USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
INTERNAL ASSESSMENT TEST –2 (KEY)
Date: 30.09.2015
Max Marks: 50
Subject & Code: PRINCIPLES AND PRACTICE OF BANKING-14MBA FM301
Section: Finance
Name of faculty: Dr. Pallavi Kudal
Time: 11.30-1.00pm
Note: Answer all questions
1 (a)
(b)
(a) And (b) as they are not conditional
(3 marks)
Duties of collecting banker:
(7 marks)
• A collecting banker is one that collects the promissory notes, bills,
cheques, and other similar instruments like dividend warrant etc for and
behalf of customers. A collecting banker may be held liable to the true
owner of the cheque for the wrong conversion if he collects a cheque for a
person in respect of which he has no title. However sec 131 of NI act
gives protection to collecting banker for following cases.
• The cheque should have been collected for a customer
• The cheque should have been crossed either generally or specially before
it comes in the hands of banker for collection.
• While collecting the cheque the banker acted in good faith and without
negligence.
• KYC guidelines have been followed at the opening of account.
If these conditions are fulfilled then collecting banker shall not be held liable to
the true owner of the cheque by the reason of only having received such
payments.
(c)
Meaning: An endorsement is the mode of negotiating a negotiable instrument. A (10 marks)
negotiable instrument payable otherwise than to a bearer can be negotiated only
by endorsement and delivery. An endorsement, according to sec. 15 of the NI Act
is “when the maker or holder of a negotiable instrument signs the same, otherwise
than as such marker. For the purpose of negotiation on the back or face thereof or
on a slip of paper annexed thereto, he is said to endorse the same and is called the
endorser.
Essentials of valid endorsement:
1. It must be written on the instrument itself and be signed by the endorser. The
simple signature of the endorser, without additional words, is sufficient. An
endorsement written on an allonge is deemed to be written on the instrument
itself.
2. The endorsement must be of the entire instrument. A partial endorsement, that
is to say, an endorsement, which purports to transfer to the endorsee a part only
of the amount payable, or which purports to transfer the instrument to two or
MBA IV SEMESTER -FINANCE
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
more endorsees severally (i.e. separately), does not operate as a negotiation of the
instrument.
3. Where a negotiable instrument is payable to the order of two or more payees or
endorsees who are not partners, all must endorse unless the one endorsee has
authority to endorse for the others.
Wherein a negotiable instrument payable to order, the payee or endorsee is
wrongly designated or his name is misspelt, he should sign the instrument in the
same manner as given in the instrument. Though, he may add, if he thinks fit, his
proper signature.
5. Where there are two or more endorsements on an instrument, each
endorsement is deemed to have been made in the order in which it appears on the
instrument, until contrary is provided.
6. An endorsement may be made in blank or special. It may also be restrictive.
• Where no space is left on the instrument, the endorsement may be made
on a slip of paper attached to it. This attached slip of paper is called
‘Allonge’.
Types of Endoresement
1. Endorsement in Blank or General Endorsement:
2. Endorsement in Full or Special Endorsement:
3. Restrictive Endorsement:
4. Sans Recourse Endorsement(without liability sec 52)
5. Conditional Endorsement:
6. Facultative Endorsement
2 (a)
The Differences between NRE and NRO accounts:
1. Repatriation: NRE account is freely repatriable (Principal and interest earned)
while the NRO account has restricted repatriability i.e permitted remittance
allowed from NRO is up to USD 1 million net of applicable taxes in a financial
year after giving undertaking along with a certificate from a chartered accountant.
2. Tax Treatment: NRE account is Tax free (no Income tax, wealth tax and gift
tax) in India. On the other hand the interest earned in NRO account and credit
balances are subject to respective income tax bracket and are also subject to
applicable wealth and gift tax.
3. Deposit of Rupee funds generated in India: If an NRI/PIO/OCI is earning
income originating in India (such as salary, rent, dividends etc.) he/she is only
allowed to deposit it in NRO account. Deposit of such earnings is not permitted
in NRE account.
4. Joint Holding: NRE account can be jointly held with another NRI but not with
MBA IV SEMESTER -FINANCE
(3 marks)
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
resident Indian. On the other hand NRO account can be held with NRI as well as
resident Indian (close relative) as defined under Section 6 of the Companies Act
1956.
(b)
(c)
Types of International banking offices:

Correspondent bank

Representative office


Foreign Branch
Subsidiary and Affiliate Bank

Offshore Banking Center
(7 marks)
A letter of credit is a document issued by a third party that guarantees payment (10marks)
for goods or services when the seller provides acceptable documentation. Letters
of credit are usually issued by banks or other financial institutions, but some
creditworthy financial services companies, like insurance companies or mutual
funds, might issue letters of credit under certain circumstances
A letter of credit generally has three participants: the beneficiary (the person or
company who will be paid), the buyer of the goods or services (sometimes called
the applicant), and the issuing bank (the institution issuing the letter of credit).
The beneficiary may request payment to an advising bank, which is a bank
where the beneficiary is a client, rather than directly to the beneficiary: this might
be done, for example, if the advising bank financed the transaction for the
beneficiary until payment was received.
TYPES:
 The revocable letter of credit can be changed at any time by either the
buyer or the issuing bank with no notification to the beneficiary. The most
recent version of the UCP, UCP 600, did away with this form of letter of
credit for any transaction under their jurisdiction. Conversely,
the irrevocable letter of credit only allows change or cancellation of the
letter of credit by the issuing bank after application by the buyer and
approval by the beneficiary. All letters of credit governed by the current
UCP are irrevocable letters of credit.
 A confirmed letter of credit is one where a second bank agrees to pay
the letter of credit at the request of the issuing bank. While not usually
required by law, an issuing bank might be required by court order to only
issue confirmed letters of credit if they are in receivership. As you might
MBA IV SEMESTER -FINANCE
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
guess, an unconfirmed letter of credit is guaranteed only by the issuing
bank. This is the most common form with regard to confirmation.
 A letter of credit may also be a transferrable letter of credit. These are
commonly used when the beneficiary is simply an intermediary for
the real supplier(s) of the goods and services or is one of a group of
suppliers. It allows the named beneficiary to present its own
documentation but transfer all or part of the payment to the actual
supplier(s). As you might guess, an un-transferrable letter of
credit does not allow transfer of payments to third parties.
 A letter of credit may also be at sight, which is payable as soon as
documentation has been presented and verified, or payment may
be deferred (also called a usance letter of credit) until a certain time
period has passed or the buyer has had the opportunity to inspect or even
sell the related goods
 A red clause letter of credit allows the beneficiary to receive partial
payment before shipping the products or performing the services.
Originally these terms were written in red ink, hence the name. In
practical use, issuing banks will rarely offer these terms unless the
beneficiary is very creditworthy or an advising bank agrees to refund the
money if the shipment is not made.
 A red clause letter of credit allows the beneficiary to receive partial
payment before shipping the products or performing the services.
Originally these terms were written in red ink, hence the name. In
practical use, issuing banks will rarely offer these terms unless the
beneficiary is very creditworthy or an advising bank agrees to refund the
money if the shipment is not made.
3
Strength: Economies of Scale:
the biggest advantage of universal banking is greater economic efficiency which
enables them to exploit economies of scale by improving spread, higher output
with better and diversified product range and low operating cost.
Diversion of Surplus:
Through diversification of activities bank can use its overall potential expertise
optimally in providing different kind of services and can reduce cost by
performing all functions by one entity rather than under separate bodies.
Optimally Utilization of Resources:
Banks operating different function under one roof is advantageous. It can collect
information like market trends, risk and return analysis of client’s portfolios etc
and this information can be further used to pursue other activities in order to
generate additional business with clients through minimum efforts.
MBA IV SEMESTER -FINANCE
(10 marks)
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
Advantage of Brand Name in Marketing:
Bank with established brand have wide network of
its branches which become active point for promoting products like insurance,
Mutual funds etc. as branch will act as a parent company or source and will
help bank to reach remotest area without any external support.
One Point Shopping:
The idea of one shopping point helps customers as well as banks in saving
transaction and other related costs and improvises the economic activities to a
great extent which ultimately advantageous to all participants.
Pro Investors Environment and Activities:
Adopting universal banking will lead to diversification of business activities
which is ultimately related to customers and thus required investor’s friendly
environment. Apart from this basic, another manifestation of UB is banks holding
stakes in firms. Its equity holding in borrower firms indicate health of the firm to
others investors and being a lending bank it have an advantage to monitor the
firm’s activities.
Weaknesses:
Regulatory Obstacles:
The road of UB is not smooth but has many regulatory obstacles which are the
real hurdles and will hamper its growth. The different regulatory requirement of
Banks and DFIs, distinction between maturity and duration, their conversion
period, funds can be kept as cash reserves by FDIs etc., needed
careful examination.
Complex long term Lending:
Converting into Universal Banking will diversify and
increase business opportunity but project which have longgestation period like
project and infrastructure finance required long term borrowing which
requires permission, market standing, expertise to generate and control long run
funds.
NPA a perpetual Problem:
The most serious problem to all banking and financial institution iscontrolling the
bad loans or non performing assets(NPA). Generally most of the NPAs come out
of commodity sector loans and advances, such as textile, steel and chemicals etc.
Using technology cannot solve the problem but it required proper appraisal and
overall analyses by DFIs and banks before and after lending and proper use of
funds and efficient working capital control by the fund users. Universal banking
will add fuel in NPA growth due to its expansion and diversification in activities
without skilled and efficient manpower.
MBA IV SEMESTER -FINANCE
USN
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of MBA
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MBA IV SEMESTER -FINANCE