Module 5 : General/ Financial Awareness

History of Banking in India

 Ancient and Medieval Period (Before 18th Century):

o Banking wasn't a formal system but existed through practices of money lending, known as
"hundis" or loan deeds.
o Merchants and wealthy individuals acted as bankers, providing loans and facilitating trade.
o Mention of usury and lending practices can be found in ancient texts like the Vedas and
Manusmriti.
 Pre-Independence Era (1786 - 1947):
o This is where modern banking began in India, largely with the arrival of the British.
o The first banks were established by the East India Company.
 Bank of Hindustan (1770) was the first, but it didn't last long.
 The three Presidency Banks—Bank of Bengal (1806), Bank of Bombay (1840), and Bank of
Madras (1843)—were the most significant.
o These three banks were later merged to form the Imperial Bank of India in 1921.
o The Reserve Bank of India (RBI) was established in 1935 to regulate banks and manage the
country's currency. This was a major milestone.
 Post-Independence Era (1947 - 1991):
o After independence, the government needed banks to support national development, especially
in agriculture and small industries.
o Nationalization of Banks: To achieve this, the government nationalized the Imperial Bank of
India in 1955, renaming it the State Bank of India (SBI).
o The most significant step was the nationalization of 14 major private banks in 1969,
followed by six more in 1980. This move gave the government control over most of the
banking sector to direct credit towards rural and priority sectors.
o The goal was to extend banking services to the rural population and reduce reliance on private
money lenders.

Banking and Financial Reforms in India

 Why were reforms needed?

o By the late 1980s, the nationalized banking system faced problems like a lack of competition,
low efficiency, and rising Non-Performing Assets (NPAs)—loans that weren't being repaid.
o The Indian economy was also undergoing a major liberalization, so the banking sector needed
to catch up.
 Key Reforms (1991 onwards):
o Narasimham Committee Recommendations: This committee was formed in 1991 to suggest
reforms. Its main recommendations were to improve efficiency and stability.
o Opening up to Private and Foreign Banks: The government allowed new private banks
(like HDFC Bank, ICICI Bank) and more foreign banks to enter the market. This increased
competition and improved services.
o Reduction in Statutory Ratios: The Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR) were gradually reduced. This meant banks could lend out more money instead of
keeping it with the RBI, boosting economic activity.
o Introduction of Basel Norms: Indian banks adopted global standards for capital adequacy to
ensure their financial stability.
 Recent Reforms and Digitalization:
o Financial Inclusion: The government launched initiatives like the Pradhan Mantri Jan
Dhan Yojana to ensure every household has a bank account.
o Digital Revolution: The growth of UPI, internet banking, and mobile wallets has transformed
how people transact, making banking more accessible and efficient.
o Payments Banks and Small Finance Banks: The RBI created these new types of banks to
serve specific needs, such as providing small loans or facilitating digital payments.

Financial Institutions in India

 What is a Financial Institution?

o A financial institution is an organization that deals with financial transactions, such as deposits,
loans, and investments.
o Think of them as the pillars of the country's financial system.
 Categories of Institutions:
o Regulators: These are the key bodies that oversee the financial system.
 Reserve Bank of India (RBI): The central bank, responsible for monetary policy, currency,
and regulating all banks.
 Securities and Exchange Board of India (SEBI): Regulates the capital markets and protects
investors.
 Insurance Regulatory and Development Authority (IRDAI): Oversees the insurance
industry.
o Commercial Banks: The most common type of bank. They accept deposits and provide loans.
 Public Sector Banks: Majority owned by the government (e.g., SBI, Punjab National Bank).
 Private Sector Banks: Privately owned (e.g., HDFC Bank, ICICI Bank).
 Foreign Banks: Branches of international banks operating in India (e.g., Citibank).
o Cooperative Banks: Focus on serving specific communities, especially in rural and urban
areas.
o Development Financial Institutions (DFIs): Provide long-term finance for economic
development.
 NABARD (National Bank for Agriculture and Rural Development): Focuses on
agricultural development.
 SIDBI (Small Industries Development Bank of India): Provides credit to small and medium
enterprises.
o Non-Banking Financial Companies (NBFCs):
 They are not banks. They cannot accept public deposits that are repayable on demand (like
savings or current accounts).
 They provide loans, wealth management, and other financial services (e.g., Muthoot Finance,
Bajaj Finance).

Functions of Banks

Banks are the backbone of any economy. Their main functions can be broken down into
primary and secondary functions.
  Primary Functions:
o Accepting Deposits: This is the most crucial function. Banks collect money
from the public and give them a safe place to keep it. They offer various types
of accounts for this purpose.
o Lending Loans: Banks use the money they've collected as deposits to give out
loans to individuals and businesses. This is how they earn most of their profits
(the interest on loans is higher than the interest they pay on deposits).
 Secondary Functions:
o Credit Creation: When a bank gives a loan, it doesn't give cash. It creates a
new deposit in the borrower's account. This process expands the money supply
in the economy.
o Agency Functions: Banks act as agents for their customers. They can collect
or pay bills, transfer funds, or buy and sell securities on their behalf.
o General Utility Functions: These are various other services like providing
locker facilities, issuing traveler's cheques, and underwriting securities.

Types of Bank Accounts

Banks offer different types of accounts to suit the needs of various customers, from students to
businesses.

 Savings Account: Best for individuals who want to save money and earn a small
amount of interest. It has some restrictions on the number of withdrawals.
 Current Account: Meant for businesses and firms that have frequent, high-volume
transactions. It usually has no limit on withdrawals but earns little to no interest.
 Fixed Deposit (FD) Account: An investment account where you deposit a lump sum
for a fixed period (e.g., 1 to 5 years). It offers a higher interest rate than a savings
account, but you can't withdraw the money before the term ends without a penalty.
 Recurring Deposit (RD) Account: An account where you deposit a fixed amount
every month for a set period. It helps you build a disciplined saving habit and earns
interest similar to an FD.
 Salary Account: A special account for employees to receive their monthly salary. It
often comes with a zero-balance facility and other benefits negotiated with the
employer.

Types of Loans

Loans are broadly categorized into two types: secured and unsecured.

 Secured Loans: These loans require you to provide an asset as collateral. If you fail
to repay the loan, the bank can sell the collateral to recover the money. Because of the
lower risk for the bank, these loans generally have lower interest rates.
o Home Loan: Used to purchase or build a house. The house itself acts as
collateral.
o Vehicle Loan: Used to buy a car or bike. The vehicle serves as collateral.
o Gold Loan: A loan taken against gold jewelry or coins.
 o Loan Against Property (LAP): A loan taken by mortgaging a residential or
commercial property.
 Unsecured Loans: These loans don't require any collateral. They are given based on
your credit history, income, and repayment capacity. They carry a higher risk for the
bank, so they have a higher interest rate.
o Personal Loan: Used for various personal expenses like a wedding, vacation,
or medical emergency.
o Credit Card Loan: A short-term loan you can get by using your credit card.
o Education Loan: Used to finance higher education. The loan is typically
approved based on the student's and co-applicant's financial profile.

Types of Mortgages

A mortgage is a specific type of loan used to buy a home or other real estate. The property
itself is the collateral. The types of mortgages can vary based on their interest rates and
repayment structures.

 Fixed-Rate Mortgage: The interest rate remains the same for the entire loan term. This
provides stability and makes it easier to budget, as your monthly payments won't
change.
 Adjustable-Rate Mortgage (ARM): The interest rate is fixed for an initial period (e.g.,
5 or 10 years) and then adjusts periodically based on market rates. The monthly
payments can go up or down.
 Simple Mortgage: This is the most common type. The borrower keeps possession of
the property, and the lender gets the right to sell it if the borrower defaults.

Types of Cheques & Cards

A cheque is a written order to a bank to pay a specific amount of money from your account to
a person or business.

 Bearer Cheque: Anyone who holds or "bears" the cheque can cash it at the bank. It's
the least secure type.
 Order Cheque: Can only be cashed by the person or entity named on the cheque. It's
more secure than a bearer cheque.
 Crossed Cheque: This cheque has two parallel lines on the top left corner. The amount
can only be deposited into a bank account; it cannot be cashed over the counter. This
makes it very safe.
 Self Cheque: A cheque written by you to yourself to withdraw cash from your own
account.
 Post-Dated Cheque: A cheque with a future date. It cannot be cashed or deposited
before the date written on it.

Banks also issue various types of cards for convenience.

  Debit Card: Linked directly to your bank account. You can use it to withdraw cash
from an ATM or pay for things, and the money is deducted instantly from your account.
 Credit Card: A card that allows you to borrow money from the bank up to a certain
limit. You have to pay back the borrowed amount, usually with interest, by the due date.

Foreign Banks in India

These are banks that have their headquarters in a foreign country but operate branches or
subsidiaries in India. They bring global practices and technology, and usually focus on
corporate banking, investment banking, and serving high-net-worth individuals. Examples
include Citibank and Standard Chartered Bank. They operate under the regulations of the
Reserve Bank of India (RBI).

Fund Transfer Services

These services allow people to move money from one bank account to another.

 NEFT (National Electronic Funds Transfer): A system for transferring funds from one bank
to another. It operates in batches, so transactions are not instant but are processed at regular
intervals throughout the day.
 RTGS (Real-Time Gross Settlement): A system for high-value fund transfers. The transfer
is done on a "real-time" and "gross" basis, meaning the money is moved instantly and
individually without being clubbed with other transactions.
 IMPS (Immediate Payment Service): An instant, 24/7 interbank electronic fund transfer
service. It is available all the time, including holidays, and is commonly used for mobile and
internet banking.
 UPI (Unified Payments Interface): A system that powers multiple bank accounts into a single
mobile application, merging several banking features, seamless fund routing, and merchant
payments in one place. It is the most popular form of digital payment in India.

Structure of the Banking Industry

The Indian banking industry is primarily divided into two categories:

 Scheduled Banks: Banks that are included in the Second Schedule of the RBI Act, 1934.
They have to meet certain conditions, such as having a minimum paid-up capital. This category
includes:
o Public Sector Banks: Banks where the majority stake is held by the government (e.g., State
Bank of India, Punjab National Bank).
o Private Sector Banks: Banks where the majority stake is held by private individuals or
corporations (e.g., HDFC Bank, ICICI Bank).
o Foreign Banks: Banks with headquarters outside India.
o Regional Rural Banks (RRBs): Banks created to serve rural areas.
o Small Finance Banks & Payments Banks: Newer types of banks created for specific purposes
like providing small loans or facilitating payments.
 Non-Scheduled Banks: Banks that are not on the Second Schedule of the RBI Act. They don't
have to follow all RBI regulations and are often smaller.
 Principles of Insurance

Insurance is a contract based on a few fundamental principles.

 Utmost Good Faith (Uberrimae Fides): Both the insurer and the insured must disclose all
material facts to each other truthfully. For example, if you don't reveal a serious health
condition when getting a life insurance policy, the company can deny your claim.
 Insurable Interest: You must have a financial interest in the item or person you are insuring.
You can't, for example, take a policy on your neighbor's car because its damage would not
cause you a direct financial loss.
 Indemnity: The purpose of an insurance contract is to put you back in the same financial
position you were in before a loss occurred. You can't profit from the insurance claim.
 Proximate Cause: The insurance company will only pay the claim if the loss was caused by a
covered event. For instance, if your house is insured against fire, and it gets damaged in a fire,
you can claim it. But if the fire was caused by an earthquake, which is not covered, the claim
might be rejected.

Credit & Debit

These terms are at the heart of accounting and banking transactions.

 Credit: A credit increases a bank's liability to you and decreases your assets. In simple terms,
a credit entry adds money to your account (e.g., when you deposit cash or receive a salary).
 Debit: A debit decreases a bank's liability to you and increases your assets. In simple terms,
a debit entry removes money from your account (e.g., when you withdraw cash or pay a bill).

Mutual Funds

A mutual fund is a professionally managed investment fund that pools money from many
investors to purchase securities like stocks and bonds.

 How they work: Instead of buying individual stocks, you buy "units" of a mutual fund. A
professional fund manager then uses the pooled money to invest in a diversified portfolio of
assets.
 Benefits: They offer diversification (spreading risk across many securities), professional
management, and are relatively easy to invest in.

Bombay Stock Exchange (BSE) & National Stock Exchange (NSE)

These are the two main stock exchanges in India.

 BSE (Bombay Stock Exchange): Established in 1875, it is Asia's oldest stock exchange. Its
benchmark index is the Sensex, which tracks the performance of 30 large companies. BSE has
a large number of listed companies, including many small and mid-cap companies.
 NSE (National Stock Exchange): Founded in 1992, it is India's largest stock exchange by
trading volume. Its benchmark index is the Nifty 50, which represents the performance of 50
 major companies. NSE is known for introducing electronic trading to India and for its high
liquidity.

Banking Ombudsman

The Banking Ombudsman is a senior official appointed by the RBI to provide a free and
speedy forum for bank customers to resolve their complaints against banks. If a bank does not
respond to a customer's complaint within 30 days, or if the customer is not satisfied with the
response, they can approach the Ombudsman.

Inflation

Inflation is the general increase in the prices of goods and services over time. As prices rise,
the purchasing power of money decreases. This means your money buys less than it did before.
The RBI tries to control inflation through its monetary policy.

Money Laundering & Anti-Money Laundering

 Money Laundering: The illegal process of making "dirty" money (earned from criminal
activities like drug trafficking or corruption) appear "clean" or legitimate. It's done in three
stages: placement (introducing the money into the financial system), layering (creating layers
of transactions to disguise its origin), and integration (returning the money to the criminals as
"clean" funds).
 Anti-Money Laundering (AML): The set of laws, regulations, and procedures designed to
prevent, detect, and report money laundering activities. Banks are required to follow strict
AML rules, such as "Know Your Customer" (KYC) procedures and reporting suspicious
transactions.

Green Banking

Green banking is an initiative that promotes environmentally friendly practices in the banking
sector. This includes:

 Reducing the bank's own carbon footprint (e.g., using less paper, saving energy).
 Providing loans for green projects (e.g., renewable energy, sustainable agriculture).
 Refusing to finance projects that are harmful to the environment.

RBI Act, 1934

The Reserve Bank of India Act, 1934, is the legislative act that established the RBI. It gives
the RBI its legal foundation and defines its powers, functions, and responsibilities, including
its role as the country's central bank and its authority to regulate and supervise the banking
sector.