Lending Principles and

Balance Sheet of A BankBanking and Finance

By Prof. Swati Bhalerao

31/03/2020

Syllabus

• Lending principles, Credit Creation and Balance Sheet of a bank

• 5.1 Safety, Liquidity, Profitability, Diversification of risks, other lending

principles

• Customer assessment through CIBIL and other similar agencies.

• 5.3 Balance sheet of a commercial bank.

Lending Principles of Bank

• 1. Liquidity

• Liquidity refers to convertibility into Cash. Liquidity is an important principle of bank lending.

• The major portion of bank deposits is repayable on demand or at a short notice. Thereforethe bank must see it that advances are not locked up but come back immediately.

• It is essential because if the bank needs cash to meet the urgent requirements of its customers, it should be in a position to sell some of the securities at a very short notice without disturbing their market prices much.

• There are certain securities such as central, state and local government bonds which are easily saleable without affecting their market prices.

2. Safety:

• The safety of funds lent is another principle of lending.

• Safety means that the borrower should be able to repay the loan and interest in time

at regular intervals without default. The repayment of the loan depends upon the

nature of security, the character of the borrower, his capacity to repay and his

financial standing.

Diversification of Risk

• Diversification aims at minimising risk of the investment portfolio of a bank.

• In choosing its investment portfolio, a commercial bank should follow the principle of diversity. It should not invest its surplus funds in a particular type of security but in different types of securities. It should choose the shares and debentures of different types of industries situated in different regions of the country.

• The principle of diversity also applies to the advancing of loans to varied types of firms, industries, businesses and trades. A bank should follow the maxim: “Do not keep all eggs in one basket.” It should spread it risks by giving loans to various trades and industries in different parts of the country.

Profitability:

• This is the cardinal principle for making investment by a bank. It must earn

sufficient profits. It should, therefore, invest in such securities which was

sure a fair and stable return on the funds invested. The earning capacity of

securities and shares depends upon the interest rate and the dividend rate

and the tax benefits they carry.

Other Principles of Lending1. Object of Loan – Loans should be extended for the productive purpose only, either for meeting

working capital requirement (Working Capital Finance) or for acquisition of plants and machinery (term Loan). Bank credit is considered as a scarce commodity and needs to be deployed carefully.

2. Security – Bank loan should be granted only after obtaining a proper security. So that in case of failure on the part of a borrower to reply the loan, the banker may, dispose it off the available security and recover the bank funds.

3. Margin Money – The difference between the amount of loan and the value of securities available to cover the same is termed as Margin Money. In order to ensure that the value of security is more than the amount of money lent, a banker needs to properly scrutinize and evaluate the security.

4. National Interest – Government as well as the banking regulator has been taking initiatives to achieve the objectives of social justice – Lending to the priority sectors - Priority Sector Lending is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, (Dairy, fishery, animal husbandry, poultry) micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections.

• Video - https://www.youtube.com/watch?v=5Lum5oW3fQs

Non-Performing Assets

• A nonperforming asset (NPA) refers to a classification for loans or advances that are in default or in arrears. A loan is in arrears when principal or interest payments are late or missed.

• A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

• NPAs can be classified as a substandard asset, doubtful asset, or loss asset, depending on the length of time overdue and probability of repayment.

• Banks are required to classify nonperforming assets into one of three categories according non-performing:

• 1. Sub-standard assets - Assets which has remained NPA for a period less than or equal to 12 months.

• 2. doubtful assets - An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.

• 3. loss assets - Loss asset is considered uncollectible

Credit rating agency In India

• A credit rating agency is equipped with all the required information to rate an entity (maybe an individual or an organization) based on its creditworthiness.

• These agencies provide highly essential risk assessment reports and analytical solutions and assign a definitive credit score to both individuals as well as organizations.

• CIBIL – Credit Information Bureau India Limited

• CRISIL – Credit Rating Information Services of India (Limited)

• ICRA – Investment Information and Credit Rating Agency of India

• CARE – Credit Analysis & Research Limited

• ONICRA – Onida Individual Credit Rating Agency of India

CIBIL – Credit Information Bureau India

Limited

Year of Establishment 2000

Headquarters Mumbai, India

Main ObjectiveThe main function of CIBIL is to track the credit history of an individual or a company

and rate their creditworthiness.

BenefitThe CIBIL scores are used by lending organizations to sanction loans quickly and for the

approval of credit cards too.

Rating scaleRatings vary between 350 and 900. Generally, a rating of above 700 is considered

favourable. A high credit score allows consumers to avail all types of loans easily and at

good interest rates.

CIBIL – Credit Information Bureau India Limited

• There are 17 crore consumer and more than 65 lacs company records, recorded in CIBIL’s database with their 500 members.

• Significance of the CIBIL score

• A CIBIL score is important because,

• It makes loan approval simple and fast.

• The interest rates for the loans are also determined based on the credit score of the individual availing the loan.

• With the ISO 27001 security certificate, the CIBIL score is highly dependable.

• CIBIL scores are also used by employers to test the trust factor of potential employees.

• https://www.bajajfinserv.in/insights/what-is-cibil-and-what-does-it-have-to-do-with-your-credit-score

• What factors influence the CIBIL score?

• The most important factor that influences the credit score is the repayment

history of the consumer (constitutes almost 35% of the credit score).

Other factors that interfere with the credit score are the credit balance of the

consumer, number of loans, number of credit cards held by the consumer,

the balance between secured (housing loans, business loans and so on)and

unsecured loans (personal loan) and so on.

CRISIL – Credit Rating Information

Services of India (Limited)

Year of Establishment 1987

Headquarters Gurgaon, India

Main ObjectiveThe main function of CRISIL is to establish the creditworthiness of companies based on the business strengths,

the board, the market share, and reputation of the company and so on. CRISIL rates organization like public

limited companies, banks and financial organizations and not individuals.

Benefit Allows investors to obtain a clear idea about an organization before investing in their debentures and bonds.

Rating scale

CRISIL offers 8 different grades credit scoring. They are,

1. CRISIL AAA, CRISIL AA, CRISIL A – The three grades offer maximum safety for timely servicing of the

loans.

2. CRISIL BBB, CRISIL BB – Offer moderate safety.

3. CRISIL B, CRISIL C, CRISIL D – High-risk individuals

ICRA – Investment Information and Credit

Rating Agency of India

Year of Establishment 1991

Headquarters Mumbai, India

Main Objective

ICRA offers 12 types of ratings which include, Corporate debt rating, Financial sector

rating, Issuer rating, Bank loan credit rating, Public finance rating, Corporate governance

rating, Structured finance rating, SME rating, Mutual fund rating, Infrastructure sector

rating, Project finance rating and Insurance sector rating,

Benefit Comprehensive ratings offered through a transparent rating system.

Rating scaleThe ICRA rating system includes symbols that represent the ability of a corporate entity to

service its debt obligations in a timely manner. The rating symbols vary with the financial

instruments considered.

CARE – Credit Analysis & Research Limited

Year of Establishment

1993

Headquarters Mumbai, India

Main Objective

Offers a complete range of credit rating services that helps investors to make informed decisions and

companies to raise capital. The company offers its credit rating and grading services in the following areas:

Debt ratings, Bank loan ratings, Issuer ratings, Corporate governance, Recovery ratings, Financial sector,

and Infrastructure ratings.

Benefit All services adhere to international quality standards thus ensuring maximum reliability.

Rating scale

CARE offers two different categories of bank loan ratings, one for long-term debt instruments and the

other for short-term debt instruments.

1. The short-term debt ratings are as follows and mentioned in the descending order of safety level for

servicing loans appropriately.

CARE AAA, CARE AA, CARE A, CARE BBB, CARE BB, CARE B, CARE C, CARE D.2. The long-term debt ratings are as follows and mentioned in the descending order of safety level for

servicing loans appropriately.

CARE A1, CARE A2, CARE A3, CARE A4 and CARE D.

ONICRA – Onida Individual Credit Rating

Agency of India

Year of Establishment 1993

Headquarters Mumbai, India

Main Objective

ONICRA credit assessment and scoring services for both individuals and businesses and is also a

reliable employee background screening company. ONICRA also offers risk assessment reports and

analytical solutions for individuals, MSME’s as well as for well-established corporate

organizations. ONICRA grades the players in the education, healthcare and solar industries and

provides a detailed assessment of each of the APMC.

BenefitOffers a holistic view of an individual or an entity and thus allows lenders and service providers to

make value-based decisions.

Ratings Credit ratings for MSME’s are based on two factors: financial strength and performance capability.

5 C’s of Credit

• https:/www.investopedia.com/terms/f/five-c-credit.asp

Assessment of Creditworthiness of a

Propective Customer/Borrower

• Creditworthiness is a measure of how deserving a loan applicant is to get a loan sanctioned in his favor.

• In other words, it is an assessment of the likelihood that a borrower will default on their debt obligations.

• It is based upon factors, such as for their history of repayment and their credit score.

• The C’s of Creditworthiness indicates the characteristic or features of creditworthiness.

• C of Creditworthiness is;

• Character

C of Creditworthiness

1. Character –

Responsibility, truthfulness, serious purpose, and serious intention to repay the loan amount.

The loan officer must determine that the borrower has a responsible attitude toward using borrowed funds, is truthful in answering questions, and will make every effort to repay what is owed.

2. Capacity -

The loan officer must be sure that the customer has the authority to request a loan and the legal standing to sign a binding loan agreement, this customer characteristic is known as the capacity to borrow money.

• Capital

• Capital represents the general financial position of the potential borrower’s

firm with special emphasis on tangible net worth and profitability, which

indicates the ability to generate funds continuously over time.

• The net worth figure in the business enterprise is the key factor that governs

the amount of credit that would be made available to the borrower.

• Collateral

• In assessing the collateral aspect of a loan request, the loan officer must ask, Does the borrower possess adequate net worth or own enough quality assets to provide adequate support for the loan.

• The loan officer is particularly sensitive to such features as the age, condition, and degree of specialization of the borrower’s assets.

• Technology plays an important role here as well. If the borrower’s assets are technologically obsolete, they will have limited value as collateral because of the difficulty of finding a buyer for those assets should the borrower’s income falter.

• Conditions

• The loan officer and credit analyst must be aware of recent trends in the borrower’s line of work or industry’ and how changing economic conditions might affect the loan.

• A loan look very good on paper, only to have its value eroded by declining sales or income in a recession or by high-interest rates occasioned by inflation.

• Control

• The last factor in assessing a borrower’s creditworthiness status is control.

• This factor centers on such questions as to whether changes in law and regulation could adversely affect the borrower and whether the loan request meets the lender’s and the regulatory authorities’ standards for loan quality.

Balance Sheet of a Bank

• Balance sheet of a bank, records the assets, liabilities and net worth for a particular period of time.

• The properties or products which are owned by the bank are known as the Assets.

• The obligations which are to be obliged by the Bank in upcoming years are known as the Liabilities.

• The difference of assets and liabilities is known as the Bank’s Net Worth.

• According to section 29 of the Banking Regulation Act, 1949, every banking company is required to prepare with reference to that year, a balance sheet and a profit and loss account as on last working day of the year in the Form A and Form B respectively.

• In complete the balance sheet is categorised into 3 sections are 1. Capital and Liabilities 2. Assets 3. Contingent Liabilities

Liabilities Side• Liabilities are both the bank’s borrowings and Deposits made by the customers.

• Capital –

• Authorized Capital – The highest amount of Capital which can be acquired by the bank as

per acceptable terms of Memorandum of Association is called Authorized Capital. This

Capital is not issued but a part of it is issued for subscription to the Public.

• Issued Capital – The issued part of authorized capital presented to the Public for

subscription is known as Issued Capital

• Subscribed Capital – The Part of issued capital applied by Public is known as the Subscribed

Capital

• Called –up Capital – When shareholders actually pay the needed amount for

that part of capital for its subscription, such capital is known as Called-up

Capital.

• Paid -Up Capital – The actual amount of money received by Bank from their

shareholder is known as the Paid up Capital.

Reserves and Surplus

• Bank is bound to reply the customer's deposit on their demand; hence for

meeting such necessity bank needs to maintain reserves.

• As per the Banking Regulation Act, 1949 of India, Section 17, every bank is

bound to transfer 20% of the net profit in the reserves fund.

Balances with Banks and Money at Call and

Short Notice

• This appears as the second component of the assets in balance sheet.

• Money at Call – it is redeemed at the notice of 24 hours

• Short Notice – it is redeemed at the notice of 7 Days

Unit 2. Negotiable

InstrumentBanking & Finance

By

Prof. Swati Bhalerao

• Negotiable Instruments

• 1 Definition, meaning and characteristics of Promissory note, Bill of

Exchange and Cheque .

• 2 Types of Cheques- Bearer, Order and Crossed .

• 3 Types of Crossing- General and Special.

• 4. Dishonour of cheque

Introduction

• Negotiable Instrument Is that document which contains a promise by one person to pay a specific amount to another certain person.

• In simple word, It is a written promise to pay a certain amount by the borrower to the lender of money or services.

• When the seller sold goods on credit to another person, he has a fear of non-payment of his due, in this case, negotiable instruments provide the guarantee to the seller for receipt of payment.

• Negotiable Instruments (Amendment) Bill, 2017 - Aims to amend the Negotiable Instruments Act, 1881

Characteristics of Negotiable Instruments

1. It must be a written document

2. It must be an unconditional promise to pay a stated fixed amount of money

3. It must be payable to order or to bearer

4. It must be payable on demand or at a definite time

5. It must be signed by the maker or the drawer

6. It must be freely transferable from one party to another party

Type of Negotiable Instrument: –

• There are following three type of Negotiable Instruments

• Promissory Note

• Bill of Exchange

• Cheque

Promissory Note: –

• A promissory note is an instrument that contains the written and signed promise by the maker(debtor) to pay a certain amount to the creditor on the specific date or on demand.

• “A Promissory Note is an writing (not being a bank note or 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 the bearer of the instrument”.

• -Section 4 of India’s Negotiable Instruments Act, 1881

The feature of the Promissory Note

• : –

• It is in writing.

• An unconditional promise to pay a certain sum of an amount.

• An amount should be described in it.

• It must be signed by the maker or issuer.

• The document must be dated and properly stamped.

• The amount must be payable to either a certain person or on his/her behalf.

• It clearly mentions the date of payment.

• Promissory notes are negotiable instruments that involve two main parties: the Drawer (also called the maker, debtor or payor) and the Drawee (bearer, Creditor or Payee). The drawer makes the promissory note and promises to pay unconditionally to the drawee a certain sum of money on a specific date. The drawee is the person in whose favour the promissory note is drawn.

• In a promissory note, the payor is the one who makes the instrument. A customer for example can draw a note and direct it to a supplier, promising to pay him a certain sum of money on a specific date. Even if promissory notes are often issued as result of a business transaction, this must not be the case. In certain countries, individuals draw promissory notes on special occasions like weddings.

• Promissory notes are not presented for acceptation, since they are promises to pay issued by payors. They are just presented for payment at due date.

• Two parties involved in a promissory note

Bills of Exchange

• A bill of exchange is an instrument that contains a promise to pay some amount of money to a certain person after a certain period of time. It is generally drawn by the creditor(maker or drawer) on his debtor(acceptor or drawee) and debtor gives the acceptance to that he will pay the money to the maker(drawer) after some certain period or specific date. It should be accepted by the person to whom it is created or by another person on his/her behalf. Without acceptance, this document doesn’t have any value.

• Definition: –

• “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.”

-Section 5 of India’s Negotiable Instruments Act, 1881

• Bills of exchange originated as a method of settling transactions in international trade. They are negotiable instruments that involve three parties:

• The Drawer: The person who makes the bill and gives the order to pay a certain sum of money

• The Drawee: The person who accepts the bill of exchange, or who is directed to pay a certain sum.

• The Payee: The person receiving payment is called the payee. He can be a designated person or the drawer himself.

• The drawer is the party that obliges the drawee to pay the payee. The drawer and the payee are generally the same entity, unless the drawer transfers the bill of exchange to a third-party payee.

• Contrary to promissory notes that are made by debtors, Bills of exchange are issued by the creditors. Bills of exchange must therefore be presented for acceptation. Only accepted bills of exchange are valid and the maturity date is determined after acceptation.

• Main parties involved in a bill of exchange

The feature of the Bill of Exchange

1. It should be in writing.

2. An order to make payment on the specific date or after a certain period.

3. An unconditional order of payment, it does not contain any condition of payment.

4. A certain amount should be described in it.

5. It must be signed by both parties Drawer (maker) and Drawee.

6. The amount must be payable to either a certain person or on his/her behalf.

7. It should be paid on the date of maturity or on demand or on mutual understanding.

Cheque

• The cheque is an instrument in writing which contains an unconditional instruction to a banker (by a person who has already deposit the amount with a banker), to pay a specific amount to a certain person or to the order of the certain person or to the bearer of the instrument only on the demand.

• The cheque is the most used type of negotiable instrument. It is simple and easy to use. It is the piece of paper on which the same of the payer is already mention and he will write the name of the receiver of the payment and amount to be paid and signed it. The receiver will receive cash from the cheque by encashing it from the bank.

• “A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.”

-Section 6 of India’s Negotiable Instruments Act, 1881

• The account holder requests his bank to debit his account and draw

the cheque on his behalf. The bank issues the cheque and hands it over to

his customer, the real drawer. The drawer delivers the cheque to the payee.

And finally the payee presents the cheque to the bank for payment.

• Contrary to promissory notes and bills of exchange that are paid in the

future, cheques are paid on demand when they are presented. Therefore

cheques cannot be used as credit instruments. Cheques serve only as

payment instruments.

• Parties involved in a cheque

Bearer cheques• It is also known as open cheque or uncrossed cheque. This cheque can be transferred by

mere delivery and needs no endorsement.

• The cheque is negotiable from the date of issue up to three months. It turns stale after the

completion of three months and needs to be revalidated before presenting to the bank.

• However, these types of cheques are very risky and once misplaced can lead to the loss of

amount stated in the cheque.

Self-Cheques

• It comes under bearer cheque where instead of writing the name, the account holder

writes “self ” to receive money physically from the branch where he holds the

account.

Account Payee Cheques

• A bearer cheque becomes an account payee cheque by writing “Account Payee” or crossing it twice with two parallel lines on the left-hand side top corner.

• The amount will be transferred to the account of the person specified on the cheque.

• It is considered the safest types of cheques and is also known as a crossed cheque.

Post dated cheque

• It is a type of a crossed or accounts payee cheque but it is post-dated to meet

the obligation at a future date. It is valid from the date of the issue up to

three months.

Crossing of Cheques

• Crossing a cheque refers to drawing two parallel transverse lines on the cheque with or without additional words like “& CO.” or “Account Payee” or “Not Negotiable” between the lines.

• By using a crossed cheque, one can make sure that the amount specified cannot be en-cashed but can only be credited to the payee’s bank account.

• Crossing of Cheque is recognized under The Negotiable Instruments Act, 1881.

• The crossing of cheque had developed gradually as a means of protection against misusing of cheques.

• Crossing of cheque provides instruction to the paying banker to pay the amount through banker only, and not directly to the payee or holder presenting it at the counter. This ensures that payment is made to the actual payee.

• Video - https://www.youtube.com/watch?v=hotkHSggsng

• https://www.youtube.com/watch?v=3oyryG22H4I - Hindi

Types of Crossing of Cheques

• Crossing of Cheques can be done in two ways: 1. General Crossing 2. Special Crossing

• General Crossing

• Section 123 of The Negotiable Instruments Act, 1881 defines General Crossing as:

• “Where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words “not negotiable”, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally”.

• Two parallel transverse lines are drawn on the face of the cheque, generally, on the top left corner of the cheque

• Holder or payee cannot get the payment at the counter but through the bank only

• Including the name of the banker is not essential, hence, the amount can be encashed by any banker

• The words, “& Company”, “Not Negotiable”, “A/C. Payee” may or may not be written

• It can be converted into Special Crossing

• Special Crossing

• Section 124 of The Negotiable Instruments Act, 1881 defines Special Crossing as:

• “Where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable”, that in addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially and to be crossed to that banker.”

• Also known as Restricted Crossing

• Two transverse lines are not necessary to be drawn

• Name of the banker is added across the face of the cheque

• The Name of the Banker may or may not carry the abbreviated word, ‘& Co.’, ‘Account payee’ or ‘Not Negotiable’

• Payment can be made only through the bank mentioned in the Crossing. The Banker, mentioned in the Crossing, may appoint another banker as his agent to collect such cheques. thus, making it safer than ‘generally’ crossed cheques

• Specially Crossed Cheques can never be converted to General Crossing.

Dishonour of cheque

• This article on “Dishonour of Cheque – Section 138 of the Negotiable instruments Act” gives a comprehensive overview about all aspects of

cheque bouncing and Cheque Dishonour as per laws in India

• A person suffers a lot if a cheque issued in his favour is dishonoured due to

the insufficiency of funds in the account of the drawer of the cheque.

Unit 3. EndorsementBanking and Finance

By

Prof. Swati Bhalerao

Syllabus

• Endorsement 08

• 1 Definition and meaning of endorsement

• 2 Types of endorsement- Blank, Full or Special, Restrictive, Partial,

Conditional, Sans Recourse, Facultative.

• 3 Effects of endorsement.

What is Endorsement?

• A signature authorizing the legal transfer of a negotiable instrument between parties is an endorsement.

• The act of a person who is holder of a negotiable instrument in signing his or her name on the back of that instrument, thereby transferring title or ownership. An endorsement may be made if favour of another individual or legal entity, resulting in a transfer of the property to that other individual o legal entity.

• Endorsement means signing at the back of the instrument for the purpose of negotiation. The act of the signing a cheque, for the purpose of transferring to the someone else, is called the endorsement of Cheque. Section 15 of the Negotiable Instrument Act 1881 defines endorsement.

Definition

• Section 15 of the Negotiable Instrument Act 1881 defines endorsement -

• “when the maker or holder 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

endorse the same, and is called the 'endorser’”

• Video - https://www.youtube.com/watch?v=MpIAbm8hY7E

Types of endorsement

1. Blank endorsement,

2. Full or Special endorsement,

3. Restrictive endorsement,

4. Partial endorsement,

5. Conditional endorsement,

6. Sans Recourse endorsement

• Video - https://www.youtube.com/watch?v=9ACbabKwAG0 Explanation in Hindi

• Blank Endorsement (Section 16(1) of NI Act): If the endorser sign his

name only without adding any words or direction, the endorsement is said to

be blank. This makes the instrument payable to bearer as per section 54 of

NI Act.

• Full Endorsement: Where the endorser signs his name and adds the name

of endorsee specifically, the endorsement is called full. Paying bank gets valid

discharge if the endorsement is regular. Example: “Pay to Mr. Bahubali or

Order”

• Restrictive Endorsement (Section 50 of NI Act): When the endorser add words like ‘Pay the Contents to Kattappa only’. The endorsee cannot endorse the instrument further.

• Partial Endorsement (Section 56 of NI Act.): When an endorser transfers only a part of the amount of the negotiable instrument to the endorsee. Its not a valid endorsement for the purpose of negotiation and such instrument should not be paid.

• Conditional Endorsement: An endorsement which stipulates some condition is

called conditional endorsement. Example – ‘Pay to Mr Mahendra Bahubali when he visits

Mahishmati ‘. The fulfillment of condition is binding between endorser and endorsee

only. The paying bank is not bound to verify the fulfillment of such conditions.

• Sans Recourse Endorsement: By adding the words like “Pay Bhallaladeva or order

without recourse to me” the endorser excludes his liability. It is caution to endorsee.

• Video - https://www.youtube.com/watch?v=tvjMqX2s6h8

Effects of Endorsement

• The property in instrument is transferred from endorser to endorsee.

• The endorsee gets right to negotiate the instrument further.

• The endorsee get the right to sue in his own name to all other parties.

Technology In BankingBANKING AND Finance

By

Prof. Swati Bhalerao

Syllabus• Technology in Banking

• Role and Uses of Technology in Banking

• 1 Need and importance of technology in banking

• 2 ATM, Cash Deposit Machine, Cheque Deposit machine, Passbook printing machine, Note and counting Device, Fake Currency Detector, Credit card, Debit card – Personal Identification Number (PIN) – Use and safety, Mobile Banking Applications, BHIM(Bharat Interface for Money)/ UPI (Unified Payments Interface), Tele Banking- Net banking.

• SWIFT (Society for Worldwide Inter- bank Financial Telecommunication),

• Concept of Core Banking Solution

• Online enquiry and update facility, Home Banking – Corporate and personal.

• Precautions in using Technology in Banking

• Current Trends in Banking Technology

Role and Uses of Technology in Banking

• Increase in Efficiency

• Handling of Information

• Cost Reduction

• Accuracy

• Customer Service

• Easy Communication

• 24/7 digital support

• Video -https://www.youtube.com/watch?v=TJyaMN0-jzY

• The technology is of great use in banking sector, it have changed the banking industry from paper and branch based banks to digitized and network services.

• Means it has played a very big role in reducing fraud in banks which protects it’s clients.

• It improved various services like online trading, online bill payment, shop online …etc.

• Customers benefits: ATM cards, cash deposit machines, online banking, mobile banking …etc.

• With the help of technology banks are able to reach out to more customers and provide better services to them.

• It helps banks function in an organized way, that means it,s used in all the banks systems.

• Technology in the banking sector has always existed and this is because banks have enormously relied on computers to record transactions. It has also helped in gaining quick and easy access to confidential information. The Importance of technology in banking sector can be seen with the launch of internet banking, ATM’s, mobile banking, debit and credit cards.

Impact of Technology on Banking Sector

• Fewer Bank Visits:

A few years ago when an individual wanted to find out as to how much money was still

available in their bank accounts, they had to spend a lot of time driving to their

respective banks. Upon reaching there they had to request one of the staff of the bank

to check the ledger and give them detailed information about the available balance in

their accounts.

However, with the use of technology in banking it has become so easy that without

paying a visit to the bank; an individual can track their account details from any place

and anytime, too hassle-free.

Quick Transactions:

• Money transactions have become so quick and easy that any type of bills can be paid without fuss, unlike the earlier days when a cheque had to be presented in order to make a purchase and there would be a long period of wait before receiving the product because the bank had to first clear the cheque.

• But with the introduction of credit and debit cards, online banking has become so easy to purchase products and pay bills.

• It almost processes instantly and without any delay the amount debited is immediately reflected on the online bank statement. There is also another amazing feature provided for online banking to pay bills, and that is by giving a standing instruction to the bank for the payments that need to go out every month. So, the bank will automatically transfer funds from your debit account without being notified every month.

Customer Service:

• Chatbots are another great service that has made a great impact in the revolution of the banking and finance industry.

• Chatbots are automated chat programs that use artificial intelligence to provide efficient customer service 24/7.

• Through chatbots, customers are now able to get their complete transaction details online without having to interact with a human.

• With the help of the chatbots, banks are able to understand each customer’s requirements and then offer customers with additional services that they are eligible for, or reward their loyal customers.

• Erica, by Bank of America. ...

• Amex bot, by American Express. ...

• EVA, by HDFC Bank. ...

Most Interesting Chatbots in Banking

• With consumer expectations increasing, the use of artificial intelligence, machine learning and chatbots in banking is also increasing. Banks and credit unions worldwide are testing new applications and deploying new solutions to improve the overall digital customer experience.

• Cost savings.

• Ease of use.

• Financial advice.

• 24/7 digital support.

Detecting Fraud:

• Prior to the introduction of technology in the banking sector, it was very difficult to

detect fraudulent transactions.

• Then years later when technology was used, the system would help in detecting the

fraud transaction, however, the staff at the bank would have the full authority to

confirm if there were any fraudulent activity or not.

• But now with invention of AI or Artificial intelligence in the banking and finance

industry, it has become very easy to detect any fraudulent transactions, and this is

because AI has an enormous ability to detect and minimize any fraud transactions.

Automated Teller Machine (ATM):

• ATM is an electronic machine, which is operated by the customer himself to make deposits, withdrawals and other financial transactions. ATM is a step in improvement in customer service. ATM facility is available to the customer 24 hours a day.

• A computerized machine that provides the customers of banks the facility of accessing their account for dispensing cash and to carry out other financial & non-financial transactions Biometric ATMs: a secure transaction through an ATM with the PIN being the finger prints of the card holder or his eye retina scan etc. Mobile ATMs: the extension of banking facilities through an ATM enclosed in a well protected van.

• The customer is issued an ATM card. This is a plastic card, which bears the

customer’s name. This card is magnetically coded and can be read by this machine.

Each cardholder is provided with a secret personal identification number (PIN).

• When the customer wants to use the card, he has to insert his plastic card in the slot

of the machine. After the card is a recognized by the machine, the customer enters

his personal identification number. After establishing the authentication of the

customers, the ATM follows the customer to enter the amount to be withdrawn by

him. After processing that transaction and finding sufficient balances in his account,

the output slot of ATM give the required cash to him. When the transaction is

completed, the ATM ejects the customer’s card

• almost all ATMs allow you

• to withdraw money, and

• many allow you to make deposits. At some ATMs,

• you can print a statement (a record of your account activity or transactions);

• check your account balances (the amount of money in your accounts right now);

• transfer money between your accounts; and even purchase stamps.

Cash Deposit Machine• The Cash Deposit Machine, better known as CDM is an ATM like machine that allows you

to deposit cash directly into your account using the ATM cum debit card. You can use this machine to instantly credit your account without visiting the branch. The transaction receipt also gives you your updated account balance. Some of the salient features of this product are:

• Instant credit of cash deposit into your own account

• Quick and convenient way to deposit cash

• Paperless transaction

• The per transaction limit is Rs.49,900/- for Card less deposit and through Debit Cards Rs. 2.00 lacs (subject to account has PAN number).

• You can also deposit cash in your PPF, RD and Loan accounts

• Up to 200 currency notes can be deposited in a single transaction

• The CDM only accepts denominations of Rs.100/-, Rs.500/- & Rs.2000/-

• How to Deposit Cash in Cash Deposit Machine?

• Insert debit card and enter PIN for validation.

• Select account type (Saving or Current).

• Place the money in the cash deposit slot and click “Continue”.

• Machine will sort the cash and will show denomination-wise amount to be

deposited.

• If correct, click “Deposit”.

• Amount will be deposited.

• Receipt will be generated.

Cheque Deposit Machine

• To increase banking automation and provide more comfort to customers, Bank has installed CDMs at selected branch. The CDMs are self operated without intervention of bank staff. The machines accept the cheques and also provides additional facility of account name /number verification for credit to the correct account. CDMs have gained popularity as cheques can be deposited even after bank working hours.

• Features & Benefits

• Deposit your cheque through the simple and fast CDM installed in the branch

• Immediate receipt

• No need to fill cheque deposit slips

• No need to stand in long queues

Passbook printing machine

• Simply open the passbook to the printing page and insert it into the printer.

With the page turning option, the Passbook Entry Machine will

automatically find the page and last line that was printed.

Note and Coin Counting Device

• A currency-counting machine is a machine that counts money—either

stacks of banknotes or loose collections of coins. Counters may be purely

mechanical or use electronic components. The machines typically provide a

total count of all money, or count off specific batch sizes for wrapping and

storage.

• Currency counters are commonly used in vending machines to determine

what amount of money has been deposited by customers.

Fake Currency Detector

• Designed high sensitive microprocessor and latest software, this machine is highly efficient to detect the fake currency notes of any dominations and of any country.

• As we know, in India, Ministry Of Finance and RBI(Reserve Bank Of India are authorized to issue currency notes and coins. But corrupt people take the advantage of high printing and scanning technologies to print fake notes by using latest hardware tools and techniques.

• Fake currency detection means finding the fake currency from the original one.

• Generally, currency recognition system is mostly used in banks, business firms, shopping malls, railway stations, government sector, organizations etc

Credit Card

• a small plastic card issued by a bank, allowing the holder to purchase goods

or services on credit.

• A credit card is a card which allows people to buy items without cash. ...

Payment using a credit card is one of the most common methods of

electronic payment. Credit cards are usually small plastic cards with a

unique number attached to an account.

Debit Card

• a card allowing the holder to transfer money electronically from their bank

account when making a purchase.

• A debit card (also known as a bank card, plastic card or check card) is

a plastic payment card that can be used instead of cash when making

purchases. It is similar to a credit card, but unlike a credit card, the money is

immediately transferred directly from the cardholder's bank account when

performing any transaction.

Electronic Fund Transfer

• Electronic funds transfer (EFT) are electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems, without the direct intervention of bank staff.

• EFT is a system whereby anyone who wants to make payment to another person / company etc. can approach his bank and make cash payment or give instructions / authorization to transfer funds directly from his own account to the bank account of the receiver / beneficiary. Electronic Fund Transfer at Point Of Sale (EFTPOS) is a payment system for making purchases through debit card at merchant establishments.

Society for Worldwide Inter-bank Financial

Telecommunications (SWIFT)

• SWIFT, as a co-operative society was formed in May 1973 with 239 participating banks from 15 countries with its headquarters at Brussels. It started functioning in May 1977. RBI and 27 other public sector banks as well as 8 foreign banks in India have obtained the membership of the SWIFT. SWIFT provides have rapid, secure, reliable and cost effective mode of transmitting the financial messages worldwide. At present more than 3000 banks are the members of the network. To cater to the growth in messages, SWIFT was upgrade in the 80s and this version is called SWIFT-II. Banks in India are hooked to SWIFT-II system.

• SWIFT is a method of the sophisticated message transmission of international

repute. This is highly cost effective, reliable and safe means of fund transfer.

• This network also facilitates the transfer of messages relating to fixed deposit,

interest payment, debit-credit statements, foreign exchange etc.

• This service is available throughout the year, 24 hours a day.

• This system ensure against any loss of mutilation against transmission.

• It serves almost all financial institution and selected range of other users.

• It is clear from the above benefit of SWIFT that it is very beneficial in effective

customer service. SWIFT has extended its range to users like brokers, trust and other

agents.

Mobile Banking Applications

• Mobile banking is a service provided by a bank or other financial institution that allows its customers to conduct financial transactions remotely using a mobile device such as a smartphone or tablet.

• Unlike the related internet banking it uses software, usually called an app, provided by the financial institution for the purpose

• Mobile banking is usually available on a 24-hour basis.

• Transactions through mobile banking depend on the features of the mobile banking app provided and typically includes obtaining account balances and lists of latest transactions, electronic bill payments, remote check deposits, P2P payments, and funds transfers between a customer's or another's accounts

BHIM (Bharat Interface for Money)

• BHIM (Bharat Interface for Money) is a mobile payment App developed by the National Payments Corporation of India (NPCI), based on the Unified Payments Interface (UPI). Named after B. R. Ambedkar and launched on 30 December 2016,[4] it is intended to facilitate e-payments directly through banks as part of the 2016 Indian banknote demonetisation and drive towards cashless transactions.

• BHIM (Bharat Interface for Money) is a UPI enabled initiative to facilitate safe, easy & instant digital payments through your mobile phone.

• Unified Payments Interface (UPI) is an instant real-time payment system developed by National Payments Corporation of India facilitating inter-bank transactions. The interface is regulated by the Reserve Bank of India and works by instantly transferring funds between two bank accounts on a mobile platform.

• The app supports all Indian banks which use UPI, which is built over the Immediate Payment Service (IMPS) infrastructure and allows the user to instantly transfer money between bank accounts of any two parties. It can be used on all mobile devices.

• Before you register on the app, please ensure the following:

• You have linked your Mobile Number with your Bank Account and the same is used for accessing BHIM.

• Your phone should have an active SIM linked to your Bank Account.

In case of Dual SIM, kindly ensure that you’ve selected the SIM card linked to your Bank Account.

You have a valid Debit Card for your Bank Account. This is required to generate UPI PIN.

• More about BHIM:-

• Transaction limit is Rs. 40,000 per transaction and per day

(Please note that your Bank’s Transaction Limit may vary from BHIM’s

limit.)

Virtual products

• e-cash/ e-money: Payment for goods or services by transmitting a signal

between computers. e-Wallet: Software storing information (passwords,

payment details) necessary for e-commerce transactions.

Electronic Clearing System (ECS)

• Under ECS (Credit) one entity / company would make payments from its

bank account to a number of recipients by direct credit to their bank

accounts ECS (Debit): is mostly used by utility companies like telephone

companies, electricity companies etc. to receive the bill payments directly

from the bank account of their customers

Core Banking Solution

• Today Banking as a business has grown tremendously and transformed itself from only a deposits taking and loan providing system to an institution which provides an entire gamut of products and services under a wide umbrella. All such activities commenced by a bank is called Core Banking.

• As per pure definition Core banking refers to a centralized system established by a bank which allows its customers to conduct their business irrespective of the bank’s branch.

• CORE is an acronym for "Centralized Online Real-time Exchange", thus the bank’s branches can access applications from centralized data centers.

• Video - https://www.youtube.com/watch?v=Q118wAXkelM

• https://www.youtube.com/watch?v=akYn80uYtdw

• https://www.forbes.com/sites/bernardmarr/2019/11/08/the-7-biggest-technology-trends-to-disrupt-banking--financial-services-in-2020/#2e165e3b2c42