CHAPTER- 1

AN INTRODUCTION

Banks are the most significant players in the Indian financial market.

They are the biggest purveyors of credit, and they also attract most of

the savings from the population. Dominated by public sector, the

banking industry has so far acted as an efficient partner in the growth

and the development of the country. Driven by the socialist ideologies

and the welfare state concept, public sector banks have long been

the supporters of agriculture and other priority sectors. They act

ascrucial channels of the government in its efforts to ensure equitable

economic development.

The Indian banking can be broadly categorized into nationalized

(government owned), private banks and specialized banking

institutions. The Reserve Bank of India acts a centralized body

monitoring any discrepancies and shortcoming in the system. Since

the nationalization of banks in 1969, the public sector banks or the

nationalized banks have acquired a place of prominence and has

since then seen tremendous progress. The need to become highly

customer focused has forced the slow-moving public sector banks to

adopt a fast track approach. The unleashing of products and

services through the net has galvanized players at all levels of the

banking and financial institutions market grid to look anew at their

existing portfolio offering. Conservative banking practices allowed

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Indian banks to be insulated partially from the Asian currency crisis.

Indian banks are now quoting al higher valuation when compared to

banks in other Asian countries (viz. Hong Kong, Singapore,

Philippines etc.) that have major problems linked to huge Non

Performing Assets (NPAs) and payment defaults. Co-operative

banks are nimble footed in approach and armed with efficient

branch networks focus primarily on the ‘high revenue’ niche retail

segments.

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ABOUT THE REPORT

Title Of The Study:

The present study titled as “A project report on the FINANCIAL

SERVICES PROVIDED BY BANKS”.

Objective of the study:

The following objectives of the present study are:

o To understand about the banking sector and financial services.

o To know about the different financial services provided by

banks.

Limitations of the study:

The following limitations of the present study are:

o The period for the study is limited.

o The study deals only with specialized financial services.

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Data And Methodology:

For the purpose of the present study the secondary data was

used. The secondary data were collected from journals, internet,

book and newspaper.

Presentation of the study:

Following are the Presentation of the study;

Chapter-1Gives an introduction to the study.

Chapter-2Deals with a Theoretical view of financial services.

Chapter-3 Deals with Financial services provided by banks in

India.

Chapter-4 Conclusion

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CHAPTER- 2

A THEORETICAL VIEW

After independence, the government of India started establishing

several corporations and other institution to promoter industrial

development of the country. As the number of such institution went

on increasing, it become necessary to co-ordinate the activities of all

these institution in a systematic manner.

An attempt was made by the government to gear the entire economy

to the needs of rapid industrialization. The necessary for increasing

production and increasing the standard of living of people as speedily

as possible, was felt very badly. This warranted the establishment of

an institution, which will look after the co-ordination of such financial

institutions working to achieve this objective. This was responsible for

the establishment of industrial development bank of India.

The bank was established with the following objective:

a) To co-ordinate the activities of the financial institutions established

in the country after independence

b) To participate in the activities of such institution if and when

necessary.

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c) To ensure that the activities of all these institution are planned and

executed in such a manner that the priorities of the plans are property

observed:

d) To function as an apex institution for all the financial institution

functioning in country:

e) To promote and ensure the success of the being development

project in the country. Commercial banks differ from investment

banks. Most financial consumers think of the bank as a place to keep

liquid financial resources such as checking accounts and savings

accounts. A consumer may have personal accounts at a commercial

bank. The commercial bank’s primary business involves taking in

financial assets as deposits then lending these assets to other

customers at a rate of interest. The interest rate the bank charges

on loans and revolving lines of credit or other credit facilities will

depend on the current interest rate environment.

A consumer bank, such as a credit union or savings bank, may focus

on the personal banking needs of a specific group or industry.

An investment bank raises capital for businesses. The investment

bank works with businesses to sell loans offered by the company

called bonds. Bonds are debts owed by the company to investors.

The investment bank distributes the bond issue to customers. The

investment bank may choose to distribute publicly traded bonds to

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clients, or arrange a private placement of the client company’s debt

directly with another company. The investment bank prices the debt

according to the current yield curve and the company’s credit

rating. A company's credit rating, like a consumer's FICA credit score

helps the company pay less to sell bonds in the public or private

markets.

Investment banks also raise capital for client companies by

arranging equity issues, called stock. Investment banks receive fees

from clients to raise capital. Many investment banks employ

professional sales and marketing teams to distribute

clients’ debt and equity issues.

As a capital market banking institution, investment banks also help

clients to restructure debt loans. In some instances, the bank creates

new structured financial products or collateralizes debt with other

financial assets. Investment banks may also utilize derivative

instruments—stand-in, synthetic investment products—to assist

clients’ achievement of financial goals.

Consumers use banks to keep financial resources safe and readily

available for use. Deposits made by customers of the bank are

insured by the Federal Deposit Insurance Corporation (FDIC).

Customers of the bank rely upon its ability to liquidate financial

resources held on account when they request the bank to do so.

Banks provide customers with specially

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printed checkbooks. Customers pay creditors and other financial

obligations by writing a check on the bank account. The bank pays

the check written by its customer. Overdrafts and other fees are

charged in accordance with the bank’s customer policy. If a customer

withdraws more money than he has in account with the bank, the

bank charges the customer a fee. Customers may arrange

for overdraft protection with the bank. Overdraft protection is a loan

that is accessed when the customer’s available fund balance is

negative.

Banks lend money to private and business customers. These loans

take the form of personal loans, commercial/business loans, and

home/property loans (mortgages).

Banks also issue credit cards to customers. A credit card is a form of

demand loan available to the customer. The bank also supports its

credit card business by processing payments to settle customer credit

card bills. To support merchants accepting customers’ credit cards,

banks may offer a merchant network service. Merchant network

services include card terminals or credit card machines.

Banks provide debit cards to their customers. Sometimes

called check cards, debit cards provide ready access for customer

use without the need to make a physical check or cash withdrawal.

Customers may use debit or credit cards in the bank’s automatic

teller machine (ATM).

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Banks facilitate fund transfers for customers via wire

transfer and electronic transfer of funds. Banks utilize

an interbank network to transfer funds for clients. Banks also provide

certified or cashiers’ checks for customers. The bank guarantees the

check so that the customer may offer it as certified available funds to

a payee. In order to create a certified check, the bank usually

withdraws client funds.

Banks offer the services of a notary public to validate clients’

important documents.

The financial needs of high net worth individuals, families, and their

businesses differ from those of most consumers. Private bank clients

must usually present a certain minimum net worth to obtain private

banking services. Private bank services include tax and estate

planning, tax planning, and philanthropic gift planning.

The Financial system and Economic growth

The financial system of a country greatly influences its economy. The

close relationship between financial structure and economic

development is reflected in the prevailing institutional arrangement

and intermediation process. The main function of the financial

structure especially the banking system is to gather funds from the

people who has more savings and lend the amount in bulk to people

who have productive investment opportunities. The Financial system

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will progress both quality and quantity of actual investment, this will

lead to better per capital income and better standard of living.

(Levine, 1997) he argued in this literature that a review in the financial

development will definitely have a positive impact on economic

growth.Authors including Franklin Allen and Hiroko Oura (2004)

emphasized that the financial system played a critical role in igniting

industrialization in England by facilitating the mobilization of capital.

Role of Financial System

Financial system will help in the mobilization of household savings to

corporate sector and distribute capital to different firms. This will help

in sharing the risk by household savings and firms. This

intermediation is the root cause for the link between financial

development and financial constitution on economic growth.

Grahame Thompson definedfinancial development “ as the process

meant the gradual evolution, in the course of economic development,

of financial institutions – money, banks and other financial

intermediaries, and organised securities markets”. Many economists

pointed out that in developing countries financial liberalization indeed

leads to financial frailty and incidents of crises; however financial

liberalisation also has led to higher GDP growth. A large empirical

literature has proved that in practice financial systems are important

for growth.Franklin Allen and Hiroko Oura (2004) in his research

discussed about few models where financial intermediaries arise to

produce information, to generate information and trade to the different

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investors. In his model he defined that financial intermediaries

produce better information, develop resource allocation and promote

growth. Hagemann and Seiter discussed about a research model in

which the financial institution will generate the best information by

properly allocating the resources i.e. funding the firm with the finest

technology for the robust economic growth.

The Indian financial system has witnessed phenomenal changes

during last five decades. Indian economy may be termed as a Mixed

economy where both private and public sectors co-exist. India has

instigated economic development of the nation with the

commencement of planning commission. The main objective of the

Five year plans was to boost domestic savings for the growth of the

economy. The industrialisation strategy highlighted on the expansion

of heavy industries, however the economic growth achieved in the

first three Five-year plans was insufficient to meet the goals of

development. Indian economy has witnessed drastic increase in the

rate of growth since 1980’s, the annual growth rate of the country was

5.5 percent, A high rate of investment was a major factor for the rise

in economic growth, there was a move up in investment from

19percent of GDP in 1970’s to 25percent of GDP in 1980’s. During

1980’s Indian government had implemented liberalisation policy and

amended several government regulations especially in foreign trade

sector, new strategies were adopted to pool up private capital in form

of foreign direct investment (FDI), New reforms were formulated to

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attract foreign investors which contributed to progress of Indian

economy discussed by Roland (2007), Since 1992 till 1994, the

overall value of imports surpassed that of India’s exports and by 1996

the export figures raised from 0.84 trillion rupees to 1.1 trillion Indian

rupees, During 1993 Indian economy had witnessed major growth by

the commencement of computer software business and adopted

globalisation policy which helped in creating new job market, in the

year 1995 Indian government was associated with World Trade

Organisation (WTO), During 1990-2005 the annual growth rate of

GDP was 5.9percent which was second among the world’s largest

economies only after China with 10.1percent.The republic of India

since 2004 had accepted free market policy, Service sectors played a

vital role by generating 52% of country’s GDP. In 2007 Indian

economy was termed as twelfth-largest economy in the world with

GDP $1.237trillion and per capita income of $1043, Despite

significant high economic growth rate Indian economy had many

pitfalls and socio-economic variance at various levels, on an average

80% of Indian population survived on less than $2 a day.

The Financial Intermediaries: The financial institution acts as a proper

channel for the transfer of funds between investors and firms through

this process certain assets or liabilities are converted into different

assets or liabilities.

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Financial organisations may be defined as economic agents focusing

in the buying and selling activities and at the same time may be very

often termed as financial bonds and securities. Banks may be

classified as a division of the financial institutions, Banking institutions

will buy the securities issued by the borrowers and will sell them to

the lenders.

The Indian banking sector played a significant role in the financial

development with deposits of more than half a trillion US dollars and

contributes about three-quarters of nation’s financial assets. The

Indian banking system has a long and detailed history of more than

200years. The General Bank of India was considered to the first bank

to be established in the nation followed by The Bank of Hindustan in

the year 1870 however these banks are now obsolete nevertheless

the country witnessed the commencement of the

Bank of Bengal in Calcutta in 1806 which is now known as the State

Bank of India the largest bank of the nation detail given in the Indian

Financial System (Anon., 2008).

During 1900s the financial market has expanded with the

commencement of banks such as Allahabad Bank, Punjab National

bank and Bank of India, in the year 1935 Reserve Bank of India

which was considered to the Central Bank of India started regulating

the banking sector in India. During the period of First World War

(1914-1918) functioning of 94 banks failed in the country and the

same phase continued till India achieved Independence in

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1947. The Reserve bank of India was nationalized and was

possessed by the Indian government in the year 1948 and after the

enforcement of the Banking Regulation Act RBI got the authorization

to standardize, direct and inspect the banks in the country in 1949

and it also instructed that no institute should be started without its

license. In the year 1969, Indian government has nationalised 14

largest public banks resulted in the raise of

Public Sector Banks’ (PSB) share of deposits from 31% to 86%

(Roland, n.d.). The primary purpose of Nationalisation policy was to

set up more branches and to mobilise the deposits. During 1980 six

more banks were nationalised as a result the public sector’s

contribution of deposits moved up to 92%. The banking industry

estimates indicate that out of 274 commercial banks operating in the

nation, 223 banks are in the public sector and 51 fall into private

sector including 24 foreign banks that had started their operations in

the country. Over the decades, banking sector has grown gradually

in size, Since Indian government had adopted the liberalisation policy

banking sector had undergone several changes in its structure by the

establishment of several private sector and foreign banks

accounting for over 80% of deposits and credits.

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PRODUCTS ANDFINANCIALSERVICES OFFERED BY BANKS

Broad Classification of Products in a bank:

The different products in a bank can be broadly classified into:

Retail Banking.

Trade Finance.

Treasury Operations.

Retail Banking and Trade finance operations are conducted at the

branch level while the wholesale banking operations, which cover

treasury operations, are at the hand office or a designated branch.

Retail Banking:

Deposits

Loans, Cash Credit and Overdraft

Negotiating for Loans and advances

Remittances

Book-Keeping (maintaining all accounting records)

Receiving all kinds of bonds valuable for safe keeping

Trade Finance:

Issuing and confirming of letter of credit.

Drawing, accepting, discounting, buying, selling, collecting of

bills of exchange, promissory notes, drafts, bill of lading and

other securities.

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Treasury Operations:

Buying and selling of bullion. Foreign exchange

Acquiring, holding, underwriting and dealing in shares,

debentures, etc.

Purchasing and selling of bonds and securities on behalf of

constituents.

The banks can also act as an agent of the Government or local

authority. They insure, guarantee, underwrite, participate in managing

and carrying out issue of shares, debentures, etc.

Apart from the above-mentioned functions of the bank, the bank

provides a whole lot of other services like investment counseling for

individuals, short-term funds management and portfolio management

for individuals and companies. It undertakes the inward and outward

remittances with reference to foreign exchange and collection of

varied types for the Government.

Common Banking Financial services Available:

Some of common available banking products are explained below:

1) Credit Card: Credit Card is “postpaid” or “pay later” card that

draws from a credit line-money made available by the card

issuer (bank) and gives one a grace period to pay. If the

amount is not paid full by the end of the period, one is charged

interest.

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A credit card is nothing but a very small card containing a means of

identification, such as a signature and a small photo. It authorizes the

holder to change goods or services to his account, on which he is

billed. The bank receives the bills from the merchants and pays on

behalf of the card holder.

These bills are assembled in the bank and the amount is paid to the

bank by the card holder totally or by installments. The bank charges

the customer a small amount for these services. The card holder

need not have to carry money/cash with him when he travels or goes

for purchasing.

Credit cards have found wide spread acceptance in the ‘metros’ and

big cities. Credit cards are joining popularity for online payments. The

major players in the Credit Card market are the foreign banks and

some big public sector banks like SBI and Bank of Baroda. India at

present has about 3 million credit cards in circulation.

2) Debit Cards: Debit Card is a “prepaid” or “pay now” card with

some stored value. Debit Cards quickly debit or subtract

money from one’s savings account, or if one were taking

out cash.

Every time a person uses the card, the merchant who in turn can get

the money transferred to his account from the bank of the buyers, by

debiting an exact amount of purchase from the card.

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When he makes a purchase, he enters this number on the shop’s PIN

pad. When the card is swiped through the electronic terminal, it dials

the acquiring bank system – either Master Card or Visa that validates

the PIN and finds out from the issuing bank whether to accept or

decline the transaction. The customer never overspread because the

amount spent is debited immediately from the customer’s account.

So, for the debit card to work, one must already have the money in

the account to cover the transaction. There is no grace period for a

debit card purchase. Some debit cards have monthly or per

transaction fees.

Debit Card holder need not carry a bulky checkbook or large sums of

cash when he/she goes at for shopping. This is a fast and easy way

of payment one can get debit card facility as debit cards use one’s

own money at the time of sale, so they are often easier than credit

cards to obtain.

The major limitation of Debit Card is that currently only some 3000-

4000 shops country wide accepts it. Also, a person can’t operate it in

case the telephone lines are down.

3) Automatic Teller Machine: The introduction of ATM’s has

given the customers the facility of round the clock banking. The

ATM’s are used by banks for making the customers dealing

easier. ATM card is a device that allows customer who has an

ATM card to perform routine banking transaction at any time

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without interacting with human teller. It provides exchange

services. This service helps the customer to withdraw money

even when the banks ate closed. This can be done by inserting

the card in the ATM and entering the Personal Identification

Number and secret Password.

ATM’s are currently becoming popular in India that enables the

customer to withdraw their money 24 hours a day and 365 days. It

provides the customers with the ability to withdraw or deposit

funds, check account balances, transfer funds and check

statement information. The advantages of ATM’s are many. It

increases existing business and generates new business. It allows

the customers.

To transfer money to and from accounts.

To view account information.

To order cash.

To receive cash.

CHAPTER 3

FINANCIAL SERVICES PROVIDED BY BANKS IN INDIA

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Financial services by Banks means the following services provided by

a banking company or a financial institution including non-banking

financial company or any other body corporate or commercial

concern, namely:

Financial leasing services including equipment leasing and hire

purchase,

Credit card services,

Merchant banking services,

Securities and foreign exchange (forex) broking,

Asset management including portfolio management, all forms

of fund management, pension fund management, custodial,

depository and Mi trust services, but does not include cash

management

Advisory and other auxiliary financial services including

investment Sub and portfolio research and advice, advice on

mergers and acquisitions and advice on corporate restructuring

and strategy   

Provision and    transfer of information and data processing

and 

Other financial services namely lending, issue of pay order,

demand draft, cheque, letter of credit and bill of exchange,

providing bank guarantee, over draft facility, bill discounting

facility, safe deposit locker, safe vaults, operation of bank

accounts.

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The Banking and Financial Service sectors provide significant

opportunities for Document Imaging software and hardware

including document scanners as this market is currently paper

driven and prospects are looking for ways to improve their

existing manual processes.

LETTER OF CREDIT

A letter of credit is a document that a financial institution or similar

party issues to a seller of goods or services which provides that the

issuer will pay the seller for goods or services the seller delivers to a

third-party buyer. The issuer then seeks reimbursement from the

buyer or from the buyer's bank. The document serves essentially as a

guarantee to the seller that it will be paid by the issuer of the letter of

credit regardless of whether the buyer ultimately fails to pay. In this

way, the risk that the buyer will fail to pay is transferred from the

seller to the letter of credit's issuer.

Letters of credit are used primarily in international trade for large

transactions between a supplier in one country and a customer in

another. In such cases, the International Chamber of

Commerce Uniform Customs and Practice for Documentary

Credits applies (UCP 600 being the latest version).They are also

used in the land development process to ensure that approved public

21

facilities (streets, sidewalks, storm water ponds, etc.) will be built. The

parties to a letter of credit are the supplier, usually called

the beneficiary, the issuing bank, of which the buyer is a client, and

sometimes anadvising bank, of which the beneficiary is a client.

SYNDICATION OF LOAN 

A syndicated loan is one that is provided by a group of lenders and

is structured, arranged, and administered by one or

several commercial banks or investment banks known as arrangers.

The syndicated loan market is the dominant way for corporations in

the U.S. and Europe to tap banks and other institutional financial

capital providers for loans. The U.S. market originated with the

large leveraged buyout loans of the mid-1980s, and Europe's market

blossomed with the launch of the euro in 1999.

At the most basic level, arrangers serve the investment-banking role

of raising investor funding for an issuer in need of capital. The issuer

pays the arranger a fee for this service, and this fee increases with

the complexity and risk factors of the loan. As a result, the most

profitable loans are those to leveraged borrowers—issuers

whose credit ratings are speculative grade and who are paying

spreads (premiums or margins above the relevant LIBOR in the U.S.

and UK, Euribor in Europe or another base rate) sufficient to attract

22

the interest of non-bank term loan investors. Though, this threshold

moves up and down depending on market conditions.

OVERDRAFT

An overdraft occurs when money is withdrawn from a bank account

and the available balancegoes below zero. In this situation the

account is said to be "overdrawn". If there is a prior agreement with

the account provider for an overdraft, and the amount overdrawn is

within the authorized overdraft limit, then interest is normally charged

at the agreed rate. If the negative balance exceeds the agreed terms,

then additional fees may be charged and higher interest rates may

apply.

Overdrafts occur for a variety of reasons. These may include:

Intentional short-term loan - The account holder finds them

short of money and knowingly makes an insufficient-funds debit.

They accept the associated fees and cover the overdraft with their

next deposit.

Failure to maintain an accurate account register - The account

holder doesn't accurately account for activity on their account and

overspends through negligence.

ATM overdraft - Banks or ATMs may allow cash withdrawals

despite insufficient availability of funds. The account holder may or

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may not be aware of this fact at the time of the withdrawal. If the

ATM is unable to communicate with the cardholder's bank, it may

automatically authorize a withdrawal based on limits preset by

theauthorizing network.

Temporary Deposit Hold - A deposit made to the account can be

placed on hold by the bank. This may be due to Regulation

CC (which governs the placement of holds on deposited checks)

or due to individual bank policies. The funds may not be

immediately available and lead to overdraft fees.

Unexpected electronic withdrawals - At some point in the past

the account holder may have authorized electronic withdrawals by

a business. This could occur in good faith of both parties if the

electronic withdrawal in question is made legally possible by terms

of the contract, such as the initiation of a recurring service

following a free trial period. The debit could also have been made

as a result of a wage garnishment, an offset claim for a taxing

agency or a credit account or overdraft with another account with

the same bank, or a direct-deposit chargeback in order to recover

an overpayment.

Merchant error - A merchant may improperly debit a customer's

account due to human error. For example, a customer may

authorize a $5.00 purchase which may post to the account for

$500.00. The customer has the option to recover these funds

through chargeback to the merchant.

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Chargeback to merchant - A merchant account could receive

a chargeback because of making an improper credit or debit card

charge to a customer or a customer making an unauthorized credit

or debit card charge to someone else's account in order to "pay"

for goods or services from the merchant. It is possible for the

chargeback and associated fee to cause an overdraft or leave

insufficient funds to cover a subsequent withdrawal or debit from

the merchant's account that received the chargeback.

UNDERWRITING

Underwriting refers to the process that a large financial service

provider (bank, insurer, investment house) uses to assess the

eligibility of a customer to receive their products (equity capital,

insurance, mortgage, or credit). The name derives from the Lloyd's of

London insurance market. Financial backers, who would accept some

of the risk on a given venture (historically a sea voyage with

associated risks of shipwreck) in exchange for a premium, would

literally write their names under the risk information that was written

on a Lloyd's slip created for this purpose. In banking, underwriting is

the detailed credit analysis preceding the granting of a loan, based on

credit information furnished by the borrower, such as employment

history, salary and financial statements; publicly available information,

such as the borrower's credit history, which is detailed in a credit

25

report; and the lender's evaluation of the borrower's credit needs and

ability to pay. Examples include mortgage underwriting.Underwriting

can also refer to the purchase of corporate bonds, commercial paper,

government securities, municipal general-obligation bonds by

a commercial bank or dealer bank for its ownaccountor for resale to

investors. Bank underwriting of corporate securities is carried out

through separate holding-company affiliates, called securities

affiliates or Section 20 affiliates.

MORTGAGE Mortgage is transfer (conveyance) of interest in the specific

immovable property (real estate) belonging to the debtor in favour of

the creditor (lender).

Section 3 of General clauses act says immovable property includes

land, benefit to arise out of land and things attached to the earth or

permanently fastened to anything attached to the earth. There is no

provision for mortgage of movables.

The property should be such as can be clearly described .The legal

ownership remains with the borrower. The actual physical possession

of the property need not always be transferred to the creditor Vide

section 58 of Transfer of property Act 1862.

Different types of Mortgages

1. Simple/Registered Mortgage

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As per Section 58 (b), the mortgagor undertakes (binds himself

personally) expressly or impliedly to pay the advance (Mortgage

money). He does not deliver the possession of mortgaged property

(non-possessory mortgage). The property can be sold only with the

court intervention (permission). It always requires registration

(irrespective of the amount of advance). It is got registered with the

concerned Sub-Registrar/Registrar of Assurances (section 28 of

Indian Registration Act). Mortgage deeds of properties valued at Rs.

100 or more attract ad valorem stamp duty.

The registration should be done within 4 months from

the date of execution of the document (Sec 23 of Indian Registration

Act). If the value of the property involved is less than Rs. 100 , the

registration is not necessary (Section 59 of Transfer of Property Act).

Simple mortgage can be created at any centre.

If the document is not presented for registration within this stipulated

period of 4 months the Registrar (not sub-Registrar) may permit the

registration, if the delay in presentation does not exceed 4 months. In

such cases, a penalty not exceeding 10 times of the usual registration

fee can be levied by the Registrar under section 25 of Registration

act.

The mortgage under a simple mortgage does not have the right of

foreclosure. That is the mortgagee cannot get the property

permanently in his own legal right. Foreclosure means that the

mortgagor absolutely loses his right to redeem (get lack)

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mortgagedproperty in the case of non-payment of mortgage money

section 67 of Transfer of Property Act.

2. Mortgage by conditional sale

The possession of the mortgaged property is not transferred to

mortgagee. It is an ostensible sale (and not a real sale). In the case

of non-payment of mortgage money, the ostensible sale becomes a

real/absolute sale (i.e. the property is deemed as sold). On liquidation

of the advance in full, the property is transferred to mortgagor. The

mortgagee can sue for foreclosure but not for sale of mortgaged

property, by foreclosure, the conditional sale becomes absolute/real.

3. Usufructuary mortgage

It is a possessory mortgage, that is, a mortgagee possesses the

mortgaged property full the advance is repaid (there is no lower/upper

time limit for this). Actual physical possession is not necessary.

The mortgagee has the right to receive profits and rents accruing

from the property. The mortgagor does not bind himself personally for

repayment of the mortgage money. The mortgagee (lender) therefore

cannot sue the mortgagor for repayment of the mortgage debt. He

cannot file suit for sale or foreclosure of the mortgaged property. The

mortgagee is left with only one remedy i.e. he can appropriate the

rents/profits towards liquidation of mortgage money and interest

thereon.Bankers do not advance against such mortgage.

4. English mortgage

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The mortgaged property is transferred absolutely to the mortgagee.

That is, all interests and rights in the property are conveyed. It is

different from simple mortgage. Thus the English mortgage is entitled

to immediate possession of mortgaged property. The mortgagor

binds himself personally to repay the mortgage money.

The property is reconvened (transferred) to the mortgagor upon

repayment of mortgage money.

In the case non-payment of mortgage money, the English mortgagee

(cannot sue for foreclosure but) can sue for a decree for sale. The

mortgaged property can be sold without count’s intervention under

some circumstances detailed in section 69 of Transfer of Property Act

(different from simple mortgage).

5. Mortgage by deposit of title deeds

Equitable mortgage (as per English law), the mortgagor [owner or his

authorised (only constituted) attorney] in any of the notified towns

delivers to the creditor (or his agent), documents of title to immovable

property (title deeds) with intent to create a security thereon.

The immovable property proposed to be equitably mortgaged (and/or

the financing branch) may be located/situated anywhere in India but

the title deeds should be delivered at the notified centre only. If it is a

sine qua non (an indispensable requisite) for equitable mortgage a

deposit made outside the notified centres creates neither a mortgage

nor a charge. The debt may be existing or future.

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6. Anomalous mortgage

A mortgage which does not belong to any of the five types is called

anomalous mortgage. It possesses a mixed character of any two or

more types of mortgages. The understanding of the above aspects

will keep the borrowers persons of ordinary prudence and lenders in

good stead.

PLEDGE

As per the Contract Act, 1872, pledge means bailment of goods for

the purpose of providingsecurity for payment of a debt or

performance of a promise.

Bailment is nothing but delivery of goods to the financier. The person

offering the goods assecurity is the bailer, pawneror pledger. The

person to whom the goods are given is thebailee, pawneeor pledgee.

At times, the delivery of goods may not be actual, but constructive.

For instance, goods ina warehouse may be pledged by handing over

the warehouse receipt. This constructivelyimplies delivery of goods of

the pledgee.There is no legal necessity for a pledge agreement;

pledge can be implied. However, it isalways preferable for the banker

to insist on a pledge agreement.The pledger is bound to inform the

pledgee about any defects in the goods pledged, or anyrisks that go

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with possession of the goods. He is also bound to bear any incidental

expensesthat arise on account of such possession.

Pledge becomes onerous for the pledger, because he has to part with

possession. For thesame reason, the pledgee is generally

comfortable with a pledge arrangement. He does notneed to take any

extra effort or incur any cost for realizing the security. He is however

boundto take reasonable care of the goods.

The pledgee has a general lien on the goods i.e. he is not bound to

release the goods unlesshis dues are fully repaid.

A point to note is that the banker’s lien is limited to the recovery of the

debt for which thepledge is created – not to other amounts that

maybe due from the borrower. This is thereason that banks often

provide a protective clause in their pledge agreement that the

pledgeextends to all dues from the borrower.In the event of default by

the borrower, the pledgee can sell the assets to recover his dues.The

dues may be towards the original principal lent, or interest thereon or

expenses incurredin maintaining the goods during the pledge.

HYPOTHECATION

Hypothecation means a charge in or upon any movable property,

existing or future, created by a borrower in favor of a secured

creditor, without delivery of possession of the moveableproperty to

such creditor, as a security for financial assistance, and includes

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floating charge and crystallization of such charge into fixed charge on

moveable property.

As with pledge, hypothecation is again adopted for movable goods.

But, unlike pledge, the possession of the asset is not given to the

bank. Thus, the borrower continues to use the asset, in the normal

course.A good example is vehicle financing, where the borrower uses

the vehicle, but it is hypothecated to the bank. The bank protects

itself by registering the hypothecation in the records of theRegional

Transport Officer (RTO).Therefore, ownership cannot be changed

without a NOCfrom the bank. Further, to prevent any unauthorized

transfers, the bank takes possession of the vehicle (re-possession) in

the event of default by the borrower.

In the business context, it is normal to obtain working capital facilities

against hypothecation of stocks and debtors. Since these are

inherent to the business, the stocks and debtors keep changing form

(some debtors clear their dues; new debtors are created based on

credit sales by the borrower) and value. The bank only insists on a

minimum asset cover. If thehypothecated assets are worth Rs.

40lakhs and the outstanding to the bank is Rs. 25 lakhs, the asset

cover is Rs. 40 lakhs ÷ Rs. 25 lakhs i.e. 1.6 times.

Since the form and value of the assets charged keep changing (the

outstanding amount also keeps changing), this kind of a charge is

therefore referred to as floating charge. In the event of default by the

borrower, the bank will seek possession of the assets charged. That

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is when it becomes a fixed charge viz. the assets charged as well as

the borrower’s dues against thoseassets get crystallised.

Since possession is with the borrower, there is a risk that non-

recoverable debts are included in debtors, or non-moving or obsolete

goods are included in inventory. Further, an unethical borrower,

despite all provisions in the hypothecation deed, may hypothecate the

same stockto multiple lenders. Therefore, banks go for hypothecation

in the case of reputed borrowers,with whom they have comfort.

Companies have a requirement of registering the charge with the

Registrar of Companies(ROC). Under the Companies Act, if the

charge is not registered with ROC within 30 days, (ora further period

of 30 days on payment of fine), then such charge cannot be invoked

in theevent of liquidation of the company. This is a protection against

multiple charges created onthe same property, in case a company is

a borrower. This is also a reason, why banks pursueborrowers until

they register the charge with the ROC.At times, when the asset cover

is high, banks may permit other bankers to have a charge onthe

same property. Such a charge in favour of multiple lenders, all having

the same priorityof repayment in the event of default, is called

paripassucharge.

Not all banks are comfortable with paripassu charge. There are

situations, where the firstlender insists on priority in repayment.

Subject to such priority, it may not object to thecreation of an

additional charge in favour of a second lender. The first lender is said

to havea first charge on the property; the second lender has second

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charge. Similarly, third charge,fourth charge etc are possible, but not

common.

ASSIGNMENT

The Banker may provide finance against the security of an actionable

claim. Under the Transfer of Property Act, an actionable claim is a

claim to any debt other than a debt secured by mortgage of

immovable property or by hypothecation or pledge of movable

property.

Since security depends on the quality of the debt, bankers are

comfortable if the dues to the borrower are from the Government.

With such a structure, the bank can earn a return that is higher than

what is normal for taking a sovereign risk.

In housing loans, where repayment depends on the earning cycle of

the borrower, financiers tend to ask for assignment of life insurance

policy that covers the life of the borrower. This can be done by

mentioning the same in the reverse of the insurance policy document,

along with signature of the assigner. Alternatively, a separate deed of

assignment can be signed. Either way, the insurance company needs

to be informed about the assignment.

HIRE PURCHASE

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Hire purchase is a type of installment credit under which the hire

purchaser, called thehirer, agrees to take the goods on hire at a

stated rental, which is inclusive of therepayment of principal as well

as interest, with an option to purchase. Under thistransaction, the hire

purchaser acquires the property (goods) immediately on signing

the hire purchase agreement but the ownership or title of the same is

transferred onlywhen the last installment is paid. The hire purchase

system is regulated by the HirePurchase Act 1972. This Act defines a

hire purchase as “an agreement under whichgoods are let on hire

and under which the hirer has an option to purchase them

inaccordance with the terms of the agreement and includes an

agreement under which:

1) The owner delivers possession of goods thereof to a person on

condition thatsuch person pays the agreed amount in periodic

installments.

2) The property in the goods is to pass to such person on the

payment of the lastof such installments, and

3) Such person has a right to terminate the agreement at any time

before theproperty so passes”.Hire purchase should be distinguished

from installment sale wherein property passes to the purchaser with

the payment of the first installment. But in case of HP (ownership

remains with the seller until the last installment is paid) buyer gets

ownership after paying the last installment. HP also differs from

leasing.

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BANKER’S ACCEPTANCE

The Group, less than one of its terms of reference, also examined the

role and scopeof introducing ‘Banker’s Acceptance’ (BA) facility in the

Indian Financial Markets.BA has been in use in markets like USA and

Europe primarily in financing internationaltrade. Historically, BA

backed by Trade Bills had readily available discount windowslike the

Discount Houses in the U.K. and the Central Banks like the Bank of

Englandand Fed Reserve.

BA is a time draft or bill of Exchange drawn on and “accepted” by a

bank as itscommitment to pay a third party. The parties involved in a

banker’s acceptanceare the Drawer (the bank’s customer - importer

or exporter), the Acceptor (a bankor an Acceptance House), the

Discounter (a bank which could be the acceptingbank itself or a

different bank or a discount house) and the Re-discounter

(anotherbank, discount house or the Central Bank). A “BA” is

accepted, when a Bankwrites on the draft its agreement to pay it on

maturity. The Bank becomes theprimary obligator of the draft or bill of

exchange drawn on and accepted by it. Ineffect, BA involves

substituting bank’s creditworthiness for that of a borrower.

Theaccepted bill bears an irrevocable, unconditional guarantee of a

bank to pay thebill on maturity, in the process creating a negotiable

instrument that is also attractiveto investors in short term paper. BA

compared favourably as a funding avenuein terms of cost vis-à-vis

LIBOR based loans. However, in the US market in recent years the

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popularity of BA has been on the wane due to a host of market

developments, particularly the emergence of cost-effective

instruments from borrower’s point ofview like the asset-backed

Commercial Paper and Euro-Commercial Paper and

narrowingspreads between yields on Euro-dollar deposits and BA,

leading to investor indifferencebetween the two as the preferred

investment avenue.

BILL DISCOUNTING 

Bill discounting is a major activity with some of the smaller Banks.

Under this type of lending,Bank takes the bill drawn by borrower on

his (borrower's) customer and pays him immediately deducting some

amount as discount/commission. The Bank then presents the Bill to

theborrower's customer on the due date of the Bill and collects the

total amount. If the bill is delayed, the borrower or his customer pays

the Bank a pre-determined interest depending upon the terms of

transaction.

FACTORING

Factoring is a financial transaction whereby a business sells

its accounts receivable (i.e., invoices) to a third party (called a factor)

at a discount. In "advance" factoring, the factor provides financing to

the seller of the accounts in the form of a cash "advance," often 70-

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85% of the purchase price of the accounts, with the balance of the

purchase price being paid, net of the factor's discount fee

(commission) and other charges, upon collection from the account

client. In "maturity" factoring, the factor makes no advance on the

purchased accounts; rather, the purchase price is paid on or about

the average maturity date of the accounts being purchased in the

batch. Factoring differs from a bank loan in several ways. The

emphasis is on the value of the receivables (essentially a financial

asset), whereas a bank focuses more on the value of the borrower's

total assets, and often also considers, in underwriting the loan, the

value attributable to non-accounts collateral owned by the borrower.

Such collateral includes inventory, equipment, and real property, That

is, a bank loan issuer looks beyond the credit-worthiness of the firm's

accounts receivables and of the account debtors (obligors) thereon.

Secondly, factoring is not a loan – it is the purchase of afinancialasset

(the receivable). Third, a nonrecourse factor assumes the "credit risk”

that a purchased account will not collect due solely to the financial

inability of account debtor to pay. In the United States, if the factor

does not assume credit risk on the purchased accounts, in most

cases a court will characterize the transaction as a secured loan.

It is different from forfaiting in the sense that forfaiting is a

transaction-based operation involving exporters in which the firm sells

one of its transactions, while factoring is a Financial Transaction that

involves the Sale of any portion of the firm's Receivables.

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Factoring is a word often misused synonymously with invoice

discounting, known as "Receivables Assignment" in American

Accounting ("Generally Accepted Accounting Principles")

"GAAP" propagated by FASB - factoring is the sale of receivables,

whereas invoice discounting is borrowing where the receivable is

used as collateral.However, in some other markets, such as the UK,

invoice discounting is considered to be a form of factoring involving

the assignment of receivables and is included in official factoring

statistics.It is therefore not considered to be borrowing in the UK. In

the UK the arrangement is usually confidential in that the debtor is not

notified of the assignment of the receivable and the seller of the

receivable collects the debt on behalf of the factor.

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CHAPTER-4

CONCLUSION

The banking scenario has changed drastically. The changes which

have taken place in the last ten years are more than the changes

took place in last fifty years because of the institutionalisation,

liberalisation, globalisation and automation in the banking industry.

Indian banking system has several outstanding achievements to its

credit, the most striking of which is its reach. Indian banks are now

spread out into the remote corners of our country. In terms of the

number of branches, India’s banking system is one of the largest in

the world. According to the Banker 2004, India has 20 banks within

the world’s top 1000 out of which only 6 are within the top 500 banks.

Today banking sector is marked by high customer expectations and

technological innovations. Technology is playing a crucial role in the

day to day functioning of the banks. These banks that have

harnessed and leveraged technology best have a strategic

advantage. To face competition it is necessary for banks to absorb

the technology and upgrade their services.

In today’s context banks are following the strategy of “relationship

banking” than “mass banking” which is need of the hour. The

customer services are playing a very significant role in banking

business. In India major events leading to deregulation, liberalisation

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and privatisation have unleashed forces of competition, making the

banks run for their business, not only to create the customer, but

more difficult to run for their business, not only to create the

customer, but more difficult to retain the customer. Prompt and

efficient customer service, thus, has become very significant.

Financial services in banking are the new paradigm for survival and

success, embracing a ‘share of customer’ approach to growth by

identifying, protecting and expanding customer relationship.

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