BLP Unit 01
BLP Unit 01
BLP Unit 01
Module-01
Introduction to Banking
Meaning of Bank
The word ‘Bank’ is derived from a latin word ‘bancus’ which means a ‘bench’. The ancient
European money lenders and money chargers used to transact their business by sitting on
benches. They were used to receive gold and other metals as deposits and issuing receipts. The
bench used by the dealers was the symbol of banking business.
A bank is financial institution that accepts deposits from the public and lend those deposits
through loans and advances or invests on securities through financial markets.
According to Sir John Payet, “A bank is an institution which takes deposit accounts, takes
current accounts, issues and pays cheques and collects cheques of the customers”.
Need and Importance of Bank
Bank provide funds for the business and play an important role in the development of a nation.
1. Acts as an intermediary: It acts as an intermediary between people having surplus
money and those requiring money for various business activities.
2. Economic development: it helps in national development by providing credit to
farmers, small-scale industries and self-employed people as well as to large business
houses which leads to balanced economic development in the country.
3. Capital formation: deposits accepted by banks are converted into loans and advances
for industrial and trading activities to business organizations. This, way banking
converts savings into investment leading to capital formation and development of
economy.
4. Services to business: banking helps business through a variety of services like
providing long term and short-term finance, arranging remittance of money, collection
of cheques and bills etc. helping in raising of capital by acting as underwriter etc.
5. Reduces use of currency: banks enable depositors to make payment by cheque,
travellers’ cheques, credit cards etc. issued by banks instead of liquid money. Thus,
associated problems of use of currency are considerably reduced.
6. Mobilization of savings: banks allow savings to be deposited in different types of
accounts such as current account, savings bank account, fixed deposit account etc.,
carrying different interest rates as their income which encourages people to save money
and put it in the banks.
7. Raising the standard of living: it helps in rising the standard of living of people in
general by providing loans for purchase of consumer durable goods, houses,
automobiles etc.
8. Benefits of rural economy: rural branches of banks play a useful role in mobilizing
savings in rural areas and provide loans to farmers and artisans at concessional rates
and on priority basis. This helps the rural economy.
9. Balanced reginal development: banks identify areas that need special assistance for
industrial development and identify backward regions and help in their economic
development by providing them adequate funds at reasonable rates.
10. Development of credit policy: the central bank of a country develops a proper
monetary policy by determining the bank which further affects interest rate and credit
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policy in the country that ultimately leads to effect on economic development of the
country.
11. Facilitates foreign trade: it also facilitates import export transactions. Reserve bank
of Inda regulates all the import and export transactions and facilitates bringing foreign
exchange to be used for country’s economic development.
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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.
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.
Bank offers the following types of Loans and Advances:
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.
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.
Bank of Hindustan is the first bank to exist, marking the foundation of India’s banking system.
But it ceased to exist in 1932.
➢ Presidency Banks
The East India Company founded three key presidency banks. These include the Bank of
Bombay (1840), Bank of Madras (1843) and Bank of Calcutta (1806).
These three banks merged and became the Imperial Bank of India. In 1955, it was renamed the
State Bank of India. Besides these, more banks, including Punjab National Bank and Allahabad
Bank, came into existence.
Between 1913 and 1948, there was stagnation in India’s banking space as growth was
slow. Multiple banks encountered periodic failures. The lack of confidence in the
country’s banking system played a part in the slow mobilisation of funds and the growth of this
sector. There were around 1100 banks during this period.
To streamline these banks' operations, the Indian Government introduced the Banking
Regulation Act 1949.
2. Phase 2 (1969-1991)
Post-independence, Indians were doubtful about the private ownership of banks. Instead, they
preferred to rely on moneylenders for necessary financial assistance. To combat this issue, the
Indian Government nationalised 14 commercial banks in 1969.
The main objective of this move was to reduce the concentration of power and wealth of
certain families that owned and controlled these financial institutions.
There were other reasons too for nationalisation:
• To support India’s agricultural sector
• Mobilise savings among individuals
• Facilitate the expansion of India’s banking network by opening more branches
• Boost the priority sectors through banking services
Some of the banks that were nationalised in 1961 include:
• Central Bank of India
• United Bank
• Canara Bank
• Indian Overseas Bank
• Dena Bank
• Union Bank of India
• Bank of Baroda
• Bank of India
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• Allahabad Bank
The evolution of India’s banking system continued in this trajectory. In 1980, the Government
nationalised six more banks, including:
• Corporation Bank
• Punjab & Sind Bank
• New Bank of India
• Vijaya Bank
• Andhra Bank
• Oriental Bank of Commerce
o Financial Institutions
Besides nationalising private banks, the Indian Government established a few financial
institutions (between 1982 and 1990) to fulfil specific objectives.
• EXIM Bank – for promoting import as well as export
• National Housing Board- for funding housing projects
• National Bank for Agriculture and Rural Development (NABARD) – for supporting
agricultural activities
• Small Industries Development Bank of India (SIDBI) – for providing financial
assistance to small-scale Indian industries
Benefits of Nationalisation
• Increased efficiency in the industry
• Empowered small-scale industries
• Provided a massive boost to India’s agricultural sector
• Increased public deposits
• Ensured better outreach
• Provided employment opportunities
3. Phase 3 (1991- Present)
Since 1991, the Indian banking system has been evolving. The Indian Government encouraged
foreign investment, which opened the economy to foreign and private investors, which has led
to the introduction of mobile banking, internet banking, ATMs, and more.
Some foreign banks in India include:
• HSBC
• Citibank
• Bank of America
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2nd Semester B.Com./Law and Practice of Banking/Module-01
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Compiled by: Dr.Girish V, Assistant Professor, P.E.S College of SAC, Mandya.
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2nd Semester B.Com./Law and Practice of Banking/Module-01
Compiled by: Dr.Girish V, Assistant Professor, P.E.S College of SAC, Mandya.
1. Central Bank
The Reserve Bank of India is the central bank of our country. Each country has a central bank
that regulates all the other banks in that particular country.
The main function of the central bank is to act as the Government’s Bank and guide and
regulate the other banking institutions in the country. Given below are the functions of the
central bank of a country:
2. Cooperative Banks
These banks are organised under the state government’s act. They give short term loans to the
agriculture sector and other allied activities.
The main goal of Cooperative Banks is to promote social welfare by providing concessional
loans
• Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt,
NABARD)
• Funded by RBI, government, NABARD. Money is then distributed to the public
• Concessional CRR, SLR applies to these banks. (CRR- 3%, SLR- 25%)
• Owned by the state government and top management is elected by members
• Tier 2 (District Level) – Central/District Cooperative Banks
• Tier 3 (Village Level) – Primary Agriculture Cooperative Banks
3. Commercial Banks
• Organised under the Banking Companies Act, 1956
• They operate on a commercial basis and its main objective is profit.
• They have a unified structure and are owned by the government, state, or any private
entity.
• They tend to all sectors ranging from rural to urban
• These banks do not charge concessional interest rates unless instructed by the RBI
• Public deposits are the main source of funds for these banks
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1. Public sector Banks – A bank where the majority stakes are owned by the Government
or the central bank of the country.
2. Private sector Banks – A bank where the majority stakes are owned by a private
organization or an individual or a group of people
3. Foreign Banks – The banks with their headquarters in foreign countries and branches
in our country, fall under this type of bank
6. Specialized Banks
Certain banks are introduced for specific purposes only. Such banks are called specialized
banks. These include:
• Small Industries Development Bank of India (SIDBI) – Loan for a small-scale industry
or business can be taken from SIDBI. Financing small industries with modern
technology and equipments is done with the help of this bank
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2nd Semester B.Com./Law and Practice of Banking/Module-01
Compiled by: Dr.Girish V, Assistant Professor, P.E.S College of SAC, Mandya.
• EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other
financial assistance with exporting or importing goods by foreign countries can be done
through this type of bank
• National Bank for Agricultural & Rural Development (NABARD) – To get any kind of
financial assistance for rural, handicraft, village, and agricultural development, people
can turn to NABARD.
There are various other specialized banks and each possesses a different role in helping develop
the country financially.
8. Payments Banks
A newly introduced form of banking, the payments bank has been conceptualized by the
Reserve Bank of India. People with an account in the payments bank can only deposit an
amount of up to Rs.1,00,000/- and cannot apply for loans or credit cards under this account.
Options for online banking, mobile banking, the issue of ATM, and debit card can be done
through payments banks. Given below is a list of the few payments bank in our country:
• Airtel Payments Bank
• India Post Payments Bank
• Fino Payments Bank
• Jio Payments Bank
• Paytm Payments Bank
• NSDL Payments Bank
The following points briefly highlight the changing role of banks in India.
1. Better customer service,
2. Mobile banking facility,
3. Bank on wheels scheme,
4. Portfolio management,
5. Issue of electro-magnetic cards,
6. Universal banking,
7. Automated teller machine (ATM),
8. Internet banking,
9. Encouragement to bank amalgamation,
10. Encouragement to personal loans,
11. Marketing of mutual funds,
12. Social banking, etc.
The above-mentioned points indicate the role of banks in India is changing. Now let's discuss
how banking in India is getting much better day after day.
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Compiled by: Dr.Girish V, Assistant Professor, P.E.S College of SAC, Mandya.
2. Mobile Banking
Under mobile banking service, customers can easily carry out major banking transactions by
simply using their cell phones or mobiles.
Here, first a customer needs to activate this service by contacting his bank. Generally, bank
officer asks the customer to fill a simple form to register (authorize) his mobile number. After
registration, this service is activated, and the customer is provided with a username and
password. Using secret credentials and registered phone, customer can now comfortably and
securely, find his bank balance, transfer money from his account to another, ask for a cheque
book, stop payment of a cheque, etc.
3. Bank on Wheels
The 'Bank on Wheels' scheme was introduced in the North-East Region of India. Under this
scheme, banking services are made accessible to people staying in the far-flung (remote) areas
of India. This scheme is a generous attempt to serve banking needs of rural India.
4. Portfolio Management
In portfolio management, banks do all the investments work of their clients.
Banks invest their clients' money in shares, debentures, fixed deposits, etc. They first enter a
contract with their clients and charge them a fee for this service. Then they have the full power
to invest or disinvest their clients' money. However, they have to give safety and profit to their
clients.
their purchases and withdrawals. Along with the transacted amount, this statement also
includes the interest and service fee. The entire amount (as reflected in the statement of
credit card) must be paid back to the bank either fully or in instalments, but before due
date.
2. Debit cards help customers to spend that money which they have saved (credited) in
their individual bank accounts. They need not carry cash but instead can use a debit
card to make a purchase (for shopping) and/or withdraw money (get cash) from an
ATM. No interest is charged on the usage of debit cards.
3. Charge cards are used to spend money up to a certain limit for a month. At the end of
the month, customer gets a statement. If he has a sufficient balance, then he only had to
pay a small fee. However, if he doesn't have a necessary balance, he is given a grace
period (which is generally of 25 to 50 days) to repay the money.
4. Smart cards are currently being used as an alternative to avail public transport
services. In India, this covers Railways, State Transport and City (Local) Buses. Smart
card has an integrated circuit (IC) embedded in its plastic body. It is made as per norms
specified by ISO.
5. Kisan credit cards are used for the benefit of the rural population of India. The Indian
farmers (kisans) can use this card to buy agricultural inputs and goods for self-
consumption. These cards are issued by both Commercial and Co-operative banks.
6. Universal Banking
In India, the concept of universal banking has gained recognition after year 2000. The
customers can get all banking and non-banking services under one roof. Universal bank is like
a super store. It offers a wide range of services, including banking and other financial services
like insurance, merchant banking, etc.
7. Automated Teller Machine (ATM)
There are many advantages of ATM. As a result, many banks have opened up ATM centres to
offer convenience to their customers. Now banks are operating ATM centres not only in their
branches but also at public places like airports, railway stations, hotels, etc. Some banks have
joined together and agreed upon to set up common ATM centres all over India.
8. Internet Banking
Internet banking is also called as an E-banking or net banking. Here, the customer can do
banking transactions through the medium of the internet or world wide web (WWW). The
customer need not visit the bank's branch. Through this facility, the customer can easily inquiry
about bank balance, transfer funds, request for a cheque book, etc. Most large banks offer this
service to their tech-savvy customers.
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2nd Semester B.Com./Law and Practice of Banking/Module-01
Compiled by: Dr.Girish V, Assistant Professor, P.E.S College of SAC, Mandya.
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2nd Semester B.Com./Law and Practice of Banking/Module-01
Compiled by: Dr.Girish V, Assistant Professor, P.E.S College of SAC, Mandya.
3. Provision of Industrial Finance: Rapid industrial growth is the key to faster economic
development. In this regard, the adequate and timely availability of credit to small, medium
and large industry is very significant. In this regard the RBI has always been instrumental in
setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK
etc.
4. Provisions of Training: The RBI has always tried to provide essential training to the staff
of the banking industry. The RBI has set up the bankers' training colleges at several places.
National Institute of Bank Management i.e NIBM, Bankers Staff College i.e BSC and
College of Agriculture Banking i.e CAB are few to mention.
5. Collection of Data: Being the apex monetary authority of the country, the RBI collects
process and disseminates statistical data on several topics. It includes interest rate, inflation,
savings and investments etc. This data proves to be quite useful for researchers and policy
makers.
6. Publication of the Reports: The Reserve Bank has its separate publication division. This
division collects and publishes data on several sectors of the economy. The reports and
bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI Annual
Report, Report on Trend and Progress of Commercial Banks India., etc. This information is
made available to the public also at cheaper rates.
7. Promotion of Banking Habits: As an apex organization, the RBI always tries to promote
the banking habits in the country. It institutionalizes savings and takes measures for an
expansion of the banking network. It has set up many institutions such as the Deposit
Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-1982, NHB-1988, etc.
These organizations develop and promote banking habits among the people. During
economic reforms it has taken many initiatives for encouraging and promoting banking in
India.
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8. Promotion of Export through Refinance: The RBI always tries to encourage the facilities
for providing finance for foreign trade especially exports from India. The Export-Import Bank
of India (EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC)
are supported by refinancing their lending for export purpose.
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