Module 2

Bank & banking

Banker
A banker is a dealer in capital or more
properly a dealer in money.
He is an intermediate party between
the borrower and the lender.
The banker is one who receives
money, collects cheques and drafts,
for customers, with an obligation to
honour the cheques drawn by
customers from time to time subject
to availability of amounts in the

Customer
Qualification of a Customer.
A person/ company/entity who has an
account with a bank is a customer.
He should not be a minor.
He should be a person of a sound mind (he
understands the contract at the time of
making it).
He shall not have been debarred from
entering into any contract under any law.
He deposits money and bank accepts it.

Banker and Customer

Relationship

The relationship between the banker and

customer is very important. It is generally
studied under the following two heads.
General Relationship
Debtor and Creditor
Creditor and Debtor
Special Relationship
Principal and Agent
Bailor and Bailee
Mortgagor and Mortgage
Pledger and Pledgee
Pawnee and pawner

General Relationship
Debtor and Creditor:
The true relationship between banker and
customer is primarily of a debtor and creditor.
Depositor is the lender and the banker is the
borrower.
Depositor is the creditor and the banker is the
debtor.
The money once deposited in the bank becomes
the money of the bank and it is prerogative of the
bank to use that money as it deems fit. The
depositor remains a creditor that too an
unsecured creditor.

Creditor and Debtor

When a bank grants loan or other
credit facilities to the customer,
relationship is reversed, that is now-Customer is Debtor & Banker is
Creditor.

SPECIAL RELATIONSHIP
Principal

and agent:

The special relationship between the customer

and the banker is that of principal and agent.
The customer (principal) deposits cheques, drafts,
dividends for collection with the bank.
He also gives written instructions to the bank to
purchase securities, pay insurance premium,
installments of loans etc on his behalf.
When the bank performs such agency services, he
becomes an agent of his customer.

Relationship

Special

Bailor and Bailee

Relationship
Bailment Defined A bailment is the delivery of goods by one
person to another for some purpose, upon a
contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed
of according to the directions of the person
delivering them.
The person delivering the goods is called the
bailor. The person to whom these are delivered
is called the bailee
A bailment is the delivery of goods in trust.

Bailor and Bailee

Relationship
A bank may accept the valuables of his
customer such as jewellary, documents,
securities for safe custody.
In such a case the customer is the Bailer
and the bank is bailee.

Pawner and Pawnee:

When a customer Pledge goods and
documents as security for an advance he
then become Pawner (Pledger) and the
bank becomes the pawnee (pledgee).
The pledged goods are to be returned
intact to the pawner after the debt is repaid
by him.

Mortgagor and Mortgagee

Relationship
Mortgage is the transfer of an interest in
specific immovable property for the
purpose of securing the payment of money
advanced or to be advanced by way of
loan.
When a customer pledges a specific
immovable property with the bank as
security for advance, the customer
becomes mortgager and banker is the
mortgagee.

Bank as a trustee
The bank act as a trustee for his
customer in those cases where he
accept securities and other valuables
for safe custody.
In such cases the customer continues
to be the owner of the valuables
deposited with the bank.

Executer, attorney,
guarantor
The bank also acts as executor,
attorney and guarantor for his
customer.

Duties or obligations
of a banker towards
the customer

To honor a customers
cheque:
The banker is to honor the cheque of
the customers, provided the cheque
are:
Properly drawn
The customer has balance to his credit
The loan contract has been signed
There is no legal bar or restriction
attaching to the customers funds.

Standing orders
It is the duty of the bank to abide by
the standing orders of the customers
in making periodical payments on his
behalf such as club, library, insurance
premium etc.

Secrecy of the
customers account
The bank owes a contractual duty not
to disclose the customers financial
position without his consent.
However the obligation of secrecy is
not considered essential on the
following occasions.

 When a banker is required to give

evidence in the court.
When there is national emergency and
disclosure is essential in the public
interest.
When there are clear proofs of treason to
the state
When a consent is given by the customer
to provide information for the preparation
of balance sheet.

Garnishee order
(order of the court)
It is the duty of the banker to abide
by the order of the court (garnishee
order) and attached the funds of the
customer to the creditors who has
obtained the order in his favor.

Rights of a banker
Right to set off:

It is a right of the banker to adjust his

outstanding loans in the name of the
customer from his credit balance of any of
the accounts he is maintaining with the
bank.

Right to charge interest,

commission etc
It is the right of the banker to charge
interest commission etc according to the
rates for the services the banker has
rendered to the customer as agent,
trustee etc.

Right to lien
A banker has the right to retain the
property belonging to the customer until
the debt due from him has been paid.

l Types of Banks

Global banks
l - full range of services
l - international capability
Commercial banks
l - wide range of services
l - limited international capability
Investment banks
l - arranging, originating and distributing debt
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and equity issues and advice
Savings banks
l - taking deposits and making loans

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Types of Accounts
Current account
Deposit/savings account
Fixed deposit
Recurring deposit a/c
Money market deposit
Certificate of deposit a/c
Loan a/c
Resident and Non-resident accounts

Types of Accounts
Current account/ Checking a/c:
Current Accounts are basically meant for businessmen
and are never used for the purpose of investment or
savings.
These deposits are the most liquid deposits and there
are no limits for number of transactions or the amount of
transactions in a day.
Most of the current account are opened in the names of
firm / company accounts.
Cheque book facility is provided and the account holder
can deposit all types of the cheques and drafts in their
name or endorsed in their favour by third parties.
No interest is paid by banks on these accounts. On the
other hand, banks charges certain service charges, on

Types of Accounts
Savings accounts
Most popular deposits for individual
accounts.
These accounts not only provide cheque
facility but also have lot of flexibility for
deposits and withdrawal of funds from the
account.
Banks pays interest for this account
From the FY 2012-13, interest earned up
to Rs 10,000 in a financial year on Saving
Bank accounts is exempted from tax.

Types of Accounts
Certificate of Deposit (CD):
Certificates of deposit, or CDs, allow you
to invest your money at a set interest rate
for a pre-set period of time.
CDs often have higher interest rates than
traditional savings accounts because the
money you deposit is tied up for the life of
the certificate
CD range from a few months to several
years.

Money market account:

Types of Accounts
Recurring deposit

These are popularly known as RD accounts and are special

kind of Term Deposits and are suitable for small investors.
Normally, such deposits earn interest on the amount
already deposited (through monthly installments) at the
same rates as are applicable for Fixed Deposits / Term
Deposits.
Under these type of deposits, the person has to usually
deposit a fixed amount of money every month (usually a
minimum of Rs,100/- p.m.).
Any default in payment within the month attracts a small
penalty.
Recurring Deposit accounts are normally allowed for
maturities ranging from 6 months to 120 months.
A Pass book is usually issued wherein the person can get
the entries for all the deposits made by him / her and the

Asset Liability
Management
in Banks

Components of a
Bank Balance sheet
Liabilities

Assets

1.Capital
2.Reserve & Surplus
3.Deposits
4.Borrowings
5.Other Liabilities

1.Cash & Balances with

RBI
2.Bal. With Banks & Money
at Call and Short Notices
3.Investments
4.Advances
5.Fixed Assets
6. Other Assets

Contingent

Components of Liabilities
1.Capital:
Capital represents owners contribution/stake
in the bank.
Like, authorized capital, paid-up capital,
issued capital & so on
It serves as a cushion for depositors and
creditors.
It is considered to be a long term sources for
the bank.

Components of Liabilities
2. Reserves & Surplus
Components under this head
includes:
I. Statutory Reserves
II.
Capital Reserves
III. Investment Fluctuation Reserve
IV. Revenue and Other Reserves
V. Balance in Profit and Loss Account

Components of Liabilities
3. Deposits
This is the main source of banks
funds. The deposits are classified as
deposits payable on demand and
time. They are reflected in balance
sheet as under:
I.
Demand Deposits
II. Savings Bank Deposits
III. Term Deposits

Components of Liabilities
4. Borrowings
(Borrowings
include
Refinance / Borrowings from RBI,
Inter-bank & other institutions)
I. Borrowings in India
i) Reserve Bank of India
ii) Other Banks
iii) Other Institutions & Agencies
II. Borrowings outside India

Components of Liabilities
5. Other Liabilities & Provisions
It is grouped as under:

I.
II.
III.
IV.
V.

Bills Payable
Inter Office Adjustments (Net)
Interest Accrued
Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
Others(including provisions)

Components of Assets
1.Cash & Bank Balances with
RBI
I. Cash in hand
(including foreign currency notes)
II. Balances with Reserve Bank of India
In Current Accounts
In Other Accounts

Components of Assets
2. BALANCES WITH BANKS AND MONEY AT
CALL & SHORT NOTICE
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. Outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice

Components of Assets
3. Investments

A major asset item in the banks balance

sheet. Reflected under 6 buckets as under:
I. Investments in India in : *
i) Government Securities
ii) Other approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and Sponsored Institutions
vi) Others (UTI Shares , Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in **
Subsidiaries and/or Associates abroad

Components of Assets
4. Advances
The most important assets for a
bank.
A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans
repayable on demand
iii) Term Loans
B. Particulars of Advances :
i) Secured by tangible assets
(including advances against Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured

Components of Assets
5. Fixed Asset
I. Premises
II. Other Fixed Assets (Including furniture
and fixtures)

6. Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction of claims
V. Deferred Tax Asset (Net)
VI. Others

Contingent Liability
Banks obligations under LCs,
Guarantees, Acceptances on behalf
of constituents and Bills accepted by
the bank are reflected under this
heads.

Banks Profit & Loss

Account
A banks profit & Loss Account
has the following components:
I.Income: This includes Interest
Income and Other Income.
II. Expenses: This includes Interest
Expended, Operating Expenses and
Provisions & contingencies.

Components of Income
1.INTEREST EARNED
I.
II.
III.
IV.

Interest/Discount on Advances / Bills

Income on Investments
Interest on balances with Reserve Bank
of India and other inter-bank funds
Others

Components of Income
2. OTHER INCOME
I.
Commission, Exchange and Brokerage
II.
Profit on sale of Investments (Net)
III.
Profit/(Loss) on Revaluation of Investments
IV. Profit on sale of land, buildings and other
assets (Net)
V. Profit on exchange transactions (Net)
VI.
Income earned by way of dividends etc. from
subsidiaries and Associates abroad/in India
VII.
Miscellaneous Income

Components of Expenses
1.INTEREST EXPENDED
I.
II.
III.

Interest on Deposits
Interest on Reserve Bank of India / Inter-Bank
borrowings
Others

Components of Expenses
2. OPERATING EXPENSES
I.
Payments to and Provisions for employees
II.
Rent, Taxes and Lighting
III.
Printing and Stationery
IV.
Advertisement and Publicity
V.
Depreciation on Bank's property
VI. Directors' Fees, Allowances and Expenses
VII. Auditors' Fees and Expenses (including
Branch Auditors)
VIII. Law Charges
IX. Postages, Telegrams, Telephones etc.
X. Repairs and Maintenance
XI. Insurance
XII. Other Expenditure

ASSET LIABILTY
MANAGEMENT
Business of banking involves the identifying,
measuring, accepting and managing the risk.
Which is called as Asset Liability Management.
Risk management is the heart of bank financial
management.
Traditionally, administered interest rates were
used to price the assets and liabilities of banks.
However, in the deregulated environment,
competition has narrowed the spreads of banks.

ASSET LIABILTY
MANAGEMENT
Asset Liability Management is concerned with
strategic balance sheet management involving
risks caused by changes in interest rates,
exchange rate, credit risk and the liquidity
position of bank.
Implementing Asset Liability Management (ALM)
function in banks is not only a regulatory
requirement in India but also an imperative for
strategic bank management.

ALM

Assets Liability
Management
It is a dynamic process of Planning,
Organizing & Controlling of Assets &
Liabilities- their volumes, mixes,
maturities, yields and costs in order to
maintain liquidity and Net Interest
income.

Reasons for Significance

of ALM
Volatility
Product Innovations & Complexities
Regulatory Environment
Management Recognition

Objectives of Asset-Liability
Management
To protect and enhance the net worth of the
institution.
Formulation of critical business policies and efficient
allocation of Capital.
To increase the Net Interest Income (NII)
It is a quantification of the various risks in the balance
sheet and optimizing of profit by ensuring acceptable
balance between profitability, growth and risks.
ALM should provide liquidity management within the
institution and choose a model that yields a stable
net interest income consistently while ensuring
liquidity.

Objectives of Asset-Liability
Management
Funding of banks operation through capital
planning.
Product pricing and introduction of new products.
To control volatility of market value of capital from
market risk.
Working out estimates of return and risk that
might result from pursuing alternative programs.

3 imp tools to measure

banks performance
Net Interest Income Interest Income-Interest Expenses.
Net Interest Margin Net Interest Income/Average Total Assets
Economic Equity Ratio The ratio of the shareholders funds to the total
assets
measures the shifts in the ratio of owned funds to
total funds.
The fact assesses the sustenance capacity of the

Categories of Risk
Risk is the chance or probability of
loss or damage
Credit Risk
Transaction
Risk /default risk
/counterparty
risk
Portfolio risk
/Concentration
risk
Settlement risk

Market Risk
Commodity risk

Operational Risk
Process risk

Interest Rate risk Infrastructure

risk
Forex rate risk
Equity price risk

Model risk
Human risk

LIQUIDITY RISK
Banks need liquidity to meet deposit withdrawal and
to fund loan demands.
The variability of loan demands and variability of
deposits determine banks liquidity needs.
It lowers the size of the default risk premium the
bank must pay for funds.
It demonstrates the market place that the bank is
safe and therefore capable of repaying its
borrowings.
Liquidity risk arises from funding of long term assets
by short term liabilities, thus making the liabilities
subject to refinancing

LIQUIDITY RISK
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EFFECTS OF LIQUIDITY CRUNCH

Risk to banks earnings
Reputation risk
Contagion effect
Liquidity crisis can lead to runs on institutions
Bank / FI failures affect economy

Factors affecting liquidity risk

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Over extension of credit
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High level of NPAs
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Poor asset quality
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Mismanagement
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Non recognition of embedded option risk
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Reliance on a few wholesale depositors
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Large undrawn loan commitments
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Lack of appropriate liquidity policy & contingent plan

LIQUIDITY RISK

RBI GUIDELINES
l Structural liquidity statement
l Dynamic liquidity statement
l Board / ALCO
l ALM Information System
l ALM organisation
l ALM process (Risk Mgt process)
l Mismatch limits in the gap statement

Statement of Structural
Liquidity

All Assets & Liabilities to be reported as per

their maturity profile into 8 maturity Buckets:
i. 1 to 14 days
ii.15 to 28 days
iii.29 days and up to 3 months
iv.Over 3 months and up to 6 months
v.Over 6 months and up to 1 year
vi.Over 1 year and up to 3 years
vii. Over 3 years and up to 5 years
viii. Over 5 years

Statement of structural
liquidity
Places all cash inflows and outflows in the maturity
ladder as per residual maturity
Maturing Liability: cash outflow
Maturing Assets : Cash Inflow
Mismatches in the first two buckets not to exceed
20% of outflows
Banks can fix higher tolerance level for other
maturity buckets.

 ADDRESSING TO MISMATCHES

Mismatches can be positive or negative

Positive Mismatch: M.A.>M.L. and vice-versa
for Negative Mismatch
In case of +ve mismatch, excess liquidity can
be deployed in money market instruments,
creating new assets & investment swaps etc.
For ve mismatch,it can be financed from
market borrowings(call/Term),Bills
rediscounting,repos & deployment of foreign
currency converted into rupee.

 DYNAMIC LIQUIDITY

Prepared every fortnight for ALCO

Projection is given for the next three months
Tools for assessing the day to day liquidity needs of the bank

Currency Risk
The increased capital flows from different nations
following deregulation have contributed to increase in
the volume of transactions
Dealing in different currencies brings opportunities as
well as risk
To prevent this banks have been setting up overnight
limits and undertaking active day time trading
Value at Risk approach to be used to measure the risk
associated with forward exposures. Value at Risk
estimates probability of portfolio losses based on the
statistical analysis of historical price trends and
volatilities.

Interest Rate Risk

Interest Rate risk is the exposure of a banks financial
conditions to adverse movements of interest rates
Though this is normal part of banking business,
excessive interest rate risk can pose a significant
threat to a banks earnings and capital base
Changes in interest rates also affect the underlying
value of the banks assets, liabilities and off-balancesheet item
Interest rate risk refers to volatility in Net Interest
Income (NII) or variations in Net Interest Margin(NIM)
NIM = (Interest income Interest expense) / Earning
assets

Sources of interest rate risk

Re-pricing Risk: The assets and liabilities could re-price at
different dates and might be of different time period. For
example, a loan on the asset side could re-price at threemonthly intervals whereas the deposit could be at a fixed
interest rate or a variable rate, but re-pricing half-yearly
Basis Risk: The assets could be based on LIBOR rates
whereas the liabilities could be based on Treasury rates or a
Swap market rate
Yield Curve Risk: The changes are not always parallel but
it could be a twist around a particular tenor and thereby
affecting different maturities differently
Option Risk: Exercise of options impacts the financial
institutions by giving rise to premature release of funds that
have to be deployed in unfavourable market conditions and
loss of profit on account of foreclosure of loans that earned a
good spread.

STATEMENT OF
INTEREST RATE SENSITIVITY
Generated by grouping RSA,RSL &
OFF-Balance sheet items in to
various (8)time buckets.
RSA:
MONEY AT CALL
ADVANCES ( BPLR LINKED )
INVESTMENT
RSL
DEPOSITS EXCLUDING CD
BORROWINGS

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Effects of Interest Rate

Risk on Loans
Effects on the Loan Portfolio
Interest Rates (Up)
Adverse Price Effect

Old Loans Worth Less

New Loans Worth More

Favorable Reinvestment Effect

Interest Rates (Down)
Favorable Price Effect

Old Loans Worth More

Adverse Reinvestment Effect

New Loans Worth Less

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Effects of Interest Rate

Risk on Deposits
Effects on Deposits
Interest Rates (Up)
Early Withdrawal (Depositors Seek Higher
Rates)
Banks Must Attract New Depositors at Higher
Rate or Face Liquidity Problems
Interest Rates (Down)
Loan Prepayments Due to Refinancing
Banks Must Issue New Loans at Lower Rates
or Face Shrinking Balance Sheet

Risk Measurement
Techniques
Various techniques for measuring
exposure of banks to interest rate risks
Maturity Gap Analysis
Duration
Simulation
Value at Risk

MATURITY GAP METHOD

(IRS)
THREE OPTIONS:
A) RSA>RSL= Positive Gap
B) RSL>RSA= Negative Gap
C) RSL=RSA= Zero Gap

IMPACT ON NII

Gap

Interest rate Impact on

Change
NII

Positive

Increases

Positive

Positive

Decreases

Negative

Negative

Increases

Negative

Negative

Decreases

Positive

Duration Analysis
It basically refers to the average life of the asset or
the liability
It is the weighted average time to maturity of all the
preset values of cash flows

The larger the value of the duration, the more

sensitive is the price of that asset or liability to
changes in interest rates

As per the above equation, the bank will be

immunized from interest rate risk if the duration gap
between assets and the liabilities is zero.

Simulation
Basically simulation models utilize what if scenarios, for
example: What if:
The absolute level of interest rates shift
Marketing plans are under-or-over achieved
Margins achieved in the past are not
sustained/improved
Bad debt and prepayment levels change in different
interest rate scenarios
There are changes in the funding mix e.g.: an increasing
reliance on short-term funds for balance sheet growth
This dynamic capability adds value to this method and
improves the quality of information available to the
management

Value at Risk (VaR)

Refers to the maximum expected loss that a bank can
suffer in market value or income:
Over a given time horizon,
Under normal market conditions,
At a given level or certainty
It enables one to calculate the net worth of the
organization at any particular point of time so that it is
possible to focus on long-term risk implications of
decisions that have already been taken or that are going
to be taken

ASSET LIABILITY MGMT

Three-tier organizational set-up
Implementation :
ALM Information System
ALM organisation
ALM process (Risk Mgt process)

for

ALM

Management Committee of the Board (MC)

Oversees the ALM implementation by ALCO
Reviews the ALM implementation periodically
Funding strategies for correcting the
mismatches in ALM Statements.

ALM Organization
The board should have overall responsibilities and
should set the limit for liquidity, interest rate, foreign
exchange and equity price risk
Is responsible for balance sheet planning from risk return perspective including the strategic
management of interest rate and liquidity risks
The role of ALCO includes product pricing for both
deposits and advances,
Develops a view on future direction of interest rate
movements and decide on a funding mix

ASSET-LIABILITY MANAGEMENT
COMMITTEE (ALCO)
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ALCO headed by E.D.

GM (T) (Nodal Officer).
GMs:Central Accounts, Credit, Risk
Management International Division are the
members.
GM (IT) & AGM (Economist) are the
invitees for ALCO meetings.

FUNCTIONS OF ALCO
Implementation of ALM System
- Monitor the risk levels of the Bank.
- Articulate the Interest Rate Position & fix interest
rate on Deposits & Advances.
- Fix differential rate of interest rate on Bulk
Deposits.
- Facilitating and coordinating to put in place the
ALM System in the Bank.

ALM STATEMENTS TO BE
SUBMITTED TO RBI
1.Statement of Structural Liquidity (Annexure - I)
2.Statement of Interest Rate Sensitivity (Annexure - II)
3.Statement of Dynamic Liquidity (Annexure - III)
4.Statement of Maturity and Position (MAP) (Annexure
- IV) - Forex
5.Statement of Sensitivity to Interest Rate (SIR)
(Annexure - V)- Forex

ALM Information Systems

Usage of Real Time information system to gather the
information about the maturity and behavior of loans
and advances made by all other branches of a bank
ABC Approach :
analysing the behaviour of asset and liability products
in the top branches, which account for significant
business
then making rational assumptions about the way in
which assets and liabilities would behave in other
branches
The data and assumptions can then be refined over
time as the bank management gain experience

ALM Process
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Risk parameters
Risk identification,
Risk measurement,
Risk management,
Risk policies and procedures,
Prudential limits & auditing,
Reporting & review

CAMEL RATING
In 1995, RBI had set up a working group under the
chairmanship of Shri S. Padmanabhan to review
the banking supervision system.
The Committee made certain recommendations
and based on such suggestions a rating system for
domestic and foreign banks based on the
international CAMELS model combining financial
management and systems and control elements
was introduced for the inspection cycle
commencing from July 1998.
CAMELS evaluates banks on the following six
parameters

key components of
CAMELS
ratings
Capital adequacy
Asset quality
Management
Earnings
Liquidity
Sensitivity to market

Capital Adequacy
Capital adequacy is measured by
the ratio of capital to riskweighted assets .
A sound capital base strengthens
confidence of depositors

ASSET QUALITY
One of the indicators for asset quality is
the ratio of non-performing loans to total
loans (GNPA).
The gross non-performing loans to gross
advances ratio is more indicative of the
quality of credit decisions made by
bankers.
Higher GNPA is indicative of poor credit
decision-making.

Management

Management includes all key

managers and the Board of Directors
Quality of the monitoring and support of
the activities by the board and
management and their ability to
understand and respond to the risks
Development and implementation of
written policies, procedures, MIS, risk
monitoring system, reporting, safeguarding
of documents,

Earnings
All income from operations, nontraditional sources, extraordinary
items
It can be measured as the return on
asset ratio

Liquidity
Cash maintained by the banks and
balances with central bank, to total
asset ratio is an indicator of bank's
liquidity.
In general, banks with a larger volume
of liquid assets are perceived safe,
since these assets would allow banks
to meet unexpected withdrawals.

Sensitivity to Market
Risks
Sensitivity to adverse changes in
interest rates, foreign exchange rates,
commodity prices, fixed assets

Purpose of CAMELS ratings

The purpose of CAMELS ratings is to
determine a banks overallcondition
and to identify its strengths and
weaknesses:
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Financial
Operational
Managerial

SCORING
Bank supervisory authorities assign each
bank a score on a scale of 1 (best) to 5
(worst) for each factor.
If a bank has an average score less than 2
it is considered to be a high-quality
institution while banks with scores greater
than 3 are considered to be less-thansatisfactory establishments.
The system helps the supervisory authority
identify banks that are in need of attention.

Bank Instruments
Bank instruments serve the following
functions:
Substitute for money
Credit device
Record-keeping device
Some of the Bank instruments are
Bank Draft
Cheque
Travellers Cheque
Credit & debit card

Drafts
A draft is a three-party instrument that is an
unconditional written order by one party that
orders the second party to pay money to a
third party
Drawer of a draft
Drawee of a draft
Payee of a draft
It is also known as demand drafts as they are
always payable on demand

Cheque
A cheque is an unconditional order on the
bank made by the client instructing the
bank to pay a certain sum of money to the
person named in the cheque or his order or
the bearer.
This instrument is very safe and convenient
method of making payments or withdrawing
money from a bank.

DIFFERENCE BETWEEN CHEQUE AND DEMAND

DRAFT
DEMAND DRAFT
l
l
l

It cannot be made
payable to bearer.
Its payment cannot be
stopped.
It is drawn by a bank
upon itself.

CHEQUE
It

may be drawn
payable to bearer.
It is countermanded
A cheque

is drawn by
one person upon
another

E- Cheque
The electronic cheques are modeled on paper
checks, except that they are initiated electronically.
They use digital signatures for signing and endorsing
and require the use of digital certificates to
authenticate the payer, the payers bank and bank
account.
They are delivered either by direct transmission
using telephone lines or by public networks such as
the Internet.

E- Cheque
Benefits of E-Cheque
Reduced processing cost
Funds received sooner
Increased sales
Simple, smart & safe
fewer errors & reduced fraud

Travelers Cheque
A medium of exchange that can be used in place of hard
currency. Available in all major currencies and in a variety of
different denominations.
A traveler's cheque is a preprinted, fixed-amount cheque
designed to allow the person signing it to make an
unconditional payment to someone else as a result of
having paid the issuer for that privilege.
They were generally used by people on vacation instead of
cash as many businesses used to accept traveler's cheques
as currency.
If a traveler's cheque were lost or stolen, they could be
replaced by informing the serial numbers on the cheque to
issuing financial institution.
The cheque were first introduced by American Express back
in 1891.

Travelers cheque

Credit card
A credit card is a thin plastic card, which authorizes the
person named on it to purchase goods and services or
obtain cash advances on credit till certain time period.
The card holder can choose to pay for the items at the
end of each month or carry the debt over into the next
month. If the balance is not paid in full by the paymentdue date interest is charged on the outstanding amount.
Credit cards are primarily used for short-term financing.
Borrowing limits are pre-set according to the individual's
credit rating.

Debit Card
Debit Card is a direct account access card.
Unlike a credit card, in the case of a debit
card, the entire amount transacted gets
debited from the customer's account as soon
as the debit card is used for purchase of
goods and services.
The amount permitted to be transacted in
debit card is to the extent of the amount
standing to the credit of the card user's
account

Debit Vs credit

Universal Banking
Universal Banking is a multi-purpose and multifunctional financial supermarket (a company offering a
wide range of financial services e.g. stock, insurance
and real-estate brokerage) providing both banking and
financial services through a single window.
Definition of Universal Banking: As per the World
Bank, "In Universal Banking, large banks operate
extensive network of branches, provide many different
services, hold several claims on firms(including equity
and debt) and participate directly in the Corporate
Governance of firms that rely on the banks for funding
or as insurance underwriters".

Universal Banking
Advantages of Universal Banking
Economies of scale
Profitable diversions
Resource utilization
Easy Marketing on the Foundation of a
Brand Name
One-stop shopping