Unit- 12 BANKING

UNIT-12

BANKING

            Banking is an important aid to trade. It ensures the smooth running of business by providing finance whenever and wherever required. Banking includes the services such as depositing of money, withdrawing of money and the transferring.

BANK

Bank is a financial institution which deals with all the financial transactions of collection of deposits from the public, safeguarding the deposits and lending for the borrowers.

TYPES OF BANKS.

Banks are of the following types.

1. CENTRAL BANK.

            Central bank is the apex banking institutions of a country. It controls entire banking activities of that country. So it is known as banker’s bank.

            The central bank of the England is Bank of England, The USA is Federal Reserve System and the Maldives is Maldives Monetary Authority (MMA).

Features of Central Bank.

a. It is the principal bank of the country.

b. It acts as the banker to the government.

c. It does not deal with the public directly.

d. It acts as banker’s bank.

Functions of Central Bank

1. The note issue.

            The central bank only has the right to issue currency notes and coins for the particular country. According to the necessity of currencies, the central bank issues notes and coins on behalf of the government and these currencies are spread to the public through the commercial banks.

2. Acts as a banker to the Government.

            Central bank acts a banker to the government because it does all the financial transactions for the government in domestic and international.

3. Controller of foreign exchange.

            The exchange of different currencies of different countries is known as foreign exchange. It will be under the control of central bank because the rate of exchange is fixed by it.

4. Acts as banker’s bank.

            The central bank acts as a banker’s bank that is every commercial bank has to keep an account with the central bank. Whenever commercial banks require money, the central bank help them.

5. The lender of last resort.

            Central bank acts as a lender of last resort. Whenever the commercial banks or government need money, the final solution is given by the central bank. The central bank decides the rate of interest and the amount of loan.

6. The controller of credit.

            Central bank regulates the supply of money according to the purchasing power of currency of the country. The over issue of currency may lead to the inflation and financial crisis.

2. COMMERCIAL BANKS.

            Commercial bank is also known as retail bank. It is having direct deal with the public in the form of depositing, lending and safeguarding of money.

Functions of commercial bank.

1. Collection of deposit.

            A commercial bank collects the money through the following types of accounts.

a. Saving Account.

            Saving account is known as time deposit. The main purpose of this account is to have savings among the customers. Prior notice of withdrawal is required in this account to take money. Lower rate of interest is paid to the customers.

b. Current Account.

            Current account is also known as demand deposit. Customers can deposit and withdraw any amount at any time. Normally there is no any interest to the customers. Current account is suitable for businessmen.

c. Fixed Deposit Account.

            Fixed deposit account is also known as term deposit. Customers can deposit money for a fixed period of time and can enjoy highest rate of interest. Customers can withdraw money after the expiry of the stipulated term.

 2. Lending of Money.

            A commercial bank lends money in the following ways.

a. Loan.

            A commercial bank gives a fixed amount to the customers in the form of loan. A separate account is required for a loan is called loan account. The borrower should repay the amount with a fixed rate of interest within the agreed period. Loans may be

            1. Short term loan (It is to be repaid within one year)

            2.  Long term loan (It is to be repaid within more than one year)

Features of a loan.

1. Loan may be long term or short term

            3. Interest rate is fixed and repayable during the period.

            2. Collateral securities are needed

            4. Separate account called loan account is required.

b. Overdraft.

            It is an informal way of lending to the customers those having current account. It is a short term payment and the customers should pay high rate of interest to the banks.

Features of overdraft.

1. Overdraft is a short term advances

2. Interest rate is variable.

3. No need of collateral securities

4. Current account is needed

5. Helps to business men.

3. Collection of cheques, demand draft (DD), bills, etc. and its encashment.

4. Safe locker.

             The commercial bank provides the facility of safeguarding the valuable things of the customers by charging a small amount. Customers are allowed to keep their valuables such as gold, diamond, silver, documents, etc in this service.

5. Night safe facility.

            In this service, the customers can deposit money after banking hrs. Certain developed banks offer this service to their customers.

6. Plastic money system

            Plastic money refers to the use of cash cards such as debit cards and credit cards.

            a. debit cards.

             It is a plastic card used to pay for the purchases or to withdraw money from the actual deposit in the bank. In order to with draw money, the customers have to keep sufficient balance in their accounts. Eg:- VISA, AMEX, MASTER,etc.

            b. Credit card

             It is similar to debit card but the difference is the customers have to pay the money after a stipulated period that how much they withdraw using this card. High rate of interest is payable by the cardholders.

            Eg:- Visa, Master card, Maestro, American express, etc

7. Standing order.

             Under this service the customers are allowed to pay a fixed amount at regular intervals. Here the customers can give a written order to the bank furnishing the payments such as rent, insurance premium, interest, etc.

8. Direct debit.

             It is similar to standing order but the creditor gives order to the buyers’ bank to pay the money with the prior authorization of the buyer (debtor). Here the amount may be varying according to the invoices and the creditors are paid immediately.

9. Bank statement.

            Bank statement is a valuable document issued by the bank to their customers. It shows the summary of all financial transaction during a particular period. This statement can be used for further financial dealings.

10. Bank draft.

            This is an easiest method to remit a large amount of money from one account to another by charging a commission.

11. ATM (Automatic Teller Machine)

            This is the latest service offered by the banks to their customers to withdraw cash using cash cards at any time without being in the queue in front of the bank.

12. Traveller's Cheque

            This is a cheque used instead of carrying large amount of foreign currencies when travelling abroad. These cheques can be encashed while abroad.

13. Bank Giro credit system.

            This service can be used to pay a single amount to a number of accounts at the same time. It is suitable to the payments such as salaries of the employees and payments to the creditors, etc.

14. CDM (Cash Depositing Machine)

            This is similar to ATM but customers can deposit money into their account without visiting the bank

3. FOREIGN BANK (OVERSEAS BANK).

            Foreign bank is the branch of any foreign bank situated in the country. It is an example of commercial bank and the main aim of this bank is to help their country’s people in foreign countries.

            Eg:- State bank of India (origin-India),  Habib bank (Pakistan), Bank of Ceylon (Sri Lanka), etc

MODES OF PAYMENTS OF COMMERCIAL BANKS

1. Cheque

2. Credit transfer (Transfer of money from one account to another directly)

3. Standing order

4. Direct debit

5. Bank draft (Demand Draft) (DD)

6. Travellers cheque

7. Electronic transfer

                        a. Online banking (Internet banking)

                        b. Use of plastic money (Debit card and credit card)

                        c. Telegraphic transfer

CHEQUE

                 A cheque can be defined as a written order by a person to a banker to pay a specified sum of money on demand to the bearer of the cheque or to the named person on it.

                 

PARTIES TO THE CHEQUE

1. Drawer: - Drawer is person who writes or signs the cheque. Drawer orders the bank to pay an amount specified to the person named in the cheque.

2. Drawee: - Drawee is a bank on which the cheque is drawn and is ordered to pay the amount specified on the cheque.

3. Payee: - Payee is the person to whom the cheque is payable. The drawer him self can be the payee also.

TYPES OF CHEQUE

1. Open or bearer cheque.

                 It is type of cheque which can be encashed easily by anyone who possesses it. It is not safe to issue an open cheque. This type cheque can be issued to the persons who do not have a bank account.

                  

2. Crossed cheque.

                  If two parallel lines are drawn across the face of a cheque, it becomes a crossed cheque. The bank will not pay cash over the counter on a crossed cheque, because the crossing indicates that the cheque must be paid into a bank account. If a thief pays a stolen crossed cheque in to the wrong account, it will be possible to trace the account to which it has been credited.

 

TYPES OF CROSSING OF THE CHEQUE

1. General Crossing

                 If a cheque bears across its face two parallel transverse lines without any words as (‘and company’ ‘or & Co.’) written in between these two lines, it is called general crossing. In general crossing the name of the banker is not mentioned.

2. Special crossing

                 It is a cheque in which the name of the payee’s bank is written (either with or without the words 'Not Negotiable') between the two parallel lines and hence it can be paid to that specific banker only. It is called special crossing. Special crossing

3. Account payee crossing

                 This type of crossing can be made in both general and special crossing by adding the words Account Payee. In this type of crossing the collecting banker is supposed to credit the amount of the cheque to the account of the payee only.

THE CONTENTS OF A CHEQUE (THE FEATURES OF A CHEQUE)

1. The date - All cheques should carry the date on which they are drawn. The date may be prior or post. The drawee bank will refuse to pay a cheque after six months have elapsed from the date of issue.

2. The drawee’s name -  Each cheque carries the name of the bank on which the cheque is drawn and the address of the branch on which it is drawn. That bank is known as the drawee.

3. The payee’s name - This is the name of the person to whom the cheque is issued, must be written on the top line of the cheque.

4. The drawer’s name – This is the name of the person who writes or sign on the cheque.  It is often printed beneath the box in which the figures are written.        

5. The branch code number - This appears in the top right-hand corner of the cheque and again at the bottom in the magnetic characters to facilitate the automatic handling of the cheque.

6. The drawer’s signature - The drawer must also sign the cheque, to authorize the bank to pay the money out. If the cheque is not signed, or if the signature does not correspond with the specimen signature, the bank will not encash the cheque.

7. The amount - The amount that is to be paid must appear both in words and in figures. There is provided specified space for this purpose.

8. The cheque number - It appears in magnetic characters in the bottom left –hand corner of the cheque and also appears on the customer’s bank statement.

9. The account number - It appears at the bottom of the cheque, again in magnetic characters, to facilitate the automatic handling of the cheque.

DATING OF A CHEQUE

   A cheque may be Ante-dated or Post-dated.

1. Ante-dated cheque.

            A cheque which bears a date which is prior to the date (past) on which it is drawn up is called an ante-dated cheque.

2. Post-dated cheque

            A cheque which bears a date which is yet to come (future), it is known as a post-dated cheque. A post-dated cheque shall not be paid by the bank until the arrival of the date mentioned therein.

3. Stale cheque

            An ante dated cheque will not be paid by the bank if it is very old or out of date. A cheque is usually considered as a stale cheque if it bears a date of six months back.

REASONS FOR THE DISHONOUR OF A CHEQUE (REFUSAL OF A CHEQUE)

1. The cheque may be Stale cheque

2. There may not be sufficient funds in the drawer’s account.

3. The drawer’s signature may not be the same as the specimen signature.

4. The amount written in words and figures may not be the same.

5. Defaced or torn cheque.

6. The cheque may be post-dated (The date is yet to come)

MONETARY POLICIES OF CENTRAL BANK

        According to the condition of the economy, the Central Bank updates certain measures to protect the economy. During Inflation and Deflation the Central bank take measures to balance the economy.

        Central bank controls the supply of money and to maintain price stability by controlling credit.

Credit Control Methods

        Following are the methods of credit control.

   1. Bank Rate: - It is the rate fixes by the central bank to maintain the surplus fund upon the other banks. During inflation, the bank rate is increased and during deflation the rate is decreased.

   2. Variable Reserve Ratio: -Every commercial bank has to keep a minimum cash reserve with the Central bank. During inflation this ratio is increased and during deflation it is decreased.

  3. Credit Rationing: - In this method, the central bank fixes a limit on the amount of loans for every commercial bank. It may be varied according to the condition of the economy.

RECENT TRENDS IN BANKING

   Following are the recent developments in the present banking sectors.

1. Automatic Teller Machines.

2. Tele-banking.

3. Internet Banking (Online banking)

4. EPOS-(Electronic Funds Transfer at the Point of Sale)

5. Cash cards (Debit and credit cards)

6. Mobile banking

7. CDM (Cash Depositing Machine)

INTERNATIONAL PAYMENT METHODS OF COMMERCIAL BANKS

1. Letter of credit/documentary credits

It is payment guarantee given by the importer’s bank to the exporter. When the goods are delivered to the importer, the exporter gets the money from the bank.

2. Electronic transfer

 Online transfer or computerized transfer of funds from country to country. Eg:- SWIFT transfer.

3. Bill of exchange

            Unconditional order signed by the person owed the money

4. Credit card/Credit card

 It is relatively fast and instant method of payment usually for smaller amounts

5. International bank draft

This is special draft which can be encashed in foreign branches of a bank.