BANKING LAW

1. Explain the principles of Sound Lending? (10)

2. Explain the sound principles of banking and lending. What are the general precautions of
lending? (10)

A prudent banker always tries to select the borrower very carefully and takes tangible assets
as securities to safeguard his interests. Tangible assets are no doubt valuable and the banker
feels safe while granting advances on the security of such assets, yet some risk is always
involved therein.

An industry or trade may face recessionary conditions and the price of the goods and
commodities may sharply fall. Natural calamities like floods and earthquakes, and political
disturbances in certain parts of the country may ruin even a prosperous business. To
safeguard his interest against such unforeseen contingencies, the banker follows the
principle of diversification of risks based on the famous maxim “do not keep all the eggs in
one basket.” It means that the banker should not grant advances to a few big firms only or to
concentrate them in a few industries or in a few cities or regions of the country only.

The advances, on the other hand, should be over a reasonably wide area, distributed
amongst a good number of customers belonging to different trades and industries. The
banker, thus, diversifies the risk involved in lending. If a big customer meets misfortune, or
certain trades or industries are affected adversely, the overall position of the bank will not
be in jeopardy.

Here are some important principles of lending:

(i) Safety- The first and foremost principle is to ensure safety and security of the funds
lent. It means that the borrower is in position to repay the loans, according to the
terms of [Link] banker should therefore, take utmost care in ensuring that the
entity to which the loan is to be granted is a sound one and the borrower is capable to
repay it successfully.

(ii) Liquidity- Liquidity is also an important principle of lending in banking. Bank lend
public money which is repayable on demand by depositors so bank lends for a short
period. A banker must ensure that money will come back on demand or as per
repayment schedule. The borrower must be able to repay the loan within a reasonable
time after demand for repayment is made.

‘Liquidity’ has as much importance as ‘safety’ of funds. The reason behind it is that a
bulk of their deposit is repayable on demand or at a very short notice. Banker must
ensure that money is locked up for a long time. If loan becomes illiquid, it may not be
possible for bankers to meet their obligations vis a vis depositor.
(iii) Profitability – Interest on loans is the main source of income for the banks, out of
which they also incur expenses to maintain deposits such as rent, stationary, premises
rent, provision for depreciation of their fixed assets, bad loans. Therefore, they must
employ their funds profitability. However, for the purpose of earning higher profits
banks should not sacrifice their safety and liquidity of funds.

(iv) Purpose- The underlying purpose for which an applicant is seeking a loan should be
productive. The purpose of loan helps in determining level of risk and also
impactinterest rate on loan. Purpose of loan should be productive in order to ensure
safety of funds while it should be extended for short term to ensure liquidity.

(v) Diversification of risk- The element of risk in relation to loans cannot be totally
eliminated, it can only be reduced through diversifying the loans. To minimize the risk,
bank should lend to borrowers from different trades, industries like agriculture,
education, IT, pharma, educational etc. Lending surplus to a particular sector may have
adverse effect on bank in time of slump. A banker must follow principle of diversity
also while choosing its investment portfolio.

(vi) National Policies- Banks have certain social responsibility towards society also. The
need to take into account the economic and social priorities of the country besides
other principles of lending. While formulating the lending policies the banks are
guided by the government policies in relation to disbursal of credit. Thus, it is an
influential factor to the lending decisions by the banks.

(vii) Business Solvency- As a profitable institution, the bank needs to maintain its long-
term solvency. Banks must be able to meet the demand for deposits. For this, the bank
needs to maintain a certain amount of reserve. On the other hand, the loan amount
should be sufficient to make a profit by satisfying the borrower’s demand and meeting
other expenses.

(viii) Business Ethics- Though providing loans is the main source of a bank’s income, banks
should not give loans for immoral or unethical purposes like the establishment of
brothels or illegal drug businesses.

(ix) Margin- The security offered against advance must be judged from the aspect of
economic value and legal aspect. The market value of the security must be higher than
the amount of advances proposed. It should give enough margins for fluctuation in
prices and interest rates.

(x) Regulatory Compliance- Banks must adhere to the regulatory framework defined by
banking authorities to ensure stability and protect depositor interests. Compliance
includes maintaining appropriate reserve requirements, reporting standards, and
transparency in financial statements.
General Precautions of Lending
Undoubtedly the advancing of loan is risky as well. If the loan is for a longer period, then risk
will be also greater. So before lending a banker should keep in view the following
precautions:
1. Credit Assessment: Thoroughly evaluate the borrower's financial situation, credit
history, assets, and liabilities to determine their ability to repay the loan.
2. Loan Documentation: Ensure that all necessary legal and financial documents are
properly completed and verified, including income statements, tax returns, and
collateral valuation reports.
3. Loan-to-Value Ratio: Assess the value of the collateral provided by the borrower to
safeguard against potential losses. Maintain a reasonable loan-to-value ratio to avoid
overexposure.
4. Loan Repayment Terms: Establish clear repayment terms, including interest rates,
installment periods, and penalties for late payments, to ensure smooth repayment.
5. Loan Monitoring: Continuously monitor the borrower's financial health and repayment
behavior during the loan tenure to identify any warning signs of default or financial
distress.
6. Purpose: The banker has to carefully examine the purpose for which the advance has
been applied for. In case the advance is intended for productive purposes, it could be
reasonably anticipated that cash flows arising for productive activities will result in
prompt repayment. Of course, the banker has to be careful to monitor the exact
purpose for which the advance is actually utilized.
7. Risk Mitigation: Consider incorporating risk mitigation tools such as collateral,
guarantors, and insurance to reduce potential losses in case of default.
8. Referral of the Customer: It is also considered that who are refer the customer. If the
referee’s are good customer will be good basically. Bankers should have to take
guarantee of the referee. It will safe for the bank and banker.
9. Capability: It is also necessary that a borrower should be capable to use the funds,
wisely. Banker can examine the management ability of the businessman of checking the
past and present record of the business.
10. Government Policy on Bank Lending: A Customer may fulfill all the “Conditions” but if
government policy on lending is credit squeeze, the Bank will not grant the Loan and
vice versa.
11. Expansion Of Credit: A banker should not advance the loan to only one sector. It can be
harmful. The bank should extend the loan various sectors of the economy. In this way
there will be maximum safety for the banker.
12. Management Guarantees:The bank will probably require personal guarantees from each
owner of the company, assuming that it is a closely held business with only several
owners. Usually, each owner completes a personal financial statement on a form
provided by the bank. The standard procedure is for the bank to review the personal
statements and then, when the loan is approved, have each owner execute a guarantee.
In addition to providing additional security, the personal guarantees assure the bank
that the owners will probably remain with the business while the loan is in force.
 By adhering to these sound principles and taking necessary precautions, banks can maintain
a stable lending environment that supports economic growth while safeguarding the
interests of depositors and shareholders.

3. Discuss the precautions to be taken by banker while lending against security of goods?
(10)

PRECAUTIONS TO BE TAKEN
BY A BANKER WHILE LENDING
AGAINST THE
SECURITY OF GOODS
INTRODUCTION
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life.
PRECAUTIONS TO BE TAKEN
BY A BANKER WHILE LENDING
AGAINST THE
SECURITY OF GOODS
INTRODUCTION
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life.
PRECAUTIONS TO BE TAKEN
BY A BANKER WHILE LENDING
AGAINST THE
SECURITY OF GOODS
INTRODUCTION
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life.
PRECAUTIONS TO BE TAKEN
BY A BANKER WHILE LENDING
AGAINST THE
SECURITY OF GOODS
INTRODUCTION
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life.
PRECAUTIONS TO BE TAKEN
BY A BANKER WHILE LENDING
AGAINST THE
SECURITY OF GOODS
INTRODUCTION
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life.
PRECAUTIONS TO BE TAKEN
BY A BANKER WHILE LENDING
AGAINST THE
SECURITY OF GOODS
INTRODUCTION
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life.
PRECAUTIONS TO BE TAKEN
BY A BANKER WHILE LENDING
AGAINST THE
SECURITY OF GOODS
INTRODUCTION
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life.
PRECAUTIONS TO BE TAKEN
BY A BANKER WHILE LENDING
AGAINST THE
SECURITY OF GOODS
INTRODUCTION
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life.
PRECAUTIONS TO BE TAKEN
BY A BANKER WHILE LENDING
AGAINST THE
SECURITY OF GOODS
INTRODUCTION
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life.
PRECAUTIONS TO BE TAKEN
BY A BANKER WHILE LENDING
AGAINST THE
SECURITY OF GOODS
INTRODUCTION
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life.
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life
The banker’s main function is
to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. Now-a -
days baker is accepting all
types of properties which
are movable in nature apart
from the immovable
properties. Produce and goods
are often taken as
security for bank advances.
Such securities offer
something tangible for the
banker to realize in case of the
customer's default and
they are easily realizable as
compared to immovable
properties. But there are
certain disadvantages to
this form of security. They
arise owing to the chances of
deterioration of the goods,
chances of
perpetrating fraud as regards
their quality, value, and title,
and risks of heavy fluctuations
in their value,
especially when they are not
necessaries of life
The banker’s main function is to give advances by way of loans. No banker will give any
advance without accepting any property as security. Now-a -days baker is accepting all types
of properties which are movable in nature apart from the immovable properties. Produce
and goods are often taken as security for bank advances. Such securities offer something
tangible for the banker to realize in case of the customer's default and they are easily
realizable as compared to immovable properties. But there are certain disadvantages to this
form of security. They arise owing to the chances of deterioration of the goods, chances of
perpetrating fraud as regards their quality, value, and title, and risks of heavy fluctuations in
their value, especially when they are not necessaries of life.

In granting advances against goods certain precautions are necessary which are as follows:
1. Integrity of the borrower: The banker should ascertain that the borrower is trustworthy,
honest and a man of sufficient experience in his business. Such a precaution is
necessary to avoid fraudulent dealings. For example, when a customer offers 100 bags
of paddy as security it is impossible to inspect each and every bag. He has to rely on the
honesty of the borrower. Further, he should see whether the borrower has adequate
practical experience in his business. An experienced businessman is conversant with
risks and the profitable areas of the business. An inexperienced one may incur loss and
be a potential risk.

2. Purpose of the loan- The repayment mostly depends upon the purpose for which the
loan is obtained. To a borrower who is engaged in speculation, the chances of loss are
greater. As such the loss will have to be shared by the banker. So, advances should not
be allowed for speculative purposes.

3. Nature of the Commodity: The banker should have a working knowledge of some of the
special features of the commodities offered as security. The commodities which should
be disposed of easily, the quality of goods which are not subject to deterioration, and
the price of goods which are almost already should be preferred by a banker as security.

4. Knowledge of different markets:A banker should be conversant with the markets for
different commodities. This is essential to regulate the margin for the goods according
to the price prevailing in the market. Failure to have knowledge of the market will put
him at the mercy of the borrower who may inflate the value to get more advance.

5. Proper care in valuation: The banker should appoint experts to value the goods. Care
should be taken to provide sufficient sale margin to avoid loss resulting from market
fluctuations. In some cases, the price mentioned in the bill may be an inflated one, so it
is advisable to compare the price with those prices prevailing in the market. If the goods
are packed, the banker should insist on a certificate from reliable packers.

6. Ascertain the title of the owner: Before accepting goods as security, the banker should
ascertain the title of the borrower to the goods by inspection of the original invoice or
cash memos.

7. Proper storage: The banker should select godowns which are properly built and safe in
every way for the storage of goods. The roof and flooring should not allow the stocks to
be damaged by rain or dampness. The godowns should be situated near the bank so
that the bank's representative can have direct and free access to them at any time. All
goods stored in bags or bales should be arranged as to facilitate inspection easily. A
careful selection should be made of godown keeper and watchmen. They should be
honest and possess a high sense of responsibility.
8. Rented godown: If the borrower makes use of a rented godown, the bank must obtain
an undertaking from the owner of the building stating that the bank has a prior lien.
This is necessary because, at times the building owner may have a prior claim for rent
due and the position of the banker will be at stake. All doors to the godown containing
stocks must be locked by the banks padlock with its name engraved on them. The bank's
name board or plate should be affixed in a permanent position preferably on the
outside of the godown. This is evidence to establish the right of possession of the bank
over the goods stocked.

9. Insurance up to the full market value: Goods should be insured against all known risks
up to their full market value. The relative insurance policies should be held by the bank.
Premium receipts should be obtained from the borrowers and kept on the bank record.

10. Creation of Charge, pledge, hypothecation: A banker may create a charge over the
goods either by pledge or by hypothecation. In pledge, the goods or title thereto is
delivered to the banker. The goods pledged are stored in the name of the banker. The
banker is entitled to sell the goods pledged after issuing reasonable notice, if the
borrower fails to repay the loan. If the goods are kept in an independent godown, the
banker should get the warehouse receipt and transfer order in his favour and submit it
to the warehouse keeper to get a new one in his name. In Hypothecation, neither
possession nor goods is transferred to the banker. So, a written undertaking from the
borrower should be obtained that the goods are not charged to any bank and will not be
charged till the agreement continues with the bank. This would give an equitable title to
the bank.

11. Handling of godown keys: Under no circumstances should the keys of the godowns be
allowed to pass into the hands of the borrower. The keys of the godown should be kept
in a strong room under dual control and taken out at the commencement of the
business and received back at the close of the business.

12. Inspection: Periodical inspection of the godown should be undertaken as to the

quantity and quality of the goods. The quantity of stock in the godown should be tallied
with the records in the bank and with the books of the borrower.

13. Supervision regarding the release of goods: When the borrower is allowed to repay the
debt in instalments, the banker should release the goods only in proportion to the
amount repaid. It is also possible that the customers may request the banker to release
a part of the goods when they get parties to sell. Such release should be directly
supervised by a responsible bank officer.

14. Reserve Bank Directives: The Reserve Bank issues directives from time-to-time
prohibiting advances against specific goods on stipulating minimum margin against
certain commodities. The directives may also specify the level up to and conditions on
 which banks may grant credit. Banks should follow the conditions in the directives while
lending against goods.
Advantages of Advances against Goods over Other Forms of Securities
- They are easily marketable due to having a ready market.
- Their value can be easily ascertained from the market.
- They are tangible assets and, therefore, can be realized in case the necessity arises.
- Loans against commodities are seasonal. They are repaid before the commencement
of the next season. Therefore, there is no unnecessary locking up of funds.
- In the case of commodities used as necessaries of life, there are not many price
fluctuations.

Limitations of Advances against Goods

- Effective supervision of goods may not be possible, particularly when they are
hypothesized. Dishonest persons may cheat the banks.
- The quality of goods is difficult to verify. The goods pledged may be quite different
than those who were promised to be pledged.
- Goods deteriorate in quality with the passage of time. ‘This results in erosion in hank’s
security.
- High transportation costs may have to be incurred to realize the best possible price for
the goods.

4. Explain the precaution to be taken by a banker while lending on hypothecation? (10)

Goods financed by banks in India are often hypothecated to the bank as security/ collateral
till the loan covering it is repaid by the borrower. Hypothecation is used when a debtor
wants to obtain a loan and use a certain property or asset as a security or collateral. It can
help reduce mortgage fees and interest and help those who may not look their best on
paper to obtain a loan.

Hypothecation generally means a fixed or floating charge on certain types of immovable

properties and tangible movable properties, whether existing or future, which is created by
a security provider in favour of a lender without actual delivery of possession of the
underlying asset to the lender. Hypothecation comes into the picture when an asset is
pledged as collateral to secure a loan. Income generated by the asset such as title,
possession or ownership rights, etc is not given up by the owner of the asset. However, if the
terms of the agreement are not met, the lender can seize the asset.

For example, a rental property may undergo hypothecation as collateral against a mortgage
issued by a bank. The bank has no claim on rental income that comes in while the property
remains collateral. However, the bank may seize the property if the landlord defaults on the
loan. The bankers must consider the following while lending on hypothecation:
 a. Loans to be given to Reputed Parties Only: A banker should sanction loan only to such
customers who have good reputation and sound financial position. Such parties should
have a clean record of past dealings.

b. Regular Inspection of Hypothecated Goods: The bank should regularly inspect the stock
of the hypothecated goods. It should also verify the stocks with account books.

c. Periodical Statement of Stocks: The banker should ask the borrower to submit
periodical statement of stock. It should verify those statements with the stocks of the
goods.

d. Signboard of Hypothecation in Favour of the Banker: The banker should ask the
borrower to display a signboard on the gate of the go down where the goods are stored
indicating that the goods are hypothecated with the banker. The banker should regularly
check that such display is being done. It will be a public notice and would avoid the
chances of duplicate charge being created on those goods.

e. Insurance: The banker should ask the borrower to get the goods insured against fire,
theft, flood etc., and assign the policy in its favour. The banker should inform the insurer
that the goods are hypothecated with him.

f. Registration of Charge: If the borrower is a company, the banker should get the charge
registered under Section 77 of the Companies Act, 2013. The charge is to be registered
with the Registrar of Companies within 30 days of its creation. The banker should obtain
a copy of registration of the charge. The banker should also get declaration from the
company that it will not create a second charge over those goods. This undertaking
should also be registered with the Registrar of Companies along with the registration of
charge.

g. Declaration from the Borrower that he is not Availing Similar Facilities from other
Banks: The banker should obtain a declaration from the borrower to this effect. This
undertaking should also be obtained periodically along with periodical statement of
stock of hypothecated goods. This declaration should be cross-checked with the
information obtained from other banks of the area.

Thus, it is clear that the banker should give the facility of hypothecation to honest persons
only because the goods remain in the possession of the borrower. In case the loan is granted
to any unscrupulous person, he may sell the goods hypothecated and pay off other creditors.

5. Explain the precaution to be taken by a banker while lending on immovable property? (10)

The banker’s main function is to give advances by way of loans. No banker will give any
advance without accepting any property as security. The term real estate included
immovable properties like land and building, factory premises, etc. Generally, bankers are
very reluctant to grant loans against real estate, since, it suffers from many drawbacks and
legal complications. However, when a customer has no other security except real estate, the
banker has to accept it. Nowadays, bankers have come forward to accept real estate just like
any other security and extend loans and advances against it.

When a banker decides to grant advances against real estate, he should, then, take the
following precautions:

a. Integrity and financial stability: since real estate’s involve a lot of risks, it is advisable to
grant loans only to customer & who are financially sound and who are men of good
character.

b. Examination of the title: The banker should ascertain whether the borrower has got a
clear and absolute title to the property. For this purpose, he must ask him to produce all
documents. He can even consult experienced lawyers for this purpose.

c. Existence of prior charge: it is very essential to see that the property is unencumbered. If
there is any prior charge, the banker’s interest will be much affected. Hence, the banker
must ask the borrower to produce an encumbrance certificate for the period immediately
preceding 13years. It can be obtained from the Register's Office.

d. Care in valuation: As stated already, it is very difficult to value real estate. Hence the
banker should get the assistance of experienced surveyors and architects in assessing the
property. Besides, he can also consult real estate agents. Valuation of the property by the
local authorities, recent sale transitions of the neighbouring properties, etc., would also
give a clue for proper valuation.

e. Freehold or Leasehold: As between freehold and leasehold, a banker should always

prefer a freehold property because; the borrower is the absolute owner of the property.
In the case of leasehold, the banker should examine the lease agreement to find out the
terms and conditions and the unexpired period of the lease. The longer the unexpired
period, the greater is the value of the security.

f. Care in the creation of charge: The banker should pay special attention to the creation of
a charge on security. A charge may be created either by way of equitable mortgages. It is
always advisable to prefer legal mortgage t equitable mortgage. In the case of a legal
mortgage, the mortgage deed has to be executed very carefully. It must be registered,
when the principal money secured is Rs, 100 or more usually bankers do have standard
forms for this purpose containing man clauses to protect their interest.
g. Payment of property tax: the banker should also verify whether the property tax has
been paid up to date to the local authorities. If not, they can attach the property at any
time and they will have a preference claim over the bakers claim.

h. Payment of income tax:In case of the value of the mortgaged property exceeds Rs.50000,
a certificate from the Income-tax officer should have been obtained stating that there are
no arrears of Income-tax officer should have been obtained starting that there are no
arrears of Income-tax from the borrower. Otherwise, the [Link] attach the property, in
spite of the fact that it has been mortgaged to the banker to secure a loan.

i. Adequate Insurance: The bank should also see that the property is insured against fire
and other natural calamities. The property should be insured to its full value. Any under
insurance win makes the insurance company liable for only a proportional loss due to the
operation of the average clause. Again, the policy must be endorsed in favor of the bank.
The policy must be renewed regularly at the borrower's expense; till the loan is repaid.

j. Adequate margin: Since this security involves many risks as discussed above, a banker
should keep a high margin Generally, a margin of 50% is maintained in order to avoid any
loss due to a fall in value.

The banker’s main function is

to give advances by way of
loans. No banker will give any
advance
without accepting any
property as security. The term
real estate included
immovable properties like
land
and building, factory premises,
etc. Generally, bankers are
very reluctant to grant loans
against real
estate, since, it suffers from
many drawbacks and legal
complications. However, when
a customer has
no other security except real
estate, the banker has to
accept it. Nowadays, bankers
have come forward
 to accept real estate just like
any other security and extend
loans and advances against it.
PRECAUTIONS
When a banker decides to
grant advances against real
estate, he should, then, take
the following
precautions
6. Credit Card. (6)

A credit card is in the nature of an unsecured loan that is extended to the cardholder by the
issuing bank or an NBFC that allow customers to borrow funds within a pre-approved credit
limit. The cardholder can use this credit to make online or offline payments to merchants or
e-commerce websites. The credit card dues have to be repaid by the due date failing which
there are many consequences like increased interest payment and negative impact on credit
score among others.

The credit limit of a person is decided based on their credit score and other factors like
income level, age of the applicant, etc. When the cardholders carry out any financial
transaction using the credit card, the amount is deducted from their credit limit. The limit is
restored when they make payment of the dues.

The best part about a credit card is that it is not linked to a bank account. So, whenever you
swipe your credit card, the amount is deducted from your credit card limit, not your bank
account. You can use it to pay for food, clothes, take care of medical expenses, travel
expenses, and other lifestyle products and emergency services.
 There are multiple types of credit cards offered by lenders to their customers. Customers can
choose from these types based on their individual needs. Some of the types of credit cards
are:

(1) Credit card for new users- These are the basic types of credit cards with no additional
perks or features.
(2) Travel credit cards - These cards provide multiple travel benefits like discounts on flight
tickets, tie-up with hotels, lounge access, etc.
(3) Student credit cards- These are for college students that have usually no credit profile.
These cards are approved easily.
(4) Fuel credit cards- These cards centre around fuel benefits in the form of discounts or
rewards points, etc. depending on the lender.
(5) Secured credit cards- These cards are offered against security in the form of fixed
deposits and are good for applicants who do not get credit cards
(6) Prepaid cards- These cards are like debit cards where the customer has to load an
amount in the account and upon carrying out a transaction, the amount will be
deducted from the balance available.
(7) Business credit cards- These cards are designed specifically for business or corporate
use. The amount is deducted from the corporate account of the entity.
(8) Air miles credit cards- These cards provide the benefit of air mile points which can be
accumulated to get a flight ticket.

Credit cards are an essential part of today’s world no matter the limitations and the cost. It
is necessary to use the credit cards in an effective manner to ensure that the credit profile
of the cardholder is good and the credit score is not adversely affected. Credit cards ensure
quick and safe transactions at the same time provide many benefits in the form of
discounts, cashback, and rewards to the cardholders.

7. ATM. (6)

Automated teller Machine (ATM), it is an electro-mechanical machine which consists of

automated banking platforms that allow clients to perform smooth transactions without the
assistance of a branch representative or teller.

ATMs are used as a channel for cash management of individual customers. It can be
accessed by ATM card, debit or credit cards. To have access the customer (the card holder)
needs to use his Personal Identification Number (PIN) issued by his/her banker and access
password. ATMs generally used for cash deposit and withdrawals, they can also be used for
payment of utility bills, funds transfer thereby ATMs serve as a channel for electronic funds
management.

The concept of the ATM started in several countries from Japan, and Sweden to the US. The
computer load machine for the computer loan was invented by Japan in 1966. In 1967, the
cash dispensing machine was developed in London. This computer load machine was used
first by Barclays Bank. As in India, the development of ATMs was very slow.

There are a few different types of automated teller machines which are mentioned below:
i. Leased Line machine: This machine connects to the host processor directly. They
connect from a four-wire point to a telephone line. The operation cost of these
machines is very high and they are preferred in particular places only.

ii. Dial-up machines: These machines link with the processor through a phone line by
using a modem. They require a normal connection and less cost. The operation cost of
these machines is less than the leased machines.

iii. White Label machine: These are operated by non-bank organisations. These are
introduced by RBI for the access of ATMs within the country. They don’t show any type
of bank logo and were introduced by TATA.

iv. Brown Label: These machines are owned by the service providers and they take care of
the cash and network areas

v. Onsite ATM: These machines are made available where a particular branch of a bank is
located. By this, both the bank and ATM are used for various purposes.

vi. Offsite ATM: These machines are made separately, which means only the ATM is
present there. This helps to reach the banks in more geographical areas to use its
services even when the bank is not available within that region.

vii. Cash dispenser: This automated teller machine provides withdrawal of cash, details of
balance, and mini statements.

viii. Mobile ATM: These were introduced during covid-19 and are helpful for the users.

ix. Green label machines: These are mainly used for agriculture purpose transactions.

x. Orange label: These are used for transactions of shares.

xi. Yellow label: This automated teller machine is for online purchases through the e-
commerce facility.
 xii. Pink label: This automated teller machine is used by women. Protectors keep a check
on these ATMs so that no one other than women can use the services.

8. Traveller’s Cheque. (6)

The Traveler’s cheque is an exchange medium that can be used as a substitute for the hard
currency. As the name suggests, these cheques are issued to the individuals who travel on
vacations to overseas. The Traveler’s cheque provides a lot of convenience to those who
travel to foreign countries, as they are not required to carry excess cash along with them and
can use these cheques as a currency to facilitate the purchases. The merchants and other
business accept the traveller’s cheque as a currency, provided the original signatures on the
cheque (the cheque signed at the time of its issue) matches the signature done at the time
purchases are initiated.

Here, the issuer of the Traveler’s cheque unconditionally guarantees the payment of the
undersigned value, irrespective of the cheque being fraudulently issued or lost or stolen.
This means that the traveller’s cheques are never bounced unless the issuer becomes
bankrupt or goes out of business. The payee receiving the cheque, can deposit it with the
Bank, as done in the case of ordinary cheques and can get the payment credited to his
account.

One of the advantages of traveller’s cheque is that it never expires, this means, the
purchaser can keep the unused cheque with him to use it anytime in the future. There are
four parties involved in the Traveler’s cheque transaction:
- The Issuer or Obligor, an organization that produces the traveller’s cheque
- An Agent, the bank or any other party that sells the cheque
- The Purchaser, the person who buys it
- The Payee or Merchant, a person to whom the cheque is handed over in exchange
for goods and services.

The convenience and wider acceptance of alternatives such as credit and debit cards and the
wider availability of ATMs has led to a significant decline in the use of traveller's cheques
since the 1990s. In addition, security concerns of retailers has led to many businesses
ceasing to accept them, in turn making them less attractive to travellers. This has led to
complaints about the difficulty that holders have in using them. In much of Europe and Asia,
traveller's cheques are no longer widely accepted and cannot be easily cashed, even at the
banks that issued them.

Since traveller's cheques do not earn interest, one of the main incentives financial
institutions have to sell traveller's cheques is that they effectively represent an interest-free
loan from the purchaser to the seller. The sustained decline in interest rates in most of the
developed world since the early-to-mid 1990s has substantially reduced the profitability of
traveller's cheques for their issuers. Financial institutions have responded to this
 development by charging new fees for traveller's cheques, increasing existing fees, or by
exiting the business altogether.

9. Internet Banking. (6)

Internet banking one of the popular e-banking modes has changed the banking operations
and offer virtual banking services to the clients on 24 x 7 basis. It is also called as convenient
banking, since the customer (account holder) can have access to his bank account from
anywhere at any time, through the bank’s web site. The customer is allowed online access to
account details and payment and funds transfer facilities. Net banking services of a bank can
be accessed through a Personal Identification Number (PIN) and access password as in the
case of ATMs. In net banking the advantage for the bank customer is that funds can be
transferred from the client’s bank account to another account with the same bank or
another bank through NEFT/RTGS. Another method of funds transfer facility is online
payment of taxes. Bank customer can pay various taxes like income tax, service tax, etc.; Net
banking can be used as a channel by the customer to pay the utility bills (electricity bills,
telephone bills, etc) on line. Customers can make use of net banking to pay the insurance
premiums and similar other payments.

There are many advantages of using internet banking, some of are listed herein:

i. Availability: You can avail the banking services round the clock throughout the year. Most of
the services offered are not time-restricted; you can check your account balance at any time
and transfer funds without having to wait for the bank to open.

ii. Easy to Operate: Using the services offered by online banking is simple and easy. Many find
transacting online a lot easier than visiting the branch for the same.

iii. Convenience: You need not leave your chores behind and go stand in a queue at the bank
branch. You can complete your transactions from wherever you are. Pay utility bills,
recurring deposit account instalments, and others using online banking.

iv. Time Efficient: You can complete any transaction in a matter of a few minutes via internet
banking. Funds can be transferred to any account within the country or open a fixed deposit
account within no time on net banking.

v. Activity Tracking: When you make a transaction at the bank branch, you will receive an
acknowledgement receipt. There are possibilities of you losing it. In contrast, all the
transactions you perform on a bank’s internet banking portal will be recorded. You can show
this as proof of the transaction if need be. Details such as the payee’s name, bank account
number, the amount paid, the date and time of payment, and remarks if any will be
recorded as well.
 Besides, this there are disadvantages of internet banking are as follows:

i. Internet Requirement: An uninterrupted internet connection is a foremost requirement to

use internet banking services. If you do not have access to the internet, you cannot make
use of any facilities offered online.

ii. Transaction Security: No matter how much precautions banks take to provide a secure
network; online banking transactions are still susceptible to hackers. Irrespective of the
advanced encryption methods used to keep user data safe, there have been cases where the
transaction data is compromised. This may cause a major threat such as using the data
illegally for the hacker’s benefit.

iii. Difficult for Beginners: There are people in India who have been living lives far away from
the web of the internet. It might seem a whole new deal for them to understand how
internet banking works. Worse still, if there is nobody who can explain them on how internet
banking works and the process flow of how to go about it. It will be very difficult for
inexperienced beginners to figure it out for themselves.

iv. Securing Password: Every internet banking account requires the password to be entered in
order to access the services. Therefore, the password plays a key role in maintaining
integrity. If the password is revealed to others, they may utilise the information to devise
some fraud. Also, the chosen password must comply with the rules stated by the banks.
Individuals must change the password frequently to avoid password theft which can be a
hassle to remember by the account holder himself.

10. Explain the general principles relating to secured loan? (10)

11. Secured Loan (6)

Meaning and Definition of Secured Loan -

Section 5(n) of the Banking and Regulations Act, 1949 defines Secured and Unsecured loans
According to Section 5(n) “secured loan or advance” means a loan or advance made on the
security of assets the market value of which is not at any time less than the amount of such
loan or advance; and “unsecured loan or advance” means a loan or advance not so secured;

In simple words, A secured loan is a type of loan that is backed by collateral. This means that
if you default on the loan, the lender can seize the collateral and use it to repay the loan.
Secured loans are often used to finance major purchases, such as a car or a home.
There are two purposes for a loan secured by debt. In the first purpose, by extending the
loan through securing the debt, the creditor is relieved of most of the financial risks involved
because it allows the creditor to take ownership of the property in the event that the debt is
not properly repaid. In exchange, this permits the second purpose where the debtors may
receive loans on more favourable terms than that available for unsecured debt, or to be
extended credit under circumstances when credit under terms of unsecured debt would not
be extended at all. The creditor may offer a loan with attractive interest rates and repayment
periods for the secured debt

General principles relating to Secured loans -

a. A secured loan is a type of debt backed by an underlying asset or collateral –

Performance-based secured loans are backed by an underlying asset and pay interest
only if the debtor meets its obligations to repay the loan.

b. The collateral is given up to the lender as security for repayment of the loan - A secured
loan is a type of loan where the borrower pledges some property or asset as collateral
for the loan. The terms of the secured loan are usually based on the value of that asset
and the terms of repayment.

c. The borrower cannot be minor - In the Secured type of loan Minor cannot be the
Borrower.

d. The object loaned for should be movable property.

e. The object loaned for should be free from any encumbrance.

f. The lender should be the owner of the object loaned for.

g. A mortgage or pledge of movable property belonging to a third party is invalid.

h. The lender should have in his possession the movable property which is given as
security of the loan.

i. The lender should not part with possession of the movable property until the debt is
repaid.

j. The lender has the authority to sell the collateral in case of default - The lender can
collect a late payment penalty if the borrower doesn't make payments on time. If the
borrower stops making payments, the lender will sell the respective property and get
most of what it's worth from the sale.

Benefits of secured loans

 Secured loans have many benefits that don't apply for other types of loans. Secured
loans can get you:
 Lower interest rates because the bank can rely on your desire to keep your collateral.
 Larger loan amounts are sanctioned, as the bank's liability and risk is substantially
reduced.
 Better terms and conditions from the bank. Easier and cheaper processing (sometimes
free), faster documentation and approval.
 Flexible repayment terms, mean that you don't have to worry about fines and charges
on settlement payments, pre-closing your loan, making one big payment that greatly
reduces your capital (if you've suddenly come into some money), or if you want to close
your loan early or even if you want to extend your loan tenure.
 Flexible repayment tenure, customizable to suit your ability to repay. You can choose to
repay your loan faster, with chunkier EMIs for a shorter period, or choose to pay smaller
amounts over a longer period. The choice is yours, for as long as your collateral asset is
yours.
 Can be availed by those who have a bad credit history or CIBIL score - as both these
indicators are basically representative of your ability to repay your loan. When you add
a collateral asset into the equation, the need for the bank to know whether you can or
can't pay back your loan becomes irrelevant. Interest is tax deductible, thus saving you
more money that would otherwise belost to taxation.
 Minimum income required is far lesser than that for Unsecured Loans, as this is also an
indicator of your ability to repay. Your ability to repay is a factor that becomes moot, as
you have already pretty much paid them by pledging an asset as collateral.

Disadvantages of secured loans- Along with the advantages that secured loans bring, there
are also many disadvantages, like:

 Collateral seizing - The bank, while it approves a higher loan amount and a lower rate of
interest, will not hesitate to seize all assets you have pledged as collateral. You must be
as ready to give up the pledged asset as you are to take the loan. You must be ready to
lose the roof over your head, the car in which you travel and the assets that earn your
keep.
 Repossession - If you're purchasing, say, a vehicle with a secured loan, you will be
placing the vehicle as collateral against the possibility of your defaulting on the loan.
This means that if you miss a payment or default in any way, the bank will take back
your new vehicle and all EMIs that you've paid thus far will be considered null and
void. You will lose all the money you've paid towards your new vehicle (plus interest),
and the vehicle itself, leaving you totally stranded and completely broke. Let's face it, if
you had the funds, you would've repaid your loan.
 Heavy paperwork - Secured loans require a lot of paperwork, as you will have to
provide the regular documents required (identity, age and address proof) along with
documents that relate to the ownership of your asset. You will also be required to affix a
metric ton of specimen signatures to a series of documents, and if even one of these
 signatures does not match the others, you will have to go through the entire arduous
process again.
 Full ownership of collateral asset - If you wish to pledge an asset against a loan, you will
have to be the full owner of that asset. The asset will have to be cleared of all EMIs and
partnership agreements and will have to be solely owned by the person who is applying
for the loan.
 Longer time period = greater total cost - A longer time to pay off the loan allows for
more potential hiccups in your general rate of income, even the slightest dip in which
could affect your repayment schedule. And if you miss an EMI payment, the bank will
levy heavy fines and penalties which will compound and result in you losing your asset.
A longer repayment schedule also means a larger eventual total cost, despite smaller
monthly payments.
 Value of asset must match or exceed loan amount - the loan you desire must be
recoverable by the sale of the asset you are planning on pledging. If the bank cannot
realize its loss through the sale of the collateral, it will come after you with a legal
document called a deficiency judgement, which will bind you to fulfil your liability.
 Living in debt - if you are unable to clear the loan even after the bank has seized your
assets, you will be doomed to a life where any income you generate will go straight to
the bank. More often than not, you will be paying off interest charges and penalty
charges and the principal amount will remain more or less the same. Can you imagine a
life where the bank has taken the roof over your head and you're still paying them off?
 CIBIL score - you CIBIL score will suffer greatly if you default on a secured loan
repayment. If the bank has to seize your house and other assets, your score and rating
could go to a place from where it is very difficult to recover.

Secured loans are a way to secure finance in times of dire need, but must be used very
cautiously and not at all be taken lightly. The asset pledged as collateral must be considered
as property of the bank in the mind of the borrower, until the loan is repaid in full. Banks will
not hesitate or think twice before seizing a defaulter's collateral, and almost seem like sharks
circling a boat waiting for someone to fall off of it.

12. Banking Ombudsman (6)

13. Discuss the powers and functions of Banking Ombudsman? (10)
14. Explain the ground under which Banking Ombudsman may reject the complaint? (10)

Banking Ombudsman, a quasi-judicial authority is formed with an intent to resolve the

complaints of the customers of the Bank. The Banking Ombudsman Scheme was introduced
by the Reserve Bank of India (RBI), under section 35A of the Banking Regulation Act, 1949 by
RBI. The Scheme is introduced in the Year 1995.

RBI integrated its three erstwhile Ombudsman Schemes viz. (i) the Banking Ombudsman
Scheme, 2006, (ii) the Ombudsman Scheme for Non-Banking Financial Companies, 2018,
and (iii) the Ombudsman Scheme for Digital Transactions, 2019, into one Scheme - ‘The
Reserve Bank - Integrated Ombudsman Scheme, 2021 (RB-IOS, 2021) w.e.f. November 12,
2021. The Scheme simplifies the grievance redress process at RBI by enabling the customers
of Regulated Entities (REs) like banks, Non-Banking Financial Companies (NBFCs), Payment
System Participants (PSPs) and Credit Information Companies to register their complaints at
one centralised reference point. The objective of the Scheme is to resolve the customer
grievances involving ‘deficiency in service’ on part of REs in a speedy, cost-effective and
satisfactory manner.

An RBI Ombudsman is a senior official of RBI appointed by RBI to redress the complaints
from customers of the REs against “deficiency in service”, as defined under Clause 3(1)(g) of
the RB-IOS, 2021.

“Deficiency in service” means a shortcoming or an inadequacy in any financial service or

such other services related thereto, which the RE is required to provide statutorily or
otherwise, which may or may not result in financial loss or damage to the customer.

For any deficiency in services, the person aggrieved, should first make a written complaint to
the Bank. If the Bank does not respond within 30 days after lodgement of complaint or
rejects or the complainant is not satisfied with the response the complainant can lodge his
complaint under the RB-IOS, 2021.

Further, it is pertinent to note that the complaint should be made to the RBI Ombudsman
not later than 1 year after receiving the reply of the Banks or, in cases where no reply is
received, not later than 1 year and 30 days after the date of the representation to the Banks.

There is no limit on the amount of disputed transaction for which the complaint/grievance
can be raised under the Scheme and on which the RBI Ombudsman can provide resolution.
However, only those complaints where the compensation sought, if any, for any loss suffered
by the complainant arising directly out of the act or omission or commission of the REs, is
Rs. 20 lakh or lower are admissible under the Scheme.

In addition, the Ombudsman may award a compensation not exceeding Rs. 1 lakh to the
complainant for loss of the complainant’s time, expenses incurred, harassment and mental
anguish suffered by the complainant.

Clause 8 of the -IOS, 2021, provides the functions and powers of a Banking Ombudsman:

1) The Ombudsman/Deputy Ombudsman shall consider the complaints of customersof

Regulated Entities relating to deficiency in service.

2) There is no limit on the amount in a dispute that can be brought before

theOmbudsman for which the Ombudsman can pass an Award. However, for
anyconsequential loss suffered by the complainant, the Ombudsman shall have the
powerto provide a compensation up to Rupees 20 lakh, in addition to, up to Rupees
 Onelakh for the loss of the complainant’s time, expenses incurred and
forharassment/mental anguish suffered by the complainant.

3) While the Ombudsman shall have the power to address and close all complaints,the
Deputy Ombudsman shall have the power to close those complaints falling
underclause 10 of the Scheme (i.e., Grounds for non-maintainability of a Complaint)
and complaints settled through facilitation as stated underclause 14 of the Scheme
(Resolution of Complaints).

4) The Ombudsman shall send to the Deputy Governor, Reserve Bank of India, areport, as
on March 31st every year, containing a general review of the activities of theoffice
during the preceding financial year, and shall furnish such other information asthe
Reserve Bank may direct.

5) The Reserve Bank may, if it considers necessary in the public interest to do so,publish
the report and the information received from the Ombudsman in suchconsolidated
form or otherwise, as it may deem fit.

Rejection of complaint by Ombudsman

As per Clause 16 of the RBI- Integrated Ombudsman Scheme, 2021;
(1) Deputy Ombudsman or the Ombudsman may reject a complaint at any stage if it
appears that the complaint made
i. is non-maintainable under Clause 10 of the Scheme, 2021 in matters involving:
a. commercial judgment/commercial decision of a Regulated Entity;
b. a dispute between a vendor and a Regulated Entity relating to an outsourcing
contract;
c. a grievance not addressed to the Ombudsman directly;
d. general grievances against Management or Executives of a Regulated Entity;
e. a dispute in which action is initiated by a Regulated Entity in compliance with
the orders of a statutory or law enforcing authority;
f. a service not within the regulatory purview of the Reserve Bank;
g. a dispute between Regulated Entities; and
h. a dispute involving the employee-employer relationship of a Regulated Entity;
or
ii. is in the nature of offering suggestions or seeking guidance or explanation;

(2) The Ombudsman may reject a complaint at any stage if:

i. in the opinion of the Ombudsman there is no deficiency in service;
ii. the compensation sought for the consequential loss is beyond the power of the
Ombudsman to award as indicated in Scheme;
iii. the complaint is not pursued by the complainant with reasonable diligence;
iv. the complaint is without sufficient cause;
 v. the complaint requires consideration of elaborate documentary and oral evidence
and the proceedings before the Ombudsman are not appropriate for adjudication of
such a complaint;
vi. in the opinion of the Ombudsman there is no financial loss or damage, or
inconvenience caused to the complainant.

15. Explain the e-Banking system in India (10)

E-banking has become an integral part of the banking system in India. Before the 90’s, the
traditional model of banking i.e., branch-based banking was prevalent, but after that non-
branch banking services were started. The credit of launching internet banking in India goes
to firstly ICICI Bank. After that Citibank and HDFC Bank followed with internet banking
services in 1999. The Government of India enacted the IT Act, 2000 w.e.f from October 17,
2000, which provided legal recognition to electronic transactions and other means of e-
commerce.

The Reserve Bank is monitoring and reviewing the legal and other requirements of e-banking
on a continuous basis to ensure that e-banking would develop on sound lines and e-banking
related challenges would not pose a threat to financial stability. To cope with the pressure of
growing competition, Indian commercial banks have adopted several initiatives and e-
banking is one of them. The competition has been especially tough for the public sector
banks, as the newly established private sector and foreign banks are leaders in the adoption
of e-banking. Indian banks offer to their customers the following e-banking products and
services viz. Automated Teller Machines (ATMs), Internet Banking, Mobile Banking, Phone
Banking, Tele banking, Electronic Clearing Services, Electronic Clearing Cards, Smart Cards,
Door Step Banking, and Electronic Fund Transfer.

Challenges in E-banking:
E-banking is in its emerging stage of development in India. Most of them are basic services
only the deregulation of the e-banking industry coupled with the emergence of new banking
technology is enabling new competitors to enter the financial services markets quickly and
efficiently. However, it needs to be recognized that perception norms and an improvement
in the functioning of e-banking services.

 Security Risk: The problem related to security has become one of the major concerns for
banks. A large group of customers refuses to opt for e-banking facilities due to
uncertainty and security concerns. According to the IAMAI Report (2006), 43% of internet
users are not using internet banking in India because of security concerns. So, it is a big
challenge for marketers and makes consumers satisfied regarding their security concerns,
which may further increase online banking use.
 The Trust Factor: Trust is the biggest hurdle to online banking for most customers.
Conventional banking is preferred by the customers because of a lack of trust in online
 security. They have a perception that online transaction is risky due to which frauds can
take place. While using e-banking facilities lot of questions arises in the mind of
customers such as: Did the transaction go through? Did I push the transfer button once or
twice? Trust is among the significant factors which influence the customers‟ willingness
to engage in a transaction with web merchants.

 Customer Awareness: Awareness among consumers about the e-banking facilities and
procedures is still on the lower side in the Indian scenario. Banks are not able to
disseminate proper information about the use, benefits, and facility of internet banking.
Less awareness of new technologies and their benefits is among one of the most ranked
barriers in the development of e-banking.

 Privacy risk: The risk of disclosing private information & fear of identity theft is one of the
major factors that inhibit consumers while opting for internet banking services. Most
consumers believe that using online banking services makes them vulnerable to identity
theft. According to the study consumers‟ worry about their privacy and feel that bank
may invade their privacy by utilizing their information for marketing and other secondary
purposes without the consent of consumers.

 Strengthening the public support: In developing countries, in the past, most e-finance
initiatives have been the result of joint efforts between the private and public sectors. If
the public sector does not have the necessary resources to implement the projects it is
important that joint efforts between public and private sectors along with the multilateral
agencies like the World Bank, be developed to enable public support for e-finance related
initiatives.

 Availability of Personnel services: In present times, banks are to provide several services
like social banking with financial possibilities, selective up gradation, computerization and
innovative mechanization, better customer services, effective managerial culture, internal
supervision and control, adequate profitability, strong organization culture etc. Therefore,
banks must be able to provide complete personnel service to the customers who come
with expectations.

 Implementation of global technology: There is a need to have an adequate level of

infrastructure and human capacity building before developing countries can adopt global
technology for their local requirements. In developing countries, many consumers either
do not trust or do not have access to the necessary infrastructure to be able to process e-
payments.

 Non- Performing Assets (NPA): Nonperforming assets are another challenge to the
banking sector. Vehicle loans and unsecured loans increase N.P.A. which terms 50% of
banks retail portfolio was also hit due to upward movement in interest rates, restrictions
 on collection practices, and soaring real estate prices. So that every bank has to take care
of regular repayment of loans.

 Competition: The nationalized banks and commercial banks have competition from
foreign and new private sector banks. Competition in the banking sector brings various
challenges before the banks such as product positioning, innovative ideas, and channels,
new market trends, cross-selling ad at managerial and organizational part this system
needs to be managed, assets and contain risk. Banks are restricting their administrative
folio by converting manpower into machine power i.e. banks are decreasing manual
powers and getting maximum work done through machine power. Skilled and specialized
manpower is to be utilized and result-oriented targeted staff will be appointed.

 Handling Technology: Developing or acquiring the right technology, deploying it

optimally, and then leveraging it to the maximum extent is essential to achieve and
maintain high service and efficiency standards while remaining cost-effective and
delivering sustainable returns to shareholders. Early adopters of technology acquire
significant competitive advances Managing technology is, therefore, a key challenge for
the Indian banking sector.

Opportunities in E-banking:
Despite various challenges that are prevailing in context with e-banking in India, the
following opportunities are motivating the marketers for implementing e-banking:

 Untapped Rural Markets: Contributing to 70% of the total population in India is a largely
untapped market for the banking sector. In all urban areas banking services entered but
only a few big villages have the banks entered. So that the banks must reach in remaining
all villages because the majority of Indians still living in rural areas.

 Multiple Channels: Banks can offer so many channels to access their banking and other
services such as ATM, Local branches, Telephone/mobile banking, video banking, etc. to
increase the banking business.

 Competitive Advantage: The benefit of adopting e-banking provides a competitive

advantage to the banks over other players. The implementation of e-banking is beneficial
for banks in many ways as it reduces costs to banks, improves customer relations,
increases the geographical reach of the bank, etc. The benefits of e-banking have become
opportunities for the banks to manage their banking business in a better way.

 Increasing Internet Users & Computer Literacy: To use internet banking it is a very
important or initial requirement that people should have knowledge about internet
technology so that they can easily adapt the internet banking services. The fast-increasing
internet users in India can be a very big opportunity and the banking industry should
 encash this opportunity to attract more internet users to adopt internet banking services.
The table shows evidence of an increasing number of internet users in India.

 Worthy Customer Service: Worthy customer services are the best brand ambassador for
any bank for growing its business. Every engagement with customers is an opportunity to
develop a customer's faith in the bank. While increasing competition customer services
have become the backbone for judging the performance of banks.

 Internet Banking: It is clear that online finance will pick up and there will be increasing
convergence in terms of product offerings banking services, share trading, insurance,
loans, based on data warehousing and data mining technologies. Anytime anywhere
banking will become common and will have to upscale, such up scaling could include
banks launching separate internet banking services apart from traditional banking
services.

 Retail Lending: Recently banks have adopted customer segmentation which has helped in
customizing their product folios well. Thus, retail lending has become a focus area
particularly in respect of the financing of consumer durables, housing, automobiles, etc.,
Retail lending has also helped in risks dispersal and in enhancing the earnings of banks
with better recovery rates.

16. Mobile banking system (6)

Mobile Banking is the way through which financial transactions are made by using mobile
phones. It includes a range of services from sending fraud alerts, transaction messages and
usage activity to online payment of bills and fund transfer services. These services are
provided by most financial institutions such as banks for the convenience of their customers.
One of the greatest benefits of Mobile Banking is that customers can access banking services
anywhere and everywhere. However, there are a few concerns associated with mobile
banking such as security issues and limitations due to the differences between in-person
banking and online banking.

History
Before the introduction and enablement of mobile web services in 1999, mobile banking
was completed primarily through text or SMS; it was known as SMS banking. European
banks were on the frontier of mobile banking service offering, using the mobile web via WAP
support.

SMS banking and mobile web were the most popular mobile banking products before 2010.
With the development of smartphones with iOS or Android operating systems, mobile
banking applications (apps) began to evolve. Clients were able to download the banking
apps onto their smartphones with more sophisticated interfaces and improved transactional
abilities.

To date, many financial institutions make use of both SMS and mobile applications to keep
their clients informed of their account activities or to send out alerts regarding possible
fraud and/or updates and maintenance of service provision.

Cybersecurity Concerns
With rising rates of online phishing scams, unsafe mobile banking can put you at the risk by
revealing highly sensitive information such as bank account details to scammers. Therefore,
it is always recommended not to store password details on any electronic gadgets such as
mobile phones, laptops and so on. Cybersecurity includes a wide range of measures put in
place to keep sensitive information secure and avoid cyber theft. It ensures that data is not
misused and prevents the information from being compromised.

Three main types of cyberattacks that

Back Door Attacks are attacked through which someone can access the system by skipping
normal security measures. Most systems have Backdoors by design or some result from the
error, which hackers can utilise to gain unauthorised access to the system.

Denial of Service Attacks means denying the right access to the rightful account holder. The
online hacker may enter the wrong password multiple times to get the account locked.

Direct Access Attack uses viruses and bugs to attack and gain access to accounts to steal
information and modify it.

How Banks can protect their customer from Online scams?

- By Educating customers about the importance of strong, unique passwords that can’t be
easily cracked by hackers.
- Inform customers not to use the same passwords everywhere.
- Using Password Managers like Lass Pass adds an extra layer of security towards
password protection.
- They can avoid online cyber-attacks by ensuring that their connection is private and
secure. It is recommended not to use public networks while using banking services.

Challenges associated with Mobile Banking

- Limitation in Technical Knowledge: Customers may not have the necessary knowledge
required to use online mobile banking services. Therefore, they won’t be able to utilise
the benefits of mobile banking to its full extent.
 - Technical Issues and Fixes: Technical glitches can occur anytime while making online
payments or using any other banking services. However, they are resolved quickly by
the bank as soon as possible, when brought to notice.
- Online Scams: Bank account details are at risk of getting into the wrong hands if stored
on the phone or any other electronic device.

17. Explain the various trends of E-Banking services? (10)

The latest trends can help many banks make improvements and serve their customers'
needs successfully.

1. Radical Transparency and Open Banking

According to Raconteur's research, trust is the second most considered factor when looking
for financial products. Keeping in focus the current trends in banking and growing
competition, banks need to build trust with their customers. This utmost need for trust has
created the concept of radical transparency — a tendency to create an open and honest
environment for a customer. It is about being transparent about your business,
communicating the truth, and accepting mistakes. Customers expect this.

According to the latest trends, a bank will need to focus more on openness and transparency
instead of just relying on typical retail banking practices. For example, Monzo — a
completely app-based online bank formed in the UK in 2015 — has more than five million
users. Monzo has proven that with transparency, new financial institutions can quickly grab
the market share of old-school financial institutions that have been present for centuries.

[Link] as a predictable Personalization Tool

Big data, Artificial Intelligence (AI), and machine learning (ML) encourage financial marketers
to offer more personalization to banking consumers. In this digital era, personalization
doesn't merely refer to fundamental data such as a customer's name. Instead, it includes
knowing your customers' likes and dislikes and developing unique packages of banking
products and services for each customer as per their requirements and desires. Each digital
banks' customer can get personalized financial trends.

According to Accenture, 74% of consumers say ''living profiles'' with more detailed personal
preferences would be useful if they were used to curate personalized experiences, products,
offers, and banking solutions. Customers want organizations to understand their preferences
quickly, especially when they have given complete data already. Personalized marketing for
the best customer journey experience is the key. Traditional banks haven't spoiled customers
with such approaches, and now is the perfect time for this.

3. AI providing more targeted services

The trends in the digital banking landscape for 2022 suggest using real-time AI-based bots to
gather information about customer preferences. Financial marketers can leverage customer
data and advanced analytics to provide predictable personalization and delight their
customers.

With the help of AI and ML, a bank can:

Understand the needs of their customers more quickly in real-time.
Identify and provide data-backed solutions for these problems.
Perform faster analyses to become more efficient and productive.
Develop key strategies for their business backed by valuable data.

4. Cloud Computing
There has been a massive growth in the use of cloud computing in digital banking innovation
trends. Cloud computing is a concept in which computing services such as software, data
warehouses, and digital networking tools are readily available on the internet.

We can expect a massive shift towards cloud computing in the banking sector in 2022
because it provides banks with such benefits as:
Cost efficiency
Global scalability
Increased productivity
Speed
Adequate security
Reliability
Convenience
Financial institutions can mitigate the risk of losing data in case of any physical disaster or
calamity. In addition to that, cloud computing helps banks eradicate massive data silos. It
also eliminates the need for physical servers, systems, and people to manage them.

5. Automation using time and money efficiently

There are still FinTech startups and banks out there that are doing heaps of manual data
work. Unfortunately, upper management is busy checking manual work instead of
formulating strategies.

Managers can plan and make decisions rather than manually writing and reading reports.
Not having to produce manual reports and analysis means they have more time to focus on
other valuable tasks. Automation and digital solutions can help reduce costs, increase
efficiency, save time, and let banks focus on innovation.

We can expect more traditional banking institutions to implement automated systems for
day-to-day tasks such as back-office services and customer support. For example, any
financial institution can get rid of data entry tasks by implementing Optical Character
Recognition (OCR) systems. Banks are also introducing Robotic Process Automation (RPA)
that can help implement error-free automation. That shapes a new image of the finance
industry.

6. No Downtime – Reliability is Key

With the rise in digital banking users, a bank cannot afford to have faulty server downtime.
Even a few minutes can destroy the reputation and goodwill they created over decades. For
example, the State Bank of India's system outage resulted in major revenue losses for the
bank. More than 16,000 financial transactions take place on the platform every hour, so
every minute counts.

These technical glitches have raised many concerns about the reputation and credibility of
the institution. Thus, banks need to invest considerable time and money to ensure that their
systems are always functioning error-free.

7. Security and Privacy

Banks and theft have a parallel relationship. With newer digital banking products and
services, customers are now more exposed to the threat of losing money. Cybersecurity is
now becoming a major consumer demand for any digital bank.

To ensure security and privacy, banks need to:

Invest in security systems to avoid the risks of cyberattacks.
Perform detailed and ongoing security audits of a bank’s system to mitigate its weaknesses
and flaws.
Protect their customers from phishing, through which anyone can steal money from
customers' accounts.
Educate customers about cybersecurity and how they can safeguard themselves from any
such attacks.

8. Speed and Reactivity

Every bank needs to increase the speed of its bureaucratic working systems. Speed is
something that can provide a competitive edge to any bank. Businesses now need to make
decisions more quickly, requiring a trustworthy and quick banking partner to channel their
funds more efficiently and rapidly.

9. Usability and Intuitive Design

User-friendly and intuitive application programming interfaces are now a vital service
requirement. Tailored mobile banking super apps are more popular than limited
functionality tools. Customers prefer graphs, infographics, and interactive modules instead
of the typical Excel sheets. So, we can expect newer features and functionality from banking
apps in 2021.

Today's world dictates that banks work critically on their mobile apps and websites rather
than their branches' interior designs.
10. Importance of visualization as a global trend
The current generation is more appreciative of visualization in their day-to-day routine. User
experience will now play a vital role in any financial institution's competitive edge. Digital
banking needs to create visually appealing systems to retain their customers' attention and
focus.

We can expect the introduction of more visualized, attractive, and trendy mobile apps in
future digital banking trends. Banks will now invest thoroughly in creating innovative mobile
banking apps, as customers need enhanced user experiences along with functionality.

11. Internet
Internet is a networking of computers and expansion would not have been possible
without this. In this marketing message, can be transferred and received worldwide.
The data can be sent and received in any part of the world. In no time, internet facility
can do many a job for us.
It includes the following –
 Sending e-mails
 It can have access to the distant database, which may be a newspaper of
foreign country.
 Customers can exchange their ideas through Internet and can make contact
with anyone who is a linked with internet.
 On internet, one can exchange letters, figures/diagrams.
 Internet is a fast developing net and is of utmost important for public sector
undertaking, Education Institutions, Research Organization etc.
 Internet makes it easy for people sitting in any part of the world to check on
their bank accounts and statements and also to contact their banks from
anywhere in the world.

12. RTGS
Real Time Gross Settlement (RTGS) is a system that allows banks to electronically tell
one bank to transfer money to another banks account in real time. It was first launched in
India in March 2004. The RBI maintains and runs the RTGS system, which offers a way for
banks to move money quickly and efficiently, facilitating their financial operations. As the
name implies, money is transferred between banks in Real Time.
As a result, funds can be transferred to the beneficiary immediately, and the
Beneficiary’s bank must credit the beneficiary’s account within two hours.

13. ECS ELECTRONIC CLEARING SERVICES

ECS is an electronic system used to generate large numbers of receipts and payments.
Payments must be of a comparable nature, even if they are repeated and of little value.
As a result, this service is particularly beneficial for government agencies and companies
who send or receive substantial amounts of money in bulk. For pre- authorized debits for
 utility payments, insurance premium payments, and instalment payments to leasing and
financing businesses, electronic clearing service-debit clearing may be implemented.

18. Cyber Evidence. (6)

19. Ascertain the title of the

owner:
20. Before accepting goods
as security, the banker
should ascertain the title of
the borrower to the goods
by
21. inspection of the original
invoice or cash memo Ascertain the title
of the owner:Before accepting goods as security, the banker should ascertain the title
of the borrower to the goods byinspection of the original invoice or cash memo