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Banking Basics

Miscellaneous Banking ActivitiesWe have already learned that the primary functions of commercial banks may be summarized as borrowing and lending of money. Besides these two main functions, a commercial bank also undertakes a variety of other activities. These activities involve services offered by banks to help the customers (account holders). Such activities include collection of cheques, dividend, warrants, etc. on behalf of customers as well as effecting transfer of funds, remittances by mail and telegram. In order to attract customers and make banking services effective, banks always make efforts to diversify their activities. Such diversification takes place by way of new service activities and schemes. These services offered by banks are generally known as agency services. These are also termed as nonbanking, general utility, and miscellaneous services.

For such types of activities, the relationship between a customer and a bank is that of a Principal and Agent. The bank acts as an agent on behalf of the customer as principal. When any bank acts as an agent, the services rendered by it are known as agency services. Under agency services, the bank undertakes payment of subscriptions, premium on insurance, collection of cheques, dividends, etc. It acts as a trustee, executor or administrator and an agent for buying and selling shares, stocks, debentures on behalf of the customer.

General utility services refer to those non-bank services which are in the interest of general public, i.e. the society at large. Such services are called non-banking services because they are not directly concerned with the main banking activities. These services include issue of travellers cheques, credit cards, drafts, circular notes, gift cheques and safe custody of valuables, like negotiable securities, jewellery, documents of title to goods, etc.

The range of services offered differs from bank to bank, depending mainly on the size and type of bank, but the acceptance of deposits from the public and lending operations form the main stay of the banking business.

In this lesson we shall describe the supplementary functions of banks and discuss the significance of non-banking services.

1Safe Deposit VaultsSafe Deposit Locker, popularly called Lockers, Facility is one of the subsidiary services provided by the bank for keeping the valuables in the Safe Deposit Locker. This provides safety to the belongings of the customers against theft / burglary. Bank provides specially designed lockers kept at specially built strong rooms for keeping the valuables of the hirer purchased from reputed manufacturers.

These boxes are said to be impervious to fire, flood, and theft, and their contents are covered by the bank's insurer. Access to individual boxes is secured through two different keys: one kept by the customer, the other by the bank.

The contents of a safe deposit box are not insured in the same way bank deposits are. Due to the fact that there is no way to verify the contents of a safe deposit box, banks will not insure their contents.

All the procedures prescribed by Know Your Customer (KYC) and Anti Money Laundering norms are followed for operations of the lockers.Safe Deposit Locker, popularly called Lockers, Facility is one of the subsidiary services provided by the bank for keeping the valuables in the Safe Deposit Locker. This provides safety to the belongings of the customers against theft / burglary. Bank provides specially designed lockers kept at specially built strong rooms for keeping the valuables of the hirer purchased from reputed manufacturers.

These boxes are said to be impervious to fire, flood, and theft, and their contents are covered by the bank's insurer. Access to individual boxes is secured through two different keys: one kept by the customer, the other by the bank.

The contents of a safe deposit box are not insured in the same way bank deposits are. Due to the fact that there is no way to verify the contents of a safe deposit box, banks will not insure their contents.

All the procedures prescribed by Know Your Customer (KYC) and Anti Money Laundering norms are followed for operations of the lockers.

2Safe Deposit VaultsAccount opening Lockers AgreementLocker RentNon- Payment of RentOperation of LockersLost KeysNomination FacilityDelivery of Locker ContentsAccount opening Lockers are available to existing customers only. For new customers, opening of an account will be a pre-requisite. All the guidelines laid down by KYC and AML have to be adhered to.It can be rented to individuals jointly with instructions to operate by anyone or survivor but not with former or survivor. When the locker is hired in the name of more than one person, access must be allowed to each one of them singly unless otherwise instructed. Lockers cannot be rented to minors.Lockers AgreementThe hirer has to execute a Lease Agreement spelling out the terms & conditions of hire. Specimen signature of the hirer is obtained and duly validated. Passwords are also provided as an additional safeguard in identification apart from the signature.Locker RentUsually banks have three sizes of lockers - small, medium and large. Fees will vary depending on the size of the locker. Normally lockers are rented for a period of one year which can be renewed further upon expiry of the leased period. It can also be leased for more than a year, but not exceeding 3 years at the option of the hirers, in which case rent have to be recovered in advance. Non- Payment of RentLocker rents are collected in advance. Delayed payment of locker rents attracts additional penalties. In case of non-payment, Bank can break open a locker after giving due notice to the hirer. In case of joint hirer, a separate notice has to be sent to each hirer.Breaking open of a locker is an extreme step and is resorted to only after exhausting all available remedies. It is broken open by the representative mechanic of the locker manufacturer in the presence of bank officials and two respectable persons of the locality to act as witness. If any contents are found, the list of the inventory is prepared and the articles are kept in the safe custody until all the dues are cleared.Operation of LockersEvery time the hirer desires to operate the locker, he has to sign a register to record the date and time. The signature is verified the concerned official. In case of any ambiguity, the password is called for. Once the identity is established, the bank official operates the Master Key and leaves the hirer alone to open the locker with the hirers key and operate. His departure time is also recorded in the register.Lost KeysIf the hirers have lost the key and request that the locker be broken open, consent of all the hirers are obtained. The locker is broken in the presence of all the hirers. The cost of breaking open the locker, as well as replacement of key, is charged to the hirers as per actual and recovered immediately.Nomination FacilityNomination facilities are also available for Lockers. But unlike deposit accounts, where only one nominee is allowed per account, irrespective of the number of depositors, here each hirer is allowed to have one nominee. Any dispute arising in distribution of the articles found in the locker has to be settled through legal processes. The banks do not carry any responsibilities in the process.Delivery of Locker ContentsIn case of the death of the hirer, the contents are delivered to the nominee. The nominee is not allowed to hold the locker in his name. In case of joint hirers, contents of locker are deliverable to the nominee of the deceased along with the surviving hirers. The Lease Agreement is terminated with death of any of the hirers.In case of either or survivor clause, the survivor can take the delivery only along with the nominee of the deceased. Before permitting the removal of contents of the locker, an inventory of the contents must be prepared. However, sealed /closed packets, if any, are not opened. The inventory is signed by the nominee and surviving hirers.

3Safe CustodySafe Custody is a service wherein a customer can handover any permissible article such as jewels, documents, etc. to the bank for safe custody on periodic payment of a fee. And the bank would keep the article/ document safe, would return the same to the customer on demand.

It needs to be observed that there is a material difference between Safe Deposit Locker facility and Safe Custody. While in the former case the customer need not disclose the items placed in the Safe Deposit Locker, in the latter the article is handed over to the bank and the Banker is aware of what is being offered for Safe Custody. In the case of Safe Deposit Locker, the relationship between the banker and the customer is that of a landlord and a tenant, while in the matter of Safe Custody it is one of a bailor and a bailee.

Safe Custody is a service wherein a customer can handover any permissible article such as jewels, documents, etc. to the bank for safe custody on periodic payment of a fee. And the bank would keep the article/ document safe, would return the same to the customer on demand.

It needs to be observed that there is a material difference between Safe Deposit Locker facility and Safe Custody. While in the former case the customer need not disclose the items placed in the Safe Deposit Locker, in the latter the article is handed over to the bank and the Banker is aware of what is being offered for Safe Custody. In the case of Safe Deposit Locker, the relationship between the banker and the customer is that of a landlord and a tenant, while in the matter of Safe Custody it is one of a bailor and a bailee.

4Cash Management ServicesCash Management Service (CMS) is an ancillary service provided by the banks. Through CMS bank helps corporate /mid-corporate and business houses to efficiently manage their resources with great time saving, with utmost accuracy and at enormous cost savings in addition to greater customer care.

The services offered under Cash Management Services can be broadly categorized under four categories:

Cash ServicesCollection ServicesPayment ServicesReconciliation Services

All these services are aimed at providing banking services at the doorstep of the customers. Banks design various products, basing upon the above 4 categories and offer them to large and mid-sized corporate customers. While opting for Cash Management Services, the customers are not bound to accept all the services; rather they can choose the services required by them. Commissions and fees well be charged only on the services they have opted to utilize.

While Cash Services aim to lift the cash from the Customers premises at Banks risk, the Collection and Payment Services strive to speed up the processes thereby enabling the customers to asses their cash positions more accurately.

Reconciliation Services keep track of all the cheques issued by the Customers and their status of payment. It also involves the balance reporting and reconciliation processes.

Since the collection and payment services are required across the geographies and the CMS offering bank may not have branches in all locations, individual banks set up agency arrangements with other banks. They are known as Correspondent Banks and act as agents for the CMS offering bank on a commission sharing basis.

5CMS Cash ServicesUnder the Cash Services, the bank arranges to pick up the cash, at stated intervals, from the centers indicated by the Customer. Once it is received at the designated premises, it is deemed to have been deposited in the Customers account.

The risk of transporting the cash to the branch lies with the bank. Normally, banks tie-up with security agencies for this kind of activities and the transportations occur under the supervision of armed guards.

A combination of Photo Identity Card and Scratch Card is a common practice employed by the banks to establish the identity of the pick-up agent.Under the Cash Services, the bank arranges to pick up the cash, at stated intervals, from the centers indicated by the Customer. Once it is received at the designated premises, it is deemed to have been deposited in the Customers account.

The risk of transporting the cash to the branch lies with the bank. Normally, banks tie-up with security agencies for this kind of activities and the transportations occur under the supervision of armed guards.

A combination of Photo Identity Card and Scratch Card is a common practice employed by the banks to establish the identity of the pick-up agent.

Photo Identity CardsFor each new enrolment, cash pick-up agency will provide the scan photocopy of Identity Cards of its staff to the bank, who will be carrying out the process of cash collection from the Customers premises. The bank will circulate the same to Customer before commencing the cash-pick-up arrangement. The cash is handed over to cash pickup agency only after verifying the identity.Scratch CardsOn enrolment, the cash pick-up agency provides a Scratch card booklet to Customer on a monthly basis. Each leaf in the booklet is dated and contains a unique alpha-numeric number which can only be seen after scratching the card. A duplicate of the same booklet with corresponding numbers is maintained by cash pick-up agency. The cash is handed over to cash pickup agency only after matching the numbers on both the leaves.

Since a large amount of cost is involved in this kind of arrangement, the fees are also high.6CMS Collection ServicesLarge business houses receive thousands of cheques and drafts every day. These instruments will be drawn on various locations across geographies. When the volume becomes very large, these business houses tend to outsource the collection process to their banks.

The Collection Services aims to speed up the collection of receivables of the Customer and can be sub-divided into 2 distinct processes.

Local cheques collection, andOutstation cheques collection

Large business houses receive thousands of cheques and drafts every day. These instruments will be drawn on various locations across geographies. When the volume becomes very large, these business houses tend to outsource the collection process to their banks.

The Collection Services aims to speed up the collection of receivables of the Customer and can be sub-divided into 2 distinct processes.

Local cheques collection, andOutstation cheques collection

Local Cheques Collection:For the local cheques, the bank arranges to collect all the cheques from the customers premises and presents them in the local clearing. Typically, banks outsource the collection process to local courier agencies. An inventory of the cheques so collected is prepared and the customers signature is obtained to authenticate the list.All the cheques are presented at the clearing house and proceeds are credited to the Customers account.Returned cheques are sent back to the Customer during the next cycle of collection and acknowledgement obtained.Outstation Cheques Collection: The normal process for collection of outstation cheques time consuming and may take about one or two weeks to realize the proceeds. This is due to the fact that the instrument has to physically travel to the originating branch for payment. Under the cash management service, the banks pick up the cheques, on behalf of the Customers, at the originating centers and present them in local clearing. This speeds up the collection process.Under the arrangement, the Customer informs the bank well in advance regarding the expected payments from various locations across the country. He also authorizes the bank to collect the cheques from the Payers on his behalf. If the bank has branches in those locations, they collect the cheques directly from the Payers, through their own branches and present in the local clearing. The realizations are credited to the customers central account. In case the bank does not have a branch at the pick-up center, they engage the Correspondent Banks to act as their agents.There could be a possibility wherein the location where the outstation cheque is drawn on is not covered under their extended network with correspondent banks. Under these circumstances, the bank purchases the cheque by affording immediate credit to the Customers account and collects the same in the normal way.

7CMS Payment ServicesAs with the case of receipt of cheques and drafts, large business houses have to write cheques and purchase demand drafts in bulk. When the volume grows large, they outsource these activities to their banks through the CMS offering of Payment Services .

The Payment Services basically involves:

Customer Cheque Printing, andBulk Demand Draft PrintingAs with the case of receipt of cheques and drafts, large business houses have to write cheques and purchase demand drafts in bulk. When the volume grows large, they outsource these activities to their banks through the CMS offering of Payment Services .

The Payment Services basically involves:

Customer Cheque Printing, andBulk Demand Draft Printing

Customer Cheque PrintingPayment by Cheque still remains a popular payment method but involves time-consuming and laborious manual processes. Payments outsourcing to a bank would enable the customer to get the cheques and the cover note printed as per the payment file with the facsimile signatures of the authorized signatories. The cheques can be printed centrally or at various remote locations as per the customers requirement.Bulk Demand Draft Printing Demand draft printing renders corporations to make bulk disbursements through demand drafts. This facility includes printing and dispatch of demand drafts to the desired locations. Just like printing of cheques, demand drafts are also printed at various locations as per the customers requirement. In case the bank does not have a branch at the desired location, it is done through the correspondent bank.

8Demat AccountsDemat Account, short for Dematerialized Account is a type of banking account which dematerializes the paper based physical securities such as shares, debentures and bonds into electronic form. It can be considered as another form of a personal bank deposit account where people keep shares instead of money. A Demat account, however, can be opened with no balance of shares.

Depositories and Depositary ParticipantsOpening a Demat AccountOperation of Demat AccountsFees InvolvedAccount-opening feeAnnual maintenance feeCustodian feeTransaction feeDematerialization and Rematerialization ChargesDemat Account, short for Dematerialized Account is a type of banking account which dematerializes the paper based physical securities such as shares, debentures and bonds into electronic form. It can be considered as another form of a personal bank deposit account where people keep shares instead of money. A demat account, however, can be opened with no balance of shares.Depositories and Depositary Participants:In order to understand Demat Accounts, one needs to be aware about the terms Depositories and Depository Participants (DP). A depository is a place where the stocks of investors are held in electronic form. There are only two depositories in India, The National Securities Depository Ltd (NSDL) and the Central Depository Services Ltd (CDSL). Under the arrangement, the Depository acts as registered owner of the securities in electronic form in the books of issuing company and the client will be the Beneficial Owner (BO). The Depositary Participants are the agents governed by Depositories through which one can operate the demat account. Depository participants are mainly banks and brokers. The banks take up the role of Depository Participant to offer Demat Account services to their customers.Opening a Demat AccountFor opening a Demat account, the customer is requested to fill up the prescribed account opening form. An agreement is executed on requisite stamp paper. Applicant & joint holder/s has to submit in person, self attested copies of the PAN card, Address and Identity proofs along with originals for verification, bank account particulars and a passport size photograph along with the application. On opening the Account a unique BO ID (Beneficial Owner Identification) Number is allotted.Each Demat account is attached to a deposit account, normally Savings Bank account, where cash is transacted pertaining to the trading in securities in the Demat account.Operation of Demat Accounts:The account operation of Demat Accounts is exactly same as those of Deposit Accounts with the banks. The money in deposit account is replaced with the details of the securities. The securities are identified through unique numbers known as ISIN (International Securities Identification Number).ISIN is a unique 12 digit alpha-numeric identification number allotted for a security and may look like INE383C01018. It will be different for different Issuing Companies and different types of securities such as equities, debentures and bonds.When an account holder buys securities, the ISINs are added to the account and when securities are sold, the corresponding entries are deleted. The corresponding cash values are reflected in the attached deposit accounts.The banks provide Transaction Statements periodically, which give details of current balances and various transactions made through the Demat account.Fees InvolvedThere are several types of charges levied on the Demat Accounts. All these charges vary from bank to bank.Account-opening feeDepending on the bank, there may or may not be an opening account fee. Most banks waive it when the account is opened for the first time but levy this when one re-opens a Demat account. Annual maintenance feeThis is also known as folio maintenance charges and is fixed for accounts. It varies from bank to bank and is generally levied in advance.Custodian feeThis fee is charged yearly and depends on the number of securities held in the account. Mostly the Issuing Companies bear the custody charges and no fee is levied to the account holder. However, in the absence of such arrangement, the Custodian Fee is recovered from the customer.Transaction feeThe transaction fee is charged for crediting/debiting securities to and from the account on a monthly basis. While some banks charge a flat fee per transaction, other peg the fee to the transaction value, subject to a minimum amount. The fee also differs based on the kind of transaction (buying or selling). Some banks charge only for debiting the securities while others charge for both. The banks also charge a penalty if an instruction to buy/sell fails or is rejected. Dematerialisation and Rematerialisation ChargesThe banks also charge a fee for converting the shares from the physical to the electronic form or vice-versa. This fee varies for both Demat and remat requests. For Demat, some banks charge a flat fee per request in addition to the variable fee per certificate, while others charge only the variable fee.

9Sale of Mutual Fund SchemesIn many countries, including India, sale of mutual funds can be carried out through certified agents. While banks take up Corporate Agency, they have their designated staff certified in this respect and carry out the business through them.

Sale of mutual funds is a risk free and commission earning business for the banks.

Banks, as agents, provide basic information and services on the schemes launched to investors, such as:

Assisting them in filling application formsSubmission of application forms along with the cheques and documentsDelivering redemption proceeds, and Answering scheme related queries investors may have.

These are transaction oriented services where investors make the investment decisions themselves, and rely on the banks mostly for execution and logistics support.While individual agents provided the foundation for growth in selling of mutual funds in early years, institutional agents, distribution companies and national brokers soon started to play an active role in promoting mutual funds. Recently, banks, finance companies, secondary market brokers and even post offices have also begun to market mutual funds to their existing and potential client bases.In many countries, including India, sale of mutual funds can be carried out through certified agents. While banks take up Corporate Agency, they have their designated staff certified in this respect and carry out the business through them.Sale of mutual funds is a risk free and commission earning business for the banks.Banks, as agents, provide basic information and services on the schemes launched to investors, such as:Assisting them in filling application formsSubmission of application forms along with the cheques and other documentsDelivering redemption proceeds, and Answering scheme related queries investors may have. These are transaction oriented services where investors make the investment decisions themselves, and rely on the banks mostly for execution and logistics support.The Mutual Funds companies expect the following competencies from the agency banks:Be fully conversant with the key provisions of the Scheme Information Document (SID), Statement of Additional Information (SAI) and Key Information Memorandum (KIM) as well as the operational requirements of various schemes. Provide full and latest information of schemes to investors in the form of SID, performance reports, fact sheets, portfolio disclosures and brochures and recommend schemes appropriate for the clients situation and needs. Highlight risk factors of each scheme, avoid misrepresentation and exaggeration and urge investors to go through SID/KIM before deciding to make investments. Disclose to the investors all material information including all the commissions (in the form of trail or any other mode) received for the different competing schemes of various Mutual Funds from amongst which the scheme is being recommended to the investors. Abstain from indicating or assuring returns in any type of scheme, unless the SID is explicit in this regard.

10BancassuranceThe Bank Insurance Model (BIM), also sometimes known as Bancassurance, is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products.

Bancassurance simply means selling of insurance products by banks. This is a system in which a bank has a corporate agency with one insurance company to sell its products. In this arrangement, insurance companies and banks undergo a tie-up, thereby allowing banks to sell the insurance products to its customers.

Like sale of mutual funds, the banks have to utilize certified personnel to undertake the business.The Bank Insurance Model (BIM), also sometimes known as Bancassurance, is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products.

Bancassurance simply means selling of insurance products by banks. This is a system in which a bank has a corporate agency with one insurance company to sell its products. In this arrangement, insurance companies and banks undergo a tie-up, thereby allowing banks to sell the insurance products to its customers.

Like sale of mutual funds, the banks have to utilize certified personnel to undertake the business.

Bancassurance allows the insurance company to maintain smaller direct sales teams as their products are sold through the bank to bank customers by bank staff.

Bank staff and tellers, rather than an insurance salesperson, become the point of sale/point of contact for the customer. Bank staff are advised and supported by the insurance company through product information, marketing campaigns and sales training.

Both the bank and insurance company share the commission. Insurance policies are processed and administered by the insurance company.

Bancassurance is extremely popular in European countries such as Spain, France and Austria. However, the concept is relatively new in the USA. The Bancassurance growth differs due to various reasons, including regulatory norms, in different countries.

By selling insurance policies bank earns a revenue stream apart from interest. This income is purely risk free for the bank since the bank simply plays the role of an intermediary for sourcing business to the insurance company.

Bancassurance provides various advantages to banks, insurers and the customers. For the banks, income from Bancassurance is non interest based and risk free income. The insurance company gets improved geographical reach without additional costs. The insured receives the services at his bank.

There is also another method called 'Bank Referral'. Here the banks do not issue the policies; they only share their customer database to the insurance companies. The insurance companies issue the policies and pay the commission to them.

In India the banking & insurance sectors are regulated by two different entries. While the banking sector is fully governed by RBI, insurance sector is governed by IRDA. Banks undertaking Bancassurance have to comply with the regulations laid down by both the authorities.

11Travelers ChequeA Traveler's Cheque is a check that is issued by a bank or a financial institution which can be used as a form of payment. Traveler's Cheques are most often used by those traveling because they are widely accepted as payment in many parts of the world, yet can be replaced if lost or stolen by the issuing bank or financial institution. Traveler's Cheques are issued in a variety of monetary denominations such as the US Dollar, Euro, Japanese Yen, Canadian Dollar, Australian Dollar, and British Pound.

The PlayersIssue of Traveler's ChequesEncashing Traveler's ChequesFees and CommissionsLoss or TheftA Traveler's Cheque is a check that is issued by a bank or a financial institution which can be used as a form of payment. Traveler's Cheques are most often used by those traveling because they are widely accepted as payment in many parts of the world, yet can be replaced if lost or stolen by the issuing bank or financial institution. Traveler's Cheques are issued in a variety of monetary denominations such as the US Dollar, Euro, Japanese Yen, Canadian Dollar, Australian Dollar, and British Pound.Traveler's cheques were first issued on 1 January 1772 by the London Credit Exchange Company for use in ninety European cities, and in 1874 Thomas Cook was issuing 'circular notes' that operated in the manner of traveler's cheques.American Express was the first company to develop a large-scale travelers cheque system in 1891, and is still the largest issuer of traveler's cheques today by volume.The PlayersThree players are involved in the Traveler's Cheque transactions:The Issuer: it is the bank or financial institution that creates it or sells itThe Purchaser: The person who buys it, andThe Payee: The person or the business entity who accept the instrument in lieu of cashFor purposes of clearance, the issuer is both the maker and the drawee. Issue of Traveler's ChequesThe Travelers Cheques can be purchased from many of the banks, financial institutions, brokers and foreign exchange dealers. Traveler's cheques are available in several currencies such as U.S. Dollars, Canadian Dollars, Pounds Sterling, Japanese Yen, and Euro. Common denominations are 20, 50, or 100The Travelers Cheques have placeholders for 2 signatures; one at the top and other at the bottom corner. At the time of purchase, the customer will be required to sign each individual Travelers Cheque at the top. The signature is one of the security features of the Travelers Cheques as the user will be required to countersign in front of the acceptor, at the bottom corner of the check, at the point of redemption. If the signatures do not match, the cheque will not be accepted. At the time of purchase, the customer will be provided with a listing of the serial numbers of the cheques that were purchased. If any cheques are reported lost or stolen, most banks will require the customer to provide the serial numbers of the missing cheques. This allows the bank to verify the validity of the claim and the cheques.Traveler's cheques do not expire, so unused cheques can be kept by the purchaser to spend at any time in the future.Encashing Travelers ChequesUsing a Travelers Cheque is a fairly simple process. The customer simply presents the cheque to the merchant as payment. The customer will then need to sign it in the presence of the merchant. Once the merchant verifies that both signatures on the check match, any applicable change is given back to the customer and the transaction is completed. Many business establishments, as an additional precaution, insist on production of a valid proof of identity before accepting the chequeThe merchant deposits the cheque in his bank account for collection of proceeds.Fees and CommissionsMost banks prefer to sell them without any commissions or fees to their customers; since accepting money in lieu of Travelers Cheques is like accepting a deposit without interest. The bank is free to utilize the money as long as the cheque is not encashed. The commission, where it is charged, is usually 1-2% of the total face value sold.Loss or TheftLoss or theft of traveler's cheques needs be reported immediately to the issuer and to the local police authority. Refund of amount can be claimed from the Issuer for the lost or stolen cheques. The receipt issued when the cheques were purchased showing the serial numbers of the cheques will expedite the refund process

12Bank GuaranteesA bank guarantee is a commercial instrument in the nature of a contract, intended between two parties, to secure compliance with the contract. It is an off-shoot of the main contract between two parties.

A bank guarantee is a guarantee made by a bank on behalf of a customer (usually an established corporate customer) should it fail to deliver the payment, essentially making the bank a co-signer for one of its customer's purchases.

No cash transaction occurs with respect to the payments until the guarantee is invoked by the beneficiary. The banks charge commissions and fees depending upon the amount and periodicity of the guarantee.

Bank guarantees take either of the following forms:

Financial Bank GuaranteePerformance Bank GuaranteeA bank guarantee is a commercial instrument in the nature of a contract, intended between two parties, to secure compliance with the contract. It is an off-shoot of the main contract between two parties.

A bank guarantee is a guarantee made by a bank on behalf of a customer (usually an established corporate customer) should it fail to deliver the payment, essentially making the bank a co-signer for one of its customer's purchases.

No cash transaction occurs with respect to the payments until the guarantee is invoked by the beneficiary. The banks charge commissions and fees depending upon the amount and periodicity of the guarantee.

Bank guarantees take either of the following forms:

1) Financial Bank Guarantee: Financial Bank Guarantee is a bond which is not cancelable and ensures the payment of the interest and repayment of the principal amount as per the schedule agreed upon by both the borrower and the lender. A guarantor to this debt security is liable to pay off the liability in case the first party or the issuer of the Financial Bank Guarantee fails to make the payment.

2) Performance Bank Guarantee: The seller issues a Performance Bank Guarantee to ensure or give concrete commitment to the buyer through its bank. This method ensures the buyer the timely execution of an agreement to have the goods exported or delivered or services performed. In case the seller defaults on execution of the terms agreed upon the Performance Bank Guarantee ensures the buyer the payment of the guarantee amount by the issuing bank.

The bank guarantee is an instrument which business partners can use to strengthen and/or secure an obligation in their contract. The Principal - the party who requests that the guarantee is issued applies to his bank for a bank guarantee to be issued in favour of the Beneficiary the party who will receive the guarantee.

After examining and approving the Principals application, the bank draws up a contract with the Principal - the Counter-Indemnity. The Counter-Indemnity states, among other things, the rights and obligations of the Principal and the bank in relation to possible payment for claims under the guarantee.

Once all of this is in place, the bank then issues the guarantee. By issuing the guarantee the bank offers a security to the Beneficiary that is separate from the Principals ability or will to fulfill his part of the contract. For example, a guarantee can be issued to secure the repayment of an advance payment if delivery does not take place.

Bank guarantees can also be used to secure performance under a contract. Such a guarantee does not however mean that the bank completes the project in the event of non-performance. Instead the banks undertaking is a payment obligation. Funds are then available to the Beneficiary to enable him to, for example, complete the project with another party.

13The acquisition of assets - particularly expensive capital equipment - is a major commitment for many businesses. How that acquisition is funded requires careful planning.

Rather than pay for the asset outright using cash, it can often make sense for businesses to look for ways of spreading the cost of acquiring an asset, to coincide with the timing of the revenue generated by the business. The most common sources of medium term finance for investment in capital assets are Leasing and Hire Purchasing.

Leasing and hire purchasing are financial facilities which allow a business to use an asset over a fixed period, in return for regular payments. The customer chooses the equipment it requires and the finance company buys it on behalf of the customer.

Leasing can take up any of the following 3 broad forms:Finance LeasingOperating LeasingContract HireEquipment leasing and Hire purchasingThe acquisition of assets - particularly expensive capital equipment - is a major commitment for many businesses. How that acquisition is funded requires careful planning.Rather than pay for the asset outright using cash, it can often make sense for businesses to look for ways of spreading the cost of acquiring an asset, to coincide with the timing of the revenue generated by the business. The most common sources of medium term finance for investment in capital assets are Leasing and Hire Purchasing.Leasing and hire purchasing are financial facilities which allow a business to use an asset over a fixed period, in return for regular payments. The customer chooses the equipment it requires and the finance company buys it on behalf of the customer.Leasing can take up any of the following 3 broad forms:Finance LeasingOperating LeasingContract HireNormally, Specialized Financial Institutions take up these activities. Many banks have setup subsidiary companies to undertake leasing and hire purchasing activities. However, some banks carry out these activities through dedicated internal departments.Many kinds of business asset are suitable for financing using hire purchase or leasing, including:Plant and machineryBusiness carsCommercial vehiclesConstruction equipmentsAgricultural equipmentsHotel equipmentsMedical and dental equipmentsOffice equipmentsLeasingThe fundamental characteristic of a lease is that ownership never passes to the customer.Instead, the leasing company claims the capital allowances and passes some of the benefit on to the business customer, by way of reduced rental charges.The customer can generally deduct the full cost of lease rentals from taxable income, as a trading expense.The customer will normally be responsible for maintenance of the equipment.There are a variety of types of leasing arrangement:Finance LeasingThe finance lease or 'full payout lease' is closest to the hire purchase alternative. The leasing company recovers the full cost of the equipment, plus charges, over the period of the lease.Although the business customer does not own the equipment, they have most of the 'risks and rewards' associated with ownership. They are responsible for maintaining and insuring the asset and must show the leased asset on their balance sheet as a capital item.When the lease period ends, the leasing company will usually agree to a secondary lease period at significantly reduced payments. Alternatively, if the customer wishes to stop using the equipment, it may be sold second-hand to an unrelated third party. The customer arranges the sale on behalf of the leasing company and obtains the bulk of the sale proceeds.Operating LeasingIf a customer needs a piece of equipment for a shorter time, then operating leasing is preferred. The leasing company will lease the equipment, expecting to sell it secondhand at the end of the lease, or to lease it again to someone else. It will, therefore, not need to recover the full cost of the equipment through the lease rentals.This type of leasing is common for equipment where there is a well-established secondhand market (e.g. cars and construction equipment). The lease period will usually be for two to three years, although it may be much longer, but is always less than the working life of the machine.Assets financed under operating leases are not shown as assets on the balance sheet. Instead, the entire operating lease cost is treated as a cost in the profit and loss account.Contract HireContract hire is a form of operating lease and it is often used for vehicles. The leasing company undertakes some responsibility for the management and maintenance of the vehicles. Services can include regular maintenance and repair costs, replacement of tyres and batteries, providing replacement vehicles, roadside assistance and recovery services and payment of the vehicle licenses.Hire purchaseHire purchase is exactly opposite to installment loans where the assets are procured in the borrowers name. Under a hire purchase agreement, the customer becomes the owner of the equipment only after all the payments have been made. This ownership transfer either automatically or on payment of an option to purchase fee.For tax purposes, from the beginning of the agreement the customer is treated as the owner of the equipment and so can claim capital allowances. Capital allowances can be a significant tax incentive for businesses to invest in new plant and machinery or to upgrade information systems.Under a hire purchase agreement, the customer is normally responsible for maintenance of the equipment.14Credit Card is a device used to obtain a revolving consumer credit up to a specified limit at the time of making a purchase.

When a purchase is made, the credit card user agrees to pay back the card issuer on an agreed future date.

When a consumer makes a purchase using a credit or charge card, a small portion of the price is paid as a fee (known as the merchant discount), with the merchant keeping the remainder. There are typically three parties who split this fee amongst themselves:

Acquiring bankIssuing bankNetwork associationCredit CardsCredit Card is a device used to obtain a revolving consumer credit up to a specified limit at the time of making a purchase. When a purchase is made, the credit card user agrees to pay back the card issuer on an agreed future date.When a consumer makes a purchase using a credit or charge card, a small portion of the price is paid as a fee (known as the merchant discount), with the merchant keeping the remainder. There are typically three parties who split this fee amongst themselves:Acquiring bank: The bank which processes credit card transactions for a merchant, including crediting the merchant's account for the value charged to a credit card less all fees. Issuing bank: The bank which issues the consumer's credit card. This is the bank a consumer is responsible for repaying after making a credit card purchase. The issuer's share of the merchant discount is known as the interchange fee. Network associations: The link between acquiring banks and issuing banks. These banks have relationships with a network, rather than with each other, for fulfilling card purchases. This allows a card issued by a community bank in Peru to be used at a shop in Sri Lanka, for instance, without requiring the banks to have a direct relationship with each other. The two largest networks in the world are Visa and MasterCard. The average merchant discount in the United States is 1.9%. Of this, approximately 0.1% goes to the acquirer, 1.7% to the issuer, and 0.09% to the network. In India, the rate goes as high as 3%. That is to say, for each sale of INR 100, the merchant keeps INR 97 and parts INR 3 for distribution amongst the 3 players.

15Cheque Return Charges Balance Enquiry Charges Cash Withdrawal Charges Card Replacement ChargesTransaction Fee on Railway TicketsBalance Transfer Processing ChargesForeign Currency Transactions MarkupOutstation Cheques Collection ChargesSurcharge at Petrol PumpsAdmission FeeAnnual SubscriptionOver Limit Charges Cheque Pickup ChargeLate Payment ChargesLost Card ChargesCharge Slip Request Mobile Alerts ChargesAuto Debit ChargesCredit Card Charges16Income from Credit Cards business is generated through 2 sources, Interest and fees. Whenever, the Card Holder revolves the credit, the balance is treated as a unsecured loan and interest, called the Finance Charge, is charged on the Card Holder.Apart from the Finance Charge, there are a lot of different charges which are levied depending upon the situations and circumstances. These charges form a substantial portion of the income from Credit Card business.Joining and annual feeIn order to entice customers into buying a credit card, many credit card companies offer credit cards free of cost i.e. no joining fees and perhaps exemption from annual fee for a particular period say 1 year after which they will start charging an annual fee. The joining and annual fee could range from Rs. 1,000 - Rs. 3,000 depending on the type of card.Duplicate Statement feeWhile monthly statements are delivered free of cost to the address of the card holder, request for a duplicate statement in the physical form attracts charges which is typically a fixed sum. Some credit card issuers also charge for a duplicate e-statement. E.g. Rs. 100 for a bill over 3 months.Late payment chargesEvery time you make a late payment, over and above the interest rate charged, credit card companies will charge a late payment fee which can either be a fixed sum or a certain percentage of the minimum outstanding balance with a minimum and maximum threshold. It varies from one credit card company to another. For example, late payment charges could be 30% of the minimum outstanding amount subject to a minimum of Rs. 300 and a maximum of Rs. 600.Cash withdrawalCash withdrawal is withdrawing money from the bank against your credit limit. Credit card companies charge individuals for cash withdrawal on the credit card. The charges could be a certain percentage of the transaction value or a fixed sum. For example, 2.5% of the transaction value subject to a minimum of Rs. 250.Overdraft LimitCredit card companies charge an overdrawn fee if the customer exceeds his credit limit. This fee is normally a certain percentage of the overdrawn amount subject to minimum and maximum amount. For example, 5% of the overdrawn limit subject to a minimum of Rs. 300 and a maximum of Rs. 600.Outstation cheque feeFor the purpose of payment, if you have issued an outstation cheque, the credit card issuer will charge the customer a fee for it which is a certain percent of the cheque value subject to a minimum amount. Cheque Return/ ECS return chargeIn case of a cheque bounce or a failure of ECS, a fixed amount is charged by the credit card issuer.Foreign currency transactionsIn case of transactions outside the country, the same is converted into home currency at a rate suggested by the network infrastructure provider (Visa/Master). Credit card issuers charge a certain percentage of the transaction value subject to a minimum amount. Petrol Transaction and Railway Ticket Purchase FeePetrol transaction is levied as a particular percentage of the transaction value subject to a minimum amount. Similar charges are also levied in case of railway ticket purchase too.Service TaxExpenses on the credit card are subject to service tax applicable which is levied on the total value of the transaction inclusive of fees, interest and other charges. Financial InclusionFinancial InclusionAccess to financial services and products from formal financial systemCommercial Banks and Financial InstitutionsInsurance CompaniesPost OfficesMicro Financial InstitutionsFinancial AdviceLoan AccountsSavings AccountsPayment ServicesPostal Savings AccountsRemittance ServicesSmall LoansInsurance ProductsFinancial Inclusion is the process of ensuring access to a variety of financial products and services needed by vulnerable groups such as weaker sections and low income groups at an affordable cost in a fair and transparent manner by mainstream Institutional players.

The delivery of products is achieved by appointing local agents, known as Business Correspondents, in areas where the banks and other financial institutions do not have branches.

While banking products remain the major thrust area, other financial products such as Financial Advisory Services and Insurance products are also offered.

17Financial Inclusion - ScopeFinancial Inclusion should include access to financial products and services like,Bank accounts check in accountImmediate Credit Savings productsRemittances & Payment servicesInsurance - HealthcareMortgageFinancial advisory servicesEntrepreneurial credit

Financial Inclusion Scope18Financial Inclusion should include access to financial products and services like,Bank accounts check in accountImmediate Credit Savings productsRemittances & Payment servicesInsurance - HealthcareMortgageFinancial advisory servicesEntrepreneurial credit

Financial Inclusion - ScopeFinancial Inclusion Process

Customers with Smart CardsBusiness Correspondent with Point of Transaction TerminalSponsor Banks BranchService Providers ServerBanks Main Server19Since the volume of customers and transactions is very high and is spread across geographies, banks usually appoint intermediaries to carry out the operations. These intermediaries are normally technical vendors, known as Service Providers, having their own servers for maintaining the financial data of the customers. These Service Providers appoint Business Correspondents (BCs) in various locations to cater to the Financial Inclusion customers. Each Business Correspondent is equipped with a Point of Transaction (POT) terminal. The Point of Transaction consists of a portable Smart Card reader, fingerprint scanner and biometric device for identification of the customers.Each customer is issued with a Smart Card which contains the details of the customer as well as the accounts and transaction details.All the transactions carried out throughout the day are stored in the Point of Transaction terminal and are relayed to the server of the technical vendor over internet or mobile network. At the end of each day, all the transactions from the vendors server are uploaded to the sponsoring banks main server.Transactions Process:Business Correspondent carries a POT device for conducting a transaction. Customer comes to the fixed transaction point or requests the agent to come at his/her doorstep.Customer card is inserted into a device and secure trust is established between Customer Card & POT Terminal.After successful key authorization & fingerprint verification the customer is registered and the system displays the transaction Menu.The Business Correspondent inputs the transaction amount on to the POT machine. The transaction amount is checked with the smart card and is authenticated.The Business Correspondent hands over / accepts the cash as the case may be. The Business Correspondent also hands over transaction slip to the customer with the pre defined contents.The smart card of the customer is updated with final balances. The Point of Transaction terminal is also updated accordingly.At the end of the day, the Business Correspondent visits the nearest branch and settles the cash transactions.

Value Added ServicesATM / Debit CardsElectronic StatementsInternet BankingMobile BankingBill Pay ServiceOnline TradingPrivate BankingApart from the fee based miscellaneous services, banks also provide a host of other value added services, mostly free of charges, to retain and attract customers, like:

ATM / Debit CardsElectronic StatementsInternet BankingMobile BankingBill Pay ServiceOnline TradingPrivate Banking

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