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 otherwise

Functions of Banks -

Primary or Traditional functions –

1 Acceptance of deposits

2 Creation of credit

3 Lending

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 companies. 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

Continued…. 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

Continued…

Development Banks

IFCI

IDBI

ICICI

IIBI

SIDBI

NABARD

EXIM

National Housing Bank

Central 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 New Delhi. 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 Act 1934).

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 financial emergencies 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

Continued…. 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 development programmes.

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 economy.

Reserve requirements

Cash reserve ratio – Minimum amount kept by banks with the RBI as reserves

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 indemnifier) -

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.

Continued…

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 property.

Banks and technology - Bank computerization – To provide customer service productivity and profitability Customer service 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 environment.

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