1. CHAPTER- 1
AN INTRODUCTION
Banks are the most significant players in the Indian financial market.
They are the biggest purveyors of credit, and they also attract most of
the savings from the population. Dominated by public sector, the
banking industry has so far acted as an efficient partner in the growth
and the development of the country. Driven by the socialist ideologies
and the welfare state concept, public sector banks have long been
the supporters of agriculture and other priority sectors. They act
ascrucial channels of the government in its efforts to ensure equitable
economic development.
The Indian banking can be broadly categorized into nationalized
(government owned), private banks and specialized banking
institutions. The Reserve Bank of India acts a centralized body
monitoring any discrepancies and shortcoming in the system. Since
the nationalization of banks in 1969, the public sector banks or the
nationalized banks have acquired a place of prominence and has
since then seen tremendous progress. The need to become highly
customer focused has forced the slow-moving public sector banks to
adopt a fast track approach. The unleashing of products and
services through the net has galvanized players at all levels of the
banking and financial institutions market grid to look anew at their
existing portfolio offering. Conservative banking practices allowed
1

2. Indian banks to be insulated partially from the Asian currency crisis.
Indian banks are now quoting al higher valuation when compared to
banks in other Asian countries (viz. Hong Kong, Singapore,
Philippines etc.) that have major problems linked to huge Non
Performing Assets (NPAs) and payment defaults. Co-operative
banks are nimble footed in approach and armed with efficient
branch networks focus primarily on the ‗high revenue‘ niche retail
segments.
2

3. ABOUT THE REPORT
Title Of The Study:
The present study titled as ―A project report on the FINANCIAL
SERVICES PROVIDED BY BANKS‖.
Objective of the study:
The following objectives of the present study are:
o To understand about the banking sector and financial services.
o To know about the different financial services provided by
banks.
Limitations of the study:
The following limitations of the present study are:
o The period for the study is limited.
o The study deals only with specialized financial services.
3

4. Data And Methodology:
For the purpose of the present study the secondary data was
used. The secondary data were collected from journals, internet,
book and newspaper.
Presentation of the study:
Following are the Presentation of the study;
Chapter-1Gives an introduction to the study.
Chapter-2Deals with a Theoretical view of financial services.
Chapter-3 Deals with Financial services provided by banks in
India.
Chapter-4 Conclusion
4

5. CHAPTER- 2
A THEORETICAL VIEW
After independence, the government of India started establishing
several corporations and other institution to promoter industrial
development of the country. As the number of such institution went
on increasing, it become necessary to co-ordinate the activities of all
these institution in a systematic manner.
An attempt was made by the government to gear the entire economy
to the needs of rapid industrialization. The necessary for increasing
production and increasing the standard of living of people as speedily
as possible, was felt very badly. This warranted the establishment of
an institution, which will look after the co-ordination of such financial
institutions working to achieve this objective. This was responsible for
the establishment of industrial development bank of India.
The bank was established with the following objective:
a) To co-ordinate the activities of the financial institutions established
in the country after independence
b) To participate in the activities of such institution if and when
necessary.
5

6. c) To ensure that the activities of all these institution are planned and
executed in such a manner that the priorities of the plans are property
observed:
d) To function as an apex institution for all the financial institution
functioning in country:
e) To promote and ensure the success of the being development
project in the country. Commercial banks differ from investment
banks. Most financial consumers think of the bank as a place to keep
liquid financial resources such as checking accounts and savings
accounts. A consumer may have personal accounts at a commercial
bank. The commercial bank‘s primary business involves taking in
financial assets as deposits then lending these assets to other
customers at a rate of interest. The interest rate the bank charges
on loans and revolving lines of credit or other credit facilities will
depend on the current interest rate environment.
A consumer bank, such as a credit union or savings bank, may focus
on the personal banking needs of a specific group or industry.
An investment bank raises capital for businesses. The investment
bank works with businesses to sell loans offered by the company
called bonds. Bonds are debts owed by the company to investors.
The investment bank distributes the bond issue to customers. The
investment bank may choose to distribute publicly traded bonds to
6

7. clients, or arrange a private placement of the client company‘s debt
directly with another company. The investment bank prices the debt
according to the current yield curve and the company‘s credit
rating. A company's credit rating, like a consumer's FICA credit score
helps the company pay less to sell bonds in the public or private
markets.
Investment banks also raise capital for client companies by
arranging equity issues, called stock. Investment banks receive fees
from clients to raise capital. Many investment banks employ
professional sales and marketing teams to distribute
clients‘ debt and equity issues.
As a capital market banking institution, investment banks also help
clients to restructure debt loans. In some instances, the bank creates
new structured financial products or collateralizes debt with other
financial assets. Investment banks may also utilize derivative
instruments—stand-in, synthetic investment products—to assist
clients‘ achievement of financial goals.
Consumers use banks to keep financial resources safe and readily
available for use. Deposits made by customers of the bank are
insured by the Federal Deposit Insurance Corporation (FDIC).
Customers of the bank rely upon its ability to liquidate financial
resources held on account when they request the bank to do so.
Banks provide customers with specially
7

8. printed checkbooks. Customers pay creditors and other financial
obligations by writing a check on the bank account. The bank pays
the check written by its customer. Overdrafts and other fees are
charged in accordance with the bank‘s customer policy. If a customer
withdraws more money than he has in account with the bank, the
bank charges the customer a fee. Customers may arrange
for overdraft protection with the bank. Overdraft protection is a loan
that is accessed when the customer‘s available fund balance is
negative.
Banks lend money to private and business customers. These loans
take the form of personal loans, commercial/business loans, and
home/property loans (mortgages).
Banks also issue credit cards to customers. A credit card is a form of
demand loan available to the customer. The bank also supports its
credit card business by processing payments to settle customer credit
card bills. To support merchants accepting customers‘ credit cards,
banks may offer a merchant network service. Merchant network
services include card terminals or credit card machines.
Banks provide debit cards to their customers. Sometimes
called check cards, debit cards provide ready access for customer
use without the need to make a physical check or cash withdrawal.
Customers may use debit or credit cards in the bank‘s automatic
teller machine (ATM).
8

9. Banks facilitate fund transfers for customers via wire
transfer and electronic transfer of funds. Banks utilize
an interbank network to transfer funds for clients. Banks also provide
certified or cashiers‘ checks for customers. The bank guarantees the
check so that the customer may offer it as certified available funds to
a payee. In order to create a certified check, the bank usually
withdraws client funds.
Banks offer the services of a notary public to validate clients‘
important documents.
The financial needs of high net worth individuals, families, and their
businesses differ from those of most consumers. Private bank clients
must usually present a certain minimum net worth to obtain private
banking services. Private bank services include tax and estate
planning, tax planning, and philanthropic gift planning.
The Financial system and Economic growth
The financial system of a country greatly influences its economy. The
close relationship between financial structure and economic
development is reflected in the prevailing institutional arrangement
and intermediation process. The main function of the financial
structure especially the banking system is to gather funds from the
people who has more savings and lend the amount in bulk to people
who have productive investment opportunities. The Financial system
9

10. will progress both quality and quantity of actual investment, this will
lead to better per capital income and better standard of living.
(Levine, 1997) he argued in this literature that a review in the financial
development will definitely have a positive impact on economic
growth.Authors including Franklin Allen and Hiroko Oura (2004)
emphasized that the financial system played a critical role in igniting
industrialization in England by facilitating the mobilization of capital.
Role of Financial System
Financial system will help in the mobilization of household savings to
corporate sector and distribute capital to different firms. This will help
in sharing the risk by household savings and firms. This
intermediation is the root cause for the link between financial
development and financial constitution on economic growth.
Grahame Thompson definedfinancial development ― as the process
meant the gradual evolution, in the course of economic development,
of financial institutions – money, banks and other financial
intermediaries, and organised securities markets‖. Many economists
pointed out that in developing countries financial liberalization indeed
leads to financial frailty and incidents of crises; however financial
liberalisation also has led to higher GDP growth. A large empirical
literature has proved that in practice financial systems are important
for growth.Franklin Allen and Hiroko Oura (2004) in his research
discussed about few models where financial intermediaries arise to
produce information, to generate information and trade to the different
10

11. investors. In his model he defined that financial intermediaries
produce better information, develop resource allocation and promote
growth. Hagemann and Seiter discussed about a research model in
which the financial institution will generate the best information by
properly allocating the resources i.e. funding the firm with the finest
technology for the robust economic growth.
The Indian financial system has witnessed phenomenal changes
during last five decades. Indian economy may be termed as a Mixed
economy where both private and public sectors co-exist. India has
instigated economic development of the nation with the
commencement of planning commission. The main objective of the
Five year plans was to boost domestic savings for the growth of the
economy. The industrialisation strategy highlighted on the expansion
of heavy industries, however the economic growth achieved in the
first three Five-year plans was insufficient to meet the goals of
development. Indian economy has witnessed drastic increase in the
rate of growth since 1980‘s, the annual growth rate of the country was
5.5 percent, A high rate of investment was a major factor for the rise
in economic growth, there was a move up in investment from
19percent of GDP in 1970‘s to 25percent of GDP in 1980‘s. During
1980‘s Indian government had implemented liberalisation policy and
amended several government regulations especially in foreign trade
sector, new strategies were adopted to pool up private capital in form
of foreign direct investment (FDI), New reforms were formulated to
11

12. attract foreign investors which contributed to progress of Indian
economy discussed by Roland (2007), Since 1992 till 1994, the
overall value of imports surpassed that of India‘s exports and by 1996
the export figures raised from 0.84 trillion rupees to 1.1 trillion Indian
rupees, During 1993 Indian economy had witnessed major growth by
the commencement of computer software business and adopted
globalisation policy which helped in creating new job market, in the
year 1995 Indian government was associated with World Trade
Organisation (WTO), During 1990-2005 the annual growth rate of
GDP was 5.9percent which was second among the world‘s largest
economies only after China with 10.1percent.The republic of India
since 2004 had accepted free market policy, Service sectors played a
vital role by generating 52% of country‘s GDP. In 2007 Indian
economy was termed as twelfth-largest economy in the world with
GDP $1.237trillion and per capita income of $1043, Despite
significant high economic growth rate Indian economy had many
pitfalls and socio-economic variance at various levels, on an average
80% of Indian population survived on less than $2 a day.
The Financial Intermediaries: The financial institution acts as a proper
channel for the transfer of funds between investors and firms through
this process certain assets or liabilities are converted into different
assets or liabilities.
Financial organisations may be defined as economic agents focusing
in the buying and selling activities and at the same time may be very
12

13. often termed as financial bonds and securities. Banks may be
classified as a division of the financial institutions, Banking institutions
will buy the securities issued by the borrowers and will sell them to
the lenders.
The Indian banking sector played a significant role in the financial
development with deposits of more than half a trillion US dollars and
contributes about three-quarters of nation‘s financial assets. The
Indian banking system has a long and detailed history of more than
200years. The General Bank of India was considered to the first bank
to be established in the nation followed by The Bank of Hindustan in
the year 1870 however these banks are now obsolete nevertheless
the country witnessed the commencement of the
Bank of Bengal in Calcutta in 1806 which is now known as the State
Bank of India the largest bank of the nation detail given in the Indian
Financial System (Anon., 2008).
During 1900s the financial market has expanded with the
commencement of banks such as Allahabad Bank, Punjab National
bank and Bank of India, in the year 1935 Reserve Bank of India
which was considered to the Central Bank of India started regulating
the banking sector in India. During the period of First World War
(1914-1918) functioning of 94 banks failed in the country and the
same phase continued till India achieved Independence in
13

14. 1947. The Reserve bank of India was nationalized and was
possessed by the Indian government in the year 1948 and after the
enforcement of the Banking Regulation Act RBI got the authorization
to standardize, direct and inspect the banks in the country in 1949
and it also instructed that no institute should be started without its
license. In the year 1969, Indian government has nationalised 14
largest public banks resulted in the raise of
Public Sector Banks‘ (PSB) share of deposits from 31% to 86%
(Roland, n.d.). The primary purpose of Nationalisation policy was to
set up more branches and to mobilise the deposits. During 1980 six
more banks were nationalised as a result the public sector‘s
contribution of deposits moved up to 92%. The banking industry
estimates indicate that out of 274 commercial banks operating in the
nation, 223 banks are in the public sector and 51 fall into private
sector including 24 foreign banks that had started their operations in
the country. Over the decades, banking sector has grown gradually
in size, Since Indian government had adopted the liberalisation policy
banking sector had undergone several changes in its structure by the
establishment of several private sector and foreign banks
accounting for over 80% of deposits and credits.
14

15. PRODUCTS ANDFINANCIALSERVICES OFFERED BY BANKS
Broad Classification of Products in a bank:
The different products in a bank can be broadly classified into:
Retail Banking.
Trade Finance.
Treasury Operations.
Retail Banking and Trade finance operations are conducted at the
branch level while the wholesale banking operations, which cover
treasury operations, are at the hand office or a designated branch.
Retail Banking:
Deposits
Loans, Cash Credit and Overdraft
Negotiating for Loans and advances
Remittances
Book-Keeping (maintaining all accounting records)
Receiving all kinds of bonds valuable for safe keeping
Trade Finance:
Issuing and confirming of letter of credit.
15

16. Drawing, accepting, discounting, buying, selling, collecting of
bills of exchange, promissory notes, drafts, bill of lading and
other securities.
Treasury Operations:
Buying and selling of bullion. Foreign exchange
Acquiring, holding, underwriting and dealing in shares,
debentures, etc.
Purchasing and selling of bonds and securities on behalf of
constituents.
The banks can also act as an agent of the Government or local
authority. They insure, guarantee, underwrite, participate in managing
and carrying out issue of shares, debentures, etc.
Apart from the above-mentioned functions of the bank, the bank
provides a whole lot of other services like investment counseling for
individuals, short-term funds management and portfolio management
for individuals and companies. It undertakes the inward and outward
remittances with reference to foreign exchange and collection of
varied types for the Government.
Common Banking Financial services Available:
Some of common available banking products are explained below:
16

17. 1) Credit Card: Credit Card is ―postpaid‖ or ―pay later‖ card that
draws from a credit line-money made available by the card
issuer (bank) and gives one a grace period to pay. If the
amount is not paid full by the end of the period, one is charged
interest.
A credit card is nothing but a very small card containing a means of
identification, such as a signature and a small photo. It authorizes the
holder to change goods or services to his account, on which he is
billed. The bank receives the bills from the merchants and pays on
behalf of the card holder.
These bills are assembled in the bank and the amount is paid to the
bank by the card holder totally or by installments. The bank charges
the customer a small amount for these services. The card holder
need not have to carry money/cash with him when he travels or goes
for purchasing.
Credit cards have found wide spread acceptance in the ‗metros‘ and
big cities. Credit cards are joining popularity for online payments. The
major players in the Credit Card market are the foreign banks and
some big public sector banks like SBI and Bank of Baroda. India at
present has about 3 million credit cards in circulation.
2) Debit Cards: Debit Card is a ―prepaid‖ or ―pay now‖ card with
some stored value. Debit Cards quickly debit or subtract
17

18. money from one‘s savings account, or if one were taking
out cash.
Every time a person uses the card, the merchant who in turn can get
the money transferred to his account from the bank of the buyers, by
debiting an exact amount of purchase from the card.
When he makes a purchase, he enters this number on the shop‘s PIN
pad. When the card is swiped through the electronic terminal, it dials
the acquiring bank system – either Master Card or Visa that validates
the PIN and finds out from the issuing bank whether to accept or
decline the transaction. The customer never overspread because the
amount spent is debited immediately from the customer‘s account.
So, for the debit card to work, one must already have the money in
the account to cover the transaction. There is no grace period for a
debit card purchase. Some debit cards have monthly or per
transaction fees.
Debit Card holder need not carry a bulky checkbook or large sums of
cash when he/she goes at for shopping. This is a fast and easy way
of payment one can get debit card facility as debit cards use one‘s
own money at the time of sale, so they are often easier than credit
cards to obtain.
The major limitation of Debit Card is that currently only some 3000-
4000 shops country wide accepts it. Also, a person can‘t operate it in
case the telephone lines are down.
18

19. 3) Automatic Teller Machine: The introduction of ATM‘s has
given the customers the facility of round the clock banking. The
ATM‘s are used by banks for making the customers dealing
easier. ATM card is a device that allows customer who has an
ATM card to perform routine banking transaction at any time
without interacting with human teller. It provides exchange
services. This service helps the customer to withdraw money
even when the banks ate closed. This can be done by inserting
the card in the ATM and entering the Personal Identification
Number and secret Password.
ATM‘s are currently becoming popular in India that enables the
customer to withdraw their money 24 hours a day and 365 days. It
provides the customers with the ability to withdraw or deposit
funds, check account balances, transfer funds and check
statement information. The advantages of ATM‘s are many. It
increases existing business and generates new business. It allows
the customers.
To transfer money to and from accounts.
To view account information.
To order cash.
To receive cash.
19

20. CHAPTER 3
FINANCIAL SERVICES PROVIDED BY BANKS IN INDIA
Financial services by Banks means the following services provided by
a banking company or a financial institution including non-banking
financial company or any other body corporate or commercial
concern, namely:
Financial leasing services including equipment leasing and hire
purchase,
Credit card services,
Merchant banking services,
Securities and foreign exchange (forex) broking,
Asset management including portfolio management, all forms
of fund management, pension fund management, custodial,
depository and Mi trust services, but does not include cash
management
Advisory and other auxiliary financial services including
investment Sub and portfolio research and advice, advice on
mergers and acquisitions and advice on corporate restructuring
and strategy
Provision and transfer of information and data processing
and
20

21. Other financial services namely lending, issue of pay order,
demand draft, cheque, letter of credit and bill of exchange,
providing bank guarantee, over draft facility, bill discounting
facility, safe deposit locker, safe vaults, operation of bank
accounts.
The Banking and Financial Service sectors provide significant
opportunities for Document Imaging software and hardware
including document scanners as this market is currently paper
driven and prospects are looking for ways to improve their
existing manual processes.
LETTER OF CREDIT
A letter of credit is a document that a financial institution or similar
party issues to a seller of goods or services which provides that the
issuer will pay the seller for goods or services the seller delivers to a
third-party buyer. The issuer then seeks reimbursement from the
buyer or from the buyer's bank. The document serves essentially as a
guarantee to the seller that it will be paid by the issuer of the letter of
credit regardless of whether the buyer ultimately fails to pay. In this
way, the risk that the buyer will fail to pay is transferred from the
seller to the letter of credit's issuer.
21

22. Letters of credit are used primarily in international trade for large
transactions between a supplier in one country and a customer in
another. In such cases, the International Chamber of
Commerce Uniform Customs and Practice for Documentary
Credits applies (UCP 600 being the latest version).They are also
used in the land development process to ensure that approved public
facilities (streets, sidewalks, storm water ponds, etc.) will be built. The
parties to a letter of credit are the supplier, usually called
the beneficiary, the issuing bank, of which the buyer is a client, and
sometimes anadvising bank, of which the beneficiary is a client.
SYNDICATION OF LOAN
A syndicated loan is one that is provided by a group of lenders and
is structured, arranged, and administered by one or
several commercial banks or investment banks known as arrangers.
The syndicated loan market is the dominant way for corporations in
the U.S. and Europe to tap banks and other institutional financial
capital providers for loans. The U.S. market originated with the
large leveraged buyout loans of the mid-1980s, and Europe's market
blossomed with the launch of the euro in 1999.
At the most basic level, arrangers serve the investment-banking role
of raising investor funding for an issuer in need of capital. The issuer
22

23. pays the arranger a fee for this service, and this fee increases with
the complexity and risk factors of the loan. As a result, the most
profitable loans are those to leveraged borrowers—issuers
whose credit ratings are speculative grade and who are paying
spreads (premiums or margins above the relevant LIBOR in the U.S.
and UK, Euribor in Europe or another base rate) sufficient to attract
the interest of non-bank term loan investors. Though, this threshold
moves up and down depending on market conditions.
OVERDRAFT
An overdraft occurs when money is withdrawn from a bank account
and the available balancegoes below zero. In this situation the
account is said to be "overdrawn". If there is a prior agreement with
the account provider for an overdraft, and the amount overdrawn is
within the authorized overdraft limit, then interest is normally charged
at the agreed rate. If the negative balance exceeds the agreed terms,
then additional fees may be charged and higher interest rates may
apply.
Overdrafts occur for a variety of reasons. These may include:
 Intentional short-term loan - The account holder finds them
short of money and knowingly makes an insufficient-funds debit.
23

24. They accept the associated fees and cover the overdraft with their
next deposit.
 Failure to maintain an accurate account register - The account
holder doesn't accurately account for activity on their account and
overspends through negligence.
 ATM overdraft - Banks or ATMs may allow cash withdrawals
despite insufficient availability of funds. The account holder may or
may not be aware of this fact at the time of the withdrawal. If the
ATM is unable to communicate with the cardholder's bank, it may
automatically authorize a withdrawal based on limits preset by
theauthorizing network.
 Temporary Deposit Hold - A deposit made to the account can be
placed on hold by the bank. This may be due to Regulation
CC (which governs the placement of holds on deposited checks)
or due to individual bank policies. The funds may not be
immediately available and lead to overdraft fees.
 Unexpected electronic withdrawals - At some point in the past
the account holder may have authorized electronic withdrawals by
a business. This could occur in good faith of both parties if the
electronic withdrawal in question is made legally possible by terms
of the contract, such as the initiation of a recurring service
following a free trial period. The debit could also have been made
as a result of a wage garnishment, an offset claim for a taxing
agency or a credit account or overdraft with another account with
24

25. the same bank, or a direct-deposit chargeback in order to recover
an overpayment.
 Merchant error - A merchant may improperly debit a customer's
account due to human error. For example, a customer may
authorize a $5.00 purchase which may post to the account for
$500.00. The customer has the option to recover these funds
through chargeback to the merchant.
 Chargeback to merchant - A merchant account could receive
a chargeback because of making an improper credit or debit card
charge to a customer or a customer making an unauthorized credit
or debit card charge to someone else's account in order to "pay"
for goods or services from the merchant. It is possible for the
chargeback and associated fee to cause an overdraft or leave
insufficient funds to cover a subsequent withdrawal or debit from
the merchant's account that received the chargeback.
UNDERWRITING
Underwriting refers to the process that a large financial service
provider (bank, insurer, investment house) uses to assess the
eligibility of a customer to receive their products (equity capital,
insurance, mortgage, or credit). The name derives from the Lloyd's of
London insurance market. Financial backers, who would accept some
of the risk on a given venture (historically a sea voyage with
25

26. associated risks of shipwreck) in exchange for a premium, would
literally write their names under the risk information that was written
on a Lloyd's slip created for this purpose. In banking, underwriting is
the detailed credit analysis preceding the granting of a loan, based on
credit information furnished by the borrower, such as employment
history, salary and financial statements; publicly available information,
such as the borrower's credit history, which is detailed in a credit
report; and the lender's evaluation of the borrower's credit needs and
ability to pay. Examples include mortgage underwriting.Underwriting
can also refer to the purchase of corporate bonds, commercial paper,
government securities, municipal general-obligation bonds by
a commercial bank or dealer bank for its ownaccountor for resale to
investors. Bank underwriting of corporate securities is carried out
through separate holding-company affiliates, called securities
affiliates or Section 20 affiliates.
MORTGAGE
Mortgage is transfer (conveyance) of interest in the specific
immovable property (real estate) belonging to the debtor in favour of
the creditor (lender).
Section 3 of General clauses act says immovable property includes
land, benefit to arise out of land and things attached to the earth or
permanently fastened to anything attached to the earth. There is no
provision for mortgage of movables.
26

27. The property should be such as can be clearly described .The legal
ownership remains with the borrower. The actual physical possession
of the property need not always be transferred to the creditor Vide
section 58 of Transfer of property Act 1862.
Different types of Mortgages
1. Simple/Registered Mortgage
As per Section 58 (b), the mortgagor undertakes (binds himself
personally) expressly or impliedly to pay the advance (Mortgage
money). He does not deliver the possession of mortgaged property
(non-possessory mortgage). The property can be sold only with the
court intervention (permission). It always requires registration
(irrespective of the amount of advance). It is got registered with the
concerned Sub-Registrar/Registrar of Assurances (section 28 of
Indian Registration Act). Mortgage deeds of properties valued at Rs.
100 or more attract ad valorem stamp duty.
The registration should be done within 4 months from
the date of execution of the document (Sec 23 of Indian Registration
Act). If the value of the property involved is less than Rs. 100 , the
registration is not necessary (Section 59 of Transfer of Property Act).
Simple mortgage can be created at any centre.
If the document is not presented for registration within this stipulated
period of 4 months the Registrar (not sub-Registrar) may permit the
27

28. registration, if the delay in presentation does not exceed 4 months. In
such cases, a penalty not exceeding 10 times of the usual registration
fee can be levied by the Registrar under section 25 of Registration
act.
The mortgage under a simple mortgage does not have the right of
foreclosure. That is the mortgagee cannot get the property
permanently in his own legal right. Foreclosure means that the
mortgagor absolutely loses his right to redeem (get lack)
mortgagedproperty in the case of non-payment of mortgage money
section 67 of Transfer of Property Act.
2. Mortgage by conditional sale
The possession of the mortgaged property is not transferred to
mortgagee. It is an ostensible sale (and not a real sale). In the case
of non-payment of mortgage money, the ostensible sale becomes a
real/absolute sale (i.e. the property is deemed as sold). On liquidation
of the advance in full, the property is transferred to mortgagor. The
mortgagee can sue for foreclosure but not for sale of mortgaged
property, by foreclosure, the conditional sale becomes absolute/real.
3. Usufructuary mortgage
It is a possessory mortgage, that is, a mortgagee possesses the
mortgaged property full the advance is repaid (there is no lower/upper
time limit for this). Actual physical possession is not necessary.
28

29. The mortgagee has the right to receive profits and rents accruing
from the property. The mortgagor does not bind himself personally for
repayment of the mortgage money. The mortgagee (lender) therefore
cannot sue the mortgagor for repayment of the mortgage debt. He
cannot file suit for sale or foreclosure of the mortgaged property. The
mortgagee is left with only one remedy i.e. he can appropriate the
rents/profits towards liquidation of mortgage money and interest
thereon.Bankers do not advance against such mortgage.
4. English mortgage
The mortgaged property is transferred absolutely to the mortgagee.
That is, all interests and rights in the property are conveyed. It is
different from simple mortgage. Thus the English mortgage is entitled
to immediate possession of mortgaged property. The mortgagor
binds himself personally to repay the mortgage money.
The property is reconvened (transferred) to the mortgagor upon
repayment of mortgage money.
In the case non-payment of mortgage money, the English mortgagee
(cannot sue for foreclosure but) can sue for a decree for sale. The
mortgaged property can be sold without count‘s intervention under
some circumstances detailed in section 69 of Transfer of Property Act
(different from simple mortgage).
5. Mortgage by deposit of title deeds
29

30. Equitable mortgage (as per English law), the mortgagor [owner or his
authorised (only constituted) attorney] in any of the notified towns
delivers to the creditor (or his agent), documents of title to immovable
property (title deeds) with intent to create a security thereon.
The immovable property proposed to be equitably mortgaged (and/or
the financing branch) may be located/situated anywhere in India but
the title deeds should be delivered at the notified centre only. If it is a
sine qua non (an indispensable requisite) for equitable mortgage a
deposit made outside the notified centres creates neither a mortgage
nor a charge. The debt may be existing or future.
6. Anomalous mortgage
A mortgage which does not belong to any of the five types is called
anomalous mortgage. It possesses a mixed character of any two or
more types of mortgages. The understanding of the above aspects
will keep the borrowers persons of ordinary prudence and lenders in
good stead.
PLEDGE
As per the Contract Act, 1872, pledge means bailment of goods for
the purpose of providingsecurity for payment of a debt or
performance of a promise.
30

31. Bailment is nothing but delivery of goods to the financier. The person
offering the goods assecurity is the bailer, pawneror pledger. The
person to whom the goods are given is thebailee, pawneeor pledgee.
At times, the delivery of goods may not be actual, but constructive.
For instance, goods ina warehouse may be pledged by handing over
the warehouse receipt. This constructivelyimplies delivery of goods of
the pledgee.There is no legal necessity for a pledge agreement;
pledge can be implied. However, it isalways preferable for the banker
to insist on a pledge agreement.The pledger is bound to inform the
pledgee about any defects in the goods pledged, or anyrisks that go
with possession of the goods. He is also bound to bear any incidental
expensesthat arise on account of such possession.
Pledge becomes onerous for the pledger, because he has to part with
possession. For thesame reason, the pledgee is generally
comfortable with a pledge arrangement. He does notneed to take any
extra effort or incur any cost for realizing the security. He is however
boundto take reasonable care of the goods.
The pledgee has a general lien on the goods i.e. he is not bound to
release the goods unlesshis dues are fully repaid.
A point to note is that the banker‘s lien is limited to the recovery of the
debt for which thepledge is created – not to other amounts that
maybe due from the borrower. This is thereason that banks often
provide a protective clause in their pledge agreement that the
31

32. pledgeextends to all dues from the borrower.In the event of default by
the borrower, the pledgee can sell the assets to recover his dues.The
dues may be towards the original principal lent, or interest thereon or
expenses incurredin maintaining the goods during the pledge.
HYPOTHECATION
Hypothecation means a charge in or upon any movable property,
existing or future, created by a borrower in favor of a secured
creditor, without delivery of possession of the moveableproperty to
such creditor, as a security for financial assistance, and includes
floating charge and crystallization of such charge into fixed charge on
moveable property.
As with pledge, hypothecation is again adopted for movable goods.
But, unlike pledge, the possession of the asset is not given to the
bank. Thus, the borrower continues to use the asset, in the normal
course.A good example is vehicle financing, where the borrower uses
the vehicle, but it is hypothecated to the bank. The bank protects
itself by registering the hypothecation in the records of theRegional
Transport Officer (RTO).Therefore, ownership cannot be changed
without a NOCfrom the bank. Further, to prevent any unauthorized
transfers, the bank takes possession of the vehicle (re-possession) in
the event of default by the borrower.
In the business context, it is normal to obtain working capital facilities
against hypothecation of stocks and debtors. Since these are
inherent to the business, the stocks and debtors keep changing form
32

33. (some debtors clear their dues; new debtors are created based on
credit sales by the borrower) and value. The bank only insists on a
minimum asset cover. If thehypothecated assets are worth Rs.
40lakhs and the outstanding to the bank is Rs. 25 lakhs, the asset
cover is Rs. 40 lakhs ÷ Rs. 25 lakhs i.e. 1.6 times.
Since the form and value of the assets charged keep changing (the
outstanding amount also keeps changing), this kind of a charge is
therefore referred to as floating charge. In the event of default by the
borrower, the bank will seek possession of the assets charged. That
is when it becomes a fixed charge viz. the assets charged as well as
the borrower‘s dues against thoseassets get crystallised.
Since possession is with the borrower, there is a risk that non-
recoverable debts are included in debtors, or non-moving or obsolete
goods are included in inventory. Further, an unethical borrower,
despite all provisions in the hypothecation deed, may hypothecate the
same stockto multiple lenders. Therefore, banks go for hypothecation
in the case of reputed borrowers,with whom they have comfort.
Companies have a requirement of registering the charge with the
Registrar of Companies(ROC). Under the Companies Act, if the
charge is not registered with ROC within 30 days, (ora further period
of 30 days on payment of fine), then such charge cannot be invoked
in theevent of liquidation of the company. This is a protection against
multiple charges created onthe same property, in case a company is
a borrower. This is also a reason, why banks pursueborrowers until
they register the charge with the ROC.At times, when the asset cover
33

34. is high, banks may permit other bankers to have a charge onthe
same property. Such a charge in favour of multiple lenders, all having
the same priorityof repayment in the event of default, is called
paripassucharge.
Not all banks are comfortable with paripassu charge. There are
situations, where the firstlender insists on priority in repayment.
Subject to such priority, it may not object to thecreation of an
additional charge in favour of a second lender. The first lender is said
to havea first charge on the property; the second lender has second
charge. Similarly, third charge,fourth charge etc are possible, but not
common.
ASSIGNMENT
The Banker may provide finance against the security of an actionable
claim. Under the Transfer of Property Act, an actionable claim is a
claim to any debt other than a debt secured by mortgage of
immovable property or by hypothecation or pledge of movable
property.
Since security depends on the quality of the debt, bankers are
comfortable if the dues to the borrower are from the Government.
With such a structure, the bank can earn a return that is higher than
what is normal for taking a sovereign risk.
34

35. In housing loans, where repayment depends on the earning cycle of
the borrower, financiers tend to ask for assignment of life insurance
policy that covers the life of the borrower. This can be done by
mentioning the same in the reverse of the insurance policy document,
along with signature of the assigner. Alternatively, a separate deed of
assignment can be signed. Either way, the insurance company needs
to be informed about the assignment.
HIRE PURCHASE
Hire purchase is a type of installment credit under which the hire
purchaser, called thehirer, agrees to take the goods on hire at a
stated rental, which is inclusive of therepayment of principal as well
as interest, with an option to purchase. Under thistransaction, the hire
purchaser acquires the property (goods) immediately on signing
the hire purchase agreement but the ownership or title of the same is
transferred onlywhen the last installment is paid. The hire purchase
system is regulated by the HirePurchase Act 1972. This Act defines a
hire purchase as ―an agreement under whichgoods are let on hire
and under which the hirer has an option to purchase them
inaccordance with the terms of the agreement and includes an
agreement under which:
1) The owner delivers possession of goods thereof to a person on
condition thatsuch person pays the agreed amount in periodic
installments.
35

36. 2) The property in the goods is to pass to such person on the
payment of the lastof such installments, and
3) Such person has a right to terminate the agreement at any time
before theproperty so passes‖.Hire purchase should be distinguished
from installment sale wherein property passes to the purchaser with
the payment of the first installment. But in case of HP (ownership
remains with the seller until the last installment is paid) buyer gets
ownership after paying the last installment. HP also differs from
leasing.
BANKER’S ACCEPTANCE
The Group, less than one of its terms of reference, also examined the
role and scopeof introducing ‗Banker‘s Acceptance‘ (BA) facility in the
Indian Financial Markets.BA has been in use in markets like USA and
Europe primarily in financing internationaltrade. Historically, BA
backed by Trade Bills had readily available discount windowslike the
Discount Houses in the U.K. and the Central Banks like the Bank of
Englandand Fed Reserve.
BA is a time draft or bill of Exchange drawn on and ―accepted‖ by a
bank as itscommitment to pay a third party. The parties involved in a
banker‘s acceptanceare the Drawer (the bank‘s customer - importer
or exporter), the Acceptor (a bankor an Acceptance House), the
Discounter (a bank which could be the acceptingbank itself or a
different bank or a discount house) and the Re-discounter
36

37. (anotherbank, discount house or the Central Bank). A ―BA‖ is
accepted, when a Bankwrites on the draft its agreement to pay it on
maturity. The Bank becomes theprimary obligator of the draft or bill of
exchange drawn on and accepted by it. Ineffect, BA involves
substituting bank‘s creditworthiness for that of a borrower.
Theaccepted bill bears an irrevocable, unconditional guarantee of a
bank to pay thebill on maturity, in the process creating a negotiable
instrument that is also attractiveto investors in short term paper. BA
compared favourably as a funding avenuein terms of cost vis-à-vis
LIBOR based loans. However, in the US market in recent years the
popularity of BA has been on the wane due to a host of market
developments, particularly the emergence of cost-effective
instruments from borrower‘s point ofview like the asset-backed
Commercial Paper and Euro-Commercial Paper and
narrowingspreads between yields on Euro-dollar deposits and BA,
leading to investor indifferencebetween the two as the preferred
investment avenue.
BILL DISCOUNTING
Bill discounting is a major activity with some of the smaller Banks.
Under this type of lending,Bank takes the bill drawn by borrower on
his (borrower's) customer and pays him immediately deducting some
amount as discount/commission. The Bank then presents the Bill to
theborrower's customer on the due date of the Bill and collects the
total amount. If the bill is delayed, the borrower or his customer pays
37

38. the Bank a pre-determined interest depending upon the terms of
transaction.
FACTORING
Factoring is a financial transaction whereby a business sells
its accounts receivable (i.e., invoices) to a third party (called a factor)
at a discount. In "advance" factoring, the factor provides financing to
the seller of the accounts in the form of a cash "advance," often 70-
85% of the purchase price of the accounts, with the balance of the
purchase price being paid, net of the factor's discount fee
(commission) and other charges, upon collection from the account
client. In "maturity" factoring, the factor makes no advance on the
purchased accounts; rather, the purchase price is paid on or about
the average maturity date of the accounts being purchased in the
batch. Factoring differs from a bank loan in several ways. The
emphasis is on the value of the receivables (essentially a financial
asset), whereas a bank focuses more on the value of the borrower's
total assets, and often also considers, in underwriting the loan, the
value attributable to non-accounts collateral owned by the borrower.
Such collateral includes inventory, equipment, and real property, That
is, a bank loan issuer looks beyond the credit-worthiness of the firm's
accounts receivables and of the account debtors (obligors) thereon.
Secondly, factoring is not a loan – it is the purchase of afinancialasset
38

39. (the receivable). Third, a nonrecourse factor assumes the "credit risk‖
that a purchased account will not collect due solely to the financial
inability of account debtor to pay. In the United States, if the factor
does not assume credit risk on the purchased accounts, in most
cases a court will characterize the transaction as a secured loan.
It is different from forfaiting in the sense that forfaiting is a
transaction-based operation involving exporters in which the firm sells
one of its transactions, while factoring is a Financial Transaction that
involves the Sale of any portion of the firm's Receivables.
Factoring is a word often misused synonymously with invoice
discounting, known as "Receivables Assignment" in American
Accounting ("Generally Accepted Accounting Principles")
"GAAP" propagated by FASB - factoring is the sale of receivables,
whereas invoice discounting is borrowing where the receivable is
used as collateral.However, in some other markets, such as the UK,
invoice discounting is considered to be a form of factoring involving
the assignment of receivables and is included in official factoring
statistics.It is therefore not considered to be borrowing in the UK. In
the UK the arrangement is usually confidential in that the debtor is not
notified of the assignment of the receivable and the seller of the
receivable collects the debt on behalf of the factor.
39

40. CHAPTER-4
CONCLUSION
The banking scenario has changed drastically. The changes which
have taken place in the last ten years are more than the changes
took place in last fifty years because of the institutionalisation,
liberalisation, globalisation and automation in the banking industry.
Indian banking system has several outstanding achievements to its
credit, the most striking of which is its reach. Indian banks are now
spread out into the remote corners of our country. In terms of the
number of branches, India‘s banking system is one of the largest in
the world. According to the Banker 2004, India has 20 banks within
the world‘s top 1000 out of which only 6 are within the top 500 banks.
Today banking sector is marked by high customer expectations and
technological innovations. Technology is playing a crucial role in the
day to day functioning of the banks. These banks that have
harnessed and leveraged technology best have a strategic
advantage. To face competition it is necessary for banks to absorb
the technology and upgrade their services.
In today‘s context banks are following the strategy of ―relationship
banking‖ than ―mass banking‖ which is need of the hour. The
customer services are playing a very significant role in banking
business. In India major events leading to deregulation, liberalisation
40

41. and privatisation have unleashed forces of competition, making the
banks run for their business, not only to create the customer, but
more difficult to run for their business, not only to create the
customer, but more difficult to retain the customer. Prompt and
efficient customer service, thus, has become very significant.
Financial services in banking are the new paradigm for survival and
success, embracing a ‗share of customer‘ approach to growth by
identifying, protecting and expanding customer relationship.
41