UNIT III: Banking Operations

Customers' Accounts with Banks

* Opening Operation: Procedures for opening various types of bank accounts.
* KYC Norms and Operation: Understanding and implementing Know Your Customer (KYC)
guidelines for account opening and verification.
* Types of Accounts and Customers: Different types of bank accounts (savings, current,
recurring, etc.) and the characteristics of customers who typically open them.
* Nomination: Process of appointing a nominee to receive the account balance in case of the
account holder's demise.
Core Banking Solutions
* Overview of core banking systems and their role in modern banking operations.
Bank as a Lender
* Types of Loans: Different types of loans offered by banks (personal, home, education, etc.).
* Overdraft Facilities: Understanding overdrafts and their terms and conditions.
* Discounting of Bills: Process of discounting bills of exchange and promissory notes.
* Financing Book Debts and Supply Bills: Providing financial assistance for book debts and
supply bills.
* Charging of Security Bills: Obtaining security bills as collateral for loans.
Security and Collateral
* Pledge, Mortgage, Assignment: Understanding the concepts of pledge, mortgage, and
assignment as security mechanisms for loans.

Opening of Bank Accounts: Procedures and Operations

The procedure for opening a bank account is an essential first step for any customer intending
to access banking services. This process varies slightly based on the type of account being
opened, the customer's profile, and regulatory requirements. Below are the general steps
followed when opening different types of accounts:

1. Types of Bank Accounts

Banks offer various types of accounts to meet the diverse needs of customers. These include:

Savings Accounts: These are designed for individual customers who wish to save their money
and earn interest over time.

Current Accounts: Typically used by businesses or individuals with high transaction volumes
who require flexibility in withdrawals and deposits.

Fixed Deposit Accounts: These accounts allow customers to deposit a sum for a fixed period,
earning higher interest than savings accounts.
Recurring Deposit Accounts: Customers deposit a fixed amount regularly for a specific tenure
and earn interest at a pre-determined rate.

NRI Accounts: Special accounts for Non-Resident Indians to hold funds in India.

2. Opening Procedure for Various Bank Accounts

The process of opening a bank account involves a set of standardized steps, regardless of the
account type, but with some variations based on the specifics of each type.

a. Documentation

The opening of any bank account requires the customer to provide certain documents for
verification. Key documents include:

Identity Proof: This can be any government-issued identification like an Aadhaar card, PAN
card, passport, or voter ID. Address Proof: Utility bills, ration cards, or other documents
indicating the customer's current address.

Photographs: Recent passport-sized photographs are required.

KYC (Know Your Customer): Customers must complete KYC compliance as mandated by the
Reserve Bank of India (RBI), which includes verifying the customer's identity, address, and
other information.

PAN Card: For tax purposes, banks require the customer's PAN card for opening most types of
accounts.

b. Application Form

Customers are required to fill out an application form specific to the type of account they are
opening. The form captures basic information such as name, address, contact details,
occupation, and income details. For current accounts or business accounts, additional
information such as business registration documents may be required.

c. Initial Deposit

Most banks require an initial deposit to activate the account. The minimum amount varies based
on the type of account. For example, savings accounts often have a lower minimum balance
requirement, while current accounts might require a higher deposit to cater to business
operations.
d. Introduction Requirement

For some accounts, such as savings and current accounts, banks may require an introduction
from an existing account holder or a reference from a reputable individual to confirm the
authenticity of the new customer.

e. Signature and Mandate

A specimen signature is taken from the customer, which the bank uses for future transaction
verifications. In case of joint accounts, mandates specifying whether the account will operate
singly or jointly must be submitted.

f. Account Number Allocation

Once all the documentation and verification steps are completed, the bank assigns a unique
account number to the customer. This number is crucial for all future transactions and serves as
the customer's primary identification within the bank.

g. Issuance of Passbook, Cheque Book, and Debit Card

Passbook: After the account is opened, the customer receives a passbook containing details of
all transactions. This serves as a record of the account.

Cheque Book: If the account holder requests one, a cheque book is issued, allowing them to
make payments or withdraw money.

Debit Card: For savings or current accounts, a debit card linked to the account is also provided
for ATM withdrawals and digital transactions.

h. Net Banking and Mobile Banking

Customers are usually given access to online banking services after the account is opened.
They can use internet banking or mobile banking apps to manage their accounts, transfer
money, and monitor transactions digitally.

3. Regulatory Compliance and Security Measures

The banking sector is heavily regulated to ensure customer safety, prevent fraud, and combat
money laundering. Compliance with RBI guidelines, adherence to Anti-Money Laundering
(AML) norms, and robust cybersecurity protocols are crucial for ensuring the integrity of banking
operations.

4. Types of Customers
Different customers have varied needs, and banks tailor their services to cater to these needs:
Individuals: Standard savings and fixed deposit accounts are common.
Businesses: Current accounts, loans, and credit services are offered to businesses for smooth
transactions.
NRIs: Specialized accounts such as Non-Resident External (NRE) and Non-Resident Ordinary
(NRO) accounts are offered to manage their finances in India.
Types of Accounts and Customers in Banking

Banks offer a variety of accounts to cater to the different needs of customers. Each account
type serves a specific purpose, and the nature of customers who open these accounts varies
based on their financial requirements, business dealings, and savings goals. Here’s a detailed
look at the different types of bank accounts and the characteristics of customers who typically
open them.

1. Savings Accounts

A savings account is one of the most common types of bank accounts, primarily designed to
encourage saving among individuals.
Features: Savings accounts provide a modest interest on the deposited amount, easy access to
funds, and additional facilities like passbooks, debit cards, and online banking.

Who Opens Them:

Salaried employees, Students, Retirees

Individuals with moderate financial activity who wish to save and grow their funds gradually.

Characteristics: Savings accounts usually require maintaining a minimum balance, though some
accounts like zero-balance accounts do not. They limit the number of withdrawals a customer
can make in a month.

2. Current Accounts

Current accounts are tailored for individuals or businesses that require frequent transactions,
such as deposits and withdrawals.

Features:

No interest on deposits, Unlimited transactions, Overdraft facilities in some cases, Cheque

book, debit card, and online banking access

Who Opens Them:

Businesses (small and large), Traders and companies with frequent financial transactions, Self-
employed professionals

Characteristics: Current accounts often have higher minimum balance requirements. They are
primarily transaction accounts, enabling smooth financial operations for businesses.

3. Fixed Deposit (FD) Accounts

A Fixed Deposit (FD) account is an investment tool where a customer deposits a lump sum for a
fixed period and earns interest at a higher rate compared to savings accounts.

Features:

Fixed tenure ranging from months to years, Higher interest rates than savings accounts
, Premature withdrawal allowed with penalty

Who Opens Them:

Individuals seeking long-term savings

Retirees or those looking for secure investments with low risk
Customers with surplus funds who want to earn interest without taking much risk

Characteristics: The customer cannot withdraw money before maturity without incurring a
penalty, making FDs a stable investment option.

4. Recurring Deposit (RD) Accounts

A Recurring Deposit (RD) account allows customers to save a fixed amount every month for a
specific period.

Features:

Monthly deposits, Fixed interest rate, Returns at the end of the term along with accumulated
interest

Who Opens Them:

Individuals with regular income who wish to save small amounts periodically, Salaried
employees or business owners looking for disciplined savings

Characteristics: It is an ideal account for people who want to build savings systematically over
time. The account tenure can vary between a few months to several years.

5. NRI Accounts

Banks offer special accounts for Non-Resident Indians (NRIs), such as the NRE (Non-Resident
External) and NRO (Non-Resident Ordinary) accounts.

Features:

NRE accounts allow the free repatriation of funds back to the NRI’s country of residence
, NRO accounts manage income earned in India, such as rent or dividends

Who Opens Them:

Indian citizens residing abroad

NRIs with income sources in India

Characteristics: These accounts help NRIs manage their income from Indian sources, while also
offering tax benefits in some cases.

2. Importance of Nomination

Avoiding Legal Complications: In the absence of a nominee, the legal heirs of the deceased
have to undergo lengthy procedures to claim the funds. A nominee ensures smooth and prompt
transfer of funds.

Peace of Mind: For the account holder, nominating someone ensures that their funds will be
easily accessible to a trusted person in case of unforeseen circumstances.

Core Banking Solutions (CBS)

Core Banking Solutions (CBS) are essential in modern banking operations, providing a
centralized platform that allows banks to offer seamless and consistent services to customers
across multiple branches and channels.

1. Overview of Core Banking Systems

Core Banking Solutions are software systems that enable banks to conduct their core activities
—such as opening accounts, managing deposits and loans, processing transactions, and
delivering services to customers—through a single, integrated platform.

Real-Time Processing: CBS allows for real-time updating of customer transactions, enabling
them to access their accounts from any branch or online platform, anywhere in the world.

Centralized Database: All customer data and transaction records are stored in a centralized
database, which can be accessed by any branch.

Efficient Service Delivery: Banks can offer faster and more efficient services such as money
transfers, loan disbursements, and bill payments without customers needing to visit a specific
branch.

2. Role in Modern Banking Operations

Unified Customer Experience: CBS provides customers with a unified experience across all
banking channels, whether it be branch banking, internet banking, or mobile banking.

Security: By centralizing customer data, CBS ensures enhanced data security and compliance
with regulatory requirements.

Cost Efficiency: Banks can reduce operational costs by automating many routine processes and
reducing the need for manual interventions.

Bank as a Lender

One of the primary roles of a bank is to act as a lender, providing loans and credit facilities to
individuals, businesses, and governments. Lending is a core banking function, through which
banks earn interest income and support economic growth by financing productive activities.

1. Types of Loans Offered by Banks

Personal Loans: Unsecured loans given to individuals for personal use, such as weddings,
education, or medical emergencies.
Home Loans: Secured loans to finance the purchase of residential property, often with longer
repayment periods and lower interest rates.

Business Loans: Loans provided to businesses for expansion, working capital, or asset
purchase, often secured by business assets or guarantees.

Agricultural Loans: Offered to farmers for agricultural activities, such as buying seeds,
machinery, or cattle.

2. Lending Process

Loan Application: Customers apply for loans by submitting the necessary documents, such as
income proof, identification, and security (in case of secured loans).

Credit Appraisal: The bank assesses the borrower’s creditworthiness, repayment capacity, and
purpose of the loan.

Disbursement: Once the loan is approved, the amount is disbursed to the borrower. For secured
loans, the security is held as collateral by the bank until the loan is repaid.

3. Importance of Lending in the Economy

Banks, by acting as lenders, facilitate the flow of money in the economy. Lending promotes
economic growth by providing capital for business expansion, home purchases, and personal
development.

Types of Loans: Different Types of Loans Offered by Banks

Banks offer a wide variety of loans to meet the diverse needs of individuals, businesses, and
institutions. Each type of loan is designed with specific purposes in mind and comes with its own
set of features, interest rates, repayment terms, and eligibility criteria. Here’s an in-depth look at
the most common types of loans offered by banks:

1. Personal Loans

Personal loans are unsecured loans provided to individuals to meet their personal financial
needs. Unlike other loans, personal loans do not require any collateral or security.

Purpose: These loans can be used for various purposes, such as medical emergencies,
weddings, travel, or purchasing consumer goods.

Features:
Unsecured, meaning no collateral is needed.

Flexible usage—borrowers can use the loan for any purpose.

Higher interest rates compared to secured loans due to the absence of collateral.

Short to medium repayment terms, usually ranging from 1 to 5 years.

Eligibility: Banks evaluate a borrower’s income, credit score, and repayment capacity before
approving a personal loan.

Who Uses Them: Salaried individuals, self-employed professionals, and those in need of quick
funds without having to pledge assets.

2. Home Loans

Home loans are secured loans offered to individuals or families for the purpose of buying,
building, or renovating a home. The property itself serves as collateral until the loan is fully
repaid.

Purpose:

Buying residential properties (houses or apartments).

Building a home on a purchased plot of land.

Renovating or extending an existing home.

Features:

Long repayment tenures, often up to 30 years.

Lower interest rates compared to personal loans due to the secured nature of the loan.

Tax benefits under sections of the Income Tax Act in India.

The loan is repaid in equated monthly installments (EMIs).

Eligibility: Banks assess the borrower’s income, age, employment stability, and credit score,
along with the property’s market value.

Who Uses Them: Individuals or families looking to buy their first home, upgrade to a larger
house, or finance home renovations.

3. Education Loans

Education loans, also known as student loans, are offered to individuals seeking financial
assistance to pursue higher education. These loans cover tuition fees, accommodation, travel,
and other education-related expenses.

Purpose: Funding for higher education in domestic or foreign institutions, covering courses such
as undergraduate, postgraduate, professional degrees, and vocational training.

Features:

The loan covers tuition fees, exam fees, study material costs, travel expenses, and living
expenses (in the case of international education).

Flexible repayment terms, with a moratorium period during the course of study and a few
months after graduation before repayment begins.

Competitive interest rates, with some government subsidies for students from economically
weaker sections.

Collateral may be required for higher loan amounts, especially for foreign education.

Eligibility: Banks evaluate the student’s academic performance, admission into a recognized
institution, the course’s value, and the repayment capacity of the co-borrower (usually a parent
or guardian).

Who Uses Them: Students aspiring to pursue undergraduate, postgraduate, or professional

studies both in India and abroad.

4. Vehicle Loans

Vehicle loans, also called auto loans, are secured loans provided for the purchase of new or
used vehicles such as cars, motorcycles, or commercial vehicles.
Purpose: Financing the purchase of a vehicle, including personal cars, motorcycles, or
commercial vehicles like trucks and buses.

Features:

The vehicle serves as collateral for the loan.

Competitive interest rates, often lower than personal loans.

Repayment tenures range from 1 to 7 years, depending on the vehicle type.

The loan amount can cover 80% to 100% of the vehicle’s on-road price.

Eligibility: Banks assess the borrower’s income, credit history, and the vehicle’s value before
approving the loan.

Who Uses Them: Individuals looking to buy a new or used vehicle for personal use, or
businesses purchasing commercial vehicles for business operations.

5. Business Loans

Business loans are provided to entrepreneurs, companies, and small and medium enterprises
(SMEs) to finance their business operations, expand their business, or manage working capital.

Purpose:

Expanding business operations.

Purchasing new machinery, equipment, or inventory.

Managing cash flow and working capital.

Features:

Can be secured or unsecured, depending on the loan amount and purpose.

Flexible repayment options tailored to the business’s cash flow.

Loans can be in the form of term loans, working capital loans, or overdraft facilities.
Eligibility: Banks evaluate the business’s profitability, credit history, revenue, and future growth
potential before approving a business loan.

Who Uses Them: SMEs, startups, and established companies looking to expand operations or
manage day-to-day expenses.

6. Agricultural Loans

Agricultural loans are offered to farmers and agricultural businesses to finance farming
activities, purchase machinery, or manage crop production.

Purpose:

Buying seeds, fertilizers, and equipment.

Expanding farming operations or purchasing land.

Financing post-harvest storage and marketing.

Features:

Special interest rates and subsidies are often provided by the government to support the
agricultural sector.

Flexible repayment schedules based on the crop cycle and harvest season.

Eligibility: Banks evaluate the farmer’s landholding, farming experience, and expected crop yield
before granting loans.

Who Uses Them: Farmers and agribusinesses involved in crop production, dairy farming,
poultry, and fisheries.

Overdraft Facilities: Understanding Overdrafts

An overdraft facility is a financial service offered by banks that allows customers to withdraw
more money than is available in their account, up to a pre-approved limit. This is especially
useful for businesses or individuals who need short-term liquidity.

1. Features of Overdraft Facilities

Flexibility: Overdrafts allow customers to withdraw funds as needed, up to the agreed limit,
without having to apply for a new loan.

Interest on Overdraft: Interest is charged only on the amount overdrawn, not on the entire
approved limit. This makes it a cost-effective option for short-term financing.

Collateral: Overdrafts can be secured (against assets like fixed deposits or property) or
unsecured, depending on the borrower’s financial profile.

Repayment: There is no fixed repayment schedule for overdrafts, but interest accrues daily on
the overdrawn amount.

2. Who Uses Overdrafts

Businesses: To manage working capital and handle cash flow fluctuations.

Individuals: For personal expenses or emergencies when immediate funds are needed.

Professionals: Self-employed individuals or professionals often use overdrafts for managing

short-term financial gaps.

Discounting of Bills: Process of Discounting Bills of Exchange and Promissory Notes

Discounting of bills is a financial service offered by banks where they purchase a customer’s bill
of exchange or promissory note at a discounted value before its maturity. This helps businesses
to obtain immediate cash flow without waiting for the bill’s payment date.

1. Process of Discounting Bills

Submission of Bill: The business submits the bill of exchange or promissory note (issued by a
debtor) to the bank for discounting.

Discounted Value: The bank deducts a small discount or fee and provides the remaining
amount to the business in advance of the bill’s due date.

Collection: Upon maturity, the bank collects the full amount from the bill issuer (the debtor).

2. Advantages of Bill Discounting

Improved Cash Flow: Businesses get immediate cash without waiting for their debtors to pay.
Low Cost: The fee charged by the bank for discounting is relatively low compared to other forms
of credit.

Risk Mitigation: By selling the bill to the bank, businesses transfer the risk of payment delay to
the bank.

3. Who Uses Bill Discounting

Businesses: To manage working capital needs and avoid cash flow issues caused by delayed
payments from customers.

Exporters and Importers: To obtain cash against bills of exchange related to international trade
transactions.

Financing Book Debts and Supply Bills

Financing book debts and supply bills are critical mechanisms through which businesses,
especially small and medium enterprises (SMEs), can obtain financial assistance to meet their
working capital needs. These methods allow companies to convert their receivables and future
payments into immediate cash, ensuring continuous business operations without liquidity
constraints.

1. Financing Book Debts

Book debts refer to the outstanding amounts owed to a business by its customers for goods or
services that have been delivered but not yet paid for. Financing book debts involves obtaining
loans or advances from banks or financial institutions against these receivables. This form of
financing is often referred to as invoice financing or receivables financing.

Purpose:

To provide businesses with immediate cash flow to maintain operations without waiting for
customers to clear their outstanding payments.

Helps businesses manage working capital more efficiently and avoid cash flow gaps.

Process:

Submission of Receivables: The business submits its list of outstanding invoices (book debts) to
the bank or financial institution.
Assessment: The bank assesses the creditworthiness of the customers who owe the business
money, and the likelihood of payment being received.

Advance: Based on the assessment, the bank provides an advance, usually a percentage of the
total book debts (e.g., 70% to 90%).

Collection and Settlement: When the business’s customers pay their invoices, the bank collects
the money directly, deducts the advance and associated fees, and transfers any remaining
balance to the business.

Advantages:

Improved Cash Flow: Businesses receive cash upfront, helping them manage their day-to-day
expenses more effectively.

No Additional Collateral: The book debts themselves act as collateral, so businesses do not
need to pledge additional assets.

Flexible Financing: As the business generates more sales and invoices, it can continue to
receive funding without needing to apply for new loans.

2. Financing Supply Bills

Supply bills refer to the bills issued by suppliers to their customers for goods or services
provided. Financing supply bills involves obtaining financial assistance based on the
outstanding amount a business owes its suppliers. This process, also known as trade financing
or supply chain financing, ensures that businesses can pay their suppliers on time while
maintaining liquidity.

Purpose:

To ensure that businesses have the financial capacity to pay their suppliers on time, even if they
are waiting for their own customers to pay.

Helps businesses avoid damaging relationships with suppliers due to delayed payments.

Process:

Issuance of Supply Bills: Suppliers issue bills to the business for goods delivered or services
rendered.
Application for Financing: The business approaches the bank for financing based on these
supply bills.

Financing Terms: The bank provides financing, which can be used to pay the suppliers. The
terms usually depend on the repayment period of the supply bills (e.g., 30, 60, or 90 days).

Repayment: The business repays the bank when it receives payment from its customers or
based on the agreed terms.

Advantages:

Supplier Relationships: Businesses can maintain healthy relationships with suppliers by

ensuring timely payments.

Continuity of Operations: Financing supply bills ensures that businesses do not face
interruptions in their supply chain due to cash flow issues.

Flexible Repayment Terms: The financing is typically short-term, and repayment terms are
aligned with the business’s cash flow cycle.

Charging of Security Bills

The charging of security bills refers to the practice of using promissory notes, bills of exchange,
or other negotiable instruments as collateral for loans. These security bills act as assurance for
banks that the borrower will repay the loan. If the borrower defaults, the bank has the right to
collect the amount mentioned in the security bills from the debtor.

1. Types of Security Bills

Bills of Exchange: A written order by one party to another, requiring the recipient to pay a
specific amount of money to the third party on a future date. This can be used as collateral for
short-term loans.

Promissory Notes: A financial instrument where one party (the issuer) promises in writing to pay
a certain amount of money to another party at a future date. It can serve as security for
obtaining loans.

2. Process of Charging Security Bills

Submission: The borrower submits the security bills to the bank as collateral for a loan.
Loan Disbursement: The bank disburses the loan based on the face value of the security bills,
after deducting any necessary fees or discounts.

Repayment and Settlement: The borrower repays the loan as per the agreed terms. If the
borrower defaults, the bank can recover the amount from the debtor who is liable under the
security bill.

3. Benefits of Security Bills:

Reduced Risk: Security bills provide the lender with a form of guarantee for repayment,
reducing the risk of default.

Access to Credit: Borrowers can secure loans without pledging physical assets, making it easier
for businesses to obtain short-term financing.

Flexibility: Security bills can be used for both domestic and international transactions, providing
a flexible form of security for trade-related loans.

Security and Collateral: Pledge, Mortgage, Assignment

In banking and finance, security and collateral are critical in protecting the interests of lenders
when extending loans to borrowers. They provide assurance that if a borrower defaults on the
loan, the lender can recover the outstanding amount by seizing or selling the collateral. The
three main mechanisms used in banking are pledge, mortgage, and assignment.

1. Pledge

A pledge is a type of security arrangement in which the borrower (pledger) delivers movable
assets (such as goods, stocks, or certificates) to the lender (pledgee) as collateral for a loan.
The lender retains possession of the pledged assets until the borrower repays the loan. If the
borrower defaults, the lender has the right to sell the pledged assets to recover the outstanding
loan amount.

Key Features:

Movable Property: Only movable property can be pledged as security. This includes goods,
stocks, bonds, or valuable documents.

Transfer of Possession: The possession of the pledged assets is transferred to the lender, but
the ownership remains with the borrower.
Right to Sell: In case of default, the lender has the legal right to sell the pledged property to
recover the loan amount.

Examples: Gold loans (where gold jewelry is pledged), stock loans (where stocks are pledged).

2. Mortgage

A mortgage is a security mechanism where the borrower offers immovable property (such as
land or a building) as collateral for a loan. Unlike a pledge, the borrower retains possession of
the property, but the lender has the right to take ownership of the property if the borrower fails to
repay the loan.

Key Features:

Immovable Property: Only immovable property, such as real estate, can be mortgaged.

Possession: The borrower retains possession of the property, but the lender has a legal claim
on the property.

Foreclosure Rights: In the event of default, the lender can foreclose on the property, taking
ownership and selling it to recover the loan amount.

Examples: Home loans and commercial real estate loans are typically secured through a
mortgage.

3. Assignment

Assignment is a security mechanism where the borrower transfers certain rights or interests in
assets, such as life insurance policies, accounts receivable, or intellectual property, to the
lender. The lender receives these rights as collateral for a loan, and in case of default, the
lender can claim these rights to recover the outstanding loan amount.

Key Features:

Intangible Assets: Assignment typically involves intangible assets, such as life insurance
policies, patents, or receivables.

Transfer of Rights: The borrower transfers the rights to the lender, but the lender does not take
possession of the asset.
Collection of Proceeds: If the borrower defaults, the lender can collect the proceeds from the
assigned assets, such as the payout from an insurance policy or future payments from
receivables.

Examples: Assignment of life insurance policies as collateral for personal loans, or assignment
of receivables for business loans.