Tag: Credit Risk Assessment

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 basis, without bundling or netting with any other transaction. “Settlement” means that once processed, payments are final and irrevocable.

RTGS or the full form Real Time Gross Settlement is a fund transfer method which is done on a real-time basis and without any delays. This wire transfer method allows the money sent by the remitter to immediately reach the beneficiary/payee as and when the request is received. The full form of RTGS includes Gross Settlement which means transactions are carried out on an individual basis and not in a batch-wise system.

It is one of the fastest interbank money transfer method available through banking channels in India. RTGS transactions require the beneficiary bank to credit the recipient’s account within 30 minutes of receiving the funds’ transfer message.

When money is transferred using RTGS, one needs the following information:

• The amount that needs to be transferred
• Name of the beneficiary/payee
• Name of the bank of the beneficiary/payee
• IFSC code of the payee/beneficiary
• Account number of the payee/beneficiary

The RTGS payment method is maintained by the Reserve Bank of India and is, therefore, one of the popular and secure methods of transferring funds.

How to do RTGS? – Step-wise guide to RTGS Process

In order to transfer money through RTGS, you must first add a beneficiary. Thereafter, you can make a funds transfer.

The steps to add a beneficiary to your account are:

Step1: Log into your respective bank’s netbanking account by entering the username and password.

Step2: Go to Funds Transfer tab.

Step3: Select “Add a beneficiary” and then click on “Select Beneficiary Type” to select “Transfer to Another Bank”.

Step4: Enter the beneficiary account details including name, bank name, IFSC code and account number.

Step5: Enter the beneficiary account details including name, bank name, IFSC code and account number.

Step6: Click on “Add” and confirm.

Step7: Wait for the confirmation message.

Once you add the beneficiary, follow these simple steps to transfer money using RTGS.

Step-1: Go to the Funds Transfer tab after logging to your Netbanking account.

Step-2: Select RTGS option and then choose the beneficiary/payee you wish to send the money.

Step-3: Add the amount that is to be transferred.

Step-4: Review all the documents before submission of the request. The funds will be credited within 30 minutes of the request.

Benefits of RTGS

RTGS is a popular fund transfer method in India and comes with a host of benefits. The benefits of using RTGS as your method of transferring funds are:

• Safe and secure: As RTGS is maintained by the Reserve Bank of India, it is a risk-free method of funds.
• Speed: Since transactions are carried out on a real-time basis, there is no room for delay.
• Wider boundaries: There are no geographical limitations in India to use RTGS.
• Convenient: Transfer of funds from your home or office.

RTGS systems are usually operated by a country’s central bank as it is seen as a critical infrastructure for a country’s economy. Economists believe that an efficient national payment system reduces the cost of exchanging goods and services, and is indispensable to the functioning of the interbank, money, and capital markets. A weak payment system may severely drag on the stability and developmental capacity of a national economy; its failures can result in inefficient use of financial resources, inequitable risk-sharing among agents, actual losses for participants, and loss of confidence in the financial system and in the very use of money.

RTGS system does not require any physical exchange of money; the central bank makes adjustments in the electronic accounts of Bank A and Bank B, reducing the balance in Bank A’s account by the amount in question and increasing the balance of Bank B’s account by the same amount. The RTGS system is suited for low-volume, high-value transactions. It lowers settlement risk, besides giving an accurate picture of an institution’s account at any point of time. The objective of RTGS systems by central banks throughout the world is to minimize risk in high-value electronic payment settlement systems. In an RTGS system, transactions are settled across accounts held at a central bank on a continuous gross basis. The settlement is immediate, final, and irrevocable. Credit risks due to settlement lags are eliminated. The best RTGS national payment system cover up to 95% of high-value transactions within the national monetary market.

RTGS systems are an alternative to systems of settling transactions at the end of the day, also known as the net settlement system, such as the BACS system in the United Kingdom. In a net settlement system, all the inter-institution transactions during the day are accumulated, and at the end of the day, the central bank adjusts the accounts of the institutions by the net amounts of these transactions.

World Bank has been paying increasing attention to payment system development as a key component of the financial infrastructure of a country, and has provided various forms of assistance to over 100 countries. Most of the RTGS systems in place are secure and have been designed around international standards and best practices.

There are several reasons for central banks to adopt RTGS. First, a decision to adopt is influenced by competitive pressure from the global financial markets. Second, it is more beneficial to adopt an RTGS system for central bank when this allows access to a broad system of other countries’ RTGS systems. Third, it is very likely that the knowledge acquired through experiences with RTGS systems spills over to other central banks and helps them make their adoption decision. Fourth, central banks do not necessarily have to install and develop RTGS themselves. The possibility of sharing development with providers that have built RTGS systems in more than one country (CGI of UK holding the IP, CMA Small System of Sweden, JV Perago of South Africa, SIA S.p.A. of Italy and Montran of USA) has presumably lowered the cost and hence made it feasible for many countries to adopt.

National Electronic Funds Transfer (NEFT) is a nationwide payment system enabling the electronic transfer of funds from one bank account to another. It is a secure, efficient, and widely-used platform managed by the Reserve Bank of India (RBI). NEFT functions on a batch processing system, allowing individuals and businesses to transfer funds in near-real-time. Transfers can be initiated online via internet banking, mobile apps, or physically at bank branches. Transactions are settled on an hourly basis during operational hours, ensuring reliability and speed. NEFT supports a wide range of payments, including interbank transfers, credit to loan accounts, and inward remittances.

Origin of NEFT in India:

Introduced by the Reserve Bank of India in 2005, NEFT replaced the earlier Special Electronic Funds Transfer (SEFT) system, providing a more accessible and robust alternative. Its design aimed to promote a cashless economy and strengthen interbank fund transfers across urban and rural regions. Over time, NEFT has undergone significant upgrades, including 24×7 availability since December 2019, reflecting the RBI’s push towards digital financial inclusivity. This milestone allowed real-time fund transfers at any time, contributing to its widespread adoption across individuals, businesses, and government organizations. NEFT has become a cornerstone in India’s move towards a digitally empowered financial system.

NEFT Process:

NEFT (National Electronic Funds Transfer) process facilitates the transfer of funds electronically between banks in India.

1. Initiation of Transaction:

The sender provides details such as the beneficiary’s name, account number, bank name, branch, and IFSC (Indian Financial System Code). Transactions can be initiated via online banking, mobile banking apps, or at a bank branch.

2. Sender’s Bank Processing:

The sender’s bank verifies the details and forwards the transaction request to its NEFT Service Centre.

3. Central Processing by RBI:

NEFT Service Centre bundles multiple transactions into batches and forwards them to the Reserve Bank of India (RBI), the clearing and settlement authority. RBI processes the transactions in hourly settlement batches during operational hours.

4. Clearing and Settlement:

The RBI routes the payment instructions to the beneficiary’s bank. Settlements are carried out in real-time gross settlement mode within the hourly batch.

5. Beneficiary Bank’s Role:

The beneficiary’s bank credits the funds to the recipient’s account upon receiving instructions from the RBI.

6. Confirmation:

Both the sender and beneficiary are notified of the transaction’s success or failure through SMS, email, or banking alerts.

NEFT Timings:

NEFT works on a deferred settlement basis which means the transactions are carried out in batches. Earlier, NEFT transactions were available from 8:00 AM to 6:30 PM from Monday to Friday only. However, RBI has regularised that NEFT transactions will be available 24*7 on all days of the year, including holidays.

Also, after usual banking hours, NEFT transactions are expected to be automated transactions initiated using ‘Straight Through Processing (STP)’ modes by the banks.

How to Transfer Funds through NEFT?

Online Transfer through Internet or Mobile Banking

• Login to Your Bank Account:

Access your account using the bank’s internet or mobile banking platform.

• Add Beneficiary:

Go to the “Add Beneficiary” or “Payee” section. Provide the beneficiary’s details such as name, account number, bank name, branch, and IFSC code.

• Beneficiary Approval:

Once added, the bank may take a few minutes to several hours to verify and approve the beneficiary.

• Initiate Transfer:

Navigate to the fund transfer section and select NEFT. Choose the beneficiary and enter the transfer amount and any remarks if required.

• Review and Authenticate:

Review the entered details carefully. Authenticate the transaction using the provided OTP or transaction password.

• Receive Confirmation:

Post successful transfer, a confirmation message will be displayed or sent via SMS/email.

Offline Transfer at Bank Branch

• Visit the Bank Branch:

Go to your bank branch and request an NEFT application form.

• Fill the Form:

Provide the beneficiary details such as name, account number, bank name, branch, IFSC, and the amount to be transferred.

• Submit the Form:

Hand over the form along with the transfer amount if not debiting directly from your account.

• Processing by the Bank:

The bank will process the NEFT request and initiate the transfer in the next available batch.

• Confirmation:

Collect the receipt and check for updates regarding the transfer’s success.

Charges applicable to NEFT:

1. Online NEFT Transactions (via Internet or Mobile Banking):

• No Charges:

As per the Reserve Bank of India (RBI) directive issued in January 2020, there are no charges for NEFT transactions made through internet banking or mobile banking platforms.

2. Offline NEFT Transactions (at Bank Branches):

Banks may levy charges for NEFT requests processed in physical mode (at branches). These charges are set within the limits prescribed by the RBI and vary slightly across banks.
Below is an indicative structure:

• Up to ₹10,000: ₹2.50 + GST.
• ₹10,001 to ₹1 Lakh: ₹5.00 + GST.
• ₹1,00,001 to ₹2 Lakhs: ₹15.00 + GST.
• Above ₹2 Lakhs: ₹25.00 + GST.

Special Cases:

• Priority Customers: Premium account holders may enjoy fee waivers, depending on the bank’s policy.
• Government Mandates: Certain beneficiary payments, such as those linked to government schemes, are NEFT-free.

Benefits of using NEFT:

1. Convenient and Accessible:

NEFT allows seamless transfer of funds from one bank account to another across India. It can be accessed both online (via internet or mobile banking) and offline (at bank branches), making it suitable for a wide range of users, including those without internet access.

2. Secure and Reliable:

NEFT transactions are regulated by the Reserve Bank of India (RBI), ensuring a high level of security. Each transaction is processed in encrypted batches, reducing risks and ensuring reliability.

3. Cost-Effective:

NEFT is economical, especially for online transactions where banks levy no charges. Even offline transactions at branches are affordable, making it an attractive choice for individuals and businesses alike.

4. No Transaction Limit:

While individual banks may impose their own restrictions, NEFT has no minimum or maximum transaction limit set by the RBI, making it ideal for both small and large fund transfers.

5. Nationwide Coverage:

NEFT is widely supported across India by most banks and branches. This vast network ensures easy fund transfers, regardless of geographic location.

6. Scheduled and Recurring Payments:

With NEFT, users can schedule future payments or set up standing instructions for recurring transactions, such as EMI payments, making financial planning simpler and hassle-free.

An endorsement is the act of signing a negotiable instrument, such as a cheque or bill of exchange, to transfer its ownership or rights to another person. The person making the endorsement is the endorser, and the one receiving the rights is the endorsee. Endorsements must be made by the holder or their authorized agent, who must mention their authority to avoid personal liability. Endorsements are typically written on the back of the instrument, but if space is insufficient, a slip called an allonge can be attached. This process facilitates smooth and secure transfer of negotiable instruments.

Essentials of Valid Endorsement:

1. Signature of the Endorser

The endorsement must be signed by the endorser (the person transferring the instrument). This signature is crucial for making the endorsement valid. The endorser can sign the instrument themselves or, in some cases, by their authorized agent. If an agent endorses the instrument, they must state their authority, such as the power of attorney, to avoid personal liability.

2. Intention to Transfer

The endorsement should show the clear intention to transfer the rights of the instrument to the endorsee (the person receiving the instrument). This is often done with the words “Pay to the order of…” or simply “Pay to…” followed by the endorsee’s name. The intention to transfer should be unambiguous, otherwise, the endorsement may not be considered valid.

3. Endorsee’s Name

The endorsee (the person to whom the instrument is transferred) must be clearly mentioned in the endorsement. This can be done by writing the endorsee’s name or simply mentioning a class of persons (e.g., “to bearer” or “to the order of [name]”). If the endorsee is not specified, the instrument may not be negotiable.

4. Date of Endorsement

While the date of endorsement is not strictly necessary, it can be important to establish the timing of the transfer, especially in case of disputes regarding payment or the validity of the instrument.

5. Endorsement on the Back or a Separate Slip

Typically, the endorsement is made on the back of the negotiable instrument. However, if the space is insufficient, an allonge (a separate slip of paper) can be attached to the instrument for further endorsement. The endorsement must be clearly linked to the instrument to avoid any potential fraud or manipulation.

6. Endorsement Should Not Be Blank (In Some Cases)

In certain cases, a blank endorsement, which leaves the instrument payable to the bearer, may not be ideal as it may increase the risk of loss or theft. To avoid this, a full or restrictive endorsement is often recommended.

7. Clear Authority

If an agent or representative is endorsing the instrument, they must ensure that they have the authority to do so. This authority should be indicated in the endorsement to avoid liability issues for the agent.

Kinds of Endorsement

Following are the kinds of endorsement

1. “Blank” or “General Endorsement”

A blank or general endorsement is the one in which the endorser simply put down his signature on the instrument, without putting down the name of the endorsee. The effect of blank endorsement is that to make the instrument payable to bearer so that property therein can thence forward be transferred by me on delivery of the instrument.

This type of endorsement is not as good as forgery to this endorsement is quite easy.

2. “Special Endorsement” or “Endorsement is full”

If the endorsement contains not only the signature of the endorser but also the name of the endorsee, it is known as special endorsement or endorsement in full. If an instrument is endorsed in blank, its holed may without signing his own name, by writing above the endorser’s signature a direction to pay to any other person as endorsee, by converging the endorsement in blank into an endorsement in full and the holder does not thereby incur the responsibility of an endorser.

3. Restrictive Endorsement

As a general rule, the holder of negotiable instrument has endorsement may restrict such right, when it is known as restrictive endorsement. Such an endorsement may (1) restrict or exclude the right of further negotiation by express words that are “Pay Ahmad Ali only” or (2) merely constitute the endorsee and agent to endorse the instrument or to receive its contents for the endorser or for some other specified person.

4. Absolute Endorsement

An endorsement is absolute when the endorsement in free from any condition attached to it. This is the general rule of endorsement that the holder of a negotiable instrument has right to transfer it to other s by further negotiable. So such endorsement may be called an absolute endorsement.

5. Partial Endorsement

A partial endorsement is one which means to transfer the document o0nly for a part of its value ordinarily a partial endorsement is not valid. When any amount has already been paid, a note to that effect may be endorsed on the instrument which can then be negotiated for the balance of the said amount.

6. Conditional Endorsement

When the endorser by express words in the endorsement, makes his own liability thereon on the right of the endorsee to receive the amount, due thereon, depend upon the happening of specified event, the endorsement excludes his own liability on the instrument.

7. Forged Endorsement

As a general rule forgery does not give a good title. But an acceptor who accepts an instrument knowingly or having reason to believe forgery, is not relieved of liability. If a cheque hears a forged enforcement and the banker pays it in the ordinary course of business in good faith and proper caution, he is not liable due to forged endorsement as the banker cannot know the signature of all the endorsers. Simply the banker should see all the endorsements in order. Banker is only liable if he does not care for the forged signatures of the drawer.

Commercial Banking in India refers to the system of financial institutions that accept deposits from the public and provide loans for consumption, trade, agriculture, and industry. These banks operate under the regulation of the Reserve Bank of India (RBI) and play a vital role in the country’s economic development. Indian commercial banks are classified into public sector banks, private sector banks, foreign banks, and regional rural banks. They offer a wide range of services, including deposit accounts, credit facilities, remittances, and digital banking. By mobilizing savings and allocating credit efficiently, commercial banks support entrepreneurship, employment generation, and financial inclusion. Their functions also include implementing monetary policy, promoting trade, and maintaining financial stability, making them integral to India’s banking and financial system.

According to Culbertson,

“Commercial Banks are the institutions that make short make short term bans to business and in the process create money.”

In other words, commercial banks are financial institutions that accept demand deposits from the general public, transfer funds from the bank to another, and earn profit.

Commercial banks play a significant role in fulfilling the short-term and medium- term financial requirements of industries. They do not provide, long-term credit, so that liquidity of assets should be maintained. The funds of commercial banks belong to the general public and are withdrawn at a short notice; therefore, commercial banks prefers to provide credit for a short period of time backed by tangible and easily marketable securities. Commercial banks, while providing loans to businesses, consider various factors, such as nature and size of business, financial status and profitability of the business, and its ability to repay loans.

Classification of Commercial banks:

1. Public Sector Banks

Refer to a type of commercial banks that are nationalized by the government of a country. In public sector banks, the major stake is held by the government. In India, public sector banks operate under the guidelines of Reserve Bank of India (RBI), which is the central bank. Some of the Indian public sector banks are State Bank of India (SBI), Corporation Bank, Bank of Baroda, Dena Bank, and Punjab National Bank.

2. Private Sector Banks

Refer to a kind of commercial banks in which major part of share capital is held by private businesses and individuals. These banks are registered as companies with limited liability. Some of the Indian private sector banks are Vysya Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, and Housing Development Finance Corporation (HDFC) Bank.

3. Foreign Banks

Refer to commercial banks that are headquartered in a foreign country, but operate branches in different countries. Some of the foreign banks operating in India are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, and Grindlay’s Bank. In India, since financial reforms of 1991, there is a rapid increase in the number of foreign banks. Commercial banks mark significant importance in the economic development of a country as well as serving the financial requirements of the general public.

Primary Functions of Commercial Banks:

• Accepting Deposits

The foremost function of commercial banks is to accept deposits from the public. These deposits come in various forms such as savings accounts, current accounts, fixed deposits, and recurring deposits. Banks offer interest on savings and fixed deposits to attract customers. This service provides a safe place for individuals and businesses to store their money. It also ensures liquidity and encourages financial discipline among people by promoting the habit of saving. These deposits are later used for lending purposes.

• Providing Loans and Advances

Commercial banks lend money to individuals, businesses, and institutions in the form of loans and advances. These may include personal loans, business loans, education loans, and home loans. Banks charge interest on the borrowed amount, which becomes a major source of their income. The terms of repayment vary depending on the nature and amount of the loan. This function promotes entrepreneurship, supports business activities, and contributes to the economic growth and development of the country.

• Credit Creation

Commercial banks create credit through the process of lending. When a bank gives out a loan, it does not always hand over cash; instead, it credits the borrower’s account with the amount. This process increases the money supply in the economy. The actual cash reserves remain with the bank while the borrower can use the deposited amount. This credit creation function plays a vital role in expanding economic activities and facilitates investment and consumption in the market.

• Agency Functions

Commercial banks perform several agency functions on behalf of their customers. These include collecting cheques, dividends, interest, and making payments such as insurance premiums and utility bills. Banks also act as agents in the purchase and sale of securities. Additionally, they provide services like standing instructions and acting as trustees or executors. These services offer convenience to customers and enhance their trust in the banking system. Banks usually charge a nominal fee for such agency services.

• Utility Functions

Apart from core banking services, commercial banks offer various utility functions to customers. These include issuing demand drafts, traveller’s cheques, locker facilities, credit and debit cards, and internet banking. Banks also assist in foreign exchange transactions and provide financial consultancy services. These functions improve customer convenience, promote secure transactions, and support business and personal needs. Utility services help banks generate additional income and maintain customer satisfaction in a competitive financial market.

• Maintaining Liquidity and Ensuring Safety

Commercial banks ensure the safety of depositors’ money by adopting strict regulatory practices and maintaining adequate cash reserves. They are required to maintain a portion of their total deposits as cash reserve ratio (CRR) and statutory liquidity ratio (SLR) with the central bank. This ensures that they have enough liquidity to meet withdrawal demands. Moreover, banks follow sound financial practices and insurance coverage under schemes like DICGC to protect depositor interests and boost confidence in the banking system.

Secondary Functions of the Commercial Banks:

• Agency Functions

Commercial banks perform several agency functions on behalf of their customers. They collect cheques, dividends, interest, rent, and other payments on behalf of account holders. Banks also make routine payments such as insurance premiums, utility bills, or subscriptions through standing instructions. They act as agents for buying and selling securities and sometimes serve as trustees, attorneys, or executors of wills. These services provide convenience, save time, and add value for customers, who rely on banks to handle their financial affairs efficiently and securely.

• General Utility Services

Banks offer various utility services beyond deposit and credit facilities. These include issuing demand drafts, pay orders, and traveller’s cheques, and providing safe deposit lockers for storing valuables. Banks also issue letters of credit and credit/debit cards, facilitating national and international trade. Online and mobile banking services are now part of this function, offering real-time account access, fund transfers, and bill payments. These utility services improve banking experience, increase customer satisfaction, and support modern lifestyles by making financial services more accessible and user-friendly.

• Foreign Exchange Services

Commercial banks play a significant role in facilitating foreign exchange transactions. They are authorized by the Reserve Bank of India (RBI) to deal in foreign currencies and provide services like buying and selling foreign currencies, remitting money abroad, and handling export/import payments. These services are crucial for individuals and businesses engaged in international trade or travel. Banks also assist in currency conversion and help customers manage foreign currency accounts. Their foreign exchange operations ensure smoother cross-border transactions and support globalization and international business operations.

• Credit Creation

Though part of their primary function, credit creation is also a broader financial service banks provide. When banks issue loans, they do so by creating demand deposits in the borrower’s account instead of giving cash. This increases the money supply in the economy. The process allows customers to use funds for investments or expenses while actual cash remains largely with the bank. This function supports business expansion, personal finance needs, and economic development by increasing liquidity and boosting purchasing power in the market.

• Safe Custody and Locker Facility

Commercial banks offer locker or safe deposit services to customers for storing valuables such as jewellery, documents, and other important items. These lockers are housed in highly secure areas within bank premises and are accessible only to the locker holder. This service provides safety from theft, fire, and natural disasters. Additionally, banks sometimes keep valuables in safe custody on behalf of customers, including title deeds or share certificates. These services help customers ensure the security of their assets beyond simple monetary deposits.

• Underwriting and Financial Advisory

Many commercial banks offer underwriting services, particularly in the case of new stock or bond issues. They guarantee the subscription of securities by purchasing unsold shares, thus reducing the issuer’s risk. Banks also provide financial advisory services to individuals and companies, guiding them on investments, tax planning, mergers, and acquisitions. These services help clients make informed financial decisions. As financial intermediaries, banks are trusted partners in strategic financial planning, helping clients manage wealth and achieve long-term financial goals effectively and professionally.

Role of the Commercial Banks:

• Financial Intermediation

Commercial banks act as intermediaries between savers and borrowers. They collect deposits from the public and provide loans to individuals, businesses, and governments. This function facilitates the smooth flow of money within the economy. Banks ensure that idle savings are transformed into productive investments, thus supporting economic development. By evaluating credit risk and allocating funds efficiently, they minimize financial uncertainty. Their intermediation helps maintain liquidity in the financial system and supports consumption, investment, and growth, making them a crucial pillar of modern economic infrastructure.

• Credit Allocation

Commercial banks play a key role in allocating credit to different sectors of the economy. They assess the creditworthiness of borrowers and distribute funds accordingly to promote balanced economic growth. Priority sectors like agriculture, small businesses, and infrastructure often receive targeted loans. Through this role, banks support social objectives such as employment, poverty reduction, and regional development. By providing customized credit solutions, banks encourage entrepreneurship and industrialization. Their credit allocation policies influence national economic priorities and help in managing inflation, liquidity, and fiscal stability.

• Promotion of Entrepreneurship

Commercial banks support entrepreneurship by providing the necessary financial resources for starting and expanding businesses. Through term loans, working capital finance, and credit guarantees, banks reduce financial barriers for entrepreneurs. They also offer guidance, project appraisal, and risk management services. By supporting micro, small, and medium enterprises (MSMEs), banks contribute to innovation, job creation, and self-employment. In rural areas, banks promote financial inclusion by funding small-scale industries and self-help groups. Thus, commercial banks serve as a catalyst in building a vibrant entrepreneurial ecosystem.

• Implementation of Monetary Policy

Commercial banks assist central banks in implementing monetary policy by regulating credit and interest rates. They follow guidelines related to the cash reserve ratio (CRR), statutory liquidity ratio (SLR), repo rate, and reverse repo rate. These tools help control inflation, manage liquidity, and stabilize the currency. When central banks adjust policy rates, commercial banks correspondingly change their lending and deposit rates, influencing the overall money supply in the economy. Through these mechanisms, commercial banks ensure the effectiveness of monetary policy and maintain financial discipline.

• Development of Trade and Industry

Commercial banks play a significant role in the development of trade and industry by providing finance, banking services, and infrastructure support. They offer trade credit, bill discounting, letters of credit, and foreign exchange services that enable smooth business operations. Banks also invest in infrastructure projects, industrial ventures, and supply chain financing. By facilitating both domestic and international trade transactions, they boost production, export competitiveness, and economic integration. Their financial support is critical in helping industries scale, modernize, and remain globally competitive.

The relationship between a banker and a customer is central to the functioning of the banking system. It forms the foundation for all transactions and interactions that take place between the two parties. This relationship is primarily based on mutual trust and adherence to legal and ethical standards. Banks provide financial services and products, while customers entrust them with their money, expecting these services to be performed in a manner that ensures security, reliability, and convenience.

Nature of Relationship

• Contractual Relationship

The relationship between a banker and a customer is primarily contractual. When a customer opens an account with a bank, they enter into an agreement with the bank. The customer agrees to deposit funds, while the bank agrees to provide services such as withdrawals, transfers, and loan facilities. This contract is governed by the terms and conditions outlined by the bank, which both parties must abide by. The contractual nature means that both the banker and customer have specific rights and obligations.

• Debtor-Creditor Relationship

The banker-customer relationship is commonly described as one of debtor and creditor. When a customer deposits money in the bank, the bank assumes the role of the debtor, owing the money to the customer. Conversely, when the bank provides loans or credit facilities to the customer, the customer becomes the debtor, owing money to the bank. The banker holds the funds of the customer in trust, and in return, the customer has the right to claim the deposit amount at any time, subject to the conditions of the agreement.

• Fiduciary Relationship

In certain cases, the banker-customer relationship can also be fiduciary. This means that the banker has a legal obligation to act in the best interests of the customer. For instance, when the bank manages the customer’s assets or provides investment advice, it must do so with care and loyalty, placing the customer’s interests ahead of its own.

• Bailment Relationship

Bailment relationship exists when a customer deposits valuables like jewelry or documents in a safety locker provided by the bank. In this case, the bank acts as a bailee, responsible for the safekeeping of the items until they are returned to the customer. The bank has a duty to ensure the safety and protection of the deposited items.

Rights of the Banker:

• Right to Charge Interest

Banker has the right to charge interest on loans, credit facilities, and overdrafts provided to the customer. The rate of interest is usually predetermined and disclosed at the time of granting the loan.

• Right to Set-Off

Bank has the right to set off or adjust any amounts owed by the customer to the bank against the customer’s balance in another account. This is known as the banker’s right of set-off. It allows the bank to recover dues from the customer by utilizing any credit balance the customer has in other accounts with the bank.

• Right to Close Accounts

Bank has the right to close a customer’s account if it becomes inactive or if the customer violates the terms and conditions of the agreement, such as non-compliance with minimum balance requirements. However, the bank must inform the customer before taking this action.

• Right to Receive Payments

The banker has the right to demand payment for services rendered, such as fees for account maintenance, ATM usage, and other banking products or services.

Duties of the Banker:

• Duty of Confidentiality

One of the primary duties of a banker is to maintain the confidentiality of customer information. The bank must not disclose any personal, financial, or transactional details to third parties unless authorized by the customer or required by law. This confidentiality extends to the customer’s account details and any other private information related to the customer’s banking relationship.

• Duty of Care

Bank is obligated to exercise reasonable care in managing the customer’s accounts and transactions. This includes ensuring that there are no errors in processing payments, withdrawals, or deposits. The bank must also ensure the security of the customer’s funds and prevent unauthorized access.

• Duty to Provide Services

Banks are obligated to provide the services they offer as per the agreement with the customer. This includes services like providing access to deposits, issuing checks, facilitating fund transfers, and offering loans. The bank must ensure that these services are rendered efficiently and timely.

• Duty to Honor Cheques

Bank is required to honor the customer’s cheques, provided that the customer has sufficient funds in the account to cover the payment. If a cheque is dishonored due to insufficient funds, the bank must notify the customer. The bank also has the right to refuse payment if the cheque is post-dated, altered, or lacks a signature.

Rights of the Customer:

• Right to Access Funds

The customer has the right to access their funds in the bank accounts at any time, subject to the terms and conditions of the account. This includes making withdrawals, using checks, and conducting other financial transactions.

• Right to Receive Interest

Customers have the right to receive interest on their deposits, provided that the deposit account type entitles them to such benefits. The rate of interest is typically agreed upon when the account is opened.

• Right to Protection Against Fraud

Customers are entitled to protection against unauthorized transactions or fraud. Banks are responsible for safeguarding the customer’s account against fraud and must take steps to prevent such occurrences.

• Right to Closure of Account

The customer has the right to close their account at any time. However, the bank may impose certain charges or conditions for closing the account, depending on the terms of the agreement.

Duties of the Customer:

• Duty to Provide Accurate Information

Customer must provide the bank with accurate and up-to-date information. This includes personal details, financial status, and changes in the customer’s circumstances, such as change of address, employment, etc.

• Duty to Maintain Account Minimums

Depending on the type of account, the customer may have a duty to maintain a minimum balance. Failure to do so may result in penalties or even account closure.

• Duty to Protect Bank Assets

Customers must take reasonable precautions to protect their bank cards, checks, and account details from unauthorized access. This includes safeguarding PINs, passwords, and reporting lost or stolen items promptly.

• Duty to Honor Debts

Customers have the duty to repay any loans or credit extended to them by the bank, including credit card bills, loans, and overdraft facilities. The customer must ensure that payments are made on time to avoid penalties and a negative impact on credit scores.

Legal Considerations in Banker-Customer Relationship

Banker-customer relationship is governed by both contract law and specific banking regulations. In India, for instance, the Banking Regulation Act, 1949 provides the legal framework within which the banking sector operates. Similarly, the Indian Contract Act, 1872 governs the contractual aspects of the relationship. In case of disputes, both parties may seek resolution through legal means, including the consumer protection mechanisms provided by the Consumer Protection Act, 2019.

A cheque is a negotiable instrument that can be categorized as either open or crossed. An open cheque, also known as a bearer cheque, is payable directly over the counter when presented by the payee to the paying banker. In contrast, a crossed cheque cannot be encashed over the counter and must be processed through a bank. The payment for a crossed cheque is credited directly to the payee’s bank account. Cheque crossings can be classified into three types: General Crossing, Special Crossing, and Restrictive Crossing.

Crossing Cheque

Crossed cheque is a type of cheque marked with two parallel lines, with or without additional words, across its face. This crossing ensures that the cheque cannot be encashed directly over the counter and must be deposited into a bank account. The purpose of crossing is to enhance security by directing the payment only to a bank account, reducing the risk of misuse if the cheque is lost or stolen. Crossings are of three types: General Crossing (with two parallel lines), Special Crossing (naming a specific bank), and Restrictive Crossing (adding further instructions like “A/C Payee Only”).

Types of Cheque Crossing (Sections 123-131 A):

The concept of cheque crossing is governed by Sections 123 to 131A of the Negotiable Instruments Act, 1881, aimed at ensuring secure payments. Cheque crossing mandates that the amount mentioned is credited to the payee’s bank account, providing an additional layer of safety. The primary types of cheque crossings are:

1. General Crossing (Section 123)

General crossing is when two parallel transverse lines are drawn across the face of the cheque, with or without the words “and company” or “not negotiable.”

• Effect: The cheque cannot be encashed over the counter but must be collected through a bank.
• Purpose: Enhances security by ensuring the payment is made to the payee’s bank account.

2. Special Crossing (Section 124)

Special crossing occurs when, in addition to two parallel lines, the name of a specific bank is mentioned within the lines.

• Effect: The cheque can only be collected through the specified bank, further narrowing the scope of encashment.
• Purpose: Provides an additional layer of security by directing the payment exclusively through the mentioned bank.

3. Restrictive Crossing

Restrictive crossing includes specific instructions such as “A/C Payee Only” or “Not Negotiable” written between the lines.

• Effect: The cheque can only be deposited into the account of the specified payee, restricting its transferability.
• Purpose: Prevents misuse and ensures the payment is credited to the intended recipient.

4. Not Negotiable Crossing (Section 130)

When the words “Not Negotiable” are added to the crossing, the cheque loses its negotiability, meaning it cannot be further endorsed.

• Effect: Even if transferred, the transferee cannot have better rights than the transferor.
• Purpose: Minimizes risks associated with stolen or improperly endorsed cheques.

5. Account Payee Crossing (Section 131A)

An “Account Payee” crossing directs the cheque payment to be made strictly to the bank account of the payee mentioned on the cheque.

• Effect: Prohibits transferability and ensures payment reaches the intended account holder only.
• Purpose: Provides the highest level of safety in cheque transactions.

General Cheque Crossing

General cheque crossing is a form of crossing where two parallel transverse lines are drawn across the face of the cheque, often accompanied by words like “& Co.” or “Not Negotiable.” This crossing directs that the cheque cannot be encashed directly over the counter and must be deposited into a bank account. The payment is routed through the banking system, enhancing the security of the transaction by ensuring that the funds are credited to the rightful account holder. General crossing serves as a preventive measure against fraud and misuse, as it mandates the cheque’s processing through a bank rather than direct encashment.

Special Cheque Crossing

Special cheque crossing is a type of cheque crossing where, in addition to two parallel lines across the cheque’s face, the name of a specific bank is mentioned within the lines. This ensures that the cheque can only be collected through the bank named in the crossing, adding an additional layer of security to the transaction.

The primary purpose of special crossing is to restrict encashment to the designated bank, minimizing the risk of fraud or misuse. For instance, if a cheque bears the crossing “State Bank of India,” only the specified bank is authorized to process the cheque.

Special crossing is particularly useful in situations where the drawer wishes to ensure the cheque’s payment is handled securely through a trusted or preferred banking channel. It is governed by Section 124 of the Negotiable Instruments Act, 1881, which protects both the drawer and payee from unauthorized access to funds.

Restrictive Cheque Crossing or Account Payee’s Crossing

Restrictive cheque crossing, also known as account payee’s crossing, is a form of cheque crossing where the words “Account Payee” or “A/C Payee Only” are written between two parallel lines on the face of the cheque. This type of crossing is used to ensure that the cheque is credited only to the bank account of the payee whose name is specified on the cheque. It prohibits further endorsement or transfer to another party, thus providing an additional layer of security.

The restrictive crossing is particularly helpful in preventing unauthorized or fraudulent transactions, as it limits the cheque’s encashment or credit to the intended recipient’s account. For instance, if a cheque is crossed as “A/C Payee Only” and made payable to a specific individual or entity, it cannot be encashed by anyone else, even if the cheque is lost or stolen.

Governed by Section 131A of the Negotiable Instruments Act, 1881, restrictive crossing is widely used in business transactions and situations requiring secure fund transfers. It provides both the drawer and payee with enhanced protection, ensuring that the payment reaches the rightful beneficiary without the risk of being misused or misappropriated during the clearing process.

Not Negotiable Cheque Crossing

Not negotiable cheque crossing is a specific type of crossing where the words “Not Negotiable” are added within two parallel transverse lines on the face of the cheque. This crossing ensures that while the cheque can be transferred, the transferee (the person to whom the cheque is endorsed) does not acquire better title than the transferor (the person endorsing it). Essentially, this crossing restricts the negotiability of the cheque while maintaining its transferability.

For example, if a cheque crossed with “Not Negotiable” is transferred to a third party, and it is later discovered that the transferor had no legal right to the cheque, the transferee cannot claim better rights to the amount than the transferor. This helps protect the drawer from potential fraud or unauthorized transfers.

The primary purpose of a “Not Negotiable” crossing is to minimize risks associated with stolen or lost cheques. Even if such a cheque falls into the wrong hands, the restrictive nature of the crossing prevents its misuse. This type of crossing is commonly used in commercial transactions to ensure added security.

Governed by Section 130 of the Negotiable Instruments Act, 1881, “Not Negotiable” crossings act as a safeguard for drawers by controlling the risks of improper transfer, ensuring funds are handled securely and lawfully.