Overview of Banking

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Objectives

From this topic you will be able to

Understand the meaning of banking Understand the role of banks as Financial intermediaries Constituents of the payment system Financial services providers Appreciate the role of the banking system in

economic development Understand the various products and services offered by banks Identify various banking channels

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Definition of Banking

Section 5 (b) of the Banking Regulation Act 1949 defines Banking as

Accepting for the purpose of lending and

investment, deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise

No definition of banking can be comprehensive enough in the present context

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Roles of Banks

Intermediation
Between those who save money and

those who need money

Risks in lending
Credit Risk Liquidity Risk Interest Rate Risk

Banks are essentially risk managers Financial intermediation plays an important economic function
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Roles of Banks [Contd.]

Payment system
Pay deposits on demand
Payment through cheques Facilitate movement of money

Circulatory system of the economy

Financial services provider

Products of mutual funds and insurance

companies Collection of utility bills, etc.

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Banking A Business of Trust

Banking is based on the trust that banks will honour their commitments Principles on which banking business is based

Liquidity Safety Profitability Secrecy Service Quality

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Summary

Up to this point you learned that

Banking is defined as accepting for the

purpose of lending and investments, deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise

Banks are risk managers Banks are constituents of the payment system Banks provide various financial services Banking is a business of trust

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Banking Services and Products

In this section you will be able to

Understand the various financial services

and products offered by banks Understand various payment and remittance services

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Various financial services & products

Payment system constituent

Payments and remittances
Collection

Financial Intermediary
Deposit Loan

Allied Services

Distribution Collection Demat services Safe keeping Advisory

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Payment and Remittance services

In this section you will be able to

Understand various modes provided by

banks for making local payment as well as making payment at other places Understand various modes available for remitting money to other places

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Cheque
A written instruction issued by a customer (Drawer) to his bank (Drawee) to pay the specified amount to the person named (Payee) in the cheque Crossed and uncrossed cheques Requirement of sufficient balance for making payment

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Payorder/Bankers Cheque

A cheque issued by a bank on itself

For local payments
To ensure certainty of payment

An image of a Bankers cheque

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Demand Drafts
Cheque issued by a bank on itself but payable at another branch In case there is no branch of the issuing bank, arrangements can be made with the other bank(s) having its/their branch(es)

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Multi City Cheques

A cheque which can be paid at any branch of the bank Networking of the branches and centralised computer system is a prerequisite

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Electronic Fund Transfer (EFT)

Faster mode of remitting money to far away places Centralised computer system enables the transaction The payment can be made instantly if the payee / beneficiary has an account with the payment branch In case payer and payee maintain accounts with two different banks, the transaction can be completed through the Reserve Bank of India Cost effective and fast mode of transaction

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Summary

Up to this point you learned that

Some of the products offered as part of

the payment service are

Cheques

Payorder / Bankers Cheque

Demand Draft (DD) Multi City Cheques Electronic Funds Transfer (EFT)

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Payment Services [Contd.]

In this section you will learn that

Some other products offered as part of

the payment service are

Debit card

Credit card
Travel card

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Debit Cards
A substitute for cheques Can be used for withdrawing cash from ATM as well as making payments to third parties through POS Account of the customer is debited instantly Add-on facilities 24 X 365 days banking

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Credit Cards
Customer gets certain credit limit from the credit card issuing bank The amount utilized is debited to credit card account Customer gets some time to make payment to the bank Customer gets interest free credit for upto 50 days

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Travel Cards
A pre-paid debit card Useful for travel abroad Image of a travel card

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Summary

In this section you learned that

Some more products offered as a part of the

payment service are Debit card Credit card Travel card

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Collection Services

In this section you will be able to

List the different types of collection

services Describe each of these specific collection services

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Different Types of Collection Services

Transfer Local Clearing ECS or Electronic Clearing Cheque Collection National Clearing CMS Cash Management Services Bills Collection Services involving Foreign Exchange

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Transfer
Transactions involving transfer of money from one account to another account within the branch of a bank or within the branches of the same bank Inter-connection through networking enables speedier transfer within branches Traditional methods (without networking) take time in realisation of proceeds

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Local Clearing

Facilitating collection of cheques which are drawn on local branches of banks Bankers meet at Clearing House for exchange of cheques RBI and / or SBI and / or commercial banks maintain Clearing House in different locations Days inward and outward cheques between banks are exchanged and transaction amounts are netted Local clearing is NET settlement

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Electronic Clearing Service (ECS)

Payment instructions are transmitted electronically Covers high volume, low value transactions Both debit (ECS Debit) and credit (ECS Credit) transactions are covered Managed by RBI or SBI Credit ECS

Example: Interest on Securities, Dividends,

Regular Salaries

Debit ECS

Example: Insurance premiums, Loan

repayments, Utility bill payments

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ECS [Contd.]

Benefits
Speed
Accuracy Secured channel

Avoids manual intervention (processing

of transactions) Saves time due to systemic handling Benefits flow to bank, customer and user public

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Summary

Up to this point you learned that

Some of the products offered as a part of

the collection service are

Transfer

Local Clearing
Electronic Clearing System (ECS)

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Collection Services [Contd.]

In this section you will learn that

Some more of the products offered as a part of the

collection service are

Cheque Collection National Clearing Cash Management Service (CMS)

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Cheque Collection
Local cheques are collected in local clearing Outstation cheques (upcountry) are collected by sending the cheques to respective banks branches Unlike local clearing, cheque collection takes time due to travel and realisation of proceeds into customers account

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National Clearing
Speedier collection of outstation cheques drawn on larger cities RBI has linked larger cities Works under the same principle as local clearing Communication has enabled networking and efficiency in collection Unlike outstation cheque collection, national clearing facilitates faster collection

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Cash Management Service (CMS)

Best suited for customers with wide network of operations and dealers Enables to manage liquidity efficiently through speedier collection and efficient management of payments Availability of MIS on collections and payments a major benefit of CMS Distributed collection and payment at point of occurrence of transactions Enables customers under CMS to reconcile their payments and collections on a daily basis
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Summary

Up to this point you learned that

Some more of the products offered as a

part of the collection service are

Cheque Collection

National Clearing
Cash Management Service (CMS)

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Collection Services [Contd.]

In this section you will learn that

Some further products offered as a part

of the collection service are

Bill Collection

Foreign Exchange

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Bill Collection

Instead of paying through cheques, business houses draw bills of exchange at times Bills can be demand bills or usance bills Invoice, bill and document of title to goods (trade documents) are handed over to the bank by seller The Bank sends the same to the buyers bank for collecting payment Buyers bank hands over all trade documents upon receipt of payment from buyer on a demand bill or receipt of acceptance from the buyer in case of usance bill Buyers bank remits the proceeds to the sellers bank and seller gets money for goods / services sold

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Foreign Exchange [Forex]

Need arises when payments are to be made to a beneficiary in an overseas country in foreign currency Payments received in foreign currency needs to be realised in Indian currency Banks maintain accounts in an overseas country to facilitate transactions involving foreign currency Such accounts are known as Nostro accounts

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Summary

Up to this point you learned that

Some further products offered as a part

of the collection service are

Bill Collection

Foreign Exchange

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Deposit & Credit Services

In this section you will be able to

Describe the products offered by banks

in deposit services Describe credit products offered by banks in retail segment Identify various products offered as business credit

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Deposit Services

Current Accounts
Demand deposits No interest is paid on balances in current accounts

Savings Accounts
Demand deposits for non-business entities Interest is paid on balances

Fixed Deposit Accounts

Accepted for fixed period Pre-mature payment is permitted as measure of

customer service

Recurring Deposit Accounts

Saving of a fixed sum every month for a fixed period

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Retail Credit Products

Retail Loans Personal Overdrafts Credit Cards

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Retail Loans

Retail Loans Provided to individuals Nature Consumer durables Housing Vehicle Personal expenses Eligibility Margin Interest application Repayment monthly or quarterly Unsecured and secured
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Personal Overdrafts

Personal Overdraft
For unexpected and periodic

requirements

Eligibility Margin Interest application Repayment Unsecured and secured

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Credit Cards

Credit Cards
For purchases / withdrawals

Eligibility Credit limit Repayment monthly or in installments Unsecured

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Deposit & Credit Services

Up to this point you have learned of

The products offered by banks in deposit

services The credit products offered by banks in retail segment

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Deposit & Credit Services [Contd.]

In this section you will be able to

Identify various products offered as

business credit

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Business Credit

Business credit
For acquisition of fixed assets
For financing current assets

Eligibility Amount Borrowing/repayment Secured and unsecured

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Term Loans
Given for acquiring of fixed assets Secured by a charge on the assets created out of bank finance Margin requires to be contributed Repayment is out of profits generated by the assets created and is spread over a time in installments

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Leasing
The assets required by the business are acquired by the bank and leased out to the customer Lease rentals are paid by the customer Not very popular now as the tax incentives available earlier are now withdrawn

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Working Capital Facilities

In this section you will understand the various types of working capital facilities Nature

overdraft
cash credit packing credit

demand loans and lines of credit

business cards
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Working Capital Facilities

Given for financing the working capital cycle Can be Pre sale or Post sale financing Overdraft

For meeting short term requirements For meeting temporary mismatches in cash flow Can be secured or unsecured

Cash Credit

Most Common and popular facility in India Running Account Permanent in nature Limit established and withdrawals within limit Secured by a hypothecation charge on current assets Margin is maintained over the value of assets

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Working Capital Facilities

Packing Credit
Similar to cash credit
For meeting export orders Originally on order to order basis

Presently running account facility is

permitted Concessive interest rate Liquidation can be only by export proceeds Delay in liquidation attracts penalty Secured by a charge on the current assets
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Working Capital Facilities

Demand Loans/Lines of Credit

Demand loan is for meeting short term

requirements Attracts cheaper interest Preferred by large corporates as cost effective Liquidated at the end of the stipulated period Line of Credit is an assurance by the banker to make available short term credit when needed Terms and conditions are pre-agreed Gives a feeling of security for the corporate The assurance is over a period of time
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Working Capital Facilities

Business Card
Equivalent of a credit or debit card to

individuals Enables business entities to make their purchase of required supplies without resorting to use of cheques or demand drafts Interest is charged from day one Being popularized in India

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Summary

In this section you learned that

Term loans and leasing finance is provided

for acquisition of fixed assets Working capital requirements are ever changing They can be pre-sale financing or post-sale financing The nature of facilities of pre-sales financing are

Overdraft Cash Credit Packing Credit Demand Loans and Lines of Credit Business Card

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Post Sale or Trade Finance

In this section you will understand the various modes of financing post sale or credit sales
Cheque purchase

Bill purchase
Bill Discount Letter of Credit

Bill Negotiation
Guarantees

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Post Sale or Trade Finance

Cheque Purchase

Avoids delay involved in collection of cheques

Funds are made available to sellers immediately Interest is charged from the date of purchase to date

of realization of the cheque

Bill Purchase
Advance against documentary bills is payable at sight Bills are then sent for collection Advance is liquidated from collection proceeds

Interest is charged from the date of purchase to the

date of receipt of proceeds is recovered upfront

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Post Sale or Trade Finance

Bill Discount
Advance against documentary Usance

bills Interest charged for the Usance period is called discount Discount is recovered upfront

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Post Sale or Trade Finance Letter of Credit

Guarantee given by the purchasers bank to

the seller that the bill representing sale of goods will be paid Parties to an LC are applicant (buyer of goods), issuing bank (buyers bank), and beneficiary (Seller of goods) Treated as a credit facility by the buyers bank It is a non-fund based facility Normally secured by a charge on current assets Commission is charged resulting in fee income to bank

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Post Sale or Trade Finance

Bill Negotiation
Purchase or discounting of a bill

accompanied by an LC Risk to negotiating bank is less Interest/discount is charged upfront

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Post Sale or Trade Finance

Guarantees

Issued by banks at the request of

customers in respect of transactions other than normal trade transactions It can be as a replacement of EMD, for receipt of mobilisation advance, for release of retention money, towards payment of penalty for non performance Commission is charged for issue of guarantee resulting in fee income to bank It is a non-fund based facility
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Summary

In this section you learned that

The various products available for post-

sale finance are:

Cheque Purchase

Bill Purchase
Bill Discount Letter of Credit (LC) Bill Negotiation Guarantees

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Allied Services

In this section you will be able to

Appreciate the various allied services

offered by banks in their role as provider of financial services

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Provider of Allied Services

The services provided by banks under the role of provider of allied services are
Distribution

Collection of taxes and bills

DeMAT accounts Safe keeping

Advisory services

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Distribution

In banking today, distribution of products and third parties have assumed great importance due to
Generation of fee income Ability to provide single umbrella service Ability to create exit barrier

Activities involved are:

Mutual Fund Units Insurance Products Sale of Bonds Trade in Gold / Gold coins Mobile Phone Recharge Shares of companies offering Public Issues

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Collection of Taxes and Bills

The products offered by banks within the collection service are

Taxes Utility Bills

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DeMat Account
A depository is like a bank. Only difference is that it holds your securities and not cash The account opened with a depository participant is called a DeMat account Dematerialisation is the process of converting physical shares into electronic form Rematerialisation is the process of converting securities from electronic form into physical form

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DeMat Account
Physical securities are transferred on basis of transfer deeds, DeMat securities get transferred electronically Each security (i.e., share of a particular company) has a unique identification No. called ISIN (International Securities Identification Number) through which the securities are recognised

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DeMat Account

Transfers are affected

Through the TIFD or Delivery Slip Which is given by the seller to his DP The shares will be transferred out of the

sellers DeMat account And into the buyers DeMat account with his DP

The entire clearing process is put through a central depository At present we have two depositories, namely CDSL & NSDL who are registered with SEBI

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Safe Keeping

Safe Deposit Vault:

Safe keeping facility is a traditional function

of banks Lockers provided at very reasonable rates Rents are charged as per size of the locker and are payable in advance Lockers can be hired by individuals, firms, Ltd. Companies, associations, societies etc Lockers are rented out for a minimum period of one year

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Safe Keeping

Safe Custody Service:

Under safe custody, banks accept sealed

packets for safe keeping in their strong rooms for which a receipt is issued Articles are returned upon the customer handing over the receipt Not offered any more as a matter of course Banks today deposit the duplicate keys of branches for safe custody with other banks in the area for use in emergencies
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Advisory Service

The product offered by banks within the Advisory service is:

Investment Advice

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Summary

In this section, you learned that

The services provided by banks under

the role of provider of allied services are

Distribution

Collection of taxes and bills

DeMAT accounts Safe keeping Advisory services

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Banking Channels

In this section, you will be able to

Appreciate the various channels offered

by banks in their role as providers of financial services

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Banking Channels

Banking Channels:

ATMs POS Terminals Internet banking Phone banking Mobile banking Branch

Migrating from branch banking to other channels- Advantages:

Convenience to customers Cost effective to banks Nearly 70% of transactions through non-

branch channels

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Summary

In this section you learned that

The various non-branch banking

channels available in India are:

ATMs POS terminals, mainly for credit cards Phone Banking (call centre) Internet Banking Mobile Banking (SMS through mobile

phones)
There is increased use of non-branch

channels
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Summary

From the topic of Overview of Banking you will have

Understood the meaning of banking Understood the role of banks as Financial intermediaries Constituents of the payment system Financial services providers Appreciated the role of the banking

system in economic development Understood the various products and services offered by banks Been able to identify the various banking channels
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Check your understanding

Sections A, B and C

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Group Assignment

Prepare a pictorial representation on one of the following topics

Draw up a scrapbook to support the

presentation

Topics
Banks contribute to economic growth of a

region in their role as intermediaries Economy will come to a halt without the payment mechanism of banks Allied services offered by banks add value to the Banks and to customers Banking is a business of trust

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E-Learning module

Introduction to Retail Banking

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