Unit 1

Banking in India

1. What is Banking in India?

Banking in India means the system of financial institutions (mainly banks) that help people and
businesses manage money. Banks in India allow you to:

• Keep your money safe (savings accounts)

• Borrow money (loans) Borrow money
• Transfer money (payments)
• Earn interest
• Invest in financial products (like fixed deposits)

✓ The Indian banking system includes:

▪ Public Sector Banks (owned by the government, like SBI)
▪ Private Sector Banks (like HDFC, ICICI)
▪ Cooperative Banks
▪ Regional Rural Banks
▪ Foreign Banks (like Citibank, HSBC)

The system is regulated by the Reserve Bank of India (RBI), which is the central bank of the country.

2. Why is Banking Important in India?

✓ Banking is important for several reasons:
• Security:
People can keep their money safe in banks instead of hiding it at home.

• Loans and Credit:

Individuals and businesses can borrow money to buy homes, study, or grow their companies.

• Convenience:

Banks help in easy payment and money transfer, both online and offline.

• Economic Growth:
Banks give loans to businesses, which helps create jobs and boosts the economy.

• Government Benefits:
Banks help in delivering subsidies and welfare schemes directly to people’s accounts (like PM Jan
Dhan Yojana).
 3. Where Do Banking Services Operate?

✓ Banking services in India are available.

▪ In cities and towns:

Through physical bank branches and ATMs.

▪ In villages:
Via rural bank branches, banking correspondents (local agents), and mobile banking vans.

▪ Online and mobile platforms: Through net banking, UPI apps (like Google Pay, PhonePe,
BHIM), and digital wallets.

So, banking is now available almost everywhere – physically or digitally.

4. How Does Banking Work in India?

✓ Here’s how the banking system works in simple steps:

• Opening an account:

You go to a bank with ID proof, fill a form, and open a savings/current account.

• Depositing money:
You put your money in the bank, and it stays safe. You may earn interest on it.

• Withdrawing or transferring money:

You can take out cash from ATMs or transfer it via cheque, UPI, NEFT, RTGS, etc.

• Taking a loan:

You apply for a loan (home, car, education, business), and the bank lends you money at a certain interest
rate.

• Repaying the loan:

You pay back the loan in small monthly amounts (EMIs).

• Bank supervision:
The RBI makes sure banks follow rules and remain safe for the public.

❖ Meaning and definition of banking

❖ Meaning of Banking
 Banking means the business activity of accepting money from people (called customers) and using
that money to give loans or perform other financial services. Banks help people save their money
safely and also allow others to borrow money when needed.

In simple words, banking is the work that banks do — like keeping your money safe, giving loans,
helping you transfer money, and offering other financial services like ATM, debit cards, and online
banking.

❖ Definition of Banking
✓ According to the Banking Regulation Act, 1949 (India):

“Banking means 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, order or otherwise.”

▪ In simple terms:
• Banking is the process where:

• People deposit money in a bank.

• The bank uses that money to give loans or invest.

• People can take their money back whenever they need (on demand).

They can withdraw money using cheques, ATMs, online banking, etc.

❖ Main Functions of Banking (in brief):

1. Accepting Deposits:
Banks take money from people and keep it safe.

2. Giving Loans:
Banks give money to people or businesses who need it, and charge interest.

3. Money Transfer Services:

Banks help people send and receive money.

[Link] Cards:

Banks provide debit and credit cards to help in buying and withdrawing cash.

5. Other Services:
Like internet banking, locker facilities, foreign exchange, etc.
❖ Banking and banking company

1. What is Banking?
Banking means accepting money from people and businesses and using that money to give loans or
provide other financial services.

▪ Main Functions of Banking:

Accepting Deposits:
People deposit their money in the bank for safety.

• Giving Loans:
Banks give loans to individuals and companies to help them grow.

• Providing Services:
Banks offer services like ATM, credit cards, debit cards, internet banking, mobile banking,
etc.

• Transferring Money:
Banks help people send money from one place to another.

• Investment Services:
Banks help people invest their money in fixed deposits, mutual funds, etc.

▪ Example:

When you put your salary into your savings account, the bank keeps it safe. If someone wants a home
loan, the bank can use the money collected from many people and give a loan to that person with
interest.

2. What is a Banking Company?

A Banking Company is a company that does the business of banking.

According to Indian Law (Banking Regulation Act, 1949):

A Banking Company means a company which does the business of banking as defined in Section
5(b) of the Act.

✓ That means:
▪ The company accepts deposits from the public.

▪ These deposits are repayable on demand (you can withdraw money when you want).

▪ The company uses the money to give loans and make investments.

▪ Examples of Banking Companies:

 ▪ State Bank of India (SBI)

▪ HDFC Bank

▪ ICICI Bank

▪ Punjab National Bank (PNB)

▪ Axis Bank

❖ Difference Between Banking and Banking Company:

Banking Banking in company

Banking is the activity of accepting deposits A banking company is a company that performs banking
and giving loans . activities.

It’s a function or service. It's a legal entity or organization.

Example: Accepting deposits is banking. Example :SBI is a banking company.

❖ Commercial bank

[Link] is a Commercial Bank?

A commercial bank is a type of financial institution that accepts deposits from people and
businesses, and gives out loans to individuals, companies, or governments. It is the most common
type of bank we use in daily life.

✓ Main Functions of a Commercial Bank

1. Accepting Deposits
People and businesses keep their money in banks for safety.

Banks offer different types of accounts: Savings accounts, Current accounts, and Fixed deposits.

2. Providing Loans

Banks lend money to people and companies for personal or business needs.

✓ Types of loans include:

 I. Personal loans
II. Home loans
III. Business loans
IV. Education loans

3. Credit Creation

Banks don’t just keep the money you deposit. They use a part of it to give loans, which increases the
amount of money in the economy.

4. Providing Cheque and Card Services

Banks allow you to make payments using cheques, debit cards, and credit cards.

5. Mobile and Online Banking

Most banks now offer internet and mobile banking, making it easy to send money, pay bills, and
check balances from anywhere.

6. Foreign Exchange Services

Commercial banks help in exchanging foreign currency and also help in international money
transfers.

7. Safe Deposit Lockers

Banks provide lockers where people can keep their valuables like jewelry or important documents
safely.

[Link] Do Commercial Banks Earn Money?

• Interest on Loans:
Banks charge higher interest on loans than what they pay on deposits.

• Service Charges:
They charge fees for certain services like ATM use, account maintenance, or international transfers.

• Investments:
Banks invest in government bonds and other financial assets.

✓ Examples of Commercial Banks

[Link] Banks:
HDFC Bank, ICICI Bank, Axis Bank

[Link] Banks:
State Bank of India (SBI), Punjab National Bank (PNB)

[Link] Banks:
 Citibank, HSBC, Standard Chartered

[Link] Are Commercial Banks Important?

They help in economic growth by supporting businesses with loans.

They encourage savings and financial discipline among people.

They make money transactions easier and safer.

❖ Commercial Bank in introduction :

A Commercial Bank is a type of financial institution that provides banking services to the public —
including individuals, businesses, and organizations. The main purpose of a commercial bank is to
accept money (deposits) from people and give loans to others who need money.

▪ Main Functions of a Commercial Bank

[Link] Deposits:

People keep their money in banks for safety and to earn interest.

Banks offer different types of deposit accounts like:

I. Savings Account
II. Current Accounts
III. Fixed Deposits

[Link] Loans:

Banks lend money to individuals and businesses.

These loans are given for things like buying a house, car, starting or expanding a business, etc.

The bank charges interest on the money it lends.

[Link] Payment Services:

Banks help people and businesses transfer money safely.

• They offer services like:
i. Cheque

ii. Debit and credit cards

iii. Online banking

iv. Mobile banking

 v. UPI and NEFT/RTGS transfers UPI

[Link] Keeping of Valuables:

Banks provide locker facilities to keep jewelry and important documents safe.

5. Exchange Services:

Commercial banks help with currency exchange for people who travel abroad.

They also help businesses with international trade payments.

[Link] Services:

Issuing demand drafts, bank guarantees, and letters of credit.

Selling insurance, mutual funds, and investment products.

[Link] Do Commercial Banks Earn Money?

Banks earn interest on the loans they give.

They charge fees for various services like ATM cards, account maintenance, and transactions.

They also earn by investing the money deposited by customers.

✓ Examples of Commercial Banks

Some well-known commercial banks include:

• In India:
State Bank of India (SBI), HDFC Bank, ICICI Bank, Axis Bank, etc.

• Globally:
JPMorgan Chase (USA), HSBC (UK), Bank of America, etc.

❖ Conclusion

A commercial bank plays a very important role in the economy. It helps people save money, get loans
when needed, and makes business activities smoother through financial services.

❖ Structure of commercial bank in india

[Link] is a Commercial Bank?

A commercial bank is a financial institution that accepts deposits from the public, provides loans, and offers
other financial services like savings accounts, fixed deposits, and credit cards. Their main aim is to earn
profit.

❖ Structure of Commercial Banks in India

 • Commercial banks in India are broadly classified into two major categories:

[Link] Commercial Banks (SCBs)

These are banks that are listed under Schedule II of the Reserve Bank of India (RBI) Act, 1934. They have to
follow certain rules and regulations of RBI and are eligible for borrowing from RBI at bank rate.

• SCBs are further divided into:

a. Public Sector Banks (PSBs)

Owned and controlled by the Government of India.

Government holds more than 50% of the shares.

✓ Examples:

State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda.

b. Private Sector Banks

Majority of the shares are held by private individuals or institutions.

They are managed privately but regulated by the RBI.

✓ Examples:

HDFC Bank, ICICI Bank, Axis Bank.

c. Foreign Banks
These are banks headquartered in a foreign country but operating in India.

They must follow RBI regulations while working in India.

✓ Examples:

Citibank, HSBC, Standard Chartered.

d. Regional Rural Banks (RRBs)

Set up to provide banking services in rural areas, especially to farmers and small businesses.

Jointly owned by the Central Government (50%), State Government (15%), and a Sponsor Bank (35%).

✓ Examples:

Prathama UP Gramin Bank, Kerala Gramin Bank.

e. Small Finance Banks (SFBs)

These are smaller banks that focus on providing financial services to small businesses, farmers, and
low-income households.
Examples:

AU Small Finance Bank, Equitas Small Finance Bank.

f. Payments Banks
These banks can accept deposits (up to a limit), but cannot provide loans.

Their goal is to increase financial inclusion using technology.

✓ Examples:

Airtel Payments Bank, Paytm Payments Bank.

[Link]-Scheduled Commercial Banks

These banks are not listed under Schedule II of the RBI Act.

They are smaller in size and do not meet certain RBI requirements (like minimum capital).

Their presence is very limited and they are rare in today’s scenario.

▪ Diagram Summary (Text Format)

Commercial Banks in India

├── Scheduled Commercial Banks

│ ├── Public Sector Banks

│ ├── Private Sector Banks

│ ├── Foreign Banks

│ ├── Regional Rural Banks

│ ├── Small Finance Banks

│ └── Payments Banks

└── Non-Scheduled Commercial Banks

o Key Roles of Commercial Banks

i. Accepting deposits
 ii. Providing loans
iii. Facilitating digital transactions
iv. Issuing credit/debit cards
v. Foreign exchange services
vi. Financial advice

❖ Commercial Bank functions

1 .What is a Commercial Bank?

A commercial bank is a financial institution that accepts money from people and businesses in the form of
deposits, and gives out loans to others who need money. These banks help in the smooth working of the
economy by managing money, helping people save, and providing credit (loans).

• Main Functions of Commercial Banks

▪ Commercial banks perform two main types of functions: Primary Functions and Secondary
Functions.

[Link] Functions

These are the most important services of a commercial bank:

a)Accepting Deposits

Banks accept money from customers and keep it safe. People can deposit their money in different types of
accounts:

I. Savings Account:
For saving small amounts, earns interest.
II. Current Account:
For businesses, no interest but allows frequent transactions.
III. Fixed Deposit Account:
Money is locked for a period; earns higher interest.
IV. Recurring Deposit:
Customers deposit a fixed amount every month.

b) Giving Loans and Advances

Banks lend money to individuals, businesses, and organizations. Types of loans include:

1. Personal Loan
2. Home Loan
3. Business Loan
4. Education Loan

Overdraft Facility (allows withdrawal more than what is in the account) Banks charge interest on loans, which
is how they earn profit.

[Link] Functions:

These are services that support the main banking operations:

a)Agency Functions (Working on behalf of customers)

Collecting cheques and payments.

Paying bills, insurance premiums, etc.

Acting as a trustee or executor (handling wills or properties).

Buying or selling shares and bonds for customers.

b)Utility Functions (Other helpful services)

Providing locker facilities for keeping valuables.

Issuing debit and credit cards.

Internet and mobile banking services.

Foreign exchange services – buying and selling foreign currency.

Providing bank statements and financial advice.

❖ Importance of Commercial Banks

▪ Helps people save money.
▪ Provides loans for personal or business needs.
▪ Encourages investment and economic growth.
▪ Helps in employment generation by supporting businesses.
▪ Supports trade and commerce through banking services.

❖ Credit creation by commercial bank

[Link] is Credit Creation?

Credit creation is the process by which commercial banks create money (credit) in the economy by lending
more than what they actually receive in deposit.

[Link] Does It Work?

❖ Here’s a step-by-step explanation:

[Link] Deposit Money in Banks

• Suppose you deposit $1,000 in your bank

• These bank does not keep all of it. It keeps a small portion (called the reserve) and lends the rest.

[Link] Requirement

• By law or regulation, banks must keep a percentage of deposits with them. This is called the Cash
Reserve Ratio (CRR).
 ✓ Example:

If the reserve ratio is 10%, the bank keeps $100 and lends $900.

[Link] Money Creates New Deposits

▪ The $900 is borrowed by someone, and when they spend it, the money goes to another person who
then deposits it in another bank.
▪ That second bank keeps 10% ($90) and lends out $810.
▪ This process keeps repeating, and with each round, new money is created.

[Link] Multiplier Effect

The original $1,000 can lead to total credit of $10,000 in the system, if the reserve ratio is 10%.

Formula:

Total Credit Created = Initial Deposit × (1 / Reserve Ratio)

= $1,000 × (1 / 0.10) = $10,000

[Link] Is Credit Creation Important?

It increases money supply in the economy.

Helps in economic growth by providing loans to businesses and individuals.

Supports investment and consumption.

❖ Limitations of Credit Creation

If people don’t take loans or banks don’t want to lend, credit creation slows down.

During recessions or bank crises, this process may stop.

Controlled by central banks through tools like CRR, repo rates, SLR, etc.

❖ In Simple Words:

▪ Banks don’t just keep your money—they use it to give loans. When they do this again and again with
everyone’s deposits, they create more money in the system than actually exists in cash. That’s credit
creation.

❖ Principal of liquidity and probability

❖ Principle of Liquidity

[Link] does it mean?

The principle of liquidity is about making sure that a business or person has enough cash or assets that can
quickly be turned into cash to pay for daily expenses or short-term debts.

[Link] is it important?

Businesses need to pay bills, salaries, rent, etc.

▪ If a company doesn’t have enough liquidity (cash or near-cash), it could face big problems—
even if it is profitable in the long run.
▪ It’s like having a good job but not enough cash in your wallet to buy food today.

❖ Examples of liquid assets:

▪ Cash

I. Money in the bank

II. Stocks (can be sold quickly)
III. Accounts receivable (money owed by customers)

• In simple words:
Liquidity means how easily and quickly you can get money when you need it.

❖ Principle of Profitability

[Link] does it mean?

The principle of profitability is about making a profit from your business or investments. This means
your income is more than your expenses.

[Link] is it important?

Profit is what helps a business grow, pay owners/shareholders, and invest in the future.

No business can survive for long if it doesn’t make profits.

[Link] do businesses measure profitability?

i. Net profit margin

ii. Return on investment (ROI)
iii. Earnings before interest and tax (EBIT)

▪ In simple words:
Profitability means how good you are at making money after paying all costs.

o Balancing Both Principles

A business needs both liquidity (to survive) and profitability (to grow).

Sometimes, businesses face a trade-off:

Keeping too much cash (high liquidity) might reduce profit (money isn’t being invested).

Investing too much (to earn profit) might reduce liquidity (less cash available).

✓ Example:

▪ If a company invests all its money in new machines (to make more profit), but then can’t pay its
workers, it has ignored liquidity.

▪ If a company keeps all its money in the bank and avoids investing, it stays safe but misses out on
making profits.

❖ Co-operative Bank introduction

[Link] is a Co-operative Bank?

A Co-operative Bank is a financial institution that is owned and operated by its members. These members are
both the owners and the customers of the bank. It works on the principle of “cooperation”, meaning people
come together to help each other financially.

▪ Main Purpose:

The main goal of a co-operative bank is not to make huge profits, but to serve the financial needs of its
members, especially in rural and semi-urban areas.

• Key Features of Co-operative Banks:

[Link]-Owned:

• Only members can own and operate the bank.

• Each member has equal voting rights, regardless of how much money they invest.

[Link] Control:

Managed by a board elected by the members.

▪ “One member, one vote” system is followed.

[Link] Focused:

Provides loans at low interest rates.

 o Offers services like savings accounts, fixed deposits, and small loans.

[Link] Operation:

Works mainly in local areas to support farmers, small businesses, and local people.

[Link]-Cost Services:

Services are affordable and simple for ordinary people.

➢ Types of Co-operative Banks in India:

[Link] Co-operative Banks (UCBs):

• Found in cities and towns.

• Serve small traders, workers, and small businesses.

[Link] Co-operative Banks:

• Found in villages and rural areas.

• Support farmers and agricultural activities.

▪ These include:
i. State Co-operative Banks (SCBs)
ii. District Central Co-operative Banks (DCCBs)
iii. Primary Agricultural Credit Societies (PACS)

➢ Functions of Co-operative Banks:

I. Accept deposits from members.

II. Provide loans for farming, housing, business, education, etc.

III. Encourage saving habits among members.

IV. Support community development and local trade.

➢ Advantages of Co-operative Banks:

• Easy access to banking for poor and middle-class people.

• Lower interest rates on loans

• Profits are shared among members or used for community welfare

 • Promotes savings and financial awareness.

▪ Challenges Faced:

• Lack of modern technology in rural areas

• Sometimes suffer from poor management or political interference.

• Limited resources compared to big commercial banks.

❖ Conclusion:

Co-operative Banks play a very important role in India’s economy by helping common people, especially in
rural and semi-urban areas. They promote financial inclusion and are based on trust, cooperation, and
mutual help.

❖ Structure

[Link] is a Co-operative Bank?

A co-operative bank is a financial institution that is owned and operated by its members. These members are
both the owners and the customers of the bank. It runs on co-operative principles, mainly to provide services
to its members, not to make huge profits.

➢ Key Features of Co-operative Banks:

• Member-owned:

Every customer is also a part-owner.

• Democratic control:

One member = one vote, regardless of the money invested.

• Service-oriented:

Main goal is to serve members, especially in rural and agricultural areas.

• Profit-sharing:

Profits are used to improve services or distributed among members.

1. Structure of Co-operative Banks in India (Three-Tier System)

[Link] Co-operative Banks (Urban Co-operative Banks – UCBs):

 • Located in towns and cities.

Serve small businesses, retailers, and individuals.

Registered under State Co-operative Societies Acts.

Supervised by both RBI and State Governments.

2. District Central Co-operative Banks (DCCBs):

Operate at the district level.

Act as a link between Primary Co-operative Credit Societies (PACS) and State Co-operative Banks.

Provide loans to PACS and monitor their functioning.

Mostly deal with rural areas and agricultural loans.

3. State Co-operative Banks (SCBs):

Operate at the state level.

Apex body for co-operative banking in a state.

Receive funds from NABARD (National Bank for Agriculture and Rural Development) and lend to DCCBs.

Supervise and coordinate the activities of DCCBs.

✓ Types of Co-operative Banks:

1. Urban Co-operative Banks (UCBs) – Serve urban and semi-urban areas.

2. Rural Co-operative Banks – Support agriculture and rural development:

Short-term structure: PACS → DCCBs → SCBs

Long-term structure: Primary Land Development Banks (PLDBs) → State Land Development Banks (SLDBs)

[Link] Regulates Co-operative Banks?

RBI (Reserve Bank of India) – Regulates banking operations.

NABARD – Supervises rural co-operative banks.

State Governments – Control administration and registration.

• Advantages:

1) Focus on rural development and financial inclusion.

2) Lower interest rates.
3) Localized service and better understanding of community needs.

• Challenges:

1. Lack of professionalism and modern technology.

2. Political interference.
3. Weak financial health in some areas.