Bank and Banking
Bank and Banking
• Bank – Institution whose debts are widely accepted in
settlement of other people’s debt to each other
• Banking – 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,order or
Functions of Banks -
• Primary or Traditional functions –
1 Acceptance of deposits
2 Creation of credit
4 Transfer of money and other related activities.
Secondary or Incidental Functions
• Transfer of funds and remittance facilities
• Cheque clearance and collection of money .
• Agency and trustee business for customers.
• Safe custody of valuables
• Merchant Banking and Underwriting business w.r.t new issues of
• Portfolio management for customers and arranging the investment of
funds for corporate and non corporate clients
• Financing of import- export business
• Issue of letter of credits
• Foreign exchange business
Types of Banks in India
• Public sector Banks
State Bank of India and its group
20 – 23 Nationalized banks
Regional Rural Banks sponsored by private sector
• Private Sector Banks
Old generation private banks
New generation private banks
Foreign Banks in India
Scheduled Co – operative Banks
Non Scheduled Banks
• Co – operative Sector
State co–operative banks
Central co–operative Banks
Primary Agriculture Credit Societies
Land development banks
Urban co-operative banks
Primary agricultural development banks
Primary land development banks
State land development Banks
• Development Banks
National Housing Bank
• An apex institution in the banking and financial system of
the country, responsible partially for the management of
the economy, also called as Bankers bank
• Objectives of Central Bank –
1. To maintain the internal value of the nation’s currency
2. To preserve the external value of the currency
3. To secure reasonable price stability
4. To promote economic growth and rising levels of
employment, output and real income.
Reserve Bank of India
• RBI was set up in 1935 as a Private Share holders’ bank.
• Nationalized in January 1949 by passage of the Reserve Bank
Act of 1948.
• Initial Paid-up capital of Rs 5 crore
• Head office at Mumbai
• 4 Regional offices situated in Mumbai, Kolkata, Chennai and
• Branches – 13 centres
• Sub offices - 6
Role of RBI as a Regulator -
• RBI empowers to be the sole note issue authority of India (u/sec 22 of RBI
• Acts as a Banker to the Government – RBI underwrites Governments
borrowing programme, provides loans and advances, creates currency to
meet the deficit of the Central Govt in their Budgets.
• Keeps the custody of cash reserves of commercial banks.
• Acts as a Lender of last resorts to Banks and financial institutions during
• Acts as a clearing Bank (cheques drawn on different banks are exchanged )
• Acts as a Custodian of Foreign exchange reserves by keeping custody of
gold and foreign exchange reserves.
• Acts as a controller of credit to maintain price stability
• Promotes savings through proper interest rate policy and wide spectrum
of savings instruments.
• Ensures the flow of adequate credit to the neglected sectors of the
economy such as Agriculture , SSI’s, SC and ST tribes etc..
• Arranges credits from IMF and IBRD (World Bank) for the countries
• Provision of finance and refinance to the commercial and co-operative
banks, Govt and financial institutions.
• Provision of currency and coins adequate for the economy.
• Regulation and control of banks, NBFC’s,
• Development of financial system and promotion of growth process in the
• Cash reserve ratio – Minimum amount kept by banks with the RBI as
• Statutory liquidity ratio – banks have to compulsorily maintain liquid
assets in the form of cash,gold, treasury bills, Govt securities etc..
• Bank rate – standard rate of discount charged by the central bank of the
country to eligible parties, it is the minimum official rate at which the
central bank rediscounts first class bills of exchange from the discount
houses and commercial banks.
Banker and customer relationships
• Bank as a Debtor and Customer as a Creditor (Debtor – Creditor)
• Bank as a Creditor and Customer as a Debtor (Creditor – Debtor)
• Bank as a Trustee – bank acts as a trustee when it safe guards certain
valuables or securities with the bank
• Bank as a bailee and customer as a bailor – When a customer deposits
certain valuables , bonds , securities , or other documents for their safe
custody , the bank , besides becoming a trustee also becomes a bailor.
• Bank as an agent and customer as a principal – bank acts as an agent in
services like remittance , collection of cheques , bills , payment of
electricity bills , telephone bills , insurance premium, etc..
• Lessor and Lessee – banks provide safe custody lockers to the customers
who hire them on lease basis
• Indemnifier and indemnified (Bank as indemnified and customer as
Services to customers and investors -
• Merchant banking – merchant banking is a service provided by the banks
who acts as a financial intermediary of transfer of capital from those who
own it to those who use it.
• Lease financing – leasing out the capital purchase of assets to another
company against monthly rent for asset’s use
• Charge card – plastic cash facility provided by banks were in amount
becomes payable immediately on the debit of the a/c.
• Credit card – card holder is sent a bill indicating the dues and has the
option to pay entire or part amount
• Debit card – card for withdrawing his savings a/c balances from ATM
services or payments from purchases while shopping
Types of deposits
• Current a/c – withdrawn any time , and in any amount , do not bear
interest income to the a/c holder are meant for business transactions
• Savings a/c – mobilization of savings of public , some restrictions on their
operations like keeping minimum balances and limits on withdrawals etc..
• Fixed deposits – also called as term , recurring , notices cannot be
withdrawn till maturity , carry high interest income to depositors
Types of lending
• Overdraft facility
• Cash credit facility
• Direct loans or advances
• Bills discounting or purchases
• Term loans
Charging of security
• Charging of security is done by banks to safe guard their advances by
taking different kinds of securities reason being to fall back on it in case
of loan is defaulted.
• Type of Charges –
1. Assignment – it is a mode of providing security to a banker for an
advance includes transfer of a right , property or debt.
2. Lien – right of the banker to retain possessions of the goods and
securities owned by the debtor until debt due is paid
3. Set-off – Total or partial merging of a claim of one person against
another in a counterclaim by the latter against the former.
4. Mortgage – Transfer of interest in immovable property to secure an
advanced loan or an existing debt or performance of an obligation.
5. Pledge – Bailment of goods for providing security for payment of debt
or performance of promise.
6. Hypothecation – Charge upon any movable property created by a
borrower in favor of a secured creditor without delivery of possession
of the movable property, also called as a mortgage of a movable
Banks and technology -
• Bank computerization –
To provide customer service
productivity and profitability
Generation of data for better management.
• Core banking – Centralized branch computerization model where the
branches are connected to a centralized host, which incorporates branch
automation modules and online multiple delivery channels like ATM , Tele-
banking , mobile-banking , internet banking etc..
• Disaster recovery sites (DRS) – used to avoid disruption in the banking
activity , acts as a backup for providing continuous processing
• Business Process Re-engineering (BPR) – Used to realign the existing
business processes to get benefits of new technology,
• Use of note counting devices , Electronic fund transfer systems