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Premium member Presentation Transcript Overview of Banking: Overview of Banking Sagar mal sharmaObjectives: Objectives From this topic you will be able to Understand the meaning of banking Understand the role of banks as Financial intermediaries Constituents of the payment system Financial services providers Appreciate the role of the banking system in economic development Understand the various products and services offered by banks Identify various banking channels Sagar mal sharmaDefinition of Banking: Definition of Banking Section 5 (b) of the Banking Regulation Act 1949 defines “Banking” as “Accepting for the purpose of lending and investment, deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise” No definition of banking can be comprehensive enough in the present context Sagar mal sharmaRoles of Banks: Roles of Banks Intermediation Between those who save money and those who need money Risks in lending Credit Risk Liquidity Risk Interest Rate Risk Banks are essentially risk managers Financial intermediation plays an important economic function Sagar mal sharmaRoles of Banks [Contd.]: Roles of Banks [Contd.] Payment system Pay deposits on demand Payment through cheques Facilitate movement of money Circulatory system of the economy Financial services provider Products of mutual funds and insurance companies Collection of utility bills, etc. Sagar mal sharmaBanking – A Business of Trust: Banking – A Business of Trust Banking is based on the trust that banks will honour their commitments Principles on which banking business is based Liquidity Safety Profitability Secrecy Service Quality Sagar mal sharmaSummary: Summary Up to this point you learned that “Banking” is defined as “accepting for the purpose of lending and investments, deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise” Banks are risk managers Banks are constituents of the payment system Banks provide various financial services Banking is a business of trust Sagar mal sharmaBanking Services and Products: Banking Services and Products In this section you will be able to Understand the various financial services and products offered by banks Understand various payment and remittance services Sagar mal sharmaVarious financial services & products: Various financial services & products Payment system constituent Payments and remittances Collection Financial Intermediary Deposit Loan Allied Services Distribution Collection Demat services Safe keeping Advisory Sagar mal sharmaPayment and Remittance services: Payment and Remittance services In this section you will be able to Understand various modes provided by banks for making local payment as well as making payment at other places Understand various modes available for remitting money to other places Sagar mal sharmaCheque: Cheque A written instruction issued by a customer (Drawer) to his bank (Drawee) to pay the specified amount to the person named (Payee) in the cheque Crossed and uncrossed cheques Requirement of sufficient balance for making payment Sagar mal sharmaPayorder/Banker’s Cheque: Payorder/Banker’s Cheque A cheque issued by a bank on itself For local payments To ensure certainty of payment An image of a Banker’s cheque Sagar mal sharmaDemand Drafts: Demand Drafts Cheque issued by a bank on itself but payable at another branch In case there is no branch of the issuing bank, arrangements can be made with the other bank(s) having its/their branch(es) Sagar mal sharmaMulti City Cheques: Multi City Cheques A cheque which can be paid at any branch of the bank Networking of the branches and centralised computer system is a pre-requisite Sagar mal sharmaElectronic Fund Transfer (EFT): Electronic Fund Transfer (EFT) Faster mode of remitting money to far away places Centralised computer system enables the transaction The payment can be made instantly if the payee / beneficiary has an account with the payment branch In case payer and payee maintain accounts with two different banks, the transaction can be completed through the Reserve Bank of India Cost effective and fast mode of transaction Sagar mal sharmaSummary: Summary Up to this point you learned that Some of the products offered as part of the payment service are Cheques Payorder / Bankers Cheque Demand Draft (DD) Multi City Cheques Electronic Funds Transfer (EFT) Sagar mal sharmaPayment Services [Contd.]: Payment Services [Contd.] In this section you will learn that Some other products offered as part of the payment service are Debit card Credit card Travel card Sagar mal sharmaDebit Cards: Debit Cards A substitute for cheques Can be used for withdrawing cash from ATM as well as making payments to third parties through POS Account of the customer is debited instantly Add-on facilities 24 X 365 days banking Sagar mal sharmaCredit Cards: Credit Cards Customer gets certain credit limit from the credit card issuing bank The amount utilized is debited to credit card account Customer gets some time to make payment to the bank Customer gets interest free credit for upto 50 days Sagar mal sharmaTravel Cards: Travel Cards A pre-paid debit card Useful for travel abroad Image of a travel card Sagar mal sharmaSummary: Summary In this section you learned that Some more products offered as a part of the payment service are Debit card Credit card Travel card Sagar mal sharmaCollection Services: Collection Services In this section you will be able to List the different types of collection services Describe each of these specific collection services Sagar mal sharmaDifferent Types of Collection Services: Different Types of Collection Services Transfer Local Clearing ECS or Electronic Clearing Cheque Collection National Clearing CMS – Cash Management Services Bills Collection Services involving Foreign Exchange Sagar mal sharmaTransfer: Transfer Transactions involving transfer of money from one account to another account within the branch of a bank or within the branches of the same bank Inter-connection through networking enables speedier transfer within branches Traditional methods (without networking) take time in realisation of proceeds Sagar mal sharmaLocal Clearing: Local Clearing Facilitating collection of cheques which are drawn on local branches of banks Bankers meet at Clearing House for exchange of cheques RBI and / or SBI and / or commercial banks maintain Clearing House in different locations Day’s inward and outward cheques between banks are exchanged and transaction amounts are “netted” Local clearing is “NET” settlement Sagar mal sharmaElectronic Clearing Service (ECS): Electronic Clearing Service (ECS) Payment instructions are transmitted electronically Covers high volume, low value transactions Both debit (ECS Debit) and credit (ECS Credit) transactions are covered Managed by RBI or SBI Credit ECS Example: Interest on Securities, Dividends, Regular Salaries Debit ECS Example: Insurance premiums, Loan repayments, Utility bill payments Sagar mal sharmaECS [Contd.]: ECS [Contd.] Benefits Speed Accuracy Secured channel Avoids manual intervention (processing of transactions) Saves time due to systemic handling Benefits flow to bank, customer and user public Sagar mal sharmaSummary: Summary Up to this point you learned that Some of the products offered as a part of the collection service are Transfer Local Clearing Electronic Clearing System (ECS) Sagar mal sharmaCollection Services [Contd.]: Collection Services [Contd.] In this section you will learn that Some more of the products offered as a part of the collection service are Cheque Collection National Clearing Cash Management Service (CMS) Sagar mal sharmaCheque Collection: Cheque Collection Local cheques are collected in local clearing Outstation cheques (upcountry) are collected by sending the cheques to respective banks’ branches Unlike local clearing, cheque collection takes time due to travel and realisation of proceeds into customer’s account Sagar mal sharmaNational Clearing: National Clearing Speedier collection of outstation cheques drawn on larger cities RBI has linked larger cities Works under the same principle as local clearing Communication has enabled networking and efficiency in collection Unlike outstation cheque collection, national clearing facilitates faster collection Sagar mal sharmaCash Management Service (CMS): Cash Management Service (CMS) Best suited for customers with wide network of operations and dealers Enables to manage liquidity efficiently through speedier collection and efficient management of payments Availability of MIS on collections and payments – a major benefit of CMS Distributed collection and payment at point of occurrence of transactions Enables customers under CMS to reconcile their payments and collections on a daily basis Sagar mal sharmaSummary: Summary Up to this point you learned that Some more of the products offered as a part of the collection service are Cheque Collection National Clearing Cash Management Service (CMS) Sagar mal sharmaCollection Services [Contd.]: Collection Services [Contd.] In this section you will learn that Some further products offered as a part of the collection service are Bill Collection Foreign Exchange Sagar mal sharmaBill Collection: Bill Collection Instead of paying through cheques, business houses draw bills of exchange at times Bills can be demand bills or usance bills Invoice, bill and document of title to goods (trade documents) are handed over to the bank by seller The Bank sends the same to the buyer’s bank for collecting payment Buyer’s bank hands over all trade documents upon receipt of payment from buyer on a demand bill or receipt of acceptance from the buyer in case of usance bill Buyer’s bank remits the proceeds to the seller’s bank and seller gets money for goods / services sold Sagar mal sharmaForeign Exchange [Forex]: Foreign Exchange [Forex] Need arises when payments are to be made to a beneficiary in an overseas country in foreign currency Payments received in foreign currency needs to be realised in Indian currency Banks maintain accounts in an overseas country to facilitate transactions involving foreign currency Such accounts are known as “Nostro” accounts Sagar mal sharmaSummary: Summary Up to this point you learned that Some further products offered as a part of the collection service are Bill Collection Foreign Exchange Sagar mal sharmaDeposit & Credit Services: Deposit & Credit Services In this section you will be able to Describe the products offered by banks in deposit services Describe credit products offered by banks in retail segment Identify various products offered as business credit Sagar mal sharmaDeposit Services: Deposit Services Current Accounts Demand deposits No interest is paid on balances in current accounts Savings Accounts Demand deposits for non-business entities Interest is paid on balances Fixed Deposit Accounts Accepted for fixed period Pre-mature payment is permitted as measure of customer service Recurring Deposit Accounts Saving of a fixed sum every month for a fixed period Sagar mal sharmaRetail Credit Products: Retail Credit Products Retail Loans Personal Overdrafts Credit Cards Sagar mal sharmaRetail Loans: Retail Loans Retail Loans Provided to individuals Nature Consumer durables Housing Vehicle Personal expenses Eligibility Margin Interest application Repayment – monthly or quarterly Unsecured and secured Sagar mal sharmaPersonal Overdrafts: Personal Overdrafts Personal Overdraft For unexpected and periodic requirements Eligibility Margin Interest application Repayment Unsecured and secured Sagar mal sharmaCredit Cards: Credit Cards Credit Cards For purchases / withdrawals Eligibility Credit limit Repayment – monthly or in installments Unsecured Sagar mal sharmaDeposit & Credit Services: Deposit & Credit Services Up to this point you have learned of The products offered by banks in deposit services The credit products offered by banks in retail segment Sagar mal sharmaDeposit & Credit Services [Contd.]: Deposit & Credit Services [Contd.] In this section you will be able to Identify various products offered as business credit Sagar mal sharmaBusiness Credit: Business Credit Business credit For acquisition of fixed assets For financing current assets Eligibility Amount Borrowing/repayment Secured and unsecured Sagar mal sharmaTerm Loans: Term Loans Given for acquiring of fixed assets Secured by a charge on the assets created out of bank finance Margin requires to be contributed Repayment is out of profits generated by the assets created and is spread over a time in installments Sagar mal sharmaLeasing: Leasing The assets required by the business are acquired by the bank and leased out to the customer Lease rentals are paid by the customer Not very popular now as the tax incentives available earlier are now withdrawn Sagar mal sharmaWorking Capital Facilities: Working Capital Facilities In this section you will understand the various types of working capital facilities Nature overdraft cash credit packing credit demand loans and lines of credit business cards Sagar mal sharmaWorking Capital Facilities: Working Capital Facilities Given for financing the working capital cycle Can be Pre sale or Post sale financing Overdraft For meeting short term requirements For meeting temporary mismatches in cash flow Can be secured or unsecured Cash Credit Most Common and popular facility in India Running Account Permanent in nature Limit established and withdrawals within limit Secured by a hypothecation charge on current assets Margin is maintained over the value of assets Sagar mal sharmaWorking Capital Facilities: Working Capital Facilities Packing Credit Similar to cash credit For meeting export orders Originally on order to order basis Presently running account facility is permitted Concessive interest rate Liquidation can be only by export proceeds Delay in liquidation attracts penalty Secured by a charge on the current assets Sagar mal sharmaWorking Capital Facilities: Working Capital Facilities Demand Loans/Lines of Credit Demand loan is for meeting short term requirements Attracts cheaper interest Preferred by large corporates as cost effective Liquidated at the end of the stipulated period Line of Credit is an assurance by the banker to make available short term credit when needed Terms and conditions are pre-agreed Gives a feeling of security for the corporate The assurance is over a period of time Sagar mal sharmaWorking Capital Facilities: Working Capital Facilities Business Card Equivalent of a credit or debit card to individuals Enables business entities to make their purchase of required supplies without resorting to use of cheques or demand drafts Interest is charged from day one Being popularized in India Sagar mal sharmaSummary: Summary In this section you learned that Term loans and leasing finance is provided for acquisition of fixed assets Working capital requirements are ever changing They can be pre-sale financing or post-sale financing The nature of facilities of pre-sales financing are Overdraft Cash Credit Packing Credit Demand Loans and Lines of Credit Business Card Sagar mal sharmaPost Sale or Trade Finance: Post Sale or Trade Finance In this section you will understand the various modes of financing post sale or credit sales Cheque purchase Bill purchase Bill Discount Letter of Credit Bill Negotiation Guarantees Sagar mal sharmaPost Sale or Trade Finance: Post Sale or Trade Finance Cheque Purchase Avoids delay involved in collection of cheques Funds are made available to sellers immediately Interest is charged from the date of purchase to date of realization of the cheque Bill Purchase Advance against documentary bills is payable at sight Bills are then sent for collection Advance is liquidated from collection proceeds Interest is charged from the date of purchase to the date of receipt of proceeds is recovered upfront Sagar mal sharmaPost Sale or Trade Finance: Post Sale or Trade Finance Bill Discount Advance against documentary Usance bills Interest charged for the Usance period is called discount Discount is recovered upfront Sagar mal sharmaPost Sale or Trade Finance: Post Sale or Trade Finance Letter of Credit Guarantee given by the purchaser’s bank to the seller that the bill representing sale of goods will be paid Parties to an LC are applicant (buyer of goods), issuing bank (buyer’s bank), and beneficiary (Seller of goods) Treated as a credit facility by the buyer’s bank It is a non-fund based facility Normally secured by a charge on current assets Commission is charged resulting in fee income to bank Sagar mal sharmaPost Sale or Trade Finance: Post Sale or Trade Finance Bill Negotiation Purchase or discounting of a bill accompanied by an LC Risk to negotiating bank is less Interest/discount is charged upfront Sagar mal sharmaPost Sale or Trade Finance: Post Sale or Trade Finance Guarantees Issued by banks at the request of customers in respect of transactions other than normal trade transactions It can be as a replacement of EMD, for receipt of mobilisation advance, for release of retention money, towards payment of penalty for non performance Commission is charged for issue of guarantee resulting in fee income to bank It is a non-fund based facility Sagar mal sharmaSummary: Summary In this section you learned that The various products available for post-sale finance are: Cheque Purchase Bill Purchase Bill Discount Letter of Credit (LC) Bill Negotiation Guarantees Sagar mal sharmaAllied Services: Allied Services In this section you will be able to Appreciate the various allied services offered by banks in their role as provider of financial services Sagar mal sharmaProvider of Allied Services: Provider of Allied Services The services provided by banks under the role of provider of allied services are Distribution Collection of taxes and bills DeMAT accounts Safe keeping Advisory services Sagar mal sharmaDistribution: Distribution In banking today, distribution of products and third parties have assumed great importance due to Generation of fee income Ability to provide single umbrella service Ability to create exit barrier Activities involved are: Mutual Fund Units Insurance Products Sale of Bonds Trade in Gold / Gold coins Mobile Phone Recharge Shares of companies offering Public Issues Sagar mal sharmaCollection of Taxes and Bills: Collection of Taxes and Bills The products offered by banks within the collection service are Taxes Utility Bills Sagar mal sharmaDeMat Account: DeMat Account A depository is like a bank. Only difference is that it holds your securities and not cash The account opened with a depository participant is called a DeMat account Dematerialisation is the process of converting physical shares into electronic form Rematerialisation is the process of converting securities from electronic form into physical form Sagar mal sharmaDeMat Account: DeMat Account Physical securities are transferred on basis of transfer deeds, DeMat securities get transferred electronically Each security (i.e., share of a particular company) has a unique identification No. called ISIN (International Securities Identification Number) through which the securities are recognised Sagar mal sharmaDeMat Account: DeMat Account Transfers are affected Through the TIFD or Delivery Slip Which is given by the seller to his DP The shares will be transferred out of the sellers DeMat account And into the buyers DeMat account with his DP The entire clearing process is put through a central depository At present we have two depositories, namely CDSL & NSDL who are registered with SEBI Sagar mal sharmaSafe Keeping: Safe Keeping Safe Deposit Vault: Safe keeping facility is a traditional function of banks Lockers provided at very reasonable rates Rents are charged as per size of the locker and are payable in advance Lockers can be hired by individuals, firms, Ltd. Companies, associations, societies etc Lockers are rented out for a minimum period of one year Sagar mal sharmaSafe Keeping: Safe Keeping Safe Custody Service: Under safe custody, banks accept sealed packets for safe keeping in their strong rooms for which a receipt is issued Articles are returned upon the customer handing over the receipt Not offered any more as a matter of course Banks today deposit the duplicate keys of branches for safe custody with other banks in the area for use in emergencies Sagar mal sharmaAdvisory Service: Advisory Service The product offered by banks within the Advisory service is: Investment Advice Sagar mal sharmaSummary: Summary In this section, you learned that The services provided by banks under the role of provider of allied services are Distribution Collection of taxes and bills DeMAT accounts Safe keeping Advisory services Sagar mal sharmaBanking Channels: Banking Channels In this section, you will be able to Appreciate the various channels offered by banks in their role as providers of financial services Sagar mal sharmaBanking Channels: Banking Channels Banking Channels: ATMs POS Terminals Internet banking Phone banking Mobile banking Branch Migrating from branch banking to other channels- Advantages: Convenience to customers Cost effective to banks Nearly 70% of transactions through non-branch channels Sagar mal sharmaSummary: Summary In this section you learned that The various non-branch banking channels available in India are: ATMs POS terminals, mainly for credit cards Phone Banking (call centre) Internet Banking Mobile Banking (SMS through mobile phones) There is increased use of non-branch channels Sagar mal sharmaSummary: Summary From the topic of Overview of Banking you will have Understood the meaning of banking Understood the role of banks as Financial intermediaries Constituents of the payment system Financial services providers Appreciated the role of the banking system in economic development Understood the various products and services offered by banks Been able to identify the various banking channels Sagar mal sharmaCheck your understanding: Check your understanding Sections A, B and C Sagar mal sharmaGroup Assignment: Group Assignment Prepare a pictorial representation on one of the following topics Draw up a scrapbook to support the presentation Topics Banks contribute to economic growth of a region in their role as intermediaries Economy will come to a halt without the payment mechanism of banks Allied services offered by banks add value to the Banks and to customers Banking is a business of trust Sagar mal sharmaE-Learning module: E-Learning module “Introduction to Retail Banking” Sagar mal sharma You do not have the permission to view this presentation. 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