UNIT 1
INTRODUCTION TO BANKING & BASICS FUNCTIONS OF BANKER
OBJECTIVES
After reading this unit, you will be able to:
Describe what is the Bank and functions of the Banker
Understand the Banking structure in India
Summarize the functions of the Reserve Bank of India
STRUCTURE
1.1. Definition of Banking& Basic functions of a Banker
1.2. Banking System in India
1.3. Reserve Bank of India:
1.4. Summary
1.5. Practice Questions
1.1. Definition of Banking& Basics functions of a Banker
We use Bank account for the following reasons:
Safety:
unforeseen occurrences such as theft, flood, or fire. Banks provide a secure environment in
which to store your money and other moveable assets such as documents and jewels.
Convenience: When you have an account with a bank, you can access your money from
anywhere. A bank account also makes it easier to pay bills and carry out other financial
transactions such as transferring money etc.
Interest earnings: Another main reason for keeping your money in the bank is the payment
that the bank makes to you for placing your money with them. This is called the interest paid
on your deposit.
Bank is an institution that deals in money and its substitutes and provides other financial
services. Banks accept deposits and make loans and derive a profit from the difference in the
interest rates paid and charged, respectively.
Section 5(b) of Banking Regulation Act, 1949 (BR Act):
king means accepting, for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and withdraw able by cheque, draft,
Section 5(d) of BR Act, 1949:
mpany which transacts the business of banking in India.
Company means any company as defined in of the Companies Act, 2013 and includes a
foreign company within the meaning of that Act.
A banking company is a company, which accepts deposits of money for the purpose of
lending or investment from the public which is payable on demand (Savings Bank and
Current Accounts) or otherwise (after a period like Fixed Deposits) and withdrawable by
cheque (Savings Bank and Current Accounts) or otherwise (by other instruments like fixed
deposits).
Basic Functions of a Banker:
A banker is a banking expert who gives clients financial advice on matters relating to loans,
investments, securities and savings. Their financial advice not only helps clients to solve
financial
financial institutions, while others work for international conglomerates and perform various
duties and tasks.
Keep Records
Bankers record all the daily financial transactions they conduct. This duty involves reviewing
documents, such as bank statements and loan application forms, every day. In doing so,
bankers can alert the necessary authorities if they notice any fraudulent activities taking place
in the bank. The banker is also responsible for properly filing all these documents in the right
place. Proper documentation facilitates smooth management of the bank and makes retrieval
easier. Bankers must also keep these records in a safe place to protect the confidentiality of
the information.
Advise Clients
One of the primary duties of a banker is to help clients fulfil their financial needs. They do so
by answering the financial questions asked by clients either during face-to-face meetings or
phone conversations. A banker will also review a client's financial situation and offer the best
banking services and programs to aide the clients in achieving their monetary goals. The
expertise of a banker is measured by the success of the financial advice he gives to clients.
Good advice helps in building a large client base, which improves the profitability of the
financial institution.
Gather Financial Information
Another integral duty performed by a banker is gathering pertinent financial information from
both new and existing clients. After speaking with clients about their financial needs, a
banker uses the information gathered to prepare accounts and loans. A banker reviews the
financial history of the client to determine their creditworthiness. The banker uses this
information
financial needs; this duty of gathering information helps the financial institution to make
informed decisions that improves its profit margin. For example, the bank uses this
information to give loans to creditworthy people who have comparatively lower chances of
defaulting.
Disburse Funds
People visit banks to withdraw and deposit funds, or to apply for loans from the financial
institution. Accepting deposits and disbursing funds requires a lot of attention and accuracy.
Bankers may use money counting machines to carry out this task. This makes work easier,
eliminates human error, improves accuracy and increases the speed of dispensing and
counting bills.
Enforcing Security
Financial institutions can make massive loss through accepting counterfeit bills. Bankers pass
the bills deposited by customers through the counterfeit money detectors to prevent any fake
bills from hitting the cash till. With the rising cases of fraud, bankers are also on the lookout
for counterfeit checks that customers may attempt to cash. The banker's duty is to ask clients
withdrawing money to verify their identity to prevent fraudulent activity. A banker also locks
the bank vault protecting valuables, money, documents and records from unauthorized
access, theft and damage by fire or natural disasters.
1.2. Banking System in India
Reserve Bank of India (RBI), the Central Bank of the Country. RBI does not undertake the
conventional banking business of accepting deposits from the public and lending to the
public.
A. Commercial Banks:
Commercial bank is an institution that accepts deposit, makes loans and offer related
services like accepting deposits and lending loans and advances to general customers and
business man.
These institutions run to make profit. They cater to the financial requirements of industries
and various sectors like agriculture, rural development, etc. it is a profit making institution
owned by government or private of both.
Commercial bank includes public sector, private sector, foreign banks and regional rural
banks:
a. Public Sector Banks:
Public Sector Banks (PSBs) are banks where a majority stake (i.e. more than 50%) is held
by a government e.g. State Bank of India, Punjab National Bank, Bank of Baroda etc. The
shares of these banks are listed on stock exchanges. There are a total of 27 PSBs in India
[21 Nationalised banks + 6 State bank group (SBI + 5 associates)].
The presidency Banks of Bengal, Bombay and Madras with their 70 branches were
merged in 1921 to form the Imperial Bank of India. The new bank took on the triple role
of a commercial bank, a banker's bank and a banker to the government.
On 1 July 1955, the Imperial Bank of India became the State Bank of India. In 1959, the
government passed the State Bank of India (Subsidiary Banks) Act. This made SBI
subsidiaries of eight that had belonged to princely states prior to their nationalization and
operational take-over between September 1959 and October 1960, which made eight state
banks associates of SBI. The seven other state banks became the subsidiaries of the new
bank when nationalised on 19 July [Link] 2008, the Government of India acquired the
Reserve Bank of India's stake in SBI so as to remove any conflict of interest because the
RBI is the country's banking regulatory authority.
The next major nationalisation of banks took place in 1969 when the government of India,
under Prime Minister Indira Gandhi, nationalised an additional 14 major banks. The total
deposits in the banks nationalised in 1969 amounted to 50 crores. This move increased the
presence of nationalised banks in India, with 84% of the total branches coming under
government control.
The next round of nationalisation took place in April 1980. The government nationalised
six banks. The total deposits of these banks amounted to around 200 crores. This move led
to a further increase in the number of branches in the market, increasing to 91% of the
total branch network of the country.
The objectives behind nationalisation were:
To break the ownership and control of banks by a few business families,
To prevent the concentration of wealth and economic power,
To mobilize savings from masses from all parts of the country,
To cater to the needs of the priority sectors.....
In 1963 SBI merged State Bank of Jaipur (est. 1943) and State Bank of Bikaner (est.1944).
There has been a proposal to merge all the associate banks into SBI to create a "mega
bank" and streamline the group's operations. The first step towards unification occurred on
13 August 2008 when State Bank of Saurashtra merged with SBI, reducing the number of
associate state banks from seven to six. Then absorption of State Bank of Indore
completed on 26 August 2010
b. Private Sector Banks:
New Private Sector
due to opening up of the economy by the Government of India. Private sector banks are
those whose equity is held by private shareholders. Private sector bank plays a major role
in the development of Indian banking industry.
Old Private Sector Banks: are like J & K Bank, Development Credit Bank, Karnataka
Bank, South India Bank etc., which were all opened prior to 1991.
c. Foreign Banks:
Foreign Banks (43): Citibank, Bank of America etc., which are incorporated abroad but
having branches in India. All types of banking transactions are undertaken.
d. Regional Rural Banks:
These are state sponsored regional rural oriented banks. They provide credit for
agricultural and rural development. The main objective of RRB is to develop rural
economy. Their borrowers include small and marginal farmers, agricultural labourers,
artisans etc. NABARD holds the apex position in the field of agricultural and rural
finance.
RRBs are jointly owned by the Government of India (50%), one of the Public Sector
Banks (35%) and the Government of the State in which the RRB is situated (15%) meant
to serve rural areas. All the banking services required by customers in the rural areas are
available.
B. Co-operative Banks:
Cooperative banks are so-called because they are organised under the provisions of the
Cooperative Credit Societies Act of the states. The major beneficiary of the Cooperative
Banking is the agricultural sector in particular and the rural sector in general.
The cooperative banks in India play an important role even today in rural co-operative
financing. The enactment of Co-operative Credit Societies Act, 1904, however, gave the
real impetus to the movement. The Cooperative Credit Societies Act, 1904 was amended in
1912, with a view to broad basing it to enable organisation of non-credit societies. They are
organised and managed on the principal of co-operation and mutual help. The main
objective of co-operative bank is to provide rural credit.
Three tier structures exist in the cooperative banking:
State cooperative bank at the apex level.
Central cooperative banks at the district level.
Primary cooperative banks and the base or local level.
New initiatives taken are:
RBI has given permission to 2 organisations to become a Bank i.e. IDFC Limited
and Bandhan Financial Services Private Limited, to set up banks under the
Guidelines on Licensing of New Banks in the Private Sector issued on February 22,
2013
Prime Minister of India Shri Narendra Modi started Jan DhanYojnaon the 28th
August 2014 and will last until 14th August 2015; the first phase will be focused on
opening a bank account and providing credit facilities for those who are outside the
banking system in urban and rural India.
Payment Banks:
On 19 August 2015, the Reserve Bank of India gave "in-principle" licences to eleven
entities to launch payments banks:
Aditya Birla Nuvo
Airtel M Commerce Services
Cholamandalam Distribution Services
Department of Posts
FINO PayTech
National Securities Depository
Reliance Industries
Dilip Shanghvi, Sun Pharmaceuticals
Vijay Shekhar Sharma, Paytm
Tech Mahindra
Vodafone M-Pesa
The "in-principle" license is valid for 18 months within which the entities must fulfill
the requirements. They are not allowed to engage in banking activities within the
period. The RBI will consider grant full licenses under Section 22 of the Banking
Regulation Act, 1949, after it is satisfied that the conditions have been fulfilled.
Small Finance Banks:
Small finance banks are a type of niche banks in India. Banks with a small finance
bank license can provide basic banking service of acceptance of deposits and lending.
The aim behind these to provide financial inclusion sections of the economy not being
served by other banks, such as small business units, small and marginal farmers,
micro and small industries and unorganised sector entities
-
ks under
(Guidelines) issued on November 27, 2014.
Names of selected applicants
Au Financiers (India) Ltd., Jaipur
Capital Local Area Bank Ltd., Jalandhar
Disha Microfin Private Ltd., Ahmedabad
Equitas Holdings P Limited, Chennai
ESAF Microfinance and Investments Private Ltd., Chennai
Janalakshmi Financial Services Private Limited, Bengaluru
RGVN (North East) Microfinance Limited, Guwahati
Suryoday Micro Finance Private Ltd., Navi Mumbai
Ujjivan Financial Services Private Ltd., Bengaluru
Utkarsh Micro Finance Private Ltd., Varanasi
-
applicants to comply with the requirements under the Guidelines and fulfil other
conditions as may be stipulated by the RBI. On being satisfied that the applicants
-
approval, the RBI would consider granting them a licence for commencement of
banking business under Section 22(1) of the Banking Regulation Act, 1949.
Until a regular licence is issued, the applicants cannot undertake any banking
business.
1.3. Reserve Bank of India
RBI is the Central Bank of our country. It was established on April 1, 1935 under the RBI
Act, 1934. In India, the RBI supervises operations of all the banks
RBI Structure:
The Central Board of Directors comprises of the Governor, 4 Deputy Governors and 15
Directors nominated by the Union Government. It is headquarters is in Mumbai. RBI has 27
regional offices. It has setup five training establishments e.g. College of Agricultural Banking
and Reserve Bank of India Staff College Pune, National Institute for Bank Management-
Pune, Indira Gandhi Institute for Development and Research Mumbai, Institute for
Development and Research in Banking Technology (IDRBT) - Hyderabad.
It subsidiaries are Deposit Insurance and Credit Guarantee Corporation of India (DICGC)
and Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL).
RBI Preamble: The Preamble of the Reserve Bank of India describes the basic objectives of
the Reserve Bank as:
monetary stability in India and generally to operate the currency and credit system of the
country to its advantage."
Departments for different functions
RBI's internal management is based on functional specialisation and coordination
amongst about 20 departments
Departments oversee specific functions such as Currency Management, Banking
Supervision, financial markets, risk monitoring etc.
Functions of RBI
Main Functions
Monetary Authority:
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability and ensuring adequate flow of credit to
productive sectors.
There are various instruments for monetary control:
Cash Reserve Ratio (CRR): indicates the quantum of cash that banks are required to
be kept with the Reserve Bank.
Statutory Liquidity Ratio (SLR): prescribes the amount of money that banks must
invest in securities issued by the government.
Liquidity Adjustment Facility (LAF): is to manage the day-to-day liquidity in the
banking system. Under this facility RBI announces Repo Rate (Repurchase Rate)
which is the rate at which RBI lends short term money to banks. Reverse Repo Rate is
the rate at which banks park their short term excess liquidity with the RBI.
Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations within which the country's banking
and financial system functions.
Objective: maintain public confidence in the system, protect depositors' interest and
provide cost-effective banking services to the public.
Manager of Foreign Exchange
Manages the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.
Issuer of Currency
Issues and exchanges or destroys currency and coins not fit for circulation.
Objective: to give the public adequate quantity of supplies of currency notes and coins
and in good quality.
Developmental role
Performs a wide range of promotional functions to support national objectives.
Related Functions
Banker to the Government: performs merchant banking function for the central and
the state governments; also acts as their banker.
Banker to banks: maintains banking accounts of all scheduled banks.
Payment & Settlement Systems:
The regulation and supervision of payment systems is being increasingly recognised as a core
responsibility of central banks. As per the Payment and Settlement Systems Act, 2007 only
payment systems authorised by the Reserve Bank can be operated in the country.
The Reserve Bank, as the regulator of financial systems, has been initiating reforms in the
payment and settlement systems to ensure efficient and faster flow of funds among various
constituents of the financial sector.
Following are the initiatives undertaken by Reserve bank for this function:
Computerization: Aims at reducing the time taken in clearing, balancing and
settlement, apart from providing accuracy in the final settlement.
Mechanisation: of the clearing operations by introducing the MICR (Magnetic Ink
Character Recognition) code.
High Value Clearing(HVC): introduced by the Reserve Bank was aimed at faster
clearing of large value cheques from select branches of banks for same day settlement.
Cheque Truncation System (CTS): eliminates the physical movement of cheques and
provides a more secure and efficient method for clearing cheques.
Electronic Clearing Service (ECS): uses a series of electronic payment instructions for
transfer of funds instead of paper instruments.
National Electronic Clearing Service (NECS): facilitates credits to bank accounts of
Electronic Funds Transfer: enable an account holder of a bank to electronically
transfer funds to another account holder with any other participating bank.
The Real Time Gross Settlement (RTGS): system settles all inter-bank payments and
customer transactions above rupees one lakh.
Pre-paid payment instruments: facilitate purchase of goods and services against the
value stored on these instruments.
Mobile Banking: are being used as a medium for providing banking services.
Reserve Bank of India (RBI), Central Bank of the Country. RBI does not undertake the
conventional banking business of accepting deposits from the public and lending to the
public
National Agricultural Bank for Rural Development (NABARD). (This is the Apex Bank
for all Agricultural financing by all other banks in the country-guidance, to the banks,
refinancing their agricultural advances etc.). NABARD borrows from public by floating
bonds for the purpose of financing other banks for agricultural lending.
EXIM Bank (Export-Import Bank of India): This is the apex bank in India in the field of
finance for Exports and Imports, to encourage and assist exporters of Indian products.
EXIM Bank borrows from public by floating bonds and also accepts Fixed Deposits
for the purpose of refinancing other banks and also directly to exporters.
1.4. Summary
A banking company is a company, which accepts deposits of money for the purpose of
lending or investment from the public repayable on demand (Savings Bank and Current
Accounts) or otherwise (after a period like Fixed Deposits) and withdrawal by cheque
(Savings Bank and Current Accounts) or otherwise
A Bank links together customers that have surplus money (i.e. savers) and customers with
shortage of money (i.e. borrowers) are known as Intermediation role and manage credit,
liquidity and interest rate risk
Banker is the face of the Bank and has general and specific responsibilities to the customers.
Banking structure in India is broadly categorized into Commercial Banks, Regional Rural
Banks and Co-operatives Banks with Reserve Bank of India (RBI) at the apex.
RBI functions are:
Regulator and supervisor of the financial system:
Manager of Foreign Exchange
Issuer of currency
Plays a Developmental role and many more.
Keywords:
RRBs Regional Rural Banks
PSBs Public Sector Banks
NABARD - National Agricultural Bank for Rural Development
EXIM Bank - Export-Import Bank of India
IIFCL - India Infrastructure Finance Co. Ltd.
IDRBT - Institute for Development and Research in Banking Technology
DICGC - Deposit Insurance and Credit Guarantee Corporation of India
BRBNMPL - Bharatiya Reserve Bank Note Mudran Private Limited
CRR - Cash Reserve Ratio
SLR - Statutory Liquidity Ratio
LAF - Liquidity Adjustment Facility
Repo Rate - Repurchase Rate
DBOD - Department of Banking Operations and Development
NBFC - Non-Banking Financial Companies
CBLO - Collateralised Borrowing and Lending Obligations
FERA - Foreign Exchange Regulation Act
HVC - High Value Clearing (HVC)
CTS - Cheque Truncation System
ECS - Electronic Clearing Service (ECS)
NECS - National Electronic Clearing Service
1.5. Practice Questions
I. Choose the correct answer:
1. Banking is defined in
a) RBI ACT
b) Banking Regulation Act
c) Govt. of India Act
d) Companies Act
2. A bank is a financial intermediary because
a) it acts as the broker between depositor and borrower
b) it acts as the link between the savers and the borrowers
c) it is in the finance industry
d) it is in the intermediary industry
3. Banker-Customer relationship starts when
a) A customer opens an account
b) A customer becomes a relative of a banker
c) The banker and banker become friends
4. RBI's function is
a) To give license to banks
b) To act as bankers' bank
c) To act as banker to Government
d) All of the above
5. Bank's services include
a) Net banking
b) Mobile banking
c) Phone banking
d) All the above
6. An Investment Bank is a bank
a) Which invests money in another bank
b) Which collects investments from public
c) An intermediary which performs a variety of financial services to corporate
7. _____________are NOT a part of the Scheduled banking structure in India.
a) Money lenders
b) Public sector banks
c) Private sector banks
d) Regional rural banks
8.
a) Acting as a clearing house
b) Working as a banker to the government
c) Managing Forex
d) Accepting deposits from general public
9. Which of the following is a role typically not performed by the Central Bank?
a) Setting the official short-term interest rate
b) Establish tax policies
c) Controlling Money Supply
d) Acting as banker to the government
10. Which of the following is NOT a function of Commercial Bank?
a) Providing Project FinanceSettling of payments on behalf of the customers
b) Deciding policy rates like CRR, SLR and Repo rate
c) Issuing credit / debit / ATM cards
11. In commercial banking, who takes the risk while giving the loan?
a) Depositor
b) Borrower
c) Commercial Bank
d) Central Bank
Answer Keys: 1 b, 2 - b, 3 a, 4 d, 5 d, 6 - c, 7 -a, 8 - d, 9 - b, 10 b, 11 c
II. Fill in the blanks:
1. Reserve Bank of India is the ____ _____ of India
2. Banking Services provided to a common man is known as ______.
3. ______ keeps an eye on the overall payment system.
4. _____ is the Lender of last resort for the Banks
Answer Keys: 1- Central Bank, 2 Retailing banking, 3 - Reserve Bank of India
(RBI), 4 RBI
III. Answer in detail:
1. What is the definition of a Bank?
2. What is the role of the Bank in the society?
3. What are the functions of RBI?
4. Define who is the Banker?
5. Explain the functions of the Banker?
6. What are the different types of Bank found in India?
IV. Activities:
1. Discuss with the students the need of a Bank?
2. Prepare a chart on the functions of RBI?
Q.1 `.
Q2. List the functions of RRB's in the development of the economy.
Q3. State the objectives of nationalisation of public sector banks.
Q4. State any 3 initiatives taken by RBI in improving the payment machenism.
Q5. What is the role laid by co-operative banks in the society.
Q6. Explain any 3 reasons why an individual need bank.
Q7. Write a short note on:
a) RRB
b) co-operative banks
c) the history of banks in India
Q8. Write the full form of NABARD and what role does it play in the economy.
Q9. Give the full form of axem bank. What function does it perform.
Q10. Write 2 points of diff. between RTG's and NEFT.
Q11. What do you mean by in-principle licence given by RBI and how is it important.
Q12. Name the first two organisations which got licence to do banking business.