Module - Business Correspondent and Facilitator (1)

7/26/2019 Module - Business Correspondent and Facilitator (1)

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BFSI Sector Council of

India

Occupational Standard

Business Correspondent & Business Facilitator

Sector : BFSI

Sub Sector : Banking

QP Code : BSC/ Q 0301

Occupation : Financial Inclusion Services

NVEQF/NVQF level : 3

Minimum Educational Qualifications : 10th

Maximum Educational Qualifications : NA


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Table of Contents

CHAPTER PAGE NO

CHAPTER 1: BC MODEL IN INDIA 1

CHAPTER 2: BASICS OF BANKING 18

CHAPTER 3: BANKING STRUCTURE IN INDIA 22

CHAPTER 4: BANK DEPOSIT ACCOUNTS 25

CHAPTER 5: BASICS OF BANK LENDING 34

CHAPTER 6: RELATIONSHIP BETWEEN BANK AND CUSTOMER 45

CHAPTER 7: EVOLVING TRENDS IN MODERN BANKING 56

CHAPTER 8: EXERCISE 62

CHAPTER 9: INTERVIEW QUESTION WITH MODEL ANSWER 76


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CHAPTER 1 BC MODEL IN INDIA

Introduction

To support the financial inclusion effort, as well as leverage advances in banking technology, two kinds

of third party banking agents were created Business Facilitators (BF) who would primarily be involvedin processing and opening accounts and Business Correspondents who could, in addition to the BF

functions mobilize deposits and disburse credit on behalf of the bank .

As per the current regulations, the following entities are permitted to act as BCs for banks: NGOs

(typically microfinance institutions (MFIs) set up as Societies/Trusts), Cooperative Societies, Section 25

companies in which no NBFC/telecom company/bank held more than 10% of ownership, post offices,

retired government/bank employees and ex-servicemen. In order to operate within the regulation,

technology service providers organizations such as FINO, EKO and A Little World have created Section 25

companies with whom they partner.

Key components of the regulatory framework surrounding BCs include:

Banks pay a (undefined) commission to BCs though BCs/banks are not allowed to charge the

end-user a service charge for any BC transactions;

BCs can service clients only within a 30 km radius from the bank branch and in case of urban

areas the radius should not be more than 10 km;

All transactions undertaken through BCs must be recorded in the books of the bank by the end

of working day;

Know Your Customer (KYC) norms must be observed by the promoting banks for all BC clients

Most of banks forays have been experimental rather than full-fledged strategic or scalable approaches;accounts have been opened through a diverse set of institutional arrangements. The most typical

arrangement appears to be a bank-Section 25 partnership where the Section 25 company is floated by a

technology service provider such as FINO or A Little World. Since the technology companies themselves

cannot, by regulation, act as BCs, they are provided by associated NGOs, FINO Fintech Foundation and

Zero Mass Foundation, respectively. The technology company then acts as a partner for operations with

their associated NGO and the bank. Promoting banks do not always choose a single model or BC entity.

The Union Bank of India (UBI) has engaged with various business correspondents including

Infrastructure Leasing and Financial Services Limited (IL& FS), FINO and DRISTI for distinct services.

What is Financial Inclusion? Financial Inclusion is delivery of banking facilities / financial services to all the people in a fair,

transparent and equitable manner at affordable cost.

Financial Inclusion has the potential to improve the financial condition and standards of life of

the poor and the disadvantaged.

Financial services permit individuals and households to manage the risk and uncertainties to

save on better terms, to invest in a business venture or property or to cope with unforeseen

expenses.


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The need for Financial Inclusion:

Consequences of financial exclusion will vary depending on the nature and extent of services

denied and may lead to social exclusion.

It may lead to higher incidence of crime, general decline in investment, difficulties in gaining

access to credit or getting credit from informal sources at exorbitant rates and increased

unemployment etc.

The financially excluded people may suffer due to higher cash handling costs, delay in

remittances of money etc.

Financial Inclusion A business opportunity

Providing mass banking with no-frills SB, Syndicate General Credit Card (SGCC) etc. can become

a win -win situation for the branch and also the people. Basically these banking services need to

be marketed to such population segments.

Branches can extend banking facilities to the low income people, on relaxed terms.

Branches can enlarge the clientele base and build up low cost deposits.

Branches can achieve targets under agriculture / priority sectors, since 50% of the creditoutstanding under SGCC can be classified as indirect finance to agriculture.

Branches can increase the business volume, as the banking relationship can be used for cross

selling of other products.

Objectives of Financial Inclusion

Every eligible person shall be invited and assisted in opening a bank account. To begin with, it

should be ensured that each family shall have an account in the name of one of their eligible

members.

Extend credit, based on the need and potentiality for the purpose of encouraging economic

activity and income generation. SGCC upto a limit of Rs.25,000/- may be considered. Aim at preparing family credit plan and village credit plan for implementation of programmes.

Cross sell various products based on potentiality

Benefits of Financial Inclusion

For the customer can avail a variety of financial products provided by institutions regulated and

supervised by credible regulators.

The regulator benefits from the audit trail which is available as transactions are conducted

transparently in supervised environment.

The economy benefits, as greater financial resources become transparently available for

efficient intermediation and allocation, for uses that have the highest returns. It strengthens the financial deepening and leads to financial development in a country, which

would in-turn accelerate economic growth of the country.

BC Banking Channel: The Basics

Banks operate a number of channels through which they deliver financial services like, branches,

extension counters, ATMs and the internet. The Business Correspondent option offers a new channel


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through which banks can extend services. The RBI guidelines are written in a way which requires that a

bank has to be involved and is the ultimate provider of services. While RBI has regulatory responsibility

for the BC banking channel as part of its regulatory regime, the principal banks are fully responsible for

the acts of their correspondents. This new channel works through a process of collaboration by the bank

with one or more partners. These partners often includes:

Technology Vendors, who often provides a range of hardware and processing capacity and

connectivity which can link clients to BCs and BCs to the bank.

Business Correspondents which are organizations or individuals that organize and offer one or

more points of transaction outside of bank branches. The BCs organize and manage a network

of such transaction points in partnership with a bank.

Customer Service Points are individuals, shops or other outlet points which are responsible for

the direct contact with the clients. CSPs open bank accounts, conduct KYC, cash out

withdrawals, receive payments and in some cases, extend credit. For the channel to become

financially viable, regulations require that all revenues from the services are to be collected by

the bank. The tech vendors, BCs and CSPs are not permitted to charge fees to clients for theservices. The banks revenue may come from the extension of services like, accounts, savings,

credit and payments. The bank under contractual relationships, then makes payment of service

charges to the BCs and technology vendors.

For the smooth functioning of the BC channel, the bank must work in collaboration with some or all of

the different component partners who make up the BC banking channel. It is well understood that all

the constituent pieces of the channel will have to work in tandem, be motivated to participate and

receive appropriate revenues in order for the channel to grow and prosper. There is no single successful

approach, however, and there are many arrangements which are currently being tested.

Various Models Employed by Banks

Banks have sought out a range of different partners and offered a range of different banking services

through the scheme. In some cases, the banks have used the BC option to open large number of no frills

accounts. In some cases, this has also been combined with channeling government payments (G2P) such

as NREGS, pensions and other social payments. In a few cases, the focus has been on extending the

credit either in partnership with an MFI or through a relationship with an SHG Federation or network.

The big difference in performance and partnerships appears to be between those BC efforts that are

account and savings focused and those who focus on delivering credit services. The partners chosen,

products offered, costs incurred, and revenues earned under different models can be quite different.

Advantages of Using BCsSome of the advantages of using BCs as listed out by various banks are :

Better Alternative than Bank Branches: Normally a rural bank branch can serve 3,000 to 4,000

families in 12 to 15 villages within a radius of around 15 kms. A public sector bank branch may

typically require more than 5 years to break even in unbanked area, while a private sector and

foreign bank with IT connectivity may require more time. The BC option potentially enables

banks to reach out at much lower cost.


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Reaching the Unreached: The model enables banks to extend financial services to the unreached

clients their branch network as beneficiaries of the BCs are mostly located at unbanked and

under banked areas.

l Doorstep Banking: Loan disbursement and recovery are at the doorsteps of the beneficiary.

l Better Quality of Assets: As target clients are known to local NGOs, Post Offices, and local social

bodies, loan facilitation by the BCs (who are the promoter/builder of the groups) enhances

quality of assets.

l Scaling up: In this model scaling up is possible within a short span of time.

Challenges to the BC Model: Banks Perspective

The banks reported many operational issues/risks, viability Issues and regulatory concerns in employing

BCs for banking services. These were:

Operational Issues

Cash Handling: Allowing BCs to handle cash is the biggest challenge. Ninety-nine percent of the

financial transactions are in cash, warranting high-cost handling operations and involving addedoperational risks. Moreover, clients tend to perceive that the BCs are the owners of the

transactions and not facilitators on behalf of the banks.

Irregular Accounting: Irregularities have been observed in accounting of clients withdrawals

and deposits by BCs and, as a result, there are delays in accounting the transactions with the

bank by the BC.

Gullible Client Profile: Recipients of BC services are mostly illiterate and unfamiliar with technology

rendering them susceptible to misguidance by the BCs.

Fraud & Misappropriation: Since the BCs staff operate individually without any line supervision,

the risk of fraud and misappropriation is higher. There have been instances of

miscommunication by BCs. Failure to account for cash and falsification of records have beennoticed and dealt with by banks.

Viability Issues

Inactive No Frills Accounts: The majority of no frills accounts opened by BCs are not operational. In

some locations that have achieved 100 per cent financial inclusion, the accounts in use have

been less than 25 per cent. The average balances in savings accounts have been very low at

uneconomic levels for banks.

Model Viability: There is a shortage of funding to BCs for meeting the group promotion costs in the

case of SHG-Bank linkage models. Additionally, there are financial constraints on the part of the

BCs for capacity building initiatives, such as investing in training for their staff. BCs Losing Money: Initial losses are forcing many BCs to shut their operations. Business continuity

risk in such cases is impacting banks adversely. It is time-consuming, costly and ineffective for

banks to substitute these BCs with new entrants.


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Regulatory Concerns

PLR Capping: Reaching the unbanked areas involves higher delivery costs and the rate cap on

interest rate small loans doesnt allow much room for banks to recover the costs. Although

banks have the freedom to set their BPLR, they generally cannot fix BPLR at high levels.

Distance Criteria: Banks do not always find it easy to get waivers in respect of distance criteria from

District Consultative Committees which are necessary to operate in certain areas. A number of

requests are pending for approval and many requests have been rejected without any

explanation.

Cash Settlement: Current regulations mandate BCs to complete accounting and settle cash with bank

branches within 24 hours of transaction. Given the area of operation of BCs - rural areas with

accessibility issues - making settlements within the prescribed timeframe has become a

challenge.

Experience of BCs

To date, a range of organizations and even individuals played the role of Business Correspondents. It

includes newly formed not-for-profit Section 25 companies, NGOs, and retired bank officials. India Postoffice has tied up with SBI to act as a BC.

Implementation Model 1: Financial Inclusion in Madhya Pradesh (MP)

SCAs (NICT & AISECT) Sign BC Agreement with SBI

AISECT and NICT, SCAs in MP, have signed Business Facilitator (BF) and Business Correspondent (BC)

agreements with the State Bank of India (SBI) to offer financial services in the State. Both offer these

services at rural CSCs.

As a Business Facilitator the CSCs generate business for the bank from the communities living in and

around their CSCs and book the business to nearest linked SBI branch. As a Business Correspondent, theCSCs with adequate ICT infrastructure act as a Banks Branch and offers the selected banking facilities.

Services being offered include:

Business Correspondent (BC) Services:

Savings Account Opening

Deposit / Withdrawal in Account

NREGS Wages Distribution & Govt. Pension Distribution (NREGS Wages Distribution is enabled

by SBI Kiosk using Biometric Thumb Impression Device at CSCs.)

Business Facilitator (BF) Services offered

New Saving or Current Account Opening

Loan Distribution (Application & Information)

Kisan credit card, Micro Finance, Loan for Agriculture and Animal

Loan for Tractor, Vehicle and House

Recurring Deposit & Fixed Deposits in Bank

Loan Recovery


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Implementation process:

Both AISECT & NICT have adopted SBIs Kiosk banking model, which enables biometric based

online user authentication in real-time via SBIs Portal.

As per the agreement, the BC has to pay the bank a minimum bank guarantee and has to

maintain a prepaid settlement account with SBI, against which all transaction settlement is done

on a daily basis. The CSCs are added under the BC, as their CSPs. The selection of CSPs is done by

the BC. The customer is recognized through a biometric authentication process.

The equipment requirement to enable kiosk banking includes a computer, printer, internet

connectivity and a low cost biometric scanner (approximately Rs.2600).

While AISECT is in the process of enabling all its CSCs as CSPs, NICT has undertaken a rigorous

VLE selection process to ensure success. This was the most important part of its implementation

process. VLE selection parameters included:

Understanding and ability to deliver financial services

Financial and family background

Local property ownership

Social status

Police & physical verification

To ensure success, VLEs are required to undergo training on an ongoing basis. Further, the SCAs

have to take proactive steps to motivate the VLEs to go out into the community and build

awareness around the benefits of kiosk banking at their CSC.

SCAs have also taken proactive steps to ensure that various Government Scheme disbursals

including NREGS wages, old age pension and scholarship payment, happen through the CSCs.

This requires educating and lobbying local government officials including collectors and

sarpanchs.

The BC- CSC Business Model: Enabling Kiosk Banking

The model that is emerging from financial inclusion implementations via CSCs in States is SCAs

becoming SBIs BC, and delivering financial services through the CSCs via SBIs online kiosk

banking solution.

Following is a summary of the requirements to implement this model.

Description SBIs kiosk banking solution enables real time banking through SBIs

Portal, nearly similar to core banking, where customers are

authenticated through biometric fingerprint authentication. It

eliminates the need for smart cards and POS and is carried out online

on the SBI Kiosk Banking Portal.

Bank-BC Relationship

Bank- State Bank of India

Business Correspondent (BC) & Business Facilitator (BF): SCA

Customer Service Point (CSP): CSC/VLE

Equipment

Requirement Computer

Printer

Biometric Fingerprint Scanner

Internet connectivity


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Investment Required BC (SCA) needs to provide bank guarantee of Rs. 10 lakhs to SBI

BC (SCA) must maintain a prepaid settlement account with SBI, for daily

transaction settlement. The amount is decided by the BC and will

determine the number of transactions that the BC can execute.

CSP (CSC) needs to invest in a low cost biometric fingerprint scanner,

approximately Rs. 2600. BC (SCA) needs to invest in manpower for CSP (CSC) training, community

awareness building and monitoring activities.

Commission Paid SBI offers the following commissions to the BC:

Opening of new account: Rs. 25 per account (one time)

Transaction commission: 0.5% per transaction for deposits and

withdrawals

Additional commissions are paid for business facilitator activities such as

loan and kisan credit card processing

Note: SBI is in the process of revising the commission paid

Expected Revenue Based on initial implementations, BCs on an average are earning the

following:

Rs. 8,000- Rs. 10,000 per month per CSP from basic banking activities, with

a minimum of Rs. 3000 per month per CSP

Up to Rs. 50,000 per month per CSP from business facilitator activities (eg.

loans and kisan credit card processing)

Note 1: These earnings are based on the number of Government Scheme wage

and benefit disbursements that are linked with banking activities at CSCs.

Note 2: SBI pays commission to its BC- in this case the SCA. The BCs CSPs- in

this case the CSC/VLEs earning will depend on its revenue share agreement

with the BC (SCA).

Estimated Revenue from Delivery of Financial Services

Initial implementation in Madhya Pradesh reveals that a CSC can earn between Rs. 3000 and Rs.50,000 a month through financial service offerings, and linkages with Government Scheme for

wage and benefit disbursements.

Experience from existing implementations indicates that when Government Scheme wage and

benefit disbursements are linked to bank accounts, income increases.

Example: Assume a Block which has 20 CSCs, and approximately 20,000 MGNREGS beneficiaries

of which only 12,000 are active workers. Following is the potential earning of a BC per CSP

(based on practiced remuneration structures as offered by SBI):

o Opening of bank accounts: 20,000 @ Rs 25 each = Rs 5,00,000 (one time)

o MGNREGS wages for all active beneficiaries per annum: 12,000 nos. @ Rs 12,000 per

annum = Rs 14,40,00,000

o Commission for BCs @ 0.5% of total transactions = Rs 7,20,000 per annum

o Earnings per BC per annum per CSP: Rs 7,20,000 / 20 = Rs 36,000 (i.e, Rs 3000 per

month per CSP)

o Note: 20 BCs located in 20 Panchayats can comfortably open 10 accounts a day each,

thus achieving a target of 20,000 accounts in 100 days.


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The above illustration clearly demonstrates that just one Government linkage can make the

creation of a viable banking facility in rural areas easy. Linking other schemes such as

scholarships, pensions etc. can make financial inclusion more viable and profitable. Further, as

the market matures, and with the availability of more relevant financial services, earning

potential for CSPs will increase.

Government Scheme Linkages Ensure Sustained Banking through CSCs

While opening bank accounts for the unbanked in rural India is a first step in ensuring financial

inclusion, it is important that these accounts remain active with citizens regularly accessing their

accounts for:

o Withdrawal of money

o Making deposits

o Ensuring savings

o Getting loans and credits

o Investing in other financial plans

This requires that citizens are sensitized and educated about the benefits of banking and howthey can avail of other financial services like loans and credits.

Further, since the amount of financial transactions that citizens undertake at the CSP, directly

impacts the BC and CSPs income (they are paid a commission based on each financial

transaction), it is important to increase number of financial transactions that occur at a CSP to

ensure sustainable income.

The fact that needs to be accepted is that currently in rural areas, citizens do not have sufficient

avenues for regular inflow and outflow of funds to make banking necessary. Thus, it is important

to identify streams of earnings for rural citizens that will require them to avail of banking

services.

One way to encourage banking activity by rural citizens is to link the disbursement of various

Government Schemes wages and benefits to citizens via bank accounts at CSCs. Schemes to be

considered include:

o NREGS wage disbursement

o Government pension payment

o Scholarship payment

o Aadhaar incentive payment for BPL citizens

Further, enabling such processes also has the benefit of transparent, timely and efficient

disbursal of Government funds.

Key Success CriteriaTo ensure successful delivery of financial services via CSCs, the following criteria must be met:

Internet Connectivity: The kiosk banking model of BC-SP can only work when the CSCs have

reliable internet connectivity. Thus, the government and banks should collaborate to ensure

that the CSCs have reliable connectivity.


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VLE Training & Motivation: It is important to ensure that the VLEs undergo training in delivering

financial services to rural customers, at regular intervals. Training should include technical

aspects of kiosk banking as well as for selling financial products. Further, VLEs need to be

constantly motivated to proactively build awareness within their community (including local

government officials) about the financial services they offer.

Linkages with Government Schemes: Government and banks need to work together to ensure

regular cash flow via banks in rural areas by linking Government Scheme wage and benefit

disbursement through banking services at CSCs.

Awareness & Community Sensitization: Banks and the Government need to take proactive steps

to build awareness and sensitize citizens and local government leaders in rural areas regarding

financial inclusion.

VLE Selection: In order to mitigate risks associated with defaults and fraud, SCAs need to

undertake a rigorous vetting process before making a VLE its CSP. Some suggested vetting

criteria for VLEs include:

o Understanding and ability to deliver financial services

o Social ties with the community (indicators include family background, social status)

o Financial Stability (indicators include financial background and local property ownership)

o Police & physical verification.

APPROACHES AND PROCESSES

Smart Card (Biometric) Solution:

Each customer is provided with Smart Card, which works as electronic pass book.

Contains details of the account holder

Used to authenticate the account holder through biometrics

BCs are provided with PoS (Point of Service) terminal which are equipped with wirelessconnectivity, printer, biometric scanner and voice enunciation in local language.

Mobile Based (Biometric) Solution:

This model also works similarly as smart card based

The only difference is biometric of the customers are stored on the NFC enabled Mobile phone

provided to BC

Customers are issued a plastic photo identity card which carries a unique number, which is

linked to the account of the customer

When this number is dialed on mobile, it prompts for biometric authentication

A customer biometric is verified with one stored on Mobile phone and the one scanned at thetime of transaction at PoS terminal with BC

Mobile -2- Mobile Based (non-Biometric) Solution:

The customers should have an account and must possess a mobile with SMS facility available.

Customer would call a toll free no. of the bank and would get routed to an Interactive Voice

Response system (IVR) in the language preferred.


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A call would originate to the registered mobile no. and the customer would ask to choose a PIN,

which is a secure PIN for carrying out financial transaction and the PIN would be a interactive

PIN and would not stored in the handset.

Once PIN is obtained, the customer can call the toll free number and provide his/ her PIN and

choose the financial services.

In case of cash withdrawal, the customer would be prompt to enter the amount of withdrawal.

The customer would get an SMS with the Transaction ID and the One Time Password (OTP).

With this, the customer can approach the BC.

On entering the Transaction ID, the system verifies whether it is a valid transaction and then

prompts for the OTP, on entering the OTP the system display the complete transaction to the BC

and the BC pays the requisite money to the customer.

A pilot is being initiated using Mobile as delivery channel in Anand district of Gujarat state.

Micro ATM solution

Bank plans to introduce micro-payment platform in order to facilitate banking in Urban and

Semi- Urban areas.

The platform will enable Business Correspondents (who could be a local kirana shop owner and

will act as micro ATM) to conduct instant transactions.

The Micro ATM is an emerging concept, in which it constitute mobile phone, scanner, smart card

reader, printer, voice enunciation capability etc.

A customer who is having Mobile phone enabled, or smart card enable, or Biometric ID card can

transmit at micro ATMs deployed with BC.

The micro platform will enable function through low cost devices (micro ATMs) that will be

connected to banks across the country.

This would enable a person to instantly deposit or withdraw funds regardless of the bank

associated with a particular BC.

This device will be based on a mobile phone connection and would be made available at every

BC.

Essentially, BCs will act as bank for the customers and all they need to do is verify the

authenticity of customer using customers UID or finger prints.

Mobile ATM Solution:

Mobile ATM Solution is one of the means to cover financially excluded people.

A mobile ATM machine will be moving from one place to another in order to provide basic

banking services like cash withdrawal, cash deposit, fund transfer, balance enquiry, mini

statement etc.

It is a most suitable model in urban inclusion. Bank is also planning to deploy few Mobile ATMs

in urban area.

FINANCIAL INCLUSION - PROCESS & BUSINESS MODEL

The scope of Financial Inclusion is not only restricted to the opening up of No-Frills Account but also

extending a gamut of affordable financial products and services such as micro-loan, micro-pension,


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micro-remittance, micro-insurance etc to the poor after an in-depth study of their financial needs.

Providing various financial products to the rural masses would also make Financial Inclusion Initiatives a

viable proposition for the Bank. Therefore, taking into the viability of the financial inclusion business into

consideration a process and business model has been sketched which is as under.

1) Identification of Villages by the Branch.2) Linking the villages to the Bank Branch which will be the Base Branch.

3) Identification of Business Correspondents (BC) as per RBI guidelines.

4) Screening and Interview of the identified field BCs (FBCs).

5) Training session for the FBCs to be conducted through the Bank staff and Service Provider.

6) Hand-holding of the FBCs by the Bank staff and Service Provider.

7) Allotment of FBCs to the identified villages.

8) KYC of the FBCs and their A/c opening in the Branches.

9) Conducting a campaigning programme by the FBC and the Bank staff for creating awareness in

the villages.

10) Household economic and personal survey to be conducted. This survey is to be carried out toprepare a credit plan for each household according to the financial needs. This would facilitate

to provide a customized financial service to each household.

11) Initiation of Enrollment Process by FBC in their respective villages which involves: (a) Filling up of

forms of customers, (b) Photograph of customers, (c)Capturing Biometrics of customers, (d)

Arranging introduction etc.

12) Submitting forms to branches for verification and authentication for A/c opening.

13) Uploading data for card preparation.

14) Dispatch of cards to respective branches.

15) Distribution of cards to FBCs for onward delivery to customers with biometric verification.

16) Uploading of data of card distributed for card activation.17) Extending various other products/services simultaneously as per the evaluation of the needs of

the survey and the judgment of the Bank Officials.

18) Quarterly review of the transactions by the BC and the Branch Manager.

19) Understanding the reasons for non-operation of the accounts.

20) Feedback by FBC and Bank staff to be provided to the Branch Manager.

Eligibility to become a Business Correspondent :

As per the RBI guidelines, the following entities are eligible for appointment of Business Correspondents

(BCs) for banks:

NGOs/ MFIs set up under Societies/ Trust Acts,

societies registered under Mutually Aided Cooperative Societies Acts or the Cooperative

Societies Acts of States,

Section 25 companies that are stand alone entities or in which NBFCs, banks, telecom

companies and other corporate entities or their holding companies did not have equity holdings

in excess of 10 per cent,


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post offices ,

retired bank employees,

ex-servicemen ,

retired government employees.

Individual kirana/medical/fair price shop owners

Individual Public Call Office (PCO) operators

Agents of Small Savings Schemes of Government of India/Insurance Companies Individuals who

own petrol pumps

Retired teachers

Authorized functionaries of well run Self Help Groups (SHGs) linked to banks Non deposit taking

NBFCs (non-banking finance companies) in the nature of loan companies whose micro finance

portfolio is not less than 80 per cent of their loan outstanding in the financially excluded districts

as identified by the Committee on Financial Inclusion

RBI has now permitted banks to engage any individual, including those operating Common

Service Centres (CSCs) as BC, subject to banks comfort level and their carrying out suitable duediligence as also instituting additional safeguards as may be considered appropriate to minimize

the agency risks

Appointment of BCs

Must be a permanent resident of the area in which they propose to operate.

They should be well established, enjoy good reputation and have the confidence of the local

people.

The ability of BCs to invest in POS machines and other equipments.

In case of individuals selected as BCs, the criterion are as under :

A minimum education qualification of Xth pass.

Field Investigation /RCU for verification of residence and dealings, etc. to be conducted.

Credibility check A/c with any other bank.

Should open account with IDBI Bank (base branch)

Suitable amount of Security deposit /Bank guarantee based on business volumes.

Scope of Activities to be undertaken byBCs

The scope of activities undertaken by BCs are as under :

Creating awareness about savings and other products and education and advice on managing

money and debt counseling.

Identification of potential customers

Collection and preliminary processing of various forms for deposits including verification of

primary information / data

Filling of applications / account opening forms including nomination clause and submission to

the Bank.

KYC will also be completed by the BCs.


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Opening of no frill deposit accounts and other products as permitted from time to time by

leveraging technology.

Collection and payment of small value deposits and withdrawals ; Min : nil; Max : Rs. 2000/- per

transaction.

Receipt and delivery of small value remittances / other payment instruments, as per FI Plan of

IDBI Bank.

In respect of all such transactions, the BC/his agent will be authorized to accept / deliver cash

either at his place of work or at any convenient location subject to the ceilings per customer (Rs

2000/- in each case).

Furnishing of mini account statements and other account information, for a period of 3 months.

Any other service on behalf of the Bank, duly authorized by the appropriate authority.

The activities undertaken by the Business Correspondents would be within the normal course of

the Banks banking business, but conducted through and by the entities at places other than the

Banks premises.

In respect of all such transactions, the BC/his/her agent will be authorized to accept / deliver

cash either at his place of work or at any convenient location subject to the ceilings per day / per

customer as laid down. The Business Correspondents will be linked to a nearby branch (base

Branch).

Cross-selling of other financial products like insurance / mutual fund products / pension

products / any other third party product, as and when they are assigned to do so.

In case duly appointed sub-agents of BCs, BCs to take care of reputational risks involved.

Due Diligence of Field BCs

Should be well established, enjoy good reputation and stature and have the confidence of the

local people.

Should have a satisfactory track record and should be able to generate the funds required for

this service.

Should be a permanent resident of the area

Age should not be exceeding 65 at the time of selection, continuation subject to annual review

of the performance, till the age of 75 years

Police verification to be completed before appointing

Complete KYC norms to be followed before appointment

Monitoring of FBCs/CSP

Daily records of End of Day (EoD) and Beginning of Day (BoD) transactions Cash Box how he handles the cash

No. of visits/ presence of CSP/FBC in villages

Feedback from villagers, Panchayats

Set up tie ups with few villages to get regular feedback etc

Daily settlement with the branch


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Roles of the Key Stakeholders

Role of the State Government/SDA:

o Linking current government scheme wage and benefit disbursement with bank accounts, to

ensure regular cash flow in rural areas

o Providing basic infrastructure to bankso Integrating CSC project with the banking mandates for the State

o Ensuring connectivity in rural areas

o Mobilizing and sensitizing Government functionaries

Role of Banks:

o Partnering with SCAs and other CSC partners for BCs and BFs agreements, to enable CSCs to

deliver financial services in rural areas

o Provide the technical solutions necessary for online kiosk banking delivery, user authentication

and monitoring

o

Offering a wide variety of banking services in rural areas via their BCso Synchronizing with Government machinery

o Training the SCAs and VLEs for delivery of financial services

Role of SCAs:

o Getting appointed as BCs and BFs for banks

o Vetting and selecting VLEs to become the customer service points

o Ensuring adherence to banking norms as per BC guidelines

o Ensuring power and connectivity at its customer service points

o Ensuring timely service delivery

o Providing an online mechanism that enables VLEs to deliver financial services via the Banks

online solution.

o Supporting awareness building and training activities.

Role of Village Level Entrepreneurs (VLE):

o Getting trained to deliver financial services

o Signing the relevant agreement with the BC to become CSPs

o Educating the citizens and local government officials on the benefits of availing financial services

at CSCs

o Ensuring timely service delivery and adherence to the banking norms

Role of Base Branch Manager /Officialso Identification of villages for implementing FI.

o Identification of Field BCs (FBCs) which includes:

a) Screening

b) Interview

c) Due diligence

o Arranging for Training Programmes for BCs.


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o Coordinating with the Service Providers for various trainings on processes, products and

technology use.

o KYC of the field BCs including police verification.

o Arranging for campaigning Programme in the villages for spreading financial awareness.

o Providing publicity material and Bank display Board to FBCs/CSPs. For this Branch Manager

should co-ordinate with Regional Offices/ Lead District Managers.

o Arranging for economic and personal survey of the households in the villages.

o Coordinating with all entities (i.e. FBCs/CSPs and Service Providers) so that the initiation of the

enrollment process is conducted smoothly.

o Ensuring enrollment and KYC verification of customers for account opening is done in time.

o Handing over of KYC verified account opening forms in village-wise lots to Technical Service

Providers for card preparation.

o Receiving cards and account opening forms with list in same lots from Technical Service

Providers.

o Verification and tallying of AOFs, list and cards and handing over the same to the FBCs/CSPs for

delivery of cards against proper acknowledgement.

o Weekly review of the transactions and interaction with FBCs/CSPs.

o Reconciliation of transactions.

o Collecting and analyzing feedback received from the field BC and Bank Staff.

o Monitoring of CSPs/FBCs along with monitoring and follow up of business generated by them.

o Having all checks and balances in place so that there are no frauds and corruption.

Role of Lead District Manager / District Coordinator

o Clustering/Mapping of villages with Base Branches.

o Village wise Road Map for implementation

o Coordination of engagement of FBCs/CSPso Coordination of training of Field BC and Branch Staff

o Awareness Camp: Taking initiative to increase the pace of FI activities.

o Coordination with Service Providers

o Fortnightly Review of:

a) Road Map of FIP

b) The performance, working and conduct of the BC.

o Liaison with the District Authorities for routing of Govt. benefits through the cards and also for

the float fund of various Govt. funds.

o Liaison with Block level and Panchayat level officials.

o Redressal of grievances and disputes between the base branch or customers & FBC/CSP.o Surprise visit in villages. Submission of visit report to the Regional Manager

Role of Regional Offices

o Review of Road Map for FIP of Region.

o Arranging for training of district Coordinators, Lead District Managers and Branch Managers

o Due Diligence of BC


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o Full details of BC to be collected for posting information on our website.

o Awareness Camp to be conducted by using Publicity materials & Stationery and displaying Bank

Board at identified Customer Service Points.

o Coordination with Service Provider

o Arranging for Quarterly Meeting

o Liaison with Govt. Officials.

o Review Meeting with LDM & Coordinators of Regional Office regarding the performance of the

FBC/CSP with respect to target achieved.

o Quarterly Review with Branch Manager.

o MIS Submission to Zonal Office/Central Office

o Scrutinizing the bills / Invoices and after vetting recommending for payment to Central Office

o Redressal of Grievances.

o Surprise check of base branches and villages by RO staff w.r.t verification of various activities,

checks and balances and submission of reports to Zonal Office and Central Office.

Role of Zonal Officeo Review of Road Map of FIP for Zone and submission of status report to Central Office for placing

information before the Board and Top Management .

o Training of Branch Managers of base branches at Zonal Staff Training Centres.

o Due Diligence of BCs

o Monthly review of progress with Lead District Manager

o Quarterly review with Regional Manger

o MIS Submission to : Central Office and RBI/Govt.

o Follow-up of irregulatory pointed out by auditors their rectification and closure

o Redressal of Grievances Closure of Complaints.

o Monitoring and follow up of all FI activities

Dos and Donts for BC

DOs

o Treat every customer with due respect

o Maintain friendly relations with the Banks Branch Manager

o Protect yourself well while traveling to and from Bank with cash

o Perform Day End and Settlement as per the terms

o Maintain the cash registers and transaction receipts carefully

o Read the manuals carefully and clarify doubts

o If you have any problem with the terminal or branch, report to Field Supervisor immediately

o Keep the terminal clean, safe and well charged

DOs FOR DISBURSAL

o Complete the disbursals effectively and efficiently

o Before the disbursal period starts, ensure the terminal is ready for disbursals

o Take measures to protect the cash meant for disbursal


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o Disburse the amount to all the intended recipients. If required, take the terminal to the

customers or keep late hours

DONTs

o Do not discriminate the customers based on religion, caste, creed, political party, family feuds,

social status, personal friendshipo Do not charge the customers for any transactions or providing any help

o Do not exploit customers do not solicit or extract any favors in return of services you provide

in cash or kind

o Do not give an impression that you are a benefactor of a customer, you are doing your duty

o Do not encourage informal borrowing or lending

o Do not reveal transaction details of the customers to anybody else

o Do not complete a cash transaction in the terminal until cash actually changes

o Do not mix up personal money with Banks or customers

o Do not keep large amounts of cash for long time

o Do not leave the cash or terminals in unsafe places for longo Do not keep customers card or customers copy of transactions with you.

What is the process flow for enrolments?

o On pre-decided date and time, BC organizes an enrollment camp

o Potential Customers and BC Operator shall be present at the enrolment camp for the enrollment

process and Details are captured in system by face to face interaction

o Photograph and biometrics are captured simultaneously

o Data submitted to DC for account opening and card personalization

o Cards along with forms are sent to CSP/BM for introduction and authentication respectively

o CSPs distribute the cards against biometric authentication and cards/accounts are activated.


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CHAPTER 2 BASICS OF BANKING

Introduction

Banks have played a critical role in the economic development of some developed countries such asJapan and Germany and most of the emerging economies including India. Banks today are important not

just from the point of view of economic growth, but also financial stability. In emerging economies,

banks are special for three important reasons. First, they take a leading role in developing other financial

intermediaries and markets. Second, due to the absence of well-developed equity and bond markets,

the corporate sector depends heavily on banks to meet its financing needs. Finally, in emerging markets

such as India, banks cater to the needs of a vast number of savers from the household sector, who

prefer assured income and liquidity and safety of funds, because of their inadequate capacity to manage

financial risks.

Forms of banking have changed over the years and evolved with the needs of the economy. Thetransformation of the banking system has been brought about by deregulation, technological innovation

and globalization. While banks have been expanding into areas which were traditionally out of bounds

for them, non-bank intermediaries have begun to perform many of the functions of banks. Banks thus

compete not only among themselves, but also with nonbank financial intermediaries, and over the

years, this competition has only grown in intensity. Globally, this has forced the banks to introduce

innovative products, seek newer sources of income and diversify into non-traditional activities.

Definition of banks

In India, the definition of the business of banking has been given in the Banking Regulation Act, (BR Act),

1949. According to Section 5(c) of the BR Act, 'a banking company is a company which transacts thebusiness of banking in India.' Further, Section 5(b) of the BR Act defines banking as, 'accepting, for the

purpose of lending or investment, of deposits of money from the public, repayable on demand or

otherwise, and withdrawals, by cheque, draft, order or otherwise.' This definition points to the three

primary activities of a commercial bank which distinguish it from the other financial institutions. These

are: (i) maintaining deposit accounts including current accounts, (ii) issue and pay cheques, and (iii)

collect cheques for the bank's customers.

Evolution of Commercial Banks in India

The commercial banking industry in India started in 1786 with the establishment of the Bank of Bengal

in Calcutta. The Indian Government at the time established three Presidency banks, viz., the Bank of

Bengal (established in 1809), the Bank of Bombay (established in 1840) and the Bank of Madras

(established in 1843). In 1921, the three Presidency banks were amalgamated to form the Imperial Bank

of India, which took up the role of a commercial bank, a bankers' bank and a banker to the Government.

The Imperial Bank of India was established with mainly European shareholders. It was only with the

establishment of Reserve Bank of India (RBI) as the central bank of the country in 1935, that the quasi-

central banking role of the Imperial Bank of India came to an end.


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In 1860, the concept of limited liability was introduced in Indian banking, resulting in the establishment

of joint-stock banks. In 1865, the Allahabad Bank was established with purely Indian shareholders.

Punjab National Bank came into being in 1895. Between 1906 and 1913, other banks like Bank of India,

Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.

After independence, the Government of India started taking steps to encourage the spread of banking inIndia. In order to serve the economy in general and the rural sector in particular, the All India Rural

Credit Survey Committee recommended the creation of a state-partnered and state-sponsored bank

taking over the Imperial Bank of India and integrating with it, the former state-owned and state-

associate banks. Accordingly, State Bank of India (SBI) was constituted in 1955. Subsequently in 1959,

the State Bank of India (subsidiary bank) Act was passed, enabling the SBI to take over eight former

state-associate banks as its subsidiaries.

To better align the banking system to the needs of planning and economic policy, it was considered

necessary to have social control over banks. In 1969, 14 of the major private sector banks were

nationalized. This was an important milestone in the history of Indian banking. This was followed by the

nationalization of another six private banks in 1980. With the nationalization of these banks, the major

segment of the banking sector came under the control of the Government. The nationalization of banks

imparted major impetus to branch expansion in un-banked rural and semi-urban areas, which in turn

resulted in huge deposit mobilization, thereby giving boost to the overall savings rate of the economy. It

also resulted in scaling up of lending to agriculture and its allied sectors. However, this arrangement also

saw some weaknesses like reduced bank profitability, weak capital bases, and banks getting burdened

with large non-performing assets.

To create a strong and competitive banking system, a number of reform measures were initiated in early

1990s. The thrust of the reforms was on increasing operational efficiency, strengthening supervision

over banks, creating competitive conditions and developing technological and institutional

infrastructure. These measures led to the improvement in the financial health, soundness and efficiency

of the banking system.

One important feature of the reforms of the 1990s was that the entry of new private sector banks was

permitted. Following this decision, new banks such as ICICI Bank, HDFC Bank, IDBI Bank and UTI Bank

were set up.

Commercial banks in India have traditionally focused on meeting the short-term financial needs of

industry, trade and agriculture. However, given the increasing sophistication and diversification of the

Indian economy, the range of services extended by commercial banks has increased significantly, leadingto an overlap with the functions performed by other financial institutions. Further, the share of long-

term financing (in total bank financing) to meet capital goods and project-financing needs of industry

has also increased over the years.

Functions of Commercial Banks

The main functions of a commercial bank can be segregated into three main areas: (i) Payment System

(ii) Financial Intermediation (iii) Financial Services.


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(i) Payment System

Banks are at the core of the payments system in an economy. A payment refers to the means by which

financial transactions are settled. A fundamental method by which banks help in settling the financial

transaction process is by issuing and paying cheques issued on behalf of customers. Further, in modern

banking, the payments system also involves electronic banking, wire transfers, settlement of credit card

transactions, etc. In all such transactions, banks play a critical role.

(ii) Financial Intermediation

The second principal function of a bank is to take different types of deposits from customers and then

lend these funds to borrowers, in other words, financial intermediation. In financial terms, bank deposits

represent the banks' liabilities, while loans disbursed, and investments made by banks are their assets.

Bank deposits serve the useful purpose of addressing the needs of depositors, who want to ensure

liquidity, safety as well as returns in the form of interest. On the other hand, bank loans and investments

made by banks play an important function in channeling funds into profitable as well as socially

productive uses.

(iii) Financial Services

In addition to acting as financial intermediaries, banks today are increasingly involved with offering

customers a wide variety of financial services including investment banking, insurance-related services,

government-related business, foreign exchange businesses, wealth management services, etc. Income

from providing such services improves a bank's profitability.

Competitive Landscape of Banks in India

Banks face competition from a wide range of financial intermediaries in the public and private sectors in

the areas of financial intermediation and financial services (although the payments system is exclusively

for banks). Such intermediaries form a diverse group in terms of size and nature of their activities, and

play an important role in the financial system by not only competing with banks, but also

complementing them in providing a wide range of financial services. Some of these intermediaries

include:

Term-lending institutions

Non-banking financial companies

Insurance companies

Mutual funds

(i) Term-Lending Institutions

Term lending institutions exist at both state and all-India levels. They provide term loans (i.e., loans withmedium to long-term maturities) to various industry, service and infrastructure sectors for setting up

new projects and for the expansion of existing facilities and thereby compete with banks. At the all-India

level, these institutions are typically specialized, catering to the needs of specific sectors, which make

them competitors to banks in those areas. These include the Export Import Bank of India (EXIM Bank),

Small Industries Development Bank of India (SIDBI), Tourism Finance Corporation of India Limited (TFCI),

and Power Finance Corporation Limited (PFCL).


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At the state level, various State Financial Corporations (SFCs) have been set up to finance and promote

small and medium-sized enterprises. There are also State Industrial Development Corporations (SIDCs),

which provide finance primarily to medium-sized and large-sized enterprises. In addition to SFCs and

SIDCs, the North Eastern Development Financial Institution Ltd. (NEDFI) has been set up to cater

specifically to the needs of the north-eastern states.

(ii) Non-Banking Finance Companies (NBFCs)

India has many thousands of non-banking financial companies, predominantly from the private sector.

NBFCs are required to register with RBI in terms of the Reserve Bank of India (Amendment) Act, 1997.

The principal activities of NBFCs include equipment-leasing, hire purchase, loan and investment and

asset finance. NBFCs have been competing with and complementing the services of commercial banks

for a long time. All NBFCs together currently account for around nine percent of assets of the total

financial system.

Housing-finance companies form a distinct sub-group of the NBFCs. As a result of some recent

government incentives for investing in the housing sector, these companies' business has grown

substantially. Housing Development Finance Corporation Limited (HDFC), which is in the private sector

and the Government-controlled Housing and Urban Development Corporation Limited (HUDCO) are the

two premier housing-finance companies. These companies are major players in the mortgage business,

and provide stiff competition to commercial banks in the disbursal of housing loans.

(iii) Insurance Companies

Insurance/reinsurance companies such as Life Insurance Corporation of India (LIC), General Insurance

Corporation of India (GICI), and others provide substantial long-term financial assistance to the

industrial and housing sectors and to that extent, are competitors of banks. LIC is the biggest player in

this area.

(iv) Mutual Funds

Mutual funds offer competition to banks in the area of fund mobilization, in that they offer alternate

routes of investment to households. Most mutual funds are standalone asset management companies.

In addition, a number of banks, both in the private and public sectors, have sponsored asset

management companies to undertake mutual fund business. Banks have thus entered the asset

management business, sometimes on their own and other times in joint venture with others.


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CHAPTER 3 BANKING STRUCTURE IN INDIA

Banking Structure in India

Banking RegulatorThe Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as

the regulator and supervisor of commercial banks.

Scheduled Banks in India

Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks. Scheduled

commercial banks form the bedrock of the Indian financial system, currently accounting for more than

three-fourths of all financial institutions' assets. SCBs are present throughout India, and their branches,

having grown more than four-fold in the last 40 years now number more than 80,500 across the

country. Our focus in this module will be only on the scheduled commercial banks.

Public Sector Banks

Public sector banks are those in which the majority stake is held by the Government of India (GoI).

Public sector banks together make up the largest category in the Indian banking system. There are

currently 27 public sector banks in India. They include the SBI and its 6 associate banks (such as State

Bank of Indore, State Bank of Bikaner and Jaipur etc), 19 nationalized banks (such as Allahabad Bank,

Canara Bank etc) and IDBI Bank Ltd.

Public sector banks have taken the lead role in branch expansion, particularly in the rural areas.

Public sector banks account for bulk of the branches in India (88 percent in 2009).

In the rural areas, the presence of the public sector banks is overwhelming; in 2009, 96 percentof the rural bank branches belonged to the public sector. The private sector banks and foreign

banks have limited presence in the rural areas.

Regional Rural Banks

Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop the rural

economy. Each RRB is owned jointly by the Central Government, concerned State Government and a

sponsoring public sector commercial bank. RRBs provide credit to small farmers, artisans, small

entrepreneurs and agricultural laborers. Over the years, the Government has introduced a number of

measures of improve viability and profitability of RRBs, one of them being the amalgamation of the RRBs

of the same sponsored bank within a State. This process of consolidation has resulted in a steep decline

in the total number of RRBs to 86 as on March 31, 2009, as compared to 196 at the end of March 2005.

Private Sector Banks

In this type of banks, the majority of share capital is held by private individuals and corporate. Not all

private sector banks were nationalized in 1969, and 1980. The private banks which were not

nationalized are collectively known as the old private sector banks and include banks such as The Jammu

and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc. Entry of private sector banks was however prohibited


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during the post-nationalization period. In July 1993, as part of the banking reform process and as a

measure to induce competition in the banking sector, RBI permitted the private sector to enter into the

banking system. This resulted in the creation of a new set of private sector banks, which are collectively

known as the new private sector banks.

Foreign BanksForeign banks have their registered and head offices in a foreign country but operate their branches in

India. The RBI permits these banks to operate either through branches; or through wholly-owned

subsidiaries. The primary activity of most foreign banks in India has been in the corporate segment.

However, some of the larger foreign banks have also made consumer financing a significant part of their

portfolios. These banks offer products such as automobile finance, home loans, credit cards, household

consumer finance etc. Foreign banks in India are required to adhere to all banking regulations, including

priority-sector lending norms as applicable to domestic banks.8 In addition to the entry of the new

private banks in the mid-90s, the increased presence of foreign banks in India has also contributed to

boosting competition in the banking sector.

Co-operative Banks

Co-operative banks cater to the financing needs of agriculture, retail trade, small industry and self-

employed businessmen in urban, semi-urban and rural areas of India. A distinctive feature of the co-

operative credit structure in India is its heterogeneity. The structure differs across urban and rural areas,

across states and loan maturities. Urban areas are served by urban cooperative banks (UCBs), whose

operations are either limited to one state or stretch across states. The rural co-operative banks comprise

State co-operative banks, district central cooperative banks, SCARDBs and PCARDBs.9

The co-operative banking sector is the oldest segment of the Indian banking system. The network of

UCBs in India consisted of 1721 banks as at end-March 2009, while the number of rural co-operative

banks was 1119 as at end-March 2008. Owing to their widespread geographical penetration,

cooperative banks have the potential to become an important instrument for large-scale financial

inclusion, provided they are financially strengthened. The RBI and the National Agriculture and Rural

Development Bank (NABARD) have taken a number of measures in recent years to improve financial

soundness of co-operative banks.

Role of Reserve Bank of India

The Reserve Bank of India (RBI) is the central bank of the country. It was established on April 1, 1935

under the Reserve Bank of India Act, 1934, which provides the statutory basis for its functioning. When

the RBI was established, it took over the functions of currency issue from the Government of India and

the power of credit control from the then Imperial Bank of India.

As the central bank of the country, the RBI performs a wide range of functions; particularly, it:

Acts as the currency authority

Controls money supply and credit

Manages foreign exchange

Serves as a banker to the government


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Builds up and strengthens the country's financial infrastructure

Acts as the banker of banks

Supervises banks

As regards the commercial banks, the RBI's role mainly relates to the last two points stated above.

RBI as Bankers' Bank

As the bankers' bank, RBI holds a part of the cash reserves of banks,; lends the banks funds for short

periods, and provides them with centralised clearing and cheap and quick remittance facilities.

Banks are supposed to meet their shortfalls of cash from sources other than RBI and approach RBI only

as a matter of last resort, because RBI as the central bank is supposed to function as only the 'lender of

last resort'.

To ensure liquidity and solvency of individual commercial banks and of the banking system as a whole,

the RBI has stipulated that banks maintain a Cash Reserve Ratio (CRR). The CRR refers to the share of

liquid cash that banks have to maintain with RBI of their net demand and time liabilities (NDTL). CRR isone of the key instruments of controlling money supply. By increasing CRR, the RBI can reduce the funds

available with the banks for lending and thereby tighten liquidity in the system; conversely reducing the

CRR increases the funds available with the banks and thereby raises liquidity in the financial system.

RBI as supervisor

To ensure a sound banking system in the country, the RBI exercises powers of supervision, regulation

and control over commercial banks. The bank's regulatory functions relating to banks cover their

establishment (i.e. licensing), branch expansion, liquidity of their assets, management and methods of

working, amalgamation, reconstruction and liquidation. RBI controls the commercial banks through

periodic inspection of banks and follow-up action and by calling for returns and other information fromthem, besides holding periodic meetings with the top management of the banks.

While RBI is directly involved with commercial banks in carrying out these two roles, the commercial

banks help RBI indirectly to carry out some of its other roles as well. For example, commercial banks are

required by law to invest a prescribed minimum percentage of their respective net demand and time

liabilities (NDTL) in prescribed securities, which are mostly government securities. This helps the RBI to

perform its role as the banker to the Government, under which the RBI conducts the Government's

market borrowing program.


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CHAPTER 4 BANK DEPOSIT ACCOUNTS

As stated earlier, financial intermediation by commercial banks has played a key role in India in

supporting the economic growth process. An efficient financial intermediation process, as is well known,

has two components: effective mobilization of savings and their allocation to the most productive uses.

In this chapter, we will discuss one part of the financial intermediation by banks: mobilization of savings.

When banks mobilize savings, they do it in the form of deposits, which are the money accepted by banks

from customers to be held under stipulated terms and conditions. Deposits are thus an instrument of

savings.

Since the bank nationalization in 1969, banks have been at the core of the financial intermediation

process in India. They have mobilized a sizeable share of savings of the household sector, the major

surplus sector of the economy. This in turn has raised the financial savings of the household sector and

hence the overall savings rate. Notwithstanding the liberalization of the financial sector and increased

competition from various other saving instruments, bank deposits continue to be the dominant

instrument of savings in India.

The gross domestic savings of the Indian economy have been growing over the years and the household

sector has been the most significant contributor to savings. Household sector saves in two major ways,

viz. financial assets and physical assets. The financial savings of the household sector, bank deposits are

the most prominent instrument, accounting for nearly half of total financial savings of the household

sector.

Introduction to Bank Deposits

One of the most important functions of any commercial bank is to accept deposits from the public,

basically for the purpose of lending. Deposits from the public are the principal sources of funds for

banks.

The share of deposits of different classes of scheduled commercial banks (SCBs). It can be seen that the

public sector banks continue to dominate the Indian banking industry. However, the share of the new

private sector banks has been rising at the expense of the public sector banks.

Safety of deposits

At the time of depositing money with the bank, a depositor would want to be certain that his/her

money is safe with the bank and at the same time, wants to earn a reasonable return.

The safety of depositors' funds, therefore, forms a key area of the regulatory framework for banking. In

India, this aspect is taken care of in the Banking Regulation Act, 1949 (BR Act). The RBI is empowered to

issue directives/advices on several aspects regarding the conduct of deposit accounts from time to time.

Further, the establishment of the Deposit Insurance Corporation in 1962 (against the backdrop of failure

of banks) offered protection to bank depositors, particularly small-account holders.


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Deregulation of interest rates

The process of deregulation of interest rates started in April 1992. Until then, all interest rates were

regulated; that is, they were fixed by the RBI. In other words, banks had no freedom to fix interest rates

on their deposits. With liberalization in the financial system, nearly all the interest rates have now been

deregulated. Now, banks have the freedom to fix their own deposit rates with only a very few

exceptions. The RBI prescribes interest rates only in respect of savings deposits and NRI deposits, leaving

others for individual banks to determine.

Deposit policy

The Board of Directors of a bank, along with its top management, formulates policies relating to the

types of deposit the bank should have, rates of interest payable on each type, special deposit schemes

to be introduced, types of customers to be targeted by the bank, etc. Of course, depending on the

changing economic environment, the policy of a bank towards deposit mobilization, undergoes changes.

Types of Deposit Accounts

The bank deposits can also be classified into (i) demand deposits and (b) time deposits.

(i) Demand deposits

are defined as deposits payable on demand through cheque or otherwise. Demand deposits serve as a

medium of exchange, for their ownership can be transferred from one person to another through

cheques and clearing arrangements provided by banks. They have no fixed term to maturity.

(ii) Time deposits

are defined as those deposits which are not payable on demand and on which cheques cannot be

drawn. They have a fixed term to maturity. A certificate of deposit (CD), for example, is a time deposit

Demand and time deposits are two broad categories of deposits. Note that these are only categories of

deposits; there are no deposit accounts available in the banks by the names 'demand deposits' or 'time

deposits'. Different deposit accounts offered by a bank, depending on their characteristics, fall into one

of these two categories. There are several deposit accounts offered by banks in India; but they can be

classified into three main categories:

Current account

Savings bank account

Term deposit account

Current account deposits fall entirely under the demand-deposit category and term deposit account falls

entirely under time deposit. Savings bank accounts have both demand-deposit and time-depositcomponents. In other words, some parts of savings deposits are considered demand deposits and the

rest as time deposits. We provide below the broad terms and conditions governing the conduct of

current, savings and term-deposit accounts.


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Current Deposits

A current account is a form of demand-deposit, as the banker is obliged to repay these liabilities on

demand from the customer. Withdrawals from current accounts are allowed any number of times

depending upon the balance in the account or up to a particular agreed amount. Current deposits are

non-interest bearing. Among the three broad categories of depositscurrent account deposit, savings

accounts deposit and term deposits--current account deposits account for the smallest fraction.

A current account is basically a running and actively operated account with very little restriction on the

number and amount of drawings. The primary objective of a current account is to provide convenient

operation facility to the customer, via continuous liquidity.

On account of the high cost of maintaining such accounts, banks do not pay any interest on such

deposits. In addition, many banks insist on customers maintaining minimum balances to offset the

transaction costs involved. If minimum balances are not maintained, these banks charge the customers

a certain amount. Current accounts can be opened by rich individuals/ partnership firms/ private and

limited companies/ Hindu Undivided Families (HUFs)/ societies/ trusts, etc.

Savings Bank Deposits

Savings deposits are a form of demand deposits, which is subject to restrictions on the number of

withdrawals as well as on the amounts of withdrawals during any specified period. Further, minimum

balances may be prescribed in order to offset the cost of maintaining and servicing such deposits.

Savings deposits are deposits that accrue interest at a fixed rate set by RBI (3.5 percent as of January

2010).

Savings bank accounts are used by a large segment of small depositors as they can put their regular

incomes into these accounts, withdraw the money on demand and also earn interest on the balance left

in the account.

The flexibility provided by such a product means that savings bank accounts cannot be opened by big

trading or business firms. Similarly, institutions such as government departments and bodies, local

authorities, etc. cannot open savings bank accounts. Savings account deposits together with current

account deposits are called CASA deposits

Term Deposits

A "Term deposit" is a deposit received by the Bank for a fixed period, after which it can be withdrawn.

Term deposits include deposits such as Fixed Deposits / Reinvestment deposits/ Recurring Deposits etc.

The term deposits account for the largest share and have remained within the range of 61% to 67 % of

total deposits in the recent years.

Interest is paid on term-deposits, either on maturity or at stipulated intervals depending upon the

deposit scheme under which the money is placed. Also, a customer can earn interest on a term-deposit

for a minimum period of 7 days. Interest rates on term-deposits are usually higher than on savings

deposits. Term deposits include:


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Fixed deposits on which a fixed rate of interest is paid at fixed, regular intervals;

Re-investment deposits, under which the interest is compounded quarterly and paid on

maturity, along with the principal amount of the deposit. Some banks have introduced "flexi"

deposits under which, the amount in savings deposit accounts beyond a fixed limit is

automatically converted into term-deposits; and

Recurring deposits, under which a fixed amount is deposited at regular intervals for a fixed term

and the repayment of principal and accumulated interest is made at the end of the term. These

deposits are usually targeted at persons who are salaried or receive other regular income. A

Recurring Deposit can usually be opened for any period from 6 months to 120 months.

Common Guidelines of Opening and Operating Deposit Accounts

To open and operate a bank account, the following guidelines need to be followed.

Due Diligence Process:

A bank before opening any deposit account has to carry out due diligence as required under "Know

Your Customer" (KYC) guidelines issued by RBI and or such other norms or procedures adopted by thebank.16 The 'due diligence' process, while opening a deposit account, involves the bank having

adequate knowledge of the person's identity, occupation, sources of income, and location. Obtaining an

introduction of the prospective depositor from a person acceptable to the bank, obtaining recent

photographs of people opening/ operating the account are part of the due diligence process. For

customers providing proof of identification and address, there is no need for personal introduction to

the bank for opening of a new savings bank account. To promote financial inclusion in rural areas / tribal

areas, KYC norms have been relaxed for below the poverty line (BPL) families.

Minimum Balance:

For deposit products like a savings bank account or a current account, banks normally stipulate certain

minimum balances to be maintained as part of terms and conditions governing operation of such

accounts. But for people below the poverty line, banks encourage the opening of 'No-frills Accounts',

typically a special savings bank account where no minimum balance requirement is required. For a

savings bank account, the bank may also place restrictions on number of transactions, cash withdrawals,

etc., during a given period.

Transparency:

Failure to maintain minimum balance in the accounts, where applicable, will attract levy of charges as

specified by the bank from time to time. Similarly, the bank may specify charges for issue of cheques

books, additional statement of accounts, duplicate passbook, folio charges, etc. All such details

regarding terms and conditions for operation of the accounts and schedule of charges for various

services provided should be communicated to the prospective depositor while opening the account for

the sake of transparency.

Eligibility:

A savings bank account can be opened by eligible person(s) and certain organizations/agencies, as

advised by the RBI from time to time. But current accounts can be opened by individuals, partnership


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firms, private and public limited companies, Hindu Undivided Families (HUFs), specified associates,

society trusts, etc. Eligibility criteria for a savings account and a current account are largely similar, but

there are important differences too. While both the accounts can be opened by individuals, the savings

account cannot be opened by a firm. Term Deposit Accounts can be opened by all categories of account

holders.

Requirement of PAN:

In addition to the due diligence requirements, under KYC norms, banks are required by law to obtain a

Permanent Account Number (PAN) from the prospective account holder or alternate declarations as

specified under the Income Tax Act.

Operation of Joint Account:

Deposit accounts can be opened by an individual in his own name or by more than one individual in

their own names (known as a 'joint account'). A joint account can be operated by a single individual or

by more than one individual jointly. The mandate for who can operate the account can be modified with

the consent of all account holders. Joint accounts opened by minors with their parents or guardians can

be only operated by the latter. Accountholders of a joint account can give mandates on the operation of

the account, and the disposal of balances in the event of the demise of one or more of the holders.

Banks classify these mandates as 'Either or Survivor', and 'Anyone or Survivor(s)', etc.

Power of Attorney:

At the request of the depositor, the bank can register mandate/power of attorney given by him

authorizing another person to operate the account on his behalf.

Closure/renewal of deposits:

Term-deposit account holders at the time of placing their deposits can give instructions with regard to

closure of deposit account or renewal of deposit for further period on the date of maturity. In absenceof such mandate, the bank will usually seek instructions from the depositor(s) as to the renewal of the

deposit or otherwise by sending intimation before say, 15 days of the maturity date of the term deposit.

If no mandate is given or received by the bank before the date of maturity of term deposit, the bank will

be at liberty to roll over the deposit on due date.

Nomination:

A depositor is permitted to officially authorize someone, who would receive the money of his account

when the depositor passes away. This is called the nomination process. Nomination facility is available

on all deposit accounts opened by individuals. Nomination is also available to a sole proprietary concern

account. Nomination can be made in favor of one individual only. Nomination so made can be cancelled

or changed by the account holder/s any time. Nomination can be made in favor of a minor too.

Deposit Related Services

As per the RBI guidelines, banks are required to provide some services to the depositors and to

recognize the rights of depositors. The ultimate objective of the banking industry should be to provide a

customer different services they are rightfully entitled to receive without demand. We take a quick look

at some such services provided by banks in India.


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Customer Information

Customer information collected from the customers should not be used for cross-selling of services or

products by the bank, its subsidiaries and affiliates. If the bank proposes to use such information, it

should be strictly with the 'express consent' of the account-holder.

Banks are not expected to disclose details/particulars of the customer's account to a thirdperson or party without the expressed or implied consent from the customer. However, there

are some exceptions, such as disclosure of information under compulsion of law or where there

is a duty to public for the bank to disclose.

Interest Payments

Savings bank accounts: Interest is paid on savings bank deposit account at the rate specified by

RBI from time to time. In case of savings bank accounts, till recently, banks paid interest on the

minimum balance between the 11th and the last day of the month. With effect from April 1,

2010, banks have been advised to calculate interest on savings bank deposit by considering daily

product, which would benefit the holders of savings bank accounts.

Term deposits: Term-deposit interest rates are decided by individual banks within these general

guidelines. In terms of RBI directives, interest is calculated at quarterly intervals on term

deposits and paid at the rate decided by the bank depending upon the period of deposits. The

interest on term deposits is calculated by the bank in accordance with the formulae and

conventions advised by Indian Bank Association. Also, a customer can earn interest on a term

deposit for a minimum period of 7 days.

Tax deducted at source (TDS): The bank has statutory obligation to deduct tax at source if the

total interest paid/payable on all term deposits held by a person exceeds the amount specified

under the Income Tax Act and rules there under. The Bank will issue a tax deduction certificate

(TDS Certificate) for the amount of tax deducted. The depositor, if entitled to exemption fromTDS, can submit a declaration to the bank in the prescribed format at the beginning of every

financial year.

Premature Withdrawal of Term Deposit

The bank on request from the depositor, at its discretion, may allow withdrawal of term deposit before

completion of the period of the deposit agreed upon at the time of placing the deposit. Banks usually

charge a penalty for premature withdrawal of deposits. The bank shall declare their penal interest rates

policy for premature withdrawal of term deposit, if any, at the time of opening of the account.

Premature Renewal of Term Deposit

In case the depositor desires to renew the deposit by seeking premature closure of an existing termdeposit account, the bank will permit the renewal at the applicable rate on the date of renewal,

provided the deposit is renewed for a period longer than the balance period of the original deposit.

While prematurely closing a deposit for the purpose of renewal, interest on the deposit f

Documents

Module - Business Correspondent and Facilitator (1)