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ConceptofBanking/Bank
1. Banks are the financial institutions which accept
deposits from the people and give loans to the needy
peopleforthepurposeofconsumptionorinvestment.
2.Accordingtosection5(b)oftheBankingRegulationAct,
1949, banking means the accepting, for the purpose of

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lending or investment, of deposits of money from the

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able by cheque, draft, and order or otherwise. Banking

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Company means any company which transacts the

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businessofbankinginIndia.Nocompanycancarryonthe
business of banking in India unless it uses as part of its

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nameatleastoneofthewordsbank,bankerorbanking.

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TypesofBank
1. Commercial Banks: The banks which accept

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deposits and lend money to the people for consumption

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orforinvestmentpurpose.Thesebanksperformallkinds

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of banking business. Since their deposits are for a short

period,thesebanksnormallyadvanceshorttermloansto
thebusinessmenandtradersandavoidmediumtermand
longterm lending. Majority of the commercial banks are
in the public sector. However, there are certain private
sector banks operating as joint stock companies. Hence,
thecommercialbanksarealsocalledjointstockbanks.

2. Industrial Banks: Industrial banks or investment

banks, meet the mediumterm and longterm financial
needsoftheindustries.
Themainfunctionsoftheindustrialbanksare:
a)Theyacceptlongtermdeposits.

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b) They provide longterm loans to the industrialists for

the purchase land, construct factory building, purchase
heavymachinery,etc.
c) They help in selling and underwrite of the debentures
andsharesofindustrialfirms.
d) They also provide information regarding the general
economicpositionoftheeconomy.

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3.AgriculturalBanks: Agricultural provide loans for

agricultureactivities.

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Theagriculturistsrequire:

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a) Shortterm credit to buy

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on

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purchase

agriculturalmachineryandequipment,etc.
In India, agricultural finance is provided by cooperative
institutions. Agricultural cooperatives provide short
term loans and Land Development Banks provide the
longtermcredittotheagriculturists.

4.ExchangeBanks:Thesebanksfinanceforeigntrade

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of a country. Their main function is to discount, accept

and collect foreign bills of exchange. They buy and sell
foreign currency and thus help businessmen in their
transactions. They also carry on the ordinary banking
business. In India, there are some commercial banks
whicharebranchesofforeignbanks.

5. Saving Banks: They accept small sums as deposits

from people. They encourage savings of the poor and
middleclasspeople.InIndiawedonothavesuchspecial

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institutions,butpostofficesperformsuchfunctions.After
nationalization most of the nationalised banks accept the
savingdeposits.

6. Central Bank: Central bank is the apex institution,

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which controls, regulates and supervises the monetary

and credit system of the country. Important functions of
thecentralbankare:
a)Ithasthemonopolyofnoteissue
b)Itactsasthebankertothegovernment

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b)Itactsasthebankertothegovernment
c)Itactsasthebankertothebanks
d)Supervisionofthebanks
e)Itservesasthelenderofthelastresort
f)Itisthecustodianofmemberbanksreserves
g)Itisthecustodianofnation'sreservesofinternational
currency
h)Itfunctionsasthebankofcentralclearance,settlement
andtransfer
i)Itactsasthecontrollerofcredit.
Besides these functions, Reserve Bank of India, also
performs many developmental functions to promote
economicdevelopmentinthecountry.

StructureofIndianBanking
1.CentralBank Reserve Bank of India (RBI). Every
Countryhasonecentralbankonly.
Ithasthemonopolyofnoteissue
Itactsasthebankertothegovernment
Itactsasthebankertothebanks
Supervisionofthebanks
Itservesasthelenderofthelastresort
Itisthecustodianofmemberbanksreserves
It is the custodian of nation's reserves of international
currency
It functions as the bank of central clearance, settlement
andtransfer
Itactsasthecontrollerofcredit.

2.ScheduledBanks A scheduled bank is a bank that

is listed under the second schedule of the RBI Act, 1934.
Scheduled banks are further classified into Scheduled
commercialandcooperativebanks.

I)ScheduledCommercialBanks
A) Domestic Banks These are registered and
incorporated within the country, India for ex SBI, PNB,
ICICI,HDFC,Dena,UBI,BOBandetc.
1)GovernmentBanks
Public Sector Bank These are owned and controlled by
the government. In India, the nationalized banks and the
regional rural banks come under these categories, e.g.
PNB,BOB,IOB,DenaBank,IndianBankandetc
RRB(RegionalRuralBank)e.g.PrathmaGraminBank
2)PrivateBanks These banks are owned by the private
individualsorcorporationsandnotbytheGovernmentor
cooperativesocieties,AxisBank,HDFCBank,ICICIBank
andetc
B) Foreign Banks These are foreign in origin and have

B) Foreign Banks These are foreign in origin and have

their head offices in the country of origin. Branches of
foreignbanksinIndiaforexHSBC,Citibankandetc

II) Scheduled Cooperative Banks Cooperative

banks are operated on the cooperative lines. In India,
cooperative credit institutions are organised under the
cooperative societies law and play an important role in
meetingfinancialneedsintheruralareas.
a)StatecooperativeBanks
b)CentralCooperativebanks
c)Primarycreditsocieties

3.NonScheduledBanksNobankatpresent

4.LandDevelopmentBankThesebankssatisfythe
longterm credit needs of the farmers. The purpose of
these banks is to fulfill the long term needs of the
customers for ex purchase of land, machinery and etc.
TheGovernmentstartedthelandmortgagebanksforthis
purposethesebankshavenowcometobecalledtheland
developmentbanks.Theseareoftwotypes:
a)CentralLandDevelopmentBank
b)PrimaryLandDevelopmentBank

5. Specialised/Development Bank For e.g. Exim

Bank,Nabard,IFCI,ICICI,SFI,IDBI

FunctionsofBanks
A)PrimaryFunctions
B)SecondaryFunctions

A)PrimaryFunctions
i)Acceptanceofdeposits
ii)LoansandAdvances

(i)AcceptanceofDeposits: Accepting deposits is the

primary function of a commercial Bank. Banks accept
depositsfromthepublic.
People can deposit their cash into following bank
accounts.

a) Fixed/Term/Time deposit Account Fixed

amountofcash(MinimumisRs1000)isdepositedinthis
accountforafixedperiodoftimeforex7days,6months,
1 year or 5 year and the money deposited in this account
cannot be withdrawn before the expiry of period. But in
the case of any emergency, banks allow Customers to
withdraw their deposited money in FD before maturity
(last) date. But In such cases, the bank deducts 1%

(deduction percentage many vary) from the interest

payableasonthatdate.Themainpurposeoffixeddeposit
account is to enable the individuals to earn a higher rate
of interest on their surplus funds. Longer the period of
deposit, higher the rate of interest. It is also called time
liabilityofthebanks.Amountisdepositedinthisaccount
foraperiodof7daysto10years.

b)RecurringDepositAccountUnderthisaccount,
a fixed amount is deposited every month for a fixed
periodforex6months,1year,3yearoretc.Thisamount
cannot be withdrawn before the maturity date under
exceptional circumstances. Interest on the amount
deposited is also credited (deposited) to the account of
thedepositor.RateofInterestofferedissimilartothatin
Fixed Deposits. Interest is compounded on quarterly
basis in recurring deposits. Amount is deposited in this
accountforaperiodof6monthsto120months.

c)Current/DemanddepositAccount Adepositor
can deposit his funds any number of times he likes and
can also withdraw the same any number of times he
wishes.Generally,businessmenusethisaccountfortheir
day to day deposits and withdraw transactions. No
interest is paid by the bank on the CA. Cheque book
facilityisprovidedandtheaccountholdercandepositall
typesofthechequesanddraftsintheirnameorendorsed
in their favour by third parties. The main benefit of this
account is that the account holder can get overdraft
facilityagainstpersonalorothersecurities.

d) Saving Account Saving accounts are opened to

encouragethepeopletosavetheirmoneyandgetinterest
ontheirdepositedmoney.Moneycanbedepositedatany
time but the maximum cannot go beyond a certain limit.
There is a restriction on the amount that can be
withdrawn at a particular time or during a week. If the
customer wishes to withdraw more than the specified
amount at any one time, he has to give prior notice.
Interest is allowed on the credit balance of this account.
The interest on Saving Bank Accounts was fixed by RBI
and it was fixed at 4.00% on daily balance basis. RBI has
deregulated Saving Fund account interest rates and now
banks are free to decide the same within certain
conditionsimposedbyRBI.

e)MoneyMultiplierAccountThepersonswhoare
interested to deposit money for more money at short
periodoftime.Underthisschemetheamountofinterest
isalsoredeposited.Therateofinterestishighestonthis
deposit. The depositor can withdraw the accumulated
money after stipulated period. The depositor can

money after stipulated period. The depositor can

withdraw the whole amount either in lumpsum or in
installments. If the depositor opted for installments
higher amount is returned to the person. This is most
suitableforoldageprovision

ii)LoansandAdvances:Thesecondprimaryfunction
of a commercial bank is to make loans and advances to
people against their personal security, gold and silver,
stocksofgoodsandotherassets.

1) Overdraft Bank overdraft is allowed to current

account holders. Under this facility Current account
holder can withdraw extra money up to the limit
sanctioned by bank. The current account holders may be
allowed to overdraw (more than available in the current
account). Interest is charged only on the amount
withdrawn.Thereisnoneedtoprovidecollateralsecurity
for the facility of overdraft. It can be used at any time of
requirement. It is the most useful form of loans to
commercial and industrial units to avail from time to
time. The overdraft will be granted by the bank with the
mutualagreementwiththecustomerandbank.

2) Cash Credit The Debtor/Customer is allowed to

withdrawn a certain amount upto the limit sanctioned by
the bank on a given security. The debtor withdraws the
amount within this limit. Interest is charged by the bank
on the amount actually withdrawn and for what period.
Under this customer can deposit his excess money and
interestischargedontheactuallywithdrawnmoneyonly.

3) Discounting Bills of Exchange Discounting of

Bills Banks provide shortterm finance by discounting
bills of their customers. Discounting Bills means banks
make payment of the amount before the due date of the
bills after deducting a certain rate of discount. The party
gets the funds without waiting for the date of maturity of
the bills. In case any bill is dishonoured on the due date,
thebankcanrecovertheamountfromthecustomer.The
commercial banks can rediscount the discounted bills
withthecentralbankswhentheyareinneedofmoney.

4)DemandloansItmeansafixedamountofloanis
raised by customer against their approved securities and
the loan is raised for a fixed period. After the maturity
period customer pays installment of principal amount
with interest on the amount raised in the form of EMI
(EquatedMonthlyInstallment).

B)SecondaryFunctions
1)Agencyfunctions

1)Agencyfunctions
2)GeneralUtilityServices

1)AgencyServices:Banksalsoperformcertainagency
functionsforandonbehalfoftheircustomers.
1) Banks collect and pay various credit instruments like
cheques, bills of exchange, promissory notes etc, on
behalfoftheircustomers.
2) Banks purchase and sell various securities like shares,
stocks,bonds,debenturesonbehalfoftheircustomers.
3) Banks collect dividends and interest on shares and
debentures of their customers and credit them to their
accounts.
4) Letter of references : Banks give information about
economic position of their customers to domestic and
foreign traders and likewise provide information about
economic position of domestic & foreign traders to their
customers.
5) Incometax Consultancy : Banks may also employ
income tax experts to prepare income tax returns for
theircustomersandtohelpthemtogetrefundofincome
tax.
6) Remitting of Money : Banks remit money at distant
placesthroughbankdraft.
7) Trustee and Executor: Banks also act as trustees and
executors of the property of their customers on their
advice.

2. General Utility Services: In addition to agency

services, the modern banks provide many general utility
servicesforthecommunityasgiven.
(a) Locker Facility: Bank provides locker facility to their
customers. The customers can keep their valuables, such
asgoldandsilverornaments,importantdocumentsforex
sharesanddebenturesintheselockersforsafecustody.
(b) Travellers Cheques Banks issue travellers cheques
tohelptheircustomerstotravelwithoutthefearoftheft
or loss of money. With this facility, the customers need
not take the risk of carrying cash with them during their
travels.
(c) Letter of Credit: Letters of credit are issued by the
banks

to

their

customers

certifying

their

credit

worthiness. Letters of credit are very useful in foreign

trade.
(d) Collection of Statistics: Banks collect statistics giving
important information relating to trade, commerce,
industries,moneyandbanking.Theyalsopublishvaluable
journalsandbulletinscontainingarticlesoneconomicand
financialmatters.

financialmatters.
(e)ActingReferee:Banksmayactasrefereeswithrespect
to the financial standing, business reputation and
respectabilityofcustomers.
(f) Underwriting Securities: Banks underwrite the shares
and debentures issued by the Government, public or
private companies. Underwriting means the banks
purchase themselves fully or partly the new shares of
companies, if the share remains unsold or unsubscribed
inthestockmarket.
(g) Gift Cheques: Some banks issue cheques of various
denominationstobeusedonauspiciousoccasions.
(h) Accepting Bills of Exchange on Behalf of Customers:
Sometimes, banks accept bills of exchange, internal as
well as foreign, on behalf of their customers. It enables
customerstoimportgoods.
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