Slide 3 - Retail Banking Operations

RETAIL BANKING OPERATIONS

OUTLINES/LEARNING OBJECTIVES

• What is Retail Banking – Reasons for Shift of Focus from Wholesale/Corporate Banking to Retail Banking

• Different Retail Banking Operations – Both on Liability Side as well as on Asset Side

• Banker Customer Relationships – Different types of Customers

• Relationship Banking/Marketing & CRM

• Banker’s duties/obligations and Rights and Customer’s Rights and Obligations

• Opening and Operation of Deposit Accounts - Formalities

OUTLINES/LEARNING OBJECTIVES

• KYC-AML Guidelines for opening of Deposit or Loan Accounts

• Resource Mobilisation/Deposit Products in India & abroad/Managing & Pricing of Deposit Services

• Strategies for Mobilisation of CASA Deposits

• Deposit Insurance

• Nomination facility of Bank Deposits, Safe Custody of Articles & Safe Deposit Lockers

• NI Act – Salient Features

• Key Words/Terminologies/Glossary

• Key Words/Terminologies/Glossary

What is Retail Banking ?• Retail Banking refers to dealing of Commercial Banks to meet the multiple

banking requirements of the individual customers and households, both on the liability side and asset side of the balance sheet by segmenting the individuals and households as a separate business market, aka Personal Segment Banking.

• Retail Banking includes a comprehensive range of financial products, viz., Fixed Deposits, Current/Savings Accounts on the liabilities side; and Personal Loans, housing loans, auto loans, educational loans, loans for consumer durables, loans ag. shares/bonds/securities, loans for subscribing to IPO on the asset side. Related ancillary services include credit cards, debit cards, demat and depository services, 3-in-1 share trading account, bill pay services, wealth management products like mutual funds, insurance products and investment advisory services, cash management services, funds transfer, internet banking, tele banking and mobile banking, safe deposit lockers etc.

What is Retail Banking ?• Today’s retail banking sector is characterised by 3 basic features :

• 1. Multiple Products (deposits, credit cards, loan products, insurance, investments, securities)

• 2. Multiple channels of distribution (Branch, Call Centre, Internet and Kiosk, DSA/DMA)

• 3. Multiple customer groups (Individuals, households, small business, corporate)

• Today, the most proactive banks (domestic, foreign, private or public) have entered the retail banking segment in a big way and have identified it as a principal growth driver and key profit driver with retail loan portfolio constituting about 20 – 25% of the total outstanding advances.

Why shift of focus to Retail BankingDrivers of Retail Banking in India

• Demand Side Factors

- Gradual Financial Disintermediation : Loan demands from big corporates falling due to easy and cheap credit availability from domestic and international markets via CPs, public deposits, shares, bonds, ECBs leading lesser reliance on bank loans

- Advent of Economic Liberalisation : Banks loan focus shifted gradually from production oriented economic activities of Commercial & Industrial (C & I) loans to consumption oriented activities like retail loans. More & more no. of players including Banks, NBFCs, MFs, Insurance Companies, Brokerage houses leading to increased competition among players to tap the savings of the people and also to meet C & I loans resulting in thinning profit margin from corporate/wholesale loans. Rising NPA in C & I loans owing partly to liberalised lending policies due to competition and partly to increased business risks due to economic liberalisation and globalisation/economic slowdown etc.


- Changing Consumer Demographics/Burgeoning Middle Class (upwardly mobile), moderation of tax rates and growing personal disposable incomes, rising consumerism : Rising economic prosperity and consequent increase in purchasing power has given a fillip to consumer boom. Changing consumer demographics indicates vast potential for growth in consumption both qualitatively and quantitatively in India. India is one of the countries having highest proportion (about 70%0 of the population below 35 years of age.

- Changing Indian Culture & Philosophy (from saving to spending & consuming, from debt shy to debt savvy)


- Cheap and easy availability of credit : Low & falling interest rates in the economy coupled with competition among bank and non-bank players has lowered the cost of credit and further made availability of credit easy and convenient and customer friendly. This has increased the demand for retail credit for Personal Loans, Auto Loans, Home Loans etc.

- Convergence of Technology & Convenience Banking : The next-gen customers are more attracted towards state of the new banking technology like ATM, Debit/Credit Card, Internet and Mobile banking than the traditional brick & mortar four walls banking.

Why shift of focus to Retail Banking

• Supply Side Factors

- Advent of Economic Liberalisation : Led to Branch expansion and increased competition among Banks to mobilise resources coupled with rising income of the people. Due to all this banks were flush with lot of liquidity. Due to falling loan demand from C & I, banks were desperately looking to augment their loan portfolio and diversify portfolio risk. Retail Banking fulfilled that need.

Why shift of focus to Retail Banking - Rate of return/Profitability from retail loan portfolio is relatively much higher even after considering the higher monitoring costs compared to wholesale/C & I loans (b/o lower bargaining power of retail customers both on the liability and asset side) where the return was pretty low (b/o higher bargaining power of and availability of cheaper financing alternatives to Corporate Customers). Further the delinquency rate i.e., default rates in case of retail loan portfolio is comfortably lower than the wholesale/C & I loan portfolio.

- Retail loans provide lot of portfolio diversification and consequent overall lower loan loss/NPA risk.

- Cross Selling of other related Products of the banks/Third Party Products like Insurance and MF and thus increasing customer stickiness (a customer retention strategy)

Banker Customer Relationship - 1• Banker- Customer relationship is contractual/legal. The

contract is formed when the bank agrees to open an account (deposit or loan)/provide credit facility for/to the customer. Hence it is necessary to understand the legal definitions of each party.

• Definition of a Banker : According to the Negotiable Instruments (NI) Act, 1881, a Banker is “A body of persons … who carry on the business of banking.”

• Section 5 (c) of BR Act, 1949 defines the term banking company as “A company which transacts the business of banking in India.”

Banker Customer Relationship - 2• Definition of a Customer : No statutory definition either in

English or Indian Banking Laws. As per convention, a customer is a person or an association of persons or any legal entity having an account relationship with the bank and whose dealings with the bank are in the nature of regular banking business (Duration and Continuity Theory). Customer is defined in the KYC guidelines of RBI.

• In Indian Banking Convention, any person having a Savings Bank or Current Deposit Account which is properly introduced with at least 6 months of satisfactory operation is considered as a bona fide Customer of a Bank for all practical purposes.

Banker Customer Relationship - 3

• Banker – Customer Relationship starts with the opening of a Bank Account or availing of a loan facility and continues until properly terminated. It’s a Contractual or Legal Relationship.

• Who can open a deposit account ?

• A person competent to contract can open a deposit account with a bank branch of his/her choice and convenience by fulfilling other requirements of the bank as mentioned below.


• Requirements of Opening a Bank Account/ A prospective customer has to fill up and sign the prescribed A/C Opening/application form and furnish :

- Introduction/Introductory reference from an acceptable person (need for introduction & who can introduce ?)

- His/her 2 passport size Photographs


- Photocopy of Income Tax PAN/GIR No. or Declaration in IT form No. 60/61

- Initial deposit of the prescribed minimum amount (varies from bank to bank)

- Know Your Customer (KYC) Norms Compliance (Submission of Documentary evidences as to acceptable Proof of Identity and Proof of Residential Address)


Since this stage forms the basis of relationship it will be appropriate if the bank spends time with the customer explaining the various aspects of the account and operational instructions and precautions reg. cheque book, its safe custody and about ATM/Debit Card etc.


• Need for KYC Compliance :

• It’s an Anti-Money Laundering (AML) device

• For Risk Management

• For Customer Relationship Management/ Marketing (CRM) and Cross-Selling

• Anti-Money Laundering (AML) Laws : US Patriot Act - 2001, PMLA-2002 in India – Purpose is to curb financial terrorism (CFT) and preventing banking and financial channels being used for terror financing.

Banker Customer Relationship - 8• What is Money Laundering Process ? : Money +

Laundering. Washing dirty money to remove its stigma/dirt/tainted tag/illegal origin. Thus it is conversion or transfer of dirty/tainted money, generated from anti-social, illicit activities like drug trafficking, smuggling, terrorist activities, international bank and security frauds, bribery, intellectual property theft and other criminal or unlawful activities, by several transactions/transfers in order to conceal/disguise/smudge its illegal source or origin and so as to appear to have originated from legitimate sources.


• Once the criminals successfully disguise their illicit origin, they can reinvest them in their criminal organizations, expand their operations, and profit from their crimes. Banks are misused, wittingly or unwittingly, as a conduit/channel in this process of money laundering.

• Steps in ML Process :

- Placement, Layering/Structuring & Integration


• What is KYC & its objectives/modalities? : KYC (Know Your Customer/Borrower) is a means to enforce AML.

• KYC – Customer Due Diligence (CDD) Exercise – Knowing the Customer in its entirety – Profiles, Nature and level of activities, Sources of funds and expected annual turn over, Purpose of the account, Major Suppliers & Buyers.


• KYC modalities/steps : KYC comprises : a) Proper identification of Customer (both Depositor & Borrower) i.e. calling for documents as to Proof of Identity, b) Proof of Address of residence, c) Proof of Income/Nature & Level of activity (for borrower) or Sources of funds and expected annual turn over (for deposit a/c), d) Purpose of Opening of the A/C, e) Monitoring Suspicious transactions in Customers’ Accounts, f) Monitoring the activities of the Customer.


• Introduction and Photographs of depositors are a must in addition to KYC. Purpose of KYC is to avoid bank becoming a party to opening Benami or fictitious A/C (for tax evasion and other illegal activities/purposes) and Money Laundering.

• Thus KYC practice is to be followed in letter and spirit and updated at least once in a year. This is part of depositor’s/Borrower’s due diligence exercise to be done by the bank.

Banker Customer Relationship – 13

• A Bank’s KYC Policy Steps

- Customer Acceptance Policy (CAP)

- Customer Identification Process (CIP)

- Monitoring of Customer’s Txns

- Risk Management/Risk Categorisation of Customers

Banker Customer Relationship – 14• KYC Requirements for opening Deposit Accounts :

- Proof of Id : (Any one of Photo Id Issued by Govt., viz., Voter Id, PAN Card, Passport, Driving Licence, Govt. ID Card/Defence ID Card) or (any other Photo Id acceptable to Bank like Employee Id, School/College Id, Letter issued by Public Authorities or Public Servants verifying the identity and residence of the customer to the satisfaction of the bank)

- Proof of Address of Residence : (Any one of Govt. issued Photo I-card which contains the current address, or Telephone bill, Electricity Bill, Ration Card, Bank Account Pass Book or Statement or any other documents to the satisfaction of the bank)


- Proof of Income (for loan accounts)/Declaration of sources of funds and Projected Annual Turn Over in the Deposit Account

- Purpose of opening accounts


- Independent and Discreet enquiry about the genuineness/bona fides of the customer and independent verification of the address of the new depositors

- Monitoring of Suspicious Txns in Customer’s accounts (Recording & Reporting of Suspicious/Unusual Txns)

- Monitoring the activities of the Customer


• Financial Inclusion/Inclusive Growth and No Frills Accounts : Accounts with minimal formalities of KYC & A/C Opening formalities for low income group people where the maximum balance in the a/c is not to exceed Rs.50 K and annual turnover in the a/c not to exceed 100 K.

• These a/cs can be opened without full/stringent KYC procedures like Id Proof and Address Proof by obtaining photo and introduction from an existing a/c holder who is subjected to full KYC or by any respectable person acceptable to the bank.


• No or very low minimum balance requirement.

• A/c providing basic banking services like deposit and withdrawal and remittance facilities. Cheque Book, ATM/Debit Card and Credit Card are Not to be issued.

• No frill a/cs can be opened in Rural, Semi-urban and also Urban/Metro Branches

• Banks may allow limited overdrafts in No-frill a/cs


• Different Relationships

- Debtor – Creditor (Deposit Accounts)

- Creditor – Debtor (Loan Accounts)

- Agent – Principal (Collection of Cheques/Bills and Sale/Purchase of Securities on b/o Customers, Issue of Draft)

- Bailee – Bailor (Safe Custody of Articles)

- Lessor – Lessee (Safe Deposit Lockers)

- Trustee – Entrustor (Bank’s executorship services for the administration of the deceased customer’s estate)


• Duties/Obligations of a Banker

- Duty of Secrecy with some exceptions (Court Order/IT Order/Otherwise)

- Duty to Honour Customer’s Cheques (Sec. 31 of NI Act, 1881)

- Duty to submit periodical A/C Statements

- Duty to collect cheques & bills

- Duty of reasonable care


Statutory obligation to Honour Customer’s Cheques (Sec. 31 of NI Act, 1881): The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to payment of such cheque, must pay the cheque when duly required to do so and in default of such payment must compensate the drawer for any loss or damage caused by such default.

Exceptions: Banker’s obligation to honour customer’s cheques extinguishes on receipt of Garnishee (Court Attachment) Order, IT/ST Attachment Order, on death, insolvency or lunancy of the customer.


- Right of General Lien/Sec. 171 of Indian Contract Act, 1872 : (Right of a creditor to retain in his possession the goods/securities owned by a debtor (no right to sell), until the debt has been discharged; But banker’s right of general lien is an Implied Pledge as banker has right to sell (as available to a pledgee) in case of debtor’s default after giving reasonable notice to the debtor).

- Right of Set-off (Right to combine/adjust 2 a/cs, one with credit balance and the other with debit balance of a Customer in same name and same capacity/ right/status)


- Right of Appropriation (sec. 59 to 61 of Indian Contract Act, 1872)

- Right to act as per mandate of the customer

- Right to charge interest/commission/service charges

- Right to close the undesirable/ un-remunerative accounts of customers by giving sufficient notice

- Right to choose a customer


Obligations of a Customer :

- To draw his cheques with sufficient care so as not to mislead the banker or facilitate forgery or fraud

- To bring to the bank’s notice any discrepancy in his a/c or any forgery of his cheques

- To pay interest on all debit accounts and a reasonable charge on all accounts

- To safe-keep cheques to avoid forgery


Rights of a Customer :

- A customer has the right on the bank to honour his cheques provided there are sufficient funds in the account and duly applicable for payment of such cheques and cheques are in order

- In case the bank wrongfully dishonours a cheque, customer has right to get compensated for the damage such a dishonour would cause to his reputation


• Termination of Banker Customer Relationship

- Voluntary Termination by either party

- Termination by law (Death, Insolvency, Lunancy, Garnishee/Court Attachment Order and Income Tax/ Sales Tax Attachment Order)


• Operations in the Deposit Accounts:

- Specimen Signature

- Operation of the a/c by the a/c holder(s)

- Operation of the a/c by authorised agent (Mandate or Power of Attorney)

- Pay-in-Slip Book/Challan

- Cheque Book

- Pass Book/Statement of Account (Paper based or E-Statement)

Banker Customer Relationship – 28• Operations in the Deposit Accounts:

- New Account/Caution: Operations in a newly opened a/c should be watched/monitored closely with much care and caution for at least 6 months or such other longer period as the branch management feels in order to avoid any fraudulent or undesirable transactions as such accounts are more fraud prone.. The Cheque book should be branded as new A/c also.

- Dormant Account: If there are no operation continuously for a period of 12 months in an SB a/c or 6 months in a CA, the a/c will be branded as Dormant and subsequent transactions in such accounts will be allowed with care by a senior official/ txns. to be monitored/watched carefully in order to avoid any frauds as such accounts are more fraud prone.

Banker Customer Relationship – 29• Operations in the Deposit Accounts:

- Inoperative Account: If there are no operation continuously for a period of 2 years in any SB/CA a/c (including the dormant period), the a/c will be branded as Inoperative and subsequent transactions in such accounts will be allowed with due care by a senior official/ txns. to be monitored/watched carefully in order to avoid any frauds as such accounts are more fraud prone.

- Transfer to Unclaimed Balances A/C at Bank’s HO: An account remaining in Inoperative Status for more than 5 years (i.e. total no operation in the a/c for 7 years) should be transferred to Unclaimed Balances A/C at Bank’s HO.

Banker Customer Relationship – 28• Different Types of Customers

- Individuals (Single or Joint)

- Minors/Illiterate Persons/Blind Persons

- HUF

- Club, Association, Society, Trust

- Proprietorship Firm

- Partnership Firm

- Company

- Local Authority/Body

- NRI


• Operational Instructions in Joint Accounts/Accounts of Firms & Companies :

- Either or Survivor (E or S) with 2 a/c holders

- Anyone or Survivor(s) with > 2 a/c holders

- Joint Operation

- Former or Survivor(s)

- Latter or Survivor(s)

- Specific mandate/authority for accounts of Firms, Companies and other representative accounts


• Deposit Insurance by DICGC :

- Banks Covered : Deposits of all Commercial Banks, RRBs, Co-operative Banks (Urban, State & District Central) are insured u/r this scheme by Deposit Insurance & Credit Guarantee Corporation. It is compulsory and no bank can opt out of it.

- Maximum Cover : Rs. 1 lakh per depositor (in the same status and right) per bank

- Deposit Insurance Premium (current rate is 10 paise per Rs.100 of assessable deposit p.a.) to be borne entirely by the insured bank


• Type of Deposit Accounts :

- Transaction Deposit Accounts/Chequable Accounts/Demand Deposits (Current Deposit Accounts and Savings Bank Accounts)

- Term/Time Deposit Accounts :

1. Fixed Deposit Accounts (FD) : (a) Cumulative/ Reinvestment Deposits where interest is reinvested with the principal and (b) Non-cumulative deposits providing periodical interest


2. Recurring Deposit Accounts (RD) : (a) A fixed Monthly deposit for a chosen period/no. of months (b) A Variable RD A/C - A core monthly deposit with flexibility to increase the monthly deposit

- Hybrid Deposits/Flexi Deposits/Sweep in Deposits/Unitised Deposits

- Certificate of Deposits (Negotiable Term Deposits)


• Deposit Accounts/General Norms :

- Minimum Balance Requirements : Varies from Bank to Bank (5K, 10K, 25K, 50K, 100/200K etc.) and also type/class of accounts offering differing level of value added services. Regular Minimum Bal. or Average Quarterly Bal. (AQB). Charges for non-maintenance of Minimum Bal.

- Differing level of value added services (Free ATM/Debit Card, Free Credit Card, Free Remittance facility (DD/BC/NEFT/RTGS) up to a specified limit p.m., Free Cheque Collection facility up to a certain limit p.m., Free internet and Mobile Phone Banking etc.)


• Deposit Accounts/General Norms (contd.. ) :

- Minimum & Maximum Period for a Term Deposits :

- RD (6 months & 120 months (10 years))

- FD (Minimum : 15 days for any amount, but 7 days for an amount = or > a cut-off amount which varies from bank to bank and maximum 10 years)

- For Deposits in the name of minors maximum period can be > 10 years till he becomes major and for deposits made @ court direction maximum period can be > 10 years

Banker Customer Relationship – 34• Deposit Accounts/General Norms (contd.. ) :

- Interest rates on SB/CA : Deregulated by RBI since November 2011. Banks are to fix their SB Interest. CA : No interest, SB interest is calculated on the daily balance.

- Interest rates on Term Deposits : Interest rate is totally deregulated, banks are free to decide their deposit rates as approved by bank’s board or Asset Liability Committee (ALCO) which should be uniform for all depositors except for high value/bulk deposits of Rs.15 lakh and above from individuals/firms/Corporates where banks have discretion to offer/quote different rates (normally higher rates) from the normal/card rates

- Fixed (Interest) Rate –vs- Floating Rate Deposits


• Nomination Facility for Bank Deposits, Safe Custody of Articles and Safe Deposit Lockers :

- Nomination of Bank accounts are compulsory, Bank should educate their customers as to the advantages of nomination.

- A valid nomination ensures that in the event of death of the sole depositor or all depositors, bank will return the amount lying in the account to the nominee without any legal hassle. Note Nomination per se does not confer any legal heirship/absolute ownership to the nominee, it only authorises the nominee to collect the amount from the bank and payment to nominee gives a valid discharge to the bank.

Banker Customer Relationship – 36• Nomination in Bank Deposit Accounts :

- Who can nominate? : The sole depositor or all joint depositors in Deposit a/cs held in individual capacity and not in any representative capacity. So No Nomination in Partnership Firm, Company, Trust, HUF or Association Accounts.

- Who can be nominated? : Only Individuals can be a nominee. One nominee for each deposit a/c. Anybody including a minor, NRI, Foreigner or blind/illiterate person can be a nominee (But Not a lunatic). In case of minor nominee an adult individual to be appointed to receive the deposit in the event of the death of the depositor during the minority of the nominee.

- Nomination forms in DA1/ for cancellation of nomination form DA2/Variation by DA3

Banker Customer Relationship – 37• Nomination in Safe Custody of Articles Accounts :

- Who can nominate? : Facility available only when the articles are held in the single name of an individual in his personal capacity. Thus Safe custody a/c in joint names are not eligible for nomination unlike Deposit A/C and Safe Deposit Locker A/c.

- Who can be nominated? : Only one Individual can be appointed as a nominee. Anybody including a minor, NRI, Foreigner or blind/illiterate person can be a nominee (But Not a lunatic).

- Nomination forms in SC1/ for cancellation of nomination form SC2/Variation by SC3

Banker Customer Relationship – 37• Nomination in Safe Deposit Locker (SDL) Accounts :

- Who can nominate? : Facility available only when the SDL A/Cs are held in the name of individuals (singly or jointly) in his/their personal capacity.

- Who can be nominated? : Nominee should be Individuals. In a single a/c only one nominee, in joint a/c more than one nominee allowed, but the number of nominees should not exceed the number of joint hirers. Anybody including a minor, NRI, Foreigner or blind/illiterate person can be a nominee (But Not a lunatic).

- Nomination forms in SL1 for sole hirer, SL1A for joint hirers/ for cancellation of nomination form SL2/Variation by SL3 for sole hirer and SL3A for joint hirers.

Salient Features of NI Act - 1 • Negotiable Instruments: Negotiable Instruments

Act, 1881 (NI Act) does not define a Negotiable Instrument. Sec. 13 of NI Act merely states “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer”. These 3 instruments are, therefore, negotiable instruments by statute. These negotiable instruments have certain common features and any instrument that possess these features may be considered to be a negotiable instrument (e.g. bank drafts, government promissory notes etc.)

Salient Features of NI Act - 2 • Common features of Negotiable Instruments :

- Transferability

- Negotiability

- Right of Action/Recovery

1. Freely Transferable: The right/interest/ ownership/property in an NI passes from one person to another by mere delivery, in case of a bearer instrument, or by endorsement and delivery, in case of an order instrument. However, the transferability of the instrument may be restricted by the maker or the holder as under:

Salient Features of NI Act - 3

1. Freely Transferable (Contd…):

a. By the maker by drawing it payable to “X only”

b. By the maker/drawer and holder by crossing it as “Account Payee” or “Account Payee only”.

c. By the holder or the endorser making a restrictive endorsement like “Pay to X only”.


2. Title of transferee/holder better than that of transferor, i.e. free from all defects: A negotiable instrument confers an absolute and valid title on the transferee who takes it in ‘good faith (bona fide), for value and without notice of defect in the title of the transferor’. This is an exception to the general rule of law that says that ‘no one can give to another a better than what one has’. Such a holder/ transferee of NI is known as ‘holder in due course’. This is the essential feature of “Negotiability” of a negotiable instrument.


3. Right of Action/Recovery: The holder in due course of an NI can sue upon a negotiable instrument in his own name for the recovery of the amount of the instrument from the party liable to pay thereon. Further he need not give the notice of transfer to the party liable on the instrument to pay.


• Promissory Note/Sec. 4: “A Promissory Note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument.”

( 2 parties: Maker & Payee): Used in borrowing and lending transactions. Borrower is the maker (Promisor) and lender is the Payee (Promisee) of the note.

Salient Features of NI Act - 7 • Bill of Exchange/Sec. 5: “A bill of exchange is an

instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument.”

• (3 parties: Maker/Drawer, Drawee and Payee):

BoE is used in business and trade involving the seller and buyer of goods/services sold on credit terms. Seller is the Drawer/Maker, Buyer is the Drawee and to whom money is to be paid is the Payee (Beneficiary).

Salient Features of NI Act - 8 Instead of paying cash, the drawee (buyer)

undertakes to pay to the payee or to his order, a specified sum on demand (i.e. demand bill on presentment of the bill) or on a specified future date (i.e. usance bill after acceptance).

The drawee of the bill is not liable until he accepts the bill, indicating thereby his assent to the drawer’s order to pay. Demand bill is payable immediately on presentment to the drawee. Usance bill is presented twice to the drawee-first for its acceptance and thereafter for payment on the due date.


The date of payment must be certain or ascertainable. Demand bill is payable on demand or immediately on presentment. Usance bill is payable after a specified period or at a future date. Usance bills attract ad valorem stamp duty and they need to be accepted by the drawee(s) to legally bind him/them for payment.


• Cheque/Sec. 6: “A cheque is a bill of exchange drawn on a specified banker and is not expressed to be payable otherwise than on demand.”

• It also includes (i) electronic image of a Truncated Cheque and (ii) Cheque in electronic form (e-Cheque)

• (3 parties: Drawer, Drawee/Bank and Payee).


• Common features of a Cheque :

- Drawer : Account holder signing the cheque.

- Drawee : Always the bank branch where the a/c holder maintains his a/c.

- Payee : Beneficiary who will receive the amount mentioned in the cheque.

Salient Features of NI Act - 12 • Other features of a Cheque :

- In written format (By Pen or Typed, Not in Pencil)

- Form of Cheque [Cheque No., MICR Code/9 digits, A/C name & no. of the drawer, Branch Name, (RTGS/NEFT) IFSC Code/11 digits (4 a + 7 n), other security features]

- Drawer’s Signature

- Date of Cheque [Stale/Ante-dated (date > 3 m on date of presentation) and Post-dated cheques are Not to be paid]

- Amount of Cheque (In words and Figures)

- Bearer Cheque and Order Cheque (Cheques payable to X or bearer, to X, to X or order, to X only)

Salient Features of NI Act - 13 • Other features of a Cheque :

- Material Alteration of the Cheque : Requires Drawer’s full signature/authentication

- Holder/Holder in Due Course (Sec. 8 & 9)

- Payment in due course (Sec. 10)

- Payable at par Cheques/Multi-City Cheques

- Crossed Cheques and Uncrossed (Open) Cheques: Open cheques can be paid across counter in cash while Crossed cheques should be collected through a bank account, i.e., no cash can be paid.


• Other features of a Cheque :

• Crossing of Cheques

- General Crossing : drawing on its face 2 parallel transverse lines

- Special Crossing : addition of the name of a banker across the face of the cheque

- Account Payee Crossing/Not Negotiable Crossing

Salient Features of NI Act - 15 • Endorsements [Means writing of a person’s name on

the face or back of an NI or on a slip of paper (called allonge) annexed thereto for the purpose of negotiation] : Blank Endorsement, Special Endorsement/Endorsement in Full, Restrictive Endorsement, Endorsement sans recourse.

• Other Negotiable Instruments :

- Banker’s Drafts

- Traveller’s Cheques

- Dividend/Interest Warrants

Salient Features of NI Act - 16 • Circumstances when a Drawee Banker can refuse payment of a

cheque :

- Insufficiency of funds in the drawer’s a/c

- Payment counter mended/stopped by drawer

- Post dated cheque/Stale cheque

- No signature of drawer/No date/Material alteration requires full signature of drawer

- Drawer’s signature differs

- Cheque mutilated

- Crossed cheque cannot be paid across counter

- Exceeds arrangement [in case of Cash Credit (CC) or Overdraft (OD)a/c]

Salient Features of NI Act - 17 • Bouncing of Cheques /Civil & Criminal Liability of the

Drawer (Debtor) and the endorser(s) (Guarantors): Sec. 138 to 147 of NI Act, 1881. Following conditions are to be satisfied :

- Drawing of a cheque for valid consideration, i.e. for discharge of debt or liability

- Presentation to the bank within the validity period

- Cheque returned unpaid/dishonoured by bank b/o insufficiency of funds or exceeds arrangement

Salient Features of NI Act - 18 - Payee or holder in due course gives notice in writing to drawer demanding payment of cheque amount within 30 days of receipt of information from the bank about the dishonour

- Drawer fails to pay the amount to the payee within 15 days of the receipt of the notice

- Payee must make a written complaint before the court/file criminal suit within one month from the expiry of 15 days period given to drawer to make payment (cause of action)

- Maximum Punishment : Imprisonment up to 2 years or fine up to 2 times the cheque amount or both

Miscellaneous Topics

• CASA Deposits, Importance of CASA and CASA ratio for a bank, Strategies for mobilising CASA Deposits

KEY WORDS/TERMINOLOGIES/GLOSSARY

• Retail Banking – vs- Wholesale/Corporate Banking; Banker, Customer, KYC-AML-CFT Guidelines, Customer Due Diligence, Money Laundering, Placement, Layering & Integration, AML, Suspicious Transactions, CASA & CASA Ratio, Deposit Insurance & DICGC, Nomination

• Negotiable Instruments (NI), Cheques, BoE, Promissory Notes, Negotiability, Transferability, Right of Action/Recovery, Holder & Holder in Due Course, Payment in due course, Crossing of Cheques – General/Special, Endorsements

Topics for Next Class – All of you Should get prepared before coming to the class

• New Banking Technology/Electronic Banking : TBA, CBS, ATM, Credit, Debit & Smart/Charge/Stored Value Cards, Mechanics of Credit Card Transaction. Tele Banking, Internet Banking, Mobile Banking, Mobile Phone Banking.

• Payment and Settlement System : Different Clearing Systems of Cheques, MICR, Cheque Truncation System (CTS), e-Cheque; Electronic Transfer of Funds – ECS, EFT, NEFT, RTGS, SWIFT etc.

Home Task & Assignment for Next Class

• Group Assignment for submission in the next class through the Class representative sharp before the start of the class.

• Assignment : Compare the SB, CA, Term Deposit Products along with value added services/freebies and Cash Management Solutions offered by the two banks allotted to your group. Suggest which bank gives better facility/low service charges/better value to customers product-wise.

Documents

Slide 3 - Retail Banking Operations