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ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

END SEMESTER EXAMINATIONS – MARCH /APRIL 2015

B.COM - IV SEMESTER

C1 12 402: THEORY AND PRACTICE OF BANKING

Duration: 3 Hours Max. Marks: 100 SECTION - A

I) Answer ALL the questions. Each carries 2 marks. (10x2=20)

1. A cheque for Rs. 2000 which had been crossed originally carries below the crossing the words ‘Crossing Cancelled’ and signed by the drawer and is presented for cash payment on the counter. How would the banker deal with the situation?

2. What do you mean by MICR?

3. Who is a collecting banker? 4. State two objectives of NABARD. 5. Mr. Peshawar is indebted to the bank and has a current account jointly

with Mr. Srinivas. Can the banker be entitled to exercise his right of general lien on the current account jointly held? Give reasons.

6. What do you mean by endorsement? 7. Mention two differences between pledge and hypothecation. 8. Who is called as Bailee? 9. Expand and explain NEFT. 10. Ms. Sonam called up the bank toll free number to enquire about her

account balance. Can the account balance be informed over the phone? Give reasons.

SECTION – B

II) Answer any FOUR questions. Each carries 5 marks. (4x5=20)

11. With the recommendation of one of the Self Help Groups, Ramu, a poor farmer came to a bank to enquire about Micro Credit. How can Ramu benefit by availing Micro Credit?

12. Explain the various earning assets of a bank. 13. Why is Basel norms introduced? Explain its impact on the Indian Banking

system. 14. Write a short note on Investment banking? 15. What is Mortgage? And explain any three types of Mortgage. 16. Define Section 6 of Negotiable Instrument Act. And also mention the

parties to a negotiable instrument.

SECTION – C

III) Answer any THREE questions. Each carries 15 marks. (3x15=45)

17. Mention two differences between Scheduled and Non scheduled banks. And Briefly classify the different types of banks.

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18. Who is a paying Banker? And what precautions are to be taken by a

paying banker. 19. What do you mean by Margin? How important it is to take into

consideration the principles of sound lending and Credit worthiness of a customer in bank lending? Explain.

20. Define banking. Explain in detail the rights and obligations of a banker. 21. Briefly explain the role of changing technology in development of banking

services in India. SECTION – D

IV) Case Study (1x15=15)

22. Why money lenders will be as relevant despite the small bank licencing scheme

Thane, a bustling Mumbai suburb, has at least nine microfinance companies operating and scores of bank branches dot the teeming township, both private as well as state-run. Despite that, Milan Panchal, a 55-year-old money lender, is doing roaring business. Panchal is unperturbed by the prospects of more small banks and micro lenders did not threaten his business either. Stories of money lenders driving farmers to suicide are still a common read in newspapers. Nearly more than four decades of bank nationalisation, and numerous attempts to take finance to the poor have led to little improvement in their conditions. But will it be different this time? The prime minister's Jan Dhan Yojana to ensure a bank account for every Indian household, overdraft facilities, new forms of banking with lighter regulations, and many eager financial entrepreneurs promise a new era in finance, but few are sure about the results.

"Getting people off the money lender will be a challenging and gradual process," says Ashvin Parekh, managing director of Ashvin Parekh Advisory Services. "It will take a while for small banks to cover the financially excluded, given the capital available." The RBI has received 113 applications from aspirants to set up niche banks.

The fact that more than half the country's population does not have access to formal finance and relies on informal funding be it business, or occasions such as marriages and funerals, has put the official machinery in overdrive. The process of transformation could be slow as money lenders have a role and even countries such as Bangladesh, where micro finance has been around for longer, still has money lenders, though less

bloodthirsty. "Historically, where microfinance is there for a longer time like Bangladesh, money lenders are still present," says Samit Ghosh, founder Ujjivan Microfinance. "But their interest rates have become competitive." When a non-banking finance company (NBFC) microfinance institution (MFI) converts into a small bank, it will be able to meet the whole range of financial needs of its clients. It will no longer be exposed to political risk as opposed to NBFCs. The fact that MFIs are growing rapidly

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recently is an indication that they could spread quickly as small banks. The profitability of these micro lenders is impressive. As micro-lenders, what these companies can do is limited. They can give a maximum credit of Rs 50,000 and no two MFIs can lend to the same borrower. The MFI sector has a very low default rate at around 1% of outstanding loans as they engage with customers door-to-door, regularly. Small bank licences are aimed at furthering financial inclusion. NBFC-MFIs are in the business of lending to small clients. As of September 30, 2014, MFIs provided microcredit to over 27.9 million clients, an increase of 23% over second quarter of the previous financial year. One of the key attractions for these MFIs is that they will be able to raise low-cost deposits once small bank licences are given out. Banks lend to MFIs at 10-12%. MFIs charge around 20-24% on an average, as RBI has allowed MFIs to charge a 10% spread of their cost of funds. "Small bank licences will equip MFIs to meet multiple financial needs of customers," says Dilli Raj, MD and CEO, SKS Microfinance. "This transformation will bring in cost efficiency, which will translate into lower cost of borrowing for customers. Mitigating political risk is one of the reasons for MFIs to convert into small banks." The fact that the need for money in villages spans various reasons provides scope for the existence of money lenders. The absence of collateral, the readiness with which money is required, say for a funeral at home, the infrequent visits of bank or micro finance company agents, are among the things that will ensure informal lending continues.

Answer the following questions: (15 marks)

a. What are the reasons behind common man still clinging on to money lenders and not small banks?

b. How the performance of MFI could be improved in the Indian banking sector?

(7.5+7.5) &&&&&&&&&&&&&&&&&&&&&

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End Semester Examinations – April 2015 THEORY AND PRACTICE OF BANKING

Answer Scheme B.Com.( IV SEMESTER)

Duration: 3 Hrs Max. Marks: 100 Section – A

Answer the following questions 10 x 2 = 20 Mks

1. The cheque would be paid across the counter as the cheque is no more a crossed cheque but an open cheque. 2. MICR: Magnetic ink character recognition. It helps in standardization of quality/size, printing of cheques with suitable space for encoding information and facilitate mechanical sorting of cheque no.,city code, bank code and branch code. 3.COLLECTING BANKER: When a Banker is deputed to collect the amount of the cheque from another banker, the former is called as ‘Collecting Banker’.

• LEGAL STATUS: while collecting a customer’s cheque the banker acts either as:

• A holder for value • An agent of the customer.

4.NABARD: The rural financial system in the country calls for a strong and efficient

credit delivery system, capable of taking care of the expanding and diverse credit needs of agriculture and rural development. More than 50% of the rural credit is disbursed by the Co-operative Banks and Regional Rural Banks. NABARD is responsible for regulating and supervising the functions of Co-operative banks and RRBs. In this direction NABARD has been taking various initiatives in association with Government of India and RBI to improve the health of Co-operative banks and Regional Rural Banks.

5. No. The banker’s right to general lien cannot be entitled on a joint account, since two account are not in the exclusive name of Mr. Peshawar.

6.Endoresment Section 15: when the maker or drawer of a negotiable instrument signs the

same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to have endorsed the same and is called endorser.

7. PLEDGE AND HYPOTHECATION

• SEC 172 of Indian Contract Act 1872, defines a pledge as the “bailment of goods as security for payment of a debt or performance of a promise.”

• A pledge occurs when goods are delivered for getting advance, • The goods pledged will be returned to the owner on repayment of the

debt and

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• The goods serve as a security for the debt. • A pledge may be in respect of goods, stocks, shares, documents of title to

goods and any other movable property. • The person who transfers the goods is called pledger and to whom it is

transferred is called the pledgee. Hypothecation

• The mortgage of movable property for securing a loan is called hypothecation.

• A charge over movable properties like goods, raw materials, goods-in-progress is created.

• HART: A charge against property for an amount where neither ownership nor possession is passed to the creditor.

• It is only an extended idea of pledge, the creditor permitting the debtor to retain the possession either on behalf of or in a trust for himself.

8. The bank functions as bailee when it keeps valuable articles, diamond, gold, securities and other documents of its customers. The bank works, as the custodian of these things and it is implied responsibility of the bank to return these things safely. Thus the bank is a bailee and the customer is a bailor or beneficiary. 9.NEFT: National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any

individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. 10. Yes account balance can be informed over the phone once certain details about the account holder is answered by the account holder for authentication.

Section – B

Answer any 4 out of 6 questions 4 x 5 = 20 Mks 11. Very small loans given to poor people who typically lack collateral, steady employment and verifiable credit history.

• Also known as “micro-lending” or “micro-loan” (Muhammed Yunus, no collateral, low interest)

IMPORTANCE • Design to support entrepreneurship • Helps in reduction of poverty • Higher employment and higher income • Empowerment of women and upliftment of community • Better education, improved nutrition.

12. An income-producing investment that is owned by a business, institution or individual.

• All advances for short term and long term. • Money at call and short notice • Investment in govt. and semi-govt securities • Discounting of bills.

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13.why basel norms and its impact.

Basel II, initially published in June 2004, was intended to create an international

standard for banking regulators to control how much capital banks need to put

aside to guard against the types of financial and operational risks banks (and the

whole economy) face. One focus was to maintain sufficient consistency of

regulations so that this does not become a source of competitive inequality amongst

internationally active banks. Advocates of Basel II believed that such an

international standard could help protect the international financial system from the

types of problems that might arise should a major bank or a series of banks collapse.

In theory, Basel II attempted to accomplish this by setting up risk and capital

management requirements designed to ensure that a bank hasadequate capital for

the risk the bank exposes itself to through its lending and investment practices.

Generally speaking, these rules mean that the greater risk to which the bank is

exposed, the greater the amount of capital the bank needs to hold to safeguard

itssolvency and overall economic stability.

Politically, it was difficult to implement Basel II in the regulatory environment prior

to 2008, and progress was generally slow until that year's major banking crisis

caused mostly by credit default swaps, mortgage-backed security markets and

similar derivatives

14. They provide medium and long-term finance to industries to meet their fixed capital requirements. (Expansion and modernisation).

• Promote new industries by underwriting the issue of securities • Provide technical guidance for efficient management of industries.

15. A mortgage is the transfer of an interest in the specific immovable property.

• Simple mortgage • Mortgage by conditional sale • Usufructuary Mortgage. • English mortgage • Mortgage by deposit of title deeds • Anomalous mortgage.

16. Section 6 of the Act defines “A cheque is a bill of exchange drawn on a specified

banker, and not expressed to be payable otherwise than on demand”.

PARTIES TO NEGOTIABLE INSTRUMENTS

Parties to Bill of Exchange

1. Drawer: The maker of a bill of exchange is called the ‘drawer’.

2. Drawee: The person directed to pay the money by the drawer is called

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the ‘drawee’,

3. Acceptor: After a drawee of a bill has signed his assent upon the bill, or

if there are more parts than one, upon one of such pares and delivered

the same, or given notice of such signing to the holder or to some

person on his behalf, he is called the ‘ acceptor’.

4. Payee: The person named in the instrument, to whom or to whose order the

money is directed to be paid by the instrument is called the ‘payee’. He is the

real beneficiary under the instrument. Where he signs his name and makes

the instrument payable to some other person, that other person does not

become the payee. 5. Indorser: When the holder transfers or indorses the instrument to anyone

else, the holder becomes the ‘indorser’.

6. Indorsee: The person to whom the bill is indorsed is called an ‘indorsee’. 7. Holder: A person who is legally entitled to the possession of the negotiable

instrument in his own name and to receive the amount thereof, is called a

‘holder’. He is either the original payee, or the indorsee. In case the bill is

payable to the bearer, the person in possession of the negotiable instrument is

called the ‘holder’. 8. Drawee in case of need: When in the bill or in any endorsement, the name of

any person is given, in addition to the drawee, to be resorted to in case of

need, such a person is called ‘drawee in case of need’.

In such a case it is obligatory on the part of the holder to present the bill to

such a drawee in case the original drawee refuses to accept the bill. The bill is

taken to be dishonoured by non-acceptance or for nonpayment, only when

such a drawee refuses to accept or pay the bill. 9. Acceptor for honour: In case the original drawee refuses to accept the bill or

to furnish better security when demanded by the notary, any person who is

not liable on the bill, may accept it with the consent of the holder, for the

honour of any party liable on the bill. Such an acceptor is called ‘acceptor for

honour’.

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Section – C

Answer any 3 out of 5 questions 3 x 15 = 45 Mks

1. 17. Scheduled Bank- (2 marks) • must have paid up capital + reserves of at least Rs. 5 Lakhs • Its affairs should not be detrimental to the interest of its

depositors • Must be a corporation or a co-operative society and must not be

a partnership or a single owner firm. 2. Non- scheduled Bank

• Those banks whose names do not appear in the Second schedule of the RBI Act.

Classification of banks.(13 marks)

• Second schedule of the RBI Act

1. Scheduled Bank- 2. Non- scheduled Bank

• Domicile

1. Foreign 2. Domestic

• Functions or Specialised area

1. Savings banks 2. Agricultural banks 3. Exchange banks 4. Central bank 5. Industrial banks 6. Commercial banks.

• Ownership

1. Public 2. Private 3. Cooperative • Organisation Structure

1. Unit 2. Branch 3. Chain

18.paying banker :

Banker is the one who in the ordinary course of his business, honours cheques drawn upon him by persons from and for whom he receives money on current accounts.

Thus it is the prime duty of a banker to honour the cheques of its customers. Precautions

Precaution regarding ‘form of the cheque’:

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Precautions regarding the ‘date’

Precautions regarding amount

Precautions regarding funds of the customer:

Precaution regarding material alteration

Precautions regarding Drawer’s Signature Precautions regarding banking hours Precautions regarding crossing

19. Margin = value of security – amount of loan granted.(2 marks) Credit worthiness of a customer(6.5 marks)

• Character: (honesty, integrity, regularity and promptness, goodwill, responsibility,, good habits..)

• Capacity: ability to manage business.(initiative, interest and experience, technical competence, operational efficiency..)

• Capital: banker does not lend money to a borrower who does not have adequate funds of his own.

Principles of sound lending(6.5 marks)

• Safety • Liquidity • Profitability • Security.

20. According to section 5(b) “Banking means the accepting for the purpose of

lending or investment of deposit of money from the public, repayable on demand or

otherwise and withdrawal by cheque, draft, order or otherwise”.

RIGHTS OF BANKER

1. Right of “Set off or the right to combine accounts”: A banker can

combine two or more accounts of a customer and shoe the net balance

as the amount due to from him.

2. Banker’s General Lien: The banker has a right of general lien against

the customer; the right to retain as security for a general balances of

accounts any goods and securities bailee to him.

3. Right of Application: Where customer has not directed the bank to

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appropriate a deposit against a particular debt, it is the bank’s right to

appropriate the Payment to any debt.

4. Law of Limitation: Under article 22 of part 2 of the schedule to the

limitation act 1963 the period of limitation for the refund of bank

deposits is there years from the date the customer demand repayment.

OBLIGATION OF A BANKER.

1. Banker has an obligation to honor the cheques of the customer up to

the amount standing to the credit of the customer’s account.

2. The banker has to maintain the secrecy of his customer’s account.

3. The banker can charge interest all compound rates for defaults in

payments of loan by the customer or for overdrawn amounts.

4. Banker is allowed to produce certified copies of the entries made in the

original books of account as proof of transaction in legal proceedings

under certain circumstances and cases in accordance with the

provisions of banker’s book evidence act, 1891.

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5. A banker is under the obligation of law to suspend the operation of

accounts by the customer in case of receipt of garnishee order from the

court.

21. Impact of technology in banking.

The use of computers has led to the introduction of online banking in India. The use of

computers in the banking sector in India has increased many fold after the economic

liberalisation of 1991 as the country's banking sector has been exposed to the world's

market. Indian banks were finding it difficult to compete with the international banks in

terms of customer service, without the use of information technology.

The RBI set up a number of committees to define and co-ordinate banking technology.

These have included:

In 1984 was formed the Committee on Mechanisation in the Banking Industry

(1984)[27] whose chairman was Dr. C Rangarajan, Deputy Governor, Reserve Bank of

India. The major recommendations of this committee were

introducing MICR technology in all the banks in the metropolises in India.[28] This

provided for the use of standardized cheque forms and encoders.

In 1988, the RBI set up the Committee on Computerisation in Banks

(1988)[29] headed by Dr. C Rangarajan. It emphasized that settlement operation must

be computerized in the clearing houses of RBI

in Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram. It further

stated that there should be National Clearing of inter-

city cheques atKolkata, Mumbai, Delhi, Chennai and MICR should be made

operational. It also focused on computerisation of branches and increasing

connectivity among branches through computers. It also suggested modalities for

implementing on-line banking. The committee submitted its reports in 1989 and

computerisation began from 1993 with the settlement between IBA and bank

employees' associations.[30]

In 1994, the Committee on Technology Issues relating to Payment

systems, Cheque Clearing and Securities Settlement in the Banking Industry

(1994)[31] was set up under Chairman W S Saraf. It emphasized Electronic Funds

Transfer (EFT) system, with the BANKNET communications network as its carrier. It

also said that MICR clearing should be set up in all branches of all those banks with

more than 100 branches.

In 1995, the Committee for proposing Legislation on Electronic Funds Transfer

and other Electronic Payments (1995)[32] again emphasized EFT system.[30]

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Automated teller machine growth

The total number of automated teller machines (ATMs) installed in India by various

banks as of end June 2012 was 99,218.

Cheque truncation initiative

In 2008 the Reserve Bank of India introduced a system to allow cheque truncation in

India, the cheque truncation system as it was known was first rolled out in the National

Capital Region and then rolled out nationally.

Expansion of banking infrastructure

Physical as well as virtual expansion of banking through mobile banking, internet

banking, tele banking, bio-metric and mobile ATMs is taking place since last decade and

has gained momentum in last few years.

Section – D

ONE Compulsory Case study (No choice) 1 x 15 = 15 Mks Marks could be awarded as per the discretion of the concerned teacher. (7.5+7.5=15marks)