Functions of Banks for JAIIB Exam: Short Notes

Functions of Banks for JAIIB Exam: Exams for JAIIB/DBF are conducted twice a year by the Indian Institute of Banking & Finance. Taking this exam is an excellent way for bank employees to advance their careers. An important element of the JAIIB exam is to ensure candidates have a solid understanding of the Functions of Banks. In this blog, learners can go through the short notes on one of the most important topics of functions of Banks Notes.

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

The different topics covered in functions of the bank JAIIB Exam are-

1. Banker Customer Relationship- Chapter 1
2. KYC/CFT/AML Norms- Chapter 2
3. Banker’s special relationship- Chapter 3
4. Banking Ombudsman & COPRA- Chapter 4
5. Negotiable Instruments- Chapter 5

These have been discussed one by one below-

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
Pledge	Pawner, i.e., Pledgee	Pawnee i.e., 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 given for its disposal	Trustee	Beneficiary
Sale/purchase of securities B/H Customer	Agent	Principal

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

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 

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.
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.

Frequently Asked Questions: Functions of Banks