Module 3 -

Banks
Introduction
Bank is a financial institution that accept deposits ( Demand and time) from public and
advance loans
Banks also provide various other services, eg. Foreign exchange, financial and advisory
services. – details explained later
It plays a significant role in financial stability and economy of the country.
They meet the requirements of=farmers, businessmen, entrepreneurs , governments ,
public and other segments of the society
An intermediary which mobilize scarce financial resources and channelize for productive
purposes.
All commercial and industrial activities are well knitted with Banks
There may be an economic crisis in the country if banks stop functioning for few days
Banking companies regulation act 1949 Defines Bank as follows :
“Banking means the accepting for the purpose of lending or investment, of deposits of
money fro the public , repayable on demand or otherwise , and withdrawable by cheque,
draft or otherwise “
Origin of commercial banking
in India
Some of the mile stones are as follows :
The first bank was General Bank of India in 1786
Bank of Hindustan was started in 1770
English Agency houses – started by East India company – did trading
and banking activities
Presidency banks viz Bank of Bengal in 1809, Bank of Bombay 1840,
Bank of Madras in 1843 – set up by East India Company
During swadeshi movement in 19th century banks like: Bank of India,
Canara Bank, Indian Bank, BOB, Central bank of India were set up
Origin of Banking in India
Imperial bank of India was set up in 1920 amalgamating 3 presidency
banks
Reserve Bank of India was set up in 1935 to regulate banks , issue notes,
bring monetary stability and economic growth. – with 5 crores paid up
capital
Nationalization of RBI in 1949 – Central government acquired the whole
share capital
Banking regulation act 1949 was passed to regulate, control and inspect
Banks in India – provides for issue license by RBI to open or continue
Banking activity.
SBI act 1955 was set up to nationalize imperial Bank of India
Nationalization of 14 Indian commercial Banks in 1969 by Governmnet
of India .
Functions of Banks - Major
1. Accepting of Deposits : Demand deposits Time deposits
2. Advancing of Loans : after satisfying the credit worthiness
of the customers like : ordinary loans, Cash credit, overdraft,
discounting of bills of exchange , Investment of funds - Issue of
Guarantee and LC, co- acceptances
3. Creation of credit : normally bank does not give hard cash –
it credits amount to customers account and allows him to draw
- the deposits of bank circulate just like money - this is creation
of money / or credit by bank
4. promote use of cheques : it is a cheap medium of exchange
– convenient to settle debts than through use of cash
5. Agency functions of Bank -
Transfer of funds
Collecting customers funds
Purchase and sale of shares and securities
Collecting dividends on shars of the company
Payment of insurance premium
Acting as Trustees and executor - preserve wills of customers and execute
after their death.
Act as income tax consultant - give advice to customers
Acts as correspondent , agent or representative of customers- obtain
passports, travelers tickets air and sea passages to customers
Other Ancillary functions
Clearance / collection
Issue of demand drafts
Issue travellers cheques
Safe custody of valuables
Gives information about its customers – about credit worthiness
Merchant Banking / underwriting
Technical/ Financial consultancy services
Portfolio Mgt Services
Foreign exchange Business – buy and sell foreign currency, - finance trade
Issue of Credit card and Debit Cards
Depository services
Anywhere Banking
Ancillary function Contd
Selling and insurance and MF
Factoring services
Venture capital
ATM Facility
Insurance
Cash management services
Payment of taxes and Bills
Telephone Banking & electronic Banking
Issue of solvency certificates
E banking
Custodial services
Leasing
Acceptance of Deposits
Acceptance of Deposits and Borrowing
Shown as Liabilities
Banks have to maintain CRR AND SLR on deposits.
All entities keep surplus funds – safety, security and convenience
Types of deposits :1. Savings Bank 2. Current Account 3 Fixed
Savings : Mobilize deposits from Public – earn notional interest – min
balance, Limit on No. of cheques
Current : Normally business men _ no restrictions on deposit and
withdrawal – No interest
Fixed Deposit: Term deposits – recurring deposits - 7 days to 5 years
and above - Fixed period - preclosure – suffer int loss
Covered by Deposit insurance corpn -1 lakh – notice board
Forms of Lending
1. OVERDRAFT FACILITY: On current Account – security of Godown
clean or personal security - mortgage
2. CASH CREDIT FACILITY : Fix limit to borrowal account – limits based
on a cash accruals & security of goods
3. DIRECT LOANS and ADVANCES: Fixed quantum – outright – fixed
asset – part of W/c – fixed interest – or floating rate – repay
installments – secured on assets of co
4. BILL DISCOUNTING & PURCHASE : SELF LIQUIDATING - Charge
interest – inland or foreign Bills
5. TERM LOANS: varying periods – upto 7 years – used for financing
projects – fixed assets Core W/c
5. Demand loans : it is a loan which can be recalled on demand
The entire amount of loan is repaid at one time
6. Clean loans : these are loans against personal security of the
customer – the period may vary from one years to 10 years
7 consumer credit : lent to meet the needs of consumer
Eg. Loans for cars, led and washing machines, vehicles etc.,
Amount is drawn in lumpsum and repaid in installment
8. Export –import credit : Bank provides pre-shipment and Post-
shipment credit to exporter
Transformation services
Liability – Asset transformation services : Collection – deposits and
deploy by granting loans
Size transformation : collect small deposits & lend in large scale
Maturity transformation : offer difft maturity for deposits – lend at difft
maturities
Risk transformation: distribute risk – diversification , industry wise,
region wise
Types of Banks
Types of Banks can be classified based on
A. As per Law
B. On the basis of ownership
C. on the basis of domicile
D. on the basis of functions
E. special types of banks
 Types of
I. On the basis of Law:
Banks
It is on the basis of Second schedule of Banking regulation act 1965
1. Scheduled Banks : It is a bank registered and named under 2 nd
schedule of RBI Act.
2. Non- scheduled Bank: Banks whose names do not appear in the
second schedule of RBI Act. - they do not enjoy benefits of scheduled
bank
II. On the basis of ownership :
1. Public sector banks : These Banks are owned and run by Government.
There are 12 public sector banks in India
2. Private sector Bank : These banks are owned and run by Private
sector ( Individuals and corporate )
3. Co-operative Banks : These banks are formed and jointly owned by a
group of individuals . Each individual has an equal share in these banks.
III on the basis of domicile
1. Foreign Banks : These banks are registered or incorporated outside
India , and having a branch in India.
2. Domestic Banks : These Banks are registered or incorporated in India
IV. On the basis of Functions:
1. Commercial Banks : set up to do profit . Their regular banking
business – accept deposits and give loans and other activities
2. Industrial Bank : these banks offer long term and medium term loans
to the industries
3. Agricultural Banks : These Banks offer long and short term credit
facilities to the agricultural sector
4. Exchange Banks : They deal in foreign exchange – commercial banks
take authorization from RBI to deal in foreign exchange.
5. Savings Banks : They collect small savings across the country and put
them to productive use – eg. Commercial banks
6. Indegenous Banks : Individuals and business families and jewelers
provide finance to the needy
Types of Banks – special types
of banks
•Retail Banks :
•Retail Banks provide financeial services to the individual customers ,
household sector rather than businesses.
•They provide various types of services such as Savings bank, personal
loans, credit cards and certificate of deposits, housing loans, consumer
durable, etc.,
•Products are designed , developed and marketed as per the individual
needs
Features of Retail Banking
Involves large volume of transactions involving low value
2. it offers various products like deposits , asset linked products and
other financial services
3. it offers an opportunity to diversify their asset portfolio .
4. risk of NPA is reduced as advances are provided to large number of
customers and transaction of low amounts
5. Offer products which are customer friendly ATM, mobile phones to
distribute the banking products
Advantages of Retail Banking
1. It is a mass market Banking,
2. a strong customer base can be established through effective
Customer relationship management.
3. it can have lot of cross selling benefits
4. It is a good avenue for fund deployment
5. it contributes better yield and improves bottom line
6. low rate of risk resulting in lower NPA
7. it offers affordable credit and improves lifestyle of people
8. it provides diversified portfolio as per expectation of customers,
resulting in lesser dependence of banks on single borrower
Disadvantages of Retail
Banking
1. problems in managing large number of customers
2. high costs are involved in maintaining branch network and handling
large number of customers
3. It is costly and time consuming for banks to develop and design new
banking products
4. problem in monitoring and follow-up of large number of loan
accounts , involving heavy recruitment of human resources
Corporate Banking
Corporate banking refers to the aspect of banking that deals with corporate
customers.
Commercial banks make loans that enable businesses to grow and hire
people, contributing to the expansion of the economy.
banks offer various products and services.
They offer fund and non – fund facilities to the corporate customers
Non Fund facilities include Letters of credit, Bank Guarantees, Co-acceptance
Corporate banking, also known as Business Banking .
typically serves a diverse clientele, ranging from small- to mid-sized local
businesses with a few million in revenues to large conglomerates with
billions in sales and offices across the country.
Reserve Bank of India
Money is medium of exchange
Monitory system – role of RBI crucial
Apex institution in Banking & fin System
Partial shouldering of management of economy
England –highly developed banking & central banking system
Bankers bank, lender of last resort – maintain CRR – create active securities
market
Technical advisory service in fx, foster growth
RBI set up in 1935 – as a body corporate -paid up Rs. 5 crores
nationalized in 1949 – to control inflation and plan economic programme and
to fall in line with international trend
Operates according to the provisions of RBI Act
Objectives of Central Bank
1. Maintain internal value of the currency
2. To preserve the external value of the currency
[Link] secure reasonable price stability
[Link] economic development – raise employment,
output, etc.,

To facilitate external trade and payment

To provide adequate quantity of currency notes and coins in
good quality
Functions of RBI – RBI Act
1. Banker to CG: accept & make payment of govt money –
exchange remittances, manage public debt –maintain govt
money & securities – give “ways & means” advance – repay in 3
months – if exceeds 75% issue GOI
Banker to SG: undertake payment/accept deposit – free of int –
public debt & issue of new loans
Issue currency notes: sole right – issue & distribute on behalf of
govt, denomination Rs. 2, 5,, 10, 50, 100, 500, 1000 notes –
legal tender – guaranteed
Bankers Bank: maintain CRR – lender of last resort
Custodian of FX reeserves
Functions – contd
Controller of credit : through OMO – selective credit controls -
regulation of banks – Bank send weekly report to RBI – inspect
books of Bank
Sponsor top Banks: idbi, nabard, NHB
Sit in boards of all banks
Advise on CG& SG – monitory matters
Keep CRR – 3% to 15%- Banks send statement/returns
Grant loans - security approved securities – rediscount Bills
Watch dog of entire financial system
Indian RBI – one of the best
Organisation and mangement
Central board : gen superintendence – a governor, not more than 4 dy
governors and 15 directors – nominated by CG
Local Board : in 4 regional areas – mumbai, Kolkata, New Delhi, and chennai.-
perform the duties delegated by Central board
Departments of RBI :
Issue department
Banking department
Banking development - expansion , training banks etc
Agricultural credit
Exchange control
Industrial finance
Non Banking companies
Depts - contd
Legal department
Research and statistics Department of planning and
reorganization
Economics department
Inspection department
Department of accounts and expenditure.,
RBI services board : HRD of RBI
Department of supervision – of banks
Role of Reserve bank of India
1. promotion of commercial banks : regulation, control and supervision
2. Promotion of rural credit : to improve agricultural sector
[Link] of co-operative credit:
4. promotion of Industrial finance : promoted many financial corporations like
IDBI
5. promotion of export credit : export credit schemes – establish exim bank
6 regulation of credit : regulate cost, quantity and purpose of credit , selective
credit controls – for eco development
7 credit to weaker sections
8 development of Bill Market - set up DFHI
9 Exchange controls – to maintain the stability of exchange value
Achievements of RBI
Developed banking practices

Managing public debt effectively

Institutionalize savings – establish specialized agencies

Promote co-operative credit

Regulate credit to meet the requirement of trade and industry

Provision of credit facilities to exporters and concessional rate – refinance,

Providing deposit insurance and credit guarantee DICGC

Successfully develop bill culture in the country

Providing information on different sectors – give publications

Providing clearing house facilities

Good management of FX by RBI

Set up training colleges to difft banks

Modernized through information technology

Operation of Bank Accounts
Traditionally banks have four types of deposit accounts in
India.
Viz Current accounts,
Savings Bank accounts,
Recurring Deposits, and
Fixed deposit accounts
But these days banks have introduced some new products
which combine the characters of these bank accounts
These accounts can be opened as per the needs of the
customers
Types of accounts
1. Fixed Deposit (FD) accounts :
It is also called time deposit account
Under FD, money is deposited for a fixed period and not
supposed to be withdrawn before the expiry of the pre-
determined period
It can be opened for 7 days to 10 years.
Rate of deposit is more then the other types of deposits
Bank may allow customer a premature closure , where the
customer foregoes a part of interest accrued on deposits
Clustomers can take loan against the deposit
 Types of accounts

2 . Savings Deposit accounts :
It is meant for the benefit of middleclass and lower income group customers
Customers can deposit small savings in this account
It is opened with a minimum specified amount
Any number of deposits can be made in a week
Withdrawals can be done only twice in this account – or 50 withdrawals in a
year.
Interest rate in this account are less than FD
Interest is paid on the daily balance outstanding
Bank pass book is issued to the customer
Cheque facility is allowed for who maintain a minimum balance In the account
Types of accounts
3. Current account:
The amount can be deposited and withdrawn any number
of times
This is an alternative to cash box to a business man
Banks provide overdraft facility to the account holder
Cheque facility is available to the customer
Banks do not pay interest on current account deposits
Types of accounts
4. Recurring Deposit accounts
Are also called as RD accounts
This deposit for customers who want to save small amount every month
RD accounts earn Interest as per FD rate
Maturities range from 6 months to 10 years.
Pass book is issued to the customer
Account can be opened single or joint names with nomination facility
No withdrawal is allowed under this account
Premature closure is allowed before maturity , customer to forego some
interest
Types of accounts
•5. Cash certificates :
•Here the deposits can be made for periods ranging from 12 months to
10 years.
•Cash certificates are available in denomination of Rs. 1000,
5000,10000,25,000,50,000,1,00,000
•Nomination facility is available
•Compound interest is eligible depending upon the perid of deposit
•Premature closure is allowed, subject to penalty
•Loan facility is available against deposits
Types of Accounts
6. Annuity deposits:
Under this scheme, a lumpsum amount is deposited by the client which is repaid to
the customer over a period in equated monthly installment , comprising of
principal and interest.
The annuity deposit is available for 3 years, 5 years, 7 years, and 10 years.
7. Super savings account :
This scheme have certain added value propositions
Some benefits are :
No charges for DD and Bankers cheque
Free collection of outstation cheques.
Auto /reverse sweep : Transfer of an amount above Rs. 20 000 to short term
deposits , reverse back when money is needed in the account
Types of Accounts
8. Non – Resident ( external ) accounts : (NRE) :
It can be opened only by an NRI
It may be in the form of SB, FD, RD or Current accounts
Maturity period is minimum 1 year
It can be opened with their resident close relative on former or survivor basis –
resident can operate with power of attorney
Account will be maintained in Indian Rupee
Balance held in the account is freely repatriable
Accrued interest and balance held is exempt from Income tax
Bankers are free to determine interest rates
Loan can be extended against the security of funds in NRE account
Types of accounts
9, New deposit savings schemes :
These deposits to meet the needs of the customers
A. Pigmy deposits: small savings collection
Customer can draw money before the stipulated period in case he needs money.
B. Insurance linked deposits:
Can be opened by person with age group of 18 – 49 – Banks pay insurance premium
C. minor “s savings: for children above 12 years –
To inculcate the habit of saving in children
D. Farmer deposit scheme : they deposit in lumpsum during harvest onece or twice in
a year and get return throughout the year.
F. Monthly Income plans : customer deposit a lumpsum for a specified period . Bank
pays annuity . Useful for pensioners.
Operation of Bank Accounts
•PROCEDURE TO OPEN A CURRENT OR A SAVINGS BANK ACCOUNT :
•1. Application form - Apply to the bank in the prescribed application
form
•Printed application form is available at Bank free of cost
•Application form contains details like name, occupation, full address
and specimen signature
•Bank has difft application forms for SB and current account
•2. Introduction :: Bank may ask references who would be consulted
about the integrity , honesty and financial standing and responsibility
of the applicant
•It can be by a reputed businessman or an existing customer of the bank
Opening of SB and current
account - contd
•3. Specimen Signatures : on satisfactory introduction , the bank may
ask for 2 or 3 specimen signatures on the prescribed form or card.
•It will be filed for ready reference to verify the signatures whenever the
need arises
•These signatures will be compared with that of the signatures on
cheques.
•If signatures differ the banker can refuse to honor the cheques.
•4. PhotoGraphs : insisted for both SB and current account.
•Customer can be identified whenever the customr visit the branch
•5. Initial deposit : the initial amount differ from bank to bank
Operation of the Bank
accounts
•When an account is opened Bankdr provides with Pay-in Slip books,
Cheque book, and pass book
•1. Pay in slip books : contains number of printed slips
•This has to be filled by the depositor at the time of depositing cash or
cheques into the account
•It contains information like name, account number, amount in words
and figures, details of currency notes, details of cheques deposited
•The depositor fills it and tenders it at the counter to the bank official .
He will put his sign and seal on the counter foil and returns it to the
depositor as an acknowledgement
2. Cheque book : it contains forms of cheques
It is used for withdrawing cash and for making payment to others
These cheques are serially numbered
3.. Pass Book : All the transactions between the bank and customer are
recorded in this book.
The transactions in the pass book are recorded by bank.
It contains details of all deposits and withdrawals
Main aim is to acquaint the customer of the state of affairs of his
account with bank.
KYC in Banks
KYC – Know Your Customer
Know Your Customer (KYC) standards are designed to protect financial
institutions against
fraud,
corruption,
money laundering and terrorist financing.
KYC involves several steps to:
establish customer identity;
understand the nature of customers' activities and
qualify that the source of funds is legitimate; and.
Who is Eligible for KYC Verification?
you must be an Indian resident and
at least 18 years old.
Customer is required to provide certain documents, such as a
government-issued photo ID and proof of address, to complete the KYC
Importance and Benefits of KYC
To be mandated by the law, the Know Your Client (KYC) process also
helps the financial institutions in several ways:
Helps lenders perform risk assessment by identifying the previous
financial history and assets owned
Limits fraud that result mainly due to hiding of identity
Prevents money laundering and other anti-social activities
Brings stability and investment to the country, as it makes the financial
framework more trustworthy and less risky
A number of countries and economic regions oversee financial anti-
money laundering agencies or regulators that overview financial
transactions
to prevent tax evasion,
terrorism financing,
and other anti-social activities.
All the agencies are a part of the
Global Financial Action Task Force (FATF), which overviews financial
transactions globally.
KYC Documents Required
The KYC process is carried out for both individuals and organizations. KYC
authentication is based on verification of identity and place of residence.
The documents required for the KYC process for individuals include
Adhar card
PAN card
Driver’s license
Social security card/number
Passport
Documents issued by the state or the federal government.
For proof of residence, the following documents can be furnished:
Adhar card
Utility bills, such as telephone, electricity, gas, etc.
Employment documents
Housing contracts and rent agreements