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Online Banking or Online Fund Transfer System
Learning Objectives
Meaning
(As per ISC scope of syllabus)
Different payment and settlement systems in India have made
the task of transferring money from one bank account to • Online services transfer of funds
another easier and faster. Now account holders don't have to through:
wait for days to receive money in their bank accounts. With the ➢ Real Time Gross Settlement
help of the latest digital payment systems, money can be sent (RTGS),
and received in an instant anytime from anywhere. A large ➢ National Electronic Funds
number of banks, private companies and government bodies Transfer (NEFT),
along with others are adopting different payment and ➢ Immediate Payment Service
settlement methods. This has helped in reducing the gap (IMPS).
between the entities and their customers and other concerned
• Issue of demand drafts online
people. These methods are fast, convenient and useful for
meaning and features.
documentation purposes. They also are superior in terms of
• Online payment system:
reliability and cost involved.
Meaning.
Different Methods to Transfer Funds Online In India
• e-Banking meaning and features,
India currently has various methods to transfer money online
advantages and disadvantages.
such as digital wallets, UPI (Unified Payments Interface), and
• Mobile Banking SMS alerts,
more. However, the most commonly used online fund transfer
transfer of funds, making
method
payments – meaning, advantages
has been:
and disadvantages.
• National Electronic Funds Transfer (NEFT)
• Real Time Gross Settlement (RTGS) • ATM (Automated Teller
• Immediate Mobile Payment Service (IMPS) Machine) Meaning and features.
While NEFT and RTGS was introduced by RBI (Reserve Bank of • Debit card and Credit card:
India), IMPS was introduced by National Payments Meaning, features and
Corporation of India (NPCI). differences.

Real Time Gross Settlement (RTGS)

Meaning
The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time)
settlement of funds individually on an order by order basis (without netting). 'Real Time' means the processing
of instructions at the time they are received rather than at some later time. 'Gross Settlement' means the
settlement of funds transfer instructions occurs individually (on an instruction by instruction basis).
Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are
final and irrevocable. RTGS is available 24x7x365 with effect from December 14, 2020. This is the fastest possible
system for transfer of money through the banking system.

Explanation [For extra knowledge]

RTGS system is generally controlled by the central bank of the country (in India, by Reserve Bank of India being
central bank of India). In RTGS system, every bank along with the central bank is linked electronically. Every
bank maintains its' account with the central bank. When any transaction takes place between two banks, this
is settled by the RTGS system, example, suppose a customer of PNB has issued a cheque of ₹ 5 lakh in favour a
customer of SBI, The latter customer deposits the cheque with his bank for collection. SBI sends the cheque to
PNB for payment. The moment PNB debits the account of its customer by ₹ 5 lakh, RTGS system debits the
account of PNB by ₹ 5 lakh and credits the account of SEB with the same amount. During the transaction hours,
there are many such transactions. All these transactions are settled on real time and gross basis.

Features and Benefits of RTGS Funds Transfer [any eight points]

1. It is a safe and secure way of transferring funds.
2. The minimum amount in a RTGS transaction is ₹ 2 lakh.
3. There is no maximum limit or upper ceiling for RTGS transfers through the bank branch.
4. Customer can perform real-time fund transfer to the beneficiary account.
5. Funds can be transferred on all days.
6. A physical cheque or demand draft is not required.
7. No chance of loss or theft of physical instruments and the fraudulent encashment for beneficiaries.
8. The transaction can be initiated from his or her home or workplace using internet banking.
9. Generally, funds can be transferred without any fees or charges. But fees charged for RTGS transactions may
imposed banks and the same may vary from bank to bank.
10. RTGS transactions are backed legally.
11. RTGS is not available at all the bank branches in India. This facility is provided only by CBS enabled bank
branches.
12. RTGS transactions are processed individually and continuously throughout banking hours rather than in
batches.
13. The receiving or beneficiary bank must credit the customer's account within two hours of receiving the
funds transfer message.

Is there any minimum or maximum amount stipulation for RTGS transactions? (For extra knowledge)
The RTGS system is primarily meant for large value transactions. The minimum amount you can transfer via
RTGS is ₹ 2 lakh. When it comes to the upper limit, there is no associated cap when you transfer through the
bank branch. Instead, if you choose to do the transfer via internet banking, you can send a maximum of ₹ 25
lakh per day per customer.

Are any transactions or service charges for RTGS transactions levy on customers? (For extra knowledge]
RBI has removed charges for NEFT, RTGS payments. It has asked banks to pass on benefits to customers.
However, RTGS transactions done through bank branches may incur certain transaction charges along with
GST. The maximum time for returning of RTGS transactions, which could not be credited to beneficiary's
account? [For Extra knowledge]
If the funds are not credited to the beneficiary's account for any reason like account does not exist, account
frozen etc., the funds will be returned to the originating bank within one hour or before the end of the RTGS
Business day whichever is earlier.

Can RTGS be Schedule in Advance? [For extra knowledge]

Yes, RTGS transactions can be scheduled in advance. The time frame to schedule an RTGS transaction in
advance is 3 working days.
What is UTR number?
Unique Transaction Reference (UTR) number is a 22 character code used to uniquely identify a transaction in
RTGS system.

National Electronic Funds Transfer (NEFT)

Meaning
National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds
transfer Under this Scheme, individuals can electronically transfer funds from any bank branch to any
individual having an account with any other bank branch in the country participating in the Scheme. The NEFT
system is available round the clock throughout the year on all days, i.e., on 24x7x365 basis. NEFT presently
operates in batches on hall hourly intervals throughout the day. In case of non-availability of NEFT for any
reason, appropriate message will be broadcasted by RBI to all system participants.
Use NEFT service to transfer funds anywhere using the following modes:
• Internet Banking
• E-Mobile

Explanation: [For extra knowledge]

National electronic funds transfer (NEFT nation-wide system that facilitates individuals and organizations
having bank account may transfer funds from their accounts electronically to individuals or organizations'
having bank accounts. However, the intending funds transferor must be authorised by the bank for this.
For transferring the funds, the transferor may either use his own electronic resources: (computer and
computer network) or cyber cafe. This facility is available throughout the country. However, the branches
concerned (transmitting branch and receiving branch) must have NEFT facility. Presently; all bank branches
in the country do not have this facility. Further, the transmitting and receiving banks should be participants' of
RTGS system.
There is no limit on the amount of transfer of funds from the accounts. However, if a person wants to transfer
funds electronically but does not have bank account also known as walk-in customer. He can transfer any
amount upto ₹49,999 by depositing it in the local branch (known as transmitting branch) of the bank in which
the beneficiary (the person to whom the funds are to be transferred) has his account. The receiving branch
where the beneficiary has account is located at different places. Further, such a customer has to provide his
full information like name, address, telephone number, etc. Service charge for NEFT is very nominal.
Features and Benefits of NEFT [any eight points]
1. NEFT is an electronic payment system that uses a secure mode of transferring funds from one bank
branch to another bank branch.
2. There is no minimum or maximum limit of amount of funds that could be transferred using NEFT.
3. The remitter can track the NEFT transaction through the originating branch.
4. A bank branch must be NEFT enabled to become a part of the NEFT transfer network.
5. An individual, firm or company can make use of NEFT even without having; bank account by
depositing cash at a NEFT enabled bank branch.
6. In order to receive funds through the NEFT system, an individual, firm company must have an
account with a NEFT enabled bank branch.
7. In case one does not have a bank account, the maximum amount that can be transferred through
NEFT system is ₹ 49999.
8. NEFT transactions take place in batches. lots
9. NEFT cannot be used to receive foreign remittances.
10. The receiver of funds has to pay no charges.

Who is Eligible to Complete a NEFT Transaction? [For extra knowledge]

The list of bank branches that come under the NEFT scheme is provided by the Reserve Bank of India.
Corporates, firms, and individuals who have a bank account under the NEFT scheme will be eligible to make
NEFT transactions. Individuals who do not have a bank account can also make a NEFT transaction by visiting
the bank branch and providing the relevant details.
Can the NEFT system be used for remitting funds even by those who do not have a bank account? [For extra
Knowledge]
Yes, the person having no bank account can remit funds through NEFT to a beneficiary having a bank account,
with another NEFT member bank. It can be done by depositing cash at the nearest NEFT enabled branch of any
bank, by furnishing additional details such as complete address, telephone number, etc. Such cash remittances
will, however, be restricted to a maximum of ₹ 50,000/- per transaction.

Is IFSC Code Necessary for NEFT? [For extra knowledge]

Yes, IFSC (Indian Financial System Code) is necessary to initiate the Fund transfer. It enables the sender's bank
to locate the receiver's bank branch which will make the fund transfer faster and error free.
What is the maximum time for returning of NEFT transactions, this could not be credited to
beneficiary's account? [For extra knowledge]
If the funds are not credited to the beneficiary's account for any reason like account does not exist,
account frozen, etc., the funds will be returned to the originating bank within one hour or before the
end of the NEFT Business day, whichever is earlier.

Immediate Payment Service (IMPS)

Meaning
This is a real-time payment service that is available round the clock, including on holidays. This service is
offered by National Payments Corp. of India that empowers customers to transfer money instantly through
banks and RBI-authorised Prepaid Payment Instruments (PPIs) across India. Money transfer through IMPS can
be initiated from mobile banking apps, bank branches, ATMs, SMS and IVRS (Interactive voice response
system). All resident current and savings account holders of the bank who are registered for Internet Banking
or Mobile Banking can use these services. IMPS is available 24x7 throughout the year, even on bank holidays.
Minimum amount that can be transferred through IMPS is ₹ 1 and maximum limit is ₹ 5 lakhs.

Explanation: [For extra knowledge]

With RTGS now operational round the clock, there has been a corresponding increase in settlement cycles of
IMPS, thereby reducing the credit and settlement risks. In view of the importance of the IMPS system in
processing of domestic payment transactions, the per-transaction limit is increased from ₹ 2 lakh to ₹ 5 lakh
for channels other than SMS and IVRS. The per-transaction limit for SMS and IVRS channels is ₹ 5000.

Features and Benefits of IMPS

1. Instant Fund Transfer: Staying true to its name, IMPS allows you to transfer funds in an instant. This is
because IMPS transactions occur individually and not in batches. You can avail IMPS via online banking,
mobile phone, ATM, or SMS.
2. 24x7 Availability: IMPS is available 24x7 throughout the year, even on bank holidays. You can use the service
to transfer funds anytime and from anywhere.
3. Instant Notifications: Both you and the beneficiary are notified when the amount is debited from one bank
account and credited to the other. As a result, you do not need to worry about whether the transaction was
successful or not.
4. Versatility of Mode: IMPS can be carried out both person to person and person to merchant. All you need is
the mobile number or the bank account details.
5. Safe and Secure: IMPS is carried out over encrypted servers, making the transfer of funds safe and secure.
Payments occurs electronically using multi-step verification.
6. Minimum Information Required: It saves time and effort as it does not require you to fill up lengthy forms
with confidential information. All you need is the beneficiary's name, mobile number, and MMID.
Alternatively, you can transfer funds via IMPS using just the beneficiary account number and IFSC Code.
7. Multiple Applications: Along with immediate transfer of funds, IMPS also allows you to pay insurance
premiums, utility bills, ticket charges, fees, online purchases, etc.
8. Cost Efficient: Banks charge online a minimal amount for availing IMPS facility. In some cases, these
minimal charges too are waived off for transactions. As a result, it is one of the most cost-efficient means of
transferring funds.

What is MMID? [For extra knowledge]

Mobile Money Identification Number (MMID) is a seven digit number of which the first four digits are the
unique identification number of the bank offering IMPS.
Distinction between NEFT, RTGS and IMPS
[For extra knowledge]
Basis for Distinction NEET RTGS IMPS

Minimum Amount that can ₹ 1 ₹ 2 lakh ₹1

be Transferred

Maximum Amount that No maximum limit No maximum limit ₹ 5 lakh

can be Transferred
 Timings 24×7 24×7 24×7

Details that must be IFSC Code, Account IFSC Code, Account MPIN (Mobile PIN) and
Provided Number, and Bank Number, and Bank Name VPA (Virtual Payment
Name Address)

Payment Options Offline/Online Offline/Online Online

Time for Transfer to be Minimum of 2 hours Immediate Immediate

Completed Immediate

Transaction Charges Depends on the bank Depends on the bank No charges

Beneficiary Addition Yes Yes Yes

Online Demand Draft

Meaning
Among the different array of methods that are available to the banking customers in the present day, a demand
draft is considered to be highly reliable and trusted. Before, it was a difficult and tedious task to get a simple
demand draft made from a bank. In the cases of most banks, one had to wait for a long time and fill out various
forms and applications to get the demand draft made. However, with the changing times and the evolution of
technology, it has become possible for customers to get an Online Demand Draft. As compared to obtaining a
demand draft from the bank, Online Demand Draft is a quick way to get the draft made.

What are the steps involved in getting an Online Demand Draft? (For Extra knowledge]
By following the steps mentioned below, a customer can get an Online Demand Draft made from any bank.
• Firstly, a customer will be required to long into his net banking account.
After this, a customer can access the feature of demand draft on the payments page.
At this page, he will be able to choose an option for issuing demand draft.
• The system might require the customer to enter his password after this step.
• After this, the customer will be able to enter the details of the draft.
The customer will be required to enter various other details as well, which are as follows:
• Change the default Demand Draft limit to your requirement. Customer should make sure that he has
enough amount in the bank account for the Online Demand Draft.
• Select the account from which the customer wants to debit the amount for Online Demand Draft.
• Then enter the amount of the demand draft.
• Then enter the name of institution under the 'In favour of field to whom the customer wishes to send
the amount.
• Then choose the purpose of the Online Demand Draft from the menu. It could be anything like
payment of admission fee, etc.
• Enter the branch code at which the Online Demand Draft is payable. If the customer doesn't have the
specific branch, then he can select the service branch of that city or the state.
• Now the customer needs to select the Delivery mode which could be 'Collect in Person' or 'Courier'. In
the first method, customer has to visit the branch from where he debited the amount for Online Demand
 Draft and then collect it. In the second method, Online Demand Draft is sent to the customer through
courier and the bank might charge an additional fee for delivery. The additional fee vary from one bank
to another.
• After that, customer should click submit.
• At the next step, the customer will be intimated about the commission that will be charged for the
Online Demand Draft. The customer will also be able to verify the details of the draft and confirm the
transaction. The intimation about the Online Demand Draft and its status, shall be updated to the
customer through his mobile number.
The whole process of availing Online Demand Draft through a bank is quite seamless and convenient. Ideally,
the customer should not have to face any trouble in the process of getting the draft made but if he does, the
option for accessing the bank's customer care is quite easy.

Features of Online Demand Draft (DD) [any eight points]

1. DD is payable on demand.
2. It is an unconditional order for payment.
3. It bears no stamp.
4. The draft can be negotiated by endorsement and delivery.
5. The purchaser of the DD need not be a customer of a bank.
6. DD is drawn by a banker on its branch or upon another bank.
7. DD is not payable to bearer.
8. The fee (excluding postage) for online Demand Draft service is lower than the fee charged at the
branch.
9. Convenience of sending out your demand drafts anytime, from anywhere.
10. Customer does not need the bank account details of the party you wish to pay.
11. Greater convenience as the bank will mail out the Demand Draft on your behalf via registered mail.
12. A relatively low cost method of making non-urgent overseas payments.
13. Available for over number of currencies worldwide.
14. Less risk compared to a cheque as it can only be credited to a specific payee's accounts.

Validity of Demand Draft [For extra knowledge]

A draft is valid for a period of 3 months from the date of issue. The draft will be expired after that period if not
presented to the bank. However, despite being expired, the money will not be refunded in the drawer's account.
The drawer then has to approach the bank to revalidate the draft. Here one thing should be noticed that the
payee or any other person cannot approach the bank in any condition to revalidate the DD.
The bank verifies the original details before revalidating the draft and extends its usability for another 3
months. However, a revalidated draft cannot be revalidated further.

Online Payment
Meaning
An online payment system is an Internet-based method of processing economic transactions. It allows a vendor
to accept payments over the web or over other Internet connections, such as direct database connections
between retail stores and their suppliers a common method of maintaining just-in-time inventories. Online
payment systems greatly expand the reach of a business and its ability to make sales.
Online payment systems typically are run by third-party corporations, such as PayPal, Google or Click2Pay.
These companies make a profit by taking a small percentage of every transaction, or by signing contracts with
institutions that need to make a large number of transactions.
Merchants accepting online payments need to comply with a list of security requirements. The online payment
specific security is designed to decrease the chance of the billing and personal information being stolen. The
transfer needs to occur over secure encrypted connection.
To accept an online payment the merchant needs to have access to an Online Payment Gateway. The online
payment gateway is a service provider that is integrated with the credit card and transfers the online payment
information between the merchant and the payment processor.

Steps Involved in Online Payment [For extra knowledge]

1. The person making any payment online is required to log in the website of the payee by using his log
in Id and password. The payee website provides log in Id and password to the person after his
registration with the website.
2. The concerned website opens and asks the person about the type of payment he wants to make. On
clicking the option of payment to be made, the website provides the details to be filled. The person fills
the required details. On clicking to continue or proceed further, the website opens the page relating to
instruments through which the payment will be made.
3. The person is required to fill the details of the payment instrument like credit card,debit card, net
banking, etc. If the website has security requirement text boxes, the person has to fill these.
4. After clicking the continue option, the website starts Payment Gateway for checking the validity of
the payment instrument. This is done in order to avoid frauds.
5. After confirming the validity of the payment instrument, the Payment Gateway initiates the process
of debiting the money from the person's account and crediting it to the payee's account.
6. After this process is over, the website confirms the payment and sends the payment receipt to the
person through e-mail.

Electronic Banking (E-banking)

Meaning
Electronic banking has many names like e-banking, virtual banking, online banking, or internet banking. It is
simply the use of electronic and telecommunications network for delivering various banking products and
services. Through e-banking, a customer can access his account and conduct many transactions using his
computer or mobile phone. It is a safe, fast, easy and efficient electronic service that enables you access to bank
account and to carry out online banking services, 24 hours a day, and 7 days a week.

Features of Electronic Banking [any eight points]

1. Anywhere, Anytime Banking
2. Cashless Banking
3. Promptness in Services
4. Globalization of Services
5. Better Services for Customers
6. Helps to face Competition Provides access to financial as well as non-financial banking services
7. Facility to check bank balance any time and make bill payments and fund transfer to other accounts
8. Keep a check on mortgages, loans, savings account linked to the bank account
 9. Safe and Secure mode of Banking
10. Protected with unique ID and password

Advantages or Merits of Electronic Banking

A. Benefits to Banks [any four points]
1. It reduces Cost
2. It reduces the Foot Fall
3. Global Coverage
4. Central Data Base
5. Increase in Customer Base
6. Improvement in Quality of Services
7. Opportunities to Cross-Sell
8. Sharing of Cost
9. Opportunities for Making Profits
10. Reduction of Risk
11. Reduction in Paper Work
12. Adequate Marketing Tool
13. Reduction in Fraud & Misappropriations

B. Benefits to Customers (any four points]

1. Prompt in Service
2. Anywhere & Anytime Banking
3. Cashless Banking
4. Online Shopping
5. Saving in Time
6. More Convenience
7. More Customer Satisfaction

C. Benefits to Traders
1. Promotion of Business
2. Immediate Settlement
3. Avoid Risk

D. Benefits to Government and Nation

1. Clarity Over Various Transactions
2. Global Coverage of Product
3. Risk Attached with Handling Cash

Disadvantages or De-merits of Electronic Banking [any eight points]

1. High Infrastructural Cost
2. Lack of Awareness
3. Security & Privacy Problems
4. Access Problem
5. No Major Participation by Govt. & RBI
 6. Lack of Proper Cyber Laws
7. Not Suitable for Small Concerns
8. Lack of Initiative on the Part of Employees
9. Hesitation on the Part of Users
10. Lack of Computerization
11. Problem of Inter Bank Transfer
12. Lack of Accurate Account Servicing
13. Unauthorised Transactions
14. Difficult for Beginners
15. Financial Jargon
16. Password security is a must. After receiving your password, do change it and memorize it otherwise
your account may be misused by someone who gets to know your password inadvertently
17. Cannot use the service in case, the bank's server is down.
18. Sometimes it becomes difficult to note whether your transaction was successful or not. It may be
due to the low of net connectivity in between, or due to a slow connection, or the bank's server is down.

Popular Types of E-Banking Services in India

1. Internet Banking: It is the type of electronic banking service which enables customers to perform several
financial and non-financial transactions via the internet. With internet or online banking or net-banking,
customers can transfer funds to another bank account, check account balance, view bank statements, pay
utility bills, and much more.
2. Mobile Banking: This electronic banking system enables customers to perform financial and non-financial
transactions via mobile phone. Most of the banks have launched their mobile banking applications available
on Google Play store and Apple App Store. Just like the net-banking portal, customers can use the mobile
application to access banking services.
3. ATM: Automated Teller Machines (ATM) is one of the most popular types of e-banking. ATMs allow
customers to withdraw funds, deposit money, change Debit Card PIN, and other banking services. To make use
of an ATM, the user must have a password. Banks charge a nominal fee from the customers on every transaction
made after crossing the specified limit of free transactions if the transaction is done from any other bank's
ATM.
4. Debit Cards: Almost every person owns a debit card. This card is connected to your bank account and you
can go cashless with this card. You can use your debit card for all types of transactions; the transaction amount
is debited from your account instantly.
5. Deposit and Withdraws (Direct): This service under e-banking offers the customer a facility to approve pay
checks regularly to the account. The customer can give the bank an authority to deduct funds from his/her
account to pay bills, instalments of any kind, insurance payments, and many more.
6. Pay by Phone Systems: This service allows the customer to contact his/her bank to request them for any bill
payment or to transfer funds to some other account.
7. Point-of-Sale Transfer Terminals: This service allows customers to pay for the purchase through a debit or
credit card instantly.

Mobile Banking
Meaning
Mobile banking is a term used to refer to systems that allow customers of a financial institution to conduct a
number of financial transactions through a mobile device such as a mobile phone or tablet. Mobile banking
differs from mobile payments, which involve the use of a mobile device to pay for goods or services either at
the point of sale or remotely, analogously to the use of a debit or credit card to effect an EFT-POS (Electronic
Funds Transfer at Point of Sale) payment. The earliest mobile banking services were offered over SMS, a service
known as SMS banking.
With the introduction of smart phones with WAP (Wireless Application Protocol) support enabling the use of
the mobile web in 1999, the first European banks started to offer mobile banking on this platform to their
customers. Mobile banking has until recently most often been performed via SMS or the mobile web. Apple's
initial success with I-Phone and the rapid growth of phones based on Google's Android have led to increasing
use of special client programs, called apps, downloaded to the mobile device. With that said advancements in
web technologies such as HTML5, CSS3 and Java Script have seen more banks launching mobile web based
services to complement native applications.

Advantages or Merits of Mobile Banking [any four points]

1. It utilizes the mobile connectivity of telecom operators and therefore does not require an internet
connection.
2. With mobile banking, users of mobile phones can perform several financial functions conveniently and
securely from their mobile.
3. You can check your account balance, review recent transaction, transfer funds, pay bills, locate ATMs, depo
cheques, manage investments, etc.
4. Mobile banking is available round the clock 24/7/365, it is easy and convenient and an ideal choice for
accessing financial services for most mobile phone owners in the rural areas.
5. Mobile banking is said to be even more secure than online or internet banking.

Disadvantages or De-merits of Mobile Banking

1. Mobile banking users are at risk of receiving fake SMS messages and scams.
2. The loss of a person's mobile device often means that criminals can gain access to your mobile banking PIN
and other sensitive information.
3. Modern mobile devices like Smart phone and tablets are better suited for mobile banking than old models of
mobile phones and devices.
4. Regular users of mobile banking over time can accumulate significant charges from their banks.

Mobile Banking Offers the Following Services to Its Customers [For extra knowledge]
1. Access account history.
2. View account balance.
3. Transfer funds between accounts.
4. Schedule future transactions or transfers.
5. Pay bills electronically.
6. SMS alerts whenever transaction takes place.
Popular Types of Mobile Banking (M-banking) Services in India
a. Short Message Service (SMS) Banking Alerts
Meaning
SMS (Short Message Service) alerts are text messaging service through which text messages are exchanged
between a bank and its customer electronically. In the age of electronic banking (e-banking), customers
conduct lot of banking transactions electronically like use of debit or credit cards for buying goods and using
services, electronic funds transfers, withdrawal of money from ATMs (Automated Teller Machines), etc.,
receipt of dividend, interest, etc., electronically. Besides, customers may deposit cheques or drafts, etc., in the
bank for collection.
SMS banking alerts, involve sending details of such transactions by banks to their customers through SMS
messaging. For this purpose, customers are required to get themselves registered with their banks mentioning
their cell numbers. Along with these the customers can know balance of their accounts through SMS alerts. In
a customer-oriented move, Reserve Bank of India has asked banks to send SMS alerts to their customers for any
transaction made via their accounts.
The messages can be in the form of alerts or notifications as well. Through the use of SMS Banking, the
customers are enabled the ease of performing various types of financial transactions by using the SMS
technology.

Explanation [For extra knowledge]

The services related to SMS Banking could be carried out as either push or pull messages. When it comes to
push messages, these are the messages sent out by banks or financial institutions to the mobile phone of the
customers without the user initiating any kind of information request. On a general basis, the push messages
might be in the form of a mobile marketing notification or message. On the other hand, the pull messages in
the SMS Banking scenario refer to the OTPs (One Time Passwords). OTPs are being used as the latest tools that
are utilized by banks & financial institutions towards combating different types of cybercrimes or frauds.
Rather than relying on the conventional by-hearted passwords, in the given pull message system, OTPs are
transmitted to the mobile phone of the customers using the mode of SMS. The users then are required to enter
the OTP for completing the financial transactions using the techniques of mobile or Internet banking. The OTP
sent out to the users is valid only for a limited period of time and expires once it has been used for making the
transactions successful.

Advantages of SMS banking [any five points]

1. SMS Banking allows you to make requests & receive relevant banking information with the use of
your phone.
2. You can check account balance, manage the account, pay bills, and perform a wide range of financial
transactions using the concept of SMS Banking.
3. Offers higher convenience as there is no need for going to the bank every time.
4. Ease of gaining access to your bank account information as & when you need it.
5. It's quite discrete, user can view it when he or she is doing everyday jobs and don't have to set aside
time to go to the bank.
6. The personal nature of mobile phones makes SMS marketing a very powerful tool.
7. Most people take their mobile phones everywhere - meaning they can be effective for time sensitive
messages.
 8. People tend to read virtually every text they get unlike junk mail, spam or adverts which can be
ignored.
9. Can be used with information from your customer relationship management system to target
customers past on their past purchase behaviour.

Disadvantages of SMS banking [any five points]

1. If you don't have the internet on your mobile you can't access what you need on your bank account.
2. You could get your phone stolen and it will have all of your details on it, so people can gain access to
your account as well as your phone.
3. It causes more people to use their mobile phones and can cause radiation.
4. People are wary of responding to SMS messages due to an increase in fraudulent messages.
5. People respond negatively to unwanted texts.

b. Transfer of Funds through Mobile Banking

There are three methods through which you can transfer funds through mobile banking.
• National Electronic Funds Transfer (NEFT),
• Real Time Gross Settlement (RTGS) and
• Immediate Payment Service (IMPS).
NEFT: With NEFT, one can transfer funds to any Third Party (Beneficiary) holding an account with any other
Bank participating in RBI's National Electronic Funds Transfer (RBI NEFT) scheme. NEFT can be initiated over
our Internet Banking or Mobile Banking portals and also by visiting any of our branches.
RTGS: With RTGS, you can transfer funds instantly to any Third Party (Beneficiary) holding an account with
any bank participating in RBI's Real Time Gross Settlement (RBI - RTGS) scheme.
RTGS can be initiated over our Internet Banking or Mobile Banking portals and also by visiting any of our
branches. This system is meant for high-value transactions. The minimum amount that you can transfer using
RTGS is ₹ 2 lakh, and there is no upper limit. RTGS is a system where processing of instructions is done in real
time, so the transfer is instant. However, RTGS service is available only on working days and during working
hours.
IMPS: This is a real-time payment service that is available round the clock, including on holidays. This service
is offered by National Payments Corp. Of India that empowers customers to transfer money instantly through
banks and RBI-authorized Prepaid Payment Instruments (PPIs) across India. Money transfer through IMPS can
be initiated from mobiles, internet or even an ATM. The charges for remittance through IMPS are decided by
individual banks and PPIs. All resident current and savings account holders of the bank who are registered for
Internet Banking or Mobile Banking can use these services.

c. Mobile Banking Payment System

A mobile payment is a money payment made for a product or service through a portable electronic device such
as a tablet or cell phone. Mobile payment technology can also be used to send money to friends or family
members, such as with the applications such as PayPal. The most obvious benefit of mobile payments is the
elimination of a physical wallet. Not reaching and pulling out cash not only saves time but is safer as well as
nobody is able to see the contents of your wallet or purse. Touch ID in the form of a fingerprint scan or PIN
input makes mobile payments more secure than a physical credit card.
Mobile wallets are one of the fastest growing trends concerning the future of mobile payment technology.
That's because mobile wallets offer speed, convenience, and security for consumers. Few examples of mobile
wallets used in India are Google Pay, Pay TM, BHIM Axis Pay, Phone Pay, etc.

Advantages or Merits of Mobile Banking Payment System [any five points]

1. Ease of Use: It's like a one click pay with no need to fill in card numbers and passwords every time.
One can link their credit cards, debit cards and bank accounts and pay immediately with no hassle to
enter the details each time.
2. Ease of Access: There will be no need of physical wallet like we do in the case of cash or cards. Also
mobile wallets are upgrading to allow you to store your documents digitally like your Driving License,
Aadhar Card, Pan Card, etc
3. There will no issue of asking or searching for change which we have while handling cash.
4. It will be possible to make instant payments. Just like we can exchange cash at any moment, we can
exchange and transfer money anytime.
5. There would synchronisation of data from multiple platforms. Bank accounts, credit and debit cards,
mobile accounts and bills - all will be interconnected and help in better management. It's like everything
is under one roof.
6. It is extremely useful for humongous unorganised sector where cash is considered as the most
suitable medium Exchange of money through mobile wallet at chaat stalls, street vendors, small shops,
etc., would remove the need to carry cash or cards at such places.

Disadvantages or De-merits of Mobile Banking Payment System

1. Mobile network connectivity is the biggest impediment. Network problems and reliable and fast
internet connectivity is not available in most of the developing countries.
2. More than connectivity, security issues are at the forefront nowadays. People are always under the
fear of misuse of their money by hackers and frauds. They always feel safer to have cash. Again there
are also issues of identity theft that need to be addressed. Issue of pick-pocketing will be replaced by
these concerns.
3. Enough support infrastructures is not available. In countries like India there is not enough financial
inclusion and financial literacy. Unless that builds up, there is no use in bringing in more and more
advanced technologies.
4. It also does not cater to needs of the entire population. It's an app on a smart phone. Most of them are
using simple cell phones. Plastic money and m-commerce has not yet caught up completely throughout
the entire nation. This is a Smartphone app. People can be sceptical enough to mention battery backup
of smart phone as a reason to stay away from this.
5. India does not have a solid dispute resolution processes. Experiences of people with the customer
service agents too are not encouraging.

Automated Teller Machine (ATM)

Meaning
The full form of ATM is Automated Teller Machine. ATM is an electro-mechanical machine that is used for
making financial transactions from a bank account. These machines are used to withdraw money from
personal bank accounts.
This makes banking process very easy because these machines are automatic and there is no need of human
cashier for transaction. It has helped in reducing the foot fall at the bank. The ATM machine can be of two
types; one with basic functions where you can withdraw cash and another one with more advanced functions
where you can also deposit cash.
Seeing the popularity of ATMs, banks have now began to install other devices such cash-depositing machine
(in which you can deposit loose cash), passbook printer, internet kiosk, information KIOSK and phone banking
device next to ATMs, which ensure branches see less number of customers.

Features of Automated Teller Machine [Any five points]

1. Obtain a summary of balances for all your accounts
2. View and print a mini-statement (up to last 10 transactions)
3. Transfer money between linked accounts
4. Deposit cash and cheques at selected Smart ATMs
5. Change your PIN
6. Open 24/7 and on holidays
7. Value added services like mobile recharge; utility bill payments etc., are also available on Smart
ATM's.

Debit Card
Meaning
This is basically a card that offers a convenient access to our bank account and allows us to carry out financial
transactions as per our requirement as well as convenience. So with a debit card, we're almost carrying our
bank account with us. It is linked with the customer's bank account and whenever any transaction is done using
the debit card the money is immediately deducted from the linked account.
The debit cards in India include Visa debit cards, Visa Electron debit cards, MasterCard debit cards, RuPay debit
cards, Maestro debit card. These are issued by the banks who have a tie-up with any of these brands.
For security reasons, a PIN (Personal Identification Number), a debit card PIN is a 4-digit numerical code which
serves as a security feature while making transactions using the debit card. As per the RBI guidelines, use of
PIN is mandatory while making purchases in point of sales as a security measure.

Explanation [For extra knowledge]

It is a small-sized electronic plastic card (approximately 85 mm x 54 mm with thickness of 0.8 mm) issued by a
bank which allows bank customers' access to their accounts to withdraw cash or pay for goods and services.
This removes the need for bank customers to go to the bank to withdraw cash from their accounts as they can
just go to an ATM or pay electronically. When the customer; presents the debit card at a ATM, the terminal
automatically transfers money from the buyers' account to the sellers' account.
The major benefits of debit card are convenience and security. Debit card is a convenient mode of accessing
account at any time and removes the hassles associated with writing cheques to withdraw money from the
bank. Debit card is considered to be a safer form of payment as a code is required to access the account while
cheques can be easily stolen.

Features of a Debit Card [Any eight points]

1. Debit Card offers the convenience of cashless transaction.
2. It can be used for cash withdrawals at ATM and shopping online or at Point of Sale (POS).
 3. It ensures instant payment as well as transfer of funds.
4. Unlike credit cards, which are a loan in disguise, debit card encourages judicious spending.
5. It lets you redeem the reward points obtained from certain services like insurance coverage, bonus
points, cash back offers that are offered by banks.
6. Debit cards are safer than carrying cash.
7. You can pay EMIs on certain online purchases as well.
8. Keeping a track on the debit card transaction is easy. All you need to do is update the passbook or be
watchful of the SMS or email notifications.
9. Using the ATM, you transfer funds via debit card. Although the amount is limited, it's a great help
especially on bank holidays.
10. You can pay utility bills, tax, recharge mobile phones and even use it at the filling station.
11. The maintenance cost is comparatively less.
12. It is easy to obtain a debit card once you open an account most banks will issue you a debit card upon
request.
13. Purchases can be made using a chip-enabled terminal or by swiping the card rather than filling out
a paper check.
14. When out of town (or out of the country), debit cards are usually widely accepted (make sure to tell
your financial institution you're leaving your city; to not have an interruption in service).
15. A debit card can also be used as an electronic identifier which allows you to access your bank account
as it helps you to make use of almost all of the features an account carries, on the go such as making
payments, to withdraw money, updating your account details, check balance status, etc.
16. Debit cards, since they are linked to your account, enable you to use money from your own savings
rather than taking credit or loans. With a debit card, you use your own money and there is no
requirement to pay back the used amount and no worries about having to pay an interest or making a
repayment schedule.
17. It also doubles up as an ATM card with allows withdrawal of money from any ATM machine,
anywhere.
18. It is a combination of cheque and ATM card.
19. It is meant for withdrawals against balance available in account.
20. It's the cardholder obligation to maintain sufficient balance in account.
21. More affordable than a credit card.
22. No credit period.
23. Card's use is terminated without any prior notice.
24. Spending is limited to bank balance.

Credit Card
Meaning
A credit card is a thin rectangular plastic card issued by financial institutions, which lets the holder borrow
funds from a pre-approved limit to pay for his or her purchases. The limit is decided by the institution issuing
the card based on the individuals' or holders' credit score and history. Generally, higher the score and better
the history, higher is the limit. It is a type of overdraft facility.
Users can swipe the credit card to make a payment or use it for online transactions. After someone applies for
a credit card, he or she has to simply make sure that the borrowed amount is repaid within the stipulated time
frame to avoid penalty charges. Credit card details are always secured with the card issuer and card holder
should not share the credit card information with anyone to avoid fraud.
The name of the customer, the name of the issuing bank Card Verification Value (CVV) number and the date of
validity are inscribed on the credit card. The card holder can buy goods and services with the help of credit
card. The seller of goods and services is provided a computer terminal at the point of sale (POS) which is tied
electronically to the bank or credit card Company's computer. The card holder pays the hill once he receives
the account statement as per the agreement with the bank. It is also called plastic money.

Features of Credit Card [Any eight points]

1. Increased purchasing power.
2. It is a Document of card holder's creditworthiness which minimises the use of hard cash in day to day
transactions.
3. It is an alternative to cash. A convenient medium of exchange which enables holder to buy goods and
services without using money.
4. Helps holder to buy when he want to buy and pay later.
5. Cards are issued to people having a certain minimum income.
6. Card holder is given a credit limit, thus he need not to keep a balance with his linked account to avail
this facility.
7. Card holder makes the payment after using the credit limit.
8. Card holder must have a good reputation and good credit score.
9. Aids payment in domestic and foreign currency.
10. Grace period or grace days to settle dues.
11. Higher fees are charged on cash withdrawals.
12. Additional charges for delay in payment.
13. Bonus points, gifts and other offers are given as incentives to attract card holders.
14. Card holder is not required to pay any interest or any higher price for the goods purchased.
15. Banks also bears risk of default on card holder's part. For all this, banks gets commission from sellers
around 2.5% to 5% of value of goods.
16. Credit limit is specified for every Credit Card.
17. Card holder can either buy goods or draw cash up to the specific credit limit only.
18. Banks meets cost of this facility from increased sales which results due to use of credit cards.

Distinction between Credit Card and Debit Card

[Any five points]

Basis for Credit Card Debit Card

Distinction

Meaning Credit card is issued by a bank or any Debit card is issued by a bank to allow its
financial institution to allow the holder of customers to purchase goods and
the card to purchase goods and services on services, whose payment is
credit. The payment is made by the bank made directly through the customer's
on the customer's behalf. account linked
To the card.
 Implies Pay later Pay now

Bank Account The bank account is not prerequisite for The bank account is a must for issuing a
issuing a credit card. debit card.

Limit The maximum limit of withdrawing The maximum limit of withdrawing

money is determined according to the money will be less than the money lying
credit rating of the holder. in the saving bank account.

Bill The holder of the card has to pay the credit There is no such bill, the amount is
card bill within 30 days of every month. directly deducted from the customer's
account.

Interest Interest is charged when payment is not No interest is charged.

made to the bank within a specified time
period.

2 MARK QUESTIONS

1. Distinguish between NEFT and RTGS.

2. What is mobile banking? State any two banking services available on mobile phone.
3. What is an online Demand Draft?
4. What is a debit card?
5. Expand the following terms: RTGS and NEFT
6. State any two features of a Credit Card

3-4-5 MARKS QUESTIONS

1. What is meant by RTGS? Give any three features of RTGS.

2. List any four features of NEFT
3. Explain the meaning of: SMS alert
4. Explain the meaning of e-banking. State any three features of e-banking.
5. Explain the following: SMS alerts and ATM
6. What is meant by RTGS? Give any two features of RTGS.
7. List any four features of NEFT.
8. Explain the meaning of: SMS alert
 OBJECTIVE QUESTIONS

A. MULTIPLE CHOICE QUESTIONS

1. Which is the most appropriate statement with reference to the electronic fund transfer through NEFT is:
(a) The fund transfer in NEFT takes place on real time, without any waiting period.
(b) National Electronic Funds Transfer (NEFT) is a nation-vide centralised payment system owned and
operated by the Reserve Bank of India (RBI).
(c) The NEFT transfer takes place from one person to another.
(d) The NEFT transfer takes place on gross settlement basis.

2. Which of the following is not the feature of E-banking?

(a) E-Banking services can be used by those bank customers who have been authorised for this.
(b) Banking transaction is conducted through electronically connected devices.
(c) A bank customer may use either his own computer resource for conducting specified banking
transaction or may use computer resource available at the cyber cafe.
(d) There is face to face contact.

3. RTCS means ________ .

(a) Real Time Gross Settlement
(b) Real Turn Gross Settlement
(c) Real Technique Grass Settlement
(d) Real Towards Gross Settlement

4. The minimum amount you can transfer via RTGS is

(a) ₹49,999
(b) ₹ 1 lakh
(c) ₹ 2 lakh
(d) ₹ 1

5. If a person wants to transfer funds electronically but does not have bank account, known as walk-in customer
be can transfer any amount upto ________ by depositing it in the local branch.
(a) ₹49,999
(b) ₹1 lakh
(c) ₹ 2 lakh
(d) No limit

6. Unlike credit cards, which are a loan in disguise, ________ encourages judicious spending.
(a) ATM card
(b) Travellers card
(c) Debit card
(d) Smart card
7. _______ system is an Internet-based method of processing economic transactions.
(a) SMS
(b) Tele Banking
(c) Online Banking
(d) Smart Banking

8. What are the operating hours of NEFT?

(a) 24 x 7 x 365 basis
(b) 8 x 7 x 365 basis
(c) 12 x 6 x 365 basis
(d) 24 x 5 x 365 basis

9. Which of the following is not a feature of RTGS?

(a) It is a safe and secure way of transferring funds.
(b) Funds can be transferred on all days.
(c) There is maximum limit or upper ceiling for RTGS transfers of 5 lakh.
(d) Customer can perform real time fund transfer to the beneficiary account.

10. Which of the following is not a feature of Electronic Banking?

(a) Anywhere, Anytime Banking
(b) Cashless Banking
(c) Promptness in Services
(d) Local Services only

11. Full form of ATM:

(a) Automatic Teller Machines
(b) Anytime Money
(c) Automated Teller Machines
(d) Ask Teller Money

12. Full form of SMS:

(a) Short Memory Service
(b) Short Message Service
(c) Straight Message Service
(d) Short Message Scheme

13. Which of the following is not a feature of Credit Card?

(a) Increased purchasing power
(b) It is a Document of cardholder's creditworthiness which minimises the use of hard cash in day to
day transactions.
(c) It is an Alternative to cash. A convenient medium of exchange which enables holder to buy goods
and services without using money.
(d) Holder has to make arrangements of funds in advance before he buys goods.
14. Which of the following is not a disadvantage of Mobile Banking?
(a) Mobile banking users are at risk of receiving fake SMS messages and scams.
(b) The loss of a person's mobile device often means that criminals can gain access to your mobile
banking PIN and other sensitive informations.
(c) Mobile banking is said to be even more secure than online or internet banking.
(d) Modern mobile devices like Smartphone and tablets are better suited for mobile banking than old
models of mobile phones and devices.

15. Shubh wants to make a payment through NEFT but he does not have a bank account. How much maximum
money can he transfer?
(a)₹40,000
(b) ₹50,000
(c)₹49,999
(d)₹ 1,00,000

16. Which financial instrument is issued by the bank for remittance of money which cannot be dishonoured?
(a) Bank draft
(b) Bank overdraft
(c) Cheque
(d) Debit card

17. What is the minimum permissible limit for the amount which can be remitted through RTGS?
(a) ₹2,50,000
(b) ₹50,000
(c) ₹2,00,000
(d) ₹ 99,999

18. Which of the following is not a feature of the demand draft?

(a) It is drawn by one office of a bank upon another office of the same bank.
(b) It is payable on demand.
(c) Its payment has to be made to the person whose name is mentioned therein or according to his order.
(d) All of the above.

19. A bank transfers wages and salaries directly from the companies account to the accounts of employees of
the company. Which system is used for the same?
(a) Automatic Teller Machine
(b) NEFT
(c) RTGS
(d) EFTS

20. Which of the following statement about ATM is incorrect?

(a) Customers can only withdraw money using ATM.
(b) Customers can deposit as well as withdraw money using ATM.
(c) It provides 24 hours money without a human cashier.
 (d) It uses the ATM card and Personal Identity Number.

21. What details are essentially required to be submitted with the bank for remitting the funds through NEFT?
(a) Name and Branch name of the beneficiary.
(b) Bank name of the beneficiary.
(c) Bank name, type of account, IFSC code and name of beneficiary
(d) Bank name, branch name, type of account, IFSC code and name of beneficiary.

22. How many RTGS transactions can be done in a single day?

(a) 5 transfers
(b) 7 transfers
(c) 10 transfers
(d) No limit

23. What are the facilities offered by Core Banking System (CBS)?
(a) Cash withdrawal facility from any of the CBS branches.
(b) Pass book entry/updating at all CBS branches.
(c) The facility of centralised corporate limits in all the CBS branches.
(d) All of the above

24. The electronic transfer of funds done in batches is:

(a) E-banking
(b) EFTS
(c) NEFT
(d) RTGS

25. NEFT transactions cannot be used to receive ________ remittance.

(a) Intra state remittance
(b) Interstate remittance
(c) Foreign remittance
(d) Local remittance

26. Under CBS system a customer becomes:

(a) Customer of the branch of the bank
(b) Customer of the bank
(c) Customer of all commercial banks
(d) Customer of the RBI

27. A service used by the banks to send a notification or an alert to the customer:
(a) IMPS
(b) NEFT
(c) RTGS
(d) SMS
28. A current account holder can avail the following facility.
(a) Cash credit
(b) Bank draft
(c) Overdraft
(d) Factoring

29. With reference to the facility of money transfer, choose the odd one out.
(a) RTGS
(b) NEFT
(c) SMS
(d) IMPS

ANSWERS
1.b 2.d 3.a 4.c 5.a 6.c 7.c 8.a 9.c 10.d
11.c 12.b 13.d 14.c 15.c 16.a 17.c 18.a 19.d 20.a
21.d 22.d 23.d 24.c 25.c 26.b 27.d 28.c 29.c

CASE BASED QUESTIONS

CASE 1

Sagar Ltd. is engaged in the business of export of garments. In the past, the performance of the company had
been upto the expectations. In line with the latest technology, the company decided to upgrade its machinery.
For this, the Finance Manager, Dalmia estimated the amount of funds required and the timings. This will help
the company in linking the investment and the financing decisions on a continuous basis. Dalmia therefore,
began with the preparation of a sales forecast for the next four years. Fie also collected the relevant data about
the profit estimates in the coming years. By doing this, he wanted to be sure about the availability of funds from
the internal sources of the business. For the remaining funds he is trying to find out alternative sources from
outside.
Identify the financial concept discussed in the above para. Also state the objectives to be achieved by
the use of financial concept, so identified.
Ans. Financial planning is the financial concept discussed in the above paragraph. The process of
estimating the fund requirements of a business and specifying the sources of funds is called financial
planning. It relates to the preparation of financial blueprint of an organisation's future operations. The
objectives to be achieved by the use of financial concept are stated below:
• To ensure availability of funds whenever required which involves estimation of the funds
required, the time at which these funds are to be made available and the sources of these funds.
• To see that the firm does not raise resources unnecessarily as excess funding is almost as bad
as inadequate funding Financial planning ensures that enough funds are available at right time.
 CASE 2

Balaji Ltd. is dealing in import of organic food items in bulk. The company sells the items in smaller quantities
in attractive packages. Performance of the company has been up to the expectations in the past. Keeping up
with the latest packaging technology, the company decided to upgrade its machinery. For this, the Finance
Manager of the company, Mr. Deepak Pandey, estimated the amount of funds required and the timings. This
will help the company in linking the investment and
the financing decisions on a continuous basis.
Therefore, Mr. Deepak Pandey began with the preparation of a sales forecast for the next four years. He also
collected the relevant data about the profit estimates in the coming years. By doing this, he wanted to be sure
about the availability of funds from the internal sources. For the remaining funds he is trying to find out
alternative sources.
Identify the financial concept discussed in the above paragraph. Also, state any two points of
importance of the financial concept, so identified.
Ans. Financial planning is the financial concept discussed in the above paragraph. The process of
estimating the fund requirements of a business and specifying the sources of funds is called financial
planning. It relates to the preparation of a financial blueprint of an organisation's future operations.
The two points highlighting the importance of planning are described below.
• It ensures smooth running of a business enterprise by ensuring availability of funds at the right
time.
• It helps in anticipating future requirements of a funds and evading business shocks and
surprises.

CASE 3

"A business that doesn't grow dies", says Mr. Shah, the owner of Shah Marble Ltd. with glorious 36 months of
its grand success having a capital base of 80 crores. Within a short span of time, the company could generate
cash flow which not only covered fixed cash payment obligations but also create sufficient buffer. The company
is on the growth path and a new breed of consumers is eager to buy the Italian marble sold by Shah Marble Ltd.
To meet the increasing demand, Mr. Shah decided to expand his business by acquiring a mine. This required
an investment of 120 crores. To seek advice in this matter, he called his financial advisor Mr. Seth who advised
him about the judicious mix of equity (40%) and Debt (60%). Mr. Seth also suggested him to take loan from a
financial institution as the cost of raising funds from financial institutions is low. Though this will increase the
financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will
not dilute the control of equity shareholders. At the same time, the interest on loan is a tax deductible expense
for computation of tax liability. After due deliberations with Mr. Seth, Mr. Shah decided to raise funds from a
financial institution.
Identify and explain the concept of Financial Management as advised by Mr. Seth in the above situation.
State the four factors affecting the concept as identified in part (1) above which have been discussed
between Mr. Shah and Mr. Seth.
Ans. Capital structure is the concept of Financial Management as advised by Mr. Seth in the above
situation. Capital structure refers to the mix between owners funds and borrowed funds.
The four factors affecting capital structure which have been discussed between Mr. Shah and Mr. Seth
are explained below:
 • Cash flow position: The issue of debt capital involves a fixed burden on the company in the
form of payment of interest and repayment of capital. Therefore if the cash flow position of a
company is good it may issue debt else equity to raise the required amount of capital.
• Risk Consideration: Financial risk refers to a situation when a company is unable to meet its
fixed financial charges. Financial risk of the company increases with the higher use of debt. This
is because issue of debt involves fixed commitment in terms of payment of interest and
repayment of capital.
• Tax rate: Considering the fact that amount of interest paid is a deductible expense, cost of debt
is affected by the tax rate. If for example a firm is borrowing @ 10% and the tax rate is 30%, the
after tax cost of debt is only 7%. Therefore, when the tax rate is higher it makes debt relatively
cheaper and increases its attraction vis-a-vis equity.
• Control: The issue of debentures doesn't affect the control of the equity shareholders over the
business as the debenture holders do not have the right to participate in the management of the
business.

CASE 4

Radhika and Vani who are young fashion designers, left their job vyith a famous fashion designer chain to set-
up a company 'Fashionate Pvt. Ltd.' They decided to run a boutique during the day and coaching classes for the
entrance examination of National Institute of Fashion Designing in the evening. For the coaching centre, they
hired the first floor of a nearby building. Their major expense was the money spent on photocopying of notes
for their students. They thought of buying a photocopier knowing fully that their scale of operations was not
sufficient to make full use of photocopier.
In the basement of the building of Fashionate Pvt. Ltd, Praveen and Ramesh were carrying on a printing and
stationery business in the name of 'Neo Prints Pvt. Ltd.' Radhika approached Praveen with the proposal to buy
a photocopier jointly which could be used by both of them without making separate investment. Praveen agreed
to this.
Identify the factor affecting the fixed capital requirements of Fashionate Pvt. Ltd.
Ans. The factor affecting the fixed capital requirement of Fashionable Pvt. Ltd. is the level of
collaboration. This kind of arrangement of using the resources jointly helps to reduce the fixed capital
requirements of the business firms.

CASE 5

Shivam, after leaving his job, wanted to start a Private Limited Company with his son. His son was keen that
the company may start manufacturing mobile-phones with some unique features. Shivam felt that mobile
phones are prone to quick obsolescence and a heavy fixed capital investment would be required regularly in
this business. Therefore, he convinced his son to start a furniture business.
Identify the factor affecting fixed capital requirements which made Shivam choose the furniture
business over mobile phones.
Ans. The factor affecting the fixed capital requirements which made Shivam choose the furniture
business over mobile phones is technological up gradation.
 CASE 6

Akash is running an 'advertising agency' and earning a lot by providing this service to big industries
State whether the working capital requirement of the firm will be 'less' or 'more'. Give reason in support
of your answer.
Ans. The working capital requirements of Akash will be relatively less as he is running an advertising
agency, wherein there is no need to maintain inventory.

CASE 7

Amar is doing his transport business in Delhi. His buses are generally used for tourists going to Jaipur and Agra.
Identify the working capital requirements of Amar. Give reasons to support your answer. Further, Amar wants
to expand and diversify his transport business.
Explain any two factors that will affect his fixed capital requirements.
Ans. The working capital requirements of Amar will be relatively less as he is engaged in providing
transport services wherein there is no need to maintain inventory.
The factors affecting the fixed capital needs of his business are as follows:
• Diversification: If a business enterprise plans to diversify into new product lines, its
requirement of fixed capital will increase.
• Growth prospects: If a business enterprise plans to expand its current business operations in
the anticipation of higher demand, consequently, more fixed capital will be needed by it.

CASE 8

Manish is engaged in the business of manufacturing garments. Generally, he used to sell his garments in Delhi.
Identify the working capital requirements of Manish giving reason in support of your answer. Further, Manish
wants to expand and diversify his garments business.
Explain any two factors that will affect his fixed capital requirements.
Ans. The working capital requirements of Manish will be relatively more as he is engaged in the
business of manufacturing garments. This is because the length of production cycle is longer i.e., it
takes time to convert raw material into finished Goods.
The factors affecting the fixed capital needs of his business are as follows:
• Scale of Operations: The amount of fixed capital required by a business enterprise is directly
proportionate to its scale of operations. Therefore, if Manish plans to do business on a large
scale, his fixed capital requirements will be more or vice-versa.
•Technological Upgradation: If Manish plans to use machines of latest technology in
manufacturing garments, his fixed capital requirements will be more as replacement of obsolete
machines will require huge financial outlay.
 CASE 9

Harish is engaged in the warehousing business and his warehouses are generally used by businessmen to store
fruits. Identify the working capital requirements of Harish giving reasons in support of your answer. Further,
Harish wants to expand and diversify his warehousing business.
Explain any two factors that will affect his fixed capital requirements.
Ans. The working capital requirements of Harish will be relatively less as he is engaged in providing
warehousing services wherein there is no need to maintain inventory. The factors affecting the fixed
capital needs of his business are as follows:
• Diversification: If a business enterprise plans to diversify into new product lines, its
requirement of fixed capital will increase.
• Scale of Operations: The amount of fixed capital required by a business enterprise is directly
proportionate to its scale of operations. Therefore, if Harish plans to do business on a large scale
his fixed capital requirements will be more or vice-versa.

CASE 10

Wooden Peripheral Pvt. Ltd. is counted among the top furniture companies in Delhi. It is known for offering
innovative designs and high quality furniture at affordable prices. The company deals in a wide product range
of home and office furniture through its eight showrooms in Delhi. The company is now planning to open five
new showrooms each in Mumbai and Bangalore. In Bangalore it intends to take the space for the showrooms
on lease whereas for opening showrooms in Mumbai, it has collaborated with a popular home furnishing
brand, 'Creations.'
1. Identify the factors mentioned in the paragraph which are likely to affect the fixed capital
requirements of the business for opening new showrooms both in Bangalore and Mumbai separately,
2. "With an increase in the investment in fixed assets, there is a commensurate increase in the working
capital requirement." Explain the statement with reference to the case above.
Ans. 1. The fixed capital requirements of Wooden Peripheral Pvt. Ltd. for opening new
showrooms in Bangalore will be relatively less as its taking space on lease, so only rentals have
to be paid.
Similarly, its fixed capital requirement for opening showrooms in Mumbai will be reduced as its
going to share the costs with another company through collaboration.
2. It's true that," With an increase in the investment in fixed assets, there is a commensurate
increase in the working capital requirement." Like in the above case, Wooden Peripheral Pvt.
Ltd. is planning to invest in new showrooms. Consequently, its requirement of working capital
will increase as it will need more money to stock goods, pay electricity bills and salaries to staff.
Also, it intends to take the space for the showrooms in Mumbai on lease so it will have to pay
rentals.