62391774 introduction to banking part i

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Introduction to Banking

Part I

Basics, Savings, Current, CCOD, Remittance, Cash

Version 1.0

TATA Consultancy Services

March 2002Mumbai


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Introduction to Banking Part I Version 1.0

Tata Consultancy Services Confidential 1of 53

Table of Contents

1. ABOUT THIS DOCUMENT...................................................................................................... 2

1.1 P URPOSE ........................................................................................................................21.2 O RGANISATION OF THIS DOCUMENT .................................................................................2

2. WHAT IS BANKING ? ............................................................................................................. 3

2.1 I NTRODUCTION ................................................................................................................32.2 T HE BUSINESS OF BANKING .............................................................................................32.3 R ELATIONSHIP BETWEEN A BANKER AND A CUSTOMER ......................................................52.4 B ANKING S YSTEM IN INDIA ...............................................................................................6

3. ACCOUNTING CONCEPTS.................................................................................................... 9

3.1 C OMPONENTS OF ACCOUNTING .......................................................................................93.2 S YSTEMS OF ACCOUNTING ............................................................................................113.3 F IXED ASSETS ...............................................................................................................163.4 C HART OF ACCOUNT .....................................................................................................173.5 S UMMARY .....................................................................................................................21

4. SAVINGS ACCOUNT ............................................................................................................ 23

4.1 C ONCEPTS ....................................................................................................................234.2 P ROCESSING OF FINANCIAL TRANSACTIONS ...................................................................244.3 I NTEREST CALCULATION ................................................................................................334.4 PPF A CCOUNT ..............................................................................................................354.5 P ENSION ACCOUNT .......................................................................................................364.6 C OLLECTION OF GOVT. ACCOUNT ..................................................................................364.7 D EFICIENCIES OF THE MANUAL S YSTEM ..........................................................................374.8 U NDERSTANDING THE ACCOUNTING ENTRIES .................................................................38

5. CURRENT ACCOUNT........................................................................................................... 39

5.1 C ONCEPTS ....................................................................................................................395.2 P ROCESSING OF FINANCIAL TRANSACTIONS ...................................................................415.3 D EFICIENCIES / LIMITATIONS OF THE MANUAL SYSTEM .....................................................41

6. CASH CREDIT/OVERDRAFT ACCOUNT ............................................................................ 42

6.1 C ONCEPTS ....................................................................................................................426.2 P ROCESSING OF FINANCIAL TRANSACTIONS ...................................................................446.3 I NTEREST CALCULATION ................................................................................................456.4 D EFICIENCIES / LIMITATIONS OF THE MANUAL SYSTEM .....................................................466.5 ALPM O PERATIONS .....................................................................................................46

7. INLAND REMITTANCES....................................................................................................... 47

7.1 N EED FOR REMITTANCE FACILITY...................................................................................47

7.2 M ODES OF REMITTANCE ................................................................................................477.3 R ECONCILIAITION OF ACCOUNTS BETWEEN BRANCHES ....................................................487.4 P ROCEDURE RELATED TO INLAND REMITTANCES .............................................................487.5 D EFICIENCIES / HANDICAPS OF THE MANUAL OPERATIONS ...............................................51

8. CASH DEPARTMENT PROCEDURE ................................................................................... 52

8.1 I NTRODUCTION ..............................................................................................................528.2 O PERATION ON THE CURRENCY CHEST ..........................................................................528.3 P ROCEDURE FOR OBTAINING CASH FROM THE CASH OFFICER .........................................528.4 R ECORD OF CASH TRANSACTIONS .................................................................................528.5 P ROCEDURE FOR TURNING IN AND BALANCING OF CASH ...................................................538.6 C USTODY OF KEYS ........................................................................................................53


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1. ABOUT THIS DOCUMEN T

1.1 Purpose

The objective of this document is to provide a basic understanding of the various operations ina bank / branch and familiarise the reader with the various banking terminology, the functionsand operations performed by the various departments in a branch. The focus in on the manualprocesses preformed at a branch as this will help in understanding the operations from abankers perspective. Computerisation has changed the way in which some of theseoperations are performed today. However, once the reader has the understanding of themanual procedures, it will be easy for him/her to map it on to the automated processes.

This document is a part of the training material for fresh entrants into the banking group. Also,the persons responsible for the implementation of Banking solutions could also use this as areference material. It is recommended that the reading is taken up in the order specified.

1.2 Organisation of this Document

This document is organized based on the various functions performed at the branch. It alsoprovides a very basic tutorial on the accounting concepts as is applicable to the bankingindustry. This document is organised in three parts for sake of convenience. It is advisable forbeginners to read this document in the order it has been presented.

Part I

What is Banking Accounting Concepts Savings Account Current Account Cash Credit / Overdraft Accounts Inland Remittances Cash Department Procedures

Part II

Time Deposits Loans Bills Letter of Credit Guarantees

Part III

Introduction to Foreign Exchange Exports Imports Foreign Remittances Forward contracts

This is the first part (Part I) of the Introduction to Banking.


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2. WHAT IS BANKING ?

2.1 Introduction

Banking is defined as Accepting of deposits of money from public for the purpose of Lendingor Investment, repayable on demand or otherwise and withdrawable by cheque, draft, orotherwise

A banking company must perform both of the essential functions accepting of deposits lending or investing the depositsand such a company is called a Bank.

Alternately, an institution (person or body, corporate or otherwise) cannot be a bank if it doesnot - Take deposit accounts Take current accounts Issue and pay cheques

Collect cheques crossed and uncrossed for his customersIf the purpose of accepting of deposits is not to lend or invest, then the business will not becalled as a banking business.

2.2 The Business of Banking

When the bank accepts deposits, it pays interest on the deposit to the customer. When thebank lends money, it charges interest on the money lent to the customer. Also, the bankprovides certain services to its customers for a fee.

Thus, the business of a bank is based on this principle of The difference in interest received on the amount lent and the interest paid on the deposits

collected. This difference between interest earned and paid is also called Spread . Income received by means of fees for the services rendered

In very simple terms, the business model of a bank can be summarised as follows -

Profit = ( I R IP ) (O C + O E) + F I

Where,IR - Interest Received on AdvancesIP - Interest Paid on DepositsOC - Operating CostsOE - Operating ExpensesF I - Fee based Income

2.2.1 Deposits

When a bank accepts money from the public, it is called as a Deposit. Accepting deposits ofmoney from the public is one of the essential functions of a bank. Deposits are one of thebasic resources for the banking industry. The relationship between a banker and a customer isestablished with the opening of an account by the customer with a deposit of money.

Deposits can be classified as -

! Demand Deposits! Time Deposits


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2.2.1.1 Demand Deposit

As the name suggests, these deposits are repayable on Demand. The customer can demandthe deposit back from the bank at his discretion and the bank has to oblige.

Examples Savings account, Current Account. We shall look at the details of this later in the

document.

2.2.1.2 Time Deposits

In this type of deposits, the bank and the customer enter into a contract over the amount ofmoney to be deposited, the duration and the interest rate applicable. Here, the money isrepaid to the customer as per the contracted date. However, there are provisions available forthe customer to take his money back without fulfilling the contract, in which case, there will bea monetary penalty levied.

Examples Term Deposits, Recurring deposits, etc. We shall look at the details of this later inthe document.

2.2.2 Advances

Banks mobilise deposits for the purpose of lending and investment in order to earn profits fromsuch operations. Funds are lent at an interest that will obviously be higher than the interestpaid by the bank on deposits. Advance is another term used for lending of funds.

Advances can be broadly classified as -

! Loans! Overdrafts

2.2.2.1 Loans

It is a disbursal of an amount towards a specific purpose for a pre-determined period and isnormally repaid in pre-determined installments. Interest is charged by the bank on the amountlent to the customer. Interest charged could be simple or compound, based on daily or monthlybalance, depending on agreed terms.

Examples Housing loan, Vehicle loan, Loan for household items, etc.

2.2.2.2 Overdrafts

This is a facility, where a limit in terms of amount is defined for a customer account. Thecustomer can withdraw the amount upto a maximum of the specified limit as and when heneeds and can repay it by means of deposits in his account. Interest is charged on the amountoverdrawn and for the period of its actual utilisation.

Advances can either be secured of unsecured.

2.2.2.3 Secured Advances

These are advances given to customers against some security such as Shares, Property, etc.

2.2.2.4 Unsecured Advances

These are advances given to customers without any security. These are essentially short-termarrangements based on the customers standing or reputation


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2.2.3 Resources (Funds) Management

Of all the resources of the bank, deposits form the most important part since banking functionsessentially consist of accepting deposits and lending the deposits for productive purposes.Deposits have a high cost as the bank has to meet in turn its obligations to the depositors.This apart, the bank has to carry a certain amount of liquidity to meet its day-to-dayobligations. Keeping idle cash may mean forfeiting the opportunity to earn interest. It istherefore, imperative that the costly resources are employed in such a way as to yieldmaximum return to the bank.

Bank deposits do not convert themselves into resource unless they are available to the bankfor effective deployment. Branches advise their deposits figures to their controlling authority ona weekly basis. These are collated and made available to the Central Office. It is only whenthe Central Office is able to plan for the investment of such deposits in time on the basis of theweekly statements, can these deposits be termed as real resources of the bank.

2.2.3.1 Cash Reserve Ratio (CRR)

One of the statutory obligations of the bank is to maintain a prescribed percentage of itsDemand and Time deposits in the form of Cash with RBI. The current prescribed percentage is7% and this keeps varying. Every scheduled bank maintains this amount as a Current Accountwith RBI and all inter-bank transactions are routed through this account. Hence, the balance inthis account will be fluctuating. RBI will consider the average balance maintained by the bankover the last 15 days for monitoring the CRR.

The bank does not receive any interest on the CRR maintained by them with RBI.

2.2.3.2 Statutory Liquidity Reserve (SLR)

The bank has to utilise a part of its resource to comply with yet another requirement namelythe SLR. A specified percentage of the banks total Demand and Time liabilities have to bemaintained by way of investments in approved securities, cash in hand, gold or excessbalance with the RBI over the CRR. The maximum percentage that RBI can specify is 40%.Currently the SLR percentage is 25%. The objective of this is to force the banks to keep asignificant proportion of their deposits in liquid assets.

These statutory requirements are also tools in the hand of the Government to regulate moneysupply in the economy.

Resources are available for lending purposes, after CRR and SLR requirements are met. Evenout of the remaining balance, certain percentages are specified for advances towards prioritysectors.

2.3 Relationship betw een a Banker and a Customer

A person from whom the bank has accepted money or to whom bank has lent money istermed as a Customer of the bank. In very loose terms, the relationship between a bank anda customer is established by means of an Account .

Relationship of a Debtor and Creditor (Banker as Debtor)

When a customer deposits money with a bank, he lends it to the banker. Thus, the depositorbecomes the creditor and the banker a debtor.

Relationship of a Creditor and Debtor

When a bank lends money to a customer, the banker becomes the creditor and the customer

a debtor.


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Banker as a Trustee

The bank can act as a trustee for customers money, where they perform certain functions forthe benefit of some other person called the beneficiary.

Banker as an Agent

In some cases the banker acts as an agent for a customer, where he buys or sells securitieson behalf of his customer, collects cheques on his behalf and makes payments of variousdues, like payment of insurance premium.

Banker as a Consultant

Some banks have separate departments to give consultancy to their customers in areas ofpayment of taxes, making investments, etc.

Banker as a Bailee

Bankers also provide service of safe custody to their customers, where they act not only as a

trustees but also as bankers. In this capacity the customer deposits valuables with the bank forsafe custody. Hence in case of a loss, Banker is liable as a bailee and the customer is a bailor.

Lessor and Lessee (Banker as a Lessor)

The banker provides Safe Deposit Lockers to its customers on lease for depositing theirvaluables. Here the banker is the Lessor and the customer is the Lessee.

2.4 Bankin g System in India

2.4.1 Evolution

The Indian Govt. established three Presidency banks in India -

Bank of Calcutta (Bank of Bengal) - 1806/1809 Bank of Bombay - 1840 Bank of Madras - 1843

These three Presidency banks were subsequently amalgamated into the Imperial Bank ofIndia in 1921 which is now State Bank of India.

The Imperial Bank of India was allowed to hold Government Funds and to manage public debtand clearing houses, till the establishment of the Reserve Bank of India in 1935.

The State Bank of India Act was passed in 1955 and the function of the Imperial Bank was

taken over by the newly constituted State Bank of India.Towards the end of 19 th century and the beginning of 20 th century, some joint stock bankscame on the scene. Some of these banks were Allahabad Bank Ltd. Punjab National BankLtd., Bank of India Ltd., Canara Bank Ltd., Indian Bank Ltd., Bank of Baroda Ltd. These banksalong with the other major banks were nationalised in 1969 and 1980.

2.4.2 Reserve Bank of India (RBI)

RBI started functioning as the central bank of the country from 1935 onwards. Originally RBIwas established as a private sector bank with its capital contributed by shareholders. Shortlyafter its establishment, RBI took over the function of currency issue from the Govt. of India andthe power to control credit of the country.


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Thus RBI is the Central bank of the country and performs the traditional functions of a centralbank and a variety of development and promotional functions. RBI is also responsible forgranting permission for setting up of new banks or branches.

2.4.2.1 Role of RBI

Some of the important functions of RBI are -

Issue and Regulation of Currency It is the sole authority for issue of currency in thecountry. It issues and regulates the issue of currency and ensures that the country hasadequate supply of currency for the smooth functioning of the economy.

Maintain Currency Chests The currency notes have to be equitably distributed in all partsof the country. For this purpose, RBI has made adequate administrative arrangements byopening offices of its issue department in important cities. |

Banker to the Central and State Governments All money belonging to Govt. of India arekept with RBI. It looks after the current financial transactions of the Govt. and also managesthe public debt of the Govt.

Bankers Bank All commercial banks keep and maintain their accounts with RBI

Regulation of Bank Credit RBI exercises its control over the volume of credit generated bycommercial banks in the economy in order to control the inflationary tendencies.

Custodian of Foreign Exchange Reserves It acts as the custodian of foreign exchangereserves of the country and focuses on building up the necessary level of foreign exchangereserves that is essential for interaction with foreign trade and commerce.

Maintaining the external value of the currency It has the responsibility of maintaining theexternal value of the Indian rupee. The foreign exchange market has been de-regulated andthe market forces determine the exchange rate. However, RBI intervenes under exceptionalcircumstances if the rupee starts sliding.

Control of Economy

As the banks have to maintain around 30 - 35 % of the Demand and time liabilities with RBI byway of CRR and SLR, RBI plays a role in controlling the countrys economy. Also RBI keepschanging the CRR and SLR percentages depending on the movement of the economy.


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2.4.3 Banking Structure in India

Reserve Bank of India

Dev. Fin. Inst. Banks

IFCI

IDBI

SIDBI

ICICI IRBI

NABARD NHB EXIM

State Lvl.Fin. Inst.

Comm. BanksReg. Rural Banks Land Dvlp. Banks Co-op. Banks

Public Sector Pvt. Sector

State BankGroup

NationalizedBank

SBI AssociatedBanks of SBI

IndianBanks

ForeignBanks

State Co-op.Banks

Central DistrictCo-op. Banks

Primary CreditSocieties


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3. ACCOUNTIN G CONCEPTS

3.1 Components of Accounting

Accounting is the process of recording the monetary transactions of business entities.

An account is an element in the accounting system that is used to classify and summarizemoney measurements of business activity. The accounting involves recording, classifying andsummarizing of past events and transactions of financial nature. Every account will beclassified as an Asset or a Liability.

3.1.1 Assets

Assets are things of value owned by the bank. In other words Assets of a bank are what othersowe the bank.

For example, when Bank gives a loan to a customer, the customer owes money to the bank.The loan disbursed to a customer is to be repaid by the customer. Thus Loan advanced by thebank will be an asset for the bank. Other examples of Assets will be the premises owned bythe bank, Cash at the bank/branch, Interest to be received, etc.

Assets can be classified as :

3.1.1.1 Fixed Assets

These are assets like land, buildings, vehicles, furniture which are used for businessoperations over a relatively long period of time. These Assets are not consumed in the courseof operations within an accounting period.

3.1.1.2 Current Assets

These are assets, which are usually converted into cash within the accounting period. In otherwords, these assets can be converted into cash quickly.

3.1.2 Liability

Liabilities are amounts or balances that a Bank owes others.

For example, the claim of the depositors constitutes the liability of the bank. The moneydeposited by a customer in the Savings account can be withdrawn by him at his discretion.Thus from the point of view of the branch, the money deposited in a Savings Bank Account isa liability to be paid on demand i.e. Demand Liability . All customer deposit accounts with thebank are Liability accounts.

Liabilities may be classified as :

3.1.2.1 Long-Term

These are liabilities that may be repayable beyond a one-year horizon.

3.1.2.2 Current Liability

Current Liabilities are all those accounts and claims on the bank which have to be settledwithin a relatively short period of time, normally within a year.


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3.1.2.3 Contingent Liability

A contingent liability is a possible future liability (are those which do not exist at that particulartime but which may arise in future), which may arise as a result of past circumstances oractions a possible future event. Examples are payment against Letter of Credit, invocation ofGuarantee, etc.

3.1.3 Fundamental Accounting Equation

Total Assets = Total Liabilities

This means that at any given point of time what is owned by the bank will be equal to what isowed by the bank.

3.1.4 Business Entity Concept

The legal entity of a Bank is distinct from the entity of its owners (shareholders). Similarly, theaccounting entity of a bank is also distinct from its owners (shareholders). Thus when theshareholders bring in capital into the bank, the bank in turn is deemed to owe the capital backto the shareholders. This concept is called as the Business Entity Concept.

Illustration 1

In order to understand this equation clearly, let us consider a new branch, which is about tostart operations. The Head Office (HO) shall provide the finance for acquiring the premises,furnitures, fixtures etc., as well as the initial capital to start banking operations.

Stage I :

Let us assume that the HO contributes Rs. 50,00,000/- of which,

Rs. 25,00,000/- is used towards acquiring the premises,Rs. 10,00,000/- is used towards acquiring the furnitures/fixturesRs. 15,00,000/- is held by the branch in cash.

The financial position of the branch at this stage will be as shown below :

Liabilities AssetsHead Office 50,00,000.00 Premises 25,00,000.00

Furniture & Fixtures 10,00,000.00Cash 15,00,000.00

Total 50,00,000.00 50,00,000.00Table 1 Financial Position at the beginning of 1st day of operation

The branch owes Rs. 50,00,000 back to its Head Office. Hence it is shown in the Liabilitiesside.

Stage II :

Let us assume that the operations performed on the first day of operation are as follows :

- A customer opens Savings A/C with an initial deposit of Rs. 2000/-- Another customer is given a loan in cash of Rs. 10000/-.

The financial position of the branch at this stage will be as shown below :

Liabilities Assets


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Head Office 50,00,000.00 Premises 25,00,000.00Furniture & Fixtures 10,00,000.00Cash 14,92000.00

Savings Accounts 2,000.00 Loans 10,000.00

Total 50,02,000.00 50,02,000.00Table 2 Financial Position at the end of 1st day of operation

This position has been achieved after taking into effect the two transactions mentioned above.

The transaction for the Savings Account will have the following effect :

- The liability under Savings Accounts will go up by Rs. 2000.- The Cash balance will go up by Rs. 2000.

The transaction for the Loan Disbursement will have the following effect :

- The Loans advanced will go up by Rs. 10000- The Cash balance will reduce by Rs. 10000

Thus the net effect will be as follows :

Head Office = 5000000/-Premises = 2500000/-Furnitures & Fixtures = 1000000/-Savings Account = 0 + 2000 = 2000Loans = 0 + 10000 = 10000Cash = 1500000 + 2000 - 10000 = 1492000.00

One can see from the above illustration that, all the assets of the bank branch are due to bepaid back either to the depositors or to the HO (owner of the branch) thus establishing thefundamental equation of accounting .

We noticed in the above example that every transaction involved two entries. The deposit intothe Savings A/C increases the Liability in the Savings A/C by Rs. 2000 and also increases theCash balance by Rs. 2000. Similarly the disbursement of the loan of Rs. 10000 increased theLoans Advanced by Rs. 10000 and decreased the Cash balance by Rs. 10000. This form ofaccounting is referred to as the Double Entry System .

3.2 Systems of Accounting

3.2.1 Types of account

There are three types of accounts:Personal Account It deals with accounts of individuals like account holders, depositors, etc.It shows the balance due to these individuals or due from these individuals on a particular date

Real Account It represents assets like Cash, Premises, Furniture & fixtures, land, etc. As ona particular date, this account shows the worth of the asset.

Nominal Account It consists of different types of expenses or incomes or profit or loss.These accounts shows the amount of income earned or expense incurred for a particularperiod. Examples are interest to be paid to depositors, interest received on loans/advances,commission received, etc.


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3.2.2 Double Entry System

The basic attributes of an account are title of the account, opening balance, closing balanceand the transaction in the account. Every business transaction will have an impact on one ormore accounts and will effect the balance of the accounts. Every business transaction willhave two effects and this system of recording both the accounting effects is known as DoubleEntry System of Book Keeping. The two effects of a business transaction are known as Debitand Credit.

Debit Represents

Outflow of Resources

! Expenses : For example - Salaries, Rent for the premises, Interest Paid, etc.! Assets : For example - Land, Building, Cash, etc. (Outflow of resources result in

increase of Assets)

All those who owe money to the bank : For example - Debtors, Customers who have takena loan from the bank

Credit Represents

Inflow of Resources

! Income : For example - Interest received, Commission received, etc.! Liabilities : For example - Deposit Accounts, Savings Account, etc. (Inflow of

resources result in the increase of Liability)

All those whom the bank owes money : For example Saving account holders, DepositAccount holders, etc.

Whether an Account is to be debited or credited is decided by the rules indicated in thefollowing tables :

Personal Accounts Real Accounts Nominal AccountsDebit The receiver What comes in All expenses and lossesCredit The giver What goes out All incomes and gains

Assets Liabilities Income ExpensesIncrease in Debit Credit Credit DebitDecrease in Credit Debit Debit CreditBalances Debit Credit Credit Debit

Example

The example below will emphasise the concepts explained above regarding the accounts,transactions and the effect of a transaction on various accounts.

Business Transaction : Mr. Shah Deposits Rs. 2000 in his Savings Account

Accounts Impacted : Mr. Shahs Savings Account, Cash Account

Transactions : 1) Debit Cash Account (Real Account)2) Credit Shahs Savings Account (Personal Account)


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Next we will discuss the concept of natural sign associated with the GL accounts. The naturalsign associated with the different GL account types and transactions are as listed below :

LIABILITY - +ASSET - -

All the Liability accounts have positive balance and all the Asset accounts have negativebalance.

A Debits transaction is negative and a Credit transaction is positive.

When there is a debit transaction in an Asset account, the absolute balance increases by theamount of the transaction. When there is a credit transaction in an Asset Account the absolutebalance decreases by the amount of the transaction.

When there is a Credit transaction in an Liability account, the absolute balance increases bythe amount of the transaction. When there is a debit transaction in a Liability Account theabsolute balance decreases by the amount of the transaction.

3.2.3 Books of Accounts in a Bank

In accounting, every transaction creates a source document, which is any written or printedevidence of a business transaction that describes the essential facts of the transaction.Examples are cheques, withdrawal slips, deposit slips, document created by the banker.These are referred to as vouchers.

3.2.3.1 Voucher

Before a transaction is recorded or entered in books of account, it is written down on a form(usually pre-printed on banks stationery) known as a voucher form, and when this form is filledin and completed it is known as a voucher. This form, even though filled in either by customeror banks internal staff, does not become a voucher till it is authorised (signed) by the banksauthorised personnel.

Generally, a voucher is first prepared by a clerk or a customer, checked by a senior personand then the transactions are entered in appropriate books.

The vouchers, being loose forms, are usually distributed among different persons for variouspurposes such as making entries in different books, writing intimations of transactions for theparties concerned, checking the entries in books etc. A cheque issued by a customer orpaying-in slip deposited along with cash become a voucher after it has been passed andentered into books of account of the bank.

Vouchers also help as valuable records of transactions, and as such banks carefully preservethem for many years.

There are three types of Vouchers Debit Vouchers Credit Vouchers Transfer Voucher

3.2.3.2 Transactions

In banking scenario, the transactions are categorized as Cash, Clearing and Transfer.

Cash transaction When one of the accounts affected in a business transaction is Cash, it isreferred to as a Cash transaction.


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For example, let us consider a business transaction : Vinod deposits Rs. 2000.00 in hisSavings account.

The accounting transactions for the above is Cr. Savings a/c. of Vinod and Dr. Cash a/c. byRs. 2000. This transaction in entirety, comprising the Debit and Credit is treated as a Cashtransaction.

Clearing transaction When one of the accounts affected in a business transaction relatesto Clearing or Service branch account, it is referred to as a Clearing transaction. It involvestransaction between two banks.

For example, let us consider a business transaction : Paresh deposits a Cheque of Rs.5000.00 of Indian Bank in his Savings account, which is maintained at Dena bank.

The accounting transactions for the above at Dena bank is- Dr. Outward clearing by Rs. 5000.00- Cr. Saving Bank a/c. of Paresh by Rs. 5000.00.This transaction in entirety, comprising the Debit and Credit is treated as a Clearingtransaction.

Transfer Transactions When the accounts effected in a business transaction are internal tothe bank, it is referred to as the Transfer transaction.

For example, Interest is credited to a Savings account or transfer of funds from one savingsaccount to another in the same bank (could be across different branches).

Consider the business transaction : Interest of Rs. 20 is credited to Shahs Term DepositAccount.

The accounting transactions for this :- Dr. Interest A/c by Rs. 20- Cr. Shahs Term Deposit A/c. by Rs. 20.

3.2.3.3 Day book/ Cash Book

Since for every business transaction debit and credit entry has to match, at the end of thebusiness day bank needs to confirm the same. This is achieved by summarizing the debitsand credits transactions grouping under cash, clearing and transfer heads for the various GLheads.

These summarised transactions under the GL heads are then posted to the respective GLaccounts at the end of the day.

The day book at the end of the day (2 nd February 2002) for the transactions given in theexamples above under Cash, Clearing and Transfer is :

Debit CreditTotal Clrng. Trfr. Cash GL Head Cash Trfr. Clrng. Total

Savings 2000.00 5000.00 7000.00Deposit 20.00 20.00

20.00 20.00 Interest2000.00 2000.00 Cash5000.00 5000.00 HO-A/c

(Clearing)7020.00 5000.00 20.00 2000.00 Total 2000.00 20.00 5000.00 7020.00

3.2.3.4 General Ledger


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The General Ledger is a ledger / book maintained by the branch for maintaining the all GLaccounts. The General Ledger is updated on a daily basis to record the transactions for the GLaccounts affected during the day. The General Ledger would show for each of the accountsthe opening balance , the consolidated transactions and also the closing balance for the day.

The General Ledger for the affected accounts at the end of the day (2 nd February 2002) is :

GL Head : Savings (Liability A/c.)Date Debit Credit Balance

01-02-2002 100,000.0002-02-2002 7000.00 107000.00

GL Head : Deposits (Liability A/c.)Date Debit Credit Balance

01-02-2002 50,000.0002-02-2002 20.00 50,020.00

GL Head : Interest Payable (Liability A/c.)Date Debit Credit Balance

01-02-2002 1000.0002-02-2002 20.00 980.00

GL Head : Cash (Asset A/c.)Date Debit Credit Balance

01-02-2002 -1,40,000.0002-02-2002 2000.00 -1,42,000.00

GL Head : HO A/c (Clearing) (Asset A/c.)Date Debit Credit Balance

01-02-2002 -11,000.0002-02-2002 5000.00 -16,000.00

3.2.3.5 Trial Balance

Since the individual transactions have been matched to ensure that Total Debits = TotalCredits, it is also essential to confirm that the Total Assets = Total Liabilities. This isachieved by creating a statement called Trial Balance .

The trial balance for 2 nd February 2002 is :

Liability AssetGL Head Balance GL Head BalanceSavings 1,07,000.00 Cash 1,42,000.00Deposits 50,020.00 HO-A/c. (Clearing) 16,000.00Interest Payable 980.00

1,58,000.00 1,58,000.00

3.2.3.6 Balance Sheet

Balance sheet is a statement, which reflects the financial position of the bank as on aparticular date. The trail balance forms the basis for the preparation of the balance sheet.Apart from the Assets and Liabilities in the Trial balance as of a date, the bank/branch willneed to pass certain adjustment entries in order to arrive at the balance sheet therebyreflecting the exact position of Assets and Liabilities as of a particular date.

For example, the interest payable account as appearing in the Trial balance is Rs. 980.00.While preparing a balance sheet based on this trial balance, an entry will have to be passed


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debiting the interest payable by the interest amount that is due to be paid on the savingsaccount till that date and crediting the individual Saving A/c. For reasons like this, the balancesheet is typically prepared on the closing date (half year ends, Years).

Now, with the advent of Computerisation of the branch operations, it is possible to arrive at a balance sheet as of any day.

3.2.3.7 Profit and Loss Statement

There are certain Accounts which will be classified as either Income or Expense head.

Income

All kinds of earnings of a bank are termed as income. For example, Interest earned on Loans,Commissions, exchange margins, etc. would form part of the Income of the bank.

Expense

All expenditure incurred by the bank are termed as expenses. For example, Items like interestpaid to the depositors, depreciation on furniture, salaries, sundry expenses, etc. would formpart of the Expense of the bank.

The natural sign associated with the Income and Expense account are as listed below :

Income - +Expense - -

All the Income accounts have positive balance and all the Expense accounts have negativebalance.

The P/L statement (also referred to as the Income and Expense Statement) is a statement thatlists of all Income and Expense heads. The difference between Income and Expense accountsdetermines the Profit or Loss of the bank. The excess of income over expense is the profit andexcess of expense over the income is the loss.

Again, the Profit or Loss can be classified under Liability or Assets.

Bank owes the profit to the shareholders and hence is classified as a Liability. Loss isclassified as an Asset.

This figure of Profit or Loss is taken into the Balance Sheet / Trial balance under the P/L GLaccount head.

3.3 Fixed Assets

Fixed assets are what a bank owns for the purpose of business like land, buildings, furniture,etc. and are normally not available for sale. They are essentially of a permanent nature andare in constant use to carry on the business.

3.3.1 Depreciation

All fixed assets except land, do get used up in business over a long period of time. This factis reflected through the process of charging depreciation on the fixed assets, so that each yearthe fixed assets are shown at a lesser value in the balance sheet than what they were shownat in the balance sheet of the previous year.

When an Asset other the conventional fixed assets are written-off over a period of time, the

process is known as amortization rather than depreciation.


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Depreciation is the accounting process adopted for the gradual conversion of asset costs intoexpense.

The basis of depreciation is quite simple. It is the diminution in value caused by the inevitablewear and tear through constant use. It thus becomes essential for the bank to set aside eachyear sums of money for the eventual replacement of aging and inefficient assets. There has to

be a charge for depreciation each year against profits. The annual depreciation charge isshown in the Profit and Loss account as an item of expenditure representing the cost of usingthe fixed assets during the year. It is not an actual outgo of cash.

There are two basic commonly used method by companies to compute their annualdepreciation :

3.3.1.1 Straight-Line Method

In this method, a certain fixed percentage of the original cost of assets is written off each year.The depreciation percentage depends on the type of asset and is decided based on theassumed life of the asset.

Example

Let us consider an asset worth Rs. 1,00,000.. For this example consider a depreciationpercentage of 20%. In this method, at the end of 5 th year the value of the asset will be zero.

This asset will be depreciated by Rs. 20,000 (Rs.100,000 x 20%) every year.

3.3.1.2 Written Down Value (WDV) Method or Reducing/Diminishing BalanceMethod

In this method, a fixed percentage of the reduced or written down value of the asset ischarged to the profit and loss account every year. Since the value of the asset goes ondiminishing year after year, the annual depreciation charge likewise goes on diminishing.

Example

Let us consider an asset worth Rs. 1,00,000.. For this example consider a depreciationpercentage of 20%. In this method, the value of the asset will never be zero.

1st Year Depreciation is Rs. 20,000 (Rs.100,000 x 20%)

2nd Year The value of the asset is now Rs. 80,000 (Rs. 1,00,000 Rs. 20,000). HenceDepreciation charged is on Rs. 80,000., i.e. Rs. 80,000 x 20 % = Rs. 16,000

3 rd Year The value of the asset is now Rs. 64,000 (Rs. 80,000 Rs. 16,000). HenceDepreciation charged is on Rs. 64,000., i.e. Rs. 64,000 x 20 % = Rs. 12,800

Note that in this method the Asset value goes on diminishing and also the depreciation.

3.4 Chart of Account

The chart of accounts is basically a list of the categories of financial transactions for aparticular business. In other words, this is a comprehensive listing of all the GL heads, whichwill be impacted by any banking transaction. General Ledger is the ultimate destination for alltransactions. These GL heads can be categorized or grouped as:

Asset Account Liability Account

Income Account Expense Account
http://acct4.html/http://acct4.html/


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All the GL heads under the Asset and Liability heads affect the Balance Sheet and the GLheads under the Income and Expense account affect the Profit and Loss Statement.

The level of detail, that is, the number of accounts, required in each classification depends ona variety of factors including the following:

regulatory reporting requirements, internal management reporting requirements, level of automation Products and services offered by the bank.

A bank may modify its chart of accounts to accommodate its particular needs at any giventime; therefore it may be useful to review in order to determine current and past activities inwhich the bank may have engaged. The chart of accounts may use a numbering schemewhich permits flexibility to add accounts to appropriate categories without renumbering theentire chart.

Example

GL Head : Savings (Liability)

GL Sub Head : NRENRONormalTrust

The balances of Savings account will be maintained at the Sub Head Level. A bank candefine more sub categories or sub head as the need may be.

GL Head : Term Deposit (Liability)

GL Sub Head : Fixed Deposit (FD)Recurring Deposit (RD)Cumulative Deposit (CD)

Similarly, the balances of Term Deposits account will be maintained at the Sub Head Level ofFD, RD, CD. The bank can define more sub head or categories as required.

GL Head : Cash (Asset)

GL Sub Head : Cash on HandCurrent Account with other banks

The balance in Cash account will be maintained at the Sub Head Level of Cash on hand andCA with other banks. The bank can define more sub head or categories as required.

3.4.1 Control Accounts

These are also termed as sensitive accounts. Every transaction affecting these heads has tobe authorized and these accounts are monitored periodically. Amount-wise and Age-wiseanalysis is done and submitted to the controlling authorities.

3.4.1.1 Suspense

This is a General Ledger account used for making payments to either staff or suppliers forwhich the final settlement will be done at a later date. This originating entry is squared off

when the payment is settled and the amount is debited to the appropriate GL head. Theoriginating entry will always be a debit entry.


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Example 1

Payment of medical advance of Rs. 50,000/- to a staff member.Debit GL Suspense Rs. 50,000/-Credit Staff Account Rs. 50,000/-

When the actual bill of Rs. 70,000/- is submitted by the staffDebit P&L Staff Welfare Account Rs. 70,000/-Credit Suspense Rs. 50,000/-Credit Staff Account Rs. 20,000/-

Example 2

Pension is paid to the customers from GL Suspense account because unlike banks staffmembers it can not be debited to any PL account. These pension claims are sent to respectivetreasuries for payment. The suspense entry is squared off after getting the respectivepayments. If the entry is outstanding i.e. not squared off, the unique reference number for atransaction facilitates to follow it up with respective department / person.

When pension is paidDebit GL Suspense Railways Pension a/c Rs. 10,00,000/-Credit various pension account holders a/c Rs. 10,00,000/-

After claim is receivedDebit GL Bankers Cheque a/c Rs. 10,00,000/-Credit GL Suspense Railways Pension a/c Rs. 10,00,000/-

There is a unique reference number generated for each originating transaction for laterreconciliation and settlement.

3.4.1.2 Sundry

Opposite to suspense account, originating entry is sundry account is always a credit. This GLhead is generally used to account for any entry for which no right claimant is found. Just likesuspense, all the entries in the sundry account are identified with a unique reference number,used later on for tracking and squaring off purpose.

Example 1

If a customer has deposited some money and inadvertently filled in the paying-in slip withwrong information i.e. correct account number but wrong name OR correct name but wrongaccount number, in that case bank can not account for this entry. Since customer has alreadyleft the bank premises and he can not come immediately and correct the slip, Bank depositsthis amount into sundry account.

Entries passed for aforesaid example are:Debit Cash a/c Rs. 10,000/-Credit GL Sundry a/c Rs. 10,000/-

When the customer comes back to bank for correction of the above entries:Debit GL Sundry a/c Rs. 10,000/-Credit Customer a/c Rs. 10,000/-

3.4.2 Contra Accounts

It is a pair of accounts, where the balances are equal and opposite. i.e. One account will be anAsset and the other corresponding account will be a Liability. When an entry is passed in one


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of the contra accounts, a corresponding entry of the same amount has to be passed in theother contra account.

Generally, Bank requires to pass Contra Entries to take care of Contingent Liabilities (likepayment against Letter of Credit, invocation of Guarantee, etc.), Remittances in transit,Outstation Cheques in Clearing, etc.

Example 1

If a Performance Guarantee has been issued for Rs. 10,00,000/- in favour of Govt. of India atthe request of a customer, then bank charges a commission and passes contra entries inAssets and Liabilities for this amount. In case of invocation of this Guarantee due to nonperformance, these contra entries are reversed and the money is paid to the Govt. to the debitof the customers account.

Example 2

When a customer deposits an outstation cheque of Rs. 1000 into his Savings account in Denabank, assume that it takes 7 days for the cheque to get cleared. Till that time, the balance of

the customer is not affected. However, Dena bank has to account for this to know the extent ofliability.

CONTRA ACCOUNTSLiability Asset

Customers Liability

Bank is liable to pay this tothe customer

Banks Liability

Other bank is liable to payDena bank. i.e. money isowed to Dena bank

On Depositing the cheque Cr. Rs. 1000 Dr. 1000On Realization Dr. Rs. 1000 Cr. 1000

Now the actual transactions are passed Dr. HO account - Rs. 1000Cr. Savings Account - Rs. 1000

3.4.3 Head Office Account

Head Office Account is a GL account maintained by all the branches of the bank for reflectingall transactions with its Head Office or with other branches (inter-branch transactions).

All deposits and loans that happen in a branch are reflected in the HO Account. The HOaccount of a branch conveys the position of the branch to the Head Office. If the HO account

is having a Dr. balance, it reflects that the branch is having more deposits than loans. If theHO account is having a Cr. balance, it reflects that the branch is having more loans thandeposits. The Head Office has to take funds from the branches that have more deposits andforward it to the branches that have more loans. This is basically a balancing function that theHO performs between the branches that are heavy in deposits and loans.

Typically, the H.O. A/c is affecting in all the types of transactions Cash, Clearing, Transfer :

Cash Cr. H.O. A/c Dr. Cash - If the branch has a deficitDr. H.O. A/c Cr. Cash - If the branch has excess

Clearing Cr. Customer A/c Dr. H.O. A/c - Outward ClearingDr. Customer A/c Cr. H.O. A/c - Inward Clearing

Transfer Dr. Customer A/c Cr. H.O. A/c - Sending Branch


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Cr. Customer A/c Dr. H.O. A/c - Receiving Branch

Example 1

Dena bank, Andheri branch issues a DD for Rs. 5000.00 payable at Ashram Road branch.

Entries at Andheri Branch

Dr. DD Payable / Customer AccountCr. Head Office Account

Entries at Ashram Road Branch

Dr. Head Office AccountCr. DD Payable / Customer Account

Basically, the transaction between adjustment between the Andheri and Ashram Road branchis handled through the Head Office account.

Example 2

Profit Payable by the branch to Head Office during Half Year end or Year-End is transferredthrough Head Office Account maintained at the branch.

Dr. P/L AppropriationCr. Head Office Account

3.5 Summary

At the time of starting operations the chart of accounts containing all the accounts to bemaintained in the branch general ledger, is to be prepared. In the case of bank branchesthe chart of accounts as defined by the Head Office will be maintained.

After completion of the days work, the various departments of the branch like Savings,Current, Cash, Clearing etc. shall prepare consolidated credit and debit vouchers for theGL accounts affected as a result of transactions originating from the department.

The Officer at the branch responsible for the maintenance of the General Ledger shallcollect the vouchers from all the departments, and verify that the total credit is equal to thetotal debit.

The vouchers shall be sorted and the day-book will be prepared. As mentioned earlier,the day-book will contain a listing of the GL accounts affected during the day, along withthe consolidated transaction for each account.

The officer shall verify that the day-book is tallied i.e.

! the total credits are equal to the total debits! the total cash, clearing and transfer figures match the figures obtained from the

respective departments

The above two checks would ensure that all the transactions carried out during the day,have been effected into the General Ledger, and also that the total credits match the totaldebits.

After the day-book is tallied the General Ledger will be updated to reflect the latestposition.


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The Trial Balance shall be prepared and it will be verified that the total assets is equal tothe total liability i.e.

Total (Asset + Expense) = Total (Liability + Income)

Since the Trial Balance has been tallied for the previous day, and the day-book for thecurrent GL processing day has been tallied, the Trial Balance for the day also has to tally.

At the end of the financial year (31st March) the net total of the income and expenseaccounts will be transferred to the Profit & Loss account (Liability or Asset depending onwhether the bank has made Profit or loss.


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4. SAVINGS ACCOUNT

4.1 Concepts

Savings Bank deposits are Demand Deposits meaning that they are repayable on demand.Money can be deposited into and withdrawn from this account at the customers discretionbarring a few exceptions like number of withdrawals, amount of withdrawals, etc. dependingupon type / product and regulatory requirements.

These accounts have facility for withdrawal by cheque, withdrawal slip, simple letter withexceptions relating to the type of constituents who can open such accounts and certainrestrictions with regards to withdrawal. This deposit carries a nominal rate of interest.

The need for keeping cash reserves against such deposits by the bank is comparatively largervis--vis the fixed deposits but smaller as against the current deposits because on therestrictions on the number of withdrawals. The restriction of withdrawal is generally set torefrain savings account being utilised for business purpose. Therefore, bank levies servicecharges if the number of withdrawal exceed the specified limits. However, the bank does notstop a customer from making more withdrawals.

Some of the basic definitions, rules governing Savings accounts are as listed below :

A Savings Bank Account is an unfixed running deposit account

The Savings account is a running account, and the customer has total flexibility w.r.t. deposit / withdrawal of funds. The customer is free to deposit money into his account at any point oftime, and also withdraw money from his account anytime subject to satisfying the minimumbalance norm. The balances maintained in the savings accounts are reflected under DemandLiabilities in the banks Balance Sheet.

A Savings Account may be opened by,

! Indian Nationals (both resident and non-resident)! Societies, Associations, Trusts, Clubs! Minors (but operated jointly with a guardian)

Note : A Savings Account may not be opened by companies.

Requirements for opening a Savings Account

A customer wishing to open a Savings Account has to approach the officer concerned. Afterfilling the account opening card and the signature card, an account number and customernumber, if not an existing customer, is assigned to the customer. The customer has to depositcash into the account, and produce the stamped cash deposit slip to the officer, and collect his

passbook and chequebook. Bank generally asks for an introduction also, which could be fromany other account holder or staff of bank or any renowned person, which is acceptable to thebank.

As per a recent notification, customers are also supposed to submit two copies of photograph.This is to check fictitious accounts.

Mode of Operation of Savings Accounts

Mode of operation governs how and by whom the account is going to be operated. The Modeof Operation of the account is to be specified by the customer in the Account Opening form.The Mode of Operation for a Savings Account may be specified as! Self! Either or Survivor


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! Authorised Signatories! Minor Account Operated by Guardian

Classification of Savings Accounts

! Resident! Non Resident! Minor

Savings Account are classified based on the customer categories, schemes for operationalconvenience. The terms and conditions governing the operation of Non Resident accounts aredifferent from those governing normal resident accounts. Thus it will be convenientoperationally, to classify the account separately. Also the balance under the various categoriesof Savings accounts are to be reflected separately in the General Ledger.

Savings Accounts can be with / without cheque book

A customer may or may not choose to avail of the cheque book facility. The minimum balanceto be maintained is higher for a cheque book account. Though it is not prevalent in India as ondate, it could happen that accounts without chequebook might earn more interest.

Nomination Facility is available for Savings Accounts

At the time of account opening or subsequently, the account holder can specify a nominee,who in the event of the death of the account holder, will be permitted to operate the account. Inthe event that a nominee is not specified, then upon the death of the account holder, the bankwill allow the legal heir to operate the account, only after he produces the necessary legalpapers. The nomination facility has been provided, to avoid such unnecessary inconvenienceto the heir.

Upto 60 withdrawals are permitted in a Savings Account per year.

If the number of withdrawals exceeds 60, then the bank branch may levy additional servicecharge. This however varies from time to time and from bank to bank.

Dormant Account

All accounts in which there was no operations for the last 12 months will be branded asDormant. For this purpose the Ledger will be scrutinized once a month to identify the Dormantaccounts. These are interest bearing accounts. However, some banks charge a specific fee onthese accounts and the customer is intimated about this accordingly.

In-operative accounts

Accounts in which there have been no operations during the past 24 months are treated as in-operative accounts. There are 2 types of such accounts

! Interest bearing! Non Interest Bearing

This is dependent based on whether the account is maintaining the minimum stipulatedbalance.

4.2 Processing of Financial Transactions

Financial transactions pertaining to Savings Accounts can be broadly classified as Cash,Clearing and Transfer transactions.


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We will study the operational procedure followed by the bank branch for executing each ofthese types of transactions. Before going onto the details of each of the above transactiontypes, we will study certain general details required for understanding the procedures followed.

4.2.1 Ledger Maintenance

Any financial transaction to an account results in the flow of money in or out of the accountand thereby affect the account balance. It is essential to correctly record the transactionsaffecting an account, and also have a reliable control and checking mechanism, to ensure thatthe transactions are recorded correctly. Failure to record a transaction or recording itincorrectly can have severe implications.

The procedure below pertains to a situation where the branch operations are carried out manually. In an automated environment the ledgers can be generated automatically based on the banking transactions.

The Ledger Book is the primary tool used by the bank branch to keep track of the financialposition of an account. At the bank branch, the Ledger Books are kept with personnel at thefront counters. Each front counter will be able to handle accounts belonging to around 10ledger books. The bank personnel at the front counters maintain the ledgers, and hence arealso referred to as the ledger keepers.

The Ledger Book has one page for each account and is sorted according to the accountnumber. The top portion of the page is used to maintain certain static information related to theaccount, like names of the account holders, mode of operation, special instructions etc. Therest of the page can be likened to a Savings bank passbook, with columns for recording detailsof the transactions, like date of transaction, transaction particulars, the transaction amount(deposits and withdrawals are recorded in separate columns), account balance after executingthe transaction, initials of the official making the ledger entry etc.

At the time of account opening, a new page is opened in the Savings ledger book, and thestatic information as well as details of the initial deposit is recorded in the ledger book. Allsubsequent financial transactions are recorded meticulously in the ledger book so that the upto date financial position of each account is available in the ledger book. The ledger books arekept under lock after office hours to prevent any tampering of the figures.

4.2.2 Cash Deposit Transaction

Two systems are followed by banks for handling cash deposits. These are Scroll System andReceipt system. The bank branches follow the system as per the directives from the HeadOffice. We will discuss these two systems, along with their relative merits and demerits.

4.2.2.1 Scroll System

Under the Scroll System a cash deposit into an account will involve the following sequence ofsteps : (Again the process described below is specific to manual operations)

! The customer will have to fill in a scroll slip for cash deposit containing details includingaccount number, amount with denominations, and give it to the scroll clerk / officer.

! The scroll clerk will record the details from the scroll slip in the Cash Scroll Register, andhand over the scroll slip to the customer.

! The customer will then hand-over the cash together with the scroll slip to the receivingcashier. The receiving cashier shall validate that the details given in the scroll slip areconsistent with the physical cash being deposited. After receiving cashier counts the cashtendered by customer and if it is in order, he will stamp the scroll slip, and handover the

counterfoil of the scroll slip to the customer. The stamped scroll slip is an


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acknowledgement of the cash deposit. The main voucher is then released for making entryin respective account / ledger

! The receiving cashier will retain the scroll slip, and at the end of the day he shall verify thatthe physical cash with him, is consistent with the figure arrived at based on the total of thescroll slips.

! The ledger keeper will enter the cash deposit entry in the ledger. The scroll slip will thenbe clubbed with the rest of the vouchers for the days transactions, and stored safely forfuture reference.

The Scroll System provides a control mechanism to ensure that the receiving cashier reportsall the cash receipt correctly, and the scope of any fraud is checked. This is achieved bychecking the total cash deposit figure from the scroll register against the physical cash depositreported by the receiving cashier. This also helps in checking any compensatory mistakeseither at the cashier or ledger keeper level, i.e. if any one has wrongly entered the amount, itcan be traced at the end of the day. In the absence of the scroll register, the receiving cashiermay throw away a scroll slip, and pocket the money himself by not reporting the receipt.Unless the customer comes back and reports that the amount has not been credited to his

account, the fraud may not be detected.

4.2.2.2 Receipt System

Under the Receipt System, the customer will approach the receiving cashier directly withoutgoing to the scroll clerk. In fact there will be no scroll clerk, and the customer will hand over thescroll slip along with the cash to the receiving cashier. The subsequent procedure will beidentical to that for a scroll system, except for the fact that there will be no end of day checkingagainst the figures from the scroll register.

Receipt System is more convenient for the customer, and reduces the service time.

4.2.3 Cash Payment

Customer wishing to withdraw cash from his account has two alternatives viz. Teller Paymentand Token Payment. Teller Payment facility is not available at all the branches. The TellerPayment facility may be offered based on the size of the branch and the number of cashpayments. In small branches with low transaction volumes, it may not be necessary to haveTeller Payment. The operational procedure followed for both the cash payment systems aredescribed below.

4.2.3.1 Teller System

Under the Teller System a customer can draw money upto a certain limit (say Rs. 5000/-) asdecided by the bank, directly from the Teller Counter without authorisation from the secondlevel. The Teller has a list of accounts with low balances, and he checks against this list beforehe makes any payment. Under the Teller System, payment is made primarily on trust withoutchecking either the balance or the signature. In an automated environment, the teller can query on the account and verify the balance and signature of the customer account before making the payment.

The Teller puts his initials on the instrument, and writes the payment details including accountnumber, amount and denominations in the Cash Payment Register. (The cash payment register need not be maintained in an automated environment, where the details of cash payment are directly entered in to the system and cash payment register is generated at the end of day for verification).

Teller Payments are usually not made against a withdrawal slip (even if the pass-book is alsofurnished). Most banks permit Teller Payments only against cheque. If a customer does not


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have his chequebook with him, then he can collect a loose leaf cheque from the officer; buteven against this loose leaf cheque, payment is permitted only through token issue.

The Teller retains the cheques until the end of the days work. After tallying his physical cashagainst the total figure extracted from the Cash Payment Register, he releases the instrumentsto the ledger keepers for entry into the ledger.

The Teller System has been introduced to offer faster service to the customers, and in theprocess the bank is taking a risk to a certain extent.

4.2.3.2 Token System

The Teller Payment that we saw earlier is permitted only for amounts upto a certain limit. Forpayments beyond the Teller Limit, the customer has to collect a token from the SavingsAccount counter against his cheque, and collect the payment from the Paying Cashier againsthis token. The stages involved in token payment are as follows : (These processes specific to branches where the operations are performed manually)

! The customer hands over the cheque to the Savings Account Counter corresponding to

his account number. The counter clerk gives a token to the customer acknowledging thereceipt of the cheque, and writes the token number on the cheque. He makes the entry inthe Ledger Book after checking for existence of sufficient balance in the account. He thenpasses on the cheque to the officer for authorisation. ( In an automated environment, the clerk keys in the details of the payment request into the system. After basic validation like balance, signature, etc., this transaction goes to the officer for authorisation on the system itself. The physical cheque is also sent to the officer for verification.)

! The officer after checking the signature, the mode of operation instruction , stop paymentinstruction if any, and the account balance, will authorise or reject the cheque. If heauthorises the cheque, then the cheque is passed on to the Paying Cashier for payment,otherwise it is returned to the customer giving appropriate reasons for the rejection.

! The paying cashier, on receiving the cheque for payment will either call out the number ordisplay the token number on the Token Number Display Board. The paying cashier willmake the payment to the customer against the token and enter the details in the CashPayment Register. The customer has to countersign at the back of cheque asacknowledgement of receiving the cash. The cheque will be retained by the cashier till theend of the days operation, and will release it to the ledger keepers only after tallying hisphysical cash position with the cash payment register figures. He then releases thecheques to be kept together with the other transaction vouchers for the day.

The Token Payment System is more time consuming, but is very essential for large paymentsto be properly validated and authorized by the officer.

4.2.4 Cheque Clearing System

Clearing is an arrangement through which a bank exchanges cheques drawn on other banksfor those drawn on it. In the absence of such an arrangement, each bank will have to presentcheques to each of the other banks for receiving payment of cheques over which they have aclaim. The cheque clearing system provides a easy, systematic, efficient and cost-effectivemethod of clearing cheques.

Vinod Shah deposits a cheque into his account, at Dadar Branch of Bank of Baroda. Thischeque has been given to him by Paresh Modi who has an account with Andheri Branch ofDena Bank. The processing of this cheque deposit transaction involves the debit of Pareshsaccount at Andheri Branch of Dena Bank, and credit Vinods account at Dadar Branch of Bankof Baroda. The activities involved in carrying out this transaction are as follows :


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! The cheque has to be sent to Andheri Branch of Dena Bank, so that they can carry out thevalidations, and debit Pareshs account in their branch.

! Andheri Branch of Dena Bank has to then debit the account in their branch and send thecredit to Dadar Branch of Bank of Baroda.

! On getting the credit from Andheri Branch of Dena Bank, Dadar Branch of Bank of Barodawill in turn credit Vinods account in their branch.

This activity becomes a complex task as every day individuals all over the country are sendingcheques drawn on their account at one bank to people who bank with other banks. There wllbe a continual stream into each bank, of cheques drawn on each of the other banks. Suchexchange of cheques therefore takes place in a Clearing House .

4.2.4.1 Service Branch

Service Branch is a specialised branch of a bank for handling clearing of cheques, paymenttowards Demand Drafts, Pay Orders an collection of outstation cheques. Its basic objective isto facilitate the clearing process. Generally, banks have one Service branch in major cities.

Wherever it is not feasible to operate an exclusive service branch, an existing branch acts as anodal branch and carries out functions of service branch.

4.2.4.2 Clearing House

The primary objective of the clearing house is to facilitate the speedy and economic way ofcollecting cheques, bills and other documents payable or deliverable at or through offices ofthe members and sub-members of the house situated in that town by a system of systems ofclearing.

In general, RBI undertakes the management of the clearing house. In the absence of this, oneof the public sector banks in that centre, which may be specified by RBI shall be managing theClearing house.

Clearing houses are established in all the cities, towns and even large villages where thevolume of cheques is large and number of banks in the area are more than 2. This results inconsiderable saving of time and cost. Clearing houses are autonomous institutions havinguniform regulations and rules regarding the conduct of operations.

4.2.4.3 Settlement

This is explained with the help of an example.

Central Bank of India presents cheques drawn on other banks which were deposited by itscustomers. The instruments are grouped by Central Bank of India bank-wise and the amountdue from each bank is shown therein. The aggregate of these amounts represents the totalamount to be received by Central Bank of India from all other banks. The instruments arepresented to the respective bank alongwith a memo in a clearing house.

Likewise Central Bank of India also received cheques presented by other banks. Theaggregate of the totals of such instruments delivered by other banks represents the totalamount of cheques drawn on Central Bank of India and payable by it. The difference betweenthe two amounts is the net debit or credit to Central Bank of India. The Central Bank of Indiaas well as other member banks keep an account with the presiding bank-branch whichmanages the clearing house, through which these debits/credits are passed.

4.2.4.4 Magnetic Ink Character Recognition

This is a technology for mechanised cheque processing for clearing. It is the technique ofusing ink containing magnetised particles to print characters of cheques, drafts, travelers


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cheques and other clearing instruments, which can be translated to machine language by adevice that senses magnetisation. The imprint in magnetic ink appears in a coded but opticallyreadable form. When the magnetised portion of the instrument is placed below the electricalfield, the magnetisation generates a certain wave pattern which is readable by the computer.

MICR processing requires standardisation of the sizes of cheques, paper quality, specified font

type, magnetic ink, printing position, location of the magnetic fields of information and thenumber of digits in the information, etc.

MICR cheques contain a white band at the bottom where information about the cheque isrecorded in a coded form. The code appearing in the MICR band denotes the following :

First 6 digits - Cheque Serial NumberNext 9 digits - is a collection of three codes of three digits each as follows -

999 - the city where the branch is located999 - the bank to which the branch belongs999 - the code allotted to the branch itself

Next 6 digits - Account numberNext 2 digits - Transaction type (10 Savings, 11 Current, 13 Cash Credit, )

Next 13 digits - Amount

The code for account number may or may not be pre-printed. The code for amount is not pre-printed; it is printed by the electronic Encoder machine where necessary. The electronicmachines called Reader Sorters will be used at the clearing house to sort the chequesbranch/bank wise

4.2.4.5 Procedure for Cheque Clearing

We will describe below the stages involved in cheque clearing. This is the process followedwhen the cheque that has been deposited is drawn on a bank that is in the same city. This isreferred to as Local Clearing .

The timings indicated are not uniformly applicable across all branches, but are quoted forbetter understanding. The various stages involved in the clearing of cheques are as follows :

! Let us say that on any day around 500 cheques are deposited by the customers at MahimBranch of Bank of Baroda. The branch would collect the cheques upto a fixed time say3.00 p.m. Cheques deposited after 3.00 p.m. will be sent for clearing on the next workingday only.

! After collecting all the cheques, a clerk in the clearing department would enter the detailsof all these cheques in an Outward Clearing Register. The cheque amounts will then betotaled using an adding machine. The listing from the adding machine will be attached tothe bundle of cheques, and sent to the Service Branch of the bank. The cheques arecollected upto 3.00 p.m., and are sent out of the branch to the banks Service Branch ataround 4.00 p.m.

! As per RBI guidelines, each clearing cheque bundle or lot should contain at most 300cheques.

This activity at Bank of Baroda where the cheques drawn on different banks that have been deposited by the customers are collected and sent to Service branch is referred to as Outward clearing.

! The Service branch of a bank receives cheques from all the branches of that bank in thatcity. These cheques would be of different banks. At the Service branch, the cheques aresorted bank-wise and encoded using the encoding machines. Encoding of the chequesinvolves the printing of the cheque amount, city code, bank code and branch code on theMICR line (at the bottom of the cheque). After encoding, the Service branch bundles the


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cheques bank-wise with control information on the number of cheques and the totalamount for each bank.

! The cheques from the Service Branch are then sent to the Clearing House which isgenerally managed by RBI or nominated bank.

! Once the Clearing House receives the encoded cheques from the various banks (throughtheir Service Branches), these cheques are processed during the night by the readersorter machines. These machines read the encoded information from the MICR line, whichcontains details such as the bank branch where the cheque was issued, the bank branchwhere the cheque has been sent for clearing, and the cheque amount.

The clearing of cheques involves transfer of funds from one bank to another, i.e.settlement. At the Clearing House, each bank has to maintain an account with themanaging bank. The inter-bank transfer of funds required in the course of cheque clearing,is effected by debiting and crediting the accounts of the respective banks accounts withRBI. Each bank in turn will credit or debit the account of the branch with the Head Office.

Simultaneously, the cheques are sorted based on the bank branch where the cheque was

issued.! Next day, the personnel from the Service branch of each bank, would collect the cheques

issued from its own branches, from the Clearing House. The Service branch sorts thecheques branch-wise. Each branch will send a person to the Service branch of the bankearly in the morning, to collect the cheques issued from their branches, which have comethrough clearing. These cheques reach the branch at around 11.00 a.m. If there are anycheques which are to be returned due to insufficient balance or any other reason, thenthese have to be sent out of the branch by 3.00 p.m.

! In case any cheque is returned, then the cheque is sent by the branch to the Servicebranch from where it is forwarded to the Clearing House who will return it to the bankwhere the cheque was deposited. If a bank branch does not receive any cheque returnadvice, then it treats the cheque as cleared. If a cheque return advice is received, then theaccount is debited.

! Thus the Dena Bank (Andheri Branch) cheques deposited at Bank of Baroda (MahimBranch) reaches Dena Bank (Andheri Branch) at around 11.00 a.m. on the followingworking day. These Cheques are posted to the respective customer accounts. Incase ofreturns that might arise due to insufficient balance, signature mismatch, etc. the chequehas to be sent back from the branch at around 3.00 p.m. These return cheques will reachbranch Bank of Baroda (Mahim Branch) early in the morning on the 3 rd day. On the 3 rd daymorning all the cheques except the ones returned will be treated as cleared.

This activity at Dena Bank branch, where the cheques drawn on Dena Bank that have been deposited at various other banks are received from the Clearing House and processed is referred to as Inward clearing.


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Following is a representation of the Clearing Cycle. Consider the Cheques of Dena Bank thathave been deposited at Bank of Baroda:

In this whole cycle the operations performed at the branch Bank of Baroda are referred to asthe Outward Clearing operations, since the cheque is going out of this branch. The operationsat the branch of Dena Bank are referred to as Inward Clearing Operations.

In the course of the cheque clearing the flow of funds will be as follows :

! the customer who has drawn the cheque gets debited! funds are transferred between the two banks involved! the customer who deposits the cheques gets a credit in his account

Now a branch can decide to credit the customers account by the cheque amount on the day itwas cleared or for the benefit of customer can decide to credit the account on the day it wasdeposited. In the latter case, the balance to the extent of cheque amount will be remainuncleared till it gets cleared on the third day.

Through the above discussion on the Clearing System, we have seen the processing ofcheques deposited, as well as the processing of cheques issued which come through clearingfor withdrawal from the accounts.

We have based our discussion assuming that the cheques are MICR cheques. However, insmall towns non-MICR cheques are still in use. The non-MICR cheques take a longer time forprocessing, since they have to be processed manually. Also the clearing need not be alwaysthrough the RBI Clearing House. In small towns where RBI does not have its Clearing House,banks have their own Inter-bank Clearing House.

High Value Clearing

All the high value cheques (Value more than Rs. 1,00,000 this amount is bank specific)deposited in the bank in the first one hour of operation (this period again varies from bank tobank) are collected and sent for clearing immediately. These cheques goes through theprocess of normal clearing, however, there is a separate cycle for these high value cheques atthe clearing house and hence these gets processed faster. In effect, the customer gets thecredit against his cheque the same day evening / next day morning.

This facility is available in all the metro cities, at the branches that are geographically closer tothe Clearing house, e.g. within 3-5 k.m.

5Returns andOutwardCheques

Clearing House

Bank of Baroda

1Outward Chequesand Returns

8Inward Cheques andReturns

2

Outward Chequesand Returns 7InwardCheques andReturns

6Returns andOutwardCheques

3Inward Chequesand Returns

Service Branch Dena Bank

4Inward Chequesand Returns

Dena Bank

Service Branch Bank of Baroda


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Outstation Cheque Clearing

If the cheque deposited has been drawn on a bank branch that is not in the same city, thenthis cheque is sent for Collection .

A cheque of Bank of Baroda Chennai branch is deposited in Indian Bank at Nariman Point

branch. This cheque will not go in the outward clearing of Indian Bank. Instead Indian Bank Nariman Point branch will send this cheque to and Indian Bank branch in Chennai. From thereit will follow the Local Clearing process and the Chennai branch of Indian Bank will receive thecredit. Chennai branch will then forward the credit to the Nariman Point branch of Indian Bank.

Accounting Entries at Indian Bank on the receipt of Cheque

- Dr. Contra Account Outward Collection Pool A/c.- Cr. Customer Contra Account

Accounting Entries at Indian Bank on realisation or return of Cheque

- Dr. Customer Contra Account

- Cr. Contra Account Outward Collection Pool A/c.

- Dr. Clearing Account- Cr. Customer Account

- Dr. Customer Account for Charges- Cr. Income Account

4.2.5 Transfer

Transfer transactions refer to the flow of funds from one account to another within a branch.Transfer of money from Savings account to a Loan account towards payment of installments,Transfer of interest from deposit account into Savings account, transfer of money from oneSavings account to another are some of the transfer transactions that take place regularly arefew examples of transfer transactions.

Every logical transfer transaction must have a credit as well as a debit transaction, and thetotal credit must be equal to the total debit.

Example

Upon maturity of a fixed deposit receipt, the deposit amount as well as interest may betransferred to the Savings account of the customer. This involves the transfer of funds from adeposit account to the Savings account. The transactions involved are a credit transfer to theSavings account and two debit transfers to the deposit account.

The operational procedure followed at the bank branch to execute transfer transactions is asfollows :

! The department which initiates the transfer transaction will prepare the credit and the debitvouchers. The credit vouchers will contain all the credit transfer transactions, and the debitvouchers will contain all the debit tr

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