Introduction:

Bank is a financial institution and a financial intermediary that accepts

deposits and channels those deposits into lending activities, either directly or
through capital markets. A bank connects customers that have capital deficits to
customers with capital surpluses. Banks are financial institutions that provide
banking and other financial services to their customers. There are also
nonbanking institutions that provide certain banking services without meeting
the legal definition of a bank. Banks are a subset of the financial services
industry. A banking system also referred as a system provided by the bank
which offers cash management services for customers, reporting the
transactions of their accounts and portfolios, throughout the day.

The banking system in India should not only be hassle free but it should be
able to meet the new challenges posed by the technology and any other external
and internal factors. For the past three decades, India's banking system has
several outstanding achievements to its credit. The Banks are the main
participants of the financial system in India. The Banking sector offers several
facilities and opportunities to their customers. All the banks safeguards the
money and valuables and provide loans, credit, and payment services, such as
checking accounts, money orders, and cashier's cheques. The banks also offer
investment and insurance products. As a variety of models for cooperation and
integration among finance industries have emerged, some of the traditional
distinctions between banks, insurance companies, and securities firms have
diminished. In spite of these changes, banks continue to maintain and perform
their primary role-accepting deposits and lending funds from these deposits
Banking in India originated in the last decades of the 18th century. The first
banks were The General Bank of India, which started in 1786, and Bank of
Hindustan, which started in 1790; both are now defunct. The oldest bank in
existence in India is the State Bank of India, which originated in the Bank of
Calcutta in June 1806, which almost immediately became the Bank of Bengal.
This was one of the three presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were established under
charters from the British East India Company. For many years the Presidency
banks acted as quasi-central banks, as did their successors. The three banks
merged in 1921 to form the

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Imperial Bank of India, which, upon India's independence, became the State
Bank of India in 1955 .

HISTORY, ORIGIN AND MEANING OF BANKING

Ancient India :

The origin of banking in dates back to the Vedic period. There are
repeated references in the Vedic literature to money lending which was quite
common as a side business. Later, during the time of the Smritis, which
followed the Vedic Period and the Epic age, banking become a full-time
business and got diversified with bankers performing most of the functions of
the present day. The Vaish community, who conducted banking business during
this period. Asfar back as the second or third century A.D. Manu the great
Hindu Jurist, devoted a section of his work to deposits and advances and laid
down rules relating to rates of interest to be charged. Still later, that is during
the Buddhist period, banking business was decentralized and become a matter
of volition. Consequently, Brahmins and Kshatriyas, who were earlier not
permitted to take to banking as their profession except under exceptionally rare
circumstances, also took to it as their business. During this period banking
became more specific and systematic and bills of exchange came in wide use.
Shresthisl or bankers influential in society and very often acted as royal
treasurers.

From the ancient times in India, an indigenous banking system has prevailed.
The businessmen called Shroffs, Seths, Sahukars, Mahajans, Chettis etc. had
been carrying on the business of banking since ancient times. These indigenous
bankers included very small money lenders to shroffs with huge businesses,
who carried on the large and specialized business even greater than the
business.

Mughal Period :

Mughal dynasty started with Babur ascending the throne of Agra in

1526 A.D. During Mughal period the indigenous bankers played a very
important role in lending money and financing of foreign trade and commerce.
They were also engaged in the profitable business of money changing. Banking
business was, however particularly during the secular and settled reign of
Emperor Akbar was gave the much needed political stability to the country.

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Every city, big or small had a _Sheth also known as a _Shah' or _Shroff, who
performed a

number of banking functions. He was respected by all parts of people as an

important citizen.

The first bank in India, called The General Bank of India was established in the
year 1786. The East India Company established The Bank of Bengal/Calcutta
(1809), Bank of Bombay (1840) and Bank of Madras (1843). The next bank
was Bank of Hindustan which was established in 1870. These three individual
units (Bank of Calcutta, Bank of Bombay, and Bank of Madras) were called as
Presidency Banks. Allahabad Bank which was established in 1865. was for the
first time completely run by Indians. Punjab National Bank Ltd. was set up in
1894 with head quarters at Lahore. Between 1906 and 1913, Bank of India,
Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of
Mysore were set up. In 1921, all presidency banks were amalgamated to form
the Imperial Bank of India which was run by European Shareholders.

After that the Reserve Bank of India was established in April 1935. At the time
of first phase the growth of banking sector was very slow. Between 1913 and
1948 there were approximately 1100 small banks in India. To streamline the
functioning and activities of commercial banks, the Government of India came
up with the Banking Companies Act, 1949 which was later changed to Banking
Regulation Act 1949 as per amending Act of 1965 (Act No.23 of 1965).
Reserve Bank of India was vested with extensive powers for the supervision of
banking in India as a Central Banking Authority.

After independence, Government has taken most important steps in regard of

Indian Banking Sector reforms. (In 1955, the Imperial Bank of India was
nationalized and was given the name "State Bank of India", to act as the
principal agent of RBI and to handle banking transactions all over the country,
It was established under State Bank of India Act, 1955. Seven banks forming
subsidiary of State Bank of India was nationalized in 1960. On 19th July, 1969,
major process of nationalization was carried out. At the same time 14 major
Indian commercial banks of the country were nationalized. In 1980, another six
banks were nationalized, and thus raising the number of nationalized banks to
20. Seven

more banks were nationalized with deposits over 200 Crores. Till the year 1980
approximately 80% of the banking segment in India was under government's
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ownership. (On the suggestions of Narsimhan Committee, the Banking
Regulation Act was amended in 1993 and thus the gates for the new private
sector banks were opened. The following are the major steps taken by the
Government of India to Regulate Banking institutions in the country.

There seems no uniformity amongst the economist about the origin of the word
Bank According to some authors the word "Bank". itself is derived from the
word "Bancus" or "Banque" that is a bench. The carly bankers, the Jews in
Lombardy, transacted their business on benches in the market place, when, a
banker failed, his "Banco" was broken up by the people; it was called
"Bankrupt". This etymology is however, ridiculed by McLeod on the ground
that --The Italian Money changers as such were never called Banchier in the
middle ages.

It is generally said that the word "BANK" has been originated in Italy. In the
middle of 12th century there was a great financial crisis in Italy due to war. To
meet the war expenses, the government of that period a forced subscribed loan
on citizens of the country at the interest of 5% per annum. Such loans were
known as 'Compare', 'minto' etc. The most common name was "Monte'. In
Germany the word "Monte was named as 'Bank' or 'Banke' According to some
writers, the word 'Bank' has been derived from the word bank. It is also said that
the word 'bank' has been derived from the word 'Banco' which means a bench.
The Jews money lenders in Italy used to transact their business sitting on
benches at different market places. When any of them used to fail to meet his
obligations, his 'Banco' or banch or bench would be broken by the angry
creditors. The word "Bankrupt' seems to be originated from broken Banco.
Since, the banking system has been originated from money leading business; it
is rightly argued that the word 'Bank' has been originated from the word
"Banco'. Whatever be the origin of the word "Bank' as Professor Ram Chandra
Rao says, -It would trace the history of banking in Europe from the middle
Ages. Actually meaning of bank is not specifies in any regulation or act. In
India, different people have different type of meaning for bank. Normal salary
earner knows means of bank that it is a saving institution, for current account
holder or businessman knows bank as a financial institutions and many other.
Bank is not for profit making, it creates saving activity in salary earner.

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In Principal cities, besides shroffs there was a _Napur Shell Town Banker'.
They were instrumental in changing Tunds from place to place and doing
collection business many through Ilundis. The Hundis were accepted mode of
change of money for commeren transactions

British Period

The seventeenth century witnessed the coming into India of the English
traders. The English traders established their own agency houses at the port
towns of Bombay, Calcutta and Madras. These agency houses, apart from
engaging in trade and commerce, also carried on the banking business. The
development of the means of transport and communication causing deflection of
trade and commerce along new routes, changing the nature of trade activities in
the country were the other factor which also contributed to the downfall of the
indigenous bankers. Partly to fill the void caused by their downfall and partly to
finance the growing financial requirements of English trade. The East India
Company now came to favor the establishment of the banking institutions
patterned after the Western style.16 The first Joint Stock Bank established in the
country was the Bank of Hindustan founded in 1770 by the famous English
agency house of M/s. Alexander and Company. The Bengal Bank and The
Central Bank of India were established in 1785. The Bank of Bengal, the first of
the three Presidency Banks was established in Calcutta in 1806 under the name
of bank of Calcutta. It was renamed in 1809 on the grant of the charter as a
Bank of Bengal. The two other presidency banks, namely the bank of Bombay
and the Bank of Madras, were established in 1840 and 1843 respectively. After
the Paper Currency Act of 1862, however the right of the note issue was taken
away from them. The Presidency Banks had branches in important towns of the
country. The banking crisis of 1913 to 1917 however brought out the serious
deficiencies in the existing banking system in the country showing the need for
effective co-ordination through the establishment of the Central Bank. Afte
repeated efforts, the three presidency bank was fused into a single bank under
the name of th Imperial Bank of India in 1921.

1949 : Enactment of Banking Regulation Act.

1955 : Nationalisation of State Bank of India.

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1959 : Nationalization of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalisation of 14 major Banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalisation of seven banks with deposits over 200 Crores.

Nationalisation:

By the 1960s, the Indian banking industry has become an important

tool to facilitate the development of the Indian economy At the same time, it has
emerged as a large employer, and a debate has ensured about the possibility to
nationalise the banking industry. Indira Gandhi, the-then Prime Minister of
India expressed the intention of the Government of India (GOI) in the annual
conference of the All India Congress Meeting the GOI issued an ordinance and
nationalised the 14 largest commercial banks with effect from the midnight of
July 19, 1969. Jayaprakash Narayan, a national leader of India, described the
step as a Masterstroke of political sagacity" Within two weeks of the issue of
the ordinance, the Parliament passed the Banking Companies (Acquisition and
Transfer of Undertaking) Bill, and it received the presidential approval on 9
August, 1969. A second step of nationalisation of 6 more commercial banks
followed in 1980. The stated reason for the nationalisation was to give the
government more control of credit delivery.

With the second step of nationalisation, the GOI controlled around 91% of the
banking business in India. Later on, in the year 1993, the government merged
New Ban nationalised banks and resulted in the reduction of the number of
nationalised banks from 20 to 19,

Aller this: until the 1990s, the nationalised banks grew at a pace of around 4%,
closer to the average growth rate of the Indian economy The nationalised banks
were credited by some; including Home minister P. Chidambaram, to have
helped the Indian cconomy withstand the global financial crisis of 2007-2009.

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Liberalisation:

There are two areas of competitions which banking industry is facing

internationally and nationa he early 1990s, the then Narsimha Rao government
embarked on a policy of liberalisation, licensing a small number of private
banks. In the pre-liberalization era, Indian banks could grow in a closed
economy but the banking sector opened up for private

competition

It is possible that private banks could become dominant players even within
India. These came to be known as New Generation tech-savvy banks, and
included Global Trust Bank (the first of such new generation banks to be set
up), which later amalgamated with Oriental Bank of Commerce, Axis
Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank- This move along with
the rapid growth in the economy of India revolutionized the banking sector in
India which has seen rapid growth with strong contribution from all the three
sectors of banks, namely, government banks, private banks and foreign banks.
The new policy shook the banking sector in India completely.

Use of ATM cards, Internet Banking, Phone Banking, Mobile Banking are the
new innovative channels of banking which are being widely used as they result
in saving both time and money which are two essential things that everyone is
short of and is running to catch hold of them. Moreover private sector banks are
aligning its infrastructures, marketing quality and technology to build deep
commitment in building consumer and retail banking- The main focus of these
banks is on innovative range of services or products. The Reserve Bank of India
is an autonomous body, with minimal pressure from the government. The stated
policy of the Bank on the Indian Rupee is to manage volatility but without any
fixed exchange rate and this has mostly been true. With the growth in the Indian

k of India with Punjab National Bank. It was the only merger between

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economy expected to be strong for quite some time-especially in its services
sector-the demand for banking services, especially retail banking, mortgages
and investment services. are expected to be strong.

Finance is the life blood of trade, commerce and industry Now a days, bank
mones home of modern business Development of any country mainly depends
upon the aning system. The tem bank is derived from the French word banco
which means a many exchange table. In olden days, European money lenders
or money changers to display Show) coins of different countries in big heaps
(quantity) on benches or the purpose of lending or exchanging A bank is
financial institution which deals with deposits and advances and other related
services. It receives money from those who at the form of deposits sad it lends
money to those who need it.

DEFINITION OF BANK
As bank is a very comprehensive word, various definitions have been given of
the com a nous places and in various forms. To understand the basic idea and
the meaning of the term bank clearly, few definitions of the term bank are taken
in different

DEFINITION GIVEN IN DICTONARY

L The Oxford English Dictionary, "A bank is an establishment for custody of

money se from one of behalf of its customers. Its essential duty is to pay their
drafts on it. Its profit arises from the use of the money left unemployed by
them"

2. s orting to Encyclopedia Britannica, "Bank is an institution that deals in

money and is subtitutes 20 provides other financial services. Banks accept
deposits and make loans ad dive a profit from the difference in the interest rates
paid and charged, respectively. Some banks also have the power to create
money.

3. Cruck History, Banks means a bench or table for changing money".

4. Wester's Dictionary. "Bank is an institution which traders in money,

establishment for on), as also for making loans and discounts and facilitating the
transmission of aces from one place to another".

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5. Business Dictionary, "An establishment authorized by a government to accept
deposits, geyinterest, dear Checks, makes loans, act as an intermediary in
financial transactions, and poids de financial services to its customers".

Bank is an establishment for the custody of money, which it pays out on

customers order

-Oxford Dictionary

According to the Indian central banking enquiry committee, A banking

company as one which carries on as its principal business, the acceptance of
money deposits on current account or otherwise subject to withdrawal by
cheque, draft, or order.

• Indian central banking enquiry Committee

• A banker is a person, firm or company having place of business where credits

are opened by the deposit or collection of money or currency, subject to or paid
or remitted upon draft, cheques, order or where money is advanced or loaned on
stocks, bonds, bullion and bills of exchange and promissory notes are received
for discount and sales.

-Findlay Shiras

* A Bank is financial intermediary, a dealer in loans and debts

-Cairncross

A bank is dealer in debts, his own and other people

-Crowther

• A banker is one who, in the ordinary course of his business received money
which he repays by honoring cheques of persons from whom or on whose
account he receives

. -H.L Hart

• Banking means accepting, for the purpose of lending or investment, of

deposits of money from the public, repayable on demand or otherwise, and
withdraw able by cheque, draft or otherwise

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- Banking Companies (Regulation) Act of India, 1949

• An Institution which trades in money, establishment for the deposit, custody

and issue of money as also for making loans and discount and facilitating the
transmission of remittance from one place to another

-Webster's Dictionary

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CLASSIFICATION OF BANKING INDUSTRTY IN INDIA

Indian banking industry has been divided into two parts, organized
and unorganized sectors. The organized sector consists of Reserve Bank of
India, Commercial Banks and Co-operative Banks, and Specialized Financial
Institutions (IDBI, ICICI, IFC etc.). The unorganized sector, which is not
homogeneous, is largely made up of money lenders and indigenous bankers. An
outline of the Indian Banking structure may be presented as follows;

1. Reserve bank of India

The reserve bank of India is a central bank and was established in

April 1, 1935 in accordance with the provisions of reserve bank of India act
1934. The central office of RBI is located at Mumbai since inception. Though
originally the reserve bank of India was privately owned, since nationalization
in 1949, RBI is fully owned by the Government of India. It was inaugurated
with share capital of Rs.5 Cores divided into shares of Rs.100 each fully paid
up.

The RBI plays an important part in the Development Strategy of the

Government of India; it is a member bank of the Asian Clearing Union. The
general superintendence and direction of the RBI is entrusted with the 21-
member central board of directors; the governor; 4 deputy governors; 2 finance
ministry representatives usually the economic affairs secretary and the financial
services secretary; 10 government-nominated directors to represent important
elements of India’s economy; and 4 directors to represent local boards
headquartered at Mumbai, Kolkata, Chennai and new Delhi. Each of these local
boards consists of 5 members who represent regional interests, the interests of
co-operative and indigenous banks.

RBI is governed by a central board headed by a governor appointed by

the central government of india.RBI has 22 regional offices across India. The
reserve bank of India was nationalized in the year 1949.The RBI act 1934 was
commenced on April 1, 1935. The act, 1934 provides the statutory basis of the
functioning of the bank. The bank was constituted for the need of following;

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 Ministry of Finance

Reserve Bank of India

Scheduled Banks

Commercials Banks Co-operative Banks

Primary credit Societies

Public sector Banks
Central Co-operative
Private sector Banks

Regional Rural Banks State Co-operative

Foreign Banks

- To regulars the issues of bank note.

- To maintain reserves with a view to securing monetary stability.
- To operate the credit currency system of the country to its advantage.

Functions of RBI as a central bank of India are explained briefly as follows.

Bank of Issue:
The RBI formulates, implements, and monitors the monitory policy. Its
main objective is maintaining price stability and ensuring adequate flow of
credit to productive sector.

Banker’s Bank:

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 Reserve bank of India also works as a central bank where commercial
banks are account holders and can deposit money. RBI maintains banking
accounts of all scheduled banks. Commercial banks create credit. It is the duty
of the RBI to control the credit through the CRR, bank rate and open market
operations. As banker’s bank, the RBI facilitates the clearing of cheques
between the commercial banks and helps the inter-bank transfer of funds. It can
grant financial accommodation to schedule banks. It acts as the lender of the last
resort by providing emergency advances to the banks. Its supervises the
functioning of the commercial banks and takes action against it if the need
arises. The RBI also advices the banks on various matters for example
Corporate social responsibility.

Regulator-Supervisor of the financial system:

RBI prescribes broad parameters of banking operations within which
the country’s banking and financial system functions. Their main objective is to
maintain public confidence in the system, protect depositor’s interest and
provide cost effective banking services to the public.

Manager of exchange control:

The manager of exchange control department manages the foreign
exchange, according to the foreign exchange management act, 1999. The
manager’s main objective is to facilitate external trade and payment and
promote orderly development and maintenance of foreign exchange market in
India

Issuer of currency:
A person who works as an issuer, issues and exchanges or destroys the
currency and coins that are not fit for circulations. His main objective is to give
the public adequate quantity of supplies of currency notes and coins and in good
quality.

Reserve bank of India is the sole body who is authorised to issue

currency in India. The bank also destroys the same when they are not fit for
circulations. All the money issued by the central bank is its monetary liability,
i.e., the central bank is obliged to back the currency with assets of equal value,
to enhance public confidence in paper currency. The objectives are not issue
bank notes and give public adequate supply of the same, to maintain the

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currency and credit system of the country to utilize it in its best advantage, and
to maintain the services.

Developmental role:
The RBI performs the wide range of promotional functions to support
national objective such as contests, coupons maintaining good public relations
and many more.

Related functions:
There are also some of the related functions to the above mentioned
main functions. They are such as; banker to the government, banker to banks
etc.

 Banker to government performs merchant banking function for the

central and the state governments; also acts as their banker.
 Banker to banks maintains banking accounts to all scheduled banks.

Controller of Credit:
RBI performs the following tasks:

 It holds the cash reserve of all the scheduled banks.

 It controls the credit operations of banks through quantitative and
qualitative controls.
 It controls the banking system through the system of licensing, inspection
and calling for information.
 It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.

Supervisory Functions:
In addition to its traditional central banking functions, the Reserve Bank
performs certain non-monetary functions of the nature of supervision of banks
and promotion of sound banking in India. RBI has authority to regulate and
administer the entire banking and financial system. Some of its supervisory
functions are given below.

1. Granting license to banks

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 The RBI grants license to banks for carrying its business. License is
also given for opening extensions counters, new branches, even to close down
exciting branches.

2. Bank inspection
The RBI grants license to banks working as per the directives and in
prudent manner without undue risk. In addition to this it can ask for periodical
information from banks on various components of assets and liabilities.

3. Control over NBFIs

The Non-Bank Financial Institutions are not influenced by the working
of a monitory policy. However RBI has a right to issue directives to the NBFIs
from time to time regarding their functioning. Through periodic inspection, it
can control the NBFIs.

4. Implementation of the Deposit Insurance Scheme

The RBI has set up the Deposit insurance Guarantee Corporation in order to
protect the deposits of small depositors. All bank deposits below Rs. One Lakh
are insured with this corporation. The RBI work to implement the Deposit
Insurance Scheme in case of bank failure.

2. Indian Scheduled Commercial Banks

The commercial banking structure in India consists of scheduled banks, and
unscheduled banks.

Scheduled Banks:
Scheduled Banks in India constitute those banks which have been included in
the second schedule of RBI act 1934. RBI in turn includes only those banks in
this schedule which satisfy the criteria laid down vide section 42(6a) of the Act.
“Scheduled banks in India “means the State Bank of India constituted under the
State Bank of India Act, 1955(23 of 1955),a subsidiary bank as defined in the
State Bank of India(subsidiary banks) Act, 1959 (38 of 1959),a corresponding
new bank constituted under section 3 of the banking companies (Acquisition
and Transfer Undertaking) Act, 1980(40 of 1980), or any other bank being a

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bank included in the Second Schedule to the Reserve bank of India Act,1934(2
of 1934), but does not include a co-operative bank”.

For the purpose of assessment of performance of banks, the Reserve

Bank of India categories those banks as public sector banks, old private sector
banks, new private sector banks and foreign banks, i.e. private sector, public
sector, and foreign banks come under the umbrella of scheduled commercial
banks.

Commercial Banks:
Commercials banks may be defined as, any banking organisation that
deals with the deposits and loans of business organisations. Commercial banks
issue bank checks and drafts, as well as accept money on term deposits.
Commercial banks also act as moneylenders, by way of instalment loans and
overdrafts. Commercial banks also allow for a variety of deposit accounts, such
as checking, savings, and time deposit. These institutions are run to make a
profit and owned by a group of individuals.

Public Sector Banks:

The Public Sector Banks are those where govt holdings are more than
50%while nationalized banks are those banks which were nationalized in 1969
and1980. Thus all nationalized banks are public sector banks. Thus in total 27
PSB’s are there.

Examples of public sector banks are: SBI, Bank of India, Canara

Bank etc.
Private Sector Banks:
These are banks majority of share capital of the bank is held by private
individuals. These banks are registered as companies with limited liability.

“Private Banks” can also refer to non-government owned banks in

general, in contrast to government-owned (or nationalized) banks, which were
prevalent in communist, socialist and some social democratic with “Private
Banks” that offer services to high net worth individuals and others.

Private Banks are banks that are not incorporated. A private bank is
owned by either an individual or a general partner(s) with limited partner(s). In

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any such case, the creditors can look to both the “entirety of banks assets” as
well as the entirety of the sole proprietors/general-partner’s assets. These are the
major players in the banking sector as well as in extension of the business
activities India.

Reserve Bank of India (RBI) came in picture in 1935 and became the
centre of every other bank taking way all the responsibilities and functions of
Imperial Bank. The share of the private bank branches stayed nearly same
between 1980 and 2000. Then form early 1990’s RBI’s liberalization policy
came in picture and with this the government gave license to a few private
banks, which came to be known as new private sector banks.

Examples of private sector banks are: ICICI Bank, Axis Bank,

HDFC,etc.
Foreign Banks:
These banks are registered and have their headquarters in a foreign
country but operate their branches in our country. Now, foreign banks in India
are permitted to set up local subsidiaries. The policy conveys that foreign banks
in India may not acquire Indian ones (except for weak identified by the RBI, on
its terms) and their Indian subsidiaries will not be able to open branches freely.
Foreign banks have brought latest technology and latest banking practices in
India. Government has come up with a road map for expansion of foreign banks
in India.

Examples of foreign banks in India are: HSBC, Citibank,

Standard Chartered Bank, JP MorganChase Bank etc.
Regional Rural Bank:
The government of India set up Regional Rural Banks (RRBs) on
October 2, 1975. The banks provide credit to the weaker sections of the rural
areas, particularly the small and marginal farmers, agricultural labourers, and
small entrepreneurs. Initially, five RRBs were set up on October 2, 1975 which
was sponsored by Syndicate Bank, State Bank of India, Punjab National Bank,
United Commercial Bank and United Bank of India.

The total authorized capital was fixed at Rs.1 Crore which has since
been raised to Rs. 5 Cores. There are several concessions enjoyed by the RRBs

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by Reserve Bank of India such as lower interest rates and refinancing facilities
from NABARD like lower cash ration, lower statutory liquid ratio, lower rate of
interest on loans taken from sponsoring banks, managerial and staff assistance
from the sponsoring bank and reimbursement of the expenses on staff training.
The RRBs, to oversee their operations, provide refinance facilities, to monitor
their performance and to attend their problems.

Co-operative Banks:
Co-operative banks are small-sized units organized in the co-operative
sector which operate both in urban and non-urban centres. These banks are
traditionally centered around communities, localities and work place groups and
they essentially lend to small borrowers and businesses. A co-operative bank is
a financial entity which belongs to its members, who are at the same time the
owners and the customers of their bank.

Co-operative banks are often created by persons belonging to the same

local or professional community or sharing a common interest. Co-operative
banks generally provide their members with a wide range of banking and
financial services (loans, deposits, banking accounts, etc). They provide limited
banking products and are specialists in agriculture related products.

Co-operative banks are the primary financiers of agricultural activities,

some small scale industries and self-employed workers. Co-operative banks
function on the basis of “no-profit no-loss”.

Anyonya Co-operative Bank Limited (ACBL) is the first co-operative

bank in India located in the city of Vadodara in Gujarat.

Primary credit societies:

These are formed in small locality like a small town or a village. The
members using this bank usually know each other and the chances of
committing fraud are minimal.

Central co-operative banks:

These banks have their members who belong to the same district. They
function as other commercial banks and provide loans to their members. They
act as a link between the state co-operative banks and primary credit societies.

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State co-operative banks:
These banks have a presence in all the states of the country and have
their presence throughout the state.

SERVICES PROVIDED BY BANKING ORGANISATIONS

Banking Regulation Act in India, 1949 defines banking as “Accepting” for
purpose of lending or investment of deposits of money from the public,
repayable on demand and withdraw able by cheques, drafts, orders etc. As per
the above definition a bank essentially performs the following functions:-

 Accepting Deposits or savings functions from customer or public by

providing bank account, current account, fixed deposit account, recurring
accounts etc.
 The payment transactions like lending money to the public. Bank
provides an effective credit delivery system for loan able transactions.
 Provide the facility of transferring of money from one place to another
place. For performing this operation, bank issues demand drafts, banker’s
cheques, money orders etc. for transferring the money. Bank also
provides the facility of Telegraphic transfer or tele cash orders for quick
transfer of money.
 A bank performs a trustworthy business for various purposes.
 A bank also provides the safe custody facility to the money and valuables
of the general public. Bank offers various types of deposit schemes for
security of money. For keeping valuables bank provides locker facility.
The lockers are small compartments with dual locking system built into
strong cupboards. These are stored in the bank’s strong room and fully
secured.

 Banks act on behalf of the Govt. to accept its tax and non-tax receipt.
Most of the government disbursements like pension payments and tax
refunds also take place through banks.

There are several types of banks, which differ in the number of services
they provide and the clientele (Customers) they serve. Although some of the

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differences between these types of banks have lessened as they have begun to
expand the range of products and services they offer, there are still key
distinguishing traits.

These banks are as follows

Commercial banks, which dominate this industry, offer a full range of services
for individuals, businesses, and governments. These banks come in a wide range
of sizes, from large global banks to regional and community banks.

Global banks are involved in international lending and foreign currency

trading, in addition to the more typical banking services.

Regional banks have numerous branches and automated teller machine (ATM)
locations throughout a multi-state area that provide banking services to
individuals. Banks have become more oriented toward marketing and sales. As
a result, employees need to know about all types of products and services
offered by banks.

Community banks are based locally and offer more personal attention, which
many individuals and small businesses prefer. In recent years, online banks-
which provide all services entirely banks, have also expanded to offer online
banking, and some formerly Internet-only banks are opting to open branches.

Savings banks and savings and loan associations, sometimes called thrift
institutions, are the second largest group of depository institutions. They were
first established as community-based institutions to finance mortgages for
people to buy homes and still cater mostly to the savings and lending needs of
individuals.

Credit unions are another kind of depository institution. Most credit unions are
formed by people with a common bond, such as those who work for the same
company or belong to the same labour union or church. Members pool their
savings and, when they need money, they may borrow from the credit union,
often at a lower interest rate than that demanded by other financial institutions.

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Federal Reserve Banks are Government agencies that perform many financial
services for the Government. Their chief responsibilities are to regulate the
banking industry and to help implement our Nation’s monetary policy so our
economy can run more efficiently by controlling the Nation’s money supply-the
total quantity of money in the country, including cash and bank deposits.

For example, during slower periods of economic activity, the Federal

Reserve may purchase government securities from commercial banks, giving
them more money to lend, thus expanding the economy. Federal Reserve banks
also perform a variety of services for other banks. For example, they may make
emergency loans to banks that are short of cash, and clear checks that are drawn
and paid out different banks.

The money banks lend, comes primarily from deposits in checking and savings
accounts, certificates of deposit, money market accounts, and other deposit
accounts that consumers and businesses set up with the bank. These deposits
often earn interest for their owners, and accounts that offer checking, provide
owners with an easy method for making payments safely without using cash.
Deposits in many banks are insured by the Federal Deposit Insurance
Corporation, which guarantees that depositors will get their money back, up to a
stated limit, if a bank should fail.

Types of Commercial Banks of India:

A bank is an institution where debts (usually referred to as bank
deposits) are commonly accepted in final settlement of others people’s debts.

Yet another definition defines banking as “the accepting for the purpose
of lending, investment of deposits of money from the public, repayable on
demand or otherwise and with draw able by cheques, drafts or otherwise.”

The modern bank thus, carries out several functions. It provides safe
custody for those savers who want to put their savings with it and earns an
income also, offers facilities to the busy businessmen or professional as the
cheque facility, thus making the flow of payments and receipts easier while at
the same time acting as the custodian of their funds. It also provides finance for
the needy ones by allowing overdraft and loan facilities by creating credit.

Types of Banking:

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 Banks can be classified into different groups either on the basis of their
structure or on the basis of their function. Structurally banking can be divided
into Branch banking and Unit banking. Functionally, banking can be divided
into Deposit Banking, Investment Banking and Mixed Banking.

Branch Banking:
This refers to a system under which two or more banks are opened
under a single ownership. Examples are State Bank of India, Punjab National
Bank, Indian Bank etc. which have several branches spread all over India.

Unit Banking:
This refers to that system of banking in which banking operations are
carried on through a single organisation, without any branches. This system
used to be popular in America.

One great advantage of branch banking is that the same bank can cater
to several parts of a large country (through its branches situated in those parts)
which a unit bank would find difficult to do. As against this, a unit bank has the
advantage that its efforts are concentrated in one area so that it can serve that
area well.

Group Banking:
This is a system under which two or more banks, separately
incorporated, are connected by being controlled by a single holding company as
trust.

Chain Banking:
This is similar to Group Banking. Here two or more banks are
controlled by a single group through the ownership of shares or otherwise.

Deposit Banking:
In this category, the banks act as custodian or trustees of the depositors.

Investment Banking:

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 This refers to banks whose main function is to provide finance for
investment to industrial concerns. They provide this by purchasing shares and
debentures of newly floated companies.

Mixed Banking:
Most banks in India play both roles. Deposit Banking and Investment
Banking. Such type of banking is called mixed banking.

Functions of Commercial Banks:

Commercial banks are institutions that conduct business for profit
motive by accepting public deposits for various investment purposes.

The functions of commercial banks are broadly classified into primary

functions and secondary functions, which are shown in Figure-1:

Functions of
Commercial Banks

Primary Secondary
Functions Functions

Figure-1: Functions of Commercial Banks

The functions of commercial banks (as shown in Figure-1) are

discussed as follows:
(a)Primary Functions:
The primary functions of a bank are also known as banking functions. They are
the main functions of a bank. Refer to the basic functions of commercial
banks that include the following:

 Accepting Deposits:

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 The main function of commercial banks is to accept deposits from the
public. Banks maintains demand deposits accounts for their customers and
converts deposit money into cash and vice versa, at the direction of the latter.
Demand deposits are technically accepted in current accounts, which are with
draw able any time by the depositor by means of cheques.

Deposits are made in fixed deposit accounts which are with draw able
only after a specific period. Thus, fixed deposits are time liabilities of the banks.
Deposits are also received in saving bank accounts subject to certain restrictions
on the amount receivable and with draw able. This is how banks pool the
scattered savings of the community and serve as the reserve of its savings.

The main kinds of deposits are:

(i)Current Account Deposits or Demand Deposits:
These deposits refer to those deposits which are repayable by the
banks on demand:
1. Such deposits are generally maintained by businessmen with the intention of
making transactions with such deposits.

2. They can be drawn upon by a cheque without any restriction.

3. Banks do not pay any interest on these accounts. Rather, banks impose
service charges for running these accounts.

(ii)Fixed Deposits or Time Deposits:

Fixed deposits refer to those deposits, in which the amount is deposited with the
bank for a fixed period of time.

1. Such deposits do not enjoy cheque-able facility.

2. These deposits carry a high rate of interest.

Basis Demand Deposits Fixed Deposits

Cheque facility They are cheque able They are non-cheque able
deposits. deposits.

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Interest payments They do not carry any They carry interest which
interest. varies directly with the
period of time.

Number of The depositor can make Depositor generally

transactions any number of transactions makes only two
for deposit or with drawl transactions: (i)Deposit
of money. of money in the
beginning
(ii) With drawl of money
on maturity.

(iii)Saving Deposits:
These deposits combine features of both current account deposits
and fixed deposits:
1. The depositors are given cheque facility to withdraw money from their
account. But, some restrictions are imposed on number and amount of
withdrawals, in order to discourage frequent use of saving deposits.
2. They carry a rate of interest which is less that interest rate on fixed
deposits. It must be noted that Current Account deposits and saving
deposits are cheque able deposits, whereas, fixed deposit is a non-cheque
able deposit.

 Advancing of Loans:
The deposits received by banks are not allowed to remain idle, so, after
keeping certain cash reserves, the balance is given to needy borrowers and
interest is charged from them, which is the main source of income for these
banks.

Different types of loans and advances made by Commercial banks

are:
(i)Cash Credit:

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 Cash credit refers to a loan given to the borrower against his current
assets like shares, stocks, bonds, etc. A credit limit is sanctioned and the amount
is credited in his account. The borrower may withdraw any amount within his
credit limit and interest is charged on the amount actually withdrawn.

(ii)Demand Loans:
Demand loans refer to those loans which can be recalled on demand by
the bank at any time. The entire sum of demand loan is credited to the account
and interest is payable on the entire sum.

(iii)Short-term Loans:
They are given as personal loans against some collateral security. The
money is credited to the account of borrower and the barrower can withdraw
money from his account and interest is payable on the entire sum of loan
granted.

 Overdraft
This type of advances is given to current account holders. No separate
account is maintained. All entries are made in the current account. A certain
amount is sanctioned as overdrafts which can be withdrawn within a certain
period of time say three months or so. Interest is charged on actual amount
withdrawn. An overdraft facility is granted against a collateral security. It is
sanctioned to businessman and firms.

 Discounting of Bill of Exchange

The bank can advance money by discounting or by purchasing bills of
exchange both domestic and foreign bills. The bank pays the bill amount to the
drawer or the beneficiary of the bill by deducting usual discount charges. On
maturity, the bill is presented to the drawer or acceptor of the bill and the
amount is collected.

(b)Secondary Functions:
Refer to crucial functions of commercial banks. The secondary
functions can be classified under three heads, namely, agency functions, general
utility functions, and other functions.
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  Agency Functions:
Implies that commercial banks act as agents of customers by
performing various functions, which are as follows:

 Collecting Cheques:
Refer to one of the important functions of commercial banks. The banks collect
checks and bills of exchange on the behalf of their customers through clearing
house facilities provided by the central bank.

 Collecting Income:
Constitute another major function of commercial banks. Commercial banks
collect dividends, pension, salaries, rents, and interests on investments on behalf
of their customers. A credit voucher is sent to customers for information when
any income is collected by the bank.

 Paying Expenses:
Implies that commercial banks make the payments of various obligations of
customers, such as telephone bills, insurance premium, school fees, and rents.
Similar to credit voucher, a debit voucher is sent to customers for information
when expenses are paid by the bank.

 Transfer of Funds:
Banks provide the facility of commercial and easy remittance of funds from
place-to-place with the help of instruments like demand drafts, mails transfers,
etc.

 Purchase and sale of Foreign Exchange:

Some commercial banks are authorized by the central bank to deal in foreign
exchange. They buy and sell foreign exchange on behalf of their customers and
help in promoting international trade.

 Purchase and sale of Securities:

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Commercial banks buy and sell stocks and shares of private companies as well
as government securities on behalf of their customers.

 Income Tax Consultancy:

They also give advice to their customers on matters relating to income tax and
even prepare their income tax returns.

 Trustee and Executor:

Commercial banks preserve the wills of their customers as trustees and execute
them after their death as executors.

 Letters of Reference:
They give information about the economic position of their customers to traders
and provide the similar information about other traders to their customers.

 General Utility Functions:

Commercial banks render some general Utility services like:

 Locker Facility:
Commercial banks provide facility of safety vaults or keep valuable
articles of customers in safe custody.

Implies that commercial banks provide locker facilities to its customers

for safe keeping of jewellery, shares, debentures, and other valuable items. This
minimizes the risk of loss due to theft at homes.

 Traveller’s Cheques:
Commercial banks issue traveller’s cheques to their customers to avoid
risk of taking cash during their journey.

Implies that banks issue traveller’s checks to individuals for travelling

outside the country. Traveller’s checks are the safe and easy way to protect
money while travelling.

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  Letter of Credit:
They also issue letters of credit to their customers to certify their credit
worthiness.

 Underwriting Securities:
Commercial banks also undertake the task of underwriting securities. As public
has full faith in the credit worthiness of banks, public do not hesitate in buying
the securities underwritten by banks.

 Collection of Statistics:
Banks collect and publish statistics relating to trade, commerce and industry.
Hence, they advice to customers on financial matters. Commercial banks
receive deposits from the public and use these deposits to give loans. However,
loans offered are many times more than the deposits received by banks. This
function of banks is known as ‘Money Creation’.

 Dealing in Foreign Exchange:

Implies that commercial banks help in providing foreign exchange to
businessmen dealing in exports and imports. However, commercial banks need
to take the permission of the central bank for dealing in foreign exchange.

 Transferring Funds:
Refers to transferring of funds from one bank to another. Funds are transferred
by means of draft, telephone transfer, and electronic transfer.

(c) Other Functions:

Include the following:
(i)Creating Money:
Refers to one of the important functions of commercial banks that help
in increasing money supply. For instance, a bank lends Rs.5 lakh to an
individual and opens a demand deposit in the name of that individual.

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 Bank makes a credit entry of Rs. 5 lakh in that account. This leads to
creation of demand deposits in that account. The point to be noted here is that
there is no payment in cash. Thus, without printing additional money, the
supply of money is increased.

(ii) Electronic Banking:

Includes services, such as debit cards, credit cards, and Internet
banking.
Types of Credit Offered by Commercial Banks:
A commercial bank offers short-term loans to individuals and organizations in
the form of bank credit, which is a secured loan carrying a certain rate of
interest.

There are various types of bank credit provided by a commercial

bank, as shown in Figure-2:
Types of Bank Credit

Bank Loan Cash Credit Bank Deposit FF

Discounting of Bills
Figure-2: Showing Types of Bank Credit

Bank Loan:
Bank loan may be defined as the amount of money granted by the bank
at a specified rate of interest for a fixed period of time. The commercial bank
needs to follow certain guideline to extend bank loans to a client.

For example the bank requires the copy of identity and income proofs
of the client and a guarantor to sanction bank loan. The banks grant loan to
client against the security of assets so that, in case of default, they can recover
the loan amount. The securities used against the bank loan may be tangible or
intangible, such as goodwill, assets, inventory, and documents of title of goods.

The advantages of the bank loan are as follows:

a. Grants loan at low rate of interest
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 b. Involve very simple process of loan granting

c. Requires minimum document and legal formalities to pass the loan

d. Involves good customer relationship management

e. Consumes less time because of modern techniques and computerization

f. Provides door-to-door facilities.

In addition to advantages, the bank loan suffers from various

imitations, which are as follows:

a. Imposes heavy penalty and legal action in case of default of loan

b. Charges high rate of interest, if the party fails to pay the loan amount in
the allotted time
c. Adds extra burden on the borrower, who needs to incur cost in preparing
legal documents for procuring loan
d. Affects the goodwill of the organization, in case of delay in payment.

Cash Credit:
Cash Credit can be defined as an arrangement made by the bank for the
clients to withdraw cash exceeding their account limit. The cash credit facility is
generally sanctioned for one year but it may extend up to three years in some
cases. In case of special request by the client, the time limit can be further
extended by the bank.

The extension of the allotted time depends on the consent of the bank
and past performance of the client. The rate of interest charged by the bank on
cash credit depends on the time duration for which the cash has been withdrawn
and the amount of cash.

The advantages of cash credit are as follows:

a. Involves very less time in the approval of credit

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 b. Involves flexibility as the cash credit can be extended for more time to
fulfil the need of the customers.
c. Helps in fulfilling the current liabilities of the organization
d. Charges interest only on the amount withdrawn by the customer. The
interest on cash credit is charged only on the amount of cash withdrawn
from the bank, not on the total amount of credit sanctioned.

The cash credit is one of the most important instruments if short-term financing
but it has some limitations.

These limitations are mentioned in the following points:

a. Requires more security for the approval of cash

b. Imposes very high rate of interest
c. Depends on the consent of the bank to extend the credit amount and the
time limit.

Bank Overdraft:
Bank overdraft is the quickest means of the short-term financing
provided by the bank. It is a facility in which the bank allows the current
account holders to overdraw their current accounts by a specified limit. The
clients generally avail the bank overdraft facility to meet urgent and emergency
requirements. Bank overdraft is the most popular form of borrowing and do not
require any written formalities. The bank charges very low rate of interest on
bank overdraft up to a certain time.

Reasons for overdraft:

Overdrafts occur for a variety of reasons. They may include:

 Intentional loan-

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 The account holder finds themselves short of money and knowingly
makes an insufficient-funds debit. They accept the associated fees and cover the
overdraft with their next deposit.

 Failure to maintain an accurate account register-

The account holder doesn’t accurately account for activity on their
account and overspends through negligence.

 ATM overdraft-
Banks or ATMs may allow cash withdrawals despite insufficient
availability of funds. The account holder may or may not be aware of this fact at
the time of the withdrawals. If the ATM is unable to communicate with the
cardholder’s bank, it may automatically authorize a withdrawal based on limits
preset by the authorizing network.

 Temporary deposit hold-

A deposit made to the account can be placed on hold by the bank. This
may be due to Regulation CC (which governs the placement of holds on deposit
checks) or due to individual bank policies. The funds may not be immediately
available and lead to overdraft fees.

 Unexpected electronic withdrawals:

At some point in the past the account holder may have authorized
electronic withdrawals by a business. This could occur in good faith of both
parties if the electronic withdrawals in question in made legally possible by
terms of the contract, such as the intimation of a recurring service following a
free trial period. The debit could also have been made as a result of a wage
garnishment, an offset claim for a taxing agency or a credit account or overdraft
with another account with the same bank, or a direct-deposit chargeback in
order to recover an overpayment.

 Merchant error-
A merchant may improperly debit a customer’s account due to human
error. For example, a customer may authorize a $5.00 purchase which may post

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to the account for $500.00. The customer has the option to recover these funds
through chargeback to the merchant.

 Chargeback to merchant-
A merchant account could receive a chargeback because of making an
improper credit or debit card charge to a customer or a customer making an
unauthorized credit or debit card charge to someone else’s account in order to
“pay” for goods services from the merchant,. It is possible for the chargeback
and associated fee to cause an overdraft or leave insufficient funds to cover
subsequent withdrawals or debit from the merchant’s account that received the
chargeback.

 Authorization holds-
When a customer makes a purchase using their debit card without using
their PIN, the transaction is treated as a credit transaction. The funds are placed
on hold in the customer’s account reducing the customer’s available balance.
However, the merchant doesn’t receive the funds until them processes the
transaction batch for the period during which the customer’s purchase was
made. Banks do not hold these funds indefinitely, and so the bank may release
the hold before the merchant collects the funds thus making these funds
available again. If the customer spends these funds, then barring an interim
deposit the account will overdraw when the merchant collects for the original
purchase.

The advantages of the bank overdraft are as follows:

a. Involves no documentation for the extension of overdraft amount

b. Imposes nominal interest on the overdraft amount

c. Charges fee only on the amount exceeding the account limit.

The disadvantages of the bank overdraft are as follows:

a. Incurs high cost for the clients, if they fail to pay the amount of overdraft

for a longer period of time

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 b. Hampers the reputation of the organization, if it fails to pay the amount

of overdraft on time

c. Allows the bank to deduct overdraft amount from the customer’s

accounts without their permission.

Discounting of Bill:
Discounting of bills is a process of setting the bill of exchange by the bank at
value less than the face value before maturity date. According to sec. 126 of
Negotiable Instruments, “a bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at fixed or determinable
future time a sum certain in money to order or to bearer.”

The facility of discounting of bills is used by the organizations to meet their

immediate need of cash for settling down current liabilities.

Conditions laid down by the bank for discounting of bill is as

follows:
a. Must be intended to specific purpose

b. Must be enclosed with the signature of the two persons (company, bank

or reputed person)

c. Must be less than the face value

d. Must be produced before the maturity period.

REFORMS IN THE BANKING SECTOR:

Banking sector reforms were initiated to upgrade the operating standard
health and financial soundness of the banks.

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 The Government of India setup the Narasimham Commitee in 1991, to
examine all aspects relating to structure, organization and functioning of the
Indian banking system the recommendation of the committee aimed at creating
at competitive and efficient banking system.

Another committee which is Khan Committee was instituted by RBI in

December, 1997 to examine the harmonization of the role and operations of
development financial institutions and banks. It submitted its report in 1998.
The major recommendations were a gradual more towards universal banking,
exploring the possibility of gain full merger as between banks, banks and
financial institutions.

Then the Varma committee was established this committee

recommended the need for greater use of IT even in the weak public sector
banks, restructuring of weak bank but not merging them with strong banks,
VRS for at least 25% of the staff.

The banking Sector reforms aimed at improving the policy frame work,
financial health and institutional infrastructure, there two phase of the banking
reforms.

Phase I: Narasimham Committee I (1991)

 Deregulation of the interest rate structure.
 Progressive reduction in pre-emptive reserves.
 Liberalization of the branch expansion policy.
 Introduction of prudential norms.
 Decline the emphasis laid on directed credit and phasing out the
confessional rate of interest to priority sector.
 Deregulation of the entry norms for private sector banks and foreign
banks.
 Permitting public and private sector banks to access the capital market.
 Setting up to asset reconstruction fund.
 Constituting the special debt recovery tribunals.

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  Freedom to appoint chief executive and officers of the banks.
 Changes in the institutions of the board.

Phase II: Narasimham Committee II (April 1998)

 Capital Adequacy
 Minimum capital to risk asset ratio be increased from the existing 8
percent to 10 percent by 2002.
 100 percent of fixed income portfolio marked to market by 2001.
 5 percent market risk weight for fixed income securities and open foreign
exchange position limits.
 Commercial risk weight (100%) to government guaranteed.
 Asset Quality
 Banks should aim to reduce gross NPAs to 3% and net NPA to zero
percent by 2002.
 Directed credit obligations to be decline from 40 percent to 10 percent.
 Government guaranteed irregular accounts to be classifies as NPAs and
provide for.
 90 days overdue norms to be applied for cash based income recognition.
 Systems and Methods
 Banks to start recruitment from market.
 Overstaffing to be dealt with by redeployment and right sizing via VRS.
 Public sector banks to be given flexibility in remuneration structure.
 Introduce a new technology.
 Industry Structure
 Only two categories of financial sector players to emerge. Banks and non-
bank finance companies.
 Mergers to be driven by market and business considerations.

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 Feeble banks should be converted into narrow banks.
 Entry of new private sector banks and foreign banks to continue.
 Banks to be given grater functional autonomy & minimum government
shareholding 33 percent for State Bank of India, 51 percent for other
Public Sector Banks
 Regulation and Supervision
 Board for financial regulation and supervision to be constituted with
statutory powers.
 Greater emphasis on public disclosure as opposed to disclosure to
regulators.
 Banking regulations and supervision to be progressively delinked from
monetary policy.
 Legal Amendments
 Broad range of legal reforms to facilitate recovery of problems loans.
 Introduction of laws governing electronic fund transfer.

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