JAI NARAIN VYAS UNIVERSITY

Session: 2021-22

PROJECT WORK ON:

“BANKING”

Submitted by- Submitted to-

Nitish Purohit Adv. Kuldeep Purohit
[Link].B. SEM 10th (Law Faculty)
(18BAL50039)
 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my teacher Adv. Kuldeep Purohit as
well as our dean Prof. Chandan Bala who gave me the golden opportunity to do this wonderful
project on the topic ‘Banking’, which also helped me in doing a lot of Research and I came to
know about so many new things I am really thankful to them.
Secondly I would also like to thank my parents and friends who helped me a lot in finalizing this
project within the limited time frame.
 BANKING
A bank is a financial institution which performs the deposit and lending function. A bank allows
a person with excess money (Saver) to deposit his money in the bank and earns an interest rate.
Similarly, the bank lends to a person who needs money (investor/borrower) at an interest rate.
Thus, the banks act as an intermediary between the saver and the borrower.
The bank usually takes a deposit from the public at a much lower rate called deposit rate and
lends the money to the borrower at a higher interest rate called lending rate.
The difference between the deposit and lending rate is called ‘net interest spread’, and the
interest spread constitutes the bank's income.

COMMON LAW DEFINITIONS :-

A number of definitions of banking emerged at common law. Perhaps the most authoritative is
that adopted in United Dominions Trust Ltd. v. Kirkwood, when the court drew on the usual
characteristics of banking, set out in Paget's Law of Banking a standard textbook. As Lord
Denning MR put it: There are, therefore, two characteristics usually found in bankers today:

● They accept money from, and collect cheques for, (heir customers and place them to their
credit;
● They honour cheques or orders drawn on them by their customers when presented for
payment and debit their customers accordingly. These two characteristics carry with them
also a third, namely: They keep current accounts, or something of that nature, in their
books in which the credits and debits are entered.
● Such an analysis cannot be regarded as sufficient. First, it tics itself to payment through
the cheque system, thus excluding traditional savings and co-operative banks, quite apart
from merchant (investment) banking. More importantly, cheques are only one way in
which payments are affected: indeed, before too long, cheques will have had their day.
For this reason the more generalized analysis of Isaacs J in the Australian I high Court,
specifically rejected by Lord Denning MR, is to be preferred.

STATUTORY DEFINITIONS :-
Internationally, statutory definitions of banks and banking take different forms. At one end of the
spectrum is the approach which defines a bank as any body recognized as such by a
governmental authority. In the absence of any indication of the criteria required for such
recognition, this approach confers too great a discretion on the state. Falling somewhere along
the spectrum is a second approach, which lists the activities which banking encompasses. The
German Banking Act adopts the list approach. There are difficulties. First it must be made clear
which activities on the list, if not all, a body must perform to be treated as a bank. Moreover, the
law must specify whether banks are confined only to these, and incidental, activities—it will not
always be an easy issue which activities are incidental—or whether they have a free rein. More
fundamentally, the list approach will soon become dated as the business of banking changes, so
that there must be a mechanism for its constant updating. At the other end of the spectrum is the
formulary approach: banking is defined in terms of a few, generalized characteristics. Again
there are problems. As with the list approach, can banks go beyond the activities specified in the
formula? What are the essential features of the formula—deposit taken from the public coupled
with granting credits for its own account (the EC approach); or some other approach, such as
deposit-taking, granting credits, and the ability to make payments to third parties on behalf of
customers? Moreover, since the formulary approach is by nature all encompassing, how is it to
be confined? Specific exemptions will be needed to exclude what will otherwise be caught.
Whether the list or formulary approach is adopted, it is clear that bodies may act like banks yet
not be categorized in law as banks. If taking deposits from the public is defined as the essential
ingredient of banking then the finance house able to fund itself from the wholesale markets, or
the co-operative taking deposits from within its membership, would probably not be caught. If
banking means deposit taking coupled with making loans, an investment fund will be able to
avoid classification as a bank by using its money to purchase short-term government paper or
other money market instruments.

Commercial Banks :-
● All the commercial banks in India- Scheduled and Non-Scheduled are regulated under
Banking Regulation Act 1949.
● By definition, any bank which is listed in the 2nd schedule of the Reserve Bank of India
Act, 1934 is considered a scheduled bank. The list includes the State Bank of India and
its subsidiaries (like State Bank of Travancore), all nationalised banks (Bank of Baroda,
Bank of India etc), Private sector banks, Foreign banks, regional rural banks (RRBs),
foreign banks (HSBC Holdings Plc, Citibank NA) and some co-operative banks.
● Till 2017, Scheduled commercial banks in India comprised 26 Public sector banks
including SBI and its associates, and 19 Nationalised Bank and IDBI. The creation of
Bhartiya Mahila Bank has increased the total no of Public sector SCB’s to 27, but the
recent merger of the Mahaila Bank with SBI had reduced the list back to 26.
● The scheduled private sector bank includes old private sector banks and new private
sector banks. There are 13 old private sector banks and 9 new private sector banks
including the newly formed IDFC and Bandhan Bank.
● There are also 43 Foreign National Banks operating in India.
● The Regional Rural Banks were started in India back in the 1970s due to the inability of
the commercial banks to lend to farmers/rural sectors/agriculture. The governance
structure/shareholding of RRBs is as follows:
● Central Government: 50%, State Government: 15% and Sponsor Bank: 35%.
● RBI has kept CRR (Cash Reserve Requirements) of RRBs at 3% and SLR (Statutory
Liquidity Requirement) at 25% of their total net liabilities.

Important Facts Relating to Scheduled Commercial Banks.

In terms of Business, Public sector banks dominate Indian Banking. PSB accounts for close to
50% of total assets, 70% of deposits and close to 70% of the advances.
Amongst the Public-Sector Banks, SBI and its Associates has the highest number of Branches.
The committee on Regional Rural Bank headed by M Narasimhan recommended the setting up
of RRBs for the purpose of providing rural credit. An RRB is sponsored by a Public-Sector Bank
which also provides a part of its share capital. Example: Maharashtra Gramin Bank (sponsored
by the Bank of Maharashtra) and the Himachal Gramin Bank (Sponsored by Punjab National
Bank). RRBs were set up to eliminate other unorganized financial institutions like money lenders
and supplement the efforts of co-operative banks. The Private Commercial banks account for
close to 1/4th of the assets of the total banking assets.
Commercial Bank :-
A commercial bank is a kind of financial institution that carries out all the operations related to
deposit and withdrawal of money for the general public, providing loans for investment, and
other such activities. These banks are profit-making institutions and do business only to make a
profit.

The two primary characteristics of a commercial bank are lending and borrowing. The bank
receives the deposits and gives money to various projects to earn interest (profit). The rate of
interest that a bank offers to the depositors is known as the borrowing rate, while the rate at
which a bank lends money is known as the lending rate.

Function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.

(a) Primary functions

Accepts deposit : The bank takes deposits in the form of saving, current, and fixed deposits. The
surplus balances collected from the firm and individuals are lent to the temporary requirements
of the commercial transactions.
Provides loan and advances : Another critical function of this bank is to offer loans and
advances to the entrepreneurs and business people, and collect interest. For every bank, it is the
primary source of making profits. In this process, a bank retains a small number of deposits as a
reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft,
cash credit, short-run loans, and more such banks.
Credit cash: When a customer is provided with credit or loan, they are not provided with liquid
cash. First, a bank account is opened for the customer and then the money is transferred to the
account. This process allows the bank to create money.

(b) Secondary functions

Discounting bills of exchange: It is a written agreement acknowledging the amount of money to

be paid against the goods purchased at a given point of time in the future. The amount can also
be cleared before the quoted time through a discounting method of a commercial bank.
Overdraft facility: It is an advance given to a customer by keeping the current account to
overdraw up to the given limit.
Purchasing and selling of the securities: The bank offers you with the facility of selling and
buying the securities.
Locker facilities: A bank provides locker facilities to the customers to keep their valuables or
documents safely. The banks charge a minimum of an annual fee for this service.
Paying and gathering the credit : It uses different instruments like a promissory note, cheques,
and bill of exchange.
The agency functions of commercial banks :-
A commercial bank is a kind of financial organisation that carries out all the operations related to
deposit and withdrawal of money for the general public, providing loans for investment, etc.
These banks are profit-making organisations and do business only to make a profit.

Agency functions of a commercial bank :-

Commercial banks provide certain services to their customers in return for some commission,
these are called agency functions.
Some of the agency functions of a commercial bank are listed below :-
● Collection of cheques, bills and drafts.
● Payment of interest, instalments of loans, insurance premium etc.
● Purchase and sale of securities
● Collection of interest, dividend etc.
● Transfer of funds through demand drafts, mail transfer etc.
● Purchase and sale of foreign exchange.

Other vital functions of Commercial Bank :-

The functions of commercial banks are classified into two main categories
(a) Primary functions
● Accepts deposit
● Provides Loan and Advances
● Credit Cash
(b) Secondary functions
● Discounting bills of exchange
● Overdraft Facility
● Purchasing and Selling of the Securities
● Locker Facilities
● Paying and Gather the Credit – It uses different instruments like a promissory note,
cheques, and bill of exchange

General Utility Services of Commercial Banks :-

Besides agency services, commercial banks perform many general utility services also. Banks
render these services not only to their customers but also to the general public. The following are
some of the important general utility services.

General utility services of Commercial Banks

1. RBI allows certain branches to undertake foreign exchange transactions. They are called
authorised dealers. The bank purchases and sells foreign currency at the rate prescribed
by RBI.
2. The bank enables foreign trade by issuing a letter of credit on behalf of the importer. It is
a letter of guarantee that enables the importer to purchase goods. Letter of credit has been
in existence for many years. It is in fact the most important single document in
international trade. Simply stated, a letter of credit is an undertaking by a banker in the
importer’s country to pay or to arrange to pay specified merchandise, provided that the
exporter satisfies certain stipulated conditions. Through the instrument of letter of credit,
the promise to pay usually made by the overseas buyer is substituted by the promise to
 pay by the banker. It is only this feature of the letter of credit, which gives the exporter
greater security. A letter of credit is a written undertaking given by a bank to the seller of
the goods at the request of the importer of the goods, to meet the bill of exchange drawn
by the seller in accordance with the terms of the undertaking providing the documents of
title to goods prescribed by the buyer are tendered on presentment of the bill of exchange
for payment.
3. In the case of foreign trade or domestic trade, bankers accept bills on behalf of customers
and make payment on the due date on these bills. Later on, they collect from the
customers.
4. In order to promote the capital market and to encourage issue of shares both in the
primary market and secondary market, the banker acts as an underwriter for certain
companies. This will enable the companies to sell their shares. Banks underwrite the
issue of shares and debentures of joint stock companies. For this service, banks receive
commission from the companies. This enables companies to get adequate capital for their
business.
5. The bank provides safe custody of valuables by providing safe deposit vaults. The
customers can keep their valuables such as jewels, silver ornaments, important
documents and share and debenture certificates safely. However, the bank will not give
any guarantee for the safety of valuables. The relationship here is only that of a tenant
and owner. And the banker, as owner, collects rent for the safe deposit vault. Here the
banker acts only as the custodian of the valuables belonging to the customers. These
lockers are made available on a half yearly or annual rental basis.
6. The income tax assessees can pay their income tax through banks notified by RBI.
7. In order to know the credit worthiness of certain customers, the banks may act as referee.
Any third party can approach the bank to know about the genuineness of customers.
8. In view of the development of technology, the bank is in a better position to provide
various data which are in general interest.

9. The banks help companies to mobilise funds in foreign market through the sale of global
deposit receipts.
10. Banks undertake factoring and leasing finance by which trade bills of customers are
given finance.

Banking Law Information Service :-

EPCOR is a resource for your everyday questions regarding the rules and regulations that govern
the payment systems, including check and image, card, ACH, wire, as well as risk and fraud.
However, we recognize that there are certain situations in which you may desire a second
opinion. That is when the EPCOR Banking Law Information Service can be of assistance.

EPCOR's Banking Law Information Service is a free, members-only resource offering you the
opportunity to ask an experienced attorney your basic payment laws and regulations questions
without establishing an attorney-client relationship. Scott Jones, a Partner in the law firm of
Adams and Reese LLP, is a highly-respected payments attorney who can help answer your
questions as they relate to:
● ACH Rules
● Wire Transfers
 ● Check Products
● Federal Regulations
● Uniform Commercial Code
● OFAC Regulations
● Bank Secrecy Act
● USA PATRIOT Act
● ECCHO Rules

This is an educational information service only, not a solicitation for legal services. If you need
legal advice or representation concerning a particular factual situation or dispute, you should
retain legal counsel.

Systems of Banking :-
When you sit back and think about it, banks are often a huge part of our lives. We deposit our
paychecks, take out loans, and set up savings accounts, all at a bank. But what do banks do?
What are the different types of banks? Let's start finding some answers to these questions by
looking at the different types of banks that make up a banking system.
A banking system is a group or network of institutions that provide financial services for us.
These institutions are responsible for operating a payment system, providing loans, taking
deposits, and helping with investments.

Some important types of banks in countries like India are discussed below:

(a) Organised and unorganised banking:

Indian banking system can broadly be classified into two categories:
(i) Organised banking and
(ii) Unorganised banking.
That part of Indian banking system which does not fall under the control of our central bank (i.e.
Reserve Bank of India) is called unorganised banking. For example, Indigenous banks. Whereas,
organised banking system refers to that part of the Indian banking system which is under the
influence and control of the Reserve Bank of India. For example, Commercial Banks, Industrial
Banks, Agricultural Banks.
(b) Scheduled and Non-scheduled banks:
Under the Reserve Bank of India Act, 1939, banks were classified as scheduled banks and non
scheduled banks.. The scheduled banks are those which are entered in the second schedule of
RBI Act, 1939. Scheduled banks are those banks which have a paid up capital and reserves of
aggregate value of not less than Rs 5 lakhs and which satisfy RBI.
(c) Indigenous Bankers:
From very ancient days indigenous banking as different from modern western banking has been
organised in the form of family or individual business. They have been called by various names
in different parts of the country as Shroffs, Sethus, Sahukars, Mahajans, Chettis and so on. They
vary in their size from petty money lenders to substantial shroffs.
(d) Central Bank:
In each country there exists a central bank which controls a country’s money supply and
monetary policy. It acts as a bank to other banks, and a lender of last resort. India Reserve Bank
of India (RBI) is the Central Bank.
(e) Commercial Bank:
A bank dealing with the general public, accepting deposits from making loans to large numbers
of households and firms. Through the process of accepting deposits and lending, commercial
banks create credit in the economy. Some examples (commercial banks in India are State Bank
India (SBI), Punjab National Bank (PNB) etc.
(f) Development Banks:
Development banks are specialised financial institutions. To promote economic development,
development banks provide medium term and long term loans to entrepreneurs at relatively low
interest rates. Some examples of development banks in India are Industrial Development Bank of
India (IDBI), Industrial Financial Corporation of India (IFCI), Industrial Credit and Investment
Corporation of India (ICICI) etc.
(g) Co-Operative Banks:
Co-operative banks are organised under the provisions of the Co- operative societies law of the
state. These banks were originally set up in India to provide credit to the farmers at cheaper rates.
However, the co-operative banks function also in the urban sectors.

Unit Banking :-
Unit Banking is a system of banking wherein a bank operates in a limited area, does not open
any branches in other places and is more responsive to local needs. These independent and
isolated units have to take care of the entire banking operations and maintain good health. They
thus have to raise their capital and deposits locally. They are more efficient as they have a
limited scale and lack of any gap between decision-makers and executives.
Unlike branch banking, where policies are framed taking a larger context in mind, decisions are
quicker and more suitable to the customers. These bankers focus on development of the local
area and better community service. These banks have their own board of directors and
stockholders. The concept originated in the USA.
Relevance of Unit Banking
It is better known as localised banking as banks are more close to the local conditions and have
specialised information about the local problems, drawbacks and needs. The funds are thus
channelized to cater to local issues only and don’t have to be transferred to other areas. As there
is no transfer of funds from rural areas to other urban commercial centres, the developmental
initiatives undertaken help to reduce regional disparities over a period of time. The management
is more effective and comparatively easy.
Due to quick decisions as the management has more operational freedom and timely
implementation, these banks have a great rapport with their customers. In addition, there small
size of operations reduces possibilities of any monopolistic tendencies. On the flip side, the unit
system of banking has its own set of drawbacks. The foremost is that due to intense local
operations and lack of branches in other areas, risk also becomes highly concentrated and severe.
There are no sister branches to divide the same. This makes these banks highly vulnerable to
financial shocks such as a sudden run on the banks.

Branch Banking :-
Branch Banking has been defined under the provisions of Section 23 of the Banking Regulation
Act, 1949 that banks can either open new branches or shift the location of existing branches. The
banks have to seek a prior approval of RBI to open a new branch in India or abroad or in the
same city or village where a branch already operates. RBI will grant such permission after it is
satisfied about the financial condition of the demanding bank, robustness of its management,
capital structure and general public interest behind such a move.
The Banking Regulations Act, 1949, defines a ‘branch’ or ‘branch office’ of a banking company
as a place where bank deposits are received, cheques cashed, money lent, any or all banking
services are carried out. These exclude the bank call centres as they are typically calling facilities
which do not have any customer interaction. A branch will include a full-fledged specialised
branch, a satellite or mobile office, an extension counter, administrative office, control office,
service branch, credit card centre etc.

Relevance of Branch Banking :-

Branch banking has a lot of importance in India as it makes banking possible for people living in
rural and remote areas. This is a true source of inclusive growth. The success of Pradhan Mantri
Jan Dhan Yojana has been possible due to extensive branch networks of various banks. Branch
banking makes management more responsive and efficient over centralised banking operations.
Also, the risk is well spread across the branches and no single office has to suffer. This helps
banks to offer more securities and investment options to its customers. Also, due to the wide
geographic spread, a broader customer base, deposits used in one branch can be profitably used
as loans or investments in other branches. This type of banking system can easily reach people in
backward areas. There are some negative points too which the branch system faces like delays
in decision-making due to limited powers of branches, influenced by local political leaders or
administration etc.

What is Group Banking?

A banking system in which a single holding company owns and controls more than two financial
institutions/ banks is known as Group Banking. This system of Banking gained popularity in the
United States of America between 1925 -1929. To own these banks, the company need not be in
the banking business.
The company can be working or conducting business in any legal industry or sector such as
banking, agriculture, textile, medicine, entertainment, etc. The banks function according to the
rules and regulations laid down by the holding company. The management and administration
are centralised. The SBI in India is an example of Group Banking in India.
The mainboard of directors and the separate entity of each bank is maintained. Because of
centralization, there is better mobility of resources and credit facilities. The accounting methods
followed are the same for all the banks, which help build better auditing reports. Not only funds
but expertise are also made available from one bank to another in case of requirement. In case a
particular bank or institution fails to perform well, it can have adverse effects on other banks,
resulting in negative effects on the holding company’s reputation.
What is Chain Banking?
A banking system in which more than three chartered financial institutions/ banks are owned and
controlled by a single person or a group of persons or family is known as Chain Banking. This
banking system originated in America and gained prominence in the year 1929 after the stock
market crash.
In this system, the ownership can be acquired by buying significant shares of the financial
institutions. The individual or individuals can control the banks independently or unified. In
India, Karur Vysya Bank and Lakshmi Vilas Bank have headquarters in a commonplace and
board of directors, making it an example of Chain Banking.
The individual or group of individuals are not forced to be involved in banking. Even in chain
banking, the owners can be working in any sector of business or profession. The rules and
regulations, as well as the administration and working of the banks, can be the same or different,
according to the decision of the owners. The accounting methods to be followed also depend on
the choice of the owners. The other advantages and disadvantages are similar to that of Group
Banking, such as mobility of funds, credit, expertise, and effect on the other banks.

Main Differences Between Group Banking and Chain Banking

The financial institutions in Group Banking are owned by a single holding company and in
Chain banking by a single person or group of persons.
The institutions in group banking can be held by a company working in any sector. In contrast, in
chain banking by anyone working in any sector or profession.
The administration in group banking is controlled by the holding company. Although, in chain
banking, the administration is governed by the owner/ owners.
The group banking system was popular in the USA during 1925- 1929. Whereas the chain
banking system became popular after 1929.
State Bank of India is an example of Group banking in India. Karur Vysya Bank and Lakshmi
Vilas Bank are examples of Group banking.

Banking Companies In India :-

1. Housing Development Finance Corporation Ltd. (HDFC Bank Ltd.)
HDFC Bank is the largest bank that India has and it is also given the tag of being the number 1’
bank of India. It has a total of 5,103 branches at present with over 1,00,000+ employees. The two
kinds of loans, the personal and the home loan have interest rates of 10.75% and 6.90%
respectively.
Some of the notable awards that HDFC got are ET Innovation Awards 2020, Euromoney Awards
for Excellence in 2020, 2020 BrandZ™ Top 75 Most Valuable Brand in India and Asiamoney
Best Bank Awards 2020.

2. State Bank Of India (SBI)

It is one of the largest public sector banks in India. Headquartered in Mumbai, it is also known as
the financial services statutory body. In 2021, SBI ranked 21st in the world’s biggest corporation
fortune Global 500 list. The bank has about 195 foreign offices across 36 different countries.
It has managed to make a splendid overseas name and recognition over so many years. It also
enjoys a market share of 23% in India with over 24000+ branches and above 2,47,000
employees. The home loan and personal loan interest rates of the bank are 7% and 9.60%
respectively.

3. ICICI Bank Ltd

The Industrial Credit and Investment Corporation of India, shortly known as ICICI Bank is the
third-largest bank in the list of ten leading banks. The bank has subsidiaries across the United
Kingdom and Canada due to which it experiences a gross overseas presence. It has 4882
branches presently and with more than 85,000 efficient employees. 6.90% and 11.25% are the
respective interest rates of home loan and personal loan.

4. Kotak Mahindra Bank Ltd.

Established in the year 2003, Kotak Mahindra Bank has managed a market capitalization of
3,80,117.77 crores as of Dec 2021. It generated a revenue of 28,547.24 crores as of the year
2019. The bank has over 1390+ branches with more than 33,000 employees contributing to the
growth of the bank and ultimately of the nation. Its home loan interest rate stands at 6.75% and
the personal loan interest rate at 10.50%.

[Link] Bank Ltd.

In the list of largest private sector banks of India, Axis Bank stands at the 4th position. It is
popular because of the financial services that it renders to its customers. It has about 4050
branches with more than 55000 efficient employees to add to its assets. The interest rate of axis
Bank stands at 7.75%, while the personal loan interest rate stands at 10.49%.

6. Indusind Bank Ltd.

With a market capitalization of 70,631.88 crores, Indusind Bank is known as the leading new
generation private bank of India. Headquartered in Mumbai, it centres itself majorly around the
metro cities of the country. With its representative branches in London, Dubai and Abu Dhabi,
the bank has been enjoying a lot of overseas presence and acknowledgement. In the year 2019, it
is said to have generated a revenue of 18,577 crores. The bank has been giving an efficient
performance with almost 25000 employees at 1558 branches.

7. Yes Bank Ltd.

With a market capitalization of 46,226.29 crores, Yes Bank is said to be one of the fastest-
growing banks of the private sector in India. Founded in 2004, the bank is especially
acknowledged for its asset management and retail banking functions to be specific. With around
18000 employees at 1122 branches, the bank generated a revenue of 25,419 crores in 2019.

8. Punjab National Bank

Popularly recognised as PNB, Punjab National Bank has a market capitalization of 37,411.52
crores. Its commendable reach and hold over around 8 crore customers is what makes the bank a
fast-growing one. With its branches in Hongkong and Dubai, the bank enjoys a great overseas
presence and acknowledgement. It has 7000+ branches with 70,800 efficient employees.

9. Bank of Baroda
A public sector bank which is to be placed at number nine in the top ten banks of India, Bank Of
Baroda, also known as BoB, has a high market capitalization of 35,251.50 crores. Spreading its
base over 12 crore customers, the bank has made a really big name of itself in a short span of
time. BoB’s home loan interest rates lie around almost 6.85% and its personal loan interest rate
stands to be at 9.85%.

10. Bank of India

Also known as BoI, the bank had a market capitalization of 28,464.06 crores, on April 2, 2019.
With its headquarters in Mumbai, it is also a founding member of the SWIFT (Society for
Worldwide Interbank Financial Telecommunication). With almost 56 offices in the overseas
locations, the bank has got recognition in the overseas market as well.

Bibliography
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