When any company borrows funds, from a financial institution (bank) or other resources the interest paid on that amount is known as ‘cost of debt’.

The ‘balloon payment’ is the final lump sum payment that is due. When the entire loan payment is not amortized over the life of the loan, the remaining balance is due as the final repayment to the lender. Balloon payment can occur within an adjustable rate or fixed rate mortgage.

The repayment of the loan by instalment to cover principal amount with interest is known as ‘Amortization’

When repayment of the loan is less than the loans accumulated interest, then negative Amortization occurs. It will increase the loan amount instead of decreasing it. It is also known as ‘deferred interest’.

Both are used for the transfer of the amount between two accounts of same banks or different bank. ‘Cheque’ is issued by an individual who holds the account in a bank, while ‘Demand draft’ is issued by the bank on request, and will charge you for the service. Also, demand draft cannot be cancelled, while cheques can be cancelled once issued.

The debt-to-income ratio is calculated by dividing a loan applicant’s total debt payment by his gross income.

Adjustment credit is a short-term loan made by the Federal Reserve Bank (U.S) to the commercial bank to maintain reserve requirements and support short term lending, when they are short of cash.

Foreign draft is an alternative to foreign currency; it is generally used to send money to a foreign country. It can be purchased from the commercial banks, and they will charge according to their banks rules and norms. People opt for ‘foreign draft’ for sending money as this method of sending money is cheaper and safer. It also enables receiver to access the funds quicker than a cheque or cash transfer.

The classification of loan based on various risks and parameters like repayment risk, borrower’s credit history etc. is known as ‘loan grading’. This system places loan on one to six categories, based on the stability and risk associated with the loan.

A system to reduce the number of credit checks on financial transaction is known as credit- netting. Such agreement occurs normally between large banks and other financial institutions. It places all the future and current transaction into one agreement, removing the need for credit cheques on each transaction.

A credit check or a credit report is done by the bank on a basis of an individual’s financial credit. It is done in order to make sure that an individual is capable enough of meeting the financial obligation for its business or any other monetary transaction. The credit check is done keeping few aspects in concern like your liabilities, assets, income etc.

Any deposit that is held by one bank for another bank is known as inter-bank deposit. The bank for which the deposit is being held is referred as the correspondent bank.

It is a letter of credit or a contractual agreement between financial institute (Bank) and the party to which the letter is handed. The ILOC letter cannot be cancelled under any circumstance and, guarantees the payment to the party. It requires the bank to pay against the drafts meeting all the terms of ILOC. It is valid upto the stated period of time. For example, if a small business wanted to contract with an overseas supplier for a specified item they would come to an agreement on the terms of the sale like quality standards and pricing, and ask their respective banks to open a letter of credit for the transaction. The buyer’s bank would forward the letter of credit to the seller’s bank, where the payment terms would be finalized and the shipment would be made.

There is not much difference between bank guarantee and letter of credit as they both take the liability of payment. A bank guarantee contains more risk for a bank than a letter of credit as it is protecting both parties the purchaser and seller

A cashier cheque issued by the bank on behalf of the customer and takes the guarantee for the payment. The payment is done from the bank’s own funds and signed by the cashier. The cashier cheque is issued when rapid settlement is necessary.

A person who signs a note to guarantee the payment of the loan on behalf of the main loan applicant’s is known as co-maker or co-signer.

Home equity loan, also known as the second mortgage, enables you to borrow money against the value of equity in your home. For example, if the value of the home is $1, 50,000 and you have paid $50,000. The balance owed on your mortgage is $1, 00,000. The amount $50,000 is an equity, which is the difference of the actual value of the home and what you owe to the bank. Based on equity the lender will give you a loan. Usually, the applicant will get 85% of the loan on its equity, considering your income and credit score. In this case, you will get 85% of $50,000, which is $42,500.

Line of credit is an agreement or arrangement between the bank and a borrower, to provide a certain amount of loans on borrower’s demand. The borrower can withdraw the amount at any moment of time and pay the interest only on the amount withdrawn. For example, if you have $5000 line of credit, you can withdraw the full amount or any amount less than $5000 (say$2000) and only pay the interest for the amount withdrawn (in this case $2000).

The bank earns profit in various ways

1. Banking value chain
2. Accepting deposit
3. Providing funds to borrowers on interest
4. Interest spread
5. Additional charges on services like checking account maintenance, online bill payment, ATM transaction

Payroll cards are types of smart cards issued by banks to facilitate salary payments between employer and employees. Through payroll card, employer can load salary payments onto an employee’s smart card, and employee can withdraw the salary even though he/she doesn’t have an account in the bank.

There are two types of card payments

1. Credit Card
2. Debit Card

ACH stands for Automated Clearing House, which is an electronic transfer of funds between banks or financial institutions.

Availability Float is a time difference between deposits made, and the funds are actually available in the account. It is time to process a physical cheque into your account.

For example, you have $20,000 already in your account and a cheque of another $10,000 dollar is deposited in your account but your account will show balance of $20,000 instead of $30,000 till your $10,000 dollar cheque is cleared this processing time is known as availability float.

The date on which the principal amount of a loan becomes due and payable is known as ‘Loan Maturity’. Yield is commonly referred as the dividend, interest or return the investor receives from a security like stock or bond, interest on fix deposit etc. For example, any investment for $10,000 at interest rate of 4.25%, will give you a yield of $425.

COFI is an index that is used to determine interest rates or changes in the interest rates for certain types of Loans.

For certain loan, there is a provision for the borrower to change the interest rate from fixed to variable and vice versa is referred as Convertibility Clause.

Charge off is a declaration by a lender to a borrower for non-payment of the remaining amount, when borrower badly falls into debt. The unpaid amount is settled as a bad debt.

‘LIBOR’ stands for London Inter-Bank Offered Rate. As the name suggest, it is an average interest rate offered for U.S dollar or Euro dollar deposited between groups of London banks. It is an international interest rate that follows world economic condition and used as a base rate by banks to set interest rate. LIBOR comes in 8 maturities from overnight to 12 months and in 5 different currencies. Once in a day LIBOR announces its interest rate.

When a loan is charged with high interest rate illegally then it is referred as ‘Usury’. Usury rates are generally set by State Law.

'A Company which transacts the business of banking in India', and 
the term, 'Banking' has been defined as 'Accepting for the purpose of 
lending and investment, of deposits of money from the public, repayable 
on demand, order or otherwise and withdrawable by cheque, draft order 
or otherwise'. 

A pay-day loan is generally, a small amount and a short-term loan available at high interest rate. A borrower normally writes post-dated cheques to the lender in respect to the amount they wish to borrow.

(a) He must have some sort of an account. 
(b) Even a single transaction may constitute him as a customer. 
(c) Frequency of transactions is anticipated but not insisted upon. 
(d) The dealing must be of a banking nature.

‘Endorsing cheque’ ensures that the cheque get deposited into your account only. It minimizes the risk of theft. Normally, in endorsing cheque, the cashier will ask you to sign at the back of the cheque. The signature should match the payee. The image over here shows the endorsed cheque.

A Banker's lien is always a general lien. A banker has a right to 
exercise both kinds of lien. his general lien confers upon his the right to 
retain the securities in respect of the general balance due from the 
customer. 

The different types of loans offered by banks are:

1. Unsecured Personal Loan
2. Secured Personal Loan
3. Auto Loans
4. Mortgage Loans
5. Small business Loans

Lien is two kinds- Particular lien and General lien. 

There are two different types of ‘Fixed Deposits’

Special Term Deposits: In this type of ‘Fixed Deposits’, the earned interest on the deposit is added to the principal amount and compounded quarterly. This amount is accumulated and repaid with the principal amount on maturity of the deposit.

Ordinary Term Deposits: In this type of ‘Fixed Deposits’, the earned credit is credited to the investor’s account, once in a quarter. In some cases, interest may be credited on a monthly basis.

The earned interest on fixed deposits is non-taxable. You can also take a loan against your fixed deposit.

It is otherwise called non-possessory lien. In the case of a negative 
lien, the securities are not in the possession of the creditor, But, the debtor 
gives an undertaking that he will not create any change on those securities 
in question without the prior written permission of the creditor. 

In the absence of any compulsion from outside, a banker voluntarily  takes up the duty of honoring a bill just to please his customer, and thus, to render him some service. But, he should keep in mind that the statutory protection extended to cheque under Sec.85 of the Negotiable Instruments 
Act is not extended to the payment of bills.

Unsound mind person is called lunatic person

Liquidity refers to the ability of an asset to be converted in cash  without loss within a short time.

Liquidity refers to the ability of an asset to be converted in cash  without loss within a short time.

The banker has an implied right to charge commission for the  services provided to the customer. 

On receiving the order the account of the customer becomes suspended,

“A bill of exchange drawn on a specified banker and not expressed to 
be payable otherwise that on demand".

The cheque which has been discussed so far in this chapter is called a  customer's cheque, since, it is drawn by a customer upon a banker.

Where the maker or holder of a negotiable instrument signs the  same, otherwise than as such maker, for the purpose of negotiation, on the  back face thereof, or on a slip of paper annexed thereto... he is said to endorse the same, and is called the endorser'. 

 Blank endorsement 
 Special endorsement 
 Conditional endorsement 
 Prepro endorsement

The draft can also be crossed just like a cheque. Moreover, the  statutory protection as extended to cheque, has been extended to draft,  also. But, the holder of a draft differs from the holder of cheque in many respects. 

In Bellamy Vs Morjori Banks, it was also said that, '....Crossing is a  mere memorandum on the face of the cheque and forms no part of the  instrument itself and in no way alters its effects...' 

According to sec.87 of the negotiable instruments Act, if a cheque is  materially altered, it cannot be regarded as a cheque at all. Therefore,  material alteration renders the cheque void. A material alteration affects  the parties at the time of alteration, and, it does not affect parties,  Subsequent to such an alteration

 General crossing 
 Special crossing 

'Where a cheque bears across its face, an additional of the words;  'And company' or any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply, either with or without the words 'Not negotiable', that addition shall be deemed to be a  crossing, and the cheque shall be deemed to be crossed generally. 

'Where a cheque bears across its face, an additional of the words;  'And company' or any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply, either with or without the words 'Not negotiable', that addition shall be deemed to be a  crossing, and the cheque shall be deemed to be crossed generally. 

"Where a cheque bears across its face , an addition of the name of a  banker with or without the words 'Not Negotiable', that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker'.

A banker on whom a cheque is drawn should pay the cheque when it  is presented for payment. This cheque-Paying function is a distinguished  one of a banker. 

A collecting banker is one who undertakes to collect the amount of a  cheque for his customer from the paying banker. 

A bearer bond certifies that the bearer is entitled to certain sum  specified on the date indicated. The bearer of the bonds possesses the  ownership. The title to the bonds is transferred by mere delivery without  any formality.

Promissory notes contain a promise by the president of India in a  case of central Government and by the Governor of the state in case of state  government securities to pay the specified sum of money to the holder of  the note or the last endorsee whose name appears on the reverse, on a  specified date or after certain notice, according to the terms of issue, A  promissory note is a negotiable one. The title to the promissory note passes  by the endorsement and delivery.

The term collateral Security is used in two senses. In a narrow sense,  it refers to the securities deposited by the third party to secure advance for  the borrower, in a wider sense, it denotes any type of security on which the  creditor has a personal right of action on the debtor in respect of the  advance. 

'Mortgage is the transfer of an interest in specific immovable  property for the purpose of securing the payment of money advanced or to  be advanced by way of loan, an existing or future debt or the performance  of an engagement which may give rise to a pecuniary liability'.

Section 172 of Indian contract Act 1872, defines a pledge as, the  'bailment of goods as security for payment of a debt or performance of a  promise'. 

Overdraft is an arrangement between a banker and his customer by  which the latter is allowed to withdraw over and above his credit balance  in the current account up to an agreed limit.

'Negotiable instrument means promissory note, bill of exchange or  cheque payable either to order or to bearer'.

The existence of legal bar like Garnishee order limits the duty of the  banker to pay a cheque

"Insurance is a process in which uncertainties are made certain"

"Life insurance business is the business of effecting contracts upon  human life" 

"A contract of marine insurance is a contract whereby the insurer  undertakes to indemnify the insured in a manner and to the extent thereby  agreed, against marine losses, i.e. to say, the losses incidental to marine  adventures". 

"An act to provide for the establishment of an authority to protect the  interest of holders of insurance policies, to regulate , promote and insure  orderly growth of the insurance industry and for matters connected  therewith and incidental thereto." 

When a party to an agreement promises to do something he must get  something in return. This is called 'Consideration'. 

Another important basic principal of insurance contract is the legality  of objects.

On the payment of first premium, the policy comes into operation  and risk is covered then onward. Insurance policy is prepared in proper  form, duly stamped and signed is finally issued to the insured. 

"Fire insurance may be defined as an agreement whereby one party,  in return for a consideration, undertakes to indemnity the other party  against financial loss caused by fire or other defined perils upto an agreed amount". 

Social Insurance has developed to provide economic security to  weaker sections of the society who are able to pay the premium for an  adequate insurance

General insurance business refers to fire, marine and other insurance  business whether carried on singly or in combination with one or more of  them. 

Measuring the current scale of money laundering is extremely difficult. The World Bank and IMF have 
estimated volume of money laundering to between 3 and 5 percent of global gross domestic product 
(GDP) equivalent to approximately US$2.2 trillion to US$3.7 trillion annually. 

Money laundering works in following three stages.

1. Placement: Illegal funds or assets are first brought into the financial system. This 
placement makes the funds more liquid. Money launderers place illegal funds using a 
variety of techniques like, depositing cash into bank accounts or purchasing insurance 
products and using cash to purchase assets.

2. Layering: To conceal the illegal origin of the placed funds and thus make them more 
useful, the funds have to be moved, dispersed and disguised. This activity is known as 
“layering”. At this stage, money launderers use many different techniques to layer the 
funds like, using multiple banks and accounts, having professionals act as intermediaries 
and transacting through corporations and trusts. This helps the launderers to disguise the 
origin of the funds.

3. Integration: The last stage of the money laundering process is called “integration”. The 
“cleaned” funds can now be made available for investment in legitimate or illegitimate 
businesses. Thus, the original “dirty” money has achieved the appearance of legitimacy

Anti Money Laundering (AML) refers to a set of procedures, laws and regulations designed to stop the 
practice of generating income through illegal actions.

Terrorism financing refers to activities that provide financing or financial support to individual terrorists 
or terrorist groups.

Combating the Financing of Terrorism (CFT) involves investigating, analyzing, deterring, and preventing 
sources of funding for activities intended to achieve political, religious, or ideological goals through 
violence and the threat of violence against civilians.

Money Laundering involves the disguising of fund derived from illegal activity so they may be used 
without detection of the illegal activity whereas terrorist financing involves the use of legally derived 
money to carry out illegal activities. 

AML/CFT is important for following reasons:
 To protect the financial system;
 To prevent criminals from enjoying the proceeds of crimes;
 To prevent criminals to build formidable economic powers and challenge the stability 

Each and every individual who works in the Banks and Financial Institution is responsible for AML/CFT 
activities. 

Government of Nepal enforces the Anti Money Laundering regulations.

Financial Information Unit (FIU) shall mean the Financial Information Unit (FIU established 
on April 21, 2008 pursuant to Section 9 of the Assets (Money) Laundering Prevention Act, 2008 
within Nepal Rastra Bank (the Central bank) as an independent unitin order to work against the 
money laundering and terrorist financing activities. It is the financial intelligence unit of the 
State of Nepal. It is the central, national agency accountable for receiving, processing, analyzing 
and disseminating financial information and intelligence on suspicious money laundering and 
terrorist financing activities.

Shell Bank/entity shall mean any bank or entity, which has no physical presence in the country in 
which it is incorporated, licensed or located, and which is not affiliated with a regulated financial 
services group that is subject to effective consolidated supervision. For the purpose of this 
clause, presence of local agent or junior level staff does not constitute physical presence. Shell 
banks/entities in themselves may not be illegal as they may have legitimate business purposes. 
However, they can also be a main component of underground activities, especially those based in 
tax havens. 

There are many sources of illegal funds. Major sources are as below:
 Participation in an organized criminal group, racketeering;
 Terrorism, including terrorist financing;
 Trafficking in human being s and migrant smuggling;
 Sexual exploitation including sexual exploitation of children;
 Illicit trafficking in narcotic drugs and psychotropic substance;
 Illicit arms trafficking;
 Illicit trafficking in stolen and other goods;
 Corruption and bribery;
 Fraud;
 Counterfeiting currency;
 Counterfeiting and piracy of products;
 Environmental crime;
 Murder , grievous bodily injury;
 Kidnapping, illegal restraint and hostage taking;
 Robbery and theft;
 Smuggling (including in relation to customs and excise duties and taxes);
 Tax crimes (related to direct and indirect taxes);
 Extortions,
 Forgery;
 Piracy;
 Insider taking and market manipulation

KYC is a process of identifying a customer trying to maintain business relationship or has  already maintained such relationship or has requested for occasional transaction/s. It helps the  Bank to identify and verify the customer/s; assess risk and manage it; develop risk-based,  effective, efficient and economic control system; and identify further business potential. Know  Your Customer (KYC) and CDD can also be taken as a unit in certain business context.

The key elements of KYC policy are:
a) Customer Acceptance Policy;
b) Customer identification Procedures;
c) Monitoring of Transactions and
d) Risk Management

Customer Acceptance Policy (CAP) lays down the criteria for acceptance of customer/s. The 
guidelines in respect of the customer relationship in the Bank broadly are: 
 No account shall be opened in the name altering from the primary identity document, anonymous 
or fictitious (benami) name(s), blank names or numeric/alphanumeric characters. Accounts shall be opened only in the name of natural and legal person/organization, the name 
being the same as in the primary identity document of the person/entity. Accounts may however 
be opened with different account titles identifying the nature/use/purpose/type/ of account at the 
written request of the legal person/organization with appropriate control parameters. 
 Minimum required information and documents i.e. proper identification and information 
pertaining to the prospective client shall be obtained prior to opening account or performing 
business relation of any kind, as per the AML Act, AML Rule, FIU Directives, NRB 
regulations/Directives and as per the product paper/policy/guidelines set forth by the Bank.
 Necessary checks/ examinations/ verifications shall be made before opening a new account so as 
to ensure that the identity of the customer does not match with any person with …..criminal 
background or with banned entries such as terrorist individual/s or terrorist organization/s etc.
 Not to open an account: Where the staff/s designated to open new accounts, find sufficient 
ground/s that the identity of the prospective customer/s could not be verified and/or the 
prospective customer/s is not disclosing the required identity, the reason for opening account, 
transaction frequency and volume, etc and any other such information/s deemed necessary for 
account opening. The refusal shall be documented properly, and shall be communicated to the 
HO AML compliance Officer through Branch AML Compliance Officer.
 Further, the Bank shall freeze an existing account under the situation when the designated staff/s 
is unable to apply appropriate customer due diligence measure/s i.e. unable to verify the identity 
and/or obtain document/s required as per the risk categorization, due to non-cooperation of the 
customer or non-reliability of the data /information furnished to the Bank. Decision for closure of 
such accounts shall be approved by Senior Management level official under recommendation of 
AML Compliance Officer at HO and also after giving due notice to the customer explaining the 
reason for such decision, Closure of such accounts shall be informed to the FIU in written.

 The Bank shall not establish any business relationship/s with the shell companies and the 
institution/s that deal with shell companies. Any identified business relationship/s with the 
financial and other institution/s that allow the transaction of shell bank, shall be discontinued. The 
bank shall not be associated with the entities located in the non-cooperative jurisdictions as 
identified by the FATF or those sanctioned by the agencies that the Bank refers to like, UN, 
OFAC, HMT, EU etc.
 Implementation of CAP should not be too restrictive resulting into denial of banking services to 
the general public, especially those who are financially or socially disadvantaged. 

Customer due diligence is a process of identifying the customer and verifying that customer’s identity 
using reliable, independent source documents, data or information. It includes;
 Identifying customers, including beneficial owners;
 Gathering information on customers and beneficial owners and creating a customer risk 
profile;
 Applying established customer acceptance policies to new customers;
 Maintaining customer and beneficial owner information on an ongoing basis; and
 Monitoring customer’s transactions and relationship with the customer on an ongoing 
basis.

It allows the institutions to know and understand their customers and their transactions better, which in 
turn allows the institutions to intercept any fraudulent dealing.

KYC will be carried out for the following but is not limited to:
 Opening a new account.(deposit/ borrowal )
 Opening a subsequent account where documents as per current KYC standards not submitted
while opening the initial account.
 Opening a locker facility where these documents are not available with the bank for all locker
facility holders.
 When the bank feels it is necessary to obtain additional information from existing customers
based on the conduct of the account.
 After periodic intervals based on instructions received from RBI.
 When there are changes to signatories, mandate holders, beneficial owners, etc.

Start-Up Loans

This type of Loan is offered to borrower to start their business and can be used to build a storefront, to acquire inventory or pay franchise fees to get a business rolling.

Line of Credit

Lines of credit are another type of business loan provided by commercial banks. It is more like a security for your business; the bank allows the customer to withdraw the amount from readily available funds in an adverse time. Customer or Company can pay back over time and withdraw money again without going into the loan process.

Small Business Administration Loans

It is a Federal Agency (U.S) that gives funding to small businesses and entrepreneurs. SBA (Small Business Administration) loans are made through banks, credit unions and other lenders who partners with SBA.

‘Bill Discount’ is a settlement of the bill, where your electricity bill or gas bill is sold to a bank for early payment at less than the face value and the bank will recover the full amount of the bill from you before bill due date. For example, electricity bill for XYZ is $1000; the electricity bill company will sell the bill to the bank for 10% to 20% discount to the face value. Here, the bank will buy the electricity bill for $900 whose face value is $1000, now the bank will recover, full amount of bill from the customer i.e $1000. If the customer fails to pay the bill, the bank will put interest on the outstanding bill and ask the customer for the payment.

Update and review of a customer shall be based on the risk as follows, at a minimum, unless 
circumstances need something else or there is urgent need of changing the category of risk:
a. High risk one year
b. Medium risk three year
c. Low risk five year

In ‘Bill Purchase’ the loan will be created for the full value of the draft and the interest will be recovered when the actual payment comes. For example, a ‘Sight draft’ is presented for which the loan is created for 100% of the draft value. The money is received after 7 days, and then the interest will be recovered for 7 days along with the principal amount.

PEPs means politically exposed persons. It includes both domestic and international PEPs. 
Domestic PEPs includes The President, Vice President, Ministers, Members of parliaments, 
Officers of the Constitutional Bodies, Judges of the different courts, senior politicians, Members 
of national political parties, Officers of special class of GoN, seniors executives of any 
institutions partially or fully owned by the government etc. 
International PEPs includes head of the state or the government, senior politicians, central 
members of political parties, senior governments, judiciary military officials, diplomats etc. 

Cheque discounting service is offered only by few banks. For instance, if you have a cheque of $3000 outstation and the cheque will take 7 seven days for clearance, then bank will offer you a service for early payment. The bank can make an early payment, but they will pay only for certain percentage of the actual amount, here they will pay you $2000 but they will charge interest on it and the remaining $1000 will be paid, once the outstation cheques get clear.

PEPs are high risk customers. So, each and every customer should be screened against PEPs list and if 
any customer falls under it, approval from high authority should be taken before opening the account.

Some utilities of banking services to business are as follows:

(a) Money deposited in a bank remains safe. Precious articles too can be kept in the safe custody of banks in the lockers

(b) Banks provide credit facilities to their customers.

(c) Banks provide convenient and safe means of transferring money from one place to another and facilitate business dealings/transactions.

(d) Banks meet the financial needs of small scale business units which are located in economically backward areas

STR means suspicious transaction report. Suspicious transactions are those transactions that deviate from  the profile, characteristics and usual transactions pattern, transaction reasonably suspected to have been  conducted with the purpose of evading the reporting and financial transaction conducted using fund  alleged to be attributable to predicate offences.  Suspicious transactions should be reported within 3 days of arriving at the conclusion that the transaction 
is suspicious. 

A commercial bank performs the following services to business community.

(a) Issue of letter of credit, traveller’s cheque and circular notes.

(b) Supply of trade information.

(c) Acting as a reforce as regards financial status of customers.

(d) Safe custody of important documents in safe deposits vaults (lockers) available on hire.

Following are the advantages of banks in a modern society:

1. Money deposited in commercial banks can be withdrawn on demand by cheque. Payments can also be made by cheque. Thus, business firms are not required to make large payments in cash and also not required to maintain large cash balances with them.
2. Financial assistance is provided by banks by way of cash credit, overdraft, loans and advances on discounting of bills of exchange.
3. Various agency services provided by commercial banks are prompt and reliable, for all these services bank charge only a nominal fee or commission.

Threshold transactions includes following transactions.
1. Credit and debit transaction of NPR 1 million or more in the account of any person or entity 
particularly of cooperative, private company, NGOs either by single or multiple transactions 
through any mode in a day. 
2. Payment of remittance of NPR 1 million or more by any person or entity to any person or entity 
through single or multiple transactions in a day. 
3. Exchange transactions of NPR 5,00,000 or more provided to any person or entity through single 
or multiple transactions in a day. 
Threshold transactions should be reported within 15 days of such transactions.

1. In the event of suspension of banking activities, the people would not be able to deposit their savings in banks, nor able to withdraw money from banks. Saving are then likely to decline with a corresponding increase in consumption expenditure.

2. Farmers and small business units will suffer badly if banking operations are suspended. They will be forced to go to money lenders to borrow money at high rates of interest when bank finance is not available.

3. Foreign trade will be badly affected in the absence of facilities regarding issue of letter of credit and foreign exchange transactions.

Tipping off means telling the clients that his/her account is being monitored or informing the client that 
there is an element of suspicion on the transaction or disclosing the information to designate authority. 
When an institution identifies a suspicious transaction, the customer should not be “tipped off” or 
informed. 

Banks provide many services other than accepting deposits and lending money. The various other services of banks are:

1. Promoting and mobilising savings of the public.
2. Providing funds to trade and industry by way of discounting bills, overdraft, cash credit facility and transfer of funds from one place to another.
3. Providing agency services to customers, such as collection of bills, payments of insurance premium, purchase and sale of securities, etc. and other general services, such as issue of travellers cheques, credit cards, locker facility, etc.

 To fine from NPR 1 million to NPR 50 million for FIs and NPR 1,00,000 to NPR 10 million for 
other Res
 To impose full or partial restriction on the business
 To suspend or cancel registration/permission/license
 To impose other appropriate sanctions. 

In every country, the bank which is entrusted with the responsibility of guiding and regulating the banking system is known as the Central Bank. In India, Reserve Bank of India is entrusted with this responsibility. It regulates the volume of currency and credit and has powers of control and supervision overall banking institutions.

For proper risk assessment of business relationship with customers and evolving suitable monitoring 
mechanism, all new customers are to be categorized as High risk, Medium risk and Low risk. It is to be 
specifically noted that risk categorization is meant for proper monitoring of accounts and does not reflect  in any way on the account holders. Risk Categorizations done by the Branch should not be disclosed to  the customers. While the extent of knowledge /information available on customers to prove their identity  sufficiently will determine the risk perception and concomitantly risk categorization.
We give below an illustrative list of Accounts/ customers / groups who may be assigned different risk 
categories:
1. High risk
2. Medium risk
3. Low risk

Co-operative banks in India are established under the provisions of the Co-operative Societies Act, 1912. These are organised on co-operative basis. Co-operative banks are organised both at primary and district level. A co-operative credit society at the primary level can be formed by the local people having common interest and common purposes.

Development banks are special financial institutions which provide long-term capital to industry. These banks assist the promotion, expansion and modernisation of industries. They act as underwriters also. Development banks which have been established and functioning in India are IFCI, SFCs, IDBI, ICICI, IRBI, etc.

The functions of commercial banks are divided into two categories.

(i) Primary functions,

(ii) Secondary function.

Primary functions include accepting deposits and lending money. Loans given by banks are: Short- term loans and long-term loans. Banks grant short-term loan to its customers by way of cash credit, overdraft discounting of bills.

Bank accepts deposits from the public and their customers in the form of current deposit, saving deposit, fixed deposit and under other deposit scheme. Bank grant loans to customers as demand loans and term loan.

The auxiliary services of banks are agency services and general utility services. Agency services are rendered as agent of customers whereas general utility services are rendered to the general public.

Non face to face transactions include but not limited to;
 business relationships concluded over the Internet or by other means such as through the 
post;
 services and transactions over the Internet;
 use of ATM machines;
 telephone banking;
 transmission of instructions or applications via facsimile or similar means; and
 making payments and receiving cash withdrawals as part of electronic point of sale 
transaction using prepaid or re-loadable or account-linked value cards.

Cheques printed with attractive colours and designs, which are issued by banks to the members of public to enable them to present a specific amount to a friend or relative on special occasions, are called gift cheques.

Beneficial Owner means the natural person/s who ultimately own or control a customer and/or 
the person on whose behalf a transaction is being conducted. It also incorporates those persons 
who exercise ultimate effective control over a legal person, entity or arrangement.

Services of bank to its customers as agent’s are:

1. Dealing in Bills of Exchange, Promissory Notes, Hundies and Drafts.
2. Issuing letter of credit, Travellers cheques and circular notes.
3. Buying, selling and dealing in bullion as well as foreign exchange and foreign bank notes.
4. Acting as ‘agent’ for clients, buying and selling shares and debentures and acting as underwriter.
5. Collection and remittance of money and extending guarantee against loans raised by customers.

The term Beneficial Owner is important to understand because a person in whose name an 
account is opened with an institution may not necessarily be the person who ultimately controls 
or is entitled to the funds or investments. The distinction is important because the focus of antimoney laundering guidelines is on the person who has the ultimate level of control or 
entitlement.

(a) A Retired Pensioner:

Bank provides various services as collecting pension on behalf of clients is one of the important services by the bank to their customers.

(b) A Traveller:

Banks issue traveller’s cheques mainly for the convenience of travelling executives or individuals. These cheques can be encashed from the branch office of the bank at the place of visit and also used to pay for airlines booking, settling hotel bills, etc.

(c) A Housewife:

Safe custody of valuable articles can be arranged by hiring lockers in banks, etc.

Bank shall keep a record of every transaction, customer and beneficial owner data, and data 
obtained for the purpose of identification, risk analysis, monitoring and other related information 
along with the date, time and nature, KYC/CDD documents, correspondence with the customers, 
sources of fund, as well as all documents related to money laundering activities such as files on 
suspicious activity reports, documentation of AML account monitoring, etc. These records must 
be kept for a minimum of 5 years until other policy/act is prescribed for more time

Non-banking Services:

Non-banking services are rendered in the interest of general public. Some of these services are issue of traveller’s cheques, gift-cheques, bank drafts, circular notes and safe custody of valuable articles and documents in bank lockers, etc.

Agency Services:

Agency services include payment of subscription, insurance premium, collection of cheques and dividends, buying and selling snares and debentures on behalf of customers.

(i) Banks undertake collection of book debts, bills of exchange promissory notes dividend warrants, etc., which greatly facilitate business activities.

(ii) Foreign trade activities are also greatly facilitated by banks undertaking issue of letter of credit; acceptance and payment of documentary bills, and providing financial assistance by way of pre-shipment and post-shipment credit, etc.

(iii) An important service provided by banks to individuals and business firms is that of acting as a reference.

The loan can be granted as:

(a) Demand loan,

(b) Term loan.

(a) Demand Loan:

Demand loan is repayable on demand. The entire amount of demand loan is disbursed at one time and the borrower has to pay interest on it. The borrower can repay the loan either in lumpsum or as agreed with the bank.

(b) Term Loans:

Medium and long term loans are called, Term loans’. Term loans are granted for more than one year and repayment of such loans is spread over a longer period The repayment is generally made in suitable instalments of fixed amount. These loans are repayable over a period of 5 years and maximum upto 15 years.

Overdraft facility is the result of an agreement with the bank by which a current account holder is allowed to withdraw a specified amount over and above the credit balance in his/her account. It is a short term facility. This facility is made available to current account holders only who operate their account through cheques. Overdraft facility is generally granted by bank on the basis of a written request by the customer.

A loan is granted for a specific time period. Generally commercial banks grant short-term loans. But term loans, that are loan for more than a year, may also be granted. Loans are generally granted against the security of certain assets. An advance is a credit facility provided by the bank to its customers.

It differs from loan in the sense that loans may be granted for a longer period but advances are normally granted for a short period of time. The rate of interest charged on advance varies from bank to bank.

A cash credit facility is an arrangement whereby the bank agrees to lend money to the borrower upto a certain limit. The bank put this amount of money to the credit of the borrower.

The borrower draws the money as and when he needs. Interest is charged only on the amount actually drawn and not on the amount placed to the credit of borrower’s account. Cash credit is generally granted on a bond of credit or certain other securities.

Banks purchase the bills at face value minus interest at current rate of interest for the period of the bill. This is known as ‘Discounting of bills’. Bills of exchange are negotiable instruments and enable the debtors to discharge their obligations towards their creditors, such bills of exchange arise out of commercial transactions both in internal trade and external trade. By discounting these bills before they are due for a nominal amount, the banks help the business community.

The agency functions of a commercial bank are as follows:

(a) Collection and payment of cheques and bills on behalf of the customers.

(b) Collection of dividends, interest and rent, etc on behalf of customers, if so instructed by them.

(c) Purchase and sale of shares and securities on behalf of customers.

(d) Payment of rent, interest, insurance premium subscription etc. on behalf of customers, if so instructed.

(e) Acting as a trustee or executor.

Primary functions of a commercial bank include:

(a) Accepting deposits: and

(b) Granting loans and advances. Secondary functions of a commercial bank include as follows:

(i) Issuing letters of credit traveller’s cheques, circular notes, etc.

(ii) Undertaking safe custody of valuables, important documents and securities by providing safe deposit vaults or lockers.

(iii) Providing customers with facilities of foreign exchange.

(iv) Collecting and supplying business information, etc.

Opening the Current Account: To open a current account, one has to fill up the application form giving all the information required by bank. The application must be introduced by a person known to the bank and operating current account with it. The specimen signature of the person who will operate the account must also be put on a separate card.

After completing all the formalities, the applicant is given an account number to be mentioned at the time of withdrawing money or depositing any amount in the account.

Operating the Current Account: A current account is an account which is generally opened by business people at their convenience. Money can be deposited and withdrawn at any time Money can be withdrawn only by means of cheques usually a banker does not allow any interest on this account.

In case a depositor requires the money before the due date, he or she makes a request to the bank for its payment. When the payment of fixed deposit is made before the due date, the depositor loses interest which is normally 1 % less compared to the rate applicable for the period.

It is one form of saving deposits. Depositors save and deposit regularly every month a fixed installment so that they are assured of sizeable amount at a later period. This will enable the depositors to meet contingent expenses. The interest earned on recurring account is higher than on the saving account

Pay-in-slips are printed forms with perforated counterfoils used for depositing cash or cheque. It contains information in respect of the name of the account holder, amount deposited, and the signature of the person depositing it. On the receipt of money, the cashier signs and stamps the pay-in-slip and the counterfoil is given back to the depositor which serves as proof of deposit.

With the permission of the bank, a depositor can withdraw money in excess of what he has deposited in the bank. This facility in known as overdraft facility and is normally granted only to current account holders.

Secured loans are those which are granted against the security of tangible assets, like stock in trade and immovable property.

There are various types of securities which are accepted for giving secured loans:

(a) Tangible assets such as plant and machinery, motor vehicles, etc.

(b) Document of title to goods, like Railway Receipt, Bills of Exchange, etc.

(c) Financial securities (Shares and Debentures)

(d) Life insurance policy

(e) Real estates (land, building, etc.)

(f) Fixed deposit receipt (FDR)

(g) Gold ornaments, jewellery, etc.

The advantages of loans and advances raised from banks by business firm are as follows:

(a) Loan and advances can be arranged from banks in keeping with the flexibility in business operations. Thus business may be run efficiently with borrowed funds from banks for financing its working capital requirements.

(b) Loans and advances are utilized for making payment of current liabilities, wages and salaries of employees, and also the tax liability of business.

(c) Bank loans and advances are found to be convenient as far as its repayment is concerned.

(d) Loans and advances by banks generally carry element of secrecy with it.

Term Loan:

Medium-term loans and long-term loans are generally known as Term loans’. These loans are granted for more than one year for heavy repairs, expansion of units, modernisation/renovation, etc. Such loans are sanctioned against the security of permanent immovable assets.

Cash Credit:

A cash credit is an arrangement by which the customer (borrower) is allowed to borrow money upto a certain limit. This is a permanent arrangement and the borrower need not draw the sanctioned amount at once, it draws the amount as and when required.

Borrowing Rate:

On the deposits received, the bank pays interest to the depositors at a specified rate. This is known as the borrowing rate.

The Reserve Bank manages the public debt and is responsible for the issue of new loans. The rupee loans of the Central Government are floated in the form of stock certificates and promissory notes through the Public Debt offices of the bank.

The State Governments also avail themselves of the bank’s facilities for the issue of new loans. In view of the bank’s close contacts and an intimate knowledge of the financial markets, it is in a position to advise the Government on the quantum, timing and terms of the new loans. The bank actively operates in the gilt-edged market to ensure the success of loan operation

The Reserve Bank sells Treasury Bills whenever necessary on behalf of the Central Government. The sale of Treasury Bills provides short-term finance to the Government and also helps to absorb any excessive liquidity in the money market Treasury bills are also rediscounted by the bank for state government’s banks and other approved bodies.

Like all central banks, the Reserve Bank also acts as adviser to the government not only on banking and financial matters but also on a wide range of economic issues including those in the field of planning and resources mobilisation.

The Bank’s advice is sought on different aspects of formulation of the country’s five-year plans such as the financing pattern, mobilisation of resources and institutional arrangements with regard to banking and credit matters. The bank has also to tender advice to Government on various matters of international finance.

It has, of course, a special responsibility in respect of financial policies and measures concerning new loans, agricultural finance, co-operative organisation, industrial finance and legislation affecting banking and credit.

The Reserve Bank’s regulatory and supervisory functions relating to commercial banks cover their establishment {i.e., licensing), branch expansion, liquidity of their assets management and methods of working, amalgamation, reconstruction and liquidation.

The control is exercised by the bank through periodic inspections conducted by its own staff and follow-up action after the inspections, as also by calling for returns and necessary information from banks

The bank has made use of both traditional and quantitative methods of credit control, and selective or qualitative controls. The primary objective of credit control can be summed up in the phrase controlled monetary expansion’. In terms of this objective, the Reserve Bank has endeavoured to do two things:

(a) To control the supply of credit so as to curb the inflationary tendencies in the economy, and

(b) To make available adequate liquidity to meet the increasing developmental requirements of trade, industry, agriculture and other sectors of the economy

The role of the Reserve Bank in agricultural credit is highly significant. The Reserve Bank of India Act envisages (a) provision of agricultural credit by the Bank through the scheduled or state co-operative banks for different purposes, and (b) setting up a special agricultural credit department to maintain the necessary staff for study and review of all questions of agricultural credit for consultation by the Government of India, the State Governments. State co-operative banks and other banking organisations.

The National Bank for Agriculture and Rural Development (NABARD) was established in July 1982 for the purpose of strengthening the system of rural credit and coordinating the activities of all other financial institutions engaged in financing of agriculture and rural development programme.

NABARD does not give direct loans and advances to agriculturists. It provides credits to the rural sector through the network of cooperative banks, commercial banks, RRB’s and other financial institutions. Over the years, NABARD has emerged as the most significant institution responsible for rural transformation

The main functions of NABARD are as follows:

(i) To provide short, medium and long term credit to State Co-operative Bank, Regional Rural Banks. Land Development Banks and other financial institutions approved by the RBI.

(ii) To grant long term loans to State Government for subscribing to the share capital of cooperative societies

(iii) To coordinate activities of Central and State Governments and other all India or State level institutions entrusted with the work of development of small scale industries, village industries and rural crafts

(iv) To inspect cooperative banks, RRB’s and co-operative societies.

(v) To promote research in agriculture and rural development.

(vi) To act as a refinancing agency for institutions providing finance to agricultural and rural development programmes.

Kisan Credit Card (KCC) scheme was introduced in 1998-99 to facilitate farmer’s access to credit from Commercial Banks and Regional Rural Banks Farmers are being provided with credit cards and passbooks.

With these credit cards, the farmers can avail the loan facilities made available by the banks upto the prescribed limits. The limits are fixed on the basis of operational land holding of the farmers, cropping pattern, scale of operations, etc.

The card is valid for three years, but is renewed on the basis of good performance and timely repayment of loans. The scheme is implemented by some selected Commercial Banks. Central and State Cooperative Banks and Regional Rural Banks.

 SIDBI became operational on April 2, 1990 with an initial paid up capital of Rs. 250 Crore and taking over the outstanding portfolio of IDBI relating to small scale sector held under the Small Industrial Development Fund as on March 31, 2000 amounting to Rs. 4200 crore.

State financial corporations extend financial assistance in the following forms :

(i) Granting of loans or advances and subscribing to the debentures of industrial concerns, repayable within a period of not exceeding twenty years.

(ii) Underwriting the issues of stocks, shares, bonds or debentures by industrial concerns.

The main objective of the UTI is to mobilise the savings of the community and channelise them into productive corporate investments so as to provide with growth and diversification of the economy UTI offers the following advantages for small investors:

(a) Considerably reduced risk since, funds are invested in a balanced and well distributed portfolios,

(b) The benefit of expert management,

(c) A steady income,

(d) Liquidity.

(i) The Bank gives long-term assistance to state Governments (Upto 20 years) for subscribing to the share capital of co-operative credit institutions.

(ii) The Bank has the responsibility of inspecting state cooperative banks and RRBS.

(i) Planning, promoting and developing industries to fill vital gaps in industrial structure.

(ii) Providing technical and administrative assistance for promotion, management and expan­sion of industry.

A bank is a financial institution licensed as a receiver of cash deposits. There are two types of banks, commercial banks and investment banks. In most of the countries, banks are regulated by the national government or central bank.

Investment banking manages portfolios of financial assets, commodity and currency, fixed income, corporate finance, corporate advisory services for mergers and acquisitions, debt and equity writing etc.

Commercial bank is owned by the group of individuals or by a member of Federal Reserve System. The commercial bank offer services to individuals, they are primarily concerned with receiving deposits and lending to business. Such bank earns money by imposing interest on the loan borrowed by the borrower. The money that is deposited by the customer will be used by the bank to give business loan, auto loan, mortgages and home repair loans.

1.Retail or consumer banking

It is a small to mid-sized branch that directly deals with consumer’s transaction rather than corporate or other banks

2. Corporate or business banking

Corporate banking deals with cash management, underwriting, financing and issuing of stocks and bonds

3. Securities and Investment banking

Investment banking manages portfolios of financial assets, commodity and currency, fixed income, corporate finance, corporate advisory services for mergers and acquisitions, debt and equity writing etc.

4. Non-traditional options

There are many non-bank entities that offer financial services like that of the bank. The entities include credit card companies, credit card report agencies and credit card issuers

Consumer bank is a new addition in the banking sector, such bank exist only in countries like U.S.A and Germany. This bank provides loans to their customer to buy T.V, Car, furniture etc. and give the option of easy payment through instalment.

1. Checking Account: You can access the account as the saving account but, unlike saving account, you cannot earn interest on this account. The benefit of this account is that there is no limit for withdrawal.

2. Saving Account: You can save your money in such account and also earn interest on it. The number of withdrawal is limited and need to maintain the minimum amount of balance in the account to remain active.

3. Money Market Account: This account gives benefits of both saving and checking accounts. You can withdraw the amount and yet you can earn higher interest on it. This account can be opened with a minimum balance.

4. CD (Certificate of Deposits) Account: In such account you have to deposit your money for the fixed period of time (5-7 years), and you will earn the interest on it. The rate of interest is decided by the bank, and you cannot withdraw the funds until the fixed period expires.

You can operate your bank accounts in different ways like

1. Internet banking
2. Telephone or Mobile banking
3. Branch or Over the counter service
4. ATM ( Automated Teller Machine)

Before opening a bank account, if it is a saving account, you have to check the interest rate on the deposit and whether the interest rate remains consistent for the period. If you have the checking account, then look for how many cheques are free to use. Some banks may charge you for using paper cheques or ordering new cheque books. Also, check for different debit card option that is provided on opening an account and online banking features.

A crossed cheque indicates the amount should be deposited into the payees account and cannot be cashed by the bank over the counter. Here in the image, number#2, you can see two cross-lines on the left side corner of the cheque that indicates crossed cheque.

Overdraft protection is a service that is provided by a bank to their customer. For instance, if you are holding two accounts, saving and credit account, in the same bank. Now if one of your accounts does not have enough cash to process the cheques, or to cover the purchases. The bank will transfer money from one account to another account, which does not have cash so to prevent check return or to clear your shopping or electricity bills.

Yes, bank will charge on ‘overdraft protection’ services but the charges will be applicable only when you start using the service

APR stands for Annual Percentage Rate, and it is a charge or interest that the bank imposes on their customers for using their services like loans, credit cards, mortgage loan etc. The interest rate or fees imposed is calculated annually.

Basically, ‘prime rate’ is the rate of interest that is decided by nations (U.S.A) largest banks for their preferred customers, having a good credit score. Much ‘variable’ interest depends on the ‘prime rates’. For example, the ‘APR’ (Annual Percentage Rate) on a credit card is 10% plus prime rate, and if the prime rate is 3%, the current ‘APR’ on that credit card would be 13%.

‘APR’ (Annual Percentage Rate) can be ‘Fixed’ or ‘Variable’ type. In ‘Fixed APR’, the interest rate remains same throughout the term of the loan or mortgage, while in ‘Variable APR’ the interest rate will change without notice, based on the other factors like ‘prime rate’.