BA7026

BANKING FINANCIAL SERVICES

MANAGEMENT

Evolution of Money

Robinson crusoe Economy

Barter Economy
Money Economy

UNIT I
OVERVIEW OF INDIAN BANKING SYSTEM
Definitions of Bank
Indian Banking Companies Act - Banking Company is
one which transacts the business of
banking which means the accepting for the purpose of
lending or investment of deposits money
from the public repayable on demand or otherwise and
withdrawable by cheque, draft, order or
otherwise.

Functions of Bank

Mobilization of Savings

Facilitate commerce and trade

Balanced Regional Development

Provision of finance to backward communities

and neglected segments of society
Development of Agriculture and other priority
sectirs in the economy

Structure of Banking system in India

Scheduled Banks
Registered in the second schedule of the
Reserve bank of India

Banking business In India

Incorporated as company in Company Act, 1956
Paid-up and reserve should be not less than 5 lacs
Satisy the terms and conditions of RBI

Commercial Banks

A bank collects money from those who have it to

spare or who are savings it out of their incomes,
and it lends this money to those who require it

Functions of Commercial banks

Secondary function

Primary functions

Accetance of deposits

Current deposits
Savings deposits
Fixed deposits

Advancing loans

Overdraft facilities
Cash credit
Discounting bills of exchange
Money at call
Terms loans
Consumer credit
Miscellaneous advances

Creation of credit

Promote the use of cheques

Financing internal and foreign trade

Remittance of funds

Agency services

Collection and payment of credit instruments

Purchase and sale of securities

Collection of dividends on shares

Acts as correspondent

Income tax consultancy

Execution of standing orders

Acts as trustee and executor

General utility services

Locker facility

Traveller's cheques and credit cards

Letter of credit

Collection of statistics

Acting referee

Underwriting securities

Gift cheques

Accepting bills of exchange on behalf of customers

Merchant banking

Fulfilment of socio-economic objectives

Co-operative banks
The Cooperative Credit Societies Act, 1904 led
to the formation of Cooperative Credit Societies
in both rural and urban areas.
Indian
cooperative structures are one of the
largest such networks in the world with more
than 200 million members.

Structure of Cooperative Banking in

India
The structure of cooperative network in India can be
divided into 2 broad segments

Urban Cooperative Banks

Rural Cooperatives

Urban Cooperative Banks

Banking activities of Urban Cooperative Banks are
monitored by RBI. Registration and Management
activities are managed by Registrar of Cooperative
Societies (RCS). These RCS operate in single-state and
Central RCS (CRCS) operate in multiple state.

Rural Cooperatives
The rural cooperatives are further divided into
short-term and long-term structures
The short-term cooperative banks are three tiered
operating in different states. These are

State Cooperative Banks- They operate at the apex level in

states District
Central Cooperative Banks-They operate at the district levels
Primary Agricultural Credit Societies-They operate at the
village or grass-root level.

the long-term structures are further divided into

State Cooperative Agriculture and Rural Development Banks (SCARDS)These operate at state-level.
Primary Cooperative Agriculture and Rural Development Banks (PCARDBS)They operate at district/block level.

All banking activities are regulated by a shared arrangement

between RBI and NABARD.

Features

Voluntary membership

Open membership

Finances

Liability of members

Democratic control (one man one vote)

Limited interest on capital

Distribution of surplus

Service motive

Registration and legal status

Reserve Bank of India Act, 1934

The Reserve Bank of India Act,1934 was enacted to constitute the Reserve Bank
of India with an objective to
(a) Regulate the issue of bank notes
(b) For keeping reserves to ensure stability in the monetary system
(c) to operate effectively the nations currency and credit system
The RBI Act covers:
(i) the constitution
(ii) powers
(iii) functions of the Reserve Bank of India.

Scheme of the Act

Chapter I: Preliminary :

Short title, extent and commencements

Extent and commencement as well as some definitions

Chapter II: Incorporation, capital, managemnet and business:

Incorporation of the bank

Provisions regarding share capital, offices, branches, local board and central board , disqualification of directors

Chapter III: Central Banking functions:

Right to issue bank notes,their denomination and recovery

Right to transact governemnt business

Chapter III A: Collection and functioning of credit information:

Power of bank to collect credit information

Procedure for furnishing information

Chapter III B: Provisions relating to non-banking institutions receiving deposits and

financial institutions:
Chapter IIIC:Prohibition of Acceptance of deposits by unincorporated bodies:
Chapter IIID: Regulation of Transactions in derivatives, money market instruments or
securities:

Chapter IV:General provisions:

Central government reserve funds
National, rural, industrial and housing credit
Appointmnet, powers and duties of auditors
Chapter V: Penalties:
Lays-down
penalties for any person,
directors, auditors and company who make
wrong statement

NEGOTIABLE INSTRUMENTS ACT, 1881

NEGOTIABLE INSTRUMENT = A written
documents transferable by delivery
According to Section 13 (a) of the Act, Negotiable
instrument means a promissory note, bill of
exchange or cheque payable either to order or to
bearer, whether the word order or bearer
appear on the instrument or not.

Characteristics of Negotiable
instruments
Writing and signature
Money
Freely transferability
Title of holder free from all defects
Notice
Presumptions for value received
Special procedure
Popularity
Evidence

TYPES OF NEGOTIABLE INSTRUMENTS

There are two types of Negotiable Instruments:
Instruments Negotiable by Statute:
The Negotiable Instruments Act mentions only three kinds of negotiable instruments (Section 13).
These are:
Promissory Notes
Bills of Exchange, and
Cheques
Instruments Negotiable by Custom or Usage:
There are certain other instruments which have acquired the character of negotiability by the usage or
custom of trade. For example:
Exchequer bills,
Bank notes,
Share warrants,
Circular notes,
Dividend warrants,
Share certificates with blank transfer deeds, etc.

PROMISSORY NOTES:
A promissory note is an instrument in
writing (note being a bank-note or a
currency note) containing an unconditional
undertaking, signed by the maker, to pay a
certain sum of money to or to the order of a
certain person, or to the bearer of the
instruments.

CHARACTERISTICS OF A PROMISSORY
NOTE
It is an Instrument in Writing
It is a Promise to Pay
Signed by the Maker
Other Formalities
Definite and Unconditional Promise
Promise to Pay Money Only
Maker must be a Certain Person
Payee must be Certain
Sum Payable must be Certain
It
may be Payable on Demand or After a
Definite Period of Time

BILL OF EXCHANGE
an instrument in writing containing an
unconditional order signed by the maker,
directing a certain person to pay a certain
sum of money only to, or to the order of, a
certain person or to the bearer of the
instrument. It is also called a Draft.

ESSENTIAL ELEMENTS OF BILL OF

EXCHANGE
It must be in Writing.
Order to pay
Drawee
Signature of the Drawer
Unconditional Order
Parties
Certainty of Amount
Payment in Kind is not Valid
Stamping
Cannot
be made Payable to Bearer on
Demand

CHEQUE
According to Section 6 of the act, A
cheque is a bill of exchange drawn on a
specified banker and not expressed to be
payable otherwise than on demand.

ESSENTIAL ELEMENTS OF A CHEQUE

In writing
Express Order to Pay
Definite and Unconditional Order
Signed by the Drawer
Order to Pay Certain Sum
Order to Pay Money Only
Certain Three Parties
Drawn upon a Specified Banker
Payable on Demand

Banking Regulation Act,1949

Protection of the interest of the depositors

Supervised and regulated the commercial banking
in India
Primary Agricultural Credit Society and cooperative
land mortgage banks are excluded from the Act.
supervise the appointment of the boards and
management
lay down instructions for audits

Scheme of the Act

Part I : Preliminary
Part II: Business of banking companies
Part IIA:Control over managemnet
Part IIB: Prohibition of certain activities in relation to
banking companies
Part IIC: Acquisitions of the undertaking of banking
companioes in certain cases
Part III: Suspension of business and winding-up of
banking companies
Part IIIA: Special provisions for speedy disposal of
winding up proceeding
Part
III B: Nomination of deposit accounts and
lockers
Part IV: Miscellaneous
Part V: Application of the act to cooperative banks

Major Functions of the Reserve Bank of India

Monetary functions

Note issuing authority

Banker's bank and lendor of the last resort

Banker to the government

Custodian of foreign exchange reserve

Controller of credit

Non-monetary functions

Collection and publication of data

Regulatory and supervisory functions

Development and promotional functions

Banker and customer

Banker: The real business of a banker is to
obtain deposits of money which he may use for
his own profit by lending it out again.

Relationship between Banker and

customer

Primary relationship
Relation of debtor and creditor

Creditor must demand payment

Proper place and time of demand
Demand must be made in proper form

Secondary relationship

Agent
Trustee-beneficiary
Bailee-bailor
Lessor-lessee
Guarantor and guarantee
Fiduciary relationship

Rights of bankers

Right of lien

Specific/particular lien
General lien

Right of set-off

Right to appropriate payments

Right not to produce books of accounts

Right to charge interest, incidental charges

Rights under garnishee order

Obligations of a banker

Obligation to honour the customer's cheques

Sufficient balance
Appliaction of the funds
Duly required to pay
Properly written
Reasonable time to collect the bill
No legal restriction
Domiciled bills

Obligation to maintain secrecy of customer's account

To satisfy statutory requirements

As a common courtesy
Disclosure at the will of customer
To protect his own interest
To protect public interest

Obligation to receive cheques and other instruments

foe collection
Obligation to give reasonable notice before closing
the account

FINANCIAL ANALYSIS
Two important financial statements commonly used for financial analysis are P & L
account, and balance sheet.
(i) The balance sheet shows the financial position of the business as at the end of a
particular period (month, quarter or year)
(ii) The profit and loss account shows the financial results of the working of an
enterprise over a period of time. For example, 1 st of April 2012 to 31 st March 2013
(iii) When comparative analysis of these statements for a number of years is done, it
would give a better view about the financial performance of the business unit.
(iv) Financial analysis and interpretation of financial statements have now become
important decision making tools.

limitations
(i) The balance sheet numbers are available as on a particular date hence may not reveal the
correct
position of the financial health for over a period of one year.
(ii) Since both profit and loss account and balance sheet are in the form of numerical statements,
these statements would not reveal the overall picture about the performance of the concern or
business unit.
iii) The methods of valuation of assets, writing off depreciation, amortization of costs, large
expenses etc. may vary from business unit to business unit. Therefore, a comparison of these
numbers and ratios would not give desired results and calls for further detailed investigations.
(iv) Further, these financial statements depict the performance of the business enterprise.
Therefore, any meaningful interpretation of these statements, will depend upon the projections of
the future trend.

Financial statement of Banks

Capital and liabilities

Capital
Reserve and surplus
Deposits
Borrowings
Other liabilities and provisions

Assets

Cash and balances with Reserve bank of India

Balances with banks and money at call and short notice
Investment
Advance
Fixed assets
Other assets

Contingent liabilities

Income statements of indian banks

Income

Interest earned
Other income
Expenditure

Interest expended
Operating expenses
Provisions and contingencies

Profit and loss

Appropriations

Relationship between balance sheet

and income statement

Stock and flow relationship

Complementary relationship

Link relationship

TECHNIQUES

USED

IN

FINANCIAL STATEMENTS

Fund flow analysis

Trend analysis

Ratio analysis

Profitability Ratio
Liquidity Ratio
Capital structure Ratio
Coverage Ratio
Turnover Ratio
Inventory Turnover Ratio

ANALYSIS

OF