Internal sources of finance can be classified into three categories-

• Owners Capital
• Depreciation funds
• Retained earnings

Owners Capital

It refers to the amount of funds invested by the owner of the business. The owner may choose to use his/her personal savings to meet the business expenditures.

Depreciation Fund

Depreciation funds are an important source of internal finance.

Depreciation means a decrease in the value of assets due to wear and tear, obsolescence, accident, etc. generally depreciation is charged against fixed assets of a company at a fixed rate every year.

A depreciation fund is created to meet the working capital requirements of the business and account for depreciation on the company’s assets. It is one kind of provision of the fund, which helps to reduce the tax burden and increase the overall profitability of the company.

Retained Earnings

It represents the earnings not distributed to shareholders. A firm may retain a portion or whole of its profits and utilize it for financing its projects.

Retained earnings are another method of internal sources of finance. Under this, a particular part of the company’s profit are reserved as retained earnings for meeting its short-term financial needs. According to the companies act 1956 certain percentage, as prescribed by the central government (not exceeding 10%) of the net profit after tax of a financial year have to be compulsorily transferred to reserve by a company before declaring its dividends.

• Retained earnings are useful for the expansion and diversification of the company.
• A company does not need to raise loans for further requirements if they have retained earnings.
• Retained earnings are one of the cheapest sources of finance.
• Sometimes excessive use of retained earnings leads to a monopolistic attitude of the company.
• The management by manipulating the value of the share in the stock can misuse the retained earnings.

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Deferred Shares are normally issued to the founders of a company.

A deferred share is a share that does not have any right to the assets of the company which is undergoing bankruptcy until all common and preference shareholders are paid.

According to the Companies Act, no public company or subsidiary to the public company can issue deferred shares.

Deferred shares are issued to the founders at a small denomination to have control over the management by the virtue of their voting rights. Deferred shares are mostly used as a method of compensation to executives and founders of a company and as a means to induce an investor in a company.

NO PAR SHARES

Those shares which have no face value are called No Par Shares. The company issues No Par Shares which are divided into a number of specific shares without any specific denomination.

No par value stock (No Par Shares) prices are determined by the amount that investors are willing to pay for the No Par Shares in an open market. The benefit of no-par value shares is that companies can issue stock at a higher price in its future offering.

The value of no par shares can be measured by dividing the net worth of the company with a total no. of shares:

Value of no par share = Real Net Worth/Total Number of Shares

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A Mutual fund is a trust that attracts savings which are then invested in capital markets. A Mutual fund is an investment vehicle for investors who pool their savings for investing in diversified portfolio securities with the aim of attractive yields and appreciation in their value.

According to SEBI, a mutual fund defined as a fund, established in the form of a trust to raise money through the sale units of the public under one or more schemes for investing in securities, including money and market instruments.

Advantages of Mutual Fund

• Mutual funds promote savings among the lower and middle-income groups of investors because mutual funds units are available with a single unit of ₹ 10 and multiplies of the same value
• Mutual funds reduce the risks as they diversify the investment into shares, debentures, bonds, etc.
• Mutual funds can be recapitalized at any time i.e. one can sell their mutual fund units at any time
• Investors get an attractive return because mutual funds are linked with the stock market
• Mutual funds are convenient and easy to invest
• Mutual funds are flexible which means it can be transferred from one scheme to another easily
• Mutual funds contribute to the economy

Types of Mutual fund

Following are the types of mutual funds:

1. Public sector Mutual funds – State bank of India, Canara Bank, Punjab national bank, general insurance, corporation are some of the public sector mutual funds.
2. Private sector Mutual funds – Kothari pioneer fund, twentieth-century fund, ICCI fund, Morgan Stanly fund, Taurus fund and CRB fund are examples of the private sector of mutual funds.
3. Open-ended mutual funds – When the mutual fund units are sold and redeemed at any time on the basis of the price determined by the fund’s net asset value, it is called an open-ended mutual fund. There is no maturity period in these mutual funds and investors can sell the units back whenever they wish.
4. Closed-ended Mutual funds – These types of mutual funds have a fixed maturity period from 2-15 years. The units of these funds can’t be redeemed.
5. Growth generated Mutual funds – These types of mutual funds are reinvested in highly growth-oriented equity shares. It consists of securities that offer high returns and growth potential.
6. Income generated mutual funds – When the investors need regular income for their investment then they can select income generated mutual funds. These funds offer a regular dividend to its investors.
7. Balanced Mutual funds – The balanced mutual funds are characterized by investment in a combination of various securities as well as government bonds. It consists of both equity and debt instruments.
8.  Domestic Mutual funds – When the mutual funds mobilize savings from a particular country or region it is called domestic mutual funds.
9. Global Mutual funds – When the mutual fund investment stocks are traded in the market throughout the world, it is called global mutual funds.
10. Regional mutual funds – When the mutual funds consist of investment from a particular region of a country then it is called a regional mutual fund.
11. Sector mutual funds- Sector mutual funds are specialized in a particular industry which consists of aggressive funds from a particular sector/industry.

Mutual funds in India

There are various mutual funds companies in India that invest in equity or stocks and manage the fund to achieve a range of goals.

Many equity mutual funds are structured to generate long term capital gains through growth or value investing strategies like Birla SL Frontline Equity fund, while others focus on generating income for its shareholders. Indian mutual funds may also invest in bonds and other securities with the goal of generating regular interest income. Funds can also take a balanced approach i.e. invest in both equity and debt instruments to create diverse portfolios that offer stability and also offer the potential for huge gains in the stock market.

Mutual funds in India are regulated by the securities and exchange board of India (SEBI). The SEBI regulations include a minimum of ₹ 500 million for open-ended debt funds and ₹ 200 million for closed-ended funds. Indian mutual funds are only allowed to borrow up to 20% of their value for a term not to exceed six months to meet short term requirements.

Mutual Fund Sponsor

The mutual fund sponsor can be either an individual, a group of individuals, or a corporate body. The Sponsor is responsible for registration with SEBI. Once approved, the sponsor must form a trust to hold the assets of the fund, appoint a board of trustees, and choose an asset management company.

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Merchant Banking involves the provision of banking services and consultancy to its customers regarding financial, marketing, managerial, and legal services. Consultancy denotes providing advice, guidance, and service for remuneration. It involves the provision of a wide range of services that help businesses from its inception to successful operations to winding up the business.

A merchant bank is an organization that underwrites securities for corporations advises such clients on mergers and is involved in the ownership of commercial ventures.

Merchant banker is defined as a person who is engaged in the business of issue management either by making arrangements regarding buying and selling securities or acting as a management consultant, advisor in relation to such issue management.

Merchant banking services help individuals and businesses in the following ways –

• It helps an individual to start a new business.
• It helps businesses to raise finance
• It helps businesses to modernize, expand and restructure their business
• It helps in revival sick business units
• It also helps companies to register, buy and sell shares at the stock exchange

Merchant banking is a type of banking where both commercial banks and investment banks can participate. It is involved in trading of unregistered securities including stock, bonds, and private equities. 

Significance of Merchant Banking

The reason for the very existence of merchant banking is illustrated by the need for specialized investment information and services. An experienced merchant banker knows exactly where strategic assets are located, and which organizations and strategies to ward off. With a merchant banker, a businessman enjoys the benefit of hiring a skilled and knowledgeable partner with a long-term commitment to the business. The real benefit here is that a merchant bank helps to lower the risks for a new firm.

Functions of the Merchant Bank

Corporate Counselling

• Provide guidance in diversification
• Undertaking evaluation of product lines
• Rejuvenation of old companies
• Evaluation of revival prospects

Project Counselling

• Undertaking the general evaluation of projects
• Providing advice on procedures
• Conducting technical feasibility
• Assisting in technical feasibility
• Identification of potential investment avenues

Pre-investment Studies

• Carrying out detailed environmental studies and feasibility studies
• Assisting the client in shortlisting projects with greater return

Capital Restructuring

• Evaluating the capital structure of clients
• Preparing comprehensive memorandum related to Capital issues
• Suggesting alternative capital structures

Credit Syndication

• Estimating the total cost of projects
• Drawing up financial plans
• Preparing loan plans for financial assistance

Issue Management and Underwriting

• Creation of an action plan
• Creation of budget
• Drafting of prospects

Portfolio Management

• Undertaking investments in securities
• Undertaking a review of the portfolio
• Carrying out a critical evaluation of the investment portfolio

Working Capital Finance

• Assessment of working capital
• Providing advice on the issue of debentures

Acceptance Credit and Bill discounting

• Acceptance and the discounting of bills of exchange

Mergers, Amalgamations, and Takeovers

• Identifying organizations with similar characteristics
• Undertaking management audit
• Obtaining approvals from shareholders

Venture Capital

• Financing high risk yet high return projects

Lease Financing

• Providing guidance on the feasibility of leasing as a substitute source for financing capital investment projects.
• Providing guidance on the choice of a favourable rental structure.

Foreign Currency Finance

• Evaluation and assistance in carrying out a study of turnkey projects
• Guiding for exchange risk
• Assisting in operating international bank accounts

Fixed Deposit Broking

• Assisting the company to observe and maintain all rules
• Making arrangement for payment of loans
• Drafting of advertisements for inviting deposits

Mutual Funds

• Collecting public savings
• Investing in a diversified portfolio
• Earning for the investor a steady flow if returns

Relief to Sick Industries

• Rejuvenating old and sick firms
• Creating rehabilitation packages
• Exploring merger and acquisition opportunities

Project Appraisal

• The evaluation of industrial projects on the basis of technology, cost, capacity, etc.

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Retail Banking is different from retail lending. Under Retail banking, the banks have to reach out to customers on both sides of the balance sheet, assets, and liabilities.

When we talk of Assets, we have the credit/loan schemes of the various banks. Bankers today are offering various concessions to attract potential customers. For example, payment of free insurance premium is attached to the vehicle loan. Some banks offer total credit solutions with housing loans. This way, retail banking includes designing of customized products from both sides of the balance sheet. The following channels are effectively utilized by the bankers to activate business from the potential clients:

• Doorstep Banking
• Automated Teller Machines
• Debit Cards and Credit Cards
• Telephone banking
• Internet Banking
• Mobile Banking
• Electronic Funds Transfer/Electronic Clearing System debit

The relationship between the bank and its customers has undergone a big change in recent years. Customers have become more demanding and the banks have to constantly improve their services as well as their products in order to retain customers. The banking market has transformed from a buyers’ market to the sellers’ market. It is the customer who designs the banking products. Banks have to constantly alter their product mix in order to satisfy customer demand.

The product mix offered by banks under retail banking is –

• Savings and Deposit Accounts
• Debit and Credit Cards
• Money Orders
• Wire Transfers
• Personal Loans
• Bank Lockers
• DEMAT Accounts
• Insurance products
• Home Loans, Car Loans, Education Loans, etc.

Customers would not just want to deposit but also gain more by depositing. The age of walk-in deposits is long gone. Rate of interest, time taken to complete processing and the ease of doing business are some of the areas where the banks have to focus more.

Other than savings bank rates, the entire sector of deposits has been deregulated. Products like housing loans, loans on consumer durables which used to be shunned earlier are a haven for profit today.

Retail Lending

Retail lending refers to loans/credit provided by banks to their retail customers.

While the competition has heated up between banks, newer ideas have led to better products. Retail lending offers a higher return, quicker turnaround time, lesser probability of bad loans, and effective monitoring.

Some examples of retail lending are:

• Housing Finance.
• Consumer durable finance.
• Vehicle (for both two-wheelers and four-wheelers) finance
• Personal Loan
• Advance against future lease rentals
• Mortgage Loan
• Pension Loan

The contribution made by the borrower is called the Margin. Margin requirements differ from one type of finance to another and from bank to bank. The interest has been deregulated by the apex bank. Hence, banks have the option to set an interest rate as per their requirements.

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A bank mandate is a written order to the bank, asking it to open an account, name the peon/s authorized to sign the cheques on behalf of the account holder, and provide the specimen signature.

It is also a written request passed by one bank to another. This is to request the second bank to allow a customer to open an account and carry out transactions in a way an existing account holder would.

Power of Attorney

The Power of Attorney is a legal document giving one person (“agent” or “attorney-in-fact”) the power to act on behalf of another person, who is also known as the principal.

The agent can have widespread legal authority or a limited one depends on the power provided to him/her.

Power of Attorney is usually given if the Principal is invalid or medically unable to discharge a set of activities or if he/she is absent to sign legal documents

There are two types of Power of Attorneys:

General Power of attorney: This provides the peon to act on behalf of the principal on general matters like management of the estate, litigations, Sale of property, etc.

Special power of attorney: A special power of attorney is meant for specific tasks. In such cases, the attorney holder has to report to the principal.

Banker’s Lien

A lien is defined as the right to retain goods in possession until the debt is paid.

A banker’s lien is defined as the right of the bank, in the absence of a contract to the contrary, to hold in its possession, the goods, as security. This right is automatic and no agreement is required. Hence, it is called a general lien. A general lien is also called the “implied pledge”. That would mean the bank also has the right to sell.

However, there is a limitation to such a right. The bank can only hold goods and securities which have been got through the normal course of business and not as a trustee or as an agent.

There, however, may be lien over particular goods as per specific contract or even a negative lien. A negative lien is an undertaking of not alienating security without the consent of the bank.

Right of Set-Off

Bank has the right to combine two or more accounts:

However, if one of the accounts is in debit of the customer, with the same name and rights, then the following needs to be taken care of:

• An account in the individual capacity of the customer showing debits balance cannot be combined with one in a fiduciary capacity (i.e. trustee etc.) showing credit balance.
• Accounts really belonging to identical persons, but dissimilar names can be combined. Thus an account of a sole proprietorship concern may be combined with that in his/her name.
• Two accounts, of a solicitor, one in his name and other marked as client account will not be combined.
• Two accounts one belonging to an individual and other jointly with someone, will not be combined.
• The right can be implemented only when the debt is due.
• The right should be implemented after giving due notice unless a contract to the contrary exists.
• The right may be exercised before the garnishee order is made effective

Garnishee Order and Attachment order

When the debtor fails to pay the debt, the creditor has the right to approach the court to issue a garnishee order on the bank of the debtor.

A garnishee order is an order issued under by the court under the provision of order 21 rules 46 of the civil procedure 1908.

The order is divided into two parts:

Order nisi

Order nisi directs the bank to stop payment in the account of the judgment debtor to explain is to why not the deposit of the particular person is attached.

The reason for the same is because the banker’s right to set off takes precedence over the garnishee order and hence the bank too requires to avail the same.

Order Absolute

This is issued later. Through this order the entire balance in the account is attached, but only after the court is dissatisfied with the explanation provided by the bank regarding Order nisi. Also to remember, that an order served to the Head Office of a bank is applicable to all its branches, after a reasonable period in time.

Let us look at the difference between the garnishee order and the Attachment order:

Pertinent to note that:

• Unauthorized or undrawn balance in overdraft cannot be attached in both cases.
• Both the instances apply to debts due or accruing due or repayable at a fixed future date

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In this article we will have a look at the different banking instruments which help us in our banking transactions:

• Pay-in-Slip
• Cheque Book
• Pass Book
• ATM cum Debit Card
• Credit Card

Pay-in-Slip

It is a blank document that has to be filled by the customer whilst depositing Cash or a cheque. The longer part of the pay-in-slip is called the counterfoil. The shorter part is to be kept with the depositor as the proof of deposit.

Cheque Book

It is a book of cheque which is used to either make a payment or a deposit.

“Cheque is an instrument in writing containing an unconditional order, addressed to a banker, signed by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.”

The Negotiable Instruments Act, 1881 defines a cheque as: “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.”

Passbook

A Passbook is a book provided by the bank which helps a customer to keep a record of all his banking transactions. This book has to be updated regularly. It consists of all the transaction history related to a particular account. The first page of the passbook has the credentials of the account holder, as provided by the bank.

ATM cum Debit Card

With greater mobility, ease of banking too has increased manifold. Now, we do not always have to visit a bank to withdraw or deposit money. This can be through ATM kiosks. ATM or Automatic Teller Machine, are cash vending machines. They dispense cash in selected denominations. Some ATMs may even dispense coins.

Most banks have also installed ATMs that can allow the user to deposit cash and a cheque. An ATM is accessed by an ATM cum Debit Card. This ATM cum Debit card is a card that will not only allow cash withdrawal or deposit at an ATM kiosk but also allow the user to make payments, either through online payment gateways or at retail counters. These cards are a handy appendage since it reduces the need to carry cash.

Credit Card

A Credit Card is similar to a debit card but with a major difference. A debit card works on the principle of a direct debit from the account, only when there is cash available in the account.

A credit card, as the name suggests, works on the principle of credit. That is, you can buy now and pay later. Credit card companies levy an annual charge. They also do levy penalties in case of late payment of outstanding balances.

One can think credit card payments to be short term loans. Here, you pay using the credit card issuer’s money and then pay him back with an interest added. Since credit card activities are reported to the credit bureaus, it is imperative for the owner of the card to use it responsibly. Also, responsible credit card usage can lead to a good credit score.

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Corporate banking represents a plethora of banking and financial services provided for domestic and international operations of big local corporates and to the local operations of multinational organizations.

Corporate banking refers to banking products and services that are offered especially to corporate clients such as lending services that could be in the form of a secured or unsecured loan, financing, underwriting, cash management, issuing of stocks and bonds, etc.

Corporate Banking Services

Services of corporate banking are as follows:

• Providing access to commercial banking products, including facilities for working capital like domestic and international trade operations and funding
• Channel financing and overdrafts,
• Letters of guarantee
• Structured solutions for both onshore and offshore operations of organizations
• Term loans
• Domestic and international payments
• Providing Support to client’s international operations, ensuring full consideration of the company’s business and financial needs.

Corporate Clientele

Banks may categorize their corporate clienteles into three sections on the basis of capital invested and the sales volume:

• Large corporations,
• Mid-size companies, and Small
• Medium business Enterprises (SMEs).

Corporate customers can be further segmented into verticals of the industry, such as automobiles, aviation, tourism, etc. Banks develop lasting relationships with their corporate customers as a part of their promotion efforts. In a market so full of competition, building strong relationships with the clients help to retain customers and increase profitability.

The communications and associations between the banks and their corporate clients are influenced by three factors

• the external environment
• the outcome of the interactions
• and the interaction process.

The ‘Partnership Relationship Lifecycle Model’ describes the evolution of the bank-corporate customer relationship, beginning at an early stage where a ‘customer’ shows interest in the bank’s offerings, and growing to become a mutually beneficial ‘partnership relationship’ between the client and the bank.

Corporate Banking Products and Pricing

Banks need to constantly deal with the evolving requirements of their clients through better product development. However, financial products can be easily replicated. The pricing of these banking products has a direct influence on customer acquirement and their retention, in addition to profitability and sustainability.

The pricing is influenced by many factors such as cost, competition, customers, etc. With the advent of deregulation and the instantaneous rise in competition, many of the banks have developed a competitive pricing policy. The Reserve Bank of India has relaxed the pricing mechanism for both asset and liability products. Every bank now has to set its own Benchmark Prime Lending Rate (BPLR) to put a value to its asset products.

Corporate banking products are dispersed mainly through direct sales or the ubiquitous bank branches, enhanced by phone banking and internet banking. Relationship officers are based at several branches of banks from where they make client visits to cultivate relationships and identify fresh business opportunities. Banks attempt to develop an ideal distribution mix in order to accomplish various purposes such as greater customer service, operational efficiency, and profitability. Core Banking Solutions (CBS) — are essential to the real-time management of the transactions that happen through the diverse means of distribution.

Banks have Global Relationship Management teams who try to understand the needs of international customers and create products and services suited to their needs.

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A loan is one of the most profitable instrument of a bank since it helps the bank to increase its earnings and make profits. The efficient management of loans and advances assumes a greater significance as it is also the largest asset for any bank. However, with the tightening of financial regulations and credit norms, increased competition, and the emergence of newer forms of risk, it becomes imperative that the credit functions of the financial establishments are further strengthened. RBI has been continuously working with commercial banks to help them evolve relevant guidelines to meet the demand of a rising market as well as control credit risks.

Classification of loans

Classification of Loans can be done into two types:

• On the basis of activity
• On the basis of purpose

Classification of loans on the basis of activity

• Priority Sector Lending
• Commercial Lending

Priority Sector Lending

Priority Sector lending or Directed credit is one of the types of lending which the Government of India through the RBI has allowed the banks to offer.

The RBI allows the banks to offer loans to certain sectors who, the Central Bank thinks, will not be able to pay the interest at the commercial rates or will not have access to the organized lending market. Small scale industry, small businesses, agricultural activities, and exports fall under this sector. It is also called directed credit. Financing of these priority sectors are done at concessional rates.

Through this, the banks influence the economic development of the country, by subsidizing the business efforts of small businesses and help them flourish.

Commercial Lending

Commercial Lending is the mainstay of Indian Banking.

In the beginning, it was the priority lending that had kept the banks afloat. However, with the evolving economic landscape and rise of income and the widening of the Indian middle class, commercial lending has become the main focus.

Commercial loans are for both short term and long term. They can be further divided into Corporate Loan and Retail Loan based on the type of customer.

Classification of Loans Based on the type of customer

Corporate Loan

These types of loans are provided to corporate houses, proprietorships, partnerships, and HUFs engaged in any legal business activity, with the objective of earning profit.

The loans are disbursed on the basis of:

• The balance Sheet’s strength
• The Cash Cycle
• Products offered by the banks

Balance Sheet’s strength

Balance sheets are audited and the banks try to analyze the profitability of the said entity. This is done to check the ability of the entity to fully utilize the loan as well as be able to pay it back.

Customers who are interested in availing loans need to furnish the balance sheets of their companies along with their application of a request for the loan. The overall line of credit is segmented into various facilities. Each facility has its own limits within the line of credit, though it is dependent on the needs of the customer.

The borrower will then proceed to complete the formalities and complete filling the other documents, as deemed necessary by the bank. The security or title to the security has to be surrendered to the bank and suitable accounts opened. Thereafter, after the formalities are completed the borrower can operate this account within the line of credit.

The cash cycle

A cash cycle is the time taken by the company to convert cash into goods and then sell the goods to earn cash or if provided on credit, retrieve the debt.

The products offered by banks

Banks are awash with financial offerings and the business community is spoilt for choices. The loans are also modeled to cater to the needs of the customer.

Retail Loans

Retail loans are meant for small traders and businesses. It is given to them on strength of their earnings keeping an eye on their returning capacity.

Classification of Loans-Purpose wise

Personal loans

These are also called consumer loans. They vary from medical loans, education loans, loans to buy a refrigerator, vacations, etc. These are personal loans, as in loans meant for individuals as opposed to corporate loans. They are also taken to consolidate debts and the amount is amortized over a fixed time period and a combination of principal and interest is paid. Such loans are either unsecured or secured by the purchase of an asset or consigned by a guarantor.

Unsecured loans are those which are offered based on the credit history of the borrower and his ability to repay the loan. Repayment is ideally done through fixed amount installments over a fixed period of time. They are also called consumer loans.

Loans for purchase of Automobiles and consumer durables

Banks provide a large number of loans to individuals for the purchase of durables and automobiles. The amount of loan is usually dependent on the repayment capacity of the borrower.

The loan provided is equated into Monthly Instalments also called EMI. It is calculated taking into consideration the maximum limit afforded by the customer. The banks look into the following to decide whether the borrower must be given a load or not –

• Latest salary certificate from the employer
• The previous year’s income tax returns

While taking the loan, it is important for the borrower to be aware of the following points:

• To check whether the interest is payable on the entire loan or just the outstanding amount
• Check all the details
• Look out for hidden charges
• The documents need to be read carefully and every clause and statement understood clearly.

Auto Loans: It is a personal loan to buy a car. Most banks offer car loans. It is one of the fastest-selling banking product in the market now. Banks sanction up to 85% of the ex-showroom price. A processing fee is also charged along with some paperwork.

Loan against shares: This is a kind of a liquid guarantee.

Home loan: This is a personal loan for buying a house. This is also one of the fastest-selling banking products as well as one of the most profitable ones.

Education Loans: With the rising cost of education, banks saw an opportunity to finance education for the students who wish to pursue higher education. This also made higher education affordable. This also led to a larger group of individuals attaining skills and join the job market.

Despite scholarships, the number of students were far greater than the available seats. The boom in the banking sector led to the glut in money and hence education became a sector of focus. With this move, the banks were able to create more demand in the education domain as well as become the driver for economic growth.

Both Nationalised as well as private banks offer a variety of schemes which cater to a larger number of students. Most banks start attracting students who clear the national level competitive exams.

The education loans are provided to cover the following:

• The college fee along with the hostel fee
• Expenses related to books, uniform, instruments, etc
• Laboratory fee
• Expenses related to buying a laptop for those pursuing engineering-related courses
• Travel and lodging expenses
• Caution deposit and the refundable deposit
• Costs borne out of any other activity essential to the completion of the course

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The term KYC or Know your customer is used to/for customer identification which involves efforts to identify an individual or an entity by verifying the personal credentials, like sources of funds, the fairness of business and its operations, the nature of the business, personal documents of the customer, like PAN, AADHAR, Birth Certificates, and address proof.

Objectives of the KYC

The primary objective is to cover the bank from future risks. Risks may arise from improper conduct of the customer or an entity, criminal elements taking advantage of the banking facility. With the KYC in place, the bank will be able to create better controls, as well as be vigilant against inappropriate conduct by the account holder and take cognizance as per the legal framework.

A KYC has two parts:

• Identity
• Address

The identity that needs to be verified are:

• Named account holder
• Beneficial owner
• Signatories to an account
• Intermediary parties.

The stages at which the Identification will have to commence:

• At the onset of establishing a banking relationship
• At the insistence of the bank, when it deems fit, based on the conduct of the account

The usual Documents that are required for the identification of the name:

• Passport
• PAN card
• Voter identity card
• Driving license with photograph
• Identity card/Adhaar Card
• A letter from an authorized public authority confirming the identity and residence of the customer to the fulfillment of the branch official sanctioned to open the account
• Authorization/ letter from employer/other banks (subject to the approval of the branch official authorized to open the bank account).

Documents to verify the address are:

• Telephone Bill,
• Bank account Statement
• Electricity bill
• Ration Card
• Letter from employer to the approval of the bank

There may be periodic requests made by the bank for updating the above credentials.

Elements of KYC

KYC basically incorporates the following elements:

• Customer Acceptance Policy
• Procedures for Customer Identification
• Transaction monitoring mechanisms
• Risk Management

Customer Acceptance Policy

• Risk perception is created as per the customer profile and categorized. Based on risk profiling, the acceptance criteria is decided.
• Accept the individual as a customer after verifying the identity as per the laid down Identification of Customer
• No accounts will be allowed to open in the name of Anonymous/fictitious and Benami holders.
• Care needs to be taken that in the process of due diligence, the banking service should not leave out the socially and economically backward sections of the society.

Procedure for Customer identification

A prospective customer is someone who they claim to be. Sufficient information needs to be obtained before the bank is absolutely satisfied with the establishment of the identity. The nature of business and predictable patterns of the transactions, proof of identity and address are some of the information that may be gathered.

Transaction Monitoring Mechanism

The monitoring of the transaction will only take place if the customer falls in the category of the appropriate risk profile.  Special attention is given to complex and unusual transactions. They may be large or belong to a pre-decided pattern. Any transaction effort which does not fit the profile of the customer will be looked into and detailed scrutiny will be undertaken.

After all, the relevant checks have been made and an inappropriate motive has been established, will the bank notify the relevant authorities and the account be placed under PML Act, 2002. The records of such an account will be preserved and kept for further discussion and detailed scrutiny.

Branches will also be responsible for the maintenance of vigilance on any transaction of INR 10 lakhs and more. The branches will also have to be reporting the same to their controlling offices with account statements.  This has to be every fortnight.

 The controlling offices will be further scrutinizing them and if they find merit in the reports will make additional queries to the branch. If the controlling office finds that the transactions are in consonance with the profile, then they would request the branch to close the case. The Branch would then direct the relevant officer to close the report.

Risk Management

The Board of Directors of the bank have to ensure that the KYC procedure is in place and followed diligently. In order to that, the following activities need to be in place:

• Roles and responsibilities need to be effectively defined
• Proper supervision of the management
• Training of the staff
• Effective usage of Systems and Controls
• Segregation of training processes for staff

The rigorous implementation of the KYC policies goes a long way in ensuring a better banking environment. It is also beneficial if the frontline banking staff to understand the efficacy of the KYC policies and the underlying premise for implementing the same.

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