WELCOME

• Rakesh Khare
• Asst. General Manager (Retired)
• Union Bank of India
• M.Sc.,M.B.A.(HR), JAIIB

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• Specialisation:
• Credit, Credit Monitoring, Recovery,
• Alternate Delivery Channels, KYC-AML

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• Contact No.: +919993170274
• Email ID: khare_rakesh1@rediffmail.com;
• Khare.rakesh1@gmail.com

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BANKING FUNCTIONS

SYLLABUS

• 1)Banker Customer Relationship - Types; Different Deposit Products & Services; Services to Customers & Investors
• 2) KYC / AML / CFT norms - PMLA Act; KYC Norms
• 3) Bankers' Special Relationship - Mandate; POA; Garnishee Orders; Banker's Lien; Right of Set off
• 4) Consumer Protection - COPRA, Banking Ombudsman Scheme - Operational Aspects of COPRA Act & Banking Ombudsman Scheme
• 5) Payment and Collection of Cheques and Other Negotiable Instruments - NI Act; Role & Duties of Paying & Collecting Banks; Endorsements; Forged Instruments; Bouncing of Cheques; Its Implications; Return of Cheques; Cheque Truncation System
• 6) Opening accounts of various types of customers - Operational Aspects of opening and Maintaining Accounts of Different Types of Customers including Aadhar, SB Rate Deregulation
• 7) Ancillary Services - Remittances; Safe Deposit Lockers; Govt. Business; EBT
• 8) Cash Operations - Cash Management Services and its Importance
• 9) Principles of lending, Working Capital Assessment and Credit Monitoring - Cardinal Principles; Non-fund Based Limits; WC; Term Loans; Credit Appraisal Techniques; Sources of WC Funds & its Estimation; Operating Cycle; Projected Net WC; Turnover Method; Cash Budget; Credit Monitoring & Its Management; Base Rate
• 10) Priority Sector Advances - Targets; Sub-Targets; Recent Developments
• 11) Agricultural Finance - Types of Agricultural Loans; Risk Mitigation in agriculture (NAIS, MSP etc)
• 12) Micro, Small and Medium Enterprises - MSMED Act, 2006 Policy Package for MSMEs; Performance and Credit Rating Scheme; Latest Developments
• 13) Government Sponsored Schemes - SGSY; SJSRY; PMRY; SLRS
• 14) Self Help Groups - Need for & Functions of SHGs; Role of NGOs in Indirect Finance to SHGs; SHGs & SGSY Scheme; Capacity Building
• 15) Credit Cards, Home Loans, Personal Loans, Consumer Loans - Operational Aspects, Advantages, Disadvantages & Guidelines of Credit Cards; Procedure and Practices for Home Loans, Personal Loans and Consumer Loans
• 16) Documentation - Types of Documents; Procedure; Stamping; Securitisation
• 17) Different Modes of Charging Securities - Assignment; Lien; Set-off; Hypothecation; Pledge; Mortgage
• 18) Types of collaterals and their characteristics - Land & Buildings; Goods; Documents of Title to Goods; Advances against Insurance Policies, Shares, Book Debts, Term Deposits, Gold, etc; Supply Bills
• 19) Non Performing Assets - Definition; Income Recognition; Asset Classification; Provisioning Norms; CDR
• 20) Financial Inclusion - BC; BF; Role of ICT in Financial Inclusion, Mobile based transactions, R SETI2
• 21)Financial Literacy - Importance of financial literacy, customer awareness

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KYC COMPLIANCE AND ANTI MONEY LAUNDERING MEASURES

DEFINITION OF MONEY LAUNDERING

Section 3 of the Prevention of Money Laundering (PML) Act 2002 has defined the “offence of money laundering” as under:-

• “ Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering”.
• Money launderers use the banking system for cleansing ‘dirty money’ obtained from criminal activities with the objective of hiding / disguising its source. The process of money laundering involves creating a web of financial transactions so as to hide the origin and true nature of these funds.
• For the purpose of this document the term money laundering would also cover financial transactions where the end use of funds goes for terrorist financing irrespective of the source of the funds.

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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1. Maintaining a record of prescribed transactions.
2. Furnishing information of prescribed transactions to the specified authority.
3. Verifying and maintaining records of the identity of its clients.
4. Preserving records in respect of 1,2,3 above for a period of ten years from the date of cessation of transactions with the clients.

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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OBLIGATIONS UNDER PML ACT2002 UNDER Section 12 of PML Act 2002

KYC – AML POLICY OBJECTIVES

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• To prevent criminal elements from using the Bank for money laundering activities.
• To enable the Bank to know / understand the customers and their financial dealings better, which in turn would help the Bank to manage risks prudently.
• To put in place appropriate controls for detection and reporting of suspicious activities in accordance with applicable laws/ laid down procedures.
• To comply with applicable laws / laid down procedures.
• To take necessary steps to ensure that the relevant staff are adequately trained in KYC-AML procedures.

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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KYC POLICY.

��The KYC policy of the Bank is framed incorporating the following four key elements:��a) Customer Acceptance Policy;

�b) Customer Identification Procedures;

�c) Monitoring of Transactions; and

�d) Risk Management.

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KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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DUTY TO OBTAIN IDENTIFICATION

• Establishing Identity:-
• What is Identity?
• Name
• Date of birth
• Residence / Address
• Isfactory identificatio
• Whose Identity should be identified?.
• Named A/c holder
• Any Principal beneficial owner of funds being invested who is not the account Holder or named investor i.e. normally those who have 20% stake or more in the entity
• The principal controller of an account or business relationship i.e. those who regularly provide instructions ;and
• Any intermediate parties eg. Where an account is managed or owned by an intermediary such as PA holder.
• Failure or refusal by an applicant to provide satisfactory identifaction; evidence within a reasonable time scale and without adequate explanation may lead to a suspicion that the depositor or investor is engaged in money laundering. In such case Branches should consider making a suspicious activity report (STR).

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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CUSTOMER IDENTIFICATION PROCEDURE

• Branches should ensure that sufficient information is obtained on the nature of business that the customer expects to undertake and any expected or predictable pattern of transactions.
• Information collected for customer identification should include :
1. The purpose and reason for opening the account or establishing the relationship
2. The anticipated level and nature of the activity that is to be undertaken
3. The expected origin of the funds to be used within the relationship
4. The details of occupation / employment to be sought for bank accounts and source of wealth or income will be required for some banking relationships.

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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�� CUSTOMER IDENTIFICATION REQUIREMENTS – INDICATIVE GUIDELINES

Small Deposit Accounts

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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(i) Although flexibility in the requirements of documents of identity and proof of address has been provided in the above mentioned KYC guidelines, it has been observed that a large number of persons, especially, those belonging to low income group both in urban and rural areas are not able to produce such documents to satisfy the bank about their identity and address. This would lead to their inability to access the banking services and result in their financial exclusion. Accordingly, the KYC procedure also provides for opening accounts for those persons who intend to keep balances not exceeding Rupees Fifty Thousand (Rs. 50,000/-) in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed Rupees One Lakh (Rs. 1,00,000/-) in a year. In such cases, if a person who wants to open an account and is not able to produce documents mentioned in Annex I of this master circular, banks should open an account for him, subject to:

Introduction from another account holder who has been subjected to full KYC procedure. The introducer’s account with the bank should be at least six months old and should show satisfactory transactions. Photograph of the customer who proposes to open the account and also his address need to be certified by the introducer,

or

any other evidence as to the identity and address of the customer to the satisfaction of the bank.

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����C�CUSTOMER IDENTIFICATION REQUIREMENTS – INDICATIVE GUIDELINES�

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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ii)  While opening accounts as described above, the customer should be made aware that if at any point of time, the balances in all his/her accounts with the bank (taken together) exceeds Rupees Fifty Thousand (Rs. 50,000/-) or total credit in the account exceeds Rupees One Lakh (Rs. 1,00,000/-) in a year, no further transactions will be permitted until the full KYC procedure is completed. In order not to inconvenience the customer, the bank must notify the customer when the balance reaches Rupees Forty Thousand (Rs. 40,000/-) or the total credit in a year reaches Rupees Eighty thousand (Rs. 80,000/-) that appropriate documents for conducting the KYC must be submitted otherwise operations in the account will be stopped.

MONITORING OF TRANSACTIONS

• Ongoing monitoring is an essential element of effective KYC procedures. Banks can effectively control and reduce their risk only if they have an understanding of the normal and reasonable activity of the customer so that they have the means of identifying transactions that fall outside the regular pattern of activity. However, the extent of monitoring will depend on the risk sensitivity of the account. Banks should pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. Banks may prescribe threshold limits for a particular category of accounts and pay particular attention to the transactions which exceed these limits. Transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer should particularly attract the attention of the bank. Very high account turnover inconsistent with the size of the balance maintained may indicate that funds are being 'washed' through the account. High-risk accounts have to be subjected to intensified monitoring. Every bank should set key indicators for such accounts, taking note of the background of the customer, such as the country of origin, sources of funds, the type of transactions involved and other risk factors. Banks should put in place a system of periodical review of risk categorization of accounts and the need for applying enhanced due diligence measures. Such review of risk categorisation of customers should be carried out at a periodicity of not less than once in six months.

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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Monitoring High Value Transactions –

(KYC-AML/221 DT. 04.02.2010)

• Bank is required to submit details of all cash Transactions taking place during during a calendar month and the aggregate value of such transactions execeeds rupees Ten(10) Laks or its equivalent in Foreign Currency.

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• This report (CTR) is generated by KYC-AML at CO through Finacle and sent to RO/Branches. (Already sent for the month of Dec 09 & January 2010 in Excel Sheet).

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• Branches to check the genuineness / bonafide of these a/cs from KYC/AML angle and to confirm to CO through Principal Officer.

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CLOSURE OF ACCOUNTS

5. Where the bank is unable to apply appropriate KYC measures due to non-furnishing of information and /or non-cooperation by the customer, the bank should consider closing the account or terminating the banking/business relationship after issuing due notice to the customer explaining the reasons for taking such a decision. Such decisions need to be taken at a reasonably senior level with the permission of Regional Office.

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KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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RISK MANAGEMENT

1. Risk Perception: - Bank’s are exposed to following risks, which arise out of Money Laundering activities:-
1. Reputation Risk – Risk of loss due to severe impact on Bank’s reputation. Banks maintain the confidence of depositors, creditors and the general market place.
2. Compliance Risk – Failure of Compliace with key regulations governing the Banks operations.
3. Operation Risk – Risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events,
4. Legal Risk – Risk of loss due to any legal action the Bank may face due to failure to comply with the law.

Perception of Money Laundering risk will depend upon the following:-

• The country of domicile of the customer irrespective of his/her nationality.
• Type of the customer and nature of business
• Type of product/service availed by the customer such as frequent remittances unconnected to the line of business, large number of cash transactions etc.

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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RISK CLASSIFICATION

The customers are to be classified into High, Medium and Low Risk levels depending on the level of risk perception:-

• High Risk
• Medium Risk
• Low Risk

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KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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ORGANISATIONAL SET UP

Principal Officer (Money Laundering Reporting Officer)�(a) Principal Officer shall be located at the head/corporate office of the bank and shall be responsible for monitoring and reporting of all transactions and sharing of information as required under the law. He will maintain close liaison with enforcement agencies, banks and any other institution which are involved in the fight against money laundering and combating financing of terrorism..�(b) The Principal Officer will be responsible for timely submission of CTR, STR and reporting of counterfeit notes to FIU-IND.

© OurBank has appointed Shri H.K.Gurnani (AGM) has been designated as Principal Officer.

FGM Shri B. Varaprasad IS THE PRINCIPAL OFFICER FOR THE ZONE & Shri P.S.Ananthnarayan is the Nominated Officer for Zone.

RH IS THE REGIONAL ANTI MONEY LAUNDERING OFFICER and CM RO is the Nominated officer.

BM IS THE PRINCIPAL ANTI MONEY LAUNDERING OFFICER FOR HIS BRANCH

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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• Branches should report Suspicious transactions which may give rise to a reasonable ground of suspicion that these may involve financing of the activities relating to Terrorism. Such instances should immediately be reported to KYC Cell CO through RO and in turn to FIU-IND.
• Consolidated Updated list of the individuals and entities as circulated by UN/RBI can be accessed in the UN website at http://www.un.org/sc/committees/1267/consolist.shtml.
• Branches should scan all existing accounts to ensure that no account is held by or linked to any of the entities or individuals included in the list. This should be also completed in next 10-15 days.d
• While opening new accounts br. Should ensure that the name/s of the proposed customer does not appear in the list.

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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Combating Financing of Terrorism

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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TIPPING OFF

Branches should ensure that the customers should not be informed (tipped off) at any level that the account is under monitoring for suspicious activities and a disclosure has been made to the appropriate statutory authorities.

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Branches can however make normal enquiries to learn about the transactions or instruction to determine whether the activities of the customer arouse suspicion.

Suspicion should not be disclosed either to the customer or third party.

Subject to internal procedures, such enquiries should normally only be made as directed by the Principal Officer.

KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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KYC - AML IC 6577 dt.14.12.2002 & IC 8540dt.06.01.10

Rakesh Khare Chief Manager, RO, Bhopal

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Financial Intelligence Unit in India – (FIU_IND)

Govt. of India has appointed wef 01.07.2005 Director, Enforcement as the Director, Financial Intelligence Unit-India, under the Ministry of Finance, Department of Revenue.

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On Failure to comply with provisions contained under Section 12 then Director (FIU_IND) can levy a fine on a Banking Company which shall not be less than Rs. 10000/- but may extend upto Rs. 1 Lac.

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• CTR-- Being generated at CO and submitted by KYC-AML Dept.
• STR -- Within 7 days of arriving at conclusion of suspicion.
• CCR – WITHIN 7 WORKINGDAYS FROM THE DATE OF COUNTERFEITING OF CURRENCY

PAYMENT & SETTLEMENT SYSTEMS ACT 2007

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• Government has passed Payment & Settlement Systems Act 2007 which came into effect on 12.08.2008, mainly to regulate and supervise the payment and settlement systems.

PAYMENT & SETTLEMENT SYSTEMS ACT 2007

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• What is Payment Obligation?

– Act says what is owed by one participant in a payment system to another which results from clearing or settlement or payment instructions relating to funds, securities, foreign exchange, derivatives or other transactions.

PAYMENT & SETTLEMENT SYSTEMS ACT 2007

• What is Payment instructions?

– Instructions, authorization or order in any form including electronic mode to effect payment by a person to a participant in a payment system or from one participant in such a system to another participant in that system. Payment instructions can be communicated either manually i.e. through instruments like cheque, draft or through electronic mode.

PAYMENT & SETTLEMENT SYSTEMS ACT 2007

• What is settlement?

– It is settlement of payment instructions received and these include settlement of securities, foreign exchange, derivatives or other transactions. It can take place either on net or gross basis.

PAYMENT & SETTLEMENT SYSTEMS ACT 2007

• PAYMENT OPTIONS
• CHEQUES
• DDs
• Electronic-fund transfer – RTGS/NEFT
• ECS
• DEBIT/CREDIT CARD

NEGOTIABLE INSTRUMENTS ACT,1881 (MEANING)

• NEGOTIABLE INSTRUMENT IS DEFINED IN SEC.13 OF THE ACT;
• IT MEANS:
1. PROMISSORY NOTES,
2. BILL OF EXCHANGE,
3. CHEQUE PAYABLE TO ORDER OR BEARER;

NEGOTIABLE INSTRUMENTS ACT,1881�(CHEQUE)

CHEQUE IS DEFINED IN SEC.6 OF NI ACT ;

•  Cheque is a bill of exchange drawn on a specified banker and payable on demand;

•   It cannot be drawn on any person other than a bank;

•   It cannot be payable so many days after date or sight as is the case with b/e;

• It is always payable on demand;

•   There is no standard format for a cheque;

• Indian Stamp Act has exempted Cheque from Stamp Duty
• Now Electronic Cheque (Image) and Truncated Image is brought under definition of Cheque as per Amendment.

•   But Cheque is not a legal tender nobody can be compelled to accept cheque towards settlement of debts;

A CHEQUE

A CASH CHEQUE

A TRANSFER CHEQUE

A CLEARING CHEQUE

NEGOTIABLE INSTRUMENTS ACT,1881�CHEQUE (BEARER OR ORDER)

• A cheque can be drawn without mentioning the words order or bearer, in the absence of such words the cheque is treated as order cheque that means a cheque drawn payable to “A” will mean payable to A or order
• If a cheque is drawn payable to A only, it can not be payable to any one other than A.
• In practice this objective is achieved by “Payee’s A/c only” crossing
• If the words “or bearer” are not struck off, the cheque is treated as bearer cheque the payment of which may be made to the named payee or any bearer of the cheque .

NEGOTIABLE INSTRUMENTS ACT,1881�HOLDER AND HOLDER IN DUE COURSE

• Any person in lawful possession of the Instrument is Holder.
• A lawful holder after consideration is holder in due course. (Sec 9 of NI Act)

Under noted persons will not be holder:

1. A thief in possession of instrument
2. A finder of an instrument
3. Person who takes the instrument under forged endorsement
4. Payee/endorsee who is prohibited by court order from receiving cheque.

NEGOTIABLE INSTRUMENTS ACT,1881�HOLDER AND HOLDER IN DUE COURSE

• A person who is not a holder in due course cannot get a title to the instrument better than that of its transferor; if the transferor has a defective title, transferee also gets a defective title; however a holder in due course gets a good title;
• However, Holder in due course should satisfy the following three conditions:
• Consideration;
• Negotiation before maturity;
• Good faith;

ROLE OF A BANKER

• Paying Banker
• Collecting Banker
• A Paying Banker is protected under section 85 of Negotiable Instrument Act.
• A Collecting Banker is protected under section 131 of Negotiable Instrument Act.

PAYMENT OF CHEQUE

• A banker is statutorily obliged to honour and to pay his customer’s cheque provided
• The customer has sufficient and clear balance in his account
• The balance available in the account should not be for any other purpose (cheques can not be payable out of balance in term deposits or out of amount earmarked under Garnishee Order or Attachment Order)

PAYMENT OF CHEQUE

• The cases when a bank is not duly required to pay the cheque may be:
•  Cheque is not properly drawn
• Payment is not demanded within banking hours
• Payment is countermanded by the drawer
• Bank is informed about the death, insolvency, or insanity of the drawer

PRECAUTIONS IN PAYMENT OF A CHEQUE

• In order to entitle a bank for protection as a paying banker under section 85 of the NI Act, the payment of cheque must be in due course
• Payment in due course means, payment:
• In accordance with the apparent tenor of the instrument (Crossings and Endorsements)
• In good faith and without negligence
• To any person in possession of the instrument
• Under circumstances that do not afford a reasonable ground to believe that a defect exists in the title of the person obtaining payment

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PAYMENTS NOT IN DUE COURSE

• Payment is not in Due Course, if:
• Payment in contradiction to apparent intention of parties
• Payment after receipt of Stop Payment Order
• Payment after Banking Hours
• Payment of a cheque bearing forged signatures
• Payment under suspicious circumstances

PRECAUTIONS IN PAYMENT OF A CHEQUE

• Example 1:
• A cheque for Rs.9.00 lacs deposited and also amount credited in a newly opened current account. Cheque was drawn by an account holder of Mumbai branch. Though the paying branch made enquiries with customer and also went through the papers (property deal), did not think of contacting the parent branch or the account holder who purported to have issued cheque. The customer receives an sms message about debit to his account and immediately contacts the branch and denies having issued any such cheque.

PRECAUTIONS IN PAYMENT OF A CHEQUE

• Example 2:
• A cheque for Rs.7.50 lacs collected in a newly opened current account. It turned out subsequently that this cheque was meant for another party with a similar name. Though KYC compliance (ID Proof, address proof, sales tax registration etc) was carried out, personal visit to the account holder was not done in this case.

OTHER IMPPORTANT PRECAUTIONS:

• A cheque bearing no date should be returned unpaid
• Holder of a cheque may however fill the date
• Validity of the cheque – it can be increased or decreased by the drawer
• Stale Cheque – Three months after date of its issue, if nothing is mentioned about validity
• Post Dated Cheque – should not be paid
• If the payee is an un-discharged insolvent, and it is known to the bank, cheque should not be paid

OTHER IMPPORTANT PRECAUTIONS:

• If the payee is a company, corporation, govt. deptt., cheque should not be paid in cash. It should not be paid if it is endorsed in favour of director or employee of the company.
• If the drawer bank is marked as payee, the mode of disposal of amount should be indicated
• If payee’s name is not written, Cheque should be returned with reason “payee’s name required”
• If amounts written in words and figure differ, bank should pay the amount in words (as per NIA) but it should be returned.
• If no amount written in words, the cheque should be returned.
• If no amount written in figures, the amount written in words be paid as per NIA but it should be returned.

OTHER IMPPORTANT PRECAUTIONS:

• If the signature on the cheque differs from the specimen signature, cheque should be returned unpaid
• A cheque torn into two or more pieces is called mutilated cheque. Even if properly pasted, such cheque should not be paid unless mutilation is confirmed by the drawer / collecting banker
• Payment of cheques presented after banking hours is not payment in due course
• While paying a cheque in cash, if person receiving payment refuses to sign on the back of the cheque on the ground that it is a bearer cheque, a separate receipt to be obtained from him.

OTHER IMPPORTANT PRECAUTIONS:

• A cheque with material alteration (alteration with regard to date, payee’s name, amount, order to bearer, etc.) without authentication by the drawer should not be paid
• Paying banker enjoys protection if such alteration can not be detected with reasonable care and ordinary prudence, provided the payment was made in due course
• If cheque is endorsed by the payee in favour of a third party , such SB cheques will not be entertained. In case the cheque is drawn on a CD account, such cheque may be accepted for collection and sent with the endorsement that “first payee’s endorsement confirmed, second payee’s account will be credited on realization.

OTHER IMPPORTANT PRECAUTIONS:

• Other Issues:
• Crossing:
• A generally crossed and a specially crossed cheque
• A specially crossed cheque is to be paid only when presented by a banker.
• A generally crossed cheque is to be paid through account.
• Account Payee Crossing
• Not Negotiable crossing
• Opening of a crossing
• Endorsements

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OTHER IMPORTANT PRECAUTIONS:

• Stop Payment
• A valid stop payment order can be given by drawer of the cheque, one of the joint account holders, or any of the partners, whether authorised to operate the account or not.
• Stop payment order should be in writing
• In case of stop payment by telephonic message, payment can only be postponed, awaiting confirmation
• Stop Payment instruction should contain –
• Printed Serial No, Date, and amount of the cheque under drawer’s signatures
• Failure to comply with stop payment instructions will render the bank liable for damages, bank should verify status before accepting stop payment instruction.

COLLECTION OF CHEQUES

• As an agent
• when the cheque is collected on behalf of customer and the bank has no interest on the cheque. He first collects the amount and then gives credit to customer

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• As a holder for value
• when he has purchased or discounted the cheque
• accepts cheque against OD, Bank has already allowed withdrawal against cheque

COLLECTION OF CHEQUES

• CONVERSION
• Wrongful interference in the property of another
• When a bank collects a cheque for a person who has no title or defective title , he can be held guilty of conversion
• Section 131 provides protection to a banker against CONVERSION in following circumstances
• acting as an agent and not as a holder for value
• must receive payment for a customer
• acting in good faith and without negligence
• cheque must be a crossed cheque
• Good faith means not having any mala fide or fraudulent intention
• without negligence means with reasonable care - must raise a doubt if the circumstances so warrant

COLLECTION OF CHEQUES

• EXAMPLES OF NEGLIGENCE
• Collecting cheque in an a/c not properly introduced
• Collecting a cheque payable to a customer in his official capacity to his personal account
• collecting a cheque specially crossed to another bank
• collecting cheques with forged endorsements
• collecting account payee cheque to a/c of someone other than payee
• collecting large value cheques to new a/cs or a/cs with small transactions

DISHONOUR OF A CHEQUE (SEC 138)

• DISHONOURED CHEQUE entails
• Civil liability;
• Criminal liability ,
• this is dealt with in sec 138 to 142 of the act;
• A drawer of a cheque is deemed to have committed a criminal offence when the cheque drawn by him is dishonoured by the drawee on account of insufficiency of funds;
• The dishonour of the cheque for any other reasons does not come within the purview of this provision;

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• Punishment –imprisonment upto 2 year Or fine upto twice the amount of the cheque or both

DISHONOUR OF A CHEQUE (SEC 138)

• Conditions to be fulfilled for application of Sec 138:
• Should have been issued for a valid consideration;
• Should have been presented to the paying banker well within the validity period;
• Payee or holder in due course gives notice in writing to the drawer demanding payment;
• Notice should be given within 30 days of his receiving information of dishonour from the bank;
• Drawer should be given 15 days time from the date of receipt of notice to make the payment;

INDIAN FINANCIAL SYSTEM CODE (IFSC)

• IFSC code means Indian Financial System Code.  IFSC code is being used as the address code in one user to another user.  RTGS and NEFT payment system of Reserve Bank of India (RBI) use these codes. IFSC code consists of 11 Characters identified as under (Lets take an example of SBI, Madhapur Hyderabad - SBIN-0-004187):-
• First 4 digits show the Identity of the bank. i.e. SBIN
• 5th digits in default as ZERO (for future use) i.e. 0
• Last 6 Characters display the Branch Identity.  i.e. 004187
• So, IFSC code for SBI, Madhapur in Hyderabad is SBIN-0-004187.  IFSC (Indian Financial System Code) is excellent unique code for International electronic payment system.

MICR

• MICR code means Magnetic Ink Character Recognition code which contains 9 digits, like 380002006 appearing at the bottom of the cheque, following the cheque number. Each Bank Branch has a unique MICR code.
• First three digits of the code display the city and is derived from first 3 character of PIN (Postal Index Number) mentioned in the address of the Branch. For example PIN code of Hyderabad, Madhapur is 500081; therefore first three digits of MICR code will be 500.
• Digit 4, 5&6 display the bank codes allotted to each bank by Reserve Bank of India. For example State Bank of India has been allotted “002”. Six digits of MICR code will become 500002
• Digit 7, 8 and 9 display the Bank Branch Codes allotted to each branches of bank. For Example SBI, Madhapur , Hyderabad 500081 branch has been allotted code no. 072. Therefore 9 digits of MICR code of State Bank of India, Madhapur(Hi Tech), Hyderabad- 500081 will be 500-002-072 i.e. City PIN Code + Bank Code +Branch Code

TYPES OF CUSTOMERS

• Individual
• Joint individual
• Proprietorship
• Partnership
• HUF
• Companies
• Clubs
• Societies
• Associations
• Trusts
• Govt. Authorities

�INDIVIDUAL�

• PRE REQUISITE
• Singly in his or her name
• Contractual capacity
• Competence to transact the business.

TYPES OF INDIVIDUALS

1. Minor
2. Married women
3. Pardanashin
4. Illiterate
5. Drunkards
6. Insolvents
7. Lunatics

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�MINOR�

• Pre requisite
• As per section 3 of Indian majority act,1875
• Age 18 years
• If guardian appointed by court - 21 years
• According to the Indian contract act sec.11, a minor is incapable to enter into a contract and therefore any contract with a minor is void ab-initio.

HOW MINOR'S ACCOUNT CAN BE OPENED

1. In case the minor is less than 10 years of age, the account will be opened:
1. in the name of minor u/g of natural or legal guardian.
2. In the joint names of minor and his / her guardian.
1. The a/c will be operated by guardian under his/her signature

HOW MINOR'S ACCOUNT CAN BE OPENED

3. An account can also be opened in the minors name by mother alone even if the natural guardian is alive provided three conditions are fulfilled:
1. An undertaking to be obtained from mother stating that the money belongs to her and that it has been deposited in minors account for the benefit of minor
2. Account will always remain in credit and will not be allowed to be overdrawn under any circumstances
3. Only cash transactions will be allowed and cheques/ dividend warrants etc drawn in the name of minor will not be accepted

HOW MINOR'S ACCOUNT CAN BE OPENED

4. Saving Bank account in the name of a minor of age 10 years or more who can read and write & can sign uniformly can be opened in the name of the minor u/g natural/ legal guardian.
1. In case the guardian furnishes an undertaking as specified in the circular 7491 dated September 25, 2006 we can permit the minor to operate the account without reference to the guardian

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• No account should be opened in the name of a minor who is blind ( even if he is more than 10 years old) to be operated by himself.

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• Proof of Date of birth is to be invariably obtained.

�WHO IS THE GUARDIAN OF A MINOR�

• Testamentary guardian :
• Guardian appointed by the will of minors father is called testamentary guardian.
• Such guardian acts only after the death of father & mother of the minor child.

��WHO IS THE GUARDIAN OF A MINOR�

Legal guardian

• Where there is no natural guardian or testamentary guardian court can appoint a guardian. Such a guardian appointed by the court is called a legal guardian.

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�WHO IS THE GUARDIAN OF A MINOR�

• Natural guardian
• As per section 6 of Hindu minority & guardianship act ,1956 . in case of a minor boy or unmarried girl father & mother shall be the guardian of both person & property of the minor.

�WHO IS THE GUARDIAN OF A MINOR�

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Type of minor Natural guardian

• Minor boy father & mother
• Minor girl ( unmarried ) father & mother
• Minor married girl husband if major (father ,mother if husband is minor)
• Minor married girl widow) father ,mother
• Illegitimate child mother
• Step son own father ,mother
• Adopted son adoptive father/mother

��WHO IS THE GUARDIAN OF A MUSLIM MINOR�

Muslim minor : father

After father, guardianship lies with executor appointed by the father after executor natural guardian is father’s father or executor appointed in will made by father's father.

• The mother of muslim minor cannot act as guardian except when appointed by court or will of father or father's father.

�WHO IS THE GUARDIAN OF A MINOR�

Christians & persons of other religion

• Father, upon his death mother acts as a guardian.
• Where both are dead , a person appointed by the court can alone act as guardian.

�MINOR - PRECAUTIONS�

• No cheque book / if issued he should present personally.
• No document can bind a minor.

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�MARRIED WOMAN�

• Married women has a legal entity of her own separate from her husband.
• Marriage of woman does not affect any right of her separate property (streedhan)
• Can open a/c in her own name operate freely.
• While opening a/c banker should record source of her income and details about her husband.

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PARDANASHEEN

• Contract entered into by a pardanasheen woman is not a contract free from all defects. Banker generally desists from opening such accounts because identity of pardanasheen lady can not be ascertained as she observes complete seclusion
• There exists a possibility of impersonation or undue influence

VISUALLY IMPAIRED

• A cheque book to be issued only on his request. An undertaking as per annexure I of IC no 7479 has to be obtained.
• All cheque leaves are to be crossed
• In case the customer requests cheques in the name of a specific payee, the same will be issued in name of payee, however the leaves are to be filled up including amount in figures, words, name of payee, a/c payee crossing etc
• A thumb impression of the person and also signature of third person accompanying the customer should be recorded in a register

VISUALLY IMPAIRED

• Person will personally visit branch, crossing on cheque to be opened with the signature of the customer with words “Crossing opened. Please pay cash” or alternatively by a WF and pass book if cheque book is not issued.
• Locker Can also be leased but to be leased in single name
• Branch will not offer assistance for operating locker
• If hirer desires help of third party, details of the party like name, address, photograph, relationship will be noted in the locker register. An oral confirmation of identity to be asked from customer
• A clause 2(b) to be incorporated in the memorandum of letting of locker

ILLITERATE�

• Illiterate persons are unable to sign.
• Bank keeps thumb impression in their record.
• Photograph.
• For withdrawal of money customer should personally visit and affix the thumb impression in presence of official of bank.
• No cheque book.
• While closing an account a witness must be recorded in the application meant for account closing

DRUNKARDS

• State of intoxication may render a person incapable of understanding the nature of his action and forming a rational judgment as to its effects upon his interest. Therefore the law provides that all the contracts made by a person in a drunken state are void.

�INSOLVENTS�

• A person is declared insolvent by the court when he fails to pay his debts.
• Person himself or his creditors may approach to the court for declaring him as insolvent.
• Declaration of insolvency renders invalid all the transactions entered into subsequently and already entered into within last six months.
• Insolvents’ accounts should not be opened nor money should be advanced to undischarged insolvent.

LUNATICS

• A person of unsound mind is not capable of entering into a valid contact.
• Banker should not open any account in the name of lunatics.
• Once lunacy is confirmed, banker should suspend / stop operations of that account and balance thereof should be paid to the person appointed by the competent court.

JOINT INDIVIDUAL

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• More than one
• Contractual capacity
• Mandate

PROPRIETORY FIRM

• When a firm is owned by a single person it is known as proprietorship firm.
• A/c is treated as an individual account.
• A/c should be opened in the name of the firm.
• No SB account is opened in the name of the proprietorship firm

�PARTNERSHIP FIRM�

• Partnership firm
• (Indian partnership act 1932)
• Partnership is the relationship between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.

�PARTNERSHIP FIRM�

• A partnership firm engaged in banking business can not have more than 10 partners (for non banking 20 partners)
• If no. of partners exceed the statutory limit it will be an illegal association.
• Registration is not necessary.

�PARTNERSHIP FIRM�

• Non registered partnership firm can not sue others.
• A/c should be in the name of the firm.
• A/c opening form should be signed by all the partners.
• Partnership deed should be examined and there should be no clause detrimental to the bank’s interest then return it.

�PARTNERSHIP FIRM�

• If registered, registration certificate should be obtained.
• Who will operate & how it will be operated.
• If minor-birth certificate

DOCUMENTS

• Obtain names, addresses and signatures of all partners on AD -07 Declaration of partnership
• Obtain the names, addresses and signatures of all partners on AD -11 in case credit facility is to be granted to a partnership firm

HINDU UNDIVIDED FAMILY

• Governed by Hindu law
• Registration is not required
• Two schools of Hindu law:
• Dayabhaga (West bengal)
• Mitakshara (rest of the country)

Dayabhag: treats father as the absolute owner of the property and sons do not acquire any interest in property by birth

Mitakshara: all male members have a right to family property by birth even from time of conception.

HINDU UNDIVIDED FAMILY

• KARTA eldest male member of the family and other members are called as co-parceners
• Liability of karta is unlimited whereas that of co-parceners is limited to the extent of their share in HUF
• A/c should be in the name of karta.
• Operated by karta or any authorised member.
• On his death (karta), it will be operated by senior most co-parcener.
• Ancestral family business.

DOCUMENTS

• Obtain Declaration of joint family AD-08 signed by Karta in the capacity of Karta and all major co-parceners in their personal capacity

CLUBS & SOCIETIES�

• Club & societies are non-profit making organizations they represent a group of persons. Purpose of such group may be social, cultural, educational, sports, literature or charitable purposes.
• A club or society gets legal entity only after its incorporation under company act 1956 or societies registration act 1860

�CLUBS & SOCIETIES�

• A club or society must be having some set rules and regulations for its conduct. Such rules and regulations are called bye-laws.
• Copy of bye-laws must be obtained before opening of an account.
• Before opening of an account obtain copy of resolution passed by the managing committee regarding opening and conduct of accounts.
• Obtain a copy of registration

LOCAL BODIES/LOCAL AUTHORITIES

• Local authority like municipal corporation, panchayat, board etc.
• These authorities are created by special act of parliament or legislative assembly. These acts prescribed its constitution, function and powers
• Bank should ask for a copy of the regulations so as to verify as to who is authorized to open and operate accounts

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TRUST ACCOUNT

• Section 3 of Indian trust act 1882 defines trust as an obligation annexed to the ownership of the property and arising out of a confidence imposed in and accepted by the owner, or declared and accepted by him for benefit of another and the owner.

TRUST ACCOUNT

• The person who reposes the confidence and transfers property is called author of trust.
• In whose favour - trustee
• The person for whose benefit trust formed - beneficiary.
• Created by document - trust deed which records the rights and obligations of trustees

TRUST ACCOUNT

Trust can be Private or Public

• Private: for benefit of a few individuals. Codified under Indian trust act 1882
• Public/ charitable: for benefit of public. Required to be registered by charities commissioner

DOCUMENTS

1. Trust deed
2. Certificate of registration in case of Public trusts/ order of court
3. Certified copy of resolution
4. List of all trustees

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��COMPANY�

Characteristics of company

• Separate legal entity
• An artificial person with perpetual succession created under the provision of companies act 1956.
• Voluntary association of persons formed for some common purpose with capital divisible into parts known as share.

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�COMPANY�

• Though the company is not a citizen it has nationality & residence.
• Company may be limited or unlimited, depending upon liability of share holders.
• Memorandum of association – object clause, name clause, authorized capital clause, office, liability clause.
• Articles of association - rules & regulations, rights & powers of directors and nature of business.

COMPANY

• Company can be classified into three categories:
• Private Ltd co is a co. which , by its articles
• (i) restricts transfer of its share
• (ii) prohibits itself from inviting subscription of shares / debentures from public.
• Public Ltd.Co. Does not have such restrictions.
• Government co. is a co. where not less 51% of the share capital is held by govt.

COMPANY

Difference between a Pvt. Ltd. Co. &Public Ltd. Co.

Points of difference Pvt. Ltd. Co. Public ltd. Co.

1. Minimum no. Of share 2 7

Holders

2. Maximum no. Of share 50 no limit

Holders

3.Transfer of shares : Restricted Freely transferable

4. Invitation to public: Prohibited Permitted

For shares & debentures

5. Certificate of not required Required

commencement of business

6. Minimum directors 2 3

COMPANY

Documents required for opening an account in the name of the company

1. Certificate of incorporation
2. Memorandum of association
3. Articles of association
4. Certificate of commencement of business (only in case of public Ltd. Co.)
5. Resolution
6. Specimen signature and account opening form
7. List of directors.

PREVENTION OF SLIPPAGES

What is slippage?

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Any account turning into Sub-standard category from Standard category

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“ Prevention is better than cure”

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SLIPPAGES - IMPACT

• It adds upto the Gross NPAs of the Bank
• It reflects on the poor Monitoring
• It off-sets the recoveries/ upgradations
• It affects liquidity
• It affects recycling of funds
• It affects the profitability/capital adequacy
• It poses reputation risk

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REASONS FOR SLIPPAGES

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OBJECTS AND GOALS OF MONITORING

The primary aim of Monitoring exercise is to ensure the safety of the amount lent and to ensure that the account is conducted in the manner normally expected and the account continues as a performing asset. For this purpose the following objects and goals are fixed:

Monitoring Objects

1. Credit delivery (Disbursement of credit facilities) to take place after complying with all the stipulated terms and conditions.
2. All the laid down procedures of the Bank are to be complied with.
3. Assets in the standard category to remain standard.
4. Within standard category, accounts are to be upgraded from SMA, EAS – II, EAS- I to pure standard category i.e. in other words to ensure that accounts are stress- free.
5. Accounts do not slip to NPA category.

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Monitoring Policy 2011-12 ... IC 9026 dt 01.08.2011

MONITORING GOALS

To ensure safety of the money lent by the Bank is the primary objective. This can be achieved by pursuing certain specific plan of action. This will include the following:

• Periodical monitoring of the actual performance of the assisted borrower vis-a-vis the projections accepted at the time of credit sanction. The performance will include sales, Operating Profits, Inventory, Debtors level, Cash Flow, DER, DSCR, Break Even Point etc.
• Where the projections are not met and the actual performance varies by a wide margin, then identify the problems faced by the borrower for timely remedial measures like rescheduling / restructuring.
• To interact with the borrower on a regular basis to know the day- to-day operations, specific problems faced by the unit, the market trend and the performance of the borrower.
• Whether the borrower faces any difficulty in servicing interest in time, repaying installments on due date, meeting commitments of non- fund based limits in time and to take remedial measures.
• If assistance to the unit cannot be continued in the long run and if it is felt that it will jeopardize the interest of the bank, then to resort to exit option, if workable.
• If exit option cannot be worked out and where interest of the Bank is under threat, then to initiate quick appropriate recovery measures in all such potentially NPA accounts.

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Monitoring Policy 2011-12 ... IC 9026 dt 01.08.2011

EFFECTIVE MONITORING

• MONITORING ACTION PLAN
• Timely review
• Timely rephasement/restructuring
• Recovery of critical amount
• Ledger scrutiny
• Accounts with other Banks
• Rectification of audit irregularities
• Market reports/enquiry in the villages
• Credit process audit
• Periodical field visit
• Excess / adhoc in the account

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MONITORING TOOLS AT THE BRANCH LEVEL

• Stock Statements
• Book Debt Statements
• Monthly Cash Budgets
• Q4/M6 Inspection Reports
• Stock Inspection Reports of outside agencies
• Factory/field Visit Reports
• Technical Officer’s Reports
• Concurrent Audit Reports
• QPRs
• MSOD
• Audited/Provisional Financial Statements

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MONITORING STAGES

• Pre-disbursement

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• During disbursement

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• Post-disbursement

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EARLY WARNING SIGNALS

• Not routing transactions through our Bank
• Avoiding meeting bank officials
• Spend-thrift
• Labour problems
• Over-indulgence
• Not visiting the shop regularly
• Unfavourable report from customers/public
• Unplanned borrowing for margin amount
• Frequent of return of cheques / excesses
• Frequent break-downs
• Downward trend in sales

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MONITORING OF ADVANCES

LOAN DEFAULTS—FUND BASED

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�������LOAN DEFAULTS—NON-FUND BASED�

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��MONITORING OF ADVANCES� NON-RENEWAL OF LIMITS�

IC 8229 DATED 31.01.2009

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NEW CLAUSE IN MONITORING POLICY 2010-2011

• Disbursement in case of all new loans to be authorized by the Branch Manager and in his absence, next incharge.
• Renewal of account should not be kept pending due to overdues in the account.
• Monitoring reports on all EAS/SMA accounts monthly as per cut-off limit and on standard accounts quarterly.
• Copy of monitoring reports to be sent to RO/FGMO.

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NEW AMENDMENTS IN MONITORING POLICY 2011-2012 – (IC 9026 DT 01.08.2011)

• Internal Loan review System for accounts sanctioned by RO Rs. 10 cr and above.
• Monitoring of Restructured a/c’s Rs. 1 cr and above by CO.
• Feedback on Restructured acccounts and close monitoring.
• Compliance on all Credit aspects by RO including AQMC observations.
• Guidance on Monitoring of Hongkong Branch.
• Cut off limits for Monitoring : Branch – upto 5 lac, RO – 5 lacs to 2 Cr, & CO above Rs 2 cr.

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Monitoring Policy 2011-12 ... IC 9026 dt 01.08.2011

SYSTEM DRIVEN NPAS

PRESENT SYSTEM OF CLASSIFICATION

• NPA classification is done manually
• Branches fail to classify the accounts as per the prudential norms
• Large amount of NPAs are classified by the auditors through MOCs
• NPAs due to technical reasons not identified
• Updation is not done in the Finacle
• Lack of transparency
• Not technology-driven

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WHAT IS SYSTEM-DRIVEN NPA?

• Finacle throws all the account into NPA which falls into this category as per the norms
• Account is classified as NPA even if the overdue is negligible
• Data in the finacle has to be updated regularly
• No divergence in actual NPA & system-driven NPA
• It is technology driven and ensures transparency
• MOCs can be avoided

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SYSTEM DRIVEN NPA – CONTD…

• Super exceptionally large branches to classify NPA as per system by June 2010

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• Exceptionally Large branches to classify NPA as per system by September 2010

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• Other branches to classify by December 2010

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SYSTEM DRIVEN NPA – CONTD…

• Now the A/c’s are classified as NPA since July 2011 on monthly basis.
• Mock run is sent to RO every month for monitoring and removing the deficiencies and to upgrade the account to standard category.
• Branches have to upgrade the accounts by rectifying the discrepancies, recovering overdues etc & technical issues to be removed.
• Of late recently Secured loans against FDR/NSC are also classified as NPA based on the value of securities available, no credit, o/s beyond value of securities.

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SYSTEM DRIVEN NPA – CONTD…

STEPS TO BE INITIATED:

• Periodically generate list of NPA from the system
• Take immediate steps to ensure that all the accounts shown as NPA for technical reasons are attended and removed
• Contact each & every borrower for recovery of overdues and involve all the staff in the exercise
• Rephasement can be undertaken in genuine cases as per the guidelines.

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THANK YOU

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