FUNDAMENTALS OF BANKING - I
SUBJECT: - FUNDAMENTAL OF BANKING - I
BCOM SEM- I
PROFESSOR SNEHAL SUNIL DARJI
UNIT - I
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What is banking and what is the role of banking in an economy?
In simple words, Banking can be defined as the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit. However, with the passage of time, the activities covered by banking business have widened and now various other services are also offered by banks. The banking services these days include issuance of debit and credit cards, providing safe custody of valuable items, lockers, ATM services and online transfer of funds across the country / world.
It is well said that banking plays a silent, yet crucial part in our day-to-day lives. The banks perform financial intermediation by pooling savings and channelizing them into investments through maturity and risk transformations, thereby keeping the economy’s growth engine revving.
Banking business has done wonders for the world economy. The simple looking method of accepting money deposits from savers and then lending the same money to borrowers, banking activity encourages the flow of money to productive use and investments. This in turn allows the economy to grow. In the absence of banking business, savings would sit idle in our homes, the entrepreneurs would not be in a position to raise the money, ordinary people dreaming for a new car or house would not be able to purchase cars or houses.
What is a bank? Define a Bank ?
In simple words, we can say that Bank is a financial institution that undertakes the banking activity ie.it accepts deposits and then lends the same to earn certain profit.
What is a Banking Company?
Any company, which transacts the business of banking defined above is termed as Banking company
What is Banking System ?
Banking systems can be defined as a mechanism through which the money supply of the country is created and controlled.
Which are the oldest banks in India :
In 1839, some Indian merchants in Calcutta established India's first bank known as "Union Bank", but it could not survive for long and failed in 1848 due to economic crisis of 1848-49. Similarly, in 1863, "Bank of Upper India" was formed but it failed in 1913.
In 1865, "Allahabad Bank" was established as a joint stock bank. This bank has survived till date and is now considered as the oldest surviving bank in India.
Type of Banks:
Different Types of Banks & their Functions-
The focus of banking is varied, the needs diverse and methods different. Thus, we need distinctive kinds of banks to cater to the above-mentioned complexities. Deposit-taking institutions take the form of commercial banks, which accept deposits and make commercial, real estate, and other loans. There are also mutual savings banks, which accept deposits and make mortgage and other types of loans. Another type is credit unions, which are cooperative organizations that issue share certificates and make member (consumer) and other loans.
The banking industry can be divided into following sectors, based on the clientele served and products and services offered:
1. Retail Banks:
Retail banks provide basic banking services to individual consumers. Examples include savings banks, savings and loan associations, and recurring and fixed deposits. Products and services include safe deposit boxes, checking and savings accounting, certificates of deposit (CDs), mortgages, personal, consumer and car loans.
2. Commercial Banks:
Banking means accepting deposits of money from the public for the purpose of lending or investment. Commercial Banks provide financial services to businesses, including credit and debit cards, bank accounts, deposits and loans, and secured and unsecured loans.
Due to deregulation, commercial banks are also competing more with investment banks in money market operations, bond underwriting, and financial advisory work.
Commercial banks in modern capitalist societies act as financial intermediaries, raising funds from depositors and lending the same funds to borrowers. The depositors’ claims against the bank, their deposits, are liquid, meaning banks are expected to redeem deposits on demand, instantly.
Banks’ claims against their borrowers are much less liquid, giving borrowers a much longer span of time to repay money owed banks. Because a bank cannot immediately reclaim money lent to borrowers, it may face bankruptcy if all its depositors show up on a given day to withdraw all their money.
There are two types of commercial banks, public sector and private sector banks.
a) Public Sector Banks:
Public sectors banks are those in which the government has a major stake and they usually need to emphasize on social objectives than on profitability.
b) Private sector banks:
Private sector banks are owned, managed and controlled by private promoters and they are free to operate as per market forces.
3. Cooperative Banks:
Cooperative Banks are governed by the provisions of State Cooperative Societies Act and meant essentially for providing cheap credit to their members. It is an important source of rural credit i.e., agricultural financing in India.
4. Investment Banks:
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions, and provide ancillary services such as market making, trading of derivatives, fixed income instruments, foreign exchange, commodities, and equity securities.
Investment banks aid companies in acquiring funds and they provide advice for a wide range of transactions. These banks also offer financial consulting services to companies and give advice on mergers and acquisitions and management of public assets.
5. Specialized Banks:
Specialized banks are foreign exchange banks, industrial banks, development banks, export-import banks catering to specific needs of these unique activities. These banks provide financial aid to industries, heavy turnkey projects and foreign trade.
6. Central Banks:
Central banks are bankers’ banks, and these banks trace their history from the Bank of England. They guarantee stable monetary and financial policy from country to country and play an important role in the economy of the country. Typical functions include implementing monetary policy, managing foreign exchange and gold reserves, making decisions regarding official interest rates, acting as banker to the government and other banks, and regulating and supervising the banking industry.
These banks buy government debt, have a monopoly on the issuance of paper money, and often act as a lender of last resort to commercial banks. The term bank nowadays refers to these commercial banks. The Central bank of any country supervises controls and regulates the activities of all the commercial banks of that country. It also acts as a government banker. It controls and coordinates currency and credit policies of any country. The Reserve Bank of India is the central bank of India.
UNIT-2
Q.1 Define Cheque. Explain Feature and Types of Cheque.
What is a Cheque ? Meaning
Cheque is an important negotiable instrument which can be transferred by mere hand delivery. Cheque is used to make safe and convenient payment. It is less risky and the danger of loss is minimised.
Definition of a Cheque
"Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument."
Feature of Cheque
1. Cheque is an instrument in writing
A cheque must be in writing. It can be written in ink pen, ball point pen, typed or even printed. Oral orders are not considered as cheques.
2. Cheque contains an unconditional order
Every cheque contains an unconditional order issued by the customer to his bank. It does not contains a request for payment. A cheque containing conditional orders is dishonoured by the bank.
3. Cheque is drawn by a customer on his bank
A cheque is always drawn on a specific bank mentioned therein. Cheque drawn by stranger are of no meaning. Cheque book facility is made available only to account holder who are supposed to maintain certain minimum balance in the account.
4. Cheque must be signed by customer
A cheque must be signed by customer (Account holder) . Unsigned cheques or signed by persons other than customers are not regarded as cheque.
5. Cheque must be payable on demand
A cheque when presented for payment must be paid on demand. If cheque is made payable after the expiry of certain period of time then it will not be a cheque.
6. Cheque must mention exact amount to be paid
Cheque must be for money only. The amount to be paid by the banker must be certain. It must be written in words and figures.
7. Payee must be certain to whom payment is made
The payee of the cheque should be certain whom the payment of a cheque is to be made i.e. either real person or artificial person like joint stock company. The name of the payee must be written on the cheque or it can be made payable to bearer.
8. Cheque must be duly dated by customer of bank
A cheque must be duly dated by the customer of bank. The cheque must indicate clearly the date, month and the year. A cheque is valid for a period of three months from the date of issue.
9. Cheque has 3 parties : Drawer, Drawee & Payee
- Drawer : A drawer is a person, who draws a cheque.
- Drawee : A drawee is a bank on whom a cheque is drawn.
- Payee : A payee is a person in whose favour a cheque is drawn.
Types of Cheque.
v A cheque which is payable to a particular person or his order is called an order cheque.
v This is a cheque whereby the printed word “Bearer” on the cheque is cancelled. The cancellation of the word “Bearer” automatically makes the cheque an “order” cheque.
v An order cheque can be paid to the named payee across the bank’s account if so presented.
v Identification must be insisted on by the bank when encashing the order cheque for the presenter. The ID number and the named payee’s signature will be asked for on the back of the cheque.
2. Bearer Cheque :
v A cheque which is payable to a person whosoever bears, is called bearer cheque.
v The cheque sometimes can be made payable to “Cash” or bearer or made payable to a specific name, for example, “bujji sekhar or Bearer”.
v This cheque is payable by the drawee bank over the counter to the Bearer or presenter of the cheque.
v A Bearer cheque can be negotiated or pass to another person by mere delivery. In other words, the holder (or the Transferer), when giving it to another person need not endorse the cheque.
v No identification is needed when a bearer cheque is presented for encashment. However, in normal banking practice, where the amount of the cheque is substantial, the identity of the encasher is insisted on.
v A bearer cheque can be collected by the bank for the credit of anyone’s account
v In banking practice, the need for the encasher’s signature on the back of the cheque is merely to evidence that the encasher has received the money from the bank.
3. Blank Cheque:
v A cheque on which the drawer puts his signature and leaves all other columns blank is called a blank cheque.
v A check that is signed by the payer but with no specific amount indicated, leaving this determination up to the drawee.
v More generally, a term used for any situation in which an usually high level of trust is afforded by one party to another.
v “ My wife must have a high level of trust for her sister, because when she asked to borrow some money my wife gave her a blank check. ”
4. Counter cheque:
v Blank cheque was also commonly used as a synonym for counter cheque. requiring that cheque be MICR encoded in order to be handled by their clearing houses, it was fairly common for banks, especially in small towns, to issue cheque to customers which were not personalized other than the name of the bank.
v Businesses would have pads of counter cheque which did not even have the bank specified on them – the customer had to not only fill in the value of the cheque, the date, and their signature, but also had to designate the bank on which funds were to be drawn.
5. Stale Cheque:
v Check presented at the paying bank after a certain period (typically six months) of its payment date. A stale check is not an invalid check, but it may be deemed an ‘irregular’ bill of exchange. A bank may refuse to honor it unless its drawer reconfirms it payment either by inserting a new payment date or by issuing a new check. Also called stale dated check.
v *NOW __The cheque which is more than three months old is a stale cheque.
v Eg. If Mr.CooL issues cheque to Miss. Bujji, if Mr. CooL has issued cheque from his SBI A/c then SBI is a drawee bank.
v The banking regulation Act has not define specific period after which the instrument (cheque) becomes stale. Some of the banks write specific instruction on the cheque where the validity period is mentioned. In such case the cheque will become stale after expiry of the period from the date of issue (date on the instrument)
6. Multilated Cheque:
v If a cheque is torn into two or more pieces such cheque is Mutilated Cheque. If it presented for payment, such a cheque the bank will not make payment against such a cheque without getting confirmation of the drawer. In case, if a cheque is torn at the corners and no material fact is erased or cancelled, the bank may make payment against such a cheque.
v If the payee is clear, signature and the MICR line intact – they can process it. There are sealable plastic carriers used to put such cheques through the high speed transports used in Clearing.
7.Post Dated Cheque:
v If a cheque bears a date later than the date of issue, it is termed as post dated cheque.
v Any check or draft that has a future date written upon it by the user. The amount of the check will not be drawn from the account until the date written on the check. For example, a check written on the 14th of the month but dated for the 28th will not be cashed for another two weeks.
8.Open Cheque:
v A cheque that is not a crossed cheque. The person whose name appears on the cheque can write the name of another person on it, and the money will be paid to them.
v An open cheque is a cheque that is not crossed on the left corner and payable at the drawee bank on presentation of the cheque.
v The words ‘OPEN’ should not be struck off and the person issuing the cheque should sign on the reverse of the cheque also before giving it to another person; otherwise the bank may refuse payment. The latter can collect the money from any branch of the bank nowadays, depending on the bank. S/he should also sign at the back of the cheque while receiving the amount.
9.Crossed Cheque
v A crossed cheque is one which has two short parallel lines marked across its face.
v A cheque which carries too parallel transverse lines across the face of the cheque with or without the words “I and co”, is said to be crossed.
v Crossed cheques are of two types. By simply crossing a cheque or with the words ” & Co”, by the payer, the payee can either deposit it in his/her account or endorse it in favour of another person on the reverse. This practice is nowadays not accepted by the banks.
v The advantage of crossing is that it reduces the danger of unauthorised persons getting possession of a cheque and cashing it. A crossed cheque can only be cashed through a bank of which the payee of the cheque is a customer.
v A cheque crossed generally will be paid to any bank through which it is presented.
v A cheque crossed specially will be paid only when it is presented for collection by the bank named between the parallel lines. Such crossing affords a greater measure of protection against loss.
10. Gift Cheques
v Gift cheque, it is a cheque forirted in decorative form issued for a small extra charge by the banks for use by customers who wish to give presents of money on special occasions.
v Gift cheques may be purchased in unlimited numbers from every branch of the ‘X’ Bank.
v Gift cheques may be used to give presents of money as
· Birthday Gift
· Wedding Gift
· Honour Gift
· EASI SMART Gift
v Gift cheques are used for offering presentations on occasions like birthday, weddings and such other situations. It is available in various denominations.
Features and Benefits
· Convenient
· Pre-denominated
· Elegant – Improve promotional impact with packaging customization and personalization options
· Flexible – Provide redemption flexibility by offering the reward with no expiration date
· Replaceable – Protect your investment and offer Reward Earners increased security and peace of mind with lost and stolen Cheque protection
· Simple – Order and administer rewards easily for timely reinforcement
· Reliable – Feel at ease with the American Express brand name — it conveys reliability, security and prestige
11.Traveller’s Cheques:
It is an instrument issued by a bank for remittance of money from one place to another.
Travelers Cheques are accepted almost everywhere and are available in many denominations. Plus, the no-expiration feature allows you to cash in leftover cheques or retain them for the next time you travel.
BENEFITS
· Convenience : Easy to use. Secured to protect your money when on the move.
· Choice : Available in United States Dollars (USD), Great Britain Pounds (GBP), EURO, Japanese Yen (JPY), Australian Dollars (AUD) and Canadian dollars (CAD).
· Acceptance : Accepted worldwide in over 400,000 locations spread across 200 countries. TCs can be encashed or used at Exchange bureaus, Banks, Hotels Shops, Restaurants and other establishments.
· Security : Signature based security. If your cheques are lost or stolen, the 24 hour Call Centre is just a phone call away. Replacement of lost TCs is attended to on priority across the world.
· Buy-Back : When you return back to India, you can encash any unused TCs issued by us, at any of the Axis Bank Branches.
· Expiry : Valid forever! You can save any unused Travellers Cheques for future trips.
12. Self cheques:
v A self cheque is written by the account holder as pay self to receive the money in the physical form from the branch where he holds his account.
v If your friend wants to pay YOU the amount of 10000/-, he/she should have written YOUR NAME in the space provided for PAYEE on the cheque. If he/she has written SELF in that area, it is supposed to be used by him (or the bearer as written on the cheque) and whoever possess that cheque can go to the same branch and bank of the account holder to cash the cheque.
v Some banks may honour cheques in their other branches than the account holder branch. However, this cannot be encashed in any other BANK.
v You can either encash it by visitng the bank and the branch of your friend’s account or should return or tear this cheque off (If lost, the person who finds it can get it cashed from the bank and branch mentioned on the cheque) and ask for another cheque in your name that you can deposit in your account.
13. Bankers Cheque:
v The banker’s cheque is an instrument issued by the bank on behalf of customer containing an order to pay a certain sum to a specified person within the city. The validity period of the Banker’s cheque is 3 months, however it can be re-validated subject to some legal formalities.
v In Banker’s cheque the chances of dishonor is not possible because it is always prepaid. It is always pre-printed with the words ‘not negotiable’ which means it cannot be further negotiated.
v Banker’s Cheque or Payment Order is a cheque issued for making payments within the same city.
v Banker’s cheque is valid up to 3 months from the date of issue.
v All banker’s cheque are pre-printed with “NOT NEGOTIABLE”.
v It can be cleared in any branch of the same city.
14. Outstanding cheque:
A cheque which has been written and therefore has been entered in the company’s ledgers, but which has not been presented for payment and so has not been debited from the company’s bank account
Q.2 what is crossing of Cheque?
A cheque is a negotiable instrument. During the process of circulation, a cheque may be lost, stolen or the signature of payee may be done by some other person for endorsing it. Under these circumstances the cheque may go into wrong hands.
Crossing is a popular device for protecting the drawer and payee of a cheque. Both bearer and order cheques can be crossed. Crossing prevents fraud and wrong payments. Crossing of a cheque means "Drawing Two Parallel Lines" across the face of the cheque. Thus, crossing is necessary in order to have safety. Crossed cheques must de presented through the bank only because they are not paid at the counter.
Different Types of Crossing
1. General Crossing :-
Generally, cheques are crossed when
- There are two transverse parallel lines, marked across its face or
- The cheque bears an abbreviation "& Co. "between the two parallel lines or
- The cheque bears the words "Not Negotiable" between the two parallel lines or
- The cheque bears the words "A/c. Payee" between the two parallel lines.
A crossed cheque can be made bearer cheque by cancelling the crossing and writing that the crossing is cancelled and affixing the full signature of drawer.
2. Special or Restrictive Crossing :-
When a particular bank's name is written in between the two parallel lines the cheque is said to be specially crossed.
In addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also be written. The payment of such cheque is not made unless the bank named in crossing is presenting the cheque. The effect of special crossing is that the bank makes payment only to the banker whose name is written in the crossing. Specially crossed cheques are more safe than a generally crossed cheques.
UNIT-3
Q.1 WRITE A BRIEF NOTE ON ENDORSEMENT
Endorsement is the act of signing a cheque for the purpose of transferring it to somebody else. Under Negotiable Instruments Act it means the writing of ones name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein. A bearer cheque can be transferred by mere delivery but an order cheque is transferred by endorsement and delivery. Endorsements are usually made on the back of the cheque, though they can be made on its face as well. If, however, no space is left on the instrument, it may be made on a separate paper attached to it.
Q.2 REMITTANCE BUSINESS
Apart from accepting deposits and lending money, Banks also carry out, on behalf of their customers the act of transfer of money - both domestic and foreign.- from one place to another. This activity is known as "remittance business" . Banks issue Demand Drafts, Banker's Cheques, Money Orders etc. for transferring the money. Banks also have the facility of quick transfer of money also know as Telegraphic Transfer or Tele Cash Orders.
In Remittance business, Bank 'A' at a place 'a' accepts money from customer 'C' and makes arrangement for payment of the same amount of money to either the customer 'C' or his "order" i.e. a person or entity, designated by 'C' as the recipient, through either a Branch of Bank 'A' or any other entity at place 'b'. In return for having rendered this service, the Banks charge a pre-decided sum known as exchange or commission or service charge. This sum can differ from bank to bank. This also differs depending upon the mode of transfer and the time available for effecting the transfer of money. Faster the mode of transfer, higher the charges.
(A) DEMAND DRAFT
Demand draft is discussed in section 85(A) of the NI Act.
A Demand draft is an order to pay money drawn at one office of a Bank upon another office of the same bank for a sum of money payable to order on demand.
1. What is a Bank Draft or Demand Draft ?
Bank Draft is also called as Demand Draft, in short, DD. DDis a special type of cheque. It is drawn by a bank on any of the branches of the same bank. It is used for remitting money from one place to another place. It is the cheapest mode of sending money. It is an order to pay money on demand.
The person who wants to send the money has to approach bank, he has to fill an application form and has to pay the required amount with commission (bank's service charge). After getting the draft, applicant has to send it by post to the party at the other place.
DD is like a cheque, therefore it can also be crossed. When the other party receives it, has to present it to the bank for payment. It is the easiest and safest way of sending money from one place to another place.
Cheque and Demand Draftsboth are used for the purpose of payments. Since it is not always possible to give the money in cash to another person or party, they are popular for doing the payments. Since the banks are involved in between the payment process, the currency paid is considered to be authentic.
DEMAND DRAFT
Also known as DD, it is kind of a pre-paid negotiable instrument that is used to direct payments from one bank to another bank or one of its own branches to pay a certain sum to the specified party.
- When a bank gets request for the issue of a DD by any individual or party, it either deducts the money from the bank account (if the individual/party has bank account in that bank) or individual/party has to give the amount in cash not exceeding Rs 50,000. In case of amount exceeding Rs 50,000, the payment is to be made by cheque along with giving the PAN No.
- Like a cheque, DD also contains DD number and MICR No. at the bottom. DDs can also be used for making payments abroad by issuing a draft in foreign currency.
CHEQUE
A cheque is a negotiable instrument drawn on a specified banker and not expressed to be payable otherwise than on demand and cheque also includes the electronic image of a truncated cheque and a cheque in the electronic form.
- ‘a cheque in the electronic form‘ means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature and asymmetric crypto system.
- ‘a truncated cheque‘ means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment. After the generation of an electronic image for transmission, the image substitutes the physical movement of the cheque in writing.
Comparison Chart
| Basis for Comparison | Cheque | Demand Draft |
| Meaning | Cheque is a negotiable instrument which contains an order to the bank, signed by the drawer, to pay a certain sum of money to a specified person. | Demand Draft is a negotiable instrument used for the transfer of money from one place to another. |
| Payment | Payable either to order or to bearer. | Always payable to order of a certain person. |
| Issuance | Cheque is issued by an individual. | Demand Draft is issued by a bank. |
| Bank Charges | No | Yes |
| Drawer | Customer of the bank. | Bank itself. |
| Parties Involved | Three Parties- Drawer, Drawee, Payee. | Two Parties- Drawer, Payee. |
| Dishonour | Yes, due to insufficient balance or other similar reasons. | No |
(B) MAIL TRANSFERS OR MAIL ORDERS
DEFINITION of 'Email Money Transfer - EMT'
v A retail banking service that allows users to transfer funds between personal accounts using email and their online banking service. Email money transfers are considered secure because only the notification of transfer is done through email. The actual funds are settled through the existing funds transfer networks that banks have used for years.
v Mail and Telegraphic Transfer is another method of sending money from one place to another place by using the letter (mail). The mail transfer (MT) is possible only when the sender (remitter) and the receiver (remittee) both are having bank accounts in the same bank, but at different branches. Generally, no charges are charged by bank for mail transfer. In this the remitter has to inform his bank to transfer a certain amount from his account to the another person's account in other branch of the same bank. The details of the remittee (receiver) such as his name, account number, the branch where he has account, etc. must be provided to the bank.
(C) TELEGRAPHIC TRANSFERS OR TELE ORDERS
v This is similar to the Mail Transfer except that the message is sent to center 'B' by way of a telegram and the money is deposited the next day. The mode of instructions nowadays is increasingly the fax.
v Largely obsolete method of transferring funds through a telegraph or telex link. Also called wire transfer, it has been replaced by secure cable and wireless telecommunications networks.
(D) WHAT IS AN OVERDRAFT ? EXPLAIN OVERDRAFT FACILITY
Overdraft is one type of loan given by the bank to its current account holder. When bank allows the current account holder to withdraw amount over and above the credit balance as per an agreement then it is called as Overdraft Facility. Overdraft is a short term loan but it can be continued from time to time. Banks give this facility after taking security or personal guarantee. This overdraft is a kind of temporary loan and bank charges interest on actual amount which is overdrawn by the customer i.e. account holder. They are allowed to overdraw the amount up to a certain limit by issuing cheques to other parties or for own business use, from their current accounts. Overdraft facility is given generally, for few months.
Earlier this month there was some newspaper reports about how a reputed bank in Bengaluru identified fake demand drafts (DD), and alerted the police. In this case the bar codes in the fake DDs lacked magnetic ink and were not readable on the MICR and this along with other vital clues helped stop the fraud.
So, in a way the MICR codes saved the day for the bank! However, this is not the only use of MICR! There are many more uses. But before that let us see what the MICR is all about! What does it comprise of? Most importantly how is it useful to you?
(E) MICR (MAGNETIC INK CHARACTER RECOGNITION) CHEQUE ?
v Many of you would have seen the magnetic inks bar codes printed on the bottom of your bank's cheque leaves. These bar codes are known as MICR code, an abbreviation for 'Magnetic Ink Character Recognition'.
v Actually, the MICR is the name given to the technology used in printing the code.
v In the early 1980s the Reserve Bank of India introduced many new modes for safe and effective payments across the country. One such important mode introduced was the unique system of MICR based cheque clearing system.
v Apart from being a security bar code to protect your transaction, the MICR code is also an indispensable part for online money transfers. Every bank branch is given a unique MICR code and this helps the RBI to identify the bank branch and speed up the clearing process.
DEFINITION of 'Magnetic Ink Character Recognition Line - MICR'
v The information that appears at the bottom of a check that includes the bank's routing number, the customer's account number, and the check number. The magnetic ink character recognition line is printed using technology that allows computers to read the printed information. Using MICR, computers can quickly read routing numbers, account numbers and other information from printed documents including checks. MICR numbers, letters and symbols are printed with magnetic ink or toner, usually in one of two major MICR fonts. The magnetic ink allows the computer to read the characters even if they have been covered with signatures, cancellation marks or other marks.
v MICR stands for Magnetic Ink Character Recognition. It is a technology which allows machines to read and process cheques enabling thousands of cheque transactions in a short time. MICR code is usually a nine digit code comprising of some important information about the transaction and the bank.
v The first three digits in the MICR code represent the city code that is the city in which the bank branch is located. In most cases it is in line with the PIN code of the postal addresses in India. The next three digits stand for the bank code while the last three digits represent the bank branch code.
For example, if you have an account with Axis Bank,New Delhi (Defence Colony) then its nine digit MICR code will be 110211004 where:
110, the first three digits representing the city code for New Delhi;
211, the next three digits representing the bank code for Axis bank;
And 004, the last three digits representing the bank branch code for Defence Colony.
( Extra Information About MICR)
What does it comprise?
v The MICR code has nine digits in it with each three digits signifying some important information about the transaction and the bank. The first three digits in the MICR code represent the city code that is the city in which the bank branch is located.
v In most cases it is in line with the PIN code of the postal addresses in India.
v The next three digits stand for the bank code while the last three digits represent the bank branch code.
v For example, if you have an account with State Bank of India (SBI) Mumbai (Central) then its nine digit MICR code will be 400002009 wherein:
v 400, the first three digits representing the city code for Mumbai;
v 002, the next three digits representing the bank code for SBI;
v And 009, the last three digits representing the bank branch code for Andheri (West).
v You can check the MICR codes of different banks and its branches by checking it out on the RBI website.
How does MICR help speed up the processing of cheques?
v Unlike the manual clearing of cheques where there is a possibility of many human errors and subsequent delay in clearing, the MICR code on the cheque printed with a unique magnetic ink usually iron oxide has magnetic material present in it and thus makes it machine-readable and almost error proof!
v Under this method the reading machine or a cheque sorting machine reads through a cheque when inserted and identifies the branch the cheque belongs to and activates the automation clearing process.
v The MICR code is so clear and fine that the machine could read it even if the MICR code isn't visible due to other marks or stamps on it.
v According to the Reserve Bank of India report (Payments in India: Vision 2009-2012), all bank branches will be enabled with MICR codes.
v Also, the RBI intends to reduce paper-based clearing process by introducing MICR- Cheque Processing Centres that will process over 95 per cent of volume and value of cheques processed in the country.
DIFFERENCE BETWEEN IFSC CODE & MICR CODE
| IFSC code | MICR code |
| Full form- Indian Financial System Code | Full form- Magnetic Ink Character Recognition |
| Definition- It is an alphanumeric code that uniquely identifies the bank branch participating in the two main electronic funds settlement system; that is NEFT and RTGS. | Definition- It can be defined as a character – recognition technology us mainly by the banking industry to ease the processing and clearance of cheques and other documents. |
| Uses- 1. It is use to transfer funds of higher amounts as well as lesser amount through NEFT (National Electronic Fund Transfer) & RTGS (Real Time Gross Settlement). 2. It is use for one to one transaction and to transfer money quickly to beneficiary’s account. | Uses- 1. It is used for ensuring the safety and security of negotiable instruments, to facilitate the processing of the cheques. 2. This code is written with the special magnetic ink, thus fraud cases can easily determined by checking it through magnetic scanner |
| Position- IFSC code is always found on the top in the cheques right below the branch written of that bank. | Position- MICR code is always found on the mid-bottom of the cheques just next to cheque number. |
| Character- IFSC code contains 11 characters-
| Digit- MICR code contains 9 digits-
|
| Example- Screen shot of IDBI Bank cheque;
IBKL represents bank – IDBI bank
| Example- Screen shot of IDBI Bank cheque;
400 represents city – Mumbai
|
(F) Tele banking
Provision of certain banking services (such as account balance inquiry, funds transfer, and payment of bills) through telephone.
Q.3 CORE BANKING
A core banking system is the software used to support a bank’s most common transactions.
Elements of core banking include:
- Making and servicing loans.
- Opening new accounts.
- Processing cash deposits and withdrawals.
- Processing payments and cheques.
- Calculating interest.
- Customer relationship management (CRM) activities.
- Managing customer accounts.
- Establishing criteria for minimum balances, interest rates, number of withdrawals allowed and so on.
- Establishing interest rates.
- Maintaining records for all the bank’s transactions.
Core banking functions differ depending on the specific type of bank. Retail banking, for example, is geared towards individual customers; wholesale banking is business conducted between banks; and securities trading involves the buying and selling of stocks, shares and so on. Core banking systems are often specialized for a particular type of banking. Products that are designed to deal with multiple types of core banking functions are sometimes referred to as universal banking systems.
Q.4 ATM (Automated Teller Machines) , SHORT NOTE
ATM plastic card
ATM cards enable you to carry financial transactions from your savings, current account or credit card accounts. To access an ATM, you need to insert your plastic card into the Automatic teller machine. The machine reads the magnetic strip at the back of the ATM card, which contains cardholder account details. To confirm access by genuine cardholder, you will be requested to key in a personal identification number (PIN). This number (usually four-digit) is a system-generated number that will be provided at the time of opening the account. You can opt to change the PIN number by requesting for a change either by contacting the bank or by using the ATM machine. Once the right PIN number is typed, the ATM recognizes the cardholder details and account details. Other details that you may find embossed on ATM cards are:
In the front:
•Name of issuing financial institution/Bank
•Card number
•Period of validity
•Name of card holder
•Specific logos
On the back:
•Magnetic strip
•Space for cardholder's authorized signature
•Card issuer contact details
•Terms and conditions of usage
Preventing ATM Fraud
Bank ATM cards are used to withdraw money, find balance in account and transfer moeny. Credit cards are also used at ATMs to avail cash advance facility or to makepayments towards credit card transactions. These plastic cards provide access to ATMs,connect to your account (Savings, Current or Credit card account) and facilitate carryingout desired financial transactions. Generally individuals are exposed to ATM fraudswhen the card is lost, the ATM card is handed over to someone else or when theconfidentiality of PIN is not adhered to.
Easy tips to protect from possible ATM frauds:
1) Keep ATM card in your possession.
2) Maintain PIN Confidentiality.
3) Retain Transaction slips.
4) Destroy unwanted slips.
5) Never trust strangers.
6) Don't rush.
7) Maintain distance: Make sure that the person standing behind you cannot read your transactions while operating the ATM. Some thieves resort to this 'shoulder surfing' to retrieve sensitive ATM card information.
8) Retrieve card: After completing your transactions wait for the ATM to push out your card. Never leave the ATM location without your card.
9) Destroy old cards.
10) Report to bank: If your card is misplaced, do report immediately to the bank and request for a replacement. You can call up the 24-hour service or toll-free numbers and deal with the emergency at once.
ATMs have many advantages, some of which are given below:
(i) In ATM one can draw cash round the clock (for 24 hours a day) and no employee interface is required.
(ii)ATM provides customer not having credit card facilities an alternative for obtaining cash when required.
(iii)It eliminates the need for the customers to travel to the branch at which his accounts are maintained if the machines are conveniently located and networked.
(iv)Automatic and instantaneous accounting is possible.
(u) When labour cost is high the technology provides a cost effective solution.
(vi)Customers can deposit cash/instruments and leave instructions for the requirements of statement of accounts, transfer, etc.
(vii)As transactions are handled through software, without cash or instruments scope for frauds, robberies and misappropriation is reduced.
UNIT-2
Q.1 Define Cheque. Explain Feature and Types of Cheque.
What is a Cheque ? Meaning
Cheque is an important negotiable instrument which can be transferred by mere hand delivery. Cheque is used to make safe and convenient payment. It is less risky and the danger of loss is minimised.
Definition of a Cheque
"Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument."
Feature of Cheque
1. Cheque is an instrument in writing
A cheque must be in writing. It can be written in ink pen, ball point pen, typed or even printed. Oral orders are not considered as cheques.
2. Cheque contains an unconditional order
Every cheque contains an unconditional order issued by the customer to his bank. It does not contains a request for payment. A cheque containing conditional orders is dishonoured by the bank.
3. Cheque is drawn by a customer on his bank
A cheque is always drawn on a specific bank mentioned therein. Cheque drawn by stranger are of no meaning. Cheque book facility is made available only to account holder who are supposed to maintain certain minimum balance in the account.
4. Cheque must be signed by customer
A cheque must be signed by customer (Account holder) . Unsigned cheques or signed by persons other than customers are not regarded as cheque.
5. Cheque must be payable on demand
A cheque when presented for payment must be paid on demand. If cheque is made payable after the expiry of certain period of time then it will not be a cheque.
6. Cheque must mention exact amount to be paid
Cheque must be for money only. The amount to be paid by the banker must be certain. It must be written in words and figures.
7. Payee must be certain to whom payment is made
The payee of the cheque should be certain whom the payment of a cheque is to be made i.e. either real person or artificial person like joint stock company. The name of the payee must be written on the cheque or it can be made payable to bearer.
8. Cheque must be duly dated by customer of bank
A cheque must be duly dated by the customer of bank. The cheque must indicate clearly the date, month and the year. A cheque is valid for a period of three months from the date of issue.
9. Cheque has 3 parties : Drawer, Drawee & Payee
- Drawer : A drawer is a person, who draws a cheque.
- Drawee : A drawee is a bank on whom a cheque is drawn.
- Payee : A payee is a person in whose favour a cheque is drawn.
Types of Cheque.
1. Order Cheque:
v A cheque which is payable to a particular person or his order is called an order cheque.
v This is a cheque whereby the printed word “Bearer” on the cheque is cancelled. The cancellation of the word “Bearer” automatically makes the cheque an “order” cheque.
v An order cheque can be paid to the named payee across the bank’s account if so presented.
v Identification must be insisted on by the bank when encashing the order cheque for the presenter. The ID number and the named payee’s signature will be asked for on the back of the cheque.
2. Bearer Cheque :
v A cheque which is payable to a person whosoever bears, is called bearer cheque.
v The cheque sometimes can be made payable to “Cash” or bearer or made payable to a specific name, for example, “bujji sekhar or Bearer”.
v This cheque is payable by the drawee bank over the counter to the Bearer or presenter of the cheque.
v A Bearer cheque can be negotiated or pass to another person by mere delivery. In other words, the holder (or the Transferer), when giving it to another person need not endorse the cheque.
v No identification is needed when a bearer cheque is presented for encashment. However, in normal banking practice, where the amount of the cheque is substantial, the identity of the encasher is insisted on.
v A bearer cheque can be collected by the bank for the credit of anyone’s account
v In banking practice, the need for the encasher’s signature on the back of the cheque is merely to evidence that the encasher has received the money from the bank.
3. Blank Cheque:
v A cheque on which the drawer puts his signature and leaves all other columns blank is called a blank cheque.
v A check that is signed by the payer but with no specific amount indicated, leaving this determination up to the drawee.
v More generally, a term used for any situation in which an usually high level of trust is afforded by one party to another.
v “ My wife must have a high level of trust for her sister, because when she asked to borrow some money my wife gave her a blank check. ”
4. Counter cheque:
v Blank cheque was also commonly used as a synonym for counter cheque. requiring that cheque be MICR encoded in order to be handled by their clearing houses, it was fairly common for banks, especially in small towns, to issue cheque to customers which were not personalized other than the name of the bank.
v Businesses would have pads of counter cheque which did not even have the bank specified on them – the customer had to not only fill in the value of the cheque, the date, and their signature, but also had to designate the bank on which funds were to be drawn.
5. Stale Cheque:
v Check presented at the paying bank after a certain period (typically six months) of its payment date. A stale check is not an invalid check, but it may be deemed an ‘irregular’ bill of exchange. A bank may refuse to honor it unless its drawer reconfirms it payment either by inserting a new payment date or by issuing a new check. Also called stale dated check.
v *NOW __The cheque which is more than three months old is a stale cheque.
v Eg. If Mr.CooL issues cheque to Miss. Bujji, if Mr. CooL has issued cheque from his SBI A/c then SBI is a drawee bank.
v The banking regulation Act has not define specific period after which the instrument (cheque) becomes stale. Some of the banks write specific instruction on the cheque where the validity period is mentioned. In such case the cheque will become stale after expiry of the period from the date of issue (date on the instrument)
6. Multilated Cheque:
v If a cheque is torn into two or more pieces such cheque is Mutilated Cheque. If it presented for payment, such a cheque the bank will not make payment against such a cheque without getting confirmation of the drawer. In case, if a cheque is torn at the corners and no material fact is erased or cancelled, the bank may make payment against such a cheque.
v If the payee is clear, signature and the MICR line intact – they can process it. There are sealable plastic carriers used to put such cheques through the high speed transports used in Clearing.
7.Post Dated Cheque:
v If a cheque bears a date later than the date of issue, it is termed as post dated cheque.
v Any check or draft that has a future date written upon it by the user. The amount of the check will not be drawn from the account until the date written on the check. For example, a check written on the 14th of the month but dated for the 28th will not be cashed for another two weeks.
8.Open Cheque:
v A cheque that is not a crossed cheque. The person whose name appears on the cheque can write the name of another person on it, and the money will be paid to them.
v An open cheque is a cheque that is not crossed on the left corner and payable at the drawee bank on presentation of the cheque.
v The words ‘OPEN’ should not be struck off and the person issuing the cheque should sign on the reverse of the cheque also before giving it to another person; otherwise the bank may refuse payment. The latter can collect the money from any branch of the bank nowadays, depending on the bank. S/he should also sign at the back of the cheque while receiving the amount.
9.Crossed Cheque
v A crossed cheque is one which has two short parallel lines marked across its face.
v A cheque which carries too parallel transverse lines across the face of the cheque with or without the words “I and co”, is said to be crossed.
v Crossed cheques are of two types. By simply crossing a cheque or with the words ” & Co”, by the payer, the payee can either deposit it in his/her account or endorse it in favour of another person on the reverse. This practice is nowadays not accepted by the banks.
v The advantage of crossing is that it reduces the danger of unauthorised persons getting possession of a cheque and cashing it. A crossed cheque can only be cashed through a bank of which the payee of the cheque is a customer.
v A cheque crossed generally will be paid to any bank through which it is presented.
v A cheque crossed specially will be paid only when it is presented for collection by the bank named between the parallel lines. Such crossing affords a greater measure of protection against loss.
10. Gift Cheques
v Gift cheque, it is a cheque forirted in decorative form issued for a small extra charge by the banks for use by customers who wish to give presents of money on special occasions.
v Gift cheques may be purchased in unlimited numbers from every branch of the ‘X’ Bank.
v Gift cheques may be used to give presents of money as
· Birthday Gift
· Wedding Gift
· Honour Gift
· EASI SMART Gift
v Gift cheques are used for offering presentations on occasions like birthday, weddings and such other situations. It is available in various denominations.
Features and Benefits
· Convenient
· Pre-denominated
· Elegant – Improve promotional impact with packaging customization and personalization options
· Flexible – Provide redemption flexibility by offering the reward with no expiration date
· Replaceable – Protect your investment and offer Reward Earners increased security and peace of mind with lost and stolen Cheque protection
· Simple – Order and administer rewards easily for timely reinforcement
· Reliable – Feel at ease with the American Express brand name — it conveys reliability, security and prestige
11.Traveller’s Cheques:
It is an instrument issued by a bank for remittance of money from one place to another.
Travelers Cheques are accepted almost everywhere and are available in many denominations. Plus, the no-expiration feature allows you to cash in leftover cheques or retain them for the next time you travel.
BENEFITS
· Convenience : Easy to use. Secured to protect your money when on the move.
· Choice : Available in United States Dollars (USD), Great Britain Pounds (GBP), EURO, Japanese Yen (JPY), Australian Dollars (AUD) and Canadian dollars (CAD).
· Acceptance : Accepted worldwide in over 400,000 locations spread across 200 countries. TCs can be encashed or used at Exchange bureaus, Banks, Hotels Shops, Restaurants and other establishments.
· Security : Signature based security. If your cheques are lost or stolen, the 24 hour Call Centre is just a phone call away. Replacement of lost TCs is attended to on priority across the world.
· Buy-Back : When you return back to India, you can encash any unused TCs issued by us, at any of the Axis Bank Branches.
· Expiry : Valid forever! You can save any unused Travellers Cheques for future trips.
12. Self cheques:
v A self cheque is written by the account holder as pay self to receive the money in the physical form from the branch where he holds his account.
v If your friend wants to pay YOU the amount of 10000/-, he/she should have written YOUR NAME in the space provided for PAYEE on the cheque. If he/she has written SELF in that area, it is supposed to be used by him (or the bearer as written on the cheque) and whoever possess that cheque can go to the same branch and bank of the account holder to cash the cheque.
v Some banks may honour cheques in their other branches than the account holder branch. However, this cannot be encashed in any other BANK.
v You can either encash it by visitng the bank and the branch of your friend’s account or should return or tear this cheque off (If lost, the person who finds it can get it cashed from the bank and branch mentioned on the cheque) and ask for another cheque in your name that you can deposit in your account.
13. Bankers Cheque:
v The banker’s cheque is an instrument issued by the bank on behalf of customer containing an order to pay a certain sum to a specified person within the city. The validity period of the Banker’s cheque is 3 months, however it can be re-validated subject to some legal formalities.
v In Banker’s cheque the chances of dishonor is not possible because it is always prepaid. It is always pre-printed with the words ‘not negotiable’ which means it cannot be further negotiated.
v Banker’s Cheque or Payment Order is a cheque issued for making payments within the same city.
v Banker’s cheque is valid up to 3 months from the date of issue.
v All banker’s cheque are pre-printed with “NOT NEGOTIABLE”.
v It can be cleared in any branch of the same city.
14. Outstanding cheque:
A cheque which has been written and therefore has been entered in the company’s ledgers, but which has not been presented for payment and so has not been debited from the company’s bank account
Q.2 what is crossing of Cheque?
A cheque is a negotiable instrument. During the process of circulation, a cheque may be lost, stolen or the signature of payee may be done by some other person for endorsing it. Under these circumstances the cheque may go into wrong hands.
Crossing is a popular device for protecting the drawer and payee of a cheque. Both bearer and order cheques can be crossed. Crossing prevents fraud and wrong payments. Crossing of a cheque means "Drawing Two Parallel Lines" across the face of the cheque. Thus, crossing is necessary in order to have safety. Crossed cheques must de presented through the bank only because they are not paid at the counter.
Different Types of Crossing
1. General Crossing :-
Generally, cheques are crossed when
- There are two transverse parallel lines, marked across its face or
- The cheque bears an abbreviation "& Co. "between the two parallel lines or
- The cheque bears the words "Not Negotiable" between the two parallel lines or
- The cheque bears the words "A/c. Payee" between the two parallel lines.
A crossed cheque can be made bearer cheque by cancelling the crossing and writing that the crossing is cancelled and affixing the full signature of drawer.
2. Special or Restrictive Crossing :-
When a particular bank's name is written in between the two parallel lines the cheque is said to be specially crossed.
Specimen of Special or Restrictive Crossing ↓
In addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also be written. The payment of such cheque is not made unless the bank named in crossing is presenting the cheque. The effect of special crossing is that the bank makes payment only to the banker whose name is written in the crossing. Specially crossed cheques are more safe than a generally crossed cheques.
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