dissertation on retail banking icici bank

7/28/2019 Dissertation on Retail Banking ICICI Bank

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INTRODUCTION

Customer satisfaction is a measure of how product and services supplied a company

can meet the customer expectations. Customer satisfaction is still one of the single

strongest predictors of customer retention. Its considerably more expensive to attract new

customers than it is to keep old once happy. In a climate of decreasing brand loyalties,

understanding customer service and measuring customer satisfaction are very crucial.

There is obviously a strong link between customer satisfaction and customer retention.

Customer perception of service and quality of product will determine the success of the

product or service in the market.

With better understanding of customer perceptions, companies can determine the

customers need e actions required to meet the can customers needs. They can identify

their own strengths and weaknesses, where they stand in comparison to their competitors,

chart out path future progress and improvement. Customer satisfaction measurement helps

to promote an increased focus on customer outcomes and stimulate improvements in the

work practices and processes used within the company.

WHAT IS A BANK?

A banker orbankis a financial institution whose primary activity is to act as a payment

agent for customers, and to borrow, lend, and, in all modern banking systems, create

money. Some of the definitions of bank are:

"Banking business" means the business of receiving money on current or deposit

account, paying and collecting cheques drawn by or paid in by customers, the making

of advances to customers, and includes such other business as the Authority may

prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2,

Interpretation).

"Banking business" means the business of either or both of the following:

1. receiving from the general public money on current, deposit, savings or other

similar account repayable on demand or within less than [3 months] or with a

period of call or notice of less than that period;2. paying or collecting cheques drawn by or paid in by customers


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Origin of the word

The name bank derives from the Italian word banco "desk/bench", used during the

Renaissance by Florentines bankers, who used to make their transactions above a desk

covered by a green tablecloth. However, there are traces of banking activity even in ancient

times.

In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders

would set up their stalls in the middle of enclosed courtyards called macella on a long

bench called a bancu, from which the words banco and bank are derived. As a

moneychanger, the merchant at the bancu did not so much invest money as merely convert

the foreign currency into the only legal tender in Rome- that of the Imperial Mint.

Traditional banking activities

Banks act as payment agents by conducting checking or current accounts for customers,

paying cheques drawn by customers on the bank, and collecting cheques deposited to

customers' current accounts. Banks also enable customer payments via other payment

methods such as telegraphic transfer, EFTPOS, and ATM.

Banks borrow money by accepting funds deposited on current account, accepting term

deposits and by issuing debt securities such as banknotes and bonds. Banks lend money by

making advances to customers on current account, by making installment loans, and by

investing in marketable debt securities and other forms of lending.

Banks provide almost all payment services, and a bank account is considered indispensable

by most businesses, individuals and governments. Non-banks that provide payment

services such as remittance companies are not normally considered an adequate substitute

for having a bank account.

Banks borrow most funds borrowed from households and non-financial businesses, and

lend most funds lent to households and non-financial businesses, but non-bank lenders

provide a significant and in many cases adequate substitute for bank loans, and money

market funds, cash management trusts and other non-bank financial institutions in manycases provide an adequate substitute to banks for lending savings to.


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Commercial role of banks

However the commercial role of banks is wider than banking, and includes:

issue of banknotes (promissory notes issued by a banker and payable to bearer on

demand)

processing of payments by way of telegraphic transfer, EFTPOS, internet banking

or other means

issuing bank drafts and bank cheques

accepting money on term deposit

lending money by way of overdraft, installment loan or otherwise

providing documentary and standby letters of credit, guarantees, performance

bonds, securities underwriting commitments and other forms of off balance sheet

exposures

safekeeping of documents and other items in safe deposit boxes

currency exchange

sale, distribution or brokerage, with or without advice, of insurance, unit trusts and

similar financial products as a 'financial supermarket'

Economic functions

The economic functions of banks include:

1. Issue of money, in the form of banknotes and current accounts subject to cheque or

payment at the customer's order. These claims on banks can act as money because

they are negotiable and/or repayable on demand, and hence valued at par and

effectively transferable by mere delivery in the case of banknotes, or by drawing a

cheque, delivering it to the payee to bank or cash.

2. Netting and settlement of payments -- banks act both as collection agent and paying

agents for customers, and participate in inter-bank clearing and settlement systems

to collect, present, be presented with, and pay payment instruments. This enables

banks to economise on reserves held for settlement of payments, since inward and

outward payments offset each other. It also enables payment flows between


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geographical areas to offset, reducing the cost of settling payments between

geographical areas.

3.

Credit intermediation -- banks borrow and lend back-to-back on their own accountas middle men

4. Credit quality improvement -- banks lend money to ordinary commercial and

personal borrowers (ordinary credit quality), but are high quality borrowers. The

improvement comes from diversification of the bank's assets and the bank's own

capital which provides a buffer to absorb losses without defaulting on its own

obligations. However, since banknotes and deposits are generally unsecured, if the

bank gets into difficulty and pledges assets as security to try to get the funding it

needs to continue to operate, this puts the note holders and depositors in an

economically subordinated position.

5. Maturity transformation -- banks borrow more on demand debt and short term debt,

but provide more long term loans. Bank can do this because they can aggregate

issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g.

withdrawals and redemptions of banknotes), maintain reserves of cash, invest in

marketable securities that can be readily converted to cash if needed, and raise

replacement funding as needed from various sources (e.g. wholesale cash markets

and securities markets) because they have a high and more well known credit

quality than most other borrowers.

Banking channels

Banks offer many different channels to access their banking and other services:

A branch banking centre or financial centre is a retail location where a bank or

financial institution offers a wide array of face-to-face service to its customers

ATM is a computerised telecommunications device that provides a financial

institution's customers a method of financial transactions in a public space without

the need for a human clerk or bank teller. Most banks now have more ATMs than

branches, and ATMs are providing a wider range of services to a wider range of

users. For example in Hong Kong, most ATMs enable anyone to deposit cash to

any customer of the bank's account by feeding in the notes and entering the account


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number to be credited. Also, most ATMs enable card holders from other banks to

get their account balance and withdraw cash, even if the card is issued by a foreign

bank.Mail is part of the postal system which itself is a system wherein written documents

typically enclosed in envelopes, and also small packages containing other matter,

are delivered to destinations around the world. This can be used to deposit cheques

and to send orders to the bank to pay money to third parties. Banks also normally

use mail to deliver periodic account statements to customers.

Telephone banking is a service provided by a financial institution which allows its

customers to perform transactions over the telephone. This normally includes billpayments for bills from major billers (e.g. for electricity).

Online banking is a term used for performing transactions, payments etc. over the

Internet through a bank, credit union or building society's secure website

Types of banks

Retail banking: dealing directly with individuals and small businesses;

Business banking: providing services to mid-market business;

Corporate banking: directed at large business entities;

Private banking: providing wealth management services to High Net worth

Individuals and families;

Investment banking: relating to activities on the financial markets.

Central banks: are normally government owned banks, often charged with quasi-

regulatory responsibilities, e.g. supervising commercial banks, or controlling the

cash interest rate. They generally provide liquidity to the banking system and act as

Lender of last resort in event of a crisis.

RETAIL BANKING

Retail Banking is that are of a bank which:

Caters the multiple banking requirements of the individuals

Augmenting their asset portfolio

Diversify their portfolio risk


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Meaning: Retail Banking is a banking service that is geared primarily toward individual

consumers. Retail banking is usually made available by commercial banks, as well as

smaller community banks. Unlike wholesale banking, retail banking focuses strictly onconsumer markets. Retail banking entities provide a wide range of personal banking

services, including offering savings and checking accounts, bill paying services, as well as

debit and credit cards. Through retail banking, consumers may also obtain mortgages and

personal loans. Although retail banking is, for the most part, mass-market driven, many

retail banking products may also extend to small and medium sized businesses. Today

much of retail banking is streamlined electronically via Automated Teller Machines

(ATMs), or through virtual retail banking known as online banking.

Retail banking coverage

Retail banking is quite broad in nature

Refers to dealing both on liabilities and assets sides

Fixed, current, savings accounts

Personal loans, housing, auto loans, and educational loans)

Ancillary services include credit cards, debit cards and depository services.

Retail Banking: Characteristics

Multiple products (deposits, credit cards, insurance, investments and securities)

Multiple channels of distribution (call centre, branch, Internet and kiosk) and

Multiple customer groups (consumer, small business, and corporate)

Opportunities of Retail Banking in India

India a growing economy

The rise of the Indian middle class

Rising percentage of middle to high income households

New retail customers: the homemaker, the retail shop keeper, the pensioners, self-

employed and those employed in unorganised sector


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CHAPTER 02

LITERATURE REVIEW


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RETAIL BANKING: ASSET PRODUCTS

Retail loans:

Meant for very small entrepreneurs and individuals who are engaged in gainful

commercial activity

Loans are given on the strength of the means of the borrower with an eye on the

repaying capacity.

The quantum of loan is generally determined by the repayment capacity which

depends upon the monthly income.

Banks calculate the maximum monthly repayment capacity of a person using

methods internally developed based on the salary certificate or IT return of a

borrower

Thereafter, a loan for which Equated Monthly Instalment (EMI) is within this

capacity is considered the outer limit for a person.

Loans to resident Indians for purchase of land and construction of residential

house/purchase of ready built house/for repairs and renovation of existing house.

Home Loans to Non-resident Indians

Auto Loansfor purchase of new/used 4 wheelers and 2 wheelers

Consumer Loansfor purchase of white goods and durables

Personal loansfor purchase of jewels, for meeting domestic consumption, etc.

Educational Loansfor pursuing higher education both in India and abroad

Trade related advances to individualsfor setting up business, retail trade, etc.

Crop loans to agricultural farmers

Credit Cards, etc.

Some figures

Retail loans which were at 10.6% of GDP in 2006 have grown to 11.8% of GDP in

2007.

Recently, retail lending has turned out to be a key profit driver for banks with retail

portfolio constituting 28.5 per cent of total outstanding advances as on March 2007.Within retail segment housing loans had the least gross asset impairment.


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Retail CreditChallenges

Customer tendency to borrow more and repay less may affect NPA levels

Future delinquency rates are not properly factored in fixing the Retail credit pricing

Increased risk weight of Consumer Credit

Liquidity mismatches may emerge as an issue

Slight change in economic scenario may affect the whole system

Existing Retail scoring models may not predict impact of mild recession.

Lack of Credit information of Retail customers from the Banking system

CIBIL is addressing the issue only to a certain extent

No system to eliminate multiple finances, including Personal Loans

Higher level of NPA from Personal Loans

Higher Loan-to-value ratio may emerge as a problem during recession

Sale of assets- bank has no control- in the case of Consumer Credit

Growing incidents of frauds and cyber crimes

Common features of retail loans

Retail loans have certain common characteristics or features. These may be broadly

classified as follows:

Retail loans are to individuals for acquiring assets for individual use- such as car,

white goods, residential property etc or for general consumption purposes which

includes education.

Retail loans are small value loans

Each loan in a retail loans portfolio is a very small portion it does not constitute

more than 0.2% of the portfolio

Retail loans where tangible security is given to bank to secure the borrowing

typically have a loan to asset value of 75%

Repayment capacity

The repayment capacity is the available surplus after meeting existing commitments and

living requirements. The surplus has to be adequate to repay the new loan sought within a


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reasonable period. A bank cannot grant loans for any length of time depending on the

repayment available. Retail loans should be repaid within a short period except in the case

of housing loan. The repayment period of different types of retail loans may be as below:

Personal loans for consumption- Two to three years; in certain cases like vacation

travel, the period of repayment be 12 months

Retail loans for consumer goods- not exceeding three years

Vehicle Loan- five to seven years

Housing Loans- five to twenty five years though usually 15 years is the norm

Educational loans Maximum of 10 years after completion of course though

usually the period given is 5 years from completion.

ELIGIBILITY CONDITIONS

In line with the character of retail loans, the eligibility conditions for availing any

retail loan is that the borrower must be an individual or a group of individuals who

have a regular income in excess of their living expenses with an adequate surplus

that will be adequate to service the retail loans availed.The main criteria are the loans are to individuals, singly or jointly and that the

individuals have a regular income. Of course, the applicant should be a major and

be of sound mind and not an undischarged insolvent

In sum, he should be able to enter into a valid contract.

KYC Norms

Proof of identity and place of residence

The borrower must be properly identified; KYC norms are applicable to borrowing

accounts also. Further, the bank cannot give loans to any one without establishing

his identity as the bank has to recover the loan with interest. Hence, the applicant

for a retail loan has to show proof of identity establishing that he is what he claims

to be. Photo identity is required; the usual photo identification process calls for any

of the following to establish identity:


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Pass port

Voter Identity card

PAN card

Identity cards issued by Government authorities

Driving Licence

Any other reliable photo identification

Proof of Income and repayment ability

Salary certificate from employer/salary slips received showing all direct deductions

is accepted for establishing proof of income.

Net income (after deductions towards existing liabilities for which the salary paying

establishment recovers the instalments and the income tax payable, if any) is the

regular income that the applicant receives.

About 55%- 65% of this income is to be reserved for living expenses and it is the

balance that is reckoned as available for repayment

Other recoveries

If the applicant has other existing loans, the loan instalments for which have not

already been deducted from salary, these have to be provided for from net salary to

arrive at the repayment ability

In case of self employed persons the bank has to rely on the disclosed income such

as the income tax returns for the past three years which will give an indication of

the average income.

Proof of other commitments and repayment record

The salary slip given by the applicant may not give the deductions being made from

salary in respect of other commitments of the applicant and the position of the

various liabilities of applicant may not come to light.


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Since we still do not have a system to collect all institutional loans availed by a

person, the lending bank has to rely on the disclosures made by the applicant in

respect of the other liabilities and repayment commitments.

To ascertain the willingness to repay and the tendency to honour obligations, bank

usually asks the applicant to show proof of repayment such as the credit card

statements, and repayment records of past loans and other commitments. These can

be established through bank statements

Credit Agency Report

Credit agencies such as CIBIL have records relating to credit card and other

personal loan defaults of borrowers of all member banks.

A report from the credit agency will give information about the defaults if any

made by applicant.

The agency report is only a negative report if repayment record in respect of

liabilities contracted by applicant is good.

Purpose

The applicant in his application has to furnish the purpose for which the loan is

sought. Retail loans are for acquisition of personal assets or for general

consumption purposes.

Retail loans are not granted for investment or speculative purposes.

REPAYMENT PERIOD

The repayment period depends on the surplus available towards loan servicing and

is dependent on the expected repayment capacity.

The Bank may stipulate a maximum period for repayment of a certain category of

retail loanfor instance 25 years in housing loan.

However, this period is not available to all borrowers. In fact, depending on

repayment ability, the bank will stipulate repayment conditions on a case to casebasis varying from 5 years to a maximum of 15 years.


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REPAYMENT METHODS

Equated monthly installment (EMI)

Equated Monthly Instalment (EMI) is the monthly amount payable which includes

interest and principal amount towards repayment.

EMI depends on the loan amount and the tenure of the loan which is based on the

repayment ability.

EMI and tenure of loan

In an EMI loan, major portion of the instalment goes towards interest in the initial

stages and only a small part is towards the principal debt

As the principal debt decreases, the interest amount also decreases and in the later

stages, major portion of EMI goes towards reducing principal part.

EMI calculators are available which give the amount of EMI for a given tenure

(3years, 5 years, 10 years, 15 years) at given rates of interest for a certain amount

of loan (Rs 1lac). Using the EMI tables, or calculators, one can fix the EMI for a

loan amount for a specific tenure.

The tenure of loan is based on the repayment ability. If repayment ability is strong,

the tenure may be low- say 3 years as against a normal repayment ability which

may require a 5 year repayment period.

PDCS

Post Dated Cheques (PDC s) are cheques drawn by the borrower to be paid infuture to the debit of his account with a bank other than the one from whom he has

borrowed and each cheque is for amount of EMI and the cheques are dated payable

on the same date every succeeding month.

For instance, a borrower may have availed a personal loan from X bank for Rs

50,000 for a period of 12 months in Jan 2008. He has a deposit account with Y

bank. If the EMI is Rs 4500 per month, he gives 12 post dated cheques all of which

fall due on 7th of the month following the month he has availed the loan. So the 12

PDCs, each for Rs 4500 will be dated 7th Feb, 7th Mar, and so on to 7th Jan 2009.


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ECS debit authorization

Instead of giving PDC s he may opt for ECS debit authorization; this is available in

select centres. Then the lending bank X will raise a ECS debit on his account with

bank Y and the borrowers account gets debited automatically if sufficient funds are

available in the account.

If the borrower has a deposit account with the lending bank, he may give standing

instructions or an authority to debit his account on the 7th of every month starting

from Feb 2008 to Jan 2009 towards EMI on his loan account.

Standing Instructions

One may ask if the borrower can give standing instructions to his Bank Y to debit

his account with them every on the 7th from Feb 2008 with Rs 4500 towards EMI

till 7th Jan 2009 and pay to Bank X. This is certainly possible but in this case, Bank

Y will issue a pay order or Bankers cheque and dispatch the instrument to Bank X

and for this the Bank will collect the charges for pay order issue and also the

courier charges. ECS and PDCs are free of such charges.

INTEREST ON LOAN

The interest on loan is the cost of borrowing. Resources have a cost and the cost of

borrowing is the interest. Interest charged by the bank on a loan is a function of various

factors such as

Cost of funds (cost of deposits and borrowed funds)

Operational cost (Cost of establishment and running the bank)

Capital Cost (Cost of capital or the return to be given to the shareholders)

Risk Cost (default premium)

Interest is risk premium

Interest on retail loans carries a uniform risk cost as these are small value loans.

Further, this is a profitable segment of business. Hence spread (interest received

interest paid) will be high. Interest is compounded monthly.


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Rate of interest is generally uniform in each category of retail loans- personal loans

carrying the highest with housing loans being charged the least.

Unsecured loans carry a higher rate of interest as risk is higher

Rate of Interest- fixed

The rate of interest charged on a loan may be fixed at a certain percentage during

the entire tenure of the loan. In this case interest rate will not be refixed.

For instance a housing loan for 15 years may carry a fixed rate of interest at 8.5%.Through the life of the loan, interest will be at 8.5%.

However, banks now include a reset clause that the interest may be rest at fixed

intervals or in the case of certain events

Rate of Interest- floating

The rate of interest is linked to a benchmark such as the prime lending rate.

So as and when prime lending rate varies depending on external conditions, bank

will revise the PLR and the rate of interest on retail loan is which is linked to PLR

will automatically change.

Benchmark may be the 5 year deposit rate and period of refixing may be every 6

months; so every 6 months, the interest on loan will be refixed and it is said to float.

When interest rates are declining, it is preferable to have loan on floating rate while

if interest rates are on the rise, fixed rate loans are better from the borrowers

viewpoint.

Option to change from fixed rate to floating rate and vice versa

Banks permit change over from fixed rate of interest to floating rate and vice versa;

however the banks collect a charge for such a switch to compensate them for the

likely loss of interest.


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Pre Payment Charges

In case of long tenure loans, banks charge a pre-payment premium in the event of

premature closure of the loan.

DELINQUENCY MANAGEMENT PROCEDURES

If any loan instalment or interest remains unpaid for a period of 90 days, the loan becomes

classified as Non-Performing Loan. No bank will allow loans to turn NPL without trying it

best to collect the dues. Recovery of loan and interest is a very important function and

ensuring recovery of principal and interest makes the portfolio healthy and performing.

Various tools used by ICICI Bank for delinquency management are discussed below:

MARGIN

Margin may be defined as the borrowers stake or contribution. The concept of margin

arises only in secured advances where lending is against an asset.

Bank provides loan for a given purpose say for buying a four wheeler- as a

percentage of the asset value; in this instance, if the price of automobile is Rs 4

lacs, bank will not give Rs 4 lacs as loan and may at the most give Rs 3 lacs for a

period of 5 years or 7 years depending on the repayment ability and its assessment

of borrower. The amount of Rs one lac which borrower has to bring is the margin

amount and it is his stake in the car. Borrower has to have a stake in the asset.

Apart from that, in case of default or any other circumstances, it may be decided to

sell the car. If the sale proceeds are less than the balance in loan account, bank runs

a risk that the balance may not be paid by the borrower. The fluctuations in asset

price give rise to a risk and to protect against this risk, the banks restrict the lending

to the market value less a discount. This discount is known as the margin.

In case of second hand vehicles, the discount will be more say 40% instead of

25% for new cars. That is, for financing purchase of second hand cars, banks will

lend only 60% of the market price. The balance 40% being the margin has to come

from borrower. This discount is the borrowers contribution. So margin is known as

the borrowers stake. It is also the discount to the market value and bank will

finance only market value less the margin. It is the safety factor for guarding

against price fluctuation.


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Third Party Guarantee

The third party guarantee is a risk mitigating measure. The borrower has to provide

a third party as a guarantor who undertakes to pay the bank the sum at default in

case the borrower does not pay. In most bank documents of third party guarantee

the guarantor waives his rights under the Contract Act and confirms that he can be

treated for all practical purposes as the borrower. So in case of default, bank can

proceed against borrower and guarantor simultaneously in a court of law and if any

tangible asset of the guarantor is given as security of guarantor, bank can proceed to

enforce the security.

The third party guarantee in some states that in consideration of the bank granting a

certain loan amount to the borrower, the guarantor agrees to stand guarantee to the

bank for the sum stated together with interest and in case the borrower does not

repay on demand, the guarantor will pay the amount due on demand and that for all

practical purposes, the bank may treat him as the borrower.

The third party guarantor must be well known to the borrower and have full trust in

him to undertake to give the guarantee. A financially sound and trust worthy third

party guarantor is a good security to the bank.

Apart from bringing moral pressure on a defaulting borrower, the third party

guarantor will pay off the bank loan and take the place of bank (step into the shoes

of the lender) (Principle of Subrogation)

Loan amount and L/V ratio

In the case of retail loans which are secured by assets, bank does not usually give

the full value of security as loan amount. The asset values are subject to volatility

and hence as a prudent measure, the loan amount is a proportion of the asset value.

Usually the loan amount is 75% of the asset value. L/V ratio is usually 0.75; for

instance, if the applicant desires to acquire a house which costs Rs 10 lacs, the loan

amount is usually Rs 7.5 lacs or less.

The L/V ratio or the Loan to Asset Value ratio is a measure of the extent of loan

amount as compared to todays market value of asset. It is also a measure of the

borrowers own stake in the asset.


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If L/V ratio is one, the bank runs a risk that when asset prices fall, the applicant

may default and simply not bother about the asset as he has no stake.

Security

Security is a risk mitigant -an insurance against default. If the borrower defaults, bank

should have something to fall back upon and realize its dues.

Security is like insurance; it is a fall back and in case the repayment is not

forthcoming, steps can be taken to enforce the security. Security is not available in

case of all retail loans.

Retail loans such as housing loan, vehicle loans may be considered as secured loans

where the security is the charge on the assets acquired.

Loans for acquisition of white goods- generally known as consumer loans- require

the charge on assets acquired it is in effect unsecured as taking possession of such

consumer goods is practically impossible and the resale value of such assets is quite

low

The banker lends for a purpose which will generate additional income from which

he hopes to get the loan and interest repaid.

Security is called the second way out and is a fallback or secondary.

The significance of security is that it is a fall back in case the expectations of

additional cash inflows do not happen.

Naturally all values of securities are volatile and hence the concept of margin on

security.

Bank will lend only a percentage of the value.

Modes of charge on security

The assets of borrower created from banks loan or his other assets are charged as

security to the banks loan.

The process of creating the charge on the assets of borrower to form the security is

known as the mode of charge. These are briefly discussed below:


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Lien and appropriation

Lien this is the right to retain; a banker has a general lien on all properties which

come to him in the normal course of business.

A banker can retain proceeds of a cheque, a fixed deposit or any other instrument or

property belonging to the borrower which comes to the banker towards amounts

owed by the borrower.

Appropriation or the right of set off- Banker can appropriate or set off credit

balances with debit balances of the borrower provided both accounts are in the

same name and same mode

Pledge

Pledge- Bailment of movable goods as security for moneys borrowed. Banker can sell

the goods kept with him in pledge after giving notice of sale. Borrower retains the title

to goods while the possession is with the bank.

Hypothecation

Hypothecation- also called the floating charge on movable assets.

In hypothecation the borrower is the owner of the goods and the possession is also

with him. He can deal with the goods in any manner in the normal course of

business.

The floating charge becomes crystallized when the banker takes possession of the

hypothecated goods.

Mortgage

Mortgage- Mortgage charge is a creation of an interest in a specific property-

usually immovable but mortgage charge on movable is also possible. Mortgages are

of different types- Registered mortgage, equitable mortgage, Usufructary mortgage,

English mortgage etc.


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Assignment

Assignment- Assignment of future receivables can be made by way of notice. For

example - A policy of life insurance can be assigned to the bank as security and the

value of the security is the surrender value of policy

Third party guarantee

Third party guarantee is an assurance from an independent party of known means

and respectability to the bank that the loan to the borrower is guaranteed by him

and that if the borrower does not pay the bank as per the terms agreed to by theborrower, he the guarantor will make good the loss.

The third party guarantee reduces the risk of the bank to some extent.

The risk, that the guarantor, in spite of his assurances and undertakings, may not

pay when called upon to do so in the event of default by the borrower, still persists.

The comfort that is derived from a third party guarantee is only that you have

another person who can bring some pressure on the borrower to repay and also have

recourse to the guarantor for recovery of dues.

CONSUMER CREDIT APPROVAL PROCESS

Decisions to be made in the processing segment of Consumer Credit

Retail loan sanctions are mostly automated. Based on the details given in the

application credit scores are worked out as per the model and depending on the cut

off score the application is approval or rejected.

Since a large number of applications are centrally evaluated using the scoring

model based on defined parameters very little scope for discretion is given

It is to be borne in mind that the scoring model has been built on observed trends of

transactions and default history.


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Review of scoring model

So normally, rejections of applications are not subject to a review. Either the

application goes through the gate or crosses the hurdle credit score (is accepted) or

is rejected.

To ensure that the model is working well and is not rejecting applications which

would qualify, a review of the rejected applications is undertaken periodically.

This along with a portfolio review of the performance of approved loans will give

an indication of the suitability of model.

Decisions in various Processing Segments of Consumer Credit

Deviation from sanction process

In some cases, the approval process may have rejected on the basis of credit score

(Credit Score being less than the cut off).

However, it may be that the applicant is offering good security or the guarantee of a

third party that has an excellent account with the bank. These factors may not be

captured by the model. Quite often, retail loans are sanctioned to persons on the


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basis of their standing in society without any rating process being adopted in the

belief that the custom of the noted persona will help in furthering banks business.

These are deviations from the regular sanction of retail loans.

Record of deviations

Deviations have to be sanctioned by a superior authority

The sanction of such loans has to be in writing explicitly stating the reasons for

deviation from practice. For instance, if an application which would normally have

been rejected on the basis of credit scoring is approved on the strength of the

guarantors dealings with bank and his standing in society and ability to repay the

advance in case of default, the sanctioning authority will make a note of these

factors and record the treasons for the sanction.

It is needless to add that the deviations from the approved practice for retail loans

will a small percentage.

Methods of disbursement: consumer and vehicle loans

Disbursement methods vary depending on the purpose

In case of assets being acquired such as consumer goods and vehicles, the practice

is to collect from the borrower the margin amount and to debit the loan amount to

borrowers account and the full cost of asset is paid to the seller of asset by means

of a pay order or Bankers cheque.

Methods of disbursement: Home loans

If the loan is towards acquiring plot and constructing house, the disbursement will

be in stages- first to the seller of the land and for the construction the disbursement

will be to the building contractor at predetermined stages

However, if a ready built apartment/flat is being acquired, the loan amount with

margin will be paid to the seller/developer through pay order.


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Methods of disbursement: Personal loans

In the case of personal loans, the loan amount being for consumption purposes, the

loan amount will be debited to borrowers loan account and will be credited to his

savings account if the borrower has account with the bank.

In cases, where the borrower does not have a savings account, the loan amount will

be debited and a pay order issued favouring the borrower or as per instructions

given by the borrower.

Methods of disbursement: Educational loans

In the case of educational loans, the loan amount is for the duration of the studies

and every semester/year the loan account is debited and the college

term/examination/special fees are paid directly to the college/institute where the

borrower is studying.

When the loan amount covers hostel expenses also, the room rent is paid directly

while the mess charges incurred are reimbursed to the borrower on his production

of paid bills.

Discharge of Security

Security given to the bank for due repayment of the loan is to be released or

discharged upon the closure of loan through repayment by periodical payments or

prepayment.

Security in case of secured assets may be in the form of pledge, mortgage,

assignment, hypothecation etc. When the loan is repaid, it is necessary for the bank

to release its charge on the asset given as security. In case of pledged articles, all

that the bank has to do is to return the goods lodged with it as security.

In case of motor vehicles thebanks charge on the vehicle will have been registered

in the books of Road Transport Authority and will be shown in the RC book. The

bank has to give a letter to RTA for deletion of the charge in the RC book in the

prescribed format.

In case of mortgages, if mortgage is by deposit of title deeds, discharge is by return

of title deeds. However, if the mortgage is a registered mortgage- simple or English


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Mortgage- this will be registered with the Sub Registrar of Conveyances and has to

be discharged through a stamped document duly signed by the bank stating that the

loan has been paid in full and the mortgage is discharged.This release document has to be registered with the sub registrar who will enter the

discharge in his books.

Assignment of policy or future receivables has to be reassigned on the account

being closed. This is also through a written document and the reassignment is noted

in the books of the debtor; for example in the case of a life policy, the assignment at

the time of creation of charge and the reassignment upon release will be registered

in the books of the insurance company.

Regulatory requirements of Retail Loans

Exposures by way of investments in securities (such as bonds and equities),

whether listed or not;

Mortgage loans to the extent that they qualify for treatment as claims secured by

residential property;

Loans and advances to banks own staff which are fully covered by superannuation

benefits and mortgage of flat/ house;

Capital market exposures;

Consumer credit, including personal loans and credit card receivables;

Venture capital funds.

Qualifying criteria

Orientation criterion - The exposure is to an individual person or persons or to a

small business; Person under this clause would mean any legal person capable of

entering into contracts and would include but not be restricted to individual, HUF,

partnership firm, trust, private limited companies, public limited companies, co-

operative societies etc. Small business is one where the total average annual

turnover is less than Rs. 50 crore. The turnover criterion will be linked to the

average of the last three years in the case of existing entities and projected turnover

in the case of new entities.


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Product criterion - The exposure takes the form of any of the following:

Revolving credits and lines of credit (including overdrafts), term loans and leases

(e.g. instalments loans and leases, student and educational loans) and small businessfacilities and commitments.

Granularity criterion - Banks must ensure that the regulatory retail portfolio is

sufficiently diversified to a degree that reduces the risks in the portfolio, warranting

the 75% risk weight. One way of achieving this is that no aggregate exposure to one

counterpart should exceed 0.2% of the overall regulatory retail portfolio.

Aggregate exposure means gross amount (i.e. not taking any benefit for credit risk

mitigation into account) of all forms of debt exposures (e.g. loans or commitments)that individually satisfy the three other criteria. In addition, one counterpart means

one or several entities that may be considered as a single beneficiary (e.g. in the

case of a small business that is affiliated to another small business, the limit would

apply to the bank's aggregated exposure on both businesses). While banks may

appropriately use the group exposure concept for computing aggregate exposures,

they should evolve adequate systems to ensure strict adherence with this criterion.

NPA s under retail loans are to be excluded from the overall regulatory retail

portfolio when assessing the granularity criterion for risk-weighting purposes.

Low value of individual exposures. The maximum aggregated retail exposure to

one counterpart should not exceed the absolute threshold limit of Rs. 5 crore.

Regulatory guidelines

For the purpose of ascertaining compliance with the absolute threshold, exposure

would mean sanctioned limit or the actual outstanding, whichever is higher, for allfund based and non-fund based facilities, including all forms of off-balance sheet

exposures. In the case of term loans and EMI based facilities, where there is no

scope for redrawing any portion of the sanctioned amounts, exposure shall mean

the actual outstanding.

Banks exposures which satisfy all the criteria prescribed for inclusion in the

regulatory retail portfolio, irrespective of the sector to which the exposure is, may

be included under the regulatory retail portfolio if such exposures have not beenspecifically addressed.


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CHAPTER 03

THEORETICAL PERSPECTIVE


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RETAILBANKING: LIABILITY PRODUCTS

Savings Bank Account

Recurring Deposit Account

Current Deposit Account

Term Deposit Account

Zero Balance Account for salaried class people

No Frill Account for the common man

Senior Citizen Deposit Accounts, etc.

Why does a customer make a deposit with a banker?

that the money will be available when he needs it

that the money will be invested with greater professional skill than the depositor is

capable of

that the money turned over is money lent to the banker and the depositor cannot

follow the specific sum of money and seek the return of money from a specific

asset of the bank

Deposit is a debt

Deposits made with the bank are in the nature of debts of a bank

Deposits are not moneys given in trust

If there are such conditions attached to the deposit, the banker cannot lend or invest

the funds using his best judgement to produce the best returns with the least risk

exposure. (Such relations do exist between bankers and customers but they are

special.)

Deposit: conditions

Deposits are repayable on demand or on maturity at the branch where account was

opened.

With internet banking, deposits into an account are possible from any centre. Alsotransfers. ATMs offer cash withdrawal from any centre.


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Traditional banking required cheques/ specified forms; in internet banking this is

not necessary.

Customer: Unsecured creditor

On the issue of repayment, the customer is in the position of an unsecured creditor.

If bank goes into liquidation, customer's claim will rank along with other creditors

of the bank.

However, all deposits are guaranteed up to a limit of Rs1,00,000 by the Deposit

Insurance Corporation

Retail Deposits

The banks deposit portfolio consists of a large number of current, savings and term

deposit accounts.

Of these savings and term deposits come mostly from individual savers. These

deposits are small in value and large in number.

Groups of individuals have a saving and spending pattern. So, at any given point in

time, a core portion of SB and current account funds will remain with bank.

Similarly Current accounts of small firms, traders and other business also display

definite characteristics of deposits and withdrawals and balances with the bank

The trend is also seen in term deposits. A core portion of term deposits will get

renewed and funds will stay with banks.

These types of deposits are known as retail deposits. Retail deposits, in general

display lower volatility than bulk deposits. They also display definite patterns of

withdrawal and deposit cycles. Banks plan their asset growth based on such

patterns.

Interest on deposits related to market rates

Prior to financial sector reforms RBI used to prescribe interest rates for all

maturities and neither the banker nor the customer had a choice in the matter.


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However, with liberalisation banks are now free to quote market interest rates. The

rates change as often as RBI changes benchmark rates or even in response to

economic conditions.

Obligations of a bank

Obligation to honour cheques: A banker has an obligation to honour cheques

drawn on an account opened by him, provided the account is in funds. S. 31 of the

Negotiable Instruments Act provides that a banker who defaults in this obligation

must compensate the customer for any loss or damage.

Obligation to maintain secrecy: A banker is bound to maintain secrecy about the

details of the customers account with him. This obligation is subject to disclosures

when compelled by law.

Obligation not to close account without notice: Having opened an account for the

customer, the banker has a contractual obligation to maintain and service the

account. If the banker has sufficient reasons to consider the account undesirable, in

terms of costs of maintenance, or other reasons he can close the account after due

notice to the customer. The notice is necessary to provide for transactions in the

pipeline to be completed, or contemplated by customer.

CLASSIFICATION OF DEPOSITS

Deposits are primarily classified into demand and term deposits, sometimes called as

demand and term liabilities.

Demand deposits

Current and Savings Bank deposits are knows as demand deposits.

These are plain vanilla deposit products that banks offer to customers who require a

bank account for making payments, or use money readily available to meet day to

day expenses.

People prefer a bank account for keeping their savings that would fetch them some

small interest. Additionally bank deposits provide safety to the savings, unlike cash

kept in houses which do not produce any return and there is the further risk of theft.


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Current and Savings accounts

A current account is a running account. Unlimited operations.

The basic objective of a current account is to facilitate use of cheques for payments

and avoiding cash dealings.

Current accounts constitute low cost deposits for a bank

However banker plans liquidity to meet demand for funds. There is thus a cost

attached to idle/less than optimally invested funds

SB account rules limit drawings; interest is paid at 3.5%p.a on lowest balance

between 10th and last day of the month.

There are other servicing costs: cheque books issued, ledger (or nowadays digital

records) maintenance costs.

Core SB and Current accounts

Demand liabilities are at call by the customers.

In practice it is not so. A certain amount of these deposits would stay with the

banks as core balances in the Savings and Current account balances of the bank.

These core funds are available as long term resources to the banks and are available

for lending and investment.

Of course, banks do not earmark funds for lending as so much out of current

account, so much out of savings account etc. They lend out of a pool of funds.

SB account with ICICI Bank

The bank offers a savings account in two options. The first option is just like any

savings a/c with the conditions that a minimum average quarterly balance of Rs.

5,000 must always be maintained else Rs. 150 per quarter will be charged. The

second option, known as the sweep-in account combines the feature of a fixed

deposit and a savings account. With no minimum balance requirement, one has to

keep a fixed deposit of Rs. 25,000 and when in need of cash can just transfer or

sweep in funds to the savings account. Here again non-maintenance will attract a

penal charge of Rs. 150 per quarter. Deposits are held in units of Rs. 1, which gives


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one the flexibility to withdraw the exact amount needed without losing up on

interest. One can even jump from option 1 to option 2. However, this will attract an

account closure charge of Rs.100

Term deposits

A term deposit is about the safest investment option for a saver who has funds that

he can invest for a definite period of time. It is the most attractive option that

combines with it an element of safety. Bank deposits are guaranteed up to a limit of

Rs.100000 by the Deposit Insurance Corporation.

Deposits placed with a bank for periods of 7 days and more are called term

deposits.

Term deposits are accepted for a period up to 10 years. But, deposits are accepted

up to a maturity of 3 years. The reason being neither the banker nor the customer is

willing to commit to an interest rate that far into the future.

Term deposits- maturities

To begin with banks were only short term lenders; their loans were for short periods

and generally for not more than a year. So, their need for resources, i.e. deposits

was for a period of one year.

As banks started lending for medium term up to three years and later for longer

periods, they needed deposits with longer maturities.

Term deposits with maturities of more than one year, and up to 10 years were

introduced.

Changes in the demand for credit, changes in savings patterns of customers, have

compelled the banks to come up with variations in term deposit products

Term Deposits- Changes in maturity range

Although banks did not offer intermediate maturities i.e. say 7 months, banks

would accept such deposits and pay interest at the rate applicable to the next lower

maturity in this case 6 months.


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The need for offering suitable maturities led to term deposits with maturities

starting from 3 months to 10 years.

Banker would prefer to handle fewer term deposit maturities and preferably notshort term. But the driver is the availability of funds of certain maturities and the

bankers needs.

Term Deposits- Product innovations of ICICI Bank

At least to begin with there was no marketing for deposits on the part of banks.

When banks needed more funds for more credit they had to change their product

orientation to meet customer expectation and not the banks convenience.

They came up with term deposit as a product.

Again, to begin with banks were short term lenders making loans up to a years

duration. So term deposits started off as short term one year deposits

Next step in the process was when a customer having made a deposit for a definite

period had urgent need of funds and asked the banker to pay him back the money.

This gave rise to some new products: a) premature payments and levy of penalty b)

overdrafts or loans against fixed deposits with higher rates of interest and c) term

deposits of varying durations to suit the needs of both customers and the bankers.

The first two would be innovations of asset products while the third a new set of

liability products.

Based on the patterns of a large number of customers deposit maturities were set at

3 months, 6 months, one year, above one year, two years and so on.

New Products & Controls

In India, new products and product innovations have not been always driven by

market forces. Until the financial sector reforms in 1991, RBI stipulated both

interest rates and the periods for term deposits.

For a considerable period of time deposits below 3 months were not permitted.

With maturing markets and the investing publics ability to understand and use

short term products, RBI dismantled controls and deposits with 15 days and later 7

day maturities have come into being


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Reinvestment Deposit

Another innovation-reinvestment deposit. Interest accruals added on to principal

with quarterly compounding of interest on principal plus interest

Product was attractive to a class of investors who were not dependent upon

periodical interest income.

Cash Certificates: another variant. Certificate issued with an upfront discount on

face value. The discount is the rate of interest payable on the deposit

Recurring or Cumulative Deposits

Recurring deposits or cumulative deposits are those where the deposits are made in

monthly instalments and the maturity payment is a lump sum

Special deposit is a variant allowing recurring or periodic deposits at intervals other

than monthly i.e. quarterly or half yearly etc.

Annuity deposits and Permanent income (or Pension) plans were another

development with periodic deposits (sometimes annual) build up into a corpus and

then the bank pays out monthly amounts for an agreed number of years akin to apension.

On fixed deposits or term deposits the banks pay interest at quarterly intervals.

However if a customer wants monthly interest they make such payments

discounting the quarterly interest amount.

Flexi Deposits

Flexi deposits: partly a response to customer demand for return on large current

account balances and partly because technology made it possible to offer such a

product.

As RBI did not permit interest payments on current account balances, banks came

up with flexi deposit as a product moving surplus funds in current account into

deposits & moved them back into current accounts when there was a demand for

funds, breaking down only the minimum needed units of deposits


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Flexi deposit: how it works?

Technology makes it possible to hold a term deposit in small units of Rs.100 or

even Rs.1. So exact amount required to meet a cheque could be made available and

balance in term deposit would continue to earn interest.

Such term deposits are sometimes called Multi-option deposits or flexi deposits

Auto sweep and Reverse sweep

Where a customer has two accounts, one in funds and the other with inadequate

funds to meet the cheque drawn on the latter account, the operating software of thebank can be programmed to automatically transfer funds to the latter accounts to

meet the cheque. This facility is called sweep- sweeping funds out of the account

with funds into the one requiring funds.

Reverse sweep is a facility which offers the customer a choice to transfer idle funds

out of an operating account into one that would earn him some interest income. E.g.

balances in a current account above a certain specified limit could be automatically

transferred to a term deposit account for agreed durations.

Supersaver account

Yet another product is the super saver account. This is similar to HSBC s Smart

Money Account. With a minimum amount of Rs. 25,000 in a fixed deposit one can

withdraw up to 75% of the deposit by paying 2% plus interest tax (for a limit of Rs.

0.2 mn) over the deposit rate only for the period one uses the money.

Auto Renewal

Under this facility when the fixed deposit a/c attains maturity, the bank will

automatically renew the principal and accrued interest for a further period as

stipulated by the a/c holder.


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ACCOUNT OPENING PROCEDURES

Introduction

A bank account is a means of keeping ones savings safe, keeping a record of ones

savings and expenses and earning some income on the money.

Bank accounts also provide a means of payment of dues, settlement of debt,

payment for purchases etc. A means that is more convenient than lugging cash

around everywhere and facing the risks involved in carrying cash, especially to

distant locations.

Opening accounts

Bank account creates a legal and contractual relationship between banker and

customer. Bankers duties and obligations are onerous. Therefore a banker has to

exercise care when he opens an account.

Before opening a new account banker should make inquiries about customer, his

profession or trade, nature and purpose of account he desires to open.

If the person is unknown the banker must ask for introduction from a person known

to the banker or call for references. RBI has directed that bankers must ask and find

out from the referees how long they have known the customer who is being

introduced to the bank.

If proper enquiries are not made at the time of opening the account and subsequent

events lead to a fraud being committed, then the banker will be held to be negligentand will not enjoy the statutory protections available to him under S.131 of the

Negotiable Instruments Act, even if he has otherwise performed his duty as a

banker.

Opening accounts: individuals

There are risks in opening accounts for individuals or even firms. A person could

be an undesirable individual who could be depositing stolen funds in to the bank.


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As per RBIs directives, banks must obtain photographs of customers while

opening the account. A copy of the photograph is kept with the signature card and

another is pasted to the passbook, if a passbook is issued.Bank accounts have been frequently used to transmit money for terror related

activities and since 2003 when the world trade centre was destroyed in terrorist

attacks, governments the world over have taken steps to control and monitor bank

accounts to prevent money laundering transactions that pass through bank accounts

KNOW YOUR CUSTOMER -INTRODUCTION

All the rigours of KYC are meant to weed out bad customers and to protect the

good ones

KYC processes ensure that banking operations are clean and help banks in

transparent and legal conduct of business, maintaining the integrity and reputation

of banks

KYC is a basic tenet in banking. It helps in:

Complying with legal requirements

Understanding customer needs and extending requisite services

Customer profiling according to size, habits, types preference etc

And to categorise them into risk classes

RBI initiatives

Guidelines issued in 2002, refined in 2004

RBI guidelines are meant to

Prevent banks from being used intentionally or unintentionally by criminal

elements for their money laundering activities

To help banks know their customers and their financial transactions and by this

to manage their risk prudently

RBI expects all banks to have comprehensive KYC policies evolved and adopted

by their Boards and put in place processes to ensure that these policies and

procedures are faithfully implemented


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Customer Acceptance Policy

No fictitious accounts to be opened in anonymous fictitious or benami names

No accounts to be opened, or existing accounts continued without due diligence

with regard to id of customer, availability of evidential documents on proof of

domicile etc,

Ensuring that the new or existing customer is not an undesirable person i.e. He is

not a person with a known criminal background, does not belong to a banned entity

like a terrorist organisation he is not a violator of law etc

When a customer desires to act on behalf of another person, an analysis should be

made on the circumstances under which such operation is required the type and size

of such transactions do not infringe the law of the land

Document requirements and other information to be collected in respect of different

categories of customers depend upon the risk perception and relate to provisions of

Prevention of Money Laundering Act.

Customer Identification processes:

Customer identification means the identification of the customer and the verifying

of his/her identity by using reliable and independent source document, data or

information

For customers who are natural persons banks should obtain sufficient identification

data to verify the identity of the person, his/her address location and also recent

photograph

For customers who are legal persons or entities banks should

Verify the legal status through proper or legal documents

Verify that any person purporting to act on behalf of the legal person/entity is so

authorised and

Verify the identity of that person

Understand the ownership and control structure of the customer and determine the

natural persons who ultimately control the entity


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the Banks board should lay down the policy on acceptance of documents

establishing identity, it should also issue guidelines on review documents on

existing accounts and where these need to be obtained afresh,

Monitoring Customer Transactions

The banks policy and procedures should clearly help parameterise the type and

normal size of transactions in a customers account

It should be possible through procedures to quickly identify an ICICI BANKormal

transaction like one that falls outside the normal level and pattern of activity

recorded for initiating further enquiry

It should facilitate special attention on all complex, unusually large transactions,

suspicious patterns that violate laws of the country

It should ensure that no structuring i.e. manipulation of the size of individual

transactions occur that will keep the transactions below the threshold level that

require reporting

Transactions that involve large amounts of cash inconsistent with customers

normal/expected activity should receive special attention

Very high account turnover inconsistent with balance maintained or income

declared might be indicative of washing of illegal funds

A record should be kept of all transactions- deposits and withdrawals- of Rs.10 lacs

and above

And banks should have an internal monitoring system to report these and other

suspicious transactions

Customer Privacy

KYC processes should not lead to harassment of customers

Banks collecting information for other than KYC purposes should not use account

opening form for such information

Customer should have the option to provide the information or not. It should be

voluntary

Banks may issue educational brochures on why elaborate questions are being asked


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Information collected should not be commercially used

Banks should have:-

an organisational structure in place to evolve, implement, maintain and review

KYC policy and processes

guidelines for opening /reviewing of accounts of various categories of customers;

identification of high value transactions; monitoring suspicious transactions and

reporting them; accountability for KYC implementation; systems for updating their

information and processes

KYC documentation

Customer Identification is best done by obtaining an introductory reference from an

existing account holder or person known to the bank and

Through documents that establish the identity and domicile/residence of the

customer

The table below gives two lists one for photo identification and the second for proof

of residence

List of documents to establish identity/proof of residence

For Identity

Passport where the address differs from that on the application

Election ID card

PAN card

Government, Defense ID card

Driving License

For Residence

Salary slip

Income wealth tax assessment order

Electricity bill

Telephone bill


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Credit Card statement

Account opening: formalities

On opening an account the bank supplies the customer with a book of pay in slips, a

cheque book (or in a savings account if such a facility is not granted then

withdrawal slips), a passbook etc.

While in the normal course a banker has no duty to verify the source of funds,

given that money today is moved around financing terror, drugs, for political

destabilization and other undesirable or unlawful activities, there is a need for the

banker to Know his customer.

The foregoing however underscores the importance of formalities associated with

opening of accounts with banks.

Accounts: Risk classification

An individual would normally open a savings bank account. So, if he wants to open

a current account the banker has a duty to seek reasons on why the customer needs

a current account

He has a further duty to make inquiries if a cheque for collection is deposited

immediately after opening the account

In line with guidelines related to managing operations risk, banks now classify

accounts as low, medium or high risk. Such classification is based on the type of

account, nature of transactions, the probability that the account could carry

undesirable or illegal transactions in it etc.

When the banker obtains information for opening an account in an account opening

form, and verifies the particulars furnished in accordance with the tenets of Know

Your Customer, a fair amount of the issues discussed in the preceding points is

automatically taken care of


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Account opening form: Details

An account opening form starts with a request by the customer to the banker to open an

account for him

In a typical form he is asked to make a product choice: 1.Savings account 2. Term

Deposit- interest payable or reinvestment 3.Recurring Deposit 4. Current account 5.

Others

Customer details: name in full, PAN number, Income tax details like when assessed

to tax, IT ward circle etc, residential address with landmarks, PIN code, telephone

no, mailing address if separate

Details of education, occupation, salaried or self-employed, name of employer,

income and family income monthly etc...

Details of existing bank accounts with branch name, account number etc

Mode of operation in case of joint accounts, either single or joint etc

Benefits customer desire: debit card, ATM card, name that should appear on card,

whether a photo debit card is desired.

Cheque book- whether local or multi-city use,

Whether internet, phone banking, mobile banking facilities are required

Whether e-statements are required, if so e mail address

Nomination under section 45ZA of the Banking Regulation Act, with particulars

and nomination declaration with signature

Details of initial deposit, cash cheque with amount and particulars

If term deposit account, tenure: days months, years, maturity instructions like auto

renewal, payment instructions etc.

Rules binding on customer

Every customer is deemed to have read the rules governing the conduct of accounts

with the bank and there is usually a statement to the effect in the account opening

form of the bank which the customer signs before the bank opens the account for

the customer.


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Mandate for operations

Sometimes a customer wants to authorise person to operate his account. A mandate

is given by him to the banker. This mandate must specify the exact authority given

to the mandate holder. Whether he can sign cheques, give receipts, whether an

overdraft created by him, inadvertently or otherwise will be binding on the

customer etc.

Joint accounts: mandates

It could be either or survivor, anyone or survivor, former or survivors to whom the

balance should be paid.

Account can be operated singly, jointly by all or any two or three or in other

combinations.

These mandates can be withdrawn at any time by any one of the account holders

Such joint accounts can also be opened for a married woman with her husband.

Where a single account is opened for a married woman, if there is an overdraft,

inadvertent or otherwise a banker will have no recourse against the husban dsestate.

ACCOUNTS OF INDIVIDUALS: SPECIAL CASES

Joint accounts

Two or more individuals can open joint accounts with a bank; a savings, current or

term deposit account for a common purpose.The banker should obtain information on the purpose for which the account is

opened, if the persons joining together for opening an account have no natural

relationship or other apparent reason for so getting together.

Banker should obtain a clear mandate on who would operate the account and to

whom the balance or maturity proceeds should be paid when the account is closed

either voluntarily or otherwise.


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Accounts of a minor

S.3 of the Indian Majority Act, 1875 provides that a person who has not attained the

age of 18 is a minor. And if a court appoints a guardian before the age of 18, such

guardianship would continue until he completes the age of 21; and he will continue

to be a minor.

According to the Indian Contract Act, a minor cannot enter into a valid contract and

if he does such a contract is void against the minor except where it is a contract for

supply of necessities of life.

Precautions to be taken in minors account

The banker therefore must take precautions while dealing with a minor or a minors

account

He can open a savings account for a minor (not a current account) to be operated by

a guardian or by himself if he is over the age of 14.

The minors account should be closed and the balance in the account paid to the

minor on the date he attains majority. The bank must have a record of the minors

date of birth.

The father of a minor is the natural guardian of a minor. If the father dies during

minority, then the mother becomes the natural guardian who can operate the

account. In the event of both father and mother dying, either a testamentary

guardian or a court appointed guardian may operate the account.

In case of the minors death the balance in the account can be withdrawn by the

guardian

If the banker permits an overdraft in the minors account, the banker cannot recover

the amount and he has no legal remedy.

No advance can be granted to the minor against the guarantee of a third party. As

irrespective of the third party, the contract of loan between the banker and the

minor is invalid and the banker cannot enforce the contract.


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A minor may draw, endorse or negotiate a cheque or a bill He will have no liability

on the instrument. The instrument itself will be valid and all other parties to the

instrument will be liable in their respective capacities.A deposit account can be opened in the name of a minor by a bank, in the style

of,........., father and natural guardian of ........, minor.

Banks open a Savings Bank account with cheque book facility for a minor who is

above 14 years of age. This is done at the banks discretion, on an assessment that

the risks are minimal in allowing an account for a minor for his personal use while

at school etc.

Accounts in the name of a married woman

A banker can open a single account or a joint account with her husband for a

married woman

In the case of a joint account, he should ask for clear instructions on who should

operate the account.

In the event of death of either of them, the banker should have clear instructions on

to whom the balances in the account should be paid.

In the event of death of the husband, banker cannot without verification pay the

balance to the widow as there could be other heirs.

If a banker grants an overdraft or loan to a married woman, he can recover his dues,

only from property owned independently in her name. A married woman cannot

make her husband responsible for her debts

Even if there is property in her name, it might be that she only has right to the

income from the property and not to sell it or encumber it. In such a case, the

banker will not be entitled his dues from that property.

Account of illiterate person

Banker can open an account in the name of an illiterate person allowing operations

in the account, against his thumbprint.

His photograph should be taken on record; and he would be required to come in

person to the bank for operations in the account.


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Transactions in the account must be in the presence of the Manager, who should

explain the transaction, read out to the illiterate person the balance in his account

and record the fact that such explanation was offered to the customer. Only a SB orterm deposit account will be opened for illiterate customers.

Accounts of executors and administrators of estates:

An executor is appointed by a person to manage the affairs of his estate after his

death.

In the absence of a testator appointing an executor, a court will appoint an

administrator for the execution of a will and manage the affairs of the deceaseds

estate.

On the death of a customer, the accounts with the bank are frozen. The banker must

stop operations in the account.

The executor will be allowed to operate on the account on production of a probate

of the will obtained from the court.

The administrator will be allowed to operate the account on production of letters of

administration obtained from the court.

If two or more persons are appointed as executors or administrators, then they must

open a joint account with the bank. Operations in the account will be based on clear

written mandate given by all the executors or administrators

Banker cannot exercise his right of set-off the credit balance in the executors

account against the debit balance in the account of deceased.

Banker should not allow transfer of funds from the estate account to the personal

account of the executor

Grant of loans to the estate of the deceased, against estate property pledged by the

executors will depend upon the provisions in the will or the court order

Account by an attorney for a customer

Banker should be guided by the provisions of the registered copy of the power of

attorney document


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Banker should verify, that the document is properly drawn up, stamped, notarized,

and make a note of all the terms that have a bearing on the operation of the bank

accountThe document should contain specific power given to the attorney to open an

account with the bank, and must contain instructions about operations of the

account.

The account opening form must be signed by the principal and the signature of the

attorney must be attested by him.

Pardanashin women:

The banker cannot establish or verify the identity of a pardanashin woman.

Therefore as a rule, he should refuse to open an account. If there are other

compulsions, he must ensure that at each point of time her identity is verified

before the transaction is put through.

Banks not to open accounts

Banks will not open accounts for known insolvents, insane persons, drunkards and

other undesirable persons

Some banks do not open accounts for lawyers, and do not extend them loans

A banker should refuse to open an account for a lunatic. If an account holder

becomes a lunatic, operations in the account must be frozen, and wait for a court

order for further action. The Banker must however obtail absolute proof of a

persons lunacy, before he/she stops operations in the account, else he lays himself

open to a claim for damages.

Confidentiality of customer accounts

What will impact the bankers duty to maintain confidentiality of customers

account information?

Answer: A duty to assist the Law enforcement agencies in their efforts to combat

crime.


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Banker can part with customer information in response to a lawful enquiry from

police, income tax or a court of law.

He will offer opinion on creditworthiness of a customer to a fellow banker inresponse to enquiries. This is a banking practice. But the banker cannot offer such

opinions if a customer expressly forbids such furnishing of opinions on his

creditworthiness.

Information requests

Criminal Procedure Code provides for calling of information from banks, by the

police to assist them in their investigations.

There are stipulations about when and how they can do it and the level of officer

who can call for information etc. Banker should take legal advice when acting on

such requests.

The request from police or from courts can be complied with by showing the

official the records in banks premises. In general, it would not be necessary to

physically produce original records at the police station or the court

If required for evidence, a certified copy of the relevant records or extracts from the

records can be produced, as provided under the Bankers Books of Evidence Act.

Income Tax Authorities can call for information from banks. The request must

relate to an actual assessment that the authorities are pursuing; a roving inquiry is

not permitted.

If the request received from the tax authorities under S.131 of the Income Tax Act,

1961 is a specific request banks must comply with it.

Disclosures permitted by law and practice

Under law: A Banker is justified in disclosing information about the customers

account when he is statutorily required to do so under (a) income Tax Act, 1961

(Section 131 & Section 133(6), (b) Companies Act, 1956 (Section 235 and Section

237), (c) Bankers Book Evidence Act, 1891 (Section 4), (d) Reserve Bank of India

Act, 1937 (Section26), (f) Foreign Exchange Management Act 1973 (Section 11)

(g) Gift Tax Act, 1958 (Section 36).


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Under express or implied consent of the customer: A customer can permit some

disclosures. For example, the customer may permit giving information about his

account to his prospective guarantor or suppliers.Common courtesy among bankers: It is customary among bankers, that when a

bank makes inquiries with another bank, such as, about proposed sureties or

acceptors, such information is shared. An implied consent of the customer is

presumed to exist. However, such information is kept confidential at both the ends

Disclosure in the banks interest: A banker can disclose information when it is

essential to protect his own interest, legally. For instance, if there is any dispute

between the customer and a banker, regarding balance standing in the account ofthe customer or if there is a loan default, then the bank will be justified in revealing

the information to the guarantor or to a solicitor for initiating legal proceedings in

the court of law.

Disclosures: Public interest

Disclosure in Public/National interest: Banker may be required to make

disclosure in the interest of the nation and public at large.

Public interest may be reckoned only according to the prevailing circumstances.

Death of an account holder

Death of a minor

On death of an account holder balance in account become payable to his legal heirs.

Balance in minors account is payable to his guardian

The father and after him the mother is the natural guardian of a minor and it is to

them that the balance is payable

If there is a court appointed guardian then the balance is payable to such guardian


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Death of one of the account holders

In the event of death of one of the account holders, balance in the account is

payable according to mandate in the form of either or survivor, former or survivor,

both or survivor etc.

If there is no mandate balance is payable jointly to survivor and legal heirs of

deceased.

There is a facility to nominate a person to receive the balances in the account if the

depositor(s) dies. Nomination entitles the person(s) nominated to receive the

balance in the account, but it does not mean that nomination overthrows the legal

claims of the heirs of the deceased.

Payment of balance to heirs

In the absence of nomination, or will, legal heirs must obtain a succession

certificate from court. The certificate must list bank deposit as an asset.

If no will is left,

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