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A
PROJECT
ON
CO-OPERATIVE BANK MANAGEMENT WITH
SPECIAL REFERENCE TO RBI NORMS
Submitted towards the partial fulfillment of the requirement for the Degree of
MASTERS OF BUSINESS ADMINISTRATION SESSION (2010-2012)
SUBMITTED BY:
NEHA LAHAR
105042249873
MBA 4TH
Regional Institute of Management and Technology
Punjab Technical University, Jalandhar
1
2
PREFACE
MBA is a stepping-stone to the management carrier and to develop good manager it is
necessary that the theoretical must be supplemented with exposure to the real
environment.
Theoretical knowledge just provides the base and it’s not sufficient to produce a
good manager that’s why practical knowledge is needed.
Therefore the research product is an essential requirement for the student of MBA.
This research project not only helps the student to utilize his skills properly learn field
realities but also provides a chance to the organization to find out talent among the
budding managers in the very beginning.
In accordance with the requirement of MBA course I have studed a project on the topic
“CO-OPERATIVE BANK MANAGEMENT WITH SPECIAL REFERENCE TO RBI NORMS”
The information regarding the project research was collected through the
questionnaire.
3
Acknowledgment
I hereby want to thank a large number of individuals have contributed to project .This project is a
humble attempt to sketch done the contribution of all those persons who have directly or
indirectly given their precious time and help along with proper guidance for making this report in
the following shape. I was thrilled to find that people were very co-operative and helped me in
all ways possible. They were very eager in solving my queries and were ready to help all the
time.
I pay my gratitude to my parents, family members, friends, faculty members of R.I.M.T. for their
moral support and whole hearted co-operation in drafting this report. .
NEHA LAHAR
MBA 2nd year
4
Table of content
SL.NO TOPIC PAGE. NO
LIST OF FIG, ABV, TABLES
EXECUTIVE SUMMARY
CHAPTER 1 INTRODUCTION TO INDIAN BANKING
SYSTEM
CHAPTER 2 ALL ABOUT PSC
CHAPTER 3 OBJECTIVES OF THE STUDY
CHAPTER 4 METHODOLOGY
CHAPTER 5 DEPOSITS
CHAPTER 6 CASH HANDLING AT BANK
CHAPTER 7 CLEARING
CHAPTER 8 LOAN
CHAPTER 9 RBI NORMS ON PRIORITY SECTOR LENDING
CHAPTER 10 RBI NORMS ON MAINTENANCE OF CRR AND
SLR
CHAPTER 11 RBI NORMS ON CAPITAL ADEQUACY
5
BIBLOGRAPHY
6
List of Abbreviations
PSC Punjab state cooperative bank
NBFCs Non Banking Financial Institutions
IPO ` Initial Public Offer
GOI Government of India
FD Fixed Deposits
PAN Permanent Account Number
KYC Know Your Customer
PC Personal Computer
OD Overdraft
FOD Fixed OD
SOD Secured OD
MD Managing Director
UI Insurance Company United India Insurance Company
NPA Non Performing Asset
RBI Reserve Bank of India
7
PCB/UCB Primary (Urban) Co-operative Bank
PACS Primary Agriculture Credit Societies
SEB State Electricity Board
ABC Adjusted Bank Credit
CRR Cash Reserve Ratio
SLR Statutory Liquidity Ratio
DTL Demand and Time Liabilities
SBI State Bank of India
DD Demand Draft
IFSC Indian Financial System Code
8
List of Tables
Table 3.1 FD interest rate table
Table 4.1 Cash receipt window
Table 4.2 Filling of cash receipt window
Table 6.1 rate of interest charged on loan
List of Figures
Figure 1.1 Classification of banks
Figure 6.1 Procedure for getting a loan
9
EXECUTIVE SUMMARY
Dissertation Title: STUDY OF BANK MANAGEMENT WITH SPECIAL REFERENCE
TO RBI NORMS
Name of student: Neha Lahar
This Thesis work gives a glimpse of working of a co-operative bank and its compliance with RBI
norms.
The bank basically has five departments with the help of which it carries out is operations. These
departments are Deposits, Cash counter, Loan, Clearing and Maintenance. To start with it was
necessary to know the services that are being offered by the bank. Thereafter, the study of bank
was done by knowing the work done at each of these departments and then integrating their work
to know how a bank performs as a single unit.
After knowing the operations of bank, its maintenance or compliance of RBI norms was studied
by reading the norms published by RBI.
10
CHAPTER- 1
11
INTRODUCTION TO INDIAN BANKING SYSTEM
The Indian banks can be broadly categorized into nationalized (government owned), private
banks, specialized banking institutions and co-operative banks as shown in figure below.
Figure 1.1 Classification of banks
Over the years the nationalized banks have acquired a place of prominence and have seen
tremendous progress. The need to become highly customer focused has forced these slow-
moving banks to adopt a fast track approach.
On the other hand private banks have been fast on the uptake and are reorienting their strategies
using the internet as a medium.
12
Complementing the roles of the nationalized and private banks are the specialized financial
institutions or Non Banking Financial Institutions (NBFCs). With their focused portfolio of
products and services, these Non Banking Financial Institutions act as an important catalyst in
contributing to the overall growth of the financial services sector. NBFCs offer loans for working
capital requirements, facilitate mergers and acquisitions, IPO finance, etc. apart from financial
consultancy services. Trends are now changing as banks (both public and private) have now
started focusing on NBFC domains.
Co-operative banks are nimble footed in approach and armed with efficient branch networks
which focus primarily on the retail segments. These banks which focus on areas of agriculture,
rural development etc. has lower overheads. This enables them to give a marginally higher
percentage on savings deposits.
Among the above stated banks the Indian nationalized banks (banks owned by the government)
continue to be the major lenders in the economy due to their sheer size and penetrative networks
which assures them high deposit mobilization.
Moreover, to control the actions of these banks, the Reserve Bank of India acts a centralized
body monitoring any discrepancies and shortcoming in the system.
Over the years, the Indian banking has gone through two main phases or changes which need to
be Noticed and are therefore explained in the following paragraphs.
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1. Nationalization of banks
By the 1960s, the Indian banking industry had become an important tool to facilitate the
development of the Indian economy. At the same time, it had emerged as a large employer, and a
debate was ensued about the possibility to nationalize the banking industry. So for this, Indira
Gandhi, the-then Prime Minister of India expressed this intention of the GOI (Government Of
India) in the annual conference of the All India Congress Meeting in a paper. The paper was
received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI
issued an ordinance and nationalized the 14 largest commercial banks with effect from the
midnight of July 19, 1969.This nationalism was described as a "masterstroke of political
sagacity” by one of the national leaders of India.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of credit delivery. With
the second dose of nationalization, the GOI controlled around 91% of the banking business of
India.
The nationalized banks were credited by some; including Home minister P. Chidambaram, to
have helped the Indian economy resist the global financial crisis of 2007-2009.
List of Public Sector Banks in India is as follows:
Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara
Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank, Indian Overseas Bank,
Oriental Bank of Commerce, Punjab and Sind Bank, Punjab National Bank, State Bank of
14
Bikaner & Jaipur, State Bank of Hyderabad, State Bank of India (SBI), State Bank of Indore,
State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra, State Bank of
Travancore, Syndicate Bank, UCO Bank, Union Bank of India.
2. Liberalization of banks
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization,
licensing a small number of private banks. The examples of private banks include Global Trust
Bank (the first of such new generation banks to be set up), which later amalgamated with
Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank.
Effects of Liberalization: The liberalization brought huge changes in the banking industry.
Some of these changes are stated below.
• The reserve which needed to be kept with the RBI was reduced to a great degree. The reduction
of the CRR and SLR resulted in increased flexibility for banks in determining both the volume
and terms of lending.
• There was deregulation of interest rates which aimed at promoting financial savings and growth
of the organized financial system.
• Because of the lowering of entry barriers, competition has significantly increased since the
beginning of the1990s. Seven new private banks entered the market between 1994 and 2000. In
addition, over 20 foreign banks started operations in India since 1994.After the episodes of
nationalization and liberalization, the next stage for the Indian banking had been setup with the
proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in
banks may be given voting rights.
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CHAPTER- 2
16
ALL ABOUT PSC BANK
HISTORY OF PUNJAB STATE COOPERATIVE BANK
Punjab State Cooperative Bank was established on 31st August, 1949 at Shimla vide
registration No. 720 has a principle financing institution of the cooperative movement in
Punjab. In 1951 its Head Office was shifted to Jalandhar from where it moved in 1963 to
its present building at Chandigarh. In the cooperative Banking structure, the position of
the Punjab State Cooperative Bank is extremely important as the whole credit system
revolves around it.
It has 19 branches and 3 extension counters in Chandigarh. There are 20 District Central
Cooperative Banks having 808 branches all over Punjab, mostly in rural areas of the State.
THE PUNJAB STATE COOPERATIVE BANK LTD.CHANDIGARH
It has 19 branches and 3 extension counters in the city of Chandigarh. 20
Central Cooperative Banks having 788 branches and 29 Extension Counters in 17
the State of Punjab are affiliated with the bank. In the Cooperative banking
structure the position of the Punjab State Coop Bank is extremely important as a
the whole short term credit system revolves around it. This bank ensures that its
member central cooperative banks follow sound banking practices and observe
strict financial discipline. The Central Cooperative Banks are financing the
farmers through PACS at the village Level. There is no arena of life where this
premier institution has not played its part. From a farmer, artisan to
traders/businessman, everybody has been covered in the fold of this institution.
The green, white and sweet revolutions in the state of Punjab are some of the
major achievement in which this institution has plays a vital role.
The Punjab State Cooperative Bank has already been awarded "BEST
PERFORMANCE AWARD" from NABARD and NAFSCOB. For the year
2003-04, Punjab Cooperative Bank has been selected for NABARD’s “Best
Performance Award “ which is based on performance of all the SCBs in the
country. Similarly our Jalandhar DCCB has also been selected for NABARD’s
Best Performance Award out of all the DCCBs in the country for the year 2003
OBJECTIVES
To serve as a Balancing Centre for Cooperative Societies in the State for
Cooperative Societies in the State of Punjab registered under the Punjab
Cooperative Societies Ac, 1961 for the time being in force. To promote the
economic interest of the member banks and cooperative societies in the state in
accordance with cooperative principles and to facilitate the development and
funding of any cooperative society registered under the said act. To carry on
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banking and credit business.
CHAPTER- 3
19
OBJECTIVE OF STUDY
The objective of my study is to know the working and functioning of the bank.
How all internal work is done there, how entries are being recorded, how loan is
passed and how the clearing of cheques take place.
I also want to know about saving and other different accounts, about fixed
deposits and long term deposits.
Another objective of my study was to know the RBI norms concerned with the
co-operative banks.
20
21
CHAPTER- 4
METHODOLOGY
METHODS OF DATA COLLECTION
Source of data collection was both primary and secondary. Primary data was collected by
interacting with employees in PSC bank.
Secondary data was collected by reading manuals which were published for banks which state
various rules and procedures of bank and its functioning. Also secondary data was collected from
various sites related to banking and RBI.
LIMITATIONS OF STUDY
There are few limitations also of my study as employees of bank are busy persons and they don’t
have sufficient time to answer my all queries.
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CHAPTER- 5
23
DEPOSITS
Introduction
Deposits are the prime source of funds for the banks. The enormity of deposits replicates the
amount of profit that a bank can make. This is so because large chunk of deposits are given away
as loans which renders higher interest rate than that given on deposits. So, it is customary to
encourage large number of huge deposits. This can be done by providing different types of
deposits according to the needs of varied customers. These deposits as offered are explained
below
A. Current
B. Savings
C. Loan account
D. Fixed
E. Recurring
F. Locker
24
Current Account
• It is basically used for business purposes. It doesn’t give any interest on deposits.
• It can be held in the name of firms (include partnership firm, pvt. Ltd. Co., ltd. Co., trust,
association), person.
• Its prime purpose is to serve the customers for their daily business transactions.
• A customer having current account can withdraw money in the form of cash or
cheque in a infinite number of times and so is unrestricted.
Savings Account
• These deposits too are used for transactions purpose. For example if you want to pay electricity
bill, telephone bill etc. you can give a cheque from your savings a/c rather than giving hard cash.
Other things such as paying fees, paying dues etc. can be done from this a/c.
• This deposit is usually held in the name of individual as it is used for personal
purposes and gives interest at the rate of 3.5% per annum.
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• Note that trust and association can hold current as well as savings account.
• A customer having savings account can withdraw money in the form of cash or cheque any no.
of times.
Note that this withdrawing power can be different for different banks according to the rules and
regulations of that particular bank.
.
. Fixed Deposits (FD)
• It is a deposit which offers the highest interest rate than any other above mentioned deposits. So
it is mainly used for long-term saving purposes. For example: a couple having a child of the age
of 10 keeps an FD account so as to use the matured amount for the child’s college fees in future.
• These deposits and its interest rates are explained in detail in the future sections that are to
come. Recurring
• It is a type of FD with deposits kept for 12 or more months. Here the deposits are given at
installment by the customer. The interest rate for these deposits is same as FD.
Locker
• If person is having locker facility from bank then person will be charged Rs 500 per annum
plus service tax as a rent of a locker and if person is not able to pay this amount than he will be
charged plenty of Rs 25 per quarter.
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Cash Certificate deposit
• This is a type of FD. Here, the amount is compulsorily required to be deposited for 12 or more
months. The interest on the deposits is calculated quarterly and is added to the principal which
makes these deposits even more lucrative.
Current account
a. Filling of form (given in Appendix 1)
b. Prerequisites
1. PAN card (compulsory): It is taken as photo proof as well as address proof. If there is a
proprietor to a business then his PAN card is needed, but if there is a partnership or association
firm then PAN card of all the partners as well as PAN card of the business is required.
2. Address (business proof).
3. Photos.
4. Reference (names of references).
5. KYC (Know Your Customer) Form: it is made mandatory from last 1 year (given in appendix
2)
Savings account
a. Address proof: residential address27
b. PAN card is not compulsory, but can be accepted as photo proof. For photo proof a customer
can give ID card/ pass port/ election card
c. KYC compulsory
d. People not having PAN card should fill form no.60(given in Appendix 3)
Methods of Transaction
Basically there are three methods by which a depositor can make a transaction i.e. credit or debit
his deposits. They are
1. Cash
2. Cheque of own bank
3. Cheque of other bank
These transactions can be understood by bifurcating them as credit transactions and debit
transactions as follows:
Credit transactions
Here suppose a depositor having his account in bank wants to credit his account, then he can do
this in following ways:
1. Cash: He can bring cash and deposit the same in his account (current, savings etc.)
2. Cheque of own bank: He can present a self cheque or a cheque from his customer (having his
Account in bank) in his name. The cheque amount is then credited to his account.
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3. Cheque of other bank: He can present a cheque of some other bank which is
written in his name. He can present this cheque at the clearing desk and can then credit his
account with the amount mentioned in the cheque.
Debit transactions
Here suppose a depositor having his account wants to debit his account, then he can do this in
following ways.
1. Cash: He can withdraw the cash from his account by issuing a self cheque. (Current, savings
etc.)
2. Cheque of own bank: Here he can debit his account by issuing a cheque to his Customer.
Now his customer can have one of the following possibilities:
a. He can present it in bank (if he is having his account in bank)
b. He can present the cheque at some other bank which through clearing comes for realization.
In both the above cases the account of the depositor gets debited by the particular amount
mentioned in the cheque.
Fixed Deposits (FD)
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From the before stated deposits only FD has a separate section of its own due to the high demand
ofit. FDs award higher return on investment for a depositor as compared to any other deposits.
the following interest rate was prevalent during my tenure of SIP.
Table 3.1 FD interest rate
Time for which deposit is kept Interest rate per annum
Time period Rate of interest
7 to 14 days 2.5%
15 to 45 days 3%
46 to 90 days 4%
91 to 179 days 5%
180 to < 1 year 5.5%
1 to < 2 year 6.75%
2 to <5 year 7%
5 year and above 7.25%
30
If a depositor is a senior citizen (above 60 years) and if the deposit kept by him is for 12 or more
months and amount is more than 5000 then he would be given 0.5% more interest on his
deposits.
FD once matured, if not renewed in 14 days of its maturity, then according to the rules of RBI
only 4% interest is given on the days after maturity.
At fixed deposits counter, depositor comes for three things as stated below:
1. Depositing new FDs
2. Renewal of matured FDs
3. Cash withdrawal from FDs
Now, the procedure followed by the banker at PSC when the depositor comes for the above
stated three services is as follows
1. Depositing new FDs
Here the depositor can give cash, cheque of the same bank, cheque of other bank. The pre
requisites for this are FD form Photo proof, PAN card and KYC form.
The depositor also mentions the time period for which he wants to deposit the amount. After
completing the formalities on the depositor side the procedure followed by banker is _ He
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follows the path: Fixed _ master transaction _create new which is applicable to PSC only. Here
he creates new account where the account number is automatically given by the system. In the
new account the banker enters the period for which the deposit is to be kept and rate of interest
for that particular time period.
The print of the receipt created is taken and is given to the customer.
2. Renewal of matured FDs
Here depositor comes for renewal of his FDs. He follows the following procedure.
a. He should have brought the earlier receipt of his FD.
b. He should mention the time for which the FD should be renewed.
c. After this banks fill up a slip containing FD a/c number, name, matured amount, date (all this
data from earlier receipt)
d. After this the officer debits the current receipt by following the path: Fixed _ transaction
posting. Here a/c number, receipt number is entered and then the receipt is debited.
e. Then credit to other receipt is done by following the path: Fixed _ master transaction _
Specialize (Here by putting a/c number customer’s a/c details are shown) _ Add new:
Here the banker enters the details of new receipt such as date for renewal, period for which FD
should be renewed and amount
f. Thereafter print of the new receipt is taken which is given to the client.
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Note: Here sometimes people come for cashing the interest of FD keeping FD intact. In this case
the only extra thing is to fill a form which is given to savings department after which the
customer withdraws the interest from saving a/c.
3. Cash withdrawal for FDs
Here depositor withdraws cash and first and fourth step of the above procedure is followed. That
is only the receipt is debited. After this for the customer to withdraw the cash, the amount is
credited to savings a/c (If he is having the a/c in this bank) or he is given pay slip (if he is not
having a/c in this bank).
Transfer
This is one of the busiest sections in a bank. The work done here can be classified into two as
follows:
1. The transfer of fund from one a/c to another with both the accounts held in PSC bank
2. The transfer of fund from one a/c to another with one held at PSC and other held at some other
bank.
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In the first case, a cheque is issued by one PSC customer to another (both having their accounts
at PSC). Here, the beneficiary presents the cheque at transfer section with a filled slip showing
the details of his a/c. After this the transfer section makes entry as per the slip
and the cheque and transfers the fund from the remitting customer’s a/c (a/c number mentioned
in cheque) to beneficiary customer’s a/c.
In the second case, the cheques are provided by the clearing department to the transfer section.
Here there can be two cases
1. A remitting customer can have an a/c at PSC, in which case the transfer section debits his a/c
and credits the a/c of the bank whose cheque is presented by clearing section to transfer section.
2. A beneficiary customer can have an a/c at PSC, in which case the transfer section credits his
a/c and debits the a/c of the bank whose cheque is presented by clearing section to transfer
section.
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CHAPTER -6
35
CASH HANDLING AT BANK
The handling of hard cash is one of the important jobs of the bank. Besides facing the threat of
robbery, theft etc. the cash department also needs to be alert about the small recklessness which
can send a large amount of money out of the bank without any notice. For this there should be no
loopholes in the procedure that is to be followed while giving and taking cash.
Basically, the cash department has two functions that are to give cash and take cash from its
depositors. It will be easy to understand this department by knowing what work is done on
different desks and how it is done which are explained below.
SCROLL: Here the customer’s and its deposit or withdrawal details are entered into the system
through PC. The procedure is as follows
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1. Here the depositor comes with a slip and the withdrawer comes with a cheque.
2. From the details of the slip or cheque, the banker here enters the data into the system through
PC.
3. First he enters R or P, R for receipt by the bank, P for payment by the bank.
4. Second he enters a/c type for example current, savings, Hypothecation etc. Note that the
colour of slip can be seen as an indicator of different accounts. For example red colour slip is
used for Hypothecation, green slip is used for savings, white slip for current etc. In case of
cheque, the a/c type is mentioned on the same.
5. Next he enters the a/c number of the customer as mentioned in the cheque or slip.
6. After entering a/c number, another window will get displayed which will show the data of
customer. The banker verifies the details of this window with the slip or cheque filled by the
depositor.
7. Then he enters the amount mentioned in the slip into the system (PC).
8. After this a window will get displayed which shows the scroll number and other details. The
banker writes the scroll number on the slip and returns the slip to the depositor. For withdrawer
the banker gives a token which signifies the scroll number.
9. After this the clerk at the scroll section hands over the slip to cash taker or cheque for
authorization, whatever the case may be.
37
CASH RECEIPT: Here the cash is taken from the customer and this cash is then credited to the
customer’s a/c. The procedure is as follows
1. Here the system (on which the person is seated) will display the pending activities i.e. the
activities (receipt only) which are already scrolled but are not finished.
2. Here the customer comes with the slip that is scrolled. On this slip the scroll number is already
written (from scroll).
3. The banker here looks at the scroll number in the slip and enters into the same scroll number
in his system.
Table 4.1 Cash receipt window
Notes x number amount
1000x
500x
100x
50x
20x
10x
5x
38
2x
1x
Total
Table 4.2 Filling of cash receipt window
Notes x number Amount
1000 x 50 50000
500 x 30 15000
100 x
50 x
20 x
10 x
39
5 x
2 x
1 x
total 65000
The numbers displayed in red are entered and the amount in yellow is calculated by the system
itself.
For convenience of the person two note counting machines are kept besides him.
4. Next the banker verifies the slip , both part the slip has two parts, one is to be retained by the
customer and one is kept with the banker. He initially verifies both the part of the slips as both
can have different figures (mistakenly).
5. After verifying the notes the banker imposes a stamp “received” on the slip and gives back a
part of the slip to the customer. The process gets completed.
6. He then hands over the slip to authorization section.
CASH PAYMENT: Here the cash is disbursed to the customer. The procedure followed is
similar to the cash receipt.
40
1. Here the banker has the queued activities on the system. His work starts as soon as the
customer approaches him with the token as mentioned before.
2. After this he takes the token and looks at that particular token number in his queue. He enters
the particular token number in the system which again displays the window showing the notes as
in cash receipt. Here he enters the note given by him to the customer.
3. For convenience he maintains bundles of notes which are not required to be counted. So that
he can quickly disburse the cash as soon as the customer approaches him. Note that according to
bank sources the fraud can happen only here in cash payment.
AUTHORIZATION: Here the authorization of different transactions is done. This is done by
officer. The authorization is done of both the cash receipt and cash payment by bank. In the
former case authorization is done at last (3rd step). In the latter authorization is 2nd step, cash
payment being the last.
In authorization the officer acknowledges that the transaction occurred is right. He has a window
showing the pending activities. He clicks on those and acknowledges these transactions. If the
authorization is required to be done for regular customer then he directly authorizes and if not so
then he verifies the sign of customer with the cheque.( in case of cash payment by bank). Note
that in case of cash receipt by bank, no customer would intentionally deposit the amount in
somebody else’s a/c. So, here there is no need to verify the signature.
Note that in case of cash receipt by the bank the order followed is
1. SCROLL
41
2. CASH RECEIPT
3. AUTHORIZATION
Whereas in case of cash payment by bank it is as follows
1. SCROLL
2. AUTHORIZATION
3. CASH PAYMENT
A transaction between cash received and cash payment section As mentioned earlier that the cash
receiver receives and cash payer pays the cash. So on one side the payer wants cash to give it to
the customers on need and on the other side receiver receives huge amount of cash which can be
difficult to handle. So to solve both the problems a transaction happens between the cash receipt
and cash payment section, where cash receipt section gives away money to the cash payment
section. The procedure followed is mentioned below
1. At first, the cash payer enters into the window of demand. Here he demands money from the
cash taker (name is available in his window).
2. Now after the demand is place neither of them can proceed. So, the cash taker has to open his
demand fulfillment window and place a window showing notes to be given by him. After his
acceptance of paying, the cash payer receives the cash.
Note that once such transaction is in process, no other work can happen on the system, so as to
avoid the delay and confusion.
42
CONCLUSION
Cash being an easily recognized wealth, is searched for by almost every person in the world. So
it is necessary to have a stringent system of give and take of cash which can avoid any mishaps
of fraud at the bank. Also accepting depositor’s cash is less risky than giving cash to him. So for
this, in case of giving of cash, authorization is done before the payment of cash.
43
CHAPTER -7
44
CLEARING
Introduction
Although RTGS (Real Time Gross Settlement) and NEFT (National Electronic Fund Transfer)
Systems are already introduced, there is still time left for these systems to become ubiquitous.
Until that time, the clearing section has to work full-fledge and perform its duty. This section
deals with two types of transactions
1. First transaction: It can be understood by following example. Mr. X having his a/c at PSC, is
given ICICI bank cheque by Mr. Y for the services rendered to him by Mr. X. Here Mr. X
presents this cheque at clearing section of PSC.PSC credits Mr. X a/c by the amount in cheque
although the cheque is not of PSC. This is called outward clearing and is explained in later in
this chapter.
2. Second transaction: The example is as follows. Mr. A having his a/c at PSC,
Gives PSC’s cheque to Mr. B for services rendered by Mr. B to him. Mr. B is not having a/c at
PSC and so goes to his bank HDFC for crediting the cheque to his a/c. Now, HDFC takes this
cheque and performs certain formalities and gives the cheque to PSC for debiting Mr. A’s a/c by
45
the amount mentioned in the cheque. This is called inward clearing for PSC and is explained
later.
In short clearing is debiting one a/c and crediting other a/c irrespective of the type of a/c and the
bank in which the a/c is held. That is irrespective of the bank and type of a/c of remitting and
beneficiary customer, the remitting customer will always get his a/c debited and the beneficiary
customer will get it credited.
Outward Clearing
Procedure: Here a customer comes with cheque/s and a slip attached to it. The slip colour is
indicative of the a/c type and its details contain a/c type and a/c number of beneficiary customer,
name of the beneficiary customer/firm, and amount to be credited. The cheque too contains the
details such as name of the beneficiary customer/firm, a/c number and a/c type of the remitting
customer and the amount. After providing the slip and cheque to the bank’s clearing department,
the procedure followed by banker is as follows
1. First the details of the slip viz. a/c type and a/c number of the beneficiary customer and
amount are entered into the system (PC). Here as soon as you enter the a/c number of the
beneficiary customer, the database of the system will show the name of the beneficiary
customer/firm. Verify this name with that mentioned on the slip, so that the amount doesn’t get
credited to anybody else’s a/c.
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2. Next the details of the cheque viz. remitting bank code and branch code (fetched from
database of the bank), cheque number (mentioned on the cheque) and the amount is entered. This
finishes the process.
Note that if there is any mistake in the entry of the above transaction, then it can be corrected
while tallying in the afternoon, after which it is sent to clearing house.
Inward Clearing
Procedure: Here the cheques are received from clearing house when a banker from bank
approaches the clearing house. After this the procedure followed by him is as follows
1. The cheques are segregated according to the a/c type viz. savings, current, etc
2. After this any bunch is selected for data entry. Here once the a/c type is entered for the first
cheque, every other after that goes into that a/c type only.
3. After having entered the a/c type, the cheque details such as a/c number of the remitting
customer, cheque number, date and amount is entered. This finishes the process.
Note that no tallying is required in inward clearing because unless the a/c number of the
remitting customer and cheque number don’t coincide, the system will not allow entering the
data. This is so because the database here already contains the information about which customer
has been issued which cheque book.
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CHAPTER- 8
LOAN
Introduction
Lending of money as loans is one of the most important way in which the bank earns its profit. It
is a service given by bank in which it lends money to the customer and gets it back at some later
stage with interest as a profit. Being a profitable service to offer, the banks always try to give
away maximum number of loans at optimal risk. Moreover, to cover the needs of different
customers the bank offers different types of loans, which are described below.
1. Hypothecation-cash credit: This loan is basically given to business people on their trading
stock.
2. Industrial: Like Hypothecation this loan is also given to firms but here it is given on finished
goods. The other things are same as Hypothecation.
3. Overdraft (OD): For the businesses like brokerage firms and trading firms, where there is no
record of the stock, but has to keep large amount of funds to felicitate trade, hypothecation and
industrial loans cannot be given. So for the liberation of these firms, OD loans can be given.
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Here these firms are given loans on the basis of their record of balance sheet and PNL (Profit and
Loss) account. These loans are of 2 type’s viz. FOD and SOD. FOD is the loan given against
fixed deposit whereas SOD means Secured OD and is given on the mortgaging of the property of
the business land or property
4. Pledge: Here stock is under the control of bank. For example the key of the warehouse in
which the goods are kept is with the bank. Example of a fridge stock. Suppose a warehouse of
fridge is under the control of bank. Now, bank will give the keys to the stockholder only if he
pays a part of loan which he has taken on the stock of fridge.
TERM LOANS: These are loans in which monthly installments are made for disbursement or
paying off of loans. The term for these loans is agreed upon in advance by the bank and
customer. These are mentioned below.
5. Consumption: This is called self-mortgaging loan where the people usually comes for taking
loans on their personal income. It is the only type of loan where the purpose of the loan is not
mentioned.
6. Staff Consumption: This is similar to the consumption loan except that it is provide to staff
people at a slightly lesser rate.
7. Commercial loan: This loan is provided to the small vendors, who are in need of money for
running their business. This is usually given to the people running small provision stores, pan
shops and others.
8. Vehicle loan: As the name implies the bank gives loan on the purchase of vehicle. Here a
customer may want an old vehicle or a new vehicle. In the former case the valuation of the
vehicle is must. This valuation can be done by the bank or the customer himself. In the later case 50
of new vehicle the bill quotation is used for considering vehicle’s value and 75% of the value can
be given as loan. However, in case of old vehicle 50% of the value of vehicle is given as loan.
9. Building loan: This loan is given on the purchase or construction of building for residential or
business purposes. This type of loan is also one of the major contributors to the credit of the
bank. These loans are basically taken by the public for housing and are also taken by the builders
for construction purpose. The loan to the builders is given on the amount of the work done. For
example when the construction is about to start the first installment of loan is sanctioned.
Thereafter, after the construction of 1st slab, another installment is given and so on.
10. Consumable loan: This loan is given for consumable such as fridge, TV, AC, etc. This is a
type of personal loan wherein it is necessary to define the purpose of the loan.
11. Machinery loan: This is a loan given to industries on the purchase of the machinery. Herein,
if it is a new machinery then bill quotation is used as valuation. On the other hand if it is an old
machinery then a valuer of bank is asked to give valuation report, based on which loan is
sanctioned.
12. Gold loan: Here the loan is given on the purchase of gold. This loan is a rarity now.
13. Bill purchase: Here the customers give their receipts receivables to the bank. Bank pay the
total amount of bills to the customer and then it itself collects the receivables on behalf of the
customers.
Rate of interest on certain loans which were charged in PSC bank.
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Figure 6.1 rate of interest
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LOAN ACCOUNT RATE OF INTEREST
HOUSING LOAN 10%
CAR LOAN 11%
TWO WHEELAR LOAN 11%
PROPERTY LOAN Charged against 150% value of
property
EDUCATION LOAN 9%
DAIRY LOAN 10.5%
R.C LIMIT 11%
Procedure for loan to get passed
For the loan to get passed it has to pass through many hands as shown in the figure below.
Figure 6.1 Procedure for getting a loan.
Reception: Here a person inquires about the loan rates and other prerequisites that are to be
submitted. He is provided this information by the clerk at the reception. For example in case of
hypothecation, he is informed to submit his stock letters and details of other things which he
wishes to mortgage for taking loan.
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Credit rating: Based on the documents submitted by the customer, the credit rating of the
customer is done i.e. how much the loan amount should be granted to the customer is calculated.
This is done as follows
1. First the total value of the customer’s assets is calculated. For example if loan is on a stock
plus if he has provided the papers of his business land, then in this case his credit will be
calculated as a sum of the value of both these assets .i.e. total value = value of stock + value of
land
2. Now, according to the rules of bank some percentage of the value of these assets can only be
given as loan. This percentage varies for different types of loans and based on it the sanctioned
loan amount is calculated.
Inspection: After having calculated the credit and the amount that can be sanctioned for loan,
the file is forwarded for inspection. Here, the officer verifies the work done by the clerk at the
credit rating desk. Moreover, he checks the bank’s database to see if the loan taker has any
previous obligations which are remaining to be met (if he is an old customer). After the
satisfaction with all the parameters, he hands over the file to the loan manager.
Loan Manager: Here the file is again examined and the interest rate for the loan is put down.
This interest rate is same for all the loans at 15% per annum.
Meeting: After having examined the file, the file is then put forward before the Chairman and
Managing Director (MD) in a meeting. This file is then cross examined and is then made ready
for disbursement of loan amount.
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Insurance: Before issuing the loan amount or opening of a/c for loan, the customer is required
to get insurance on the thing on which he wishes to take loan. This is done by bank with the help
of United India (UI) Insurance Company. Moreover, if any other thing is mortgage for taking
loan, then the insurance is taken on that particular thing also. This is explained in detail in the
coming sections.
Giving away of loans After paying the insurance amount, the loan amount or account is
handed over to the customer.
Prerequisites for taking a loan- From the customers’ point of view, there are some formalities
and prerequisites that are to be complied with before taking a loan. Among these prerequisites,
some are more or less general which can apply to almost all types of loans mentioned above.
However, there are some other prerequisites which are specific to particular loans. These general
and specific prerequisites are mentioned below
General Prerequisites
1. Letter of Continuing Security ( Rs. 50 stamp)
2. Demand promissory note: In this note it is stated that the customer is seeking loan from the
bank and promises to payback the same in due time.
3. Receipt showing the receiving of loan amount by the customer: It is similar to the demand
promissory note.
4. Acceptance of Loan amount: It shows the amount, the interest rate ‘r’, the penal interest rate,
sign of customer and his guarantors. It also shows the guarantors making a promise of payback
incase customer defaults.
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5. Letter of guarantors: It shows that the name of the people who are agreeing to be guarantors
and making a promise of payback in case the customer defaults.
6. It is a rule of RBI that any customer who wants to take loan form a co-operative bank has to be
necessarily the shareholder of the bank. It was decided by RBI that for secured* loans the loan
taker should possess 2.5% and for unsecured *loans he should possess 5% of the sanctioned loan
amount.
7. 1.5% of the sanctioned amount is to be given as document charge to the bank. These
documents involve all the above letters.
*Secured loans are loans on which enough properties for mortgaging is provided to cover the
loan amount whereas unsecured loans are loans on which there are not enough properties for
mortgaging to cover the loan amount. Specific Prerequisites
Consumption and Commercial Loans: The prerequisites for these loans involve all the above 7.
Besides these the following prerequisite is also required.
1. Papers of assets kept for mortgaging Vehicle loan or machinery loan: Here too
the prerequisites involve all the points mentioned above.
Besides these some other involve
1. Valuation report: this report shows the value of vehicle or machinery. The loan amount is then
sanctioned on the percentage amount of this value.
Hypothecation loan: Here all except 1st of the general prerequisites are required. In addition to
these others involve 1. Letter of guarantors on Rs. 50 stamp 2.Agreement on Rs. 50 stamp
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Insurance
The customer will be taking loan on things such as stock, building, etc. On these things the bank
issues insurance which is compulsory. The insurance amount is to be paid by the customer. At
first time when the customer has just issued the loan, he is asked to give a cheque or pay cash to
the bank for taking insurance. The bank in turn hands over this amount to the insurance company
Stock maintenance
For the loans such as hypothecation, industrial and others, where the loan is taken on stock of
goods, it is required to maintain a stock file or database in which the stock letters of customers is
maintained. This is required so as to know the capability of the customer in pay-back of the loan.
Moreover, it also shows that whether the loan facility given by the bank is properly used or not.
The person here maintains the stock letter which shows the stock of the customer every month.
The bank when it gives loan to a customer on stock at the first time physically checks the stock.
Thereafter, it commands the customer to provide the bank with the stock letter.
Every time the customer gives the stock letter, his stock maintenance is checked against the
amount of bank’s money which he is using. According to the rule of RBI for co-operative
society, 70% of his stock value should be greater than the amount of bank’s money used by him.
Note that one may think here that when the customer comes for loan he can show a huge stock
and then in the next show case on paper may show fake stock. This can create a fraud if the
customer runs away with the money.
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However, it must be noticed here that besides the stock the bank asks for mortgaging of land,
machinery and other. So even if a customer wants cash credit of 1 crore and he has stock = 1
crore, then too he is required to mortgage the land, machinery and other things.
Getting back to the person on this desk, he is required to send the letters to customers every
month telling them to send the stock letter. Along with this letter he sends a form in which
customer is asked to note down its stock.
Every time the customer provides the banker with the stock letter, the database (a physical
register) is updated to inform the system that the customer has given his stock letter. At the end
of the closing date for the stock letter, the customers who are still left to give their stock letter are
given a call.
Loan Recovery section
This is the only less significant section of the whole bank as people here are having no work or
less work. This is so because the PSC bank has almost zero NPA (Non Performing Asset) and
has very few defaulters. As the name implies this section deals with the recovery of loan which is
in danger of becoming NPA.
The process here starts with the regular sight on the loan repayment instalments of the customer.
The person here keeps updates of the loan repayment of customers. He keeps a look at the loan
repayment by all the customers as to whether they are able to successfully repay the loan or not.
For a term loan, usually a phone call is made initially when the customer is unable to pay the
instalment till the 4th week after it is due. After this on the non-payment till 5-6 weeks, he is
given informal notice of bank. Here the notice is also sent to the 2 guarantors of the customer.
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This is so because the guarantor will push the customer to repay the loan instalments as his
image will be at stake. Next the officer here visits his place for collection of loan amount. Even
after this if the customer is unable to pay the instalment then the formal court notice is sent to
him. The same procedure is applicable to other loans too.
Earlier under the law, the bank had to approach the court and then do the needful. But after some
amendments to the law, the bank can now itself take steps such as auction the property of the
customer etc. So nowadays the non repayment of loans is less as compared to the previous days
as the power has moved into the hands of banks. When repayment of the loan occurs after the
force of loan recovery section, then the additional document charge (consisting of court papers
etc.) is charged to the customers. A copy of notice sent to the customer is kept with the bank.
If a customer is unable to repay the full amount then his guarantor is required to pay the
remaining or full amount. But in rare case such a situation happens.
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CHAPTER- 9
RBI NORMS ON PRIORITY SECTOR LENDING
Introduction
RBI has incessantly believed that in giving the loans and advances, the commercial banks should
give priority to certain sections of the society such as agriculturists, small scale industrialists etc.
and for certain purposes such as housing loans, education loans etc. This lending of money by
bank is called “Priority Sector Lending”.
After its formalization in 1972, RBI has over the years modified the regulations regarding
lending to priority sector. In September 2005, after examining and reviewing the regulations, the
RBI has decided to include only those sectors as part of the priority sector that impact large
sections of the population, the weaker sections and the sectors which are employment-intensive
such as agriculture, and tiny and small enterprises. Accordingly, the broad categories of priority
sector for UCBs (Urban Co-operative Banks) will be as under:
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1. Agriculture (Direct and Indirect finance)
Direct finance to agriculture shall include short, medium and long term loans given for
agriculture and allied activities (dairy, fishery, piggery, poultry, bee-keeping, etc.) directly to
individual farmers without limit for taking up agriculture/allied activities. Direct finance may be
limited to regular members and not to nominal members or to agencies like primary agriculture
credit societies (PACS), primary land development banks etc. Indirect finance to agriculture
include loans given for agriculture and allied activities indirectly.
Some of these loans include loans granted to NGOs/MFIs provided they have been admitted as
members for on-lending to individual farmers, loans given to State Electricity Boards (SEBs) for
providing low tension connection from step-down point to individual farmers.
2. Small Enterprises (Direct and Indirect Finance)
Direct finance to small enterprises shall include all loans given to micro and small
(manufacturing) enterprises engaged in manufacture/ production, processing or preservation of
goods, and micro and small (service) enterprises engaged in providing or rendering of service.
The micro and small (service) enterprises shall include small road & water transport operators,
small business, professional & self-employed persons, and all other service enterprises.
Indirect finance to small enterprises shall include finance to any person providing inputs to or
marketing the output of artisans, village and cottage industries, handlooms and to cooperatives of
producers in this sector.
3. Retail Trade
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Retail trade shall include retail traders/private retail traders dealing in essential commodities (fair
price shops).
4. Micro Credit
This include provision of credit and other financial services and products of amounts not
exceeding Rs. 50,000 per borrower or the maximum permissible limit on unsecured advances
whichever is lower.
5. Education loans
Education loans include loans and advances granted to only individuals for educational purposes
up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad, and do not include those
granted to institutions.
6. Housing loans
Loans up to Rs. 20 lakh to individuals for purchase/construction of dwelling unit per family, and
loans given for repairs to the damaged dwelling units of families up to Rs. 1 lakh in rural and
semiurban areas and up to Rs. 2 lakh in urban and metropolitan areas.
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CHAPTER- 10
64
RBI NORMS ON MAINTENANCE OF CRR AND SLR
All primary (urban) co-operative banks (PCBs) (scheduled as well as non-scheduled) are
required to maintain stipulated level of cash reserve ratio (CRR) and statutory liquidity ratio
(SLR). For this the Reserve Bank of India has been periodically issuing instructions to these
banks. In regard to CRR, there are different provisions which govern the scheduled and non-
scheduled banks. However, for SLR each and every commercial bank is governed under the
same provision.
Before going further and learning about the maintenance in detail, it will be beneficial to learn
certain terms which are a part of the future explanation. These terms are specified in detail by
RBI and are stated below Demand and Time Liabilities (DTL) Liabilities of the bank to the
banking system is classified into two broad categories viz. Demand Liabilities and Time
Liabilities.
Demand Liabilities’ to the banking system are further classified as under:
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(a) Balances in current accounts maintained with PCBs, by
• SBI
• SBI Subsidiary Banks
• Nationalised Banks
(b) Other demand liabilities comprises of –Balances in current accounts maintained with
PCBs by RRB, Banking Companies i.e. Private Sector Banks & Foreign Banks, Cooperative
Banks, Other ‘Notified’ financial institutions and others.
In short the balances with the bank which are payable to other banks and others on demand are
called demand liabilities. Similarly, the time liabilities are the liabilities which are not payable on
demand but are payable only when the time is due for that particular liability. These time
liabilities include
(a) All types of time deposits from the banks
(b) Certificates of deposits from the banks
(c) Participation Certificates issued to banks which are not payable on demand
(d) Interest accrued on time deposits of banks Fortnight
It shall mean the period from Saturday to second following Friday, both days inclusive.
Maintenance of CRR
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According to the Banking Regulation Act, every non-scheduled PCB is required to maintain on
daily basis a cash reserve, an amount not less that 3 per cent of its DTL as obtained on the last
Friday of the second preceding fortnight and shall submit to the Reserve Bank before fifteenth
day of every month a return showing the amount so held on alternate Fridays during a month
with particulars of demand and time liabilities in India on such Fridays and if any such Friday is
a public holiday, at the close of business on the preceding working day. This balance may be
maintained by way of cash resources with itself or by way of balance in a current account with
the Reserve Bank or the State Co-operative Bank of the State concerned or by way or net balance
in current accounts with the Central Co-operative Bank of the district concerned. Note that
according to RBI rules, for CRR purpose the reserves can be held only in current account of any
bank and balances in any other account cannot be taken as CRR.
Reporting Requirements
(i) Non-scheduled banks are required to submit a Return in Form I, as per proforma given in
Table 6.1Annex 4, to the concerned Regional Office not later than 20 days after the end of the
month to which it relates showing the position of cash reserve maintained by the banks as at the
close of business on each alternate Friday during the month, with particulars of its DTL in India
on such Fridays or if any such Friday is a public holiday, at the close of business on the
preceding working day.
(ii) Non-scheduled banks are required to show the position of the (a) cash reserve required to be
maintained. (b) cash reserve actually maintained, and the (c) extent of deficit/surplus for each
day of the month.
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CHAPTER -11
68
RBI NORMS ON CAPITAL ADEQUACY
Introduction
Capital acts as a buffer in times of crisis or poor performance by a bank. Sufficiency of capital
also instils depositors’ confidence. As such, adequacy of capital is one of the pre-conditions for
licensing of a new bank as well as its continuance in business. So to enforce the banks to be
capital adequate, capital adequacy norms were introduced amongst UCBs in April 25, 2001.
Statutory Requirements
According to the Banking Regulation Act, no cooperative bank shall commence or carry on
banking business unless the aggregate value of its paid up capital and reserves is not less than
one lakh rupees.
Share linking to Borrowings
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Traditionally, UCBs have been augmenting their share capital by linking the same to the
borrowings of the members. The Reserve Bank has prescribed the following share linking norms:
(i) 5% of the borrowings, if the borrowings are on unsecured basis.
(ii) 2.5% of the borrowings, in case of secured borrowings.
This traditional approach to sufficiency of capital does not capture the risk elements in various
types of assets in the balance sheet as well as in the off-balance sheet business and compare the
capital to the level of the assets.
Capital to Risk Asset Ratio (CRAR)
To overcome the shortcoming of the traditional approach, Capital to Risk Asset Ratio (CRAR)
framework has been adopted by most of the regulatory authorities as the basis of measurement of
capital adequacy. CRAR takes into account the element of risk associated with various types of
assets reflected in the balance sheet as well as in respect of off-balance sheet items and the level
of capital held by the banks. Initially RBI had introduced a minimum CRAR of 8% in 1992, for
the commercial banks. This committee felt that the continued financial stability of UCBs could
not be ensured unless they were subjected to the CRAR discipline. The committee was of the
view that CRAR norms should be implemented in respect of UCBs on account of the following:
i) CRAR serves as a buffer, which can absorb the unforeseen losses a UCB may incur in future;
ii) UCB sector is an important segment of the financial system and exclusion of this segment
from CRAR discipline would undermine the stability of the whole system; and
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iii) UCBs perform the same banking functions as commercial banks and are subject to similar
risks. To exempt UCBs from the CRAR discipline would, therefore, be untenable.
Returns
Banks should furnish to the respective Regional Offices annual return indicating
(i) capital funds,
(ii) conversion of off-balance sheet/non-funded exposures
(iii) calculation of risk weighted assets,
(iv) calculation of capital funds and risk assets ratio.
BIBLOGRAPHY
www.rbi.org.in/
http://en.wikipedia.org/wiki/Banking_in_India
http://www.indiaonline.in/Utilities/Banks/banks.asp
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