UNIT I

ORIGIN OF BANKING
Banking in India forms the base for the economic development of the country.
Major changes in the banking system and management have been seen over the
years with the advancement in technology, considering the needs of people.
The History of Banking in India dates back to before India got independence in
1947 and is a key topic in terms of questions asked in various Government exams.
In this article, we shall discuss in detail the evolution of the banking sector in India.

The banking sector development can be divided into three phases:

Phase I: The Early Phase which lasted from 1770 to 1969
Phase II: The Nationalisation Phase which lasted from 1969 to 1991
Phase III: The Liberalisation or the Banking Sector Reforms Phase which began in
1991 and continues to ourish till date

Pre Independence Period (1786-1947)

The rst bank of India was the “Bank of Hindustan”, established in 1770 and
located in the then Indian capital, Calcutta. However, this bank failed to work and
ceased operations in 1832.
During the Pre Independence period over 600 banks had been registered in the
country, but only a few managed to survive.
Following the path of Bank of Hindustan, various other banks were established in
India. They were:
• The General Bank of India (1786-1791)
• Oudh Commercial Bank (1881-1958)
• Bank of Bengal (1809)
• Bank of Bombay (1840)
• Bank of Madras (1843)

Post Independence Period (1947-1991)

At the time when India got independence, all the major banks of the country were
led privately which was a cause of concern as the people belonging to rural areas
were still dependent on money lenders for nancial assistance.
With an aim to solve this problem, the then Government decided to nationalise the
Banks. These banks were nationalised under the Banking Regulation Act, 1949.
Whereas, the Reserve Bank of India was nationalised in 1949.
Candidates can check the list of Banking sector reforms and Acts at the linked
article.
Following it was the formation of State Bank of India in 1955 and the other 14
banks were nationalised between the time duration of 1969 to 1991. These were
the banks whose national deposits were more than 50 crores.
Given below is the list of these 14 Banks nationalised in 1969:
1. Allahabad Bank
2. Bank of India
3. Bank of Baroda
4. Bank of Maharashtra
5. Central Bank of India
6. Canara Bank
fi
fl
fi
 7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank
11. Syndicate Bank
12. Union Bank of India
13. United Bank
14. UCO Bank

BANKING SYSTEM IN INDIA

In India the banks and banking have been divided in di erent groups. Each group
has their own bene ts and limitations in their operations. They have their own
dedicated target market. Some are concentrated their work in rural sector while
others in both rural as well as urban. Most of them are only catering in cities and
major towns.

There are mainly three Financial regulators in India:

1. Reserve Bank of India (RBI) - Banking Sector
2. Securities Exchange Board of India (SEBI) - Capital Markets /Mutual Funds
3. Insurance Regulatory and Development Authority (IRDA) - Insurance
Companies

STRUCTURE OF BANKING SYSTEM IN INDIA

Banks can generally be classi ed into various sub-categories as follows:
• PUBLIC SECTOR BANKS IN INDIA
◦ The State Bank Group and Nationalized banks: Is a group of 27 banks
◦ Has the largest number of branches in metro/ urban/rural areas
throughout the country
◦ Contributes to about 75% of the total deposits
◦ Contributes about 70% of total advances of all commercial banks in
India.
◦ Most have a very large branch network spread over all parts of the
country
◦ Have a Large deposits and assets base
◦ Perform all kinds of core and modern banking functions
• SCHEDULED BANKS:
◦ These are banks which are listed in the second schedule of the Reserve
Bank of India Act, 1934
◦ These banks are required to maintain certain amounts with RBI and, in
return, they enjoy the facility of nancial accommodation and
remittance facilities at concessionary rates from RBI
◦ State Co-operative Banks
◦ Commercial Banks
The banking system plays an important role in promoting economic growth not
only by channeling savings into investments but also by improving allocative
e ciency of resources. The recent empirical evidence, in fact, suggests that
banking system contributes to economic growth more by improving the allocative
ffi
fi
fi
fi
ff
 e ciency of resources than by channeling of resources from savers to investors.
An e cient banking system is now regarded as a necessary pre-condition for
growth.
The banking system of India consists of the central bank (Reserve Bank of
India - RBI), commercial banks, cooperative banks and development banks
(development nance institutions). These institutions, which provide a meeting
ground for the savers and the investors, form the core of India’s nancial sector.
Through mobilization of resources and their better allocation, banks play an
important role in the development process of underdeveloped countries.

INDIGENOUS BANKERS
Indigenous banking system is the system of banking that involves private rms or
individuals who act as banks by providing nancial services such as loans and
accepting deposits.
Indigenous banking system is made up of indigenous bankers who do not fall
under the purview of the government. The system of indigenous banking dates
back to the medieval period. This system continued till the middle part of the
nineteenth century.
Indigenous bankers formed the bulk of the Indian nancial system in the ancient
times. These bankers provided credit facilities to the individuals and businesses as
well as to the governments at times.
The indigenous banking system lost its charm with the advent of foreign banks and
commercial banks. The business contracted further with the formation of co-
operative banks and commercial banks in the late 1950s.
Functions of Indigenous Bankers
The indigenous bankers performed the following functions:
1. Accepting deposits from the public: It is one of the important functions of the
bankers.The deposits will be for a xed period and can be of either xed or current
period.
2.Providing loans against security: Indigenous bankers provide loans against
securities or assets such as land, vehicles, gold ornaments, etc.
3. Discounting Hundis: Hundis were important instruments of money exchange for
the businesses in times before new instruments were introduced. Discounting
Hundis is one of the most pro table businesses for the indigenous bankers.
Hundis are of two types 1) Darshni or Sight hundi, a hundi that is payable on
demand and 2) Muddati Hundi, a hundi that is payable after a certain time period.
The time period after which it becomes payable is mentioned at the face of the
hundi.
4. Remittance: Indigenous bankers also provide remittance services by having
separate branches or tie ups with other indigenous bankers across the country.

COMMERCIAL BANKS
A commercial bank is a kind of nancial institution that carries all the operations
related to deposit and withdrawal of money for the general public, providing loans
for investment, and other such activities. These banks are pro t-making
institutions and do business only to make a pro t.
ffi
ffi
fi
fi
fi
fi
fi
fi
fi
fi
fi
fi
fi
 The two primary characteristics of a commercial bank are lending and borrowing.
The bank receives the deposits and gives money to various projects to earn
interest (pro t). The rate of interest that a bank o ers to the depositors is known as
the borrowing rate, while the rate at which a bank lends money is known as the
lending rate.
Related link: Banking and its Type
Function of Commercial Bank:
The functions of commercial banks are classi ed into two main divisions.
(a) Primary functions
Accepts deposit : The bank takes deposits in the form of saving, current, and
xed deposits. The surplus balances collected from the rm and individuals are
lent to the temporary requirements of the commercial transactions.
Provides loan and advances : Another critical function of this bank is to o er loans
and advances to the entrepreneurs and business people, and collect interest. For
every bank, it is the primary source of making pro ts. In this process, a bank
retains a small number of deposits as a reserve and o ers (lends) the remaining
amount to the borrowers in demand loans, overdraft, cash credit, short-run loans,
and more such banks.
Credit cash: When a customer is provided with credit or loan, they are not
provided with liquid cash. First, a bank account is opened for the customer and
then the money is transferred to the account. This process allows the bank to
create money.
(b) Secondary functions
Discounting bills of exchange: It is a written agreement acknowledging the
amount of money to be paid against the goods purchased at a given point of time
in the future. The amount can also be cleared before the quoted time through a
discounting method of a commercial bank.
Overdraft facility: It is an advance given to a customer by keeping the current
account to overdraw up to the given limit.
Purchasing and selling of the securities: The bank o ers you with the facility of
selling and buying the securities.
Locker facilities: A bank provides locker facilities to the customers to keep their
valuables or documents safely. The banks charge a minimum of an annual fee for
this service.
Paying and gathering the credit : It uses di erent instruments like a promissory
note, cheques, and bill of exchange.
Types of Commercial Banks:
There are three di erent types of commercial banks.
Private bank –: It is a type of commercial banks where private individuals and
businesses own a majority of the share capital. All private banks are recorded as
companies with limited liability. Such as Housing Development Finance
Corporation (HDFC) Bank, Industrial Credit and Investment Corporation of India
(ICICI) Bank, Yes Bank, and more such banks.
Public bank –: It is a type of bank that is nationalised, and the government holds a
signi cant stake. For example, Bank of Baroda, State Bank of India (SBI), Dena
Bank, Corporation Bank, and Punjab National Bank.
Foreign bank –: These banks are established in foreign countries and have
branches in other countries. For instance, American Express Bank, Hong Kong
fi
fi
fi
ff
ff
fi
ff
fi
ff
ff
fi
ff
 and Shanghai Banking Corporation (HSBC), Standard & Chartered Bank, Citibank,
and more such banks.
Examples of Commercial Banks
1. State Bank of India (SBI)
2. Housing Development Finance Corporation (HDFC) Bank
3. Industrial Credit and Investment Corporation of India (ICICI) Bank
4. Dena Bank
5. Corporation Bank

COOPERATIVE BANKS
The word ‘co-operative’ originated from the Latin word ‘cooperari’ or ‘cooperat’
which means worked together, it basically means that individuals come together
and help each other for their similar interests. Likewise, co-operative banks are a
kind of associations of members who have a common belief in which they come
together and cooperate with each other.
De nition Of Co-operative Banks
A co-operative bank is known as to be one of the nancial entity which belongs to
their members and at the same time they are its owners and also are the
customers of the bank.
Objective Of Co-operative Banks
It helps those people who have been less resources or whoever not nancially
strong. It also promotes a habit of thrift, savings and mutual help. The main focus
of co-operative banks is to come up with a low cost nancially on the basis of the
principal of mutual help.
Earning pro t is not a taboo however its motive is non-pro t, the motive can not be
the pro t earning, however, there is no restriction on gaining the pro t out of the
activities and facilities provided by the Co-operative banks to its customers.

Functions
1. Primary Urban Co-operative Bank (PUCBs)
This type of Co-operative banks provide their services to mainly urban areas of
India, they mainly provide advances in shares and debentures to the small
businessmen and also provide these small businessmen loans with extension in
credit facilities.
2. District Central Co-operative Bank (DCCBs)-
These type of banks provide their services to the district or local area. They make
and implements the policies at a district level and also provide credit facilities to
the PACs and PUBCs.
3. Primary Agriculture Credit Society (PACs)-
PACs are a type of Co-operative bank which provides loans to its customers with
less complexity, they also motivate their customers to learn to save their money
fi
fi
fi
fi
fi
fi
fi
fi
through deposits. It also provides the bene ts and development of the large
society.
4. State Co-operative Banks (SCBs)-
SCBs are governed by NABARD and acts as supervisor to the DCCBCs.
5. Land Development Banks (LDBs)-
These banks help in ful lling the needs and requirements of the agricultural sector
and provide credit in local areas and also perform all the general and basic
functions of a bank. This type of bank motivates and helps in the increase in
agricultural production in our country.

REGIONAL BANKS
The RRB and its functions make up an important section in the study of the
banking system in non-urban regions and are instrumental in promoting small
handicraft-based artisans and agricultural farmers in villages. The Regional Rural
Bank Act passed in 1976. More than 40 RRBs are functioning all over the country
being sponsored by the Indian Government. The introduction of the RRB was an
initiative to strengthen the banking sector in India. It was observed in the 20th
century that banking opportunities were not equitably distributed amongst all
classes of people. Especially su ering were the underprivileged and marginalised
sections of the communities. So, the e ort was taken by the Government to
introduce a scheme through which everyone could avail of banking services.
RRB and its Functions
The Regional Rural Banks or RRBs are commercial banks in India. The
recapitalisation of RRBs is sponsored by the central bank. These banks are
empowered to conduct nancial transactions to promote growth and development
in rural areas. RRB as a mix of cooperative and commercial banks has certain
features:
• Provide easy and accessible banking
• Support and promote local artisans, MSMEs (Medium-Small Sized
Businesses), and agricultural farmers
• Mobilise regional nancial resources
• Operate on the district as well as state-level
RRB and its functions include:
• Extend loans to artisans, farmers, labourers, and MSMEs
• Accepting savings and other forms of deposits
• Distributional and disbursement of pension and wages
• Providing internet banking
• UPI services
• Provide credit facility in the agricultural department, renewable energy
sources, and cultural initiatives
The RRBs are owned by the state, central governments, and sponsoring banks.
The RRBs are often subjected to amalgamations which cause a uctuation in their
number over the country.

FOREIGN BANKS
The term "foreign bank" generally refers to any United States operation of a
banking organization headquartered outside of the U.S.The rst foreign banks
fi
fi
fi
ff
ff
fi
fi
fl
 established their presence in the United States in the mid-1800's, with New York
being the rst state to license or regulate these institutions. While state
governments took the lead in welcoming foreign banks to the United States, the
federal government has also acted to ensure that American markets are open to
banks from all nations.
Functions of foreign banks in India:
▪ Customer satisfaction enhancement
▪ Skill and technology transfer
▪ Banking sector competition enhancement
▪ Deepening of nancial system through contribution of money market and
foreign exchange by participation of foreign banks
▪ Expansion of modernised banking services
▪ Foreign currency provision to corporations enhancement
▪ International cash management services
▪ International loan syndications
▪ Trade nancing arrangement
▪ Foreign exchange arrangement
▪ Contributes to the growth of GDP

PAYMENT BANKS
De nition: A payments bank is like any other bank, but operating on a smaller
scale without involving any credit risk. In simple words, it can carry out most
banking operations but can’t advance loans or issue credit cards. It can accept
demand deposits (up to Rs 1 lakh), o er remittance services, mobile payments/
transfers/purchases and other banking services like ATM/debit cards, net banking
and third party fund transfers.
Features of Payments Banks:
Payments banks will do almost all the work that is currently being done by
commercial banks, but the payments banks will work under certain restrictions
like;
1. As the commercial banks, the payment banks will also accept the money of the
people as a deposit but the limit is xed, which means the payments banks can
accept deposits up to a maximum of Rs. 1 lakh from a customer.
2. Payments banks; will be entitled to issue ATM or debit cards to their customers
but cannot issue a credit card.
3. Payments banks; will be authorised to open both savings and current accounts
of their customers.
4. Payments banks cannot provide loans or lending services to customers.
5. Payments banks cannot accept deposits from the Non-Resident Indians (NRIs).
It means; the people of Indian origin who have settled abroad cannot deposit their
money in the payment banks.
6. Payments banks will be allowed to make personal payments and receive
remittances from the cross border on the current accounts.
7. Payments banks will have to deposit the amount in the form of a Cash Reserve
Ratio (CRR) with RBI as other commercial banks do.
8. Payments Banks will have to invest a minimum of 75% of its demand deposits
in government treasury/securities bills with maturity up to one year and hold a
fi
fi
fi
fi
fi
ff
 maximum of 25 %in currents and xed deposits with other commercial banks for
operational purposes.
9. Payment banks can provide the Facility of utility bill payments to its customers
and the general public.
10. Payments banks can not open subsidiaries to undertake Non-Banking
Financial Services activities.
11. Payments bank; with approval from RBI, can work as a partner with other
commercial banks and also can sell mutual funds, pension products, and
insurance products.
12. Payments banks must use the word "Payments Bank" in their names to look
di erent from other banks.
13. Payments banks will be allowed to provide internet banking and mobile
banking facility to their customers.

RESERVE BANK OF INDIA

The central bank of India, RBI is also regarded as a bank of banks owing to the
functions of RBI. It was established on April 1, 1935, under the Reserve Bank of
India Act, 1934. In the beginning, the headquarters of RBI was established in
Calcutta. However, soon after, in 1937, it was permanently shifted to Mumbai.
As of October 2021, the Governor of the Reserve Bank of India is Mr Shaktikanta
Das. He is the 25th RBI Governor and all the RBI functions are supervised by him.
De nition:
Reserve Bank of India (RBI) is India’s central bank. It controls the monetary policy
concerning the national currency, the Indian rupee. The basic functions of the RBI
are the issuance of currency, to sustain monetary stability in India, to operate the
currency, and maintain the country’s credit system.

Important Functions of RBI (Reserve Bank of India)

Being a central bank of India, RBI serves a critical role in regulating the nancial
transactions in the country. Some of the important functions of RBI are listed
below:
• Issue of Bank Notes
• Banker to the Government
• Custodian of the Cash Reserves of Commercial Banks
• Custodian of country’s forex reserves
• Lender of last resort
• Controller of credit
The Issuer of Bank Notes:
The most important function of RBI is the issuance of currency notes and coins,
except the one rupee note and coin which are issued by the Ministry of Finance.
All other notes bear the signature of the RBI Governor. However, the agency of
distribution of all notes and coins issued by the Government of India is the Reserve
Bank of India.
Banker to the Government:
Another chief function of RBI is that it takes care of the banking needs of the
government, which includes maintaining & operating the deposit accounts of the
government, collecting the receipts of funds, and making payments on behalf of
ff
fi
fi
fi
 the Government of India. It also represents the Indian Government, as a member
of the International Monetary Fund and the World Bank.
Custodian of Cash Reserves of Commercial Banks:
Commercial banks are required to maintain the cash reserves at a rate decided by
the RBI in its monetary policy.
Custodian of Foreign Exchange Reserve:
Another of the important functions of RBI is maintaining a reserve of foreign
currencies that enables the RBI to deal with any crisis situation.
Lender of the Last Resort:
Often regarded as the banker of banks, the RBI acts as a parent to all commercial
banks in India. Thus, it becomes the lender of the last resort for all banks when
they are in a crisis situation. RBI helps them by lending money, although at higher
RoI, to sail through the tide of nancial di culties.
Controller of credit:
RBI controls the credit created by the commercial banks in India, in accordance
with the economic priorities of the government of India. RBI uses quantitative and
qualitative methods to control and regulate the ow of money in the market. These
are implemented by announcing monetary policies at regular intervals. The
monetary policy involves the management of interest rates and money supply. The
central bank of India tweaks the money supply to achieve objectives such as
liquidity, in ation, and consumption.

Export-Import Bank of India (EXIM Bank)

Exim Bank was established by the Government of India, under the Export-Import
Bank of India Act, 1981 as a purveyor of export credit, mirroring global Export
Credit Agencies. Exim Bank serves as a growth engine for industries and SMEs
through a wide range of products and services. This includes import of technology
and export product development, export production, export marketing, pre-
shipment and post-shipment and overseas investment.
Exim Bank extends Lines of Credit (LOCs) to overseas nancial institutions,
regional development banks, sovereign governments and other entities overseas,
to enable buyers in those countries to import developmental and infrastructure
projects, equipment, goods and services from India, on deferred credit terms.
EXIM Bank has laid strong emphasis on enhancing project exports, the funding
options for which have been enhanced with introduction of the Buyer's Credit-
National Export Insurance Account (BC-NEIA) program.

Functions of the EXIM Bank

Let us take a look at some of the main functions of Export and Import Bank of
India bank:
1. Finances import and export of goods and services from India
2. It also nances the import and export of goods and services from countries
other than India.
3. It nances the import or export of machines and machinery on lease or hires
purchase basis as well.
4. Provides re nancing services to banks and other nancial institutes for their
nancing of foreign trade
fi
fi
fi
fl
fi
fi
ffi
fl
fi
fi
 5. EXIM bank will also provide nancial assistance to businesses joining a joint
venture in a foreign country.
6. The bank also provides technical and other assistance to importers and
exporters. Depending n the country of origin there are a lot of processes and
procedures involved in the import-export of goods. The EXIM bank will
provide guidance and assistance in administrative matters as well.
7. Undertakes functions of a merchant bank for the importer or exporter in
transactions of foreign trade.
8. Will also underwrite shares/debentures/stocks/bonds of companies engaged
in foreign trade.
9. Will o er short-term loans or lines of credit to foreign banks and
governments.
10. EXIM bank can also provide business advisory services and expert
knowledge to Indian exporters in respect of multi-funded projects in foreign
countries

Importance of the EXIM Bank

Other than providing nancial assistance, the Export and Import Bank of India
bank is always looking for ways to promote the foreign trade sector in India. In the
early 1990s, EXIM introduced a program in India known as the Clusters of
Excellence.
The aim was to improve the quality standards of our imports and exports. It also
has a tie-up with the European Bank for Reconstruction and Development. It has
agreed to co- nance programs with them in eastern Europe.
In order to promote exports EXIM bank also has schemes such as production
equipment nance program, export marketing nance, vendor development
nance, etc.

Write down the establishment year of all banks:

fi
ff
fi
fi
fi
fi
fi
 UNIT II
BANKER
A banker is nothing but an institution/corporation which works as a mediator in
various transactions and nancial a airs between people or business organizations
with di erent needs. Banks act as a connecting link or a bridge between the
funding population and the population which seeks money to fund their business
or other activities.
The origin of the word ‘Bank’ is in the German language, meaning a joint-stock
fund. As a nancial mediator, a bank accepts deposits from those who are willing
to keep their money with the safety of the bank & seek small extra money for future
needs. On the other end, the bank also lends money on loans to the needy and
gains interest on that loan. The country’s central bank works as a supervisor for all
other banks for regulation purposes and has some special functions &
responsibilities.

Functions of bank/banker
Two principal functions of banks are- accepting deposits and availing loans &
advances. We will discuss these two functions in quite detail in the following text:
1. Accepting deposits:
As mentioned earlier, banks accept money from the public or organizations/
businesses and provide services for on-demand withdrawal and interests. There
are primarily four types of deposit accounts as follows:
1. Saving deposit:
it is the simplest of all other types, and the important perk of this deposit account
is the facility for on-demand payment. Depositors also get a small amount of
interest on money deposited. Obligation to maintain a minimum balance amount
and restriction on the amount & number of withdrawals one can make are the
limitations of this account. This type is also known as a demand deposit.
2. Fixed deposit:
This type of deposit gets better interest, but a xed amount of money has to be
invested for a xed period. The depositor can not make withdrawals before the
maturity period. These are also called term/time deposits.
3. Recurring deposits:
This type of deposit, like xed deposits, does not support withdrawal before the
completion of the maturity period. This has a longer duration for maturity, and
deposits have to be made at regular intervals.
ff
fi
fi
fi
fi
ff
fi
 4. Current deposits:
Unlike other call types, these deposits are neither bound to any withdrawal
limitations nor provide any interest on deposits. These are usually used for
business purposes.
2. Availing loans & advances:
As mentioned earlier, banks use the money collected in the form of deposits to
o er loans with quite higher interests in return to the needy. Loans or advances
o ered by the bank are of the following types:
1. Cash credit facility:
Banks provide these short-term loans with higher interests to businesses, generally
against some assets as a security.
2. Overdraft facility:
This service is also provided against some collateral and applies to current
account holders. This facility enables bank users to have a current account for
withdrawals of the high amount at the cost of high interests.
3. Bill/invoice discounting:
This is the discounting facility provided to businesses by a bank against due
payments of organizations.
4. Loans:
Bank provides secured or unsecured loans to an individual like home loans, car
loans, education loans, etc. these can be long-term/short term, and payments to a
bank can be made in installments.
Other than these two principal functions, banks also deal with other work aiding
Government or organizations policies and nancial a airs. These are known as
secondary functions of a bank, and these can be grouped into two broad
categories-
1. Agency functions:
These include functions related to making bill payments, collection of due
payments, etc. following are some speci c examples of these functions-
• Periodic payments
• Periodic collection
• Fund transfer
• Cheques negotiation
• Advisory services
2. Utility functions:
These include services such as locker services, house taxes, pension, AEPS
withdrawal, etc.

Customer:
The expression ‘Customer’ in the simple sense means, one who transacts himself
with the bank subject to certain terms and conditions as imposed by the Banker. In
other words, a person, who maintains an account with the bank may be regarded
as customer.
The term ‘customer of a bank’ has not been de ned in the Banking Regulation Act,
1949 or any other Act. By the term it is generally understood or mean an account
holder of bank. But this general understanding of the term has been quali ed by
banking experts and judgements of law courts. Hence, there is no satisfactory
de nition for the term ‘customer’.
ff
ff
fi
fi
fi
fi
ff
fi
 RELATIONSHIP BETWEEN BANKER AND CUSTOMER

Introduction
The relationship between a Banker and a Customer is based on trust. In today’s
world, banks are considered a pivotal element for the economy of the country. It is
an e ective banking system that paves the way for the proper growth of the
economy. Customers avail di erent kinds of services from the bank. This article
critically analyses di erent types of relationship between customer and banker. It
also discusses di erent legislations that protect the interest of the banker and
customer and also provide proper remedies to them.
Di erent kind of relationship
• Relationship of debtor and creditor
When a customer opens a bank account with the bank, he lls the form and other
requisites compulsory for the same. When he deposits money in his bank account,
he becomes a creditor to the bank. The bank becomes the debtor. The obligations
of the bank to carry further business from the deposits of the consumer are solely
dependent on their own choice. The bank can invest that money according to their
own convenience. If the consumer wants to take back that money, then he needs
to follow a procedure of withdrawal.
• Relationship of pledger and pledgee
When a customer pledges an article (goods and documents) with the banker as a
security for the payment of debt or performance of the promise, the customer
becomes a pledger and the banker becomes the pledgee.
• Relationship of bailor and a bailee
Section 148 of the Indian Contract Act, 1872 de nes Bailment, bailor and bailee. A
“Bailment” is the transfer of goods from one person to another for some purpose,
upon a contract that they shall return the goods after completion of the purpose or
will dispose of the goods according to the direction agreed as per the terms and
conditions of the contract. The person delivering the good is called the bailor and
the person to whom the good is delivered is called the bailee. Banks secure their
advances by taking some tangible assets as securities. Sometimes they keep
valuable items, or land and other things as security. By doing so, the bank
becomes the baillie and the consumer becomes the bailor.
• Relationship of lesser and lesse
Section 105 of Transfer of Property Act, 1882 de nes lease, lessor, lesse, premium
and rent.
A lease of immovable property is transferred to the right to enjoy the property for a
certain period of time. The transferor is the lessor. The transferee is called the
lessee.
• Relationship of trustee and bene ciary
When a bank receives money or other valuable securities, then the banker’s
position is of a trustee. On the other hand, when a bank receives money and uses
it in various sectors, the bank becomes the bene ciary.

DEPOSITS
A deposit is a nancial term that means money held at a bank. A deposit is a
transaction involving a transfer of money to another party for safekeeping.
ff
ff
fi
ff
ff
ff
fi
fi
fi
fi
fi
 However, a deposit can refer to a portion of money used as security or collateral
for the delivery of a good.
Example of a Deposit
Deposits are also required on many large purchases, such as real estate or
vehicles, for which sellers require payment plans. Financing companies typically
set these deposits at a certain percentage of the full purchase price, and
individuals commonly know these kinds of deposits as down payments.

In the case of rentals, the deposit is called the security deposit. A security
deposit's function is to cover any costs associated with any potential damage
done to the property or asset rented during the rental period. A partial or a total
refund is applied after the property or the asset is veri ed at the end of the rental
period.

Types of Deposits
On the basis of purpose they serve, bank deposit accounts may be classi ed as
follows:
• Savings Bank Account
• Current Deposit Account
• Fixed Deposit Account
• Recurring Deposit Account
Let us see all of these in detail now!
Savings Bank Account
As the name suggests this type of account is suitable for people who have a
de nite income and are looking to save money. For example, the people who get
salaries or the people who work as laborers. This type of account can be opened
with a minimum initial deposit that varies from bank to bank. Money can be
deposited at any time in this account.
Withdrawals can be made either by signing a withdrawal form or by issuing a
cheque or by using an ATM card. Normally banks put some restriction on the
number of withdrawal from this account. Interest is allowed on the balance of
deposit in the account. The rate of interest on savings bank account varies from
bank to bank and also changes from time to time. A minimum balance has to be
maintained in the account as prescribed by the bank.
Current Deposit Account
Big businessmen, companies, and institutions such as schools, colleges, and
hospitals have to make payment through their bank accounts. Since there are
restrictions on the number of withdrawals from a savings bank account, that type
of account is not suitable for them. They need to have an account from which
withdrawal can be made any number of times.
Banks open a current account for them. Like a savings bank account, this account
also requires a certain minimum amount of deposit while opening the account. On
this deposit, the bank does not pay any interest on the balances. Rather the
account holder pays a certain amount each year as an operational charge.
These accounts also have what we call the overdraft facility. For the convenience
of the accountholders banks also allow withdrawal of amounts in excess of the
balance of the deposit. This facility is known as an overdraft facility. It is allowed to
fi
fi
fi
 some speci c customers and up to a certain limit subject to previous agreement
with the bank concerned.
Fixed Deposit Account
Some bank customers may like to put away money for a longer time. Such
deposits o er a higher interest rate. If money is deposited in a savings bank
account, banks allow a lower rate of interest. Therefore, money is deposited in a
xed deposit account to earn interest at a higher rate.
This type of deposit account allows the deposit to be made of an amount for a
speci ed period. This period of deposit may range from 15 days to three years or
more during which no withdrawal is allowed. However, on request, the depositor
can encash the amount before its maturity. In that case, banks give lower interest
than what was agreed upon. The interest on a xed deposit account can be
withdrawn at certain intervals of time. At the end of the period, the deposit may be
withdrawn or renewed for a further period. Banks also grant a loan on the security
of the xed deposit receipt.
Recurring Deposit Account
While opening the account a person has to agree to deposit a xed amount once
in a month for a certain period. The total deposit along with the interest therein is
payable on maturity. However, the depositor can also be allowed to close the
account before its maturity and get back the money along with the interest till that
period.
The account can be opened by a person individually, or jointly with another, or by
the guardian in the name of a minor. The rate of interest allowed on the deposits is
higher than that on a savings bank deposit but lower than the rate allowed on a
xed deposit for the same period.
The Recurring Deposit Accounts may be of the following types:
1. Home Safe Account or Money Box Scheme: For regular savings, the bank
provides a safe or box (Gullak) to the depositor. The safe or box cannot be
opened by the depositor, who can put money in it regularly, which is collected
by the bank’s representative at intervals and the amount is credited to the
depositor’s account. The deposits carry a nominal rate of interest.
2. Cumulative-cum-Sickness deposit Account: A certain xed sum is deposited
at regular intervals in this account. The accumulated deposits over time along
with interest can be used for payment of medical expenses, hospital charges,
etc.
3. Home Construction deposit Scheme/Saving Account: In this account, we can
deposit the money regularly either for the purchase or construction of a at or
house in future. The rate of interest o ered on the deposit, in this case, is
relatively higher than in other recurring deposit accounts.

KYC KNOW YOUR CUSTOMER GUIDLINESS

1. What is KYC? Why is it required?
KYC means “Know Your Customer”. It is a process by which banks obtain
information about the identity and address of the customers. This process helps to
ensure that banks’ services are not misused. The KYC procedure is to be
completed by the banks while opening accounts and also periodically update the
same.
2. What are the KYC requirements for opening a bank account?
fi
fi
fi
fi
ff
fi
ff
fi
fi
fi
fl
 To open a bank account, one needs to submit a Aadhaar/enrolment number and
PAN as ‘proof of identity and proof of address’ together with a recent photograph.
3. If I refuse to provide requested documents for KYC to my bank for opening an
account, what may be the result?
If you do not provide the required documents for KYC, the bank may not be able to
open your account.
4. Do I have to furnish KYC documents for each account I open in a bank even
though I have furnished the documents of proof of identity and address?
No, if you have opened an account with a bank, which is KYC compliant, then for
opening another account with the same bank, furnishing of documents is not
necessary.
5. Whether KYC is applicable for Credit/Debit/Smart/Gift cards?
Yes. Full KYC exercise is necessary for Credit/Debit/Smart/for purchaser of Gift
Cards and also in respect of add-on/ supplementary cards.
6. I do not have a bank account. But I need to make a remittance. Is KYC
applicable to me?
Yes. KYC exercise needs to be done for all those who want to make domestic
remittances of Rs. 50,000 and above and all foreign remittances.
7. Can I purchase a Demand Draft/Payment Order/Travellers Cheque against cash
without KYC?
Demand Draft/Payment Order/Travellers Cheques for Rs.50,000/- and above can
be issued only by way of debiting the customer's account or against cheques.
8. Do I need to submit KYC documents to the bank while purchasing third party
products (like insurance or mutual fund products) from banks?
Yes, all customers who do not have accounts with the banks (known as walk-in
customers) have to produce proof of identity and address while purchasing third
party products from banks if the transaction is for Rs.50,000 and above. KYC
exercise may not be necessary for bank’s own customers for purchasing third
party products. However, instructions to make payment by debit to customers’
accounts or against cheques for remittance of funds/issue of travellers’ cheques,
sale of gold/silver/platinum and the requirement of quoting PAN number for
transactions of Rs.50,000 and above would be applicable to purchase of third
party products from banks by bank’s customers as also to walk-in customers.
9. My KYC was completed when I opened the account. Why does my bank insist
on doing KYC again?
Banks are required to periodically update KYC records. This is a part of their
ongoing due diligence on bank accounts. The periodicity of such updation would
vary from account to account or categories of accounts depending on the bank’s
perception of risk. Periodical updation of records also helps prevent frauds in
customer accounts.
10. Are banks required to categorise their customers based on risk assessment?
Yes, banks are required to classify the customers into ‘low’, ‘medium’ and ‘high’
categories depending on their AML risk assessment.
11. Do banks inform customers about this risk categorisation?
No
12. What are the rules regarding periodical updation of KYC?
• Di erent periodicities have been prescribed for updation of KYC records
depending on the risk perception of the bank. KYC is required to be done
ff
 once in every two years for high risk customers, once in every eight years for
medium risk customers and once in every ten years for low risk customers.
This exercise would involve all formalities normally taken at the time of
opening the account.
• During the process, the following are carried out.
◦ PAN veri cation from the veri cation facility available with the issuing
authority and
◦ Authentication, of Aadhaar Number already available with the RE with
the explicit consent of the customer in applicable cases.
◦ In case identi cation information available with Aadhaar does not
contain current address an O cially Valid Documents (OVDs)
containing current address may be obtained.
◦ Certi ed copy of OVD containing identity and address shall be
obtained at the time of periodic updation from individuals not eligible
to obtain Aadhaar, except from individuals who are categorised as ‘low
risk’. In case of low risk customers when there is no change in status
with respect to their identities and addresses, a self-certi cation to
that e ect shall be obtained.
• Customers who are minors have to submit fresh photograph on becoming
major.
• REs may not insist on the physical presence of the customer for the purpose
of furnishing OVD or furnishing consent for Aadhaar authentication/O ine
Veri cation unless there are su cient reasons that physical presence of the
account holder/holders is required to establish their bona- des. Normally,
OVD/Consent forwarded by the customer through mail/post, etc., shall be
acceptable.

Types of Bank deposit customers

Banks open accounts for various types of customers like individuals, partnership
rm, Trusts, companies, etc. While opening the accounts, the banker has to keep
in mind the various legal aspects involved in opening and conducting those
accounts, as also the practices followed in conducting those accounts. Normally,
the banks have to deal with following types of deposit customers
1. Individuals
2. Joint Hindu Families
3. Partnership Firms
4. Limited Liability Companies
5. Clubs and Associations
6. Trusts
1. Individuals
The depositor should be properly introduced to the bank and KYC norms are to be
observed. Introduction is necessary in terms of banking practice and also for the
purpose of protection under section 131 of the Negotiable Instruments Act.
Usually, banks accept introductions from the existing customers, employee of the
bank, a locally well-known person or another bank.
A joint account may be opened by two or more persons and the account opening
form etc., should be signed by all the joint account holders. When a joint account
is opened in the name of two persons, the account operations may done by
fi
fi
fi
ff
fi
fi
fi
ffi
ffi
fi
fi
ffl
 • Either or survivor
• Both jointly
• Both jointly or by the survivor
• Former or survivor
When the Joint account is in the names of more than two person, then the
following operations are made:
• all of them jointly or by survivors
• any one of them or by more than one of them jointly
Non-resident individuals (NRIs)
Non-Resident Indian means, a person, being a citizen of India or a person of Indian
origin residing outside India. A person is considered Indian Origin when he or his
parents or any of his grand parents were Indian National. If at any time held an
Indian passport, (nationals of Bangladesh and Pakistan are not deemed to be of
Indian origin), a spouse (who is not a Bangladeshi or Pakistan national), of a
person of Indian origin shall also be deemed to be of Indian origin. Non-resident
falls generally into the following two categories:
• A person who stay abroad for the purpose of employment or to carry on
business activities or vocation or for any other purpose for an inde nite period
of stay outside India and
• Indian National working abroad for a speci c period.
Facilities for maintaining bank accounts are available in India to Indian National or
origin, living abroad. The exchange control procedures relating to these facilities
have been simpli ed. The details of various deposit schemes available to NRI’s are
as follows:
Various Types of NRI Accounts
▪ Ordinary Non-resident Rupee Accounts (NRO Accounts);
▪ Non-Resident (External) Rupee Accounts (NRE Accounts);
▪ Non-resident (Non-Repatriable) Rupee Deposits (NRNR Accounts); and
▪ Foreign Currency (Non-Resident) Accounts (Banks) Scheme (FCNR (B)
Accounts).
While NRO and NRE accounts can be kept in the form of current, savings bank,
recurring deposit or term deposit accounts, deposits under NRNR and FCNR (B)
schemes can be kept only in the form of term deposits for periods ranging from six
months to three years.

2. Joint Hindu Family (JHF):

Joint Hindu Family (JHF) (also known as Hindu Undivided family) is a legal entity
and is unique for Hindus. It has perpetual succession like companies; but it does
not require any registration. The head of JHF is the Karta and members of the
family are called co-parceners. The JHF business is managed by Karta.
3. Partnership rms
A partnership is not a legal entity independent of partners. It is an association of
persons. Registration of a partnership is not compulsory under Partnership Act.
However, many banks insist on registration of a partnership. In any case, ie
stamped partnership deed or Partnership letter should be taken when an account
is opened for a partnership. The partnership deed will contain names of the
fi
fi
fi
fi
 partners, objective of the partnership, and other operational details, which should
be taken note of by the bank in its dealings.
4. Joint stock companies (Limited Liability Companies)
A company is registered under companies Act has a legal status independent of
that of the share-holders. A company is an arti cial person which has perpetual
existence with limited liability and common seal. Memorandum and Articles of
Association, Certi cate of Incorporation, Resolution passed by the Board to open
account, name and designations of persons who will operate the account with
details of restriction placed on them are the essentials documents required
to open an account.
5. Clubs, Societies and Associations
The clubs, societies, association etc., may be unregistered or registered. Account
may be opened only if persons of high standing and reliability are in the managing
committee or governing body. Copy of certi cate of registration and Copy of bye-
law, certi ed to be the latest, by the Secretary/President are required to be
obtained and also a certi ed copy of the resolution of the Managing Committee/
Governing body to open the bank account and giving details of o ce bearers etc.,
to operate the account.
6. Trust Account:
Trusts are created by the settler by executing a Trust Deed. A trust account can be
opened only after obtaining and scrutinizing the trust deed. The Trust account has
to be operated by all the trustees jointly unless provided otherwise in the trust
deed. A trustee cannot delegate the powers to other Trustees except as provided
for in the Trust Deed. A cheque favoring the Trust shall not be credited to the
personal account of the Trustee.

SECURED AND UNSECURED ADVANCES

What is a Secured Loan?
A secured loan is a loan given out by a nancial institution wherein an asset is
used as collateral or security for the loan. For example, you can use your house,
gold, etc., to avail a loan amount that corresponds to the asset’s value. In the case
of a secured loan, the bank or nancial institution that is dispensing the loan will
hold on to the ownership deed of the asset until the loan is paid o .
Examples of secured loans
• Loan against property
• Home equity line of credit
• Car loan
What is an Unsecured Loan?
Unsecured loans, like the name suggests, is a loan that is not secured by a
collateral such as land, gold, etc. These loans are comparatively riskier to a lender
and therefore associated with a high interest rate. When a lender releases an
unsecured loan, he does so after evaluating your nancial status and assessing
whether or not you are capable of repaying your loan.
Examples of unsecured loans
• Credit cards
• Personal loans
• Student loans
fi
fi
fi
fi
fi
fi
fi
fi
ffi
ff
 Di erence Between Secured and Unsecured Loan (Secured vs Unsecured
loan)
• The most important di erence between a secured and unsecured loan is the
collateral required to attain the loan. A secured loan requires you to provide
the lender with an asset that will be used as a collateral for the loan. Whereas
and unsecured loan doesn’t require you to provide an asset as collateral in
order to attain a loan.
• Another key di erence between a secured and unsecured loan is the rate of
interest. Secured loans usually have a lower rate of interest when compared
to an unsecured loan. This is because unsecured loans are considered to be
risker loans by lenders than secured loans.
• Secured loans are easier to obtain while unsecured loans are harder to
obtain, as it is less risker for a banker to dispense a secured loan.
• Secured loans usually have longer repayment periods when compared to
unsecured loans. In general, secured loans o er a borrower a more desirable
contract that an unsecured loan would.
• Secured loans are easier to obtain for the mere fact that they are less risky for
a lender to give out, while unsecured loans are comparatively harder to
obtain.

PRINCIPLES OF SOUND LENDING

1. Safety
The most important golden rule for granting loans is the safety of funds.
The main reason for this that the very existence of the bank is dependent upon the
loans granted by him.
In case the bank does not get back the loans grated by it, it might fail.
A bank cannot and must not sacri ce the safety of its fund to get a higher rate of
interest.
2. Liquidity
The second important golden rule of the grant loan is liquidity. Liquidity means the
possibility of converting loans into cash without loss of time and money.
Needless to say, the funds with the bank out of which he lends money are
payable on demand or short notice.
As such a bank cannot e ort to block its funds for a long time.
Hence, the bank should lend only short term requirements like working capital.
The bank cannot and should not lend for long term requirements, like xed capital.
3. Return or Pro tability
It is another important principle. The funds of the bank should be invested to earn
the highest return, so that it may pay a reasonable rate of interest to its customers
on their deposits, reasonably good salaries to its employees and a good return to
its shareholders.
However, a bank should not sacri ce either safety or liquidity to earn a high rate of
interest.
Of course, if safety and liquidity in a particular case are equal, the banker should
lend its funds to aa person who o ers a higher rate of interest.
4. Diversi cation
One should not put all his eggs in one basket is a proverb which very clearly
explains this principle.
ff
fi
ff
fi
ff
ff
ff
fi
fi
ff
fi
 A bank should not invest all its funds in one industry. Incase that industry fails, the
banker will not be able to recover his loans.
Hence, the bank may also fail. According to the principle of diversi cation, the
bank should diversify its investments in di erent industries and should give loans
to di erent borrowers in one industry.
It is less probable that all the borrowers and industries will fail at one and at the
same time.
5. Object of Loan
A banker should thoroughly examine the object for which his client is taking loans.
This will enable the bank to assess the safety and liquidity of its investment. A
banker should not grant loans for unproductive purposes or to buy the xed
assets.
The bank may grant loans to meet working capital requirements.
However, after the nationalization of banks, the banks have started granting loans
to meet loan term requirements.
As per prudent banking policy, it is not desirable because of term lending by
banks a large number of banks had failed in Germany.
6. Security
A banker should grant secured loans only. In case the borrower fails to return the
loan, the banker may recover his loan after realizing the securing.
In the case of unsecured loans, the chances of bad debts will be very high.
However, the bank may have to relax the condition of security in order to comply
with the economic policy of the government.
8. National Interest
Banks were nationalized in India to have social control over them.
As such, they are required to invest a cetin percentage of loans and advances in
priority sectors, viz, agriculture, small scale, and tiny sector, and export-oriented
industries, etc.
Again, the Reserve Bank also gives directives in this respect to the scheduled
banks from time to time.
The banks are under obligation to comply with those directives.
9. The Character of the Borrower
last but not the least, the bank should carefully examine the character of the
borrower.
Character implies honesty, integrity, creditworthiness, and capacity of the borrower
to return the loan.
In case a person fails to verify the character of the borrower, the loans and
advances might become bad debts for the bank.

Various modes of creating a charge by bank are:

Pledge:
Pledge is said to be a bailment of goods as security for payment of a debt or
performance of a promise. Pledged is the borrower who pledges the property and
pledgee is the person with whom the property in pledged. Two important features
of pledge are delivery of goods and return of goods.
Ownership of goods is not given and only possession over the goods is given,
when goods are pledged. The pledger remains the owner of the property. This
method is said to be very popular and simple in order to secure a charge on the
ff
ff
fi
fi
property. The bank has the right to retain the security only in case of a particular
debt for which goods are pledged.
Hypothecation:
It is a mode that creates charge on goods or related documents without
surrendering the possession of goods. It is a legal transaction where goods may
be made available as security for a debt without transferring the property or
possession to the lender. It is the borrower who keeps the possession of
hypothecated goods. For the debt amount, an equal charge is created on the
goods.
Hypothecator is the borrower who hypothecates the goods and hypothecates is
the lender. The borrower performs this method by using a document in favor of the
lender called letter of hypothecation. Letter states that the said goods or property
are at order and disposition of the lender until the debt is cleared. This method is
said to be a risky one and that is why regular inspection and physical veri cation
should be done of the hypothecated goods by the bank.
Mortgage:
It means transferring interest in a speci c immovable property by one person to
another with a vie to secure an advance of money. Mortgagor is the transferor and
mortgagee is the transferee. Mortgage deed is said to bean instrument with the
help of which the mortgage is e ected. Mortgage money means the advance of
money by which the mortgage is e ected.
It is not necessary that possession of the property is always transferred to the
mortgagee. Possession remains with the mortgagor. Mortgagee has the right, as
per which he can sell of the property and recover his loan. Interest that lies in the
property is conveyed to the mortgagor, when amount of loan with the interest is
repaid by the borrower.
Mortgage is of many types simple mortgage, usufructuary mortgage, English
mortgage, mortgage by conditional sale, anomalous mortgage and equitable
mortgage.

SECURITY
VARIOUS KINDS OF SECURITIES
Bank accepts various kinds of tangible assets as security after creating the charge.
Some important types of securities are as under:
1. LAND & BUILDING/REAL ESTATE
It is common security accepted by the banks. During the lending bank mortgaged/
creation of charged the landed property in favour of the bank. The advantage of
these types of securities is that their value generally increases over time. It is xed
and cannot be shifted to another place. It can be freehold or leasehold property.
Valuation of the property is required for acceptance as a security in the loan
account. The advantages and disadvantages of this form of security cannot be
universally applied to all lands and it depends on the nature of the land o ered. We
shall now discuss both the advantages and disadvantages.
ADVANTAGES:
The advantage of collateral security of Land & Building are as under;
(i) The advantage that land has over other types of securities is that its value
generally increases with time. With every fall in the value of money, the value of
ff
ff
fi
ff
fi
fi
 land goes up, and due to its scant availability in developing areas, its value is
bound to increase.
ii) It cannot be shifted, a fact which sometimes is also a disadvantage.
(iii) The securitisation of the mortgaged property can be done without court
intervention under SARFAESI Act 2002.
DISADVANTAGES:
The disadvantage of collateral security of Land & Building are as under;
(I) VALUATION IS AT TIMES DIFFICULT:
The value of a building depends on several factors such as location, size of
property, amenities, etc., this makes the valuation very di cult. Buildings and the
materials used in the buildings are not alike. Buildings must be valued on a
conservative basis because of the limited market in the event of a sale.
(II) ASCERTAINING THE TITLE OF THE OWNER:
The banker cannot obtain a proper title unless the borrower himself has title to the
property to be mortgaged. In India, the laws of succession particularly those
relating to Hindus and Muslims being very complicated, it is di cult to ascertain
whether a person has a perfect title to the property or not. Title veri cation must
also be done to know whether the property was encumbered. Bank’s advocate has
to be done by verifying records with the Registrar’s o ce, which involves expense
and time. In the case of agricultural land, with the introduction of land ceiling
legislation, legislation protecting the tenants’ rights, absence of up-to-date and
proper land records, it has become less valuable as security.
(III) DIFFICULT TO REALIZE THE SECURITY:
Land is not easily and quickly realizable, due to the lack of a ready market. It may
take months to sell and sometimes if the market is not favourable, it may fetch a
lower price than what was anticipated. After the SARFAESI Act 2002, now the
bank can securitize the mortgaged property without the intervention of the court.
(IV) CREATING A CHARGE IS COSTLY:
The security can be charged either by way of a legal mortgage or by way of an
equitable mortgage. An equitable mortgage may be created by a simple deposit of
title deeds with or without a memorandum. Since the remedies under a legal
mortgage are better than those under an equitable mortgage. However, completing
a legal mortgage involves expenses including stamp duty and a lot of formalities.

LEIN
What is a Lien?
The term lien refers to a legal claim or legal right which is made against the assets
that are held as collaterals for satisfying a debt. A lien can be established by a
creditor or a legal judgement. The purpose of the lien is to guarantee an underlying
obligation such as the repayment of the loan. In case the borrower fails to satisfy
this underlying obligation, the lender or the creditor has the legal right to seize the
asset that is subject of the lien. Many types of liens are used to secure assets.
The three main types of lien are bank, real estate and tax. When it comes to
property, the contract on the property needs to be paid. In case the contract is not
paid, the lender has the legal right to seize the property as well as to sell the
property. Liens can be of various types depending on who they are generated by. A
creditor, legal judgement or tax authority can generate a lien.
How does a Lien work?
ffi
ffi
ffi
fi
 When giving out a loan to a borrower, the creditor is always faced with a risk that
the borrower may fail to repay the given amount on time or just won’t repay it at all.
To avoid this, the concept of a lien is considered to be highly useful. A lien
provides the creditor with the legal rights to seize and sell the collateral assets or
property which is the subject of the lien without the consent of the lien holder or
the borrower. When the lien is granted on an inventory or any other un xed
property, it is known as a oating lien.
Although, liens are often voluntary and consensual like the lien on the property for
a loan, there also exist involuntary or statutory liens. Involuntary liens are where the
creditor or the lender seeks a legal action against the borrower for nonpayment of
the loan. After such legal action is taken, a lien can be placed on assets including
property as well as bank accounts.
Some liens are also led with the government in an e ort to let the public know
that the lienholder has an interest on the property or on the asset. Having a public
record of a lien helps the people to know that a particular asset or property is
subject to a lien and if they are interested to buy that particular asset or property,
the lien rst needs to be released as the asset or property cannot be sold with the
lien. This is something that will help all the interested buyers to know about the
nancial record of the asset or the property before making a decision of buying it.

What are the di erent types of Liens?

Now that we know what the term lien stands for and we have seen how it works
and why it is important in the nancial world, it is time to learn about the di erent
types of liens that are out there. As discussed above, there are many types of liens
and lien holders. A lien can be placed by governments, nancial institutions, as
well as by small businesses. We are going to see ve of the most common types of
liens, which are bank lien, judgement lien, mechanic’s lien, real estate lien, and tax
lien. To understand each of these types better let us go through each one of them
individually.
1. Bank Lien Bank lien is the lien which is often granted when the individual
takes a loan from a bank to purchase an asset. For instance, you borrow a
loan from a bank to buy yourself a car. The price of the car will be paid by the
loan amount. This gives the bank the legal right to grant lien on the car. Now,
in case you fail to repay the loan and interest that was promised at the time of
borrowing the loan, the bank has the right to take the asset that is the car,
into their possession. However, if you successfully pay o the loan on time,
the bank will release the lien and you will become the rightful owner of the
car.
2. Judgement lien When a lien is placed on the asset by the court, usually as a
result of a lawsuit, it is referred to as a judgement lien. This judgement lien
can be helpful to the defendant in getting paid back in a nonpayment case by
liquidating the assets of the accused.
3. Mechanic’s lien The lien attached to real property in case the owner fails to
pay a contractor for the services he has rendered is referred to as a
mechanic’s lien. In case the owner never goes through with the payment, the
contractor has every right to take the debtor to the court and get a judgement
in which usually the property or assets are auctioned o to pay the lien
holder.
fi
fi
ff
fi
fl
fi
fi
ff
ff
fi
ff
fi
ff
 4. Real estate lien The legal right to seize or sell a real estate property on
nonful llment of a contract is referred to as a real estate lien. In case you
borrow a loan from a bank in order to buy a house, a lien is placed on the
house by the bank until you pay o the mortgage. If you fail to repay the
mortgage the bank has the legal rights to seal your property.
5. Tax liens Tax liens are the liens created by law. The law often allows tax
authorities to put liens on properties of taxpayers who do not pay the taxes
on time.

PLEDGE
A Pledge is a process in which when an individual or group of individuals go to a
bank or any other nancial institution to avail of the loan, the bank asks for the
possession that the borrower has by himself, and keeps it to the bank. The
possessions can not be any property or lounges, they can be papers such as
certi cates and goods.
The major di erence is that the security that is seized by the bank or any other
nancial institution can only be movable goods or objects. The seized security
possession is kept under the bank until the borrower pays the entire debt
completely.
This term “pledge” is discussed in Section 172 of the Indian Contract Act enacted
in 1872.
The Indian Contract Act de nes what is bailments. The bailment is the process of
delivery of objects where there are terms and conditions applied to each good with
some purpose, when that purpose of the lending money is completed or
accomplished, then the pledged goods will be returned to the bailer.
The pledgee which is the bank here has the right to sell the possessions seized
from the borrower without worrying about informing the court and any
interventions if the borrower is not been able to repay the bank loan.

MORTGAGE
What is a Mortgage Loan?

Mortgage refers to the process of o ering something as a guarantee or collateral

against a loan. One may come across the term when looking for secured loans.
Generally, home loans of all types are secured loans. The borrower must o er their
property as a security to the lender. The property mortgaged acts as collateral until
the borrower has repaid the loan in full. Mortgage loans are also commonly known
as loans against property.
A mortgage loan can be used to either buy or build a house or re nance a
property. Re nancing refers to getting a new loan for a property while the original
loan is still being repaid. It is usually done to get a loan with better terms.
Types of Mortgage

Di erent types of mortgages are available to prospective borrowers. Before you

accept one, it is best to know your options and ensure that you are making the
best choice. Here are the types of mortgages you should know about.
Simple Mortgage
fi
ff
fi
fi
fi
ff
fi
fi
ff
ff
fi
ff
A simple mortgage is an agreement that if the borrower is unable to repay the loan
in full, the lender can sell the property that was o ered as collateral and recover
their amount. However, the property is not transferred to the lender.
Usufructuary Mortgage

In this case, the property is transferred to the lender, who can then earn pro ts
from the same. Usufructuary mortgage usually does not o er full ownership but
rather a temporary right.
English Mortgage

The collateral can come under the possession of the lender if the borrower fails to
make full repayment of the loan during the tenure originally agreed upon.
Sub Mortgage

If a prospective borrower has a less than ideal credit history or a low credit score
and the lender would like to o er a loan, they tend to do so at higher interest rates.
It is done to ensure recovery of their money in case the borrower failed to make
payments. These are termed as sub mortgage loans.
Mortgage Loan Process

The process of applying for a mortgage, or a loan against property, is broadly

similar across all available avenues. Before starting your mortgage loan process,
make sure that it is the right option for you. Di erent banks will o er di erent
repayment tenures, interests, and so on. Researching your options beforehand is
essential.
Once you shortlist the banks you can apply to, check their eligibility criteria and
application requirements. If you are eligible, gather all the required documents. It
usually includes your proof of identity, address, and income, as well as come
property-related documents. Some banks may o er the option to apply online, but
in most cases, you may be able to visit the nearest branch.
The application may take anywhere between three to 10 days, depending on your
eligibility.

ASSIGNMENT
What Is an Assignment?
Assignment most often refers to one of two de nitions in the nancial world:

• The transfer of an individual's rights or property to another person or

business. This concept exists in a variety of business transactions and is
often spelled out contractually.
• In trading, assignment occurs when an option contract is exercised. The
owner of the contract exercises the contract and assigns the option writer to
an obligation to complete the requirements of the contract.
Property Rights Assignment
Assignment refers to the transfer of some or all property rights and obligations
associated with an asset, property, contract, etc. to another entity through a
written agreement. For example, a payee assigns rights for collecting note
ff
ff
fi
ff
ff
ff
fi
ff
ff
fi
 payments to a bank. A trademark owner transfers, sells, or gives another person
interest in the trademark. A homeowner who sells their house assigns the deed to
the new buyer.
To be e ective, an assignment must involve parties with legal capacity,
consideration, consent, and legality of object.

Examples
A wage assignment is a forced payment of an obligation by automatic withholding
from an employee’s pay. Courts issue wage assignments for people late with child
or spousal support, taxes, loans, or other obligations. Money is automatically
subtracted from a worker's paycheck without consent if they have a history of
nonpayment. For example, a person delinquent on $100 monthly loan payments
has a wage assignment deducting the money from their paycheck and sent to the
lender. Wage assignments are helpful in paying back long-term debts.

Another instance can be found in a mortgage assignment. This is where a

mortgage deed gives a lender interest in a mortgaged property in return for
payments received. Lenders often sell mortgages to third parties, such as other
lenders. A mortgage assignment document clari es the assignment of contract
and instructs the borrower in making future mortgage payments, and potentially
modi es the mortgage terms.

A nal example involves a lease assignment. This bene ts a relocating tenant

wanting to end a lease early or a landlord looking for rent payments to pay
creditors. Once the new tenant signs the lease, taking over responsibility for rent
payments and other obligations, the previous tenant is released from those
responsibilities. In a separate lease assignment, a landlord agrees to pay a creditor
through an assignment of rent due under rental property leases. The agreement is
used to pay a mortgage lender if the landlord defaults on the loan or les for
bankruptcy. Any rental income would then be paid directly to the lender.

Options Assignment
Options can be assigned when a buyer decides to exercise their right to buy (or
sell) stock at a particular strike price. The corresponding seller of the option is not
determined when a buyer opens an option trade, but only at the time that an
option holder decides to exercise their right to buy stock. So an option seller with
open positions is matched with the exercising buyer via automated lottery. The
randomly selected seller is then assigned to ful ll the buyer's rights. This is known
as an option assignment.

Once assigned, the writer (seller) of the option will have the obligation to sell (if a
call option) or buy (if a put option) the designated number of shares of stock at the
agreed-upon price (the strike price). For instance, if the writer sold calls they would
be obligated to sell the stock, and the process is often referred to as having the
stock called away. For puts, the buyer of the option sells stock (puts stock shares)
to the writer in the form of a short-sold position.

Example
fi
fi
ff
fi
fi
fi
fi
 Suppose a trader owns 100 call options on company ABC's stock with a strike
price of $10 per share. The stock is now trading at $30 and ABC is due to pay a
dividend shortly. As a result, the trader exercises the options early and receives
10,000 shares of ABC paid at $10. At the same time, the other side of the long call
(the short call) is assigned the contract and must deliver the shares to the long.

Hypothecation
What Is Hypothecation?
Hypothecation occurs when an asset is pledged as collateral to secure a loan. The
owner of the asset does not give up title, possession, or ownership rights, such as
income generated by the asset. However, the lender can seize the asset if the
terms of the agreement are not met. Hypothecation is di erent from a mortgage,
lien, or assignment.
Hypothecation in Mortgages
Hypothecation occurs most commonly in mortgage lending. A mortgage is a type
of loan that's secured by an underlying property. The borrower technically owns
the house, but because the house is pledged as collateral, the mortgage lender
has the right to seize the house if the borrower cannot meet the repayment terms
of the loan agreement—which occurred during the foreclosure crisis.
Auto loans are similarly secured by the underlying vehicle. Unsecured loans, on the
other hand, do not work with hypothecation because there is no collateral to claim
in the event of default. As hypothecation provides security to the lender because of
the collateral pledged by the borrower, it is easier to secure a loan, and the lender
may o er a lower interest rate than on an unsecured loan.

CASH CREDIT
What is Cash Credit?
A Cash Credit (CC) is a short-term source of nancing for a company. In other
words, a cash credit is a short-term loan extended to a company by a bank. It
enables a company to withdraw money from a bank account without keeping a
credit balance. The account is limited to only borrowing up to the borrowing limit.
Also, interest is charged on the amount borrowed and not the borrowing limit. To
learn more, check out CFI’s Credit Analyst Certi cation program.
Important Features of Cash Credit
1. Borrowing limit
A cash credit comes with a borrowing limit determined by the creditworthiness of
the borrower. A company can withdraw funds up to its established borrowing limit.
2. Interest on running balance
In contrast with other traditional debt nancing methods such as loans, the interest
charged is only on the running balance of the cash credit account and not on the
total borrowing limit.
3. Minimum commitment charge
The short-term loan comes with a minimum charge for establishing the loan
account regardless of whether the borrower utilizes the available credit. For
example, banks typically include a clause that requires the borrower to pay a
minimum amount of interest on a predetermined amount or the amount withdrawn,
whichever is higher.
4. Collateral security
ff
fi
fi
fi
ff
 The credit is often secured using stocks, xed assets, or property as collateral.
5. Credit period
Cash credit is typically given for a maximum period of 12 months, after which the
drawing power is re-evaluated.
Example of Cash Credit
Company A is a phone manufacturer and operates a factory where the company
invests money to purchase raw materials to convert them into nished goods.
However, the nished goods inventory is not immediately sold. The company’s
capital is stuck in the form of inventory. In order for Company A to meet its
expenses while waiting for its nished goods inventory to convert into cash, the
company takes a cash credit loan to run its business without a shortfall.
Advantages of Cash Credit
1. Source of working capital nancing
A cash credit is an important source of working capital nancing, as the company
need not worry about liquidity issues.
2. Easy arrangement
It can be easily arranged by a bank, provided that collateral security is available to
be pledged and the realizable value of such is easily determined.
3. Flexibility
Withdrawals on a cash credit account can be made many times, up to the
borrowing limit, and deposits of excess cash into the account lower the burden of
interest that a company faces.
4. Tax-deductible
Interest payments made are tax-deductible and, thus, reduce the overall tax
burden on the company.
5. Interest charged
A cash credit reduces the nancing cost of the borrower, as the interest charged is
only on the utilized amount or minimum commitment charge.
Disadvantages
1. High rate of interest
The interest rate charged by a loan on cash credit is very high compared to
traditional loans.
2. Minimum commitment charges
A minimum commitment charge is imposed on the borrower regardless of whether
the company utilizes its cash credit or not.
3. Di culty in securing
The short-term loan is extended to the borrower depending on the borrower’s
turnover, accounts receivable balance, expected performance, and collateral
security o ered. Therefore, it can be di cult for new companies to obtain.
4. Temporary source of nance
The loan is a short-term source of nancing. A company cannot rely on it for an
extended period of time. After the expiration of the loan, it must be renewed under
new terms and conditions.

OVERDRAFT
What Is an Overdraft?
An overdraft occurs when there isn't enough money in an account to cover a
transaction or withdrawal, but the bank allows the transaction anyway. Essentially,
ffi
ff
fi
fi
fi
fi
fi
fi
ffi
fi
fi
fi
it's an extension of credit from the nancial institution that is granted when an
account reaches zero. The overdraft allows the account holder to continue
withdrawing money even when the account has no funds in it or has insu cient
funds to cover the amount of the withdrawal.

Basically, an overdraft means that the bank allows customers to borrow a set
amount of money. There is interest on the loan, and there is typically a fee per
overdraft. At many banks, an overdraft fee can run upwards of $35.
Overdraft Protection
Some but not all banks will pay overdrafts automatically, as a courtesy to the
customer (while charging fees, of course.) Overdraft protection provides the
customer with a further tool to prevent embarrassing shortfalls that re ect poorly
on your ability to pay.

Usually, it works by linking your checking account to a savings account, other

checking account, or a line of credit. If there's a shortfall, this source gets tapped
for the funds, ensuring that you won't have a check returned or a transaction/
transfer declined. It also avoids triggering a non-su cient funds (NSF) charge.

The dollar amount of overdraft protection varies by account and by bank. Often,
the customer needs to speci cally request it. There are a variety of pros and cons
to using overdraft protection, but one thing to bear in mind is that banks aren't
providing the service out of the goodness of their hearts. They usually charge a fee
for it.

As such, customers should be sure to rely on overdraft protection sparingly and

only in an emergency. If the overdraft protection is used excessively, the nancial
institution can remove the protection from the account.

What Is an Overdraft Fee?

An overdraft is a loan provided by a bank that allows a customer to pay for bills
and other expenses when the account reaches zero. For a fee, the bank provides a
loan to the client in the event of an unexpected charge or insu cient account
balance. Typically these accounts will charge a one-time funds fee and interest on
the outstanding balance.

BANK GRAUNTEE
What Is a Bank Guarantee?
A bank guarantee is a type of nancial backstop o ered by a lending institution.
The bank guarantee means that the lender will ensure that the liabilities of a debtor
will be met. In other words, if the debtor fails to settle a debt, the bank will cover it.
A bank guarantee enables the customer (or debtor) to acquire goods, buy
equipment, or draw down a loan.
Types of Bank Guarantees
A bank guarantee is for a speci c amount and a predetermined period of time. It
clearly states the circumstances under which the guarantee is applicable to the
contract. A bank guarantee can be either nancial or performance-based in nature.
fi
fi
fi
fi
fi
ff
ffi
ffi
fl
fi
ffi
 In a nancial bank guarantee, the bank will guarantee that the buyer will repay the
debts owed to the seller. Should the buyer fail to do so, the bank will assume the
nancial burden itself, for a small initial fee, which is charged from the buyer upon
issuance of the guarantee.
For a performance-based guarantee, the bene ciary can seek reparations form the
bank for non-performance of the obligation as laid out in the contract. Should the
counterparty fail to deliver on the services as promised, the bene ciary will claim
their resulting losses from non-performance to the guarantor – the bank.
For foreign bank guarantees, such as in international export situations, there may
be a fourth party – a correspondent bank that operates in the country of domicile
of the bene ciary.

LETTER OF CREDIT
What Is a Letter of Credit?
A letter of credit, or a credit letter, is a letter from a bank guaranteeing that a
buyer’s payment to a seller will be received on time and for the correct amount. If
the buyer is unable to make a payment on the purchase, the bank will be required
to cover the full or remaining amount of the purchase. It may be o ered as a
facility.

Due to the nature of international dealings, including factors such as distance,

di ering laws in each country, and di culty in knowing each party personally, the
use of letters of credit has become a very important aspect of international trade.

Types of Letters of Credit

The types of letters of credit include a commercial letter of credit, revolving letter of
credit, traveler’s letter of credit, and con rmed letter of credit.

Commercial Letter of Credit

This is a direct payment method in which the issuing bank makes the payments to
the bene ciary. In contrast, a standby letter of credit is a secondary payment
method in which the bank pays the bene ciary only when the holder cannot.

Revolving Letter of Credit

This kind of letter allows a customer to make any number of draws within a certain
limit during a speci c time period.

Traveler’s Letter of Credit

For those going abroad, this letter will guarantee that issuing banks will honor
drafts made at certain foreign banks.

Con rmed Letter of Credit

A con rmed letter of credit involves a bank other than the issuing bank
guaranteeing the letter of credit. The second bank is the con rming bank, typically
the seller’s bank. The con rming bank ensures payment under the letter of credit if
the holder and the issuing bank default. The issuing bank in international
transactions typically requests this arrangement.
fi
ff
fi
fi
fi
fi
fi
fi
fi
ffi
fi
fi
fi
fi
fi
ff
 UNIT IV

What is insurance?
Insurance is a way to manage your risk. When you buy insurance, you purchase
protection against unexpected nancial losses. The insurance company pays you
or someone you choose if something bad happens to you.

Nature of Life Insurance:

There are di erent types of life insurance plans that you can choose from. While
some o er only life cover, others can o er a savings element as well, which is
disbursed as a maturity bene t. So, to understand the exact nature of life
insurance, you need to understand the various types as each type varies from the
other.
• Term Insurance Plans
A term plan is purchased for a xed policy tenure (that can go up to 80 years).
Under a pure protection term plan, the policyholder purchases only life cover.
In case of the death of the insured, a death bene t is payable. In case the
individual survives the policy, no bene t is paid out.
• Term Return Of Premium Plans (TROP)
A term return of premium plan, as the name suggests, is a savings cum life
cover plan. In case the policyholder expires during the tenure, the nominee
receives a death bene t. However, if the policyholder survives the tenure, he/
she receives all the premiums paid that have been paid so far.
• Money Back Plans
A money-back insurance plan ensures you get a regular income along with
guaranteed life cover. You can choose to get the income at regular intervals or
speci c stages of life by paying a regular premium. Apart from this, the
policyholder may also get a maturity bene t if he/ she survives the policy
tenure. The nominee receives the death bene t in case the insured individual
dies during the tenure.
fi
ff
ff
fi
fi
fi
fi
fi
ff
fi
fi
fi
 • Child Insurance Plans
A child insurance plan comes with a savings unit that lets you plan your
child's future nancial needs. The policyholder (parents) gets a life cover, and
one part of the premium is saved for the child's future nancial goals, like a
wedding or higher education.
• Unit-Linked Insurance Plans (ULIP)
If you are looking for a life cover that also lets you invest, ULIPs are an ideal
choice. One part of the premium gives you life cover, while the other part is
invested in market-linked investment, which could be in the equity or the debt
market or a combination of the two based on your choice. However, ULIPs
have a lock-in period of 5 years.
• Endowment Plans
An endowment plan gives both life cover and savings opportunities. One part
of the premium is saved for a lump sum maturity bene t, and the other is
invested for a life cover. The insured individual receives the maturity bene t if
he/she survives the tenure. If not, the family/nominee receives the death
bene t of the plan.
• Whole Life Policy
A whole life policy is a life insurance plan that covers an insured till the time
they turn 99/100 years. In case the insured passes away during the tenure,
the family behind receives a death bene t. Because they have long-term/
whole life cover, these are known as whole life cover.
• Retirement Plans
A retirement plan, as the name suggests, is an ideal one for individuals
planning their retirement provides. It o ers a life insurance cover and pays a
lump sum death bene t to the nominee in case the insured passes away.
Apart from this, one part of the premium is also used to provide a regular
source of income as an annuity that may be immediate or deferred.
• Group Life Insurance Plans
Most popular in the employment sector, a group life insurance plan covers all
the members of a group. All the group members collectively pay the premium
and receive life cover under one single plan.

Bene ts and scope of life insurance:

The death of a family member can be devastating, and if the deceased was an
earning member, the nancial burden on the family could be ruinous. A life
insurance plan, therefore, is nothing less than a basic necessity for every
household. The bene ts of a life insurance policy are far too many. The top 5
bene ts are listed below to de ne the overall scope of life insurance:
• Secure your family’s goals
As the primary earner of the family, plenty of responsibilities lie on your
shoulders. If something unfortunate happens to you, the death bene t
received by your family will help them sustain a comfortable lifestyle. Thus,
opting for adequate life insurance coverage, choosing a suitable sum assured
is essential for the family’s security.
fi
fi
fi
fi
fi
fi
fi
fi
ff
fi
fi
fi
fi
fi
 • Protect the children’s future
You work hard to provide the best of everything for your children. A life
insurance plan allows you to secure the dreams and aspirations of your child
even if you are no longer around. Most child insurance plans come with a
premium waiver bene t. So, if you happen to die within the policy tenure, i.e.
before your child completes his/her education, the insurer would pay for the
remaining premiums and the policy would continue as per original schedule
and the maturity bene ts would be provided to the child as de ned. This
would help to fund the child’s education without any nancial woes.
• Takes care of your liabilities
The various loans and liabilities that you take to make your life comfortable
may become burdensome for your family in your absence. The sum assured
would be bene cial in repaying them. Thus, most high value loans, such as
home loans, are usually coupled with loan protection insurance plans.
• Gear up for the future
With an annuity-based plan or other savings schemes, you can enjoy the dual
bene ts of insurance as well as wealth creation. Thus, insurance could be
easily combined with the family’s nancial plan.
• Tax bene ts
Yet another major bene t that you can avail of is tax saving. You can get tax
bene ts of up to INR 1.5 lakhs on the premium that you pay towards the
insurance policy as per Section 80C of the Income Tax Act. Also, the death/
maturity bene ts received by your nominee would be tax-free under Section
10(10D).

Principles of Insurance
In insurance, there are 7 basic principles that should be upheld, ie Insurable
interest, Utmost good faith, proximate cause, indemnity, subrogation, contribution
and loss of minimization.
1. Principle of Utmost Good Faith
This is a primary principle of insurance. According to this principle, you have to
disclose all the information that is related to the risk, to the insurance company
truthfully.
You must not hide any facts that can have an e ect on the policy from the insurer.
If some fact is disclosed later on, then your policy can be cancelled. On the other
hand, the insurer must also disclose all the features of a life insurance policy.
2. Principle of Insurable Interest
According to this principle, you must have an insurable interest in the life that is
insured. That is, you will su er nancially if the insured dies. You cannot buy a life
insurance policy for a person on whom you have no insurable interest.
3. Principle of Proximate Cause
While calculating the claim for a loss, the proximate cause, i.e., the cause which is
the closest and the main reason for a loss should be considered.
Though it is a vital factor in all types of insurance, this principle is not used in Life
insurance.
4. Principle of Subrogation
fi
fi
fi
fi
fi
fi
fi
fi
ff
fi
fi
ff
fi
fi
 This principle comes into play when a loss has occurred due to some other
person/party and not the insured. In such a case, the insurance company has a
legal right to reach that party for recovery.
5. Principle of Indemnity
The principle of indemnity states that the insurance will only cover you for the loss
that has happened. The insurer will thoroughly inspect and calculate the losses.
The main motive of this principle is to put you in the same position nancially as
you were before the loss. This principle, however, does not apply to life insurance
and critical health policies.
6. Principle of Contribution
According to the principle of contribution, if you have taken insurance from more
than one insurer, both insurers will share the loss in the proportion of their
respective coverage.
If one insurance company has paid in full, it has the right to approach other
insurance companies to receive a proportionate amount.
7. Principle of Loss Minimisation
You must take all the necessary steps to limit the loss when it happens. You must
take all the necessary precautions to prevent the loss even after purchasing the
insurance. This is the principle of loss minimization.

Basic Functions of Insurance

It is important to understand that an insurance policy has both a nancial and an
emotional aspect for the policyholder. There are certain functions that an insurance
company must promise to take care of while they are nalising the contract with
the insured party. We will attempt to explain those functions below:
• To provide safety and security to the insured – One of the prime reasons for
entering into an insurance contract is to seek nancial security in the event of
a loss from an unexpected occurrence. Insurance o ers support to the
policyholder and helps to reduce the uncertainties in the business or in
human lives. With the help of a policy, the insured party is protected against
future hazards, vulnerabilities and accidents. Although no insurer in the world
can prevent the dangerous event from occurring, they can certainly help by
providing some sort of nancial protection to compensate the insured party.
• Protection for your loved ones – Medical insurance can help you and your
family get the right sort of treatment and cover hospitalisation expenses. It
helps to take care of their health in case of an accident, illness or any other
unfortunate event. The well being of your family comes before anything, and
insurance helps take care of that in the best possible manner.
• Collective Risks – Another function of an insurance contract is that it helps a
number of individuals get an insurance policy to safeguard themselves from
the losses that may occur due to an unfortunate event. This strategy works
on the principle that not all of the policyholders for a particular risk will face it
at the same time. For example, if a total of fty thousand people are insured
against damage to their cars due to accidents, the most likely scenario is
that only a few of them would have accidents in a single year. So the amount
that they can claim from the insurance company for the nancial losses due
to the accidents would be adequately covered by the insurance premiums
from all fty thousand policyholders.
fi
fi
fi
fi
ff
fi
fi
fi
fi
 • Risk Assessment – Insurance organisations play an important role in
determining the actual amount of risk from the occurrence of a particular
event by assessing the situation. They analyse all the aspects of a risk
carefully to make an informed decision. It helps them to arrive at the nal
insurance amount as well as x the premium to be paid by the insured.
• Certainty – One of the main bene ts of taking a policy for the insured is that
they can feel secure about meeting the future losses after taking coverage
for a particular risk. It can be very reassuring for the insured party and can
also help them to proceed with their daily activities in a much more assured
manner without fear or hesitation.
• It helps to forestall losses – An insurance contract can help the insured to
mitigate their losses by providing some sort of security in case of an
unforeseen event. It helps businesses have a contingency plan in case things
do not go as planned. Insurance is a very important tool for organisations as
it allows them to cover their bases while operating in a very risky
environment where the losses can be huge if they do not play their cards
right. It also allows them to be able to cover these huge risks in their
businesses by paying a relatively small amount as the premium.
• Ful l the legal requirements – In some countries, any business is required to
have certain insurance covers in order to engage in any economic activity.
So the insurance company can help organisations ful l these requirements.
• It allows the development of big businesses – Any large-sized organisation is
exposed to a greater amount of risk. If the chances of loss are relatively
higher, it may prevent the management in those organisations from taking
calculated risks, which has the potential of bringing more pro ts. Insurance
helps to mitigate that risk in a way and encourage businesses to take bold
decisions. Insurance takes away some of the nancial pressures and allows
businesses to ourish in the long run.
• It can help in boosting the economy – When the businesses have su cient
insurance cover, they can increase their scope of economic activity that will
bring commensurate rewards. This can provide an impetus to the overall
economy of a country in the long run.

ROLE AND IMPORTANCE OF INSURANCE

1. Provide safety and security:
Insurance provide nancial support and reduce uncertainties in business and
human life. It provides safety and security against particular event. There is always
a fear of sudden loss. Insurance provides a cover against any sudden loss. For
example, in case of life insurance nancial assistance is provided to the family of
the insured on his death. In case of other insurance security is provided against the
loss due to re, marine, accidents etc.
2. Generates nancial resources:
Insurance generate funds by collecting premium. These funds are invested in
government securities and stock. These funds are gainfully employed in industrial
development of a country for generating more funds and utilised for the economic
development of the country. Employment opportunities are increased by big
investments leading to capital formation.
3. Life insurance encourages savings:
fi
fi
fi
fl
fi
fi
fi
fi
fi
fi
fi
ffi
fi
Insurance does not only protect against risks and uncertainties, but also provides
an investment channel too. Life insurance enables systematic savings due to
payment of regular premium. Life insurance provides a mode of investment. It
develops a habit of saving money by paying premium. The insured get the lump
sum amount at the maturity of the contract. Thus life insurance encourages
savings.
4. Promotes economic growth:
Insurance generates signi cant impact on the economy by mobilizing domestic
savings. Insurance turn accumulated capital into productive investments.
Insurance enables to mitigate loss, nancial stability and promotes trade and
commerce activities those results into economic growth and development. Thus,
insurance plays a crucial role in sustainable growth of an economy.
5. Medical support:
A medical insurance considered essential in managing risk in health. Anyone can
be a victim of critical illness unexpectedly. And rising medical expense is of great
concern. Medical Insurance is one of the insurance policies that cater for di erent
type of health risks. The insured gets a medical support in case of medical
insurance policy.
6. Spreading of risk:
Insurance facilitates spreading of risk from the insured to the insurer. The basic
principle of insurance is to spread risk among a large number of people. A large
number of persons get insurance policies and pay premium to the insurer.
Whenever a loss occurs, it is compensated out of funds of the insurer.
7. Source of collecting funds:
Large funds are collected by the way of premium. These funds are utilised in the
industrial development of a country, which accelerates the economic growth.
Employment opportunities are increased by such big investments. Thus, insurance
has become an important source of capital formation.

What is IRDAI?
The Insurance Regulatory Development Authority of India (IRDAI) is a regulatory
body created with the aim of protecting the policyholder’s interest. It also regulates
and sees to the development of the insurance industry.

History and Purpose of IRDAI?

The statutory body of IRDAI was established in the year 1999, deriving its powers
and functions from the IRDAI Act, 1999 and Insurance Act, 1938. IRDAI works as
an autonomous body responsible for managing and regulating the insurance and
reinsurance industry in India along with registering and/or licensing insurance,
reinsurance companies and intermediaries according to the regulations. Some
purposes of IRDAI are:
• To protect the interest of the policyholders
• To regulate and promote the orderly growth of the insurance and reinsurance
industry
• To ensure speedy claim settlement and prevent Insurance frauds and other
malpractices
• To better the standards of insurance markets
fi
fi
ff
 To take action when established regulatory standards are ine ectively
•
enforced
Powers and Functions of IRDAI in the Insurance Industry
To protect the interests of policyholders, the IRDAI was granted signi cant
responsibilities. Here are some of them.
• E ciently conducting insurance business and protecting the interests of the
policyholders in matters concerning assigning of policy, nomination by
policyholders, insurable interest, settlement of insurance claim, surrender
value of the policy and other terms and conditions of contracts of insurance
• Approving product terms and conditions o ered by various insurers
• Regulating investment of funds by insurance companies and maintaining a
margin of solvency
• Specifying nancial reporting norms of insurance companies
• Ensuring insurance coverage is provided in the rural areas and also to the
vulnerable sections of society

Life Insurance - Meaning

Life Insurance can be de ned as a contract between an insurance policy holder
and an insurance company, where the insurer promises to pay a sum of money in
exchange for a premium, upon the death of an insured person or after a set period.
Here, at ICICI Prudential Life Insurance, you pay premiums for a speci c term and
in return, we provide you with a Life Cover. This Life Cover secures your loved
ones’ future by paying a lump sum amount in case of an unfortunate event. In
some policies, you are paid an amount called Maturity Bene t at the end of the
policy term.

There are two basic types of Life Insurance plans -

• 1. Pure Protection
• 2. Protection and Savings

What is Pure Protection Plan?

A Pure Protection plan is designed to secure your family’s future by providing a
lump sum amount, in your absence.
What is Protection and Savings Plan?
A Protection and Savings plan is a nancial tool that helps you plan for your long-
term goals like purchasing a home, funding your children’s education, and more,
while o ering the bene ts of a Life Cover.

Factors that a ect life insurance premium

Now that you know what is life insurance and why you need it, nd out the factors
that can a ect the life insurance premium:
• Age: One of the prime factors that a ect the premium for a life insurance
plan is your age. The life insurance premium is lower for younger people and
gradually increases with age
• Gender: Studies have shown women live longer than men1. Therefore, the
life insurance premium is lower for women as compared to men
ffi
ff
ff
fi
ff
fi
fi
fi
ff
ff
fi
ff
fi
fi
fi
 • Health conditions: Your present and past health conditions can determine
the premium for your life insurance plan. If you have any pre-existing illnesses
or have su ered from an illness in the past that may resurface or a ect your
present health, you would be charged a higher premium
• Family health history: The chances of su ering from a disease that runs in
your family are considerably high. So, if any hereditary illnesses run in your
family, you may have to pay a higher premium
• Smoking and drinking alcohol: Lifestyle habits like smoking and drinking
alcohol can impact your health and lead to multiple health issues. Therefore,
insurance companies charge a high premium for individuals who smoke or
drink alcohol
• Type of coverage: The type of coverage you opt for can increase or decrease
the life insurance plan’s premium. If you add any riders to your plan, the
premium would increase. A longer policy term can also result in a higher
premium compared to a shorter term. In addition to this, the type of life
insurance plan you select also impacts the premium. For instance, term life
insurance is the most a ordable form of life insurance
• Amount of coverage: A higher sum assured would result in a higher premium
and vice versa
• Occupation: If you work in a high-risk job, the premium for your life
insurance plan would be higher than others. For example, if you work in
construction or if your job puts you at any kind of risk, such as regular
exposure to chemicals, the insurance company will charge a higher premium

Features of Life Insurance Plans

1. Policyholder
Policyholder is the individual who pays the premium for the life insurance policy
and signs a life insurance contract with a life insurance company.
2. Premium
A premium is the cost the policyholder pays the life insurance company for
covering his/her life.
3. Maturity
Maturity is the stage at which the policy term is completed and the life insurance
contract ends.
4. Insured
Insured is the individual whose life is secured via the life insurance. After his/her
death the insurance company is accountable to provide a nancial amount to the
dependents.
5. Sum Assured
The amount the insurance company pays the dependents of the insured if those
events occur which are speci ed in the life insurance contract.
6. Policy Term
Policy term is the speci ed duration (listed in the life insurance contract) for which
the insurance company provides a life cover and the time period during which the
contract is active (listed in the life insurance contract).
7. Nominee
A nominee is an individual listed in the life insurance contract who is entitled to
receive the predetermined compensation, as a part of the policy.
ff
ff
fi
fi
ff
fi
ff
 8. Claim
On the insured's demise, the nominees can le a claim with the insurance provider
in order to receive the predetermined payout amount.

What Is Assurance?
Assurance refers to nancial coverage that provides remuneration for an event that
is certain to happen. Assurance is similar to insurance, with the terms often used
interchangeably. However, insurance refers to coverage over a limited time,
whereas assurance applies to persistent coverage for extended periods or until
death. Assurance may also apply to validation services provided by accountants
and other professionals.

Types of assurance services

Good procurement
Procurement processes must be robust and fair to all the parties involved, such as
contractors, consultants, and purchasers. They must meet the standards for good
practice expected of public entities. Our team can provide an invaluable
independent review of public entities’ processes and procedures.

Contract management
Whether public entities are handling a major supply contract or a small
professional services contract, good practice is essential. Our team can review
contracting practices and provide independent advice.

Information systems
Computerised information systems, a major part of most businesses, need to be
put into e ect and managed e ectively. Our Information Systems Audit and
Assurance team can assess information systems to help public entities to better
manage risks.

Probity and integrity

Integrity is about honesty and adherence to strong ethical principles. Whenever a
public entity spends money, this must meet standards of probity that will allow it to
withstand parliamentary and public scrutiny. With extensive knowledge of the
public sector, we are well positioned to provide its entities with assurance about
probity risks.
Portfolio, programme, and project management
Portfolio management is about delivering strategically important change. It
balances investment in running the organisation (business as usual) with changing
the organisation. Managing programmes and projects paid for by the public carries
signi cant risks. Public entities are responsible for their outcomes, and for
ensuring that public funds have been used e ectively and e ciently. Our team can
provide independent assurance that these entities are managing their portfolio,
programmes, or projects to good practice standards.

Managing risks
fi
ff
fi
ff
fi
ff
ffi
 Identifying, analysing, and mitigating or eliminating risks is integral to the
reputation of a public entity. All public entities need systems to avoid con icts of
interest and to show that the entity adheres to professional accounting, legal, and
nancial standards. Public entities need to show that they have appropriate quality
assurance, external review, and training for managing risks. Understanding good
practice thoroughly means our specialists can provide quality assurance for public
entities’ practices.

Managing assets
Managing assets well will result in an organisation reducing risks and getting better
value for money. Public entities will want e ective plans for managing their assets
e ectively and e ciently. Our specialists have wide experience in advising on
asset management and can provide assurance on planning.

Governance
Getting governance right is vital to protect and enhance the performance of a
public entity. Good governance contributes to an open, fair, and transparent public
sector. Our team has wide experience identifying where governance works well
and where improvements can be made.

Sensitive spending
An example of sensitive spending is giving private bene t to an individual – for
example, spending on travel, accommodation, and hospitality. A public entity
might spend money on something considered unusual for that organisation’s
purpose and/or functions. A public entity’s sensitive spending needs to stand up to
the scrutiny of Parliament and the public. With extensive knowledge of the public
sector, our team is well positioned to provide public entities with assurance about
sensitive spending.

Public private partnerships

Partnering between the public and private sectors is becoming more important in
procuring major infrastructure work and public services. More public entities are
partnering with private companies to build new infrastructure or provide services.
Our specialists have experience advising about public private partnerships and
can provide public entities with assurance about their partnerships.

Managing performance
Managing performance e ectively is critical to the success of a well-run public
entity. Managing performance well should provide managers with the information
that they need to make decisions, help to guide and manage sta , and provide
information to stakeholders and the public about the services that a public entity
provides. Our specialists’ thorough understanding of best practice means that they
can provide quality assurance for public entities.

Discretionary expenditure
All of a public entities’ discretionary spending should have a clear and appropriate
business purpose and be properly authorised. Our specialists can o er assurance
fi
ff
ffi
ff
ff
fi
ff
ff
fl
that a public entities’ discretionary spending is appropriate and complies with
policies.

What is an actuary?
Actuaries are professionals in the nancial industry who use their expertise to
perform risk assessments and develop plans for limiting the impact of nancial
risks. They research theory and case studies in the eld of actuarial science to help
businesses and organizations make decisions about their nancial security and
liability management. Actuaries must have a complex understanding of math,
economics and computer science and be skilled in calculating probability and
interpreting statistics to identify major and minor risk factors and help a business
reasonably prepare for changing conditions.
Role of an Actuary in an Insurance Company

It is ideal for insurance companies to create policies that bear minimal risk and can
generate stable returns. Estimating risk and return from each proposal also in turn
aids in assuring policyholders that their claims will be settled.
With regards to insurance, actuarial practices involve analysing factors related to a
customer’s life expectancy, construction of mortality tables that help one to have a
measurement of predictability and o ering insight to brokers.
Actuarial science mostly nds its application in the life insurance mortality analysis.
However, they can also be applied in case of other general insurance elds like
property and liability insurance.
Sometimes recommendations for the determination of premium for insurance
policies made by actuaries can also have a positive impact on the behaviour of
policyholders. For instance, premium payable by non-smokers for life insurance
policies is often signi cantly lesser than that for smokers. This might push
individuals to quit smoking to avail their life insurance policies at a lower premium.
fi
fi
fi
ff
fi
fi
fi
fi