BFM Assignment

On
Study of Banking sector

by
Siddharth Parashar (1062220063)
Submitted to

Dr. Vedashree Mali

(School of Business (SOB)

(MBA: 2022 – 2024)

MIT-World Peace University’s

School of Management (PG)
Pune
Evolution of Banks and Banking Structures in India and the Rights and Obligations of
Banks
India's banking system differs greatly from that of other Asian countries due to the nation's
distinct geographic, social, and economic qualities. India has a sizable population, a wide
area, a diverse culture, and stark income differences between its regions. Despite having a
sizable pool of managerial and technologically advanced expertise, the country has
significant levels of illiteracy among a sizable portion of its people. The percentage of people
who live in metro and urban areas ranges between 30 and 35 percent, with the remainder
dispersed throughout several semi-urban and rural centres.
The economic structure of the nation incorporates elements of socialism and capitalism with
a strong preference for investments in the public sector. Instead of the "export led growth" of
other Asian economies, India has adopted a growth-led export strategy that emphasises self-
sufficiency through import substitution.
The banking system has been required to support the objectives of economic policies outlined
in succeeding five-year development plans, notably those related to equitable income
distribution, balanced regional economic growth, and the diminution and abolition of private
sector monopolies in trade and industry. The banking sector was exposed to a variety of
nationalisation plans in several periods (1955, 1969, and 1980) to be used as a tool of state
policy. As a result of local priorities, particularly enormous branch expansion and drawing
more people into the system, banking remained internationally isolated (few Indian banks had
presence outside in international financial centres).
The Indian financial system comprises the following institutions:
1. Commercial banks
a. public sector
b. Private sector
c. foreign banks
d. Cooperative institutions
(i) Urban cooperative banks (
ii) State cooperative banks
(iii) Central cooperative banks
2. Financial institutions
a. All-India financial institutions (AIFIs)
b. State financial corporations (SFCs)
c. State industrial development corporations (SIDCs)
3. Nonbanking financial companies (NBFCs)
4. Capital market intermediaries
Nationalization of Banks (1969)
The RBI had grown to be a significant employer by the 1960s, and the Indian banking sector
had started to play a significant part in fostering economic growth. However, other from SBI,
the majority of banks were still managed by private companies.
The 14 biggest commercial banks in India at the time were nationalised in 1969 as a result of
the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, which was
enacted by the Indian government. The 14 commercial banks nationalized in 1969:
1. Allahabad Bank (now Indian Bank)
2. Bank of Baroda
3. Bank of India
4. Bank of Maharashtra
5. Central Bank of India
6. Canara Bank
7. Dena bank
8. Indian Bank
9. Indian Overseas Bank
10. Punjab National Bank
11. Syndicate Bank (now Canara Ban)
12. UCO Bank
13. Union Bank of India
14. United Bank of India (now Punjab National Bank)
Rights and Obligations of Banks
 You are aware that a bank is your customer's debtor, so you have an obligation to
honour your checks. According to the law, the bank must honour client checks up to
the amount that is already on the customer's account. A bank must pay the client
compensation if it improperly refuses to honour the customer's cheque.
 Maintaining Confidentiality is Required: The relationship between the banker and the
consumer is one of a kind. The bank is not allowed to reveal information about a
customer's account to anyone outside of the consumer, as doing so could harm the
customer's credit and business.
 Legal Obligation to Obey Customer Instructions: The banker is required by law to
abide by the customer's instructions. This is true since the bank and the customer have
a contractual relationship.
 Duty to Maintain Accurate Records: The banker has a duty to accurately record every
transaction that a customer makes with the bank.
 Duty to Give Notice Before Closing the Account: If a bank wants to shut a customer's
account, it has an obligation to give the consumer adequate notice.
 Because there could be substantial repercussions for the customer, a bank cannot shut
a customer's account on its own.
Rights
Right of General Lien: A bank's right of general lien is one of its most significant privileges.
A lien is the legal right of one person to keep another person's property until that other
person's claims are met. The Indian Contract Act's Section 171 grants bankers the power to a
general lien. The banker in possession is allowed to keep commodities and securities as long
as its claims against the customer are unpaid, thanks to a general lien. The banker's lien is an
implied commitment in the sense that if the debtor defaults, the banker can, after giving
provide the consumer a reasonable period of notice, sell the items in his possession, and get
the money back. When valuables are stored with a bank for safekeeping, it is considered a
bailment and the bank cannot use its general lien authority.
Right of Appropriation: A consumer may owe the bank a number of different obligations.
When a client deposits money into a bank account without giving any instructions and the
amount is insufficient to pay off all bills, the question of which debt this money should be
applied to arises. The bank has the power to appropriate the deposited cash to any loan, even
a time-barred obligation, in the absence of any special instructions. However, the banker is
required to let the client know about the appropriation.

Different Form of Banks in India and their Functions

Payment banks scheduled commercial banks, foreign banks, local banks, and organisations
like Reginal Rural Bank are just a few of the several sorts of banks that exist in India.
1. Central Bank: A central bank is an autonomous organisation tasked by the
government with keeping an eye on the country's monetary policy and money supply.
The Reserve Bank of India no longer serves as the nation's central bank in India.
Every nation has a central bank that regulates all other banks there. In layman's terms,
 central banks act as the government's banks, regulate the monetary system and
policies, and offer leadership to other financial institutions.

2. Commercial Banks: The Banking Regulation Act of 1949 governs commercial

banks, and they operate in a profit-oriented manner. They offer services to both rural
and urban populations. Their main responsibility is to take deposits and lend money to
people, companies, and governments. They are owned by the federal government,
state governments, or any other private organisation, and they have a unified structure.
Public-sector banks, private-sector banks, and overseas banks are additional divisions
of commercial banks.
A) Public sector bank: If the government or the country's central bank owns a majority
stake (more than 50%), the bank is considered to be in the public sector. In India,
public sector banks account for more than 75% of all banks in the country.
B) Private sector banks: A private organisation, a person, or a group of persons controls
a substantial portion of equity in private sector banks. Both public and private sector
banks offer the same range of services aside from the ownership structure;
nevertheless, all banking laws and rules enforced by the Reserve Bank of India (the
central bank) apply to private sector banks.
C) Foreign banks: Private banks with global headquarters and domestic branches fall
under this category. These banks are subject to the laws of both their home country
and the countries in which they conduct business.

3. Cooperative Banks: The Cooperative Societies Act of 1912 recognises cooperative

banks, which are managed by an elected managing committee. The main
responsibility of cooperative banks is to support the entire rural population financially.
Cooperative banks primarily support small businesses, industries, and independent
contractors in urban areas. They mostly support farming, raising livestock, and
hatcheries in rural areas.

4. Regional Rural Banks: RRBs are specialised commercial banks that provide loans at
lower interest rates to the agricultural and rural sectors of the economy. This kind of
bank was established to offer loans to the most vulnerable people in society, including
small businesses, marginal farmers, and agricultural labourers. RRBs were established
under the Regional Rural Bank Act of 1976 after it was established in 1975. A total of
196 RRBs were founded between 1987 and [Link] ventures involving the federal
government (50%) and the states (15%) as well as commercial banks (35%) are
known as RRBs.

5. Specialized Banks: A certain industry or sector is the focus of specialised banks. It

might focus on export and import, or it might provide financial services to niche
companies.
 6. Small Finance Banks: Small Finance Banks are legally recognised organisations that
offer undeveloped and neglected communities with basic banking services. Indian
small finance banks work to provide financial inclusion to underprivileged economic
sectors who often lack access to banking facilities. This kind of bank provides
services to varied unorganised sector entities, including marginal and small farmers
and small commercial units.

Agency and Utility Services

General Utility services provided by Banks:
1)Protecting the assets: Banks use lockers to protect their clients' belongings, such as gold,
jewellery, and documents. Customers can utilise the lockers by renting them.
2)Serving as a referee: Banks serve as a referee by providing information about a
customer's financial situation to outside parties. Based on customer demand, banks serve as
referees; otherwise, details are kept private.
3) Issuing letters of credit: Banks issue certificates to their clients attesting to their
creditworthiness. Credit letters are widely used in international trade.
4) Serving as information banks: Banks gather data on the financial, economic, and
statistical aspects of trade and commerce and provide it to customers upon request. Banks are
doing this now by leveraging information technology.
5) Issuing traveller’s checks and credit cards: Banks provide their clients with traveller’s
checks, which eliminates the need for them to carry cash while travelling and lowers the
danger of theft and loss. Credit cards are also available for online transactions.
6) Issuance of gift checks: Banks also provide gift checks to their clients in the amounts of
11, 21, 31, 51, and 101 for no additional cost.
7) Foreign exchange: Some commercial banks also offer the option of converting Indian
rupees to foreign currency.
8) Banks assist their customers in obtaining financing from non-financial institutions through
their merchant banking services.
Agency Services provide by Banks:
1. Various Checks, Dividends, Interests, and other Documents
One of the primary business services provided by banks is the collection of checks, draughts,
bills of trade, profits, interests, and other financial instruments for its clients and crediting the
amount in their account. The financier takes into account ongoing instructions from the
clients and plans to collect revenue, interest, perks, pay rates, bills, and other items for his
clients.
2. Instalment payments for rent, insurance, and other obligations
In the interest of their customers, banks try to pay membership dues, rent, insurance
premiums, and other obligations, and they charge the money to the account. It acknowledges
the client's standing instructions and plans for. the payment of such expenses for their benefit.
It assesses a minimal fee via commission for this administration.
3. Review your stock exchange transactions.
For the advantage of their customers, banks purchase and sell a variety of insurance products,
such as shares, debentures, bonds, and so forth, of both private and public business entities.
4. Acting as an executor, trustee, attorney, etc.
Banks act as executors, administrators, solicitors, and chairman. As an agent, it stores the
customers' "Wills" and carries them out after their passing. In its capacity as a legal
administrator, it manages the customers' assets. It executes contracts and other legal
documents on behalf of the client.

Banking Regulation Act, KYC norms, and CIBIL

All Indian banking institutions are subject to regulation under the Banking Regulation Act,
1949. The Banking Companies Act of 1949, which was passed, went into effect on March 16,
1949, and was renamed the Banking Regulation Act of 1949 on March 1, 1966. Since 1956, it
has been in effect in Jammu & Kashmir. The law initially exclusively applied to banking
institutions. However, it was changed in 1965 to include cooperative banks and make other
amendments. It was changed in 2020 to provide Reserve Bank of India control over
cooperative banks.
The Act offers a framework for the supervision and regulation of commercial banking in
India. The Act adds to the 1956 Companies Act. The Act does not apply to cooperative land
mortgage banks or the Primary Agricultural Credit Society. The Act grants the Reserve Bank
of India (RBI) the authority to grant bank licences, regulate shareholder shareholding and
voting rights, oversee the appointment of boards and management, oversee bank operations,
establish guidelines for audits, control moratoria, mergers, and liquidations, and issue
directives on banking policy and penalties.
The Act was revised in 1965 to add Section 56, bringing cooperative banks within its
jurisdiction. State governments create and oversee cooperative banks, which are limited to
one state's operations. However, the RBI manages business operations and licences. The
Banking Act was an addition to earlier banking-related laws.
KYC Norms
'Know Your Client' or 'Know Your Customer' is the abbreviation for this phrase. The Reserve
Bank of India (RBI) has made KYC, a mechanism to gather information about the address
and identity of the customer, a requirement for every financial institution or bank. In order to
prevent any misuse of any service offered by the banks, the Reserve Bank of India (RBI) has
made this step required before creating an account. According to the RBI's directive, banks
must update the KYC details regularly at regular periods of two, eight, or ten years based on
the risk associated with the customer's profile.
With KYC, banks and other ultimate institutions will find it easier to comprehend and get to
know their customers. The Reserve Bank of India (RBI) mandated the implementation of
KYC standards for all new bank accounts in 2002, and these standards went into effect on
July 1st, 2005. To prevent money laundering and terrorist financing, KYC Norms were made
mandatory. In accordance with Section 35A of the Banking Regulation Act of 1949 and the
Prevention of Money Laundering (Maintenance of Records) Rules of 2005, the Reserve Bank
of India (RBI) offers guidelines for KYC. The Bank Regulation Act of 1949 imposes
penalties for any banks that violate or contravene its provisions.
What is CIBIL?
A three-digit numerical depiction of someone's creditworthiness is known as a CIBIL score,
and it is offered by the Credit Information Bureau (India) Limited (CIBIL). This score, which
ranges from 300 to 900, gives lenders a brief analysis of a borrower's credit history and
repayment capacity. The better the creditworthiness, the closer the score is to 900. It mostly
comes from a person's credit history, which contains information on credit cards, loans,
payment habits, defaults, and other relevant financial behaviours. A high CIBIL score
improves your chances of getting credit cards or loans, frequently at lower interest rates. An
inferior score, on the other hand, may prevent loan approvals or lead to higher interest rates.
It's critical to regularly review and comprehend one's CIBIL score because it facilitates the
early detection of Keeping one's financial situation in good standing is important when
applying for credit.

Fund based & Non – Fund based lending, and Priority sector Lending
Fund based lending
 Loans are lending facilities that have a set repayment schedule. Such as a term loan or
a demand loan.
 Cash Credit is a short-term loan that banks have approved for use by firms, financial
institutions, and businesses to cover working capital needs. As a result, it is sometimes
referred to as a working capital loan. Even without a credit balance, the borrowing
business may withdraw funds up to the sanction limit. Stock, goods, debtors, and all
other current assets created during the course of business are hypothecated in order to
protect the facility. Mortgages on real estate can also be used as collateral security to
acquire cash credit.
 Overdraft: A current account holder is permitted to withdraw up to the amount of their
overdraft up to a permitted cap. It is protected by a mortgage on real estate, a promise
of F.D.s, bonds, shares, gold, silver, and other tangible assets, as well as a
hypothecation of stock, debtors, and all other current assets created by the company
while it was in operation.
 An exporter may be granted a packing credit at the pre-shipment stage in order to
purchase raw materials at fair prices, manufacture or produce goods in accordance
with the buyer's specifications and arrange for the packing of those goods for further
export. Additionally, it is protected by the hypothecation of the company's inventories,
debtors, and all other current assets produced during regular business operations.
 Bill Discounted, Bill Purchased, Advance Against Hypothecation of Vehicles
(Transport Loan), House Building Loan, Consumer Loan, Agriculture Loan—Farming
 —Non-Farming, Consortium Loan, Lease Financing, Hire Purchase, etc. are some
more fund-based credit facilities.
Non – Fund Based Credit
 A letter of credit is issued by the bank to the supplier or exporter when a buyer or
importer purchases goods from an unidentified seller or exporter. The supplier or
exporter then delivers the items to the unidentified buyer or importer. The
buyer's/importer's bank receives a signed invoice and letter of credit, and the bank
then pays the seller/exporter directly.
 Bank Assurance: The bank offers that it will fulfil the loss of money as specified in
the contract in the event that a specific event occurs or does not occur. Financial
guarantees, performance guarantees, and deferred payment guarantees are all
examples of bank guarantees.
 Buyer credit is the credit that an importer obtains from foreign lenders (such as banks
and financial institutions) to pay for his purchases. The letter of credit and bank
guarantee supplied by the importer bank are often the basis on which the foreign bank
loans to the importer.
 Suppliers Credit: Under this type of credit arrangement, an exporter gives a foreign
importer credit to help him pay for his purchase. The importer typically pays a portion
of the contract value in cash and then issues a promissory note as proof of his promise
to pay the remaining amount over time. Thus, the exporter agrees to the importer's
deferred payment and may be able to get cash by selling or discounting the
promissory note he created with his bank.
Priority Sector Lending
The RBI oversees a lending requirement known as priority sector lending (PSL) that requires
banks to lend a minimum percentage of their funds to industries with a high potential for
development or industries with a difficult time obtaining loans.
The sectors and loan limits that are eligible for priority sector lending are periodically
updated by the RBI. The regulations also list the organisations that are required to make these
loans. In essence, the PSLs are designed to offer institutional credit to those industries and
market groups who have trouble obtaining credit. Priority sector requirements state that
scheduled commercial banks must lend 40% of their loans to designated priority sectors, as
determined, according to RBI guidelines, adjusted net bank credit (also known as ANBC)
must be provided to the designated priority sectors. For Commercial Banks, including RRBs,
Small Finance Banks, Local Area Banks, and Urban Cooperative Banks, there are certain
constraints. Limits for subsectors and other requirements for the benefit groups are added to
the regulations on a regular basis. If these goals are not met, banks will be required to fund
the government's growth plans for the particular industries.
Types of Deposits in Banking
1. Saving Account: A savings bank account, as the name suggests, is a standard deposit
account that provides the account holder with a specific minimum interest rate.
People who want to save their money in an account and have a specific income should
use a savings account.
The process of opening a savings account is fairly easy. You only need to make a little deposit
that counts as your first deposit and is determined by the specific bank in accordance with its
rules and regulations. The depositor may make deposits at any time into a savings bank
account. These banks provide ATM cards that account holders can use to withdraw money
from their accounts whenever they want. Additionally, the investor can withdraw funds from
the account using a cheque or withdrawal form the report. There are, however, some
limitations on the types of withdrawals and transactions that can be made in a savings
account. Here, the bank places a limit on the monthly transactions that the consumer is
permitted.

2. Current Account: Another sort of bank account that can be opened by a depositor is
a current account. In this case, the bank imposes less transactional restrictions than it
does with savings accounts. Most merchants and enterprises that frequently need to
transact in cash on a daily basis use current account, commonly referred to as demand
deposit accounts. There are no restrictions on how many transactions the depositor
may make each day with these accounts. Additionally, compared to a savings account,
a current account allows you to keep more liquid deposits or cash on hand. Current
accounts also have the benefit of an overdraft facility, which lets the depositor take
out more money than is currently in his or her account. This special feature
distinguishes a current account from a savings account. The fact that current accounts
in India do not give any interest rates and are therefore classified as zero-interest
bearing accounts is another important distinction between current accounts and
savings accounts.

3. Recurring Deposits: A recurring deposit (RD) has a set duration and enables the
depositor to periodically (either monthly or quarterly) invest a certain amount of
money therein to receive interest. The deposit or investment does not have to be made
in one single sum. Instead, the account holder can make regular deposits of a set
amount. The RD's term is set in stone and cannot be changed. In between six months
and ten years, the majority of RDs mature. A penalty in the form of low interest may
be imposed on the depositor if they take their money out too soon. The ideal solution
for those looking to incorporate the habit of saving into their lives is an RD.
Depending on the bank where you open the account, the RD interest rate may change.
For citizens under the age of 60, it may be in the range of 5–7%. Senior citizens may
pay a different rate.

4. Fixed Deposits: In India, fixed deposits (FDs) are a form of bank account that let
investors deposit money to grow their money while earning a competitive interest
rate. A fixed amount of money can be kept in the bank by the investor in this case
until the FD matures. The period of FDs can range from seven days to ten years, and
the interest rate varies with the FD tenure. The investor cannot often withdraw money
from FDs prior to maturity. Even if they do, they charge the buyer with a low interest
rate as a penalty. FDs are guaranteed return programmes with higher interest rates,
ranging from 5 to 9%, which is greater than savings accounts. Furthermore, under
section 80C of the Income Tax Act of 1961, FDs also offer a tax exemption of up to
INR 1,50,000. Like recurring accounts, FDs do not permit early money withdrawals.
Although a customer can close their FD account in advance, they must pay a fee for
doing so. Overall, FD is a secure investment portfolio that offers profits that are
guaranteed.

Recent Trends in Banking Sector

1. Artificial Intelligence
AI banking provides high-quality banking services to customers and saves operating
costs. AI-powered tools, such as virtual assistants and chatbots, automate customer
service interactions. Additionally, they provide customers with account information
and resolve account-related queries. AI-based biometrics detect fraud and improve
security, as well as enhance AML applications and KYC checks.

[Link] Banking
Open banking links banks and non-banking financial institutions (NBFCs) to offer
customers more specialised and convenient financial services. Third-party developers
can safely access client financial data through banking application programming
interfaces (APIs) without compromising data compliance. Account aggregators are
another component of open banking that let users manage all of their banking
accounts from a single interface.

3. Extremely Customised Banking

Personalised banking experiences increase customer loyalty. For this reason, banks
today use a variety of tactics and tools, like omnichannel banking, financial
counselling tools, and buy now pay later (BNPL), to customise their products. For
instance, omnichannel banking enables customers to communicate with banks through
a variety of channels while offering a uniform, customer-centric picture of their
financial information.

4. Banking on blockchain
Blockchain increases transactional security and transparency by providing tamper-
proof records of all financial transactions. Furthermore, it streamlines manual and
paper-based activities while also increasing trade efficiency through transaction
automation. Financial contracts perform better thanks to smart contracts, which
automate financial transactions.

6. Cybersecurity
Significant volumes of private consumer and transactional data are handled by the
banking sector. As a result, fraudsters frequently target the company's IT
infrastructure. Startups address this issue by offering data compliance management
and security protocols that are specific to financial systems. These cybersecurity tools
help banks protect sensitive data.