Banking services

1. Banking services and
operations
Unit 1

2. Topics to be covered
 Evolution of commercial banking industry
 Structure of commercial banking industry
 Types of banking
 Role and functions of banks

3. Banks
 The term bank originally refers to an individual or organization where money gets changed and
exchanged one currency for the other
 Bank is an institution in which people keep their cash balances in the form of deposits
 Banks are institutions whose debt usually referred to as bank deposits are commonly accepted in
final settlement of other people’s name
 According to banking regulation act 1949 “banking means the excepting for the purpose of lending
or investment of deposits of money from the public repayable on demand or otherwise and
withdraw the bill by cheque draft order or otherwise”.

4. Evolution of commercial banking
industry in India
 The commercial banking industry in India started in 1786 with the establishment of the
Bank of Bengal in Calcutta. The Indian Government at the time established three
Presidency banks, viz., the Bank of Bengal (established in 1809), the Bank of Bombay
(established in 1840) and the Bank of Madras (established in 1843).
 In 1921, the three Presidency banks were amalgamated to form the Imperial Bank of
India, which took up the role of a commercial bank, a bankers’ bank and a banker to
the Government.
 The Imperial Bank of India was established with mainly European shareholders. It was only
with the establishment of Reserve Bank of India (RBI) as the central bank of the country in
1935, that the quasi-central banking role of the Imperial Bank of India came to an end.
 In 1860, the concept of limited liability was introduced in Indian banking, resulting in the
establishment of joint-stock banks.

5.  In 1865, the Allahabad Bank was established with purely
Indian shareholders. Punjab National Bank came into being
in 1895.
 Between 1906 and 1913, other banks like Bank of India, Central Bank of India, Bank of
Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. After independence,
the Government of India started taking steps to encourage the spread of banking in India.
 In order to serve the economy in general and the rural sector in particular, the All India
Rural Credit Survey Committee recommended the creation of a state-partnered and state-
sponsored bank taking over the Imperial Bank of India and integrating with it, the former
state-owned and state-associate banks. Accordingly, State Bank of India (SBI) was
constituted in 1955. Subsequently in 1959, the State Bank of India (subsidiary bank) Act
was passed, enabling the SBI to take over eight former state-associate banks as its
subsidiaries.

6. structure
RBI
SCHEDULED BANKS
COMMERCIAL
NATIONALISED /
PUBLICS SECTOR
SBI
OTHER
NATIONALISE
D BANKS
PRIVATE
FOREIGN RRB
REGIONAL RURAL BANKS
COPERATIVE
SHORT TERM
CREDIT
LONG TERM
CREDIT
NON SCHEDULED
DEVELOPMENT
BANKS
EXIM INDUSTRIAL
AGRICULTURE

7. Scheduled banks
 Scheduled banks are covered under the 2nd Schedule of the Reserve Bank of India Act, 1934.
To qualify as a scheduled bank, the bank should conform to the following conditions:
• A bank that has a paid-up capital of Rs. 5 Lakh and above qualifies for the schedule bank
category
• A bank requires to satisfy the central bank that its affairs are not carried out in a way that causes
harm to the interest of the depositors
• A bank should be a corporation rather than a sole-proprietorship or partnership firm

8. Non-scheduled banks
 Non-scheduled banks refer to the local area banks which are not listed in the Second
Schedule of Reserve Bank of India. Non-Scheduled Banks are also required to
maintain the cash reserve requirement, not with the RBI, but with them.

9. Co-operative banks
 Co-operative banks are registered under the Cooperative Societies Act, 1912 and they are run
by an elected managing committee. These work on no-profit no-loss basis and mainly serve
entrepreneurs, small businesses, industries and self-employment in urban areas. In rural areas,
they mainly finance agriculture-based activities like farming, livestock and hatcheries.
 Urban Co-operative Banks
 State Co-operative Banks

10. Urban Co-operative Banks
 Urban Co-operative Banks refer to the primary cooperative banks located in urban and semi-
urban areas. These banks essentially lent to small borrowers and businesses centered around
communities, localities work place groups.
 According to the RBI, on 31st March, 2003 there were 2,104 Urban Co-operative Banks of which
56 were scheduled banks. About 79% of these are located in five states, – Andhra Pradesh,
Gujarat, Karnataka, Maharashtra and Tamil Nadu.

11. State Cooperative Bank
 State Cooperative Bank is a federation of the central cooperative bank which acts as custodian of the
cooperative banking structure in the State.
 Banks can also be classified on the basis of Scheduled and Non-Scheduled Banks. It is essential for
every individual to check if they are holding their savings or deposit account with a Scheduled Bank or
Non-Scheduled Bank. Scheduled Banks are also covered under the depositor insurance program of
Deposit Insurance and Credit Guarantee Corporation (DICGC), which is beneficial for all the account
holders holding a savings and fixed / recurring deposit account. Under DICGC, bank deposits of up to
Rs 1 lakh, including the fixed, savings, current and recurring deposits, per depositor per bank in the
event of bank failure are insured.

12. Commercial
bank
A commercial bank is a financial institution
that provides services like loans,
certificates of deposits, savings bank
accounts bank overdrafts, etc. to its
customers. These institutions make money
by lending loans to individuals and earning
interest on loans.
it is a financial institution whose purpose is
to accept deposits from people and
provide loans and other facilities.
Commercial banks provide basic services of
banking to their customers and small to
medium-sized businesses.

13.  A commercial bank is a financial institution that provides services like
loans, certificates of deposits, savings bank accounts bank overdrafts,
etc. to its customers. These institutions make money by lending loans
to individuals and earning interest on loans. Various types of loans
given by a commercial bank are business loans, car loans, house loans,
personal loans, and education loans.
 They give out these loans from the money deposited by their
customers in different types of accounts. They use the deposits as
capital for providing loans. Commercial banks are essential for the
economy of a country because they help in creating capital, credit as
well as liquidity in the market. These banks are generally physically
located in cities but these days there are online banks are growing in
numbers.

14. How they work
 Commercial banks offer basic services of banking to the public including individual customers
as well as small and medium-sized businesses. Money is made by banks by charging for
services and fees. The fees depend on the products given such as overdraft fees, fees for
safe deposit boxes, late fees, etc. Various loans also consist of fees other than interest on
loans.
 Banks earn money by giving out loans and for that purpose they use funds from customer
deposits. They charge higher interest rates on loans they give out and comparatively less
rate of interest on the amount they get as deposits from their customers. For e.g., a bank
may provide a 0.30 per cent rate of interest on savings account to its customers but charges
a 4.8 per cent rate of interest annually for home loans.

15.  Generally, commercial banks are situated in buildings where their customers come for using ATM
machines and other banker window facilities.
 As internet technology has risen in recent years, most banks allow customers to do most services online.
People can now make money transfers, deposits or make payments for bills online.
 Importance of commercial banks Commercial banks are essential for the economy because they create
liquidity in the market and create capital besides providing their customers with essential services.
Banks make sure liquidity in the market by lending out loans from the deposits of their customers.
 Why are commercial banks important?
 Commercial banks are important because they help in creating liquidity in the market.

16. Commercial bank functions
 The basic functions are
 accepting deposits,
 lending out loans,
 transfer of money, and
 discounting bills of exchange.

17. Classification of commercial banks
 Commercial Banks can be further classified into public sector banks, private
sector banks, foreign banks and Regional Rural Banks (RRB).
 Commercial Banks are regulated under the Banking Regulation Act, 1949 and
their business model is designed to make profit.
 Their primary function is to accept deposits and grant loans to the general
public, corporate and government. Commercial banks can be divided into-

18. Public sector banks
 These are the nationalized banks and account for more than 75 per cent of the
total banking business in the country.
 Majority of stakes in these banks are held by the government.
 In terms of volume, SBI is the largest public sector bank in India and after its
merger with its 5 associate banks (as on 1st April 2017) it has got a position
among the top 50 banks of the world.

19. There are a total of 12 nationalised banks in the country
namely below:
Bank of Maharashtra
Bank of baroda
Bank of india
Canara bank
SBI
Punjab national bank
Indian bank
Punjab and Sindh bank
Central bank of india
Union bank of india
UCO Bank
Indian Overseas Bank

20. Private banks
 These include banks in which major stake or equity is held by private
shareholders. All the banking rules and regulations laid down by the RBI will
be applicable on private sector banks as well. Given below is the list of
private-sector banks in India-

21. Axis
Federal Bank
Indusind
Banndhan
DCB
CITY UNION
Krur vysya
Karnataka
Jammu & Kashmir
Kotak Mahindra
Lakshmi vilas
Yes bank
Nainital
ICICI Bank
IDFC Bank
IDBI Bank

22. Foreign bank
 A foreign bank is one that has its headquarters in a foreign country but operates in India as a private entity.
 These banks are under the obligation to follow the regulations of its home country as well as the country in
which they are operating.
 Given below is the list of foreign banks operating in India –
 National , Australia Bank, deutsche bank
 HSBC BANK, BANK OF NOVA SCOTIA

23. RRB
 These are also scheduled commercial banks but they are established with the main objective of
providing credit to weaker sections of the society like agricultural labourers, marginal farmers and
small enterprises. They usually operate at regional levels in different states of India and may
have branches in selected urban areas as well. Other important functions carried out by RRBs
include-
• Providing banking and financial services to rural and semi-urban areas
• Government operations like disbursement of wages of MGNREGA workers, distribution of
pensions, etc.
• Para-Banking facilities like debit cards, credit cards and locker facilities

24. Functions of banks in India
There are two types of functions of banks:
Primary functions – being primary are also called banking functions.
Secondary Functions

25. Primary Functions of Bank
1. Accepting of deposits
 Saving Deposits (SA); Fixed Deposits (FDs); Current deposits (CA) ; Recurring Deposits
(RDs)
2. Granting of loans and advances
 Bank Overdraft; Cash Credits; Loans; Discounting the bills of exchange

26.  Accepting of Deposits
 A very basic yet important function of all the commercial banks is mobilising public funds, providing safe
custody of savings and interest on the savings to depositors. Bank accepts different types of deposits from
the public such as:
1. Saving Deposits: encourages saving habits among the public. It is suitable for salary and wage earners.
The rate of interest is low. There is no restriction on the number and amount of withdrawals. The account for
saving deposits can be opened in a single name or in joint names. The depositors just need to maintain
minimum balance which varies across different banks. Also, Bank provides ATM cum debit card, cheque
book, and Internet banking facility.
2. Fixed Deposits: Also known as Term Deposits. Money is deposited for a fixed tenure. No withdrawal money
during this period allowed. In case depositors withdraw before maturity, banks levy a penalty for premature
withdrawal. As a lump-sum amount is paid at one time for a specific period, the rate of interest is high but
varies with the period of deposit.

27. 3. Current Deposits: They are opened by businessmen. The account holders get an overdraft facility
on this account. These deposits act as a short term loan to meet urgent needs. Bank charges a high-
interest rate along with the charges for overdraft facility in order to maintain a reserve for unknown
demands for the overdraft.
4. Recurring Deposits: A certain sum of money is deposited in the bank at a regular interval. Money
can be withdrawn only after the expiry of a certain period. A higher rate of interest is paid on recurring
deposits as it provides a benefit of compounded rate of interest and enables depositors to collect a
big sum of money. This type of account is operated by salaried persons and petty traders

28. Granting of Loans & Advances
 The deposits accepted from the public are utilised by the banks to advance loans to the businesses
and individuals to meet their uncertainties.
 Bank charges a higher rate of interest on loans and advances than what it pays on deposits.
 The difference between the lending interest rate and interest rate for deposits is bank profit.

29. 1. Bank Overdraft: This facility is for current account holders. It allows holders to withdraw money anytime
more than available in bank balance but up to the provided limit. An overdraft facility is granted against
collateral security. The interest for overdraft is paid only on the borrowed amount for the period for which
the loan is taken.
2. Cash Credits: a short- term loan facility up to a specific limit fixed in advance. Banks allow the customer
to take a loan against a mortgage of certain property (tangible assets and / guarantees). Cash credit is
given to any type of account holders and also to those who do not have an account with a bank. Interest
is charged on the amount withdrawn in excess of the limit. Through cash credit, a larger amount of loan
is sanctioned than that of overdraft for a longer period.

30. 3. Loans: Banks lend money to the customer for short term or medium periods of say 1 to 5 years against
tangible assets. Nowadays, banks do lend money for the long term. The borrower repays the money either in a
lump-sum amount or in the form of instalments spread over a pre-decided time period. Bank charges interest on
the actual amount of loan sanctioned, whether withdrawn or not. The interest rate is lower than overdrafts and
cash credits facilities.
4. Discounting the Bill of Exchange: It is a type of short -term loan, where the seller discounts the bill from the
bank for some fees. The bank advances money by discounting or purchasing the bills of exchange. It pays the bill
amount to the drawer(seller) on behalf of the drawee (buyer) by deducting usual discount charges. On maturity,
the bank presents the bill to the drawee or acceptor to collect the bill amount.

31. Secondary Functions of Bank
 Like Primary Functions of Bank, the secondary functions are also
classified into two parts:
1. Agency functions
2. Utility Functions

32. Agency Functions of Bank
 Banks are the agents for their customers, hence it has to perform various agency functions as mentioned
below:
 Transfer of Funds: Transferring of funds from one branch/place to another.
 Periodic Collections: Collecting dividend, salary, pension, and similar periodic collections on the clients’
behalf.
 Periodic Payments: Making periodic payments of rents, electricity bills, etc on behalf of the client.
 Collection of Cheques: Like collecting money from the bills of exchanges, the bank collects the money of
the cheques through the clearing section of its customers.
 Portfolio Management: Banks manage the portfolio of their clients. It undertakes the activity to purchase
and sell the shares and debentures of the clients and debits or credits the account.
 Other Agency Functions: Under this bank act as a representative of its clients for other institutions. It acts
as an executor, trustee, administrators, advisers, etc. of the client.

33. Utility Functions of Bank
• Issuing letters of credit, traveler's cheque, etc.
• Undertaking safe custody of valuables, important documents, and securities by providing safe deposit
vaults or lockers.
• Providing customers with facilities of foreign exchange dealings
• Underwriting of shares and debentures
• Dealing in foreign exchanges
• Social Welfare programme
• Project reports
• Standing guarantee on behalf of its customers, etc.

34. Other functions of commercial
banks
 The provision of safety vaults or lockers to keep the valuables of
customers in safe custody (jewelry and other important documents).
 Acting as agents for customers to buy and sell security on their behalf
 Making and receiving payments on behalf of its depositors
 Issuing letter of credit and
 Issuing of travelers check for the convenience of the customer

35. Thank you