The document provides an extensive overview of banking and financial institutions, outlining key definitions, historical evolution, functions, and regulations in India. It discusses the roles of different types of banks, including commercial and central banks, and covers banking operations such as credit control, managing non-performing assets (NPA), and the impact of banking reforms. Additionally, it highlights the significance of technological advancements like e-banking and the role of institutions like NABARD in promoting rural development.

1. Banking and Financial
Institutions
By: Abbas vattoli
Asst: Professor
Dept of Commerce
Amal College Nilambur

2. Syllabus

3. Origin of the term Bank
• Italian word – ‘banco’
• Latin word – ‘bancus’
• Greek word – ‘banque’
• French word – ‘banque’
Which mean bench
• German word – ‘banc’ or ‘banck’ which means a
joint stock fund.

4. Definition
• Sec 5(1)(c ) of indian Banking regulation Act
1949 defines
• The term banking company as any company
which transacts the business of banking in india.
• Sec 5(1) (b) defines the term banking as
accepting, for the purpose of lending or
investment, of deposits of money from the
public, repayable on demand or otherwise and
withdrawable by cheques, draft, order or
otherwise.

5. • In sec 6 various activities included in banking
are listed such as lending, borrowing, accepting
and discounting of bills, dealing in foreign
currency, deposit lockers, trasfer of money,etc
• Sec 8 prohibits a bank from buying and selling
goods
• Sec 9 prohibits from holding immovable
property

6. Evolution of banking
• Banking existed in babylonia as early as in 2000
BC
• Temples were used a place for money lending
• Banking confined money lending
• Bank of england established in 1694
• In india banking was in existance during vedic
period
• Modern banks emerged only during industrial
revolution(1750 to 1850 )

7. Ancestors of modern banks
• Merchant banks- traders become financiaers
• Money lenders- only lends money
• Goldsmiths- for safe keeping of valuables and
money

8. Role and Importance of Banks
• Deposit mobilization
• Granting of credit
• Creation of credit
• Channalize funds into productive investments
• Provision of finance to the government
• Protecting the funds of depositors
• Provision of remittance facilities
• Provision of medium of exchange
• Discharge of social responsibility
• Innovative services

10. Acts relating to banks
• Banking [Regulation] Act, 1949
• Deposit Insurance Corporation Act, 1961
• Industrial Development Bank of India Act, 19
• Export-Import Bank of India Act, 1981
• Industrial Reconstruction Bank of India Act, 1984
• National Housing Bank Act, 1987
• Regional Rural Banks Act, 1976
• Reserve Bank of India Act, 1934
• Small Industries Development Bank of India Act,
1989
• State Bank of India Act, 1955

11. Classification of banks
based on functions
• Commercial banks or deposit banks
• Industrial banks or investment banks
• Agricultural banks-(agricultural co operative
banks and land mortgage or development banks)
• Exchange banks(export/import)
• Savings banks (small savings- not found in
india)
• Central banks( banker’s bank)

12. Nature of commercial banking
• They are the intermediaries between lenders and
borrowers
• They are not merely purveyors of money , but
also manufacturers of money
• It renders variety of services to the depositors
and general public
• They are the oldest banking institution and hold
lien share in the total banking operation

13. Commercial banking principles
• Profitability
• Liquidity
• Security of safety
• Principle of social responsibility of social good
• Purpose of advances
• Mass banking

14. Functions of commercial banks
Primary functions
• Accepting deposits
• Lending money
• Investment of funds
• Creation of moeny

15. Type of deposits account
• Current Accounts-by business people, numerous
transactions, no interest, overdraft facility
• Savings bank account- for promoting savings
among people, low rate of interest, restrictions
on no and size withdrawals.
• Fixed deposits account- fixed amt for fixed
period at fixed interest. Time liability and get
high interest.
• Recurring deposits account

16. Type of advances
• Loans
• Overdrafts
• Cash credits
• Discounting of bills

17. Subsidiary or secondary functions
Agency services( as an agent of the customer)
• Collection of money
• Making of payments
• Purchase and sale of securities
• Advising customers regarding stock exchange
investments
• Arranging for remittances of funds(Bank draft, mail
transfers, telegraphic transfer)
• Acting as trustee, executor, administrator or
attorney of customers
• Serving as correspondents and representatives of
customers

18.  General Utility serivices
• Safe custody of valuables(accepting valuables for safe
custody or hiring out safe deposit lockers)
• Dealing in foreign exchange business (export finance,
import credit, deffered payment guarantee, forward
contracts, issue of solvency certificates, letter of
introduction, provision of trade information)
• Issue of traveler's letter of credit, circular note, travelers
cheques
• Acting as refereee
• Collecting information about other business men for
customers

19. New lines of activities of commercial
banks
• Rendering of merchant banking services
• Underwriting of shares and debentures
• Factoring services
• Lease financing
• Housing finance
• Issue of credit and debit cards
• Consultancy services
• Setting up of mutual funds

20. Classification of commercial banks
On the basis of lending practices
• Pure banking – lend only for short period to
industries and commerce
• Investment banking – provide medium and long
term funds to industries and commerce
• Mixed banking – provides both short term and
long term finance to industries and commerce

21. Classification of commercial banks
On the basis of structure of commercial banking
• Group banking – a group of banks separately
incorporated are brought under the control of a
holding company. It was popular in USA during
1930s
• Chain banking – a number of separately
incorporated banks are brought under common
control by a device other than holding company.
(inter locking of directors)

22. • Correspondent banking – Unit banks in small towns
are linked with big correspondent banks situated in
nearby bigger towns so the correspondent banks are
the intermediaries through which all the unit banks
are linked with the banks in the very important
financial centers
• Branch banking – an individual bank carries on
banking business with a network of branches
• Unit banking – an individual bank carries on
banking business through a single office or through
few offices

23. Other systems of commercial banking
• Universal banking – a commercial bank offers a
wide variety of banking and financial services
beyond those offered by a traditional bank.
• Narrow banking – a bank which provides only
limited banking activities in a particular region

24. Functions of Central bank
 Issuing currency notes
• Principle of Note issue –
• Currency principle(100% gold backing) and
banking principle
• Systems of note issue –
• Fixed fiduciary system (central bank can issue
notes up to a limit call fiduciary limit with out
any gold backing.

25. • Maximum fiduciary system
• Proportional fiduciary system (since 1956 india
is on this system)
• Minimum reserve system

26. acting as a banker to the state or government
Central bank as the bankers bank
Controller of credit
Acting as the custodian of the nations gold and
foreign exchanges reserves
Developmental functions of central bank

27. Credit control
• Credit control means regulating
credit(expansion and contraction) according to
the requirements of the economy
• channelizing the credit into productive uses

28. Objectives credit control/monetary
policy
• Internal price stability
• Economic stability
• Full employment
• Economic growth
• Stability in money market
• Stability of foreign exchange rates
• International economic equilibrium

29. Methods of credit control
Quantitative of general methods
• Bank rate policy – bank rate or discount rate is
the official minimum rate at which the central
bank rediscounts eligible bills of exchange
offered by commercial banks and other financial
institutions.(lending rate of the CB)
• Open market operation – purchase and sale of
govt securities in the open market

30. • Variable cash reserve ratio(CRR)
• Variation of statutory liquidity ratio(SLR)

31. Current rates
Policy rates
• Bank rate- 9%
• Repo rate- 8%
• Reverse repo- 7%
Reserve ratios
• CRR- 4.5%
• SLR- 23%
Lending/ Deposit rates
• Base rate – 10 -10.5%
• Deposit rate – 8- 9.5

32. Qualitative or selective credit control
• Which control the quality or uses of credit. In
other words it encourages credit to essential uses
and discourages credit to non essential uses
•

33. Types of qualitative credit contol
• Fixation of margin requirement on secured loans
• Regulation of consumer credit
• Control of bank advances through directives
• Rationing of credit – central bank limit the total
amount of loans or specific catogories loans granted
by commercial banks
• Moral suasion (persuade)
• Direct Action (punishment against violating banks)
• Publicity(educating and influencing public openion)

34. History of development of indian
banking system
• Banking in the form of money lending was in
existance during vedic period
• During pre independence period banking was
mainly carried out by
• Indigenous bankers and money lenders
• Indigenous bankers are individuals or firms
dealing in hundies and some times accepts
deposits
• Money lenders are persons who lend their own
money mainly for consumption.

35. • Bank of hindustan, the first bank in india started
by britishers in 1770.
• Presidency bank of bengal 1806
• Presidency bank of bombay 1840
• Presidency bank of madras 1846
• The first joint stock bank in india is Oudh
commercial bank in 1881 followed by PNB 1895

36. • Imperial bank was formed in 1921 through the
presidency banks of bengal bombay and madras
• RBI was established in 1 st april 1935
Post independence
• RBI nationalised 1st jan 1949
• The banking regulation act 1949 passed
• The imperial bank nationalised and converted into
state bank of india in 11th july 1955
• 14 major banks were nationalized I on 19th jul 1969
and 6 more banks in 15th april 1980
• Several RRBs and developmental banks established

37. • Today there are 27 public sector banks
• 30 private sector scheduled commercial banks
• 2 private sector non scheduled commercial
banks
• 31 foreign banks
• 196 Regional rural banks

38. Non performing aseets
• NPA is an asset which ceases to generate income
for the bank. It mean an advance or credit
facility in respect of which the interest or
installment of principal remains overdue for a
period of more than 90 days with effect from 31st
march 2004.

39. Impact of NPA
• They do not generate income
• They enhance the administrative, legal and
recovery costs of loans
• They reduce profitability of the lending bank
• They affect banks credibility and image
• They adversely affect decision making for fresh
loans

40. Early indicators of NPA
• Financial warning signal – default in repayment,
falling profits, rising level of bad debts, decliainign
sales
• Operational warning signal- under utilisation of
capacity, frequent labour problems, over stocking
• Banking warning signals- frequent requests for
further loans, delay in payment of interest or install
ment due, reduction in transactions, dishonour of
cheques, opeing account with other banks, etc

41. • Managerial warning signal- poor financial
control, frequent change in ownership,
undertaking of undu risks, window dressing
• External warning signal – economic recession,
change in govt policies, new competition

42. Factors responsible for NPA
Internal factors
• Diversion of funds by the borrowers
• Delay and consequent increase in cost of the
project
• Business failure
External factors
• Recession
• Shortage of input/power
• Rise in prices of inputs

43. Techniques for managing NPA
• Ensure that loans are diversified across sectors
• Loans are granted to credit worthy borrowers
• Improving its monitoring system
• React to early warning signals
• Knowing clients profile thoroughly
• Adapting credit rating system
•

44. Banking legislations in india
• The Negotiable instruments Act 1881
• The banking regulation act 1949
• The reserve bank of india act 1934

45. Banking ombudsman scheme
• A banking ombudsman is a person appointed by
the reserve bank of india to redress customer
complaints against certain deficiencies in
banking services
• It is to resolve and settle complaints relating to
the provisions of banking services

46. E Banking
• E banking means conduct of banking operations
through electronic means of devices, such as
computers, telephones, mobile phones, ATMs,
etc
Forms of e banking
• Internet banking
• Mobile banking
• Telephone banking
• Home banking

47. Credit card
A credit card is an instrument which provides
instantaneous credit facilities to its holder to
purchase goods or services from business
establishments enrolled as members of the credit
card system
Debit cards
It also a payment card. It is used to obtain cash, goods
or services automatically deviting the payments to
the card holders bank account instantly upto the
credit balance which exists in the customers bank
accoun

48. Electronic Fund Transfer
• It is a scheme of RBI introuduced in 1996.
• It helps banks to offer their customers money
transfer service from one account to another
account of a bank branch both intercity and intra
city and also from one account of one bank to
another account of another bank in the same city
or different cities

49. NABARD
• National Bank for Agriculture and Rural
Development
• an apex Development Bank for promotion and
development of agriculture, small-scale
industries, cottage and village industries,
handicrafts and other rural crafts
• Established in 12 july, 1982, by an Act of
Parliament

50. NABARD's Roles and Functions
• Credit Functions-planning, dispensation and
monitoring of credit
• Developmental and Promotional Functions-
helping RRBs and co operative banks for growth
• Supervisory Functions- in respect of cooperative
banks and Regional Rural Banks
• Role in Training

51. NABARD’s Initiatives
• SHG Bank linkage programme started as a pilot project
in 1992 with 500 SHGs
• Farmers Clubs
• Rural Infrastructure Development Fund (RIDF)
• Watershed Development 1999-2000
• Rural Innovation Fund in association with Swiss Agency
for Development and Cooperation (SDC)
• agreements for co-financing with 14 commercial banks
2006-07
• Kisan Credit Card
• NABARD Consultancy Services (Nabcons)
• NABARD Financial Services Limited, [NABFINS]

52. Rural banking
• Rural banking and micro finance are needed for
sustainable development
• Rural banks focus on agriculture
• SBI the largest bank catering to rural banking
• Rural economy constitutes about 50% of GDP
• Financial inclusion or inclusive development
• Section 54 of the RBI Act
• establishment of Regional Rural Banks in 1975
• informal debt markets account for 70 to 80 per
cent of debt transactions

53. Banking sector reforms in india
• The NarasimhamCommittee laid the foundation
for the reformation of the Indian bankingsector.
• Constituted in 1991, the Committee submitted
two reports, in1992 and 1998
• The main recommendations of the Committee
were
• Reduction of SLR and CRR
• Minimum Capital AdequacyRatio
• Prudential Norms
• Disclosure Norms

54. • Rationalisation of Foreign Operations in india
• Special Tribunals and Asset Reconstruction
Fund
• Restructuring of Weak Banks
• Reduction of Government Stake in PSBs
• Deregulation on Interest Rates

55. Capital Adequacy Ratio
• The Committee on Banking Regulations and Supervisory
Practices (Basel Committee) had released the guidelines
on capital measures and capital standards in July 1988
• In India it has been implement-ed by RBI w.e.f. 1.4.92
• Minimum requirements of capital fund in India:
* Existing Banks 09 %
* New Private Sector Banks 10 %
* Banks undertaking Insurance business 10 %
* Local Area Banks 15%
• Capital Fund has two tiers - Tier I capital and Tier II

56. Basel Norms
• Basel is a city in Switzerland. It is the headquarters
of Bureau of International Settlement (BIS)
• Currently there are 27 member nations in the
committee.
• Basel guidelines refer to broad supervisory
standards formulated by this group of central banks
• India adopted Basel 1 guidelines in 1999.
• In June ’04, Basel II guidelines were published by
BCBS
• In 2010, Basel III guidelines were released

57. Industrial Development Bank of
India (IDBI)
• established in July 01, 1964 a subsidiary of RBI
• the apex institute to finance the industries and it
also coordinates with the other banks for
financing
• In 1976 it was converted as the autonomous
body
• It become IDBI ltd October 01, 2004
• The merger with idbi bank ltd became effective
from April 02, 2005
• the new name idbi bank ltd became effective

58. • Direct assistance is provided by way of project
loans, underwriting of and direct subscription to
industrial securities, soft loans, technical refund
loans, etc
• indirect assistance is in the form of refinance
facilities to industrial concerns

59. Industrial Finance Corporation of
India (IFCI)
• established in 1948 under an Act of Parliament
• the first Development Financial Institution in
the country to cater to the long-term finance
needs of the industrial sector
• Converted to Joint-Stock Company 1993
• Products and services include
• Financial Products
• Project Development
• Corporate Advisory services
• Nodal Agency for Sugar Development Fund

60. State Financial Corporations
• A Central Industrial Finance corporation was set
up under the industrial Financecorporations Act,
1948 in order to provide medium and long term
credit to industrialundertakings which fall
outside normal activities of commercial banks
• State financial Corporations Act 1951 was passed
in the parliament
• There are 18 SFCs in india
• Kerala Financial Corporation (KFC)

61. Unit Trust of India
• created by the UTI Act 1963
• For more than two decades it remained the sole
vehicle for investment in the capital market by
the Indian citizens
• In mid- 1980s public sector banks were allowed
to open mutual funds
• its flagship and largest scheme was US 64

62. Small Industries Development Bank
of India (SIDBI)
• set up on April 2, 1990 under an Act of Indian
Parliament
• Principal Financial Institution for the
Promotion, Financing and Development of the
Micro, Small and Medium Enterprise (MSME)
sector
• Wholly owned subsidary of idbi
• an e-platform ‘NTREES Promoted by SIDBI &
NSE,
• NTREES will facilitate discounting of MSME

63. Thank you
• abbasvattoli@yahoo.com
• www.dcamal.wordpress.com