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INSURANCE

Elements of

JYOTSNA SETHINISHWAN BHATIA

Second Edition

KopyK

itabJYOTSNA SETHI

Associate ProfessorDepartment of CommerceJesus and Mary College

University of Delhi

NISHWAN BHATIAAssociate Professor

Department of CommerceJesus and Mary College

University of Delhi

New Delhi-1100012012

SECOND EDITION

Elements of

Banking and Insurance

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ELEMENTS OF BANKING AND INSURANCE, Second EditionJyotsna Sethi and Nishwan Bhatia

© 2012 by PHI Learning Private Limited, New Delhi. All rights reserved. No partof this book may be reproduced in any form, by mimeograph or any other means,without permission in writing from the publisher.

ISBN-978-81-203-4657-4

The export rights of this book are vested solely with the publisher.

Sixth Printing (Second Edition) October, 2012

Published by Asoke K. Ghosh, PHI Learning Private Limited, M-97, ConnaughtCircus, New Delhi-110001 and Printed by Rajkamal Electric Press, Plot No. 2,Phase IV, HSIDC, Kundli-131028, Sonepat, Haryana.

KopyK

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toThe Academic Fraternity

andOur Inquisitive Students

By the Grace of Guru

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Contents

Preface xiPreface to the First Edition xiiiAbbreviations xv

1. Introduction to Banking Business 1–151.1 Brief History 21.2 Business of Banking 61.3 Banker Customer Relationship 101.4 Bank Deposits 13Key Terms 15Review Questions 15

2. Structure of Commercial Banks in India andApex Banking Institution 16–442.1 Structure of Indian Banking System 172.2 Reserve Bank of India 182.3 Commercial Banks 222.4 Public Sector Banks 242.5 Private Sector Banks 252.6 Public Sector Banks Vs. Private Sector Banks 272.7 Local Area Banks 272.8 Indian Banks 282.9 Foreign Banks 292.10 Indian Banks Vs. Foreign Banks 302.11 Regional Rural Banks 312.12 Cooperative Banks 332.13 Commercial Vs. Cooperative Banks 362.14 Apex-Level Banking Institutions 362.15 National Bank for Agriculture and

Rural Development (NABARD), 1982 372.16 National Housing Bank (NHB) 382.17 Small Industries Development Bank of India (SIDBI) 412.18 Industrial Development Bank of India Limited 422.19 Export Import Bank of India (EXIM Bank) 43Key Terms 43Review Questions 44

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3. Banking Sectors 45–633.1 Recent Developments in Banking Industry 463.2 Banking Sectors 463.3 Corporate Banking 463.4 Retail Banking 483.5 International Banking 503.6 Rural Banking 533.7 Non-Banking Financial Intermediaries 58Key Terms 62Review Questions 63

4. Electronic Banking 64–774.1 Meaning of E-banking 654.2 Automated Teller Machine 664.3 Internet Banking 674.4 Electronic Clearing Service (ECS) 684.5 Electronic Funds Transfer (EFT) 694.6 Telebanking 704.7 Electronic Cheques 704.8 Credit Cards 704.9 Debit Cards 744.10 Smart Card 754.11 Risks in E-banking 76Key Terms 77Review Questions 77

5. Loans and Advances 78–925.1 Principles of Sound Lending 785.2 Methods of Granting Advances 815.3 Secured Advances 845.4 Modes of Creating Charges 86Key Terms 92Review Questions 92

6. Priority Sector Lending 93–1016.1 Rationale of Priority Sector 936.2 Different Segments of Priority Sector Advances 96Key Terms 100Review Questions 101

7. Export Credit 102–1117.1 Export and Import Finance 1027.2 RBI Measures to Promote Export Credit 1047.3 Pre-shipment or Packing Credit 1047.4 Post-shipment Finance 1067.5 Export Import Bank of India (EXIM Bank) 1077.6 Export Credit Guarantee Corporation of India (ECGC) 109Key Terms 110Review Questions 111

8. Annual Report and Balance Sheet of a Bank 112–1228.1 Annual Report 1138.2 Balance Sheet of a Commercial Bank 114

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8.3 Liabilities and Assets of a Bank 119Key Terms 122Review Questions 122

9. Project and Working Capital Finance 123–1329.1 Project Finance 1249.2 Project Appraisal 1259.3 Working Capital 127Key Terms 131Review Questions 132

10. Banking Legislation 133–14110.1 The Reserve Bank of India Act, 1934 13410.2 The Banking Regulation Act, 1949 138Key Terms 141Review Questions 141

11. Banking Sector Reforms and NPAs 142–15011.1 Rationale of Banking Sector Reforms 14211.2 Non-Performing Assets (NPA) 147Key Terms 149Review Questions 150

12. Practical Banking 151–16112.1 Cheque 15212.2 Magnetic Ink Character Reading (MICR)

Cheques/Drafts 15312.3 Core Banking Solution (CBS) System 15312.4 Essential Features of a Cheque 15412.5 Bank Drafts/Pay Order, Banker’s Cheque 15512.6 Banking Ombudsman Scheme, 2006 159Key Terms 161Review Questions 161

13. Risk Management: An Overview 162–17813.1 Importance of Risk Management 16313.2 The Concept of Risk 16413.3 Meaning of Business Risks 16613.4 Nature of Business Risks 16613.5 Causes of Business Risks 16713.6 Types of Business Risks 16813.7 Methods of Handling Risks 17212.8 Enterprise Risk Management 175Key Terms 177Review Questions 178

14. Introduction to Insurance 179–20214.1 Characteristics of Insurance 18014.2 Insurance: Purpose and Need 18114.3 Benefits of Insurance 18314.4 Functions of Insurance 18414.5 Importance of Insurance 18514.6 Principles of Insurance 186

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14.7 Nature of Insurance Contract 19014.8 Types of Insurance Contracts 19114.9 Fundamentals of Insurability 19214.10 Insurance Contract Vs. Wagering Agreement 19214.11 Assurance Vs. Insurance 19314.12 Gambling Vs. Insurance 19414.13 Classification of Insurance 195Illustrations 197Insurance Terminologies 198Key Terms 201Review Questions 202

15. Life Insurance 203–22915.1 Essential Features of Life Assurance 20415.2 Advantages of Life Assurance 20615.3 Types of Life Insurance Plans 207Key Terms 228Review Questions 228

16. Fire Insurance 230–24016.1 Scope of Fire Insurance 23216.2 Fire Insurance: Underlying Principles 23416.3 Types of Fire Policies 23516.4 Assignment of Fire Policy 23816.5 Settlement of Claims 238Illustrations 239Key Terms 240Review Questions 240

17. Marine Insurance 241–25517.1 The Scope of Marine Insurance 24217.2 Marine Insurance Contracts 24317.3 Fundamental Principles of Marine Insurance 24417.4 Marine Insurance Policies 24817.5 Types of Marine Losses 25017.6 Important Clauses of Marine Insurance 252Illustrations 254Key Terms 254Review Questions 255

18. Motor Vehicle Insurance 256–26318.1 Taxonomy of Motor Vehicles 25718.2 Kinds of Motor Vehicle Insurance Policies 25818.3 Servicing of Motor Vehicle Insurance 26018.4 Claims Settlement Under Motor Vehicle Insurance 262Key Terms 263Review Questions 263

19. Health Insurance 264–27419.1 Types of Health Insurance Policies 26619.2 Health Insurance Schemes in India 272Key Terms 273Review Questions 273

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20. Miscellaneous Insurance 275–28620.1 Fidelity Guarantee Insurance 27620.2 Property Insurance 27720.3 Building Insurance 27720.4 Earthquake Insurance 27820.5 Flood Insurance 27820.6 Burglary Insurance 27920.7 Cattle Insurance 28020.8 Engineering Insurance 28220.9 Liability Insurance 28520.10 Crop Insurance 285Key Terms 285Review Questions 286

21. Reinsurance 287–29521.1 Characteristics of Reinsurance 28821.2 Types of Reinsurance 28821.3 Reinsurance Vs. Double Insurance 29021.4 Over Insurance 29121.5 Essentials of A Reinsurance Programme 29221.6 Important Terms Concerning Reinsurance 294Key Terms 295Review Questions 295

22. Insurance Pricing 296–31122.1 Pricing Objectives 29722.2 Life Insurance Pricing Elements 29822.3 Insurance Rating Methods 29922.4 Calculation of Premium 30122.5 Methods of Loading 30722.6 Classification of Expenses 30822.7 Payment of Premium 30822.8 Rate Making 309Key Terms 310Review Questions 311

23. Underwriting 312–32123.1 Purposes and Principles of Underwriting 31323.2 The Underwriting Process 31323.3 Methods of Rate Determination 31623.4 Types of Underwriters 31823.5 Role of Agents in Underwriting 320Key Terms 321Review Questions 321

24. Policy Servicing and Claims Settlement 322–34524.1 Insurance Documents 32324.2 Nomination and Assignment: A Comparison 32724.3 Alterations 33024.4 Revival 33224.5 Policy Loans 33224.6 Surrender Value and Paid-Up Value 333

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24.7 Issue of Duplicate Policy 33524.8 Lost Policies 33624.9 Claims Settlement in Life Insurance 33624.10 Improvements in Policy Servicing 343Key Terms 344Review Questions 345

25. Channels of Distribution 346–36325.1 Insurance Intermediaries and their Functioning 34725.2 Bancassurance 356Key Terms 362Review Questions 362

26. Legal Framework 364–42326.1 The Indian Contract Act, 1872 36526.2 The Consumer Protection Act, 1986 37426.3 The General Insurance Business (Nationalization)

Act, 1972 38126.4 Life Insurance Corporation Act, 1956 38826.5 The Insurance Regulatory and Development

Authority Act, 1999 39826.6 The Insurance Act, 1938 407Key Terms 421Review Questions 422

27. Indian Insurance Industry: Transition and Prospects 424–44827.1 Insurance in India: Historical Background 42527.2 Reforms in the Indian Insurance Sector 42727.3 Liberalization: Meaning and Implications 42927.4 Future Trends in the Indian Insurance Industry 43127.5 Macro Insurance: The Indian Perspective 43427.6 Major Players in Indian Insurance Industry 435Key Terms 447Review Questions 448

Appendix A: Public Sector Banks 449–450State Bank of India and its Subsidiaries 449Nationalized Banks 449

Appendix B: Foreign Banks in India 451–452Appendix C: Private Sector Banks 453–454

Old Private Sector Banks 453New Private Sector Banks 454

Appendix D: Cooperative Banks 455–456Appendix E: Cases 457–460

Case 1 Banker’s Right of General Lien 457Case 2 Dishonour of Cheques 458Case 3 Banker’s Right of Appropriation 458Case 4 Relative Rights of Unpaid Seller and

the Banker Hypothecatee 460

Bibliography 461–464Index 465–472

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Preface

We are indeed thankful to our dear students and esteemedcolleagues for the overwhelming response to our book Elements ofBanking and Insurance, as is evident from five reprints in a shortspan of time. It has also been included in the reading list of someof the top universities of the country. The appreciation andfeedback received by the book has encouraged us to enlarge, reviseand update it.

The present second edition includes many more and wide-ranging aspects of banking and insurance, including the role andfunctions of the apex banking institutions such as National Bankfor Agriculture and Rural Development (NABARD), SmallIndustries Development Bank of India (SIDBI), and NationalHousing Bank (NHB). A new chapter on Practical Banking hasbeen added to make the students familiar with magnetic inkcharacter reader (MICR), core banking solution (CBS), bouncing ofcheques, and banking ombudsman. The recent trends in theinsurance industry have been well-incorporated with informationon new private players and policies being offered. Discussions onvarious aspects of insurance are further elaborated.

We ardently hope that the reader will find the second editioneven more useful. We look forward to receiving valuable commentsand suggestions from students as well as faculties to furtherimprove and enhance the contents of the book.

Jyotsna SethiNishwan Bhatia

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Preface to the First Edition

The financial sector constitutes one of the major components of theservices sector and within the financial sector Banking andInsurance have a significant role to play. There has been amanifold increase in the demand for banking services along with acommensurate increase in insurance services to cover variouscommercial and personal risks arising out of increasingcomplexities of modern life.

The past few years have witnessed myriad institutional andstructural changes paving the way for the entry of a number ofprivate and foreign players in these fields. These, in turn, havethrown up numerous opportunities as well as challenges forbanking and insurance companies.

The present book is an attempt to describe the role of bankingand insurance sectors in the current era of globalization,privatization and liberalization. Besides, the strides made in thefield of information technology in recent years, have significantlyimpacted the operating environment resulting in increasedcompetitive pressures and changing customer demands. A corollaryof this is the increased employment opportunities in these sectors,directly or indirectly.

Many universities have exhibited great foresight by introducingthe subjects of Banking and Insurance at the undergraduate level.Delhi University in particular, has offered an Application Coursein Banking and Insurance for the third year students of B.A.(restructured) programme. The subject of Insurance has also beenoffered as a discipline course for the B.A. (restructured)programme.

We hope that the lucid style of the text presentation which hasbeen supported with suitable tables, figures and illustrations will

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prove useful to our students in the understanding of these subjectsas well as help them to keep abreast of the current developmentstaking place in these areas. It is also expected that this text willaid fellow teachers in clarifying certain theoretical and conceptualissues as well as provide useful insight to professionals in thefields of banking and insurance.

Despite our best efforts, we acknowledge our humanlimitations and possible errors. We, therefore, invite constructivesuggestions as they would be instrumental in further improvingour work.

We are deeply indebted to our families whose support andunderstanding helped bring this effort to fruition.

Jyotsna SethiNishwan Bhatia

xiv Preface to the First Edition

Elements Of Banking And Insurance

Publisher : PHI Learning ISBN : 9788120346574Author : Jyotsna Sethi,Nishwan Bhatia

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