BANKING – ACADEMIC NOTES

1. Meaning and Defini on of Bank

Meaning of Bank

A bank is a financial ins tu on that accepts deposits from people who wish to save money and
lends those funds to individuals and businesses who require finance. It also provides various
related financial services.

Defini ons

 Oxford Dic onary: A bank is an organiza on that provides financial services, especially
accep ng deposits, safeguarding money and lending it.

 Prof. Kinley: A bank is an ins tu on that receives deposits, lends and invests money, and
provides payment facili es for goods and services.

2. Banking Regula on Act, 1949

Introduc on

The Banking Regula on Act, 1949 is the main legal framework governing banking companies in
India. It empowers the Reserve Bank of India (RBI) to regulate, supervise and control the banking
system. Ini ally called the Banking Companies Act, 1949, its scope was later extended to
coopera ve banks.

Objec ves of the Act

1. Regula on and Control of Banking Ins tu ons

The Act ensures orderly and efficient func oning of banks through a structured regulatory
framework.

2. Protec on of Depositors’ Interests

It strengthens public confidence in the banking system by safeguarding depositors’ money.

3. Development of Sound Banking Prac ces

The Act promotes disciplined and prudent banking opera ons across the country.

4. Financial Stability

It ensures safety, stability and security of the banking sector.

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Salient Features of the Act

1. Defini on of Banking

Banking means accep ng deposits from the public for lending or investment, repayable on
demand or otherwise, and withdrawable by cheque, dra or other means.

2. Licensing of Banks

No banking company can operate in India without obtaining a license from the RBI.

3. Capital and Reserve Requirements

Minimum capital and reserve norms are prescribed to ensure financial strength and
stability.

4. Control Over Management

Appointment of directors and key managerial persons is regulated to ensure competent

and fit management.

5. Regula on of Business Ac vi es

Banks must maintain Statutory Liquidity Ra o (SLR) and Cash Reserve Ra o (CRR) to ensure
liquidity and solvency.

6. Inspec on and Supervision

RBI has the authority to inspect books, accounts and func oning of banks.

7. Amalgama on and Winding Up

Legal provisions exist for mergers, reconstruc on and closure of banks.

8. Prohibi on of Certain Ac vi es

Banks are restricted from trading in goods to avoid non-banking risks.

9. Deposit Insurance

Depositors’ funds are protected through DICGC.

Amendments and Relevance

1. Extension to Coopera ve Banks (1965)

The Act was made applicable to coopera ve banks for be er regula on.

2. Recent Amendment (2020)

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 RBI was empowered to ini ate reconstruc on or amalgama on of coopera ve banks to
protect depositors.

3. Corporate Governance

Greater emphasis on transparency and accountability in banking management.

3. Structure of Indian Banking System

Role of RBI

The Reserve Bank of India is the apex monetary authority and performs the following func ons:

 Issue of currency

 Regula on of banks and NBFCs

 Formula on of monetary policy

 Supervision of payment and se lement systems

 Management of foreign exchange

Scheduled Banks

These banks are included in the Second Schedule of the RBI Act, 1934 and enjoy borrowing
facili es from RBI.

Commercial Banks

1. Public Sector Banks

Owned and operated by the government with a focus on financial inclusion and priority sector
lending.

2. Private Sector Banks

Owned by private en es and known for customer-centric and technology-driven services.

3. Foreign Banks

Headquartered outside India and specialize in trade finance and wealth management.

4. Regional Rural Banks (RRBs)

Established to provide banking services in rural areas and jointly owned by the Central
Government, State Government and a sponsor bank.

5. Small Finance Banks

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Target small borrowers, farmers, micro-industries and unserved sec ons.

6. Payments Banks

Accept deposits and provide remi ance services with limited banking func ons.

Coopera ve Banks

1. Urban Coopera ve Banks – Operate in urban and semi-urban areas.

2. State Coopera ve Banks and District Central Coopera ve Banks – Provide rural credit and
act as intermediaries in the coopera ve credit structure.

Non-Scheduled Banks

These banks are not included in the Second Schedule of the RBI Act and have limited opera ons
and privileges.

Development Banks

Provide long-term finance for industry, agriculture and infrastructure.

Examples: IDBI, NABARD, SIDBI.

Non-Banking Financial Companies (NBFCs)

These ins tu ons provide loans, leasing, hire purchase and investment services but do not hold a
banking license.

Specialized Banks

Banks created for specific sectors such as:

 EXIM Bank for interna onal trade

 Na onal Housing Bank for housing finance

4. Stages in Evolu on of Banking in India

1. Pre-Independence Era (1786–1947)

Features

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  Establishment of the first bank: General Bank of India (1786).

 Presidency Banks: Bank of Bengal, Bank of Bombay and Bank of Madras.

 Forma on of Imperial Bank of India in 1921 through merger of presidency banks.

 Growth of private sector banks such as Punjab Na onal Bank and Bank of Baroda.

 Banking served mainly wealthy business classes; rural areas were neglected.

 Frequent bank failures due to poor governance.

2. Post-Independence Era (1947–1969)

Features

 RBI became the central bank a er na onaliza on in 1949.

 Enactment of Banking Regula on Act, 1949.

 Crea on of State Bank of India in 1955 to expand public sector banking.

3. Na onaliza on of Banks (1969–1991)

Features

 Na onaliza on of 14 major banks in 1969 and 6 more in 1980.

 Introduc on of priority sector lending.

 Establishment of Regional Rural Banks in 1975.

 Emphasis on inclusive banking and rural development.

4. Liberaliza on and Reform Phase (1991–2000)

Features

 Entry of new private sector banks.

 Expansion of foreign banks.

 Computeriza on and digi za on of banking opera ons.

 Measures to reduce Non-Performing Assets (NPAs).

5. Digital Banking and Moderniza on (2000–Present)

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Features

 Introduc on of online banking, mobile banking and digital payment apps.

 Consolida on and merger of public sector banks.

 Financial inclusion through PMJDY.

 Focus on cybersecurity and green banking prac ces.

5. Func ons of Banks

A. Primary Func ons

1. Accep ng Deposits

Types of Deposits

1. Savings Deposits

Encourage saving habit; low interest; limited withdrawals; suitable for salaried individuals.

2. Fixed Deposits

Lump sum deposited for a fixed period; higher interest; no withdrawal before maturity.

3. Current Deposits

Used by business people; no interest; free withdrawals; overdra facility available.

4. Recurring Deposits

Periodic deposits; higher interest; suitable for salaried persons and small traders.

2. Gran ng Loans and Advances

Types

1. Overdra
Facility to withdraw more than the balance in a current account up to a sanc oned limit
against security.

2. Cash Credit

Loan against tangible assets; separate account maintained; interest charged on amount
u lized.

3. Loans
Granted for short, medium or long term; repayable in instalments or lump sum.

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 4. Discoun ng of Bills of Exchange

Bank purchases bills before maturity a er deduc ng discount and collects payment on due
date.

B. Secondary Func ons

1. Agency Func ons

 Transfer of funds from one place to another.

 Collec on of cheques and bills.

 Making periodic payments like electricity bills and rent.

 Por olio management (purchase and sale of shares and debentures).

 Collec on of salary, pension and dividends.

 Ac ng as trustee, executor and representa ve.

2. General U lity Func ons

 Issue of dra s and le ers of credit.

 Locker facility for safe custody of valuables.

 Underwri ng of shares and debentures.

 Dealing in foreign exchange.

 Prepara on of project reports.

 Conduc ng social welfare programmes.

 Providing creditworthiness informa on.

 Issuing travellers’ cheques.

6. Importance / Significance of Banking

1. Mobiliza on of Savings and Lending

Banks collect savings and provide loans which support business and economic ac vity.

2. Facilitates Money Transfer and Payments

Cheques, dra s and bills of exchange make transac ons safe and convenient.

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3. Encourages Saving and Capital Forma on
Savings mobilized by banks are converted into produc ve investments.

4. Transfer of Savings into Investment

Banks channel idle funds into capital forma on and economic growth.

5. Overdra Facili es
Help customers overcome temporary financial difficul es.

6. Discoun ng Bills of Exchange

Provides immediate funds to traders and supports working capital needs.

7. Financing Internal and External Trade

Through le ers of credit and bill discoun ng, banks promote trade.

8. Acts as an Agent
Provides services like purchase and sale of securi es, locker facili es and payment
collec on.

9. Traveller’s Cheques
Ensure safety and convenience for travellers.

10. General U lity Services

Banks contribute to overall economic development and public prosperity.

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