BANKING &
INSURANCE
&
INTRODUCTION TO
BANKING
ORIGIN OF THE TERM
‘BANKING’
BANCUS
(LATIN)
BANCO BANQUE
(ITALIAN) (FRENCH)
Which means
“BENCH”
BANK
A GERMAN WORD
Which means
“HEAP OF MONEY”
ANCESTORS OF MODERN
BANKS
ANCESTORS OF MODERN BANKS
- [Link]
1. THE
MERCHA 2. THE
MONEY 3. THE
NT GOLDSMITH
LENDER
1. THE MERCHANT
❖ EARLIEST STAGE OF EVOLUTION OF
BANKING
❖TRADING COMMODITIES BY ROAMING
AROUND THE WORLD
❖REQUIRE REMITTANCES OF MONEY FROM
PUBLIC AS THEY DON’T CARRY LIQUID
CASH
❖FOR THIS PURPOSE THEY ISSUED
“HUNDIS” AS AN ACKNOWLEDGEMENT
2. THE MONEY LENDER
❖ KNOWN AS THE SECOND ANCESTOR OF
MODERN BANKS
❖USED TO LEND THEIR SURPLUS MONEY
AT HIGH INTEREST RATES
❖LATER, BEGAN ACCEPTING MONEY FOR
THE PURPOSE OF LENDING AT LOWER
INTEREST RATES
3. THE GOLDSMITH
❖ GOLDSMITHS IN ENGLAND BEGAN
ACCEPTING PRECIOUS STONES FROM
PUBLIC
❖THEY ASSURED SAFE CUSTODY FOR A
CONSIDERATION
❖AS AN ACKNOWLEDGEMENT, THEY
ISSUED DEPOSIT RECEIPTS NAMED AS
“GOLDSMITH’S NOTES”
1. MERCHANT
MODERN BANKS ALSO ISSUE
ISSUES HUNDIS AS ACKNOWLEDGEMENT OF
ACKNOWLEDGEMENT DOCUMENTS SUCH AS
REMITTANCES
CHEQUES, TRAVELLERS CHEQUES ETC.
2. MONEY LENDER
BANKERS ALSO ACCEPT MANY TYPES OF
ACCEPTS MONEY FOR THE PURPOSE OF LENDING
DEPOSITS AND LEND LOANS AND ADVANCES
3. GOLD SMITH
MODERN BANKS OFFER LOCKER FACILITY FOR A
ASSURES SAFE CUSTODY OF VALUABLES
FEE
ORIGIN OF BANKS IN INDIA
YEAR BANK
1770 BANK OF HINDUSTHAN
1786 GENERAL BANK OF INDIA
1806 BANK OF BENGAL
1840 BANK OF BOMBAY
1843 BANK OF MADRAS
1921 IMPERIAL BANK OF INDIA
1935 RESERVE BANK OF INDIA
1955 STATE BANK OF INDIA ( REPLACED IMPERIAL BANK OF INDIA)
Public Sector Banks (Government Shareholding %, as of 30th june, 2020)
State Bank of India (57.64%)
Punjab National Bank (85.59%)
Bank of Baroda (71.60%)
Canara Bank (78.55%)
Union Bank of India (89.07%)
Punjab & Sind Bank (83.06%)
Indian Bank (88.06%)
Bank of Maharashtra (92.49%)
Bank of India (89.10%)
Central Bank of India (78.55%)
Indian Overseas Bank (95.84%)
UCO Bank (94.44%)
BANKING REGULATION ACT, 1949
❖CAME INTO EFFECT ON 10TH MARCH
1949
❖ LEGISLATION IN INDIA THAT
REGULATES ALL BANKING FIRMS IN
INDIA
❖EARLIER, IT WAS NAMED AS
BANKING COMPANIES ACT
DEFINITION OF BANKING
“ ACCEPTING FOR THE PURPOSE OF
LENDING OR INVESTMENT, OF
DEPOSITS OF MONEY FROM THE
PUBLIC REPAYABLE ON DEMAND OR
OTHERWISE AND WITHDRAWABLE BY
CHEQUE, DRAFT AND ORDER OR
OTHERWISE”- THE BANKING REGULATION
ACT,1949
CHARACTERISTICS OF BANKING
❖ ACCEPTING DEPOSITS FROM
PUBLIC
❖GRANTING LOANS & ADVANCES
❖PROFIT-CUM-SERVICE MOTIVE
BASIS FOR THE CLASSIFICATION
OF BANKS
I. ON THE BASIS OF FUNCTIONS
I. ON THE BASIS OF OWNERSHIP
I. ON THE BASIS OF DOMICILE &
I. ON THE BASIS OF REGISTRATION
CLASSIFICATION OF
BANKS
[Link] THE BASIS OF FUNCTIONS :
❖ COMMERCIAL BANKS (eg; federal bank, SBI etc)
❖ INDUSTRIAL BANKS (eg; IDBI, SIDBI etc)
❖ AGRICULTURAL BANKS (eg; NABARD)
❖ EXCHANGE BANKS (eg; INDIAN OVERSEAS
BANK)
❖ SAVINGS BANK (eg; POST OFFICE SAVINGS
BANKS)
❖ CENTRAL BANK (ie, RBI)
❖ WORLD BANK ( IBRD)
II. ON THE BASIS OF OWNERSHIP
❖ PUBLIC SECTOR BANKS (eg: SBI,
UNION BANK etc.)
❖PRIVATE SECTOR BANKS (eg: HDFC
BANK, AXIS BANK etc.)
❖ CO-OPERATIVE BANKS
III. ON THE BASIS OF DOMICILE
❖DOMESTIC BANKS (eg: BANK OF
BARODA, VIJAYA BANK etc.)
❖ FOREIGN BANKS (eg: Citi BANK,
HSBC BANK etc.)
IV. ON THE BAIS OF REGISTRATION
❖ SCHEDULED BANKS
❖NON – SCHEDULED BANKS
❖LICENSED BANKS
❖NON – LICENSED BANKS
CLASSIFICATION OF BANKS
ON THE ON THE ON THE ON THE BASIS
BASIS OF BASIS OF BASIS OF OF
FUNCTION OWNERSHIP DOMICILE REGISTRATIO
S N
COMMERCIAL PUBLIC DOMESTI SCHEDULE
BANK SECTOR C BANKS D BANKS
INDUTRIAL BNAKS FOREIGN NON –
BNAK PRIVATE BANKS SCHEDULE
AGRICULTURA SECTOR D BANKS
L BNAK BANKS LICENSED
EXCHANGE CO-OPERA BANKS
BANK TIVE BANKS NON –
SAVINGS BANK LICENSED
CENTRAL BANK BANKS
WORLD BANK
EXIM BANK
FUNCTIONS OF COMMERCIAL
BANKS
PRIMARY FUNCTIONS SECONDARY FUNCTIONS
ACCEPTING AGENCY
DEPOSITS SERVICES
LENDING GENERAL UTILITY
MONEY SERVICES
I. PRIMARY FUNCTIONS :
a) ACCEPTING DEPOSITS
❖ FIXED DEPOSITS
❖ CURRENT DEPOSITS
❖ SAVINGS DEPOSITS
❖ RECURRING DEPOSITS
b)LENDING MONEY
❖OVERDRAFT
❖CASH CREDIT
❖DISCOUNTING OF BILL OFEXCHANGE
❖MONEY AT CALL & SHORT NOTICE
❖TERM LOANS
❖BRIDGE LOANS
[Link] FUNCTIONS
a) AGENCY SERVICES b) GENERAL UTILITY SERVICES
TRANSFER OF FUNDS PROVIDING LOCKER FACILITY
COLLECTION OF CHEQUES, BILLS ISSUE OF TRAVELLER’S CHEQUES
etc.
EXECUTION OF STANDING ISSUE OF LETTER OF CREDIT
ORDERS
PURCHASE AND SALE OF COLLECTION & DISSEMINATION OF
SECURITIES INFORMATION
COLLECTION OF DIVIDEND ON UNDERWRITING SECURITIES
SHARES
INCOME TAX CONSULTANCY DEALING IN FOREIGN EXCHANGE
ACTING AS TRUSTEE & EXECUTOR ACTING AS REFEREE
ISSUE OF ATM CARDS
MERCHANT BANKING
LEASE FINANCE
HOUSING FINANCE
FACTORING SERVICES
CREDIT CREATION
❖ONE OF THE IMPORTANT
FUNCTIONS OF COMMERCIAL
BANKS
❖ CREDIT CREATION MEANS “THE
CAPACITY OF A BANK TO CREATE
DERIVATIVE DEPOSITS OUT OF
PRIMARY DEPOSITS”
PRIMARY DEPOSITS Vs. DERIVATIVE
DEPOSITS
PRIMARY DEPOSITS
• MEANS A DEPOSIT ARISING FROM THE
ENTRUSTMENT OF CURRENCY BY A
DEPOSITOR
• ENABLES A BANKER TO CREATE
DERIVATIVEDEPOSITS
DERIVATIVE DEPOSITS
• MEANS THE ADDITIONAL DEPOSITS THAT
A BANKER CREATES OUT OF THE
PRIMARY DEPOSITS
• DERIVED FROM LENDING OF PRIMARY
DEPOSITS
ASSUMPTIONS OF CREDIT
CREATION CONCEPT (PILLARS OF
CREDIT CREATION)
❑THERE IS ONLY ONE BANK IN EXISTENCE
❑THE TOTAL LEGAL TENDER MONEY IN
CIRCULATION IS FIXED
❑ BANK IS REQUIRED TO KEEP A RESERVE
OF CASH TO MEET REQUIREMENTS OF
DEPOSITORS
❑THE PUBLIC ARE HIGHLY DEPENDENT ON
BANK AND SETTLES TRANSACTIONS
THROUGH CHEQUES
PROCESS OF CREDIT CREATION
(EXPLAINED WITH THE HELP OF AN EXAMPLE)
CONSIDER THE FOLLOWING
ASSUMPTIONS;
❖ PUBLIC ARE HIGHLY BANKING MINDED
❖THERE IS ONLY ONE BANK NAMED ABC BANK
❖TOTAL LEGAL TENDER MONEY IN
CIRCULATION IS Rs.10000
❖BANKS ARE REQUIRED TO KEEP A RESERVE
OFD 20% TO MEET DEPOSITORS’ REQUIREMENTS
BASED ON THE ABOVE ASSUMPTIONS, LET’S PREPARE
BALANCE SHEET OF ABC BANK
BALANCE SHEET OF ABC BANK AS ON ----------
LIABILITIES AMOUNT ASSETS AMOUNT
DEPOSITS; CURRENT
10000 ASSETS; 10000
PRIMARY CASH IN
HAND
TOTAL 10000 TOTAL 10000
ACCORDING TO THE ASSUMPTIONS GIVEN;
ABC BANK REQUIRED TO KEEP 20% CASH AS RESERVE =
Rs.2000
THEREFORE;
TOTAL CASH IN HAND - 10000
LESS AMOUNT OF RESERVE - (2000)
BALANCE AMOUNT - 8000
THEREFORE;
❖ BALANCE AMOUNT (Rs.8000) WILL BE GIVEN AS ADVANCES TO BORROWERS
❖THE CUSTOMERS BEING HIGHLY BANK MINDED, BANKS NEED NOT GIVE LOANS IN LIQUID CASH.
I.E, ABC BANK WILL SIMPLY CREDIT CUSTOMER’S ACCOUNT WITH THE AMOUNT OF LOAN
❖THE BORROWERS MAY USE THE LOAN AMOUNT TO SET OFF THEIR CREDITORS OR TO MAKE
PAYMENTS. FOR THE SAME THEY WILL ISSUE ABC BANK’S CHEQUE IN FAVOUR OF CREDITORS.
❖THESE CHEQUES WILL BE CLEARED BY ABC BANK ( SINCE THERE IS ONLY ONE BANK) AND IN
TURN CREDITS THE ACCOUNT OF CREDITORS IN THE SAME BANK
❖IN THIS PROCESS, TRANSACTION BETWEEN BORROWERS AND THEIR CREDITORS ARE SETTLED
WITHOUT AFFECTING CASH BALANCE OF ABC BANK.( NO CHANGES IN CASH FLOW)
❖HOWEVER, IT LED TO THE CREATION OF ADDIITONAL DEPOSITS BY CREDITING THE ACCOUNT OF
CREDITORS ( INCRESAE IN DEPOSITS BY CREATING ADDITIONAL DEPOSITS CALLED DERIVATIVE
DSEPOSITS)
❖NOW LETS SEE THE UPDATED BALANCE SHEET OF ABC BANK
BALANCE SHEET OF ABC BANK AS ON ----------
LIABILITIES AMOUNT ASSETS AMOUNT
DEPOSITS; ASSETS;
10000 CASH IN 10000
PRIMARY 8000 HAND 8000
LOANS &
DERIVATIVE ADVANCES
TOTAL 18000 TOTAL 18000
NEW CASH RESERVE OF ABC BANK
= Rs.3600 ( 18000 * 20/100)
THEREFORE;
TOTAL CASH IN HAND - 10000
LESS AMOUNT OF RESERVE - (3600)
BALANCE AMOUNT - 6400
THEREFORE;
❖ BALANCE AMOUNT (Rs.6400) WILL BE GIVEN AS ADVANCES TO BORROWERS
❖THE CUSTOMERS BEING HIGHLY BANK MINDED, BANKS NEED NOT GIVE LOANS IN LIQUID
CASH. I.E, ABC BANK WILL SIMPLY CREDIT CUSTOMER’S ACCOUNT WITH THE AMOUNT OF
LOAN
❖THE BORROWERS MAY USE THE LOAN AMOUNT TO SET OFF THEIR CREDITORS OR TO MAKE
PAYMENTS. FOR THE SAME THEY WILL ISSUE ABC BANK’S CHEQUE IN FAVOUR OF CREDITORS.
❖THESE CHEQUES WILL BE CLEARED BY ABC BANK ( SINCE THERE IS ONLY ONE BANK) AND IN
TURN CREDITS THE ACCOUNT OF CREDITORS IN THE SAME BANK
❖IN THIS PROCESS, TRANSACTION BETWEEN BORROWERS AND THEIR CREDITORS ARE SETTLED
WITHOUT AFFECTING CASH BALANCE OF ABC BANK.( NO CHANGES IN CASH FLOW)
❖HOWEVER, IT LED TO THE CREATION OF ADDIITONAL DEPOSITS (RS. 6400) BY CREDITING THE
ACCOUNT OF CREDITORS ( INCRESAE IN DEPOSITS BY CREATING ADDITIONAL DEPOSITS
CALLED DERIVATIVE DSEPOSITS)
❖NOW LETS SEE THE UPDATED BALANCE SHEET OF ABC BANK
BALANCE SHEET OF ABC BANK AS ON ----------
LIABILITIES AMOUNT ASSETS AMOUNT
DEPOSITS; ASSETS;
10000 CASH IN 10000
PRIMARY 14400 HAND 14400
LOANS &
DERIVATIVE ADVANCES
(8000 + 6400) (8000 + 6400)
TOTAL 24400 TOTAL 24400
❖THIS PROCESS CONTINUES TILL THE AMOUNT OF RESERVE REACHES Rs.10000 (then
the ABC Bank will mandated to keep the whole cash in hand as reserve) AS SHOWN BELOW:
CASH IN HAND - RS. 10000
RATE OF RESERVE - 20% OF TOTAL DEPOSITS
AMOUNT OF DEPOSITS AT WHICH ENTIRE
CASH IN HAND IS TO BE KEPT AS RESRVE - . 50000 RS
(10000 * 100/20)
THEREFORE,
PRIMARY DEPOSITS - RS. 10000
DERIVATIVE DEPOSITS - RS. 40000
THAT MEANS,
“ PROCESS OF CREDIT CREATION HELPS IN CREATING ADDITIONAL DEPOSITS CALLED
DERIVATIVE DEPOSITS USING THE PRIMARY DEPOSITS”
OR’
“EVERY LOAN CREATES A DEPOSIT AND EVEY DEPOSIT CREATES A LOAN”
CREDIT CREATION WHEN THERE IS MORE THAN
ONE BANK
LIMITATIONS OF CREDIT CREATION
1. Availability of primary deposits
2. Cash reserve requirement
3. Availability of good securities
4. Banking habit of the general public
5. Economic conditions
6. Monetary policy of the central bank
7. Availability of borrower
8. Behaviour of other banks
9. Attitude of people
STRUCTURE AND MANAGEMENT
As per RBI Act, the organisational structure of the bank consist of
a. The Central Board
b. Local Boards
The Central Board
The central board comprising of 20 members
• One governor who is the chairman of central board
• 4 deputy governors appointed by central government
• 4 directors nominated by central government for each of the local boards
• Ten directors nominated by the central government representing various fields
from business, industry. Finance
• One government official.
LOCAL BOARDS
• RBI has four local boards in four regions- the western, the eastern, the
northern and the southern part of india.
• Headquartered in Mumbai, Kolkata, New Delhi and Chennai respectively
• Central government nominates five members on each local board for a
tenure of four years
The functions of local boards are:
• To advice the central board of directors on such matters of local importance
as may be generally or specially referred to them.
• To perform such function which may be assigned to them by the central
board
OBJECTIVES OF RBI
CREDIT CONTROL
Credit control is a mechanism through which central bank exercise control over the total money circulation
in the country.
On the basis of economical situation, central government is able to increase or decrease the total money
circulation in the economy.
The step taken by the central bank of a country to ensure smooth flow of bank credit in the country is
called credit control
Credit control is effected by the central bank through the commercial banks.
OBJECTIVES OF CREDIT CONTROL
• Price Stability
• To achieve stability of foreign exchanges
• Elimination of business cycle
• Economic Growth
METHODS/WEAPONS OF CREDIT CONTROL
1) QUANTITATIVE CREDIT CONTROL
➔ Bank Rate Policy (BRP)
➔ Open Market Operations (OMO)
➔ Variable Reserve Ratio
➔ Variations in SLR
1) QUALITATIVE CREDIT CONTROL
➔ Fixation of margin requirements
➔ Regulation of consumer credit
➔ Moral suasion
➔ Direct action
BANKING OMBUDSMAN SCHEME
● Introduced by RBI in June 1995 & revised in 2002 & 2006
● Meant for redressal of grievances of public against banks
● All scheduled commercial banks, primary co-operative banks & RRBs
● Ombudsman is an officer appointed by RBI to perform the functions
entrusted to him under the scheme
● Should have knowledge in the areas law, banking, financial services, public
administration etc
● Appointed for a period not exceeding 3 yrs; eligible for extension of 2 yrs
on attainment of 65 yrs.
NATURE OF COMPLAINTS
● Non-payment or undue delay in the payment or collection of cheques, drafts, bills
etc
● Non issue of drafts to customers
● Failure to comply with prescribed working hours
● Non acceptance of small denomination notes without sufficient reason
● Failure to honour guarantee or letter of credit commitments
● Complaints relating to operation of savings, current or other types of deposits
● Complaints from exporters such as delay, collection of bills, handling export
proceeds etc
● Complaints of NRI’s relating to remittance of money from abroad
NATURE OF COMPLAINTS
● Failure to comply with RBI directions regarding interest
rate on loans, delay in sanctioning loans etc
● Non adherence to RBI regulations relating to ATM/ debit
card/credit card operations
SETTLEMENT OF COMPLAINTS BY OMBUDSMAN
● Settlement by Agreement
● Settlement by recommendation
● Settlement by award