Tag: Mobile Banking

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.

Reserve Bank of India (RBI), established in 1935, is India’s central bank and the primary authority responsible for regulating the country’s monetary and financial system. Its key functions include formulating monetary policy, issuing currency, managing foreign exchange, and regulating financial institutions such as banks and non-banking financial companies (NBFCs). The RBI ensures economic stability, controls inflation, and promotes financial inclusion by providing banking access to all sectors of society. It serves as the banker to the government and other commercial banks, overseeing their operations to maintain the integrity of the financial system and national economy.

Roles of the Reserve Bank of India (RBI)

1. Regulating the Volume of Currency

RBI is performing the regulatory role in issuing and controlling the entire volume of currency in the country through its Issue Department. While regulating the volume of currency the RBI is giving priority on the demand for currency and the stability of the economy equally.

2. Regulating Credit

RBI is also performing the role to control the credit money created by the commercial banks through its qualitative and quantitative methods of credit control and thereby maintains a balance in the money supply of the country.

3. Control over Commercial Banks

Another regulatory role performed by the RBI is to have control over the functioning of the commercial banks. It also enforces certain prudential norms and rational banking principles to be followed by the commercial banks.

4. Determining the Monetary and Credit Policy

RBI has been formulating the monetary and credit policy of the country every year and thereby it controls the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), bank rate, interest rate, credit to priority sectors etc.

5. Mobilizing Savings

RBI is playing a vital promotional role to mobilize savings through its member commercial banks and other financial institutions. RBI is also guiding the commercial banks to extend their banking network in the unbanked rural and semi-urban areas and also to develop banking habits among the people. All these have led to the attainment of greater degree of monetization of the economy and has been able to reduce the activities of indigenous bankers and private money­lenders.

6. Institutional Credit to Agriculture

RBI has been trying to increase the flow of institutional credit to agriculture from the very beginning. Keeping this objective in mind, the RBI set up ARDC in 1963 for meeting the long term credit requirement of rural areas. Later on in July 1982, the RBI set up NABARD and merged ARDC with it to look after its agricultural credit functions.

7. Specialized Financial Institutions

RBI has also been playing an important promotional role for setting specialized financial institutions for meeting the long term credit needs of large and small scale industries and other sectors. Accordingly, the RBI has promoted the development of various financial institutions like, WCI, 1DBI, ICICI, SIDBI, SFCs, Exim Bank etc. which are making a significant contribution to industry and trade of the country.

8. Security to Depositors

In order to remove the major hindrance to the deposit mobilization arising out of frequent bank failures, the RBI took major initiative to set up the Deposit Insurance Corporation of India in 1962. The most important objective of this corporation is to provide security to the depositors against such failures.

9. Advisory Functions

The RBI is also providing advisory functions to both the Central and State Governments on both financial matters and also on general economic problems.

10. Policy Support

The RBI is also providing active policy support to the government through its investigation research on serious economic problems and issues of the country and thereby helps the Government to formulate its economic policies in a most rational manner. Thus, it is observed that the RBI has been playing a dynamic role in the economic development process of the country through its regulatory and promotional framework.

Importance of RBI:

1. Monetary Policy Formulation

RBI is responsible for formulating and implementing India’s monetary policy. Through its monetary policy tools—such as the repo rate, reverse repo rate, and cash reserve ratio (CRR)—the RBI controls inflation, ensures price stability, and supports economic growth. The central bank manages the money supply in the economy by either increasing or decreasing the amount of money circulating, depending on the economic conditions. Its role is critical in balancing inflation and growth, which is essential for maintaining a stable economy.

2. Issuer of Currency

RBI has the exclusive authority to issue and manage India’s currency. It designs, manufactures, and circulates currency notes, except for the one-rupee note and coins, which are issued by the Ministry of Finance. By controlling the supply of currency, the RBI plays a crucial role in maintaining the value of the Indian rupee, preventing counterfeit currency, and ensuring the integrity of the monetary system.

3. Banker’s Bank

As the banker to the government and all commercial banks in India, the RBI performs several functions that are essential to the functioning of the financial system. It facilitates transactions between banks, acts as a clearinghouse, and manages inter-bank payments. The RBI ensures that the commercial banking system is stable by regulating financial operations, offering emergency liquidity support, and overseeing the solvency of banks.

4. Regulation of Financial Institutions

RBI is responsible for regulating and supervising commercial banks, cooperative banks, and other financial institutions to ensure they operate within the framework of the law and maintain sound financial practices. It issues licenses, sets regulatory standards for capital adequacy, and ensures that financial institutions follow prudent risk management practices. Through its regulatory role, the RBI safeguards the interests of depositors and maintains the trust in the banking system.

5. Management of Foreign Exchange

RBI plays a pivotal role in managing India’s foreign exchange reserves. It intervenes in the foreign exchange market to stabilize the rupee’s value against foreign currencies, maintaining external sector stability. The RBI also monitors foreign exchange flows, manages India’s external debt, and ensures that the country meets its international financial obligations. Its interventions are critical in protecting India from excessive volatility in foreign exchange markets.

6. Financial Inclusion and Development

The RBI has taken several initiatives to promote financial inclusion and ensure that banking services are accessible to all sections of society. By encouraging the establishment of rural and regional rural banks, setting up policies for microfinance institutions, and promoting digital banking, the RBI has played a significant role in broadening the reach of banking. Its efforts have focused on ensuring that underserved and low-income populations have access to affordable financial products, helping in the economic upliftment of rural India and ensuring balanced growth.

Functions of the Reserve Bank of India (RBI):

1. Note Issue

Being the Central Bank of the country, the RBI is entrusted with the sole authority to issue currency notes after keeping certain minimum reserve consisting of gold reserve worth Rs. 115 crore and foreign exchange worth Rs. 85 crore. This provision was later amended and simplified.

2. Banker to the Government

RBI is working as banker of the government and therefore all funds of both Central and State Governments are kept with it. It acts as an agent of the government and manages its public debt. RBI also offering “ways and means advance” to the government for short periods.

3. Banker’s Bank

RBI is also working as the banker of other banks working in the country. It regulates the whole banking system of the country, keep certain percentage of their deposits as minimum reserve, works as the lender of the last resort to its scheduled banks and operates clearing houses for all other banks.

4. Credit Control

RBI is entrusted with the sole authority to control credit created by the commercial banks by applying both quantitative and qualitative credit control measures like variation in bank rate, open market operation, selective credit controls etc.

5. Custodian of Foreign Exchange Reserves

RBI is entrusted with sole authority to determine the exchange rate between rupee and other foreign currencies and also to maintain the reserve of foreign exchange earned by the Government. The RBI also maintains its relation with International Monetary Fund (IMF).

6. Developmental Functions

RBI is also working as a development agency by developing various sister organizations like Agricultural Refinance Development Corporation. Industrial Development Bank of India etc. for rendering agricultural credit and industrial credit in the country.

On July 12, 1986, NABARD was established and has taken over the entire responsibility of ARDC. Half of the share capital of NABARD (Rs. 100 crore) has been provided by the Reserve Bank of India. Thus, the Reserve Bank is performing a useful function for controlling and managing the entire banking, monetary and financial system of the country.

Commercial Banks are the most important components of the whole banking system. Commercial bank is a profit-based financial institution that grants loans, accepts deposits, and offers other financial services, such as overdraft facilities and electronic transfer of funds.

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

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.

Role of Commercial Banks:

• Mobilization of Savings

Commercial banks encourage individuals, businesses, and institutions to save money by offering various deposit schemes like savings accounts, fixed deposits, and recurring deposits. By pooling these savings, banks create a reservoir of funds that can be utilized for productive purposes, fueling economic growth.

• Credit Creation

One of the primary functions of commercial banks is to create credit by extending loans and advances to individuals, businesses, and industries. Through this process, banks inject money into the economy, facilitating investments, consumption, and overall economic activity. This credit creation is a vital mechanism for boosting economic development.

• Facilitating Trade and Commerce

Commercial banks provide critical financial services such as letters of credit, bill discounting, and trade financing that support domestic and international trade. They ensure the smooth functioning of commerce by offering payment mechanisms like cheques, demand drafts, and electronic fund transfers.

• Promoting Industrial Development

By providing short-term, medium-term, and long-term loans, commercial banks support industrial growth. Financing projects for setting up industries, expanding operations, and adopting new technologies significantly contributes to the development of the industrial sector.

• Supporting Agricultural Sector

Commercial banks play a pivotal role in rural development by offering credit facilities tailored for farmers, agricultural enterprises, and rural industries. Loans for purchasing equipment, seeds, fertilizers, and irrigation systems enhance agricultural productivity, which is critical for an agrarian economy like India.

• Enhancing Entrepreneurship

By offering financial assistance in the form of startup loans, working capital loans, and project financing, commercial banks encourage entrepreneurship. They enable individuals to establish and expand businesses, contributing to innovation, job creation, and economic dynamism.

• Promoting Financial Inclusion

Commercial banks ensure that financial services are accessible to all, including marginalized and underserved communities. Through initiatives such as rural banking, microfinance, and digital banking, they help reduce poverty, empower communities, and promote balanced economic development.

• Providing Investment Opportunities

Banks offer investment options like fixed deposits, mutual funds, and government securities, enabling individuals and institutions to grow their wealth. By managing these investments, commercial banks play a vital role in capital formation and resource allocation in the economy.

Primary Functions of Commercial Banks:

• Accepting Deposits from the public in savings account, current account, fixed deposits, recurring deposits, deposits from NRIs.
• Lending money to the public for their various purposes like personal loans, housing loans, vehicular loans, etc.
• Providing overdraft facility to the credit card holders and under any schemes by the government like in Pradhan Mantri Jan Dhan Yojana Scheme.

Secondary Functions or Para banking Activities of the Commercial Banks:

• Issue debit, credit and prepaid cards.
• Issue Letter of Credit and Bank Guarantee.
• Collect amounts through cheques and other instruments.
• Sale and purchase of shares and debentures.
• Act as investment bank for Initial Public Offering (IPO) by a private company.
• Help in anti-money laundering through KYC process.
• Become an intermediary between its customers and other institutions, like payment of insurance premium, payment of various bills, direct benefit transfer (DBT) scheme of government, etc.

• Provide facilities such as Electronic Clearing Service, transfer of funds domestically and internationally, locker facilities, foreign exchange, etc.

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.