Banking and Insurance

B.Com. Semester V BANKING AND INSURANCE

UNIT I

Banking: Meaning and definition

Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector acts as the backbone of modern business. Development of any country mainly depends upon the banking system. A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in the form of deposits and it lends money to those who need it. It deals with deposits and advances and other related services like lending money to grow the economy. Banks act as bridge between the people who save and people who want to borrow i.e., It receives money from those people who want to save as deposits and it lends money to those who want to borrow it. The money you deposited in bank will not be idle. It will grow by means of interest to your bank account they will earn interest in return for lending out the same money to borrowers. This would ensure smooth money flow to develop our economy.

Chamber‘s Twentieth century Dictionary defines a bank as, ―an institution for the keeping, lending and exchanging etc. of money‖.

According to Banking Regulation Act, ―Banking means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, and an order or otherwise‖.

Oxford Dictionary defines a bank as "an establishment for custody of money, which it pays out on customer's order."

Prof. Kent defines a bank as, ―an organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure‖.

Evolution (Origin) of Banking

The term bank is either derived from Old Italian word banca or from a French word banque both mean a Bench or money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging. According to some authorities, the work ―Bank‖ itself is derived from the words ―bancus‖ or ―banqee,‖ that is, a bench. The early bankers, the Jews in Lombardy, transacted their business on benches in the market place. There are others, who are of the opinion that the word ―bank‖ is originally derived from the German word ―back‖ meaning a joint stock fund, which was Italianized into ―banco‖ when the Germans were masters of a great part of Italy. This appears to

be more possible. But whatever is the origin of the word ‗bank‘, ―It would trace the history of banking in Europe from the Middle Ages.‖

Early History of Banking As early as 2000 B.C., the Babylonians had developed a banking system. There is evidence to show that the temples of Babylon were used as banks and such great temples as those of Ephesus and of Delbhi were the most powerful of the Greek banking institutions. But the spread of irreligion soon destroyed the public sense of security in depositing money and valuables in temples, and the priests were no longer acting as financial agents. The Romans did not organize State Banks as did the Greeks, but their minute regulations, as to the conduct of private banking, were calculated to create the utmost confidence in it. With the end of the civilization of antiquity, and as a result of administrative decentralization and demoralization of the Government authority, with its inevitable counterpart of commercial insecurity, banking degenerated for a period of some centuries into a system of financial make shifts. However, upon the revival of civilization, growing necessity forced the issue in the middle of the 12th century, and banks were established at Venice and Genoa, though in fact they did not become banks as we understood them today, till long after. Again the origin of modern banking may be traced to the money dealers in Florence, who received money on deposit, and were lenders of money in the 14th century, and the names of the Bardi, Acciajuoli, Peruzzi, Pitti and Medici soon became famous throughout Europe, as bankers. At one time, Florence is said to have had eighty bankers, though it could boast of no public bank.

Some experts briefed the history of modern banking as: The first public banking institution was The Bank of Venice, founded in 1157. The Bank of Barcelona and the bank of Genoa were established in 1401 and 1407 respectively. These are the recognized forerunners of modern commercial banks. Exchange banking was developed after the installation of the Bank of Amsterdam in 1609 and Bank of Hamburg in 1690. The credit for laying the foundation of modern banking in England goes to the Lombard‘s of Italy who had migrated to other European countries and England. The bankers of Lombardy developed the money lending business in England. The Bank of England was established in 1694. The development of joint stock commercial banking started functioning in 1833. The modern banking system actually developed only in the nineteenth century.

Growth and developments of banks in India

We cannot have a healthy economy without a sound and effective banking

system. The banking system should be hassle free and able to meet the new challenges posed by technology and other factors, both internal and external.

In the past three decades, India's banking system has earned several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to metropolises or cities in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main aspects of India's growth story.

The government's regulation policy for banks has paid rich dividends with the nationalization of 14 major private banks in 1969. Banking today has become convenient and instant, with the account holder not having to wait for hours at the bank counter for getting a draft or for withdrawing money from his account.

History of Banking in India

The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases:

Phase 1 (1786 to 1969)

The first bank in India, the General Bank of India, was set up in 1786. Bank of Hindustan and Bengal Bank followed. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843) as independent units and called them Presidency banks. These three banks were amalgamated in 1920 and the Imperial Bank of India, a bank of private shareholders, mostly Europeans, was established. Allahabad Bank was established, exclusively by Indians, in 1865. Punjab National Bank was set up in 1894 with headquarters in Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. The Reserve Bank of India came in 1935.

During the first phase, the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1,100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with the Banking Companies Act, 1949, which was later changed to the Banking Regulation Act, 1949 as per amending Act of 1965 (Act No. 23 of 1965). The Reserve Bank of India (RBI) was vested with extensive powers for the supervision of banking in India as the Central banking authority. During those days, the general public had lesser confidence in banks. As an aftermath, deposit mobilization was slow. Moreover, the savings bank facility provided by the Postal department was

comparatively safer, and funds were largely given to traders. Phase 2 (1969 to 1991)

The government took major initiatives in banking sector reforms after Independence. In 1955, it nationalized the Imperial Bank of India and started offering extensive banking facilities, especially in rural and semi-urban areas. The government constituted the State Bank of India to act as the principal agent of the RBI and to handle banking transactions of the Union government and state governments all over the country. Seven banks owned by the Princely states were nationalized in 1959 and they became subsidiaries of the State Bank of India. In 1969, 14 commercial banks in the country were nationalized. In the second phase of banking sector reforms, seven more banks were nationalized in 1980. With this, 80 percent of the banking sector in India came under the government ownership.

Phase 3 (1991 onwards)

This phase has introduced many more products and facilities in the banking sector as part of the reforms process. In 1991, under the chairmanship of M Narasimham, a committee was set up, which worked for the liberalization of banking practices. Now, the country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking are introduced. The entire system became more convenient and swift. Time is given importance in all money transactions.

The financial system of India has shown a great deal of resilience. It is sheltered from crises triggered by external macroeconomic shocks, which other East Asian countries often suffered. This is all due to a flexible exchange rate regime, the high foreign exchange reserve, the not-yet fully convertible capital account, and the limited foreign exchange exposure of banks and their customers.

Indian Banking Structure or Types of Banks

The structure of banking in India consists of following components:

1. Central Bank – Reserve Bank of India (RBI) 2. Commercial Banks a. Public sector Banks b. Private Banks

c. Foreign Banks 3. Co-operative Banks a. Primary Credit Societies b. Central Co-operative Banks c. State Co-operative Banks 4. Regional Rural Banks 5. Development Banks 6. Specialized Banks a. Export Import Bank of India b. Small Industries Development Bank of India c. National Bank for Agricultural and Rural Development 7. Microfinance institutions 8. Development financial institutions

Payments Bank is a new introduction to the category.

Reserve bank of India, commercial banks, co-operative banks and regional rural banks broadly make up the banking system in India. There are two more types of banks, namely development banks and specialized banks for some particular purposes.

1. Central Bank – Reserve Bank of India (RBI) The Reserve Bank of India (RBI), the central bank of India, which was established in 1935, has been fully owned by the government of India since nationalization in 1949. Like the central bank in most countries, Reserve Bank of India is entrusted with the functions of guiding and regulating the banking system of a country.

2. Commercial Banks There are three types of commercial banks in India 1. Public sector banks 2. Private Banks 3. Foreign banks

3. Co-operative banks Co-operative banks are banks incorporated in the legal form of cooperatives. Any cooperative society has to obtain a license from the Reserve Bank of India before starting banking business and has to follow the guidelines set and issued by the Reserve Bank of India. Currently, there are 68 co-operatives banks in India. There are three types of co-operatives banks with different functions: a. Primary Credit Societies: Primary Credit Societies are formed at the village or town level with borrower and non- borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds. b. Central Co-operative Banks: Central co-operative banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state co-operative banks. c. State Co-operative Banks: These are the highest level co-operative banks in all the states of the country. They mobilize funds and help in its proper channelization among various sectors. The money reaches the individual borrowers from the state co-operative banks through the central co- operative banks and the primary credit societies.

4. Regional rural Banks The regional rural banks are banks set up to increase the flow of credit to smaller borrowers in the rural areas. These banks were established on realizing that the benefits of the co-operative banking system were not reaching all the farmers in rural areas. Currently, there are 196 regional rural banks in India. Regional rural banks perform the following two functions: 1. Granting of loans and advances to small and marginal farmers, agricultural workers, co- operative societies including agricultural marketing societies and primary agricultural credit societies for agricultural purposes or agricultural operations or related purposes. 2. Granting of loans and advances to artisans small entrepreneurs engaged in trade, commerce or industry or other productive activities.

5. Development Banks Development Banks are banks that provide financial assistance to business that requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. A development bank is a multipurpose institution which shares entrepreneurial risk, changes its approach in tune with industrial climate and encourages new industrial projects to bring about speedier economic growth. These banks also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public. There are three important national level development banks. They are;

Industrial Development Bank of India (IDBI) The IDBI was established on July 1, 1964 under an Act of Parliament. It was set up as the central co-ordinating agency, leader of development banks and principal financing institution for industrial finance in the country. Originally, IDBI was a wholly owned subsidiary of RBI. But it was delinked from RBI w.e.f. Feb. 16, 1976. IDBI is an apex institution to co-ordinate, supplement and integrate the activities of all existing specialised financial institutions. It is a refinancing and re-discounting institution operating in the capital market to refinance term loans and export credits. It is in charge of conducting techno-economic studies. It was expected to fulfil the needs of rapid industrialisation.

The IDBI is empowered to finance all types of concerns engaged or to be engaged in the manufacture or processing of goods, mining, transport, generation and distribution of power etc., both in the public and private sectors. Industrial finance Corporation of India (IFCI) The IFCI is the first Development Financial Institution in India. It is a pioneer in development banking in India. It was established in 1948 under an Act of Parliament. The main objective of IFCI is to render financial assistance to large scale industrial units, particularly at a time when the ordinary banks are not forth coming to assist these concerns. Its activities include project financing, financial services, merchant banking and investment. Till 1993, IFCI continued to be Developmental Financial Institution. After 1993, it was changed from a statutory corporation to a company under the Indian Companies Act, 1956 and was named as IFCI Ltd with effect from October 1999. Industrial Credit and Investment Corporation of India (ICICI) ICICI was set up in 1955 as a public limited company. It was to be a private sector development bank in so far as there was no participation by the Government in its share capital. It is a diversified long term financial institution and provides a comprehensive range of financial products and services including project and equipment financing, underwriting and direct subscription to capital issues, leasing, deferred credit, trusteeship and custodial services, advisory services and business consultancy. The main objective of the ICICI was to meet the needs of the industry for long term funds in the private sector.

Apart from this the Industrial Reconstruction Corporation of India (IRCI) established in 1971 with the main objective of revival and rehabilitation of viable sick units and was converted in to the Industrial Reconstruction Bank of India (IRBI) in 1985 with more powers

Development banks have been established at the state level too. At present in India, 18 State Financial Corporation‘s (SFCs) and 26 State Industrial investment/Development Corporations (SIDCs) are functioning to look over the development banking in respective areas /states.

6. Specialized Banks In India, there are some specialized banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity. They engage themselves in some specific area or activity and thus, are called specialized banks. There are three important types of specialized banks with different functions:

a. Export Import Bank of India (EXIM Bank): The Export-Import (EXIM) Bank of India is the principal financial institution in India for coordinating the working of institutions engaged in financing export and import trade. It is a statutory corporation wholly owned by the Government of India. It was established on January 1, 1982 for the purpose of financing, facilitating and promoting foreign trade of India. This specialized bank grants loans to exporters and importers and also provides information about the international market. It also gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc.

b. Small Industries Development Bank of India This specialized bank grant loan to those who want to establish a small-scale business unit or industry. Small Industries Development Bank of India (SIDBI) was established in October 1989 and commenced its operation from April 1990 with its Head Office at Lucknow as a development bank, exclusively for the small scale industries. It is a central government undertaking. The prime aim of SIDBI is to promote and develop small industries by providing them the valuable factor of production finance. Many institutions and commercial banks supply finance, both long-term and short-term, to small entrepreneurs. SIDBI coordinates the work of all of them.

c. National Bank for Agricultural and Rural Development It was established on 12 July 1982 by a special act by the parliament. This specialized bank is a central or apex institution for financing agricultural and rural sectors. It can provide credit, both short-term and long-term, through regional rural banks. It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small- scale industries, cottage and village industries handicrafts and allied economic activities in rural areas .

Indian Bank-like financial institutions

In India, there are some Bank-like financial institutions that provide financial services.

There are two types of such institution that are important to the development on India:

7. Microfinance Institutions Microfinance Institutions are Bank-like financial institutions that providing financial services, such as microcredit, micro savings or micro insurance to poor people.

8. Development financial institutions (DFIs) DFIs are specialized financial institutions the Government established to promote investments in the manufacturing and agricultural sectors.

Banker and Customer Relationship

The relationship between banker and customer is mainly that of a debtor and creditor. However, they also share other relationships.

Some of the important relationships they share are depicted below.

Discussed below are important banker-customer relationships.

1. Relationship of Debtor and Creditor

When a customer opens an account with a bank and if the account has a credit balance, then the relationship is that of debtor (banker / bank) and creditor (customer).

In case of savings / fixed deposit / current account (with credit balance), the banker is the debtor, and the customer is the creditor. This is because the banker owes money to the customer. The customer has the right to demand back his money whenever he wants it from the banker, and the banker must repay the balance to the customer.

In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because the customer owes money to the banker. The banker can demand the repayment of loan / advance on the due date, and the customer has to repay the debt.

A customer remains a creditor until there is credit balance in his account with the banker. A customer (creditor) does not get any charge over the assets of the banker (debtor). The customer's status is that of an unsecured creditor of the banker.

The debtor-creditor relationship of banker and customer differs from other commercial debts in the following ways:

The creditor (the customer) must demand payment. On his own, the debtor (banker) will not repay the debt. However, in case of fixed deposits, the bank must inform a customer about maturity.

The creditor must demand the payment at the right time and place. The depositor or creditor must demand the payment at the branch of the bank, where he has opened the account. However, today, some banks allow payment at all their branches and ATM centres. The depositor must demand the payment at the right time (during the working hours) and on the date of maturity in the case of fixed deposits. Today, banks also allow pre-mature withdrawals.

The creditor must make the demand for payment in a proper manner. The demand must be in form of cheques; withdrawal slips, or pay order. Now-a-days, banks allow e- banking, ATM, mobile-banking, etc.

2. Relationship of Pledger and Pledgee

The relationship between customer and banker can be that of Pledger and Pledgee. This happens when customer pledges (promises) certain assets or security with the bank in order to get a loan. In this case, the customer becomes the Pledger, and the bank becomes the Pledgee. Under this agreement, the assets or security will remain with the bank until a customer repays the loan.

3. Relationship of Licensor and Licensee

The relationship between banker and customer can be that of a Licensor and Licensee. This happens when the banker gives a sale deposit locker to the customer. So, the banker will become the Licensor, and the customer will become the Licensee.

4. Relationship of Bailor and Bailee

The relationship between banker and customer can be that of Bailor and Bailee.

Bailment is a contract for delivering goods by one party to another to be held in trust for a specific period and returned when the purpose is ended.

Bailor is the party that delivers property to another.

Bailee is the party to whom the property is delivered.

So, when a customer gives a sealed box to the bank for safe keeping, the customer became the bailor, and the bank became the bailee.

5. Relationship of Hypothecator and Hypothecatee

The relationship between customer and banker can be that of Hypothecator and Hypotheatee. This happens when the customer hypothecates (pledges) certain movable or non-movable property or assets with the banker in order to get a loan. In this case, the customer became the Hypothecator, and the Banker became the Hypothecatee.

6. Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary, and the profit earned from this property belongs to the beneficiary. If the customer deposits securities or valuables with the banker for safe custody, banker becomes a trustee of his customer. The customer is the beneficiary so the ownership remains with the customer.

7. Relationship of Agent and Principal

The banker acts as an agent of the customer (principal) by providing the following agency services:

Buying and selling securities on his behalf,

Collection of cheques, dividends, bills or promissory notes on his behalf, and

Acting as a trustee, attorney, executor, correspondent or representative of a customer.

Banker as an agent performs many other functions such as payment of insurance premium, electricity and gas bills, handling tax problems, etc.

8. Relationship of Advisor and Client

When a customer invests in securities, the banker acts as an advisor. The advice can be given officially or unofficially. While giving advice the banker has to take maximum care and caution. Here, the banker is an Advisor, and the customer is a Client.

9. Other Relationships

Other miscellaneous banker-customer relationships are as follows:

Obligation to honour cheques : As long as there is sufficient balance in the account of the customer, the banker must honour all his cheques. The cheques must be complete

and in proper order. They must be presented within six months from the date of issue. However, the banker can refuse to honour the cheques only in certain cases.

Secrecy of customer's account : When a customer opens an account in a bank, the banker must not give information about the customer's account to others.

Banker's right to claim incidental charges : A banker has a right to charge a commission, interest or other charges for the various services given by him to the customer. For e.g. an overdraft facility.

Law of limitation on bank deposits : Under the law of limitation, generally, a customer gives up the right to recover the amount due at a banker if he has not operated his account since last 10 years.

TYPES OF CUSTOMERS OF BANKS

In the ordinary language, a person who has an account in a bank is considered its customer. The term customer also presents some difficulty in the matter of deﬁnition. There is no statutory deﬁnition of the term either in India or in England. However, the legal decisions on the matter throw some light on the meaning of the term.

According to Dr. Hart “a customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such.‖

―Broadly speaking, a customer is a person who has the habit of resorting to the same place or person to do business. So far as banking transactions are concerned he is a person whose money has been accepted on the footing that the banker will honour up to the amount standing to his credit, irrespective of his connection being of short or long standing.‖ Thus, a person who has a bank account in his name and for whom the banker undertakes to provide the facilities as a banker is considered to be a customer. It is not essential that the account must have been operated upon for some time.

Thus, in order to constitute a person as a customer, he must satisfy the following conditions:

1. He must have an account with the bank – i.e., saving bank account, current deposit account, or fixed deposit account.

2. The transactions between the banker and the customer should be of banking nature i.e., a person who approaches the banker for operating Safe Deposit Locker or purchasing travellers cheques is not a customer of the bank since such transactions do not come under the orbit of banking transactions.

3. Frequency of transactions is not quite necessary though anticipated.

Special Types of Customers

Special types of customers are those who are distinguished from other types of ordinary customers by some special features. Hence, they are called special types of customers. They are to be dealt with carefully while operating and opening the accounts. They are: I. Minors: II. Lunatics: III. Drunkards: IV. Married Women: V. Insolvents: VI. Illiterate Persons: VII. Agents: VIII. Joint Stock Company IX. Clubs, Associations and Educational Institutions: X. Partnership Firm: XI. Joint Accounts: XII. Joint Hindu Family: XIII. Trustees

I. Minors: Under the Indian law, a minor is a person who has not completed 18 years of age. The period of minority is extended to 21 years in case of guardian of this person or property is appointed by a court of law before he completes the age of 18years.According to Indian Contract Act, a minor is recognised as a highly incompetent party to enter into legal contractsand any contract entered into with a minor is not only invalid but voidable at the option of the minor. The law has specially protected a minor merely because his mental faculty has not fully developed and as such, he is likely to commit mistakes or even blunders which will affect his interests adversely. It is for this reason; the law has come to the rescue of a minor. A banker can very well open a bank account in the name of a minor. But the banker has to be careful to ensure that he does not open a current account.

If a current account is opened and stands overdrawn inadvertently, the banker has no remedy against a minor, as he cannot be taken to a court of law. It is for this reason that the banker should be careful to see that he invariably opens a savings bank account.

II. Lunatics:

A lunatic or an insane person is one who, on account of mental derangement, is incapable of understanding his interests and thereby, arriving at rational judgement. Since a lunatic does not understand what is right and what is wrong, it is quite likely that the public may exploit the weakness of a lunatic to their advantage and thus deprive him of his legitimate claims. On account of this, the Indian Contract Act recognises that a lunatic is incompetent to enter into any contract and any such contract, if entered into, is not only invalid but voidable at the option of the lunatic. Since a lunatic customer is an incompetent party, the banker has to be very careful in dealing with such customers. Bankers should not open an account in the name of a person of unsound mind. On coming to know of a customer‘s insanity, the banker should stop all operations on the account and await a court order appointing a receiver. It would be dangerous to rely on hearsay information. The bank should take sufficient care to verify the information and should not stop the account unless it is fully satisﬁed about the correctness of the information. In case a person suffers from a temporary mental disorder, the banker must obtain a Certiﬁcate from two medical officers regarding his mental soundness at the time of operation on the account.

III. Drunkards:

A drunkard is a person who on account of consumption of alcoholic drinks get himself intoxicated and thereby, loses the balance over his mental capacity and hence, is incapable of forming rational judgement. The law is quite considerable towards a person who is in drunken state. A lawful contract with such a person is invalid. This is for the simple reason that it is quite likely that the public may exploit the weakness of such a person to their advantage and thus, deprive him of his legitimate claims. A banker has to be very careful in dealing with such customers. There cannot be any objection by a banker to open an account. In case a customer approaches the banker for encashment of his cheque especially when he is drunk, the banker should not make immediate payment. This is because the customer may afterwards argue that the banker has not made payment at all. Therefore, it is better and safer that the banker should insist upon such a customer getting a witness (who is not drunk) to countersign before making any payment against the cheque.

IV. Married Women:

An account may be opened by the bank in the name of a married woman as she has the power to draw cheques and give valid discharge. At the time of opening an account in the name of a married woman, it is advisable to obtain the name and occupation of

her husband and name of her employer, if any, and record the same to enable detection if the account is misused by the husband for crediting there in cheques drawn in favour of her employer. In case of an unmarried lady, the occupation of her father and name and address of her employer, if any, may be obtained and noted in the account opening form. If a lady customer requests the bankers to change the name of her account opened in her maiden name to her married name, the banker may do so after obtaining a written request from her. A fresh specimen signature has also to be obtained for records.

While opening an account of a purdah lady (purdah nishin), the bank obtains her signature on the account opening form duly attested by a responsible person known to the bank. It is advisable to have withdrawals also similarly attested. In view of practical difficulties involved, it would be better not to open accounts in the names of purdah ladies.

V. Insolvents:

When a person is unable to pay his debts in full, his property in certain circumstances is taken possession of by official receiver or official assignee, under orders of the court. He realises the debtor‘s property and rateably distributes the proceeds amongst his creditors. Such a proceeding is called ‗insolvency‘ and the debtor is known as an ‗insolvent‘. If an account holder becomes insolvent, his authority to the bank to pay cheques drawn by him is revoked and the balance in the account vests in the official receiver or official assignee.

VI. Illiterate Persons:

A person is said to be illiterate when he does not know to read and write. No current account should be opened in the name of an illiterate person. However, a savings bank account may be opened in the name of such a person. On the account opening form the bank should obtain his thumb mark in the presence of two persons known to the bank and the depositor. Withdrawal from the account by the account holder should be permitted after proper identiﬁcation every time. The person who identiﬁes the drawer must be known to the bank and he should preferably not be a member of the bank‘s staff.

VII. Agents:

A banker may open an account in the name of a person who is acting as an agent of another person. The account should be considered as the personal account of an agent, and the banker has no authority to question his power to deal with the funds in

the account unless it becomes obvious that he is being guilty of breach of trust. However, if a person is authorised to only act on behalf of the principal, the banker should see that he is properly authorised to do the acts which he claims to do. If he has been appointed by a power of attorney, the banker should carefully pursue the letter- of-attorney to conﬁrm the powers conferred by the document on the agent. In receiving notice of the principal‘s death, insanity or bankruptcy, the banker must suspend all operations on the account.

VIII. Joint Stock Company

A joint stock company has been deﬁned as an artiﬁcial person, invisible, intangible and existing only in contemplation of law. It has separate legal existence and it has a perpetual succession.

IX. Partnership Firm:

A partnership is not regarded as an entity separate from the partners. The Indian Partnership Act, 1932, defines partnership as the ―relation between persons who have agreed to share the profit of the business, carried on by all or any of them acting for all.‖Partnershi p is formed or constituted on account of agreement between the partners and with the sole intention of earning and sharing profits in a particular ratio. Further, the business is carried on either by all the partners or some partners acting for all. The partners carry joint and several liabilities and the partnership does not possess any legal entity.

X. Joint Accounts:

When two or more persons open an account jointly, it is called a joint account.

XI. Joint Hindu Family:

Joint Hindu family is an undivided Hindu family which comprises of all male members descended from a common ancestor. They may be sons, grandsons and great grandsons, their wives and unmarried daughters. ―A joint, Hindu family is a family which consists of more than one male member, possesses ancestral property and carries on family business.‖ Therefore, joint Hindu family is a legal institution. It is managed and represented in its dealings and transactions with others by the Kartha who is the head of the family. Other members of the family do not have this right to manage unless a particular member is given certain rights and responsibilities with common consent of the Kartha.

XII. Trustees:

According to the Indian Trusts Act, 1882, ―a trust is an obligation annexed to the ownership of property and arising out of a confidence reposed in an accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.‖ As per this definition, a trustee is a person in whom the author or settler reposes confidence and entrusts the management of his property for the benefit of a person or an organisation who is called beneficiaries. A trust is usually formed by means of document called the ―Trust Deed.‖

Types of Deposit and Accounts

Money and banking are part of everyday life. Banks offer all sorts of financial products to help you manage your money on a day-to-day basis. The bank is such a place where once we deposit money, it remains safe and also earns interest over some time. This is known as the deposit and to each deposit, the bank assigns a unique identity which is known as the account. Each deposit corresponds to a unique account and vice versa.

Sometimes we use numbers to uniquely identify an account. This is what we call the account number. It may also be a combination of alphanumeric letters. Bank deposits serve different purposes for different people. Some people cannot save regularly. They deposit money in the bank only when they have extra income. The purpose of deposit then is to keep money safe for future needs. Some may want to deposit money in a bank for as long as possible to earn interest or to accumulate savings with interest so as to buy a flat, or to meet hospital expenses in old age, etc. Some, mostly businessmen, deposit all their income from sales in a bank account and pay all business expenses out of the deposits.

Types of Deposits

On the basis of purpose they serve, bank deposit accounts may be classified as follows:

1. Savings Bank Account 2. Current Deposit Account 3. Fixed Deposit Account 4. Recurring Deposit Account

1. Savings Bank Account As the name suggests this type of account is suitable for people who have a definite income and are looking to save money. For example, the people who get salaries or the people who work as laborers. This type of account can be opened with a minimum initial

deposit that varies from bank to bank. Money can be deposited at any time in this account.

Withdrawals can be made either by signing a withdrawal form or by issuing a cheque or by using an ATM card. Normally banks put some restriction on the number of withdrawal from this account. Interest is allowed on the balance of deposit in the account. The rate of interest on savings bank account varies from bank to bank and also changes from time to time. A minimum balance has to be maintained in the account as prescribed by the bank.

2. Current Deposit Account Big businessmen, companies, and institutions such as schools, colleges, and hospitals have to make payment through their bank accounts. Since there are restrictions on the number of withdrawals from a savings bank account, that type of account is not suitable for them. They need to have an account from which withdrawal can be made any number of times.

Banks open a current account for them. Like a savings bank account, this account also requires a certain minimum amount of deposit while opening the account. On this deposit, the bank does not pay any interest on the balances. Rather the account holder pays a certain amount each year as an operational charge.

These accounts also have what we call the overdraft facility. For the convenience of the accountholders banks also allow withdrawal of amounts in excess of the balance of the deposit. This facility is known as an overdraft facility. It is allowed to some specific customers and up to a certain limit subject to previous agreement with the bank concerned.

3. Fixed Deposit Account Some bank customers may like to put away money for a longer time. Such deposits offer a higher interest rate. If money is deposited in a savings bank account, banks allow a lower rate of interest. Therefore, money is deposited in a fixed deposit account to earn interest at a higher rate.

This type of deposit account allows the deposit to be made of an amount for a specified period. This period of deposit may range from 15 days to three years or more during which no withdrawal is allowed. However, on request, the depositor can encash the amount before its maturity. In that case, banks give lower interest than what was agreed upon. The interest on a fixed deposit account can be withdrawn at certain intervals of time. At the end of the period, the deposit may be withdrawn or renewed for a further period. Banks also grant a loan on the security of the fixed deposit receipt.

4. Recurring Deposit Account While opening the account a person has to agree to deposit a fixed amount once in a month for a certain period. The total deposit along with the interest therein is payable on maturity. However, the depositor can also be allowed to close the account before its maturity and get back the money along with the interest till that period.

The account can be opened by a person individually, or jointly with another, or by the guardian in the name of a minor. The rate of interest allowed on the deposits is higher than that on a savings bank deposit but lower than the rate allowed on a fixed deposit for the same period.

The Recurring Deposit Accounts may be of the following types:

Home Safe Account or Money Box Scheme: For regular savings, the bank provides a safe or box (Gullak) to the depositor. The safe or box cannot be opened by the depositor, who can put money in it regularly, which is collected by the bank‘s representative at intervals and the amount is credited to the depositor‘s account. The deposits carry a nominal rate of interest.

Cumulative-cum-Sickness deposit Account: A certain fixed sum is deposited at regular intervals in this account. The accumulated deposits over time along with interest can be used for payment of medical expenses, hospital charges, etc.

Home Construction deposit Scheme/Saving Account: In this account, we can deposit the money regularly either for the purchase or construction of a flat or house in future. The rate of interest offered on the deposit, in this case, is relatively higher than in other recurring deposit accounts.

Financial Services offered by banks

Modern Services Offered by Banks to Customers In the modern world, banks offer a variety of services to attract customers. However, some basic modern services offered by the banks are discussed below:

List of banking services are;

1. Advancing of Loans. 2. Overdraft. 3. Discounting of Bills of Exchange. 4. Collection and Payment Of Credit Instruments 5. Foreign Currency Exchange. 6. Remittance of Funds. 7. Credit cards.

8. ATMs Services. 9. Debit cards. 10. Online banking. 11. Mobile Banking. 12. Accepting Deposit. 13. Priority banking. 14. Private banking.

1. Advancing of Loans

Banks are profit-oriented business organizations. Banks have to advance a loan to the public and generate interest from them as profit. After keeping certain cash reserves, banks provide short-term, medium-term and long-term loans to needy borrowers.

2. Overdraft

Sometimes, the bank provides overdraft facilities to its customers through which they are allowed to withdraw more than their deposits. Interest is charged from the customers on the overdrawn amount.

3. Discounting of Bills of Exchange

This is another popular type of lending by modern banks.Through this method, a holder of a bill of exchange can get it discounted by the bank, in a bill of exchange, the debtor accepts the bill drawn upon him by the creditor (i.e., holder of the bill) and agrees to pay the amount mentioned on maturity.

After making some marginal deductions (in the form of commission), the bank pays the value of the bill to the holder. When the bill of exchange matures, the bank gets its payment from the party, which had accepted the bill.

4. Collection and Payment Of Credit Instruments

In modern business, different types of credit instruments such as the bill of exchange, promissory notes, cheques etc. are used. Banks deal with such instruments. Modern banks collect and pay different types of credit instruments as the representative of the customers.

5. Foreign Currency Exchange

Banks deal with foreign currencies. As the requirement of customers, banks exchange foreign currencies with local currencies, which is essential to settle down the dues in the international trade.

6. Remittance of Funds

Banks help their customers in transferring funds from one place to another through cheques, drafts, etc.

7. Credit cards

A credit card is cards that allow their holders to make purchases of goods and services in exchange for the credit card‘s provider immediately paying for the goods or service, and the cardholder promising to pay back the amount of the purchase to the card provider over a period of time, and with interest.

8. ATMs Services

ATMs replace human bank tellers in performing giving banking functions such as deposits, withdrawals, account inquiries. Key advantages of ATMs include:

 24-hour availability  Elimination of labor cost  Convenience of location 9. Debit cards

Debit cards are used to electronically withdraw funds directly from the cardholders‘ accounts. Most debit cards require a Personal Identification Number (PIN) to be used to verify the transaction.

10. Online banking

Online banking is a service offered by banks that allows account holders to access their account data via the internet. Online banking is also known as ―Internet banking‖ or ―Web banking.‖

Online banking through traditional banks enable customers to perform all routine transactions, such as account transfers, balance inquiries, bill payments, and stop- payment requests, and some even offer online loan and credit card applications.

Account information can be accessed anytime, day or night, and can be done from anywhere.

11. Mobile Banking

Mobile banking (also known as M-Banking) is a term used for performing balance checks, account transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant (PDA),

12. Accepting Deposit

Accepting deposit from savers or account holders is the primary function of a bank. Banks accept deposit from those who can save money but cannot utilize in profitable sectors. People prefer to deposit their savings in a bank because by doing so, they earn interest.

Changing Role of Banks in India

The role of banks in India has changed a lot since economic reforms of 1991. These changes came due to LPG, i.e. liberalization, privatization and globalization policy being followed by GOI. Since then most traditional and outdated concepts, practices, procedures and methods of banking have changed significantly. Today, banks in India have become more customer-focused and service-oriented than they were before 1991. They now also give a lot of importance to their rural customers. They are even willing ready to help them and serve regularly the banking needs of country-side India.

The changing role of banks in India can be glanced in points depicted below.

The following points briefly highlight the changing role of banks in India.

1. Better customer service, 2. Mobile banking facility, 3. Bank on wheels scheme, 4. Portfolio management, 5. Issue of electro-magnetic cards, 6. Universal banking, 7. Automated teller machine (ATM), 8. Internet banking, 9. Encouragement to bank amalgamation, 10. Encouragement to personal loans, 11. Marketing of mutual funds, 12. Social banking, etc.

The above-mentioned points indicate the role of banks in India is changing. Now let's discuss how banking in India is getting much better day after day.

1. Better Customer Service

Before 1991, the overall service of banks in India was very poor. There were very long queues (lines) to receive payment for cheques and to deposit money. In those days, some bank staffs were very rude to their customers. However, all this changed remarkably after Indian economic reforms of 1991.

Banks in India have now become very customer and service focus. Their service has become quick, efficient and customer-friendly. This positive change is mostly due to rising competition from new private banks and initiation of Ombudsman Scheme by RBI.

2. Mobile Banking

Under mobile banking service, customers can easily carry out major banking transactions by simply using their cell phones or mobiles.

Here, first a customer needs to activate this service by contacting his bank. Generally, bank officer asks the customer to fill a simple form to register (authorize) his mobile number. After registration, this service is activated, and the customer is provided with a username and password. Using secret credentials and registered phone, customer can now comfortably and securely, find his bank balance, transfer money from his account to another, ask for a cheque book, stop payment of a cheque, etc.

Today, almost all banks in India provide a mobile-banking service.

3. Bank on Wheels

The 'Bank on Wheels' scheme was introduced in the North-East Region of India. Under this scheme, banking services are made accessible to people staying in the far-flung (remote) areas of India. This scheme is a generous attempt to serve banking needs of rural India.

4. Portfolio Management

In portfolio management, banks do all the investments work of their clients. Banks invest their clients' money in shares, debentures, fixed deposits, etc. They first enter a contract with their clients and charge them a fee for this service. Then they have the full power to invest or disinvest their clients' money. However, they have to give safety and profit to their clients. 5. Issue of Electro-Magnetic Cards

Banks in India have already started issuing Electro-Magnetic Cards to their customers. These cards help to carry out cash-less transactions, make an online purchase, avail ATM facility, book a railway ticket, etc.

Banks issue many types of electro-magnetic cards, which are as follows:

Credit cards help customers to spend money (loaned up to a certain limit as previously settled by the bank) which they don't have in hand. They get a monthly statement of their purchases and withdrawals. Along with the transacted amount, this statement also includes the interest and service fee. The entire amount (as reflected in

the statement of credit card) must be paid back to the bank either fully or in installments, but before due date.

Debit cards help customers to spend that money which they have saved (credited) in their individual bank accounts. They need not carry cash but instead can use a debit card to make a purchase (for shopping) and/or withdraw money (get cash) from an ATM. No interest is charged on the usage of debit cards.

Charge cards are used to spend money up to a certain limit for a month. At the end of the month, customer gets a statement. If he has a sufficient balance, then he only had to pay a small fee. However, if he doesn't have a necessary balance, he is given a grace period (which is generally of 25 to 50 days) to repay the money.

Smart cards are currently being used as an alternative to avail public transport services. In India, this covers Railways, State Transport and City (Local) Buses. Smart card has an integrated circuit (IC) embedded in its plastic body. It is made as per norms specified by ISO.

Kisan credit cards are used for the benefit of the rural population of India. The Indian farmers (kisans) can use this card to buy agricultural inputs and goods for self- consumption. These cards are issued by both Commercial and Co-operative banks.

6. Universal Banking

In India, the concept of universal banking has gained recognition after year 2000. The customers can get all banking and non-banking services under one roof. Universal bank is like a super store. It offers a wide range of services, including banking and other financial services like insurance, merchant banking, etc.

7. Automated Teller Machine (ATM)

There are many advantages of ATM. As a result, many banks have opened up ATM centres to offer convenience to their customers. Now banks are operating ATM centres not only in their branches but also at public places like airports, railway stations, hotels, etc. Some banks have joined together and agreed upon to set up common ATM centres all over India.

8. Internet Banking

Internet banking is also called as an E-banking or net banking. Here, the customer can do banking transactions through the medium of the internet or world wide web (WWW). The customer need not visit the bank's branch. Through this facility, the customer can easily inquiry about bank balance, transfer funds, request for a cheque book, etc. Most large banks offer this service to their tech-savvy customers.

9. Encouragement to Bank Amalgamation

Failure of banks is well-protected with the facility of amalgamation. So depositors need not worry about their deposits. When weaker banks are absorbed by stronger banks, it is called amalgamation of banks.

10. Encouragement to Personal Loans

Today, the purchasing power of Indian consumers has increased dramatically because banks give them easy personal loans. Generally, interest charged by the banks on such loans is very high. Interest is calculated on reducing balance. Large banks offer loans up to a huge amount like one crore. Some banks even organise Loan Mela (Fair) where a loan is sanctioned on the spot to deserving candidates after they submit proper documents.

11. Marketing of Mutual Funds

A mutual fund collects money from many investors and invests the money in shares, bonds, short-term money market instruments, gold assets; etc. Mutual funds earn income by interest and dividend or both from its investments. It pays a dividend to subscribers. The rate of dividend fluctuates with the income on mutual fund investments. Now banks have started selling these funds in their own names. These funds are not insured like other bank deposits. There are different types of funds such as open-ended funds, closed-ended funds, growth funds, balanced funds, income funds, etc.

12. Social Banking

The government uses the banking system to alleviate poverty and unemployment. Many social development programmes are initiated by the banks from time to time. The success of these programmes depends on financial support provided by the banks. Banks supply a lot of finance to farmers, artisans, scheduled castes (SC) and scheduled tribe (ST) families, unemployed youth and people living below the poverty line (BPL).

UNIT II

Endorsement and Crossing of Negotiable Instrument

Negotiable Instrument:

The negotiable Instruments Act (1881) does not define a negotiable instrument but merely state that a ―negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer (Section- 13)

A negotiable instrument is a transferable document that passes freely from hand to hand & forms an integral part of the modern business mechanism.

Endorsement:

Endorsement means the signature of the maker/ drawer or a holder of a negotiable instrument, either with or without any writing, for the purpose of negotiation. The endorsement is done by the payee or endorsee, as the case may be by signing on the instrument customarily on its back & where the space is insufficient on a slip of paper annexed thereto called ―allonge‖.

Kinds of endorsement

There are five kinds of endorsement:

1. Blank endorsement: If the endorser signs his name only, the endorsement is said to be in blank and it becomes payable to bearer, e.g. Mahbubul Haq.

2. Special or Full endorsement: An endorsement ―in full‖ or a special endorsement is one where the endorser not only puts his signature on the instrument but also writes the name of a person to whom or to whose order the payment is to be made. Example: Pay to Mr. Rafiqul Islam or order-Sd/Sarafat All.

3. Conditional endorsement: In conditional endorsement the endorser puts his signature under such a writing which makes the transfer of title subject to fulfillment of some conditions of the happening of some events. Example: Pay to Mr. Sarwar Jahan or order after his marriage-Sd/Badrul Kamal.

4. Restrictive endorsement: An endorsement is called restrictive when the endorser restricts or prohibits further negotiation. Example: ―Pay to Miss. / A. Pereira only‖ Sd/Hosne Ara.

5. Partial endorsement: In Partial endorsement only a part of the amount of the bill is transferred or the amount of the bill is transferred to two or more endorsees severally.

This does not separate as a negotiation of the instrument. The law lays down that an endorsement must relate to the whole instrument. However, where the amount has been partly paid, a note to that affect may be endorsed on the instrument which may then be negotiated for the balance. This is not done in case of cheques or banker‘s drafts.

Crossing:

When an instrument bears across its face two parallel transverse lines or an addition of the name of a Banker, either with or without the words ―& Co.‖, ―Account Payee‖ etc.

The significance of crossing is that the payment of the instrument can only be made through a Banker( Account Holder). When it is a crossed instrument it gives direction to the paying Banker (Bank) to pay the money to a Banker. Thus the holder of such an instrument must deposit the same into his or same other person‘s Bank a/c for collection. An instrument is crossed in order to provide a safeguard against theft of fraud.

Persons who can Cross a Cheque: Crossing is an instruction or a direction to the paying banker. Obviously, the drawer of a cheque is competent to cross it generally or specially. Section 125, however, permits the following persons also to cross the cheque.

(1) The holder of a cheque may cross it generally or specially, if it is uncrossed or may cross it specially if it is crossed generally or may add the words ‗not negotiable‘ in case of both types of crossing.

(2) The banker to whom the cheque is crossed specially may again cross it especially to another banker, his agent, for collection. This is called Double Special Crossing.

A general crossing may be converted into a special crossing by a holder by adding the name of a banker to make the payment of the cheque safer. But the reverse is not possible into a general crossing, because such alteration amounts to a material alteration and needs confirmation by the drawer.

Types of Crossing:

Crossing are mainly two types, these are (i) General Crossing (ii) Special Crossing. i) General Crossing: Section 123 of Negotiation Instruments Act, 1881, defines a general crossing as follows:

Where a cheque bears across its face an addition of the words ‗and company‘ or any abbreviation thereof, between two parallel traverse lines or two parallel lines simply either with or without the words ―not negotiable‖ and that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally.

e.g. (1) & Co. (2) A/c. Payee (3) Payee‘s Account only (4) Not negotiable

ii Special Crossing: Section 124 of the Negotiable Instruments Act, 1881, defines special crossing as follows:

Where a cheque bears across its face an addition of the name of a Banker with or without the words ―not negotiable‖, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed to that Banker.

(1) State Bank of India (2) State Bank of India Payee‘s A/c. (3) State Bank of India Not negotiable

Opening of Crossing: If the crossing on a cheque is cancelled, it is called opening of the crossing. The cheque thereafter becomes an open cheque. Only the drawer of the cheque is entitled to open the crossing of the cheque by writing the words ‗Pay Cash‘ and canceling the crossing along with his full signature. His initials are not sufficient for this purpose.

The paying banker must be very careful in ascertaining the validity or genuineness of the drawer‘s signature opening the crossing. If drawer‘s signature (already on the

cheque) is forged by the holder in order to open the crossing and the payment is obtained at the counter, the banker will remain liable to the true owner of the cheque. The banker is under an obligation to pay the cheque according to the direction of the drawer conveyed through the crossing on the cheque.

Rules of Crossing of Cheque

Negotiable Cheques are generally crossed as a measure of safety.

 A cheque can be crossed generally, may be crossed specially by the holder.  The Cheque holder has the right to add the words ―not negotiable‖ to it.  When an uncrossed cheque or a crossed cheque generally is sent to a banker for the collection, the person may cross it specially to himself. In this case, he does not enjoy the Statutory protection against being sued for conversion.

PAYING BANKER AND COLLECTING BANKER

PAYING BANKER

Meaning

The banker on whom a cheque is drawn or the banker who is required to pay the cheque drawn on him by a customer is called the paying banker.

Duties Of Paying Banker:

The duty of the paying banker to honour his customer‘s cheques is a statutory duty.

Section 31 of the Negotiable instruments Act, has imposed upon the banker the obligation to honour customers cheques.

According to this section, the drawer of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheque must pay the check when properly required to do as such, and in default of such payment, must remunerate the drawer for any loss or damage brought by such default.

The paying banker has the following duties:

A) In case of sufficiency of funds in the account of the drawer which can be properly used to pay the cheque, the banker must pay the cheque when required to do so.

B) The paying banker is expected to pay the cheque to the genuine payee as per the direction of the drawer.

C) The paying banker should pay the cheque when there is no restriction imposed on the payment by the drawer or by the law.

D) The payment should be made when the cheques are presented for payment within a reasonable time after being drawn and during banking hours.

E) He has to honour the cheque drawn against the account maintained at that branch of the bank where the cheque is presented.

F) The banker should not make payment of crossed cheques over the counter of the bank. He must pay the crossed cheques through a banker.

In short, the paying banker is required to make payment of his customers‘ cheque according to the provisions of the law.

The paying banker should act with care and caution and prudence in honouring the cheques.

Liabilities Of Paying Banker :

The paying banker is responsible to his customer and is under a duty to make payment of the cheques to the right persons in accordance with the instructions of the drawer.

If he dishonours the cheque wrongfully or honours the cheques carelessly and negligently he subjects himself to heavy liabilities.

In the following ways liabilities of the paying banker may arise :

A) When there are sufficient funds in the account of the customer applies for the payment of cheques the paying banker shall be liable to pay damages if he wrongfully dishonours the cheques.

B) When the customer has been granted overdraft facility, the banker will be held liable if he dishonours cheques drawn by the customer on the basis of the overdraft.

C) When the customer is misled by the entry in the passbook and draws a cheque believing the balance shown by passbook as the actual balance, the banker shall be liable if the cheque is dishonoured.

D) When the customer is allowed by the banker to draw a cheque on the basis of cheque deposited for collection, before it is actually realised, the banker shall be liable to the customer if he subsequently dishonours the cheque.

E) The paying banker shall be liable if he pays the cheque contravening the legal provisions laid down by the Negotiable instruments act.

Precautions for the Paying Banker:

The paying banker has to be extremely vigilant while making payment of customers cheques.

On one hand, he may have to bear the loads for wrongful payment and on the other hand, he may be held liable for wrongful dishonour of cheques by the customer.

Therefore, a banker must carefully examine the cheques presented to him and take the following precautions :

A) Form of Cheque: The cheque drawn by customer must satisfy all the requisites of a valid cheque. The negotiable instruments act has not given the form of a cheque.

B) Date of Cheque: A cheque must be bear a date without which it is incomplete. The date of the cheque is important because the order of the customer to the banker given through the cheque becomes legally effective on the date mentioned on the cheque.

C) Amount of Cheque: The amount should be mentioned on the cheque both in words and in figures. It should be written as distinctly as possible and in a way to prevent insertions or alterations.

It should commence as near printed Words ―Rupees and Rs ‖ as possible and should add the words ―only‖ or draw a line after the amount in words or figure.

D) Fund of the customer: The banker should see whether there are sufficient funds in the account of the customer to pay the cheque.

It may be noted that the cheque has to be paid in full and not in part and therefore, the inadequacy of funds of the customer will result in the dishonour of the cheque unless the banker has granted loan or overdraft facility to the customer.

STATUTORY PROTECTION TO PAYING BANKER

1. Bearer Cheques : the drawee is discharged by payment in due course to the bearer thereof, not with standing any endorsement whether in full or blank appearing there on. The banker shall be free from any liability if the payment in respect of a bearer cheque in payment is due course.

2. Order Draft with Forged Endorsement: this Provision gives protection to the paying banker regarding the draft having a forged endorsement. Again the conditions to be satisfied are:

 The endorsement should be regular  The payment should be made in due course.

3. Protection in respect of a crossed cheque: The paying banker has to make payment of the crossed cheque as per the instruction of the drawer refuted through the crossing

4. Materially Altered Cheques: if material alteration is apparent the banker should get confirmation from the drawer by obtaining full signature at the place of material alteration.

COLLECTING BANKER

The collecting banker is a banker who collects cheques drawn upon other bankers for and on behalf of his customer. He is called the collecting banker as he undertakes the work of collection of cheques.

Holder for value: A collecting banker becomes a holder for value if he has paid the value of the cheque to the customer before the cheque is already collected.

As an agent

A collecting banker acts as an agent of the customer on crediting the account of the customer only after realising the payment from the paying banker(drawee bank)

DUTIES AND RESPONSIBILITIES OF A COLLECTING BANKER

 Banker must take at most care while presenting the cheque for collection.  Collecting banker must present the cheque within reasonable time.  Notice to customer in case of dishonour of cheque.  The banker has to credit the proceeds of the cheque to the account of the customer  Should undertake the collection of cheque only for customer and not for stranger.  Must receive the payment as an agent of the customer.  Cheque must be crossed

Statutory Protection to the collecting Banker

According to sec. 131 of the Negotiable Instrument Act, statutory protection is available to the collecting Banker in the following cases:

(i) Crossed cheques only: Statutory protection can be claimed by a collecting banker only for crossed cheques It is so because, in the case of an open cheque it is not absolutely necessary for a person to seek the service of a bank.

(ii) Collections on behalf of customers as an agent: The above protection can be claimed by a banker only for those cheques collected by him as agent of his customers.

(iii) In good faith and without negligence: In order to get the protection under this section, a collecting banker must act in good faith and without negligence.

Basis of Negligence

When a collecting banker wants to claim protection under Sec. 131 he has the burden of proving that he has acted without negligence.

(I) Gross negligence: If a banker is completely careless in collecting a cheque, then, h will be held liable under the ground of ‗gross negligence.‘ Examples:

(a) Collecting a cheque crossed A/C payee’ for other than the payee’s account:

Account payee crossing ¡s a direction to the collecting banker. If he collects a cheque crossed ‗A/C payee‘ for any person other than the payee, then, this fact will be proved as an evidence of gross negligence.

(b) Failure to verify the correctness of endorsement: If a banker omits to verify the correctness of endorsements on cheques payable to order, he will be deprived of the statutory protection.

(c) Failure to verify the existence of authority in the case of per pro signatures: If a collecting banker fails to verify the existence of authority in the case of per pro signatures, if any, will be paid as an evidence of gross negligence.

(ii) Negligence connected with the immediate collection: If, on the face of a cheque there is a warning that there is the misappropriation of money, the collecting banker should make some reasonable enquiry and only after getting some satisfactory explanations, he can proceed to collect cheques. Examples:

(a) collecting a cheque drawn against the principal‘s A/c, to the private A/c of the agent without enquiry.

(b) Collecting a cheque payable to the firm to the private Nc of a partner without enquiry.

(c) Collecting a cheque payable to the company to the private account of a direction or any other officer without enquiry.

(d) Collecting a cheque payable to the employer to the private account of the employee would constitute negligence under sec.131 of the Nl. Act.

(e) Collecting a cheque payable to the trustee, to the private account of the person operating the trust account is another instance of negligence of a banker. .

(iii) Negligence under Remote Grounds: Normally we can not expect a banker to be liable under certain circumstances. But, the bankers have been held negligent under those situations which are branded as remote grounds.‘ Examples: .

(a) Omission to obtain a letter of introduction from a new customer causes negligence. .

(b) Failure to enquire into the source of supply of large funds into an account which has been kept in a poor condition for a long time constitutes negligence.

UNIT III

PRINCIPLES OF SOUND LENDING

Lending is one the primary function of a bank. The banks accept deposits from people and then lend that money to the needy people in the form of loans, advances, cash credit and overdraft. Interest received from these lending is the main source of income for the bank. So a bank should examine the security offered against loan, credit worthiness of the borrower and the purpose of the loan. Therefore a bank uses these following principle for smooth running of the business.

i. Liquidity - Liquidity is an important principle of bank lending. Banks lend money for short periods only because they lend public money (money accept as deposits from people) which can be withdrawn at any time by depositors. They, therefore, advance loans on the security of such assets which can be easily converted into cash at a short notice. A bank chooses such securities because if the bank needs cash to meet the urgent requirements of its customers, it should be in a position to sell some of the securities at a very short notice without disturbing their price much. There are certain securities such as central, state and local government bonds which are easily saleable without affecting their market prices. ii. Safety - The safety of funds lent is another principle of lending. Safety means that the borrower should be able to repay the loan and interest in time at regular intervals without default. The repayment of the loan depends upon the nature of security, the character of the borrower, his capacity to repay and his financial standing. Like other investments, bank investments involve risk. But the degree of risk varies with the type of security. Securities of the central government are safer than those of the state governments and local bodies. From the point of view, the nature of security is the most important consideration while giving a loan. Even then, it has to take into consideration the creditworthiness of the borrower which is governed by his character, capacity to repay, and his financial standing. Above all, the safety of bank funds depends upon the technical feasibility and economic viability of the project for which the loan is advanced. iii. Diversity - A commercial bank should follow the principle of diversity. It should not invest its surplus funds in a particular type of security but in different types of securities. It should choose the shares and debentures of different types of industries situated in different regions of the country. The same principle should be followed in the case of state governments and local bodies. Diversification aims at minimizing risks of the investment portfolio of a bank. The principle of diversity also applies to the advancing of loans to varied types of firms, industries, businesses and trades. A bank should follow the maxim: ―Do not keep all eggs in one basket.‖ It should spread it risks by giving loans to various trades and industries in different parts of the country.

iv. Stability in the Value of Investments - The bank should invest its funds in those stocks and securities the prices of which are more or less stable. The bank cannot afford to invest its funds in securities, the prices of which are subject to frequent fluctuations. v. Profitability - A commercial bank by definition is a profit hunting institution. The bank has to earn profit to pay salaries to the staff, interest to the depositors, dividend to the shareholders and to meet the day-to-day expenditure. Since cash is the least profitable asset to the bank, there is no point in keeping all the assets in the form of cash on hand. The bank has got to earn income. Hence, some of the items on the assets side are profit yielding assets. They include money at call and short notice, bills discounted, investments, loans and advances, etc. Loans and advances, though the least liquid asset, constitute the most profitable asset to the bank. Much of the income of the bank accrues by way of interest charged on loans and advances. But, the bank has to be highly discreet while advancing loans. vi. Saleability of Securities - Further, the bank should invest its funds in such types of securities as can be easily marketed at a time of emergency. The bank cannot afford to invest its funds in very long term securities or those securities which are unsaleable. It is necessary for the bank to invest its funds in government or in first class securities or in debentures of reputed firms. It should also advance loans against stocks which can be easily sold. vii. Margin Money – in case of secured loans (A secured advance is one which is made on the security of either assets or against personal security or other guarantees. An advance which is not secured is called an unsecured advance), the bank should carefully examine and value of security. There should be sufficient margin between the amount of loan and value of the security. If adequate margin is not maintained, the loan might become unsecured, in case the borrower fails to pay the interest and return the loan. Margin means a sufficient gap between loan value and security value for ex if security market value is Rs 1000 then bank may offer Rs 800 as loan. viii. Principle of Purpose - At the time of granting an advance the banker must ask about the purpose of the loan. If it is for unproductive purposes, then there is less chances of repayment of loan. On the other hand, If it is for productive purposes then there is more chances of repayment loan value with the interest.

SECURED ADVANCES

A secured loan is a loan given out by a financial institution wherein an asset is used as collateral or security for the loan. For example, you can use your house, gold, etc., to avail a loan amount that corresponds to the asset‘s value. In the case of a secured loan, the bank or financial institution that is dispensing the loan will hold on to the ownership deed of the asset until the loan is paid off.

Examples of secured loans Loan against property Home equity line of credit Car loan Objective of Securities :-

The basic objective of obtaining securities is to recover the unpaid amount of loan if any, through the sale of these securities. Hence, the securities should be clearly identifiable be easily marketable, have stability and their title should be clear and easily transferable.

Features

Qualifying can be more difficult: Repossessing a car or foreclosing on a house can take time, and the condition of the collateral is never certain, so lenders want to know a lot about a borrower‘s income and credit history before issuing a secured loan.

Can Borrow More Money: Typical collateral for a secured loan is a high value item, such as a home or car, therefore you can usually qualify for a larger sum of money for a secured loan.

Longer Repayment Schedule: Repayment schedules for secured loans tend to be longer. A typical auto loan is 5 years, and the most popular home loan is the 30-year mortgage.

Advantages

Lower Interest Rates and longer repayment schedules

When done within a limits, you can improve your credit score by making consistent, on-time payments toward secured loans

Disadvantages

If you fail to make payments, you can lose the collateral: your home or vehicle.

If you fail to make payments, you can harm your credit score.

WHAT IS AN UNSECURED LOAN?

Unsecured loans, like the name suggests, is a loan that is not secured by a collateral such as land, gold, etc. These loans are comparatively riskier to a lender and therefore associated with a high interest rate. When a lender releases an unsecured loan, he does so after evaluating your financial status and assessing whether or not you are capable of repaying your loan.

Examples of unsecured loans

Credit cards

Personal loans

Student loans

Features

Loan amounts are smaller: With the exception of student loans, the size of an unsecured loans is often much smaller than secured ones and the amount of interest charged on balances due is usually much greater.

Interest rates are higher: Interest rates on unsecured loans tend to be significantly higher. The average credit card interest rate over the past several years ranges from 15-18%, while payday loans can cost you 300%-400%.

Advantages

Unsecured loans are convenient, and usually easy to qualify for. They can help you buy things and make payments when money is short.

Unsecured loans, when paid on time each month, can help you improve your credit score and eventually qualify for lower interest secured loans.

Disadvantages

Higher interest rates can contribute to you paying significantly more for goods and services than you would otherwise spend.

Missing payments will harm your credit score.

Types of Securities :-

i. Personal Securities - These are also called intangible securities. E.g. promissory notes, bills or exchange, a security bond are the personal liability of guarantor etc. ii. Tangible Securities - These are impersonal security, such as, land, buildings and machinery. If the borrower fails to repay the loan then the bank can sell the asset with the help of court. iii. Primary Securities - These are those securities or assets which are created with the help of finance made available by the bank, like machinery or equipment purchased with the help of bank finance. iv. Collateral Security - It is additional security given by the borrower where the primary security is not enough to recover the loan amount at the time of realization, e.g. the

land of the factory is given as security along with the machinery purchased out of the bank loan.

Difference between Secured and Unsecured Loan (Secured vs Unsecured loan)

i. The most important difference between a secured and unsecured loan is the collateral required to attain the loan. A secured loan requires you to provide the lender with an asset that will be used as a collateral for the loan. Whereas and unsecured loan doesn‘t require you to provide an asset as collateral in order to attain a loan. ii. Another key difference between a secured and unsecured loan is the rate of interest. Secured loans usually have a lower rate of interest when compared to an unsecured loan. This is because unsecured loans are considered to be risker loans by lenders than secured loans. iii. Secured loans are easier to obtain while unsecured loans are harder to obtain, as it is less risker for a banker to dispense a secured loan. iv. Secured loans usually have longer repayment periods when compared to unsecured loans. In general, secured loans offer a borrower a more desirable contract that an unsecured loan would. v. Secured loans are easier to obtain for the mere fact that they are less risky for a lender to give out, while unsecured loans are comparatively harder to obtain.

TYPES OF LOANS AND ADVANCES

Lending money is one of the primary functions of the bank. Lending of funds to individuals, traders, businessmen and industrial enterprises, is one of the important activities of commercial banks. Interest earns on these loans and advances are the major source of income of the banks. Interest given on deposits is lower than the interest received on such loans and advances. Amount deposited by the customers forms the main source of loans and advances.

Various types of loans and advances given by banks: Banks lend money in various forms for various purposes which are given below:

1. Cash Credit: Cash Credit is a type of advance wherein a banker permits his customer to borrow money upto a particular limit by a bond of credit with one or more securities. The advantage associated with this system is that a customer can withdrawn money as and when required. The bank will charge interest only on the actual amount withdrawn by the customer. Many industrial concerns and business houses borrow money in this form.

2. Overdraft: An overdraft is an arrangement by which the customer is allowed to overdraw his account. It is granted against some collateral securities. The facility to

overdraw is allowed through current account only. Interest is charged on the exact amount of overdrawn subject to the payment of minimum amount by way of interest.

3. Loan: Loan is an advance in lump sum amount the whole of which is withdrawn and is supported to be rapid generally wholly at one time. It is made with or without security. It is given for a fixed period at in agreed rate of interest. Repayments may be made in installments or at the expiry of a certain period.

4. Discounting Bill of Exchange: The bank also gives advances to their customers by discounting their bills. The net amount after deducting the amount of discount is credited to the account of customer. The bank may discount the bills with or without any security from the debtor in addition to the personal security of one or more person already liable on the bill.

BANK ADVANCES AGAINST VARIOUS SECURITIES

A major part of bank advances are granted only for productive purposes and banks normally do not grant any advance for consumption purpose. Advances against miscellaneous securities such as bank's own fixed deposits receipts, national savings certificates, life policies, shares etc. are still granted on a restricted scale. The policies in this regard may differ from bank to bank. It may also not be possible to specify the exact terms and conditions on which the advances will be granted.

I. ADVANCES AGAINST BANKS OWN DEPOSITS

Deposits of the bank may be broadly divided in two categories as under:

i. Demand Deposits. ii. Term Deposits.

Demand deposits are payable on demand and as such no advance against such a deposit may normally be required. ,

Term deposits are payable after a fixed period and may generally be accepted under three different schemes:

1. Fixed deposits where a fixed amount is accepted for an agreed term and the interest is payable, every quarter.

2. Reinvestment plan where a fixed amount is accepted for an agreed term and interest accrued every quarter is further invested. The depositor is paid a lump‑sum amount after expiry of the agreed term.

3. Monthly recurring deposit where a monthly instalment is accepted for an agreed term and a lump‑sum amount is paid to the depositor after its expiry.

II. ADVANCES AGAINST LIFE INSURANCE POLICIES

Life insurance policies are considered as one of best securities available for bank advances and are readily accepted as collateral security. Need based advance is also granted against life insurance policies on a restricted basis.

III. ADVANCES AGAINST GOVERNMENT SECURITIES, NATIONAL SAVINGS CERTIFICATES, POST‑OFFICE TERM DEPOSITS, ETC.

Government securities are generally issued in two forms as under: • Stocks. • Promissory notes. For securities which are held in the form of stocks, the owner is only given a certificate to the effect that his name has been registered as an owner of certain amount of stock in a specified loan in the Public Debt Office. These stocks are transferable only by submitting a special transfer form obtainable from a public debt office. Public Debt Office will transfer the stock and issue a fresh certificate in favour of the transferee.

The security issued in the form of promissory notes are transferable by endorsement and delivery just like any other negotiable instrument and are not required to be sent to Public Debt Office at the time of each transfer unlike stocks. These securities have a stable value and are easily marketable and constitute good security for bank advances.

National Saying Certificates are freely acceptable as security for bank advances. Premature encashment of these certificates before three years has now been stopped by post office and any short‑term requirement of funds against the certificates will be met by banks only. The general terms and conditions of advances against Govt. securities, National Saying Certificates etc. are given below:

(i) The bank should satisfy themselves as to the acceptability of the credit needs of the borrower and end use of funds lent and they should not be guided solely by availability of the security.

(ii) The interest rate should be as per the directives on interest rate issued by the Reserve Bank of India.

(iii) Adequate margin should be maintained to cover the defaults, if any, in repayment of the principal and interest.

(iv) They should ascertain and follow the procedure prescribed by the Public Debt Office of the RBI, postal authorities, etc., when advances against Government securities, postal certificates, etc. are granted.

IV. ADVANCES AGAINST RELIEF BONDS

Relief Bonds issued in different series in demat form are‑eligible for sanction of loans against them subject to the following terms:

(i) The banks will satisfy themselves as to the acceptability of the purpose, genuineness of the credit, need of the borrower and end use of funds lent.

(ii) The rate of interest will be in accordance with the directives on interest rates issued by the RBI from time to time.

(iii) Adequate margin will be kept to cover defaults, if any, in repayment of the principal and interest at the appropriate rate.

UNIT IV

E-Banking

E-banking involves information technology based banking. Under this I.T system, the banking services are delivered by way of a Computer-Controlled System. This system does involve direct interface with the customers. The customers do not have to visit the bank's premises.

Advantages of E-Banking

i. The operating cost per unit services is lower for the banks. ii. It offers convenience to customers as they are not required to go to the bank's premises. iii. There is very low incidence of errors. iv. The customer can obtain funds at any time from ATM machines. v. The credit cards and debit cards enables the Customers to obtain discounts from retail outlets. vi. The customer can easily transfer the funds from one place to another place electronically.

Benefits of internet Banking

There are many benefits of Internet banking. Even if a person miles away from your bank or out of the country, a person can still use this kind of banking as long as you have an online connection. The benefits of having this type of bank account can be seen below.

i. Control your money conveniently

A person can have access to an account 24 hours a day, seven days a week, with this can check the amount of funds available 24/7 and know every detail of transactions through the Internet.

ii. Pay bills online

One of the great advantages of online banking is online bill pay. Rather than having to write checks or fill out forms to pay bills, once a person set up an accounts online, all it takes is a simple click — or even less, as a person can usually automate his bill payments. With online bill pay, it‘s easy to manage accounts from one central source and to track payments into and out of an account.

iii. Easy-to-find records

There‘s no hassle in looking for past financial banking records, a person quickly see it in account using online business banking. Just simply go to transaction history and select the date and kind of your transaction. After furnishing all this information, all the particulars of transaction appears. iv. Access to online products, rates and services

There are some bank products only available via the Internet that are not available to business owners going to the bank directly. These bank products presented in the Internet provide advantages such as instant funding and flexible repayment options.

v. Secure online transaction

In online banking, safety is very important because it involves money and confidential data. To protect account from business identify theft, online banks have security features like log in ID and password, card security number, secured encryption site, anti-virus protection, and firewalls.

Home Banking:

Home banking is the practice of conducting banking transactions from home rather than at branch locations. Home banking generally refers to either banking over the telephone or on the internet (i.e. online banking). It is another important innovation took place in Indian banking sector. The customer can check the balance and transfer the funds with the help of a telephone. But, it is not that popularly utilized in our country.

The first experiments with internet banking started in the early 1980s, but it did not become popular until the mid-1990s when home internet access was widespread. Today, a variety of internet banks exist which maintain few, if any, physical branches.

The increasing popularity of home banking has fundamentally changed the character of the banking industry. Many people are able to arrange their affairs so that they seldom have need of a physical branch. Online-only banks have profited from this shift in the industry. The absence of brick and mortar locations allows many online banks to offer favorable interest rates, lower service charges, and many other incentives for those willing to bank online.

Home Banking and Cybersecurity Concerns

With the increased shift to online banking, new security threats have arisen. All information, such as customer account information, balances, recent transactions, and more, which is stored on a computer, other electronic device, or in the cloud, is vulnerable to hackers and theft. Many commercial banks with online arms have put into

place cybersecurity measures to prevent such dangerous theft from occurring. Cybersecurity has become essential as the world is more reliant on computers than ever before.

Three major ways that cyber thieves obtain sensitive consumer financial data are: backdoor attacks, in which criminals exploit alternate methods of accessing a system (or don't require usual authentication methods); denial-of-service attacks, which block a rightful user from entering a system; and direct-access attacks, including more commonly known bugs and viruses. Bugs and viruses gain access to a system and copy its information and/or modify parts or all of it.

Mobile banking

Mobile banking is a service provided by a bank or other financial institution that allows its customers to conduct financial transactions remotely using a mobile device such as a smartphone or tablet. Unlike the related internet banking it uses software, usually called an app, provided by the financial institution for the purpose. Mobile banking is usually available on a 24-hour basis. Some financial institutions have restrictions on which accounts may be accessed through mobile banking, as well as a limit on the amount that can be transacted. Mobile banking is dependent on the availability of an internet or data connection to the mobile device.

Transactions through mobile banking depend on the features of the mobile banking app provided and typically includes obtaining account balances and lists of latest transactions, electronic bill payments, remote check deposits, P2P payments, and funds transfers between a customer's or another's accounts. Some apps also enable copies of statements to be downloaded and sometimes printed at the customer's premises. Using a mobile banking app increases ease of use, speed, flexibility and also improves security because it integrates with the user built-in mobile device security mechanisms.

From the bank's point of view, mobile banking reduces the cost of handling transactions by reducing the need for customers to visit a bank branch for non-cash withdrawal and deposit transactions. Mobile banking does not handle transactions involving cash, and a customer needs to visit an ATM or bank branch for cash withdrawals or deposits. Many apps now have a remote deposit option; using the device's camera to digitally transmit cheques to their financial institution.

History of Mobile Banking

The earliest mobile banking services used SMS, a service known as SMS banking. With the introduction of smart phones with Wireless Application Protocol (WAP) support enabling the use of the mobile web in 1999, the first European banks started to offer mobile banking on this platform to their customers.

Mobile banking before 2010 was most often performed via SMS or the mobile web. Apple's initial success with iPhone and the rapid growth of phones based on Google's Android (operating system) have led to increasing use of special mobile apps, downloaded to the mobile device. With that said, advancements in web technologies such as HTML5, CSS3 and JavaScript have seen more banks launching mobile web based services to complement native applications.

A recent study (May 2012) by Mapa Research suggests that over a third of banks have mobile device detection upon visiting the banks' main website. A number of things can happen on mobile detection such as redirecting to an app store, redirection to a mobile banking specific website or providing a menu of mobile banking options for the user to choose from.

Mobile Banking and Cybersecurity

Cybersecurity has become increasingly important in many mobile banking operations. Cybersecurity encompasses a wide range of measures taken to keep electronic information private and avoid damage or theft. It is also used to make data which is not misused, extending from personal information to complex government systems.

Three main types of cyber attacks can occur. These are:

 Backdoor attacks, in which thieves exploit alternate methods of accessing a system that doesn't require the usual means of authentication. Some systems have backdoors by design; others result from an error.  Denial-of-service attacks prevent the rightful user from accessing the system. For example, thieves might enter a wrong password enough times that the account is locked.  The direct-access attack includes bugs and viruses, which gain access to a system and copy its information and/or modify it.

Steps financial advisors can take to protect their clients against cyber attacks include:

 Helping educate clients about the importance of strong, unique passwords (e.g, not reusing the same one for every password-protected site), along with how a password manager like Valt or LastPass can add an extra layer of security.  Never accessing client data from a public location, and being sure the connection is always private and secure. 

Virtual Banking

Definition:

A financial institution that handles all transactions via the Web, email, mobile check deposit and ATM machines. By not having the overhead of physical branches, people expect a virtual bank to offer higher interest rates on their accounts. Traditional banks may also own a virtual bank subsidiary.

The Virtual Banking is the provision of accessing the banking and related services online without actually going to the bank branch/office in person. Simply, availing the banking services through an extensive use of information technology without any requirement for the physical walk-in premises is called as virtual banking.

Also called a "direct bank," "neobank," "branchless bank" and "online bank," the first bank without branches debuted in 1989 in the U.K. when First Direct bank offered telephone banking. However, in the mid-2000s, many virtual banks emerged due to the ease of access via the Internet and mobile phones.

Any financial institution that offers the traditional banking services online is termed as a virtual bank. Virtual banking enables a customer to pay bills online, check account details, secure loans, withdraw and deposit money anytime as per the convenience.

Some common forms of virtual banking are, ATMs, use of magnetic ink character recognition code (MICR), Electronic clearing service scheme, electronic fund transfer scheme, RTGS, computerized settlement of clearing transactions, centralized fund management schemes, etc.

Virtual Banks vs. Online Banking

All transactions in a virtual bank are handled entirely online, whereas "online banking" is an Internet based option offered by regular banks.

E-Commerce Payment System

An e-commerce payment system (or an electronic payment system) facilitates the acceptance of electronic payment for online transactions. Also known as a subcomponent of Electronic Data Interchange (EDI), e-commerce payment systems have become increasingly popular due to the widespread use of the internet-based shopping and banking.

An electronic payment (e-payment), in short, can be simply defined as paying for goods or services on the internet. It includes all financial operations using electronic devices, such as computers, smartphones or tablets.

Credit cards remain the most common forms of payment for e-commerce transactions. It is difficult for an online retailer to operate without supporting credit and debit cards due to their widespread use. Online merchants must comply with stringent rules stipulated by the credit and debit card issuers (e.g. Visa and MasterCard) in accordance with bank and financial regulation in the countries where the debit/credit service conducts business.

For the vast majority of payment systems accessible on the public Internet, baseline authentication (of the financial institution on the receiving end), data integrity, and confidentiality of the electronic information exchanged over the public network involves obtaining a certificate from an authorized certification authority (CA) who provides public-key infrastructure (PKI). Even with transport layer security (TLS) in place to safeguard the portion of the transaction conducted over public networks—especially with payment systems—the customer-facing website itself must be coded with great care, so as not to leak credentials and expose customers to subsequent identity theft.

There are companies that specialize in financial transaction over the internet, such as Stripe for credit cards processing, Smartpay for direct online bank payments and PayPal for alternative payment methods at checkout. Many of the mediaries permit consumers to establish an account quickly, and to transfer funds between their on-line accounts and traditional bank accounts, typically via Automated Clearing House (ACH) transactions.

The speed and simplicity with which cyber-mediary accounts can be established and used have contributed to their widespread use, despite the risk of theft, abuse, and the typically difficult process of seeking recourse when things go wrong. The inherent information asymmetry of large financial institutions maintaining information safeguards provides the end-user will little insight into the system when the system mishandles funds, leaving disgruntled users frequently accusing the mediaries of sloppy or wrongful behavior; trust between the public and the banking corporations is not improved when large financial institutions are revealed to have taken flagrant advantage of their asymmetric power, such as the 2016 Wells Fargo account fraud scandal.

Methods of online payment

Credit cards constitute a popular method of online payment but can be expensive for the merchant to accept because of transaction fees primarily. Debit cards constitute an excellent alternative with similar security but usually much cheaper charges. Besides card-based payments, alternative payment methods have emerged and sometimes even claimed market leadership.

Bank payments

This is a system that does not involve any sort of physical card. It is used by customers who have accounts enabled with Internet banking. Instead of entering card details on the purchaser's site, in this system the payment gateway allows one to specify which bank they wish to pay from. Then the user is redirected to the bank's website, where one can authenticate oneself and then approve the payment. Typically there will also be some form of two-factor authentication.

It is typically seen as being safer than using credit cards, as it is much more difficult for hackers to gain login credentials compared to credit card numbers. For many E- Commerce merchants, offering an option for customers to pay with the cash in their bank account reduces cart abandonment as it enables a way to complete a transaction without credit cards.

Mobile Money Wallets

In developing countries many people don't have access to banking facilities, especially in tier II and tier III cities. Taking the example of India, there are more mobile phone users than there are people with active bank accounts. Telecom operators, in such locations, have started offering mobile money wallets which allow adding funds easily through their existing mobile subscription number, by visiting physical recharge points close to their homes and offices and converting their cash into mobile wallet currency. This can be used for online transaction and E-Commerce purchases.

What Is Biometric Authentication?

In the fight against fraudulent credit card usage, technology has turned to biometric authentication. Biometric technology has made great strides over the last few years and is already integrated into everyday life, commonly used in smartphone security, workplaces, banking, healthcare, cars, as well as border control, and other official institutions. The most well-known forms are fingerprint scanning, voice and facial recognition, as well as iris scanning, but can also include gait, heartbeat or even how someone types.

Fingerprint Scanning Cards

In a world with increased cybercrime, financial fraud, security breaches, and rising credit card usage, card issuers are looking for more secure authentication processes. PINs and passwords are static forms of information and can too easily be stolen or forgotten. Enter the contactless biometric card.

A biometric card is a combination of fingerprint scanner and EMV card technology. Initially, the card owner will be required to go to their bank to register their fingerprint.

Then, when paying, place finger over a small scanner embedded in the card and the card draws power from the card reader to activate the fingerprint reader. This then calculates if there is a match with the rightful owner‘s fingerprint/s, and the payment will be authorized.

What Are the Advantages of Biometric Payment Cards?

1. Better Protection of Your Data

Unlike PINs, fingerprint data is encrypted and is only stored in the card, bypassing the need for a central database connected to the internet, protecting a card user‘s sensitive data from hackers. Additionally the technology safeguards against duplicated 2D and rubber fingerprints because it requires electrical capacitive sensing.

2. Even More Convenience

Credit cards save consumers time and allow them to pay quickly. For EMV PIN and chip cards, remembering a PIN code can slow down the process. Using fingerprint authentication can speed the process along and reduces friction in the payment process.

3. Works with Existing POS Infrastructure

A biometric credit card will work on any EMV ready payment terminal and no modification is required for existing Point of Sale devices. This means there are no rollout costs for the merchants and this technology can become accepted quickly.

ATM card

An ATM card is a payment card or dedicated payment card issued by a financial institution which enables a customer to access automated teller machines (ATMs). ATM cards are payment card size and style plastic cards with a magnetic stripe or a plastic smart card with a chip that contains a unique card number and some security information such as an expiration date or CVVC (CVV). ATM cards are known by a variety of names such as bank card, MAC (money access card), client card, key card or cash card, among others. Most payment cards, such as debit and credit cards can also function as ATM cards, although ATM-only cards are also available.

ATM cards can also be used on improvised ATMs such as "mini ATMs", merchants' card terminals that deliver ATM features without any cash drawer. These terminals can also be used as cashless scrip ATMs by cashing the receipts they issue at the merchant's point of sale.

The first ATM cards were issued in 1967 by Barclays in London.

Credit Cards

A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. A credit card is different from a charge card: a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. A credit card also differs from a cash card, which can be used like currency by the owner of the card. Most credit cards are issued by the banks or credit unions.

Debit Card

A debit card (also known as a bank card or check card) is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution. Some cards have a stored value against which a payment is made, while most relay a message to the cardholder's bank to withdraw funds from a designated account in favour of the payee's designated bank account. The card can be used as an alternative payment method to cash when making purchases. In some cases, the cards are designed exclusively for use on the Internet, and so there is no physical card. In many countries the use of debit cards has become so widespread that their volume of use has overtaken or entirely replaced the check and, in some instances, cash transactions. Like credit cards, debit cards are used widely for telephone and Internet purchases. However, unlike credit cards, the funds paid using a debit card are transferred immediately from the bearer's bank account, instead of having the bearer pay back the money at a later date.

Credit Card Vs Debit Card

Credit card Debit card 1 It is a ―pay later product‖ It is ―pay now product‖ 2 The card holder can avail of credit for Customers account is debited 30-45 days immediately 3 No sophisticated communication sophisticated communication network/ system is required for credit card system is required for debit card operation operation ( eg.ATM) 4 Opening bank account and maintaining Opening bank account and maintaining required amount are not essential required amount are essential 5 Possibility of risk of fraud is high Risk is minimised through using PIN

Smart Card

A smart card resembles a credit card in size and shape, but inside it is completely different. First of all, it has an inside -- a normal credit card is a simple piece of plastic. Theinside of a smart card usually contains an embedded microprocessor. The microprocessor is under a gold contact pad on one side of the card.

Smarts cards may have up to 8 kilobytes of RAM, 346 kilobytes of ROM, 256 kilobytes of programmable ROM, and a 16-bit microprocessor.

The most common smart card applications are:

 Credit cards  Electronic cash  Computer security systems  Wireless communication  Loyalty systems (like frequent flyer points)  Banking  Satellite TV  Government identification

NEFT - National Electronic Funds Transfer

What is NEFT?

National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals can electronically transfer funds from any bank branch to any individual having an account with any other bank branch in the country participating in the Scheme. It is an online system for transferring funds from one financial institution to another within India usually the banks. The system was launched in November 2005, and was set to inherit every bank that was assigned to the SEFT (Special Electronic Funds Transfer System) clearing system. It was made mandatory by the RBI for all banks on the SEFT system to migrate to NEFT by mid December 2005. As such, SEFT was discontinued as of January 2006. The RBI welcomed banks that were full members of the RTGS to join the NEFT system.

What Is Real-Time Gross Settlement (RTGS)?

Real-time gross settlement (RTGS) systems are specialist funds transfer systems where the transfer of money or securities takes place from one bank to any other bank on a "real-time" and on a "gross" basis. Settlement in "real time" means a payment

transaction is not subjected to any waiting period, with transactions being settled as soon as they are processed. "Gross settlement" means the transaction is settled on a one-to-one without bundling or netting with any other transaction. "Settlement" means that once processed, payments are final and irrevocable.

How Real-Time Gross Settlement (RTGS) Works

Real-time gross settlement is a system that is generally used for large-value interbank funds transfers. These often require immediate and complete clearing and are usually organized by a country‘s central bank.

Real-time gross settlement lessens settlement risk overall, as interbank settlement usually occurs in real time throughout the day—instead of simply all together at the end of the day. This eliminates the risk of a lag in completing the transaction. (Settlement risk is often called delivery risk.) RTGS can often incur a higher charge than processes that bundle and net payments.

Benefits of Real-Time Gross Settlement (RTGS)

RTGS systems, increasingly used by central banks worldwide, can help minimize the risk to high-value payment settlements among financial institutions. Although companies and financial institutions that deal with sensitive financial data typically have high levels of security in place to protect information and funds, the range and nature of online threats are constantly evolving.

RTGS-type systems help protect financial data by making it vulnerable to hackers for a briefer time window.

Real-time gross settlement can allow a smaller window of time for critical information to be vulnerable, thus helping to mitigate threats. Two common examples of cybersecurity threats to financial data are social engineering or phishing (tricking people into revealing their information) and data theft, whereby a hacker obtains and sells data to others.

The first system resembling a RTGS system was the U.S. Fedwire system, which was launched in 1970. That system was an evolution of a previous telegraph-based system, which was used to transfer funds electronically between U.S. Federal Reserve banks. In 1984, the United Kingdom and France both implemented RTGS type systems.

The British system, called CHAPS (for Clearing House Automated Payment System), is currently run by the Bank of England. France and other Eurozone nations share a system called TARGET2 (for Trans-European Automated Real-time Gross Settlement Express Transfer System). Other developed and developing countries have also introduced their own RTGS-type systems.

Difference between RTGS Vs. NEFT

The fundamental difference between RTGS and NEFT, is that while RTGS is based on gross settlement, NEFT is based on net-settlement. Gross settlement is where a transaction is completed on a one-to-one basis without bunching with other transactions. On the other hand a Deferred Net Basis (DNS), or net-settlement means that the transactions are completed in batches at specific times. Here, all transfers will be held up until a specific time. RTGS transactions are processed throughout the working hours of the system.

RTGS transactions involve large amounts of cash, basically only funds above Rs 200,000 may be transferred using this system. For NEFT, any amount below Rs 200,000 may be transferred, and this system is generally for smaller value transactions involving smaller amounts of money.

RTGS processes in real-time (‗push‘ transfer), while NEFT processes in cycles during the given working day. This causes a NEFT transaction that is initiated later than the last cycle to be completed the next day.

So if you want to transfer large sums of money real time RTGS is better but for small amounts where there is not much urgency NEFT is a Better Option. Usually RTGS costs more than NEFT Transactions.

TABLE OF DIFFERENCES BETWEEN NEFT & RTGS Criteria NEFT RTGS (Retail) Settlement Done in batches (Slower) Real time (Faster) National Electronic Fund Real Time Gross Full Form Transfer Settlement Timings on Mon – Fri 8:00 am – 6:30 pm 9:00 am – 4:30 pm Timings on Saturday 8:00 am – 12:30 pm 9:00 am – 1:30 pm Minimum amount of money No Minimum 2 lacs transfer limit Maximum amount of money No Limit No Limit transfer limit When does the Credit Happen in Happens in the hourly batch Real time between beneficiary account Between Banks Banks Rs. 25-30 (Upto 2 – 5 Upto 10,000 – Rs. 2.5 lacs) from 10,001 – 1 lac – Rs. 5 Rs. 50-55 (Above 5 Maximum Charges as per RBI from 1 – 2 lacs – Rs. 15 lacs) Above 2 lacs – Rs. 25 (Lower charges for first half of day) Suitable for Small Money Transfer Large Money Transfer

What is Electronic Clearing Service (ECS)?

Electronic Clearing Service (ECS) in bank transaction is a simple, faster and cost effective solution for repetitive bulk transactions. The system was first introduced by Reserve Bank of India in April 1995 to facilitate speedier bulk inter-bank transactions. It is most useful to facilitate repetitive payment transaction such as salary, pension, interest, commission, dividend etc. ECS is also useful to big corporate, Multinational companies, Government departments who are required to make payment to large number of beneficiaries. ECS also facilitates domestic and foreign banks who have obtained standing instructions from the borrowers to recover their monthly loan installments through ECS debit.

ECS credit to large number of beneficiaries

In ECS credit system, paper instruments such as cheques, drafts, warrants etc, are substituted by electronic instructions. Under the system, magnetic media files are provided to clearing houses for bulk and repetitive payment instructions. These magnetic media files are used by clearing houses for effecting credits or debits to the bank accounts of respective account holder.

ECS debits towards EMI and Utility services

In ECS debit system, the bank customers give an authority(standing instruction) to paying banker to debit their account towards electric bill, telephone bill etc., as and when they receive ECS debit notes received through clearing. This augurs well for consumers of utility services as they need not wait for monthly bill and take time to remit the bill amount before the due date. Paying bank of ECS debits, should be careful while debiting customers account. Similarly domestic and foreign banks take standing instruction from their customers who have availed consumer loan etc., to recover the EMI from their account in another bank under ECS. Paying bankers will verify their records in respect of the name of the account holder, account no., operation instruction in the account, signature of the account holder etc., when they receive ECS mandate. If they notice any discrepancy they may not approve the ECS debit mandate given by their customer. The account holders must ensure that all the details provided by them in ECS mandate is correct, before making it operational.

CONCEPT OF E-MONEY

Electronic money refers to money that exists in banking computer systems that may be used to facilitate electronic transactions. Although its value is backed by fiat currency and may, therefore, be exchanged into a physical, tangible form, electronic money is

primarily used for electronic transactions due to the sheer convenience of this methodology.

Electronic money can be transferred by smart cards (credit or debit cards), smartphones and computer systems among others. In order to facilitate transactions from bank accounts, financial firms and banks sign deals with e-money networking processors to give customers access to smart cards with which electronic transactions will be possible. Also, with most e-commerce platforms allowing e-money transactions, consumers can now shop for almost the goods and services available online.

Broadly, electronic money is an electronic store of monetary value on a technical device. The definition of electronic money is becoming more scientific and specific with developments associated with it. The European Central Bank defines e-money in the following words. ―E-money can be defined as amount of money value represented by a claim issued on a prepaid basis, stored in an electronic medium (card or computer) and accepted as a means of payment by undertakings other than the issuer‖ (ECB).

E money is a monetary value that is stored and transferred electronically through a variety of means – a mobile phone, tablet, contactless card (or smart cards), computer hard drive or servers. Electronic money need not necessarily involve bank accounts in transaction but acts as a prepaid bearer instrument. They are often used to execute small value transactions.

Types of electronic money

E-money is usually issued by an institution upon receipt of funds and is given a value in a national currency like Rupee. Basically, money is of three types with the first two being the most important. The first category is stored value cards that contain prepaid money. Smart cards, prepaid cards and cards used in bus like Mybus card, are examples of this prepaid payment cards. Second is the software based electronic money where money is kept online in servers. Here, account balances are kept at online service providers such as Paytm.

Electronic money in India

In India, the field of electronic money is regulated by the RBI mainly under Payment and Settlement System Act (PPS Act) 2007. The Act gives details about the issue pf electronic money under the name Prepaid Payment Instruments. Separate Prepaid Payments Instruments guidelines are also issued by the RBI on this behalf. As per the PPS Act, banks and non-bank entities can issue pre-paid payment instruments in the country after obtaining necessary approval / authorisation from RBI.

In 2002, a Working Group under YV Reddy has submitted report on Electronic Money by making an extensive study about the potentials of electronic money in India. Electronic money in the form of Prepaid Payment Instruments are expected to push cashless transactions in the country.

Electronic purse (ePurse)

Definitions

An electronic purse is

― stored value device that can be used to make purchases from more than one vendor. ‖

―mechanism that allows end users to pay electronically for goods and services. The function of the electronic purse is to maintain a pool of value that is decremented as transactions are performed.‖

An electronic purse is "designed to facilitate small-value face-to-face retail payments by offering a substitute for banknotes and coins. They are intended to complement rather than substitute for traditional retail payment instruments such as cheques and credit and debit cards."

"Electronic purses differ from other cashless payment instruments in that they are supplied in advance with generally accepted purchasing power. They can be loaded at bank counters, through Automated Teller Machines (ATMs) or through specifically equipped telephones, against a debit entry in a credit institution account, or against banknotes and coins.

Examples are: Paytm, Mobikwik, Alipay, American Express, Apple pay, Microsoft Wallet, Samsung Pay.

Placement of value on the card (electronic purse)

The value is placed on the card in one of three ways:

 Preloaded on to the card (in the same manner as telephone cards), without possibility to add further value. The intention is that the card is discarded when the value is expired.  Added to the card at the time the card is issued, or when the e-purse application is added to an existing card.  Additional value added to an existing ePurse (―top-up‖). 

Benefits of electronic purse

Benefits of electronic purse are:

 The customer pays only for the travel made.  Incentives such as free transfers, discounts and fare-capping can be offered to the customer in a secure and consistent way.  Cash handling is reduced as customers migrate to prepaid tickets.  Innovative means of adding/renewing value can be utilized.  High degree of security.  Third parties can become involved in issuing value.

Cautions with regard to electronic purse

Cautions with regard to electronic purse are:

 Technical complexity, which requires a substantial level of technical competence within the organization.  Need for a high level of electronic security, and the capacity and commitment to managing this security correctly.  The higher the value of the scheme, and the more places the electronic purse can be used, the more likely the regulations applying to banks and deposit-taking institutions will become applicable to the scheme.  Loss of corporate focus can occur when the transport agencies become overly interested in the ancillary uses for the electronic purse, to the detriment of the core purpose – which is the payment of transit fares.

What is Digital Cash?

Digital cash aims to mimic the functionality of paper cash, by providing such properties of anonymity and transferability of payment. Digital cash is intended to be implemented data which can be copied, stored, or given as payment (for example, attached to an email message, or via a USB stick, bluetooth, etc). Just like paper currency and coins, digital cash is intended to represent value because it is backed by a trusted third party (namely, the government and the banking industry).

Most money is already paid in electronic form; for example, by credit or debit card, and by direct transfer between accounts, or by on-line services such as PayPal. This kind of electronic money is not digital cash, because it doesn't have the properties of cash (namely, anonymous and off-line transferability between holders).

How does Digital Cash work?

The figure shows the basic operation. User A obtains digital cash "coins" from her bank (and the bank deducts a corresponding amount from her account). The user is now entitled to use the coins by giving them to another user B, which might be a merchant. B receives e-cash during a transaction and see that it has been authorized by a bank. They can then pay the cash into their account at the bank.

Ideal properties of a Digital Cash system

Ideal properties:

i.Secure. Alice should be able to pass digital cash to Bob without either of them, or others, able to alter or reproduce the electronic token. ii. Anonymous. Alice should be able to pay Bob without revealing her identity, and without Bob revealing his identity. Moreover, the Bank should not know who Alice paid or who Bob was paid by. Even stronger, they should have the option to remain anonymous concerning the mere existence of a payment on their behalf. iii. Portable. The security and use of the digital cash is not dependent on any physical location. The cash should be able to be stored on disk or USB memory stick, sent by email, SMS, internet chat, or uploaded on web forms. Digital cash should not be restricted to a single, proprietary computer network. iv. Two-way. Peer-to-peer payments are possible without either party required to attain registered merchant status (in contrast with today's card-based systems). Alice, Bob, Carol, and David share an elaborate dinner together at a trendy restaurant and Alice pays the bill in full. Bob, Carol, and David each should then be able to transfer one- fourth of the total amount in digital cash to Alice. v. Off-line capable. The protocol between the two exchanging parties is executed offline, meaning that neither is required to be host-connected in order to proceed. Availability must be unrestricted. Alice can freely pass value to Bob at any time of day without requiring third-party authentication.

vi. Wide acceptability. The digital cash is well-known and accepted in a large commercial zone. With several digital cash providers displaying wide acceptability, Alice should be able to use her preferred unit in more than just a restricted local setting. vii.User-friendly. The digital cash should be simple to use from both the spending perspective and the receiving perspective. Simplicity leads to mass use and mass use leads to wide acceptability. Alice and Bob should not require a degree in cryptography as the protocol machinations should be transparent to the immediate user.

E-Money E Purse Digital Cash Value is backed by fiat currency E-Wallets are prepaid Digital money is a currency wallets that requires that exists purely in digital money to be loaded form. Digital cash is prior to any transaction. intended to be implemented data which can be copied, stored, or given as payment (for example, attached to an email message, or via a USB stick, bluetooth, etc). Exchanged into a physical, In some cases, it can be tangible form. transferred into physical cash, for example by withdrawing cash from an ATM. Various companies allow for Paytm, Mobikwik, The most successful and transactions to be made with Alipay, American widely-used form of digital electronic money, such as Express, Apple pay, money is the PayPal. Microsoft Wallet, cryptocurrency Bitcoin. Samsung Pay, Most of the digital money owned in the world is owned by banking institutions. Electronic money is most Money in bank account is commonly utilized through converted to a digital code. electronic banking systems and monitored through electronic processing. A mere fraction of the currency The user of digital cash is is utilized in physical form, the assured an anonymous vast percentage of it is housed transaction by any vendor in bank vaults and is backed by who accepts it. central banks.

UNIT V

What Is Risk?

In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences

Risk is defined in financial terms as the chance that an outcome or investment's actual gains will differ from an expected outcome or return. Risk includes the possibility of losing some or all of an original investment.

Everyone is exposed to some type of risk every day – whether it‘s from driving, walking down the street, investing, capital planning, or something else. An investor‘s personality, lifestyle, and age are some of the top factors to consider for individual investment management and risk purposes

Types of Business Risk

Businesses face all kinds of risks, some of which can cause serious loss of profits or even bankruptcy. But while all large companies have extensive "risk management" departments, smaller businesses tend not to look at the issue in such a systematic way.

1. Strategic Risk

Everyone knows that a successful business needs a comprehensive, well-thought-out business plan. But it‘s also a fact of life that things change, and best-laid plans can sometimes come to look very outdated.

This is strategic risk. It‘s the risk that a company‘s strategy becomes less effective and company struggles to reach its goals as a result. It could be due to technological changes, a powerful new competitor entering the market, shifts in customer demand, spikes in the costs of raw materials, or any number of other large-scale changes.

History is littered with examples of companies that faced strategic risk. Some managed to adapt successfully; others didn‘t.

A classic example is Kodak, which had such a dominant position in the film photography market that when one of its own engineers invented a digital camera in 1975, it saw the innovation as a threat to its core business model, and failed to develop it.

Failure to adapt to a strategic risk led to bankruptcy for Kodak. It‘s now emerged from bankruptcy as a much smaller company focusing on corporate imaging solutions, but if it had made that shift sooner, it could have preserved its dominance.

2. Compliance Risk

These are risks associated with the need to comply with the rules and regulations of the government. Laws change all the time, and there‘s always a risk that a business face additional regulations in the future. As business expands, need to comply with new rules increases that didn‘t apply before.

3. Operational Risk

These are the risks associated with the operational and administrative procedures of the particular industry. Operational risk refers to an unexpected failure in company‘s day-today operations. It could be a technical failure, like a server outage, or it could be caused by your people or processes.

In some cases, operational risk has more than one cause. For example, consider the risk that one of your employees writes the wrong amount on a check, paying out Rs.100,000 instead of Rs.10,000 from your account.

That‘s a ―people‖ failure, but also a ―process‖ failure. It could have been prevented by having a more secure payment process, for example having a second member of staff authorize every major payment, or using an electronic system that would flag unusual amounts for review.

In some cases, operational risk can also stem from events outside your control, such as a natural disaster, or a power cut, or a problem with your website host. Anything that interrupts your company‘s core operations comes under the category of operational risk.

4. Financial Risk

These are the risks associated with the financial structure and transactions of the particular industry. Most categories of risk have a financial impact, in terms of extra costs or lost revenue. But the category of financial risk refers specifically to the money flowing in and out of your business, and the possibility of a sudden financial loss.

For example, let‘s say that a large proportion of revenue comes from a single large client, and the extension of 60 days credit to that client.

In that case, a company have a significant financial risk. If that customer is unable to pay, or delays payment for whatever reason, then business is in big trouble.

Having a lot of debt also increases your financial risk, particularly if a lot of it is short- term debt that‘s due in the near future. And what if interest rates suddenly go up, and instead of paying 8% on the loan, you‘re now paying 15%? That‘s a big extra cost for business, and so it‘s counted as a financial risk.

5. Reputational Risk

Reputational risks are those risks which bring negative publicity to the organization, impacting its growth and revenue. There are many different kinds of business, but they all have one thing in common irrespective of industry that is reputation is everything.

If reputation is damaged, an immediate loss of revenue an organization suffers. But there are other effects, too. Employees may get demoralized and even decide to leave. It is hard to hire good replacements, as potential candidates have heard about bad reputation and don‘t want to join the firm. Suppliers may start to offer less favorable terms. Advertisers, sponsors or other partners may decide that they no longer want to be associated with the business with not good reputation.

Risk Assessment

Risk profiling is an assessment of a risk to be insured in the event of an accident happening or a claim being made from that insured risk. This assessment will result in what insurers would charge for that risk.

In motor insurance, various parameters are used for the assessment of a risk. However, each of these parameters may apply differently to an insured‘s risk. As such, the parameters listed below are subjective and will be based on the Underwriting Guidelines adopted by the respective insurance company.

Some of the parameters that can be used by an insurance company in assessing the risk profile of an insured could be as follows:

Age of the vehicle – It will become obvious that an older car will be subjected to more wear and tear, and the mileage run/used will mean that it will be prone to more repairs, breakdowns and worst still, parts failures, which may result in an accident or even fatality.

Age of the driver- It is an acceptable fact that a younger driver will be more prone to accidents because of inexperience and youthful vigour. Statistics have shown most serious accidents were recorded by motorists aged between 17 and 23 years.

Likewise, much older motorists also have higher perceived risk because age causes a slowdown in reflexes and have intentions to drive extra cautiously or slower (thus being

a hazard on the road). Health issues and illnesses like Dementia, heart problems and Parkinson‘s disease have also caused accidents.

Gender of the driver -There are many studies conducted in developed countries that have proven that females make better drivers than males. They are more patient and less reckless behind the wheel, thus resulting in safer driving habits. In the UK, men pay more than women for a similar motor insurance policy.

Driver’s claims record – A motorist, who is constantly involved/causing accidents and making insurance claims, is obviously a high risk case and will have to endure a higher motor premium

Insurance and the Transfer of Risk

Many people buy insurance in order to gain security and peace of mind. Comprehensive insurance policies can protect our assets, our health, and our loved ones. Insurance contracts function by shifting the risks you face every day to your insurance company. Read on to learn more about this transfer of risk.

How the Transfer of Risk Works

The transfer of risk is an essential tenant of insurance contracts. When you purchase an insurance policy, the insurance company will agree to indemnify you for a certain amount of loss in exchange for your payment of a set premium. An insurance policy, which is a legally binding contract, effectively passes the risk from the party who doesn't want to take it on (the insured, or purchaser of the policy), to the party who is willing to take on the risk in exchange for a fee (the insurance company). For example, if you buy a home, you will likely also purchase a homeowners insurance policy. By doing so, you are essentially paying an insurance company to take on the various risks that are associated with owning a home.

Risk Pooling

Risk can be transferred from insured individuals to insurance companies, and can also be transferred from insurers to reinsurers. This is known as "risk pooling." An insurance company will collect millions of dollars in premium payments each year. The company will spend these premiums meeting company expenses and also paying out claims as necessary. The company uses actuarial statistics and other information to calculate premiums to make sure that the amount of premiums collected exceeds the amount that the company has to pay out.

Reinsurance Companies

However, because the dollar value of the risk that insurance companies typically take on exceeds the amount of capital that they maintain for paying out claims, insurance companies often pass on some of their risk to reinsurance companies. Reinsurance basically provides insurance companies with insurance against loss. This comes in handy in the case of catastrophic loss, such as large-scale natural disasters that cause insurers to issue many payments at once.

Insurance and the Risk of Death

Different types of insurance policies guard against any number of risks, including the risk that you may get in a car accident or that your home may be burglarized or damaged by fire. However, perhaps the greatest risk we face every day—and the one we don't always like to think about—is the risk of unexpected death.

Many people choose to purchase life insurance to ensure that their loved ones are cared for in the event of premature or unexpected death. Every person has an estate— which is basically all of the assets and funds that would be bequeathed to your heirs when you die. But, if your estate isn't big enough to pay for all necessary expenses (including your funeral, burial expenses, and other funds to ensure your family's financial security), then your family may be left unprotected. A life insurance policy serves as a medium to transfer that risk to an insurance company. By taking your premium payment, which is a form of consideration, the insurance company becomes obligated to pay your beneficiaries a specified amount upon your death.

Basic Principles of Contract of Insurance

Contract of insurance have all the essential elements of general contract. According to section 2(h) and section 10 of the Indian Contract Act 1872, a valid contract must have the essential elements of offer and acceptance, consideration, legal parties, sound mind and free consent of the parties. Further, Insurance transactions need be governed by special principles in order to protect the interests of the contracting parties, particularly the customer. It is in view of this that the contracts are governed by certain special basic legal principles. These make insurance contracts very unique and different from other kinds of commercial contracts. As one shall see below, there are, however, differences between life and general insurance with regard the application, of the principles.

Following are the important essential elements or principles of a valid contract of insurance

1. Nature of contract – General to all contract

Special principles of insurance contract

2. Insurable interest

3. Utmost good faith

4. Indemnity

5. Causa proxima

6. Contribution

7. Mitigation of loss

8. Subrogation

1. Nature of Contract

The nature of contract is a fundamental principle of a contract of insurance required for a valid contract. Essential elements of a valid contract are: a. Agreement (offer and acceptance) –insurance is an agreement between insurer and insured. Proposal is made by one party and accepted by other. b. Lawful consideration- premium is consideration for insurance contract c. Lawful objects- object of insurance is lawful and not against to public policy. It is for public welfare d. Free consent- consent of parties to contract should be free. I.e., not by means of coercion, undue influence, fraud, misrepresentation etc. e. Competent parties (legal capacity of parties)- parties to an insurance contract should be competent to contract. Ie, they should not be idiot, lunatic, minor, insolvent etc. f. Consensus ad idem- parties to contract should understand the subject matter of insurance in same sense. g. Possibility and certainty of performance etc.

2. The principle of insurable interest

The existence of insurable interest is an essential ingredient of any insurance contract. Insurable interest is the pre-requisite for insurance. A general definition

used for insurable interest is ―The legal right to insure arising out of financial relationship, recognized under law, between the insured and the subject matter of insurance.‖ Therefore, just as the owner of a house or a factory has an insurable interest in the house or factory, the bank that has lent money for the construction of the house or the factory too has an insurable interest in these to the extent of the outstanding loan amount since in the event of the damage or destruction of the property, the bank stands to lose a part or the whole of the money lent. A person who wants to insure must have insurable interest in the property to be insured. The essentials of insurable interest are:

1. There must be a property capable being insured.

2. Such a property must be subject matter of interest.

3. The insured should have a legal relation to the subject matter insurable interest could arisenin a number of ways such as ; Ownerships, Mortgagee, Trustee, Bailee, Lessee etc.

In fire insurance, the insurable interest must exist throughout the contract. It must exist a. At the inception i.e. while placing the proper for insurance. b. During the term of the policy, i.e. the interest should not cease during the period of insurance. c. At the time of loss i.e. in the event of fire accident the insured should continue to have the interest in the property to claim insurance money.

Referring to life insurance, a person is deemed to have insurable interest on his own life to an unlimited extent, as in the event of his pre-mature death, there will be loss of his future earnings of individual. Spouses are presumed to have insurable interest in each other‘s life. However in case of other members of the family, insurable interest is not presumed to exist. A person cannot, therefore, insure, say his brother or sister though they may dependent on him.

3. The Principle Of Utmost Good Faith

The principle of Utmost Good Faith is also known as Uberrimae Fides (Latin phrase). It means that both the policyholder and the insurer need to disclose all material and relevant information to each other before commencement of the contract.

Under Section 45 of Insurance Act 1938 states that if within 2 years of commencement or revival of the insurance policy, the insurer get to know that there has been a non- disclosure or misrepresentation of material facts, then the insurer can call the policy null and void.

It simply means that if within 2 years the Insurance Company finds out that the policy holder has not stated the complete truth or has lied while filling up the proposal form, then it can cancel the policy and decline the claim. It is not necessary that they will definitely repudiate the claim, but it is also a possibility. The insurer may ask for the difference in premium or change the terms and conditions after the fact has been disclosed.

Thus, if an alcoholic person had mentioned that he is non-alcoholic and he dies in a heart attack within 2 years of the policy commencement, then also the Insurance Company may repudiate or decline the claim on grounds of ―non-disclosure‖ or ―misrepresentation‖ of ―material facts‖, i.e. for not stating the complete truth or misstating information which is relevant for underwriting and risk assessment. His policy could have been over-rated or loaded with additional premium if the underwriters were aware of the fact.

It becomes very important for the policyholder to disclose all relevant information at the time of commencement of the policy so that his family doesn‘t have to face difficulty at the time of getting the claim in the unfortunate event of death of the life insured.

4. The Principle Of Indemnity

The object of insurance is to place insured in the same financial position as was just before the loss. This principle prevents the insured from making a profit out of loss and ensures public interest at large. For example, if a machinery insured and is destroyed by fire, the insurance company will make good to loss by taking into consideration the depreciation and wear the tear of the machinery having been in use by the insured for some time. It will not be true indemnity to pay the price of new machinery as the insured has enjoyed the use of the machinery for some years. If the insurance company pays him the money to get new machinery, it may tempt him to set fire to the sofa so that he could get new machinery for old at insurance cost.

For a building damaged by fire measure of indemnity is the cost of repairing the building to its pre-fire condition. For machinery the measure of indemnity is the cost of repair, if the machinery is destroyed by fire the market value of such a machine after taking in to consideration wear and tear and depreciation. For stock in a retail shop the measure is the cost of replacement at wholesale rate. For manufacturer it is the cost of labour, fuel, and overheads. The indemnity is for the net loss suffered by the insured and therefore, if there by any salvage of the damaged property, the value of the salvage is deducted from the amount of loss.

In the case of personal accident policies it is not possible to place a value on life as such. Hence personal accident policies are called benefit policies.

There are four methods of indemnification and they are.

1) Cash payment

2) Repair

3) Replacement

4) Reinstatement

In case of life insurance, however, the economic value of a human life cannot be measured precisely before death. It could in fact be unlimited. Hence, life insurance cannot strictly be a contract of indemnity. This does not however, mean a person can be granted life insurance for an unlimited amount.

5. The Principle Of Subrogation

Subrogation is principle, which applied to all contracts of indemnity. It means that after payment of the loss the insurer gets the right of taking all steps to recover any money in compensation from a third party. Technically speaking ―Subrogation is the right, which an insurer gets, after he has indemnified the loss, to step into the shoes of the insured and avail himself of all the rights against their party in respect of loss indemnified.‖ The subrogation principle prevents the insured of collecting the twice of the same loss at first instance, and wrong doer would escape liability at second. It strengthens the areas of insurer in cases of possibility of one recovery of misdoings, stealing or damaging made by third party and recovering the goods indemnified.

6. Contribution

The contribution is the right of an insurer who has paid a loss under a policy to recover a proportionate amount from other insurer who is liable for the loss. Such situations only arise

(a) When different insurer has agreed to contribute the loss by way of collecting proportionate premium.

(b) The policies are in existence at the time of loss.

(d) The interest covered under all the policies are same, and affected in favour of a common insured.

Indemnity is also governed by the principle of contribution. The insurer is required to contribute proportionately loss to the extent of its interest. If a property has been insured with more than one insurer, in the event of a loss the insured will get a proportionate part of the loss from each insurer, so that the insured does not make a profit out of the settled claim.

For instance, imagine that you have taken out two insurance contracts on your used Car so that you are covered fully in any situation. Let‘s say you have a policy with Company A that covers Rs. 300,000 in property damage and a policy with Company B that cover Rs. 500,000 in property damage. If you end up in a wreck that causes Rs.500,000 worth of damage to your vehicle. Then about Rs.187,500 will be covered by Co. A and Rs.312,500 by Co.B.

7. The Proximate Cause

Proximate cause literally means the ‗nearest cause‘ or ‗direct cause‘. This principle is applicable when the loss is the result of two or more causes. The proximate cause means; the most dominant and most effective cause of loss is considered. This principle is applicable when there are series of causes of damage or loss.

 The loss of insured property can be caused by more than one incident even in succession to each other.  Property may be insured against some but not all causes of loss.  When a property is not insured against all causes, the nearest cause is to be found out.

If the proximate cause is one in which the property is insured against, then the insurer must pay compensation. If it is not a cause the property is insured against, then the insurer doesn‘t have to pay.

When buying your insurance policies, you will most likely go through a process where you select which instances you and your property will be covered for and which ones they will not. This is where you are selecting which proximate causes are covered. If you end up in an incident, then the proximate cause will have to be investigated so that the insurance company validates that you are covered for the incident.

This can lead to disputes when you have suffered an incident you thought was covered but your insurance provider says it‘s not. Insurance companies want to make sure they are protecting themselves but sometimes they can use this to get out of being liable for a situation. This might be a dispute where you‘ll need a lawyer to help argue for you.

Classification of Insurance We can classify the insurance as following: I. On the basis of Risk a. Personal insurance b. Property insurance c. Liability insurance d. Fidelity guarantee insurance II. On the basis of nature of business a. Life insurance b. General insurance – 1. Fire insurance 2. Marine insurance 3. Social insurance 4. Miscellaneous insurance Miscellaneous insurance may includes a) Vehicle insurance b) Accident insurance c) Burglary insurance d) Crop insurance e) Cattle insurance f) Engineering insurance etc. As per our syllabus, we can classify insurance into 2 groups‘ i.e. life insurance and nonlife (general) insurance.

I. Life Insurance

Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries when the insured dies. The insurance company promises a death benefit in exchange for premiums paid by the policyholder. It is governed by the LIC act 1956. It is contract in which the insurer, in consideration of payment of premium compensate to a person on death or on the expiry of certain period whichever is earlier.

II. General Insurance

A policy or agreement between the policyholder and the insurer which is considered only after realization of the premium. The premium is paid by the insurer who has a financial interest in the asset covered. The insurer will protect the insured from the financial liability in case of loss. General Insurance covers a wide range of services. Section 6(b) of the insurance act 1938 defines General Insurance. It includes all the risks except life.

Difference between General Insurance and Life Insurance

General Insurance Life Insurance Applicability Arun took a Fire Insurance Policy Arun took a Life Insurance Policy of claim for his factory. The Sum Insured for Rs. 1 crore. He had to give an for the factory was Rs.1 cr and the annual premium of Rs. 20000 for premium was Rs. 10 lakhs. In case 50 years. After 10 installments, of fire or loss due to any peril, the Arun met with an accident and insurance company will pay the passed away. Arun‘s family claim amount after the deductible received an amount of Rs.1 crore. (as applicable). The reimbursement under the life insurance is made either at the time of maturity or death. Amount of Sheela got her car insured for Rs.5 Sheela chose to buy a Life Reimbursem lacs. She got her car banged and Insurance Policy worth Rs.50 ent her car‘s bumper came off. The lakhs. The total time for which she repair charges for the bumper was had to deposit the premium was Rs.15,000/-. The insurance 10 years. After 10 years, she company will pay off the amount received Rs. 50 lakh. The Life after the deductible. General Insurance Policy is an investment insurance works as per the policy policy which is paid on maturity of limits and conditions. the policy. Functional Prakash bought a Fire Insurance Prakash bought an Endowment Period for his factory and got the building, Policy which will pay him some equipment, and other fixtures. The proceeds on the maturity or policy was issued on 2.03.2019 otherwise pay some amount to his and will be renewed on 1.03.2020. family members in the event of The General Insurance Policies Prakash‘s death. The Life are issued for a period of 1 year. Insurance Policy is issued for Life Time or till the time of the maturity period. Payment of Madhur bought a car and got its Madhur bought a Money Back Premium insurance also. The next year, he Policy for 20 years. He will have to sold his car. He bought a bike and pay the premium for 20 years with did not get the renewal for the car. money being received after every Under the General Insurance 3 years. The premium will be paid Policy, the premium will be paid for till the total term of the policy, that one year till the renewal. Madhur is, 20 years. Under the Life sold his car and hence, no renewal Insurance Policy, the premium will or no payment of premium. be paid for the total term of the policy. Insurable Rikant bought a Tata Safari in the Rikant took a Term Plan and got Interest year 2018. He got its insurance at his policy issued from ABC Life the same time.The next year, he Insurer. It is important for Rikant sold the car to Shweta and the to be present at the time of policy was renewed again as the contract. Under the Life Insurance

vehicle will be in use. The policy the individual who has the was renewed by Shweta and not insurable interest should always Rikant. Under the General be present. Insurance Policy, the insurable interest of the policyholder should be present at the time of renewal and the loss.

What Is Reinsurance?

Reinsurance is also known as insurance for insurers or stop-loss insurance. Reinsurance is the practice whereby insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim.

The party that diversifies its insurance portfolio is known as the ceding party. The party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsurer.

How Reinsurance Works

Reinsurance allows insurers to remain solvent by recovering some or all amounts paid to claimants. Reinsurance reduces the net liability on individual risks and catastrophe protection from large or multiple losses. The practice also provides ceding companies, those that seek reinsurance, the capacity to increase their underwriting capabilities in terms of the number and size of risks.

According to the Insurance Information Institute, Hurricane Andrew caused $15.5 billion in damage in Florida in 1992, causing seven U.S. insurance companies to become insolvent.

Benefits of Reinsurance

By covering the insurer against accumulated individual commitments, reinsurance gives the insurer more security for its equity and solvency by increasing its ability to withstand the financial burden when unusual and major events occur.

Through reinsurance, insurers may underwrite policies covering a larger quantity or volume of risk without excessively raising administrative costs to cover their solvency margins. In addition, reinsurance makes substantial liquid assets available to insurers in case of exceptional losses.

Insurers are legally required to maintain sufficient reserves to pay all potential claims from issued policies.

Types of Reinsurance

Facultative coverage protects an insurer for an individual or a specified risk or contract. If several risks or contracts need reinsurance, they a renegotiated separately. The reinsurer holds all rights for accepting or denying a facultative reinsurance proposal.

A reinsurance treaty is for a set period rather than on a per-risk or contract basis. The reinsurer covers all or a portion of the risks that the insurer may incur.

Under proportional reinsurance, the reinsurer receives a prorated share of all policy premiums sold by the insurer. For a claim, the reinsurer bears a portion of the losses based on a pre-negotiated percentage. The reinsurer also reimburses the insurer for processing, business acquisition, and writing costs.

With non-proportional reinsurance, the reinsurer is liable if the insurer's losses exceed a specified amount, known as the priority or retention limit. As a result, the reinsurer does not have a proportional share in the insurer's premiums and losses. The priority or retention limit is based on one type of risk or an entire risk category.

Excess-of-loss reinsurance is a type of non-proportional coverage in which the reinsurer covers the losses exceeding the insurer's retained limit. This contract is typically applied to catastrophic events and covers the insurer either on a per- occurrence basis or for the cumulative losses within a set period.

Reinsurance Deconstructed

Under risk-attaching reinsurance, all claims established during the effective period are covered regardless of whether the losses occurred outside the coverage period. No coverage is provided for claims originating outside the coverage period, even if the losses occurred while the contract was in effect.

Risk

Risk is an integral part of life. It can be defined as a probability or unexpected threat that may result in damage or loss of property or injury to or death of a person.

These may be due to occurrence of a negative event that may be caused due to internal factors or external factors.

For instance when one is driving down the road, one is open to the risk of meeting with an accident. One may take adequate precautions to avoid it, thereby reducing the probability to minimal for the happening of such an event, but under no circumstances can there be a surety that such an event will never happen.

Returns are the monies received from incurring a certain level of risk. It can be called as returns premiums. As a result, there's a direct correlation between risk and return. For a higher level of risk, we expect a high return or our customers to pay a higher premium.

In purchasing an insurance product, the customer has transferred the risk to an insurance company. This strategy is called risk transfer. There are also two other risk management strategies: risk assumption and avoidance.

Risk and Return Relationship

As a general rule, investments with high risk tend to have high returns and vice versa. Another way to look at it is that for a given level of return, it is human nature to prefer less risk to more risk. Therefore, the higher the risk of an investment, the higher its returns have to be to attract investors.

The existence of risk does not mean that you should not invest – only that you should be aware that any investment has some degree of risk which should be considered when deciding whether the expected returns of that investment are worth it.

Therefore, when considering the suitability of any investment, you must understand both the likely returns and the risks involved. The appropriate risk-return combination will depend on your financial objectives. Some people prefer a low-risk, steady income stream while others don‘t mind taking on more risk for the chance of making higher returns.

Insurance companies are in business to accept risks -- risk that an automobile accident may occur, a house may burn down, or a business may flood. Insurance companies restore the property to its original state before the loss occurred.

However, insurance companies require a return, or premium. That premium is based on the risk. The higher the probability the loss will occur, the higher the premium.

What is the Coordination of Benefits?

The health care system is riddled with complexities and nuances, particularly when it comes to employer-provided health insurance. One confusing aspect of employer health coverage is the coordination of benefits, or COB, when an employee has more than one insurance plans.

In the world of health insurance, coordination of benefits is a policy that applies to employees with more than one insurance plan. Employees in this situation might have specific preexisting conditions that require two plans, they could be partially covered by a family member‘s insurance, or they are potentially on Medicaid and need multiple insurance plans to meet their needs.

One of the main benefits for employers and health providers is that a COB ensures the proper allocation of funds. In other words, the COB makes sure that your coverage is not overpaying on the total amount of the claim in question.

How to Coordinate Benefits

When an employee with existing health insurance enrolls in your health plan, a COB is crucial to ensure. This is because a COB is the main way to determine which insurance plan has primary payment responsibility—and how the other plans will integrate financially into the remaining payments.

It helps clarify to employers, employees, and insurance providers who will be responsible in the case that any medical need arises. Essentially, it reduces the administrative struggles and the potential for duplicate payments.

How do I ensure a non-duplication of benefits?

The COB helps ensure a non-duplication of benefits because it identifies which plan will be responsible for the payments first. The first plan responsible is the primary form of insurance and any additional plan becomes the secondary form. It‘s best to determine this during the open enrollment period.

How do two different benefits plans work together? What are the limitations?

By coordinating the payment and benefits process, and defining the key financial provider of benefits in the insurance plan, COB ensures that plans work together in harmony rather than clashing.

It can also help an employee receive an additional payout if their plan doesn‘t cover everything. Let‘s say a person‘s primary plan only foots 70% of a bill from a major surgery, for example. The secondary provider can supplement that remaining 30%. Having two plans also makes sense if the employee intends on meeting the deductible for both—which makes any additional monthly premium worthwhile.

However, it‘s also important to understand that having two insurance plans isn‘t always the best option. Many insurance plans offer the same basic benefits, meaning that a person could be paying two monthly premiums for the same services.

Insurance Regulatory and Development Authority

The Insurance Regulatory and Development Authority of India (IRDAI) is an autonomous, statutory body tasked with regulating and promoting the insurance and reinsurance industries in India. It was constituted by the Insurance Regulatory and Development Authority Act, 1999, an Act of Parliament passed by the Government of

India.The agency's headquarters are in Hyderabad, Telangana, where it moved from Delhi in 2001

IRDA - Insurance Regulatory Development and Authority is the statutory, independent and apex body that governs and supervise the Insurance Industry in India.

Powers of IRDA

The following are the powers of IRDA

1. All insurance companies have to register with IRDA compulsorily.

2. Companies can undertake only insurance business.

3. The capital structure of the companies will be determined by IRDA.

4. Companies have to deposit with RBI the amount stipulated by IRDA.

5. Accounts and balance sheets of companies have to be submitted to IRDA.

6. Insurance companies have to appoint actuaries and they will value the liabilities of the insurance companies and report the same to IRDA.

7. Investment of assets will be prescribed by IRDA in the form of approved securities.

8. The nature of general insurance business will be prescribed by IRDA.

9. Statements of investment assets to be submitted to IRDA every financial year.

10. All insurance companies have to devote certain percentage of their business including insurance for crops. This should cover unorganized sector including the economically weaker sections.

11. The appointment of chief executive officer requires prior permission of the IRDA.

12. All insurance agents must obtain license from IRDA.

13. IRDA has powers for levying penalty on companies which fail to comply with the rules and regulations.

Composition of IRDA

One chairperson and not more than 9 members of whom not more than 5 would be full time members and they are appointed by the government. Those who have experience in life and general insurance, actuarial service, finance, economics etc., are appointed.

Duties of IRDA

1. Regulates insurance companies

The working of insurance companies will be regulated in the following aspects

 the persons to be employed,  the nature of business,  covering of risks,  terms and agreements for covering risks etc., will be prescribed by IRDA.

2. Promotes insurance companies

Corporate set-up is a must for establishing an insurance company and they have to submit periodical reports to IRDA. Different kinds of policies and different types of insurance are also suggested by IRDA to these insurance companies.

3. Ensures growth of insurance and reinsurance companies

Here, the promotion of new companies is encouraged. Even banks are also permitted to promote insurance companies as a subsidiary.

Functions of IRDA

1. Issuing certificate of registration.

2. protecting the interest of policy holders.

3. issuing license to agents.

4. Specifying code of conduct for surveyors and loss assessors.

5. Promoting efficiency in the insurance business.

6. Undertaking inspection, conducting enquiries etc., on insurance companies.

7. Control and regulations of rates, terms and conditions by insurance company to policy holders.

8. Adjudication of disputes between insurance company and others in the insurance business.

9. Fixing the percentage of insurance business to rural and social sectors.

Online insurance

In online insurance, customers directly deal with the health insurance company and buy a plan. Hence, the distributors' commission is saved. The entire process requires less paperwork and is done via internet, so it is cost effective. These saving are further shared with the policyholder in the form of lesser premiums.

Advantages of online insurance In one sentence, purchasing insurance online is convenient, fast and usually cost you lesser. The insurers know the potential of this distribution channel and therefore have the entire product range-from life to health, motor and travel-available on the net for you. With click of a mouse you can buy any policy from any corner of the world at any point of time. Buying Benefits: The distribution efficiency also leads to cost efficiency. Since the customer buys directly from the insurer, the distributor's margin (or commissions) is saved. Also, the entire process is carried in the virtual world and is paperless, reducing the costs further. These savings are usually shared with the customer in the form of lower premiums. The biggest benefit of online platform is that it offers the customer to make an informed choice. Various aggregator sites, such as Policybazaar.com, MyInsuranceClub.com and Easypolicy.com let you do an overall comparison of features and prices of a particular type of policy across various companies. So, you can weigh the pros and cons and then buy the policy that suits your need the best. Moreover, when buying online, you can check the reviews and comments section. This is first-hand posted genuine information about the services of the insurer from existing customers-an important feedback that is missing when buying from any other channel. Automated Servicing: The online platform is not limited to sale. It is a prompt and efficient servicing channel as well, which can be used by existing policyholders', regardless of whether you buy online or not. You can download product literature like brochures and policy wordings, get quick premium quotes, renew your old policies, pay premiums online, track your insurance investments and make online claims. The difference from offline mode is that here you do not have to depend on anyone and are self-sufficient. Moreover, the processes are hassle-free and you can complete a transaction at a much lesser time. Online Assistance: Since not all of us are equally net-savvy and may have reservations making financial transactions online, the insurance company websites usually also have live chat facility on their websites where customers can seek clarification in case of any doubt. Also, there is a toll-free number where you can call to take the offline route. You can either ask the representative you make the purchase for you telephonically by giving your details or can also request for a face-to-face meeting. The insurer then sends an executive to help you make the purchase.