dissertation on icici bank
TRANSCRIPT
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INTRODUCTION
Customer satisfaction is a measure of how product and services supplied a company
can meet the customer expectations. Customer satisfaction is still one of the single
strongest predictors of customer retention. Its considerably more expensive to attract new
customers than it is to keep old once happy. In a climate of decreasing brand loyalties,
understanding customer service and measuring customer satisfaction are very crucial.
There is obviously a strong link between customer satisfaction and customer retention.
Customer perception of service and quality of product will determine the success of the
product or service in the market.
With better understanding of customer perceptions, companies can determine the
customers need e actions required to meet the can customers needs. They can identify
their own strengths and weaknesses, where they stand in comparison to their competitors,
chart out path future progress and improvement. Customer satisfaction measurement helps
to promote an increased focus on customer outcomes and stimulate improvements in the
work practices and processes used within the company.
WHAT IS A BANK?
A banker orbankis a financial institution whose primary activity is to act as a payment
agent for customers, and to borrow, lend, and, in all modern banking systems, create
money. Some of the definitions of bank are:
"Banking business" means the business of receiving money on current or deposit
account, paying and collecting cheques drawn by or paid in by customers, the making
of advances to customers, and includes such other business as the Authority may
prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2,
Interpretation).
"Banking business" means the business of either or both of the following:
1. receiving from the general public money on current, deposit, savings or other
similar account repayable on demand or within less than [3 months] or with a
period of call or notice of less than that period;
2. paying or collecting cheques drawn by or paid in by customers
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Origin of the word
The name bank derives from the Italian word banco "desk/bench", used during the
Renaissance by Florentines bankers, who used to make their transactions above a desk
covered by a green tablecloth. However, there are traces of banking activity even in
ancient times.
In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders
would set up their stalls in the middle of enclosed courtyards called macella on a long
bench called a bancu, from which the words banco and bank are derived. As a
moneychanger, the merchant at the bancu did not so much invest money as merely convertthe foreign currency into the only legal tender in Rome- that of the Imperial Mint.
Traditional banking activities
Banks act as payment agents by conducting checking or current accounts for customers,
paying cheques drawn by customers on the bank, and collecting cheques deposited to
customers' current accounts. Banks also enable customer payments via other payment
methods such as telegraphic transfer, EFTPOS, and ATM.
Banks borrow money by accepting funds deposited on current account, accepting term
deposits and by issuing debt securities such as banknotes and bonds. Banks lend money by
making advances to customers on current account, by making installment loans, and by
investing in marketable debt securities and other forms of lending.
Banks provide almost all payment services, and a bank account is considered indispensable
by most businesses, individuals and governments. Non-banks that provide payment
services such as remittance companies are not normally considered an adequate substitute
for having a bank account.
Banks borrow most funds borrowed from households and non-financial businesses, and
lend most funds lent to households and non-financial businesses, but non-bank lenders
provide a significant and in many cases adequate substitute for bank loans, and money
market funds, cash management trusts and other non-bank financial institutions in manycases provide an adequate substitute to banks for lending savings to.
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Commercial role of banks
However the commercial role of banks is wider than banking, and includes:
issue of banknotes (promissory notes issued by a banker and payable to bearer on
demand)
processing of payments by way of telegraphic transfer, EFTPOS, internet banking
or other means
issuing bank drafts and bank cheques
accepting money on term deposit
lending money by way of overdraft, installment loan or otherwise
providing documentary and standby letters of credit, guarantees, performance
bonds, securities underwriting commitments and other forms of off balance sheet
exposures
safekeeping of documents and other items in safe deposit boxes
currency exchange
sale, distribution or brokerage, with or without advice, of insurance, unit trusts and
similar financial products as a 'financial supermarket'
Economic functions
The economic functions of banks include:
1. Issue of money, in the form of banknotes and current accounts subject to cheque or
payment at the customer's order. These claims on banks can act as money because
they are negotiable and/or repayable on demand, and hence valued at par and
effectively transferable by mere delivery in the case of banknotes, or by drawing a
cheque, delivering it to the payee to bank or cash.
2. Netting and settlement of payments -- banks act both as collection agent and paying
agents for customers, and participate in inter-bank clearing and settlement systems
to collect, present, be presented with, and pay payment instruments. This enables
banks to economise on reserves held for settlement of payments, since inward and
outward payments offset each other. It also enables payment flows between
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geographical areas to offset, reducing the cost of settling payments between
geographical areas.
3. Credit intermediation -- banks borrow and lend back-to-back on their own accountas middle men
4. Credit quality improvement -- banks lend money to ordinary commercial and
personal borrowers (ordinary credit quality), but are high quality borrowers. The
improvement comes from diversification of the bank's assets and the bank's own
capital which provides a buffer to absorb losses without defaulting on its own
obligations. However, since banknotes and deposits are generally unsecured, if the
bank gets into difficulty and pledges assets as security to try to get the funding it
needs to continue to operate, this puts the note holders and depositors in an
economically subordinated position.
5. Maturity transformation -- banks borrow more on demand debt and short term debt,
but provide more long term loans. Bank can do this because they can aggregate
issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g.
withdrawals and redemptions of banknotes), maintain reserves of cash, invest in
marketable securities that can be readily converted to cash if needed, and raise
replacement funding as needed from various sources (e.g. wholesale cash markets
and securities markets) because they have a high and more well known credit
quality than most other borrowers.
Banking channels
Banks offer many different channels to access their banking and other services:
A branch banking centre or financial centre is a retail location where a bank or
financial institution offers a wide array of face-to-face service to its customers
ATM is a computerised telecommunications device that provides a financial
institution's customers a method of financial transactions in a public space without
the need for a human clerk or bank teller. Most banks now have more ATMs than
branches, and ATMs are providing a wider range of services to a wider range of
users. For example in Hong Kong, most ATMs enable anyone to deposit cash to
any customer of the bank's account by feeding in the notes and entering the account
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number to be credited. Also, most ATMs enable card holders from other banks to
get their account balance and withdraw cash, even if the card is issued by a foreign
bank. Mail is part of the postal system which itself is a system wherein written documents
typically enclosed in envelopes, and also small packages containing other matter,
are delivered to destinations around the world. This can be used to deposit cheques
and to send orders to the bank to pay money to third parties. Banks also normally
use mail to deliver periodic account statements to customers.
Telephone banking is a service provided by a financial institution which allows
its customers to perform transactions over the telephone. This normally includesbill payments for bills from major billers (e.g. for electricity).
Online banking is a term used for performing transactions, payments etc. over the
Internet through a bank, credit union or building society's secure website
Types of banks
Retail banking: dealing directly with individuals and small businesses;
Business banking:providing services to mid-market business;
Corporate banking: directed at large business entities;
Private banking: providing wealth management services to High Net worth
Individuals and families;
Investment banking: relating to activities on the financial markets.
Central banks: are normally government owned banks, often charged with quasi-
regulatory responsibilities, e.g. supervising commercial banks, or controlling thecash interest rate. They generally provide liquidity to the banking system and act as
Lender of last resort in event of a crisis.
RETAIL BANKING
Retail Banking is that are of a bank which:
Caters the multiple banking requirements of the individuals
Augmenting their asset portfolio
Diversify their portfolio risk
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Meaning: Retail Banking is a banking service that is geared primarily toward individual
consumers. Retail banking is usually made available by commercial banks, as well as
smaller community banks. Unlike wholesale banking, retail banking focuses strictly onconsumer markets. Retail banking entities provide a wide range of personal banking
services, including offering savings and checking accounts, bill paying services, as well as
debit and credit cards. Through retail banking, consumers may also obtain mortgages and
personal loans. Although retail banking is, for the most part, mass-market driven, many
retail banking products may also extend to small and medium sized businesses. Today
much of retail banking is streamlined electronically via Automated Teller Machines
(ATMs), or through virtual retail banking known as online banking.
Retail banking coverage
Retail banking is quite broad in nature
Refers to dealing both on liabilities and assets sides
Fixed, current, savings accounts
Personal loans, housing, auto loans, and educational loans)
Ancillary services include credit cards, debit cards and depository services.
Retail Banking: Characteristics
Multiple products (deposits, credit cards, insurance, investments and securities)
Multiple channels of distribution (call centre, branch, Internet and kiosk) and
Multiple customer groups (consumer, small business, and corporate)
Opportunities of Retail Banking in India
India a growing economy
The rise of the Indian middle class
Rising percentage of middle to high income households
New retail customers: the homemaker, the retail shop keeper, the pensioners, self-employed and those employed in unorganised sector
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CHAPTER 02
LITERATURE REVIEW
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RETAIL BANKING: ASSET PRODUCTS
Retail loans:
Meant for very small entrepreneurs and individuals who are engaged in gainful
commercial activity
Loans are given on the strength of the means of the borrower with an eye on the
repaying capacity.
The quantum of loan is generally determined by the repayment capacity which
depends upon the monthly income.
Banks calculate the maximum monthly repayment capacity of a person usingmethods internally developed based on the salary certificate or IT return of a
borrower
Thereafter, a loan for which Equated Monthly Instalment (EMI) is within this
capacity is considered the outer limit for a person.
Loans to resident Indians for purchase of land and construction of residential
house/purchase of ready built house/for repairs and renovation of existing house.
Home Loans to Non-resident Indians
Auto Loans for purchase of new/used 4 wheelers and 2 wheelers
Consumer Loans for purchase of white goods and durables
Personal loans for purchase of jewels, for meeting domestic consumption, etc.
Educational Loans for pursuing higher education both in India and abroad
Trade related advances to individuals for setting up business, retail trade, etc.
Crop loans to agricultural farmers
Credit Cards, etc.
Some figures
Retail loans which were at 10.6% of GDP in 2006 have grown to 11.8% of GDP in
2007.
Recently, retail lending has turned out to be a key profit driver for banks with retail
portfolio constituting 28.5 per cent of total outstanding advances as on March 2007.
Within retail segment housing loans had the least gross asset impairment.
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Retail Credit Challenges
Customer tendency to borrow more and repay less may affect NPA levels
Future delinquency rates are not properly factored in fixing the Retail credit pricing
Increased risk weight of Consumer Credit
Liquidity mismatches may emerge as an issue
Slight change in economic scenario may affect the whole system
Existing Retail scoring models may not predict impact of mild recession.
Lack of Credit information of Retail customers from the Banking system
CIBIL is addressing the issue only to a certain extent
No system to eliminate multiple finances, including Personal Loans
Higher level of NPA from Personal Loans
Higher Loan-to-value ratio may emerge as a problem during recession
Sale of assets- bank has no control- in the case of Consumer Credit
Growing incidents of frauds and cyber crimes
Common features of retail loans
Retail loans have certain common characteristics or features. These may be broadly
classified as follows:
Retail loans are to individuals for acquiring assets for individual use- such as car,
white goods, residential property etc or for general consumption purposes which
includes education.
Retail loans are small value loans
Each loan in a retail loans portfolio is a very small portion it does not constitute
more than 0.2% of the portfolio
Retail loans where tangible security is given to bank to secure the borrowing
typically have a loan to asset value of 75%
Repayment capacity
The repayment capacity is the available surplus after meeting existing commitments and
living requirements. The surplus has to be adequate to repay the new loan sought within a
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reasonable period. A bank cannot grant loans for any length of time depending on the
repayment available. Retail loans should be repaid within a short period except in the
case of housing loan. The repayment period of different types of retail loans may be asbelow:
Personal loans for consumption- Two to three years; in certain cases like vacation
travel, the period of repayment be 12 months
Retail loans for consumer goods- not exceeding three years
Vehicle Loan- five to seven years
Housing Loans- five to twenty five years though usually 15 years is the norm Educational loans Maximum of 10 years after completion of course though
usually the period given is 5 years from completion.
ELIGIBILITY CONDITIONS
In line with the character of retail loans, the eligibility conditions for availing any
retail loan is that the borrower must be an individual or a group of individuals who
have a regular income in excess of their living expenses with an adequate surplus
that will be adequate to service the retail loans availed.
The main criteria are the loans are to individuals, singly or jointly and that the
individuals have a regular income. Of course, the applicant should be a major and
be of sound mind and not an undischarged insolvent
In sum, he should be able to enter into a valid contract.
KYC Norms
Proof of identity and place of residence
The borrower must be properly identified; KYC norms are applicable to borrowing
accounts also. Further, the bank cannot give loans to any one without establishing
his identity as the bank has to recover the loan with interest. Hence, the applicant
for a retail loan has to show proof of identity establishing that he is what he claims
to be. Photo identity is required; the usual photo identification process calls for any
of the following to establish identity:
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Pass port
Voter Identity card
PAN card
Identity cards issued by Government authorities
Driving Licence
Any other reliable photo identification
Proof of Income and repayment ability
Salary certificate from employer/salary slips received showing all direct deductions
is accepted for establishing proof of income.
Net income (after deductions towards existing liabilities for which the salary paying
establishment recovers the instalments and the income tax payable, if any) is the
regular income that the applicant receives.
About 55%- 65% of this income is to be reserved for living expenses and it is the
balance that is reckoned as available for repayment
Other recoveries
If the applicant has other existing loans, the loan instalments for which have not
already been deducted from salary, these have to be provided for from net salary to
arrive at the repayment ability
In case of self employed persons the bank has to rely on the disclosed income such
as the income tax returns for the past three years which will give an indication ofthe average income.
Proof of other commitments and repayment record
The salary slip given by the applicant may not give the deductions being made from
salary in respect of other commitments of the applicant and the position of the
various liabilities of applicant may not come to light.
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Since we still do not have a system to collect all institutional loans availed by a
person, the lending bank has to rely on the disclosures made by the applicant in
respect of the other liabilities and repayment commitments.
To ascertain the willingness to repay and the tendency to honour obligations, bank
usually asks the applicant to show proof of repayment such as the credit card
statements, and repayment records of past loans and other commitments. These can
be established through bank statements
Credit Agency Report
Credit agencies such as CIBIL have records relating to credit card and other
personal loan defaults of borrowers of all member banks.
A report from the credit agency will give information about the defaults if any
made by applicant.
The agency report is only a negative report if repayment record in respect of
liabilities contracted by applicant is good.
Purpose
The applicant in his application has to furnish the purpose for which the loan is
sought. Retail loans are for acquisition of personal assets or for general
consumption purposes.
Retail loans are not granted for investment or speculative purposes.
REPAYMENT PERIOD
The repayment period depends on the surplus available towards loan servicing and
is dependent on the expected repayment capacity.
The Bank may stipulate a maximum period for repayment of a certain category of
retail loan for instance 25 years in housing loan.
However, this period is not available to all borrowers. In fact, depending on
repayment ability, the bank will stipulate repayment conditions on a case to case
basis varying from 5 years to a maximum of 15 years.
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REPAYMENT METHODS
Equated monthly installment (EMI)
Equated Monthly Instalment (EMI) is the monthly amount payable which includes
interest and principal amount towards repayment.
EMI depends on the loan amount and the tenure of the loan which is based on the
repayment ability.
EMI and tenure of loan
In an EMI loan, major portion of the instalment goes towards interest in the initial
stages and only a small part is towards the principal debt
As the principal debt decreases, the interest amount also decreases and in the later
stages, major portion of EMI goes towards reducing principal part.
EMI calculators are available which give the amount of EMI for a given tenure
(3years, 5 years, 10 years, 15 years) at given rates of interest for a certain amount
of loan (Rs 1lac). Using the EMI tables, or calculators, one can fix the EMI for aloan amount for a specific tenure.
The tenure of loan is based on the repayment ability. If repayment ability is strong,
the tenure may be low- say 3 years as against a normal repayment ability which
may require a 5 year repayment period.
PDCS
Post Dated Cheques (PDC s) are cheques drawn by the borrower to be paid in
future to the debit of his account with a bank other than the one from whom he has
borrowed and each cheque is for amount of EMI and the cheques are dated payable
on the same date every succeeding month.
For instance, a borrower may have availed a personal loan from X bank for Rs
50,000 for a period of 12 months in Jan 2008. He has a deposit account with Y
bank. If the EMI is Rs 4500 per month, he gives 12 post dated cheques all of which
fall due on 7th of the month following the month he has availed the loan. So the
12
PDCs, each for Rs 4500 will be dated 7th Feb, 7th Mar, and so on to 7th Jan 2009.
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ECS debit authorization
Instead of giving PDC s he may opt for ECS debit authorization; this is available in
select centres. Then the lending bank X will raise a ECS debit on his account with
bank Y and the borrowers account gets debited automatically if sufficient funds are
available in the account.
If the borrower has a deposit account with the lending bank, he may give standing
instructions or an authority to debit his account on the 7th of every month starting
from Feb 2008 to Jan 2009 towards EMI on his loan account.
Standing Instructions
One may ask if the borrower can give standing instructions to his Bank Y to debit
his account with them every on the 7th from Feb 2008 with Rs 4500 towards EMI
till 7th Jan 2009 and pay to Bank X. This is certainly possible but in this case, Bank
Y will issue a pay order or Bankers cheque and dispatch the instrument to Bank X
and for this the Bank will collect the charges for pay order issue and also the
courier charges. ECS and PDCs are free of such charges.
INTEREST ON LOAN
The interest on loan is the cost of borrowing. Resources have a cost and the cost of
borrowing is the interest. Interest charged by the bank on a loan is a function of various
factors such as
Cost of funds (cost of deposits and borrowed funds)
Operational cost (Cost of establishment and running the bank)
Capital Cost (Cost of capital or the return to be given to the shareholders)
Risk Cost (default premium)
Interest is risk premium
Interest on retail loans carries a uniform risk cost as these are small value loans.
Further, this is a profitable segment of business. Hence spread (interest received interest paid) will be high. Interest is compounded monthly.
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Rate of interest is generally uniform in each category of retail loans- personal loans
carrying the highest with housing loans being charged the least.
Unsecured loans carry a higher rate of interest as risk is higher
Rate of Interest- fixed
The rate of interest charged on a loan may be fixed at a certain percentage
during the entire tenure of the loan. In this case interest rate will not be refixed.
For instance a housing loan for 15 years may carry a fixed rate of interest at 8.5%.
Through the life of the loan, interest will be at 8.5%.
However, banks now include a reset clause that the interest may be rest at fixed
intervals or in the case of certain events
Rate of Interest- floating
The rate of interest is linked to a benchmark such as the prime lending rate.
So as and when prime lending rate varies depending on external conditions, bank
will revise the PLR and the rate of interest on retail loan is which is linked to PLR
will automatically change.
Benchmark may be the 5 year deposit rate and period of refixing may be every 6
months; so every 6 months, the interest on loan will be refixed and it is said to
float.
When interest rates are declining, it is preferable to have loan on floating rate whileif interest rates are on the rise, fixed rate loans are better from the borrowers
viewpoint.
Option to change from fixed rate to floating rate and vice versa
Banks permit change over from fixed rate of interest to floating rate and vice versa;
however the banks collect a charge for such a switch to compensate them for the
likely loss of interest.
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Pre Payment Charges
In case of long tenure loans, banks charge a pre-payment premium in the event of
premature closure of the loan.
DELINQUENCY MANAGEMENT PROCEDURES
If any loan instalment or interest remains unpaid for a period of 90 days, the loan becomes
classified as Non-Performing Loan. No bank will allow loans to turn NPL without trying it
best to collect the dues. Recovery of loan and interest is a very important function and
ensuring recovery of principal and interest makes the portfolio healthy and performing.
Various tools used by ICICI Bank for delinquency management are discussed below:
MARGIN
Margin may be defined as the borrowers stake or contribution. The concept of margin
arises only in secured advances where lending is against an asset.
Bank provides loan for a given purpose say for buying a four wheeler- as a
percentage of the asset value; in this instance, if the price of automobile is Rs 4
lacs, bank will not give Rs 4 lacs as loan and may at the most give Rs 3 lacs for a
period of 5 years or 7 years depending on the repayment ability and its assessment
of borrower. The amount of Rs one lac which borrower has to bring is the margin
amount and it is his stake in the car. Borrower has to have a stake in the asset.
Apart from that, in case of default or any other circumstances, it may be decided to
sell the car. If the sale proceeds are less than the balance in loan account, bank runs
a risk that the balance may not be paid by the borrower. The fluctuations in asset
price give rise to a risk and to protect against this risk, the banks restrict the
lending to the market value less a discount. This discount is known as the margin.
In case of second hand vehicles, the discount will be more say 40% instead of
25% for new cars. That is, for financing purchase of second hand cars, banks will
lend only 60% of the market price. The balance 40% being the margin has to come
from borrower. This discount is the borrowers contribution. So margin is known as
the borrowers stake. It is also the discount to the market value and bank will
finance only market value less the margin. It is the safety factor for guarding
against price fluctuation.
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Third Party Guarantee
The third party guarantee is a risk mitigating measure. The borrower has to provide
a third party as a guarantor who undertakes to pay the bank the sum at default in
case the borrower does not pay. In most bank documents of third party guarantee
the guarantor waives his rights under the Contract Act and confirms that he can be
treated for all practical purposes as the borrower. So in case of default, bank can
proceed against borrower and guarantor simultaneously in a court of law and if any
tangible asset of the guarantor is given as security of guarantor, bank can proceed to
enforce the security.
The third party guarantee in some states that in consideration of the bank granting a
certain loan amount to the borrower, the guarantor agrees to stand guarantee to the
bank for the sum stated together with interest and in case the borrower does not
repay on demand, the guarantor will pay the amount due on demand and that for all
practical purposes, the bank may treat him as the borrower.
The third party guarantor must be well known to the borrower and have full trust in
him to undertake to give the guarantee. A financially sound and trust worthy third
party guarantor is a good security to the bank.
Apart from bringing moral pressure on a defaulting borrower, the third party
guarantor will pay off the bank loan and take the place of bank (step into the shoes
of the lender) (Principle of Subrogation)
Loan amount and L/V ratio
In the case of retail loans which are secured by assets, bank does not usually givethe full value of security as loan amount. The asset values are subject to volatility
and hence as a prudent measure, the loan amount is a proportion of the asset value.
Usually the loan amount is 75% of the asset value. L/V ratio is usually 0.75; for
instance, if the applicant desires to acquire a house which costs Rs 10 lacs, the loan
amount is usually Rs 7.5 lacs or less.
The L/V ratio or the Loan to Asset Value ratio is a measure of the extent of loan
amount as compared to todays market value of asset. It is also a measure of theborrowers own stake in the asset.
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If L/V ratio is one, the bank runs a risk that when asset prices fall, the applicant
may default and simply not bother about the asset as he has no stake.
Security
Security is a risk mitigant -an insurance against default. If the borrower defaults, bank
should have something to fall back upon and realize its dues.
Security is like insurance; it is a fall back and in case the repayment is not
forthcoming, steps can be taken to enforce the security. Security is not available in
case of all retail loans.
Retail loans such as housing loan, vehicle loans may be considered as secured loans
where the security is the charge on the assets acquired.
Loans for acquisition of white goods- generally known as consumer loans- require
the charge on assets acquired it is in effect unsecured as taking possession of such
consumer goods is practically impossible and the resale value of such assets is quite
low
The banker lends for a purpose which will generate additional income from which
he hopes to get the loan and interest repaid.
Security is called the second way out and is a fallback or secondary.
The significance of security is that it is a fall back in case the expectations of
additional cash inflows do not happen.
Naturally all values of securities are volatile and hence the concept of margin on
security.
Bank will lend only a percentage of the value.
Modes of charge on security
The assets of borrower created from banks loan or his other assets are charged as
security to the banks loan.
The process of creating the charge on the assets of borrower to form the security is
known as the mode of charge. These are briefly discussed below:
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Lien and appropriation
Lien this is the right to retain; a banker has a general lien on all properties which
come to him in the normal course of business.
A banker can retain proceeds of a cheque, a fixed deposit or any other instrument or
property belonging to the borrower which comes to the banker towards amounts
owed by the borrower.
Appropriation or the right of set off- Banker can appropriate or set off credit
balances with debit balances of the borrower provided both accounts are in the
same name and same mode
Pledge
Pledge- Bailment of movable goods as security for moneys borrowed. Banker can sell
the goods kept with him in pledge after giving notice of sale. Borrower retains the title
to goods while the possession is with the bank.
Hypothecation
Hypothecation- also called the floating charge on movable assets.
In hypothecation the borrower is the owner of the goods and the possession is also
with him. He can deal with the goods in any manner in the normal course of
business.
The floating charge becomes crystallized when the banker takes possession of the
hypothecated goods.
Mortgage
Mortgage- Mortgage charge is a creation of an interest in a specific
property- usually immovable but mortgage charge on movable is also possible.
Mortgages are of different types- Registered mortgage, equitable mortgage,
Usufructary mortgage, English mortgage etc.
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Assignment
Assignment- Assignment of future receivables can be made by way of notice. For
example - A policy of life insurance can be assigned to the bank as security and the
value of the security is the surrender value of policy
Third party guarantee
Third party guarantee is an assurance from an independent party of known means
and respectability to the bank that the loan to the borrower is guaranteed by him
and that if the borrower does not pay the bank as per the terms agreed to by theborrower, he the guarantor will make good the loss.
The third party guarantee reduces the risk of the bank to some extent.
The risk, that the guarantor, in spite of his assurances and undertakings, may not
pay when called upon to do so in the event of default by the borrower, still persists.
The comfort that is derived from a third party guarantee is only that you have
another person who can bring some pressure on the borrower to repay and also have
recourse to the guarantor for recovery of dues.
CONSUMER CREDIT APPROVAL PROCESS
Decisions to be made in the processing segment of Consumer Credit
Retail loan sanctions are mostly automated. Based on the details given in the
application credit scores are worked out as per the model and depending on the cut
off score the application is approval or rejected.
Since a large number of applications are centrally evaluated using the scoring
model based on defined parameters very little scope for discretion is given
It is to be borne in mind that the scoring model has been built on observed trends of
transactions and default history.
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Review of scoring model
So normally, rejections of applications are not subject to a review. Either the
application goes through the gate or crosses the hurdle credit score (is accepted) or
is rejected.
To ensure that the model is working well and is not rejecting applications which
would qualify, a review of the rejected applications is undertaken periodically.
This along with a portfolio review of the performance of approved loans will give
an indication of the suitability of model.
Decisions in various Processing Segments of Consumer Credit
Deviation from sanction process
In some cases, the approval process may have rejected on the basis of credit score
(Credit Score being less than the cut off).
However, it may be that the applicant is offering good security or the guarantee of a
third party that has an excellent account with the bank. These factors may not be
captured by the model. Quite often, retail loans are sanctioned to persons on the
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basis of their standing in society without any rating process being adopted in the
belief that the custom of the noted persona will help in furthering banks business.
These are deviations from the regular sanction of retail loans.
Record of deviations
Deviations have to be sanctioned by a superior authority
The sanction of such loans has to be in writing explicitly stating the reasons for
deviation from practice. For instance, if an application which would normally have
been rejected on the basis of credit scoring is approved on the strength of the
guarantors dealings with bank and his standing in society and ability to repay the
advance in case of default, the sanctioning authority will make a note of these
factors and record the treasons for the sanction.
It is needless to add that the deviations from the approved practice for retail loans
will a small percentage.
Methods of disbursement: consumer and vehicle loans
Disbursement methods vary depending on the purpose
In case of assets being acquired such as consumer goods and vehicles, the practice
is to collect from the borrower the margin amount and to debit the loan amount to
borrowers account and the full cost of asset is paid to the seller of asset by means
of a pay order or Bankers cheque.
Methods of disbursement: Home loans
If the loan is towards acquiring plot and constructing house, the disbursement will
be in stages- first to the seller of the land and for the construction the disbursement
will be to the building contractor at predetermined stages
However, if a ready built apartment/flat is being acquired, the loan amount with
margin will be paid to the seller/developer through pay order.
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Methods of disbursement: Personal loans
In the case of personal loans, the loan amount being for consumption purposes, the
loan amount will be debited to borrowers loan account and will be credited to his
savings account if the borrower has account with the bank.
In cases, where the borrower does not have a savings account, the loan amount will
be debited and a pay order issued favouring the borrower or as per instructions
given by the borrower.
Methods of disbursement: Educational loans
In the case of educational loans, the loan amount is for the duration of the studies
and every semester/year the loan account is debited and the college
term/examination/special fees are paid directly to the college/institute where the
borrower is studying.
When the loan amount covers hostel expenses also, the room rent is paid directly
while the mess charges incurred are reimbursed to the borrower on his production
of paid bills.
Discharge of Security
Security given to the bank for due repayment of the loan is to be released or
discharged upon the closure of loan through repayment by periodical payments or
prepayment.
Security in case of secured assets may be in the form of pledge, mortgage,
assignment, hypothecation etc. When the loan is repaid, it is necessary for the bank
to release its charge on the asset given as security. In case of pledged articles,
all that the bank has to do is to return the goods lodged with it as security.
In case of motor vehicles the banks charge on the vehicle will have been
registered in the books of Road Transport Authority and will be shown in the RC
book. The bank has to give a letter to RTA for deletion of the charge in the RC
book in the prescribed format.
In case of mortgages, if mortgage is by deposit of title deeds, discharge is by return
of title deeds. However, if the mortgage is a registered mortgage- simple or
English
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Mortgage- this will be registered with the Sub Registrar of Conveyances and has to
be discharged through a stamped document duly signed by the bank stating that the
loan has been paid in full and the mortgage is discharged. This release document has to be registered with the sub registrar who will enter the
discharge in his books.
Assignment of policy or future receivables has to be reassigned on the account
being closed. This is also through a written document and the reassignment is noted
in the books of the debtor; for example in the case of a life policy, the assignment at
the time of creation of charge and the reassignment upon release will be registered
in the books of the insurance company.
Regulatory requirements of Retail Loans
Exposures by way of investments in securities (such as bonds and equities),
whether listed or not;
Mortgage loans to the extent that they qualify for treatment as claims secured by
residential property;
Loans and advances to banks own staff which are fully covered by superannuation
benefits and mortgage of flat/ house;
Capital market exposures;
Consumer credit, including personal loans and credit card receivables;
Venture capital funds.
Qualifying criteria
Orientation criterion - The exposure is to an individual person or persons or to a
small business; Person under this clause would mean any legal person capable of
entering into contracts and would include but not be restricted to individual, HUF,
partnership firm, trust, private limited companies, public limited companies, co-
operative societies etc. Small business is one where the total average annual
turnover is less than Rs. 50 crore. The turnover criterion will be linked to the
average of the last three years in the case of existing entities and projected turnoverin the case of new entities.
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Product criterion - The exposure takes the form of any of the following:
Revolving credits and lines of credit (including overdrafts), term loans and leases
(e.g. instalments loans and leases, student and educational loans) and small business
facilities and commitments.
Granularity criterion - Banks must ensure that the regulatory retail portfolio is
sufficiently diversified to a degree that reduces the risks in the portfolio, warranting
the 75% risk weight. One way of achieving this is that no aggregate exposure to one
counterpart should exceed 0.2% of the overall regulatory retail portfolio.
Aggregate exposure means gross amount (i.e. not taking any benefit for credit risk
mitigation into account) of all forms of debt exposures (e.g. loans or commitments)
that individually satisfy the three other criteria. In addition, one counterpart means
one or several entities that may be considered as a single beneficiary (e.g. in the
case of a small business that is affiliated to another small business, the limit would
apply to the bank's aggregated exposure on both businesses). While banks ma
y appropriately use the group exposure concept for computing aggregate exposures,
they should evolve adequate systems to ensure strict adherence with this criterion.
NPA s under retail loans are to be excluded from the overall regulatory retailportfolio when assessing the granularity criterion for risk-weighting purposes.
Low value of individual exposures. The maximum aggregated retail exposure
to one counterpart should not exceed the absolute threshold limit of Rs. 5 crore.
Regulatory guidelines
For the purpose of ascertaining compliance with the absolute threshold, exposure
would mean sanctioned limit or the actual outstanding, whichever is higher, for all
fund based and non-fund based facilities, including all forms of off-balance sheet
exposures. In the case of term loans and EMI based facilities, where there is no
scope for redrawing any portion of the sanctioned amounts, exposure shall mean
the actual outstanding.
Banks exposures which satisfy all the criteria prescribed for inclusion in the
regulatory retail portfolio, irrespective of the sector to which the exposure is, may
be included under the regulatory retail portfolio if such exposures have not been
specifically addressed.
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CHAPTER 03
THEORETICAL PERSPECTIVE
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RETAILBANKING: LIABILITY PRODUCTS
Savings Bank Account
Recurring Deposit Account
Current Deposit Account
Term Deposit Account
Zero Balance Account for salaried class people
No Frill Account for the common man
Senior Citizen Deposit Accounts, etc.
Why does a customer make a deposit with a banker?
that the money will be available when he needs it
that the money will be invested with greater professional skill than the depositor is
capable of
that the money turned over is money lent to the banker and the depositor cannot
follow the specific sum of money and seek the return of money from a specificasset of the bank
Deposit is a debt
Deposits made with the bank are in the nature of debts of a bank
Deposits are not moneys given in trust
If there are such conditions attached to the deposit, the banker cannot lend or invest
the funds using his best judgement to produce the best returns with the least risk
exposure. (Such relations do exist between bankers and customers but they are
special.)
Deposit: conditions
Deposits are repayable on demand or on maturity at the branch where account was
opened.
With internet banking, deposits into an account are possible from any centre. Also
transfers. ATMs offer cash withdrawal from any centre.
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Traditional banking required cheques/ specified forms; in internet banking this is
not necessary.
Customer: Unsecured creditor
On the issue of repayment, the customer is in the position of an unsecured creditor.
If bank goes into liquidation, customer's claim will rank along with other creditors
of the bank.
However, all deposits are guaranteed up to a limit of Rs1,00,000 by the Deposit
Insurance Corporation
Retail Deposits
The banks deposit portfolio consists of a large number of current, savings and term
deposit accounts.
Of these savings and term deposits come mostly from individual savers. These
deposits are small in value and large in number.
Groups of individuals have a saving and spending pattern. So, at any given point in
time, a core portion of SB and current account funds will remain with bank.
Similarly Current accounts of small firms, traders and other business also display
definite characteristics of deposits and withdrawals and balances with the bank
The trend is also seen in term deposits. A core portion of term deposits will get
renewed and funds will stay with banks.
These types of deposits are known as retail deposits. Retail deposits, in general
display lower volatility than bulk deposits. They also display definite patterns of
withdrawal and deposit cycles. Banks plan their asset growth based on such
patterns.
Interest on deposits related to market rates
Prior to financial sector reforms RBI used to prescribe interest rates for all
maturities and neither the banker nor the customer had a choice in the matter.
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However, with liberalisation banks are now free to quote market interest rates. The
rates change as often as RBI changes benchmark rates or even in response to
economic conditions.
Obligations of a bank
Obligation to honour cheques: A banker has an obligation to honour cheques
drawn on an account opened by him, provided the account is in funds. S. 31 of the
Negotiable Instruments Act provides that a banker who defaults in this obligation
must compensate the customer for any loss or damage.
Obligation to maintain secrecy: A banker is bound to maintain secrecy about the
details of the customers account with him. This obligation is subject to disclosures
when compelled by law.
Obligation not to close account without notice: Having opened an account for
the customer, the banker has a contractual obligation to maintain and service the
account. If the banker has sufficient reasons to consider the account undesirable, in
terms of costs of maintenance, or other reasons he can close the account after due
notice to the customer. The notice is necessary to provide for transactions in the
pipeline to be completed, or contemplated by customer.
CLASSIFICATION OF DEPOSITS
Deposits are primarily classified into demand and term deposits, sometimes called as
demand and term liabilities.
Demand deposits
Current and Savings Bank deposits are knows as demand deposits.
These are plain vanilla deposit products that banks offer to customers who require
a bank account for making payments, or use money readily available to meet day
to day expenses.
People prefer a bank account for keeping their savings that would fetch them some
small interest. Additionally bank deposits provide safety to the savings, unlike cash
kept in houses which do not produce any return and there is the further risk of theft.
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Current and Savings accounts
A current account is a running account. Unlimited operations.
The basic objective of a current account is to facilitate use of cheques for payments
and avoiding cash dealings.
Current accounts constitute low cost deposits for a bank
However banker plans liquidity to meet demand for funds. There is thus a cost
attached to idle/less than optimally invested funds
SB account rules limit drawings; interest is paid at 3.5%p.a on lowest balance
between 10th
and last day of the month.
There are other servicing costs: cheque books issued, ledger (or nowadays digital
records) maintenance costs.
Core SB and Current accounts
Demand liabilities are at call by the customers.
In practice it is not so. A certain amount of these deposits would stay with the
banks as core balances in the Savings and Current account balances of the bank.
These core funds are available as long term resources to the banks and are available
for lending and investment.
Of course, banks do not earmark funds for lending as so much out of current
account, so much out of savings account etc. They lend out of a pool of funds.
SB account with ICICI Bank
The bank offers a savings account in two options. The first option is just like any
savings a/c with the conditions that a minimum average quarterly balance of Rs.
5,000 must always be maintained else Rs. 150 per quarter will be charged. The
second option, known as the sweep-in account combines the feature of a fixed
deposit and a savings account. With no minimum balance requirement, one has to
keep a fixed deposit of Rs. 25,000 and when in need of cash can just transfer or
sweep in funds to the savings account. Here again non-maintenance will attract a
penal charge of Rs. 150 per quarter. Deposits are held in units of Rs. 1, which gives
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one the flexibility to withdraw the exact amount needed without losing up on
interest. One can even jump from option 1 to option 2. However, this will attract an
account closure charge of Rs.100
Term deposits
A term deposit is about the safest investment option for a saver who has funds
that he can invest for a definite period of time. It is the most attractive option that
combines with it an element of safety. Bank deposits are guaranteed up to a limit of
Rs.100000 by the Deposit Insurance Corporation.
Deposits placed with a bank for periods of 7 days and more are called term
deposits.
Term deposits are accepted for a period up to 10 years. But, deposits are accepted
up to a maturity of 3 years. The reason being neither the banker nor the customer is
willing to commit to an interest rate that far into the future.
Term deposits- maturities
To begin with banks were only short term lenders; their loans were for short periods
and generally for not more than a year. So, their need for resources, i.e. deposits
was for a period of one year.
As banks started lending for medium term up to three years and later for longer
periods, they needed deposits with longer maturities.
Term deposits with maturities of more than one year, and up to 10 years were
introduced.
Changes in the demand for credit, changes in savings patterns of customers, have
compelled the banks to come up with variations in term deposit products
Term Deposits- Changes in maturity range
Although banks did not offer intermediate maturities i.e. say 7 months, banks
would accept such deposits and pay interest at the rate applicable to the next lower
maturity in this case 6 months.
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The need for offering suitable maturities led to term deposits with maturities
starting from 3 months to 10 years.
Banker would prefer to handle fewer term deposit maturities and preferably notshort term. But the driver is the availability of funds of certain maturities and the
bankers needs.
Term Deposits- Product innovations of ICICI Bank
At least to begin with there was no marketing for deposits on the part of banks.
When banks needed more funds for more credit they had to change their product
orientation to meet customer expectation and not the banks convenience.
They came up with term deposit as a product.
Again, to begin with banks were short term lenders making loans up to a years
duration. So term deposits started off as short term one year deposits
Next step in the process was when a customer having made a deposit for a definite
period had urgent need of funds and asked the banker to pay him back the money.
This gave rise to some new products: a) premature payments and levy of penalty b)overdrafts or loans against fixed deposits with higher rates of interest and c) term
deposits of varying durations to suit the needs of both customers and the bankers.
The first two would be innovations of asset products while the third a new set of
liability products.
Based on the patterns of a large number of customers deposit maturities were set at
3 months, 6 months, one year, above one year, two years and so on.
New Products & Controls
In India, new products and product innovations have not been always driven by
market forces. Until the financial sector reforms in 1991, RBI stipulated both
interest rates and the periods for term deposits.
For a considerable period of time deposits below 3 months were not permitted.
With maturing markets and the investing publics ability to understand and use
short term products, RBI dismantled controls and deposits with 15 days and later 7
day maturities have come into being
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Reinvestment Deposit
Another innovation-reinvestment deposit. Interest accruals added on to
principal with quarterly compounding of interest on principal plus interest
Product was attractive to a class of investors who were not dependent upon
periodical interest income.
Cash Certificates: another variant. Certificate issued with an upfront discount on
face value. The discount is the rate of interest payable on the deposit
Recurring or Cumulative Deposits
Recurring deposits or cumulative deposits are those where the deposits are made in
monthly instalments and the maturity payment is a lump sum
Special deposit is a variant allowing recurring or periodic deposits at intervals other
than monthly i.e. quarterly or half yearly etc.
Annuity deposits and Permanent income (or Pension) plans were another
development with periodic deposits (sometimes annual) build up into a corpus and
then the bank pays out monthly amounts for an agreed number of years akin to a
pension.
On fixed deposits or term deposits the banks pay interest at quarterly intervals.
However if a customer wants monthly interest they make such payments
discounting the quarterly interest amount.
Flexi Deposits
Flexi deposits: partly a response to customer demand for return on large current
account balances and partly because technology made it possible to offer such a
product.
As RBI did not permit interest payments on current account balances, banks came
up with flexi deposit as a product moving surplus funds in current account into
deposits & moved them back into current accounts when there was a demand for
funds, breaking down only the minimum needed units of deposits
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Flexi deposit: how it works?
Technology makes it possible to hold a term deposit in small units of Rs.100 or
even Rs.1. So exact amount required to meet a cheque could be made available and
balance in term deposit would continue to earn interest.
Such term deposits are sometimes called Multi-option deposits or flexi deposits
Auto sweep and Reverse sweep
Where a customer has two accounts, one in funds and the other with inadequate
funds to meet the cheque drawn on the latter account, the operating software of the
bank can be programmed to automatically transfer funds to the latter accounts to
meet the cheque. This facility is called sweep- sweeping funds out of the account
with funds into the one requiring funds.
Reverse sweep is a facility which offers the customer a choice to transfer idle funds
out of an operating account into one that would earn him some interest income. E.g.
balances in a current account above a certain specified limit could be automatically
transferred to a term deposit account for agreed durations.
Supersaver account
Yet another product is the super saver account. This is similar to HSBC s Smart
Money Account. With a minimum amount of Rs. 25,000 in a fixed deposit one can
withdraw up to 75% of the deposit by paying 2% plus interest tax (for a limit of Rs.
0.2 mn) over the deposit rate only for the period one uses the money.
Auto Renewal
Under this facility when the fixed deposit a/c attains maturity, the bank will
automatically renew the principal and accrued interest for a further period as
stipulated by the a/c holder.
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ACCOUNT OPENING PROCEDURES
Introduction
A bank account is a means of keeping ones savings safe, keeping a record of ones
savings and expenses and earning some income on the money.
Bank accounts also provide a means of payment of dues, settlement of debt,
payment for purchases etc. A means that is more convenient than lugging cash
around everywhere and facing the risks involved in carrying cash, especially to
distant locations.
Opening accounts
Bank account creates a legal and contractual relationship between banker and
customer. Bankers duties and obligations are onerous. Therefore a banker has to
exercise care when he opens an account.
Before opening a new account banker should make inquiries about customer, his
profession or trade, nature and purpose of account he desires to open.
If the person is unknown the banker must ask for introduction from a person known
to the banker or call for references. RBI has directed that bankers must ask and find
out from the referees how long they have known the customer who is being
introduced to the bank.
If proper enquiries are not made at the time of opening the account and subsequent
events lead to a fraud being committed, then the banker will be held to be negligent
and will not enjoy the statutory protections available to him under S.131 of the
Negotiable Instruments Act, even if he has otherwise performed his duty as a
banker.
Opening accounts: individuals
There are risks in opening accounts for individuals or even firms. A person could
be an undesirable individual who could be depositing stolen funds in to the bank.
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As per RBIs directives, banks must obtain photographs of customers while
opening the account. A copy of the photograph is kept with the signature card and
another is pasted to the passbook, if a passbook is issued.
Bank accounts have been frequently used to transmit money for terror related
activities and since 2003 when the world trade centre was destroyed in terrorist
attacks, governments the world over have taken steps to control and monitor bank
accounts to prevent money laundering transactions that pass through bank accounts
KNOW YOUR CUSTOMER -INTRODUCTION
All the rigours of KYC are meant to weed out bad customers and to protect the
good ones
KYC processes ensure that banking operations are clean and help banks in
transparent and legal conduct of business, maintaining the integrity and reputation
of banks
KYC is a basic tenet in banking. It helps in:
Complying with legal requirements
Understanding customer needs and extending requisite services
Customer profiling according to size, habits, types preference etc
And to categorise them into risk classes
RBI initiatives
Guidelines issued in 2002, refined in 2004
RBI guidelines are meant to
Prevent banks from being used intentionally or unintentionally by criminal
elements for their money laundering activities
To help banks know their customers and their financial transactions and by this
to manage their risk prudently
RBI expects all banks to have comprehensive KYC policies evolved and
adopted by their Boards and put in place processes to ensure that these policies andprocedures are faithfully implemented
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Customer Acceptance Policy
No fictitious accounts to be opened in anonymous fictitious or benami names
No accounts to be opened, or existing accounts continued without due diligence
with regard to id of customer, availability of evidential documents on proof of
domicile etc,
Ensuring that the new or existing customer is not an undesirable person i.e. He is
not a person with a known criminal background, does not belong to a banned entity
like a terrorist organisation he is not a violator of law etc
When a customer desires to act on behalf of another person, an analysis should bemade on the circumstances under which such operation is required the type and size
of such transactions do not infringe the law of the land
Document requirements and other information to be collected in respect of
different categories of customers depend upon the risk perception and relate to
provisions of Prevention of Money Laundering Act.
Customer Identification processes:
Customer identification means the identification of the customer and the verifying
of his/her identity by using reliable and independent source document, data or
information
For customers who are natural persons banks should obtain sufficient identification
data to verify the identity of the person, his/her address location and also recent
photograph For customers who are legal persons or entities banks should
Verify the legal status through proper or legal documents
Verify that any person purporting to act on behalf of the legal person/entity is so
authorised and
Verify the identity of that person
Understand the ownership and control structure of the customer and determine the
natural persons who ultimately control the entity
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the Banks board should lay down the policy on acceptance of documents
establishing identity, it should also issue guidelines on review documents on
existing accounts and where these need to be obtained afresh,
Monitoring Customer Transactions
The banks policy and procedures should clearly help parameterise the type and
normal size of transactions in a customers account
It should be possible through procedures to quickly identify an ICICI BANKormal
transaction like one that falls outside the normal level and pattern of activity
recorded for initiating further enquiry
It should facilitate special attention on all complex, unusually large transactions,
suspicious patterns that violate laws of the country
It should ensure that no structuring i.e. manipulation of the size of
individual transactions occur that will keep the transactions below the threshold
level that require reporting
Transactions that involve large amounts of cash inconsistent with customers
normal/expected activity should receive special attention
Very high account turnover inconsistent with balance maintained or income
declared might be indicative of washing of illegal funds
A record should be kept of all transactions- deposits and withdrawals- of Rs.10 lacs
and above
And banks should have an internal monitoring system to report these and other
suspicious transactions
Customer Privacy
KYC processes should not lead to harassment of customers
Banks collecting information for other than KYC purposes should not use account
opening form for such information
Customer should have the option to provide the information or not. It should be
voluntary
Banks may issue educational brochures on why elaborate questions are being asked
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Information collected should not be commercially used
Banks should have:-
an organisational structure in place to evolve, implement, maintain and review
KYC policy and processes
guidelines for opening /reviewing of accounts of various categories of customers;
identification of high value transactions; monitoring suspicious transactions and
reporting them; accountability for KYC implementation; systems for updating their
information and processes
KYC documentation
Customer Identification is best done by obtaining an introductory reference from an
existing account holder or person known to the bank and
Through documents that establish the identity and domicile/residence of the
customer
The table below gives two lists one for photo identification and the second for proofof residence
List of documents to establish identity/proof of residence
For Identity
Passport where the address differs from that on the application
Election ID card
PAN card
Government, Defense ID card
Driving License
For Residence
Salary slip
Income wealth tax assessment order
Electricity bill
Telephone bill
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Credit Card statement
Account opening: formalities
On opening an account the bank supplies the customer with a book of pay in slips, a
cheque book (or in a savings account if such a facility is not granted then
withdrawal slips), a passbook etc.
While in the normal course a banker has no duty to verify the source of funds,
given that money today is moved around financing terror, drugs, for political
destabilization and other undesirable or unlawful activities, there is a need for the
banker to Know his customer.
The foregoing however underscores the importance of formalities associated with
opening of accounts with banks.
Accounts: Risk classification
An individual would normally open a savings bank account. So, if he wants to
open a current account the banker has a duty to seek reasons on why the customerneeds a current account
He has a further duty to make inquiries if a cheque for collection is deposited
immediately after opening the account
In line with guidelines related to managing operations risk, banks now classify
accounts as low, medium or high risk. Such classification is based on the type of
account, nature of transactions, the probability that the account could carry
undesirable or illegal transactions in it etc.
When the banker obtains information for opening an account in an account opening
form, and verifies the particulars furnished in accordance with the tenets of Know
Your Customer, a fair amount of the issues discussed in the preceding points is
automatically taken care of
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Account opening form: Details
An account opening form starts with a request by the customer to the banker to open an
account for him
In a typical form he is asked to make a product choice: 1.Savings account 2. Term
Deposit- interest payable or reinvestment 3.Recurring Deposit 4. Current account 5.
Others
Customer details: name in full, PAN number, Income tax details like when assessed
to tax, IT ward circle etc, residential address with landmarks, PIN code, telephone
no, mailing address if separate
Details of education, occupation, salaried or self-employed, name of employer,
income and family income monthly etc...
Details of existing bank accounts with branch name, account number etc
Mode of operation in case of joint accounts, either single or joint etc
Benefits customer desire: debit card, ATM card, name that should appear on card,
whether a photo debit card is desired.
Cheque book- whether local or multi-city use,
Whether internet, phone banking, mobile banking facilities are required
Whether e-statements are required, if so e mail address
Nomination under section 45ZA of the Banking Regulation Act, with particulars
and nomination declaration with signature
Details of initial deposit, cash cheque with amount and particulars
If term deposit account, tenure: days months, years, maturity instructions like auto
renewal, payment instructions etc.
Rules binding on customer
Every customer is deemed to have read the rules governing the conduct of accounts
with the bank and there is usually a statement to the effect in the account opening
form of the bank which the customer signs before the bank opens the account for
the customer.
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Mandate for operations
Sometimes a customer wants to authorise person to operate his account. A mandate
is given by him to the banker. This mandate must specify the exact authority given
to the mandate holder. Whether he can sign cheques, give receipts, whether an
overdraft created by him, inadvertently or otherwise will be binding on the
customer etc.
Joint accounts: mandates
It could be either or survivor, anyone or survivor, former or survivors to whom thebalance should be paid.
Account can be operated singly, jointly by all or any two or three or in other
combinations.
These mandates can be withdrawn at any time by any one of the account holders
Such joint accounts can also be opened for a married woman with her husband.
Where a single account is opened for a married woman, if there is an overdraft,
inadvertent or otherwise a banker will have no recourse against the husbands
estate.
ACCOUNTS OF INDIVIDUALS: SPECIAL CASES
Joint accounts
Two or more individuals can open joint accounts with a bank; a savings, current or
term deposit account for a common purpose.
The banker should obtain information on the purpose for which the account is
opened, if the persons joining together for opening an account have no natural
relationship or other apparent reason for so getting together.
Banker should obtain a clear mandate on who would operate the account and to
whom the balance or maturity proceeds should be paid when the account is closed
either voluntarily or otherwise.
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Accounts of a minor
S.3 of the Indian Majority Act, 1875 provides that a person who has not attained the
age of 18 is a minor. And if a court appoints a guardian before the age of 18, such
guardianship would continue until he completes the age of 21; and he will continue
to be a minor.
According to the Indian Contract Act, a minor cannot enter into a valid contract and
if he does such a contract is void against the minor except where it is a contract for
supply of necessities of life.
Precautions to be taken in minors account
The banker therefore must take precautions while dealing with a minor or a minors
account
He can open a savings account for a minor (not a current account) to be operated by
a guardian or by himself if he is over the age of 14.
The minors account should be closed and the balance in the account paid to theminor on the date he attains majority. The bank must have a record of the minors
date of birth.
The father of a minor is the natural guardian of a minor. If the father dies during
minority, then the mother becomes the natural guardian who can operate the
account. In the event of both father and mother dying, either a testamentary
guardian or a court appointed guardian may operate the account.
In case of the minors death the balance in the account can be withdrawn by theguardian
If the banker permits an overdraft in the minors account, the banker cannot recover
the amount and he has no legal remedy.
No advance can be granted to the minor against the guarantee of a third party. As
irrespective of the third party, the contract of loan between the banker and the
minor is invalid and the banker cannot enforce the contract.
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A minor may draw, endorse or negotiate a cheque or a bill He will have no liability
on the instrument. The instrument itself will be valid and all other parties to the
instrument will be liable in their respective capacities.
A deposit account can be opened in the name of a minor by a bank, in the style
of,........., father and natural guardian of ........, minor.
Banks open a Savings Bank account with cheque book facility for a minor who is
above 14 years of age. This is done at the banks discretion, on an assessment that
the risks are minimal in allowing an account for a minor for his personal use while
at school etc.
Accounts in the name of a married woman
A banker can open a single account or a joint account with her husband for a
married woman
In the case of a joint account, he should ask for clear instructions on who should
operate the account.
In the event of death of either of them, the banker should have clear instructions
on to whom the balances in the account should be paid.
In the event of death of the husband, banker cannot without verification pay the
balance to the widow as there could be other heirs.
If a banker grants an overdraft or loan to a married woman, he can recover his dues,
only from property owned independently in her name. A married woman cannot
make her husband responsible for her debts
Even if there is property in her name, it might be that she only has right to theincome from the property and not to sell it or encumber it. In such a case, the
banker will not be entitled his dues from that property.
Account of illiterate person
Banker can open an account in the name of an illiterate person allowing operations
in the account, against his thumbprint.
His photograph should be taken on record; and he would be required to come in
person to the bank for operations in the account.
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Transactions in the account must be in the presence of the Manager, who should
explain the transaction, read out to the illiterate person the balance in his account
and record the fact that such explanation was offered to the customer. Only a SB orterm deposit account will be opened for illiterate customers.
Accounts of executors and administrators of estates:
An executor is appointed by a person to manage the affairs of his estate after his
death.
In the absence of a testator appointing an executor, a court will appoint an
administrator for the execution of a will and manage the affairs of the deceaseds
estate.
On the death of a customer, the accounts with the bank are frozen. The banker must
stop operations in the account.
The executor will be allowed to operate on the account on production of a probate
of the will obtained from the court.
The administrator will be allowed to operate the account on production of letters of
administration obtained from the court.
If two or more persons are appointed as executors or administrators, then they must
open a joint account with the bank. Operations in the account will be based on clear
written mandate given by all the executors or administrators
Banker cannot exercise his right of set-off the credit balance in the executors
account against the debit balance in the account of deceased.
Banker should not allow transfer of funds from the estate account to the personalaccount of the executor
Grant of loans to the estate of the deceased, against estate property pledged by the
executors will depend upon the provisions in the will or the court order
Account by an attorney for a customer
Banker should be guided by the provisions of the registered copy of the power of
attorney document
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Banker should verify, that the document is properly drawn up, stamped, notarized,
and make a note of all the terms that have a bearing on the operation of the bank
account
The document should contain specific power given to the attorney to open an
account with the bank, and must contain instructions about operations of the
account.
The account opening form must be signed by the principal and the signature of the
attorney must be attested by him.
Pardanashin women:
The banker cannot establish or verify the identity of a pardanashin woman.
Therefore as a rule, he should refuse to open an account. If there are other
compulsions, he must ensure that at each point of time her identity is verified
before the transaction is put through.
Banks not to open accounts
Banks will not open accounts for known insolvents, insane persons, drunkards and
other undesirable persons
Some banks do not open accounts for lawyers, and do not extend them loans
A banker should refuse to open an account for a lunatic. If an account holder
becomes a lunatic, operations in the account must be frozen, and wait for a court
order for further action. The Banker must however obtail absolute proof of a
persons lunacy, before he/she stops operations in the account, else he lays himselfopen to a claim for damages.
Confidentiality of customer accounts
What will impact the bankers duty to maintain confidentiality of customers
account information?
Answer: A duty to assist the Law enforcement agencies in their efforts to combat
crime.
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Banker can part with customer information in response to a lawful enquiry from
police, income tax or a court of law.
He will offer opinion on creditworthiness of a customer to a fellow banker inresponse to enquiries. This is a banking practice. But the banker cannot offer such
opinions if a customer expressly forbids such furnishing of opinions on his
creditworthiness.
Information requests
Criminal Procedure Code provides for calling of information from banks, by the
police to assist them in their investigations.
There are stipulations about when and how they can do it and the level of
officer who can call for information etc. Banker should take legal advice when
acting on such requests.
The request from police or from courts can be complied with by showing the
official the records in banks premises. In general, it would not be necessary to
physically produce original records at the police station or the court
If required for evidence, a certified copy of the relevant records or extracts from
the records can be produced, as provided under the Bankers Books of Evidence
Act.
Income Tax Authorities can call for information from banks. The request must
relate to an actual assessment that the authorities are pursuing; a roving inquiry is
not permitted.
If the request received from the tax authorities under S.131 of the Income Tax Act,
1961 is a specific request banks must comply with it.
Disclosures permitted by law and practice
Under law: A Banker is justified in disclosing information about the customers
account when he is statutorily required to do so under (a) income Tax Act, 1961
(Section 131 & Section 133(6), (b) Companies Act, 1956 (Section 235 and Section
237), (c) Bankers Book Evidence Act, 1891 (Section 4), (d) Reserve Bank of IndiaAct, 1937 (Section26), (f) Foreign Exchange Management Act 1973 (Section 11)
(g) Gift Tax Act, 1958 (Section 36).
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Under express or implied consent of the customer: A customer can permit some
disclosures. For example, the customer may permit giving information about his
account to his prospective guarantor or suppliers.
Common courtesy among bankers: It is customary among bankers, that when a
bank makes inquiries with another bank, such as, about proposed sureties or
acceptors, such information is shared. An implied consent of the customer is
presumed to exist. However, such information is kept confidential at both the ends
Disclosure in the banks interest: A banker can disclose information when it is
essential to protect his own interest, legally. For instance, if there is any dispute
between the customer and a banker, regarding balance standing in the account of
the customer or if there is a loan default, then the bank will be justified in revealing
the information to the guarantor or to a solicitor for initiating legal proceedings in
the court of law.
Disclosures: Public interest
Disclosure in Public/National interest: Banker may be required to make
disclosure in the interest of the nation and public at large.
Public interest may be reckoned only according to the prevailing circumstances.
Death of an account holder
Death of a minor
On death of an account holder balance in account become payable to his legal heirs.
Balance in minors account is payable to his guardian
The father and after him the mother is the natural guardian of a minor and it is to
them that the balance is payable
If there is a court appointed guardian then the balance is payable to such guardian
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Death of one of the account holders
In the event of death of one of the account holders, balance in the account is
payable according to mandate in the form of either or survivor, former or survivor,
both or survivor etc.
If there is no mandate balance is payable jointly to survivor and legal heirs of
deceased.
There is a facility to nominate a person to receive the balances in the account if the
depositor(s) dies. Nomination entitles the person(s) nominated to receive the
balance in the account, but it does not mean that nomination overthrows the legal
claims of the heirs of the deceased.
Payment of balance to heirs
In the absence of nomination, or will, legal heirs must obtain a succession
certificate from court. The certificate must list bank deposit as an asset.
If no will is left, heirs must approach court for appointment of an executor to the
estate and obtain letters of administration. This will provide necessary authority to
deal with bank balances.
For relatively small sums, a banker may overlook the requirement of a succession
certificate or a letter of administration and pay out the balances in the account, after
obtaining a suitable indemnity from the appa