FUNCTIONS OF BANK

INTRODUCTIONBasic function of a bank is to accept money from the public by way of deposit and deploying the same by means of loans and investments. Apart from this, Bank provides varieties of other services like, locker facilities, keeping articles in safe custody, collecting bills, cheques and so on. REQUIREMENT TO BE CALLED A BANKBanking means accepting of deposits from public for the purpose of lending or investment.Only a firm or company and not an individual are permitted to act as bank.A firm consisting of not more than ten partners or a company incorporated under Indian Companies Act 1956 can be a Bank under section 5( c ) of a Banking Regulation Act.

FUNCTIONS OF BANK

• Money lenders are not Bankers.• Every institution carrying out the business of Banking must

accept deposits from public.• Deposits should be accepted to the purpose of lending and or

investment only.• Deposits accepted should be repayable on demand or

otherwise.• Important Banking functions covered u/s 6 are

Discounting of bills Remittances

Hiring of safe deposit lockers Conducting foreign exchange transactions

Issuing LCs/BGs Safe custody

Collection of cheques Govt. Transactions

FUNCTIONS OF BANK

• BANKER CUSTOMER RELATIONSHIP

01.Debtor – Creditor Relationship:

When a customer deposits money with his Bank, the customer becomes a lender and the Banker becomes a borrower. Money handed over to the Bank is a debt. Hence the relationship is Debtor – Creditor between a Banker and customer.

02.Creditor – Debtor Relationship

When a Banker lends money to the customer, the relationship becomes Creditor – Debtor between a Banker and a Customer.

03.Bank as a trustee:

If a customer keeps certain valuables or securities with the Bank for safe keeping or deposits a certain amount of money for a specific purpose, the Banker besides becoming a bailee, is also becoming a trustee.

FUNCTIONS OF BANK

• 04.Agent – Principal Relationship

One of the ancillary services rendered by Bank is collection of cheques, bills etc. on behalf of the customers. It further undertakes to pay regularly, electricity, telephone, water bills, insurance premium, club fees etc.. In all such cases the Bank acts as an agent to the customer, customer being the principal.

05.Lessor and Lessee ( Bank as a lessor and customer as a lessee)

Bank provides safe deposit lockers to the customers, who hire them on lease basis. The relationship therefore is that of lessor and lessee. Bank leases out the space to the customer for use.

06.Indemnifier and indemnified:

A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by any other person is called a contract of indemnity.

FUNCTIONS OF BANK

• ANTI MONEY LAUNDERING:

Money laundering is a process by which the origin of funds generated by illegal means is concealed( drug trafficking, gun smuggling, corruption etc.)

The operation takes place in several layers, consists in making the capital and assets that are illegally gained seem as though they are derived from a legitimate source and inserting them into economic circulation.

STAGES OF MONEY LAUNDERING

PALCEMENT; This is the first step. It refers the physical disposal of proceeds of criminal activity.

LAYERING: Separating the illicit proceeds from their source by creating complex layers of financial transactions. Layering conceals audit trails and provides anonymity.

INTEGRATION: Placing the laundered proceeds into the legitimate economy.

FUNCTIONS OF BANK

• OBJECTIVES OF PREVENTION OF MONEY LAUNDERING:

To prevent criminal elements from using the banking system for money laundering activities.

To enable Banks to understand the customers and their financial dealings better.

To put in place the appropriate controls for early detection and reporting of suspicious transactions in accordance with the appropriate laws and regulatory guidelines.

To take necessary steps to ensure that the concerned staff are adequately trained in know your client and Anti Money Laundering procedures.

KNOW YOUR CUSTOMER

A person or an entity that maintains an account or has a business relationship with the Bank is a customer.

FUNCTIONS OF BANK

• One on whose behalf the account is maintained.

• Beneficiary of a transaction conducted by a professional intermediaries such as stock brokers, Chartered Accountants, Solicitors etc.

KEY ELEMENTS OF KYC

Customer Acceptance Policy

Classify customers into various risk categories and based in risk perception

Decide on acceptance criteria for each category of customers

Accept customers after verifying their identity as per the customer identification procedures.

Not to open accounts in the name of anonymous/fictitious persons.

Strive not to inconvenience the general public who desires to transact banking business.

FUNCTIONS OF BANK• CUSTOMER IDENTIFICATION PROCEDURES

Identifying the customer by using reliable, independent source documents date or information.

Verifying customer identity not only at the time of establishing a banking relationship but also at the time of executing a transaction or when the bank has a doubt about the authenticity/veracity about the previously obtained identification data.

Wherever applicable information on the nature or business activity, location, mode of payments, volume of turnover, social and financial status etc. will be collected for completing the profile of the customer.

Customers will be classified into three categories namely high, medium and low risk categories based on the risk perception.

Customer identification will be obtained for non account holders, approaching bank for high value one-off transaction or entity connected with a financial transaction, which can pose significant reputational or other risks to the bank.

FUNCTIONS OF BANK

• Indicative list of documents/information to verify the identity, address and other features suggested is given below.

For Individuals

For legal name and any other name used in any of the following

1.Pass Port 2.PAN card 3.Voter Identity 4.Driving Licence 5.Identity Card (Subject to bank’s satisfaction)

6.Letter from recognised public authority

For correct permanent address

1.Telepohone bill 2.Bank account statement 3.EB Bill

4.Letter from recognised authority5.Ration card

6.Letter from employer (subject to the bank’s satisfaction)

FUNCTIONS OF BANK

• FOR COMPANIES:

1.Certificate of incorporation and MOA & AOA – Principal Place and mailing address of company

2.Resolution of board of directors to open an account and identification of those who have authority to operate the account.

3.Power of attorney granted to it’s Managers, Officers or employees etc. to transact business on it’s behalf.

4.PAN allotment letter- Telephone Number- Fax Number

5.Telephone Bill

FUNCTIONS OF BANK

• FOR PARTNERSHIP FIRMS

1.Registration certificate if registered – Address

2.Partnership deed

3.Power of attorney granted to a partner or employee of the firm to transact business on its behalf.

4.Any officially valid document identifying the partners and the persons holding pow4e of attorney and their addresses, telephone no. of the firm and

5.Telephone bill

FUNCTIONS OF BANK

• FOR TRUSTS AND FOUNDATION

1.Certificate of registration, if registered.

2.Power of attorney granted to transact business on its behalf - Names and addresses of the founder, the managers/directors and the beneficiaries

3.An officially valid document to identify the trustees, settlers, beneficiaries and those holding power of attorney, founders/managers/directors and their addresses

4.Resolution of the managing body of the foundation/association – Telephone/Fax No.

5.Telephone bill

FUNCTIONS OF BANK

• RELAXATION FOR SMALL CUSTOMERS

If a person is unable to produce documents mentioned, a relaxation is extended if

balance is not exceeding Rs.50000 in all their accounts

not expected to exceed Rs.1 Lac in a year

However the above is subject to introduction by a customer who have a satisfactory dealing with the bank for a minimum period of six months and who has been verified of KYC.

RBI has suggested stopping of transaction when it reaches Rs.40000 and when the turnover reaching Rs.80000/ by notifying the customer.

FUNCTIONS OF BANK

• MONITORING TRANSACTIONS :

Taking the risk profile into account special attention will be paid to all complex and unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. These will be subject to detailed scrutiny.

OBLIGATIONS UNDER AML:

1.Cash Transaction Report: a) All cash transactions of value more than Rs.10 Lacs or its equivalent in foreign currency

b) all series of transactions which are integrally connected ;put together exceeds Rs.10 Lacs value

c) all cash transactions counterfeit or forged notes have been used.

Suspicious Transactions Report: Strict implementation of KYC guidelines will prevent the money launderers from using the Banking channels for their money laundering activities.

FUNCTIONS OF BANK

• DIFFERENT DEPOSIT PRODUCTS OR SERVICES

Deposits are normally classified as demand and time deposits.

Demand Deposits

1.Payable on demand

2.Low interest rates or no interest

3.It includes current, savings, overdue deposits and unclaimed deposits

4.Intrerest is paid on half yearly basis in savings account.

Time Deposits

1.Repaid after expiry of the deposit period.

2.High interest rate varying according to the period of deposit

3.Deposits from 7days to 120 months with or without reinvestment

4.Interest is paid on quarterly basis.

FUNCTIONS OF BANK

• FEATURES OF DEMAND DEPOSITS:

Current Deposits: Opened for meeting business needs and hence not entitled for interest

On the contrary for the service rendered Bank will levy per page fees basing on transactions, cheque leaves used, keeping of minimum balance etc.

Savings Deposit: To inculcate the savings habit. It is opened by individuals/trusts etc. Interest is paid as decided by individual bank. Amount can be withdrawn by the customers by cheque or withdrawal form. Nomination facility is available. Return of cheques will invite charges and frequent return of cheques bank may close the account after giving due notice to the customer. Number of withdrawals are restricted by each bank and beyond such limit, the charges will be levied.

FUNCTIONS OF BANK

• FEATURES OF TIME DEPOSITS

1.Can be opened by individuals/companies/firms/designated institutions.

2.Amount is repayable on maturity.(7 days to 120 months)

3.ROI is fixed by individual banks.

4.Deposits can be withdrawn before maturity at a reduced interest rate.

5.Interest is cumulative on quarterly basis.

6.TDS is to be deducted by Banks, where the interest paid exceeds Rs.10000 or more in a year.

7.Term deposits are not transferable.

8.If maturity date is a holiday, the deposit will be paid for such days also along with the contracted date.

FUNCTIONS OF BANK

• 9.Cash payment of deposit will be made if the total amount with interest does not exceed Rs.20,000/

• 10.Term deposits are classified under various schemes• Fixed Deposits (with simple interest payable every 6

months)• Monthly interest deposits• Quarterly interest deposits• Short term deposits (less than one year)• Reinvestment deposits (interest is reinvested)• Recurring Deposit

FUNCTIONS OF BANK

• SERVICES TO CUSTOMERS AND INVESTORS

MERCHANT BANKING.

Financial intermediaries who act to transfer capital from those who own it (investors/bond subscribers) to those who use it (Corporates / Government)

Assists in selecting or appointing outside technical consultants in addition to in house technical personnel for preparation of detailed project report, market survey report, feasibility studies etc. If the company has already prepared the project the viability study will be done.

Obtaining regulatory clearances such as RBI, SEBI, Ministry of Finance, Stock exchanges and ROC.

Printing and timing of IPO

Underwriting of IPO by financial institutions or brokers.

FUNCTIONS OF BANK

• Selection and appointment of principal broker and sub brokers• Appointment of registrars for the issue• Appointment of advertising consultants or agencies for publicity

campaign, investor conferences etc• Printing and distribution of prospectus• Making applications to stock exchanges for listing of the security.

LEASE FINANCING

This means leasing out the capital purchase of assets to another company against monthly rents for asset’s consumption.

• Finance is arranged by lessor• Lessor is entitled to write off a certain amount against taxable

profits

FUNCTIONS OF BANK

• .Lessee’s benefit is that he is not investing any capital• Lease expenses are permitted as revenue expense

PLASTIC MONEY• Cash in bulk cannot be paid• Cheque some times not accepted • Cards are preferred mode.• Moving towards cashless transactions.

CHARGE CARD• Transactions are accumulated and debited to account• Card holder given time of 25 to 50 days

CREDIT CARD• Card holder gets a credit period for payment• No fee is levied if full amount is paid within due date

FUNCTIONS OF BANK

• Card holder need not maintain account with the card issuing bank

• Credit card pose risk to the issuing bank.

DEBIT CARDS:

• Amount due for each and every transaction is debited to the account immediately.

• No credit period involved.

• Less or no risk to issuing bank

• Suitable for those who like to avoid debt trap

ATM CARDS

• Cards issued to savings account holders.

• ATM can be at branch or off site.

• Debit/Credit cards are used as ATM cards

• Need not visit branch for small transactions.

FUNCTIONS OF BANK

• ADVANTAGES OF CREDIT CARD SYSTEMTO CARD HOLDERS

• Convenient to carry against wallet• Inculcates financial discipline• Proof of purchase is available• Members can be added on• Additional benefits like insurance cover and discounts

TO MEMBER ESTABLISHMENTS• Increase in sales• Preferred locations by card holders due to acceptance• Can avoid providing of direct credit to customers• Systematic accounting as sale vouchers are routed through

Banking channels.

FUNCTIONS OF BANK

• Advertising and promotional support nation wide.• Development of clientele base• Assured and immediate settlement/payment• Avoidance of cost and security related problems involved in

handling cash

TO BANKS• Scope and potential for better profitability• Relationship with new customers.• Additional service to the existing customers• Higher popularity and image of bank• Savings of expenses on cash holding/stationery printing and

manpower etc.

FUNCTIONS OF BANKBANKERS SPECIAL RELATIONSHIP

– Normally the account is operated by the customer himself.– There are occasions the account holder gives authority to somebody else to

operate the account

MANADATE

– Authority given by the account holder to a third party to do certain acts on his behalf.

– Customer to inform the banker that he has authorised a person to operate his account

– Signature of the mandatory is obtained and verified by the account holder in the mandate letter.

– Mandate is normally issued for a short term – Mandate is not acceptable from institutions, they have to issue

only power of attorney.– In case of joint account all have to sign the mandate– Mandate ceases when the a/c holder’s death, insanity,

FUNCTIONS OF BANK

• Insolvency and bankruptcy.

• Mandate can be withdrawn by the a/c holder at any time.

POWER OF ATTORNEY

• Executed by one person called donor (principal in favour of

donee agent) to act on his behalf as per the authority given in the document.

• Two types of P/A are generally granted

• General or universal

• Special or limited

• General P/A to act in more than one transaction

• Special or limited given only for specific purpose and normally for one transaction

• General P/A gives power to sign cheque, stop payment, to sign borrowal documents on behalf of principal

FUNCTIONS OF BANK

• It is stamped and executed before notary public/magistrate

• P/A holder must sign as

Per pro____________

sd/ Constituted Attorney

• Principal can revoke the P/A at any time for future transactions.

• P/A stands revoked on the death, insolvency, insanity of principal.

DELEGATION OF POWER:

• Holders of a joint a/c want to empower a third party

• The authority should be signed by all

• Fiduciaries such as executors, administrators and legal guardians cannot appoint agents.

• Attorney cannot delegate his power unless P/A specifically provides

FUNCTIONS OF BANK• GARNISHEE ORDER

• It is a court order obtained by the judgment creditor attaching the funds belonging to the judgment debtor.

• Includes his bank a/c Bank is called garnishee

• Bank advised not to release the credit balance

• Issued under Indian Civil Procedure Code Order 21 rule 46

• Bank attaches the credit balance to the extent specified in the order

• “nishi” is the preliminary proceedings.

• The order can only relate to the present balance in the a/c

DOS AND DONTS UNDER GARNISHEE ORDER

Payment of cheque:

If order received after debit to the a/c but before payment of cash, better course is to refuse payment. If it is received in clearing

FUNCTIONS OF BANK BANKERS SPECIAL RELATIONSHIP

• and the order is received subsequently but before the stipulated time for returning clearing the cheque should not be paid. If the amount is transferred to another a/c the same should be cancelled provided the other customer is not advised of the same.

• Right to set off:

When a bank has a prior right to set off, Bank is not bound by the order. Where lien is marked on the fixed deposit, it cannot be attached by order. Court should be intimated about the lien

order vacated. Any amount excess over the lien should be attached.

• Uncleared effects and subsequent credits in a/c: Credits received subsequent to the order is not attachable.

FUNCTIONS OF BANK

• JOINT ACCOUNTS:

If the a/c is joint one (husband, wife, two brothers, mother and daughter) with the operation clause either or survivor, the a/c cannot be attached. If the operation is “former or survivor” the a/c can be attached.

• TRUST ACCOUNT:

Outstanding amount In the trust a/c cannot be attached, if the judgment debtor has deposited the money as a trustee.

• PARTNERSHIP ACCOUNTS:

Personal a/c of the partner can be attached for firm’s debt, because partners are jointly and severally liable. Nevertheless

partnership a/c cannot be attached for individual debt.

• LIQUIDATION: Order cannot be attached as the money belongs to liquidator not of the company.

FUNCTIONS OF BANK BANKERS SPECIAL RELATIONSHIP

• When the order does not name the customer correctly or with sufficient accuracy to enable the bank to identify the account in the books, bank is not bound to act upon the order.

• If customer is having more than one a/c, one is in debit and the other is in credit, only the net credit will be attached.

• Bank cannot adjust the credit balance to the contingent liability of the customer.

• Balance held outside India cannot be attached.• The Order of the ITO may attach

a. any debt due and payable

b. debts due but not payable on the date of oredr

c. any amount received subsequently.

FUNCTIONS OF BANK

• BANKER’S LIEN:

Lien is the right of the banker to retain possession of the goods and securities owned by the debtor until the debts due from the later is cleared.

Banker’s lien is an implied pledge.

U/s 171 of the Indian Contract Act 1872 Banker get an absolute right to retain the goods he comes into possession during the ordinary course of business.

When a customer inadvertently leaves a packet containing FD receipts of other Banks, L I Policy, Share certificates in the Bank premises, Bank cannot hold them as they are not received in the ordinary course of business.

Where a right can apply?

General lien gives right to bank to sell the debtors’ properties.

FUNCTIONS OF BANK

• Right is exercised on the goods and securities of the customer only. Right cannot be exercised when the debtor has a joint account.

• Where a right cannot apply?

When a customer deposits securities, ornaments and other valuables for safe custody, Banker acts as a trustee/bailee and cannot exercise the general lien unless specifically an agreement exists.

Documents/money deposited for specific purpose cannot be taken under lien.

Articles left negligently in the bank premises cannot be taken under lien.

Lien can not be exercised against immature debts.

If a customer has stolen the goods of the real owner and delivers it to bank, lien cannot be exercised as it is not received in normal course of business.

FUNCTIONS OF BANK

• RIGHT OF SET OFF:

Set off is a right of a debtor to take into account a debt owing to him by a creditor, when claiming a debt due from him to the creditor. Bank can adjust any amount due from a customer against any money due to him.

Set off is a statutory right.

There should be mutual debts and the debts should be for a certain sum and the cross claim should be for a certain sum.

For the purpose of set off all the branches of a bank are treated as single entity.

Set off can be applied only to those debts which are recoverable on the date of exercising set off.

Indebtedness should arise in the same rights. When the amount in the customer account is held under trust, the same cannot be adjusted.

FUNCTIONS OF BANK BANKERS SPECIAL RELATIONSHIP

• A deceased’s credit amount and customers debit amount cannot be combined.

• Automatic right to set off arises in the following cases.

Death / insanity / insolvency of a customer.

Receipts of garnishee order

Receipt of notice of assignment of customer’s credit balance

Receipt of notice of secured mortgage over the security charged to bank.

• A/c of a sole proprietor and his individual a/c can be combined• A customer does not have a right of set off against various

accounts of various branches.