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8/6/2019 Commercial Banking II
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Commercial BankingCommercial Banking --IIIIInstitute of Public EnterpriseInstitute of Public Enterprise
July,2010July,2010HyderabadHyderabad
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Bank NationalizationBank Nationalization
Why Nationalization?Why Nationalization?
Concentration of Economic PowerConcentration of Economic Power in few private handsin few private hands
Branch Expansion ( Rural BranchesBranch Expansion ( Rural Branches ±± Mass Banking)Mass Banking)
Credit Allocation ( Not Profit Motive)Credit Allocation ( Not Profit Motive) ±± neglect of neglect of agricultureagriculture
Prevent MalpracticesPrevent Malpractices
Change in attitude & outlook was neededChange in attitude & outlook was needed
When Nationalization ?When Nationalization ?
19691969 ±± applicable in Feb 1970applicable in Feb 1970
19801980 ±± April 1980April 1980
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Reserve Bank of IndiaReserve Bank of India
Custodian of Foreign Exchange and other ReservesCustodian of Foreign Exchange and other Reserves
Maintains Currency ChestsMaintains Currency Chests ±± Print NotesPrint Notes
Bankers¶ BankBankers¶ Bank
Controller of CreditController of Credit ±± Selective Credit controlSelective Credit control
Banker to GovernmentBanker to Government ±± Treasury & other Debt ManagementTreasury & other Debt Management Regulatory FunctionRegulatory Function ±± Commercial Banks, Money Market, ForeignCommercial Banks, Money Market, Foreign
Currency Market, NBFCsCurrency Market, NBFCs
Supervisory & Control of Banks & NBFCsSupervisory & Control of Banks & NBFCs --Collects information ,Collects information ,Conducts Inspection / Audit, Issues operational guidelines,Conducts Inspection / Audit, Issues operational guidelines,permission for Branch Expansion, appointment of executivespermission for Branch Expansion, appointment of executives
Control of interest , inflation and exchange rates in the economyControl of interest , inflation and exchange rates in the economy(Zero risk rates, Control of credit & market liquidity / money(Zero risk rates, Control of credit & market liquidity / moneysupply, buying and selling of currency in the market)supply, buying and selling of currency in the market)
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Credit ControlCredit Control
Variation in Bank RateVariation in Bank Rate ±± The rate at which RBI discountsThe rate at which RBI discountseligible bills of exchanges of commercial bankseligible bills of exchanges of commercial banks
Variation in CRR & SLR ( Cash Reserve Ratio & StatutoryVariation in CRR & SLR ( Cash Reserve Ratio & StatutoryLiquidity Ratio)Liquidity Ratio)
Open Market Operation ( Buying and selling of Central andOpen Market Operation ( Buying and selling of Central andState Government Securities to infuse or flush out liquidityState Government Securities to infuse or flush out liquidityfrom the market)from the market)
Selective Credit Control ( Prevent hoarding of essentialSelective Credit Control ( Prevent hoarding of essentialcommodities and speculative activitiescommodities and speculative activities
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Other ControlsOther Controls
Credit Exposure to individual and group borrowersCredit Exposure to individual and group borrowers
UnUn--hedged Foreign Currency exposurehedged Foreign Currency exposure
Margin on advances against sharesMargin on advances against shares
Issue of GuaranteesIssue of Guarantees
Bank finance to employees to buy shares in their ownBank finance to employees to buy shares in their owncompaniescompanies
Limit on Unsecured advances and unsecured guaranteesLimit on Unsecured advances and unsecured guarantees
CIBILCIBIL ±± Credit Information Bureau of India LtdCredit Information Bureau of India Ltd ±± KeepsKeepstrack of all borrowings from Banks and repayment records.track of all borrowings from Banks and repayment records.
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Related DefinitionsRelated Definitions
Repo & Reverse Repo RatesRepo & Reverse Repo Rates ±± RBI issues securities toRBI issues securities toborrow funds and repurchases securities on a future date atborrow funds and repurchases securities on a future date ata given rate ( known as reverse repo rate). Repo rate is thea given rate ( known as reverse repo rate). Repo rate is therate at which RBI lends money to bank by buying outrate at which RBI lends money to bank by buying out
securities to sell them on a future date to the banks at asecurities to sell them on a future date to the banks at agiven price. These are short term rates to control shortgiven price. These are short term rates to control shortterm market liquidity. RBI always borrows cheap and lendsterm market liquidity. RBI always borrows cheap and lendshigh. So reverse Repo rates are lower than repo rates.high. So reverse Repo rates are lower than repo rates.Reverse repo rate is a key or bench mark overnight rate.Reverse repo rate is a key or bench mark overnight rate.
CRR and SLR are related to net banks demand and timeCRR and SLR are related to net banks demand and timeliabilities ( Fortnightly). CRR is kept with RBI. SLR is theliabilities ( Fortnightly). CRR is kept with RBI. SLR is theamount of investment ( certain % of Net Demand and Timeamount of investment ( certain % of Net Demand and TimeLiabilities) banks will keep in approved securities like TLiabilities) banks will keep in approved securities like T--BillsBillsand dated securities etc.and dated securities etc.
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Related DefinitionsRelated Definitions
M1 = Narrow Money, M3 = Broad MoneyM1 = Narrow Money, M3 = Broad Money
M1 = Net Demand Deposit of Banks ( CA + Certain % of M1 = Net Demand Deposit of Banks ( CA + Certain % of SB) +Other deposits with RBI +Currency Notes & CoinsSB) +Other deposits with RBI +Currency Notes & Coinsheld by publicheld by public
M3= M1 + Net Time Deposit with Banks ( including balanceM3= M1 + Net Time Deposit with Banks ( including balanceportion of SB)portion of SB)
M1 and M3 are measures of money supplyM1 and M3 are measures of money supply
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Banking developmentsBanking developments
Any where Banking / Anytime BankingAny where Banking / Anytime Banking ±± ATMS (AutomatedATMS (AutomatedTeller MachinesTeller Machines ±± PINPIN ±± Personal Identification Number)Personal Identification Number)
(Interior ATMS(Interior ATMS±± within the branch /Exterior ATMswithin the branch /Exterior ATMs-- outsideoutsidethe branch , Online ATMsthe branch , Online ATMs-- connected to bank¶s hostconnected to bank¶s host
computer / Offline ATMscomputer / Offline ATMs±± not connected to bank¶s hostnot connected to bank¶s hostcomputer)computer)
Shared ATMsShared ATMs ±± Can draw from any bank ATMs ( Visa,Can draw from any bank ATMs ( Visa,Master Card , Amex )Master Card , Amex )
EE-- BankingBanking ±± Electronic Banking / Internet BankingElectronic Banking / Internet Banking -- IPINIPIN
MM--BankingBanking-- Mobile BankingMobile Banking -- TPINTPIN Debit Cards, Credit Cards, Smart Cards ( with an embeddedDebit Cards, Credit Cards, Smart Cards ( with an embedded
integrated circuitintegrated circuit ±±IC Chip. The IC contains memory, mayIC Chip. The IC contains memory, maycontain a processor and communicates with the externalcontain a processor and communicates with the externalworld through contacts on the surface of the card)world through contacts on the surface of the card)
Electronic Fund TransferElectronic Fund Transfer
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ATMs ATMs
Advantages of ATMsAdvantages of ATMs -- CustomersCustomers
24 hour 7 days a week, any where banking24 hour 7 days a week, any where bankingfacility, efficient and quick service, privacy infacility, efficient and quick service, privacy in
transaction, free from errorstransaction, free from errors Advantages For BankAdvantages For Bank ±± No need to extendNo need to extend
working hours, no crowding of branches,working hours, no crowding of branches,reduction in operational cost as it reduces thereduction in operational cost as it reduces theneed of extensive branch network, human errorneed of extensive branch network, human erroreliminated, increased market penetration,eliminated, increased market penetration,employees can be spared for more analyticalemployees can be spared for more analyticalworkwork
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ATMs ATMs
Advantages of ATMsAdvantages of ATMs -- CustomersCustomers
24 hour 7 days a week, any where banking24 hour 7 days a week, any where bankingfacility, efficient and quick service, privacy infacility, efficient and quick service, privacy in
transaction, free from errorstransaction, free from errors Advantages For BankAdvantages For Bank ±± No need to extendNo need to extend
working hours, no crowding of branches,working hours, no crowding of branches,reduction in operational cost as it reduces thereduction in operational cost as it reduces theneed of extensive branch network, human errorneed of extensive branch network, human erroreliminated, increased market penetration,eliminated, increased market penetration,employees can be spared for more analyticalemployees can be spared for more analyticalworkwork
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Debit Card, Credit Card, Smart Card, Silver, Gold &Debit Card, Credit Card, Smart Card, Silver, Gold &
Platinum CardPlatinum Card
Debit CardDebit Card
Credit CardCredit Card
Smart CardSmart Card
Silver CardSilver Card Gold CardGold Card
Platinum CardPlatinum Card
Petrol Card / Airlines Card/ Diners Club CardPetrol Card / Airlines Card/ Diners Club Card
Visa / Masters / Amex CardsVisa / Masters / Amex Cards
CPPCPP ±±Card Protection Plan www.cppindia.comCard Protection Plan www.cppindia.com
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Banking FunctionsBanking Functions
Accepting Deposits ( SB, CA,STD, FDs)Accepting Deposits ( SB, CA,STD, FDs) Giving Loans ( W /C, Term Loan, EducationalGiving Loans ( W /C, Term Loan, Educational
Loan, Housing Loan, Consumer Loan, AgriculturalLoan, Housing Loan, Consumer Loan, AgriculturalLoan, Industrial / Infrastructural Finance,Loan, Industrial / Infrastructural Finance,
Financing SMEs, Microcredit etc)Financing SMEs, Microcredit etc) Remittances, Drafts IssueRemittances, Drafts Issue Merchant BankingMerchant Banking Bank GuaranteesBank Guarantees Forex TransactionsForex Transactions Financial Planning & Wealth ManagementFinancial Planning & Wealth Management Safe Custody of Deeds, Securities / Safe DepositSafe Custody of Deeds, Securities / Safe Deposit
lockerslockers
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Banking FunctionsBanking Functions
Credit Card, Debit CardCredit Card, Debit Card
Bank AssuranceBank Assurance
Sale of Mutual Fund / Insurance ProductsSale of Mutual Fund / Insurance Products
Tax AdvisoryTax Advisory Infrastructure Finance and AdvisoryInfrastructure Finance and Advisory
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Banker Banker-- Customer relationshipsCustomer relationships
Relationship as Debtor & CreditorRelationship as Debtor & Creditor
(Deposits)(Deposits) ±± Demand is necessaryDemand is necessary ±± Demand in prescribedDemand in prescribedMannerManner
CreditorCreditor ±± DebtorDebtor ±± Loans and advancesLoans and advances
Banker as Trustee and customer BeneficiaryBanker as Trustee and customer Beneficiary±±Safe Custody /Safe Custody /Safe Deposit LockersSafe Deposit Lockers
BankBank ±± Bailee and CustomerBailee and Customer ±± BailorBailor ±± Safe CustodySafe Custody
Bank Lessor and CustomerBank Lessor and Customer ±± LesseeLessee ±± Leasing of SafeLeasing of SafeDeposit lockerDeposit locker
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Banker Banker-- Customer RelationshipsCustomer Relationships
Banker as an agentBanker as an agent ±± remittances, Clearing , Collection of remittances, Clearing , Collection of ChequesCheques
Bank is Indemnified and Customer is IndemnifierBank is Indemnified and Customer is Indemnifier ±± Issue of Issue of Duplicate against lost draftDuplicate against lost draft
Know Your Customer (KYC) NormsKnow Your Customer (KYC) Norms ±± Identity and addressIdentity and addressproof To monitor transactions of suspicious natureproof To monitor transactions of suspicious nature
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Obligations of a Banker Obligations of a Banker
Obligation to Pay ChequesObligation to Pay Cheques ±± Fund available,Fund available,Cheque properly drawn, valid signature, not staleCheque properly drawn, valid signature, not staleor post dated, not a crossed cheque, receivedor post dated, not a crossed cheque, receivedafter stop payment or death of customer orafter stop payment or death of customer orattachment / garnishee order is issuedattachment / garnishee order is issued
Obligation to Maintain Secrecy of AccountObligation to Maintain Secrecy of Account ±±unless required under law, under express orunless required under law, under express orimplied consent of the customer or disclosure isimplied consent of the customer or disclosure is
required in public / national interest, to a fellowrequired in public / national interest, to a fellowbankerbanker
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Rights of a Banker Rights of a Banker -- LienLien
Lien means right of the creditor to retainLien means right of the creditor to retainpossession of goods / securities owned by thepossession of goods / securities owned by thedebtor till the debt is paiddebtor till the debt is paid
Lien are of two kinds: (i) Special Lien and (ii)Lien are of two kinds: (i) Special Lien and (ii)General LienGeneral Lien ±± Where the rights conferred on theWhere the rights conferred on thecreditor confines to particular goods it is calledcreditor confines to particular goods it is calledspecial lien tailors lien on a stitched cloth. Whenspecial lien tailors lien on a stitched cloth. Whenthe right extends to all goods, it is called generalthe right extends to all goods, it is called general
lienlien Banker¶s lien is a general lienBanker¶s lien is a general lien ±± which is anwhich is an
implied pledgeimplied pledge ±± banker can sale goods to realizebanker can sale goods to realizeits debtits debt
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Right to SetRight to Set--off & Appropriationoff & Appropriation When the bank transfers a part of balance from oneWhen the bank transfers a part of balance from one
account to another of the same customer, both accountsaccount to another of the same customer, both accountsoperated by him in the same capacity, it is setoperated by him in the same capacity, it is set--off off
When there are several debt accounts of the debtor, theWhen there are several debt accounts of the debtor, the
right of appropriation of any credits of any such account isright of appropriation of any credits of any such account iswith the debtor. In case the debtor fails to give instruction,with the debtor. In case the debtor fails to give instruction,the right of appropriation is with the creditor / bankerthe right of appropriation is with the creditor / banker
In partnership account if a partner dies, the firms accountIn partnership account if a partner dies, the firms accountshould be discontinued and the remaining partners shouldshould be discontinued and the remaining partners should
open a separate account for their furt
her transactionsopen a separate account for t
heir furt
her transactions
Claytons RuleClaytons Rule ±±Credit entries adjust debts in chronologicalCredit entries adjust debts in chronologicalorderorder ±± partner / guarantor¶s death / insolvencypartner / guarantor¶s death / insolvency
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Right of SetRight of Set--off off
The accounts should be of same name and sameThe accounts should be of same name and samerightright
Sole proprietor and individual account can beSole proprietor and individual account can becombinedcombined
Unless nothing is agreed to the contrary, aUnless nothing is agreed to the contrary, apartners individual account can be setpartners individual account can be set--off againstoff againstdebt of partnership firm as partners are jointlydebt of partnership firm as partners are jointlyand severally liable for the debts taken by theand severally liable for the debts taken by thefirmfirm
Right to set off can be applied for debts due butRight to set off can be applied for debts due butnot future or contingent debtsnot future or contingent debts
Debts should be a sum certain absolute beforeDebts should be a sum certain absolute beforeexercising the right to setexercising the right to set--off off
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Right to SetRight to Set--off ( Continued)off ( Continued)
It is banker¶s discretion whether to applyIt is banker¶s discretion whether to applyright to setright to set--off or notoff or not
Right to setRight to set--off should be applied beforeoff should be applied before
the garnishee order becomes effective.the garnishee order becomes effective.After it becomes effective, the right canAfter it becomes effective, the right cannot be exercised.not be exercised.
Banker must obtain a letter to exerciseBanker must obtain a letter to exercise
right to setright to set--off and lien at the time of off and lien at the time of granting a loan.granting a loan.
Banker can exercise this right withoutBanker can exercise this right withoutgiving any notice.giving any notice.
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Automatic Right to Set Automatic Right to Set--off in certainoff in certain
casescases
On death of customer closing theOn death of customer closing theaccount by credit of the debt accountaccount by credit of the debt account
When the customer becomes insolventWhen the customer becomes insolventor lunaticor lunatic
When a garnishee order is issued onWhen a garnishee order is issued onthe customer¶s account by the courtthe customer¶s account by the court
When a notice of assignment of creditWhen a notice of assignment of creditbalance to some one else has beenbalance to some one else has beengiven by the customer to the bankergiven by the customer to the banker
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Right of AppropriationRight of Appropriation--Indian LawIndian Law
& Clayton¶s Rule& Clayton¶s Rule If the debtor does not indicate / intimateIf the debtor does not indicate / intimate
the right of appropriation is vested with the right of appropriation is vested with the creditorthe creditor
Creditor may apply at his discretion to anyCreditor may apply at his discretion to anylawful debt actually due and payable tolawful debt actually due and payable tohim from the debtorhim from the debtor
Where neither party makes any indicationWhere neither party makes any indicationregarding appropriation, the paymentregarding appropriation, the payment
shall be applied in discharge of the debt inshall be applied in discharge of the debt inorder of time.order of time. If the debts are of equal standing (date) ,If the debts are of equal standing (date) ,
the payment shall be applied in dischargethe payment shall be applied in dischargeof each proportionatelyof each proportionately
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Rights of a Banker Rights of a Banker ± ± Clayton¶s RuleClayton¶s Rule
In case of a debt due with interest, any paymentIn case of a debt due with interest, any paymentmade by the debtor in first instance to be appliedmade by the debtor in first instance to be appliedtowards satisfaction of interest and there aftertowards satisfaction of interest and there afterprincipal unless there is an agreement to theprincipal unless there is an agreement to thecontrarycontrary
If the customer has two or more accountsIf the customer has two or more accountsClayton's rule would not apply, however right toClayton's rule would not apply, however right tosetset--off would be applicableoff would be applicable
Clayton¶s rule is applicable to running currentClayton¶s rule is applicable to running currentaccount or cash credit account only and does notaccount or cash credit account only and does notapply to FD and SB Accountsapply to FD and SB Accounts
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Special Type of CustomersSpecial Type of Customers
MinorMinor
Joint AccountJoint Account
HUFHUF PartnershipPartnership
Limited CompaniesLimited Companies
TrustsTrusts Clubs & SocietiesClubs & Societies
Government & Public BodiesGovernment & Public Bodies
OthersOthers