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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.

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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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.

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.

Functions of Commercial Bank/Bank


There are two types of functions of banks:
1. Primary functions – being primary are also called banking functions.
2. Secondary Functions
Both the types of functions of bank are explained below in detail:
Primary Functions of Bank
All banks have to perform two major primary functions namely:
1. Accepting of deposits
2. Granting of loans and advances
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. Candidates can know about the Types of
Cheques at the linked page.
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.
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

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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.

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.

Secondary Functions of Bank


Like Primary Functions of Bank, the secondary functions are also classified into two
parts:
1. Agency functions
2. Utility (Modern) Functions
Agency Functions of Bank
Banks are the agents for their customers; hence it has to perform various agency
functions as mentioned below:
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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.

➢ 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.
Utility (Modern) Functions of Bank
➢ Issuing letters of credit, traveller’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 programmes
➢ Project reports
➢ Standing guarantee on behalf of its customers, etc.

Origin and Growth (Evolution) of Commercial Banks in India


The banking sector in India plays a vital role in this country’s economic development. Over the
centuries, numerous changes have occurred within this industry, from technological
advancement to the diversification of financial services and products.
Currently, the Indian banking system includes commercial banks, small finance banks, and
cooperative banks.
Banks operating within the boundaries of India abide by the Banking Regulation Act 1949.
Let’s understand India’s banking system in three phases.
1. Phase 1 (1786-1969)
This is the pre-independence phase, which lasted nearly 200 years. During this period, there
were close to 600 banks. At the same time, some significant developments in the banking
industry also took place.
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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.

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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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.

• 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
Compiled by: Dr.Girish V, Assistant Professor, P.E.S College of SAC, Mandya.

• Standard Chartered Bank


• DBS Bank
• Royal Bank of Scotland
To stabilise the nationalised public sector banks, the Indian Government formed the
Narasimham Committee in 1991 to manage reforms in the banking sector. During this time,
the Government approved various private banks. These include Axis Bank, IndusInd Bank, and
ICICI Bank.
Other noteworthy developments or changes:
• Small finance banks became eligible to open new branches anywhere in India
• The Government and RBI began to treat both private and public sector banks equally
• Banks started digitising transactions along with other banking operations
• Payments banks were established

Banker and Customer Relationship


The relationship between the banker and the customer varies according to the type of customer
and the service he/she demand. There are two main relationships between the banker and
customer, they are:
1. General relationship: it consists of the possible services the banker provides to the
customer.
2. Special relationship: it consists of duties and instructions to the banker.
General Relationship between Banker and Customer
The general relationship between a banker and customer is:
1. Debtor and Creditor relationship
➢ When a customer fills and signs the account opening form, he/she enters into a contract
with the bank.
➢ And when the customer deposits money in their account, the customer becomes a
creditor and the bank becomes a debtor.
➢ The bank can utilise the amount in the way they want. They aren’t bound to inform the
creditor about the utilization and aren’t bound to give any security to the depositor.
➢ The banks are liable to give the amount back when the depositor demands.
Lending money by providing loans is one of the major aspects of banks. They provide loans
by charging a particular amount of interest by utilizing the resources mobilized by them. In this
case, the bank becomes a creditor and the customer becomes a debtor. But here, the bank
requires security and documents for providing loans.

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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.

2. Trustee and Beneficiary relationship


Section 3 of the Indian Trust Act, 1882 describes trust as: “an obligation annexed to the
ownership of property, and arising out of a confidence reposed in and accepted by the owner,
or declared and accepted by him, for the benefit of another, or of another and the owner’.
➢ Here the relationship between the bank and the customer is based on trust.
➢ When the bank receives a valuable asset or document for security in exchange for the
loan provided by the bank,
➢ the bank is considered to be a trustee and the customer is considered to be a beneficiary.
3. Principal and Agent
➢ An agent is a person who acts as the one who is employed to do any act for another or
to represent another in dealings with the third person.
➢ The person for whom the work is done or to whom it is represented is called the
principal.
➢ Bank carry payments to various authorities by collecting cheques, bills on the behalf of
the customers.
➢ Here bank acts according to the guidelines of the customer and charges for the services
rendered to them.
4. Lesser and Lessee
➢ Section 105 of the Transfer of Property Act 1882 had defined the term lease as: “a lease
of immovable property is a transfer of a right to enjoy such property, made for a certain
time, express or implied, or in perpetuity, in consideration of a price paid or promised,
or of money, a share of crops, service or any other thing of value, to be rendered
periodically or on specific occasions to the transferor by the transferee, who accepts the
transfer on such terms”.
➢ The important term that comes under Section 105 is:
i. Lessor: the person who transfers the immovable property.
ii. Lessee: the person to whom the property is transferred.
iii. Premium: to obtain a lease of an immovable property a price called “premium”
is paid.
iv. Rent: the service or money that is rendered is known as rent.
5. Bailor and Bailee
➢ A bailment is a contract where the customer provides a valuable asset or any specific
good for a specific period of time to the banker.
➢ The customer who entrusts the asset to the banker is a bailer.
➢ And the banker to whom the asset is entrusted for a specific time is called a bailee.
➢ Bankers also charge a particular amount for bailment.
6. Advisor and Client
The banker acts as an advisor when a customer invests in securities. Here the customer is the
client. The banker should be cautious while giving advice officially or unofficially.

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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.

Special Relationship between Banker and Customer


The special relationship that exists between banker and customer is:
1. The obligation of bankers to maintain records
The banker should maintain the records of transactions, deposits, loans and investments done
by a customer. The records should be clear and genuine. Any irregularity in records might leads
to legal trouble for the banker and customer.
2. The obligation of banker to maintain confidentiality
The bank is responsible to keep all the information and details of the customers safe and secure.
Even though the information is confidential, the information can be disclosed to government
officials in terms of any legal issues.

3. The obligation of the banker to honour checks


The banker is responsible to provide the cheque of the customer equivalent to the sum of money
present in their account. The conditions that needed to be fulfilled while honoring the cheque
of the customer under Section 31 of the Negotiable Instruments Act, 1881:
i. Proper design of the cheque.
ii. The check should be properly presented.
iii. The cheque should be collected only on banking hours.
iv. The correctness of the cheque should be noticed.
v. Availability of sufficient funds of the customer.

Types of Banks in India


Banks can be classified into various types. Given below are the bank types in India: -
• Central Bank
• Cooperative Banks
• Commercial Banks
• Regional Rural Banks (RRB)
• Local Area Banks (LAB)
• Specialized Banks
• Small Finance Banks
• Payments Banks

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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:

• Guiding other banks


• Issuing currency
• Implementing the monetary policies
• Supervisor of the financial system
In other words, the central bank of the country may also be known as the banker’s bank as it
provides assistance to the other banks of the country and manages the financial system of the
country, under the supervision of the Government.

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

They are organised in the 3-tier structure

• 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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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.

The commercial banks can be further divided into three categories:

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

4. Regional Rural Banks (RRB)


• These are special types of commercial Banks that provide concessional credit to
agriculture and rural sector.
• RRBs were established in 1975 and are registered under a Regional Rural Bank Act,
1976.
• RRBs are joint ventures between the Central government (50%), State government
(15%), and a Commercial Bank (35%).
• 196 RRBs have been established from 1987 to 2005.
• From 2005 onwards government started merger of RRBs thus reducing the number of
RRBs to 82
• One RRB cannot open its branches in more than 3 geographically connected districts.
Aspirants can check the list of Regional Rural banks in India at the linked article.

5. Local Area Banks (LAB)


• Introduced in India in the year 1996
• These are organized by the private sector
• Earning profit is the main objective of Local Area Banks
• Local Area Banks are registered under Companies Act, 1956
• At present, there are only 4 Local Area Banks all which are located in South India

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
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• 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.

7. Small Finance Banks


As the name suggests, this type of bank looks after the micro industries, small farmers, and the
unorganized sector of the society by providing them loans and financial assistance. These banks
are governed by the central bank of the country.

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

Changing role of Commercial Banks in India


The role of banks in India has changed a lot since economic reforms of 1991. These changes
came due to LPG, i.e. liberalization, privatization and globalization policy being followed by
GOI. Since then, most traditional and outdated concepts, practices, procedures and methods of
banking have changed significantly. Today, banks in India have become more customer-
focused and service-oriented than they were before 1991. They now also give a lot of
importance to their rural customers. They are even willing ready to help them and serve
regularly the banking needs of country-side India.
The changing role of banks in India can be glanced in points depicted below.
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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.

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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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. Better Customer Service


Before 1991, the overall service of banks in India was very poor. There were very long queues
(lines) to receive payment for cheques and to deposit money. In those days, some bank staffs
were very rude to their customers. However, all this changed remarkably after Indian economic
reforms of 1991.
Banks in India have now become very customer and service focus. Their service has become
quick, efficient and customer-friendly. This positive change is mostly due to rising competition
from new private banks and initiation of Ombudsman Scheme by RBI.

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.

5. Issue of Electro-Magnetic Cards


Banks in India have already started issuing Electro-Magnetic Cards to their customers. These
cards help to carry out cash-less transactions, make an online purchase, avail ATM facility,
book a railway ticket, etc.
Banks issue many types of electro-magnetic cards, which are as follows:
1. Credit cards help customers to spend money (loaned up to a certain limit as previously
settled by the bank) which they don't have in hand. They get a monthly statement of
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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.

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.

9. Encouragement to Bank Amalgamation


Failure of banks is well-protected with the facility of amalgamation. So depositors need not
worry about their deposits. When weaker banks are absorbed by stronger banks, it is called
amalgamation of banks.

10. Encouragement to Personal Loans


Today, the purchasing power of Indian consumers has increased dramatically because banks
give them easy personal loans. Generally, interest charged by the banks on such loans is very
high. Interest is calculated on reducing balance. Large banks offer loans up to a huge amount
like one crore. Some banks even organise Loan Mela (Fair) where a loan is sanctioned on the
spot to deserving candidates after they submit proper documents.
11. Marketing of Mutual Funds
A mutual fund collects money from many investors and invests the money in shares, bonds,
short-term money market instruments, gold assets; etc. Mutual funds earn income by interest
and dividend or both from its investments. It pays a dividend to subscribers. The rate of
dividend fluctuates with the income on mutual fund investments. Now banks have started
selling these funds in their own names. These funds are not insured like other bank deposits.
There are different types of funds such as open-ended funds, closed-ended funds, growth funds,
balanced funds, income funds, etc.

12. Social Banking


The government uses the banking system to alleviate poverty and unemployment. Many social
development programmes are initiated by the banks from time to time. The success of these
programmes depends on financial support provided by the banks. Banks supply a lot of finance
to farmers, artisans, scheduled castes (SC) and scheduled tribe (ST) families, unemployed
youth and people living below the poverty line (BPL).

Reserve Bank of India


The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions
of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially
established in Kolkata but was permanently moved to Mumbai in 1937.
Roles and Functions of RBI
Reserve Bank of India being an apex court of the center enjoys enormous power and
functions under banking system in India. It has monopoly over the issue of bank-notes and
monetary system of the country. These power and functions as to issue of bank notes and
currency system are governed by the Reserve Bank of India Act, 1934. Besides it the Banking
Regulation Act, 1949 also empowers certain power and Function of the Reserve 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.

• Main Functions of RBI


Main functions are those functions which every central bank of each nation performs all
over the world. Basically, these functions are in line with the objectives with which the bank
is set up. It includes fundamental functions of the Central Bank. They comprise the following
tasks.
1. Issue of Currency Notes: The RBI has the sole right or authority or monopoly of issuing
currency notes except one rupee note and coins of smaller denomination. These currency
notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20,
50, 100, 500, and 1,000. The RBI has powers not only to issue and withdraw but even to
exchange these currency notes for other denominations. It issues these notes against the
security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes
and government of India bonds.
2. Banker to other Banks: The RBI being an apex monitory institution has obligatory
powers to guide, help and direct other commercial banks in the country. The RBI can control
the volumes of banks reserves and allow other banks to create credit in that proportion. Every
commercial bank has to maintain a part of their reserves with its parent's viz. the RBI.
Similarly, in need or in urgency these banks approach the RBI for fund. Thus, it is called as
the lender of the last resort.
3. Banker to the Government: The RBI being the apex monitory body has to work as an
agent of the central and state governments. It performs various banking function such as to
accept deposits, taxes and make payments on behalf of the government. It works as a
representative of the government even at the international level. It maintains government
accounts, provides financial advice to the government. It manages government public debts
and maintains foreign exchange reserves on behalf of the government. It provides overdraft
facility to the government when it faces financial crunch.
4. Exchange Rate Management: It is an essential function of the RBI. In order to maintain
stability in the external value of rupee, it has to prepare domestic policies in that direction.
Also, it needs to prepare and implement the foreign exchange rate policy which will help in
attaining the exchange rate stability. In order to maintain the exchange rate stability, it has
to bring demand and supply of the foreign currency (U.S Dollar) close to each other.
5. Credit Control Function: Commercial bank in the country creates credit according to
the demand in the economy. But if this credit creation is unchecked or unregulated then it
leads the economy into inflationary cycles. On the other credit creation is below the required
limit then it harms the growth of the economy. As a central bank of the nation the RBI has
to look for growth with price stability. Thus, it regulates the credit creation capacity of
commercial banks by using various credit control tools.
6. Supervisory Function: The RBI has been endowed with vast powers for supervising the
banking system in the country. It has powers to issue license for setting up new banks, to
open new branches, to decide minimum reserves, to inspect functioning of commercial banks
in India and abroad, and to guide and direct the commercial banks in India. It can have
periodical inspections an audit of the commercial banks in India.

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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.

• Developmental / Promotional Functions of RBI


Along with the routine traditional functions, central banks especially in the developing
country like India have to perform numerous functions. These functions are country specific
functions and can change according to the requirements of that country. The RBI has been
performing as a promoter of the financial system since its inception. Some of the major
development functions of the RBI are maintained below.
1. Development of the Financial System: The financial system comprises the financial
institutions, financial markets and financial instruments. The sound and efficient financial
system is a precondition of the rapid economic development of the nation. The RBI has
encouraged establishment of main banking and non- banking institutions to cater to the credit
requirements of diverse sectors of the economy.
2. Development of Agriculture: In an agrarian economy like ours, the RBI has to provide
special attention for the credit need of agriculture and allied activities. It has successfully
rendered service in this direction by increasing the flow of credit to this sector. It has earlier
the Agriculture Refinance and Development
Corporation (ARDC) to look after the credit, National Bank for Agriculture and Rural
Development (NABARD) and Regional Rural Banks (RRBs).

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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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.

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.

• Supervisory Functions of RBI


The reserve bank also performs many supervisory functions. It has authority to regulate
and administer the entire banking and financial system. Some of its supervisory functions
are given below.
1. Granting license to banks: The RBI grants license to banks for carrying its business.
License is also given for opening extension counters, new branches, even to close down
existing branches.
2. Bank Inspection: The RBI grants license to banks working as per the directives and in
a prudent manner without undue risk. In addition to this it can ask for periodical information
from banks on various components of assets and liabilities.
3. Control over NBFIs: The Non-Bank Financial Institutions are not influenced by the
working of a monitory policy. However, RBI has a right to issue directives to the NBFIs from
time to time regarding their functioning. Through periodic inspection, it can control the
NBFIs.
4. Implementation of the Deposit Insurance Scheme: The RBI has set up the Deposit
Insurance Guarantee Corporation in order to protect the deposits of small depositors. All bank
deposits below Rs. One lakh are insured with this corporation. The RBI work to implement
the Deposit Insurance Scheme in case of a bank failure.

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