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If the beneficiary is given the right to transfer his power of drawing bills to some one else, under a letter of credit, such a letter of credit is knows as a transferable letter of credit. Even the total amount of credit can be divided into more than one part and each part may be transferred to a different person. Transferable letters of credit are normally issued when the beneficiary is only an intermediary and not the exporter.

A letter of credit under which the beneficiary has no right of transfer of his power to draw bill is non-transferable letter of credit. If a beneficiary requests the banker to open a new letter of credit in favour of some other persons on the security of the non-transferable letter of credit and the same is done, such a letter of credit is known as a Back to Back letter of credit.

6. “With” and “Without Recourse” Letter of Credit

In the case of a letter of credit ‘with recourse’, the banker can recover the amount of the bill form the drawer (usually the exporter) if the drawee of the bill (usually the importer) fails to honour, i.e., the banker has recourse to the

drawer. The drawer or exporter may prefer a letter of credit ‘without recourse’ under which the banker has no recourse to the drawer.

Advantages of a Letter of Credit

The advantages of a letter of credit may be analyzed under two heads.

1) Advantage to the beneficiary or exporter, and 2) Advantages to the Importer

Advantages to the Beneficiary

1) Assured payment and absence of Risk:

The beneficiary is assured of payment as the banker is bound to honour the bills drawn by him under the letter of credit. The financial standing and reputation of the opening banker (and also confirming banker in the case of a confirmed letter of credit) provide absolute security against any risk of dishonour:

2) Ready Negotiability: The exporter, if he wants can secure the payment immediately by discounting or negotiating the bills drawn by him under the letter of credit with the confirming banker or some other banker. In the absence of the letter of credit, it may not be possible for the exporter to get the bills discounted on the strength of his own financial standing counter-indemnity so that in the event of failure to complete the contract and a requirement for payment under the terms of bonds, it will be able to make a claim against the contractor. This counter-indemnity may be backed by some from of security given by the customer.

Financial Guarantees

It sometimes happens that customers need the guarantee of a bank before being allowed to undertake certain actions. For example, it may be necessary for an exporter to raise funds in foreign currency for financing his operations in connections with an export project. In such a case, the financing institution abroad may need a bank guarantee to be furnished by the exporter in accordance with international practice. To void the risk of possible future loss, apart from obtaining export performance guarantee of ECFC if available, the customer will be asked to give a counter-indemnity if the bank is willing to comply with his request. In his way if the bank has to make a payment to the foreign institution abroad, it will itself have a claim against the customer.

Standing Instructions

Banks perform another subsidiary service for their customers and accept standing instructions form them either to make periodic payments, collect monies, or effect transfer of money on stipulated dates, on their behalf either for a limited period or until further notice. The bank will automatically do this by debiting payments or crediting receipts to its customer’s account.

Some of the common standing instructions received by banks from their customers are given below:

1. Transfer of funds from one account a another 2. Payment of insurance premiums to LIC

3. Membership subscription to clubs, libraries, professional associations and institutions.

4. Periodic remittances on customer’s account to another account at the same branch, or to another branch or another bank or by money orders.

5. Collection of dividends on behalf of customers.

6. Collection of interest on G.P. Notes held in safe custody or otherwise 7. Collection of pensions on behalf of account holders.

Such instructions which are obtained from the account holder in writing must be clearly worded and unambiguous. The banker may not accept standing instructions which are difficult to comply with, but once accepted, it is the duty of the bank to carry out the instructions carefully and promptly. If a small branch is unable to carry out certain instructions by itself, it may sometimes accept them, and put through one of bigger branches or though the Head Office.Once the standing order mandate has been accepted, no further action is required by the customer beyond ensuring that necessary funds are in his account on the specified date. If the standing instruction is of open-ended type, it is the responsibility of the customer to ensure its cancellation at the appropriate time; otherwise the bank will continue to make the payment to the payee.

Credit Cards

Credit Cards are issued by banks as a method of payment without the use of a cheque. They provide a means of obtaining goods and services immediately but paying for them later. Each card holder is given a credit limit on his credit card account. Payment for goods and services can only be made by this method at premises having the special machines for preparing sale vouchers to record the transaction, and retail outlets usually display the sings of the credit cards they are prepared to accept.

It was in the fifties that many big banks in America adopted the credit card plan and it was in 1966 that Barclays Bank was the first British bank to introduce credit cards known as “Barclaycard”. In the U.K., the credit cards are, however, not restricted to banks, many retail chains and even small independent stores operate their credit cared schemes and the phenomenal growth in their use indicates that “Plastic money” is gradually moving closer to a “cashless society.”

To pay for goods, the cared is handed to the retailer, who places it in the special machine together with a sale voucher, when the machine is operated, the embossed characters on the card, which detail the name and number of the account, are recorded on the sales voucher together with the retailer’s name and address. The details and amount of sales entered on the voucher and signed by the purchaser, after comparing this signature with that on the card, and being satisfied with its authenticity, the retailer gives a copy of the voucher to the purchaser and hands back the card. The retailer sends his part of the sales voucher to the using bank of the credit cared organization through a local branch bank, and receives payment accordingly.

Each month a cardholder is sent a statement depicting his purchases and he has the option of either paying the full balance of the account or paying a certain minimum amount and carrying forward the remaining balance to the next month. Cardholders are charged interest on outstanding balance and retailers are required to allow the bank a rate of discount on all card sales-this varies from one trade to another, and averages between 2 and 3 percent. The card can also be used to draw cash at bank branches and correspondent banks displaying the relevant credit card sign.

In India, credit cards are known as “Retail Credit Cards’ as a retail trader is fixed a limit in his credit card account on the basis of his credit worthiness. The cards are to be used for he purchases made by the retailer from the wholesaler or distributors to whom payment is made directly by the bank on the basis of invoices. On the same lines one bank in India has introduced ‘Agricard’ scheme which enables the small farmer to purchase his requirement of seeds, manure, pesticides, etc., from approved agencies. The invoices are sent to the bank with the Agricard for payment to be made directly to the concerned dealer. Interest is charged to the Agricard holder from the date of payment.

The credit card system is advantageous to the traders who supply goods and services in that they are assured of payment without having to send reminders for the outstanding debt. Further, bad debts are minimized and more liquidity of current assets is assumed. Credit cards underwrite to a fixed amount and for a fixed period the credit of a card holder.

Merchant Banking Services

Merchant banking activity which was in its embryonic stage in India few years back and was, by a large, confined to few larger banks has now become part and parcel of business of almost every bank. Merchant banking Departments of banks offer a range of services to the business community and issuing house services are amongst the most special offered by banks. There services include advising the clients as to the methods and terms of raising capital organizing the actual issue and arranging for the underwriting. Methods of raising capital include: 1) the issue by prospectus, where the issue is offered direct to the public on behalf of the borrowing company, ii) the offer for sale, where the issuing house (merchant Banking Department of a Bank) buys the securities from the company and then offers them to the public; and iii) placing the issue with a limited number of investors. The bank advises on the most effective method of bringing the shares to the market and to gain Stock Exchange acceptability for them.

Apart from assisting new and existing companies in equity flotation, merchant banking activities include syndication of loans, a techniques used when a group of banker, often from different countries, come together to provide large loans on a joint basis. The bank that is organizing the loan called the lead bank, contracts other banks to participate.

Management of capital issues is one of the main activities of a merchant banker operating in India, as stated before. Very few of them have tried to develop other merchant banking services such as portfolio management, project counseling, management consultancy, capital restructuring, corporate counseling and management of sick units. Banks will have to develop the required skills and expertise in these types of activities to render efficient and

effective service to their customers. The banks may also assist the promoters to obtain technical data relating to feasibility, market demand and other relevant aspects and would also work out the arrangements, for obtaining finance from various institutions such a IDBI, IFCI and SFCs.

Providing Investment Advice

Banks have wide knowledge of the financial market conditions because they invest their own surplus funds in various securities and shares to comply with liquidity requirements and to earn a reasonable return on their investment. But bankers do not normally take upon themselves the responsibility of giving specific advice to their customers on investment. What they usually do is to either suggest he names of a few reliable stock and share brokers without responsibility, from whom the customer may get the requisite advice or they themselves obtain the advice from one or two reliable brokers and pass it on to the customer without responsibility.

In this context, there is an important case of Woods V. Martin Bank Ltd. (1959) in which both the defendants-the bank and defendants-the manager-were held liable for defendants-the loss of £14,800 caused to defendants-the plaintiff because defendants-the financial advice had been given to the plaintiff without the ordinary care and skill that a bank manager should process. But this decision should not terrify the banker if they act prudently and resist the temptation of introduction to the customer who is seeking capital to another customer who has funds to spare, as happened in the Woods case.

At least major commercial banks should make investment information available and publish a regular review, containing up-to-date statistical information and comment on current economic conditions as well as articles of interest to readers. Regular surveys of the economy as well as report on important overseas economies should also be published for the enlightenment of bank customers and the sta Tax.

This service is of recent origin and provides advice on income tax and other personal taxes such as capital gains tax and capital transfer tax. The bank’s income tax department offers complete tax services which consist of preparing the customer’s annual statement of income and expenditure, claiming allowances as permitted and generally seeing that the customer pays no more tax than necessary, and claiming any rebate to which he may be entitled. The Department can also provide a service to persons who are non-resident of India, but who have income in this country.

The tax departments are also to advise customers how to arrange their affairs to the best advantage of themselves and their families. This involves a full consideration of the customer’s will, tax position, life insurance and investment of capital so that a suitable scheme may be worked out to reduce taxation and meet his obligation and wishes.

As a customer’s investment choices and tax position are closely interwoven, a bank, when providing tax service, also often undertakes investment management for that customer. The banks accumulate massive expertise in managing their own investment; selling this expertise to customers makes commercial sense.

Mobile Banking Facilities and Extension Counter Service

The mobile banking or ‘Bank-on-wheel’ is a recent innovation in banking service to reach the rural areas as part of performing the bankers social obligation. Mobile banks can be of much help in securing deposits from widely scattered areas which would otherwise not be reached by normal banking facilities. Mobile banking requires a mobile van which can safely travel on roads and is fitted with a counter and cash safe and is bullet proof, having a radio telephone sysem./ The towns are generally fed daily and the villages bi-weekly or tri-weekly depending on the needs.

The bank is staffed with a manager, an accountant, one or two clerks and a driver who also acts as a guard. Despite the problems of unsatisfactory communications and security in rural areas, this facility is worth developing both in the context of social objectives and possibility of locating future centers for normal banking facilities.

Extension counter service is also a recently innovated customer service. The extension counter is not a full-fledged branch of a bank, but is only an extension of he deposit counter of the base branch, opened for the convenience of those who find it difficulty to avail banking facilities during the usual banking hours. The facilities provided by extension counter include: i) deposit transactions, ii) issue and encashment of drafts and mail transfers, iii) encashment of travellers cheques, and iv) collection of bills. Like extension counter, morning and evening counter are also opened for the convenience of the public.

Teller System

One of the important measures for reducing the waiting time of customers at the counter is the adoption of the teller system. It refers to the system under which the teller is authorized to receive cash and make payments up to limited amounts without reference to the ledger balance or the specimen signature as he is expected to be thoroughly conversant with the types of the accounts allotted to him and specimen signatures of the relative depositors. Only in case of doubt the gets the balance or the signature verified by the ledger keeper and the supervisory official who are seated near him. The teller system is adopted at certain selected branches and not all the branches of a bank.

A variation of the teller system is the Prompt Payment System which involves maintenance of the record of the customers’ account and their specimen signature in duplicate. On set, in the form of cards, is with the teller who is authorized to pay cheque up to a specified amount out of the cash provided with him after verifying the signature and positing the cheque in the ledger card.

In either case, the object is to expedite payment of cheques for small amounts. Where the amount of the cheque is in excess of the amount delegated to the teller, the cheque has to be dealt with by the ledger keeper in the normal way and aid after all the usual formalities have been complied with through certain stages, i.e., clearance by ledger keeper, passing officer and paying cashier.

Lock-Box and Night Safe Service

Some banks provide the ‘Lock-box’ service at selected centers, which enables the customers, particularly the traders, to lodge the cheques and other remittances in a box kept at the branch of a bank after office hours to be collected by the bank the next day and necessary entries passed. It obviates the need for the customers to go to the bank during the customer’s own office hours and thus saves time for them.

Some banks also provide night safe facilities at selected branches whereby the customers, can lodge their cash overnight. This service is particularly, useful for a trader who receives large sums of cash after the banks are closed and who for security reasons does not wish to keep in on his own premises. The money is simply places in a wallet and delivered through a chute accessible from the outside of the branch. A customer can either arrange for the bank to open the wallet and credit his account, or he calls at the bank, opens the wallet himself and pays into his account in the normal way.

The Clearing System

The clearing system or simply ‘clearing’ is an arrangement through which a bank exchanges cheques drawn on other banks for those drawn on it, thus eliminating the time-consuming and expensive method of presenting cheques at the various banks at which they are drawn. This is done at the ‘Clearing House’ which is a Voluntary association formed by a group of banks in a particular locality. The clearing principle is simple but the massive number of cheques and drafts, etc., involved makes the process intricate.

Gift Cheques

One of the new devices adopted by some banks to attract customers is the issue of gift cheques, artistically designed in attractive folders and covers. The purchaser of a gift cheque need not be an account holder with that bank or any other bank to avail of this service. The cheque is collectable at par at al offices of the issuing bank in India.

BANKING – THEORY, LAW AND PRACTICE