AHSEC - Class 12: Banking Solved Question Paper' 2016 | Class 12 Banking Solved Question Papers

[Banking Solved Question Papers, AHSEC, Class 12, 2016]

BANKING SOLVED QUESTION PAPERS
AHSEC CLASS 12 BANKING' 2016
BANKING
Full Marks: 100
Time: 3 hours
The figures in the margin indicate full marks for the questions.

1. Answer as directed:          1x10=10

a) Which is the first Development Bank established in India?
Ans: IFCI
b) What is primary market?
Ans: Ans: Primary market which is also called new issue market represents a market where new securities i.e. shares and bonds that have never been previously issued are offered. It is a market of fresh capital. The main function of this market is to facilitate the transfer of funds from willing investors to the entrepreneurs.               
c) In which year fourteen Indian commercial banks were nationalized?
Ans: 1969
d) What do you mean by scheduled bank?
Ans: Scheduled banks refer to those banking institutions whose names are included in the Second Schedule of the Reserve Bank of India Act, 1934. Moreover, the banking company may included in scheduled list only after must fulfill the some conditions.

e) Capital market is the market for long-term fund. (State whether True or False)            TRUE
f) Write the full form of MMMF.
Ans: Money Market Mutual Fund
g) A collecting banker can claim statutory protection only in the case of Crossed cheque. (Fill up the blank)
h) What is statutory liquidity ratio?
Ans: Statutory Liquidity ratio of the total deposits of a bank which it has to maintain with itself in the form of liquid funds like government securities and cash in hand at any given conditions and point of time.
2. Name two departments of the Reserve Bank of India.                              2
Ans: DEPARTMENTS OF THE RBI: To ensure smooth and efficient functioning of the Bank the RBI has been divided and sub-divided into various department which are as follows:
1.       Issue department: The issue department is concerned with the proper and efficient management of the note issue.
2.       Banking department: The banking department is responsible for providing the banking services to the Government and to the banks.
3. What is the meaning of cash credit?                  2
Ans: Cash Credit: Cash Credit is a type of advance wherein a banker permits his customer to borrow money upto a particular limit by a bond of credit with one or more securities. The advantage associated with this system is that a customer can withdrawn money as and when required. The bank will charge interest only on the actual amount withdrawn by the customer. Many industrial concerns and business houses borrow money in this form.
4. State the ‘minimum reserve system’ of note issue.                    2
Ans: The minimum reserve system is a system in which the Central Bank is authorized to issue notes up to any limit by keeping a certain minimum reserve of gold and foreign securities. In India, the RBI is required to keep the minimum reserve of Rs. 200/- crore out of which Rs. 115/- crore should be kept in gold. The system is very elastic and economical for developing countries as it requires only a small and fixed amount of gold reserve. However, it lacks in public confidence due to non-convertibility of notes.
5. Who can cross a cheque?                        2
Ans: The Drawer: The drawer of a cheque may cross a cheque before issuing it. He may cross it generally or specially.
The Holder: The holder of a cheque can cross.
The Banker: The banker to whom the cheque is crossed specially may again cross it especially to another banker's agent, for collection. This is called double special crossing.
6. Define endorsement.               2
Ans: Ans: The term “Endorsement” of a negotiable instrument means writing of a person’s name of the back of the instrument for the purpose of negotiation. The person who puts his signature is called the “endorser” and the person in whose favour it is being endorsed in called the “endorsee”.
7. State the meaning of Development Bank with example.         3
Ans: Development bank is a specialised financial institution which provides medium and long term finance to business units in the forms of loans, underwriting, investments and guarantees operations, promote entrepreneurship and upgrade knowhow and do-how. It is a multi-purpose financial institution and not just a term-lending institution. It does not accept deposits from the public, unlike commercial banks. A development bank does not perform ordinary banking functions. For example: IDBI, IFCI,
8. Briefly explain the utility services rendered by the commercial banks.                             3
Ans: General Utility functions: These are certain utility functions performed by the modern commercial bank which are:
1.       Locker facility: Banks provides locker facility to their customers where they can their valuables.
2.       Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.
3.       Gift cheque: Some banks issue gift cheques of various denominations to be used on auspicious occasions.
4.       Letter of Credit: Letter of credit are issued by the banks to their customers certifying their credit worthiness. Letter of credit are very useful in foreign trade.
5.       Foreign Exchange Business: Banks also deal in the business of foreign currencies.
9. Write a brief note on capital market.                                3
Ans: Capital Market is generally understood as the market for long-term funds. This market supplies funds for financing the fixed capital requirement of trade and commerce as well as the long-term requirements of the Government. The long-term funds are made available through various instruments such as debentures, preference shares, and common shares. The capital market can be local, regional, national, or international.
Features of Indian Capital Market          
a)      Dealing in Securities: It deals in long-term marketable securities and non-marketable securities.
b)      Segments: It included both primary and secondary market. Primary market is meant for issue of fresh shares and secondary market facilitates buying and selling of second hand securities.
c)       Investors: It includes both individual investors and institutional investors.
Or
Write a short note on foreign exchange market.                              3
Ans: FOREIGN EXCHAGE MARKET: International transactions involve payments or receipts in currencies other than home currency of the trading countries. This results in the necessity for buying and selling of foreign exchange. The market in which currencies of different countries are bought and sold for one another is called the foreign exchange market. In other words, foreign exchange market is a market in which foreign exchange transactions take place. According to Kindle berger, “Foreign exchange market it a place where foreign money are bought and sold”.             
10. Draw specimen of a blank cheque.                   3
11. State any three differences between Bill of Exchange and Promissory note.                               3
Ans: Difference between bill of exchange and Promissory Note
Basis
Bill of Exchange
Promissory Note
Drawer
It is drawn by the creditor
It is drawn by the debtor.
Parties
There can be three parties to it, viz. the drawer, the Drawee and the payee.
There are only two parties to it, viz. the drawer and the payee.
Order or Promise
It contains an order to make payment.
It contains a promise to make payment.
12. What are the objectives of IBRD (World Bank)?         5
Ans: The objectives of World Bank are:
a)      To provide long-run capital to the member countries for reconstruction and development.
b)      To promote private capital investment by providing guarantee on private loans and capital investment.
c)       To maintain equilibrium in balance of payments and balanced development of international trade.
d)      When private capital is not available on reasonable terms, to supplement private investment by providing finance for productive purpose on suitable conditions.
e)      To encourage the development of productive facilities and resources in less developed countries.
13. Mention five advantages and disadvantages of Branch Banking System.        5
Ans: Merits of Branch Banking
1.       Benefits of large Scale Production: Due to large scale production, the cost per unit of operation is very low in case of this system.
2.       Distribution of Risks: There is a distribution of risks because the losses incurred by one branch are made up by the profits earned by other branches.
3.       Effective Central Bank control: Due to presence of few big banks in the banking system, the RBI can effectively and easily regulate the activities of banks.
4.       Public Confidence: Branch banking system gains greater public confidence because of its large scale operations and huge financial resources.
5.       Easy transfer of funds: Since the branches of bank under branch banking are spread all over the country, it is easier and cheaper, for it to transfer funds from one place to another.
Demerit of branch banking
1.       Problems of Management: The effective management and control of bank under branch banking system is difficult due to large network of branches.
2.       Delay in Decision Making: Decision making is delayed because the branch manager has to consult with the head office before taking decision.
3.       Ignorance of local heads: Branches follows the policies framed by the head office. The head office and the branch may not be aware of the local conditions.
4.       Monopolistic tendencies: Branch banking encourages monopolistic tendencies. A few big banks can dominate and control the whole banking system.
5.       Regional imbalances: Under branch banking system the financial resources collected in smaller and backward regions are transferred to the bigger industrial centre. This encourages regional imbalances in the country. 
14. Discuss five features or characteristics of Indian money market.       5
Ans: The distinguishing features of Indian money market are given below:
1.       Dichotomy: The Indian money market is dichotomized into organised and unorganised sectors.
2.       Lack of co-ordination: The Indian money market may be characterized as loose and unbalanced because there exists no co-ordination between the organised and unorganised sectors.
3.       Inadequate control by the RBI: The RBI has inadequate control over the functioning of unorganised sector of the Indian money market.
4.       Instability and inelasticity: The instable and inelastic Indian money market acts as a great hindrance to the rapid economic development of the country.
5.       No Banker’s acceptance: There is no development of banker’s acceptance or acceptance of credit by the banks in India.
6.       Banking gap: Scientifically run institutions like commercial banks have a largely urban orientation in India. Banking facilities are inadequate in villages of India.
Or
What are the differences between Money Market and Capital Market?                               5
Ans: Difference between capital market and money market
Basis of  Distinction
Capital Market
Money Market
1)   Meaning
The market dealing in long-term funds is known as capital market.
The market dealing in short-term funds in known as money market.
2)   Constituents
These include new issue market, stock market, stock brokers and intermediaries.
These include call money market, bill market and discounting market.
3)   Participants
Individual and institutional investors operate in the capital market.
Only the institutional investors operate in the money market.
4)   Amount of funds
Capital market arranges large amount of funds.
Money market arranges comparatively small amount of funds.
5)   Instruments
The instruments in the capital market include shares debentures bonds etc.
Trade bills T-bills, certificate of deposits, commercial papers etc. are the instruments of money market.
6)   Period/ duration
The instruments of capital market are of long duration, i.e. more than one year.
The money market instruments are of short duration.
7)   Liquidity
The instruments of capital market always take time to convert into cash.
The instruments of money market have very high degree of liquidity.
15. Write about the five essential elements of valid endorsement.        5
Ans: The rules and regulations regarding endorsement may be summarised as follows:
a)      Signature of the endorser: A regular endorsement implies signature of the holder of the negotiable instrument himself or his duly authorised agent on its face or back for the purpose of negotiation.
b)      Spelling: The endorser must sign his name in the exact spelling as appearing on the negotiable instrument.
c)       Prefixed and suffixes to be excluded: Endorsement need not contain the complementary Prefixes or Suffixes e.g. Mr., Mrs., Shri, Smt etc.
d)      Sign in Ink: Endorsement in pencil or by a rubber stamp is usually not accepted.
e)      Delivery of the instrument: An endorsement must be completed by delivery of the instrument.
Or
Explain briefly about different types of crossing with example.                                5
Ans: Types of crossing:
1. General crossing: A general crossing is a crossing where a cheque simply bears two parallel lines with or without any words and without any specification. According to Sec. 123 of the Negotiable Instrument Act, 1881, “When a cheque bears across its face an addition of the words. “and company” or any abreactions thereof between two parallel transverse line or of two parallel transverse lines simply either or without the words, “Not Negotiable” that addition shall be deemed a general crossing. Simplify, In case of General crossing words such as “and company”, “not Negotiable”, “Account payee” etc. may be inserted between the lines.
A general crossing cheque protects the drawer and also the payee or the holder thereof. Whenever a drawer desires to make payment to an outstation party, he can cross the cheque so that even if the cheque is lost, only a piece of paper is lost and nothing beyond that. If by any chance, it is encashed by a third and unauthorized person, it is possible to find out to whose account the amount is credited and the unauthorized person can be identifies and suitable action taken against him.
2. Special crossing: Section 124 of the Negotiable Instruments Act, 1881 defines special crossing as “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.”
Thus, in case of special crossing, the name of a particular bank is written in between the parallel lines. The main implication of this type of crossing is that the amount of the cheque will be paid to the specified banker whose name is written in between the lines. Special crossing is in a particular bank and by special crossing, he is assured of double safety, safety to the drawer and safety to the payee.
3. Account payee crossing: This type of crossing is done by adding the words ‘Account Payee’. This can be made both in general crossing and special crossing. The implication of this type of crossing is that the collecting banker has to collect the amount of the cheque only for the payee. If he wrongly credits the amount of the cheque to another account, he will be held responsible for the same. 
4. Not negotiable crossing: When the words ‘not negotiable’ is added in generally or specially crossed cheques, it is called not negotiable crossing. A cheque bearing not negotiable crossing cannot be transferred. If a cheque bearing ‘Not negotiable crossing’ is transferred, care must be taken regarding the ownership of title of both the transferor and transferee.
16. Examine the statutory protections provided to a collecting banker under the Negotiable Instruments Act, 1881.  5
Ans: Legal Protections Granted to a Collecting Banker: The Negotiable Instrument Act 1881 provides legal or statutory protection to the collecting banker against the risk of conversations. The collecting banker gets statutory protections in the following ways:
a)      The cheque must be a crossed cheque: The statutory protection is available to the banker only in case of cheques crossed generally or specially to him. He cannot avail of this protection in case of an uncrossed cheque. It is essential that the cheque is a crossed one before it is deposited with the collecting banker, otherwise the banker will be liable for conversion if the title of the customer proves to be defective or the endorsement thereon is forged one.
b)      The payment must be received for a customer: The statutory protection is available only when the banker collects the cheque on behalf of a customer. The protection cannot be availed of in case of cheques sent to the banker by a person who is not a customer of the banker.
c)       Collection as an agent: The collecting banker can avail the statutory protection only if he collects the cheque as an agent of the customer. This protection is not available when he collects cheques as a holder for value.
d)      Payment must be received in good faith and without negligence: The most essential prerequisite for availing of the statutory protection is that the banker must receive payment in good faith and without negligence. He should not be negligent in receiving payment. It must be carefully noted that ordinarily a banker owes duty to his own customer but the law makes him responsible to the true owner of the cheque also.
17. Discuss briefly about different types of loans and advances granted by a commercial bank.  5
Ans: Different types of loans and advances granted by a commercial bank are discussed below:
(i)      Cash Credit: Cash Credit is a type of advance wherein a banker permits his customer to borrow money upto a particular limit by a bond of credit with one or more securities. The advantage associated with this system is that a customer can withdrawn money as and when required. The bank will charge interest only on the actual amount withdrawn by the customer. Many industrial concerns and business houses borrow money in this form.
(ii)    Overdraft: An overdraft is an arrangement by which the customer is allowed to overdraw his account. It is granted against some collateral securities. The facility to overdraw is allowed through current account only. Interest is charged on the exact amount of overdrawn subject to the payment of minimum amount by way of interest.
(iii)   Loan: Loan is an advance in lump sum amount the whole of which is withdrawn and is supported to be rapid generally wholly at one time. It is made with or without security. It is given for a fixed period at in agreed rate of interest. Repayments may be made in installments or at the expiry of a certain period.
(iv)  Discounting of Bills of Exchange: The bank also gives advances to their customers by discounting their bills. The net amount after deducting the amount of discount is credited to the account of customer. The bank may discount the bills with or without any security from the debtor in addition to the personal security of one or more person already liable on the bill.
18. Explain the functions of Stock Exchange.       5
Ans: As the barometer measures the atmospheric pressure, the stock exchange measures the growth of the economy. it performs the following vital functions:
a)      Ready market and liquidity: Stock exchange provides a ready and continuous market where investors can convert their money into securities and securities into money easily and quickly. It provides a convenient meeting place for buyers and sellers of securities.
b)      Evaluation of securities: Stock exchange helps in determining the prices of various securities that reflect their real worth. The forces of demand and supply act freely in the stock exchange and help in the valuation of securities.
c)       Mobilisation of savings: Stock exchange helps in mobilising surplus funds of individuals and institutions for investment in securities. In the absence of facilities for quick and profitable disposal of securities, such funds may remain idle.
d)      Capital formation: Stock exchange not only mobilises the existing savings but also induces the public to save money. It provides avenue for investment in various securities which yield higher returns. It helps in allocation of available funds into the most productive channels.
e)      Regulation of corporate sector: Stock exchanges frame their rules and regulations. Every company which wants its securities to be dealt in at the stock exchange has to follow the rules framed by the stock exchange in this regard.
19. Explain the traditional functions of the Reserve Bank of India.           8
Ans: The functions of RBI are:
1)      Note Issue: The reserves bank of India is the sole authority for the issue of currency in India other than one rupee coins/notes and subsidiary coins. The RBI has adopted the minimum reserves system of note issue to issue currency notes in the country. Under this system the RBI maintains a minimum reserve of Rs. 200 crore of which Rs. 115 crore is in gold and the rest in securities. The issue department of RBI has the responsibility to issue paper money; the issue of currency into circulation and its withdrawal from circulation take place through the banking department of the Bank.
2)      Bankers to Government :- The RBI acts as banker to the Central and State Government as a bankers as a adviser as a agent into there capacities :-
a)      As a bankers.
b)      As an agent.
c)       As an advisor.
As a Government banker the RBI performs the following functions:-
Ø  It maintains and operates deposit account of the central and state governments.
Ø  It receives and collects payment on behalf of the Central and state governments.
Ø  It makes payments on behalf of the central and state governments.
Ø  It provides short term advances to government for which are called ways and means advances etc.
As a Government agent the RBI perform the followings functions:-
Ø  Collect tax and other payments on behalf of the government.
Ø  Raise loan from the public and thus manages public debts.
Ø  Transfer funds and provide remittances facilities to the government etc.
As an adviser the RBI acts as an advising the Government on all financial matters such as loan separations investment, agricultural and industrial finance, banking planning etc. It also advices to promote the attainment of the national economic goals.
3)      Bankers Bank: The Central Bank is a banker to all the other banks. It is the supreme bank of all the banks. As the supreme bank it performs various functions. Some of the functions are:
4)      Custodian of cash reserve of the bank: The Central Bank acts as the custodian of cash reserve of the banks. Every Commercial bank has to keep a certain portion of their deposits and time and demand liabilities to the Central Bank in the form of cash reserves. The Central Bank maintains this cash reserve as the custodian and grants money to the commercial bank in times of emergency.
5)      Lender of the last resort: The Central Bank is the Lender of the last resort of the commercial banks. When the other banks shortage of funds, then they can approach to the Central Bank for financial assistance. The Central Bank lends money to them by discounting their bills. This enables the Central Bank to establish control over the banking system of the country. The RBI is ultimate source of money and credit provide fund to money market participate thus the RBI act as lender of last resort for the commercial banks.
6)      Clearing agent: In India the central clearing functions is managed by the RBI or the SBI is authorized to manage clearing house functions every day. Each commercial bank receives a number of cheques for collection from other banks on account of their customers. One bank may have to pay certain amount to another bank again the RBI will transfer fund from debtor to creditors account. Since all banks have their accounts with the RBI, the RBI can easily settle the claims of various banks each other with least use of cash.
7)      Control of credit :- As a central bank, the RBI take the responsibility to control of credit in order to economic development and price stability in the country under credit control policy different method are used to control the volume of credit in the economy. Important of them are General Credit Control and Selective Credit Control.
8)      Custodian of gold and foreign exchange reserves: - The RBI act as a custodian of gold and foreign exchange reserves for both on its own and on behalf of the Government.
Or
State the meaning of cash reserve. Distinguish between Cash Balance and Cash Reserve.                             2+6=8
20. Discuss the principles followed by the commercial banks in investing its fund in securities.   8
Ans: Principles of Sound Investment: Banks are one of the genuine investors in the securities market. Banks invest in the market in the hope of earning some return. Since, banks deals in borrowed funds, therefore a banker must select the securities very carefully and follow the following principles of sound investments:
1)      Safety of principal: A banker deals in borrowed funds and therefore his main consideration is safety of principal invested in securities. The banker has to ensure that the principal amount invested by him remain safe. The safety of investments depend on the solvency and ability of the issuing authorities to honour their commitment made to the investors. The government and semi-government securities are the safest securities because they are guaranteed by the government.
2)      Price stability: The price of security selected by the banker should remain stable. The safety of investments depends on the stability in the prices of securities. Banker should prefer those securities whose prices remain fairly stable over a period of time. The Prices of government securities remain stable and do not fluctuate.
3)      Marketability or liquidity: The primary objective of buying securities by the banker is to earn income and at the same time maintain his liquidity position. Thus, the banker should see that the security in which he can be sold in the market without loss of time and money. Marketability of securities ensures liquidity of investments. Government and semi-government securities are highly liquid as they have a ready market.
4)      Profitability or yield: After ensuring the safety of the principal money invested in securities, the banker should consider the returns from the investments. The banker should not give undue importance to higher yields at the cost of safety. The banker should not expect windfall profit, because high profit may bear the germ of loss.
5)      Diversification of Investment: The banker should diversify the risk involved in investment by investing in wide variety of securities issued by wide variety of business enterprises belonging to different trade and industry.
6)      Refinance: To ensure the liquidity of his investments the banker has to see that the security is eligible to obtain refinance from the Central Bank and other refinancing institutions.
In conclusion, it may be said that for a banker the government and semi-government securities are most ideal for investment of funds. Government securities with virtually no risks, have a ready market, are eligible for refinance and bring reasonably good return.
21. Explain the role and functions of non-banking financial institutions.                               8
Ans: Role of indigenous and non-banking financial institution (NBFI’S)
a)      Financing of industries: The foremost objective of institutional finance is to extend financial accommodation to industrial concerns on a long-term basis. Term loans are provided for setting up new concerns and also for modernisation of existing concerns.
b)      Balanced regional development: Another prime objective of institutional finance is to encourage the setting up of industries in the backward regions of the country for balanced regional development.
c)       Development of capital market: In India, financial institutions were set up to develop capital market by providing merchant banking, underwriting and issue house services to companies for raising capital from the capital market.
d)      Mobilisation of public savings: Financial institutions raise funds by issuing debentures and bonds. These funds are recycled for the industrial growth of the country.
e)      Procurement of foreign technology: Financial institutions help the industrialists to acquire latest foreign technology by extending foreign currency loans and guarantees.
f)       Gap-filler: Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.
g)      Management consultancy: Financial institutions provide technical and management consultancy to industrial units.
h)      Training of entrepreneurs: Financial institutions train and develop entrepreneurs, help them in preparing projects reports, and provide them initial capital to launch their enterprises.
i)        Research: Development banks undertake market and investment research and surveys as also technical and economic studies related to development of industries.
j)        Co-ordination: The development banks co-ordinate the working of other financial term lending institutions engaged in financing promoting and developing industries.
k)      Assist in procuring foreign capital: Development banks acquire foreign capital and allocate it to varied industrial sectors on priority basis.
Or
Discuss the role of the State Bank of India in Indian economy.                   8
Ans: The State Bank of India was established under the State Bank of India Act, 1955, by nationalizing the Imperial bank of India with the object of extending banking facilities in rural areas. I came into existence on 1st July 1955. Though Imperial Bank was important banking institution in 16th April 1955, SBI bill was passed on 8th May 1955 by the Government of India. SBI was organized depending on the recommendation of All India Rural Credit Survey Committee (AIRCSC) which was appointed by RBI in 1951.
SBI is managed by Central Board of directors. In this Board, there is one chairman, one vice-chairman two managing directors and sixteen directors (Total 20 members). The head quarter of SBI is located at Mumbai and its local offices at Kolkata, Mumbai, Chennai, New Delhi, Lucknow, Ahmadabad, Hyderabad, Bhubaneswar, Bangalore, Guwahati etc. It performed all the functions performed by commercial banks. Besides it, SBI performed as an agent of RBI where there is no branch of RBI
The objectives of establishment of SBI are as follows:
a)      To extend banking facilities on a large scale, particularly in the rural urban and semi-urban areas.
b)      To promote agricultural finance and remove the defects in the system of agricultural finance.
c)       To helps the RBI in implementing its credit policies.
d)      To help the Government to pursue its broad economic policies.
Functions of State Bank of India
As an agent of RBI, the SBI also performs certain Central Banking functions such as:
1.       Bankers to Government : As an agent of the RBI, SBI acts as banker to the Central and State Government as a bankers as a adviser as a agent into there capacities :
a)      As a bankers.
b)      As an agent.
c)       As an advisor.
As a Government banker the SBI performs the following functions:
a)      It maintains and operates deposit account of the central and state governments.
b)      It receives and collects payment on behalf of the Central and state governments.
c)       It makes payments on behalf of the central and state governments.
d)      It provides short term advances to government for which are called ways and means advances etc.
As a Government agent the SBI perform the followings functions:
1)      Collect tax and other payments on behalf of the government.
2)      Raise loan from the public and thus manages public debts.
3)      Transfer funds and provide remittances facilities to the government etc.
2.       Bankers Bank: As an agent of the RBI, SBI acts as a banker to all the other banks.
a)      Custodian of cash reserve of the bank: As an agent of the RBI, SBI acts as the custodian of cash reserve of the banks.
b)      Clearing agent: In India the central clearing functions is managed by the RBI or the SBI is authorized to manage clearing house functions every day. Each commercial bank receives a number of cheques for collection from other banks on account of their customers.
Other functions of the SBI as General Banks act
A) Primary functions:
a)      Acceptance of deposits: It is the most important function of a bank. Under this function, bank accept deposits from individuals and organizations and finances the temporary needs of firms.
b)      Making loans and advances: The second important function of banks is advancing loan. The commercial bank earns interest by lending money.
c)       Investments of Funds: Besides loans and advances, banks also invest apart of its funds in securities to earn extra income.
d)      Credit Creations: The Bank creates credit by opening an account in the name of the borrower while making advances. The borrower is allowed to withdraw money by cheque whenever he needs.
B) Secondary functions of a bank: This function is divided into two parts
1)      Agency functions: These functions are performed by the banker for its own customer. For these bank changes certain commission from its customers. These functions are:
a)      Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.
b)      Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.
c)       Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers.
d)      Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.
22. What precautions should be taken by a banker while making payment of a cheque? Explain. 8
Ans: The paying banker should take precautions on the following points:
a)      Form of cheque: The Negotiable Instrument Act 1881 has not given the form of a cheque. In India every bank has right to use separate form for withdrawals, be it a cheque or withdrawal form. The banking practice requires that the cheque must be drawn in the printed forms supplied by the banks and the banks reserve the right of dishonouring a cheque if it is not in the prescribed form.
b)      Date of cheque: In case an undated cheque is presented for payment, the banker should refuse to honour it. Before presenting a cheque for payment, the drawer should mention the date of issuing the cheque. But if he has not done so, the instrument does not become invalid. The payee of the cheque or any subsequent holder thereto may fill in the date.
c)       Amount of the cheque: The amount of the cheque must be certain and expressed both in words and figures. In case of any discrepancy between the amount expressed in words, and figures, sec 18 provides that the amount in words shall be the amount undertaken or ordered to be paid. The banker may therefore pay the amount written in words without incurring any liability for the same.
d)      Drawer’s signature: A banker is expected to known the signatures of his customers and therefore, if the drawer’s signatures have been forged, and the banker makes the payment it shall not be entitled to debit the customer’s account with the payment. The loss will be borne by banker.
e)      Material alterations: A cheque contains an order of the drawer to his banker to pay a specified sum of money to the bearer or the person mentioned therein or to his order. Before honouring a cheque, the paying banker should see that material alteration is confirmed by the initials or by signature of the drawer. If a cheque is signed by more than one person, material alteration should be confirmed by all the persons.
f)       Sufficiency of funds: It is a legal duty of a customer to keep sufficient funds in his account for payment of the cheque. The cheque is to be paid in full and not in part and therefore, inadequate funds in the customer’s account will result in the dishonour of the cheque unless there are arrangements for granting of loans or an overdraft. The paying banker has to be very careful regarding the sufficiency of funds in the account of a customer on which a cheque is drawn.
g)      Banking hours: The banker should make payment of only such cheques which have been presented to it for payment during its banking hours. Any payment of cheques which was presented after banking hours will not be taken as a payment in due course and banker will not be entitled to debit the customer’s account.
h)      Crossing of cheques: If the cheque is a crossed one, it should not be paid on the counter but through a collecting banker.

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