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Functions of Banks -
JAIIB
IE&IFS - Module A

As per latest syllabus

Exclusive Notes By
Siva Rama Prasad Sir
EX-GM, SBI PO
36+ Years of Experience

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Functions of Banks FREE E-BOOK

Functions of Banks

Banks are a vital part of any healthy economy. They function as institutions for
transferring money, borrowing and lending, trade and storage of capital. Banks
perform a variety of functions especially in the context of the Indian Economy.
This eBook covers the basic functions performed by banks and their
responsibilities in the Indian economy.

Primary Functions of Banks

The primary function of banks is to ensure that people's money is kept safe
and to offer loans to people who need it. People deposit money with banks which
the banks use to provide loans to people. Apart from these primary functions,
the banks also perform different other functions.

Increased rivalry in the banking business, technological advancements, and

various other reasons contributed to this growth of goods and services.

The notion of the time worth of money is well-known among the general public;
they are now aware of the future possibilities for their money. Instead of only
having a savings account in the name of investing, individuals now have various
alternative investment options. This is one of the key reasons why banks can no
longer rely on consumer deposits and must seek out new financial services
through which they may profit.

Other Functions
Other functions that the bank performs, which are known as ancillary services,
are as follows-

1. Fund Transfer (RTGS/NEFT)

2. Merchant Banking
3. Factoring
4. Bank drafts
5. Traveller's Cheque
6. Retail banking
7. Bank Assurance/Guarantee
8. Internet Banking
9. Insurance
10.Mobile Banking
11.Bank Cards
12.Mutual Funds
13.Foreign Exchange/Forex services
14.Custodial Services
Functions of Banks FREE E-BOOK

Topics Covered Under Functions

of Banks for JAIIB

• Banker Customer
Chapter 1 Relationship

• KYC/AML/CFT Norms
Chapter 2

• Bankers Special
Chapter 3 Relationship

• Banking Ombudsman and

Chapter 4 COPRA

• Negotiable Instruments
Chapter 5
Functions of Banks FREE E-BOOK

Banker Customer Relationship - Chapter 1

The different transactions involved in a banker customer relationship have been
covered in the table below:

Transaction Bank Customer

Deposit in the Bank Debtor Creditor

Safe Custody Bailee Bailor

Collection of Cheque Agent Principal

Loan from Bank Creditor Debtor

Locker Lessor Lessee

Purchase of Draft Debtor Creditor

Pawner, i.e., Pawnee i.e.,

Pledge
Pledgee Pledger

Payee of Draft Trustee Beneficiary

Hypothecation Hypothecatee Hypothecator

Standing Instruction Agent Principal

Mortgage Mortgagee Mortgagor

Shares given for sale Agent Principal

Article left by mistake Trustee Beneficiary

Money deposited but instruction not

Trustee Beneficiary
given for its disposal
Sale/purchase of securities B/H
Agent Principal
Customer
Functions of Banks FREE E-BOOK

KYC/CFT/AML Norms - Chapter 2

1. The KYC guidelines were introduced for ensuring Combatting Terrorism
Finance (CTF) and Anti Money Laundering (AML) and risk management.
2. The four key elements that need to be included by the Banks in the KYC
Policies include Customer Identification Procedures, Customer Acceptance
Policy, Risk Management, and Monitoring of Transactions.
3. It is necessary for banks to obtain the identity and address of the
customer at the time of opening the bank account by the customer.
4. Customers are categorised into three categories: high-risk customers,
medium risk, and low-risk customers.
5. Low-risk customers include pensioners, Government Departments,
salaried persons, and no-frill accounts.
6. High-risk customers include High Net Worth Individuals, trusts, NGOs,
Politically exposed persons, etc.
7. The risk profile of customers should be reviewed by banks at least once in
six months.
8. Customer identification data, full KYC exercises should be periodically
updated as follows-
• Low Risk - Every 10 years
• Medium Risk- Every 8 years
• High Risk- Every 2 years

________________________________________________

Banker's Special Relationship - Chapter 3

Mandate- A person who is legally capable of entering into a contract may
authorise another person to create and manage his account.

Mandatee- Authorised Person

Power of Attorney- A document signed by one person (Principal or Donor) in

favour of another (Agent or Donee) to act on behalf of the donor.

Types

1. Special or Limited
2. General or Universal

Garnishee Order

A judgment creditor obtains a court order attaching funds belonging to the

judgment debtor in the hands of his debtors, including the bank.

Dos and Donts of Banks under Garnishee Order

Functions of Banks FREE E-BOOK

Right to set off

• When a lien is marked on fixed deposit receipts, it cannot be attached by

a garnishee order.
• Bank has a prior right to set off

Joint Account

When a garnishee order is in a single name and a customer account is joint-

former or survivor- Attached

either or survivor- Not Attached

Payment of Cheques

Cash payment should be refused after receiving a garnishee order. The cheques
must be returned in case of a clearing.

Partnership Account

The personal account of the partner can be attached to the firm's debt. However,
the firm's account cannot be attached to the individual debt of the partners.

Unclear effects and Subsequent credit in A/c

Credits received subsequent to the garnishee order are not attachable because
debts due or accruing at the time of receipt of the order are only attachable.

Liquidator

In Liquidator garnishee order attached

Trust Account

Garnishee order against the trustee is not attached to the trust account.

Banking Ombudsman & COPRA- Chapter 4

Consumer Protection Act (COPRA)

District Forum- up to Rs. 20 Lakh

State Commission- Above Rs. 20 Lakh to Rs. 1 Crore

Central Commission- Above Rs. 1 crore

Banking Ombudsman Scheme

Resolution of complaints relating to services rendered by banks

Functions of Banks FREE E-BOOK

Compensation amounts arising directly out of act or Rs. 10 Lakhs, whichever is

lower

In the case of credit cards- Not exceeding Rs. 1 Lakhs

Negotiable Instruments- Chapter 5

These are covered under the Negotiable Instruments Act 1881

Bill of Exchange

As per Section 5, a bill of exchange is a written document that contains an

unconditional order signed by the creator ordering a specific person to pay a
certain sum of money solely or to the order of a specific person or to the bearer
of the instrument. The individual who requests the money is known as the
Drawer, and the person who is asked to pay is known as the Drawee. The payee
is the person who receives the money.

Cheque

A cheque is a bill of exchange but is always payable on demand, and the drawee
is always a banker. It also includes electronic cheques and truncated cheques.

Promissory Note

As per section 4, a Promissory Note is in writing containing an unconditional

undertaking or promise, signed by the maker, to pay a certain sum of money to
or to the order of a certain person or to the bearer thereof. It requires payment
of stamp duty and can be Usance Promissory Note or Demand Promissory Note.
There are two parties: maker and payee.

Endorsement of Cheques

1. Endorsement in full - When the endorser indicates the name of the

endorsed it is called a full endorsement.
2. Endorsement in blank- In this the endorser just signs his name without
indicating endorsee. It can be converted into full by writing the name of a
person above signatures. The effect of an endorsement in blank is that it
makes an instrument drawn originally payable in order to be a bearer
instrument for the person of negotiation which can be further negotiated
by mere delivery.
3. Restrictive Endorsement- An endorsement that restricts the further rights
of negotiation is a restrictive endorsement.
4. Conditional Endorsement- When along with endorsement, a condition is
imposed by the endorser. Condition binds endorser and endorsee only.
5. Facultative- An endorsement in which the endorser waives the notice of
dishonour is called Facultative Endorsement. But this is not applicable to
the other parties to the instrument.
Functions of Banks FREE E-BOOK

6. Sans Recourse- An endorsement in which the endorser excludes his

liability is termed sans recourse or without recourse endorsement. In case
of dishonour of the instrument, the amount cannot be recovered from
such an endorser.

Protection to Paying Bankers-

1. Paying bankers protected by payment in due course of order cheque that

bears regular endorsement. The genuineness of endorsement is not to be
ensured by the paying bank.
2. Protection of paying bankers in case of bank drafts.
3. Protection of paying bankers in case of a bearer cheque. Endorsement on
a bearer cheque to be ignored.
4. Protection for payment in due course of crossed cheques.
5. Protection to paying bank for the materially altered instrument.

Protection to Collecting Banker-

For the collection of cheques/demand drafts, the protection will be available only
if

1. the bank receives the payment for its customer

2. the draft/cheque is crossed
3. it receives the payment in good faith and without negligence
4. the bank acts as an agent for collection and not a holder for value.

Conclusion
We hope the article gives you relevant information about the Functions of the
Bank JAIIB Exam in detail. For any queries, contact us at Oliveboard.
Functions of Banks FREE E-BOOK

Frequently Asked Questions: Functions of

Banks
Q. Will the firm's account be attached for the individual debt of
partners?

The personal account of the partner can be attached for the firm's debt.
However, the firm's account cannot be attached for the individual debt of the
partners.

Q. When will the collecting banker have protection in case of collection

of cheques/demand drafts?

Ans. The collecting banker will have protection in case of collection of

cheques/demand drafts only if

the bank receives the payment for its customer

the draft/cheque is crossed

it receives the payment in good faith and without negligence

the bank acts as an agent for collection and not a holder for value.
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Siva Rama Prasad Sir Himanshu Sharma Sir Shubhi Ma’am Rajeev Mishra
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Experience: 36+ Year 9+ Years of 4+ Years of 13+ Years of
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