Introduction to Banking

Banking is defined under section 5(b) of the Banking Regulation Act,1949 as the acceptance of deposits of money from the public for the purpose of lending or investment. Bank must perform two essential functions
Acceptance of deposits Lending or Investment

Licence for Banking

For commencing or carrying on the business of banking, it is necessary to obtain licence from RBI under section 22 of the Banking Reg.Act Every banking company has to use the word bank as a part of its name. No company other than a banking company can use the word bank, banking as part of its name except subsidiary or association of banks

Constitution of Banks in India

Body corporate constituted under special status Company registered under Co.Act 1956 or foreign company Cooperative society registered under Cooperative Societies Act

Banking Regulation Act 1949

This Act was enacted to provide suitable framework for regulating the banking companies Initially the Act was for banking companies only In 1965 the Act was amended to cover cooperative banks as well The Act does not apply to primary agri. cr. socities(PACs) and coop.land devt. banks

Theoretical basis of banking

Like any other business, for a bank profitability and liquidity management is essential However, for a bank balancing profitability and liquidity requires more attention This is because banks deal in public money which is repayable on demand

Theoretical basis contd.

Management of Reserve
Banks are expected to hold part of their deposits in the form of cash reserve If banks are not compelled for such reserve, they may not maintain It can have adverse effect on the financial system Central bank is empowered to prescribe the reserve ratio for twin objective (a) To ensure liquidity (b) Credit control

Credit creation by banks

Role of Banks
Mobilization and allocation of saving Financial intermediation
Funds of surplus sectors are channeled to deficit sector

Important part of payment mechanism Helps monetary authority for stability of price and financial system

Role of banks
Important role in developing financial market
Developing mutual funds, merchant banks, debt market

Banks are the issuer, investors, guarantors, underwriters, in financial mkt. Active role in growth and liquidity of debt market Social role

Liabilities of Banks
Deposits
It is a major source of funds for banks

Types of Deposits
Demand Deposit Time Deposit

Demand Deposits further sub-divided

Current Deposit Saving Deposit

Assets of the bank

Broad classification of banks assets
Cash in hand and balance with RBI Assets with the banking system Investment in Govt. and other approved securities Bank credit

Quantitatively bank credit and investment in Govt. securities are most important

Bank Investment
SLR securities
Govt. of India & other approved securities

Non SLR securities

Non approved securities

Investment in Govt. security is sometime far in excess of SLR because,

High fiscal deficit Slack credit demand

Bank investment contd.

Investment in non SLR securities
Shares and debentures of PSUs Shares and debentures of private corporate sector Commercial paper Units of mutual funds

Bank credit
Banks in India provides mainly short term finance for working capital needs Types of loans / credit
Cash credit Overdraft Demand loans Discounting of commercial bills Installment or hire purchase credit Term loan

Some of the basic concepts

Cheque Bill of Exchange Lien Right of the creditor Retain possession of the security belongs to debtors Retention is till debtor clears the debt In case of a bankers lien the right to sale of the security is with bank if there is default by the borrowers

Banker customer relationship

Debtor / Creditor relationship
Deposit and loan customer

Bank as an agent
When bank provides various services

Bank as a Trustee
Safe custody service (Not safe deposit locker)

Rights of a banker
Right of general lien
Right to retain the goods or securities for all (different types of loan account) amounts due from the debtors

Right of setoff
Right to use credit balance of one account to recover debit balance of another a/c (even if different accounts are with different branches of the same bank)

Rights of a banker
Right of appropriation
When borrower gets multiple facility of loan from the bank When payment is made by the customer without specifying the loan account Bank will decide about appropriation of such payment

Right to charge interest and different charges

Obligations of a banker
Honour Cheques
Subject to sufficient funds and proper presentation

No wrong dishonour of cheque Maintain confidentiality Act in good faith without negligence while
Opening / closing account Settlement on death of the depositor Collection of cheques and other instruments