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GNDU Question Paper-2021
Bachelor of Commerce
(B.Com) 5
th
Semester
BANKING SERVICES MANAGEMENT
Time Allowed: Three Hours Max. Marks: 50
Note : Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Explain briefly the various tangible and intangible services provided in the banking
sector.
2. What are the deficiencies in the provision of customer services in banks? How can these
be improved? Discuss in detail.
SECTION-B
3. What are loans and advances? Explain the principles for sound lending.
4. Write a brief note on different forms of loans advanced by banks.
SECTION-C
5. Discuss the regulatory framework for governance of banks in India.
6. What are Negotiable Instruments? Explain their types.
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SECTION-D
7. What is Internet Banking? Describe its merits and demerits
8. Discuss the implementation status of banking sector reforms in India.
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GNDU Answer Paper-2021
Bachelor of Commerce
(B.Com) 5
th
Semester
BANKING SERVICES MANAGEMENT
Time Allowed: Three Hours Max. Marks: 50
Note : Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Explain briefly the various tangible and intangible services provided in the banking
sector.
Ans: The Story of a Bank Beyond Bricks and Mortar
Imagine a young student named Riya who just got her first job. She receives her salary in
cash from her employer. Riya wonders, “Should I keep this money at home, under my
mattress, or is there a smarter way to keep it safe?” That’s when she remembers her father
always saying:
“Beta, a bank is not just a building with money counters. It’s like a friend who takes care of
your money, guides you, and even helps when you are in trouble.”
Curious, Riya goes to the nearest branch of a bank. The moment she enters, she notices two
kinds of services—some that she can see and touch (tangible) and some that she can feel
but not touch (intangible). Together, they form the backbone of the banking world.
Let’s walk with Riya as she discovers them.
1. Tangible Services of Banks
Tangible means things that can be touched, seen, or physically experienced. In banks,
these are the services that give a physical form to money management.
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(a) Accepting Deposits
Riya opens a Savings Account. The passbook, debit card, cheque book, and even the ATM
machine she sees are all tangible services.
Diagram:
Money (Cash/Cheque) → Bank Account → Passbook/ATM Card
(b) Providing Loans
When Riya dreams of buying her first scooter, the bank officer tells her about personal
loans, car loans, and education loans. The agreement papers, sanction letters, and EMI
schedules are tangible evidence of this service.
(c) ATM & Branch Facilities
Riya also learns she can withdraw cash from an ATM machine anytime. The card in her
hand, the receipt that comes out, the currency notes—all are tangible services.
(d) Locker Facility
Her mother, who has precious jewellery, uses the bank locker facility. This is a very visible,
physical service that ensures security.
(e) Payment Instruments
Cheques, demand drafts (DD), pay orders, and even printed account statements are classic
tangible services. These tools make transactions real and verifiable.
2. Intangible Services of Banks
Now comes the magical part—services that cannot be touched, but are deeply felt. These
are invisible benefits that build trust and satisfaction.
(a) Trust and Security
When Riya deposits her salary, she doesn’t actually “see” her money being protected, but
she feels secure knowing the bank is safeguarding it. That feeling of trust is an intangible
service.
(b) Convenience
Banking today is not limited to standing in long queues. With mobile apps, internet
banking, and UPI payments, customers enjoy the comfort of banking from their homes. This
invisible convenience factor is priceless.
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Diagram:
Mobile Banking App → Instant Payments → Customer Satisfaction
(c) Financial Advice
The bank manager explains to Riya how she can start a Fixed Deposit (FD) to earn interest
and also invest in mutual funds. This guidance and advisory role cannot be touched but is
extremely valuable.
(d) Customer Service & Relationship
Whenever Riya faces a problem with online transactions, the customer support team helps
her. The politeness, respect, and problem-solving attitude are intangible yet powerful
services.
(e) Reputation & Goodwill
People often choose banks based on their image and reputation. For example, if a bank is
known for quick loans or secure services, customers automatically trust it. This brand value
is intangible.
3. Linking Tangible and Intangible Together
Here’s how tangible and intangible services go hand in hand:
• Tangible: Debit Card
• Intangible: The confidence that you can use it anywhere safely.
• Tangible: Bank Locker
• Intangible: Peace of mind that your jewellery is protected.
• Tangible: Loan documents
• Intangible: The trust that the bank will support your dreams.
Diagram:
Tangible Service + Intangible Benefit = Complete Banking Experience
4. Why Both are Important
1. If only tangibles existed → Banks would just be money-keeping shops. No emotional
connection, no trust.
2. If only intangibles existed → Customers wouldn’t see proof of service. They need
physical assurance.
3. Combination makes banks reliable. This balance helps banks build strong, lifelong
relationships with customers.
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5. Extended Examples
• Digital Banking: UPI apps like Google Pay or PhonePe (intangible: convenience) +
SMS confirmation (tangible: proof).
• Loans: Loan agreement paper (tangible) + hope of fulfilling dreams (intangible).
• Deposits: Passbook/FD receipt (tangible) + assurance of future savings (intangible).
6. Visual Summary
Tangible vs Intangible Services in Banking
Tangible Services
Intangible Services
Passbook, Cheque book, ATM card
Trust & Security
Loan agreements, receipts
Customer convenience (online banking)
Lockers, Branches, ATMs
Financial advice & guidance
Demand drafts, pay orders
Reputation & goodwill
Conclusion
As Riya walks out of the bank, she smiles. She now understands that banking is not just
about counting notes or signing forms. It is a beautiful mix of what you can see (tangible)
and what you can feel (intangible).
The passbook in her hand reassures her about her savings, while the invisible trust in her
heart assures her that her dreams are safe with the bank.
That is the real magic of the banking sector—it is both visible and invisible, physical and
emotional, practical and psychological.
2. What are the deficiencies in the provision of customer services in banks? How can these
be improved? Discuss in detail.
Ans: Understanding Customer Service Deficiencies in Banks – A Story Approach
Imagine walking into a bank on a busy Monday morning. You are holding your account
passbook and hoping to deposit some money quickly. But as soon as you step inside, you
are greeted by long queues, confused staff, and forms that seem to never end. This is a
common scene in many banks, and it highlights the deficiencies in customer service that
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can frustrate customers. Let’s break this down, understand why these deficiencies exist, and
explore ways to improve them.
1. Long Waiting Time – The Biggest Frustration
One of the most common complaints from bank customers is long waiting time. People
often have to wait in line for 20–30 minutes for simple services like depositing cash or
getting account statements.
Why does this happen?
• Limited number of staff for peak hours
• Inefficient queue management systems
• Complex processes that require multiple approvals
Impact on customers:
• Frustration and stress
• Loss of trust in the bank
• Some customers may switch to competitors
How to improve it:
• Banks can introduce digital queue management systems, where customers take a
token via an app and get notified when it’s their turn.
• Staff allocation during peak hours can be optimized using historical data of
customer inflow.
• Introducing self-service kiosks for routine transactions can reduce the burden on
staff.
Diagram 1: Example of Customer Waiting Time Reduction
Before:
Customer -> Long Queue -> Wait 30 min -> Service
After:
Customer -> Take Digital Token -> Wait Comfortably -> Service
2. Lack of Personalized Attention
Another deficiency is the lack of personalized service. Often, bank staff follow a routine,
treating every customer in the same way without considering individual needs.
Example:
A senior citizen visiting the bank might need extra guidance for filling forms or
understanding online banking, but they are often rushed.
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Why it happens:
• High workload for staff
• Lack of training on interpersonal skills
• Emphasis on completing tasks rather than building relationships
Impact on customers:
• Customers feel undervalued
• Decrease in loyalty towards the bank
Improvement Strategies:
• Staff training programs focused on soft skills, empathy, and communication
• Relationship managers for premium or long-term customers
• Customized banking solutions, e.g., SMS or email alerts tailored to customer
preferences
Diagram 2: Personalized Service Flow
Customer Requirement -> Bank Staff Understanding -> Tailored Solution -> Customer
Satisfaction
3. Poor Communication and Transparency
Sometimes, banks fail to communicate clearly with their customers. Hidden charges,
confusing account terms, and unclear policies lead to dissatisfaction.
Example:
A customer is charged an unexpected fee for ATM withdrawal or fund transfer. If not
explained properly, this feels unfair.
Why it happens:
• Staff may not be updated on new policies
• Banks use complex terminology that common customers find hard to understand
• Lack of effective communication channels
Impact:
• Customers feel misled
• Increased complaints and disputes
• Damage to bank’s reputation
Solutions:
• Simplify banking language on forms and documents
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• Use digital communication tools like apps, emails, and chatbots for clear
notifications
• Regularly update staff about policy changes and ensure they can explain them
4. Inadequate Technological Infrastructure
In today’s digital age, banking is not just about visiting a branch; online banking, ATMs, and
mobile apps are equally important. But many banks face deficiencies here:
Examples:
• Mobile banking apps crash frequently
• ATMs run out of cash or are out of service
• Slow internet banking services
Impact:
• Customers get frustrated and may stop using digital channels
• Increased footfall in branches, creating more waiting time
Improvements:
• Regular system upgrades and maintenance
• Invest in secure and fast digital platforms
• Provide 24/7 customer support for digital services
5. Inadequate Feedback Mechanisms
Many banks do not have an effective system for collecting customer feedback or addressing
complaints promptly.
Example:
A customer complains about a delayed fund transfer, but the response takes days or weeks.
Impact:
• Customers lose faith in bank services
• Negative word-of-mouth damages reputation
Solutions:
• Implement real-time feedback systems via apps or kiosks
• Quick resolution teams for complaints
• Analyze feedback to identify recurring issues and improve services
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6. Staff Attitude and Behavior
Even if processes are efficient, a rude or indifferent staff can ruin the customer experience.
Example:
A bank employee refuses to help a confused customer, telling them “It’s not my job.”
Impact:
• Customers feel disrespected
• Creates a negative impression of the bank
Improvement Strategies:
• Behavioral training programs for staff
• Incentives for excellent customer service
• Promote a customer-first culture in all branches
7. Physical Infrastructure Deficiencies
Sometimes, the bank’s physical layout itself causes service issues:
• Poor seating arrangements
• Unclear signage
• Inaccessible counters for elderly or disabled customers
Solution:
• Redesign branches for comfort and accessibility
• Digital signboards for clear directions
• Priority counters for senior citizens and differently-abled individuals
Summary of Deficiencies and Improvements
Deficiency
Improvement Strategy
Long waiting time
Digital queues, self-service kiosks, staff allocation
Lack of personalized attention
Relationship managers, soft skill training
Poor communication
Simplified language, proactive updates, staff training
Technological issues
App upgrades, ATM maintenance, 24/7 support
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Deficiency
Improvement Strategy
Feedback issues
Real-time feedback, complaint resolution teams
Staff attitude
Behavioral training, incentives, customer-first culture
Physical infrastructure
Branch redesign, accessible counters, clear signage
Conclusion – Turning Banks into Customer-Friendly Spaces
Customer service is like the heart of a bank. Without it, the bank may still function, but
customers feel neglected. By addressing these deficiencies—through technology, training,
communication, and infrastructure—banks can transform themselves into customer-friendly
institutions.
Picture a bank where customers are greeted warmly, transactions are quick, problems are
solved efficiently, and digital services are seamless. This is not just a dream; it is achievable
with a customer-centric mindset.
In short, improving bank customer service is not just about reducing complaints; it is about
building trust, loyalty, and a strong reputation, which ultimately leads to long-term success
for the bank.
SECTION-B
3. What are loans and advances? Explain the principles for sound lending.
Ans: A Fresh Beginning: The Bank Manager’s Dilemma
Picture this: Mr. Mehra, a seasoned bank manager, sits at his desk on a Monday morning.
Two customers walk in — one wants ₹50 lakh to expand his factory, the other wants ₹5 lakh
to buy raw materials for his shop.
Mr. Mehra knows the bank’s money is not his own — it belongs to depositors. If he lends
carelessly and the borrowers fail to repay, the bank’s reputation and stability will suffer. So,
before approving any request, he must understand what kind of facility the customer needs
(loan or advance) and apply the principles of sound lending.
Part 1: Meaning of Loans and Advances
1. Loans
• Definition: A loan is a sum of money lent by a bank to a borrower for a specific
purpose, repayable after a fixed period, usually with interest.
• Key Features:
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o Disbursed in lump sum.
o Fixed repayment schedule (monthly, quarterly, etc.).
o Interest charged on the entire loan amount from the date of disbursement.
o Usually for long-term or medium-term needs.
Example: Mr. Mehra approves ₹50 lakh for the factory owner, repayable over 5 years —
that’s a loan.
2. Advances
• Definition: Advances are short-term credit facilities granted by banks to meet
day-to-day working capital needs of a business.
• Key Features:
o Usually for less than one year.
o May be given as cash credit, overdraft, or bills discounting.
o Interest charged only on the amount actually used.
o Flexible withdrawals and repayments.
Example: Mr. Mehra sanctions ₹5 lakh as a cash credit limit for the shopkeeper to buy raw
materials — that’s an advance.
Diagram – Loans vs Advances
Loans:
- Lump sum
- Long/medium term
- Interest on full amount
- Fixed repayment
Advances:
- Short term
- Flexible withdrawals
- Interest on amount used
- For working capital
Part 2: Types of Loans and Advances
Loans
• Term Loans – For fixed assets like machinery, repayable over years.
• Demand Loans – Repayable on demand by the bank.
• Secured Loans – Backed by collateral.
• Unsecured Loans – Based on borrower’s creditworthiness.
Advances
• Cash Credit – Withdrawals up to a sanctioned limit against security.
• Overdraft – Drawing more than the account balance, up to a limit.
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• Bills Discounting – Bank buys bills of exchange before maturity at a discount.
Part 3: Principles for Sound Lending
Mr. Mehra knows that lending is both an art and a science. Banks follow certain principles
to ensure loans and advances are safe, profitable, and beneficial to the economy.
1. Safety
• Meaning: The bank must ensure the borrower will repay the loan with interest.
• How: Assess creditworthiness, financial statements, repayment capacity.
• Example: Lending to a stable, profitable company is safer than to a risky start-up
without a plan.
2. Liquidity
• Meaning: Loans should be recoverable quickly when needed, so the bank can meet
withdrawal demands of depositors.
• How: Prefer short-term loans or loans with easily realizable security.
• Example: Advances against government securities are highly liquid.
3. Purpose
• Meaning: The loan should be for a productive and legitimate purpose.
• How: Verify end-use of funds.
• Example: Financing for buying machinery is productive; speculative stock market
bets are risky.
4. Profitability
• Meaning: Lending should earn sufficient interest to cover costs and provide profit.
• How: Set interest rates based on risk and market conditions.
• Example: Higher rates for unsecured loans to compensate for risk.
5. Security
• Meaning: Loans should be backed by adequate collateral to reduce risk.
• How: Accept assets like property, shares, fixed deposits as security.
• Example: A housing loan secured by the house itself.
6. Diversification
• Meaning: Spread loans across sectors and borrowers to avoid concentration risk.
• How: Avoid lending too much to one industry or region.
• Example: If the textile industry faces a slump, diversified lending protects the bank.
7. National Interest
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• Meaning: Lending should support economic development and align with
government priorities.
• How: Finance priority sectors like agriculture, small industries, renewable energy.
• Example: Loans to farmers under government schemes.
Diagram – Principles of Sound Lending
Safety
Liquidity
Purpose
Profitability
Security
Diversification
National Interest
Part 4: Applying the Principles – Back to Mr. Mehra
• Factory Owner’s Loan:
o Safety: Strong financials, good repayment history.
o Liquidity: Medium-term, but secured by factory property.
o Purpose: Expansion — productive.
o Profitability: Interest rate covers risk.
o Security: Mortgage of property.
o Diversification: Manufacturing sector — fits portfolio.
o National Interest: Supports industrial growth.
• Shopkeeper’s Advance:
o Safety: Regular customer, steady sales.
o Liquidity: Short-term, recoverable quickly.
o Purpose: Working capital — productive.
o Profitability: Interest on used amount.
o Security: Stock pledged.
o Diversification: Retail sector — balances portfolio.
o National Interest: Supports small business.
Part 5: Why Principles Matter
Without these principles:
• Banks could face bad debts.
• Depositors’ money would be at risk.
• The economy could suffer from misallocation of funds.
With these principles:
• Banks remain profitable and stable.
• Borrowers get funds for productive use.
• The economy grows sustainably.
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Part 6: Real-Life Example
In 2008, during the global financial crisis, many banks suffered huge losses because they
ignored safety and purpose — lending heavily for speculative real estate without proper
checks. Banks that stuck to sound lending principles survived better.
Final Story Recap
In our story:
• Loans are like giving someone a full water tank to use over time — fixed repayment,
interest on the whole tank.
• Advances are like giving access to a tap — they take only what they need, interest on
what’s used.
• Principles of sound lending are the rules Mr. Mehra follows to ensure the bank’s
money is safe, liquid, profitable, and used for the right purposes — while serving
both the customer and the nation.
4. Write a brief note on different forms of loans advanced by banks.
Ans: A Fresh Beginning: A Day Inside Sunrise Bank
It’s a bright Monday morning at Sunrise Bank. You walk in and see a line of customers —
each with a different need:
• A young couple buying their first home
• A shopkeeper needing funds for stock
• A farmer preparing for the sowing season
• A business owner importing machinery
• A student heading abroad for studies
The bank manager smiles and says:
“Each of them needs money, but not in the same way. That’s why we have different forms
of loans.”
Part 1: Meaning of Loans
A loan is money lent by a bank to a borrower for a specific purpose, under an agreement to
repay with interest over a set period. But the form of the loan — how it’s structured,
disbursed, and repaid — depends on the borrower’s needs.
Diagram – Bank Lending Overview
Code
Customer Need → Bank Assessment → Suitable Loan Form → Disbursement → Repayment
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Part 2: Different Forms of Loans Advanced by Banks
Let’s meet each “character” in our bank story.
1. Term Loans
• Meaning: Lump-sum loans repayable over a fixed period in instalments.
• Purpose: Purchase of fixed assets like machinery, buildings, vehicles.
• Tenure: Short-term (up to 3 years), medium-term (3–5 years), long-term (5+ years).
• Example: The business owner buying new machinery.
• Features:
o Fixed repayment schedule.
o Interest charged on the full amount from disbursement.
2. Demand Loans
• Meaning: Loans repayable on demand by the bank.
• Purpose: Short-term needs, often secured by goods or documents.
• Example: A trader pledging goods to get immediate funds.
• Features:
o No fixed repayment schedule — bank can recall anytime.
o Interest charged until repayment.
3. Overdraft Facility
• Meaning: Permission to withdraw more than the balance in a current account, up to
a limit.
• Purpose: Meet short-term cash flow gaps.
• Example: The shopkeeper covering supplier payments before customer receipts
arrive.
• Features:
o Interest charged only on the overdrawn amount.
o Flexible — repay and borrow again within the limit.
4. Cash Credit
• Meaning: A working capital facility where the borrower can withdraw funds up to a
sanctioned limit against security (like stock or receivables).
• Purpose: Day-to-day business operations.
• Example: A manufacturer buying raw materials.
• Features:
o Interest charged on the amount actually used.
o Renewable annually.
5. Bills Discounting
• Meaning: Bank buys a bill of exchange (customer’s receivable) before maturity at a
discount, giving immediate funds.
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• Purpose: Improve liquidity for businesses waiting for customer payments.
• Example: An exporter selling goods on credit and discounting the bill with the bank.
• Features:
o Bank collects full amount from the debtor at maturity.
o Discount is the bank’s income.
6. Housing Loans
• Meaning: Long-term loans for purchase, construction, or renovation of residential
property.
• Purpose: Home ownership.
• Example: The young couple buying their first flat.
• Features:
o Secured by mortgage of the property.
o Repayable in monthly instalments over 10–30 years.
7. Agricultural Loans
• Meaning: Loans to farmers for crop production, equipment purchase, irrigation, etc.
• Purpose: Support agriculture and rural development.
• Example: The farmer buying seeds and fertilizer.
• Features:
o May be short-term (seasonal) or long-term (equipment).
o Often at concessional interest rates.
8. Education Loans
• Meaning: Loans to students for higher studies in India or abroad.
• Purpose: Cover tuition, living expenses, travel.
• Example: The student heading to the UK for a Master’s degree.
• Features:
o Repayment usually starts after course completion.
o May have government interest subsidies.
9. Consumer Loans / Personal Loans
• Meaning: Unsecured loans for personal needs — travel, medical expenses,
weddings.
• Purpose: Non-business personal expenses.
• Example: A family taking a loan for a wedding.
• Features:
o Fixed EMIs.
o Higher interest due to no collateral.
10. Syndicated Loans
• Meaning: Large loans provided jointly by multiple banks to one borrower.
• Purpose: Fund massive projects like infrastructure.
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• Example: Financing a new airport.
• Features:
o One lead bank coordinates.
o Risk shared among lenders.
Diagram – Forms of Loans
Loans
├── Term Loans
├── Demand Loans
├── Overdraft
├── Cash Credit
├── Bills Discounting
├── Housing Loans
├── Agricultural Loans
├── Education Loans
├── Personal Loans
└── Syndicated Loans
Part 3: How Banks Decide the Form of Loan
The bank considers:
• Purpose of funds (asset purchase, working capital, personal use)
• Duration needed
• Security available
• Repayment capacity
• Risk level
Example Decision Flow:
1. Need for long-term asset → Term Loan or Housing Loan.
2. Need for short-term working capital → Cash Credit or Overdraft.
3. Need for immediate liquidity from receivables → Bills Discounting.
Part 4: Why Different Forms Exist
• Flexibility: Different borrowers have different needs.
• Risk Management: Matching loan type to purpose reduces default risk.
• Profitability: Banks can price loans according to risk and tenure.
• Economic Support: Specialized loans (agriculture, education) promote development.
Part 5: Real-Life Story Recap
In Sunrise Bank:
• The business owner got a Term Loan for machinery.
• The shopkeeper used Overdraft for stock purchases.
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• The farmer took an Agricultural Loan for seeds.
• The student secured an Education Loan for studies abroad.
• The young couple got a Housing Loan for their dream home.
Each loan was tailored to the borrower’s purpose, repayment ability, and security —
ensuring both the bank’s safety and the customer’s success.
Final Exam-Friendly Summary Table
Loan Form
Purpose
Tenure
Key Feature
Term Loan
Asset purchase
1–15 years
Lump sum, fixed EMI
Demand Loan
Short-term needs
On demand
Repayable anytime
Overdraft
Cash flow gaps
1 year (renew)
Interest on overdrawn amt
Cash Credit
Working capital
1 year (renew)
Interest on used amt
Bills Discounting
Liquidity from receivables
Short term
Bank collects at maturity
Housing Loan
Home purchase/construction
10–30 years
Secured by property
Agricultural Loan
Farming needs
Seasonal/long
Concessional rates
Education Loan
Higher studies
Course + grace
Repay after study
Personal Loan
Personal expenses
1–5 years
Unsecured
Syndicated Loan
Large projects
Long term
Multiple banks share risk
SECTION-C
5. Discuss the regulatory framework for governance of banks in India.
Ans: A Fresh Beginning: The City of Banks
Imagine India’s banking sector as a vast, bustling city. In this city:
• Banks are the buildings where money lives and moves.
• Customers are the citizens who depend on these buildings for safety and services.
• And above all, there’s a city council — a network of regulators, laws, and guidelines
— ensuring that every building is strong, fair, and trustworthy.
This “city council” is what we call the regulatory framework for governance of banks.
Part 1: Why Banks Need a Regulatory Framework
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Banks deal with public money. If a bank fails due to mismanagement or fraud, thousands (or
millions) of people can lose their savings. So, governance in banks isn’t just about internal
discipline — it’s about public trust and economic stability.
Objectives of the framework:
1. Ensure financial stability.
2. Protect depositors’ interests.
3. Promote transparency and accountability.
4. Align banking practices with national economic goals.
5. Prevent fraud, mismanagement, and risky practices.
Part 2: The Pillars of Bank Governance in India
The governance of banks in India rests on three main pillars:
1. Regulatory Authorities
2. Legislative Framework
3. Internal Governance Mechanisms
Let’s explore each.
1. Regulatory Authorities
a) Reserve Bank of India (RBI)
• Role: Apex regulator of the banking system.
• Powers:
o Issues banking licenses.
o Regulates capital adequacy, liquidity, and lending norms.
o Conducts inspections and audits.
o Issues guidelines on corporate governance.
• Example: RBI’s “Fit and Proper” criteria for bank directors.
b) Ministry of Finance (MoF)
• Role: Oversees public sector banks (PSBs) and formulates banking policy.
• Example: Approves capital infusion in PSBs.
c) Securities and Exchange Board of India (SEBI)
• Role: Regulates listed banks in matters of disclosure, investor protection, and
corporate governance (for banks listed on stock exchanges).
d) Other Bodies
• Bank Boards Bureau (BBB): Recommends appointments of top executives in PSBs.
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• National Bank for Agriculture and Rural Development (NABARD): Regulates
cooperative and regional rural banks in rural credit matters.
Diagram – Regulatory Authorities
Ministry of Finance
|
RBI --------- SEBI -------- NABARD
|
Bank Boards Bureau
2. Legislative Framework
The laws governing banks form the legal backbone of governance.
a) Banking Regulation Act, 1949
• Main law regulating all banks in India.
• Covers licensing, management, accounts, audits, and winding up.
b) Reserve Bank of India Act, 1934
• Establishes RBI and defines its powers.
c) Companies Act, 2013
• Governs corporate structure and governance for banks incorporated as companies.
d) Other Relevant Laws
• Negotiable Instruments Act, 1881 – Governs cheques, promissory notes.
• SARFAESI Act, 2002 – Empowers banks to recover NPAs without court intervention.
• Prevention of Money Laundering Act (PMLA), 2002 – Anti-money laundering
compliance.
3. Internal Governance Mechanisms
Even with external regulators, banks must have strong internal systems.
a) Board of Directors
• Sets strategic direction.
• Ensures compliance with laws and RBI guidelines.
• Includes independent directors for unbiased oversight.
b) Committees of the Board
• Audit Committee – Oversees financial reporting and internal controls.
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• Risk Management Committee – Monitors credit, market, and operational risks.
• Nomination & Remuneration Committee – Appoints and evaluates top
management.
c) Internal Controls
• Internal audits, compliance checks, whistleblower mechanisms.
Part 3: Key Governance Guidelines by RBI
RBI issues detailed governance norms, such as:
• Fit and Proper Criteria for directors.
• Tenure and Age Limits for top executives.
• Disclosure Requirements for transparency.
• Risk Management Frameworks for credit, market, and operational risks.
• Prompt Corrective Action (PCA) framework for banks under stress.
Part 4: How the Framework Works in Practice
Let’s revisit our “City of Banks” analogy.
• RBI is like the city’s mayor — setting rules, inspecting buildings, and ensuring safety.
• MoF is the city planner — deciding where new banks can be built and how they fit
into the economy.
• SEBI is the public auditor — ensuring listed banks are honest with their investors.
• Bank Boards Bureau is the HR department — picking the right leaders.
• Laws are the building codes — every bank must follow them.
• Internal governance is the self-discipline of each building — keeping it clean, safe,
and functional.
Diagram – Governance Flow
External Oversight:
RBI + MoF + SEBI + NABARD + BBB
↓
Legal Framework:
Banking Regulation Act + RBI Act + Companies Act + Others
↓
Internal Governance:
Board of Directors + Committees + Controls
↓
Outcome:
Safe, Transparent, and Stable Banking System
Part 5: Challenges in Bank Governance
Even with a strong framework, challenges remain:
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1. Rising NPAs – Poor lending decisions can still slip through.
2. Political Interference – Especially in PSBs.
3. Rapid Technological Change – Cybersecurity risks.
4. Global Integration – Exposure to international crises.
5. Balancing Regulation and Innovation – Too much control can stifle growth.
Part 6: Recent Reforms and Trends
• Indradhanush Plan – For PSB reforms (appointments, capital, de-stressing).
• Merger of PSBs – To create stronger banks.
• Enhanced Disclosure Norms – For transparency.
• Strengthened PCA Framework – Early intervention for weak banks.
• Digital Banking Guidelines – For fintech integration.
Part 7: Why This Framework Matters
Without this framework:
• Banks could take excessive risks.
• Depositors’ money would be unsafe.
• The economy could face instability.
With it:
• Banks operate transparently.
• Risks are monitored and managed.
• Public trust in the banking system remains strong.
Final Story Recap
In the “City of Banks”:
• The regulators are the guardians.
• The laws are the rules of the city.
• The internal governance is the discipline of each building.
• Together, they ensure that the city thrives — safe for its citizens (depositors),
attractive to investors, and strong enough to weather storms.
6. What are Negotiable Instruments? Explain their types.
Ans: A Fresh Beginning: The Merchant’s Promise
Centuries ago, in a bustling Indian port city, a spice merchant named Aarav was preparing to
send a shipment to a trader in another town. Carrying bags of gold coins for payment was
risky — thieves, storms, and accidents could wipe out the fortune.
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Instead, the trader handed Aarav a written promise:
“Present this paper to my banker in Surat, and you will receive the agreed payment.”
This simple piece of paper — transferable, payable to whoever held it — was the ancestor of
what we now call a Negotiable Instrument.
Part 1: Meaning of Negotiable Instruments
Definition (as per Negotiable Instruments Act, 1881): A Negotiable Instrument is a written
document guaranteeing the payment of a specific amount of money, either on demand or
at a set time, with the payer named on the document.
Key Features
1. Freely Transferable – Can be passed from one person to another by delivery or
endorsement.
2. Title of Holder – The person who acquires it in good faith gets a clear title, free from
defects.
3. Written and Signed – Must be in writing and signed by the maker/drawer.
4. Certain Amount – Specifies a definite sum of money.
5. Payable on Demand or at a Future Date – Time of payment is fixed or determinable.
Part 2: Importance in Modern Banking and Trade
• Safety – Avoids carrying large sums of cash.
• Convenience – Easy to transfer and encash.
• Credit Facility – Enables trade on credit terms.
• Legal Protection – Governed by law, ensuring enforceability.
Part 3: Types of Negotiable Instruments
The Negotiable Instruments Act, 1881, recognizes three main types:
1. Promissory Note
2. Bill of Exchange
3. Cheque
Let’s meet each one in our story.
1. Promissory Note
Definition: A promissory note is a written, unconditional promise made by one person (the
maker) to another (the payee) to pay a certain sum of money, either on demand or at a
fixed future date.
Example in Story: Aarav borrows ₹50,000 from his friend Rohan. He writes:
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“I promise to pay Rohan ₹50,000 on 1st December 2025.” Signed: Aarav.
Key Features:
• In writing.
• Contains an unconditional promise to pay.
• Signed by the maker.
• Payable to a certain person or order.
• Amount and date certain.
2. Bill of Exchange
Definition: A bill of exchange is a written, unconditional order by one person (the drawer)
to another (the drawee) to pay a certain sum to a third person (the payee) or to the bearer,
on demand or at a fixed future date.
Example in Story: Aarav sells goods worth ₹1,00,000 to Meera. He draws a bill on Meera
ordering her to pay the amount to his banker after 90 days. Meera accepts the bill by
signing it.
Key Features:
• In writing.
• Contains an unconditional order to pay.
• Signed by the drawer.
• Accepted by the drawee.
• Payable to a certain person or bearer.
3. Cheque
Definition: A cheque is a bill of exchange drawn on a specified banker and payable on
demand.
Example in Story: Meera writes a cheque to Aarav for ₹1,00,000, payable immediately.
Key Features:
• Always drawn on a bank.
• Payable on demand.
• No acceptance required.
• Can be bearer, order, or crossed.
Types of Cheques:
1. Bearer Cheque – Payable to whoever presents it.
2. Order Cheque – Payable to a specific person.
3. Crossed Cheque – Can only be deposited into a bank account.
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Part 4: Other Negotiable Instruments (by usage)
While the Act specifies three, in practice, other instruments are treated as negotiable by
custom:
• Treasury Bills
• Dividend Warrants
• Bank Drafts
• Postal Orders
Part 5: Differences Between the Three Main Types
Feature
Promissory Note
Bill of Exchange
Cheque
Nature
Promise to pay
Order to pay
Order to pay
Parties
2 (Maker, Payee)
3 (Drawer, Drawee,
Payee)
3 (Drawer, Drawee Bank,
Payee)
Acceptance
Not required
Required from drawee
Not required
Payable
On demand/future
date
On demand/future date
On demand only
Drawn on
Any person
Any person
Bank only
Part 6: Legal Protection and Transfer
• Endorsement: Signing on the back to transfer ownership.
• Delivery: Physical handover of the instrument.
• Holder in Due Course: A person who acquires the instrument in good faith, for value,
before maturity — gets a clear title.
Part 7: Why They’re Still Relevant Today
Even in the age of digital payments:
• Cheques remain important for legal and formal transactions.
• Bills of exchange are used in trade finance.
• Promissory notes are common in lending agreements.
Final Story Recap
In our merchant’s journey:
• Promissory Note was Aarav’s personal promise to repay Rohan.
• Bill of Exchange was his order to Meera to pay his banker.
• Cheque was Meera’s instruction to her bank to pay Aarav.
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These instruments made trade safer, faster, and more reliable — and centuries later, they
still form the backbone of many financial transactions.
SECTION-D
7. What is Internet Banking? Describe its merits and demerits
Ans: A Fresh Beginning: The Bank That Fits in Your Pocket
It’s a Saturday morning. Ananya, a young entrepreneur, is sipping coffee at home. She needs
to transfer money to a supplier, check her account balance, and pay her electricity bill. In
the past, this would have meant:
• Dressing up
• Travelling to the bank
• Standing in queues
• Filling out forms
But today, she simply opens her laptop, logs into her bank’s website, and in five minutes, all
her tasks are done — without leaving her sofa.
This convenience is the magic of Internet Banking.
Part 1: Meaning of Internet Banking
Definition: Internet Banking (also called Online Banking or E-Banking) is a system that
allows customers to conduct financial transactions over the internet, using a bank’s secure
website or mobile application, without visiting a physical branch.
Key Features
• 24×7 Access – Available anytime, anywhere.
• Multiple Services – Fund transfers, bill payments, account management, loan
applications, etc.
• Secure Login – Protected by passwords, OTPs, and encryption.
• Paperless Transactions – No physical forms required.
Diagram – Internet Banking Concept
Code
Customer Device → Secure Bank Website/App → Bank’s Server → Transaction Processing
Part 2: How Internet Banking Works
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1. Registration – Customer applies for internet banking and gets a user ID and
password.
2. Login – Access via bank’s official website or app.
3. Authentication – Security checks like OTP (One-Time Password) or biometric
verification.
4. Transaction – Customer selects service (transfer funds, pay bills, etc.).
5. Confirmation – Bank processes the request and provides a digital receipt.
Part 3: Services Offered Through Internet Banking
• Fund Transfers – NEFT, RTGS, IMPS, UPI.
• Bill Payments – Electricity, water, mobile recharge.
• Account Services – Check balance, download statements.
• Investment Services – Buy/sell mutual funds, fixed deposits.
• Loan Services – Apply for loans, check EMI schedules.
• Other Requests – Cheque book request, stop payment instructions.
Part 4: Merits of Internet Banking
Let’s go back to Ananya’s story — here’s why she loves internet banking.
1. Convenience
• Anytime, Anywhere – No need to visit the branch.
• Example: Paying bills at midnight or transferring funds while travelling.
2. Time-Saving
• Transactions take minutes instead of hours.
• Example: Instant fund transfer to a supplier instead of waiting for cheque clearance.
3. Cost-Effective
• Saves travel costs and reduces bank’s operational expenses.
• Many banks offer lower fees for online transactions.
4. Wide Range of Services
• From fund transfers to investments — all in one place.
• Example: Opening a fixed deposit online without paperwork.
5. Real-Time Access
• Instant updates on account balance and transactions.
• Example: Knowing immediately if a payment has been credited.
6. Environment-Friendly
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• Paperless transactions reduce environmental impact.
Part 5: Demerits of Internet Banking
But Ananya also knows there are risks and limitations.
1. Security Risks
• Threats like phishing, hacking, and malware.
• Example: Fraudulent emails tricking customers into revealing passwords.
2. Internet Dependency
• Requires a stable internet connection.
• Example: Unable to make urgent payments during network outages.
3. Lack of Personal Interaction
• No face-to-face guidance for complex transactions.
• Example: Elderly customers may prefer in-person help.
4. Technical Issues
• Server downtime or app glitches can delay transactions.
5. Risk of Wrong Transactions
• Mistakes in entering account numbers or amounts can be costly.
6. Limited Services for Certain Accounts
• Some services (like large cash withdrawals) still require branch visits.
Part 6: Safety Measures for Internet Banking
To enjoy the merits while avoiding the demerits, banks and customers follow safety
practices:
• Use strong, unique passwords.
• Enable two-factor authentication.
• Avoid public Wi-Fi for transactions.
• Regularly update devices and apps.
• Verify bank’s official website before logging in.
Part 7: Real-Life Example
During the COVID-19 lockdown, internet banking became a lifeline:
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• Salaries were credited and bills paid without leaving home.
• Businesses managed supplier payments online.
• Government subsidies were transferred directly to beneficiaries’ accounts.
Part 8: Balanced View
Internet banking is like having a branch in your pocket:
• Merits: Speed, convenience, cost savings, and a wide range of services.
• Demerits: Security risks, technical issues, and lack of personal touch.
The key is responsible use — combining the technology’s power with safe practices.
Final Story Recap
In Ananya’s world:
• Internet banking turned hours of bank visits into minutes of online work.
• She could run her business more efficiently.
• She stayed alert to security risks and followed safe banking habits.
For banks, it reduced costs and improved customer satisfaction. For customers, it brought
the bank to their fingertips — literally.
8. Discuss the implementation status of banking sector reforms in India.
Ans: A Fresh Beginning: The Two Eras of Indian Banking
Imagine Indian banking as a grand old train. For decades after independence, it ran on a
slow but steady track — heavily regulated, government-controlled, and focused on social
objectives like rural outreach and priority sector lending.
But by the early 1990s, the train was struggling:
• Non-performing assets (NPAs) were high.
• Profitability was low.
• Technology was outdated.
• Global competition was knocking at the door.
In 1991, with India’s economic liberalisation, the government decided to upgrade the train
— new engines, modern coaches, faster tracks. This upgrade came in the form of Banking
Sector Reforms.
Part 1: What Are Banking Sector Reforms?
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Definition: Banking sector reforms are policy measures aimed at improving the efficiency,
profitability, and competitiveness of banks, while ensuring financial stability and better
customer service.
Objectives of Reforms
1. Strengthen the financial health of banks.
2. Improve operational efficiency.
3. Introduce competition and innovation.
4. Enhance transparency and governance.
5. Align Indian banking with global best practices.
Part 2: The Reform Journey – Two Phases
The reforms came in two major waves, guided by expert committees.
Phase I – Narasimham Committee I (1991)
• Focus: Liberalisation and deregulation.
• Key Recommendations:
o Reduce statutory pre-emptions (CRR, SLR).
o Allow new private sector banks.
o Introduce prudential norms (capital adequacy, income recognition,
provisioning).
o Strengthen RBI’s supervisory role.
Phase II – Narasimham Committee II (1998)
• Focus: Consolidation and strengthening.
• Key Recommendations:
o Reduce government stake in PSBs to 33%.
o Merge strong banks for global competitiveness.
o Set up Asset Reconstruction Companies for NPAs.
o Improve risk management and technology adoption.
Part 3: Implementation Status – What Has Been Achieved
Let’s walk through the main reform areas and see where we stand today.
1. Reduction in Statutory Pre-emptions
• Then: CRR and SLR were very high, locking up bank funds.
• Now: Both have been reduced to more reasonable levels, freeing funds for lending.
• Impact: Improved profitability and lending capacity.
2. Prudential Norms
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• Implemented: Capital adequacy norms (Basel I, II, III), income recognition, asset
classification, provisioning.
• Impact: Better transparency in balance sheets, early recognition of bad loans.
3. Entry of Private and Foreign Banks
• Implemented: New private banks like HDFC Bank, ICICI Bank, Axis Bank entered in
the 1990s.
• Impact: Increased competition, better customer service, innovation in products.
4. Technology Upgradation
• Implemented: Core Banking Solutions (CBS), ATMs, internet and mobile banking,
UPI.
• Impact: Faster transactions, nationwide connectivity, digital payments boom.
5. Financial Inclusion
• Implemented: Jan Dhan Yojana, Business Correspondent model, small finance banks,
payment banks.
• Impact: Millions of unbanked citizens brought into the formal banking system.
6. NPA Management
• Implemented: SARFAESI Act (2002), Debt Recovery Tribunals, Insolvency and
Bankruptcy Code (2016).
• Impact: Faster recovery mechanisms, though NPAs remain a challenge.
7. Governance Reforms in PSBs
• Implemented: Bank Boards Bureau, performance-linked incentives, mergers of PSBs.
• Impact: Larger, stronger banks; improved governance, though political interference
concerns remain.
8. Risk Management and Basel Norms
• Implemented: Basel III capital and liquidity standards.
• Impact: Stronger capital buffers, better risk assessment.
9. Digital Banking Push
• Implemented: UPI, BHIM, digital KYC, neo-banks.
• Impact: India emerging as a global leader in digital payments.
Part 4: Areas Where Implementation Is Partial or Ongoing
Not all recommendations have been fully implemented.
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1. Government Stake in PSBs
• Recommendation: Reduce to 33%.
• Status: Still above 50% in most PSBs; full privatisation politically sensitive.
2. Consolidation
• Recommendation: Merge strong banks.
• Status: Several mergers done (e.g., SBI with associates, Bank of Baroda with Vijaya &
Dena), but integration challenges remain.
3. NPA Resolution
• Status: IBC has improved recovery, but delays and legal challenges persist; NPAs still
significant in some sectors.
4. Professional Autonomy
• Status: Progress made, but PSBs still face political and bureaucratic influence in
lending and appointments.
5. Rural Credit Efficiency
• Status: Financial inclusion improved, but rural branches still face profitability and
service quality issues.
Part 5: Impact of Reforms – The Before and After
Before Reforms (Pre-1991):
• High NPAs hidden in books.
• Low profitability.
• Poor customer service.
• Limited competition.
After Reforms (2025):
• Transparent accounting.
• Stronger capital base.
• Tech-driven services.
• Global-scale private banks.
• Wider financial inclusion.
Part 6: Current Challenges Despite Reforms
1. NPA Overhang – Especially in infrastructure and MSME sectors.
2. Cybersecurity Risks – With rapid digitisation.
3. Global Economic Shocks – Affecting credit demand and asset quality.
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4. Balancing Inclusion and Profitability – Serving rural areas sustainably.
5. Privatisation Debate – Political and social sensitivities.
Part 7: The Road Ahead
• Further Governance Reforms – Greater autonomy for PSBs.
• Privatisation of Select PSBs – To improve efficiency.
• Strengthening IBC – Faster resolution timelines.
• Digital Transformation – AI, blockchain in banking.
• Green Banking – Financing sustainable projects.
Final Story Recap
Think of Indian banking as that old train we met at the start:
• Phase I reforms replaced the rusty engine with a modern one — liberalisation,
competition, prudential norms.
• Phase II reforms added better coaches — consolidation, governance, technology.
• Recent reforms laid high-speed tracks — digital banking, financial inclusion, NPA
resolution.
The train is now faster, safer, and reaches more destinations than ever before. But the
journey isn’t over — the next stops are full autonomy, deeper digital integration, and
global competitiveness.
“This paper has been carefully prepared for educaonal purposes. If you noce any mistakes or have
suggesons, feel free to share your feedback.”
