MAHENDRA ARTS & SCIENCE COLLEGE

(AUTONOMOUS)
Affiliated to Periyar University, Salem.
Accredited with „A++‟ Grade by NAAC, Recognized
under 2(f) & 12(B) of UGC Act, 1956
Kalippatti (Po), Tiruchengode (Tk), Namakkal (DT) – 637501.
___________________________________________________________________________

BANKING THEORY LAW & PRACTICE

PREPARED BY

FACULTY NAME : MDK.GAYATRI M.COM, PGDCA,

DEPARTMENT : COMMERCE WITH COMPUTER APPLICATION

CLASS : III - B.COM (CA) “B”

 BANKING THEORY LAW & PRACTICE

OBJECTIVE:

 To Familiarise students with the functions of commercial banks

 To expose the credit control measure of RBI to the students
 To update students with the changing trends in the banking industry

UNIT – I

Banking – Definition – Classification - Commercial Bank - Functions and Services.

UNIT - II

Reserve Bank of India – Origin – Functions – Role in Economic Development.

UNIT – III

E-Banking – Meaning – Traditional Banking Vs E-Banking – E-Banking – Services –

Benefits – Mobile Banking features and services.

UNIT – IV

Internet Banking – Services – Major Issues – Drawbacks- Indian Scenario – Concept

of ATM – ATM features – Mechanism – functions and strategic importance - CDM

UNIT – V

Recent development in Banking – RTGS – NEFT - IMPS

TEXT BOOK:

1. KPM. Sundaram & P.N.Varshny – Banking Theory, Law and Practice, Sultan Chand &
Sons, New Delhi.

2. B.S. Raman - Banking Theory Law and Practice, United Publishers.

REFERENCE BOOKS:
1. E. Gordon & K. Natarajan - Banking Theory, Law and Practice, Himalaya Publishing
House
2. S.N. Maheswari - Banking Law and Practice
3. Radhasamy - Banking Law and Practice

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 UNIT - I
BANKING

INTRODUCTION

 Banks are public service institutions dealing with the funds of the public.
 Banks obtain a very large proportion of their working capital from public in the form
of deposits
 There is a need to regulate the working of banks by a separate act.

ORIGIN OF THE ACT

 In India, there was no separate legislation for banking till 1949, so banks were
brought under the control of the Indian companies act.
 A bill was introduced in March 1948 and was passed in the parliament in Feb 1949.
 It came into force from 16th March 1949.
 This act was originally called the banking companies act 1949 and how it is renamed
as the banking regulation act 1949.

ORIGIN OF BANKING

Since the banking activities were started in different periods in different countries,
there is no unanimous view regarding the origin of the word „bank‟, The word, „bank‟ is said
to have derived from the French word „Banco” or „Bancus‟ or „Banc‟ or „Banque‟ which
means, a „bench‟.

In fact, the early Jews in Lombardly transacted their banking business by sitting on
benches. When their business failed, the benches were broken and hence, the word „bankrupt‟
came into vogue.

Another common held view is that the word „bank‟ might be originated from the
German word „back‟ which means a joint stock fund. Of course, a bank essentially deals with
funds. In due course, it was Italianised into “banco”, Frenchised into „bank‟ and finally
Anglicised into „bank‟.

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DEFINITION OF BANKING (Sec 5(b))

The term „Banking‟ is defined as “accepting, for the purpose of lending of

investment, of deposits of money from the public, repayable on demand or otherwise, and
withdrawal by cheque, draft, and order or otherwise”

Sec 5(c) defines a banking company as “any company which transact in business of
banking in India”.

THE SALIENT FEATURES OF THIS DEFINITION ARE AS FOLLOWS:

(i) A banking company must perform both of the essential functions, viz., (a)
accepting of deposits, and (b) lending or investing the same. If the purpose of accepting of
deposits is not to lend or invest, the business will not be called banking business.

(ii) The phrase „deposit of money from the public‟ is significant. The banker accepts
deposits of money and not of anything else. The word „public‟ implies that a banker accepts
deposits from anyone who offers his/her money for such purpose.

(iii) The definition also specifies the time and mode of withdrawal of the deposits.
The deposited money should be repayable to the depositor on demand made by the latter or
according to the agreement reached between the two parties.

MEANING & DEFINITION OF BANKER

A person who is doing the banking business is called a banker.

The bill of exchange act of 1882

Banker includes a body of persons whether incorporated or not who carry on the
business of banking.

Sec 3 of the negotiable instrument Act 1881

The term banker includes “a person or a corporation or a company acting as a

banker”.

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Sir John Paget‟s Definition

According to Sir John Paget, “No person or body, corporate or otherwise, can be a
banker who does not (i) take deposit accounts, (ii) take current accounts, (iii) issue and pay
cheques, and (iv) collect cheques, crossed and uncrossed, for his customers”.

DEFINITION OF A CUSTOMER

The term „Customer‟ of a bank is not defined by law. Ordinarily, a person who has
an account in a bank is considered its customer.

Sir John Paget, “To Constitute a customer, there must be some recognizable course
or habit of dealing in the nature of regular banking business.”

According to Dr. Hart, “A customer is one who has an account with a banker or for
whom a banker habitually undertakes to act as such.”

CLASSIFICATION (OR) TYPES OF BANKS

The banking institutions form an indispensable part in a modern developing society.

They perform varied functions to meet the demands of various sections of the society. On the
basis of the functions performed, the banks can be classified into the following types:

(1) Commercial Banks

The commercial banks mobilize deposit from the public which are repayable on
demand or at short notice. They lend to traders and manufacturers for short periods. They
provide the working capital to the business in the form of overdraft and cash credit. Besides,
the banks render a number of agency services such as collection of cheques and bills and
subsidiary services such as discounting bills of exchange, safe keeping the valuables, issue of
letters of credit, remittance of funds, etc. The services of banks are ever expanding with the
change in the needs and requirements of the society.

(2) Investment Banks or Industrial Banks

Investment banks provide medium and long-term finance to industries to meet their
fixed capital requirements. For existing industries, they lend for expansion and modernization
of industries. They help to promote new industries by underwriting the issue of securities.
The industrial banks secure funds through share capital and debentures.

5
 They also receive deposits from the public for long periods. Nowadays, the banks
provide technical guidance for the efficient management of industries.

(3) Exchange Banks

Exchange banks specialize in financing the foreign trade. They supply necessary
foreign exchange required for settlement of transactions in foreign trade. The exchange banks
discount foreign bills of exchange. Nowadays, commercial banks themselves undertake
foreign exchange business. So, there is no separate bank called foreign exchange bank.

(4) Co-operative Banks

Banks formed on the principle of cooperation are called cooperative banks. They
provide short-term credit to agriculturists, artisans, small farmers and small-scale industries.
Cooperative banks accept all kinds of deposits and make loan to the members at lower rate of
interest. The cooperative banks play a very useful role in financing agriculture and allied
activities.

(5) Land Development Banks

Agriculturists require short-term and long-term loans. Land development Banks

provide long-term loans to agriculturists for purchasing tools and equipment‟s and cattle and
making permanent improvement on land. The long-term loans are granted against the security
of immovable property such as land. Land development banks are organized on cooperative
basis in India. These banks raise their resources in the form of debentures and by issuing
long-term securities. The proceeds, thus, collected are utilized to advance loans to the
farmers. These banks are presently known as Agriculture and Rural Development Banks.

(6) Savings Banks

Savings banks are specialized institutions to collect savings from the poor and middle
income people of the society. These banks primarily intended to encourage habits of thrift
and savings among people with small incomes. The depositors are allowed to withdraw the
amount in times of need. But, there are restrictions on the number of withdrawals to be made
in a month. Separate savings banks are organized in various countries. In India, the
government runs savings bank and they are managed by the postal department.

6
 In most of the countries including India commercial banks do the function of savings
banks and encourage people to open savings account with them.

(7) Central Bank

Every country has generally one central bank. The central bank acts as the leader of
the money market, Supervising, controlling and regulating the activities of the commercial
banks and other financial institutions. It enforces monetary discipline to the country‟s
economy. It seeks to manage the issue and circulation of currency and control the creation of
bank deposits with a view to safeguarding the financial stability in the country. The central
bank functions in close touch with the government and assists in the implementation of its
economic policies. It serves as banker, agent and adviser to the government. Thus, the central
bank is the apex bank of the country in maintaining the monetary and economic stability.

COMMERCIAL BANKS

The term “bank” originally referred to an individual or organisation which acted as a

money changer and exchanged one currency for another. But these days, a bank is an
institution in which people keep their cash balances in the form of deposits.

According to Prof. Sayers, “Banks are institutions whose debt - usually referred to
as „bank deposits‟ - are commonly accepted in final settlement of other people‟s debts.”

According to the Banking Regulation Act, 1949, “Banking means the accepting for
the purpose of lending or investment of deposits of money from the public, repayable on
demand or otherwise, and withdrawal by cheque, draft, order or otherwise.”

The business of a commercial bank is primarily to hold deposits and make loans and
investments with the object of securing profits for its shareholders.

FUNCTIONS OF COMMERCIAL BANKS

(I) RECEIVING DEPOSITS FROM THE PUBLIC:

Commercial bank is to attract deposits from the public. Those who have cash balances
but who want to keep them in a safe place, deposit the same with a bank. The commercial
bank not only protects them but also provides the depositors with a convenient method for
transferring funds through the use of cheques.

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 It accepts deposits from every class and from every source and in all cases, without
exception, it undertakes to repay the money, either in part or in full, in legal tender money.

Deposits are of various types

(a) Demand deposits

(b) Savings deposits

(c) Fixed deposits

(a) Demand deposits:

Demand deposits also known as current accounts are those which can be withdrawn
by the depositor at any time by means of cheques. The bank does not pay any interest on
demand deposits but in fact makes a small charge on the customers with current account.

Demand deposits may be created in two ways - either by the depositors converting
cash into a demand deposit with a bank or by borrowing from a bank and using the amount to
create a demand deposit with it. Demand deposits constitute the most important source of
circulating medium of exchange.

(b) Savings Deposits:

Savings deposits are those deposits on which the bank pays a certain percentage of
interest to the depositors but the bank places certain restrictions on withdrawal. For instance,
they may not be withdrawn more than once or twice a week or more than a fixed sum of
money at a time.

(c) Fixed Deposits:

Fixed deposits are made for specific periods and can be withdrawn only at the expiry
of the specific periods. These deposits are liked by depositors both for their safety as well as
for the interest they bring to them.

(II) MAKING LOANS AND ADVANCES:

Commercial bank is to make loans and advances out of deposits of the public. Direct
loans and advances are given to all types of persons, particularly to businessmen and
investors, against personal security, gold and silver and other movable and immovable assets.

8
 The most common way of lending is by overdraft facilities i.e., allowing the borrower
to overdraw his current account and also through discounting bills of exchange.

On the one hand, the depositors are granted facilities not only to protect their surplus
funds but also for safe investment and, on the other, the merchants and the manufacturers
are enabled to obtain adequate funds for their operations.

The bank is thus an intermediary mobilizing the savings of the people on the one side,
and using them to assist industry and trade, on the other. By choosing only those who should
be allowed to borrow, the commercial bank helps in the development of those industries
and occupations which are most useful to the community.

(III) USE OF THE CHEQUE SYSTEM AND THE PLASTIC CARD:

A Commercial bank performs a number of other useful functions to the community,

For instance, it has developed the cheque system, under which the depositors are given the
right to withdraw from their deposits any amount at their convenience by means of cheques.
While the currency note is legal tender money and is used extensively for all small
transactions, the cheque is also used extensively but for large transactions. Till recently, the
cheque was regarded as the most developed credit instrument evolved by man. This is being
gradually replaced by the plastic card which is also based on bank deposits.

(IV) TRANSFER OF FUNDS:

Commercial bank is to provide facilities for transfer of funds from one part of the
country to another or from one country to another. This may be done either by the cheque
itself or through a bank draft. Any amount of money can be transferred cheaply by these
methods.

(V) OTHER FUNCTIONS:

Commercial bank include,
1. The provision of safety vaults
2. Lockers to keep Jewellery
3. Valuable documents of customers in safe custody
4. Acting as agents for customers to buy and sell securities on their behalf,
5. Making and receiving payments on behalf of its depositors,
6. Issuing letters of credit

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 7. Traveller‟s cheques for the convenience of the customers and in general, performing
all functions which bring in profits.
8. Advice on financial matters
9. Gift cheques
10. Acting as referees

1. Safety Locker Facility:

The banks are safe keep of important documents and valuable things like jewels are
one of the oldest services provided by commercial banks. „Lockers‟ are small receptacles
which are fitted in steel racks and kept inside strong rooms known as vaults. Those lockers
are available on half-yearly or annual rental basis. Only customers of safety lockers after
entering into a register his name account number and time can enter into the vault. Because
the vault is holding important valuables of customer in lockers, it is also known as „strong
room‟.

2. Issue traveller cheques:

Banks issue travelers cheques to help carry money safety while traveling within India
or abroad. Thus, the customers can travel without fear theft or loss of money.

3. Letters of credit:

Letters of credit is a payment document provided by the buyer‟s banker in favors of

seller. This document guarantees payment to the seller upon production of document
mentioned in the letter of credit evidencing dispatch of goods to the buyer. The letter of credit
is an assurance of payment upon fulfilling conditions mentioned in the letter of credit. The
letter of credit is an important method of payment in international trade.

4. Advice on financial matters:

The commercial banks also give advice to their customers on financial matters
particularly on investment decisions such as expansion, diversification, new ventures, rising
of funds, etc.,

5. Gift cheques:

The commercial banks offer gift cheque facilities to the general public, these cheques
received a wider acceptance in India. Under this system by paying equivalent amount one can
buy gift cheque for presentation on occasions like wedding Birthday.

10
6. Acting as referees:

The banks act as referees and supply information about the business transactions and
financial standing of their customers on enquiries made by third parties. This is done on the
acceptance of the customers and help to increase the business activity in general.

MAIN FUNCTIONS OF THE BANKING COMPANY

 Borrowing, raising or taking up of money.

 Lending of money with or without security
 Granting and issuing of loans.
 Drawing, making, accepting, discounting, buying, and collecting in bills of exchange
promissory note.
 Purchasing & selling of foreign exchange.
 Purchasing & selling of bonds on behalf of customer or receiving such securities for
sale custody.
 Collecting & transmission of money and securities.

GENERAL RELATIONSHIP BETWEEN BANKER AND CUSTOMER

The relationship between banker & customer are as follows.

1. Debtor and Creditor

2. Trustee and Beneficiary
3. Agent and Principal
4. Bailor and Bailee

I. Debtor - Creditor Relationship:

(a) Banker as a Debtor:

 This respective position is determined by state of account.

 When a banker receives deposit from a customer, if the deposit is to the credit of the
customer, the banker becomes a debtor and the customer is a creditor.

Privileged Debtor:

 The customer must come to the bank and make an express demand in writing for
repayment of money.

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  The demand by the creditor must be made only at the particular branch where the
account is kept.
 Specified banking hours of business
 The banker is able to get the deposit money without getting any security to the
customer (unsecured creditors)
 The banker has the right to combine the account of a customer provided he has two or
more accounts in his name and in the same capacity.

(b) A banker as a Creditor:

In case of loan, cash credit and overdraft the banker becomes a creditor and the
customer act as debtor.

II. Trustee - Beneficiary (Banker act as a trustee)

Customer deposits securities & Valuables for safe custody with the banker. In such
case, banker act as a trustee and the customer demands the securities; the banker has to return
them to the customer who is beneficiary.

When a cheque is given for collection the banker is a trustee and after realization he
has to credit the account of the customer. The banker is a trustee whenever he undertakes to
called cheques given for collection once the cheque is realized the banker is a trustee and the
customer is beneficiary.

III. Agent - Principal: (A banker as an agent)

A banker act as an agent of a customer, when he performs certain functions as per the
instructions of the customer
There are some of the functions, performed by the banker as an agent of the customer.

 Purchasing and selling securities (shares, bonds)

 Collect Cheques, bills, dividend warrants, coupons, Interest warrants.
 Paying club subscription, insurance premium, rent etc., on behalf of customer.
IV. Bailor - Bailee (A banker as a bailee)

When a customer borrows form bank against the security under Pledge, the bank is
regarded not a pledge but also a bailee and so the bank has to take care of the security until it
is returned to the customer. (E.g. Gold Ornaments, Important documents)

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OBLIGATIONS OF A BANKER or “DUTY” or “RESPONSIBILITY”

I. DUTY TO HONOUR CUSTOMER CHEQUE

Every bank has a prime duty to honour customer‟s cheques which are drawn properly
and presented during the working hours of a bank.

The bank has a right to dishonor cheques under the following grounds

1. Date:

(a) Postdated Cheque: Which carry a date yet to come - banker will honours the cheque.

(b) Stale Cheque: (useless cheque)

When a cheque is more than 3 months old, it is no more a cheque

2. Payee - Proper person (Wrong person)

3. Amount in words & figure differ (Banker will dishonor the cheques)

4. Signature (different)

5. Endorsement (defects in endorsement)

6. Insufficient Funds (Banker will dishonor the cheque)

7. Mutilated Cheque (Cheques are torn)

8. Smudged Cheque (Writing on cheque is unclear or smudged because of sueat or water, it

will be dishonoured.

9. Material Alteration (Alteration must be done by the knowledge of drawer or the banker.

10. Overwriting or cancellation (The banker will dishonor the cheques)

II. DUTY TO MAINTAIN SECRECY OF CUSTOMER‟S ACCOUNT

The banker has an obligation towards the customer to maintain secrecy about the
status of account.

In the following conditions the secrecy of the customer account will be disclosed.
1. Express or Implied condition

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 2. Under Compulsion of Law
3. In the Course of banking business
4. Disclosure in Public Interest
5. Bankers among themselves
1. Express or Implied Condition

When a customer has given in writing to the banker regarding the secrecy of the
customer‟s account

2. Under compulsion of Law

A banker under compulsion of law will have to reveal the secrecy of customer‟s
account. (Act basis declare in customer information)
I. Under income tax act, 1961
II. Under foreign exchange regulation act
III. Under RBI act
IV. Under Indian Companies act 1956
V. Under sec 4 of bankers book evidence act
VI. Enquiries by government both state and central
3. In the course of banking business:

A bank in order to protect its own interest may have to reveal the secrecy of
customer‟s account.

4. Disclosure in Public Interest

When customers have been huge wealth by cheating the public and increasing the
deposit account with the bank, it is the duty of banker to reveal of the same to the public.

5. Bankers among themselves

Between the bankers as per the trade custom information can be share in their own
business interest

III. Duty to render proper accounts of deposits made and withdrawn by customers.

A passbook is one which contains a record of transaction taking place between the
banker and the customer. It is quite often passes between the banker and the customer.

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RIGHTS OF A BANKER

1. Right of Set - off

2. Right of Lien

3. Right of Appropriation

4. Right to charge Interest, Commission & Brokerage

5. Right to close the account of undesirable customer

BANKING SYSTEM

BANKING
SYSTEM

BRANCH UNIT
BANKING BANKING

OTHER
BANKING
SYSTEMS

BRANCH BANKING:

In the branch banking system, every bank, as a single legal entity having one board of
directors, one group of shareholders, operates through a network of branch throughout the
country.

ADVANTAGES OF BRANCH BANKING: (BENEFITS OR MERITS)

(1) Proper distribution of capital:

It transfers capital from regions which have a surplus to those regions which require capital.

(i) Capital is put to the most productive use and thus it promotes increased output and
national income of the country.

(ii) Interest rates tend to be uniform throughout the country.

15
(2) Diversification of deposits and assets:

It covers geographical area. Deposits received from all areas, particularly from areas
where savings are in plenty. at the same time, loans and advances are made in those areas
where there is scarcity of money and where interest rates are high.

Great convenience to trade since trader customers can get in contact easily with
traders in other parts of the country (or) world.

(3) Loans and advances made on merit:

It made purely on merit and not on other considerations. Branch manager is not
influenced by personal or local considerations in the granting of loans. In the case of refusal
to a particularly influential but not so credit worthy customer, the branch manager can always
throw the responsibility of refusal on to the head office.

(4) Large financial resources:

The requirement of large customers can be easily met by the branch banking system.
Loans and advances on a more liberal scale can be made. Further, the failure of business in
any area, however big they may be, need not lead to the failure of the bank. Branch banking
is its financial strength and ability to meet any crisis.

(5) Efficiency in management:

(a) The best men may be recruited for top management. (Branch manager can be
carefully trained and supervised with greater opportunity for promotion for those who show
good promise.

(b) Top class business efficiency at headquarters is available to all branches.

(6) Economy in working:

Capital is made available in plenty and at cheaper rates, internal and foreign exchange
business can be handled economically and even small isolated towns and villages.

(7) Central banking control effective:

Central banking control much more effective and easier than is possible when the
central bank has to deal with innumerable unit banks

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DISADVANTAGES OF BRANCH BANKING: (DEMERITS)

1. There is much red tape and delay in granting special large loans and advances.
2. This is because of the lack of sufficient authority to branch managers.
3. In the case of any large loan, the branch managers have to refer to the head office and
this often results in delay.
4. Branch managers may not be familiar with local conditions and with the special
problems and difficulties of local borrowers.
5. It leads of concentration of enormous financial resources in the hands of a small
number of men. Such a monopoly power is a constant source of danger to the
community.
6. Preferential treatment shown to firms situated near head office.
7. Possibility of mismanagement in branches.
8. Managerial and supervisory problems in managing and controlling
9. The funds of a particular locality may not be available for the development of that
area.

UNIT BANKING:

The unit banking system, the banking operations are called through a single banking
office rather than through a network of branches. Ordinally, there is only one place of
operation and no branches elsewhere but there may be branches within a strictly limited area.

Under the unit banking system, the area of its operation as well as the size of the bank
is smaller and for more limited than is the case under the branch banking system.

ADVANTAGES OF UNIT BANKING: (BENEFITS OR MERITS)

A. Resources of the locality are used for the economic development of the locality and
are not transferred to other areas.
B. The unit banker has specialized knowledge of the local industries and occupations,
customs and prejudices, he can serve the local needs of the small communities in an
effective manner. In fact, he pays great attention to the financial problems and needs
of the individual‟s enterprises in his area.
C. There are very few possibilities for fraud and irregularities.
D. Management and supervision do not offer any serious problems.

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 E. Unit banking is free from the diseconomies of large - scale operations which are
generally associated with branch banking.

DISADVANTAGES OF UNIT BANKING: (DEMERITS)

 Unit bank has limited financial resources and therefore, cannot withstand a business
depression or a run on it.
 Lack of diversification of deposits and assets and specialization in those industries
which are located in the area.
 Unit banking is not able to provide full and adequate banking facilities to small
communities because the area of its operations is restricted.
 Inadequacy of financial resources is responsible for the inability of unit banking
system to support an efficient management.
 Unit banker, being a local man, may have to follow considerations other than strict
economic principles in granting loans and advances. For instance, it may be very
difficult and even dangerous for the banker to refuse and influential local businessman
who may not be so creditworthy.

OTHER BANKING SYSTEMS

There are three other types of banking systems also, viz.,

THE
GROUP

THE
CHAIN

THE CORRESPONDENT
BANKS

(1) THE GROUP BANKING:

Group banking is one where two or more separately incorporated banks are brought
under the control of a holding company which may or may not be a banking company. The
banks so brought together may be unit banks or branch banks or both.

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(2) THE CHAIN BANKING:

It refers to separately incorporated banks brought under common control by a device

other than the holding company. This may be through some persons being directors of two or
more banking companies or some groups of persons owning them.

(3) THE CORRESPONDENT BANKING:

Banks are linked together through deposits by smaller banks of some of their cash
reserves with bigger banks, here the bigger banks with which deposits are so made are called
correspondents banks.

THE INDIAN BANKING SYSTEM

RESERVE BANK OF INDIA
(CENTRAL BANK &
MONETARY AUTHORITY)
1. COMMERCIAL BANKS 2. REGIONAL 3. CO-OPERATIVE
RURAL BANKS
BANKS (RRB)
(i) PUBLIC SECTOR (ii) PRIVATE SECTOR STATE
CO-OPERATIVE
BANKS
STATE BANK GROUP OTHER INDIAN FOREIGN URBAN
NATIONALISED CO-OPERATIVE
BANKS BANKS
STATE ASSOCIATE CENTRAL
BANK BANKS CO-OPERATIVE
OF BANKS
INDIA
PRIMARY
CREDIT SOCIETIES

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 UNIT - II
THE RESERVE BANK OF INDIA - RBI - 1935
OR
CENTRAL BANKING
___________________________________________________________________________

THE RESERVE BANK OF INDIA

The Reserve Bank of India (RBI) was set up by the Government of India in April
1935 with a share capital of Rs. 5 crores, divided into shares of Rs. 100 each fully paid up.
The entire share capital was contributed by private shareholders with the exception of the
nominal value of Rs. 2.2 lakh subscribed by the Central Governement. In every country there
is one bank which acts as the leader of the money market, supervising, controlling and
regulating the activities of commercial banks and other financial institutions. It acts as a bank
of issue and is in close touch with the government, as banker, agent and adviser to the latter.
Such a bank is known as the central bank of the country. The Bank was nationalized in 1949.

FUNCTIONS OF THE RESERVE BANK OF INDIA

The functions RBI performs are of two types:

MONETARY
FUNCTIONS

NON -
MONERARY
FUNCTIONS RBI

A. MONETARY FUNCTIONS

(i) Bank of Issue: RBI has the sole right to issue bank notes of all denominations. „The
Reserve Bank has a separate issue department which is entrusted with the issue of currency
notes. The system of note issued as it exists today is known as minimum reserve system.

20
(ii) Government Banker:

RBI acts as Government banker, agent and adviser, The Bank has the obligation to
transact Government business, viz., to keep the cash balances as deposit free of interest, to
receive and to make payments for the government and to carry out their exchange remittances
and other banking operations. It helps the government both the Union and the States to float
new loans and manage public debt. RBI makes ways and means advances to the government
for 90 days. It makes loans and advances to states and local authorities.

RBI advises the government on all monetary and banking matters on the floating of
loans, on agricultural and industrial finance, on legislation affecting banking and credit, on
financial aspects of planning, etc.

(iii) Bankers‟ Bank and Lender of the Last Resort:

RBI acts as the bankers‟ bank. According to the provisions of the RBI Act, 1934,
every scheduled bank was required to maintain with RBI a cash balance equivalent to 5 per
cent of its demand liabilities and 2 per cent of its time liabilities in India. This provision
helps to centralize the banking reserves of the country so as to enable RBI to regulate and
control the credit position in the country.

The scheduled banks can borrow from RBI on the basis of the eligible securities or
get financial accommodation in times of need or stringency by rediscounting their bills of
exchange, Since commercial banks can always expect RBI to come to their help, RBI is not
only the bankers‟ bank but also the lender of the last resort.

Under the banking regulation act of 1949, RBI has considerable powers of
supervision and control over the banking system in issuing licences to banks, giving
permission to open branches, etc.

(iv) Controller of Credit:

RBI is the controller of credit, i.e., it has the power to influence the volume of credit
created by banks in India. It can do so through changing the bank Rate or through open-
market operations. According to the Banking Regulation Act of 1949, RBI can ask any
particular bank or the whole banking system not to lend to particular groups of persons or on
the basis of certain types of securities.

21
(v) Custodian of Foreign Exchange Reserves:

RBI has the responsibility to maintain the official rate of exchange. According to RBI
Act, 1934, the Bank was required to buy and sell sterling at fixed rates any amount of sterling
in lots of not less than Rs.10, 000. After India became a member of the International
Monetary Fund, RBI has the responsibility of maintaining fixed exchange rates with all other
member countries of the IMF. RBI buys and sells foreign exchange from authorized persons
at rates of exchange fixed by the Government. Besides maintaining the rate of exchange of
the rupee, RBI holds India‟s reserves of international currencies. Finally RBI administers the
exchange control system of the country.

B. NON - MONETARY FUNCTIONS

(i) Supervisory Functions:

RBI wide power of supervision and control over all scheduled banks, relating to

 Licensing and establishment,

 Branch expansion,
 Liquidity of their assets,
 Management and methods of working,
 Amalgamation,
 Re - Construction and Liquidation

RBI is authorized to carry out periodical inspections of the banks and to call for
returns and necessary information from them. RBI for directing the growth of banking and
credit policies towards more rapid development of the economy and realization of certain
desired social objectives. RBI has helped a great deal in improving the standard of banking in
India to develop on sound lines and to improve the methods of their operation.

(ii) Promotional Functions:

RBI with economic growth assuming a new urgency since Independence, the range of
RBI‟s functions has steadily widened. RBI now performs a variety of developmental and
promotional functions, which at one time were regarded as outside the normal scope of
central banking.

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 RBI was asked to promote banking habit, extend banking facilities to rural and semi-
urban areas, and establish and promote new specialized financing agencies.

RBI has helped in the setting up of,

 IFCI AND SFCs

 Deposits Insurance Corporation in 1962
 Unit Trust of India in 1964
 Industrial Development Bank of India in 1964
 Agricultural Refinance Corporation of India in 1963
 Industrial Reconstruction Corporation of India in 1972
 NABARD in 1982

These institutions were set up directly or indirectly by RBI to promote saving habit
and to mobilise savings, to provide industrial finance as well as agricultural finance. The RBI
set up the Agricultural Refinance and Development Corporation (ARDC) to provide long -
term finance to farmers.

ROLE & IMPORTANCE OF BANKING AND ECONOMIC DEVELOPMENT

Banks play a very important role in the economic development of every nation. They
have control over a large part of the supply of money in circulation. Economic development
is a dynamic and continuous process. The economic development are highly depends upon
the extent of mobilization of resources and investment and on the operational efficiency of
the various segments of the economy.

Commercial banks can contribute to a country‟s economic development in the following

way.

1. Capital formation:

The capital formation depends upon savings of various categories of people

organizations. Banks offer facilities for savings and thus, encourage the habits of thrift and
industry among people.

2. Creation of money:

Creation of money is the unique feature of commercial banks and is of great economic
significance. Banks have become significant by their power to creation of money.

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3. Strengthen the link between the organized and unorganized sectors:

Indian money market consists of organized and unorganized sectors. Both of them are
to be linked for the economic well-being of the country.

4. Provision of long-term loans:

Industrial development, which is the rock-basis for the economy, depends upon the
long-term loans. Banks provide medium and long-term loans for the industries.

5. Helping agriculture and small scale industries:

The development of a country not only depends upon the industrial development but
also on the development of agriculture and small scale and cottage industries. Similarly,
small scale industries provide large employment opportunities and goods manufactured by
this sector are also exported out of India. The banks cater to the financial requirements of
these sectors, which leads to the economic progress of the country.

6. Development of entrepreneurs:

Banks have special drives and specific schemes for the development of
entrepreneurship. They foster their strength and health. This helps the nation as a whole in
various ways including the increase in productivity.

7. Regulation of the flow of national savings:

Banks regulate the flow of national savings into various productive channels, while
lending money, they discriminate between a genuine trader and speculator and they
discourage the speculator. Thus, banks ensure the diversion of national savings into the
productive purposes.

8. Comprehensive infrastructure facilities:

Banks can develop comprehensive infrastructure facilities in the country. It includes

the social, educational, fiscal and other aspects, whose development is essential for the
economic progress of a nation.

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9. Maintaining balance of trade:

Through properly devised banking system the country can promote exports through
easy and timely credit facilities to exporters, quickly obtaining money from foreign buyers of
goods.

10. Cheque system-medium of exchange:

Banks provide the cheque payment system which is a great convenience and safe
method for making payments. Bank cheques settle transactions legally; Cheques act as a
medium of exchange and helps in the promotion of trade and industry. A wrong payment by
cheque can also easily be traced, particularly when the cheque is crossed.

ROLE OF RBI IN ECONOMIC DEVELOPMENT

As a central bank, the Reserve Bank has significant powers and duties to perform for
smooth and speedy progress of the Indian financial system, it has to perform some important
tasks.

Among others it includes,

 Maintain monetary and financial stability,

 To develop and maintain stable payment system,
 To promote and develop financial infrastructure and
 To regulate or control the financial institutions.

DEVELOPMENT ROLE:

This is one of the most critical roles RBI plays in building the country‟s financial
structure. Key tools in this effort include priority sector.

 Lending such as agriculture

 Micro and small enterprises (MSE)
 Housing and Education

RBI work towards strengthening and supporting small local banks and encourage
banks to open branches in rural areas to include large section of society in banking net.

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 UNIT - III
E - BANKING
INTRODUCTION

Many developments in tele-communication technology and electronic data processing

in recent years have contributed to remarkable changes in the banking sector.
The application of modern information technology has radically altered the traditional
way of doing banking business.
Availability of ATMs and plastic money (i.e., credit and debit cards) has helped
customers avoid going to bank premises for cash.
Bank customers can view their bank accounts; get statements of accounts, purchase
drafts and transfer funds through their personal computers.
Another development, viz., Electronic Data Interchange (EDI) has contributed to
effective working of banks.
The computer networks have helped to automate the funds transfer, contributing to
more efficient systems of payments.
All these developments in banking sector in recent years have given birth to a new
concept called e-banking or electronic banking.
MEANING OF E-BANKING OR ELECTRONIC BANKING:

E-banking or electronic banking means conduct of banking operations through

electronic means or devices, such as computers, telephones, mobile phones, ATMs, etc. In
other words, e-banking means provision of banking products and services (i.e., banking
facilities) by banks directly to customers through electronic delivery channels. In short, e-
banking means the conduct of banking operations (i.e., the provision of banking products and
services) by bankers through electronic tools or devices.

CHARACTERISTIC OR FEATURES OF E-BANKING:

(i) E-banking is essentially performance of banking operations through electronic

means or tools.
(ii) E-banking is provision of banking products and services by banks through the
extensive use of information technology without direct recourse to the bank by customers. In
fact, e-banking is characterized by overwhelming reliance on information technology and
absence of physical bank branch to deliver banking services to customers.

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 (iii) Provision of round - the clock (i.e. twenty-four hour) access to banking facilities
is an essential feature of e-banking.
(iv) E-banking is conduct of banking operations globally. In other words, e-banking is
anywhere banking.
DIFFERENCES BETWEEN TRADITIONAL BANKING AND E-BANKING
TRADITIONAL BANKING E-BANKING
1. A customer has to visit the branch of his 1. E-banking enables a customer to perform
bank in person to perform the basic banking the basic banking transactions, viz., account
operations, such as accounts enquiry, funds enquiry, funds transfer, cash withdrawals,
transfer, cash withdrawals, etc., etc., by sitting at office or at home through
personal computer.
2. Conventional or traditional banking is an 2. E-banking is more of a science, as it is
art. knowledge-based and mostly scientific in
using the electronic devices of the computer
revolution.
3. A bank building is essential for doing the 3. But no building is required for e-banking.
banking transactions. That means, traditional Banking business can be conducted through
banking is confined to a branch of a bank. website. That means, e-banking is not
confined to a branch of a bank.
4. It is conducted only during specified time, 4. e-banking is available round the clock, i.e.,
generally between 10 a.m. and 2 p.m. for 24 hours day.
5. High cost 5. Banks are able to deliver their products
and services through e-banking more cheaply
than through traditional banking.

SIGNIFICANCE AND BENEFITS OF E-BANKING:

E-banking has attained great significance today, and has offered a number of benefits
to banks as well as customers.
1. Benefits of E-banking to Banks
2. Benefits of E-banking to Customers
1. Benefits of E-banking to Banks:

 E-banking to banks is better brand image. Banks which offer e-banking services are
regarded as leaders in technology implementation and they would enjoy a better brand
image.
 E-banking ensures large number of satisfied customers for a bank, and thereby
contributes to higher rate of retention of existing customers for a bank.
 E-banking also helps in attracting new customers for a bank because of the
availability of innovative banking facilities.

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  There is more scope for offering differential services under e-banking
 In e-banking, there is opportunity for participation in shared network and thereby
expanding the banks operations base.
 In e-banking, the operational costs of banking would come down thanks to internet
banking, shared network, reduction in staff requirements at the bank branches, etc.
 E-banking contributes to profitable banking for banks through reduced cost of
operations, increased number of satisfied customers, etc.
 E-banking i.e., phone banking, enables banks to pay certain fees or to transfer funds
between accounts.
 Establishment of centralized database, implicit in e-banking can considerably reduce
the load on branches. Integrated customer data paves the way for individualized
customerised service.
Benefits of E-Banking to Customers:
 Customers of banks can enjoy new and innovative banking products and services.
 Customers can enjoy wide range of banking products and services at reduced cost.
 In e-banking, increased comfort and time-serving facilities are made available to
customers twenty four hours a day without requiring their physical interaction with
the bank.
 In e-banking, quicker, easier and continuous access to information is made available
to the customers.
 E-banking helps the customers to ensure better management of cash by making
available to customers a large variety of cash management instruments at banking
sites.
 E-banking offers round the clock banking. Automatic Teller Machines (ATMs) or 24-
hour Tellers allow round the clock access to banking services.
 Through e-banking, i.e., through ATMs it is possible for a customer of a bank to
withdraw cash, make deposits, or transfer funds between accounts.
 E-banking facilitates pre-authorized direct withdrawals for marking payment of
recurring bills, insurance premium, utility bills, etc.
 Personal computer banking, ensured by e-banking, allows the customers to handle
many banking transactions through personal computers. For instance, a customer may
use the computer to view the account balance, require transfers between accounts and
pay bills electronically.

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  E-banking facilitates point-of-sale transfers. Point-of-sale-transferors facilitate
payment for purchases with a debit card. A debit card purchase transfers money fairly
quickly from the customer‟s bank account to the merchant‟s bank account.
 Electronic banking facilitates electronic fund transfer (EFT).
 E-banking inculcates a sense of financial discipline by recording each and every
transaction.
 E-banking lowers the risk and generates higher security to the customers, as it has
necessary safeguards against risks and insecurities.
 Online purchase of goods and services and online payment for the same provided by
e-banking is a boon to the customers.

DRAWBACKS OF ELECTRONIC BANKING:

(a) Huge Initial Startup Cost:
Huge initial startup cost such as the cost of connection to the internet or any other
mode of electronic communication, the cost of sophisticated hardware, software and other
related components including modem, etc., and the cost of setting up organization activities
to implement e-banking is involved in e-banking.
(b) Training and Maintenance:
Introduction of e-banking involves 24 hour support environment and quality service
to end - users which would necessitate a well-qualified and robust group of skilled people to
meet external and internal commitments. Hence, the bank has to spend a lot of money o
training the staff. Further, the bank has to outsource certain functions and services to maintain
the level of standards and state of readiness. The training and retaining of skilled manpower
is a major cause of concern.
(c) Lack of skilled personnel:
There is an acute scarcity of web developers, content providers and knowledgeable
professional to route banking transactions through internet. In a fast changing technological
scenario, the obsolescence of technology is fast, and hence, there is always shortage of skilled
personnel.
(d) Security Threat:
Security threat is one of problems of e-banking. The security threat may come from
unauthorized access, loss or damage of data by hackers, loss of data by virus or unauthorized
access within network. Banks have to address these threats to reduce the risks involved in e-
banking.

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(e) Risk of loss from breach of security:
For banks, the risk of loss from breach of security in e-commerce-related application
is very high. So, banks need to put in place computer security related hardware and software,
such as firewalls, encryption programmes and virus protection programmes. These have to be
checked and updated regularly so as to re-in force controls in computer environment.
(f) Obsolescence of technology:
In a fast changing technological scenario, the obsolescence of technology is fast, and
so, there is always the risk of obsolescence of information technology equipment‟s and the
need for replacement of obsolete technology.
(g) Adoption of technology:
In old established banks with vast network of branches and existing work culture
legacy, it is difficult to adopt modern technology, and so, such banks are required to make
strenuous efforts for providing e-banking services to their customers.
(h) Customer‟s acceptance:
The level of acceptance of e-banking channels by average customers in countries like
India remains low due to certain psychological factors and fear of technology. This is a
serious limitation of e-banking.
(i) Legal Issues:
The legal issues should cover unauthorized modification of data, wrongful
communication, and punishment to be meted out to combat computer crimes. To prevent
computer crimes, the country‟s banking legislation needs to make suitable provisions with a
thorough consultation and discussion among the legal and technical experts.
(j) Restricted clientele, and technical problems:
The user of e-banking needs a computer and time to log on to the site. That means, the
target clientele is restricted to those who have a home PC or can access the Net through the
office or cybercafé. Moreover, phone connections are not always perfect and on a home PC,
the modem connection often breaks off, requiring another tedious log-on. Navigating around
websites on home computers is often slow and frustrating. Moreover, local calls are not free
generally, and so, the customer has to pay every time be checks his balance.
(k) Restricted Business:
Not all transactions can be arrived at electronically. Many deposits and some
withdrawals require the use of postal services. Some banks have automated their front - end
process for the customers, but still largely depend upon manual process at the back end.

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 For instance, the internet customers receive their statements online but paper
statements are also sent by mail. Mail and distribution costs are still necessary as the
statements, cheques, etc., are routed through mail.
(l) Security measures for E-Banking:
 Authority controls to verify identity to individual letter, password, PIN. etc.
 Accuracy controls to ensure the correctness of the data flowing across the network.
 Completeness controls to make sure that no data is missing.
 Redundancy controls to see that data is travelled and processed only once, and there is
no repetitive sending of data.
 Privacy controls to protect the data from inadvertent or unauthorized access.
 Audit trail controls to ensure keeping chronological note of events that have occurred
in the system.
 Existence controls to make sure that on-going availability of all the system resources
is the same throughout.
 Efficiency controls to ensure that the system uses minimum resources to achieve the
desired goal.
 Fire wall controls to prevent unauthorized users accessing the private networks which
are connected to the internet.
 Encryption controls to enable only those which possess secret key to decrypt the
cyber text.
Facets or Dimensions of E-Banking:
(i) Customer - to - Bank E-Banking
(ii) Bank - to - Bank E-Banking
(iii) Electronic Central Banking
(iv) Internet procurement.
(i) Customer - to - Bank - E-Banking:
Customer - to - Bank e-banking is done through internets. In fact, e-banking is
basically internet - based. Banking products and services, such as deposits, remittances, credit
cards, etc., and all important banking information can be made available with easy access to
customers on internets. Customers can make use of these services with no restricted office
hours and without waiting. Several network innovations for customer - bank e-banking can be
visualized, such as smart card, electronic data interchange, etc.,

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(ii) Bank - to - Bank - E-banking:
Bank - to - Bank - e-banking is done through extranets. This form of e-banking is for
transacting interbank transactions, such as money at call, etc. This type of e-banking is
restricted to banks only. So, it is well-secured, and unauthorized access is averted.
(iii) Electronic Central Banking:
Electronic central banking is done through extranets. Under electronic central
banking, all banks within the jurisdiction of a central bank are inter-connected on extranet to
facilitate clearing of cheques, management of cash reserves, open market operations,
discounting of bills, etc., In fact, the central bank has to be connected with the Government
treasury on extranet to carry out its function as an agent of the Government. Again, the
central banks of all countries can be inter - linked with the IMF, World Bank and other
international financial Institutions through extranets.
(iv) Internet Procurement:
Procurement of internet is one of the important facets or dimensions of e-banking. For
transactions that are internal to a bank, and for transaction between a bank and its branches,
deployment of intranet is quite essential. Internet enables a bank to have full control over the
uses of intranet and the information to be transmitted.
E-Banking Transactions or Services:

Though any type of transactions can be handled through e-banking, generally, the
following transactions are handled through e-banking:
 Account enquiry.
 Fund transfer.
 Payment of electricity, water, telephone bills, etc.
 Online payment for transactions actually performed through internet.
 Request for issuance of cheque book, draft, etc.
 Request for statement of accounts.
 Access to latest scheme of the bank.
 Access to rates of interest and other service charges of the bank.

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 MOBILE BANKING

INTRODUCTION:

The constant innovations in electronic banking have contributed to a new

development called „mobile banking‟. The development of mobile banking may be attributed
to increasing demand from the mobile work force. The increasingly growing number of
mobile work force has given impetus to the progress of mobile banking.

MEANING OF MOBILE BANKING:

Mobile banking refers to conduct of banking operations on mobile (i.e., cell) phones.
In other words, mobile banking means banking operations that are done through mobile
phone while a person is on the move.

FEATURES OF MOBILE BANKING:

(i) Mobile Customers:

Those who use mobile phones make use mobile banking service.

(ii) M-commerce (i.e., mobile commerce):

Mobile banking is a part of m-commerce under which business and trade are carried
on through mobile online.

(iii) Technology Based:

Mobile banking is based on technology developments. Mobile banking makes use of

the internet for transmission, transaction and delivery of banking services. The network
provides the required software support.

(iv) Types of Services:

Mobile banking offers the entire internet-based banking services, such as on-line
account opening, account verification, funds transfer, etc.

(v) Eligibility:

At present, mobile banking is extended only to individual customers having account

with any branch of a particular bank that offers internet banking facility.

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(vi) Application:

In order to avail the facility of mobile banking, an application duly filled in is to be

submitted to the bank. The application is made available in the official website of the bank.

(vii) Registration:

It is usually required that the customer who registers for internet banking also
registers for mobile banking. For this purpose, a common application form is to be filled.

ESSENTIAL REQUIREMENTS OF MOBILE BANKING:

To register and use the mobile banking services, it is necessary that the following
requirements are met:
 Service is available only to existing customers of the bank availing internet banking
services.
 Registration is essential for internet banking and mobile banking services.
 Mobile banking is available for the individual customers.
 There is the need for owning a mobile phone by the user of mobile banking. If WAP
(Wireless Application Protocol) Banking is to be availed, the mobile phone should be
WAP enabled whose browser is capable of sending referrer URL.
SERVICES AVAILABLE UNDER MOBILE BANKING:
 Making enquiry about the bank balance.
 Making enquiry of the last few transactions.
 Viewing the details of the bank account.
 Order a demand draft.
 Request for a cheque book.
 Stop payment of cheque.

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 UNIT - IV
INTERNET BANKING OR NET BANKING
INTRODUCTION

There has been a major banking revolution in India in recent years. Till now, the
introduction of ATMs, which facilitates only limited operations over the ATM, was regarded
as the most technologically advanced development in banking. But, today, Internet banking
or net banking, which encompasses every banking activity a customer, could do over a bank
counter, from his home or office is the most remarkable development in banking.
In India, ICICI Bank is the leader in the introduction of internet banking (i.e., the first
Indian bank to offer internet services to its customers with Infosy‟s Software, „Bank Away‟)
HDFC Bank is another Indian Bank which is offering internet banking to its customers.
Public sector banks like the State Bank of India, Punjab National Bank, Corporation Bank,
etc. are also offering internet banking services, today. Eventually, all major commercial
banks in India would be able to provide internet banking services.
Today, many banks in India have their own web sites. Some of them offer banking
facilities, such as account enquiry, request for statement and cheque book.
Internet banking exists only on the internet, but it has the same protections and
regulatory approvals of a brick and mortar bank (i.e., an ordinary branch bank).
In internet banking, the bank provides customers with an ATM Card, a visa cheque
and electronic bill payment facilities, etc.
MEANING OF INTERNET BANKING:
Internet banking refers to provision of banking services by a bank to its customers
through its website.
SCOPE OF INTERNET BANKING IN INDIA:
Currently, the internets, i.e., the websites, are used by Indian banks to disseminate
information to users and generate awareness about their products and services. That is, Indian
banks are using their web sites as an economical means of advertising their products and
services.
A number of Indian banks have tried to create some level of interactivity at their web
sites with features like e-mail and account opening forms. For instance, Times Bank provides
on-line account opening facility for non-resident Indians. Most of the Indian banks have
down loadable account opening forms that have to be printed, held up and sent to banks via
ordinary mail.

35
 Banks like ICICI Bank and IndusInd Bank have also effectively used their web sites
for their public issues by making the application forms and details of the issue available over
the net. For instance, ICICI Bank received a huge response with more than 3,000 forms being
downloaded through the internet.
ADVANTAGES OF INTERNET BANKING:
i. Internet banking enables the customers to have every banking activity which a
customer could do over a bank counter with comforts from his office or home.
ii. Internet banking, i.e., bank‟s websites, acts as an economical means of advertising
their products and services. Banks benefit by using the internet as a remote banking
delivery channel.
iii. Internet banking helps the banks to raise huge deposits from the NRIS.
iv. Internet banking has helped many banks to introduce e-mail and account opening
facilities.
v. Internet banking has helped banks in their public issues by making the application
forms and details of the issue available over the net.
vi. Customers can interact with a bank at all hours from home, office or on the road and
perform any transaction at the cost of a local phone call.
vii. Internet allows access to the largest number of customers and prospects at the lowest
cost.
viii. The additional benefit of internet banking is easy access to NRI‟s who can access
their accounts and conduct financial transactions at the click of the mouse.
ix. Customers have a complete view of the services offered by the bank and their
financial information at a glance.
x. Through internet banking, customers can have banking with the bank, and not just
with a branch.
xi. Internet banking is quite beneficial to a bank with less number of branches, since
customer retention is higher in internet banking.
LIMITATIONS OF THE INTERNET BANKING:
(i) The security of internet banking is one of the key issues or problems. This issue is
required to be solved successfully.
(ii) The initial cost of installation of web sites and provision of internet banking is
quite high.

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 AUTOMATED TELLER MACHINES (ATMs)
INTRODUCTION:
An Automated Teller Machine (ATM) is an electronic delivery channel. ATMS have
become the marketing tool to target the masses. ATMs have become the order of the day in
banking.
MEANING OF ATM:
An Automated Teller Machine or Automatic Teller Machine, popularly called the
Cash Machine or Any Time Money is an electronic machine installed by a commercial bank
and operated by the customer himself, to withdraw money and to make other financial
transactions.
FEATURES OF ATMs:

(i) ATMs can be installed at any place, at the bank premises or at important places
like railway station, bus station, shopping centers, etc., where the public gather in large
numbers.
(ii) ATMs are anywhere banking, as the bank customers can transact banking business
at ATMs installed at any place.
(iii) ATMs are anytime banking, as they provide banking services round the clock.
(iv) ATMs are safe.
(v) They are user-friendly.
OPERATION OF ATM:
The customer of a bank, which has installed automated teller machine, is issued an
ATM Card by the bank. The ATM card is a plastic card which bears the customer‟s name.
The ATM card is magnetically coded, and can be read by the ATM.
A customer who wants to withdraw cash form his bank account can withdraw the
same (i.e., cash) by using his ATM Card. He has to insert his ATM card in the slot of the
ATM. After the card is recognized by the ATM, the customer has to enter his PIN (Personal
Identification Number). After establishing the authentication of the customer, the ATM
allows the customer to enter the transaction. After processing the transaction, the ATM
performs the desired functions in his account, and the output slot of the ATM gives the
required cash to the customer. (It may be noted that the customer can also ask for the balance
amount left in his bank account after the withdrawal.) The ATM returns the ATM card to the
customer after the transaction is completed.

37
TYPES OF ATM:

1. On-site ATM
2. Off-site ATM
An ATM installed at the bank premises is called on-site ATM. Generally, on-site
ATM is meant for the customers of the specified branch where the ATM is installed. The
withdrawals of cash from an on-site ATM may be extended to customers of other branches of
the bank on certain terms and conditions.

ATMs installed by a bank at important places, such as supermarkets, petrol bunks,

airports, railway stations, etc. for the benefit of all the customers of a bank are called off-site
ATMs. It may be noted that off-site ATM facilities are possible only where the branches are
inter-connected. Through off-site ATM‟s, the customer of a bank can have anytime and
anywhere banking services.

ADVANTAGES OF ATM:
1. ATM provides many facilities to customers
2. ATM helps to the banks
1. ATM provides many facilities to customers:
 ATM permits cash withdrawals by customers from their bank accounts.
 ATM permits cash deposits by customers into their bank accounts.
 ATM enables the customers to make enquiry about their bank balance or to check the
balance in their bank accounts.
 ATM facilitates requests by customers for their statements of accounts.
 ATM card holders can have access to cash and service at any location regardless of
where they have maintained their accounts.
 There is privacy in transactions
 ATM permits change of Personal Identification Number (PIN).
 ATM facilitates requests by customers for cheque books.
 ATM facilitates transfer of funds from one account to another account in the same
branch or in the different branches of the bank.
 ATM facilitates bill payments.
 ATM facilities are available at any time, day or night, all the 24 hours, and seven days
a week, and 365 days in a year.

38
2. ATM is also helpful to the banks:
 Today, ATMs have emerged as a marketing tool to target the masses.
 ATMs can be installed in any convenient location in the city.
 ATMs reduce the operative costs of the bank.
 ATMs avoid crowding of customers inside the branch for cash withdrawals.
 ATMs reduce pressure of work on bank staff.
 ATMs are free from human errors.
 ATMs help banks to have increased market penetration.
DISADVANTAGES OF ATMs:
 Initial cost of installation of ATMs is very high.
 If the ATMs are on-site ATMs, and not off-site ATMs, customers have to go to their
respective branches. In that case, there will not be anywhere banking.
 The ATM system demands literacy on the part of the users, i.e., the customers.
 ATM system requires full computerization of all bank branches.
 There are certain restrictions on the ATM facilities. For instance, more than a specific
amount, say, Rs.10,000 a day, cannot be withdrawn from an ATM.
MEANING OF CREDIT CARD:
A credit card is an instrument which provides instantaneous credit facilities to its
holder to purchase goods or services from business establishments enrolled as members of
the credit card system. A credit card is popularly known as plastic money, as it is usually
made of plastic. There are three parties to a credit card, viz., (i) the issuing banker, (ii) the
card holder and (iii) the member business establishments.
MEANING OF DEBIT CARD:
A debit card is also a payment card. It is used to obtain cash, goods or services
automatically, debiting the payments to the card holder‟s bank account instantly up to the
credit balance which exists in the customer‟s bank account.
The system of debit card works as follows:
When the holder of a debit card makes a purchase from a merchant establishment, the
merchant establishment inserts the debit card in an electronic data capture machine, which
debits the bank account of the debit card holder. The merchant establishment gets the
payment before providing the goods or services. In a debit card, the limit of the card holder
will be the amount of funds in his bank account.

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CASH DEPOSIT MACHINES:
The cash deposit machine, better known as CDM is an ATM like machine that allows
you to deposit cash directly into your account using the ATM cum debit card. You can use
this machine to instantly credit your account without visiting the branch. The transaction
receipt also gives you your updated account balance.
Some of the salient features of this product are:
1. Instant credit of cash deposit into your own account.
2. Quick and convenient way to deposit cash.
3. Paperless transaction
4. The per transaction limit is Rs.49, 900/-
5. Up to 200 currency notes can be deposited in a single transaction
6. The CDM only accepts denominations of Rs.2000/-, Rs.1000/-, Rs.500/- and Rs.100/-
For example: SBI at present cash deposit at CDMs are available free of cost of all our
customers except when using Green Remit Card our SME Insta card and business Debit card
customers can also use the CDMs for instant deposit of cash. Locate your nearest CDM using
the SBI finder application.
OTHER SERVICES AVAILABLE ON THE CDM:
1. PIN change
2. Balance enquiry
3. Mini statement of account.
1. PIN Change: (Personal Identification Number)
Use this service to change your password at regular intervals.
2. Balance Enquiry:
The current available balance in your account
3. Mini statement of account:
Gives you an insight into the last 10 transactions in your account

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 UNIT - V
REAL TIME GROSS SETTLEMENT
Real Time Gross Settlement (RTGS) is an internationally accepted system to reduce
the settlement risk. It is the centerpiece of an integrated payment system. All payments settled
under Real Time Gross Settlement are same within same day. The RTGS system is
maintained and operated by the Reserve Bank of India (RBI)
Real-time gross settlement are specialist funds transfer systems where the transfer of
money or securities takes place from one bank to another on a "real time" and on a "gross"
basis. Settlement in "real time" means a payment transaction is not subjected to any waiting
period, with transactions being settled as soon as they are processed. "Gross settlement"
means the transaction is settled on one-to-one basis without bundling or netting with any
other transaction. "Settlement" means that once processed, payments are final and
irrevocable.
RTGS systems are typically used for high-value transactions that require and receive
immediate clearing. In some countries the RTGS systems may be the only way to get same
day cleared funds and so may be used when payments need to be settled urgently. However,
most regular payments would not use a RTGS system, but instead would use a national
payment system or network that allows participants to batch and net payments.
RTGS systems are usually operated by a country's central bank as it is seen as a
critical infrastructure for a country's economy. Economists believe that an efficient national
payment system reduces the cost of exchanging goods and services, and is indispensable to
the functioning of the interbank, money, and capital markets. A weak payment system may
severely drag on the stability and developmental capacity of a national economy; its failures
can result in inefficient use of financial resources, inequitable risk-sharing among agents,
actual losses for participants, and loss of confidence in the financial system and in the very
use of money.
Maintained or controlled by the central bank of a country. There is no physical
exchange of money; the central bank makes adjustments in the electronic accounts of Bank A
and Bank B, reducing the balance in Bank A's account by the amount in question and
increasing the balance of Bank B's account by the same amount. The RTGS system is suited
for low-volume, high-value transactions. It lowers settlement risk, besides giving an accurate
picture of an institution's account at any point of time. The objective of RTGS systems by
central banks throughout the world is to minimize risk in high-value electronic payment
settlement systems. In an RTGS system, transactions are settled across accounts held at a
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central bank on a continuous gross basis. Settlement is immediate, final and irrevocable.
Credit risks due to settlement lags are eliminated. The best RTGS national payment system
cover up to 95% of high-value transactions within the national monetary market.
RTGS systems are an alternative to systems of settling transactions at the end of the
day, also known as the net settlement system, such as the BACS system in the United
Kingdom. In a net settlement system, all the inter-institution transactions during the day are
accumulated, and at the end of the day, the central bank adjusts the accounts of the
institutions by the net amounts of these transactions.
The World Bank has been paying increasing attention to payment system
development as a key component of the financial infrastructure of a country, and has
provided various forms of assistance to over 100 countries. Most of the RTGS systems in
place are secure and have been designed around international standards and best practices.
THERE ARE SEVERAL REASONS FOR CENTRAL BANKS TO ADOPT RTGS.
First, a decision to adopt is influenced by competitive pressure from the global
financial markets.
Second, it is more beneficial to adopt an RTGS system for central bank when this
allows access to a broad system of other countries' RTGS systems.
Third, it is very likely that the knowledge acquired through experiences with RTGS
systems spills over to other central banks and helps them make their adoption decision.
Fourth, central banks do not necessarily have to install and develop RTGS
themselves. The possibility of sharing development with providers that have built RTGS
systems in more than one country (CGI of UK, CMA Small System of Sweden, JV Perago of
South Africa and SIA SpA of Italy, Montran of USA) has presumably lowered the cost and
hence made it feasible for many countries to adopt.
As at 1985, three central banks had implemented RTGS systems, while by the end of
2005, RTGS systems had been implemented by 90 central banks.
NATIONAL ELECTRONIC FUNDS TRANSFER
National Electronic Funds Transfer (NEFT) is one of the most prominent electronic
funds transfer system of India. Started in November 2005, NEFT is a facility provided to
bank customers to enable them to transfer funds easily and securely on a one-to-one basis. It
is done via electronic messages. This is not on real-time basis like RTGS (Real Time Gross
Settlement). This is a "net" transfer facility which is executed in hourly batches resulting in a
time lag. NEFT facilities are available in 30,000 bank branches all over the country and work
on a batch mode.
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 RBI explains this scheme as "National Electronic Funds Transfer (NEFT) is a nation-
wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals,
firms and corporates can electronically transfer funds from any bank branch to any
individual, firm or corporate having an account with any other bank branch in the country
participating in the Scheme."
NEFT has gained popularity due to its saving on time and the ease with which the
transactions can be concluded, This reflects from the fact that 42% of all electronic
transactions in the 2008 financial year were NEFT transactions.
PROCESS OF NEFT:
Step-1:
Customer fills an application form providing details of the beneficiary (like name,
bank, branch name, IFSC, account type and account number) and the amount to be remitted.
The remitter authorizes his/her bank branch to debit his account and remit the specified
amount to the beneficiary. This facility is also available through online banking and some
banks offer the NEFT facility even through the ATMs.
Step-2:
The originating bank branch prepares a message and sends the message to its pooling
center (also called the NEFT Service Centre).
Step-3:
The pooling centre forwards the message to the NEFT Clearing Centre (operated by
National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next available
batch.
Step-4:
The Clearing Centre sorts the funds transfer transactions destination bank-wise and
prepares accounting entries to receive funds from the originating banks (debit) and give the
funds to the destination banks (credit). Thereafter, bank-wise remittance messages are
forwarded to the destination banks through their pooling center (NEFT Service Centre).
Step-5:
The destination banks receive the inward remittance messages from the Clearing
Centre and pass on the credit to the beneficiary customers' accounts.

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SERVICE CHARGES FOR NEFT TRANSACTIONS
The structure of charges that can be
a) Inward transactions at destination bank branches (for credit to beneficiary accounts):
 Free, no charges to be collected from beneficiaries
b) Outward transactions at originating bank branches (charges for the remitter):
 For transactions up to 10,000 (not exceeding): 2.50 (+ Service Tax)
 For transactions above 10,000 up to 1 lakh (not exceeding): 5 (+ Service Tax)
 For transactions above 1 lakh and up to 2 lakhs (not exceeding): 15 (+ Service Tax)
 For transactions above 2 lakhs: 25 (+ Service Tax)
SETTLEMENT TIMINGS
Currently, NEFT operates in hourly batches - there are eleven settlements from 9:00
AM to 7:00 PM on week days and five settlements from 10 am to 1 pm on Saturdays.
Any transaction initiated after a designated settlement time would have to wait till the
next designated settlement time. As of 2013, all transactions initiated before 5 PM will be
settled on same day. No transactions are settled on weekly holidays and public holidays.
Transaction Timings for NEFT, Monday to Saturday (Except 2nd and 4th Saturday) is
8:00 AM to 6:30 PM. RTGS / NEFT is not allowed on Sundays, second and fourth Saturday
of the month and the declared bank holidays for the calendar year National Electronic Funds
Transfer (NEFT) is one of the most prominent electronic funds transfer system of India.
Started in November 2005, NEFT is a facility provided to bank customers to enable them to
transfer funds easily and securely on a one-to-one basis. It is done via electronic messages.
This is not on real-time basis like RTGS (Real Time Gross Settlement).
This is a "net" transfer facility which is executed in hourly batches resulting in a time
lag. NEFT facilities are available in 30,000 bank branches all over the country and work on a
batch mode.
COMPARISON
The key difference between RTGS and NEFT is that while RTGS is on gross
settlement basis, NEFT is on net settlement basis. Besides, RTGS facilitates real-time
("push") transfer, while NEFT involves twelve settlements from 8 am to 7 pm on week days
and six settlements from 8 am to 1 pm on Saturdays. Customers can access the RTGS facility
between 9 am to 4:30 pm on weekdays and 9 am to 1:30 pm on Saturday.

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 Thus if a customer has given instruction to its bank to transfer money through NEFT
to another bank in the morning hours, money would be transferred the same day, but if the
instruction is given much later during the day, money may be transferred next day.
RTGS facility is available in over 1, 13,000 branches across India, while NEFT is
available in little over 1, 15,000 branches of a 100 banks.
IMMEDIATE PAYMENT SERVICE
Immediate Payment Service (IMPS) is an instant real-time inter-bank electronic funds
transfer system in India. IMPS offers an inter-bank electronic fund transfer service through
mobile phones. Unlike NEFT and RTGS, the service is available 24/7 throughout the year
including bank holidays.
It is managed by the National Payments Corporation of India (NPCI) and is built upon
the existing National Financial Switch network. In 2010, the NPCI initially carried out a pilot
for the mobile payment system with 4 member banks (State Bank of India, Bank of India,
Union Bank of India and ICICI Bank), and expanded it to include Yes Bank, Axis Bank and
HDFC Bank later that year. IMPS was publicly launched on November 22, 2010.
RECENT PAYMENT AND SETTLEMENT SYSTEMS IN INDIA
Payment and settlement systems in India are regulated by the Payment and Settlement
Systems Act, 2007 (PSS Act), legislated in December 2007.
The Reserve Bank of India continually strives towards ensuring the smooth progress
of the payments system. In India it is the BPSS (Board for Regulation and Supervision of
Payment and Settlement Systems) which is in charge of regulating these systems.
India has multiple payments and settlement systems. RBI Still continues to evolve
new payment methods and slowly revamping the payments and settlement capability in India.
India supports a variety of electronic payments and settlement system, both Gross as
well as Net settlement systems.
The Gross systems is
Real Time Gross Settlement (RTGS)
The Net settlement systems are:
ECS - Credit
ECS - debit
Credit cards and Debit cards
National Electronic Fund Transfer (NEFT)
Immediate Payment Service

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Electronic Payment and Settlement Systems in India
The Reserve Bank of India is doing its best to encourage alternative methods of
payments which will bring security and efficiency to the payments system and make the
whole process easier for banks. The Indian banking sector has been growing successfully,
innovating and trying to adopt and implement electronic payments to enhance the banking
system. Though the Indian payment systems have always been dominated by paper-based
transactions, e-payments are not far behind. Ever since the introduction of e-payments in
India, the banking sector has witnessed growth like never before.
According to a survey by celent, the ratio of e-payments to paper based transactions
has considerably increased between 2004 and 2008. This has happened as a result of
advances in technology and increasing consumer awareness of the ease and efficiency of
internet and mobile transactions.
In the case of India, the RBI has played a pivotal role in facilitating e-payments by
making it compulsory for banks to route high value transactions through Real Time Gross
Settlement (RTGS) and also by introducing NEFT (National Electronic Funds Transfer) and
NECS (National Electronic Clearing Services) which has encouraged individuals and
businesses to switch to electronic methods of payment. With the changing times and
technology so have changed the methods of payments in India. E-payments in India have
been growing at a fast rate of 60% over the last 3 years.
In India 'plastics' have been fast over-taking 'papers'. With 130 million cards in
circulation currently, both credit and debit, and an increasing consumer base with disposable
income, India is clearly one of the fastest growing countries for payment cards in the Asia-
Pacific region. Behavioral patterns of Indian customers are also likely to be influenced by
their internet accessibility and usage, which currently is about 32 million PC users, 68% of
whom have access to the net. However these statistical indications are far from the reality
where customers still prefer to pay "in line" rather than online, with 63% payments still being
made in cash. E-payments have to be continuously promoted showing consumers the various
routes through which they can make these payments like ATM's, the internet, mobile phones
and drop boxes.
Due to the efforts of the RBI and the (BPSS) now over 75% of all transaction volume
are in the electronic mode, including both large-value and retail payments. Out of this 75%,
98% come from the RTGS (large-value payments) whereas a meager 2% come from retail
payments.

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 This means consumers have not yet accepted this as a regular means of paying their
bills and still prefer conventional methods. Retail payments if made via electronic modes are
done by ECS (debit and credit), EFT and card payments.
Electronic Clearing Service (ECS Credit)
Known as "Credit-push" facility or one-to-many facility this method is used mainly
for large-value or bulk payments where the receiver's account is credited with the payment
from the institution making the payment.
Such payments are made on a timely-basis like a year, half a year, etc. and used to pay
salaries, dividends or commissions. Over time it has become one of the most convenient
methods of making large payments.
Electronic Clearing Services (ECS Debit)
Known as many-to-one or "debit-pull" facility this method is used mainly for small
value payments from consumers/ individuals to big organizations or companies. It eliminates
the need for paper and instead makes the payment through banks/corporates or government
departments. It facilitates individual payments like telephone bills, electricity bills, online and
card payments and insurance payments. Though easy this method lacks popularity because of
lack of consumer awareness.
Credit cards and Debit cards
As mentioned above India is one of the fastest growing countries in the plastic money
segment. Already there are 130 million cards in circulation, which is likely to increase at a
very fast pace due to rampant consumerism. India's card market has been recording a growth
rate of 30% in the last 5 years. Card payments form an integral part of e-payments in India
because customers make many payments on their card-paying their bills, transferring funds
and shopping.
Ever since Debit cards entered India, in 1998 they have been growing in number and
today they consist of nearly 3/4th of the total number of cards in circulation.
Credit cards have shown a relatively slower growth even though they entered the
market one decade before debit cards. Only in the last 5 years has there been an impressive
growth in the number of credit cards- by 74.3% between 2004 and 2008. It is expected to
grow at a rate of about 60% considering levels of employment and disposable income.
Majority of credit card purchases come from expenses on jewellery, dining and shopping.
Another recent innovation in the field of plastic money is co-branded credit cards,
which combine many services into one card-where banks and other retail stores, airlines,
telecom companies enter into business partnerships.
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 This increases the utility of these cards and hence they are used not only in ATM's
but also at Point of sale (POS) terminals and while making payments on the net.
CHANNELS OF E-PAYMENTS
In their effort to enable customers to make payments the electronic way banks have
developed many channels of payments viz. the internet, mobiles, ATM's (Automated Teller
Machines) and drop boxes.
The internet as a channel of payment is one of the most popular especially among the
youth. Debit and credit payments are made by customers on various bank's websites for small
purchases,(retail payments) and retail transfers( ATM transfers).
ATM's serve many other purposes, apart from functioning as terminals for
withdrawals and balance inquiries, such as payment of bills through ATM's, applications for
cheques books and loans can also be made via ATM's.
Banks also provide telephone and mobile banking facilities. Through call agents
payments can be made and as the number of telephone and mobile subscribers are expected
to rise, so is this channel of payment expected to gain popularity.
Drop boxes provide a solution to those who have no access to the internet or to a
telephone or mobile. These drop-boxes are kept in the premises of banks and the customers
can drop their bills along with the bill payment slips in these boxes to be collected by third
party agents.
ROLE OF THE RBI IN ENCOURAGING E-PAYMENTS
As the apex financial and regulatory institution in the country it is compulsory for the
RBI to ensure that the payments system in the country is as technologically advanced as
possible and in view of this aim, the RBI has taken several initiatives to strengthen the e-
payments system in India and encourage people to adopt it.
Raghuram Rajan, Ex-Governor, RBI, and Nandan Nilekani, Ex-Chairman, UIDAI and
Advisor, NPCI, and at the launch of Unified Payments Interface (UPI) in Mumbai.
Imagine paying for everyday purchases directly from your bank, without the need for
carrying cash. The RBI's new interface helps you do just that. Reserve Bank of India
Governor Raghuram Rajan launched the Unified Payments Interface (UPI) system, as its
latest offering in boosting digital money transfers.
The interface has been developed by National Payments Corporation of India (NPCI),
the umbrella organisation for all retail payments in the country. The UPI seeks to make
money transfers easy, quick and hassle free.

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 The Payment and Settlement Systems Act, 2007 was a major step in this direction. It
enables the RBI to "regulate, supervise and lay down policies involving payment and
settlement space in India." Apart from some basic instructions to banks as to the personal
and confidential nature of customer payments, supervising the timely payment and settlement
of all transactions, the RBI has actively encouraged all banks and consumers to embrace e-
payments.
In pursuit of the above-mentioned goal the RBI has granted NBFC's (Non-Banking
Financial Companies) the permission to issue co-branded credit cards forming partnerships
with commercial banks.
The Kisan Credit Card Scheme was launched by NABARD in order to meet the
credit needs of farmers, so that they can be free of paper money hassles and use only plastic
money.
A domestic card scheme known as RuPay has recently been started by the
National Payments Corporation of India (NPCI), promoted by RBI and Indian Banks
Association (IBA), inspired by Union pay in China, which will be promoting the use of cards
i.e., "plastic money". Initially functioning as an NPO, Rupay will focus on potential
customers from rural and semi-urban areas of India. Rupay will have a much wider coverage
than Visa, MasterCard or American Express cards which have always been used for card-
based settlements.
The NREGA (National Rural Employment Guarantee Scheme) introduced by the
Government will ensure rural employment in turn ensuring that the employees get wages.
Each employee will have a smart card functioning as his personal identification card, driver's
license, credit card which will also function as an electronic pass book, thus familiarising the
rural populations with e-payments. However, the Indian banking system suffers from some
defects due to certain socio-cultural factors which hampers the spread of the e-payments
culture even though there are many effective electronic payment channels and systems in
place. Despite the infrastructure being there nearly 63% of all payments are still made in
cash. A relatively small percentage of the population pays their bills electronically and most
of that population is from urban India-the metropolitans. Also in some cases the transaction is
done partially online and partially "offline". The main reason for this apathy to switch to e-
payments comes from lack of awareness of the customer despite various efforts by the
Government.
*** ALL THE BEST ***

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