Banking

&
Insurance

Standard X

Study Material

Manuscript
 Table of Contents

UNIT 1 - LAWS RELATING TO NEGOTIABLE INSTRUMENTS (NIS) ....................................... 6

1.1. Introduction to Negotiable Instruments .............................................................................. 7
1.2. Types of Negotiable Instruments ........................................................................................ 9
1.3. Parties to the bill of exchange: .......................................................................................... 27
1.4. Crossing of Cheques ......................................................................................................... 28
1.5. Summary: ......................................................................................................................... 30
1.6. Practice Questions ............................................................................................................ 33
UNIT 2 - LENDING FUNCTIONS OF A BANK ............................................................................ 38
2.1. Types of Advances- Secured & Unsecured ........................................................................ 41
2.2. Loans: Short, Medium and Long Term .............................................................................. 50
2.3. Methods of Granting Advances......................................................................................... 54
2.4. Summary: ......................................................................................................................... 61
2.5. Practice Questions ............................................................................................................ 63
UNIT 3 - UTILITY SERVICES OF A BANK ................................................................................. 70
3.1. Remittance through Bank Drafts ....................................................................................... 71
3.2. E Banking:......................................................................................................................... 73
3.3. Internet Banking ............................................................................................................... 88
3.4. Safe Deposit Lockers: ........................................................................................................ 93
3.5. Summary: ......................................................................................................................... 96
3.6. Practice Questions ................................................................................................................
UNIT 4 .......................................................................................................................................... 103
LIFE INSURANCE ....................................................................................................................... 103
4.1. Life Insurance - Meaning ................................................................................................ 104
4.2. Features of Life Insurance............................................................................................... 104
1.3. Advantages of Life Insurance .......................................................................................... 105
4.4. Importance of Life Insurance Policies .............................................................................. 107
4.5. Types of Life Insurance Policies ....................................................................................... 107
4.6. Procedure of taking Life Insurance Policies ..................................................................... 113
4.7. Nomination and Assignment of Life Insurance Policies.................................................... 114
UNIT 5 .......................................................................................................................................... 122
GENERAL INSURANCE ............................................................................................................. 122
5.1. General Insurance - Meaning .......................................................................................... 124
5.2. Importance of General Insurance ................................................................................... 124
 5.3. Types of General Insurance Policies ................................................................................ 126
5.4. Fire Insurance ................................................................................................................. 129
5.5. Marine Insurance ........................................................................................................... 133
5.6. Motor Vehicle Insurance................................................................................................. 141
5.7. Health Insurance ............................................................................................................ 144
5.8. Theft & Burglary Insurance ............................................................................................. 153
5.9. Procedure for taking Fire Insurance Policy ...................................................................... 154
5.10. Procedure for taking Marine Insurance Policy ............................................................. 156

UNIT 6 .......................................................................................................................................... 122

COMMUNICATION AT WORK PLACE

1. Verbal and Non-Verbal Communication

a) Demonstrate effective use of verbal and non-verbal communication skills

b) Identify the practices in verbal and non-verbal communication

2. Forms of Communication

a) Identify the forms of communication

b) Find out the advantages and disadvantages of different forms of communication

3. Communication media and Equipment

a) Operate the communication media and equipment properly

b) Evaluate the communication media

4. Barriers in Communication

a) Identify the barriers in communication

b) Select the strategies for overcome barriers in communication.

Learning Objective – Unit 1
Location DURATION-20 HOURS
SESSION-1 INTRODUCTION TO NEGOTIABLE INSTRUMENTS
Learning Knowledge Performance Teaching and
Outcome Evaluation Evaluation Training
Method
Basic 1. Meaning of 1. Give a brief Interactive
Understanding Negotiable introduction of lecture- On
of Negotiable Instruments Negotiable concept of
Instruments 2. Definition of Instruments Negotiable
Negotiable 2. Enumerate the Instruments
Instruments(Sec 13) characteristics of Activity –
3. Features of Negotiable Collect various
Negotiable Instruments types of
Instruments 3. Name the various Negotiable
4. Types of Negotiable types of negotiable Instruments
Instruments instruments.
SESSION-2 TYPES OF NEGOTIABLE INSTRUMENTS
1. Cheque
Cheque-Its 1. Describe the 1. Evaluate the Interactive
concept, meaning of cheques characteristic of lecture-
features, 2. Essential features of cheques. Discussion on
MICR, forms cheques. 2. Detail description of the most
of cheques 3. Specimen of cheque how to fill a cheque important
4. Meaning and 3. Explain the role of Negotiable
concept of MICR MICR Instruments -
with examples 4. Explain the concept cheques, its
5. Meaning of cheques of cheques in types and
in electronic form electronic form and MICR
and truncated truncated cheques Activity
cheques 1. Draw
specimen
of a
cheque
2. Collect
cheques
of 5
different
banks
3. Fill the
cheques.
2. B/E (BILLS OF EXCHANGE)
Concept of 1. Definition of Bills 1. Explain the concept Interactive
Bills of of Exchange of Bills of lecture on the
Exchange and 2. Features of Bills of Exchange meaning and
its features Exchange 2. Describe its key concept of Bills
with specimen 3. Draw the specimen features. of Exchange
of Bills of 3. Usage of Bills of Activity –
Exchange Exchange Draw the
specimen of
Bills of
Exchange
3. Promissory Note
Concept of 1. Meaning of 1. Explain in detail the Interactive
Promissory Promissory Note meaning of lecture
Note its 2. Key element of Promissory Note Highlight the
features and Promissory Note 2. List out the major role of
specimen 3. Specimen of features of Promissory
Promissory Note Promissory Note Note as a
3. Suitability of Negotiable
Promissory Note Instrument and
its usage
Activity –
Draw specimen
of Promissory
Note
SESSION-3 PARTIES TO NEGOTIABLE INSTRUMENTS
Core concept Discussion on parties to 1. Describe the role of Interactive
of various Negotiable Instruments parties to Negotiable lecture
parties of • Drawer Instruments Classroom
Negotiable • Drawee 2. Evaluate the key lecture with
Instruments • Payee responsibilities of suitable
• Endorsee each party to examples
• Endorser Negotiable Activity - Role
Instruments play
SESSION 4 CROSSING OF CHEQUES
Basic 1. Meaning crossing of 1. Describe with Interactive lecture
concept of cheques Illustrations on importance of
Crossing of 2. Requisites of crossing various forms Crossing of cheque,
Cheques, of cheques of crossings the persons involved
Types of 3. Various forms of 2. Enlist the and its forms
Crossing of Crossing persons who Activity -Show
cheques  Special Crossing can cross a various types of
 General Crossing cheque crossing on a cheque
 Account Payee 3. Elucidate the (actual /
Crossing significance of hypothetical)
4. Describe who can cross Crossing of
cheques? Cheques
 UNIT 1

LAWS RELATING TO NEGOTIABLE INSTRUMENTS (NIS)

OBJECTIVES
After reading this unit you will be able to:
 Describe the features of Negotiable instruments
 Summarise the types of negotiable instruments and their features
 List the parties to the Bill of Exchange and their roles and responsibilities
 Illustrate the types of crossing of cheque and its importance

STRUCTURE

1.1.Introduction to Negotiable Instruments

1.2.Types of Negotiable Instruments
1.3.Parties to the Bill of Exchange
1.4.Crossing of Cheques
1.5.Summary
1.6.Practice Questions
1.1. Introduction to Negotiable Instruments

A. Meaning of Negotiable Instruments:

The word “Negotiable” means Transferable by Delivery” and “Instrument” means a written
document by which a ‘right’ is created by one person in favour of other person. Thus,
negotiable instrument means “a document transferable by delivery”.

The Negotiable Instruments Act has not defined the term negotiable instrument. It only
names three Negotiable Instruments in Sec. 13. These are:

 Cheques
 Promissory Notes (PN)
 Bills of Exchange (BE)
Payable to either order or bearer.

A negotiable instrument may be made payable to two or more payees jointly, or it may be
made payable in the alternative to any one of two, or one or- some of several payees. These
instruments are in a way substitutes for cash. In other words they are almost equivalent to
cash. They play crucial role in settlement of dues of one person to another.

The legislation that governs these instruments in India is known as “The Negotiable
Instruments Act.”, which was passed in 1881. The Act came into existence mainly to
facilitate trade and commerce activities by giving legal recognition to these instruments.

In the absence of these instruments, the trading and business community would have had to
handle huge amounts of currency notes, which would be highly risky and inconvenient
affairs.

An important feature of Negotiable Instruments is that they are independent or ‘Stand-alone’

instruments – which means while settling disputes, other supporting documents or evidence
are not required as these instruments are self-sufficient in this respect.
B. Features of a Negotiable Instrument:

a. Instrument in writing: An NI is an instrument in writing which is duly signed by the

‘maker’ of a PN and the drawer in the case of a BE or cheque to make it completely
valid and enforceable.
b. Unconditional order/promise: A BE and a Cheque are issued by the “Drawer’ and
contain an unconditional order, directing the Drawee to pay a certain sum of money.
Example: If somebody writes to another person: “Pay Mr. X Rs. 1,000 if you earn
profit in bourse. Such writing does not make it an BE because it does not contain an
unconditional order to pay

c. A cheque is always drawn on a specified banker, whereas a BE may be drawn on

anybody who has to pay. A cheque is always payable on demand.

d. The promise or acceptance to pay is for payment of money and money only.
Example: “On Demand, I promise to pay you 2 Kgs of rice” is not a PN.

e. Certainty of the amount: The amount of the instrument must be certain or

ascertainable correctly in monetary terms.
Example: “On Demand I Promise to pay you the sum of Rs. 10,000 with interest
thereon at 10% per annum from today till the date of payment” is a valid PN since the
interest amount can be calculated with the help of the data given in the promise.

f. Payable to order or bearer: An NI must be payable either to order or to bearer.

Example: If a cheque is drawn showing the Payee’s name as Mr. Mansukh, then it may
be paid to Mansukh or to his order (i.e. to any other person as per his order).

g. Payee must be a certain person: The person named as the payee may be an individual
or an association, or a cooperative or a company. There can even be joint payees.
Example: A cheque is drawn as: “Pay to A and B”. In this case, both A and B have to
give a joint discharge on the back of the cheque or to receive the amount from the
bank. Alternatively both of them have to open a ‘joint’ account in a bank and entrust
the bank with the responsibility to collect the amount of the cheque and credit the same
to their account

h. Delivery of the instrument: According to Section 45: The making, acceptance or

endorsement of a PN, BE or cheque is completed by delivery, actual or constructive.
As between parties standing in immediate relation, delivery to be effectual must be
made by the party making, accepting or indorsing the instrument, or by a person
authorized by him in that behalf.
 A PN, BE or cheque payable to bearer is negotiable by the delivery thereof. A
promissory note, bill of exchange or cheque payable to order is negotiable by the
holder by endorsement and delivery thereof. It means that in case of an order
instrument, endorsement is necessary.

Section 47: Negotiations by delivery: Subject to the provisions of section 58, a

promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery
thereof. No endorsement is necessary.

Stamping of promissory notes and bill of exchange is necessary where applicable as per
the Stamp Act.

i. Currency note: A currency note is a PN payable to bearer on demand. Section 21 of

Reserve Bank of India Act prohibits drawing of this type of promissory notes i.e.
payable to bearer on demand by anyone other than the Reserve Bank of India.

j. Transferability: Easily transferable from one person to another. A NI is a document is

transferable by the application of the law. The instrument is transferable till maturity
and in case of cheques till it becomes stale (on the expiry of 3 months from the date of
its issue).

k. It confers absolute and good title on the transferee. It protects the person who
receives it bona-fide and for value, i.e. he possesses good title thereto, even if the
transferor has no title or had defective title to the instrument.

l. The transferee of a negotiable instrument is known as holder in due course.’ His title or
right is not affected by any defect in the title of the transferor or of any of the previous
holders of the instrument. This is the main distinction between a negotiable instrument
and other instruments.

m. The holder of an NI acquires the right to sue upon the instruments in his own name.

1.2. Types of Negotiable Instruments

Negotiable Instruments (NIs) can be classified from different angles or view points, as under:

A. ‘Bearer’ Instruments and Order instruments:

An NI is said to be ‘payable to bearer’ if:

 It is expressed to be so payable, or
 The only or last endorsement on the instrument is an endorsement in blank.

In case of a bearer instrument, the bearer may claim the money without having his name
mentioned on the cheque. If a NI is lost or destroyed, then its ‘holder’ is the one who is
entitled to receive the amount of the NI, at the time of such loss or destruction.

A NI is said to be payable to order if

 It is expressed to be so payable; or
 It is expressed to be payable to a particular person, and does not contain any words
prohibiting transfer or indicating an intention that it shall not be transferable

B. Inland Instruments (Section 11 of the NI Act) and Foreign Instruments:

An NI drawn or made in India, and made payable, or drawn upon any person, resident in
India is called an ‘Inland instrument’. An inland PN is a PN which is made payable in India.

An instrument which is not an inland instrument is a foreign instrument. Therefore an

instrument is ‘foreign’ instrument if:
 It is drawn outside India and made payable outside or inside India; or
 It is drawn in India and made payable outside India and drawn on a person resident
outside India.

C. ‘Demand’ Instruments (Section 19 of NI Act) and Time (usance) instruments:

A PN or BE, in which no time for payment is specified, and a cheque, are payable on
demand. A PN and BE may be payable on demand or after a time period but a cheque is
always payable on demand. Usually such instruments contain the words “Pay At Sight…..”
or “Pay on Demand…..” The drawee has to pay the amount of the instrument as soon as the
demand is made on him.

A ‘Time’ instrument is one which is payable after sometime. Usual trade practice is after 30,
60, 90 or 120 days. There are variations in the manner in which the ‘time’ is stipulated e.g.:

 “Pay 30 days after sight of this instrument…..”

  “Pay 30 days after date of this instrument……”
 “Pay 30 days after the date of acceptance of BE.

D. Other Types of Instruments:

Ambiguous Instruments (Section 17 of NI Act);

If an instrument is drawn in such a way that the holder may treat it as a PN or a BE, then it is
said to be an ambiguous instrument. Once a holder treats an instrument either as a bill or as a
note, it cannot be treated differently afterwards.

Inchoate or Incomplete Instrument (Section 20 of NI Act):

An inchoate stamped instrument is a paper signed and stamped in accordance with the law
relating to negotiable instruments and either wholly blank or containing an incomplete
negotiable instrument. When one person gives to another such a document, the latter is
prima facie entitled to complete the document and make it into a proper negotiable
instrument up to the value mentioned in the instrument, or up to the value covered by the
stamp affixed on it. The person signing the instrument is liable on it to any holder in due
course.

Example: Anil signs his name on a blank stamped paper and gives it to Anush, asking him
to complete the form as a Promissory Note for Rs. 1,000. Anush takes advantage of the
situation and fills the amount as Rs. 10,000, which is the maximum allowable amount for the
stamp paid on the instrument. Anush then passes on the PN to one Ankit, who accepts the
PN in good faith and for valid consideration. Ankit can recover the whole amount of Rs.
10,000 on the instrument even though Anil intended the instrument only for Rs. 1,000.

Quasi Negotiable Instruments:

In India, Govt. Promissory notes, Hundis, Railway Receipts, Bill of Lading etc. have been
held negotiable by usage or custom. Since these instruments have the characteristics of
Negotiable Instruments, these are said to belong to the category of ‘Quasi Negotiable
Instruments’.

Cheques:
Section 6 of the Act defines cheque:
A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the electronic image of a truncated cheque
and a cheque in the electronic form.

A cheque is an instrument that contains an order to the bank to pay a certain sum of money
from a bank account. The person writing the cheque is called the drawer. He has a bank
account (often called a current or savings account) where his/her money is held. The drawer
writes the various details including the amount, date, and the name of a payee on the cheque,
and signs it, ordering his/her bank, known as the Drawee bank, to pay the stated amount of
money to the payee.

A cheque is a negotiable instrument instructing a banking institution to the bank to pay a

specific amount of a specific currency from a specified account held in the drawer's name
with that institution. Both the drawer and payee may be natural persons or legal entities.
Cheques are either order instruments or bearer instruments.
a. Essential Features of a cheque:
Since a cheque is a “Bill of Exchange” drawn on a specified banker and payable on
demand, it is easy to recall its features. They are:
 It is an instrument in writing, signed by the maker who is the account holder
 It contains an unconditional order to the drawee bank to pay
 The order is to pay money and money only
 The amount of the cheque has to be certain
 It is payable to ‘order’ of a payee or to the ‘bearer’ of the instrument
 The payee must be a certain person
 The cheque may be transferred by the holder to person ‘endorsement and delivery’ in
the case of an ‘order’ instrument and by mere delivery in the case of a ‘bearer’
instrument.
 It confers absolute and good title on the transferee.
 The holder of a cheque acquires the right to sue upon the instrument in his own name.
Parties to a Cheque:
 Drawer: He is the person who draws the cheque, i.e., the account holder in the bank.
 Drawee: It is the drawer’s banker on whom the cheque has been drawn.
 Payee: He is the person who is entitled to receive the payment of the cheque.

b. MICR Band of the Cheque:

Before the system of MICR was started in India in 1984, the cheques running in thousands
(and in lakhs in cities like Mumbai) had to be sorted out manually for presenting to the
respective drawee banks in the Clearing House. That was causing delay in clearing the
cheques and also there were mistakes in sorting. MICR cheque was the answer to these
problems. MICR stands for Magnetic Ink character Recognition.

In the cheque specimen shown above, there is a white colour band (MICR band) at the
bottom of the cheque with some characters printed in a diferent style. These characters are
printed before the issue of the cheque to the customer. These characters are printed in a
special ink which contains Iron Oxide which helps the ’Sorting Machines’ (which are
basically a type of computers) to ’read’ the characters and sort them as per the city and
bank for quick presentation of the cheques to the drawee banks without mistakes. But
before presentation of the cheques in the Clearing House, the amount of the cheques have
also to be ’encoded’ at the right hand bottom of the MICR white band through machines
called ’Encoders’. The Encoders and the Sorters are capable of arriving at the total
number of instruments encoded/sorted bankwise and so the earlier system of arriving at
the totals manually have also been dispensed with .

Understanding the MICR Code:

At the bottom of the MICR cheque there is a white band with numbers printed which
indicate as follows (example given):

First number is 578647 which is the serial number of the cheque issued to the drawer.

Next nine numbers are 560229027 is the MICR code which identifies the Bank

First 3-digits (560) are the MICR City code. It is the PIN code of the city. In this case, it is
Tiruvananthapuram in Kerala State. e.g. Kolkata banks will have 700, New Delhi 110,
Mumbai 400, Chennai 600, Bengaluru 560 and Hyderabad 500 etc.)

Next 3 digits (229) are the Bank code for ICICI Bank given by RBI. e.g. 001 – RBI, 002-
SBI, ICICI -229 & so on in any city in India

Next 3 digits (027) are the MICR Branch code of ICICI Bank in the city of Bangalore.
So the cheque which is shown above pertains to Branch No. 027 of ICICI Bank Ltd in the
city of Bangalore

001016 - The third set of six digit numbers is a recent addition.

Next 2 digits field are known as transaction code. 9,10, 11 indicates that it is local cheque,
11 is used for a current account cheque, 29,30, 31 is used for cheques payable at par, 13
is used for for Dividend Warant etc.

At the end, the amount of the cheque is encoded by the Payee Bank on receipt in “Paisa”
before sending the cheque for clearing to clearing house.

c. Types of cheques: Cheques are classified as follows from different purposes:

i. Bearer and Order Cheque: When the words "or bearer" appear on the face of the
cheque after the name of the payee, the cheque is called a bearer cheque. The bearer
cheque is payable to the person specified therein (i.e. the payee) or to anyone else who
presents it to the bank for payment. Such cheque is risky; because if it is lost, the finder
of the cheque can collect payment from the bank.

Order Cheque: When the word "bearer" appearing on the face of a cheque is cancelled
or the word "or order" is written on the face of the cheque, the cheque is called an order
cheque. Such a cheque is payable to the person specified therein as the payee, or to any
one else to whom it is endorsed (transferred).

ii. Crossed Cheque / Uncrossed Cheque:

Crossed Cheque: Crossing on a cheque means drawing two parallel lines on the face of
the cheque with or without additional words like "& CO." or "Account Payee" or "Not
Negotiable". A crossed cheque cannot be encased at the cash counter of the drawee
bank but it can only be credited to the payee's account.

Uncrossed / Open Cheque: When a cheque is not ‘crossed’, it is known as an "Open

Cheque" or an "Uncrossed Cheque". The payment of such a cheque can be obtained at
the counter of the bank. An open cheque may be a bearer cheque or an order one.

iii. Post Dated or Stale Cheque:

Post-Dated Cheque: If a cheque bears a date which is yet to come (future date) then it
is known as post-dated cheque. A post-dated cheque cannot be honoured earlier than the
date on the cheque. For example, a cheque is written on the 14th of the July 2015 month
but dated the 28th of the July 2015 will not be encashed till 28 July 2015.
 Stale Cheque: If a cheque is presented for payment after three months from the date
written on the cheque, it is called stale cheque. A stale cheque is not honoured by the
bank.

Anti-Dated Cheque: If a cheque bears a date earlier than the date on which it is
presented to the bank, it is called as "anti-dated cheque". Such a cheque is valid up to
three months from the date of the cheque.

d. Meaning of cheques in Electronic form and truncated cheques:

Till recently before the introduction of the ‘Truncation’ System (CTS), cheques were
printed on paper and issued and were in circulation till they were ultimately paid. After the
introduction of the CTS, the NI Act had to be amended to include the CTS cheques also in
the definition of the cheque and hence the phrase “……..and it includes the electronic
image of a truncated cheque and a cheque in the electronic form.” has been added to the
original definition of cheques.

Cheque Truncation System (CTS): is an online image based cheque clearing system
where images and MICR data is captured at the collecting bank branch and transmitted
electronically. A cheque in the electronic form means a cheque which contains the exact
mirror image of a paper cheque, and is generated, written and signed in a secure system
ensuring the maximum safety standards with the use of digital signature (with or without
biometric signature) and asymmetric crypto system.

A truncated cheque means a cheque which is ‘truncated’ during the course of the clearing
cycle, either by the clearing house or by the bank whether paying or receiving payment,
immediately on generation of an electronic image for transmission, substituting the further
physical movement of the cheque in writing.

In the erstwhile physical clearing of cheques, the cheque used to be sent for clearing to RBI
clearing house. With the implementation of the Cheque Truncation system (CTS), the
image of the cheque is sent to the RBI clearing house.
 i. Branch address with IFSC code printed on top of the cheque
ii. Date in dd/mm/yyyy format with boxes
iii. Printers name with CTS-2010 in left side of cheque
iv. A pantograph which shows VOID/COPY while taking photocopy of the cheque below
the account number
v. New rupee symbol instead of bilingual format
vi. "Please sign above" is mentioned on bottom right of the cheque

Watermark "CTS INDIA" to be visible cheque is held against any light.

Ultra Violet logo of Bank printed at upper left corner of cheque to be visible in UV lamps

Endorsement:

A negotiable instrument may be transferred by negotiation.

i. Negotiation can be effected by mere delivery if the instrument is a bearer one.

ii. By endorsement and delivery in case it is an order instrument.
 CHEQUE BOOK
On the opening of a saving and current account, a banker hands over to the customer
(account holder). The following there for operating the account:
a) Cheque Book
b) Pay-in-Slip Book
c) Pass Book
A cheque Book contains sequentially number cheques forms than the account holder can
use for withdrawing money from his account. The number of cheque forms may be 10, 25,
50 or 106 as per the account holder’s requirement, the name of the account holder is
printed as the right hand bottom side of the cheque form.
Apart from the cheque forms the Cheque also contains two other slips:
(a) Requisition Slip
Requisition Slip is used by the account holder when a new cheque book is to be
acquired from the bank, after all the cheque forms have been used. In contains a request
to the bank to issue to him a new cheque book containing the required number of
cheque forms. The account holder mentions the date, account number, his current
address, mobile number. E-mail address and desired number of cheque forms and
submits to the banker, Banks now a day’s send the cheque book to the account holder
by post only for safety reasons.
(b) Record Slip
Every cheque look contains either in the beginning or at the end, two or three slips,
which are meant for the purpose of keeping record of the cheques issued by the
Account holder. Specimen of such slip, which is cashed record slips is as follow:

Record Slip A/c No_______________

Cheque Number Date In favour of Cheque Amount Deposit Balance

Earlier, such record was kept separately for each cheque on the counter fail of each
cheque. Now Record slips are in use. The Account holder can thus keep track of the
balance in his account, if he incorporates in the slip, the amount of deposits made by
him.

(c) Multicity Cheques

These cheques are normal cheques, but contain the following sentences also:
“MULTI CITY CHEQUE. Payable as per as all Branches of the Bank.”
Such cheques can be encashed as any branch as any branch of the bank concern
without incurring any cost by way of commission.
But there is an upper lume on the amount which can be withdrawn through such
cheque. Such cheque need not be sent to the clearing House by any branch of the same
bank.
 An order instrument means instrument payable to a specified person or to the order of
that specified person. If an instrument payable to order is transferred without
endorsement, it is merely assigned and the holder thereof is not entitled to the rights of
a holder in due course.

Meaning of Endorsement:

An endorsement is the mode of negotiating a negotiable instrument. A negotiable

instrument payable otherwise than to a bearer can be negotiated only by endorsement and
delivery. According to sec. 15 of the NI Act “when the maker or holder of a negotiable
instrument signs the same, otherwise than as such marker for the purpose of negotiation on
the back or face thereof or on a slip of paper annexed thereto, he is said to endorse the
same and is called the endorser. The person to whom the instrument is endorsed is called
the endorsee.

“The word endorsement is said to have been derived from Latin ‘en’ means ‘upon’ and
‘dorsum’ meaning ‘the back’. Thus usually the endorsement is on the back of the
instrument though it may be even on the face of it. Where no space is left on the
instrument, the endorsement may be made on a slip of paper attached to it. This attached
slip of paper is called ‘Allonge’.

Essentials of a Valid Endorsement:

An endorsement, in order to operate as mode of negotiation must comply with the

following conditions, namely:

1. It must be written on the instrument itself and be signed by the endorser. The simple
signature of the endorser, without additional words, is sufficient. An endorsement
written on an allonge is deemed to be written on the instrument itself.
2. The endorsement must be of the entire instrument. A partial endorsement, that is to
say, an endorsement, which purports to transfer to the endorsee only a part of the
amount payable, or which purports to transfer the instrument to two or more
endorsees separately, does not annexed to negotiation of the instrument.
3. Where a negotiable instrument is payable to the order of two or more payees or
endorsees who are not partners, all must endorse unless then has authority to
endorse for the others.
 4. Wherein a negotiable instrument payable to order, the payee or endorsee is wrongly
designated or his name is misspelt, he should sign the instrument in the same
manner as given in the instrument. Though, he may add, if he thinks fit, his proper
signature also.

5. Where there are two or more endorsements on an instrument, each endorsement is

deemed to have been made in the order in which it appears on the instrument, until
contrary is provided.

Types of Endorsement:

According to the N.I. Act, 1881 endorsement may take any of the following forms:

1. Endorsement in blank or general endorsement.

2. Endorsement in full or special endorsement.
3. Restrictive endorsement.
4. Partial endorsement.
5. Conditional endorsement.

i. Endorsement in Blank or General Endorsement: In case of an endorsement in

blank, the payee or endorser does not specify the name of an endorsee and he
simply signs his name (S. 16 NIA).

ii. Endorsement in Full or Special Endorsement: When the payee or endorser

specifies the person to whom or to whose order the instrument is to be paid, the
endorsement is called special endorsement or endorsement in full. The specified
person i.e. the endorsee then becomes the payee of the instrument.

iii. Restrictive Endorsement: An endorsement is restrictive when it prohibits further

negotiation of a negotiable instrument. Sec. 50 of the NI Act 1881states. “The
endorsement may, by express words, restrict on exclude the right to negotiate
further or constitutes the endorsee an agent to endorse the instrument or to receive
its contents for the endorser or for some other specified person.”

For example, if B endorses an instrument payable to bearer as follows, the right of

C to further negotiate is excluded
 Pay the contents to C only
  Pay C for my use

iv. Partial Endorsement: If only a part of the amount of the instrument is endorsed,
it is a case of partial endorsement. An endorsement which purports to transfer to
the endorsee only a part of the amount payable, or which purports to transfer the
instrument to two or more endorsees severally, is not valid.

v. Conditional Endorsement: If the endorser of a negotiable instrument, by express

words in the endorsement, makes his liability or the right of the endorsee to
receive the amount due thereon, dependent on the happening of a specified event,
although such event may never happen, such endorsement is called a conditional
endorsement (Section 52 of NI Act). Such an endorser gets the following rights:

He may make his liability on the instrument conditional on the happening of a

particular event. He will not be liable to the subsequent holder if the specified
event does not take place.

For example, “pay C if he returns from London”. Thus C gets the right to receive
payment only on the happening of a particular event, i.e. if he returns from
London.
 Effect of Endorsement

An unconditional endorsement of a negotiable instrument followed by its delivery has the

effect of transferring the property therein to the endorsee. The endorsee acquires a right to
negotiate the instrument further to anyone he likes.

Section 50 of NI Act also permits that an instrument may also be endorsed so as to

constitute the endorsee an agent of the endorser.

 To endorse the instrument further or

 To receive its amount for the endorser or for some other specified person.

Bills of Exchange:

Section 5 of the Negotiable Instrument to Act define a BE as follows:

A "bill of exchange" is an instrument in writing, containing an unconditional order, signed

by the maker, directing a certain person to pay a certain sum of money only to, or to the
order of, a certain person or to the bearer of the instrument.

An order to pay is not "conditional", by reason of the time for payment of the amount or any
instalment thereof being expressed to be on, the lapse of a certain period after the occurrence
of a specified event which, according to the ordinary expectation of mankind, is certain to
happen, although the time of its happening may be uncertain.
A specimen of a bill of exchange is given below:

Features of Bill of Exchange (BE):

  It should be in writing
 It should contain a direction or order by the drawer to the ‘drawee’ to pay money;
 The order should be unconditional.
 The order should be signed by the person who gives the order. He is called the
‘Drawer’ of the BE. It should be signed in the proper capacity, i.e. as an individual, or
as a partner of a firm, or as the Manager, Secretary, Managing Director etc. of a
Company, Managing Trustee of Trust etc.
 The drawer, the drawee, and the payee should be clearly identifiable with certainty.
 The drawer and the payee may be one and the same person. So in a BE, there should
be at least 2 distinct persons, the drawer and the drawee
 A bill contains an order to pay a definite amount of money either on sight of the bill
or after a specified time. In the former case, the bill is payable on demand. In the
latter case, it is payable after a specified period of time, say 30, 60 or 90 days. Such
bills are called Usance Bills. They need acceptance by the drawee.
 The bill has to be ‘delivered’ to the payee to make it an effective BE.
 The BE confers absolute and good title on the transferee.
 The holder of a BE acquires the right to sue upon the instrument in his own name.

Promissory Note

Section 4 of the NI Act defines a PN as follows:

A "promissory note" is an instrument in writing (not being a bank- note or a currency- note)
containing an unconditional undertaking, signed by the maker, to pay a certain sum of
money only to, or to the order of, a certain person, or to the bearer of the instrument.

Illustrations: A signs an instrument in the following terms:

a. "I promise to pay B or order Rs. 500."

b. "I acknowledge the debt I owe to ‘B’ in Rs. 1, 000 to be paid on demand, for value
received"

The above two examples are PNs as they are unconditional promise to pay.

c. Mr. B, I O U Rs. 1, 000"

 d. I promise to pay B Rs. 500 and whatever other dues I owe him”

e. I promise to pay B Rs. 500, after adjusting his dues to me”

f. "I promise to pay B Rs. 500 10 days after my return from Delhi"

g. "I promise to pay B Rs. 500 on D’s death, provided D gives me Rs. 500 in his will”

h. "I promise to pay B Rs. 500 and to deliver to him my old scooter next year"

The instruments respectively marked (c); (d), (e), (f), (g) and (h) are not Promissory Notes
since they contain ‘conditional’ promise to pay.

Parties to a Promissory Note:

 Maker: He is the person who promises to pay the amount stated in the note. He is the
debtor.
 Payee: He is the person to whom the amount is payable i.e. the creditor.
 Holder: He is the payee or the person to whom the note might have been endorsed.
The endorser and endorsee on the same person as in the case of a bill of exchange.

Specimen of Promissory Note:

Essential Elements of Promissory Notes are:

a. The instrument must be in writing.

 b. The instrument must be signed by its maker. A signature in pencil or by a rubber stamp
of facsimile is good. An illiterate person may use a mark or cross instead of writing out
his name. The signature or mark may be placed anywhere on the instrument, not
necessarily at the bottom. It may be at the top or at the back of the instrument.

c. The instrument must contain a promise to pay. The promise to pay must be express. It
cannot be implied or inferred. A mere acknowledgement of indebtedness is not enough.

d. The promise to pay must be unconditional. If the promise to pay is coupled with a
condition it is not a promissory note.

e. The maker of the instrument must be certain and definite.

f. A Promissory note must be stamped according to the Indian Stamp Act.

g. The sum of money to be paid must be certain.

h. The amount must be payable in the legal tender currency of India. A promise to pay
certain quantity of goods or a certain amount of foreign money is not a promissory
note.

i. The money must be payable to a definite person or to his order. A note is valid even if
the payee is misnamed or is indicated by his official designation only. Evidence is
admissible to show who the payee really is.

j. The promissory note may be payable on demand or after a certain definite period of
time.

k. The Reserve Bank of India Act prohibits the creation of a promissory note payable on
demand to the bearer of the note, except by the Reserve Bank and the Government of
India.

The following are the differences between a PN and a BE,

PN BE
It contains a promise to pay It contains a order to pay
Primary liability to pay is of the maker Primary liability to pay is on the Drawee.
of the PN If the drawee fails, the liability will be that
of the drawer
 A PN has to be presented for payment A ‘demand’ BE has to be presented for
only (not for acceptance since the PN is payment.
itself issued by the person who has to A ‘Usance’ BE has to be presented first
pay) for acceptance and after acceptance it has
to be presented to the acceptor for
payment on or before the due date
Initially there are two parties –the maker Initially there are three parties – the maker
(promissor) and the payee (promisee). who is the drawer, the Drawee who is
Maker and payee have to be different ordered to pay and the payee who has to
persons. get the money. The drawer and the payee
may be the same person.
PN is drawn in a single copy. NI Act provides that a foreign Bill of
exchange to be drawn in sets. (One of
them being satisfied, the other is
automatically nullified).
PN cannot be drawn conditionally BE also cannot be drawn conditionally,
but the acceptor/endorser can make it
conditional by restricting.
If a PN is dishonoured, notice of If a BE is dishonoured, the holder has to
dishonour need not be given. give notice of dishonour to all his prior
parties against whom he desires to take
action.

1.3. Parties to a Bill of Exchange:

Drawer: The maker of a bill of exchange is called the ‘drawer’.

Drawee: The person directed to pay the money by the drawer is called the ‘Drawee’.

Payee: The person named in the instrument, to whom or to whose order the money is to be
paid by the drawee is called the ‘payee’. He is the real beneficiary under the instrument.
Where he signs his name and makes the instrument payable to some other person, that other
person also becomes the payee.

Endorser: When the holder or the payee endorses the instrument to anyone else, the
transferor becomes the ‘endorser’.
Endorsee: The person to whom the bill is endorsed is called an ‘endorsee’.

Acceptor: After the drawee of a bill a signs his assent upon the bill, or if there are more parts
than one, upon one of such parts and delivered the same, or given notice of such signing to the
holder or to some person on his behalf, he is called the ‘ acceptor’.

Holder: A person who is legally entitled to the possession of the negotiable instrument in his
own name and to receive the amount thereof, is called a ‘holder’. He is either the original
payee, or the endorsee. In case the bill is payable to the bearer, the person in possession of the
negotiable instrument is called the ‘holder’.

Drawee in case of need: When in the bill or in any endorsement, the name of any person is
given, in addition to that of the drawee, to be resorted to in case of need, such a person is
called ‘drawee in case of need’.

In such a case it is obligatory on the part of the holder to present the bill to such a drawee in
case the original drawee refuses to accept the bill. The bill is taken to be dishonoured by non-
acceptance or for non-payment, only when such a drawee refuses to accept or pay the bill.

Acceptor for honour: In case the original drawee refuses to accept the bill or to furnish better
security when demanded by the notary, any person who is not liable on the bill, may accept it
with the consent of the holder, for the honour of any party liable on the bill. Such an acceptor
is called ‘acceptor for honour’.

1.4. Crossing of Cheques

A. Meaning of Crossing the Cheque:

A crossed cheque is a cheque that has been marked to specify an instruction about the way it
is to be paid. A common instruction is to specify that it must be deposited directly into an
account with a bank and not encashed by a bank over the counter. But generally two parallel
lines and/or the words 'Account Payee' or similar may be placed either vertically across the
cheque or in the top left hand corner. By using crossed cheques, cheque writers can
effectively protect the cheques they write from being stolen and cashed

A cheque that is not crossed is an open Cheque. A cheque may be crossed by its drawer or
payee or the collecting banks.
B. Types of Crossing done on a cheque:

a. General Crossing: For general crossing two transverse lines on the face of cheque are
essential. The paying banker shall pay the amount of the cheque only to a banker.

 The cheque may bear across its face the words “& co.” or the words “not
negotiable”. In addition to the two transverse lines
 The cheque bears a short form "& Co. “between the two parallel lines
 The cheque bears the words "A/c. Payee” between the two parallel lines.
 The cheque bears the words "Not Negotiable" between the two parallel lines.

b. Special or Restrictive Crossing of Cheques: When a particular bank's name is written

in between the two parallel lines or without parallel lines the cheque is said to be
specially crossed. The cheque may be in favour of Account Payee or Company.

In addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also
be written. Payment of such cheque is not made unless the bank named in the crossing
is presenting the cheque. The effect of special crossing is that the bank makes payment
 only to the banker whose name is written in the crossing. Specially crossed cheques are
safer than generally crossed cheques.

Uses of Crossing of Cheque:

The usefulness of a crossing lies in the fact that a crossed cheque cannot be paid at the
counter of the paying bank but can be collected only through a bank. Crossing provides
protection and safeguard to the owner of the cheque, as by securing payment through a
banker it can be easily detected to whose use the money is received. Where the cheque is
crossed, the paying banker shall not pay it except to a banker. In case of ‘not negotiable’
crossing, the person holding such a cheque gets no better title than that of his transferer and
cannot pass on a better title to his own transferee. In case of 'account payee only’ crossing, a
direction is given to the collecting banker to collect cheque and to place the amount to the
credit of the payee only.

1.5. Summary:

 A Negotiable instrument means

 A promissory note,
 Bill of exchange or
 Cheque
Payable either to order or bearer.

 Negotiable instruments can be

 Payable to Order
 Payable to Bearer
 Payable to Joint payees

 Negotiable instruments are regulated by the Negotiable Instruments Act, 1881.

 Features of Negotiable instrument are:

 Instrument in writing
 Unconditional order / promise
 A cheque is drawn on a specific banker
 The promise or acceptance to pay is for payment of money and money only
 Certainty of the sum
 Payable to order or bearer:
 Payee must be a certain person
  Delivery of the instrument
 Currency note
 Transferability
 Confers absolute and good title on the transferee

 Quasi Negotiable Instruments: Instruments having the characteristics of NI, viz.

 Govt. Promissory Notes

 Hundis
 Railway Receipts
 Bill of Lading etc.

 Different types of Negotiable instruments which are available:

 Bearer instruments
 Order instruments
 Inland instruments
 Foreign instruments
 Demand instruments
 Time or Usance instruments
 Ambiguous instruments
 Inchoate or Incomplete Instrument

 Cheque is a bill of exchange drawn on a specified banker and not expressed to be

payable otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form.

 Different types of cheques are available such as Bearer, Order, Crossed, Uncrossed,
anti-dated, post dated, stale etc.

 Cheque Truncation System (CTS): is an online image based cheque clearing system
where images and MICR data is captured at the collecting bank branch and transmitted
electronically

 Bill of Exchange is an instrument in writing, containing an unconditional order signed

by the maker directing a certain person to pay a certain sum of money only to or to the
order of a certain person or to the bearer of the instrument.
  Promissory note is an instrument in writing containing an unconditional undertaking
signed by the maker to pay a certain sum of money only to or to the order of a certain
person or to the bearer of the instrument.
 Parties to bill of exchange are Drawer, Drawee, Acceptor, Payee, Endorser, and
Endorsee & Holder.
 Parties to a Promissory Note are Maker, Payee & Holder
 Parties to a Cheque are Drawer, Drawee & Payee
 There are type of crossing of cheques – General and Special.
 Crossing provides a protection and safeguard to the owner of the cheque as by
securing payment through a banker as it can be easily detected to whose use the
money is received.
 Crossing of cheque can be general crossing and special crossing
 A cheque can be crossed by the holder, drawer and the Banker

Keywords:
NI – Negotiable Instruments
PN – Promissory Notes
BE – Bill of Exchange
1.6. Self Test Questions

I. Choose the correct option:

1. ‘Mr. Ram, I owe you a sum of Rs 1000/’- is

a) Promissory Note
b) Acknowledgement of debt
c) Conditional Promise
d) None of these

2. “We have received a sum of Rs 15000/- from Sri Vikash Prasad Verma. The above
amount will be repaid on demand. We have received Rs 15000/- in cash today is
a) Promissory Note
b) Acknowledgement of debt
c) Neither a nor b
d) Both a & b

3. A cheque becomes stale after expiry of how many months from the date of the
cheque?
a) 3 months
b) 6 months
c) 9 months
d) 12 months

4. A negotiable instrument can be negotiated

a) By mere delivery if payable to bearer
b) By endorsement and delivery if payable to order
c) Both a and b are true
d) Neither A Nor B is true

5. A Quasi Negotiable Instrument is

a) an instrument printed in the form of an NI
b) has some characteristics of an NI
c) none of them
d) may be any of them
 6. A truncated cheque is
a) a cheque cut into 2 pieces
b) a cheque in a trunk
c) scan of the physical cheque
d) none of them

7. Bill of Exchange is defined in Sec ______ of NI Act

a) Sec 4
b) Sec 5
c) Sec 6
d) Sec 8

8. A promissory note is defined in Sec ______ of NI Act

a) Sec 4
b) Sec 5
c) Sec 6
d) Sec 8

9. Crossing of the cheque can be cancelled by

a) Drawer only along with his initial
b) Drawer only along with his full signature
c) Payee of the cheque
d) Holder in due course

10. The person who is directed to pay in a Bill of exchange or Cheque is known as __
a) Drawer
b) Drawee
c) Holder
d) Payee

Answers: 1 – b, 2 – b, 3- a, 4 – a, 5- b, 6 – c, 7 – 5, 8 – c, 9-b, 10 – 2

II. Fill in the blanks:

 1. General crossing of a cheque requires parallel transverse lines simply, either with or
without the words ______
2. In a BE, the number of parties are ____
3. In India, the reasonable time for presentation to the bank in the case of cheques and
drafts is …..months from date of issue
4. Inchoate negotiable instruments means ____
5. Maker of a Bill of exchange or cheque is known as ______.
6. Negotiable Instrument Act came into existence in _________.
7. Promissory note is defined in Sec ______ of NI Act
8. Full form of CTS is ____ ____ ____
9. Negotiable instruments can be payable to _____, ____, ____.
10. Cheque which is not crossed is a ____ cheque.

Answers: 1- Account Payee, 2 – 2, 3 – 3, 4- Incomplete instrument, 5 – Drawer, 6 – 1881, 7

– 4, 8 – Cheque Truncation System, 9 – Order, Bearer, Joint payees, 10 - open

III. Answer in detail:

1. What is a negotiable instrument?
2. Defines what is cheque?
3. What is Special crossing?
4. What is Bill of Exchange?
5. What is Promissory note?
6. Compare the characteristics of Bills of Exchange and Promissory note?
7. What are the advantages of crossing of cheque?
8. Explain the various special crossing of the cheque?

IV. Activities:

1. Prepare a chart showing the different negotiable instrument & their characteristics?
2. Explain the class, the different ways a cheque can be crossed and it implications?
3. Do roles play on the parties involved in Bills of Exchange?
Learning Objective – Unit 2
Location DURATION- 20 HOURS
SESSION-1 TYPES OF ADVANCES-SECURED AND UNSECURED
Learning Knowledge Performance Teaching
Outcome Evaluation Evaluation and
Training
Method
Introduction to 1. Meaning of 1. Discuss the Interactive
Lending of funds, Lending of funds Secured and lecture –
Principle of sound 2. Clarity on Unsecured Explanation on
Lending ,Types of Principles of advances of the principles
Advances Lending bank of lending with
 Secured  Liquidity 2. Identify the importance of
 Unsecured  Safety principles of secured and
 Profitability lending Unsecured
 Purpose 3. Elucidate the loans
 Diversification of importance of Activity – List
Risk lending out the various
3. Classification of 4. Distinguish assets which
Advances between can be used as
 Secured –meaning secured and security
with Example unsecured against loan.
loans
 Unsecured-
meaning with
example
SESSION -2 LOANS(SHORT TERM AND LONG TERM)
Evaluating the key 1. Classification of 1. Discuss in Interactive
role of Loan system of various methods of detail the Lecture-
banks. granting advances concept of Discussion on
2. Concept of Loan Loan system Loan System
system with its 2. Explain the facility
advantages and various types provided by
disadvantages of loans with banks
3. Specification of example Activity -
types of loan 3. Enumerate the Visit a bank
system draw backs and and meet
 Short Term advantages of manager
 Long term loan system. asking about
4. Distinguish the types of
4. Describe short term between long loans granted
and long term loans term and short by them to
with suitable term loans. their regular
examples. customers and
rate of interest
charged on
various types
of loans.
SESSION-3 METHODS OF GRANTING ADVANCES
A. CASH CREDIT
Understanding 1. Identify the various 1. Explain the key Interactive
the concept of Advantage and features of Cash lecture
Cash Credit Disadvantage of Credit Identification
Cash Credit to a 2. Describe the of Cash Credit
 borrower advantages and as one of the
2. Suitability of cash disadvantages method of
credit in present granting loan
scenario Activity –Visit
3 banks and list
out how these
banks fix cash
credit limits.
B. OVERDRAFT
Overview of 1. Core Concept of 1. Describe in detail Interactive
Overdraft as a Overdraft the role of lecture – On
method of 2. Features of Overdraft as the concepts of
granting Overdraft advancing loan. Overdraft
advances. 3. Suitable examples 2. Enumerate the Activity – Visit
to explain this features of a bank and
system of Advances Overdraft prepare a report
3. In which cases on how to take
Overdraft facility Overdraft
not granted facility and
how do banks
and fix
overdraft limits
C. BILL DISCOUNTED AND PURCHASED
Understanding 1. Fundamentals of 1. Detail Overview on Interactive
the concept Bill Discounted and the concept of Bill lecture-On the
Bill Discounted Purchased Discounted and concept of Bill
and Purchased 2. Importance of Bill Purchased Discounted and
Discounted and 2. Explain its Purchased
Purchased advantages to bank Activity Group
3. Comparative view 3. How is Bill discussion on
of all types of Discounted and the merits and
advances. Purchased different demerits of
from other credit various credit
facilities given by facilities of
bank (in form of bank.
chart)
 UNIT 2

LENDING FUNCTIONS OF THE BANK

OBJECTIVES
After reading this unit you will be able to:
 Describe the Principles of Lending of funds by Banks
 Understand the difference between Secured and Unsecured loan
 Explain what are cash credit and overdraft and their differences?
 Understand what is Bills Discounting and Purchase and their uses for short
term funding

STRUCTURE

2.1.Types of Advances- Secured & Unsecured

2.2.Loans: Short, Medium and Long Term
2.3.Methods of Granting Advances
2.3.1. Cash Credit
2.3.2. Overdraft
2.3.3. Bills Discounting and Purchase
2.4.Summary
2.5.Practice Questions
A Bank is a financial institution / financial intermediary that accepts deposits and channels
those deposits into lending activities. It is done either directly by lending to the needy
borrowers or indirectly by investing is the capital markets instruments. Thus a bank
intermediates between customers who have surpluses of funds and customers who need funds.

Nowadays, banks offer many more services apart from their basic business explained above.
For a bank, the Deposits are Liabilities, and the Loans & Advances are Assets. Banks provide
both fund based and non fund based loans facilities.

‘Fund based facilities are those facilities where a bank releases money / funds to the
borrowers. ‘Non fund based’ facilities are those facilities where Bank does not release money
but the gives a guarantee or makes a promise or undertaking (Letter of Credit) on behalf of the
customer (Applicant) in favour of third parties (Beneficiaries).

A. Principles of Sound Lending: The important principles that banks must follow while
lending are as follows:

a. Safety: "Safety first" is the cardinal principle of sound lending. When a bank lends, it
must ensure that the advance is safe; i.e. the money will definitely be returned back.
For example, if a borrower invests in an unproductive or speculative venture, or if the
borrower himself is dishonest, the advance would be in jeopardy. Credit worthiness of
the borrower can be checked through various mechanisms such as credit ratings, CIBIL
records,

b. Liquidity: It is also necessary that the money lent by banks must come back on
demand or according to pre-agreed terms of repayment. The borrower must be in a
position to repay within a reasonable time after a demand for repayment is made. This
is more likely if the money is employed by the borrower for short-term requirements
and not locked up in assets or schemes which take a long time to repay. The source of
repayment must also be definite. Even if the bank lends for longer periods, it must
verify the end use of the funds lend, and the feasibility and viability of the borrower’s
project to ensure his ability to repay the funds within the stipulated time in the
stipulated manner.

c. Purpose: Banks must closely scrutinize the purpose for which the money is required,
and ensure that the money borrowed for a particular purpose is applied by the borrower
accordingly. The purpose of the borrower should be productive so that the money not
 only remains safe but is repaid also. Banks usually discourage advances for
hoarding stocks or for speculative or anti-social activities.

d. Profitability: Equally important is the principle of ‘profitability’. Banks have to pay

interest on the deposits received by them. They have to incur expenses on maintaining
their establishments. They have to make provision for depreciation and also for
possible bad or doubtful debts. Therefore a reasonable profit must be made by the bank
to remain a going concern. Otherwise, it will not be possible to transfer any funds to
the reserve or to pay dividend to the shareholders. It is after considering all these
factors a bank decides its lending interest rate.

e. Security: It has been the practice of banks not to lend as far as possible except against
security. Security is considered as a cushion to fall back upon in case of an emergency.
Even when the bank lends for purposes of new projects or expansionary endeavors of
corporates, they secure the funds by way of a charge on the assets to be created the
borrower company.

f. Diversification: Another important principle of good lending is the diversification

of advances. It is important to spread the risks involved in lending over a large number
of borrowers, a large number of industries and areas, and secured against different
types of securities.

g. Suitability: Even when an advance satisfies all the previous principles, it may still not
be a suitable one. The advance may run counter to national interest or against existing
government regulations, etc. It may also be against the banks’ policy / motto. For
example, NABARD lends more towards rural projects. It may not be suitable to the
banks’ area of operation to lend to say, a power project. Such things need to be
considered along with the other principles of lending.
There are 5 basic principles for lending known as the 5 C’s. They are:

 Character: The borrower’s willingness to repay, his honesty and integrity;

 Capacity: Ability to successfully run the business and repay the borrowed amount
out of the profits of his business;
 Capital: How much own money he has put in the business and how much he has
saved from his earnings so far. It is called the net worth;
  Collateral: The security offered to the bank as cover for the advance, so that if the
borrower does not pay the dues, the bank can recover it by selling the security; the
security should have stable value and should be easily marketable;
 Conditions: The changes that are constantly occurring in the economy which may
affect the borrower’s business.

The other points to be considered by the banker are:

 Whether the loan to the borrower will be profitable to the bank?

 Whether the loan is as per the bank’s policies and is useful to the borrower?
 Whether the venture of the borrower is economically, technologically, and
financially viable?
 Whether the borrower has adequate managerial competence to run the business?

2.1. Types of Advances- Secured & Unsecured

In case of lending, money is provided on the condition that the amount borrowed will be
returned, along with interest at a future date.

Secured and Unsecured loans:

 a. Secured Bank loans: It is in the interest of a bank to recover all the loans with the
interest thereon at the due dates. To ensure this, the banks try to obtain security (whose
value is greater than the loan amount) from the potential borrowers as backing for the
prompt recovery of the loans.

Such security may be in the form of a house / residential flat / any landed property like
factory land, or Plant and Machinery, Life Insurance policies with surrender values,
Gold ornaments, Fixed Deposit receipts investors’ receivable vehicles like car / two
wheelers/ Buses / Truck etc.

In the event the borrower fails to repay the loan with interest, the bank will be able to
liquidate the security (after giving sufficient notice to the borrower) and appropriate the
proceeds towards the repayment in dues of the borrower. If the sale proceeds of the
securities exceed the dues of the borrower, the excess amount is refunded the borrower.

b. Unsecured Bank loans: Unsecured bank loans, as the name itself suggests, are loans
granted by a bank without the backing of any physical securities either primary or
collateral. These loans are given to those borrowers who do not have any securities
acceptable to the bank and who are considered creditworthy for the amount of loan.

An unsecured loan is more risky for a bank – if the borrower fails to pay the dues, the bank
has no security to fall back upon for recovering its dues. So a bank grants unsecured loans
only to persons of very good credit rating, with good track record, and a steady income
sufficient enough to repay the loan. The potential borrower’s existing loans also is an
important point to consider.

An overdraft limit may be given either as a secured or unsecured advance depending upon the
borrower’s credit worthiness, purpose and size. Advances limits against bills receivable are
considered secured because documents of title of goods are generally with such bills.
RBI defines unsecured exposure as an exposure (both funded and non-funded) where the
realizable value of the security, as assessed by the Bank, is not more than of the outstanding
exposure (All types of exposures including underwriting commitments are included) of the
value of security is less than the exposure such loan are called partly secured loans.

Security means only tangible security such as:

 Land and buildings

 Plant and machinery
 Raw materials
 Work-in-process
 Finished Goods,
 Fixed Deposits,
 Life Insurance Policies etc.

These are “properly charged” to the Bank and will not include intangible securities like
guarantees, comfort letter, etc. Every bank has to take care to see that its exposure to
unsecured loans and advances does not exceed the limit fixed by the RBI / its own Board of
Directors.
Methods of Creating charge on securities
A change over the assets of the borrower any be created by any of the methods
(a) Lied, (b) pledge (c) hypothecation (d) mortage.

B. Types of Secured Loans:

a. Loan against Gold:

The most popular type of secured loan in India is ‘Gold Loan’. Apart from banks, a
number of NBFCs also compete with the banks. The Banks / NBFCs employ goldsmiths as
retainers to verify the gold’s purity and value of the gold brought by their clients.

RBI had imposed a loan-to-value cap of 60 per cent for the gold loan companies, though it
was not made mandatory for banks. Typically, most public sector banks maintain a loan to
value ratio of 70 per cent, while it is higher for some private-sector lenders. Loan to Value
means the amount of loan that can be granted against the value of the asset (in this case
gold).
If the borrower fails to repay the loan in time, the Bank / NBFC can always sell the gold /
jewellery in auction and recover the loan out of the sale proceeds. Generally the interest
rate ranges between 12% – 15%.

b. Loan against Insurance Policies:

LIC’s (Life Insurance Corporation of India) Insurance policies are well known as very
useful savings instruments for protection of one’s family’s financial welfare. In times of
need, the policy holders can avail loans against their policies that have acquired ‘Surrender
Values’ (SV). The policies acquire SVs after premium are paid up at least for 3 years. LIC
sanctions loans up to a certain percent (generally up to 90%) of the SVs. Banks also have
standard procedures and guidelines for sanctioning loans against insurance policies. The
lender gets the LIC policy ‘assigned’ to itself by the policy holder as security, so that in
case the loan is not repaid, the lender can always ‘surrender’ the policy and close the loan
account from the proceeds from the surrendered policy..

c. Loan against Bank Fixed Deposits:

Depositors deposit their savings in banks in different types of Deposits accounts depending
upon their cash flow needs in future. However, due to some unexpected expenses which
the depositors have to meet, they may think of encashing their term deposits before
maturity.

A term deposit is a contract between the depositor and the bank for keeping the deposit in
the bank for a predetermined term earning them interest at predetermined rates. Premature
encashment of a term deposit results in breaking the contract which results in reduction of
interest rate on the deposit. Depending upon the timing of such need for cash, it may
sometimes be advantageous for the depositor to avail loan against the deposit, rather than
encashing it prematurely. (The interest to be paid on the loan may be less than the loss of
interest due to premature encashment alternative).

Normally banks grant loans on the term deposits up to 75 to 95 % of the amount of the
deposits, charging interest at 1 to 2% more than what they pay on such deposits. As
contracts with minors are void, loans cannot be granted to minors. However, if a depositor
is a minor, loans on such deposits can be granted to the natural guardian / guardian
provided the natural guardian / guardian gives a declaration that the loan amount is being
utilized for the benefit of the minor depositor – e.g. to meet his/her educational or medical
needs etc.

d. Housing Loans
There is an acute shortage of housing in the country and every citizen dreams of owning a
house (or a flat as the case may be) in his life time. The RBI also encourages banks to lend
to the housing sector because of the social benefit angle, by including housing loans as one
of the ‘Priority Sector’ advances. (As per RBI guidelines, every bank has to lend 40% of its
total advances to the ‘Priority Sectors’.)

Banks give housing loans for purchase of plot and build a house thereon, or to purchase an
existing house / flat, or to purchase a flat that is being built now.

Any salaried employee or a self-employed person or a professional like a Doctor, Engineer,

Architect, Chartered Accountant etc. with a regular income is eligible to avail a housing
loan from a bank.

A person wishing to avail a housing loan should contribute 20% or more of the
consideration price of the house / flat / budgeted cost of construction of the house or flat
from his own savings, as banks normally lend only about 80% of the consideration price
etc.

Tenor of the loans i.e. the number of years required to repay the loan can be fixed any
where up to 25 years depending upon the surplus from disposable income available to the
borrow for repayment of the loan. However it should be borne in mind that the longer the
period, higher will be the total amount of interest that the borrower has to pay.

Interest chargeable on the loan may at:

 ‘Fixed’ rate basis (the interest rate will remain the same during the entire duration of
the loan) or
 ‘Floating’ rate basis (interest rate will be periodically reset as a predetermined margin
over a pre-agreed index like the bank’s Base Rate (BR) or the RBI’s Repo rate or
MIBOR (Mumbai Inter-Bank Offered Rate) or 1 year Treasury bill’s yield rate etc.

Currently the rate of interest ranges from 8.5% to 13%.In addition to the interest charged
on the housing loan, the borrower may have to pay a ‘processing fees’ of about 0.5% to 1%
of the loan amount. Nowadays, most of the banks have waived processing fees on account
of the acute competition among them to grant housing loan to credit worthy borrowers.

e. Loans against other securities:

Shares and Units in Mutual Funds: Banks offer loans against shares and units of Mutual
Funds. However as the values of these securities are volatile in nature, banks stipulate
around 50 % margins to be maintained, the banks have a list of ‘approved’ shares and
Mutual Funds units which are eligible for the loan facility. The borrower has to pledge the
shares to the bank while taking the loan.

f. Vehicle Loans:

Vehicle loans are very popular products among the banks as the car makers compete with
one another to woo the prospective buyers with a number of attractive schemes. Banks
finance the purchase of a new or a used four wheeler - car, van, bus, truck – or a three
wheeler or a two wheeler. Depending upon the credit-worthiness of the borrower the bank
insists on a third party guarantee. Interest is charged on actual outstanding balances at
monthly intervals, at rate ranging from 9.5% to 14%. Processing Fees is also payable by
the borrower at the time of the sanction of the loan. Prepayment penalty will be levied by
the banks (rate varies from bank to bank). The total period permitted to the borrower to
repay the entire loan, i.e. tenor of the loan ranges from 36 months to 84 months depending
upon the cost of the vehicle. Quantum of loans is usually not more than 90% of the ‘on the
road’ value of new vehicles and 50% of the value of the used vehicles as assessed by the
bank’s empanelled automobile valuers.

g. Loans for Exports and Imports:

Banks grants credit to exports at both (i) pre- shipment and (ii) post-shipment stages.

Export Finance: Due to the importance attached to this sector by the Government of
India, RBI has given detailed guidelines to all the banks in India to give special attention to
exporters’ needs for finance. An exporter can avail Pre-shipment and Post-shipment
finance from banks in Rupees or denominated in foreign currencies, as per choice
exercised by the exporter.
  Pre-shipment finance is given to an exporter who gets an export order, to procure the
raw material, manufacture or procure the finished product suitable for exports, and
ship the goods.
 Post-shipment finance is given to the exporter after he has shipped the goods, till the
export proceeds are realized. Though availment of Pre-shipment finance is not
necessary to avail Post-shipment finance, it is convenient for an exporter to avail Pre-
shipment finance on receipt of an export order, ship the goods and then switch over to
Post-shipment finance till realization. The proceeds of the post-shipment finance
enable the experts to clear the dues under pre-shipment finance. Post-shipment is
granted generally by way of discounting/purchase of export bill of exchange drawn
by exports on their customers.
Import Finance: Importers also may require finance for importing raw materials which
are used in their exports. Letters of Credits (LCs) are opened by bnaks on behalf of the
importers in favour of the foreign suppliers. On receipt of the import documents, the
import bills are paid by the bank. On receipt of the import documents, the banks pay the
bill amounts by arranging term loans in the name of the importers. The machineries are
used by the importers and from the income generated, pay back the term loans with
interest.

C. Types of Unsecured Loans:

a. Personal Loans:

These are generally unsecured loans and are given only to the credit worthy customers well
known to the bank, having adequate cash flows to repay such loans. There are a number of
miscellaneous expenditures that a house holder has to meet – viz.

 Children’s educational fees,

 Occasional medical expenses,
 Some family function,
 Going on holiday,
 Minor repairs or home renovations
 Purchase of consumer durables like fridges, air conditioners, washing machines etc.

Personal loan come very handy for the borrower to meet such expenditures. Since these
loans are unsecured, banks insist on a co-borrower or a guarantor to join the borrower.
b. Credit Cards Loan:

A credit card is a plastic card containing the name of the card holder and the details of the
‘credit limit’ sanctioned to him. The card holder can use the card for

 Purchases of goods / articles / services on credit in person or

 Through internet or draw cash (as loan) through Automated Teller Machines (ATMs)
– up to the credit limit sanctioned to him.
The card issuing bank sends the bills to the cardholder at the end of the billing period (e.g.
11th of a month to the 10th of the next month) allowing him a grace period of 15 days to
pay the bill amount to the bank (in this example, by 25th of the month). If the card holder
fails to pay the dues by the due date, the bank will charge interest on the dues. Till he
clears the entire dues, the card holder will not be entitled to any grace period in respect of
the any further dues. The ‘credit limit’ given to the card holder is a revolving one.

The full terms and conditions (T & C) of the use of the card is given to the cardholder at
the time of the issue of the card. The rate of interest charged by different card issuing
banks may be different (may range anywhere from 18% to 48%). Similarly, the incentives
for the card holders for using the cards more often may also be different from bank to
bank. Since the issue of a card is sanction of a loan limit, the bank will take the usual
precautions before issuing the card (like assessing the creditworthiness of the card holder).
The card holder should only use the card as a mechanism to match his payment due dates
to his cash flows.

Cards issued by the bank are of different grades. Starting from the simplest card with low
limits for spending, Silver, Gold Platinum and Titanium cards are issued by banks
depending upon the gradation of the customers’ creditworthiness and spending habits.

Nowadays all cards are issued for use in foreign countries also and these cards are called
‘International’ cards. The turnover in the Cards held by Individuals is generally small.
Theoretically a credit card can be used for purchases up to the limits. Since the purchases
of Corporate will be for huge amounts, the Card Issuing Banks rope in Corporate as
customers with an eye on the turnover, on which the quantum of fees depend. With a
single account for debiting, many ‘Corporate Cards’ can be issued to a single company for
the use of their Executives for their travel etc. and ‘Corporate Commercial Cards’ are
issued for the purchases made by the Corporate for their day to day operations. Based on
the creditworthiness of the Corporate, the credit limits are fixed.
Two well-known Card Issuing Associations are VISA and MASTERCARD, as the cards
carrying their logo have universal acceptance. Card issuing banks become members of
these Associations. So the names of the Card Issuing banks appear on the cards along with
the logos of VISA / MASTERCARD. These cards can be used in any establishments
anywhere in the world displaying the logo of these two Associations.
2.2. Loans: Short, Medium and Long Term

Banks grants advances in the following forms:

Advances

Bills Purchased
Loans Cash Credit Overdraft &
Discounted

Medium Long
Short Term
Term Term

Bank loans are the easiest source of availing finance. A bank loan is an extension of credit by
a bank to a customer or business house; it has to be paid along with interest.

Features of Bank Loans: Bank loans have the following characteristics:

 A bank loan may be either secured or unsecured depending upon the circumstances.
 The interest charged by the bank on such a loan may be either at the fixed rate or at
variable rate.
 If mortgage loan is to be obtained, the borrower has to pay a number of fees such as
title searching fees, application fees, inspection fees, etc.

Advantages of Bank Loans: Bank loans offer the following advantages:

 The loan can be easily procured.

 The loan can be used for short-term as well as medium-term financing.
 Interest paid on a bank loan is tax deductible expenditure of a business entity.

Disadvantages of Bank Loans: The disadvantages of bank loans are:

 Some bank loans carry prepayment penalty.

  Borrowing too much from bank can lead to increase in interest burden and hence
decreased cash flow.
 In most cases, the bank does not disburse the whole amount of loan applied for; it
often grants loans cash lower than the loan asked for.

Classification of the Loans based on repayment period is as follows:

 Loans for period up to 1 years are called Short Term loans

 If the loan period is more than 1 years but less than 5 years then they are called
Medium Term loans
 In a loan period is more than 5 years then they are called Long Term loans.

Corporates require short term loans for Working Capital needs and Long Term Loans for
Long Term investments in Plant and Machinery, Land and Buildings, Projects etc. Small and
Medium Enterprises (SMEs) are also included in the Corporate Sector

Short Term Loans for Corporates:

 The short term facilities are repayable within a year

 Working capital loans are dishonoured as Pre-shipment and Post-shipment loans, Cash
Credit (Overdraft) accounts, bill discounting limits
 Non-funded facilities like Letters of Credits and Bank Guarantees etc.

Long Term Loans for Corporates:

 Repayable over a period of 5 to 7 years

 Required for meeting the capital expenditures for investing in Land and buildings,
plant and machinery, and in new projects
 Repayment structures depend on the projected future cash flows of the corporate
borrowers
 Foreign Currency Loans are also granted for the above purpose.

Banks also, as permitted by the RBI, extend foreign currency loans (External Commercial
Borrowings-ECBs) to their corporate clients. The ECBs can be utilized by the Corporates for
Working Capital needs or importing Plant and machinery etc.

A. Short term loans:

Short term loans are designed for shorter repaying duration. Short term loans are to be repaid
quickly and may be provided for any purpose including educational expenses, home
improvements, auto repairs, clearing smaller debts etc.

a. Advantages of short term loans:

 Short term loans do not usually require collateral

 Short term loans are granted in several days or even written hours
 Short term loans require little paperwork
 Short term loans provide money when one feels a sudden unexpected need
 With short term the borrower does not burden himself with long term obligations

b. Disadvantages of short term loans:

 Short term loans are usually more expensive. As short term loans are not secured by
collateral the lender changes higher interest rates to cover the risk they bear.
 The lender of short term loans is likely to investigate the credit history of the
borrower and it will be offered only when it is found satisfactory.
 Short term loans are granted for a smaller amount

B. Term Loan

a. Features of Term Loans:

Term loan is a part of debt financing obtained from banks and financial institutions. The
basic features of a term loan are discussed below:

i. Security: Term loans are secured loans. Assets which are financed through term loans
serve as primary security and the other assets of the company serve as collateral
security.

ii. Obligation: Interest payment and repayment of principal on term loans is obligatory
on the part of the borrower. Whether the firm is earning a profit or not, term loans are
generally repayable over a period of 5 to 10 years in installments.

iii. Interest: Term loans carry a fixed rate of interest which is negotiated between the
borrower and lender at the time of dispersing the loan.
iv. Restrictive Covenants: Besides asset security, the lender of the term loans imposes
other restric­tive covenants also e.g. Lenders ask the borrowers to maintain a minimum
asset base, not to raise additional loans or not to repay existing loans, etc.

v. Convertibility: Term loans may be converted into equity at the option and according
to the terms and conditions laid down by the financial institutions.

b. Advantages of Term Loans: Term loans are one of the important sources of project
financing. The advantages of term loans are as follows:

i. From Point of View of the Borrower:

Cheap: It is a cheaper source of medium-term financing.

Tax Benefit: Interest payable on term loan is tax deductible expenditure and thus
taxation benefit is available on interest.

Flexible: Term loans are negotiable loans between the borrowers and lenders. So terms
and condi­tions of such type of loans are not rigid and this provides some sort of
flexibility.

Control: Since term loans represent debt financing, the interest of the equity
shareholders are not diluted.

ii. From Point of View of the Lender:

Secured: Term loans are provided by banks and other financial institutions against
security Thus term loans are secured loans.

Regular Income: It is obligatory on the part of the borrower to pay the interest and
repayment of principal irrespective of its financial position—hence the lender has a
regular and steady income.

Conversion: Financial institutions may insist on convertion of the term loans into
equity. Therefore, they can get the right to control the affairs of the company.
 c. Disadvantages of Term Loans: Term loans have several disadvantages which are
discussed below:

i. From Point of View of the Borrower:

Obligation: Yearly interest payment and repayment of principal is obligatory on the

part of bor­rower. Failure to meet these payments raises a question on the liquidity
position of the borrower and its existence will be at stake.

Risk: Like any other form of debt financing term loans also increase the financial risk
of the com­pany. Debt financing is beneficial only if the internal rate of return of the
concern is greater than its cost of capital; otherwise it adversely affects the benefit of
shareholders.

Interference: In addition to collateral security, restrictive covenants are also imposed

by the lenders which lead to unnecessary interference in the functioning of the concern.

ii. From Point of View of the Lender:

Negotiability: Terms and conditions of term loans are negotiable between borrower and
lenders and thus it sometimes can affect the interest of lenders.

Control: Like other sources of debt financing, the lenders of term loans do not have any
right to control the affairs of the company.

2.3. Methods of Granting Advances

A. Cash Credit
Overdraft and cash credit are widely used external sources of finance for availing short term
borrowing at some cost. Both cash credit and overdraft are used by businesses to manage
short term working capital requirements. However, they differ on various aspects which
include nature of account, charges and fees, amount, purpose, type of security, use of funds,
interest rate etc.
Both these facilities are repayable on demand and therefore classified as sources of finance
payable on demand or loans payable on demand. However, these facilities are rarely re-
called in real-life scenario except in very rare circumstance like customer’s business and
financial position is going from bad to worse phase as time passes by or in case when the
value of the security is found extremely low during period revaluation of the security or
during renewal of the facility. Both Overdraft and Cash Credit accounts are both open-ended
facilities.

Generally the facility given to the Industrial / Business customers is known as ‘Cash Credit’
(CC) account in which the stock (raw material / work in process / finished goods) lying in
the godown is taken as the security by the bank. In a CC account, the bank fixes a ‘drawing
power’ for the borrower which is usually 75% to 80% of the values of stocks and book debts
(minus creditors for purchase), as declared by the borrower in a prescribed format
periodically. The bank conducts periodical surprise checks in the godowns of the borrower
to ensure that the borrower declares the quantity and value of the stocks accurately and
maintains the acceptable level of financial discipline.

a. Features of Cash Credit: Following are the features of cash credit:

 This loan is given to meet the working capital requirements of a company.

 It is given against a collateral security.
 Interest is charged only on the amount of loan availed by the customer and not on
the amount of credit sanctioned.

b. Advantages of Cash Credit: The advantages of cash credit are:

 It is an important source of working capital financing.

 Cash credit can be obtained very easily and quickly.
 Interest is charged only on the utilized amount.

c. Disadvantages of Cash Credit: Cash credit has the following disadvantages:

 The rate of interest charged by lenders loan on cash credit is very high.
 Such loan is granted by bank on the basis of company’s turnover, its financial status,
value of inven­tory, etc. So it is difficult for new and financially weak companies to
obtain cash credit.
 For banks, cash credit disturbs their cash planning as the cash inflow and cash
outflows remain uncertain and depends upon the borrowers’ convenience and needs.

B. Overdrafts
Loans are repayable within a definite agreed period. They may be repayable in periodical
installments also e.g. Monthly, Quarterly, Half yearly, Annual etc. as agreed to with the
bank. An overdraft facility is an open-ended facility. Normally the limit will be initially
sanctioned for a period of one year and rolled over after a review by the bank of the facility
utilised by the borrower. Bank charges interest on the actual amount utilised by the
borrower.

a. Features of Overdraft facility:

 Approved credit limit: Every overdraft facility has an approved credit limit
 Repayable on demand at any time: An overdraft facility is not subject to any
repayment as long as the amount used is within the overdraft limit. But, it is
repayable on demand by the bank at any time.
 No minimum monthly payment: There is no minimum monthly repayment for an
overdraft facility as long as the amount you owe is within the credit limit. But, if the
account goes into “excess” you need to repay the excess amount immediately. If the
excess is not paid immediately, the bank can stop the overdraft facility and require
you to repay the full outstanding amount within a given time. If the bank recalls
your overdraft facility, your credit record will be adversely affected.
 Joint borrowers allowed: As a joint applicant of an overdraft facility, you and your
joint applicant(s) are equally liable for the outstanding debt. You will be liable for
the debt even if it was the other applicant who used the facility. The bank can
choose to recover the total outstanding debt from all account holders, partial
amounts from each account holder, or the total amount from any one account holder.

b. Advantages of Overdrafts:

 Flexible – An overdraft is there when you need it, and costs nothing (apart from
possibly a small fee) when you do not. It allows you to make essential payments,
and helps to maintain cash flow. You only need to borrow what you need at the
time.
 Quick – Overdrafts are easy and quick to arrange, providing a good cash flow
backup with the minimum of fuss.

c. Disadvantages of Overdrafts:

 Cost – Overdrafts carry interest and fees; often at much higher rates than loans.
Overdrafts are not meant for long term borrowing.
  Recall – Unless specified in the terms and conditions, the bank can recall the entire
overdraft at any time. This may happen if you fail to make other payments, or if you
have broken terms and conditions;
 Security – Overdrafts may be secured by the assets, which put them at risk if you
cannot meet repayments.
 Difference between Cash Credit Facility and Overdraft Facility:

Cash Credit Facility Overdraft Facility

Account One needs to usually open a Overdraft can be availed on the
requirement separate cash credit account existing current account. It is like a
with a bank to avail cash facility of “excess withdrawal” given
credit facility. in current account and at times even
in savings account.
Security Company inventory and Overdraft facility does not
Requirement receivables are usually necessarily require current assets as
taken as security for security. An overdraft facility may be
allowing cash credit extended by taking shares, other
facility. investments like FDs, insurance
policies as security. At times even
based on the credibility of the
person, overdraft limit may be
approved.
Limits Limit is usually a Limit is usually allotted taking into
Sanctioning percentage of the stocks or consideration the assets collateralised
Rationale receivables. and also on the basis of financial
statements of the company.
End Use This is generally given Overdraft Facility can be used for
specifically for the purpose any purpose and not necessarily for
of the business operation business.
(as working capital).
Length of Cash Credit is usually for a Overdraft facility is allowed for a
Credit Period short period. That means, very short duration at times (Say a
the limit is allowed for a month or even for a week in some
period of 1 year and is cases), but can be allowed for a
 Cash Credit Facility Overdraft Facility
renewed every year. In period of up to 1 year.
some cases, renewals or
review may be stipulated
half yearly as well.
Limits The cash credit withdrawal The amount or the overdraft limit
Availability limit keeps changing with that the customer gets remains
the change in the amount of constant since limits sanctioned is
current assets kept as not based on current assets.
security. Withdrawal limit However, if OD is against shares or
from the CC facility is insurance policy surrender value, the
called drawing power. limit changes based on the
underlying security value at periodic
intervals.
Rate of The rate of interest charged The rate of interest charged under
Interest under cash credit facility is over draft facility is higher than what
lesser than what is usually is usually charged under the cash
charged under the overdraft credit facility.
facility.

The Cash Credit facility is quite useful to those businesses where cash payment like wages,
transportation, cash purchases are to be made and the receivables are not realized in time.

Overdrafts are available on current accounts only. Overdraft facilities are provided at the
discretion of the bank to meet short term needs. The amount that will be granted in the
form of an overdraft, in most cases, depend on the history of transactions in the current
account. If there is a bad credit history, it may be difficult to obtain an overdraft.

C. Purchase and Discounting of Bills:

a. Introduction: Funds for working capital required by commerce and industry are also
provided by banks by Purchase/discounting of commercial bills.

When the seller sells goods on credit, he gets payment from the buyer after the credit
period is over. In the meanwhile he may need funds for working capital purposes. So he
draws a Bill of Exchange on the buyer which accepts and returns it to the seller. The seller
may discount the bill immediately with is banker or may choose to wait till the date of
 maturity. In the former case, seller gets funds minus a discount immediately from the
banker. The banker receives the amount of the bill from the drawee on the date of maturity
of the bill. This process of providing finance is called discounting of bills

b. Advantages of Bill Discounting:

 Easy access
 Safety of funds
 Certainty of payments
 Profitability
 Smooth liquidity
 Ideal investment
 Facility of refinancing
 Relative stability of Prices.
c. Disadvantages of Bills Discounting:
 Absence of Bill Culture
 Absence of rediscounting among banks
 Stamp duty
 Absence of secondary market
 Difficulty in ascertaining genuine trade bills
 Limited foreign trade
 Absence of acceptance services
 Attitude of banks.

d. Advantages of Bills Discounting to Banks:

 Safety of Funds: A bill of exchange bears signatures of two parties, drawer and the
acceptor. If the acceptor does not honour the bill, the drawer is liable to pay the
amount of the bill to the discounting banker
 Profitability: Discount is front-ended, i.e deduction from the amount of the bill at
the time of discounting so the yield is higher than that on loans

Bills Purchased, in trade finance, allows a seller to obtain financing and receive immediate
funds in exchange for a sales document not drawn under a letter of credit. The bank will
send the sales documents to the buyer’s bank on behalf of the seller.

D. Difference between Bills Discounting and Bills Purchase:

In Bill Discounting, the interest is deducted up-front while giving a loan. This is typically a
case of USANCE bill where the maturity can be calculated as per the tenor. For example, if
the tenor is 30 days from shipment date, then while granting a loan, the bill will be
discounted up-front, by deducting the interest for 30 days.

In Bill Purchase, the loan will be given for the full value of the draft and the interest will be
recovered when the actual payment comes. This is typically the case with SIGHT drafts,
where fixed maturity is not known. For e.g, if the sight draft is presented for which the loan
is created for 100% of the draft value. The money is received after 5 days then, days interest
will be recovered for 5 days along with the principal.

Advantages of Bills Discounting and Purchase are that the seller can get the money upfront
instead for payment date. This helps the seller to receive the money faster.

Base Rate:
RBI had made it mandatory for all banks to introduce Base Rate wef 1st July, 2010. The
Base Rate is the minimum interest rate of a Bank below which it cannot lend, except in cases
allowed by RBI. Base Rate system is applicable to all new loans and for those old loans that
come up for renewal after July 2010. Existing loans based on the Basic Prime Lending Rate
(BPLR) system may run till their maturity. In case existing borrowers want to switch to the
new system, before expiry of the existing contracts, an option may be given to them, on
mutually agreed terms
As per RBI guidelines (as in July 2012), the following categories of loans could be priced
without reference to Base Rate:-
 Differential Interest Rate Advances;
 Loans to banks' own employees including retired employees;
 Loans to banks' depositors against their own deposits

RBI does not fix the base rate. It has issued broad guidelines to bank as to how they should
arrive at the base rate. Thus, individual bank itself fixes its own base rate.
The calculations of the BPLR by various banks was not transparent. In case of BPLR,
Banks normally used to take into consideration the factors like cost of funds, administrative
costs and a margin over it. However, such parameters were neither disclosed by banks nor
were same for all the banks. The Base Rate calculations include all those cost elements
which can be clearly identified and are common across borrowers. The constituents of the
Base Rate includes
 i. the interest rate on retail deposit (deposits below Rs. 15 lakh) with one year maturity
(adjusted for CASA deposits);
ii. adjustment for the negative carry in respect of CRR and SLR;
iii. unallocatable overhead cost for banks which would comprise a minimum set of
overhead cost elements; and
iv. average return on net

Current Base Rate is 10 – 10.25% (15 Jan 2015)

Fixed and Floating Interest Rates:

Fixed Rate Interest: When the rate of interest applied to a loan or a deposit remains constant
and unchanged from the beginning to the end of the maturity of the loan/deposit, it is called
“Fixed Rate of Interest’.

Floating Rate Interest: Floating interest rate as the name implies that the rate of interest
which varies with market conditions. The biggest benefit with floating rate home loans is that
they are cheaper than fixed interest rates. So, if you are getting a floating interest rate of 11.5
per cent while the fixed rate loan is being offered at 14 per cent, you still save money if the
floating interest rate rises by up to 2.5 percentage points. Even if the floating rate goes over
the fixed rate, it will be for some period of the loan and not for the entire tenure. The interest
rates may fall over a long period and, thus, the floating interest rate brings a lot of savings.

The drawback with floating interest rates is the uneven nature of monthly instalments. This
makes it difficult to budget with floating interest rate home loans.

In the case of floating interest rate, the total amount of interest is not determined for the entire
period of loan, at the time of borrowing, but is dependent on some underlying index, which
goes on changing, i.e. ‘floating’ in financial terms. Underlying index used are Bank’s Base
rate or MIBOR rate (Mumbai Inter Bank Offered Rate). MIBOR is the rate at which banks in
Mumbai offer loans to one another.

2.4. Summary:
 ‘Funded’ facilities are where Bank releases loan money / funds to the borrower.

 ‘Non- funded’ facilities is where Bank does not release money when limit is sanctioned.
But the bank (Issuer / Guarantor) gives a guarantee or promise or undertaking (Letter of
Credit) on behalf of the customer (Applicant) in favour of third parties (Beneficiaries).

 Principles of good lending are:

 Safety
 Liquidity
 Purpose
 Profitability
 Security
 Diversification
 Suitability

 Banks also see the 5Cs of lending to ensure that the loans granted are returned to avoid
non performing asset issue.
 Loan not backup by a security is called Unsecured loan and Loan backup by a security is
known as Secured loan. In case of non-payment of the loan, Bank can liquidate the asset
to recovery the loan amount. Hence, secured loans are less risky for the Bank.

 Types of Secured Loan:

 Gold Loan
 Insurance Policy
 Term Deposits
 Housing Loan
 Loan against Shares / Mutual Funds
 Public Provident Funds
 Vehicle loan
 Export Credit limits

 Types of Unsecured Loan:

 Personal loan
 Credit Card loans
 Loans can be classified on tenors as Short term, Medium loan and Long term.

 Cash credit account is secured by a charge on the stock (raw material / work in process /
finished goods) lying in the godown is taken as the security by the bank.

 Overdraft facility is a credit given to an individual against his or her assets as collateral
with banks.
 When the seller obtains financial accommodation from a bank or financial institution, it is
known as ‘Bill discounting’
 Features of Bills Discounting are Charge, Maturity & Ready Finance

Keywords:
SV – Surrender value
MIBOR -Mumbai Inter-Bank Offered Rate
PPF – Public Provident Fund
PPO – Pension Payment order
T&C – Terms and Conditions
ECB – External Commercial Borrowings

2.5. Self Test Questions

I. Choose the correct option:

1. Which loans are safer for the Banks?

a) Secured Loan
b) Unsecured loan
c) None of the above
d) Both of the above

2. Letter of credit is ___ loan

a) Funded
b) Unfunded
c) None of the above
d) Both of the above

3. In a secured loan, Bank

 a) takes the security
b) may take the security
c) does not require security

4. An OD limit is sanctioned as a
a) secured limit
b) unsecured limit
c) maybe one of them
d) neither of them

5. A short term loan is a loan which repayable

a) within 3 years
b) within 4 years
c) within 5 years
d) none of them

6. In a housing loan, the rate of interest is

a) fixed
b) floating
c) any one of the above
d) none of them

7. In a loan against shares. The shares are

a) are hypothecated to bank
b) are pledged to bank
c) are mortgaged to bank
d) none of them

8. A credit card limit is a

a) Revolving loan limit
b) Installment loan limit
c) both of them
d) none of them

9. Pre shipment finance facility is provided to:

 a) User
b) Importer
c) Exporter

10. Advances against shares and mutual funds is provided ____ of the market value
a) 50 %
b) 60%
c) 75 %
d) 90 %

Answers: 1 – a, 2- b, 3 – a, 4 – a, 5 – a, 6 - c, 7 -b, 8 - a, 9 – c, 10 – a.
 II. Fill in the blanks:

1. In case of personal loan, ____ security is taken by the Bank

2. Non fund based facilities provided by the bank are _____ and ______
3. Cardinal Principle of good lending is _____
4. Spreading the risks across large number of borrowers, a large number of industries &
areas and across different types of securities is known as ______.
5. Unsecured loans are generally given for ____ months
6. In case of falling market rate scenario, customer wants ______ interest on the loans.
7. In case of personal loans, Bank insist on ____ or ____ before granting the loan
8. Interest on Cash Credit account is ____ than Overdraft interest rate
9. In case when the loan will be created for the full value of the draft and the interest will
be recovered when the actual payment comes is known Bills _____
10. In case of Bank Balance sheet, Deposits are _____

Answers: 1 – No or zero, 2- Guarantee and Letter of Credit, 3 – safety first, 4 –

Diversification, 5 – 60, 6 - floating, 7 –Co borrower or guarantor, 8 -lesser, 9 – Purchase, 10 –
liabilities.

III. Answer in detail:

1. What is difference between Fund based and Non fund based facilities?
2. What is security in loans?
3. What are the long term loans available to Corporate?
4. What is the difference between Cash Credit and Overdraft facility?
5. Explain the 5C’s of Lending?
6. What are the advantages / disadvantages of Bills discounting?
IV. Activities:
1. Prepare a chart showing against which assets Bank will give loans?
2. Do a comparative study of one Public Sector Bank, one Private sector bank, one
foreign bank and one cooperative for the Housing and Vehicle loan and present to the
class?
3. Do roles play on the points the borrower has to consider before borrowing and why?
4. Discuss the difference between various types of charge created on an asset given for
taking a loan?
5. Discuss the difference between various types of charge created on an asset given for
taking a loan?
 Learning Objective – Unit 3
Location DURATION- 20 HOURS
BANKS AND SESSION-1 REMITTANCES THROUGH BANK DRAFT
CLASSROOM Learning Knowledge Performance Teaching and
Outcome Evaluation Evaluation Training
Method
Evaluation of 1. Meaning of Bank 1. Evaluate the Interactive
Remittances Draft important of lecture –
through Bank Draft 2. Parties to Bank Bank Draft Remittance
as an importance Draft 2. List down the through
service of a Bank. 3. Specimen of a parties to Demand Draft
Bank Draft Demand as a utility
4. Procedure of Draft(Bank service of bank
preparing Bank Draft) Activity-
Draft 3. Describe in 1. Role play as
5. Importance of detail the a banker and a
Bank Draft in procedure of Customer who
today’s business preparing Bank wants to get a
world Draft Bank Draft
4. Draw a made.
specimen of 2. List out the
Bank Draft formalities for
getting the
draft made
from bank.
SESSION-2 E-BANKING
Understand the 1. Concept of E- 1. Discuss the Interactive
concept of e-bank banking importance of lecture –On
through various 2. Importance of E- E-banking in the basic
services offered by banking today’s world. concept of
e-banking 3. Forms of E- 2. Comment on services
Banking how the online offered by E-
 ECS operations banking.
 RTGS have provided Activity – Visit
 NEFT major thrust to a bank and
 Internet Banking banking collect
4. Meaning and operation? information
Advantages of 3. Explain the and forms for
different forms of E- meaning and taking various
banking operation of E-banking
5. Risks involved in  RTGS facilities.
E- banking  NEFT
 ECS
 Internet
banking
4. Elucidate the
risks involved
in E-banking
SESSION-3 SAFE DEPOSIT LOCKERS
Understanding the 1. Requisites in a 1. Describe the Interactive
facility of bank for Safe need of Safe lecture-On the
providing safe Deposit Lockers Deposit basic concept
deposit vaults to 2. Procedure Locker of services
customers. followed to get 2. Evaluate the offered by E-
 this facility prerequisites banking
3. Necessity of Safe of getting this Activity
Deposit Lockers facility  List out the
4. Person who can 3. List the valuables
avail the facility persons who which
can avail this should be
facility and kept in safe
what should custody of
be kept in banks
Lockers  Visit
banks, find
out the
Locker
Rent
Charges of
various
types of
lockers
with
different
banks and
present a
comparativ
e report
 UNIT 3

UTILITY SERVICES OF A BANK

OBJECTIVES
After reading this unit you will be able to:

 Understand in detail about the demand draft issued by the bank

 Describe E Banking
 List the features of different forms of E banking and their significance.
 Explain the need for safe deposit lockers and procedure for availing lockers.

STRUCTURE

3.1.Remittance through Bank Drafts

3.2.E Banking:
3.3.Safe Deposit Lockers:
3.4.Summary
3.5.Practice Questions
3.1. Remittance through Bank Drafts

A Demand Draft is a cheque that contains an order of one branch of a bank (Drawer branch)
directing another branch of the same bank (Drawee branch) to pay on demand a certain sum
of money to a specified beneficiary (Payee). A Demand Draft may be crossed also with an
Account payee instrument, meaning thereby that its amount may be credited to the account of
the payee and it cannot be encashed over the counter by the payee.

A Demand Draft is a much safer method of payment than cheques, since in the case of
cheques, an individual is the drawer and hence the cheque can be dishonored by the drawee
bank due to insufficiency of funds in the drawer's account. But since in the case of a DD, the
drawer is a bank, payment is certain and it cannot be dishonored.

Since a draft is a cheque issued by a bank (that is, drawer is a bank) it does not carry the
signatures of the customer, unlike the cheques which carry the signature of the customer (who
is the drawer). Instead, a DD carries signatures of one or two bank officials, depending on the
DD amount. Usually the DD will carry the name/code of both the Drawee branch and the
Issuing (Drawer).

Pay Orders, also called Local DDs or Bankers' cheques, are cheques where the drawer and the
drawee branch is the same. These are used for local payments (that is, payments within a
city).

A. Definition of Demand Draft:

 Demand Draft is a cheque that contains an order of one branch of a bank (Drawer
branch) directing another branch of the same bank (Drawee branch) to pay on demand
a certain sum of money to a specified beneficiary (Payee). Thus there are three parties
to a Demand draft e.g. the drawer branch, the drawee branch and the payee. Demand
drafts are always payable on demand.
Specimen of Demand Draft:

Specimen of Application form for issuing Demand Draft:

B. Demand Draft Issuance Process:

 An applicant for a Demand Draft is required to fill in a DD Request Slip, mentioning the
amount, payee's name, issuing branch, location the draft should be payable at, his name,
signature and account number etc. In most cases, the purchaser of the draft is an account
holder with the bank, hence he can authorise the bank to debit (that is, take out funds from)
his account either through a Cheque or a debit mandate. The Cheque should be drawn in
favor of “Yourself for the issue of DD favoring XYZ ", where XYZ refers to the payee of
the DD. The banker will debit the account of the account holder and issue a DD in favour of
the beneficiary. The purchaser of the Demand Draft will send it to the beneficiary who will
deposit the DD in his Bank account. Beneficiary’s Banker will clear the draft through the
clearing process. On clearance, Beneficiary’s Bank will credit the Beneficiary’s account

The bank levies charges for issuing the DD, in the form of a commission. Hence the
customer has to pay an amount equal to (DD amount + Commission + Service Tax).

DDs can also be issued against the payment of cash by the purchaser, but in this case, the
total amount (inclusive of commission and taxes) should not exceed Rs. 49,999. PAN
number of the purchaser will be necessary if the amount of DD exceeds Rs.10,000/=

Since a DD is a kind of a cheque, the principle of Cheque Clearing also applies to DDs. In
the example mentioned above, if the payee, does not have an account with SBI, but with
another bank, say PNB, he would deposit the Draft in its PNB branch and the PNB officials
would lodge the DD in outward clearing. (The DD would be sent to the local Clearing
House).

C. Advantages of Demand Draft:

 It may be crossed also i.e. “Account payee”. Hence cannot be encashed at the Bank
counter
 It cannot be dishonoured due to insufficiency of funds thus it ensures its payment to the
payee

Due to the above advantages, it is considered as an important instrument for payments. It

helps avoid duplication of efforts when cheques bounced. The payee is sure to receive the
amount. If the DD is lost in transit, the payee can stop payment of the lost DD. The
purchaser is not mentioned a party to DD. Hence he cannot stop its payment.

3.2. E Banking:
Electronic Payment and Settlement Systems in India:

The Reserve Bank of India is doing its best to encourage alternative methods of payments
which will ensure security and efficiency to the payments system and make the whole process
easier for banks. The Indian banking sector has been growing successfully, innovating and
trying to adopt and implement electronic payment systems. The Indian payment systems had
always been dominated by paper-based transactions. But since the introduction of e-payments
in India, the banking sector has witnessed growth like never before.

In the case of India, the RBI has played a pivotal role in facilitating e-payments by making it
compulsory for banks to route high value transactions through Real Time Gross Settlement
(RTGS) and also by introducing NEFT (National Electronic Funds Transfer) and NECS
(National Electronic Clearing Services) which have encouraged individuals and businesses to
switch to electronic methods of payment. With the changing times and technology we have
changed the methods of payments in India. E-payments in India have been growing at a fast
speed in recent years.

E-payments have to be continuously promoted showing consumers the various routes through
which they can make these payments like ATM’s, the internet, mobile phones and drop boxes.

Benefits of E Banking: There are plenty of benefits perks that customers who adopt this
mode of banking can derive from it. Some of the key benefits of internet banking are:

 Convenience
 Better Interest Rates
 Services
 Mobility
 Environment Friendly
 Lower operating cost
 Very low incidence of errors

Last but not the least, internet banking has helped to cut down the usage of paper, thereby
being good for the environment where it helps to reduce pollution. People do not have to visit
the bank. In a growing country like India, efficient and faster payments method helps in the
development of economy as a whole.

Electronic Clearing Services (ECS)

ECS is an electronic mode of payment / receipt for transactions that are repetitive and periodic
in nature. ECS is used by institutions for making bulk payment of amounts towards
distribution of dividends, interest, salaries, pension, etc., or for bulk collection of amounts
towards telephone / electricity / water dues, cess / tax collections, loan instalment repayments,
periodic investments in mutual funds, insurance premium etc. Essentially, ECS facilitates
transfer of monies from one bank account into many banks accounts or vice versa.

Primarily, there are two variants of ECS, ECS Credit and ECS Debit.

ECS Credit is used by an institution for giving credit to a large number of beneficiaries (for
instance, employees, investors etc.) having accounts with bank branches at various locations
within the jurisdiction of a ECS Centre by raising a single debit to the bank account of the
user institution. ECS Credit enables payment of amounts towards distribution of dividends,
interest, salaries, pension, etc., by the user institution.

ECS Debit is used by an institution for collecting amounts from a large number of accounts
maintained with bank branches at various locations within the jurisdiction of an ECS Centre
for credit to the bank account of the user institution. ECS Debit is useful for collection of
telephone / electricity / water bills, cess / tax payments, loan installment repayments, periodic
investments in mutual funds, insurance premium etc., that are periodic or repetitive in nature
and payable to the user institution by large number of customers etc.

Based on the geographical location of branches covered, there are three broad categories of
ECS Schemes – Local ECS, Regional ECS and National ECS.

Local ECS – this is operating at 81 centres / locations across the country. At each of these
ECS centres, the branch coverage is restricted to the geographical coverage of the clearing
house, generally covering one city and/or satellite towns and suburbs adjoining the city.

Regional ECS – this is operating at 9 centers / locations in various parts of the country. RECS
facilitates the coverage of all core-banking-enabled branches in a State or group of States and
can be used by institutions desirous of reaching beneficiaries within the State / group of
States. The system takes advantage of the core banking system in banks. Accordingly, even
though the inter-bank settlement takes place centrally at one location in the State, the actual
customers under the Scheme may have their accounts at various bank branches across the
length and breadth of the State / group of States.
National ECS – this is the centralized version of ECS Credit which was launched in October
2008. The Scheme is operated at Mumbai and facilitates the coverage of all core-banking
enabled branches located anywhere in the country. This system too takes advantage of the
core banking system in banks. Accordingly, even though the inter-bank settlement takes place
centrally at one location at Mumbai, the actual customers under the Scheme may have their
accounts at various bank branches across the length and breadth of the country. Banks are free
to add any of their core-banking-enabled branches in NECS irrespective of their location.

A. ECS (CREDIT)

ONE DEBIT => MULTIPLE CREDITS

ECS Credit payments can be available of by any institution (called ECS Credit User) which
needs to make multiple or repetitive payments to a number of beneficiaries. The institutional
User has to first register with an ECS Centre. The User has also to obtain the consent of
beneficiaries (i.e., the recipients of salary, pension, dividend, interest etc.) and get their bank
account particulars prior to participation in the ECS Credit scheme.

ECS Credit payments can be put through by the ECS User only through his / her bank
(known as the Sponsor bank). ECS Credits are given to the beneficiary account holders
(known as destination account holders) through the beneficiary account holders’ bank
(known as the destination bank). The beneficiary account holders are required to give
mandates to the user institutions to enable them to give credit to their bank accounts through
the ECS Credit mechanism.

MICR is an acronym for Magnetic Ink Character Recognition. The MICR Code is a numeric
code that uniquely identifies a bank-branch participating in the ECS Credit scheme. This is a
9 digit code to identify the location of the bank branch; the first 3 characters represent the
city, the next 3 the bank and the last 3 the branch. The MICR Code allotted to a bank branch
is printed on the MICR band of cheques issued by bank branches.
The beneficiary has to furnish a mandate to the user institution giving consent to avail the
ECS Credit facility. The mandate contains details of his / her bank branch, account
particulars and authorises the user institution to credit the amount to his / her account with
the destination bank branch.

It is the responsibility of the user institution to communicate to the beneficiary the details of
credit that is to be given to his / her account, indicating the proposed date of credit, amount
and related particulars of the payment. Destination banks are required to ensure that the pass
books / statements given to the beneficiary account holders reflect particulars of the
transaction / credit provided by the ECS user institutions. The beneficiaries can match the
entries in the passbook / account statement with the advice received by them from the User
Institutions. Many banks also give mobile alerts / messages to customers after credit of such
funds to accounts.

If a Destination Bank is not in a position to credit the beneficiary account due to any reason,
the same would be returned to the ECS Centre to enable the ECS Centre to pass on the un-
credited items to the User Institution through the Sponsor Bank. The User Institution can
then initiate payment through alternate modes to the beneficiary.

In case of delayed credit by the destination bank, it would be liable to pay penal interest (at
the prevailing RBI LAF Repo rate plus two percent) from the due date of credit till the date
of actual credit. Such penal interest should be credited to the Destination Account Holder’s
account even if no claim is lodged to the effect by him.

There is no limit on the amount of individual transactions. The Reserve Bank of India has
deregulated the charges to be levied by sponsor banks from user institutions. The sponsor
banks are, however, required to disclose the charges in a transparent manner. With effect
from 1st July 2011, originating banks are required to pay a nominal charge of 25 paisa per
transaction to the Clearing house and destination banks each. Destination bank branches
have been directed to afford ECS Credit free of charge to the beneficiary account holders.
 ECS Credit working:
The User intending to effect payments through ECS Credit has to submit details of the
beneficiaries (like name, bank / branch / account number of the beneficiary, MICR code of
the destination bank branch, etc.), date on which credit is to be afforded to the
beneficiaries, etc., in a specified format (called the input file) through its sponsor bank to
one of the ECS Centres where it is registered as a User.

The bank managing the ECS Centre then debits the account of the sponsor bank on the
scheduled settlement day and credits the accounts of the destination banks, for onward
credit to the accounts of the ultimate beneficiaries with the destination bank branches.

Advantages of ECS Credit:

i. Beneficiary Benefits:

 The beneficiary need not visit his / her bank for depositing the paper instruments
which he would have otherwise received had he not opted for ECS Credit.
 The beneficiary need not be apprehensive of loss / theft of physical instruments or
the likelihood of fraudulent encashment thereof.
 The beneficiary receives the funds right on the due date.

ii. Benefits to User Institutions:

 User institutions also enjoy many advantages. For instance, cost incurred on
administrative machinery and printing, dispatch and reconciliation of paper
instruments etc is saved which would have been incurred had beneficiaries not opted
for ECS Credit.
 Avoid chances of loss / theft of instruments in transit, likelihood of fraudulent
encashment of paper instruments, etc. and subsequent correspondence / litigation.
 It is an efficient payment system which ensures the beneficiaries get credit on a
designated date.

iii. Benefits to Banking system: The banking system too benefits from ECS Credit
Scheme such as follows:
 Freedom from paper handling and the resultant disadvantages of handling,
presenting and monitoring paper instruments presented in clearing. Ease of
processing and return for the destination bank branches.
  Smooth process of reconciliation for the sponsor banks.

B. ECS (DEBIT)

MULTIPLE DEBITS => ONE CREDIT

ECS Debit transaction can be initiated by any institution (called ECS Debit User) which has
to receive / collect amounts on account of telephone / electricity / water dues, cess / tax
collections, loan instalment repayments, periodic investments in mutual funds, insurance
premium etc. It is a Scheme under which an account holder with a bank branch can authorise
an ECS User to recover an amount at a prescribed frequency by raising a debit to his / her
bank account.

The user institution has to first register with an ECS Centre. The User institution has to
obtain the authorization (mandate) from its customers also for debiting their account along
with their bank account particulars prior to participation in the ECS Debit scheme. The
mandate has to be duly verified by the beneficiary’s bank. A copy of the mandate should be
available on record with the destination bank where the customer has a bank account.

ECS Debit Working:

The ECS Debit User intending to collect receivables through ECS Debit has to submit
details of the customers (like name, bank / branch / account number of the customer, MICR
code of the destination bank branch, etc.), date on which the customer’s account is to be
debited, etc., in a specified format (called the input file) through its sponsor bank to the
ECS Centre.
The bank managing the ECS Centre then passes on the debits to the destination banks for
onward debit to the customer’s account with the destination bank branch and credits the
sponsor bank's account for onward credit to the User institution. Destination bank branches
will treat the electronic instructions received from the ECS Centre on par with the physical
cheques and accordingly debit the customer accounts maintained with them. All the
unsuccessful debits are returned to the sponsor bank through the ECS Centre (for onward
return to the User Institution) within the specified time frame.
Advantages of ECS Debit Scheme:

i. Customers: The advantages of ECS Debit to customers are many which are as
follows:
  ECS Debit mandates will take ensure automatic debit of the amount to customer
accounts on the due dates without customers visiting bank branches / collection
centers of utility service providers etc.
 Customers need not keep track of due date for payments.
 The debits to customer accounts would be monitored by the ECS Users, and the
customers are alerted accordingly.

ii. Benefits to User institutions: User Institutions enjoy many benefits from the ECS
Debit Scheme as follows:

 Savings on administrative machinery and costs of collecting the cheques from

customers, presenting in clearing, monitoring their realization and reconciliation.
 Better cash management because of realization / recovery of dues on due dates
promptly and efficiently.
 Avoids chances of loss / theft of instruments in transit, likelihood of fraudulent
access to the paper instruments and encashment thereof.
 Realization of payments on a uniform date instead of fragmented receipts spread
over many days.

iii. Benefits to Banking system: The banking system has many benefits from ECS
Debit such as:
 Freedom from paper handling and the resultant disadvantages of handling, receiving
and monitoring paper instruments presented in clearing.
 Ease of processing by the destination bank branches. Destination bank branches can
debit the customers’ accounts after matching the account number of the customer in
their database and due verification of existence of valid mandate and its particulars.
With core banking systems in place and straight-through-processing, this process
can be completed with minimal manual intervention.
 Smooth process of reconciliation for the sponsor banks.

Mandate:

Any mandate in ECS Debit is on par with a cheque issued by a customer. The mandate
may contain a ceiling on the maximum amount of debit; specify the purpose of debit and
validity period of the mandate. There is no value limit on the amount of individual
transactions that can be collected by ECS Debit.
The customer has to maintain adequate funds in his / her account with the destination bank
branch to ensure that the ECS Debit instructions are honored on due dates. In case of any
need to withdraw or stop a mandate, the customer has to give prior notice to the ECS user
institution well in time, so as to ensure that the input files submitted by the user do not
continue to include the ECS Debit details in respect of the mandates withdrawn or stopped
by the customer

ECS Debit Charges:

The Reserve Bank of India has deregulated the charges to be levied by sponsor banks from
user institutions. The sponsor banks are, however, required to disclose the charges in a
transparent manner. With effect from 1st July 2011, originating banks are required to pay a
nominal charge of 25 paise and 50 paise per transaction to the Clearing house and
destination bank respectively. Bank branches do not generally levy processing / service
charges for debiting the accounts of customers maintained with them.

C. Real Time Gross Settlement:

RTGS System:

The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the
continuous (real-time) settlement of funds transfers individually on an order by order basis
(without netting). 'Real Time' means the processing of instructions at the time they are
received rather than at some later time; 'Gross Settlement' means the settlement of funds
transfer instructions occurs individually (on an instruction by instruction basis).
Considering that the funds settlement takes place in the books of the Reserve Bank of
India, the payments are final and irrevocable.
 Difference between RTGS and NEFT:

NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement
(DNS) basis which settles transactions in batches. In DNS, the settlement takes place with
all transactions received till the particular cut-off time. These transactions are netted
(payable and receivables) in NEFT whereas in RTGS the transactions are settled
individually. For example, currently, NEFT operates in hourly batches. [There are twelve
settlements from 8 am to 7 pm on week days and six settlements from 8 am to 1 pm on
Saturdays.] Any transaction initiated after a designated settlement time would have to wait
till the next designated settlement time Contrary to this, in the RTGS transactions are
processed continuously throughout the RTGS business hours.

The minimum amount to be remitted through RTGS is Rs 2 lakh. There is no upper ceiling
for RTGS transactions. Under normal circumstances the beneficiary branches are expected
to receive the funds in real time as soon as funds are transferred by the remitting bank. The
beneficiary bank has to credit the beneficiary's account within 30 minutes of receiving the
funds transfer message.

The remitting bank receives a message from the Reserve Bank that money has been
credited to the receiving bank. Based on this the remitting bank can advise the remitting
customer through SMS that money has been credited to the receiving bank.
 The RTGS service window for customer's transactions is available to banks from 9.00
hours to 16.30 hours on week days and from 9.00 hours to 14:00 hours on Saturdays for
settlement at the RBI end. However, the timings that the banks follow may vary depending
on the customer timings of the bank branches.

With a view to rationalize the service charges levied by banks for offering funds transfer
through RTGS system, a broad framework has been mandated as under:

 Inward transactions – Free, no charge to be levied.

 Outward transactions – Rs 2 lakhs to 5 lakhs - not exceeding Rs 30.00 per
transaction; above Rs 5 lakhs – not exceeding Rs 55.00 per transaction.

The remitting customer has to furnish the following information to a bank for initiating a
RTGS remittance:

 Amount to be remitted
 Remitting customer’s account number which is to be debited
 Name of the beneficiary bank and branch
 The IFSC Number of the receiving branch
 Name of the beneficiary customer
 Account number of the beneficiary customer
 Sender to receiver information, if any
D. National Electronic Funds Transfer

NEFT has gained popularity as it saves time and the transactions can be concluded easily.
National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating
one-to-one funds transfer. Under this Scheme, individuals, firms and corporates can
electronically transfer funds from any bank branch to any individual, firm or corporate
having an account with any other bank branch in the country participating in the Scheme.
For being part of the NEFT funds transfer network, a bank branch has to be NEFT- enabled
branch. The list of bank-wise branches which are participating in NEFT is provided in the
website of Reserve Bank of India at http://www.rbi.org.in/scripts/neft.aspx

Individuals, firms or corporate maintaining accounts with a bank branch can transfer funds
using NEFT. Even such individuals who do not have a bank account (walk-in customers)
can also deposit cash at the NEFT-enabled branches with instructions to transfer funds using
NEFT. However, such cash remittances will be restricted to a maximum of Rs.50,000/- per
transaction. Such customers have to furnish full details including complete address,
telephone number, etc. NEFT, thus, facilitates originators or remitters to initiate funds
transfer transactions even without having a bank account.

Individuals, firms or Corporates maintaining accounts with a bank branch can receive funds
through the NEFT system. It is, therefore, necessary for the beneficiary to have an account
with the NEFT enabled destination bank branch in the country.
Presently, NEFT operates in hourly batches - there are twelve settlements from 8 am to 7 pm
on week days (Monday through Friday) and six settlements from 8 am to 1 pm on Saturdays.
 NEFT Operations:

Step-1 : An individual / firm / corporate intending to originate transfer of funds through

NEFT has to fill an application form providing details of the beneficiary (like name of the
beneficiary, name of the bank branch where the beneficiary has an account, IFSC of the
beneficiary bank branch, account type and account number) and the amount to be remitted.
The application form will be available at the originating bank branch. The remitter
authorizes his/her bank branch to debit his account and remit the specified amount to the
beneficiary. Customers enjoying net banking facility offered by their bankers can also
initiate the funds transfer request online. Some banks offer the NEFT facility even through
the ATMs. Walk-in customers will, however, have to give their contact details (complete
address and telephone number, etc.) to the branch. This will help the branch to refund the
money to the customer in case credit could not be afforded to the beneficiary’s bank
account or the transaction is rejected / returned for any reason.

Step-2: The originating bank branch prepares a message and sends the message to its
pooling centre (also called the NEFT Service Centre).

Step-3 : The pooling centre forwards the message to the NEFT Clearing Centre (operated
by National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next
available batch.
Step-4: The Clearing Centre sorts the funds transfer transactions destination bank-wise and
prepares accounting entries to receive funds from the originating banks (debit) and give the
funds to the destination banks (credit). Thereafter, bank-wise remittance messages are
forwarded to the destination banks through their pooling centre (NEFT Service Centre).

Step-5: The destination banks receive the inward remittance messages from the Clearing
Centre and pass on the credit to the beneficiary customers’ accounts.

Indian Financial System Code (IFSC):

Indian Financial System Code (IFSC) is an alpha-numeric code that uniquely identifies a
bank-branch participating in the NEFT system. This is an 11 digit code with the first 4
alpha characters representing the bank, and the last 6 characters representing the branch.
The 5th character is 0 (zero). IFSC is used by the NEFT system to identify the originating /
destination banks / branches and also to route the messages appropriately to the concerned
banks / branches.

The structure of charges that can be levied on the customer for NEFT is given below:
 Inward transactions at destination bank branches (for credit to beneficiary accounts)
-Free, no charges to be levied on beneficiaries

 Outward transactions at originating bank branches – charges applicable for the

remitter are as follows:
- For transactions up to Rs 10,000: not exceeding Rs 2.50 (+ Service Tax)
- For transactions above Rs 10,000 up to Rs 1 lakh not exceeding Rs 5 (+ Service
Tax)
- For transactions above Rs 1 lakh and up to Rs 2 lakh: not exceeding Rs 15 (+
Service Tax)
- For transactions above Rs 2 lakh: not exceeding Rs 25 (+ Service Tax)

With effect from 1st July 2011, originating banks are required to pay a nominal charge of
25 paise per transaction to the clearing house as well as to destination bank as service
charge. However, these charges cannot be passed on to the customers by the banks.
The beneficiary can expect to get credit for the NEFT transactions within two business
hours from the batch in which the transaction was settled (currently NEFT business hours
are from 8 AM to 7 PM on all week days and from 8 AM to 1 PM on Saturdays)

In case of non-credit or delay in credit to the beneficiary account, the NEFT Customer
Facilitation Centre (CFC) of the respective bank can be contacted (the remitter can contact
his bank’s CFC; the beneficiary may contact the CFC of his bank) and can be escalated to
NEFT Help Desk (or Customer Facilitation Centre of Reserve Bank of India) at National
Clearing Cell, Reserve Bank of India, Mumbai or the General Manager, Reserve Bank of
India, National Clearing Centre, Mumbai Regional Office, Fort Mumbai 400001.

If it is not possible to afford credit to the account of the beneficiary for whatever reason,
destination banks are required to return the transaction (to the originating branch) within
two hours of completion of the batch in which the transaction was processed. For example,
if a customer submits a fund transfer request at 12.05 p.m. to a NEFT-enabled branch, the
branch in turn forwards the message through its pooling centre to the NEFT Clearing
Centre for processing in the immediately available batch which (say) is the 1.00 pm batch.
If the destination bank is unable to afford the credit to the beneficiary for any reason, it has
to return the transaction to the originating bank, not later than in the 3.00 pm batch. On
receiving such a returned transaction, the originating bank has to credit the amount back to
account of the originating customer.

NEFT can also be used to transfer funds from or to NRE and NRO accounts in the country.
This, however, is subject to the adherence of the provisions of the Foreign Exchange
Management Act, 2000 (FEMA) and Wire Transfer Guidelines.

Besides personal funds transfers, the NEFT system can also be used for a variety of
transactions including payment of credit card dues to the card issuing banks, payment of
loan EMI etc. It is necessary to quote the IFSC of the beneficiary card issuing bank to
initiate the bill payment transactions using NEFT.

In case of successful credit to the beneficiary's account, the bank which had originated the
transaction is expected to send a confirmation to the originating customer (through SMS or
e-mail) advising of the credit and mentioning the date and time of credit. For the purpose,
remitters need to provide their mobile number / e-mail-id to the branch at the time of
originating the transaction.
 The remitter can track the NEFT transaction through the originating bank branch or its
CFC using the unique transaction reference number provided at the time of initiating the
funds transfer. It is possible for the originating bank branch to keep track and be aware of
the status of the NEFT transaction at all times.

Following are the pre-requisites for putting through a funds transfer transaction using
NEFT:
 Originating and destination bank branches should be part of the NEFT network
 Beneficiary’s details such as beneficiary’s name, account number and account type,
name and IFSC of the beneficiary’s bank branch should be available with the
remitter
 Customers should exercise due care in providing the account number of the
beneficiary, as, in the course of processing NEFT transactions, the credit will be
given to the customer’s account solely based on account number provided in the
NEFT remittance instruction / message.

Benefits of NEFT:

NEFT offers many advantages over the other modes of funds transfer:

 The remitter need not send the physical cheque or Demand Draft to the beneficiary.
 The beneficiary need not visit his / her bank for depositing the paper instruments.
 The beneficiary need not be apprehensive of loss / theft of physical instruments or
the likelihood of fraudulent encashment thereof.
 Credit confirmation of the remittances is sent by SMS or email.
 Remitter can initiate the remittances from his home / place of work using the
internet banking also.
 Near real time transfer of the funds to the beneficiary’s account in a secure manner.

3.3. Internet Banking

Internet Banking allows the customer of a Bank to conduct bank transactions online, instead
of going to a bank and interacting with a teller. In a broad sense, it is the use of electronic
means to transfer funds directly from one account to another, rather than by cheque or cash. It
is a system of banking in which customers can view their account details, pay bills, and
transfer money by means of the internet.
 Uses of Internet Banking:

Customers use a password for conducting a number of transactions like NEFT funds
transfers, pay taxes, etc. on line. On line purchases of railway / bus / hotel bookings, are all
permitted in this channel. They can even fill up loan applications online.

Internet Banking may be used for:

 Payment of Bills
 Credit Card dues
 Insurance premiums,
 Customer services,
 Recharging prepaid phone and
 for shopping

Types of Internet Banking

 PC Banking: The term "PC banking" refers to the online access of banking
information from a personal computer. A solution for both personal or business
banking needs, this type of financial management allows you to conduct
transactions using an Internet connection and your computer in lieu of a trip to the
local bank branch or the use of an ATM. PC banking enables an account holder to
perform real-time account activities and effectively manage finances in a way that
avoids the hassle of daytime bank visits and eliminates the postage required to pay
bills by mail.

 Digital TV Banking: The Television Banking enables customers to conduct banking

business with television and TV set-top box as the terminal and remote control for
the operational tool based on the cable TV broadband network. Compared with
online banking, television banking is closer to the life of everyone. Customers of
television banking do not need to purchase a computer or bear the internet "jam";
compared with telephone banking, television banking has a more direct trading
interface and all-inclusive information display. Television banking enables
customers to complete banking transactions through the television, have access to
financial products and industry information, and experience a more fashionable and
convenient wealth management approach. With this service, customers can enjoy
 such financial services as bank card transfer, inquiry and bill payment. Television
banking has become another self-service channel following online banking,
telephone banking, mobile banking and ATM. The television banking is still in its
initial stage and has a limited number of customers; however, it will have plenty of
room for development with the help and promotion of digital television technology.

 Text Phone Banking: Banks use mobile texting facility to provide updates to the
customers. It uses the Short Message Services (SMS) for providing services such as
Credit / Debit to customer account alert, daily balance alert, Loan payment date
alerts etc.

Usage of Internet Banking:

 Step 1: Access Internet Banking - Obtain your User ID and Passwords.

 Step 2: Create your Own Unique User ID.
 Step 3: Link the Account Number to your User ID

Advantages of Internet Banking:

 It involves less cost, ensure transaction speed and efficiency. It ensures speed
banking and vast coverage and is available 24 X 7

Issues in Internet Banking: As with online banking, Internet Banking faces similar
issues which are:

 Security Learning difficulties

 Lack of skilled personnel
 Technical breakdowns
  Long start up time
 Inexpensive

Risks in Internet Banking:

 Increasing number of fraudulent websites

 Fake emails purporting to be sent from banks
 Attacks on online banking used today are based on deceiving the user to steal login
data and valid TANs. viz. phishing and pharming
 Cross-site scripting and key logger / Trojan horses can also be used to steal login
information.
 Man in the Browser attack, where a Trojan horse permits a remote attacker to
modify the destination account number and also the amount.

Phishing

Phishing is the centre stage of Internet scams. Phishing is the way of sending emails at
arbitrary, indicating to come from a candid company which is operating on the internet.
When the customers make an attempt, its request disclosing information at a bogus website
will be operated by them. Information entered on the bogus website is captured by the
criminals and they use it for their own purpose.

Skimming

Fraudsters use skimmers to make fake ATM cards, a swipe-card device which reads
consumer’s ATM card’s information. Scammers swipe information from credulous
customers by inserting onto an ATM. They take a blank card and by inserting the card they
are able to encode all the information when they swipe from an ATM and through a small
camera which is mounted on the ATM the skimmer catches the PIN.

Spoofing:

The invader creates a misleading context which false you in making an unsuitable security-
appropriate decision. For example false ATM machines have been set up. If they will be
having PIN number they will be having enough information to steal from the account.

Security Features
 Security token device for online banking
 Use of a secure website has become almost universally adopted
 Single password authentication
 PIN/TAN system where the PIN represents a password, used for the login
 OTP (One time password) to user's (GSM) mobile phone via SMS.
 Signature based online banking where all transactions are signed and encrypted
digitally
 Digital certificates are used against phishing and pharming
 Use of class-3 card readers is a measure to avoid manipulation of transactions by the
software in signature based online banking variants
 Users should use virus scanners and be careful with downloaded software or e-mail
attachments to protect Trojan attacks
3.4. Safe Deposit Lockers:

Safe deposit vaults or bank lockers have long been considered the safest place to store
valuable ornaments, stock certificates, deeds and other valuables. While most banks offer
such a facility, the locker size, annual rent, deposit required, time period and provision for
refund differs for various banks.

A box (usually located inside a bank) - is used to store valuables. A safe deposit box is rented
from the institution and can be accessed with keys, pin numbers or some other security pass.
Valuables such as documents and jewellery are placed inside and customers rely on the
security of the building to protect those valuables.

Process for hiring Bank Locker:

In order to rent a safe deposit vault, you must first have a savings account with the particular
bank. Some banks may also ask you to deposit a fixed amount as cautionary deposit for a
specific time period. You have to pay the locker rent in advance, either for one year or more,
depending on the bank. Apart from the usual documents required for opening a bank account
(identity and address proof), banks conduct a signature verification process before renting
out a locker.

You can operate the locker either singly or jointly, but only one key is allotted per customer,
while the other key remains with the bank.
A bank locker can be assigned to any adult, firm or association, on a single or joint basis.
You have to fill a simple locker application form and locker agreement, agreeing to abide by
the terms and conditions, and pay the deposit amount and the rent.
Most banks insist on some kind of financial collateral. So, they give a locker only to their
existing account holders, or to those who agree to open an account (savings or current) or
make a fixed deposit that covers rentals for three years and charges for breaking open the
locker in case of an eventuality.

Need of Bank Lockers:

Storing too much jewellery and valuables in the house at times becomes a security risk and
an impediment in case of natural calamities. Bank lockers offers you, a safe, trustworthy
space to store your valuables, jewellery, documents and other things.

Customer / Bank relationship:

The relationship between a person hiring the locker and the bank is that of a Lessee and a
lesser.

Bank Locker Charges

The rent may vary slightly for different branches of the same bank depending on the branch
location. The locker rent is higher if the branch is located in a prime commercial area of the
city. Moreover, private and foreign banks charge a much higher rent compared to public
sector banks.

If you decide to close your locker in mid year, in most cases, you forego the annual rent
which you paid at the beginning of the year. As regards the safety aspect, most banks claim
that confidentiality of the locker's contents is maintained, unless the income tax authorities
or the police require otherwise.

Persons who can avail Bank locker facilities: Locker facility is provided by the bank
at its select branches. For obtaining a locker at the bank, you must be an account holder
with the bank.

 Lockers can be allotted both individually (except minor) as well as jointly.

 The lockers are allotted on first come first served basis to the customers only.
  At the time of hiring the locker, bank will obtain a minimum-security deposit in the
form of a Fixed Deposit Receipt (FDR) from the lessee for the amount which would be
sufficient to cover 3 years rent and the charges for breaking open the locker in case of
such eventualities.
 The Security Deposit will be kept under Bank's lien in respect of rentals and other
dues on locker services.
 An acknowledgement will be issued by the bank for fixed deposit to be kept as
security deposit.
 The hirer of the locker will be provided the copy of the agreement i.e. 'Memorandum
of Letting' by the bank.
 Loss of key should be immediately informed to the bank branch.
 The bank is responsible for any loss.
 Charges for opening the locker, or replacing the lost key, and for changing the lock
shall be payable by the Renter(s).
 With standing instruction, the rent may be recovered by the bank from the deposit
account of the hirer on due date.
 The Renter is required to operate the locker at least once in every six months and if the
locker remains un-operated for more than a year from the last date of operation then the
bank has a right to cancel the allotment of the locker by giving a notice for security
reasons and treat the Renter/s as a defaulter, notwithstanding that the rent has been paid
up to date.
 The locker is to be operated during the specified timing displayed at the branches.

Operations of Bank Locker:

There are two keys for opening the locker. One key is with the lessee (customer) and the
other (one master key) is with the bank. The lessee needs to visit the branch during the
specified time mentioned for the locker operations.

 Lessee will sign the register filling in the locker number.

 Responsible Bank officer will verify the signature with the Bank records.
 If the signature tallies, the officer will take the customer to the locker room.
 Bank officer will open the locker with his key and then lesser will open the locker with
his key to open the locker.
 Once the locker is opened, the Bank officer will leave the locker room and the lesser
will deposit / withdraw valuables he wants
  Once he completes his transaction, he closes the locker door and locks the locker with
his key only.

The locker operation may vary from the Bank to Bank based on the type of locker, standard
procedure followed by the Bank

As per the RBI policy: “The bank will, in no way, be responsible / liable for the contents
kept in the locker by the hirer. In case of theft, burglary or similar unforeseen events, action
will be initiated as per law.” The RBI has also said that even if the banks do not know about
the contents of the locker, they should take necessary steps to protect the contents in the
locker. There have been a few cases in the past where customers have received
compensation for loss or damage to locker contents.

It is always beneficial to avail the benefits of nomination facility available to locker-hirers.

The major advantage of availing this facility is that in the event of unfortunate death of
locker-hirer, the right to operate the locker is vested in the person who has been designated
as the Nominee.

3.5. Summary:

In Demand draft as the Bank is the drawer, payment is certain and it cannot be dishonoured.

Remittance of funds using Demand Draft is done through the clearing and settlement process

ECS is used by institutions for making bulk payment of amounts towards distribution of
dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone /
electricity / water dues, cess / tax collections, loan instalment repayments, periodic
investments in mutual funds, insurance premium etc.

ECS Credit enables payment of amounts towards distribution of dividend, interest, salary,
pension, etc., of the user institution.

ECS Debit is useful for payment of telephone / electricity / water bills, cess / tax collections,
loan instalment repayments

NEFT is deferred net settlement (DNS) payment system which helps transfer of money in a
batch of one hour basis from 8 am to 7 pm

Real Time Gross Settlement is the system which helps transfer of funds on real time basis
(0900 to 1630 hrs) but has limit of minimum amount of Rs 2 lakhs.

Internet banking allows you to conduct bank transactions online with the use of electronic
means.

Bank Lockers provides facilities to keep personal valuables like will property papers and
jewellery

Keywords
DD – Demand Draft
ECS – Electronic Clearing System
NEFT – National Electronic Funds Transfer
RTGS - Real Time Gross Settlement
IFSC - Indian Financial System Code
OTP - One Time password

3.6. Practice Questions

I. Choose the correct option:

1. Which is the fastest mode of payment?

a) Cheque
b) Draft
c) NEFT
d) RGTS

2. Phishing is an electronic instrument for fishing

a) is related to cyber crime
b) is one of the latest forms of wishing somebody
c) none of them

3. Electronic Payment system used for crediting salary is known as ________.

a) ECS Debit
b) ECS Credit
c) NEFT
d) RTGS
 4. What does NEFT stands for?
a) National Economic Fund Transfer
b) National Electron Fund Tenor
c) National Electronic Fund Transfer

5. The Bank which initiates ECS credit is known as ______ Bank

a) Sponsor Bank
b) Destination Bank
c) Beneficiary Bank

6. In case of inward remittance through RTGS, ___ amount is charged by the Bank.
a) Zero
b) Rs 30 per transaction
c) Rs 55 per transaction.

7. Cash remittance limit for NEFT transaction for a walk in customer is

a) Rs 10,000
b) Rs 25,000
c) Rs 50,000
d) Rs 200,000

8. Indian Financial System Code is

a) Alpha numeric 11 digit code
b) Numeric code 11 digit code
c) Alpha numeric 8 digit code
d) Numeric code 8 digit code

9. Which is the costliest mode of payments?

a) Cheque
b) Demand Draft
c) RTGS
d) NEFT

Answers: 1- d, 2 – a, 3 – d, 4 – c, 5-a, 6 - a, 7 – c, 8 –a, 9 –a

II. Fill in the blanks:

1. Banker Lockers are not used for _____, _____, ______.

2. Pay orders are also called _____ cheques
3. Banks charges ___ for the issuance of Demand
4. In case of demand draft, your PAN number will be necessary if the amount of DD
exceeds Rs.______
5. RBI run __ NEFT batches on a normal day.
6. Minimum amount that can be transferred through RTGS is Rs ________________.
7. In case of ECS Credit, there is ___ debit and ____ credits
8. _________ and ________ can be used to steal login information in online banking
9. Digital certificates are used against _______ and ________
10. Bank locker operations requires ___ keys

Answer : 1 – Drugs, Guns and Explosives, 2 – Bankers’ cheque, 3 – Commission, 4 – Rs

10,000.00, 5 – 12, 6 – Rs 200,000.00, 7 – one and multiple, 8 – Key logger and Trojan
horses, 9 - phishing and pharming, 10 - 2
III. Answer in detail
1. What are advantages of using Demand draft?
2. Explain the process of obtaining a Demand draft?
3. What are the security issues in e banking?
4. What are the services provided through e banking?
5. What are the other utility services provided by the Bank?
6. What are the advantages of Electronic Clearing systems?
7. What are the differences between ECS Debit and ECS Credit?
8. What are the differences between NEFT & RTGS?
9. What is the need for Bank lockers?
10. Explain in brief the procedure for availing Bank locker?

IV. Activities:
1. Get demand draft request form and request the students to fill the same and discuss the
steps involved in obtaining a demand draft?
2. Fill in the request for RTGS & NEFT payment
3. Visit a Bank branch to see the locker operations.
Learning Objective – Unit 4
LOCATION DURATION-20 HOURS
INSURANCE SESSION-1 LIFE INSURANCE POLICIES
OFFICE AND Learning Knowledge Performance Teaching and
CLASSROOM Outcome Evaluation Evaluation Training
Method
Meaning of 1. Meaning of 1. Explain the Interactive
Basic concept Life meaning of Life lecture On the
of Life Insurance Insurance core concept
Insurance 2. Features of 2. Describe the Life Insurance
Policies Life advantages of Policies
Insurance Life Insurance Activity- Visit
3. Advantages 3. Evaluate the a Life Insurance
of Life Importance of Organization to
Insurance Life Insurance to get a general
4. Importance of individual overview of
Life 4. Substantiate the functioning of
Insurance key elements of an Insurance
Life Insurance organization

SESSION -2 TYPE OF LIFE INSURANCE POLICIES

Brief outlook on 1. Whole Life 1. Explain the Interactive
the various Plans concept of lecture-
types of Life 2. Endowment various types of Detailed
Insurance Plans Plans plans. discussion on
3. Term 2. Describe the the types of
Assurance usefulness of Life Insurance
Plan such plans. policies
4. Children Plans
5. Money Back Activity –
Plans  Visit any LIC
6. Group branch and
Insurance prepare a
Schemes Presentation
on any one
type of Life
Insurance
Plan
 Interaction
with an
Insurance
officer in
classroom.
SESSION – 3 PROCEDURE FOR TAKING POLICY
Understanding To analyze the 1. List out the steps Interactive
the procedure steps for taking a to be undertaken lecture- On the
for taking a policy while taking a procedure of
policy. 1. Proposal form Life Insurance taking a Policy
2. Proof of age Policy Activity-
3. First Premium 2. Explain the Collect all the
Receipt procedure in document
4. Policy Bond detail required for
 5. Certificate of taking Life
Insurance Insurance
6. Cover Note Policy.

SESSION-4 NOMINATION AND ASSIGNMENT OF A POLICY

Understanding 1. Meaning of 1. Discuss in Interactive
the concept of Nomination detail the lecture-
Nomination and 2. Meaning of concept of Highlight the
Assignment Assignment Nomination importance and
3. Difference 2. Explain with meaning of
between example the Nomination and
Nomination meaning of Assignment
and Assignment Activity- Group
Assignment 3. Distinguish Discussion
between highlighting the
Nomination importance of
and Nomination and
Assignment Assignment
with suitable
example
 UNIT 4

LIFE INSURANCE

OBJECTIVES
By the end of this module, you will be able to:
 Understand the concept of Life Insurance
 Understand features , advantages and Importance of Life Insurance
 Analyze various types of Life Insurance Policies
 Enumerate the procedure of taking Life Insurance Policies
 Understand the Nomination and assignment of Life Insurance Policies.

STRUCTURE
1.1.Life Insurance - Meaning
1.2.Features of Life Insurance
1.3.Advantages of Life Insurance
1.4.Importance of Life Insurance
Policies
1.5.Types of Life Insurance Policies
1.6.Procedure of Taking Life
Insurance Policy
1.7.Nomination and Assignment of
Life Insurance Policies
1.8.Summary
1.9.Key Words
1.10. Self Assessment Questions
1.1. Life Insurance - Meaning

Life Insurance is a financial cover for a contingency or risk linked with human life such as
loss of life by death, disability, accident etc. The
risk to human life is due to natural factors or
causes related to various types of accidents. When
human life is lost or a person is disabled
permanently or temporarily there is a loss of
income to the entire household.

It is not possible to value human life. Rather it

would be more appropriate to say that human life is beyond any value. However it would
also be inappropriate to say that loss of human life or a disability does not result into any
financial loss. Such loss would be primarily due to loss of income that could have been earned
by the effected person. Hence the most appropriate method to determine such loss would be to
assess the same on the basis of loss of income in the future years, also known as human life
value.

Life Insurance policies provide compensation for such loss by providing for payment of a
definite amount of money to be paid by the Insurer in the event the Insured dies or is disabled
permanently/temporarily during the term of the policy.

1.2. Features of Life Insurance

There are various ways of defining Life Insurance. Some of the definitions of Life Insurance
are as follows:

A. Life insurance is a contract to pay a certain sum of money on the death of a person in
consideration of the due payment of a certain annuity for his life calculated according to
the probable duration of life.

B. “Life insurance contract is a contract whereby a person (insurer) agrees for a

consideration (that is payment of a sum of money) or a periodical payment, called the
premium to pay to another (insured or his estates) a stated sum of money on happening
of an event dependent on human life.
 C. Life insurance is a contract in which one party agrees to pay a given sum of money upon
the happening of a particular event contingent upon the duration of human life in
consideration of immediate payment of a smaller sum or other equivalent periodical
payments by the other.

One of the basic factors that distinguish Life Insurance from other types of Insurances is that
Life Insurance is not a contract of indemnity whereas the other forms of Insurance are
essentially contracts of Indemnity. Under the principle of Indemnity the insured should be
compensated only for the loss that has been incurred by him as a result of the event in respect
of which the insurance has been taken. It will not be in order if the Insured should make any
profit out of such event.

The effect of Life Insurance not being a contract of indemnity is that on the happening of an
event insured against, the insurer should pay the agreed amount irrespective of whether
assured suffers a loss or not.

Based on this definition the essential features of life insurance can be summed up as under:

 It is a contract relating to human life.

 There need not be an express provision that payment is due on the death of a person.
 Money called premium has to be paid in advance by the Insured to the Insurer.
 The contract provides for payment of lump sum money
 The amount is paid at the expiration of a certain period or on the death of a person.

1.3. Advantages of Life Insurance

Life Insurance provides dual benefits to the persons taking such insurance. These dual
benefits are savings and security.
The following factors explain as to why this investment tool should be a part of one’s
financial plans.

A. Risk Cover

Life is today full of uncertainties. In this scenario Life Insurance ensures that the loved ones
of the Insured continue to enjoy good quality of life and the same should not be affected by
any unforeseen circumstances. Since in the event of death of the Insured, the amount
provided in the policy is paid by the Insurer to the next of kin who people then will be able
maintain a reasonable life style.

B. Planning Life Stage Needs

Life Insurance not only provides for financial support in the event of untimely death but also
acts as a long term investment. One can meet one’s goals, be it children's education, their
marriage, building your dream home or planning a relaxed and peaceful retired life. This is
because generally on the expiry of the term of insurance the insured gets the amount for
which policy was taken plus bonus/s.

C. Habit of Saving

Life Insurance is a long term contract where as a policy holder one has to pay a fixed
amount at specified periods. This builds the habit of Long term savings. Regular Savings
over a long period ensures that a decent corpus is built to meet various needs at different
stages of life.

D. Safety of Investment

The investment made in Life Insurance is quite safe as Life Insurance is a highly regulated
sector. The body that regulates Insurance Sector in India is called IRDA (Insurance
Regulatory and Development Authority)
 E. Liquidity

Life Insurance provides good liquidity to the Policy Holders as such policies provide an
option of taking loan against their policy. Thus when there is an urgent need of funds, the
insured can avail the facility of loan against his policy which will, however, depend upon the
surrender value of the Policy.

F. Tax Benefits

The premiums paid for life insurance policies and the amounts received in the event of death
or on maturity of the said policy attract tax benefits.

1.4. Importance of Life Insurance Policies

From the above it can easily be inferred that Life

Insurance is an essential part of a person’s financial
planning.

Apart from being an effective tool of saving, it can

ensure financial security to those who mean the most to
insured such as spouse, children and dependent parents
in the event of death of the insured.

A carefully executed life insurance policy can help a

person prepare for life’s uncertainties and give peace of mind knowing that the future of those
who rely on you is secure.

1.5. Types of Life Insurance Policies

As per the above discussion it becomes apparent that Life Insurance is required for both
protection and investment purposes. Based on the primary objective and benefits, life
insurance products are of the following types:

 Traditional plans like term insurance, endowment, money back, etc.

 Unit linked insurance plans
Let’s discuss each of them in detail.
A. Term Insurance

Term Insurance is the simplest form of life insurance. The payment of Insurance amount is
made only if death occurs during the term of the policy, which may, generally, range from
one to 30 years. Most term policies do not provide for any other benefit.

Thus the features of Term Insurance Plan are as follows:

 It is a pure life cover i.e. in the event of death of the

insured the sum assured is paid to the family
(beneficiaries/nominees).
 In case the insured survives the policy term, there is no
refund of premium.
 There is no investment component in a term plan.

Example

Mr. X took a term insurance plan from ABC Life Insurance Co. Ltd. for a period of 20 years
and sum assured of Rs.10lacs. In the event of his death, Rs.10lacs would be paid to Mrs. X.
If Mr. X survives the term, there will be no refund of premium.

B. Whole Life Insurance

Under this policy, premiums are paid throughout the life of the
Insured and the sum insured becomes payable only in the event of
the death of the insured. The policy remains in force throughout
the life of the assured and he continues to pay the premium till his
death. This is the cheapest policy as the premium is to be paid till
the death of the Insured hence the same i.e. the premium is low in
this policy as compared to other policies.
This type of Policy is also known as ‘ordinary life policy’.

C. Endowment Plans
An endowment policy is a saving linked Insurance policy with a specific maturity date. This
type of policy serves the dual purpose of saving as well as securing the family in the event of
death. Hence these days this is the most popular type of Life Insurance Policy.
The features of an endowment policy are as follows:
a) The term for which policy is taken is called Endowment Period.
b) The sum assured is paid at the end of the
endowment period or in the event of death of
the insured, whichever is earlier.
c) The premium under this policy is paid upto the
maturity of the policy ie the point of time when
the amount under the policy becomes payable.
d) Options are also available where premiums can
be paid for specific periods (terms like 5yrs/10
yrs/15 yrs etc) and maturity periods can be 10/15/20/25/30/35 years (depending on the
age of policy holder).

Under this type of Policy the premium would be little higher than the whole life policy.

D. Child Policies

These types of policies are taken on the life of the parent/child for the benefit of the child.
Under the terms of this policy the parent can plan to get funds when
the child attains various stages in life. Some Insurers offer waiver of
premium in case of unfortunate death of the parent/proposer during
the term of the policy.

These policies can be used towards education expenses, marriage

expenses and any other expenses that can be planned for the life at different life stages.
E. Annuity/ Pension Plans

When an employee retires he no longer gets his salary

while his need for a regular income continues. Though
there are Retirement benefits such as Provident Fund and
gratuity which are paid in lump sum but they may be spent
too quickly or may not be invested prudently. As a result of
this the retired employee finds himself without regular
income in his post - retirement days.

Pension is ideal solution to this problem as it entails benefit in the form of regular
income. Financial independence during old age is a must for everybody.

This issue of having regular income during old age is taken care off by Annuity Policies.
Annuities are series of payments received at fixed intervals over a fixed number of years or
over the lifetime of the individual.

Accordingly the features of Annuity Policy are as follows:

a) It is a policy under which the insured amount is payable to the assured by monthly or
annual installments after he attains a certain age.
b) The assured may pay the premium regularly over a certain period or he may pay the
premium regularly over a certain period or he may a lump sum of money at the
beginning of the Policy

These policies are useful to persons who wish to provide a regular income for themselves
and their dependents.
 F. Money Back Policies

Unlike ordinary endowment insurance plans

where survival benefits are payable only at
the end of endowment period, Money Back
Policy provides for periodic payments of
partial survival benefits during the term of
the policy, of course, so long as the policy
holder is alive.

Examples
a) In case of a 20 year Money Back Policy, 20% of the sum assured becomes payable
after 5,10, 15 years and the balance of 40% plus the accrued bonus becomes payable
at the end of 20th Year.
b) For a Money Back Policy of 25 years, 15% of the sum assured becomes payable
after 5, 10, 15, 20 years and the balance 40% plus the accrued bonus becomes
payable at the end of 25th year.

An important feature of this type of policies is that in the event of death at any time within
the policy term, the death claim comprises full sum assured without deducting any of the
survival benefit amounts, which have already been paid. Similarly the bonus is also
calculated on the full sum assured.

Thus money back policy is an endowment policy with liquidity benefits.

Illustration

Bhakt Sethi has opted for a Money Back Life Insurance Policy. His plan has a Sum Assured
of 5 lakhs for a policy term of 25 years. He would need to pay premiums for 25 years. And
he would get back a part of the Sum Assured at regular intervals. For example, for a policy
of 25 years, he would get 15% of Sum Assured after the 5th, 10th, 15th and 20th year of the
policy i.e. he gets 15 X 4 = 60% of the Sum Assured as Survival Benefit. On Maturity of the
policy he would get the remaining 40% of the Sum assured.

G. Group Insurance
Group insurance is an insurance that covers a defined group of people such as the members
of a Society or a Professional Association or the employees of a particular Organization.

In Life Insurance under Group Insurance Scheme the life insurance cover is allowed to all
members of the group. However, under this scheme the insured amount is paid only on the
death of a member of the group and there is no maturity value at the end of the scheme.

The premium rates are more competitive in Group Insurance as compared to other
insurances. These policies are suitable for large part of population who cannot afford
individual life cover. Further members of an eligible group who otherwise cannot be insured
can benefit through group insurance. Once the conditions of group insurance are satisfied,
members can get life insurance at significantly lower rates compared to individual policies.

The group may consist of employees, doctors, lawyers, credit societies etc. A group
insurance scheme can be either

a. Contributory scheme – In this case the premium on the group life insurance policy is
paid by both the employer and the employee.

b. Non-Contributory scheme – In this case premium is paid by the employer or the main
agency fully.

H. Unit Linked Insurance Plan

Unit linked insurance plans (ULIPs) aim to serve both the protection and investment
objectives of investing. ULIP’s are subject to capital market risks.
1.6. Procedure of taking Life Insurance Policies

The procedure for taking out a Life Insurance Policy is as under:

A. Fill a proposal form providing information such as his name, age, occupation, medical
history, particulars regarding his health and that of his parents, the amount he wishes to
be insured for, the type of policy, the rate and mode of premium and name of the
nominee.

B. Submit proof of age (Birth certificate, and baptism certificate for Christians, high school
certificate, service book , passport, adhar card ).

C. Obtain an 'Age admission certificate' from the Insurance Company

D. A medical examination by Insurer’s-approved doctors. The doctor's report is sent

directly to the Insurer. This step is often bypassed for someone very young or if the
insured amount is very small.

E. After the medical report, the Insurer’s

agent's confidential report is submitted to obtain
impartial information about the individual.

F. An assessment of risk is made based on the

information obtained. If the life proposed is found
insurable, then the Insurer accepts it and sends an
acceptance letter along with a premium notice
stating the amount of the premium payable and the due date.

G. On and from the date of payment of the first premium, the risk of the Insurer commences
on the life proposed and he/she becomes life insured. However, in case of certain
policies, the risk commences from a later date. Once the risk commences, Insurer
becomes liable to pay the full amount of insurance in the event of happening of the
insured event.

H. The signed and stamped original policy documents are dispatched to the individual.
1.7. Nomination and Assignment of Life Insurance Policies

A. Nomination

a. Meaning

Nomination means nominating a person to receive the benefits of a Life Insurance

Policy. The person so nominated is called the Nominee.

The nominee has the right to receive the amount assured in the event of the death of the
Insured.

The nominee need not necessarily be a relative or a Legal Representative of the assured
and can be changed at the choice of the policy holder any number of times.

b. How is Nomination effected

Nomination can be done at the inception of the

policy by providing details of nominee in the
proposal form. However, if the nomination is
not done at the inception of the policy, the
policyholder can nominate at a later date. This
nomination has to be effected by giving notice
in a prescribed form to Insurer and getting it
endorsed on policy bond.

c. Who Can Nominate

Nomination can be done only by a policyholder who is a major & holding Policy Bond
in his own name.

d. What are rights of a Nominee

Under Nomination, the Nominee gets only the right to receive the policy money in the
event of the death of the policyholder. Nomination does not pass on the property in the
policy. If nominee dies when the policyholder is still surviving then the nomination
 would be ineffective. Nomination has no effect if the policyholder is surviving. If
Nominee dies after the death of the policyholder but before receiving policy money,
then also Nomination becomes ineffective and money can be claimed only by the legal
heirs of the policyholder.

e. How can Nomination be cancelled

A nomination can be changed or cancelled either by an endorsement at the back of the

policy or by making a will. In the case of change or cancellation by a will, notice of
such cancellation or change would be required from the executors of the will after the
death of the insured. In case of change or cancellation through endorsement, it should be
notified to the Insurer for registration in its records.

B. Assignment

a. Meaning of Assignment of Policies

Assignment is a means whereby the beneficial interest, right and title under a policy get
transferred from the assignor to the assignee. Assignor is the policyholder who transfers
the title and 'Assignee is the person who derives the title from the assignor.
b. When can assignment be made

Assignment can be made only after acquiring the policy. Assignment can be done only
for consideration- for money or money's worth or good, moral and meritorious
consideration like, love and affection

c. How is the Policy assigned

Assignment can be done by mere endorsement on the policy or by a separate duly

stamped deed. Assignment can be done by the proposer, policyholder, or the absolute
assignee

d. What are the essential features of assignment

Assignment can be done by mere endorsement on the policy or by separate duly

stamped deed. Assignment can be done by the proposer, policyholder, or the absolute
assignee

e. What are the essential features of assignment

 The person assigning the policy must have absolute right or interest vesting in him in
respect of the policy.
 The assignor must be a major and competent to enter into a contract.
 The assignor must not be subject to any legal disqualification.
 A life insurance policy from LIC may be assigned only after a period of five years.
1.8. Summary


Life Insurance is a financial cover for a contingency or risk linked with
human life such as loss of life by death, disablement, accident etc.
 The most appropriate method to determine the financial loss due to loss of
human life would be to access the same on the basis of loss of income in the
future years. This is also known as human life value.
 Life Insurance provides dual benefits to the person taking such insurance.
These dual benefits are savings & security.
 Life Insurance Products are of the following types:
a) Traditional plans like term insurance, endowment, money back etc.
b) Unit linked Insurance Plans
 Nomination means nominating a person to receive the benefits of Life
Insurance Policy. The person nominated is called Nominee.
 Assignment is a means whereby the beneficial interest, right & title under the
policy gets transferred from assignor to assignee.

1.9. Key Words

a. Nomination
b. Assignment
c. Term Insurance
d. Whole Life Insurance
e. Endowment
f. Annuity

1.10. Self Assessment Questions

A. Fill Up the Blanks

a. Life Insurance is a __________ a cover for a contingency or risk linked with
_____ _________ such as loss of life by death, disability, accident etc.

b. Life Insurance is not a contract of _______ whereas other forms of insurance are
essentially contracts of __________.

c. Life Insurance provides dual benefits to the person taking the insurance. These
dual benefits are _______ & ________.
d. _________ linked ________ plan is a type of Life Insurance.
 e. An endowment policy is a saving linked insurance policy with a specific _______
date.

Answer key : a) financial; human life; b) indemnity; indemnity c) saving; security; d)

Unit; Insurance e) maturity

B. True or False
a. Life Insurance provides dual advantage of coverage of risk of life and
investment. State whether this statement is :
True/ False
b. Under Term Insurance the insured is paid only if death occurs during the term of
the policy. In case the insured survives the policy term, there is no return of
premium. State whether this statement is :
True/ False
c. The nominee has the right to receive the amount assured in the event of death of
the Insured. State whether:
True / False

d. Assignment of Life Insurance Policy can be done even before acquiring the Life
Insurance Policy. State whether
True/ False
e. Assignment of Life Insurance Policy cannot be done by simple endorsement. It
has to be done by separate duly stamped deed. State whether
True/False

Answer keys : a) True b) True c) True d) False e) False

C. Match the Following

S.No Section A Section B

1. Group Insurance Periodic Payments
2. Money Back Policy Retirement
3. Pension Plan Maturity Date
4. Endowment Policy Right to receive
5. Nomination Defined group of people

Answer Keys:

Section A Section B
1. 5
2 1
3 2
4 3
5 4

D. Choose the Correct Option

a. Assignment of Life Insurance Policy can be done only for _________ for money or
money’s worth.
Payment ; Consideration ; Premium ; Receipt.

b. A nomination of Life Insurance Policy can be changed or cancelled either by ________

at the back or by making a will.
Stamp ; Declaration ; Endorsement ; Statement

c. The issue of having regular income during old age is taken care off by ___________
Policies.
Endowment ; Benefit ; Annuity; Regular Income

d. The first step towards taking a Life Insurance Policy to fill up a ____________ form
providing requisite information about the person desirous of taking the policy.
Application; Proposal; Word ; Project
e. In case of a contributory scheme the premium on group life insurance policy is paid
both by the _____ & the ____________
Insured, Insurer; Insured, Nominee; Insured, Assignee; Employer, Employee.

Answer keys: a) Consideration b) Endorsement c) Annuity d) Proposal e) Employer,

Employee.

E. Answer in brief

a. Explain the meaning of the term Assignment of Life Insurance Policy.

b. Explain the meaning of the term Nomination of Life Insurance Policy
c. Explain the benefits of Annuity/ Pension Plans.

F. Answer in detail

a. Explain different types of Life Insurance Policies.

b. Explain the steps involved in taking Life Insurance Policies
Learning Objective – Unit 5
LOCATION DURATION-20 HOURS
INSURANCE SESSION-1 GENERAL INSURANCE
OFFICE AND Learning Knowledge Performance Teaching and
CLASSROOM Outcome Evaluation Evaluation Training
Method
Meaning and 1. Detail view Of 1. Explain the Interactive
Importance of General Meaning of lecture On the
General Insurance General core concept Life
Insurance 2. Enlisting the Insurance Insurance
Types of key features of 2. Enlist the need Policies
General General and Activity- List the
Insurance Insurance importance of companies which
3. Subsidiaries of General provide General
General Insurance Insurance.
Insurance 3. Identify
various
Subsidiaries of
General
Insurance
a. FIRE INSURANCE
Meaning, 1. Meaning of Fire 1. Discuss in Interactive
need, Insurance detail the lecture- On the
importance 2. Stressing the meaning of Fire scope of Fire
and Types of need and Insurance Insurance with
Fire Insurance importance of 2. Enumerate the need and
Fire Insurance importance of importance
3. Scope of Fire Fire Insurance Activity –
Insurance 3. Discuss the Name 10
4. Types of Fire various types of Insurance
Policy Fire Insurance companies which
 Specific Policy Policies provide Fire
 Value Policy Insurance.
 Average Policy
 Floating Policy

b. MARINE INSURANCE
Meaning, 1. Meaning of 1. Explain the Interactive
need, Marine meaning lecture- On the
importance, Insurance Marine meaning
Types of 2. Need and Insurance importance of
Marine Importance of 2. Enlist and Marine
Insurance Marine Explain the Insurance
Insurance various forms Activity- Name
3. Types of Marine 10 Insurance
of Marine
Insurance Policy companies which
Insurance
 Voyage Policy provide Marine
 Time Policy 3. Identify the
Insurance.
 Valued Policy need of Marine
 Floating Policy Insurance
 c. MISCELLANEOUS INSURANCE POLICIES (INSURANCE,
MOTOR VEHICLES INSURANCE, BURGLARY AND
THEFT INSURANCE)
Apprise the 1. Understanding 1. Explain the Interactive
concept and the concept and meaning of lecture- on the
need of meaning of various various
Miscellaneous  Health health Miscellaneous
Insurance Insurance Insurance , Insurance
Plans  Motor Vehicles Motor Policies
Insurance Vehicles Activity- Name
 Burglary and Insurance, 10 Insurance
Theft Insurance Burglary and companies which
2. Identify the Theft provide Motor
need of such Insurance Vehicle,
Policies 2. Derive the Burglary and
need and health Insurance.
importance of
such
Insurance
Policies to
the
Individuals
SESSION -2 PROCEDURE FOR TAKING FIRE/MARINE
INSURANCE
Identifying the Enlisting the Steps 1. List the steps Interactiv
procedure of involved in taking involved in e lecture- On the
taking the fire Fire Insurance taking o Fire steps for taking
Insurance and Policy/Marine Insurance Fire and Marine
Marine Insurance Policy Policy Insurance Policy
Insurance  Selecting the 2. Enumerate Activity- The
Insurance the procedure class should visit
Company of finalizing an insurance
 Filling up the the Marine company which
Proposal form Insurance offers fire and
 Gathering Policy marine
evidences insurance. They
 Evaluating should observe
Property the actual
 Accepting working and
Proposal prepare a
 Issuing Cover presentation on
note the procedure of
 Issuing Final taking/ Issuing
Policy such policies

UNIT 5

GENERAL INSURANCE

OBJECTIVES
By the end of this module, you will be able to:
  Understand the meaning of General Insurance
 Understand the Importance of General Insurance
 Analyze the types of General Insurance Policies
 Understand the concepts of Fire Insurance
 Understand the concepts of Marine Insurance
 Understand the concepts of Health Insurance
 Understand the concept of Theft and Burglary Insurance
 Establish the procedure of taking fire insurance policy and marine insurance
policy.

STRUCTURE
2.1.General Insurance – Meaning
2.2.Importance of General Insurance
2.3.Types of General Insurance Policies
2.4.Fire Insurance
2.5.Marine Insurance
2.6.Motor Vehicle Insurance
2.7.Health Insurance
2.8.Theft & Burglary Insurance
2.9.Procedure for taking Fire Insurance Policy
2.10. Procedure for taking Marine Insurance Policy
2.11. Summary
2.12. Key Words
2.13. Self Assessment Questions
2.1. General Insurance - Meaning

Such contracts of Insurance that do not come within the ambit of Life Insurance are called
General Insurance or Non Life Insurance Contracts.

General Insurance thus covers a variety of risks.

Some of the risks that are covered under General
Insurance are as follows:

 Damage to property due to fire, theft etc.

 Injury to a person due to Accident.
 Illness of a person
 Legal liabilities arising out of claims made
by third parties.
 Losses arising dues to credits given by parties

In the current times various types of risks are covered by General Insurance. In nutshell
General Insurance provides indemnity against loss arising from damage to property or assets,
expenditure or loss of earning arising from injury to a person, legal liabilities etc.

2.2. Importance of General Insurance

General Insurance is the best practical option for every person who would like to cover
himself from loss arising out of risks.

Risk is associated with everything that we do or are involved in. Immovable Properties that
we own are prone to fire and damage/destruction due to natural calamities such as
Earthquakes, Floods etc

Movable properties including personal effects such as jewelry are prone to theft and burglary.
Vehicles are also prone to accidents. Similarly human beings are prone to injuries resulting
from accidents and illnesses.

All the incidents enumerated above would result into financial losses.
Then there could be Third Party Claims on you. For instance, you are driving a car and
unfortunately you meet with an accident in which a pedestrian is injured. Such person will
have a Claim on you.

Also there could be claims on you while you are performing your professional duties. A
Doctor may be subject to a claim for negligence in treating a patient.

General Insurance, wherever applicable, would provide cover against such losses. The modern
day General Insurance covers practically all losses arising out of risks. The primary risk that is
not covered by General Insurance is death of a person which is covered by Life Insurance.

Needless to say, when the losses due to risks are covered a person would lead a peaceful life.
The Security provided by General Insurance would improve the quality of life of a person.

Apart from the peace of mind General Insurance also covers Business Losses and Personal
Losses in case the unfortunate incident happens resulting in the loss. This would help the
person who has suffered loss to run his business smoothly.

Illustration

Let us take an example where a fire occurs in a factory. As a result of the fire certain stocks
are damaged and are unusable. In case fire insurance has been taken for such stocks, the
Insurance Company would pay, to the entity which suffered the loss, an amount equivalent to
the loss or the amount of insurance whichever is less.

Thus such entity would be fully or partly compensated for the loss incurred by it. Even though
the fire may result into disruptions this would help it in running its operations smoothly even
after some time.
Thus from the above it is amply clear that General Insurance plays an extremely important
role in our lives.

2.3. Types of General Insurance Policies

A. Fire Insurance

Fire insurance is an insurance wherein the Insurer covers the loss incurred by Insured due to
destruction of or damage to property or goods, caused by fire.

Thus the primary features of Fire Insurance are as

follows:

a. The loss to the property should result from

damage due to fire.

b. The quantum of risk covered by the Insurer is

limited to the actual loss or the amount of
insurance cover taken by the Insured, whichever
is less.

The important factor to be noted here is that the damage to property should be caused
by fire and not by accident.

B. Marine Insurance

Marine Insurance is an Insurance against loss or damage or destruction of Cargo, freight,

merchandise or means or instruments of transportation whether by sea, land or air.

Thus marine insurance provides indemnity for loss or damage to ship, cargo or mode of
transport by which the cargo is taken, acquired or held between the point of Origin and point
of destination.

C. Motor Vehicle Insurance

Motor Vehicle Insurance, also referred to as ‘Automotive Insurance’, is a contract of

Insurance under which the Insurer indemnifies the Insured, who is the owner or an operator
of a Motor Vehicle, against any loss that he may incur due to damage to the property (i.e. the
Motor Vehicle) or any other person (i.e. Third Party) as a result of an accident.

There are two types of Motor Vehicle Insurance:

a. Mandatory

In India it is mandatory i.e. required by Law, for every owner or operator of a Motor
Vehicle to take insurance that provides for payment of compensation to a Third Party
who dies or suffers injuries due an accident caused by the said motor vehicle. Thus the
objective of such a policy is prevention of public liability to protect the general public
from any accident that may take place on the road.

It may be noted here that in Insurance the Insured is the First Party, the Insurance
Company is the Second Party and all other are third parties.

Such a policy is also known as ‘Act Only’ Policy as it is mandatory by Law.

b. Comprehensive

Under a comprehensive motor insurance policy apart from the coverage of Third Party
Liability (as provided in the mandatory policy) various other risks are also covered.
These include damage to the Motor Vehicle caused by fire, accident, theft etc.

As a single policy is issued to cover all risks, such type of policy is called
Comprehensive Policy.
D. Health Insurance Policy

The Health Insurance or Medi Claim Policies, as it is also referred to, are those policies
which cover hospitalization expenses for the treatment of illness/ injury as per the terms and
conditions of the policy.

These policies may also cover pre hospitalization expenses prior to hospitalization and also
post hospitalization expenses for the period specified in the policy.

Some of the Insurers also cover the following expenses in this policy:

a. Ambulance Charges

b. Day Care treatment charges i.e. treatment by using advanced technologies when even
24 hours of hospitalization is not required.

c. Hospitalization room rent per day/ number of days.

E. Personal Accident Insurance

The purpose of personal insurance is to provide for payment of a fixed compensation for
death or disablement resulting from injury to the body of a human being caused due to an
accident.

Thus under the contract of personal accident insurance if at any time during the tenure of the
said contract or policy, the insured (i.e. the person who has taken the policy) sustains any
bodily injury resulting from an accident, the Insurer shall pay to the insured or to his legal
representatives, as the case may be, a specified sum in the event of specified contingencies
such as permanent disability, death etc.

F. Burglary or Theft Insurance

Theft Insurance Contract covers losses from burglary, robbery and other forms of theft.

Theft generally refers to the act of stealing. Burglary is defined to mean the unlawful taking
of the property within the premises that have been closed and in which there are visible
marks evidencing forceful entry.
 2.4. Fire Insurance

A. What is Fire Insurance

Fire insurance is a contract under which the insurer in return for

a consideration (premium) agrees to indemnify the
insured/assured for the financial loss which the Insured may
suffer due to destruction of or damage to property or goods, caused by fire, during a
specified period.

Thus the basic ingredients of Fire Insurance are as follows:

a. The financial loss should be on account of fire resulting in damage or destruction of

property or goods.

b. The maximum amount which the Insured can claim as compensation in the event of
loss is agreed to between the parties at the time of entering into the contract.

It should be understood here that the event that results into financial loss would be fire and
not accident. Secondly the financial loss resulting from damage to a property may be much
more than the sum assured. In such case the Insurer would be liable to make payment of the
sum assured only.

For example, if a person has insured her house for Rs.10.00 lakh against loss by fire, the
insurer is not liable to pay the full sum, unless the house is destroyed by fire, but only pay
the actual loss subject to the maximum limit of Rs. 10.00 lakh.

B. Importance of Fire Insurance

Fire insurance provides the security for home, stock, furniture, business buildings, etc,. Fire
insurance provides the cost of replacement of properties and assets, which gets damaged due
to the fire accident.
Fire insurance provides the benefits for the home owner in these ways
 a. It provides the cost of damage for the building

b. It provides the replacement cost, if any furniture is destroyed due to the fire accident,
like plywood furniture, carpets, clothes

c. It provides replacement or repair cost for the electronic items, which is damaged due to
fire, like television, computer, and air coolers.

Fire insurance provides benefits to the business in the following ways

a. It covers the cost of stock damaged due to the fire

b. It provides the death benefits to employee, in case of death occurred due to the fire
accident.

c. It provides the replacement or repair cost for the machines, if they get damaged due to
fire accident.

d. It provides the medical expenses for the employees, if they get injured due to the fire
accident.

Fire accidents are very much unexpected but are heavily destructive. Hence, having fire
insurance is very much essential.

C. Proximity Clause

In order to establish a claim under a fire insurance policy it will not be sufficient to prove
that the loss is attributable to fire. It will also be essential to prove that the fire must be the
efficient proximate cause for the loss.

In other words the fire must be the immediate cause or dominant factor and not the remote
or the distant cause.

This is in terms of Proximity Clause.

D. Scope of Fire Insurance

a. Types of Losses covered by Fire Insurance are:

 The following losses have been held to be caused proximately by fire:
i. Loss which is the necessary consequence of fire in the sense that had there been no
fire it would not have happened.
ii. Loss which is reasonable and probable consequence of fire in that it results in ordinary
course of event from the happening of fire.
iii. Loss caused by water used to extinguish fire, destroying property or by Fire Brigade in
the execution of their duties.
iv. Loss arising as a consequence of removal of property from the building in which fire
is raging with the intention of saving it or loss due to theft during the confusion caused
by fire.
v. Wages paid to persons engaged in extinguishing fire.

b. Losses not covered by a fire insurance policy

In determining the extent of liability of the Insurer, the cause of fire is immaterial unless
it has been deliberately brought about by the Insured.

Thus the claim of Fire Insurance will not be admissible if the fire is caused by the wilful
act of the Insured or by someone else acting in concert with him.

Following are the losses that are not covered by the Fire Policy:

i. Loss due to fire caused by earthquake, invasion, act of foreign enemy, hostilities or
war, civil strife, riots, mutiny, martial law, military rising or rebellion or insurrection.
ii. Loss caused by subterranean (underground) fire.
iii. Loss caused by burning of property by order of any public authority.
iv. Loss or damage to property caused by its own fermentation or spontaneous
combustion e.g. exploding of a bomb due to an inherent defect in it.
v. Loss or damage by lightening or explosion is not covered unless these caused actual
ignition which spread into fire.

E. Types of Fire Insurance Policies

The different types of Fire Insurance Policies are as follows:

a. Specific policy
 A specific policy is a policy which insures the risk for a fixed amount. Under this Policy
the Insurer will pay the actual loss or the Insured amount whichever is less.

In this policy the value of the property has no relevance in arriving at the liability.

b. Valued Policy

In such a policy a fixed amount is paid as compensation irrespective of the loss. This type
of policy violates the principle of Indemnity and can be legally challenged, at the time of
loss the market value of the property is not taken into consideration.

c. Average Policy

A fire policy containing an average clause is called Average Policy. An average policy
requires the insurer to pay that proportion of actual loss as the Insurance bears to the
actual value of the property at the time of loss.

Example: If the actual value of the property is Rs 10,00,000 and the same is insured for
Rs 8, 00,000 and loss on account of fire is Rs 2,00,000. In such case the Insured will get
8,00,000 X 2,00,000 = 1,60,000
10,00,000

The balance of Rs 40,000 shall be borne by the Insured himself.

However if the insured amount is equal to the value of the property or more than that he
will get compensation of the entire loss i.e. Rs 2,00,000.

d. Floating Policy

This policy covers loss by fire caused to property belonging to the same person but
located at different places under a single sum and for one premium. Such a policy might
cover goods lying in two warehouses at two different locations. This policy is always
subject to 'average clause’.

e. Comprehensive policy
 This is also known as 'all in one' policy and covers risks like fire, theft, burglary, third
party risks, etc. It may also cover loss of profits during the period the business remains
closed due to fire.

f. Replacement or Re-instatement policy

In this policy the insurer inserts a re-instatement clause, whereby he undertakes to pay the
cost of replacement of the property damaged or destroyed by fire. Thus, he may re-instate
or replace the property instead of paying cash. In such a policy, the insurer has to select
one of the two alternatives, i.e. either to pay cash or to replace the property, and
afterwards he cannot change to the other option.

2.5. Marine Insurance

A. Introduction to Marine Insurance

Trade by sea is one the oldest form of trade that countries have followed. Transit of goods
by sea has various risks associated with it.

Such risks would include, amongst others, the following:

a. Losing the ship along with goods that being carried by it.

b. Sea Piracy i.e. robbery or criminal violence at sea.

c. Loss or damage to goods while goods are on ship

 d. Transit Delays

These risks gave rise to one of the most important and oldest forms of Insurance called
‘Marine Insurance’

In the current era, Marine Insurance is not limited to transportation by sea other inland
waters but also covers transportation of goods by rail, road, air as well as couriers.

Marine insurance plays a very important role in the field of overseas commerce and internal
trade of a country.

B. Types of Marine Insurance

Marine insurance now has a vast coverage but broadly marine insurance can be classified
into four major types:-
a. Hull Insurance:

The Hull is the basic structure of a Ship. On the Hull the superstructure is constructed.

Thus, as the name suggests, Hull Insurance covers any loss or damage to ships, tankers,
bulk carriers, smaller vessels, fishing boats and sailing vessels. It covers the insurance of
the vessel and its equipment i.e. furniture and fittings, machinery, tools, fuel, etc. A Hull
Policy may also cover the risk while the vessel is under construction. Ship-owners,
charterers, Shipbuilders, bankers, financiers of Ships or vessels who have Insurable
interest can buy this policy.

Since the goods that are loaded on the ship or any other type of vessel do not form a part
of the basic structure of the ship the loss arising out of damage of such goods is not
covered by Hull Insurance.

b. Cargo Insurance:

Cargo means the goods carried on a ship.

Thus as the terms suggests, cargo insurance is taken in respect of the cargo carried by the
ship from one place to another. This covers goods, freight and other interests against loss
or damage to goods whilst being transported by rail, road, sea and/or air.

It includes the cargo or goods contained in the ship and the personal belongings of the
crew and passengers. The cargo insurance policy may be a ‘time policy’ or ‘voyage
policy’. When the policy is for a definite period, it is known as ‘time policy’; if it is for a
particular voyage it is known as ‘voyage policy’ and there is no time limit. There may be
mixed time and voyage policies.

Cargo insurance, accordingly, concerns the following:

i. Export and import shipments by ocean-going vessels of all types,

ii. Coastal shipments by steamers, sailing vessels, mechanized boats, etc.
iii. Shipments by inland vessels or country craft, and
iv. Consignments by rail, road, or air and articles sent by post.

c. Freight Insurance
 Freight is the rent or amount paid for the transportation of cargo. This insurance provides
protection against the loss of freight. Generally, the ship-owner and the person receiving
the freight is one person. The freight could be paid in advance or at the destination.

Under the marine law the freight is paid only if the cargo reaches safely at the destination
port. Therefore, if the freight has been paid in advance, it poses no difficulty. There is a
problem sometime when the freight is payable at the destination and the cargo may get
lost during the voyage and does not reach its destination. In that event the freight is lost
and the shipping company has to bear the cost. In order to overcome such contingency
freight insurance is taken.

For example- The owner of goods is bound to pay freightage, under the terms of the
contract, only when the goods are safely delivered at the port of destination. If the ship is
lost on the way or the cargo is damaged or stolen, the shipping company loses the freight.
Freight insurance is taken to guard against such risk.

d. Liability Insurance

In this type of insurance the insurer undertakes to indemnify against the loss which the
insured may suffer on account of liability to a third party caused by collision of the ship
and other similar hazards.

A liability is a legal obligation owned to an individual or group/organization. For

example in case of collision the liability of the insured will be to the owner of the other
vessel (as well as other stakeholders depending on the related legal aspects).

Third party is a person or group apart from the two primarily involved in a
situation/transaction, especially in a dispute like collision of the ship with another ship. It
also covers legal liability towards damages to the third party in respect of accidental
death, bodily injury or loss of or damage to property along with Legal costs and expenses
incurred with prior consent.

C. Insurable Interest

In a contract of marine insurance, the insured must have insurable interest in the subject
matter insured at the time of the loss. Insurable interest means the policyholder must have a
pecuniary or monetary interest in the property which has been insured by him. Insurable
interest is not required to be present at the time of taking the policy but it should exist at the
time of loss. Under marine insurance, the following persons are deemed to have insurable
interest:-

 The owner of the ship has an insurable interest in the ship.

 The owner of the cargo has insurable interest in the cargo.
 A creditor who has advanced money on the security of the ship or cargo has insurable
interest to the extent of his loan.
 The master and crew of the ship have insurable interest in respect of their wages.
 If the subject matter i.e. goods etc of insurance is mortgaged, the mortgagor has
insurable interest in the full value thereof, and the mortgagee has insurable interest in
respect of any sum due to him.
 A trustee holding any property in trust has insurable interest in such property.
 In case of advance freight the person advancing the freight has an insurable interest in
so far as such freight is repayable in case of loss.
 The insured has an insurable interest in the charges of any insurance policy which he
may take.
Thus anyone having an interest in the transaction or “insurable interest” can procure
insurance cover.

D. Types of Marine Insurance Policies

There are various types of Insurance Policies under Marine Insurance depending on the
duration & type and the nature of the risk that is covered.
Some of the Marine Insurance policies are:

a. Specific Voyage policy

This is a policy in which the subject matter is insured for a particular voyage irrespective
of the time involved in it.
In this case the risk is initiated only when the ship starts on the voyage. This policy is
valid for a single voyage or transit. The policy will be issued before the voyage starts.
The coverage will cease immediately on completion of the voyage.

The specific voyage policy must show complete details of the risk. It should contain
particulars of conveyance/Vessel name/ Way bill or Bill of Lading* the date and sum
insured terms and conditions of cover voyage cargo description etc like all other marine
policies.

A waybill or Bill of Lading is a document issued by a carrier giving details and

instructions relating to the shipment of a consignment of goods. It serves as evidence that
the goods were actually shipped. It also gives the particulars of the cargo.

b. Time policy

This is a policy in which the subject matter is insured for a definite period of time.

The ship may pursue any course it likes; the policy would cover all the risks from perils
of the sea for the stated period of time. A time policy cannot be for a period exceeding
one year, but it may contain a 'continuation clause'. The 'continuation clause' means that
if the voyage is not completed within the specified period, the risk shall be covered until
the voyage is completed, or till the arrival of the ship at the port of call.

c. Mixed policy

This is a combination of voyage and time policies and covers the risk during particular
voyage for a specified period of time.
d. Valued policy

This is a policy in which the value of the subject matter insured is agreed upon between
the insurer and the insured and it is specified in the policy itself.

e. Open or Un-valued policy

This is the policy in which the value of the subject matter insured is not specified. Subject
to the limit of the sum assured, it leaves the value of the loss to be subsequently
ascertained. This policy is issued for transit of goods within India. Policy is valid for one
year and all transits during the policy period and declared are automatically covered by
the insurance company subject to the availability of the overall sum insured.

f. Open Cover

This policy which is issued for a policy period of one year indicates the rates, terms and
conditions agreed upon by the insured and insurer to cover the consignments to be
imported or exported.

A declaration is to be made to the insurance company as and when a consignment is to be

sent along with the premium at the agreed rate.

The insurance company will then issue a certificate covering the declared consignment.
Open cover is usually issued for import/export. The open cover is a contract affected for a
period of 12 months whereby the insurance company agrees to provide insurance cover to
all shipments coming within the scope of the open cover. Open cover is not a policy. It is
an unstamped agreement. As and when shipments are declared, specific policies are
issued as evidence of the contract and on collection of premium.

g. Floating policy

This is a policy which only mentions the amount for which the insurance is taken out and
leaves the name of the ship(s) and other particulars to be defined by subsequent
declarations. Such policies are very useful to merchants who regularly dispatch goods
through ships.

h. Wagering or Honour policy

 This is a policy in which the assured has no insurable interest and the underwriter is
prepared to dispense with the insurable interest. Such policies are also known as 'Policy
Proof of Interest (P.P.I).

i. Special Declaration Policy

This is a form of floating policy issued to clients whose annual estimated dispatches (i.e.
turnover) by rail / road / inland waterways exceed Rs 2 cores. Declaration of dispatches
shall be made at periodical intervals and premium is adjusted on expiry of the policy
based on the total declared amount. When the policy is issued sum insured should be
based on previous year’s turnover or in case of fresh proposals, on a fair estimate of
annual dispatches.

j. Special Storage Risks Insurance

This insurance is granted in conjunction with an open policy or a special declaration

policy. The purpose of this policy is to cover goods lying at the Railway premises or
carrier’s godowns after termination of transit cover under open or special declaration
policies but pending clearance by the consignees. The cover terminates when delivery is
taken by the consignee or payment is received by the consignor, whichever is earlier.

k. Annual Policy

This policy, issued for 12 months, covers goods belonging to the insured, which are not
under contract of sale, and which are in transit by rail / road from specified depots /
processing units to other specified depots / processing units. This policy may be issued to
cover goods in transit by road or rail or sea from specified depots or processing units
owned or hired by the insured. The goods covered must belong to or held in trust by the
insured. These policies cannot be assigned or transferred. For such policies the sum
insured should not be less than Rs 5,000/-.
 l. “Duty” Insurance

Cargo imported into India is subject to payment of Customs Duty, as per the Customs
Act. This duty can be included in the value of the cargo insured under a Marine Cargo
Policy, or a separate policy can be issued in which case the Duty Insurance Clause is
incorporated in the policy.

Warranty provides that the claim under the Duty Policy would be payable only if the
claim under the cargo policy is payable.

This policy also covers loss of custom duty paid in case goods arrive in damaged
condition. This policy can be taken even if the overseas transit has been covered by an
insurance company abroad, but it has to be taken before the goods arrive in India.

2.6. Motor Vehicle Insurance

A. Introduction to Motor Vehicle Insurance

Motor Vehicle Insurance, also referred to as ‘Automotive Insurance’, is a contract of

Insurance under which the Insurer indemnifies the Insured, who is the owner or an operator
of a Motor Vehicle, against any loss that he may incur due to damage to the property (i.e. the
Motor Vehicle) or any other person (i.e. Third Party) as a result of an accident.
There are two types of Motor Insurance viz:

 Mandatory Motor Vehicle Insurance

 Comprehensive Motor Vehicle Insurance

B. Classification of Motor Vehicles

For the purpose of motor insurance the motor vehicles are classified into following three
broad categories:

a. Private cars

b. Motor cycles and motor scooters

c. Commercial vehicles which are further classified into

i. Goods carrying vehicles

ii. Passenger carrying vehicles e.g.
 Motorized rickshaws
 Taxis
 Buses
iii. Miscellaneous Vehicles, e.g.
 Hearses (funeral van)
 Ambulances
 Cinema Film Recording & Publicity vans
 Mobile dispensaries etc

C. Classification of Parties

In case of motor vehicle insurance the classification of the parties is as follows:

 The Insured is the First Party

 The Insurer is the Second Party
 All other parties are Third Parties

D. Mandatory Motor Vehicle Insurance

There are situations where an accident caused by Motorist may result into the injury or death
of a third party. Such third party may be a pedestrian walking on the road or who is knocked
down by the motor vehicle or a passenger who is travelling in the vehicle. Similarly the
motor accident may also result in the damage to the property of a Third Party.

In the earlier days, such third persons were not able to get any compensation as the motorists
did not have enough resources to compensate them and the insurance policies also did not
provide for the insured to compensate these victims of accidents.

This anomaly was removed with the enactment of Motor Vehicle Act 1988 which provides
for mandatory insurance against Third Party Risks.

Thus while the Insurance against damage to motor vehicles caused by an accident is not
mandatory the insurance of third party liability arising out of use of motor vehicles in public
places is made mandatory. Accordingly no motor vehicle can ply in a public place without
such Third Party Insurance.

Quantum of Liability under Third Party Insurance

The policy of insurance should cover the liability incurred in respect of an accident as
follows:

a. In respect of death of or bodily injury to any person, the amount of liability incurred is
without limit i.e. unlimited

b. In respect of damage to any property of third party: A limit of Rs.6,000/-.

The liability in respect of death of or bodily injury to any passenger of a public service
vehicle in a public place, the amount of liability incurred is unlimited.

E. Comprehensive Insurance

Under a comprehensive motor insurance policy apart from the coverage of Third Party
Liability (as provided in the mandatory policy) various other risks are also covered. Such
policy may provide coverage for the damage to the motor vehicle caused by the following
events:

 Fire, Explosion, Self- Ignition, Lightning

 Burglary/Housebreaking / Theft
  Riot & Strike
 Earthquake
 Flood, Storm, Cyclone, Hurricane, tempest, inundation, hailstorm, frost
 Accidental external means
 Malicious Act
 Terrorism acts
 While in Transit by Rail/ Road, Inland waterways, Lift, Elevator or Air
 Land slide / Rock slide

These damages caused due to the above events are called ‘Own Damages’. Thus a
Comprehensive/ Own Damage Policy covers both Third Party Liability (Act Liability) and
Own Damage.

It will be in the interest of the Insured that apart from coverage of third party liability which
as explained earlier is mandatory, maximum possible risks should be covered.

2.7. Health Insurance

Health Insurance is an insurance against the risk of covering medical expenses among
individuals. With Medical costs on the rise and increased awareness about health related
issues, a large number of people opt for health insurance covers. Health insurance has become
one of the most important insurance policies that people opt for. A health insurance cover
helps in reducing the burden of medical bills and expenditure.

A. What is Health Insurance?

IRDA regulations define Health Insurance

Business as: “Health insurance business” or
“health cover” means the effecting of
insurance contracts which provide for
sickness benefits or medical, surgical or
hospital expense benefits, including assured
benefits and long- term care, travel insurance
and personal accident cover.
Thus the term ‘Health Insurance’ relates to a type of insurance that essentially covers one’s
medical expenses.

Accordingly a health insurance policy is a contract between insurers and an individual /

group in which the insurer agrees to provide specified health insurance cover for a particular
“premium” subject to terms and conditions specified in the policy.

In case of medical emergencies or medical illnesses (as covered and specified by the policy)
the insurer agrees to pay for the expenses incurred (as per the specified amount) thereon.
Health insurance is important in times of hospitalization as one gets cover from the Insurer
and saves the insured from excess expenditure. For a consideration known as premium,
which the assured needs to pay the insurer, the insurer agrees to cover certain medical
expenses as specified in the policy.

B. Coverage under Health Insurance

A Health Insurance Policy would normally cover expenses reasonably and necessarily
incurred under the following heads in respect of each insured person subject to overall
ceiling of sum insured (for all claims during one policy period).

Thus, all expenses incurred as part of treatment or hospitalization will be covered if:

 It is within the policy period

 Expenses covered are limited to the amount insured

In a health insurance policy the following may be covered:

 Room, boarding expenses

 Nursing expenses
 Fees of surgeon, anaesthetist, physician, consultants, specialists
 Anaesthesia, blood, oxygen, operation theatre charges, surgical appliances, medicines,
drugs, diagnostic materials, X-ray, Dialysis, chemotherapy, Radio therapy, cost of pace
maker, Artificial limbs, cost or organs and similar expenses.

Health policies may also contain a provision for reimbursement of cost of health check up.

C. Sum Insured
The sum assured is decided by the kind of policy the insured is buying. The Sum Insured
offered may be on an individual basis or on floater basis for the family as a whole.

D. Types of Health Insurance Policies

The commonest form of health insurance policies in India cover the expenses incurred on
Hospitalization, though a variety of products are now available which offer a range of
health covers, depending on the need and choice of the insured. The health insurer usually
provides either direct payment to hospital (cashless facility) or reimburses the expenses
associated with illnesses and injuries or disburses a fixed benefit on occurrence of an illness.
The type and amount of health care costs that will be covered by the health plan are
specified in advance.

Health insurance policies are available from a sum insured of Rs 5,000 in micro-insurance
policies to even a sum insured of Rs 50 Lakhs or more in certain critical illness plans. Most
insurers offer policies between 1 lakh to 5 lakh sum insured.

Also, while most non-life insurance companies offer health insurance policies for a duration
of one year, there are policies that are issued for two, three, four and five years duration
also.

A Hospitalization policy covers, fully or partly, the actual cost of the treatment for hospital
admissions during the policy period.

A Critical Illness benefit policy provides a fixed lump sum amount to the insured in case of
diagnosis of a specified illness or on undergoing a specified procedure.

There are also other types of products, which cater to the needs of specified target audience
like senior citizens.

Thus there are many types of policies issued by the Insurance Companies. The variation is
based on the coverage i.e. What all the policy will insure the insured for, age group and
number of people insured.

Some of the main policy types are listed below:

a. Personal Accident Policy

This policy is basically designed to offer compensation to the insured person who suffers
bodily injury solely as a result of an accident which is external, violent and visible. Hence
death or injury due to any illness or disease is not covered by the policy.

This policy offers compensation in case of death or bodily injury to the insured person,
directly and solely as a result of an accident, by external, visible and violent means. The
policy operates worldwide and is a 24 hours cover.

Different coverage’s are available ranging from a restricted cover of Death only; to a
comprehensive cover covering death, permanent disablements and temporary total
disablements.

Family Package cover is available to Individuals under Personal Accident Policy whereby
the proposer, spouse and dependent children can be covered under a single policy with a
10% discount in premium.

Group personal accident policies are also available for specified groups with a discount in
premium depending upon the size of the group.

There are many other variations of this policy; for example the New India Assurance
Company Limited offers the following:

 Individual Personal Accident policy.

 Group Personal Accident policy.
 Passenger Flight Coupon - Covering personal accident risk whilst travelling as a
passenger on a scheduled flight.
 Garmin Personal Accident Policy - for persons residing in rural areas where
benefits are covered for a capital sum insured of Rs. 10,000/-.
 Janata Personal Accident policy - where benefits are covered for a maximum sum
insured of Rs.1,00,000/-. Long Term Policies can also be issued up to 5yrs.
 Student Safety Insurance - for schools and colleges, covering students against
Personal Accident benefits for a capital sum insured of Rs. 10,000/-.
 Raj Rajeshwari Mahila Kalyan Yojna - for women in the age group of 10 to 75
years. Where benefits are covered for a capital sum insured for Rs. 25,000/-. In
case of death of an unmarried woman due to an accident, Rs. 25,000/- is payable
to the nominee or legal heir. In case of a married woman, if the husband dies due
 to an accident, Rs. 25,000/- is payable to the wife but if the wife or insured dies
no compensation is payable.
 Bhagyashree Child Welfare Policy - for girl child in the age group of 0 to 18
years. Whose parent’s age does not exceed 60 yrs. In case of death of either or
both parents due to an accident, a sum of Rs. 25,000/- is deposited in the name of
the girl child with a financial institution named in the policy which will disburse
amounts as specified for the benefit of the girl child to the living parent or to the
nominated guardian. Group policies can also be issued.

b. Medi claim Policy

This Policy is designed to give the insured, protection against unforeseen Hospitalization
expenses. This insurance is available to persons between the age of 18 years and 65 years.
Children between the age of 3 months and 25 years can be covered provided they are
financially dependent on the parents and one or both parents are covered simultaneously.
The upper age limit will not apply to a mentally challenged child and an unmarried
daughter.

This Policy does NOT cover ALL cases of Hospitalization. Any Hospitalization expense
relating to a Pre Existing Disease is not payable. Similarly, a Hospitalization expense for
pregnancy is not covered under the Policy. There are other such instances, where the
claim is not payable. These exclusions and other details are listed in the policy document.

For Medi claim Policies, each Insured Person has a separate Sum Insured. The insurer
will pay Hospitalization expenses up to a limit, known as Sum Insured. In cases where
the Insured Person is hospitalized more than once, the total of all amounts paid

 for all cases of Hospitalization,

 expenses paid for medical expenses prior to Hospitalization,
 expenses paid for medical expenses after discharge from hospital, and
 Any other payment made under the Policy shall not exceed the Sum Insured.

Another variation of this policy is the Family Medi claim policy. For Family Medi claim
2012 Policies, the Sum Insured is for all persons covered. In Family Medi claim 2012
policies, any payment made to one Insured Person would make the Sum Insured reduced
for all Insured Persons.
 The total payments (under a Family Medi claim 2012 Policy) for all Insured Persons for
all claims during the Policy period shall not exceed the Sum Insured.

c. Floater Health Insurance Policy:

Family Floater is one single policy that takes care of the hospitalization expenses of the
entire family. The policy has one single sum insured, which can be utilized by any/all
insured persons in any proportion or amount subject to maximum of overall limit of the
policy sum insured. Quite often Family floater plans are better than buying separate
individual policies. A family Floater plan takes care of all the medical expenses during
sudden illness, surgeries and accidents. This insurance is available to persons between the
ages of 18 years to 60 years.

FLOATER BENEFIT means the Sum Insured as specified for the proposer under the
policy, is available for any or all the members of his /her family for one or more claims
during the tenure of the policy.
 The Family Floater Medi claim Policy can be issued to the persons up to 60 years of age
covering the following family members:

 Self
 Spouse
 Dependent children - Maximum two

Parents/Parents-in law/ brothers and sisters are not covered under Family Floater Policy
even if they are residing with the proposer.

The other features of Floater Health Insurance Policy are:

 Sum Insured: Minimum Sum Insured is Rs. 2 lakhs and Maximum Sum Insured is
Rs 5 lakhs.
 Premium: Premium is as per Individual Medi claim Policy (2007). The basic
premium will be as per highest age of the family member.

For example, a family consists of self, spouse and two children purchases health
insurance of Rs 1.00 lakh.

Under the floater policy, any family member can avail the medical claim of Rs 1.00 lakh.
The premium will be applicable to the highest aged member of the family.

d. Critical Illness Insurance Policy:

Critical illness insurance or critical illness cover is an insurance product, where the
insurer is contracted to typically make a lump sum cash payment if the policyholder is
diagnosed with one of the critical illnesses listed in the insurance policy. Critical Illness
insurance covers hospitalization expenses and also gives a lump sum compensation that
can help one meet day to day expenses .The policy may also be structured to pay out
regular income and the payment may also be on the policyholder undergoing a surgical
procedure, for example, having a heart bypass operation.

The contract terms contain specific rules that define when a diagnosis of a critical illness
is considered valid. It may state that the diagnosis need be made by a physician who
specializes in that illness or condition, or it may name specific tests, e.g. EKG changes of
a myocardial infarction, that confirm the diagnosis.
e. Group Health Insurance Policy:

The Group Health Insurance Policy is available to any Group / Association / Institution /
Corporate body of more provided it has a central administration point and subject to a
minimum number of persons to be covered. The group policy is issued in the name of the
Group / Association / Institution / Corporate Body (called insured) with a schedule of
names of the members including his/her eligible family members (called insured persons)
forming part of the policy.

The coverage under the policy is the same as under Individual Medi claim Policy with the
following differences:-

 Cumulative bonus and Health Check up expense are not payable.

 Group discount in the premium is available
 Renewal premium is subject to claims made during the previous policy.
 Maternity benefit extension is available at extra premium. Option for maternity
benefits has to be exercised at the inception of the policy period and no refund is
allowable in case of insured cancellation of this option during currency of the
policy.
f. Overseas Medical Policy:

Medical expenses incurred by the insured persons, outside India as a direct result of
bodily injuries caused or sickness or disease contracted are covered by this policy. Policy
is to be taken prior to departure from India. Premium payable in Rupees and Claims
settled abroad in foreign Currency. Policy is available for frequent corporate travellers.

Eligibility: Indian Residents undertaking bona fide trips abroad for:

 Business and official purposes.

 Holiday purpose
 Accompanying spouse and children of the person who is going abroad will be
treated as going under holiday travel.
 Foreign Nationals working in India for Indian employers of Multi-National
Organisation getting their salary in Indian Rupees, covering their official visits
abroad provided they are undertaken on behalf of their employers.
 Age Limit:
 For adults up to 70 years
  Cover beyond 70 years is permissible at extra premium.
 Children between the ages of 6 months to 5 years are covered by
excluding certain specific children diseases.

These policies may also give ADDITIONAL Add-on benefits like:-

 Personal Accident in the foreign country

 Flight delays beyond 6 hours
 Loss of checked in Baggage
 Delay of checked in Baggage
 Loss of passport
 Personal Liability arising out of any accident.
 Premium depends on the Age-band, Trip-band and Country of visits. Initially
cover up to 180 days is provided under Business & Holiday Plan .Extension is
allowed on original policy for further period of 180 days subject to declaration of
good health.

g. Senior Citizen Medi claim Policy

This insurance policy is for senior citizens. Any senior citizen resident in India and aged
between 60 and 80 can buy this policy. If renewed without a break, the cover can be
continued up to age 90.

The Proposers must undergo a prescribed pre-acceptance health check at their own cost to
identify pre- existing diseases. The health check may be waived if the proposer is already
having Medi claim insurance in continuity with the insurance company. This policy
covers:

 Hospitalization expenses incurred for the treatment of illness/injury.

 Pre- and post-hospitalization expenses up to 30 and 60 days respectively.
 Ambulance Charges.
 Limited cover for hospitalizations in government and /or registered Ayurvedic
/Homeopathic and Unani hospitals.
 Pre-existing diseases are covered only after 18 months of continuous insurance
with the insurance Company. Pre-existing conditions like Hypertension, Diabetes
mellitus and its complications are covered after 18 months of continuous
insurance but only on payment of additional premium.
 There are many new products and policies introduced by various insurance companies
which offer additional “benefits”. These types of products, offer lump sum payments like
on undergoing a specified surgery (Surgical Cash Benefit), or the Hospital Cash
Supplementary policy which gives a lump sum or a daily allowance which can be used
for medical and non-medical expenses you incur during hospitalization

2.8. Theft & Burglary Insurance

A. Difference between Burglary and Theft

Theft is the unlawful taking of property of another: the term includes such crimes as
burglary, larceny and robbery.

Burglary is a theft committed by breaking into or out of the premises. Evidence of breaking
in, is necessary.

Thus Burglary is a specific type of Theft. The basic premise is the same. The person
carrying out theft or Burglary forcefully or unlawfully takes the property that lawfully
belongs to someone else.

B. Burglary and Theft Insurance

Theft Insurance Contract covers losses from

burglary, robbery and other forms of theft.

These policies generally provide for indemnity

against loss of both business assets and personal
assets of the Insurer.

Theft and Burglary Insurance Policies, in case of Business Assets, provide for coverage of
property contained in business premises, stocks owned or held in trust/ commission. It can
be further extended to cover cash, valuables, securities kept in locked safe or cash box in
locked steel cupboard.

C. Losses covered under Burglary and Theft Insurance

Theft Insurance generally provides coverage for the following occurrences:

  Loss or damage to the Insured Property due to burglary and/or housebreaking
 Damage to premises caused by burglars during burglary or attempts of burglary.
 The policy can be extended to cover riot, strike, malicious damage and theft.

D. Exclusions from the Policy

The theft insurance policy would generally not cover the following losses/damages:

 Acts involving the family members or employees of the Insured

 Due to war perils, riot & strike, natural calamities and nuclear perils.
 For items stolen from a safe using a key or duplicate key unless it is obtained by
violence or threat.

This list is not exhaustive. However some of the risks mentioned above may be covered by
payment of additional premium.

E. Extent of Indemnity

The extent of loss compensated under this policy would be as follows:

 Actual loss / damage to the insured property caused by burglary and housebreaking.
 If the sum assured is not adequate the policy pays only the proportionate loss.

2.9. Procedure for taking Fire Insurance Policy

A person desirous of taking a Fire Insurance Policy should follow the following steps:

A. Selection of Company

As a first step the fire insurance company with which the insurance is to be effected must be
identified.

B. Proposal Form

Once the Insurance Company has been selected the next step is to fill the proposal form
which forms the basis of the contract.
  The proposal Form would require the following details to be filled up:
 Name and Address of the Proposer
 Nature of Business
 Details of Asset to be Insured
 Type of Fire Insurance Policy i.e. Specific Policy, Comprehensive Policy, Valued
Policy
 Current Market Value of the Asset
 Amount for which the Insurance is to be taken.

C. Evidence of Credibility

The Insurance Company may check the credentials of the proposer to establish his
credibility and ensure that he has not been involved in any unscrupulous activity.

D. Survey of the Property

The next step in Fire Insurance is to take the survey of the property proposed to be insured
by qualified experts known as Surveyors.

The Surveyors are to inspect the property carefully and to estimate the degree of risk
involved. It is on this basis of the Surveyor’s Report that the Insurance Company accepts or
rejects the proposal. In case the proposal is accepted the rate of premium is quoted.

E. Acceptance of Proposal Form

On the basis of the proposal and the Surveyor’s Report the Insurance Company would
accept or reject the proposal.

F. Commencement of Risk

The next step is to pay premium. Once the premium is paid the coverage of risk would
commence.

G. Cover Note

The Insurance Company may accept risk unconditionally or subject to certain conditions and
may give provisional protection to the Insured by a document known as Cover Note.
 H. Policy

The final step is to issue the Fire Insurance Policy.

2.10. Procedure for taking Marine Insurance Policy

The following steps are involved in taking a Marine Insurance Policy:

 Submission of form
 Quotation from the Insurance Company
 Payment of Premium
 Issue of cover note/Policy

A. Submission of form

The form will have the following information:

a. Name of the shipper or consignor (the insured).

b. Full description of goods to be insured: The nature of the commodity to be insured is

important for rating and underwriting. Different types of commodities are susceptible
for different types of damage during transit- sugar, cement, etc are easily damaged by
seawater; cotton is liable to catch fire; liquid cargoes are susceptible to the risk of
leakage and crockery, glassware to breakage; electronic items are exposed to the risk of
theft, and so on.

c. Method and type of packing: The possibility of loss or damage depends on this
factor. Generally, goods are packed in bales or bags, cases or bundles, crates, drums or
barrels, loose packing, paper or cardboard cartons, or in bulk etc.

d. Voyage and Mode of Transit: Information will be required on the following points :

 the name of the place from where transit will commence and the name of the
place where it is to terminate
 mode of conveyance to be used in transporting goods, (i.e.) whether by rail, lorry,
air, etc., or a combination of two or more of these. The name of the vessel is to be
given when an overseas voyage is involved. In land transit by rail, lorry or air, the
 number of the consignment note and the date thereof should be furnished. The
postal receipt number and date thereof is required in case of goods sent by
registered post
 If a voyage is likely to involve a trans-shipment it enhances the risk. This fact
should be informed while seeking insurance. Trans-shipment means the change of
carrier during the voyage.

e. Risk Cover required: The risks against which insurance cover is required should be
stated. The details of risks are discussed subsequently in this chapter.

B. Quotation by insurance company

Based on the information provided as above, the insurance company will quote the premium
rate. In nutshell, the rates of premium depend upon:

 Nature of commodity
 Method of packing
 The Vessel
 Type of insurance policy

C. Payment of premium:

On accepting the premium rates, the concerned person will make the payment to the
insurance company. The payment can be made on the consignment basis.

D. Issue of cover note /Policy document:

a. Cover Note: A cover note is a document granting cover provisionally pending the
issue of a regular policy. It happens frequently that all the details required for the
purpose of issuing a policy are not available. For instance, the name of the steamer, the
number and date of the railway receipt, the number of packages involved in transit,
etc., may not be known.

b. Marine Policy: This is a document which is an evidence of the contract of marine

insurance. It contains the individual details such as name of the insured, details of
goods etc. These have been identified earlier. The policy makes specific reference to
the risks covered.
Glossary

Accident - An unforeseen, unintended event.

Agent - A person who sells insurance policies.

Annuitant - A person who receives the payments from an annuity during his or her
lifetime.

Annuity - A contract in which the buyer deposits money with a life insurance company
for investment. The contract provides for specific payments to be made at regular
intervals for a fixed period or for life.

Annuity certain - An annuity that provides a benefit amount payable for a specified
period of time regardless of whether the annuitant lives or dies.

Annuity period - The time span between the benefit payments made under an annuity
contract.

Application - A form to be filled out with personal information that an insurance company
will use to decide whether to issue a policy and how much to charge

Beneficiary - The person, people, or entity designated to receive the death benefits from
a life insurance policy or annuity contract.

Cancellation - Termination of an insurance policy by the company or insured before the

renewal date.

Cash surrender option – Non-forfeiture option that specifies the policy owner can
cancel the coverage and receive the entire net cash value in a lump sum.

Cash value - The amount of money the life insurance policy owner will receive as a
refund if the policy owner cancels the coverage and returns the policy to the company.
Also called "cash surrender value."

Certificates of coverage - Printed material showing members of a group health benefit

plan the benefits provided by the group master policy.

Churning - This can occur when an agent persuades a consumer to borrow against an
existing life insurance policy to pay the premium on a new one.

Claim - A policyholder's request for reimbursement from an insurance company under a

home insurance policy for a loss to property.

Claimant - A person who makes an insurance claim.

Complaint - A written communication primarily expressing a grievance against an
insurance company or agent.

Complaint history - Information collected or maintained by the Texas Department of

Insurance (TDI) relating to the number of complaints received against a particular
insurer, agent, or premium finance company and the disposition of the complaints.

Comprehensive coverage (physical damage other than collision) - Pays for damage
to or loss of your automobile from causes other than accidents. These include hail,
vandalism, flood, fire, and theft.

Conditional receipt - A premium receipt given to an applicant that makes a life and
health insurance policy effective only if or when a specified condition is met.

Contestable period - A period of up to two years during which a life insurance company
may deny payment of a claim because of suicide or a material misrepresentation on an
application.

Contingent beneficiary - Another party or parties who will receive the life insurance
proceeds if the primary beneficiary should predecease the person whose life is insured.

Contract - In most cases, an insurance policy. A policy is considered to be a contract

between the insurance company and the policyholder.

Conversion privilege - The right to change (convert) insurance coverage from one type
of policy to another. For example the right to change from an individual term insurance
policy to an individual whole life insurance policy

Death benefit - Amount paid to the beneficiary upon the death of the insured.

Deferred annuity - An annuity under which the annuity payment period is scheduled to
begin at some future pre decided date/year/period.

Declarations page - The page in a policy that shows the name and address of the
insurer, the period of time a policy is in force, the amount of the premium, and the
amount of coverage.

Effective date - The date on which an insurance policy becomes effective.

Expiration date - The date on which an insurance policy expires.

Extended term insurance option - A policy provision that provides the option of
continuing the existing amount of insurance as term insurance for as long a period of
time as the contract's cash value will purchase.

Grace period(s) - The time - usually 31 days - during which a policy remains in force
after the premium is due but not paid. The policy lapses as of the day the premium was
originally due unless the premium is paid before the end of the 31 days or the insured
dies.

Grievance procedure - The required appeal process an HMO provides for you to protest
a decision regarding medical necessity or claim payment. Insurance companies also may
have grievance procedures.

Indemnity plan - A health plan that allows you to go to any physician or provider you
choose, but requires that you pay for the services yourself and file claims for
reimbursement. (Also known as fee-for-service.)

Insurable interest - Any financial interest a person has in the property or person
insured. In life insurance, a person´s or party´s interest - financial or emotional - in the
continuing life of the insured.

Insured - The person or organization covered by an insurance policy.

Insurer - The insurance company.

Lapse - The termination of an insurance policy because a renewal premium is not paid
by the end of the grace period.

Liability - Responsibility to another for one´s negligence that results in injury or damage.

Loss - The amount an insurance company pays on a claim.

Paid-up - This event occurs when a life insurance policy will not require any further
premiums to keep the coverage in force.

Paid-up additions - Additional amounts of life insurance purchased using dividends;

these insurance amounts require no further premium payments.

Peril - A specific risk or cause of loss covered by a property insurance policy, such as a
fire, windstorm, flood, or theft. A named-peril policy covers the policyholder only for the
risks named in the policy. An all-risk policy covers all causes of loss except those
specifically excluded.

Personal property - All tangible property (other than land) that is either temporary or
movable in some way, such as furniture, jewelry, electronics, etc.

Policy - The contract issued by the insurance company to the insured.

Policy loan - An advance made by a life insurance company to a policy owner. The
advance is secured by the cash value of the policy.

Policy owner - The person or party who owns an individual insurance policy. This
person may be the insured, the beneficiary, or another person. The policy owner usually
is the one who pays the premium and is the only person who may make changes to a
policy.

Policy period - The period a policy is in force, from the beginning or effective date to the
expiration date.

Premium - The amount paid by an insured to an insurance company to obtain or

maintain an insurance policy.

Premium load - An amount deducted from each life insurance premium payment, which
reduces the amount credited to the policy.

Rated policy - A policy issued at a higher premium to cover a person classified as a

greater-than-average risk, usually due to impaired health or a dangerous occupation.

Refund - An amount of money returned to the policyholder for overpayment of premium

or if the policyholder is due unearned premium.

Reinstatement - The process by which a life insurance company puts a policy back in
force after it lapsed because of nonpayment of renewal premiums.

Renewal - Continuation of a policy after its expiration date.

Underwriter - The person who reviews an application for insurance and decides if the
applicant is acceptable and at what premium rate.

Underwriting - The process an insurance company uses to decide whether to accept or

reject an application for a policy.

2.11. Summary
 Such contracts of Insurance that do not come within the ambit of Life
Insurance are called General Insurance or Non Life Insurance Contracts.

 Some of the risks that are covered under General Insurance are as follows:
 Damage to property due to fire, theft etc.
 Injury to a person due to Accident.
 Illness of a person
 Legal liabilities arising out of claims made by third parties.
 Losses arising dues to credits given by parties
 Various types of General Insurance are:

 Fire Insurance
  Marine Insurance

 Motor Vehicle Insurance

 Health Insurance

 Personal Accident Insurance

 Burglary or theft insurance

2.12. Key Words

 Specific Policy

 Valued Policy

 Floating Policy

 Comprehensive Policy

 Third Party Policy

 Indemnity

2.13. Self Assessment Questions

A. Fill up the Blanks

a. Fire Insurance is an Insurance wherein the Insurer covers the loss incurred by the
Insured due to destruction of ________ or ___________ caused by fire.

b. Marine Insurance is an Insurance against loss or damage or destruction of

___________, _______________, _______________ during transportation.

c. Burglary is a theft committed by ___________ into or out of premises.

d. A cover note is a document granting cover ____________ pending the issue of a

regular policy

e. Annuity contract provides for specific payments to be made at _______ ________

for a fixed period or for life.
 Answer Keys: a) Property, Goods b) Cargo, Freight, Merchandise c) breaking
d) provisionally e) regular intervals

B. True or False

a. Marine Insurance provides cover for such losses to goods that are caused by
transportation of the same by sea only. State whether this statement is:

Correct/ Incorrect

b. Like all insurances, motor vehicle insurance is to be taken voluntarily and any type
of such insurance is not mandatory by law. State whether this statement is

Correct/ Incorrect

c. The amount payable under Fire Insurance would be the amount mentioned in the
Insurance Policy irrespective of the Loss incurred by the Insured. State whether this
statement is

Correct/ Incorrect

d. Claims under Fire Insurance are not admissible if the fire is caused by wilful act of
the Insured or someone acting in concert with him. State whether this statement is:

Correct/ Incorrect

e. Mediclaim Insurance Policies do not cover Ambulance charges. State whether this
statement is :

Correct/ Incorrect

Answer Key : a. Incorrect b. Incorrect c. Incorrect e. Correct d. Incorrect

C. Match the Following

S.No Section A Section B

1 Marine Insurance Family

2 Floater Health Policy Injury

 3 Personal Accident Policy Motor Vehicle

4 General Insurance Cargo

5 Third Party Insurance Non Life

Answer Key

Section A Section B

1 4

2 1

3 2

4 5

5 3

D. Choose the Correct Option

a. Under Third Party Insurance in reference to Motor Vehicle Insurance in respect of

damage to any property of third party the amount of compensation is limited to Rs
__________.

6,000 ; 7500 ; 11,000 ; 20,0000

b. In respect of Annual Policy under Marine Insurance the sum insured should not be
less than _____________

10,000; 1,00,000; 5,000; 20,000

c. Under a comprehensive motor insurance policy apart from the coverage of Third
Party Liability (as provided in the mandatory policy) ___________ risks are also
covered

Fire, theft , fire & theft , various other

d. Personal Accident Policy does not cover death or injury due to _________

Murder; Suicide ; Homicide; Illness or disease.

e. The theft insurance policy would generally not cover the losses/ damages due to
acts involving ___________ & employees of the insured.

Associates; Friends; Family Members, Nominees

 Answer Key : a) 6000 b) 5,000 c) various other d) illness or disease e) family
members

E. Answer the following briefly

a. Explain what is a Overseas Medical Policy

b. Explain what Health Insurance Policy is.

c. Explain what is Hull Insurance under Marine Insurance

d. Explain what is Floater Health Insurance Policy

F. Answer in Detail

a. Explain different types Fire Insurance

b. Explain different types of Marine Insurance

Session–1 : Communication at Work Place
Unit – 6
Learning Objective
Location
Duration-10 HOURS

SESSION -1 Verbal and Non Verbal Communication

Classroom
or
Banks
Learning Knowledge Performance Teaching and Training
Outcome Evaluation Evaluation Method
To understand the 1. Introducing and 1. Be able to introduce Interactive lecture on
concept of Greeting and greet role of importance of
communication a) Introduce and people confidently communication at the
greet in a work place
2. Be able to frame
proper way Questions on his
Own
2. Framing of
Questions and 3. Explain requirement
Complete of polite,
Sentences courteous
a) Framing of communication
question and requirement
sentence with customers

4. List the principles

3. Dealingwith
of effective
Customers in
communication
Banking
Environment
a) Dealingwith
customers
4. Principles
Communication
a) Identify of
elements
communication
cycle
Learning Objective

After reading this unit, youwill be able to:

 Define communication?

 Identify the Barriers to communication?

 Unspoken communication?

 Know How to greet a person?

 Understand howto dealwithCustomers inBankingEnvironment

 Learn how to interact and dealwith customerswhile they are in the Bank

 Describe the Principles of communication

STRUCTURE

1.1 Introducing andGreeting atwork place

1.2 Framing ofQuestions andComplete Sentences

1.3 DealingwithCustomers inBankingEnvironment

1.4 Principles ofCommunication

1.5 Summary

1.6 SelfTestQuestions
We, as individuals, communicate 70% of our time, an organization communicates
90% of its working time. The importance and role of communication in
anorganization can be seen as a job of bringing all aspects of the business together–
employees, superiors, suppliers, customers, public, etc

Hence it is essential to understand the importance of Effective Communication.

Meaning of Communication:

Communication is a process of exchanging information, ideas, thoughts, feelings

and emotions through speech, signals, writing, or behavior. In communication
process, a sender (encoder) encodes a message and then using a medium/channel
sends it to the receiver (decoder) who decodes the message and after processing
information, sends back appropriate feedback/reply using a medium/channel.

Communication is also a professional and social need of an individual.

It is of paramount importance to any organization. Effective or ineffective
Communication at a workplace, very often, marks the difference between success
and failure.
What matters is HOW you say it not alone WHAT you say. Body language, Gestures
and tone play a major role in communication.
As the quote states “Actions speak louder than words”
Communication is an act of imparting or exchanging of information, ideas, or feeling. Communication is a
two-way activity that takes place between two or more people. Sending, giving or exchanging
information and ideas are often expressed verbally and non-verbally. It is an important process

through which facts, ideas, experiences and feelings are shared and exchanged. Effective
communication occurs only if the receiver understands the exact information or idea that
the sender intended to transmit. Communicating in an effective manner, irrespective of
the mode of communication used. The process of conveying a message is complete only
when the person receiving it has understood the message in completely properly. Better
communication helps better job performance. Effective and communication promotes
better relations and work culture among the employees.

To be successful, a person requires a combination of communication skills. These skills are,

writing skills, speaking skills, listening skills and non verbal skills (body language).

Effective communication skills are particularly important for those engaged in “Front End” activities of
retailing. The should be able to explain the characteristics and features of percent products to

prosp ctive customers in order to convince them to buy. They also need to understand
the customer’s needs to be able to recommend the right product.All this is not possible
without good communication skills.

To develop good relationship with a customer, it is important to look well groomed and
communicate effectively and in a politemanner. This is the starting point for establishing
awinning relationship with the customer.

The Business Introduction: In business introductions, rank and position take precedence
over age and gender.Whenever you find yourself in a group or in situations where you must
introduce a colleague to a senior person or your client to your boss, always say the name of
the most important person first to show respect.
The Right Handshake: The handshake is the universally accepted way of greeting people
and introducing oneself in the business world. It should be a warm, palm-to-palm
handshake, lasting about 3-4 seconds.

Value Time, Value Business:

 Time is precious, time is money.


 Be time conscious and stick to the rules of punctuality.

 Final advice on workplace etiquette is simple. Take charge of what is your duty, maintain
proper decorum at all times and always treat others the way you want to be treated.

ETIQUETTE
Expressing general requests

 I beg your pardon


 Excuse me

 Sorry?

 What?

Greeting somebody

 Please have a seat.


 Thanks for agreeing to meet with me.

 He’ll be right with you. .

 Can I offer you something to drink?

 My pleasure.

 Hello Sir, How are you

 Hello, may I speak to Mr. Malik? (on telephone)

Grooming

Grooming describes basic personal hygiene as well as the process that prepares employees
for a specific position within a company. The difference is that personal grooming is focused
on appearance, while organizational grooming is focused on behavior. Both types of
grooming are necessary to succeed in a work environment. Grooming includes:
 Personal Grooming

Personal grooming is taking care of your body in a hygienic manner. Caring for your body by
washing your hands, brushing your teeth, combing your hair, trimming your nails, shaving,
wearing clean clothing and showering is important for a person’s own health.

 Clothing

Personal grooming also includes how you dress. Clothing style is an extension of your
attitude. Personal grooming also determines the impression you make on people and how
you feel about yourself. Someone who has good personal grooming habits looks clean, neat,
does not have visible body piercings other than in the ear, wears deodorant to limit body
odour and does not overdo perfume. Well-groomed people wear clothes that are ironed, fit
and are not torn. Pockets should, preferably be empty, avoid tangling of change and
jewellery should be understated, as opposed to jewellery that is bright or chunky. Personal
grooming is also important to avoid the spread of germs in the workplace.

 Organizational Grooming

Organizational grooming is how one is prepared to for a position in a workplace. Many

organizations have required dress codes. Personal grooming can help demonstrate
organizational commitment and is a sign of respect for yourself and your job. Depending on
where you work, dress codes will vary.

 Job Grooming

Organizational grooming also includes demonstrating work-appropriate behavior. These

include a positive attitude, use of good manners, smiling, making eye contact, listening and
discussing rather than arguing. Grooming individuals for jobs is also part of organizational
grooming. Managers groomemployees on howto do their jobsmore efficiently and
skillfully.Organizational grooming is also a matter of accepting responsibility, being honest
and committing yourself to your accomplishments.

Class Room Activity

Given below is a conversation betweenMr. X who enters the BankMr.Ywho is a customer

service representative:

Mr. Y: Good Morning Sir, Can I help you? Mr. X’ No thank you! I am OK.

Mr. Y: Do you want any assistance?What are you looking for? Mr. X’ I have come to deposit
the cheque. Thank you.
Framing of Questions and Complete Sentences

How to Frame questions?

The interrogative pronouns who, what, whom, whose, which and the interrogative adverbs
where, when, why and how are used to frame information questions.

The structure ‘how + an adjective/adverb’ may also be used to frame information questions.
Frame questions which will elicit the following answers.

1. These are John’s books.

2. I want a pen.
3. We will stay with our cousins.
5. I am going with my aunt.I went there to meet James.
6. My boy is the one in red shirt.
7. I come from Bangkok.
8. I met him last week.
9. This bridge is fifty feet long.
10. My father is sixty years old ..
11. I have two brothers and two sisters.
12. Mr. Mathew is our headmaster.
13. We came to this place five years ago.

Answers

1. Whose books are these?

2. What do you want?
3. Whom will you stay with?
4. Whom are you going with?
5. Why did you go there?
6. Which is your boy?
8. When did you meet him?
9. How long is this bridge?
10. How old is your father?
11. How many brothers and sisters do you have?
12. Who is your headmaster?
13. When did you come to this place? Incomplete sentences

Incomplete sentences
Sentence fragments are a common mistake. A sentence fragment is an incomplete
sentence. It could be a prepositional phrase. Or it could be a dependent clause.

An English sentence must have a subject and a verb of its own. Study the sentences given
below. Mike took out his pen.

He started writing.
As you can see, both sentences given above have a subject and a verb of their own. They
also make complete sense.Asentence can have any number of clauses but it must have at
least one main or independent clause.A dependent or subordinate clause, too, will have a
subject and a verb of its own. However, a dependent clause cannot stand on its own. It
needs to be attached to an independent
clause. It is easy to determine whether a clause is a dependent clause or an independent
clause.A dependent clause will almost always begin with a subordinating conjunction.
Examples are: if when, whether, before, after, unless, though, although, even if, because, as,
since etc.

Study the examples given below.

 ‘Why are you crying?’ ‘Because mummy hit me.’

Here the dependent clause ‘Because mummy hit me’ is perfectly normal in spoken English,
but it is considered incorrect in writing.

When you write you have to use complete sentences.

 I am crying because mummy hit me.

 ‘Why did he lose his job?’ ‘Because he was never on time.’

The sentence fragment ‘because he was never on time’ needs to be attached to an

independent clause.

 He lost his job because he was never on time.

Sentence fragments are perfectly acceptable in spoken English. In fact, when you speak if
you use complete sentences all the time, you will sound very unnatural. However,
youmustmake a conscious effort to avoid fragments in writing.

Remember that all dependent clauses need to be attached to an independent clause.

Making Complete Sentences:
Eliminate incomplete sentences from your writing.We have already learned that a sentence
must have a subject and a finite-verb of its own. An independent clause can make a sentence
because it has a subject and a verb. Phrases, on the other hand, cannot be sentences. A phrase is
a group of words that does not have a subject or a verb. A phrase can consist of any number of
words; however, most phrases are not all that long. Students sometimes mistake phrases for
sentences.

Examples arc given below:

 I think that the new shopping mall will bring many benefits. For example. more jobs and
economic development.

Here the group of words .for example, more jobs and economic development’ is a phrase. It
cannot make a sentence.

It should, therefore, be attached to the previous sentence.

 I think that the new shopping mall will during many benefits, for example, more jobs and
economic development.
We can convert a phrase into a clause by supplying a suitable subject and verb.
Consider the example given below.
 I think that the new shoppingmall will bringmany benefits. For example, it
will.createmore jobs and economic development.

Another example is given below.

 I support the decision to build a new theatre. To improve the economy and entertain
people.

Consider the group of words ‘to improve the economy and entertain people ‘.Although it
contains the verb ‘to improve’, it cannot be a clause because infinitives are non-finite verbs.
Therefore, the sentence should be rewritten as:

 To improve the economy and entertain peoole support the decision to build a new
theatre.

Exercise 1: Complete the following sentences using an appropriate word or phrase.

1. She _____________________wait for over two years.

a) was made to
b) had made to
c) has made to
d) would make to
2. It _________________during the whole of last week.
a) rained
b) was raining
c) is raining
d) has been raining
3. He would have accepted this proposal, if you_________________________ore courteous.
a) had been
b) have bee
c) ar
d) wer
4. What I don’t understand is why they _________________ so long without lodging a complaint.

a) waited
b) were to wait
c) are to waitin
5. Should it prove to be true, I_____________________resign from the committee.
a) shall
b) were t
c) had to
d) should
6. If he drank less, he ________________________________liver trouble.
a) wouldn’t develop
b) couldn’t have developed
c) shouldn’t have developecL
d) wouldn’t have developed
7. Newton saw the apple ______________________ to the ground.
a) fall
b) fell
c) fallen
d) to fall
Answers

1. She was made to wait for over two years.

2. It rained during the whole of last week.
3. He would have accepted this proposal, if you had been more courteous.
4. What I don’t understand is why they waited so long without lodging a complaint.
5. Should it prove to be true, I shall resign from the committee.
6. The drank less, he wouldn’t develop liver trouble.
7. Newton saw the apple fall to the ground.

6.3 Dealing with Customers in Banking Environment:

In addition to the skills mentioned above, the customer service representative should ensure
that he has all the products knowledge bank is providing. In case, he does not know, he should
look up the Standard Operating procedure of the Bank. If does not find the information in the
SOP, he should check with his seniors before advising the customer. Remember it is OK to say
that “Can I get back to you”. Also do remember to get back to the customer in the time line
mentioned.

Some strategies for making a good impression when dealing with customers in the branch:

1. When you greet people in person for the first time - To make a positive first impression
when meeting newpeople include the following as part of your greeting: awarmsmile, an
introduction that includes your first and last name, a welcoming comment, direct eye
contact and a firm handshake, if appropriate. I also recommend repeating the person’s
name. For instance, “It’s very nice to meet you Bob.”
2. When you meet people who don’t tell you their name-If this occurs, simply ask them for
their name. I might say, “I didn’t catch your name.”After they respond, I will repeat their
name as described in the previous point. This is a simple way of demonstrating your interest
in them.
3. When someone introduces you and does not include your name-When you are introduced to
someone and the person making the introduction doesn’t include your name, it’s likely they
forgot for they don’t know how to make a proper introduction. In this case, offer a warm
greeting as I
described in the first tip and be sure to include your first and last name. This will prove,
that are paying attended that you realize your name was omitted.

4. When you greet someone who likely forgot your name-When I greet people I have not
seen in a while, I always take the initiative to introduce myself by name. I could say, “Hi
Paul; Todd Smith; how are you doing?” If I don’t remember the person’s name, I will
introduce myself by sharing my name and hope they respond by sharing theirs. If people
5. When you are not introduced-I was with a friend in a restaurant recently and a couple of his
friends stopped by the table to say hi. He talked to them for a few minutes but never introduced
me. The proper etiquette in this circumstance would have been for him to introduce me to his
friends.When I’m not introduced to people, I generally respond by introducing myself if the right
opportunity presents itself. This seems to make everyone feel more comfortable.
6. When you meet with a group of people, you DON’T mow-Have you ever walked into a
room with a small group of people you didn’t know and stood there awkwardly not
knowing what you should do? If this happens, be proactive and introduce yourself to
each person in the room. This will make you stand out from the group as someone with
confidence. It will also make everyone feel more at ease.
7. When you meet with a group of people, you DO know -When you get together with a group
of friends or business associates, immediately greet each person with a friendly greeting.As
new people join the group, be the first one to show you care by greeting them. It is also
called “Being Like a Dog.” Dogs are always happy to see you and they’re the first ones to
greet you.
8. When you meet with a group of people, some know and some you don’t know -When I find
myself in this situation, Iwill always greet the people I know and introducemyself to .the people I
have not yet met. Once again, this seems to make everyone in the group feel comfortable.
9. When you greet a receptionist-Whether you are greeting the receptionist at your
dentist’s office or at the offices of one of your clients, always introduce yourself with a
smile and friendly greeting. For instance, “Hi my name is Todd Smith, I have a 4:00
appointment with Steve Johnson.” In the case of a business environment, I always hand
the receptionist my business card to go along with my verbal introduction.
10. Practice, practice, practice-If you will follow these tips, you can be assured of making a positive
first impression and enhance your existing relationships.You will be viewed as someone who is
friendly, confident and recognizes the value of making people feel comfortable. Some of these
recommendations may feel a little uncomfortable at first, but like anything, the more you do it,
the more comfortable it will become.When you show an interest in others and the things
important to them, they will show an interest in you and the things important to you!
Greeting People:

 Hello. / Hi.
 Good morning. (before 12 o’clock)
 Good afternoon (after 12 o’clock)
 Good evening

Introducing People?

 What’s your name?

 Who are you?
 My name is ...
 I am ...
 My friends call me ...
 You can call me ...
 Haven’t we met (before)?
 Yes,. I think we have.
 No, I don’t think we have.
 I think we’ve already met.
 I don’t think we’ve met (before).
 This is ...
 Meet ...
 Have you met ... ?
 Yes, I have.
 No, I haven’t.
 Yes, I think I have.
 No, I don’t think I have.
 Hello, ... (name)
 Nice to meet you. (informal)
 Pleased to meet you.
 How do you do? (formal)
 Nice to see you.
 Nice to see you again.

Say Goodbye:

 Good bye.
 Bye. I See you.
 See you later.
 See you soon.
 See you tomorrow.
 See you next week.
 Good night.

Health:

 How are you?

 How are you today?
 Fine, thank you/thanks.
 Not too bad.
 Verywell
 I’m okay/all right.
 Not too well, actually.
 What’s wrong with you?
 What’s the matter with you?
 Are you all right?
 I’m tired
 I’m exhausted
 I’ve got a cold.
As banking becomes more digitized, customers still crave a human connection. Here’s how
to ensure a rewarding customer experience.

Banks are looking to streanlline services in the name of cutting costs to compensate for
declining revenue. One added benefit of these simplified policies and procedures is that
banks als~ are providing a simpler, easier customer experience.

Simplification, in particular, provides a more consistent customer experience.

But as new channels, such as mobile and sophisticated collaboration technologies, drive
cusomer expectations higher, just making the experience simpler and more consistent won’t
be enough to provide competitive advantage.

Some tactics that can help banks produce a more compelling customer experience.
 Customer is the king. Make him feel like one.We are dependent on him and not
otherwise
 Be polite and warm while speaking to the customer
 Listen to the customer complaints / queries
 Apologise first to the customer and ensure rectification of the error
 Provide solutions to meet the customer requirements
 Explain in detail any form filling to be done and ensure the customer has understood the
requirement.
 Meet the customers expectations and strive to do better than that
 Do what you promise
 Strive to add a “VOW” experience while servicing them
 Do what you say / promise
 Thank your customer for providing opportunity to serve them

6.4 Understanding Communication Cycle

Effective communication creates healthy and happy environment within and outside the
organization. Breakdown in communication is either due to lack of skill in communicating or
lack of proper uuderstanding. This also happens due to the breakdown of the
communication network. This creates a communication gap.
Communication cycle: Communication has three important parts - transmitting or sending,
listen-ing and feedback. The sender transmits the message through one medium or
another. The receiver listens to the message and then conveys his understanding of the
message to the sender in the form of feedback to complete the communication cycle.

Elements of Communication Cycle:

 Sender: The sender sends or encodes a message, e.g. greets a visitor or a customer.
 Message: The message in this case is the greeting.
 Medium: It is the channel used for communication. Themediummay be in any of the
following forms - verbal, non- verbal, pictorial, symbolic and written.

Receiver: The receiver decodes the incoming message or expression, and reacts in the form of a
esponse. The communication cycle is the process by which the “sender” “encodes” the message
into words/ sentence or phrases, sends the coded message as he/she speaks, writes or
understands the “message”. Messages are conveytd through channels e.g. Telephone, video-
conferencing, letters, emails.meetings.memos.recordsandreports.Itis then “decoded” by the
“receiver” by hearing or reading the message in order to understand what the sender wants to
convey.
 Feedback – How the receiver responds or reacts is known as feedback

1
Idea occurs 2
Message understood Message coded
Message decoded

3
5 Message sent
Message decoded 4
Message
received

Communication Cycle

Encoding takes place according to the personality of the sender, which determines the
words or style used by the sender in the message. These assumptions are unspoken and so
are only perceived through non-verbal communication.

Decoding also takes place according to the receiver’s personality. Sometimes the sender and
receiver think ditTerently and therefore these assumptions hinder him/her frominterpreting
the message in the context that was meant by the sender.

In an effective communication cycle, the receiver understands the language and the
message ia the same way that the sender meant it to be. The words, tone, body language
etc, all convey the sanle message and nothing gets changed or lost in the process of sending
it.

To deliver your messages effectively, you must break down the barriers that exist in each of
these stages of the communication process. If your message is too lengthy or contains
errors, your message can be misunderstood and misinterpreted.
Forms of Communication:
Internal Communication

Communication within an organization is called “Internal Communication”.

It includes all communication within an organization. It may be formal or an

informal communication. Effective internal communication is a vital means of
addressing organizational concerns. Good communication may help to increase
job satisfaction, safety, productivity, and profits and decrease grievances and
turnover.

External Communication

Communication with people outside the company is called “external

communication”. Supervisors communicate with sources outside the
organization, such as vendors and customers.

Both Internal and External Communication are equally important.

Benefits of Better Communication

 Improves profits and profitability

 Holds Employees Together

 Builds mutual trust and Harmonious workplace relations

 Binds our Customers with us

 Joins the stakeholders with us

 Increases Product Quality

 Increases Service Quality

 Increases Team Spirit

 Increases Confidence

 Increases Respect for Top Management

 Increases Workplace Discipline (read- obedience)

 Increases Job Satisfaction


  Increases Respect for Top Management

 Increases Workplace Discipline (read- obedience)

 Increases Job Satisfaction

The medium of communication determines the type of communication. Based on the

medium used for communicating, the process of communication can be broadly classified as
verbal communication and non-verbal communication.

Verbal communication includes written and oral communication, whereas non-verbal

communication includes body language, facial expressions and pictures. Thus, the various

methods of communication are verbal communication (oral and written), non-verbal

communication (including body language, pictorial communication, symbolic communication).

Verbal communication useswords as themediumof communication.An effective verbal

communication is a two-way process-speaking and listening must occur. Usually verbal
communication is in the oneto-one mode or one-to-one interaction

Factors Influencing Verbal Communication:

R - Rhythm -Maintaining rhythm while speaking is important for communicating effectively.
Pauses in speech allow the speaker the time to think of his/her next thought, and also
provide the listener enough ime to process the information.

S - Speech - It is the act of delivering a formal spoken communication to an audieces.

T - Tone - Tone is the quality of sound that portrays feelings or changes in meaning.Amonotone delivery
could indicate that a speaker is fed up.An emphatic tone might reveal interest or anger. The statement:
“That is just great” delivered in a normal tone would mean the speaker likes something.Aspeaker
delivering this statement in a sarcastic tone: “That is just GREAT” would mean the opposite.

P - Pitch - Pitch occurs because of the vibration of the human vocal cords. Changes in the
tension of the.”ocal cords cause differences in pitch. Usually, the pitch of women’s voices is
higher than that of men.

Written communication skill is the ability of an individual to communicate in writing.

Importan skills in effective written communication. are:

 It is done in a one-to-one mode or in a one-to-many mode.


 Words should be clearly written and should be legible, givimg all the essential information needed.

 Effectivewriting involves careful choice ofwords, their organization in correct order in
sentences and preparing a comprehensive composition of sentences.

Non-verbal communication: Communication that uses physical parts of the body. It includes
facial expressions, tone of voice, sense of touch, sense of smell, and body movements.

By understanding the important aspects of non-verbal communication or body language,

you can learn to read people more easily.

Features of non-verbal communication that conveys information:

1. Distance: The distance one stands from another frequently conveys a non-verbal message. In some
cultures it is a sign of attraction, while in others it may reflect status or the intensity of the wamlth or
feeling. In India, a foot awayfrom another person is considered a respectful distance while
communicating.

2. Orientation: People may present themselves in various ways: face-to-face, side-to-side, or

even back-to-back. For example, cooperating people are likely to side-by-side while competitors
frequently face one another. In the security sector, face-to-face orientation is common.

3. Posture: Your posture conveys message. For example if you are sitting on a chair with
your legs crossed or our arms folded, then such postures convey a degree of relaxation in
the communication exchange.

4. Gestures with hands and arms: Shaking hands, touching, holding, embracing or patting on
the back, all convey messages. They all reflect an element of intimacy.

5. Facial Expressions: Asmile, frown, raised eyebrow, yawn, and sneer all convey information.
Facial expressions continually change during interaction and are observed constantly by the
recipient. There isevidence that the meaning of these expressions may be similar across
cultures. Smiling is considered to be pleasant and helpful.Afrown conveys confusion and at
times anger. Raised eyebrows, yawn, a sneer are all unacceptable body language, as they reflect
anger or ignorance.

6. Gestures: One of the most frequently observed, bur leascunderstood cues is a hand
movement. Most people use hand movements regularly when talking. Hands at the side or
at the back are considered non-threatening, encouraging and acceptable.

7. Looking: Amajor feature of social communication is eye contact. Eye contact is crucial for effective
communication. The frequency of contact may suggest either interest or boredom. For example, a
SecurityGuard should look straight into the eyes of the person, although pleasantly and affably.

8. Pictorical Communication includes communicating with signs like traffic signals, the 21-gun salute,
horns, sirens, etc. For example, the sign of ‘stop’ tells you to stop at the given point, the sign of two
children with school bags indicate the school zone, the sign of U-turn tells you to take a U-turn, and
the sign of a person crossing the road indicates the place where you can cross the road.

9. SymbolicCommunication: Symbolic communication uses symbols that signify religion.

school, stop communication devices, etc. money from the public, repayable on demand
or otherwise, and withdrawable by cheque, draft, order or otherwise

BARRIERS IN COMMUNICATION:

There are various factors that not only affect ~ommunication but also act as barriers to
effective communication.We will nowlearn about the various factors that may act as
barriers in communication and also discuss the possible solutions to overcome those
barriers.

A. Environmental Factors
Environmental factors that affect communication include noise and physical obstacles like
distance and lack of proper instruments for communication.

(i) Noise: Noise causes stress. Background noise aJld excessive echo are great distracters to
listening, especially for the persons with poor roncentration. Similarly use {)f loud
speakers, noise from generators or other machinery interferes with communication.

(ii) Physical Obstacles: Physical obstacles like distance and use of defective instruments for
communication affects the effectiveness of communication. Poor lighting,
uncomfortable seating arrangements and unhygienic rooms also affect communication.

Checking the instrument before using it for communication is useJitl in avoiding unpleasant
situation.
B. Attitudinal Factors
Attitudinal factors that affect communication include fear of upsetting others, fear of
rejection or ridicule and low self image.

C. System Design
(i) Time: Some functions are time sensitive and cannot be delayed. Time pressures affect
the ability to communicate.

Manage your time and pace of communication to ensure effectiveness.

(ii) Information overload: Too much information may result in confusion, misinterpretation
and loss of infoffilation.

Effective Communication:
(i) Physical characteristics: Individual characteristics include biological factors like lisping.

(ii) Language differences:

Knowledge of vocabulary, grammar, etc. affects communication effectiveness.

Perception is generally howeach individual interprets theworld around him. Communication

distortion occurs if there is wrong perception about the message. Rephrasing or asking questions
to clarify and checking for understanding helps in reducing barrier due to perceptual differences.

iv. In attention
At times we do not listen, but only hear, especially when there are more important things to be
taken care of. For instance, if a visitor comes to you at the same instance when you are
answering the phone, then it is important to excuse yourself from the person on the phone so
that exclusive attention can be given to the visitor or you may request the visitor to wait for
some time.

Conclusion:
 Listening to others is an art.
 By Good listening reflects courtesy and good manners.
 Listening carefully to the instructions of superiors improve competence and
perfoffilance. The result of poor listening skill could be disastrous in business, and
employment
 Good listening can eliminate a number of imaginary grievances of employees.
Use the following checklist.

PartA
Role Play
(a) Differentiate between Sender, Message, Medium, Receiver and Feedback.
Part B
(a) What is communication cycle?

(b) What are the different elements of communication cycle?

(c) How communication cycle is important in effective communication?

Performance standards

Performance standards Yes No

Identify elements of communication cycle.

Establishing relationship with customers: You can establish effective relationships with
customers by:
 Communicating with your customers m a way which makes them feel valued and respected.

 Identifying and confirming the needs and expectations of your customers.

 Treating your customers courteously and helpfully even when you are working under pressure.

 Maintaining communication with your customers to ensure that they are kept informed
and reassured.

 Adapting your behavior to respond effectively to different customer behavior.

Respond appropriately to customers by:

 Checking with your customers that you have fully understood their needs and expectations.

Communicate information to customers by:

 Greeting customers like good morning/good afternoon/good evening, etc. >- Quickly
locating information which will help your customer.

 Giving your customers, the information they need about the products or services offered
by your organization.

Telephone Etiquette

Following are some of the important points to be taken care of while communicating on telephone

 Answering to the call at the earliest


 Greet the caller or customer

 Take a message and communicate it to the concerned person

 Call back on time if you have assured the customer that you will be calling him/her at a
particular time.

Etiquette at Workplace
Being polite, sets the tone for work relationships, how you interact with .people. Good
Manners Mean Good Business. It takes 15 seconds to make a good first impression, and the
rest of your l ife to undo it, if it was a negative one. So always be prepared to look and sound
your best. Etiquette is very important for different communication and working styles. How do
you deal with difficult people making impossible demands?

Focusing on listening to their entire request and then determining what they really need—not what they say
they want. A good hearing can resolve a lot of difficulties. Active listening is the best etiquette.

 Your uniform talks a lot about your organization.


 First impressions are made within the first 5 minutes of meeting someone

 A neat clean and well ironed uniform is acceptable and appreciated by one and all at all times.

Key Words:
EffectiveCommunication
Etiquette
Grooming

Barriers to communication
Active listening
Practice, practice, practice

Able to draw a diagram of communication cycle

6.5 Summary
 Communication is a two-way activity that takes place between two or more people. Sending, giving
or exchanging information and ideas are often expressed verbally and non-verbally. It is an
important process through which facts, ideas, experiences and feelings are shared and exchanged.·

 Effective communication takes place if both the sender and the receiver understand the
exact information or idea which is being conveyed.

 Effective and timely communication promotes better relations with the customers.

 Self grooming, communicate effectively in a polite manner is a must for the customer facing
staff of the Bank

 Communication in writing should have complete sentences

 Customer is the King. Make him feel like one.
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 Effective communication is a must even in everyday life and we should be alert to barrier
incommunication and do active listening

6.6 Self Test Questions

1. Choose the correct option:
Exercise 2: Complete the following sentences using an appropriate word or phrase.

1. He attributed his good health to his ________________________________with nature.

a) communion
b) company
c) commitment
d) commi.~nication

2. She is __________________________________________________acareerin writing.

a) keen on building
b) keen at building
c) keen for building
d) keen to building

3. They____________________________________________him to prison for five years.

a) sent
b) are sent
c) send
d) were sent

4. Sometimes I wish................................................................... , .

a) I had never been born

b) I have never born
c) I was never been born
 d) I had never born

5. What _____________________________________________ifthe train had been late?

a) would you do
b) will you do
c) would you have did
d) would you have done

6. He _________________________________________________understood.
a) was not able to be
b) can’t be
c) won’t be
d) is not able to

7. After marching through the foothill for two days, we found ourselves_____________proper.
a) at the bottom of the mountain

b) under the mountain

c) beneath the mountain
d) at the base of the mountain

8. She smiled _____________________________________

a) in a friendly way
b) friendlily
c) a friendly way
d) friendly

Answers: 1 - a, 2 - a, 3 - a, 4 - a, 5 - d, 6 - b, 7 - d, 8 - a.

Complete the following using an appropriate clause or phrase. Choose your answers from

tbe given options.

1. I want to know _________________________________________

a) why is she angry with me

b) that she is angry with me

 c) Either could be used here

2. If he had asked me, ______________________________________

a) I would help him

b) I would have helped him

c) Iwill help him

3. She would have come ____________________________________

a) if you invited her

b) if you had invited her

c) if you would invite her

4. We are looking forward to_________________________________

a) hear from you

b) hearing from you

c) Either could be used her~

5. No sooner did we hear the gunshots _____________________________

a) when we rushed to the camp

b) than we rusheq to the camp

c) than we would rush to the camp

6. Would you mind ____________________________________________?

a) moving a bit

b) by to move a bit

c) Either could be used here

7. She is very fond __________________________________________

 a) of her grandchildren

b) with her grandchildren

c) Either could be used here

8. He enjoys _________________________________ .

a) swimming in the sea

b) to swim in the sea

c) Either could be used here

9. She accused me __________________________________

a) that J poisoned her dog

b) of poisoning her dog

c) about poisoning her dog

10. She is very confident ________________________ __________________________

a) of winning

b) to win

c) Either could be used here

Answers: 1 - a, 2 - b, 3 - b, 4 - b, 5 - b. 6 - a, 7 - a, 8 - a, 9 - b, 10 - a.

II. Fill in the blanks:

1. The sales person is expected to meet the .......................... standards for appearance and
behavour____________the needs and expectations of the customer is important for
developing relationship with rostomer.

2. The sales person should be trained to respond effectively to difterent customer

 _______________ .

3. The handshake is the universally accepted way of

_________________________people and introducing oneseif in the business world.

4. _________________________when you speak to the customers.

5. In India, _______________________is the way to greet without touching the customer.

6. Be time conscious and stick to the rules of _____________________ .

7. Time is pr-ecious, time is ____________________________.

8. Organizational grooming is focused on __________________________.

Answers: 1 - organizational, 2 - Meeting, 3 - n~eds, 4 - greetings, 5 - smile, 6 - Namaste, 6 -

Credit risk, Liquidity risk and lnterest rate risk, 7 - punctualIty, 8 - money, 9 - behaviour

1. Grooming Telephone andWork place

2. Etiquette Written communication

3. Complete Sentence Eye Contact

4. Barrier to communication Personal & Organisation

5. Verbal communication Noise

Answers: 1 - 4, 2 - 1, 3- 2, 4 - 5, 5 - 3.

IV. True or False:

 1. Oral communication is a form of non-verbal communication

2. Written communication is a form of verbal communication

3. Body language is a form of non-verbal communication

4. Pointing fingers while talking is a good gesture of communication-

5. Maintaining eye contact willIe talking or giving speech is ameans of effective communication

Answers: 1 - False, 2 - True, 3- True, 4 - True, 5 - True

V.Answer the following briefly

1. Explain why effective communication is important in the Banking environment?

2. What is verbal communication?

3. What is non verbal communication?

4. What are the elements of communication?

5. Explain the communication cycle

VI. Answer in detail:

1. What is Grooming and explain in detail?\

2. What are the barriers to communication?

3. What are the ways to overcome barriers to communication?

4. Explain in detail the non verbal communication

5. What are the telephone etiquettes to be followed while answering the phone?

VII. Activities
 1. Plan a visit to the nearest Bank branch and observe the way communication is calTied
with the customers?

2. Do a role play for communicating to the customer for the following:

 Dealing with problems or complaints of customers

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 Dealing with an arrogant customer
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 Dealing with an alcoholic customer
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 Dealing with an angry customer
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3. Play a game in which one team Identifies the various non verbal ways of
communication used by another person. Team with maximum points wins.