UNIT-5

LENDING BY BANKS
Good Lending Principles
 A banker follows certain basic principles of lending while doing carrying out their
lending and credit operations. Banks deals with public money accepting deposit and lend
to their borrowers to earn profit. Banks follow some fundamental principles of lending in
order to ensure safety, security and profitability on money it lend. Lending is one of the
most important functions performed by the commercial banks and is major source of
income of bank.
 Borrower may differ in terms of their purpose of advance, activities, financial health,
repayment capacity, risk so some important principles / considerations are followed by
bank before taking lending decision.

Important Principles of Lending in Banking

 Here are some important principles of lending:

Safety
 Safety is the most important fundamental principle of lending. Banks deal with public
money so safety of money from public is first priority of bank. When a banker lends, he
must be sure about that the money is in safe hand and will definitely come back at regular
interval as per repayment schedule without any default.
 Safety of funds depends on nature of security, character of borrower, repayment
capabilities and financial health of the borrower.
 A banker must ensure that finance extended by him goes to right type of borrower and is
being used for the intended purpose. And also after utilizing it for right purpose it should
be repaid with interest.
 As the bank lends the funds entrusted to it by the depositors, the first and foremost principle of
lending is to ensure the safety of the funds lent.
 By safety is meant that the borrower is in a position to repay the loan, along with interest,
according to the terms of the loan contract.
 The repayment of the loan depends upon the borrower’s capacity to pay, and willingness to pay.
The former depends upon his tangible assets and the success of his business; if he is successful in
his efforts, he earns profits and can repay the loan promptly. Otherwise, the loan is recovered out
of the sale proceeds of his tangible assets. The willingness to pay depends upon the honesty and
character of the borrower. The banker should, therefore, taken utmost care in ensuring that the
enterprise or business for which a loan is sought is a sound one and the borrower is capable of
carrying it out successfully. He should be a person of integrity, good character and reputation. In

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 addition to the above, the banker generally relies on the security of tangible assets owned by the
borrower to ensure the safety of his funds.

Liquidity
 Liquidity is also an important principle of lending in banking. Bank lend public money
which is repayable on demand by depositors so bank lends for a short period.
 A banker must ensure that money will come back on demand or as per repayment
schedule. The borrower must be able to repay the loan within a reasonable time after
demand for repayment is made.
 ‘Liquidity’ has as much importance as ‘safety’ of funds. The reason behind it is that a
bulk of their deposit is repayable on demand or at a very short notice. Banker must ensure
that money is locked up for a long time. If loan becomes illiquid, it may not be possible
for bankers to meet their obligations vis a vis depositors.
 Banks are essentially intermediaries for short term funds. Therefore, they lend funds for short
periods and mainly for working capital purposes. The loans are, therefore, largely payable on
demand.
 The banker must ensure that the borrower is able to repay the loan on demand or within a short
period. This depends upon the nature of assets owned by the borrower and pledged to the banker.
For example, goods and commodities are easily marketable while fixed assets like land and
buildings and specialized types of plant and equipment can be liquidated after a time interval.
Thus, the banker regards liquidity as important as safety of the funds and grants loans on the
security of assets which are easily marketable without much loss.

Purpose
 The underlying purpose for which an applicant is seeking a loan should be productive.
The purpose of loan helps in determining level of risk and also impact interest rate on
loan. Purpose of loan should be productive in order to ensure safety of funds while it
should be extended for short term to ensure liquidity.
 While lending his funds, the banker enquires from the borrower the purpose for which he seeks
the loan. Banks do not grant loans for each and every purpose—they ensure the safety and
liquidity of their funds by granting loans for productive purposes only, viz., for meeting working
capital needs of a business enterprise.
 Loans are not advanced for speculative and unproductive purposes like social functions and
ceremonies or for pleasure trips or for the repayment of a prior loan. Loans for capital
expenditure for establishing business are of long-term nature and the banks grant such term loans
also. After the nationalization of major banks loans for initial expenditure to start small trades,
businesses, industries, etc., are also given by the banks.

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 Diversity / Risk Spread
 Risk is always present while extending any kind of advance to any type of borrower. To
minimize the risk, bank should lend to borrowers from different trades, industries like
agriculture, education, IT, pharma, educational etc.
 Lending surplus to a particular sector may have adverse affect on bank in time of slump.
A banker must follow principle of diversity also while choosing its investment portfolio.
He must invest the funds over different share and debentures of different industries rather
than investing in particular type of security.
 This is also a cardinal principle of sound lending. A prudent banker always tries to select the
borrower very carefully and takes tangible assets as securities to safeguard his interests. Tangible
assets are no doubt valuable and the banker feels safe while granting advances on the security of
such assets, yet some risk is always involved therein. An industry or trade may face recessionary
conditions and the price of the goods and commodities may sharply fall.
 Natural calamities like floods and earthquakes, and political disturbances in certain parts of the
country may ruin even a prosperous business. To safeguard his interest against such unforeseen
contingencies, the banker follows the principle of diversification of risks based on the famous
maxim “do not keep all the eggs in one basket.”
 It means that the banker should not grant advances to a few big firms only or to concentrate them
in a few industries or in a few cities or regions of the country only. The advances, on the other
hand, should be over a reasonably wide area, distributed amongst a good number of customers
belonging to different trades and industries. The banker, thus, diversifies the risk involved in
lending. If a big customer meets misfortune, or certain trades or industries are affected adversely,
the overall position of the bank will not be in jeopardy.

Profitability
 Banks accept deposits from public and lend it to make profit. Banks also incur expenses
to maintain deposits such as rent, stationary, premises rent, provision for depreciation of
their fixed assets, bad loans.
 After incurring such expenditures, a bank must earn some profit like other financial
institutions. So a banker must extend the advance in such a way that it is profitable for
bank and also at competitive lending rate.
 Commercial banks are profit-earning institutions; the nationalized banks are no exception to this.
They must employ their funds profitably so as to earn sufficient income out of which to pay
interest to the depositors, salaries to the staff and to meet various other establishment expenses
and distribute dividends to the shareholders (the Government in case of nationalized banks). The
rates of interest charged by banks were in the past primarily dependent on the directives issued by
the Reserve Bank.
 Now banks are free to determine their own rates of interest on advances.. The variations in the
rates of interest charged from different customers depend upon the degree of risk involved in
lending to them. A customer with high reputation is charged the lower rate of interest as
compared to an ordinary customer. The sound principle of lending is not to sacrifice safety or
liquidity for the sake of higher profitability. That is to say that the banks should not grant

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 advances to unsound parties with doubtful repaying capacity, even if they are ready to pay a very
high rate of interest. Such advances ultimately prove to be irrecoverable to the detriment of the
interests of the bank and its depositors.

Security
 A banker avoid lending to a borrower without any security. Security Act as insurance to
lender bank in case of default by the borrower.
 The banker carefully scrutinizes all the different aspects of an advance before granting it.
At the same time, he provides for an unexpected change in circumstances which may
affect the safety and liquidity of the advance. It is only to provide against such
contingencies that he takes security so that he may realize it and reimburse himself if the
well-calculated and almost certain source of repayment unexpectedly fails.

VARIOUS KINDS OF SECURITIES

Land/Real Estate as a Security for the Loan/Advance
 Bankers in the olden days were very much averse to accept land and building as a security, but
this prejudice has over a period of time changed and land and building as a security has become
an acceptable collateral in most advances, more particularly to corporate customers. The
advantages and disadvantages of this form of security cannot be universally applied to all lands
and it depends on the nature of the land offered. We shall now discuss both the advantages and
disadvantages.
 Advantages
(i) The advantage that land has over other types of securities is that its value generally increases
with time. With every fall in the value of money, the value of land goes up and due to its
scant availability in developing areas its value is bound to increase.
(ii) It cannot be shifted, a fact which sometimes is also a disadvantage.
 Disadvantages
(i) Valuation is at times difficult
The value of a building depends on several factors such as location, size of property, state of
repair, amenities, etc., and in the case of factories and industrial buildings, the machinery,
nature of industry, etc. This makes the valuation very difficult. Buildings and the materials
used in the buildings are not alike. In fact, buildings must be valued on a conservative basis
because of limited market in the event of sale.
(ii) Ascertaining the title of the owner
The banker cannot obtain a proper title unless the borrower himself has title to the property to
be mortgaged. In India, the laws of succession particularly those relating to Hindus and
Muslims being very complicated, it is difficult to ascertain whether a person has a perfect title
to the property or not. The banker would therefore have to consult solicitors and obtain their
opinion before accepting it as a security, which in many cases delays lending. Title

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 verification, must also be done to know whether the property was encumbered. This has to be
done by verifying record with the Registrar’s office, which involves expense and time. In the
case of agricultural land, with 198 PP-BL&P the introduction of land ceiling legislation,
legislation protecting the tenants’ rights, absence of up-to-date and proper land records, it has
become less valuable as a security. Added to this there have been a number of legislations in
different states giving debt relief to the farmers and prohibiting transfer of land to persons
other than agriculturist.
(iii) Difficult to realize the security
Land is not easily and quickly realizable, due to the lack of ready market. It may take months
to sell and sometimes if the market is not favorable, it may fetch a lower price than what was
anticipated.
(iv) Creating a charge is costly
The security can be charged either by way of legal mortgage or by way of an equitable
mortgage. An equitable mortgage may be created by a simple deposit of title deeds with or
without a memorandum. Although equitable mortgage is less expensive, a banker always
prefers legal mortgage to an equitable mortgage. Since the remedies under a legal mortgage
are better than those under an equitable mortgage. However, completing a legal mortgage
involves expenses including stamp duty and lot of formalities.
(v) Difficulty on account of Rent Control Act
In the case of buildings, which come within the purview of the Rent Control Act, it would be
difficult to sell the building, particularly when a tenant has been occupying it for a long time.

Stocks and Shares as a Security for the Laon/Advance Shares

 These may be classified into preference shares (which enjoy preference both with regards the
payment of dividend and repayment of capital) and equity shares, i.e., shares which are not
preference shares.
 Advantages
(i) Value of the security can be ascertained without any difficulty.
(ii) In normal times, stocks and shares enjoy stability of value and are not subject to wide
fluctuations.
(iii) Stocks and shares require very little formalities, for taking them as security.
(iv) It is easier compared to real estate to ascertain the title, more so with the advent of
depositories.
(v) Creating a charge of this is less expensive than real estate.
(vi) They yield income by way of dividends, which can be appropriated towards the loan account.
(vii) Being a tangible form of securities they are more reliable.
(viii) The release of such securities involves very little expense and formality.
 Disadvantages
(i) Being easy to realize, they are fraud prone and as such they must be properly secured.
(ii) In the case of partly paid shares, the following demerits are there:
(a) The banker may have to pay the calls.
(b) Partly paid shares are subject to violent price fluctuations.

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Debentures as a Security for the Loan/Advance
 Debenture is a document issued by a company acknowledging its indebtedness to the bearer or a
registered holder. A fixed rate of interest is payable at stated periods on such debentures. In the
case of mortgage debentures, a charge is created on the assets of the company issuing such
debentures in favour of a trustee who is responsible to take care of the interest of individual
investors.
 Advantages
(i) Easy to sell.
(ii) Not subject to violent price fluctuations.
(iii) They can be transferred at minimum cost.
(iv) Bearer debentures are fully negotiable.
(v) They rank in priority to shares and mostly secured by a charge on the company’s property.
 Disadvantages
(i) If interest is not paid regularly on the debentures it would affect its price and marketability.
(ii) If the charge on property of company is not registered, the subsequent charges will get a
priority.
(iii) Debentures may be issued by companies having no power to borrow money.

Goods as a Security for the Loan/Advance

 Though, earlier, bankers were not forthcoming to advance against goods or documents of title to
goods, now more and more secured advances of the scheduled banks in India are against goods.
 Merits of this Security
(i) Goods have a ready market and as such can be easily sold unlike other kinds of security.
(ii) Valuation of the goods can be easily done.
(iii) The banker gets a tangible form of security compared to unsecured advances, which in case
of default by the borrower, can be realized by sale of pledged goods.
(iv) Advances against goods are normally given for short periods and therefore the risk of the
banker is considerably reduced.
(v) Barring a few states where the stamp duty is heavy, creating a charge on the security is less
costly and involves minimum formalities.
(vi) Banker acquires a good title to the goods when dealing with customers of repute and
standing.
 Demerits of this Security
(i) Certain goods are liable to perish or deteriorate in quality over a period of time, thus resulting
in reduction of the value of the banker’s security.
(ii) There are possible risks of fraud or dishonesty on the part of the borrower. For example,
when 10,000 tins of cashew nuts are shown in the godown as security for an advance, it is not
possible for the banker to verify the quality and quantity in every tin. It is not even possible to
verify whether all the 10,000 tins contain cashew nuts. A fraudulent borrower may not store
the full stocks as declared in the godown.

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 (iii) The value of the security in certain cases more particularly electronic consumer goods are
subject to wide fluctuations. Therefore, the valuation of such goods is difficult. Even in the
case of necessaries, there being several varieties, unless the banker has expert knowledge, the
valuation may be misleading. Disposing of large quantities of goods within a short time may
be difficult and may not fetch the expected/ declared price.
(iv) The banker may find it difficult to store the goods.
(v) Transporting the goods from the borrower’s premises to the banker’s premises and thereafter
to the market in case of sale is a considerably costly and time-consuming affair.
(vi) When the banker releases goods for sale on the execution of trust receipts, the money realized
by the sale of such goods may not be deposited with the banker, and the borrowers may
default to the bankers. (vii) If the goods are warehoused, the warehouse keeper enjoys a lien
over the goods for any unpaid charges

Life Policies as a Security for the Loan/Advance Purpose of Life Policy

 A life policy is taken for two purposes:
(i) It is a source of income for the dependents of the assured in case of his death.
(ii) It is an ideal form of saving since along with income tax deduction on the premium, paid
loans can be raised on the policies in times of need
 Advantages
(i) Life insurance business being highly regulated and permitted only to companies having sound
financial health, the banker need not doubt the realisation of the policies, which will be done
without any difficulty, if the policy and the claim are in order.
(ii) The assignment of the policy in favour of the banker requires very little formalities and the
banker obtains a perfect title.
(iii) The longer the period for which the policy has been in force, the greater the surrender value.
It is also useful as an additional security because, in the event of the borrower’s death, the
debt is easily liquidated from the proceeds of the policy.
(iv) The security can be realized immediately on the borrower’s default of payment by
surrendering the policy to the insurance company.
(v) The policy is a tangible security and is in the custody of the bank. The banker only has to
ensure that regular payment of premiums is made.
 Disadvantages
(i) If the premium is not paid regularly, the policy lapses and reviving the policy is complicated.
(ii) Insurance contracts being contracts of utmost good faith, any misrepresentation or non-
disclosure of any particulars by the assured would make the policy void and enable the
insurer to avoid the contract.
(iii) The person (proposer) who has obtained the policy must have an insurable interest in the life
of the assured or the contract is void.
(iv) The policy may contain special clauses, which may restrict the liability of the insurer.
(v) When the banker accepts a policy coming under Married Women Property Act he must
ensure that all the parties sign in the bank’s form of assignment.

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 (vi) There is facility to obtain the duplicate policy if the original is lost. This can be misused by
persons by obtaining duplicate policies. Banker should therefore, verify that no duplicate
policy has been issued and there are no encumbrances on the policy.

Book Debts as a Security for the Loan/Advance

 Borrowers can take advances by assigning book debts in favour of the bank. Section 130 of
the Transfer of Property Act, permits assignment of actionable claim and the procedure to be
followed is:
(i) The assignment must be in writing and signed by the transferor or his duly authorised agent
(ii) Notice of the assignment in writing must be given to the debtor; and
(iii) The assignment may be absolute or by way of charge

Fixed Deposit as a Security for the Loan/Advance

 When money deposited by a customer is not repayable on demand and is payable on the
expiry of a specified period from the date of deposit such a deposit is called a ‘Fixed
Deposit’. The banker evidences a deposit by issuing a receipt known as fixed deposit receipt.
Interest, is paid at regular intervals at a specified rate on such deposits.
 Banks usually permit depositors to borrow against the deposit. This security is certainly the
most valuable, as the money represented by the receipt is already with the bank and there is
no problem of valuation or enquiring the title, or the problem of storage and costs associated
with storage.

Supply Bills as a Security for the Loan/Advance

 Supply bills arise in relation to transactions with the Government and public sector undertakings.
A party might have taken a contract for execution, and he is entitled to progressive payments
based on work done, for which he has to submit bills in accordance with the terms and conditions
of the contract.
 Similarly, parties who have accepted tenders for supply of goods over a period are entitled to
payments on the supply of goods, for which they submit bills in accordance with the terms of the
contract. These bills are known as supply bills.

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 Recent Trends of banking system
 The 20th century witnessed many changes to the International Trade, Banking and
Finance on account of new revolution in the Information and Communication
Technology. Banks across nations have been moving to the e -commerce and e-banking
environment.
 On account of these changes banks are able to provide more flexible banking options for
their clients, by offering many innovative products and services through ATMs, Credit
and Debit Cards, Internet Banking , Core Banking Solutions etc. While quicker and faster
services like convenient banking, anywhere banking, 24 x7 virtual banking are offered,
coupled with quick remittance and funds transfers, on the other hand banks are also
exposed to the cyber crimes, on account of more usage of computers and IT enabled
services. Further, in view of cross border transactions, if proper control is not exercised,
banks can be used as channels for money laundering as well.
 Some important areas where the IT plays important roles are: Funds Transfer mechanism:
ECS, EFT, RTGS, NEFT .Clearing House operations: MICR, CTS.Innovative on line e-
banking services: Tele banking, Mobile banking, SMS banking, Credit/ Debit Cards,
ATMs, Internet banking, Core Banking Solutions, etc

National Electronic Funds Transfer (NEFT)

 NEFT is a system similar to RTGS with certain differences. RTGS handles big ticket
transactions, whereas NEFT handles smaller size transactions. Most branches are using
this facility to transfer funds in an efficient manner.
 Once the applicant for the transfer of funds furnishes full and correct details (correct
account details means correct name of the beneficiary, the correct account number, the
branch and bank of the beneficiary, and the correct IFS code, etc.) funds can be
transferred to the beneficiary’s account by the remitting bank. Transfer of funds through
NEFT is safe, quick. It reduces the paper work and is cost effective. NEFT is an
innovative electronic media for effecting transfer of funds.
 Special features of NEFT are:
i. NEFT is a funds transfer system which enables a customer of a bank to transfer
funds to another customer of another bank having account with any participating
bank.
ii. NEFT allows both intra and inter-bank funds transfer within a city and across
cities.
iii. Since it is in the form of e transfer, without any physical movement of
instruments, funds can be transferred quickly.
iv. The beneficiary customer gets funds in his account on the same day or at the
earliest on the next day depending upon the time of settlement.

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 v. Both the originating and destination bank branches should be on NEFT platform.
vi. The correct details of IFSC, beneficiary’s name, account numbers, etc., should be
furnished to the originating bank.
vii. The originating bank branch can keep track of the status of the NEFT transaction.
In case for any reason the destination branch is not able to afford credit to the
beneficiary’s account, destination branch/bank have to return the funds to the
originating bank within two hours of completion of the batch through which the
transaction was processed.
It is not only easy method of transfer of funds, but also enables the remitters to
have user friendly and cost effective transfer of funds.

Automated Teller Machines (ATMs)

 ATMs are used as a channel for cash management of individual customers. ATMs can be
accessed by ATM card, debit or credit cards. To have access the customer (the card
holder) needs to use his Personal Identification Number (PIN) issued by his/her banker
and access password.
 ATMs generally used for cash deposit and withdrawals, they can also be used for
payment of utility bills, funds transfer thereby ATMs serve as a channel for electronic
funds management. Requests for new cheque book and statement of accounts can also be
given through ATMs.
 White Label ATMs- RBI has vide notifications dated 20th June, 2012, permitted non-
banking entities to set up or start ATMs which are called White Label ATMs (WLA).
From such ATMs customers of any bank will be able to withdraw money, takeout
statement, change PIN etc. These WLAs will not display logo of any bank. However,
WLA operator has been permitted to display advertisements, and offer value added
services as per regulations in force. While WLA operator is entitled to receive a fee from
the banks for use of ATM resources by their customers, WLAs are not permitted to
charge Bank customers directly for use of WLA.
 ATMs are electronic machines discovered by John Shefferd Berron which are operated
by a customer himself to deposit or withdraw cash. It can also be used to deposit cheques,
getting balance information, getting account statement for limited entries, payment of
bills, transfer of funds etc.
 ATMs can be interior (ie. located in the branch premises) or exterior (located outside the
branch premises such as in a shopping centre, airport, railway station etc.) Operation. For
using an ATM, a customer requires an ATM card which is a plastic card magnetically
coded and read by the machine.
 To use an ATM, the customer has to insert the card in the machine and quote his PIN
(personal identification number).
 After establishing the authentication of the customer. The ATM permits a customer to
make entries and after processing the transaction, the machine performs the desired

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 function. On completion may also apply cheque books from A.T.M. card is ejected. Now
customer may also apply cheque books from ATM.
 Security : In order to provide proper security, the ATMs are provided access locks
covering key board, monitor etc. that could be opened with the help of ATM card.

Broader advantage of ATMs are:

1. Quick and efficient services.

2. Provision for un-interrupted service for all days of the week and on any time (24x7x365).
3. Any place availability to the customer of the bank amounting to anywhere banking.
4. Extended working hours.
5. Helps in utilizing human resources in more productive functions by taking over the
routine payment functions.
6. ATMs provide round the clock service with ease and privacy of operations.
7. It reduces pressure on bank staff and avoids congestion in the bank premises.

Real Time Gross Settlement (RTGS)

 One of the important IT revolutions in Indian Banking Scenario was the implementation of the
Real Time Gross Settlement (RTGS) system by the Reserve Bank of India. With the changing
scenario from manual environment to electronic mode, banks started to use faster, safer and
efficient methods to transfer funds.
 In this regard, two important and popular electronic funds transfer systems are Real Time Gross
System (RTGS) and National Electronic Funds Transfer System (NEFT) RTGS is an electronic
payment system, where payment instructions are processed on a ‘continuous’ or ‘REAL TIME’
basis and settled on a ‘GROSS’ or ‘individual’ basis without netting the debits against credits.
 In India, RBI introduced this system and the system is functioning well. The payments so effected
are ‘final’ and ‘irrevocable’. The settlement is done in the books of the central bank (RBI). The
RTGS system allows transfer of funds across banks on a real time (immediate) basis. Each
participant bank needs to open a dedicated settlement account for putting through its RTGS
transactions. Not only does it allow transfer of funds, it also reduces the credit risk. Both
customers and banks can transfer funds monies the same day at regular intervals within the
banking hours.
a. Real Time Gross Settlement helps banks to settle interbank and forex settlements.
b. It also helps banks in handling big ticket funds transfers
c. Since RTGS it is routed through RBI platform, the credit risk is minimized (this is one of
the main advantages in settlement of funds).
d. Unlike in case of cheque clearance, the drawer of the cheque cannot enjoy the float time
(the date of issuance of cheque and the date on which it is received in inward clearing and
debited by his banker) However, in the case of RTGS, the remitter’s account is debited
first and then only the funds are transferred .
e. If all relevant details such as the beneficiary’s name, account number, IFSC code of the
receiving branch, name of the beneficiary bank, etc., are correctly furnished it would assist
the remitting bank to effect the transfer quickly.

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 f. As the name RTGS suggests, the transfer mechanism works on real time and, therefore,
the beneficiary branch/bank should receive the funds immediately. The beneficiary’s
branch/bank should give credit to the beneficiary’s account immediately or latest within 2
hours of receiving the funds transfer message. However, in case the funds cannot be
credited for any reason, such funds should be returned to the originating branch within two
hours. In such a situation, as soon as the money is returned, the remitting bank should
reverse the original debit entry in the client’s (remitter’s) account. This system is
applicable between banks/branches who are on Core Banking Solutions (CBS).

Indian Financial System Code (IFSC)

 IFSC is an alpha-numeric code that identifies a bank-branch participating in the RTGS/NEFT
system. IFSC has 11 digit code and the first four alpha characters represents the bank, the 5th
code is 0 (zero), which is reserved for future use and the last six digits are numeric characters
represents the branch. Correct IFSC code is essential for identifying the beneficiary’s branch and
bank as destination for funds transfers. E.g. Syndicate Bank Cuffe Parade Branch, Mumbai-
SYNB0005087.

Cheque Truncation System (CTS)

 Cheques are being used as a medium for exchange of funds, which play a key role in the funds
management of customers and banks. The efficient cheque clearing system helps in settlement of
receipts and payments.
 Cheque Truncation is a new system introduced in Indian Banking Scenario. It is a system of
cheque clearance and settlement between banks based on electronic data and/or images without
the need for exchange of physical cheques and negotiable instruments like demand drafts, pay
orders, dividend warrants, etc.
 Cheque truncation - Special features: – Bank customers would get their cheques realized faster –
Quick realization helps in better cash management (receivables/payables) – In the long run, it
would reduce the administrative costs for bank – Importantly this would assist banks’ in
reconciliation and also reduction in clearing frauds.

Core Banking Solutions (CBS)

 Core Banking Solutions has helped banks to offer better customer service. It has also reduced the
time and increased the efficiency. The Core Banking Solutions mainly work on the support of
effective communication and good information technology. It is on account of merger of
communication technology and information technology which enables the banks to offer core
banking needs of the clients.
 Core Banking Solutions are computer based banking applications (software) which works on a
platform. The computer software handles the different functions of the bank like, recording of
transactions, updating the balances in the accounts based on the type of transactions, calculate
interests and application of interest, charges etc., The software is installed in the branches and the
computer systems are interconnected with a main computer server though communication lines
(telephones, satellite, internet, fibre optical)

Lakshmi Devi K, Assistant Professor of Law, Unit 5, Banking Law 12

  CBS is a back end system, and it processes daily banking transactions and updates the records
accordingly. CBS helps the clients to operate their accounts from any CBS branch. CBS branch
assist customers to handle their funds transfers in a quick turnaround time. It also assists the client
to withdraw and deposit funds in other branches apart from the parent branch, where he maintains
his account.
 Data Warehousing- A Data Warehouse or Enterprise Data Warehouse (DWH/EDW) is a database
used for reporting and data analysis. It is a central repository of data which is created by
integrating data from one or more separate sources. DWH store current as well as historical data
and are used for creating trending reports for use by senior management. The data stored in the
warehouse are uploaded from the operation systems. The main source of data is cleaned,
transformed, catalogued and made available for use by the managers for data mining, online
analytical processing and decision support.

Electronic Clearing System (ECS)

 One of the earliest electronic forms of funds transfer is the Electronic Clearing System. ECS is a
retail funds transfer system to effect payments (utility bills, dividends, interest, etc) ECS helps
corporates, government departments, public sector undertakings, utility service providers to
receive and/or pay bulk payments.
 ECS is divided into ECS (credit) and ECS (debit) ECS – important aspects/ features On receipt of
the required mandate, the funds (payments/ receipts) can be handled by a bank through ECS. ECS
(debit) is generally used by utility companies like electricity companies, telephone companies and
other to receive the bill payments directly from bank accounts of their clients.
 Instead of payment of utility bills by means of cash or cheque payments, an individual or a
company can make payment through ECS. In case the company has the facility of payment
through ECS, the client can give a mandate to the company to receive the utility bill amount from
his bank account directly. The utility company (service provider) based on the ECSmandate given
by the client, would advise the client’s bank to debit the bill amount to the client’s account on the
due date (or on a any date before the due date as per the client’s request) and transfer the amount
to the company’s own bank account. Similarly, ECS (Credit) can facilitate payment to various
clients like dividend warrants, maturity values of Annuities.

Internet Banking
 Internet banking one of the popular e-banking modes has changed the banking operations
and offer virtual banking services to the clients on 24 x 7 basis. It is also called as
convenient banking, since the customer (account holder) can have access to his bank
account from anywhere at any time, through the bank’s web site.
 The customer is allowed online access to account details and payment and funds transfer
facilities. Net banking services of a bank can be accessed through a Personal
Identification Number (PIN) and access password as in the case of ATMs. In net banking
the advantage for the bank customer is that funds can be transferred from the client’s

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 bank account to another account with the same bank or another bank through
NEFT/RTGS.
 Another method of funds transfer facility is online payment of taxes. Bank customer can
pay various taxes like income tax, service tax, etc.; Net banking can be used as a channel
by the customer to pay the utility bills (electricity bills, telephone bills, etc) on line.
Customers can make use of net banking to pay the insurance premiums and similar other
payments.

Credit cards
 Credit Card is a financial instrument issued by banks with a pre set credit limit, helping
the users to make cashless transactions. The card issuer determines the credit limit based
on credit score, credit history, and income.
 It is a thin rectangular piece of plastic which contains information like card number, card
holder name, expiration date, chip, magnetic strip, CVC and hologram.
 It allows cardholder to borrow funds to pay for Goods and Services with merchants.

Advantages

 A credit card is safer than carrying cash.

 A credit card can build your credit rating.
 Interest-free day.
 Earn rewards points
 Credit cards work in any currency.
 Credit cards often have complimentary extras.

Disadvantages

 High rate of interest, more than initially charged interest if failed to pay installments.
 Credit Profile damage due to missed repayments and ongoing debts.
 Annual fees is way more high than a debit card.
 Overspending is more as the user is easily carried away with their credit card, creating a
debt that is beyond their means to pay off.
 Credit card fraud are more. As fraudster targets the credit card holders.
 Other fees can be added up quickly

Lakshmi Devi K, Assistant Professor of Law, Unit 5, Banking Law 14

 Debt Recovery Tribunals
 Debt Recovery Tribunals are Tribunals which facilitate the debt recovery involving banks
and other financial institutions with their customers. DRTs can now take cases from
banks for disputed loans above Rs 20 Lakhs.
 Debt Recovery Tribunals (DRTs): Background Bad loans and Non-Performing Assets
(NPAs) are a perpetual source of trouble for banks in India. This was an acute problem in
the period before 1993, as such cases were listed in civil courts where the proceedings
used to drag on for years.
 In 1993, the Recovery of Debts due to Banks and Financial Institutions (RDDBFI) Act
was passed which led to the establishment of Debt Recovery Tribunals (DRT) to
facilitate the debt recovery involving banks and other financial institutions. The
Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) Act passed in 2002 also provide access to DRTs.

Recovery of Debts due to Banks and Financial Institutions (RDDBFI) Act

 The RDDBFI Act provides speedy redressal to lenders and borrowers through the filing
of Original Applications (OAs) in Debts Recovery Tribunals (DRTs) and appeals in
Debts Recovery Appellate Tribunals (DRATs).

What are Debt Recovery Tribunals (DRT)?

 DRTs and DRATs are established by the Central Government and consist of one person
each referred to as the Presiding Officer of the Tribunal and the Chairperson of the
Appellate Tribunal respectively.
 DRTs are empowered to go beyond the Civil Procedure Code and pass comprehensive
orders. It can hear cross-suits, counterclaims and allow set-offs. DRTs were empowered
to adjudicate claims equal to or greater than ten lakh rupees. This limit was raised to
twenty lakh rupees in 2018.
 After adjudication, the DRT issues order and Recovery Certificate, certifying the amount
payable by the borrower. This is executed by Recovery Officers as per the procedure for
recovery of income tax. There are 39 DRTs and 5 DRATs at present.

Jurisdiction of Debt Recovery Tribunals

 DRTs can entertain applications from banks and financial institutions for recovery of
debts which are due to them. The banks may make an application to the Tribunal within
the local limits of whose jurisdiction the defendant resides or carries on business. The
Act bars all other Courts from the adjudication of matters relating to debt recovery apart
from the Supreme Court and High Court.

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Proceedings of Debt Recovery Tribunals

 Banks need to make an application to the DRT which has jurisdiction in the region in
which the bank operates and pay the required fees.
 The defendant shall present a written statement of his defence before the first hearing and
set up a counter-claim during the course of the hearing.
 The Tribunal may, after giving the applicant and the defendant an opportunity of being
heard, pass such interim or final order.
 The interim order passed against the defendant can restrict him from disposing or
transferring his property without the prior assent of the Tribunal.
 DRT after hearing both the parties and their submissions would pass the final judgment
within 30 days from hearing.
 DRT will issue a Recovery Certificate within 15 days from the date of judgment and pass
on the same to Recovery Officer.
 The Tribunal may direct the conditional attachment of the whole or any portion of the
property specified by the applicant.
 The Tribunal may also appoint a receiver and confer him all powers to defend the suit in
the court and to manage the property. Where a certificate of recovery is issued against a
company registered under the Companies Act, 1956 the Tribunal may order the sale
proceeds of such company to be distributed among its secured creditors.

Case laws

 DRT is a special Act for recovery of debt due to banks and financial institutions. DRT
has overriding effect over the provisions of Companies Act,1956, hence leave of the
company court is not required even if the company is under winding up proceedings
(Allahabad Bank vs Canara Bank AIR 2000 SC 1535)
 Money realized under DRT Act and distribution between bank and other secured
creditors, in cases where winding up proceedings are pending in company court, priority
of secured creditors is subject to provisions of 529 A of Companies Act (as per the said
section, priority of secured creditors and workman over other dues and distribution inter
se between secured creditors and workmen should be pari-pasu).

Lakshmi Devi K, Assistant Professor of Law, Unit 5, Banking Law 16

 BANKERS’ BOOK EVIDENCE ACT, 1891
 The Act extends to the whole of India except the State of Jammu & Kashmir
 ‘Bank’ and ‘banker’ means
(i) any company or corporation carrying on business of banking
(ii) any partnership or individual to whose books, provision of this Act are made
applicable
(iii) any post office saving bank or money order office
 ‘Bankers’ books include all books like ledgers, day book, cash book and all other records
used in the ordinary business of a bank. The records can be maintained in any form such
manual records, printed computer printouts, it can be in written form or stored in a micro-
film, magnetic tape or any other form of mechanical or electronic data. Such record can
be either on site or at any off site location including a back-up or disaster recovery site.
 Court means the person or persons before whom a legal proceeding is held and the
’judge’ refers to a judge of a High Court
 Legal proceeding refers to different types of inquiries proceedings and investigation.
Legal proceedings means
(i) any proceeding or inquiry in which evidence is or may be given
(ii) an arbitration
(iii) any investigation or inquiry under Code of Criminal Procdure,1973 or under any
other law as applicable for collection of evidence, conducted by a police officer as
well
 A certified true copy of the bank records.

Important aspects of Bankers’ Book Evidence Act, 1891

 If the records are maintained in written form, a copy of any entry along with a certificate
certifying at the foot of such copy clearly indicating that;
(i) it is a true copy of such entry/entries
(ii) the extract is taken from one of the ordinary books of the bank
(iii) such entry was made in the ordinary course of business
(iv) such record is still in the custody of the bank
(v) if the copy was obtained by a mechanical or other process a certificate is required
for the authenticity of the information/data.
Please note that each certificate mentioned above should bear date and should be
signed by the principal accountant or manager of the bank with his name and
official designation/ title.
 If the records are maintained in the electronic form (computer printouts, floppy, disc,
tapes etc.,) a copy of print out and a certificate as mentioned for the manual records
 If the records are maintained in mechanical form (i) a printout of any entry in the books
of a bank stored in a mechanical or electronic form, it should contain a certificate

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 covering all aspects discussed for manual records. Further in case the books of the bank
are not written in the handwritten form, then the copies in the form computer printout,
such copy must accompany:
(a) a certificate by the principal accountant or the manager stating that it is a
printout of such entry or a copy of such printout
(b) In addition to the above another certificate by a person who is in charge of
computer furnishing a brief description of the computer system and other
particulars like
(i) the safety features adopted by the bank to protect the date integrity;
(ii) prevention of unauthorized entry into the system;
(iii) checks and balancing system of verification of authenticity of input
and output;
(iv) if the data is retrieved and transformed, details of control system, and
(v) in case of micro film and similar manner in which the data are stored,
then the details of the arrangement for the storage and custody of such
storage systems and practices.
 In short, the certificate should be certified by the person in charge of the computer system
certifying about the integrity, accuracy and security of the computer system and the data/
records.
 A certificate of any entry in a banker’s book should in all legal proceedings be received
prima facie evidence of the existence of such entry, and should be admissible as if
original is produced. On production of certified copy, no further evidence is required.
Court can order inspection of books of accounts.

Lakshmi Devi K, Assistant Professor of Law, Unit 5, Banking Law 18