Banking and Insurance Study Material PDF

Banking & Insurance Standard X Study Material Manuscript  Table of Contents UNIT 1 - LAWS RELATING TO NEGOTIABLE INSTRUMENTS (NIS)....................................... 6 1.1. Introduction to Negotiable Instruments..............

Banking & Insurance Standard X Study Material Manuscript  Table of Contents UNIT 1 - LAWS RELATING TO NEGOTIABLE INSTRUMENTS (NIS)....................................... 6 1.1. Introduction to Negotiable Instruments.............................................................................. 7 1.2. Types of Negotiable Instruments........................................................................................ 9 1.3. Parties to the bill of exchange:.......................................................................................... 27 1.4. Crossing of Cheques......................................................................................................... 28 1.5. Summary:......................................................................................................................... 30 1.6. Practice Questions............................................................................................................ 33 UNIT 2 - LENDING FUNCTIONS OF A BANK............................................................................ 38 2.1. Types of Advances- Secured & Unsecured........................................................................ 41 2.2. Loans: Short, Medium and Long Term.............................................................................. 50 2.3. Methods of Granting Advances......................................................................................... 54 2.4. Summary:......................................................................................................................... 61 2.5. Practice Questions............................................................................................................ 63 UNIT 3 - UTILITY SERVICES OF A BANK................................................................................. 70 3.1. Remittance through Bank Drafts....................................................................................... 71 3.2. E Banking:......................................................................................................................... 73 3.3. Internet Banking............................................................................................................... 88 3.4. Safe Deposit Lockers:........................................................................................................ 93 3.5. Summary:......................................................................................................................... 96 3.6. Practice Questions................................................................................................................ UNIT 4 - LIFE INSURANCE PRODUCT.......................................................................................103 4.1. Life Insurance - Meaning................................................................................................ 104 4.2. Features of Life Insurance............................................................................................... 104 1.3. Advantages of Life Insurance.......................................................................................... 105 4.4. Importance of Life Insurance Policies.............................................................................. 107 4.5. Types of Life Insurance Policies....................................................................................... 107 4.6. Procedure of taking Life Insurance Policies..................................................................... 113 4.7. Nomination and Assignment of Life Insurance Policies.................................................... 114 UNIT 5 - GENERAL INSURANCE..............................................................................................122 5.1. General Insurance - Meaning.......................................................................................... 124 5.2. Importance of General Insurance................................................................................... 124 5.3. Types of General Insurance Policies................................................................................ 126 5.4. Fire Insurance................................................................................................................. 129 5.5. Marine Insurance........................................................................................................... 133 5.6. Motor Vehicle Insurance................................................................................................. 141 5.7. Health Insurance............................................................................................................ 144 5.8. Theft & Burglary Insurance............................................................................................. 153 5.9. Procedure for taking Fire Insurance Policy...................................................................... 154 5.10. Procedure for taking Marine Insurance Policy............................................................. 156 Learning Objective – Unit 1 Location DURATION-20 HOURS SESSION-1 INTRODUCTION TO NEGOTIABLE INSTRUMENTS Learning Knowledge Performance Teaching and Outcome Evaluation Evaluation Training Method Basic 1. Meaning of 1. Give a brief Interactive Understanding Negotiable introduction of lecture- On of Negotiable Instruments Negotiable concept of Instruments 2. Definition of Instruments Negotiable Negotiable 2. Enumerate the Instruments Instruments(Sec 13) characteristics of Activity – 3. Features of Negotiable Collect various Negotiable Instruments types of Instruments 3. Name the various Negotiable 4. Types of Negotiable types of negotiable Instruments Instruments instruments. SESSION-2 TYPES OF NEGOTIABLE INSTRUMENTS 1. Cheque Cheque-Its 1. Describe the 1. Evaluate the Interactive concept, meaning of cheques characteristic of lecture- features, 2. Essential features of cheques. Discussion on MICR, forms cheques. 2. Detail description of the most of cheques 3. Specimen of cheque how to fill a cheque important 4. Meaning and 3. Explain the role of Negotiable concept of MICR MICR Instruments - with examples 4. Explain the concept cheques, its 5. Meaning of cheques of cheques in types and in electronic form electronic form and MICR and truncated truncated cheques Activity cheques 1. Draw specimen of a cheque 2. Collect cheques of 5 different banks 3. Fill the cheques. 2. B/E (BILLS OF EXCHANGE) Concept of 1. Definition of Bills 1. Explain the concept Interactive Bills of of Exchange of Bills of lecture on the Exchange and 2. Features of Bills of Exchange meaning and its features Exchange 2. Describe its key concept of Bills with specimen 3. Draw the specimen features. of Exchange of Bills of 3. Usage of Bills of Activity – Exchange Exchange Draw the specimen of Bills of Exchange 3. Promissory Note Concept of 1. Meaning of 1. Explain in detail the Interactive Promissory Promissory Note meaning of lecture Note its 2. Key element of Promissory Note Highlight the features and Promissory Note 2. List out the major role of specimen 3. Specimen of features of Promissory Promissory Note Promissory Note Note as a 3. Suitability of Negotiable Promissory Note Instrument and its usage Activity – Draw specimen of Promissory Note SESSION-3 PARTIES TO NEGOTIABLE INSTRUMENTS Core concept Discussion on parties to 1. Describe the role of Interactive of various Negotiable Instruments parties to Negotiable lecture parties of Drawer Instruments Classroom Negotiable Drawee 2. Evaluate the key lecture with Instruments Payee responsibilities of suitable Endorsee each party to examples Endorser Negotiable Activity - Role Instruments play SESSION 4 CROSSING OF CHEQUES Basic 1. Meaning crossing of 1. Describe with Interactive lecture concept of cheques Illustrations on importance of Crossing of 2. Requisites of crossing various forms Crossing of cheque, Cheques, of cheques of crossings the persons involved Types of 3. Various forms of 2. Enlist the and its forms Crossing of Crossing persons who Activity -Show cheques  Special Crossing can cross a various types of  General Crossing cheque crossing on a cheque  Account Payee 3. Elucidate the (actual / Crossing significance of hypothetical) 4. Describe who can cross Crossing of cheques? Cheques  UNIT 1 LAWS RELATING TO NEGOTIABLE INSTRUMENTS (NIS) OBJECTIVES After reading this unit you will be able to:  Describe the features of Negotiable instruments  Summarise the types of negotiable instruments and their features  List the parties to the Bill of Exchange and their roles and responsibilities  Illustrate the types of crossing of cheque and its importance STRUCTURE 1.1.Introduction to Negotiable Instruments 1.2.Types of Negotiable Instruments 1.3.Parties to the Bill of Exchange 1.4.Crossing of Cheques 1.5.Summary 1.6.Practice Questions 1.1. Introduction to Negotiable Instruments A. Meaning of Negotiable Instruments: The word “Negotiable” means Transferable by Delivery” and “Instrument” means a written document by which a ‘right’ is created by one person in favour of other person. Thus, negotiable instrument means “a document transferable by delivery”. The Negotiable Instruments Act has not defined the term negotiable instrument. It only names three Negotiable Instruments in Sec. 13. These are:  Cheques  Promissory Notes (PN)  Bills of Exchange (BE) Payable to either order or bearer. A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to any one of two, or one or- some of several payees. These instruments are in a way substitutes for cash. In other words they are almost equivalent to cash. They play crucial role in settlement of dues of one person to another. The legislation that governs these instruments in India is known as “The Negotiable Instruments Act.”, which was passed in 1881. The Act came into existence mainly to facilitate trade and commerce activities by giving legal recognition to these instruments. In the absence of these instruments, the trading and business community would have had to handle huge amounts of currency notes, which would be highly risky and inconvenient affairs. An important feature of Negotiable Instruments is that they are independent or ‘Stand-alone’ instruments – which means while settling disputes, other supporting documents or evidence are not required as these instruments are self-sufficient in this respect. B. Features of a Negotiable Instrument: a. Instrument in writing: An NI is an instrument in writing which is duly signed by the ‘maker’ of a PN and the drawer in the case of a BE or cheque to make it completely valid and enforceable. b. Unconditional order/promise: A BE and a Cheque are issued by the “Drawer’ and contain an unconditional order, directing the Drawee to pay a certain sum of money. Example: If somebody writes to another person: “Pay Mr. X Rs. 1,000 if you earn profit in bourse. Such writing does not make it an BE because it does not contain an unconditional order to pay c. A cheque is always drawn on a specified banker, whereas a BE may be drawn on anybody who has to pay. A cheque is always payable on demand. d. The promise or acceptance to pay is for payment of money and money only. Example: “On Demand, I promise to pay you 2 Kgs of rice” is not a PN. e. Certainty of the amount: The amount of the instrument must be certain or ascertainable correctly in monetary terms. Example: “On Demand I Promise to pay you the sum of Rs. 10,000 with interest thereon at 10% per annum from today till the date of payment” is a valid PN since the interest amount can be calculated with the help of the data given in the promise. f. Payable to order or bearer: An NI must be payable either to order or to bearer. Example: If a cheque is drawn showing the Payee’s name as Mr. Mansukh, then it may be paid to Mansukh or to his order (i.e. to any other person as per his order). g. Payee must be a certain person: The person named as the payee may be an individual or an association, or a cooperative or a company. There can even be joint payees. Example: A cheque is drawn as: “Pay to A and B”. In this case, both A and B have to give a joint discharge on the back of the cheque or to receive the amount from the bank. Alternatively both of them have to open a ‘joint’ account in a bank and entrust the bank with the responsibility to collect the amount of the cheque and credit the same to their account h. Delivery of the instrument: According to Section 45: The making, acceptance or endorsement of a PN, BE or cheque is completed by delivery, actual or constructive. As between parties standing in immediate relation, delivery to be effectual must be made by the party making, accepting or indorsing the instrument, or by a person authorized by him in that behalf.  A PN, BE or cheque payable to bearer is negotiable by the delivery thereof. A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by endorsement and delivery thereof. It means that in case of an order instrument, endorsement is necessary. Section 47: Negotiations by delivery: Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof. No endorsement is necessary. Stamping of promissory notes and bill of exchange is necessary where applicable as per the Stamp Act. i. Currency note: A currency note is a PN payable to bearer on demand. Section 21 of Reserve Bank of India Act prohibits drawing of this type of promissory notes i.e. payable to bearer on demand by anyone other than the Reserve Bank of India. j. Transferability: Easily transferable from one person to another. A NI is a document is transferable by the application of the law. The instrument is transferable till maturity and in case of cheques till it becomes stale (on the expiry of 3 months from the date of its issue). k. It confers absolute and good title on the transferee. It protects the person who receives it bona-fide and for value, i.e. he possesses good title thereto, even if the transferor has no title or had defective title to the instrument. l. The transferee of a negotiable instrument is known as holder in due course.’ His title or right is not affected by any defect in the title of the transferor or of any of the previous holders of the instrument. This is the main distinction between a negotiable instrument and other instruments. m. The holder of an NI acquires the right to sue upon the instruments in his own name. 1.2. Types of Negotiable Instruments Negotiable Instruments (NIs) can be classified from different angles or view points, as under: A. ‘Bearer’ Instruments and Order instruments: An NI is said to be ‘payable to bearer’ if:  It is expressed to be so payable, or  The only or last endorsement on the instrument is an endorsement in blank. In case of a bearer instrument, the bearer may claim the money without having his name mentioned on the cheque. If a NI is lost or destroyed, then its ‘holder’ is the one who is entitled to receive the amount of the NI, at the time of such loss or destruction. A NI is said to be payable to order if  It is expressed to be so payable; or  It is expressed to be payable to a particular person, and does not contain any words prohibiting transfer or indicating an intention that it shall not be transferable B. Inland Instruments (Section 11 of the NI Act) and Foreign Instruments: An NI drawn or made in India, and made payable, or drawn upon any person, resident in India is called an ‘Inland instrument’. An inland PN is a PN which is made payable in India. An instrument which is not an inland instrument is a foreign instrument. Therefore an instrument is ‘foreign’ instrument if:  It is drawn outside India and made payable outside or inside India; or  It is drawn in India and made payable outside India and drawn on a person resident outside India. C. ‘Demand’ Instruments (Section 19 of NI Act) and Time (usance) instruments: A PN or BE, in which no time for payment is specified, and a cheque, are payable on demand. A PN and BE may be payable on demand or after a time period but a cheque is always payable on demand. Usually such instruments contain the words “Pay At Sight…..” or “Pay on Demand…..” The drawee has to pay the amount of the instrument as soon as the demand is made on him. A ‘Time’ instrument is one which is payable after sometime. Usual trade practice is after 30, 60, 90 or 120 days. There are variations in the manner in which the ‘time’ is stipulated e.g.:  “Pay 30 days after sight of this instrument…..”   “Pay 30 days after date of this instrument……”  “Pay 30 days after the date of acceptance of BE. D. Other Types of Instruments: Ambiguous Instruments (Section 17 of NI Act); If an instrument is drawn in such a way that the holder may treat it as a PN or a BE, then it is said to be an ambiguous instrument. Once a holder treats an instrument either as a bill or as a note, it cannot be treated differently afterwards. Inchoate or Incomplete Instrument (Section 20 of NI Act): An inchoate stamped instrument is a paper signed and stamped in accordance with the law relating to negotiable instruments and either wholly blank or containing an incomplete negotiable instrument. When one person gives to another such a document, the latter is prima facie entitled to complete the document and make it into a proper negotiable instrument up to the value mentioned in the instrument, or up to the value covered by the stamp affixed on it. The person signing the instrument is liable on it to any holder in due course. Example: Anil signs his name on a blank stamped paper and gives it to Anush, asking him to complete the form as a Promissory Note for Rs. 1,000. Anush takes advantage of the situation and fills the amount as Rs. 10,000, which is the maximum allowable amount for the stamp paid on the instrument. Anush then passes on the PN to one Ankit, who accepts the PN in good faith and for valid consideration. Ankit can recover the whole amount of Rs. 10,000 on the instrument even though Anil intended the instrument only for Rs. 1,000. Quasi Negotiable Instruments: In India, Govt. Promissory notes, Hundis, Railway Receipts, Bill of Lading etc. have been held negotiable by usage or custom. Since these instruments have the characteristics of Negotiable Instruments, these are said to belong to the category of ‘Quasi Negotiable Instruments’. Cheques: Section 6 of the Act defines cheque: A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. A cheque is an instrument that contains an order to the bank to pay a certain sum of money from a bank account. The person writing the cheque is called the drawer. He has a bank account (often called a current or savings account) where his/her money is held. The drawer writes the various details including the amount, date, and the name of a payee on the cheque, and signs it, ordering his/her bank, known as the Drawee bank, to pay the stated amount of money to the payee. A cheque is a negotiable instrument instructing a banking institution to the bank to pay a specific amount of a specific currency from a specified account held in the drawer's name with that institution. Both the drawer and payee may be natural persons or legal entities. Cheques are either order instruments or bearer instruments. a. Essential Features of a cheque: Since a cheque is a “Bill of Exchange” drawn on a specified banker and payable on demand, it is easy to recall its features. They are:  It is an instrument in writing, signed by the maker who is the account holder  It contains an unconditional order to the drawee bank to pay  The order is to pay money and money only  The amount of the cheque has to be certain  It is payable to ‘order’ of a payee or to the ‘bearer’ of the instrument  The payee must be a certain person  The cheque may be transferred by the holder to person ‘endorsement and delivery’ in the case of an ‘order’ instrument and by mere delivery in the case of a ‘bearer’ instrument.  It confers absolute and good title on the transferee.  The holder of a cheque acquires the right to sue upon the instrument in his own name. Parties to a Cheque:  Drawer: He is the person who draws the cheque, i.e., the account holder in the bank.  Drawee: It is the drawer’s banker on whom the cheque has been drawn.  Payee: He is the person who is entitled to receive the payment of the cheque. b. MICR Band of the Cheque: Before the system of MICR was started in India in 1984, the cheques running in thousands (and in lakhs in cities like Mumbai) had to be sorted out manually for presenting to the respective drawee banks in the Clearing House. That was causing delay in clearing the cheques and also there were mistakes in sorting. MICR cheque was the answer to these problems. MICR stands for Magnetic Ink character Recognition. In the cheque specimen shown above, there is a white colour band (MICR band) at the bottom of the cheque with some characters printed in a diferent style. These characters are printed before the issue of the cheque to the customer. These characters are printed in a special ink which contains Iron Oxide which helps the ’Sorting Machines’ (which are basically a type of computers) to ’read’ the characters and sort them as per the city and bank for quick presentation of the cheques to the drawee banks without mistakes. But before presentation of the cheques in the Clearing House, the amount of the cheques have also to be ’encoded’ at the right hand bottom of the MICR white band through machines called ’Encoders’. The Encoders and the Sorters are capable of arriving at the total number of instruments encoded/sorted bankwise and so the earlier system of arriving at the totals manually have also been dispensed with. Understanding the MICR Code: At the bottom of the MICR cheque there is a white band with numbers printed which indicate as follows (example given): First number is 578647 which is the serial number of the cheque issued to the drawer. Next nine numbers are 560229027 is the MICR code which identifies the Bank First 3-digits (560) are the MICR City code. It is the PIN code of the city. In this case, it is Tiruvananthapuram in Kerala State. e.g. Kolkata banks will have 700, New Delhi 110, Mumbai 400, Chennai 600, Bengaluru 560 and Hyderabad 500 etc.) Next 3 digits (229) are the Bank code for ICICI Bank given by RBI. e.g. 001 – RBI, 002- SBI, ICICI -229 & so on in any city in India Next 3 digits (027) are the MICR Branch code of ICICI Bank in the city of Bangalore. So the cheque which is shown above pertains to Branch No. 027 of ICICI Bank Ltd in the city of Bangalore 001016 - The third set of six digit numbers is a recent addition. Next 2 digits field are known as transaction code. 9,10, 11 indicates that it is local cheque, 11 is used for a current account cheque, 29,30, 31 is used for cheques payable at par, 13 is used for for Dividend Warant etc. At the end, the amount of the cheque is encoded by the Payee Bank on receipt in “Paisa” before sending the cheque for clearing to clearing house. c. Types of cheques: Cheques are classified as follows from different purposes: i. Bearer and Order Cheque: When the words "or bearer" appear on the face of the cheque after the name of the payee, the cheque is called a bearer cheque. The bearer cheque is payable to the person specified therein (i.e. the payee) or to anyone else who presents it to the bank for payment. Such cheque is risky; because if it is lost, the finder of the cheque can collect payment from the bank. Order Cheque: When the word "bearer" appearing on the face of a cheque is cancelled or the word "or order" is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is payable to the person specified therein as the payee, or to any one else to whom it is endorsed (transferred). ii. Crossed Cheque / Uncrossed Cheque: Crossed Cheque: Crossing on a cheque means drawing two parallel lines on the face of the cheque with or without additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed cheque cannot be encased at the cash counter of the drawee bank but it can only be credited to the payee's account. Uncrossed / Open Cheque: When a cheque is not ‘crossed’, it is known as an "Open Cheque" or an "Uncrossed Cheque". The payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order one. iii. Post Dated or Stale Cheque: Post-Dated Cheque: If a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque. A post-dated cheque cannot be honoured earlier than the date on the cheque. For example, a cheque is written on the 14th of the July 2015 month but dated the 28th of the July 2015 will not be encashed till 28 July 2015.  Stale Cheque: If a cheque is presented for payment after three months from the date written on the cheque, it is called stale cheque. A stale cheque is not honoured by the bank. Anti-Dated Cheque: If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as "anti-dated cheque". Such a cheque is valid up to three months from the date of the cheque. d. Meaning of cheques in Electronic form and truncated cheques: Till recently before the introduction of the ‘Truncation’ System (CTS), cheques were printed on paper and issued and were in circulation till they were ultimately paid. After the introduction of the CTS, the NI Act had to be amended to include the CTS cheques also in the definition of the cheque and hence the phrase “……..and it includes the electronic image of a truncated cheque and a cheque in the electronic form.” has been added to the original definition of cheques. Cheque Truncation System (CTS): is an online image based cheque clearing system where images and MICR data is captured at the collecting bank branch and transmitted electronically. A cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the maximum safety standards with the use of digital signature (with or without biometric signature) and asymmetric crypto system. A truncated cheque means a cheque which is ‘truncated’ during the course of the clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. In the erstwhile physical clearing of cheques, the cheque used to be sent for clearing to RBI clearing house. With the implementation of the Cheque Truncation system (CTS), the image of the cheque is sent to the RBI clearing house.  i. Branch address with IFSC code printed on top of the cheque ii. Date in dd/mm/yyyy format with boxes iii. Printers name with CTS-2010 in left side of cheque iv. A pantograph which shows VOID/COPY while taking photocopy of the cheque below the account number v. New rupee symbol instead of bilingual format vi. "Please sign above" is mentioned on bottom right of the cheque Watermark "CTS INDIA" to be visible cheque is held against any light. Ultra Violet logo of Bank printed at upper left corner of cheque to be visible in UV lamps Endorsement: A negotiable instrument may be transferred by negotiation. i. Negotiation can be effected by mere delivery if the instrument is a bearer one. ii. By endorsement and delivery in case it is an order instrument.  CHEQUE BOOK On the opening of a saving and current account, a banker hands over to the customer (account holder). The following there for operating the account: a) Cheque Book b) Pay-in-Slip Book c) Pass Book A cheque Book contains sequentially number cheques forms than the account holder can use for withdrawing money from his account. The number of cheque forms may be 10, 25, 50 or 106 as per the account holder’s requirement, the name of the account holder is printed as the right hand bottom side of the cheque form. Apart from the cheque forms the Cheque also contains two other slips: (a) Requisition Slip Requisition Slip is used by the account holder when a new cheque book is to be acquired from the bank, after all the cheque forms have been used. In contains a request to the bank to issue to him a new cheque book containing the required number of cheque forms. The account holder mentions the date, account number, his current address, mobile number. E-mail address and desired number of cheque forms and submits to the banker, Banks now a day’s send the cheque book to the account holder by post only for safety reasons. (b) Record Slip Every cheque look contains either in the beginning or at the end, two or three slips, which are meant for the purpose of keeping record of the cheques issued by the Account holder. Specimen of such slip, which is cashed record slips is as follow: Record Slip A/c No_______________ Cheque Number Date In favour of Cheque Amount Deposit Balance Earlier, such record was kept separately for each cheque on the counter fail of each cheque. Now Record slips are in use. The Account holder can thus keep track of the balance in his account, if he incorporates in the slip, the amount of deposits made by him. (c) Multicity Cheques These cheques are normal cheques, but contain the following sentences also: “MULTI CITY CHEQUE. Payable as per as all Branches of the Bank.” Such cheques can be encashed as any branch as any branch of the bank concern without incurring any cost by way of commission. But there is an upper lume on the amount which can be withdrawn through such cheque. Such cheque need not be sent to the clearing House by any branch of the same bank.  An order instrument means instrument payable to a specified person or to the order of that specified person. If an instrument payable to order is transferred without endorsement, it is merely assigned and the holder thereof is not entitled to the rights of a holder in due course. Meaning of Endorsement: An endorsement is the mode of negotiating a negotiable instrument. A negotiable instrument payable otherwise than to a bearer can be negotiated only by endorsement and delivery. According to sec. 15 of the NI Act “when the maker or holder of a negotiable instrument signs the same, otherwise than as such marker for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, he is said to endorse the same and is called the endorser. The person to whom the instrument is endorsed is called the endorsee. “The word endorsement is said to have been derived from Latin ‘en’ means ‘upon’ and ‘dorsum’ meaning ‘the back’. Thus usually the endorsement is on the back of the instrument though it may be even on the face of it. Where no space is left on the instrument, the endorsement may be made on a slip of paper attached to it. This attached slip of paper is called ‘Allonge’. Essentials of a Valid Endorsement: An endorsement, in order to operate as mode of negotiation must comply with the following conditions, namely: 1. It must be written on the instrument itself and be signed by the endorser. The simple signature of the endorser, without additional words, is sufficient. An endorsement written on an allonge is deemed to be written on the instrument itself. 2. The endorsement must be of the entire instrument. A partial endorsement, that is to say, an endorsement, which purports to transfer to the endorsee only a part of the amount payable, or which purports to transfer the instrument to two or more endorsees separately, does not annexed to negotiation of the instrument. 3. Where a negotiable instrument is payable to the order of two or more payees or endorsees who are not partners, all must endorse unless then has authority to endorse for the others.  4. Wherein a negotiable instrument payable to order, the payee or endorsee is wrongly designated or his name is misspelt, he should sign the instrument in the same manner as given in the instrument. Though, he may add, if he thinks fit, his proper signature also. 5. Where there are two or more endorsements on an instrument, each endorsement is deemed to have been made in the order in which it appears on the instrument, until contrary is provided. Types of Endorsement: According to the N.I. Act, 1881 endorsement may take any of the following forms: 1. Endorsement in blank or general endorsement. 2. Endorsement in full or special endorsement. 3. Restrictive endorsement. 4. Partial endorsement. 5. Conditional endorsement. i. Endorsement in Blank or General Endorsement: In case of an endorsement in blank, the payee or endorser does not specify the name of an endorsee and he simply signs his name (S. 16 NIA). ii. Endorsement in Full or Special Endorsement: When the payee or endorser specifies the person to whom or to whose order the instrument is to be paid, the endorsement is called special endorsement or endorsement in full. The specified person i.e. the endorsee then becomes the payee of the instrument. iii. Restrictive Endorsement: An endorsement is restrictive when it prohibits further negotiation of a negotiable instrument. Sec. 50 of the NI Act 1881states. “The endorsement may, by express words, restrict on exclude the right to negotiate further or constitutes the endorsee an agent to endorse the instrument or to receive its contents for the endorser or for some other specified person.” For example, if B endorses an instrument payable to bearer as follows, the right of C to further negotiate is excluded  Pay the contents to C only   Pay C for my use iv. Partial Endorsement: If only a part of the amount of the instrument is endorsed, it is a case of partial endorsement. An endorsement which purports to transfer to the endorsee only a part of the amount payable, or which purports to transfer the instrument to two or more endorsees severally, is not valid. v. Conditional Endorsement: If the endorser of a negotiable instrument, by express words in the endorsement, makes his liability or the right of the endorsee to receive the amount due thereon, dependent on the happening of a specified event, although such event may never happen, such endorsement is called a conditional endorsement (Section 52 of NI Act). Such an endorser gets the following rights: He may make his liability on the instrument conditional on the happening of a particular event. He will not be liable to the subsequent holder if the specified event does not take place. For example, “pay C if he returns from London”. Thus C gets the right to receive payment only on the happening of a particular event, i.e. if he returns from London.  Effect of Endorsement An unconditional endorsement of a negotiable instrument followed by its delivery has the effect of transferring the property therein to the endorsee. The endorsee acquires a right to negotiate the instrument further to anyone he likes. Section 50 of NI Act also permits that an instrument may also be endorsed so as to constitute the endorsee an agent of the endorser.  To endorse the instrument further or  To receive its amount for the endorser or for some other specified person. Bills of Exchange: Section 5 of the Negotiable Instrument to Act define a BE as follows: A "bill of exchange" is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. An order to pay is not "conditional", by reason of the time for payment of the amount or any instalment thereof being expressed to be on, the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain. A specimen of a bill of exchange is given below: Features of Bill of Exchange (BE):   It should be in writing  It should contain a direction or order by the drawer to the ‘drawee’ to pay money;  The order should be unconditional.  The order should be signed by the person who gives the order. He is called the ‘Drawer’ of the BE. It should be signed in the proper capacity, i.e. as an individual, or as a partner of a firm, or as the Manager, Secretary, Managing Director etc. of a Company, Managing Trustee of Trust etc.  The drawer, the drawee, and the payee should be clearly identifiable with certainty.  The drawer and the payee may be one and the same person. So in a BE, there should be at least 2 distinct persons, the drawer and the drawee  A bill contains an order to pay a definite amount of money either on sight of the bill or after a specified time. In the former case, the bill is payable on demand. In the latter case, it is payable after a specified period of time, say 30, 60 or 90 days. Such bills are called Usance Bills. They need acceptance by the drawee.  The bill has to be ‘delivered’ to the payee to make it an effective BE.  The BE confers absolute and good title on the transferee.  The holder of a BE acquires the right to sue upon the instrument in his own name. Promissory Note Section 4 of the NI Act defines a PN as follows: A "promissory note" is an instrument in writing (not being a bank- note or a currency- note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument. Illustrations: A signs an instrument in the following terms: a. "I promise to pay B or order Rs. 500." b. "I acknowledge the debt I owe to ‘B’ in Rs. 1, 000 to be paid on demand, for value received" The above two examples are PNs as they are unconditional promise to pay. c. Mr. B, I O U Rs. 1, 000"  d. I promise to pay B Rs. 500 and whatever other dues I owe him” e. I promise to pay B Rs. 500, after adjusting his dues to me” f. "I promise to pay B Rs. 500 10 days after my return from Delhi" g. "I promise to pay B Rs. 500 on D’s death, provided D gives me Rs. 500 in his will” h. "I promise to pay B Rs. 500 and to deliver to him my old scooter next year" The instruments respectively marked (c); (d), (e), (f), (g) and (h) are not Promissory Notes since they contain ‘conditional’ promise to pay. Parties to a Promissory Note:  Maker: He is the person who promises to pay the amount stated in the note. He is the debtor.  Payee: He is the person to whom the amount is payable i.e. the creditor.  Holder: He is the payee or the person to whom the note might have been endorsed. The endorser and endorsee on the same person as in the case of a bill of exchange. Specimen of Promissory Note: Essential Elements of Promissory Notes are: a. The instrument must be in writing.  b. The instrument must be signed by its maker. A signature in pencil or by a rubber stamp of facsimile is good. An illiterate person may use a mark or cross instead of writing out his name. The signature or mark may be placed anywhere on the instrument, not necessarily at the bottom. It may be at the top or at the back of the instrument. c. The instrument must contain a promise to pay. The promise to pay must be express. It cannot be implied or inferred. A mere acknowledgement of indebtedness is not enough. d. The promise to pay must be unconditional. If the promise to pay is coupled with a condition it is not a promissory note. e. The maker of the instrument must be certain and definite. f. A Promissory note must be stamped according to the Indian Stamp Act. g. The sum of money to be paid must be certain. h. The amount must be payable in the legal tender currency of India. A promise to pay certain quantity of goods or a certain amount of foreign money is not a promissory note. i. The money must be payable to a definite person or to his order. A note is valid even if the payee is misnamed or is indicated by his official designation only. Evidence is admissible to show who the payee really is. j. The promissory note may be payable on demand or after a certain definite period of time. k. The Reserve Bank of India Act prohibits the creation of a promissory note payable on demand to the bearer of the note, except by the Reserve Bank and the Government of India. The following are the differences between a PN and a BE, PN BE It contains a promise to pay It contains a order to pay Primary liability to pay is of the maker Primary liability to pay is on the Drawee. of the PN If the drawee fails, the liability will be that of the drawer  A PN has to be presented for payment A ‘demand’ BE has to be presented for only (not for acceptance since the PN is payment. itself issued by the person who has to A ‘Usance’ BE has to be presented first pay) for acceptance and after acceptance it has to be presented to the acceptor for payment on or before the due date Initially there are two parties –the maker Initially there are three parties – the maker (promissor) and the payee (promisee). who is the drawer, the Drawee who is Maker and payee have to be different ordered to pay and the payee who has to persons. get the money. The drawer and the payee may be the same person. PN is drawn in a single copy. NI Act provides that a foreign Bill of exchange to be drawn in sets. (One of them being satisfied, the other is automatically nullified). PN cannot be drawn conditionally BE also cannot be drawn conditionally, but the acceptor/endorser can make it conditional by restricting. If a PN is dishonoured, notice of If a BE is dishonoured, the holder has to dishonour need not be given. give notice of dishonour to all his prior parties against whom he desires to take action. 1.3. Parties to a Bill of Exchange: Drawer: The maker of a bill of exchange is called the ‘drawer’. Drawee: The person directed to pay the money by the drawer is called the ‘Drawee’. Payee: The person named in the instrument, to whom or to whose order the money is to be paid by the drawee is called the ‘payee’. He is the real beneficiary under the instrument. Where he signs his name and makes the instrument payable to some other person, that other person also becomes the payee. Endorser: When the holder or the payee endorses the instrument to anyone else, the transferor becomes the ‘endorser’. Endorsee: The person to whom the bill is endorsed is called an ‘endorsee’. Acceptor: After the drawee of a bill a signs his assent upon the bill, or if there are more parts than one, upon one of such parts and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the ‘ acceptor’. Holder: A person who is legally entitled to the possession of the negotiable instrument in his own name and to receive the amount thereof, is called a ‘holder’. He is either the original payee, or the endorsee. In case the bill is payable to the bearer, the person in possession of the negotiable instrument is called the ‘holder’. Drawee in case of need: When in the bill or in any endorsement, the name of any person is given, in addition to that of the drawee, to be resorted to in case of need, such a person is called ‘drawee in case of need’. In such a case it is obligatory on the part of the holder to present the bill to such a drawee in case the original drawee refuses to accept the bill. The bill is taken to be dishonoured by non- acceptance or for non-payment, only when such a drawee refuses to accept or pay the bill. Acceptor for honour: In case the original drawee refuses to accept the bill or to furnish better security when demanded by the notary, any person who is not liable on the bill, may accept it with the consent of the holder, for the honour of any party liable on the bill. Such an acceptor is called ‘acceptor for honour’. 1.4. Crossing of Cheques A. Meaning of Crossing the Cheque: A crossed cheque is a cheque that has been marked to specify an instruction about the way it is to be paid. A common instruction is to specify that it must be deposited directly into an account with a bank and not encashed by a bank over the counter. But generally two parallel lines and/or the words 'Account Payee' or similar may be placed either vertically across the cheque or in the top left hand corner. By using crossed cheques, cheque writers can effectively protect the cheques they write from being stolen and cashed A cheque that is not crossed is an open Cheque. A cheque may be crossed by its drawer or payee or the collecting banks. B. Types of Crossing done on a cheque: a. General Crossing: For general crossing two transverse lines on the face of cheque are essential. The paying banker shall pay the amount of the cheque only to a banker.  The cheque may bear across its face the words “& co.” or the words “not negotiable”. In addition to the two transverse lines  The cheque bears a short form "& Co. “between the two parallel lines  The cheque bears the words "A/c. Payee” between the two parallel lines.  The cheque bears the words "Not Negotiable" between the two parallel lines. b. Special or Restrictive Crossing of Cheques: When a particular bank's name is written in between the two parallel lines or without parallel lines the cheque is said to be specially crossed. The cheque may be in favour of Account Payee or Company. In addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also be written. Payment of such cheque is not made unless the bank named in the crossing is presenting the cheque. The effect of special crossing is that the bank makes payment  only to the banker whose name is written in the crossing. Specially crossed cheques are safer than generally crossed cheques. Uses of Crossing of Cheque: The usefulness of a crossing lies in the fact that a crossed cheque cannot be paid at the counter of the paying bank but can be collected only through a bank. Crossing provides protection and safeguard to the owner of the cheque, as by securing payment through a banker it can be easily detected to whose use the money is received. Where the cheque is crossed, the paying banker shall not pay it except to a banker. In case of ‘not negotiable’ crossing, the person holding such a cheque gets no better title than that of his transferer and cannot pass on a better title to his own transferee. In case of 'account payee only’ crossing, a direction is given to the collecting banker to collect cheque and to place the amount to the credit of the payee only. 1.5. Summary:  A Negotiable instrument means  A promissory note,  Bill of exchange or  Cheque Payable either to order or bearer.  Negotiable instruments can be  Payable to Order  Payable to Bearer  Payable to Joint payees  Negotiable instruments are regulated by the Negotiable Instruments Act, 1881.  Features of Negotiable instrument are:  Instrument in writing  Unconditional order / promise  A cheque is drawn on a specific banker  The promise or acceptance to pay is for payment of money and money only  Certainty of the sum  Payable to order or bearer:  Payee must be a certain person   Delivery of the instrument  Currency note  Transferability  Confers absolute and good title on the transferee  Quasi Negotiable Instruments: Instruments having the characteristics of NI, viz.  Govt. Promissory Notes  Hundis  Railway Receipts  Bill of Lading etc.  Different types of Negotiable instruments which are available:  Bearer instruments  Order instruments  Inland instruments  Foreign instruments  Demand instruments  Time or Usance instruments  Ambiguous instruments  Inchoate or Incomplete Instrument  Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.  Different types of cheques are available such as Bearer, Order, Crossed, Uncrossed, anti-dated, post dated, stale etc.  Cheque Truncation System (CTS): is an online image based cheque clearing system where images and MICR data is captured at the collecting bank branch and transmitted electronically  Bill of Exchange is an instrument in writing, containing an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.   Promissory note is an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.  Parties to bill of exchange are Drawer, Drawee, Acceptor, Payee, Endorser, and Endorsee & Holder.  Parties to a Promissory Note are Maker, Payee & Holder  Parties to a Cheque are Drawer, Drawee & Payee  There are type of crossing of cheques – General and Special.  Crossing provides a protection and safeguard to the owner of the cheque as by securing payment through a banker as it can be easily detected to whose use the money is received.  Crossing of cheque can be general crossing and special crossing  A cheque can be crossed by the holder, drawer and the Banker Keywords: NI – Negotiable Instruments PN – Promissory Notes BE – Bill of Exchange 1.6. Self Test Questions I. Choose the correct option: 1. ‘Mr. Ram, I owe you a sum of Rs 1000/’- is a) Promissory Note b) Acknowledgement of debt c) Conditional Promise d) None of these 2. “We have received a sum of Rs 15000/- from Sri Vikash Prasad Verma. The above amount will be repaid on demand. We have received Rs 15000/- in cash today is a) Promissory Note b) Acknowledgement of debt c) Neither a nor b d) Both a & b 3. A cheque becomes stale after expiry of how many months from the date of the cheque? a) 3 months b) 6 months c) 9 months d) 12 months 4. A negotiable instrument can be negotiated a) By mere delivery if payable to bearer b) By endorsement and delivery if payable to order c) Both a and b are true d) Neither A Nor B is true 5. A Quasi Negotiable Instrument is a) an instrument printed in the form of an NI b) has some characteristics of an NI c) none of them d) may be any of them  6. A truncated cheque is a) a cheque cut into 2 pieces b) a cheque in a trunk c) scan of the physical cheque d) none of them 7. Bill of Exchange is defined in Sec ______ of NI Act a) Sec 4 b) Sec 5 c) Sec 6 d) Sec 8 8. A promissory note is defined in Sec ______ of NI Act a) Sec 4 b) Sec 5 c) Sec 6 d) Sec 8 9. Crossing of the cheque can be cancelled by a) Drawer only along with his initial b) Drawer only along with his full signature c) Payee of the cheque d) Holder in due course 10. The person who is directed to pay in a Bill of exchange or Cheque is known as __ a) Drawer b) Drawee c) Holder d) Payee Answers: 1 – b, 2 – b, 3- a, 4 – a, 5- b, 6 – c, 7 – 5, 8 – c, 9-b, 10 – 2 II. Fill in the blanks:  1. General crossing of a cheque requires parallel transverse lines simply, either with or without the words ______ 2. In a BE, the number of parties are ____ 3. In India, the reasonable time for presentation to the bank in the case of cheques and drafts is …..months from date of issue 4. Inchoate negotiable instruments means ____ 5. Maker of a Bill of exchange or cheque is known as ______. 6. Negotiable Instrument Act came into existence in _________. 7. Promissory note is defined in Sec ______ of NI Act 8. Full form of CTS is ____ ____ ____ 9. Negotiable instruments can be payable to _____, ____, ____. 10. Cheque which is not crossed is a ____ cheque. Answers: 1- Account Payee, 2 – 2, 3 – 3, 4- Incomplete instrument, 5 – Drawer, 6 – 1881, 7 – 4, 8 – Cheque Truncation System, 9 – Order, Bearer, Joint payees, 10 - open III. Answer in detail: 1. What is a negotiable instrument? 2. Defines what is cheque? 3. What is Special crossing? 4. What is Bill of Exchange? 5. What is Promissory note? 6. Compare the characteristics of Bills of Exchange and Promissory note? 7. What are the advantages of crossing of cheque? 8. Explain the various special crossing of the cheque? IV. Activities: 1. Prepare a chart showing the different negotiable instrument & their characteristics? 2. Explain the class, the different ways a cheque can be crossed and it implications? 3. Do roles play on the parties involved in Bills of Exchange? Learning Objective – Unit 2 Location DURATION- 20 HOURS SESSION-1 TYPES OF ADVANCES-SECURED AND UNSECURED Learning Knowledge Performance Teaching Outcome Evaluation Evaluation and Training Method Introduction to 1. Meaning of 1. Discuss the Interactive Lending of funds, Lending of funds Secured and lecture – Principle of sound 2. Clarity on Unsecured Explanation on Lending ,Types of Principles of advances of the principles Advances Lending bank of lending with  Secured  Liquidity 2. Identify the importance of  Unsecured  Safety principles of secured and  Profitability lending Unsecured  Purpose 3. Elucidate the loans  Diversification of importance of Activity – List Risk lending out the various 3. Classification of 4. Distinguish assets which Advances between can be used as  Secured –meaning secured and security with Example unsecured against loan. loans  Unsecured- meaning with example SESSION -2 LOANS(SHORT TERM AND LONG TERM) Evaluating the key 1. Classification of 1. Discuss in Interactive role of Loan system of various methods of detail the Lecture- banks. granting advances concept of Discussion on 2. Concept of Loan Loan system Loan System system with its 2. Explain the facility advantages and various types provided by disadvantages of loans with banks 3. Specification of example Activity - types of loan 3. Enumerate the Visit a bank system draw backs and and meet  Short Term advantages of manager  Long term loan system. asking about 4. Distinguish the types of 4. Describe short term between long loans granted and long term loans term and short by them to with suitable term loans. their regular examples. customers and rate of interest charged on various types of loans. SESSION-3 METHODS OF GRANTING ADVANCES A. CASH CREDIT Understanding 1. Identify the various 1. Explain the key Interactive the concept of Advantage and features of Cash lecture Cash Credit Disadvantage of Credit Identification Cash Credit to a 2. Describe the of Cash Credit  borrower advantages and as one of the 2. Suitability of cash disadvantages method of credit in present granting loan scenario Activity –Visit 3 banks and list out how these banks fix cash credit limits. B. OVERDRAFT Overview of 1. Core Concept of 1. Describe in detail Interactive Overdraft as a Overdraft the role of lecture – On method of 2. Features of Overdraft as the concepts of granting Overdraft advancing loan. Overdraft advances. 3. Suitable examples 2. Enumerate the Activity – Visit to explain this features of a bank and system of Advances Overdraft prepare a report 3. In which cases on how to take Overdraft facility Overdraft not granted facility and how do banks and fix overdraft limits C. BILL DISCOUNTED AND PURCHASED Understanding 1. Fundamentals of 1. Detail Overview on Interactive the concept Bill Discounted and the concept of Bill lecture-On the Bill Discounted Purchased Discounted and concept of Bill and Purchased 2. Importance of Bill Purchased Discounted and Discounted and 2. Explain its Purchased Purchased advantages to bank Activity Group 3. Comparative view 3. How is Bill discussion on of all types of Discounted and the merits and advances. Purchased different demerits of from other credit various credit facilities given by facilities of bank (in form of bank. chart)  UNIT 2 LENDING FUNCTIONS OF THE BANK OBJECTIVES After reading this unit you will be able to:  Describe the Principles of Lending of funds by Banks  Understand the difference between Secured and Unsecured loan  Explain what are cash credit and overdraft and their differences?  Understand what is Bills Discounting and Purchase and their uses for short term funding STRUCTURE 2.1.Types of Advances- Secured & Unsecured 2.2.Loans: Short, Medium and Long Term 2.3.Methods of Granting Advances 2.3.1. Cash Credit 2.3.2. Overdraft 2.3.3. Bills Discounting and Purchase 2.4.Summary 2.5.Practice Questions A Bank is a financial institution / financial intermediary that accepts deposits and channels those deposits into lending activities. It is done either directly by lending to the needy borrowers or indirectly by investing is the capital markets instruments. Thus a bank intermediates between customers who have surpluses of funds and customers who need funds. Nowadays, banks offer many more services apart from their basic business explained above. For a bank, the Deposits are Liabilities, and the Loans & Advances are Assets. Banks provide both fund based and non fund based loans facilities. ‘Fund based facilities are those facilities where a bank releases money / funds to the borrowers. ‘Non fund based’ facilities are those facilities where Bank does not release money but the gives a guarantee or makes a promise or undertaking (Letter of Credit) on behalf of the customer (Applicant) in favour of third parties (Beneficiaries). A. Principles of Sound Lending: The important principles that banks must follow while lending are as follows: a. Safety: "Safety first" is the cardinal principle of sound lending. When a bank lends, it must ensure that the advance is safe; i.e. the money will definitely be returned back. For example, if a borrower invests in an unproductive or speculative venture, or if the borrower himself is dishonest, the advance would be in jeopardy. Credit worthiness of the borrower can be checked through various mechanisms such as credit ratings, CIBIL records, b. Liquidity: It is also necessary that the money lent by banks must come back on demand or according to pre-agreed terms of repayment. The borrower must be in a position to repay within a reasonable time after a demand for repayment is made. This is more likely if the money is employed by the borrower for short-term requirements and not locked up in assets or schemes which take a long time to repay. The source of repayment must also be definite. Even if the bank lends for longer periods, it must verify the end use of the funds lend, and the feasibility and viability of the borrower’s project to ensure his ability to repay the funds within the stipulated time in the stipulated manner. c. Purpose: Banks must closely scrutinize the purpose for which the money is required, and ensure that the money borrowed for a particular purpose is applied by the borrower accordingly. The purpose of the borrower should be productive so that the money not  only remains safe but is repaid also. Banks usually discourage advances for hoarding stocks or for speculative or anti-social activities. d. Profitability: Equally important is the principle of ‘profitability’. Banks have to pay interest on the deposits received by them. They have to incur expenses on maintaining their establishments. They have to make provision for depreciation and also for possible bad or doubtful debts. Therefore a reasonable profit must be made by the bank to remain a going concern. Otherwise, it will not be possible to transfer any funds to the reserve or to pay dividend to the shareholders. It is after considering all these factors a bank decides its lending interest rate. e. Security: It has been the practice of banks not to lend as far as possible except against security. Security is considered as a cushion to fall back upon in case of an emergency. Even when the bank lends for purposes of new projects or expansionary endeavors of corporates, they secure the funds by way of a charge on the assets to be created the borrower company. f. Diversification: Another important principle of good lending is the diversification of advances. It is important to spread the risks involved in lending over a large number of borrowers, a large number of industries and areas, and secured against different types of securities. g. Suitability: Even when an advance satisfies all the previous principles, it may still not be a suitable one. The advance may run counter to national interest or against existing government regulations, etc. It may also be against the banks’ policy / motto. For example, NABARD lends more towards rural projects. It may not be suitable to the banks’ area of operation to lend to say, a power project. Such things need to be considered along with the other principles of lending. There are 5 basic principles for lending known as the 5 C’s. They are:  Character: The borrower’s willingness to repay, his honesty and integrity;  Capacity: Ability to successfully run the business and repay the borrowed amount out of the profits of his business;  Capital: How much own money he has put in the business and how much he has saved from his earnings so far. It is called the net worth;   Collateral: The security offered to the bank as cover for the advance, so that if the borrower does not pay the dues, the bank can recover it by selling the security; the security should have stable value and should be easily marketable;  Conditions: The changes that are constantly occurring in the economy which may affect the borrower’s business. The other points to be considered by the banker are:  Whether the loan to the borrower will be profitable to the bank?  Whether the loan is as per the bank’s policies and is useful to the borrower?  Whether the venture of the borrower is economically, technologically, and financially viable?  Whether the borrower has adequate managerial competence to run the business? 2.1. Types of Advances- Secured & Unsecured In case of lending, money is provided on the condition that the amount borrowed will be returned, along with interest at a future date. Secured and Unsecured loans:  a. Secured Bank loans: It is in the interest of a bank to recover all the loans with the interest thereon at the due dates. To ensure this, the banks try to obtain security (whose value is greater than the loan amount) from the potential borrowers as backing for the prompt recovery of the loans. Such security may be in the form of a house / residential flat / any landed property like factory land, or Plant and Machinery, Life Insurance policies with surrender values, Gold ornaments, Fixed Deposit receipts investors’ receivable vehicles like car / two wheelers/ Buses / Truck etc. In the event the borrower fails to repay the loan with interest, the bank will be able to liquidate the security (after giving sufficient notice to the borrower) and appropriate the proceeds towards the repayment in dues of the borrower. If the sale proceeds of the securities exceed the dues of the borrower, the excess amount is refunded the borrower. b. Unsecured Bank loans: Unsecured bank loans, as the name itself suggests, are loans granted by a bank without the backing of any physical securities either primary or collateral. These loans are given to those borrowers who do not have any securities acceptable to the bank and who are considered creditworthy for the amount of loan. An unsecured loan is more risky for a bank – if the borrower fails to pay the dues, the bank has no security to fall back upon for recovering its dues. So a bank grants unsecured loans only to persons of very good credit rating, with good track record, and a steady income sufficient enough to repay the loan. The potential borrower’s existing loans also is an important point to consider. An overdraft limit may be given either as a secured or unsecured advance depending upon the borrower’s credit worthiness, purpose and size. Advances limits against bills receivable are considered secured because documents of title of goods are generally with such bills. RBI defines unsecured exposure as an exposure (both funded and non-funded) where the realizable value of the security, as assessed by the Bank, is not more than of the outstanding exposure (All types of exposures including underwriting commitments are included) of the value of security is less than the exposure such loan are called partly secured loans. Security means only tangible security such as:  Land and buildings  Plant and machinery  Raw materials  Work-in-process  Finished Goods,  Fixed Deposits,  Life Insurance Policies etc. These are “properly charged” to the Bank and will not include intangible securities like guarantees, comfort letter, etc. Every bank has to take care to see that its exposure to unsecured loans and advances does not exceed the limit fixed by the RBI / its own Board of Directors. Methods of Creating charge on securities A change over the assets of the borrower any be created by any of the methods (a) Lied, (b) pledge (c) hypothecation (d) mortage. B. Types of Secured Loans: a. Loan against Gold: The most popular type of secured loan in India is ‘Gold Loan’. Apart from banks, a number of NBFCs also compete with the banks. The Banks / NBFCs employ goldsmiths as retainers to verify the gold’s purity and value of the gold brought by their clients. RBI had imposed a loan-to-value cap of 60 per cent for the gold loan companies, though it was not made mandatory for banks. Typically, most public sector banks maintain a loan to value ratio of 70 per cent, while it is higher for some private-sector lenders. Loan to Value means the amount of loan that can be granted against the value of the asset (in this case gold). If the borrower fails to repay the loan in time, the Bank / NBFC can always sell the gold / jewellery in auction and recover the loan out of the sale proceeds. Generally the interest rate ranges between 12% – 15%. b. Loan against Insurance Policies: LIC’s (Life Insurance Corporation of India) Insurance policies are well known as very useful savings instruments for protection of one’s family’s financial welfare. In times of need, the policy holders can avail loans against their policies that have acquired ‘Surrender Values’ (SV). The policies acquire SVs after premium are paid up at least for 3 years. LIC sanctions loans up to a certain percent (generally up to 90%) of the SVs. Banks also have standard procedures and guidelines for sanctioning loans against insurance policies. The lender gets the LIC policy ‘assigned’ to itself by the policy holder as security, so that in case the loan is not repaid, the lender can always ‘surrender’ the policy and close the loan account from the proceeds from the surrendered policy.. c. Loan against Bank Fixed Deposits: Depositors deposit their savings in banks in different types of Deposits accounts depending upon their cash flow needs in future. However, due to some unexpected expenses which the depositors have to meet, they may think of encashing their term deposits before maturity. A term deposit is a contract between the depositor and the bank for keeping the deposit in the bank for a predetermined term earning them interest at predetermined rates. Premature encashment of a term deposit results in breaking the contract which results in reduction of interest rate on the deposit. Depending upon the timing of such need for cash, it may sometimes be advantageous for the depositor to avail loan against the deposit, rather than encashing it prematurely. (The interest to be paid on the loan may be less than the loss of interest due to premature encashment alternative). Normally banks grant loans on the term deposits up to 75 to 95 % of the amount of the deposits, charging interest at 1 to 2% more than what they pay on such deposits. As contracts with minors are void, loans cannot be granted to minors. However, if a depositor is a minor, loans on such deposits can be granted to the natural guardian / guardian provided the natural guardian / guardian gives a declaration that the loan amount is being utilized for the benefit of the minor depositor – e.g. to meet his/her educational or medical needs etc. d. Housing Loans There is an acute shortage of housing in the country and every citizen dreams of owning a house (or a flat as the case may be) in his life time. The RBI also encourages banks to lend to the housing sector because of the social benefit angle, by including housing loans as one of the ‘Priority Sector’ advances. (As per RBI guidelines, every bank has to lend 40% of its total advances to the ‘Priority Sectors’.) Banks give housing loans for purchase of plot and build a house thereon, or to purchase an existing house / flat, or to purchase a flat that is being built now. Any salaried employee or a self-employed person or a professional like a Doctor, Engineer, Architect, Chartered Accountant etc. with a regular income is eligible to avail a housing loan from a bank. A person wishing to avail a housing loan should contribute 20% or more of the consideration price of the house / flat / budgeted cost of construction of the house or flat from his own savings, as banks normally lend only about 80% of the consideration price etc. Tenor of the loans i.e. the number of years required to repay the loan can be fixed any where up to 25 years depending upon the surplus from disposable income available to the borrow for repayment of the loan. However it should be borne in mind that the longer the period, higher will be the total amount of interest that the borrower has to pay. Interest chargeable on the loan may at:  ‘Fixed’ rate basis (the interest rate will remain the same during the entire duration of the loan) or  ‘Floating’ rate basis (interest rate will be periodically reset as a predetermined margin over a pre-agreed index like the bank’s Base Rate (BR) or the RBI’s Repo rate or MIBOR (Mumbai Inter-Bank Offered Rate) or 1 year Treasury bill’s yield rate etc. Currently the rate of interest ranges from 8.5% to 13%.In addition to the interest charged on the housing loan, the borrower may have to pay a ‘processing fees’ of about 0.5% to 1% of the loan amount. Nowadays, most of the banks have waived processing fees on account of the acute competition among them to grant housing loan to credit worthy borrowers. e. Loans against other securities: Shares and Units in Mutual Funds: Banks offer loans against shares and units of Mutual Funds. However as the values of these securities are volatile in nature, banks stipulate around 50 % margins to be maintained, the banks have a list of ‘approved’ shares and Mutual Funds units which are eligible for the loan facility. The borrower has to pledge the shares to the bank while taking the loan. f. Vehicle Loans: Vehicle loans are very popular products among the banks as the car makers compete with one another to woo the prospective buyers with a number of attractive schemes. Banks finance the purchase of a new or a used four wheeler - car, van, bus, truck – or a three wheeler or a two wheeler. Depending upon the credit-worthiness of the borrower the bank insists on a third party guarantee. Interest is charged on actual outstanding balances at monthly intervals, at rate ranging from 9.5% to 14%. Processing Fees is also payable by the borrower at the time of the sanction of the loan. Prepayment penalty will be levied by the banks (rate varies from bank to bank). The total period permitted to the borrower to repay the entire loan, i.e. tenor of the loan ranges from 36 months to 84 months depending upon the cost of the vehicle. Quantum of loans is usually not more than 90% of the ‘on the road’ value of new vehicles and 50% of the value of the used vehicles as assessed by the bank’s empanelled automobile valuers. g. Loans for Exports and Imports: Banks grants credit to exports at both (i) pre- shipment and (ii) post-shipment stages. Export Finance: Due to the importance attached to this sector by the Government of India, RBI has given detailed guidelines to all the banks in India to give special attention to exporters’ needs for finance. An exporter can avail Pre-shipment and Post-shipment finance from banks in Rupees or denominated in foreign currencies, as per choice exercised by the exporter.   Pre-shipment finance is given to an exporter who gets an export order, to procure the raw material, manufacture or procure the finished product suitable for exports, and ship the goods.  Post-shipment finance is given to the exporter after he has shipped the goods, till the export proceeds are realized. Though availment of Pre-shipment finance is not necessary to avail Post-shipment finance, it is convenient for an exporter to avail Pre- shipment finance on receipt of an export order, ship the goods and then switch over to Post-shipment finance till realization. The proceeds of the post-shipment finance enable the experts to clear the dues under pre-shipment finance. Post-shipment is granted generally by way of discounting/purchase of export bill of exchange drawn by exports on their customers. Import Finance: Importers also may require finance for importing raw materials which are used in their exports. Letters of Credits (LCs) are opened by bnaks on behalf of the importers in favour of the foreign suppliers. On receipt of the import documents, the import bills are paid by the bank. On receipt of the import documents, the banks pay the bill amounts by arranging term loans in the name of the importers. The machineries are used by the importers and from the income generated, pay back the term loans with interest. C. Types of Unsecured Loans: a. Personal Loans: These are generally unsecured loans and are given only to the credit worthy customers well known to the bank, having adequate cash flows to repay such loans. There are a number of miscellaneous expenditures that a house holder has to meet – viz.  Children’s educational fees,  Occasional medical expenses,  Some family function,  Going on holiday,  Minor repairs or home renovations  Purchase of consumer durables like fridges, air conditioners, washing machines etc. Personal loan come very handy for the borrower to meet such expenditures. Since these loans are unsecured, banks insist on a co-borrower or a guarantor to join the borrower. b. Credit Cards Loan: A credit card is a plastic card containing the name of the card holder and the details of the ‘credit limit’ sanctioned to him. The card holder can use the card for  Purchases of goods / articles / services on credit in person or  Through internet or draw cash (as loan) through Automated Teller Machines (ATMs) – up to the credit limit sanctioned to him. The card issuing bank sends the bills to the cardholder at the end of the billing period (e.g. 11th of a month to the 10th of the next month) allowing him a grace period of 15 days to pay the bill amount to the bank (in this example, by 25th of the month). If the card holder fails to pay the dues by the due date, the bank will charge interest on the dues. Till he clears the entire dues, the card holder will not be entitled to any grace period in respect of the any further dues. The ‘credit limit’ given to the card holder is a revolving one. The full terms and conditions (T & C) of the use of the card is given to the cardholder at the time of the issue of the card. The rate of interest charged by different card issuing banks may be different (may range anywhere from 18% to 48%). Similarly, the incentives for the card holders for using the cards more often may also be different from bank to bank. Since the issue of a card is sanction of a loan limit, the bank will take the usual precautions before issuing the card (like assessing the creditworthiness of the card holder). The card holder should only use the card as a mechanism to match his payment due dates to his cash flows. Cards issued by the bank are of different grades. Starting from the simplest card with low limits for spending, Silver, Gold Platinum and Titanium cards are issued by banks depending upon the gradation of the customers’ creditworthiness and spending habits. Nowadays all cards are issued for use in foreign countries also and these cards are called ‘International’ cards. The turnover in the Cards held by Individuals is generally small. Theoretically a credit card can be used for purchases up to the limits. Since the purchases of Corporate will be for huge amounts, the Card Issuing Banks rope in Corporate as customers with an eye on the turnover, on which the quantum of fees depend. With a single account for debiting, many ‘Corporate Cards’ can be issued to a single company for the use of their Executives for their travel etc. and ‘Corporate Commercial Cards’ are issued for the purchases made by the Corporate for their day to day operations. Based on the creditworthiness of the Corporate, the credit limits are fixed. Two well-known Card Issuing Associations are VISA and MASTERCARD, as the cards carrying their logo have universal acceptance. Card issuing banks become members of these Associations. So the names of the Card Issuing banks appear on the cards along with the logos of VISA / MASTERCARD. These cards can be used in any establishments anywhere in the world displaying the logo of these two Associations. 2.2. Loans: Short, Medium and Long Term Banks grants advances in the following forms: Advances Bills Purchased Loans Cash Credit Overdraft & Discounted Medium Long Short Term Term Term Bank loans are the easiest source of availing finance. A bank loan is an extension of credit by a bank to a customer or business house; it has to be paid along with interest. Features of Bank Loans: Bank loans have the following characteristics:  A bank loan may be either secured or unsecured depending upon the circumstances.  The interest charged by the bank on such a loan may be either at the fixed rate or at variable rate.  If mortgage loan is to be obtained, the borrower has to pay a number of fees such as title searching fees, application fees, inspection fees, etc. Advantages of Bank Loans: Bank loans offer the following advantages:  The loan can be easily procured.  The loan can be used for short-term as well as medium-term financing.  Interest paid on a bank loan is tax deductible expenditure of a business entity. Disadvantages of Bank Loans: The disadvantages of bank loans are:  Some bank loans carry prepayment penalty.   Borrowing too much from bank can lead to increase in interest burden and hence decreased cash flow.  In most cases, the bank does not disburse the whole amount of loan applied for; it often grants loans cash lower than the loan asked for. Classification of the Loans based on repayment period is as follows:  Loans for period up to 1 years are called Short Term loans  If the loan period is more than 1 years but less than 5 years then they are called Medium Term loans  In a loan period is more than 5 years then they are called Long Term loans. Corporates require short term loans for Working Capital needs and Long Term Loans for Long Term investments in Plant and Machinery, Land and Buildings, Projects etc. Small and Medium Enterprises (SMEs) are also included in the Corporate Sector Short Term Loans for Corporates:  The short term facilities are repayable within a year  Working capital loans are dishonoured as Pre-shipment and Post-shipment loans, Cash Credit (Overdraft) accounts, bill discounting limits  Non-funded facilities like Letters of Credits and Bank Guarantees etc. Long Term Loans for Corporates:  Repayable over a period of 5 to 7 years  Required for meeting the capital expenditures for investing in Land and buildings, plant and machinery, and in new projects  Repayment structures depend on the projected future cash flows of the corporate borrowers  Foreign Currency Loans are also granted for the above purpose. Banks also, as permitted by the RBI, extend foreign currency loans (External Commercial Borrowings-ECBs) to their corporate clients. The ECBs can be utilized by the Corporates for Working Capital needs or importing Plant and machinery etc. A. Short term loans: Short term loans are designed for shorter repaying duration. Short term loans are to be repaid quickly and may be provided for any purpose including educational expenses, home improvements, auto repairs, clearing smaller debts etc. a. Advantages of short term loans:  Short term loans do not usually require collateral  Short term loans are granted in several days or even written hours  Short term loans require little paperwork  Short term loans provide money when one feels a sudden unexpected need  With short term the borrower does not burden himself with long term obligations b. Disadvantages of short term loans:  Short term loans are usually more expensive. As short term loans are not secured by collateral the lender changes higher interest rates to cover the risk they bear.  The lender of short term loans is likely to investigate the credit history of the borrower and it will be offered only when it is found satisfactory.  Short term loans are granted for a smaller amount B. Term Loan a. Features of Term Loans: Term loan is a part of debt financing obtained from banks and financial institutions. The basic features of a term loan are discussed below: i. Security: Term loans are secured loans. Assets which are financed through term loans serve as primary security and the other assets of the company serve as collateral security. ii. Obligation: Interest payment and repayment of principal on term loans is obligatory on the part of the borrower. Whether the firm is earning a profit or not, term loans are generally repayable over a period of 5 to 10 years in installments. iii. Interest: Term loans carry a fixed rate of interest which is negotiated between the borrower and lender at the time of dispersing the loan. iv. Restrictive Covenants: Besides asset security, the lender of the term loans imposes other restric­tive covenants also e.g. Lenders ask the borrowers to maintain a minimum asset base, not to raise additional loans or not to repay existing loans, etc. v. Convertibility: Term loans may be converted into equity at the option and according to the terms and conditions laid down by the financial institutions. b. Advantages of Term Loans: Term loans are one of the important sources of project financing. The advantages of term loans are as follows: i. From Point of View of the Borrower: Cheap: It is a cheaper source of medium-term financing. Tax Benefit: Interest payable on term loan is tax deductible expenditure and thus taxation benefit is available on interest. Flexible: Term loans are negotiable loans between the borrowers and lenders. So terms and condi­tions of such type of loans are not rigid and this provides some sort of flexibility. Control: Since term loans represent debt financing, the interest of the equity shareholders are not diluted. ii. From Point of View of the Lender: Secured: Term loans are provided by banks and other financial institutions against security Thus term loans are secured loans. Regular Income: It is obligatory on the part of the borrower to pay the interest and repayment of principal irrespective of its financial position—hence the lender has a regular and steady income. Conversion: Financial institutions may insist on convertion of the term loans into equity. Therefore, they can get the right to control the affairs of the company.  c. Disadvantages of Term Loans: Term loans have several disadvantages which are discussed below: i. From Point of View of the Borrower: Obligation: Yearly interest payment and repayment of principal is obligatory on the part of bor­rower. Failure to meet these payments raises a question on the liquidity position of the borrower and its existence will be at stake. Risk: Like any other form of debt financing term loans also increase the financial risk of the com­pany. Debt financing is beneficial only if the internal rate of return of the concern is greater than its cost of capital; otherwise it adversely affects the benefit of shareholders. Interference: In addition to collateral security, restrictive covenants are also imposed by the lenders which lead to unnecessary interference in the functioning of the concern. ii. From Point of View of the Lender: Negotiability: Terms and conditions of term loans are negotiable between borrower and lenders and thus it sometimes can affect the interest of lenders. Control: Like other sources of debt financing, the lenders of term loans do not have any right to control the affairs of the company. 2.3. Methods of Granting Advances A. Cash Credit Overdraft and cash credit are widely used external sources of finance for availing short term borrowing at some cost. Both cash credit and overdraft are used by businesses to manage short term working capital requirements. However, they differ on various aspects which include nature of account, charges and fees, amount, purpose, type of security, use of funds, interest rate etc. Both these facilities are repayable on demand and therefore classified as sources of finance payable on demand or loans payable on demand. However, these facilities are rarely re- called in real-life scenario except in very rare circumstance like customer’s business and financial position is going from bad to worse phase as time passes by or in case when the value of the security is found extremely low during period revaluation of the security or during renewal of the facility. Both Overdraft and Cash Credit accounts are both open-ended