer. For e.g. an overdraft facility.

Law of limitation on bank deposits : Under the law of limitation, generally, a customer
gives up the right to recover the amount due at a banker if he has not operated his
account since last 10 years.

TYPES OF CUSTOMERS OF BANKS

In the ordinary language, a person who has an account in a bank is considered

its customer. The term customer also presents some difficulty in the matter of
definition. There is no statutory definition of the term either in India or in England.
However, the legal decisions on the matter throw some light on the meaning of the
term.

According to Dr. Hart “a customer is one who has an account with a banker or
for whom a banker habitually undertakes to act as such.”

“Broadly speaking, a customer is a person who has the habit of resorting to the
same place or person to do business. So far as banking transactions are concerned he
is a person whose money has been accepted on the footing that the banker will honour
up to the amount standing to his credit, irrespective of his connection being of short or
long standing.” Thus, a person who has a bank account in his name and for whom the
banker undertakes to provide the facilities as a banker is considered to be a customer.
It is not essential that the account must have been operated upon for some time.

Thus, in order to constitute a person as a customer, he must satisfy the following

conditions:

1. He must have an account with the bank – i.e., saving bank account, current deposit
account, or fixed deposit account.

2. The transactions between the banker and the customer should be of banking nature
i.e., a person who approaches the banker for operating Safe Deposit Locker or

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purchasing travellers cheques is not a customer of the bank since such transactions do
not come under the orbit of banking transactions.

3. Frequency of transactions is not quite necessary though anticipated.

Special Types of Customers

Special types of customers are those who are distinguished from other types of
ordinary customers by some special features. Hence, they are called special types of
customers. They are to be dealt with carefully while operating and opening the
accounts. They are:
I. Minors:
II. Lunatics:
III. Drunkards:
IV. Married Women:
V. Insolvents:
VI. Illiterate Persons:
VII. Agents:
VIII. Joint Stock Company
IX. Clubs, Associations and Educational Institutions:
X. Partnership Firm:
XI. Joint Accounts:
XII. Joint Hindu Family:
XIII. Trustees

I. Minors:
Under the Indian law, a minor is a person who has not completed 18 years of age. The
period of minority is extended to 21 years in case of guardian of this person or property
is appointed by a court of law before he completes the age of 18years.According to
Indian Contract Act, a minor is recognised as a highly incompetent party to enter into
legal contractsand any contract entered into with a minor is not only invalid but
voidable at the option of the minor. The law has specially protected a minor merely
because his mental faculty has not fully developed and as such, he is likely to commit
mistakes or even blunders which will affect his interests adversely. It is for this reason;
the law has come to the rescue of a minor. A banker can very well open a bank
account in the name of a minor. But the banker has to be careful to ensure that he
does not open a current account.

If a current account is opened and stands overdrawn inadvertently, the banker

has no remedy against a minor, as he cannot be taken to a court of law. It is for this

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reason that the banker should be careful to see that he invariably opens a savings
bank account.

II. Lunatics:

A lunatic or an insane person is one who, on account of mental derangement, is

incapable of understanding his interests and thereby, arriving at rational judgement.
Since a lunatic does not understand what is right and what is wrong, it is quite likely
that the public may exploit the weakness of a lunatic to their advantage and thus
deprive him of his legitimate claims. On account of this, the Indian Contract Act
recognises that a lunatic is incompetent to enter into any contract and any such
contract, if entered into, is not only invalid but voidable at the option of the lunatic.
Since a lunatic customer is an incompetent party, the banker has to be very careful in
dealing with such customers. Bankers should not open an account in the name of a
person of unsound mind. On coming to know of a customer‟s insanity, the banker
should stop all operations on the account and await a court order appointing a receiver.
It would be dangerous to rely on hearsay information. The bank should take sufficient
care to verify the information and should not stop the account unless it is fully satisfied
about the correctness of the information. In case a person suffers from a temporary
mental disorder, the banker must obtain a Certificate from two medical officers
regarding his mental soundness at the time of operation on the account.

III. Drunkards:

A drunkard is a person who on account of consumption of alcoholic drinks get

himself intoxicated and thereby, loses the balance over his mental capacity and hence,
is incapable of forming rational judgement. The law is quite considerable towards a
person who is in drunken state. A lawful contract with such a person is invalid. This is
for the simple reason that it is quite likely that the public may exploit the weakness of
such a person to their advantage and thus, deprive him of his legitimate claims. A
banker has to be very careful in dealing with such customers. There cannot be any
objection by a banker to open an account. In case a customer approaches the banker
for encashment of his cheque especially when he is drunk, the banker should not make
immediate payment. This is because the customer may afterwards argue that the
banker has not made payment at all. Therefore, it is better and safer that the banker
should insist upon such a customer getting a witness (who is not drunk) to countersign
before making any payment against the cheque.

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IV. Married Women:

An account may be opened by the bank in the name of a married woman as she has
the power to draw cheques and give valid discharge. At the time of opening an account
in the name of a married woman, it is advisable to obtain the name and occupation of
her husband and name of her employer, if any, and record the same to enable
detection if the account is misused by the husband for crediting there in cheques
drawn in favour of her employer. In case of an unmarried lady, the occupation of her
father and name and address of her employer, if any, may be obtained and noted in
the account opening form. If a lady customer requests the bankers to change the name
of her account opened in her maiden name to her married name, the banker may do so
after obtaining a written request from her. A fresh specimen signature has also to be
obtained for records.

While opening an account of a purdah lady (purdah nishin), the bank obtains her
signature on the account opening form duly attested by a responsible person known
to the bank. It is advisable to have withdrawals also similarly attested. In view of
practical difficulties involved, it would be better not to open accounts in the names of
purdah ladies.

V. Insolvents:

When a person is unable to pay his debts in full, his property in certain circumstances
is taken possession of by official receiver or official assignee, under orders of the court.
He realises the debtor‟s property and rateably distributes the proceeds amongst his
creditors. Such a proceeding is called „insolvency‟ and the debtor is known as an
„insolvent‟. If an account holder becomes insolvent, his authority to the bank to pay
cheques drawn by him is revoked and the balance in the account vests in the official
receiver or official assignee.

VI. Illiterate Persons:

A person is said to be illiterate when he does not know to read and write. No current
account should be opened in the name of an illiterate person. However, a savings bank
account may be opened in the name of such a person. On the account opening form
the bank should obtain his thumb mark in the presence of two persons known to the
bank and the depositor. Withdrawal from the account by the account holder should be
permitted after proper identification every time. The person who identifies the drawer
must be known to the bank and he should preferably not be a member of the bank‟s
staff.

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VII. Agents:

A banker may open an account in the name of a person who is acting as an agent of
another person. The account should be considered as the personal account of an
agent, and the banker has no authority to question his power to deal with the funds in
the account unless it becomes obvious that he is being guilty of breach of trust.
However, if a person is authorised to only act on behalf of the principal, the banker
should see that he is properly authorised to do the acts which he claims to do. If he has
been appointed by a power of attorney, the banker should carefully pursue the letter-
of-attorney to confirm the powers conferred by the document on the agent. In receiving
notice of the principal‟s death, insanity or bankruptcy, the banker must suspend all
operations on the account.

VIII. Joint Stock Company

A joint stock company has been defined as an artificial person, invisible, intangible and
existing only in contemplation of law. It has separate legal existence and it has a
perpetual succession.

IX. Partnership Firm:

A partnership is not regarded as an entity separate from the partners. The

Indian Partnership Act, 1932, defines partnership as the “relation between persons
who have agreed to share the profit of the business, carried on by all or any of them
acting for all.”Partnershi p is formed or constituted on account of agreement between
the partners and with the sole intention of earning and sharing profits in a particular
ratio. Further, the business is carried on either by all the partners or some partners
acting for all. The partners carry joint and several liabilities and the partnership does
not possess any legal entity.

X. Joint Accounts:

When two or more persons open an account jointly, it is called a joint account.

XI. Joint Hindu Family:

Joint Hindu family is an undivided Hindu family which comprises of all male
members descended from a common ancestor. They may be sons, grandsons and
great grandsons, their wives and unmarried daughters. “A joint, Hindu family is a family
which consists of more than one male member, possesses ancestral property and

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carries on family business.” Therefore, joint Hindu family is a legal institution. It is

managed and represented in its dealings and transactions with others by the Kartha
who is the head of the family. Other members of the family do not have this right to
manage unless a particular member is given certain rights and responsibilities with
common consent of the Kartha.

XII. Trustees:

According to the Indian Trusts Act, 1882, “a trust is an obligation annexed to the
ownership of property and arising out of a confidence reposed in an accepted by the
owner, or declared and accepted by him, for the benefit of another, or of another and
the owner.” As per this definition, a trustee is a person in whom the author or settler
reposes confidence and entrusts the management of his property for the benefit of a
person or an organisation who is called beneficiaries. A trust is usually formed by
means of document called the “Trust Deed.”

Types of Deposit and Accounts

Money and banking are part of everyday life. Banks offer all sorts of financial products
to help you manage your money on a day-to-day basis. The bank is such a place where
once we deposit money, it remains safe and also earns interest over some time. This is
known as the deposit and to each deposit, the bank assigns a unique identity which is
known as the account. Each deposit corresponds to a unique account and vice versa.

Sometimes we use numbers to uniquely identify an account. This is what we call the
account number. It may also be a combination of alphanumeric letters. Bank deposits
serve different purposes for different people. Some people cannot save regularly. They
deposit money in the bank only when they have extra income. The purpose of deposit
then is to keep money safe for future needs. Some may want to deposit money in a
bank for as long as possible to earn interest or to accumulate savings with interest so as
to buy a flat, or to meet hospital expenses in old age, etc. Some, mostly businessmen,
deposit all their income from sales in a bank account and pay all business expenses out
of the deposits.

Types of Deposits

On the basis of purpose they serve, bank deposit accounts may be classified as follows:

1. Savings Bank Account

2. Current Deposit Account
3. Fixed Deposit Account
4. Recurring Deposit Account
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1. Savings Bank Account

As the name suggests this type of account is suitable for people who have a definite
income and are looking to save money. For example, the people who get salaries or the
people who work as laborers. This type of account can be opened with a minimum initial
deposit that varies from bank to bank. Money can be deposited at any time in this
account.

Withdrawals can be made either by signing a withdrawal form or by issuing a cheque or

by using an ATM card. Normally banks put some restriction on the number of
withdrawal from this account. Interest is allowed on the balance of deposit in the
account. The rate of interest on savings bank account varies from bank to bank and
also changes from time to time. A minimum balance has to be maintained in the
account as prescribed by the bank.

2. Current Deposit Account

Big businessmen, companies, and institutions such as schools, colleges, and hospitals
have to make payment through their bank accounts. Since there are restrictions on the
number of withdrawals from a savings bank account, that type of account is not suitable
for them. They need to have an account from which withdrawal can be made any
number of times.

Banks open a current account for them. Like a savings bank account, this account also
requires a certain minimum amount of deposit while opening the account. On this
deposit, the bank does not pay any interest on the balances. Rather the account holder
pays a certain amount each year as an operational charge.

These accounts also have what we call the overdraft facility. For the convenience of the
accountholders banks also allow withdrawal of amounts in excess of the balance of the
deposit. This facility is known as an overdraft facility. It is allowed to some specific
customers and up to a certain limit subject to previous agreement with the bank
concerned.

3. Fixed Deposit Account

Some bank customers may like to put away money for a longer time. Such deposits
offer a higher interest rate. If money is deposited in a savings bank account, banks
allow a lower rate of interest. Therefore, money is deposited in a fixed deposit account
to earn interest at a higher rate.

This type of deposit account allows the deposit to be made of an amount for a specified
period. This period of deposit may range from 15 days to three years or more during
which no withdrawal is allowed. However, on request, the depositor can encash the

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amount before its maturity. In that case, banks give lower interest than what was agreed
upon. The interest on a fixed deposit account can be withdrawn at certain intervals of
time. At the end of the period, the deposit may be withdrawn or renewed for a further
period. Banks also grant a loan on the security of the fixed deposit receipt.

4. Recurring Deposit Account

While opening the account a person has to agree to deposit a fixed amount once in a
month for a certain period. The total deposit along with the interest therein is payable on
maturity. However, the depositor can also be allowed to close the account before its
maturity and get back the money along with the interest till that period.

The account can be opened by a person individually, or jointly with another, or by the
guardian in the name of a minor. The rate of interest allowed on the deposits is higher
than that on a savings bank deposit but lower than the rate allowed on a fixed deposit
for the same period.

The Recurring Deposit Accounts may be of the following types:

Home Safe Account or Money Box Scheme: For regular savings, the bank provides
a safe or box (Gullak) to the depositor. The safe or box cannot be opened by the
depositor, who can put money in it regularly, which is collected by the bank‟s
representative at intervals and the amount is credited to the depositor‟s account. The
deposits carry a nominal rate of interest.

Cumulative-cum-Sickness deposit Account: A certain fixed sum is deposited at

regular intervals in this account. The accumulated deposits over time along with interest
can be used for payment of medical expenses, hospital charges, etc.

Home Construction deposit Scheme/Saving Account: In this account, we can deposit

the money regularly either for the purchase or construction of a flat or house in future.
The rate of interest offered on the deposit, in this case, is relatively higher than in other
recurring deposit accounts.

Financial Services offered by banks

Modern Services Offered by Banks to Customers In the modern world, banks offer a
variety of services to attract customers. However, some basic modern services offered
by the banks are discussed below:

List of banking services are;

1. Advancing of Loans.
2. Overdraft.

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3. Discounting of Bills of Exchange.

4. Collection and Payment Of Credit Instruments
5. Foreign Currency Exchange.
6. Remittance of Funds.
7. Credit cards.
8. ATMs Services.
9. Debit cards.
10. Online banking.
11. Mobile Banking.
12. Accepting Deposit.
13. Priority banking.
14. Private banking.

1. Advancing of Loans

Banks are profit-oriented business organizations. Banks have to advance a loan to the
public and generate interest from them as profit. After keeping certain cash reserves,
banks provide short-term, medium-term and long-term loans to needy borrowers.

2. Overdraft

Sometimes, the bank provides overdraft facilities to its customers through which they
are allowed to withdraw more than their deposits. Interest is charged from the
customers on the overdrawn amount.

3. Discounting of Bills of Exchange

This is another popular type of lending by modern banks.Through this method, a holder
of a bill of exchange can get it discounted by the bank, in a bill of exchange, the debtor
accepts the bill drawn upon him by the creditor (i.e., holder of the bill) and agrees to pay
the amount mentioned on maturity.

After making some marginal deductions (in the form of commission), the bank pays the
value of the bill to the holder. When the bill of exchange matures, the bank gets its
payment from the party, which had accepted the bill.

4. Collection and Payment Of Credit Instruments

In modern business, different types of credit instruments such as the bill of exchange,
promissory notes, cheques etc. are used. Banks deal with such instruments. Modern
banks collect and pay different types of credit instruments as the representative of the
customers.

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5. Foreign Currency Exchange

Banks deal with foreign currencies. As the requirement of customers, banks exchange
foreign currencies with local currencies, which is essential to settle down the dues in the
international trade.

6. Remittance of Funds

Banks help their customers in transferring funds from one place to another through
cheques, drafts, etc.

7. Credit cards

A credit card is cards that allow their holders to make purchases of goods and services
in exchange for the credit card‟s provider immediately paying for the goods or service,
and the cardholder promising to pay back the amount of the purchase to the card
provider over a period of time, and with interest.

8. ATMs Services

ATMs replace human bank tellers in performing giving banking functions such as
deposits, withdrawals, account inquiries. Key advantages of ATMs include:

 24-hour availability
 Elimination of labor cost
 Convenience of location
9. Debit cards

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

10. Online banking

Online banking is a service offered by banks that allows account holders to access their
account data via the internet. Online banking is also known as “Internet banking” or
“Web banking.”

Online banking through traditional banks enable customers to perform all routine
transactions, such as account transfers, balance inquiries, bill payments, and stop-
payment requests, and some even offer online loan and credit card applications.

Account information can be accessed anytime, day or night, and can be done from
anywhere.

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11. Mobile Banking

Mobile banking (also known as M-Banking) is a term used for performing balance
checks, account transactions, payments, credit applications and other banking
transactions through a mobile device such as a mobile phone or Personal Digital
Assistant (PDA),

12. Accepting Deposit

Accepting deposit from savers or account holders is the primary function of a bank.
Banks accept deposit from those who can save money but cannot utilize in profitable
sectors. People prefer to deposit their savings in a bank because by doing so, they earn
interest.

Changing Role of Banks in India

The role of banks in India has changed a lot since economic reforms of 1991. These
changes came due to LPG, i.e. liberalization, privatization and globalization policy being
followed by GOI. Since then most traditional and outdated concepts, practices,
procedures and methods of banking have changed significantly. Today, banks in India
have become more customer-focused and service-oriented than they were before 1991.
They now also give a lot of importance to their rural customers. They are even willing
ready to help them and serve regularly the banking needs of country-side India.

The changing role of banks in India can be glanced in points depicted below.

The following points briefly highlight the changing role of banks in India.

1. Better customer service,

2. Mobile banking facility,
3. Bank on wheels scheme,
4. Portfolio management,
5. Issue of electro-magnetic cards,
6. Universal banking,
7. Automated teller machine (ATM),
8. Internet banking,
9. Encouragement to bank amalgamation,
10. Encouragement to personal loans,
11. Marketing of mutual funds,
12. Social banking, etc.

The above-mentioned points indicate the role of banks in India is changing. Now let's
discuss how banking in India is getting much better day after day.

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1. Better Customer Service

Before 1991, the overall service of banks in India was very poor. There were very long
queues (lines) to receive payment for cheques and to deposit money. In those days,
some bank staffs were very rude to their customers. However, all this changed
remarkably after Indian economic reforms of 1991.

Banks in India have now become very customer and service focus. Their service has
become quick, efficient and customer-friendly. This positive change is mostly due to
rising competition from new private banks and initiation of Ombudsman Scheme by RBI.

2. Mobile Banking

Under mobile banking service, customers can easily carry out major banking
transactions by simply using their cell phones or mobiles.

Here, first a customer needs to activate this service by contacting his bank. Generally,
bank officer asks the customer to fill a simple form to register (authorize) his mobile
number. After registration, this service is activated, and the customer is provided with a
username and password. Using secret credentials and registered phone, customer can
now comfortably and securely, find his bank balance, transfer money from his account
to another, ask for a cheque book, stop payment of a cheque, etc.

Today, almost all banks in India provide a mobile-banking service.

3. Bank on Wheels

The 'Bank on Wheels' scheme was introduced in the North-East Region of India. Under
this scheme, banking services are made accessible to people staying in the far-flung
(remote) areas of India. This scheme is a generous attempt to serve banking needs of
rural India.

4. Portfolio Management

In portfolio management, banks do all the investments work of their clients.

Banks invest their clients' money in shares, debentures, fixed deposits, etc. They first
enter a contract with their clients and charge them a fee for this service. Then they have
the full power to invest or disinvest their clients' money. However, they have to give
safety and profit to their clients.
5. Issue of Electro-Magnetic Cards

Banks in India have already started issuing Electro-Magnetic Cards to their customers.
These cards help to carry out cash-less transactions, make an online purchase, avail
ATM facility, book a railway ticket, etc.

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Banks issue many types of electro-magnetic cards, which are as follows:

Credit cards help customers to spend money (loaned up to a certain limit as

previously settled by the bank) which they don't have in hand. They get a monthly
statement of their purchases and withdrawals. Along with the transacted amount, this
statement also includes the interest and service fee. The entire amount (as reflected in
the statement of credit card) must be paid back to the bank either fully or in installments,
but before due date.

Debit cards help customers to spend that money which they have saved (credited) in
their individual bank accounts. They need not carry cash but instead can use a debit
card to make a purchase (for shopping) and/or withdraw money (get cash) from an
ATM. No interest is charged on the usage of debit cards.

Charge cards are used to spend money up to a certain limit for a month. At the end of
the month, customer gets a statement. If he has a sufficient balance, then he only had
to pay a small fee. However, if he doesn't have a necessary balance, he is given a
grace period (which is generally of 25 to 50 days) to repay the money.

Smart cards are currently being used as an alternative to avail public transport
services. In India, this covers Railways, State Transport and City (Local) Buses. Smart
card has an integrated circuit (IC) embedded in its plastic body. It is made as per norms
specified by ISO.

Kisan credit cards are used for the benefit of the rural population of India. The Indian
farmers (kisans) can use this card to buy agricultural inputs and goods for self-
consumption. These cards are issued by both Commercial and Co-operative banks.

6. Universal Banking

In India, the concept of universal banking has gained recognition after year 2000. The
customers can get all banking and non-banking services under one roof. Universal bank
is like a super store. It offers a wide range of services, including banking and other
financial services like insurance, merchant banking, etc.

7. Automated Teller Machine (ATM)

There are many advantages of ATM. As a result, many banks have opened up ATM
centres to offer convenience to their customers. Now banks are operating ATM centres
not only in their branches but also at public places like airports, railway stations, hotels,
etc. Some banks have joined together and agreed upon to set up common ATM centres
all over India.

8. Internet Banking

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Internet banking is also called as an E-banking or net banking. Here, the customer can
do banking transactions through the medium of the internet or world wide web (WWW).
The customer need not visit the bank's branch. Through this facility, the customer can
easily inquiry about bank balance, transfer funds, request for a cheque book, etc. Most
large banks offer this service to their tech-savvy customers.

9. Encouragement to Bank Amalgamation

Failure of banks is well-protected with the facility of amalgamation. So depositors need

not worry about their deposits. When weaker banks are absorbed by stronger banks, it
is called amalgamation of banks.

10. Encouragement to Personal Loans

Today, the purchasing power of Indian consumers has increased dramatically because
banks give them easy personal loans. Generally, interest charged by the banks on such
loans is very high. Interest is calculated on reducing balance. Large banks offer loans
up to a huge amount like one crore. Some banks even organise Loan Mela (Fair) where
a loan is sanctioned on the spot to deserving candidates after they submit proper
documents.

11. Marketing of Mutual Funds

A mutual fund collects money from many investors and invests the money in shares,
bonds, short-term money market instruments, gold assets; etc. Mutual funds earn
income by interest and dividend or both from its investments. It pays a dividend to
subscribers. The rate of dividend fluctuates with the income on mutual fund
investments. Now banks have started selling these funds in their own names. These
funds are not insured like other bank deposits. There are different types of funds such
as open-ended funds, closed-ended funds, growth funds, balanced funds, income
funds, etc.

12. Social Banking

The government uses the banking system to alleviate poverty and unemployment. Many
social development programmes are initiated by the banks from time to time. The
success of these programmes depends on financial support provided by the banks.
Banks supply a lot of finance to farmers, artisans, scheduled castes (SC) and scheduled
tribe (ST) families, unemployed youth and people living below the poverty line (BPL).

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