Jayanth Kumar R

Assistant Professor
Dept of Commerce & Management

Chapter 1
Evolution of Banking

Introduction
A bank is a financial intermediary for the safeguarding, transferring, exchanging, or lending of
money. Banks distribute “money” - the medium of exchange. A bank is a business and banks sell
their services to earn money, and they need to market and manage those services in a competitive
field.

Meaning of Bank
A bank is a financial institution and a financial intermediary that accepts deposits and channels those
deposits into lending activities, either directly by loaning or indirectly through capital markets.
A bank may be defined as an institution that accepts deposits, makes loans, pays checks and provides
financial services. A bank is a financial intermediary for the safeguarding, transferring, exchanging,
or lending of money.
The term bank refers to a financial institution which deals with deposits and advances and other
related services. Bank received money from those who want to save in the form of deposits and it
lends money to those who need it.

Definition of Bank:
According to oxford Dictionary bank as defined "an establishment for custody of money which it
pays out on customer's order".
According to The Indian Banking Companies Act, 1949 “Banking means the acceptance for the
purpose of lending or investment, of deposits of money from the public repayable on demand or
otherwise, and withdrawal by cheque, draft, order or otherwise".

Features/Functions of Bank:
PRIMARY FUNCTIONS:
i. Acceptance of deposits,
ii. Advancing loans,
iii. Creation of credit
iv. Clearing of cheques,
v. Financing foreign trade,
vi. Remittance of funds

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

Acceptance of deposits
Commercial bank accepts various types of deposits from public especially from its clients. These
deposits are payable after a certain time period. Banks generally accept three types of deposits
viz., (a) Current Deposits (b) Savings Deposits (c) Fixed Deposits and d) Recurring Deposit.
1. Current Deposits: These deposits are also known as demand deposits. These deposits can
be withdrawn the customer is required to leave a minimum balance undrawn with the bank.
2. Savings Deposits: This is meant mainly for professional men and middle-class people to
help them deposit their small savings. It can be opened without any introduction. Money can
be deposited at any time but the maximum cannot go beyond a certain limit.
3. Fixed Deposits: These deposits are also known as time deposits. These deposits cannot be
withdrawn before the expiry of the period for which they are deposited or without giving a
prior notice for withdrawal.
4. Recurring Deposit: Recurring Deposits are a special kind of Term Deposits offered by
banks in India which help people with regular incomes to deposit a fixed amount every
month into their Recurring Deposit account and earn interest at the rate applicable to Fixed
Deposits. It is similar to making FDs of certain in amount in monthly instalments,
forexampleRs1000 every month.

Advancing Loans
Loans are made against personal security, gold and silver, stocks of goods and other assets. The
second primary function of a commercial bank is to make loans and advances to all types of persons,
particularly to businessmen and entrepreneurs. The most common way of advancing loans is given
below:
❖ Overdraft Facilities: In this case, the depositor in a current account is allowed to draw over
and above his account up to a previously agreed limit. Suppose a businessman has only
Rs.6,000/- in his current account in a bank but requires Rs. 12,000/- to meet his expenses.
He may approach his bank and borrow the additional amount of Rs. 6,000/-.
❖ Cash Credit: Under this account, the bank gives loans to the borrowers against certain
security. But the entire loan is not given at one particular time, instead the amount is
credited into his account in the bank; but under emergency cash will be given. The borrower
is required to pay interest only on the amount of credit availed to him.
❖ Discounting Bills of Exchange: This is another type of lending which is very popular with
the modern banks. The holder of a bill can get it discounted by the bank, when he is in need
of money. After deducting its commission, the bank pays the present price of the bill to the
holder. Such bills form good investment for a bank.
❖ Money at Call: Banks grant loans for a very short period, generally not exceeding 7 days to
the borrowers, usually dealers or brokers in stock exchange markets against collateral
securities like stock or equity shares, debentures, etc., offered by them. Such advances are

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

repayable immediately at short notice hence; they are described as money at call or call
money.
❖ Term Loans: Banks give term loans to traders, industrialists and now to agriculturists also
against some collateral securities. Term loans are so-called because their maturity period
variesbetween1 to 10years.
❖ Consumer Credit: Banks also grant credit to households in a limited amount to buy some
durable consumer goods such as television sets, refrigerators, etc., or to meet some personal
needs like payment of hospital bills etc. Such consumer credit is made in a lump sum and is
repayable in instalments in a short time.
❖ Miscellaneous Advances: The other forms of bank advances there are packing credits
given to exporters for a short duration, export bills purchased/discounted, import finance
advances against import bills, finance to the self-employed, credit to the public sector and
credit to the cooperative sector.
Creation Of Credit
Credit creation is the multiple expansions of banks demand deposits. It is an open secret now that
banks advance a major portion of their deposits to the borrowers and keep smaller parts of deposits
to the customers on demand. Even then the customers of the banks have full confidence that the
depositor’s lying in the banks is quite safe and can be withdrawn on demand.
Promote The Use Of Cheques, Dd Or Online Transactions
The commercial banks render an important service by providing to their customers a cheap medium
of exchange like cheques. It is found much more convenient to settle debts through cheques rather
than through the use of cash. The cheque is the most developed type of credit instrument in the
money market.
Financing For Internal And Foreign Trade
The bank finances internal and foreign trade through discounting of exchange bills. Some times, the
bank gives short-term loans to traders on the security of commercial papers. This discounting
business greatly facilitates the movement of internal and external trade.
Remittance Of Funds
Commercial banks, on account of their network of branches throughout the country, also provide
facilities to remit funds from one place to another for their customers by issuing bank drafts, mail
transfers or telegraphic transfers on nominal commission charges. As compared to the postal money
orders or other instruments, bank drafts have proved to be a much cheaper mode of transferring
money and have helped the business community considerably.
SECONDARYFUNCTIONS:
⮚ Agency Services

AGENCYSERVICES:

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

Commercial banks act as attorney for their clients. They buy and sell shares and bonds,
receive and pay utility bills, premiums, dividends, rents and interest for their clients. Banks
also perform certain agency functions for and on behalf of their customers. The agency
services are of immense value to the people at large. The various agency services rendered by
banks are as follows:
1) Collection and Payment of Credit Instruments: Banks collect and pay various credit
instruments like cheques, bills of exchange, promissory notes etc., on behalf of their
customers.
2) Purchase and Sale of Securities: Banks purchase and sell various securities like shares,
stocks, bonds, debentures on behalf of their customers.
3) Collection of Dividends on Shares: Banks collect dividends and interest on shares and
debentures of their customers and credit them to their accounts.
4) Acts as Correspondent: Sometimes banks act as representative and correspondents of their
customers. They get passports, traveller’s tickets and even secure air and sea passages for
their customers.
5) Income-tax Consultancy: Banks may also employ income tax experts to prepare income tax
returns for their customers and to help them to get refund of income tax.
6) Execution of Standing Orders: Banks execute the standing instructions of their customers
for making various periodic payments. They pay subscriptions, rents, insurance premium etc.,
on behalf of their customers.
7) Acts as Trustee and Executor: Banks preserve the ‘Wills’ of their customers and execute
them after their death.

Modern functions of banks:

● It provides lockers facility to the customers where the customers can keep the valuable
documents and ornaments etc.
● It underwrites the company debentures and shares.
● It provides information’s about the customers.
● It issues travellers cheques, letter of credit etc. to the customers and it accepts bills on behalf
of the customers.

Origin of bank
Evolution of Banking in India
Stages in Evolution of Banking in India
The banking sector development can be divided into three phases:
Phase I: The Early Phase which lasted from 1770 to 1969
Phase II: The Nationalization Phase which lasted from 1969 to 1991

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

Phase III: The Liberalization or the Banking Sector Reforms Phase which began in 1991 and
continues to flourish till date
Pre Independence-Period (1786-1947) The first bank of India was the “Bank of Hindustan”,
established in 1770 and located in the then Indian capital, Calcutta. However, this bank failed to
work and ceased operations in 1832.
During the Pre Independence period over 600 banks had been registered in the country, but only a
few managed to survive.
Following the path of Bank of Hindustan, various other banks were established in India. They were:
● The General Bank of India (1786-1791)
● Oudh Commercial Bank (1881-1958)
● Bank of Bengal (1809)
● Bank of Bombay (1840)
● Bank of Madras (1843)

During the British rule in India, The East India Company had established three banks: Bank of
Bengal, Bank of Bombay and Bank of Madras and called them the Presidential Banks. These three
banks were later merged into one single bank in 1921, which was called the “Imperial Bank of
India.”
The Imperial Bank of India was later nationalised in 1955 and was named The State Bank of India,
which is currently the largest public sector Bank.
Post Independence Period (1947-1991) At the time when India got independence, all the major
banks of the country were led privately which was a cause of concern as the people belonging to
rural areas were still dependent on money lenders for financial assistance.
With an aim to solve this problem, the then Government decided to nationalise the Banks. These
banks were nationalised under the Banking Regulation Act, 1949. Whereas, the Reserve Bank of
India was nationalised in 1949.
Following it was the formation of State Bank of India in 1955 and the other 14 banks were
nationalised between the time duration of 1969 to 1991. These were the banks whose national
deposits were more than 50 crores.
Given below is the list of these 14 Banks nationalised in 1969:
● Allahabad Bank
● Bank of India
● Bank of Baroda
● Bank of Maharashtra
● Central Bank of India
● Canara Bank
● Dena Bank
● Indian Overseas Bank

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

● Indian Bank
● Punjab National Bank
● Syndicate Bank
● Union Bank of India
● United Bank
● UCO Bank

In the year 1980, another 6 banks were nationalised, taking the number to 20 banks. These banks
included:
● Andhra Bank
● Corporation Bank
● New Bank of India
● Oriental Bank of Comm.
● Punjab & Sind Bank
● Vijaya Bank

Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were
nationalised in 1959:
● State Bank of Patiala
● State Bank of Hyderabad
● State Bank of Bikaner & Jaipur
● State Bank of Mysore
● State Bank of Travancore
● State Bank of Saurashtra
● State Bank of Indore
All these banks were later merged with the State Bank of India in 2017, except for the State Bank of
Saurashtra, which merged in 2008 and State Bank of Indore, which merged in 2010.
Impact of Nationalisation
There were various reasons why the Government chose to nationalise the banks. Given below is the
impact of Nationalising Banks in India:
∙ This led to an increase in funds and thereby increasing the economic condition of the country
∙ Increased efficiency
∙ Helped in boosting the rural and agricultural sector of the country
∙ It opened up a major employment opportunity for the people
∙ The Government used profit gained by Banks for the betterment of the people
∙ The competition decreased, which resulted in increased work efficiency
This post Independence phase was the one that led to major developments in the banking sector of
India and also in the evolution of the banking sector
Liberalization Period (1991-Till Date)

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

Once the banks were established in the country, regular monitoring and regulations need to be
followed to continue the profits provided by the banking sector. The last phase or the ongoing phase
of the banking sector development plays a hugely significant role.
To provide stability and profitability to the Nationalised Public sector Banks, the Government
decided to set up a committee under the leadership of Shri. M Narasimham to manage the various
reforms in the Indian banking industry.
The biggest development was the introduction of Private sector banks in India. RBI gave license to
10 Private sector banks to establish themselves in the country. These banks included:
● Global Trust Bank
● ICICI Bank
● HDFC Bank
● Axis Bank
● Bank of Punjab
● IndusInd Bank
● Centurion Bank
● IDBI Bank
● Times Bank
● Development Credit Bank

The other measures taken include:

∙ Setting up of branches of the various Foreign Banks in India
∙ No more nationalization of Banks could be done
∙ The committee announced that RBI and Government would treat both public and private sector
banks equally
∙ Any Foreign Bank could start joint ventures with Indian Banks
∙ Payments banks were introduced with the development in the field of banking and technology
∙ Small Finance Banks were allowed to set their branches across India
∙ A major part of Indian banking moved online with internet banking and apps available for fund
transfer

Structure of the Indian Banking System

The Indian banking system is a complex framework that has evolved over decades to cater to the
diverse financial needs of the economy. It is primarily categorized into two main sectors: organized
and unorganized. Here’s a detailed overview of its structure:
1. Organized Sector
The organized sector includes regulated and formal banking institutions, which are further classified
into various categories:
● Reserve Bank of India (RBI):

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

● The RBI is the central bank of India, established on April 1, 1935. It regulates the
country's monetary policy, supervises the banking sector, and acts as a banker to the
government and other banks. The RBI plays a crucial role in maintaining financial
stability and overseeing currency and credit systems.
● Scheduled Banks:
● These banks are included in the Second Schedule of the Reserve Bank of India Act,
1934, and are subject to stricter regulations. Scheduled banks can be further divided
into:
● Public Sector Banks: These include nationalized banks such as Punjab
National Bank, Canara Bank, and Union Bank of India, as well as the State
Bank of India (SBI) and its associates.
● Private Sector Banks: These banks are privately owned and include
institutions like HDFC Bank and ICICI Bank.
● Foreign Banks: Banks that have their headquarters outside India but operate
within the country.
● Regional Rural Banks (RRBs): Established to provide banking services in
rural areas, RRBs are sponsored by commercial banks.
● Non-Scheduled Banks:
● These banks are not included in the Second Schedule of the RBI Act. They do not
have access to borrowing from the RBI except in emergencies

2. Unorganized Sector
The unorganized sector consists of informal banking entities that operate without formal regulation.
This includes moneylenders and cooperative societies that provide financial services but do not
adhere to the same regulatory framework as organized banks.

3. Development Banks
Development banks play a vital role in providing long-term credit for capital-intensive projects. They
focus on sectors like agriculture, small industries, and infrastructure development. Examples include:
● National Bank for Agriculture and Rural Development (NABARD)
● Small Industries Development Bank of India (SIDBI).

4. Cooperative Banks

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

Cooperative banks operate on a cooperative basis and are established to serve specific communities
or sectors. They provide financial services primarily to their members and focus on agricultural
financing and rural development.

RBI: History-Role & Functions.

History: The Reserve Bank of India was set up on the basis of the recommendations of the Hilton
Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis
of the functioning of the Bank, which commenced operations on April 1, 1935.
The Bank was constituted to
* Regulate the issue of banknotes
* Maintain reserves with a view to securing monetary stability and
* To operate the credit and currency system of the country to its advantage.

The Bank began its operations by taking over from the Government the functions so far being
performed by the Controller of Currency and from the Imperial Bank of India, the management of
Government accounts and public debt. The existing currency offices at Calcutta, Bombay, Madras,
Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department.
Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and
Rangoon.
Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as
the Central Bank for Burma till Japanese Occupation of Burma and later upto April, 1947. After the
partition of India, the Reserve Bank served as the central bank of Pakistan upto June 1948 when the
State Bank of Pakistan commenced operations. The Bank, which was originally set up as a
shareholder's bank, was nationalized in 1949

OBJECTIVES OF RBI:
Regulating the issue of currency in India;
∙ Keeping the Foreign Exchange Reserves of the Country;
∙ Establishing the Monetary Stability in the Country; And
∙ Developing the Financial Structure of the Country On Sound Lines
∙Consistent With the National Socio-Economic Objectives and Policies.

Role of RBI:
As the central bank of the country, the RBI is the one of the architects of the nation's economy and
its decisions touch everyday lives of all Indians. From ensuring stability of interest rates and
exchange rates to providing adequate liquidity for productive sectors and ensuring adequate supply
of currency, the Reserve Bank of India also monitors flow of credit to desired sectors and ensures
orderly development of financial markets and institutions.
∙ Monetary Authority

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

The Reserve Bank of India constantly works towards keeping inflation under check and ensuring
adequate supply of liquidity for the productive sector as also towards financial stability.
∙ Supervisor of the Financial System
Prescribes regulations for sound functioning of banks and financial institutions, including non-
banking finance companies
- Promotes best practices in risk management and corporate governance to protect depositors' interest
and to enhance public confidence in the financial system of the country
- Encourages use of technology in banks to provide cost-effective service to consumers.

∙ Issuer of Currency
Ensures good quality coins and currency notes in adequate quantity
- Mops up notes and coins unfit for circulation
- Advises the Government on designing of currency notes with the latest security features.

∙ Manager of Foreign Exchange

Formulates policies to facilitate external trade and payments, facilitates foreign investments in India
and Indian investments abroad and promotes orderly development of foreign exchange markets.
∙ Banker to the Government
Maintains accounts of central and state governments. Performs merchant banking function for the
central and the state governments
- Encourages development and orderly functioning of Government securities market
- Advises central and state governments in better cash management.

∙ Payment Systems
Work towards establishment of modern, robust, efficient, secure and integrated payment and
settlement system for the country.
∙ Bankers' Bank
Ensures adequate liquidity in the financial system and in individual banks, on a daily basis -
Performs lender of the last resort function.
∙ Developmental Role
Performs a wide range of functions to support national objectives such as ensuring orderly growth
and development of financial markets and institutions, creating institutions to serve specialized
financial needs and extending the organized financial sector to all parts of the economy.
∙ Under Research
Serves as the primary source of information on Indian economy and financial system
- Analyses the issues and problems affecting the Indian economy
- Renders advice for policy formulation and shaping monetary, banking and financial policies
- Prepares the Bank's publications
- Warehouses data to enable decision-making.

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

FUCTIONS OF RBI:
There are various functions which are performed by Reserve Bank of India, which are following:
a) Traditional functions
b) Development functions
c) Supervisory functions
A. Traditional functions
1. RBI issues Currency Notes
Section 22 of the Reserve Bank of India Act 1934 provides that RBI has sole right to issue currency
notes except one rupee note and coins of smaller denomination. RBI issues, against the security of
gold bullion, foreign securities, rupee coins, exchange bills, promissory notes and government of
India bonds etc, currency notes of Rs. 2, 5, 10, 20, 50, 100, 500,2000.
2. As a banker to other Banks
RBI guides, helps and directs other commercial banks of the country. RBI keeps control the bank
reserves. Every commercial bank has to maintain a part of their reserves with RBI which is called
Cash Reserve. If bank need fund they approach to RBI for fund and RBI lend to them
Banker of the Government RBI also works as an agent of the governments. RBI makes payments,
taxes and deposits etc on the behalf of governments. It represents the government at international
level also. It maintains accounts of government and also provides financial advice to the government
whenever required
3. Management of Exchange Rate
RBI prepares domestic policies for maintaining value of rupee. It also prepares and implements also
the foreign exchange rate policy which helps in attaining the exchange rate stability. It brings
demand and supply of foreign currency (U.S.) dollar close to each other for maintenance of exchange
rate stability.
4. Credit Control
RBI has to balance growth with stability. Thus it checks the credit creation capacity of commercial
banks by using various credit control tools. If the credit creation by commercial banks is unregulated
then it may lead the economy into inflationary cycles
5. Supervision
RBI has to supervise the commercial banks. It has the power to give license to new banks which are
going to open or to new branches to be established. It guides and conducts the audit of other banks.
B. Development functions:
1. Financial System Development

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

The financial system includes many things like, financial institutions, financial markets and financial
instruments. For rapid economic development of the nation’s economy, sound and efficient financial
system is necessary for which RBI encourages the banking and non – banking institutions.
2. Agricultural Development
RBI always pays attention to agriculture sector by assessing credit needs of this particular sector.
Regional Rural Banks (RRBs), National Bank for Agriculture and Rural Development (NABARD)
which are only for agriculture finance are under the direct control of RBI.
3. Industrial Finance
For economic growth of the country, Industrial development is necessary and for this purpose RBI
supports the industrial sector as well. RBI plays vital role for setting up of industrial finance
institutions like ICICI Limited, IDBI, SIDBI, EXIM etc.
4. Promotion of Export
RBI always encourage the facilities for providing finance for foreign trade especially exports from
India. The Export Import Bank of India (EXIM), and the Export Credit Guarantee Corporation of
India (ECGC) are supported by RBI.
5. Reports Publication
RBI has a separate publication division. It collects and publishes data on different sector of the
economy. The reports and bulletins are regularly published by the RBI and available for public.
6. Collection of Data
RBI collects important statistical data about several topics like interest rates, inflation, savings,
investments, deflation etc. the data collected by RBI is very much useful for policy makers and
researchers.

C. Supervisory functions:
1. License to Banks
RBI provides license to the banks going established. It also provide license to the new branches of
existing banks.
2. Inspection of Banks
RBI may as and when required, may inspect the assets and liabilities of the banks which are under its
control.
3. Control on Non-Bank Financial Institutions
RBI may issue directives to the NBFIs from time to time with regard to their functioning. It can
control the NBFIs through periodic inspection.
Monetary Policy Tools in India

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

The Reserve Bank of India (RBI) employs various monetary policy tools to regulate the economy,
control inflation, and manage liquidity. The primary tools include the Repo Rate, Reverse Repo Rate,
Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR). Here’s an overview of each tool:
1. Repo Rate
● Definition: The Repo Rate is the rate at which the RBI lends money to commercial banks
against securities. It is a crucial tool for controlling inflation and managing liquidity in the
economy.
● Function:
● Liquidity Management: The repo rate is a primary tool for managing liquidity in the
banking system. By adjusting this rate, the RBI can influence the amount of money available
for banks to lend.
● Inflation Control: An increase in the repo rate makes borrowing more expensive, which can
reduce consumer spending and investment, thereby helping to control inflation.
● Interest Rate Signals: Changes in the repo rate serve as signals to the market about the
central bank's stance on monetary policy, influencing expectations regarding future interest
rates.
2. Reverse Repo Rate
● Definition: The Reverse Repo Rate is the rate at which the RBI borrows money from
commercial banks. This tool helps manage liquidity in the banking system.
● Function:
● Absorption of Excess Liquidity: The reverse repo rate allows the RBI to absorb excess
liquidity from the banking system. When banks have surplus funds, they can park these with
the RBI at this rate, effectively reducing the money supply in circulation.
● Encouraging Safe Investments: By offering a higher reverse repo rate, the RBI incentivizes
banks to invest their surplus funds safely with it rather than in riskier assets.
● Stabilizing Money Market Rates: The reverse repo rate helps stabilize short-term interest
rates in the money market by providing a benchmark for banks to lend or borrow funds.
3. Cash Reserve Ratio (CRR)
● Definition: CRR is the percentage of a bank's total deposits that must be maintained as
reserves with the RBI in cash form.
● Function:
● Regulating Money Supply: By changing the CRR, the RBI can directly influence the
amount of funds that banks have available for lending. A higher CRR means banks must hold
more cash with the RBI and have less to lend, reducing money supply.
● Ensuring Solvency: CRR acts as a safety net for banks, ensuring they maintain enough
liquidity to meet customer withdrawals and obligations.

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

● Monetary Policy Implementation: Adjustments to CRR are part of broader monetary policy
measures aimed at controlling inflation and stabilizing the economy.
4. Statutory Liquidity Ratio (SLR)
● Definition: SLR is the minimum percentage of a bank's net demand and time liabilities that
must be maintained in liquid assets such as cash, gold, or government securities.
● Function:
● Promoting Financial Stability: SLR ensures that banks maintain a portion of their liabilities
in liquid assets, which promotes overall financial stability and reduces risk.
● Control Over Credit Growth: By increasing SLR, the RBI can restrict credit growth by
limiting the funds available for lending. Conversely, lowering SLR can encourage banks to
lend more.
● Investment in Government Securities: SLR mandates that a portion of bank deposits be
invested in government securities, thereby ensuring a steady demand for such securities and
supporting government borrowing.

Banking Regulation Act

The Banking Regulation Act, 1949 is a pivotal piece of legislation that governs the banking sector
in India. It provides a comprehensive framework for the regulation and supervision of banks,
ensuring the stability and integrity of the financial system. Here’s an overview of its key features,
objectives, provisions, and recent amendments.
Overview of the Banking Regulation Act, 1949
● Enactment: The Act was passed by the Indian Parliament on March 10, 1949, and came into
force on March 16, 1949. It was initially known as the Banking Companies Act but was
renamed in 1966.
● Scope: The Act applies to all banking companies in India and has been amended over the
years to include cooperative banks and other financial institutions.
Key Features
1. Regulatory Authority:
● The Reserve Bank of India (RBI) is empowered to regulate and supervise banking
companies, including licensing, management appointments, and operational
guidelines.
2. Licensing of Banks:
● The Act mandates that no banking company can operate without a license from the
RBI.

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

3. Capital Requirements:
● It establishes minimum capital requirements for banks to ensure they maintain
adequate financial health.
4. Management Oversight:
● The RBI has the authority to appoint or remove bank directors and management
personnel to ensure effective governance.
5. Prohibition of Non-Banking Activities:
● Banking companies are prohibited from engaging in trading activities unrelated to
banking to mitigate risks associated with non-banking ventures.
6. Liquidation and Mergers:
● The Act outlines procedures for the liquidation of banks and allows for the merger of
weaker banks with stronger ones to maintain stability in the banking system.
7. Deposit Protection:
● It includes provisions aimed at protecting depositors’ interests and ensuring that banks
maintain sufficient liquidity to meet withdrawal demands.
Objectives
● Stability in Banking Sector: To promote stability and soundness in the banking system
through effective regulation.
● Protection of Depositors: To safeguard the interests of depositors by ensuring that banks
operate within a defined legal framework.
● Balanced Growth: To facilitate balanced growth in the banking sector by regulating branch
expansions and licensing new banks.
● Prevention of Malpractices: To prevent malpractices and abuse of power by banking
institutions.
Important Provisions
1. Definitions:
● The Act provides clear definitions for terms such as "banking company," "bank," and
"branches."
2. Business Activities:
● Section 6 outlines permissible business activities for banking companies, including
borrowing and lending money, managing securities, and dealing in foreign exchange.
3. Audit Requirements:

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

● Banks are required to have their accounts audited regularly to ensure transparency and
accountability.
4. Penalties for Non-Compliance:
● The Act prescribes penalties for violations, including fines and imprisonment for
misrepresentation or failure to comply with regulations.
Recent Amendments
● In 2020, significant amendments were made to bring all cooperative banks under the
supervision of the RBI. This included provisions for better governance, enhanced regulatory
oversight, and measures to protect depositors' interests.

Prompt Corrective Action (PCA)

Prompt Corrective Action (PCA) is a regulatory framework established by the Reserve Bank of India
(RBI) to monitor and address the financial health of banks. Here’s an overview of the PCA
framework, its functions, and its implications:
Overview of Prompt Corrective Action (PCA)
● Purpose: PCA aims to ensure that banks maintain adequate capital levels, asset quality, and
profitability ratios to protect depositors' funds and maintain financial stability in the banking
sector.
● Implementation: The framework was introduced in 2002 and has undergone revisions, with
significant updates made in 2017. It applies to all Scheduled Commercial Banks in India,
excluding Regional Rural Banks, Payment Banks, and Small Finance Banks.
Key Parameters for PCA
Banks are categorized based on their performance against three critical thresholds:
1. Capital Adequacy Ratio (CAR): Measures a bank's capital against its risk-weighted assets.
2. Non-Performing Assets (NPAs): Indicates the proportion of loans that are in default or close
to being in default.
3. Return on Assets (RoA): Reflects the bank's ability to generate profit from its assets.
Functions of PCA
1. Supervisory Oversight:
● The RBI monitors banks' financial health through regular assessments. If a bank falls
below specified thresholds on the key parameters, it is placed under PCA.
2. Mandatory Restrictions:
● Banks under PCA face mandatory restrictions such as:
● Prohibitions on dividend payments.

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Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

● Limitations on branch expansion.

● Restrictions on directors' compensation.
3. Discretionary Actions:
● The RBI may impose discretionary measures based on the severity of the bank's
financial condition, including:
● Capping lending limits.
● Requiring special audits.
● Restructuring operations or management.
4. Timely Intervention:
● PCA allows for early intervention to prevent further deterioration of a bank's financial
condition. This includes enforcing corrective measures that banks must implement to
restore their health.
5. Promoting Financial Stability:
● By closely monitoring banks and enforcing corrective actions, PCA helps maintain
overall stability in the banking sector and protects depositors' interests.
Implications of PCA
● Impact on Banking Operations: Being placed under PCA can significantly affect a bank's
operations, customer relationships, and market reputation. It may lead to reduced lending
capabilities and loss of customer confidence.
● Economic Considerations: While PCA aims to strengthen banks, it can also be viewed as an
economic hindrance, potentially limiting credit availability in the economy during periods of
financial stress.

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Surana College, Peenya
Jayanth Kumar R
Assistant Professor
Dept of Commerce & Management

Chapter 2
TYPES OF BANKS & BANKER – CUSTOMER RELATIONSHIP

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