Basics of Banking

BANKING AWARENESS

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Basics of Banking

Definition of Bank and Banking

 After independence, steps were taken in order to regulate the banking and banking business in India.
Government brought in a law in this regard, wherein banking and banking business in India has been
defined.

 This law changed to an Act and named the Banking Regulation Act, (BR Act), 1949. As per the Act, Section
5(c) defines that ‘a banking institution is a company which transacts the business of banking in India.’

 Further, Section 5(b) of the BR Act describe banking business as, ‘accepting, for the purpose of lending or
investment of deposits of amounts from the public, repayable on demand or otherwise, and
withdrawable by draft, cheque, and order or otherwise.’

Structure of Bank

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Requirements for Setting up New Banks & Branch

 Scheduled Banks have been described in the Reserve Bank of India Act as those which are listed in the 2nd
schedule of the RBI Act, 1934.

 In order to be listed in the 2nd schedule of the RBI Act, a bank must fulfill the following 3 criteria:

i. The paid up capital and reserves together should not be less than Rupees 5 lakhs.

ii. Working of the bank should not be detrimental to the interests of the depositors.

iii. The banks to be included in the second schedule should either be a company as per the Companies
Act, 1956 or a State Cooperative Bank or a corporation or any institution notified by the
Government of India in this behalf.

 While non-scheduled bank is one who’s paid up capital is less than Rupees 5 lakhs.

 The minimum statutory precondition for setting up new banks in India are described In the BR Act, 1949.

 The RBI explicates the eligibility criteria for the entry of new banks. At present, the capital requirement for
any new bank entry is Rupees 500 crore.

 Reserve Bank of India also provides some guidelines / directive on various things about banking
operations including expansion, control etc.

 Guidelines / directives to upgrade its branch authorization policy, which governs the opening of new
branches by all Scheduled Commercial Banks in the country.

 Under the banking framework, private money lenders do not form the part of scheduled banking
structure. Legally, banks are not allowed to create a charge upon any unpaid capital of the company as
per Banking Regulation Act, 1949 (section-14).

 As per the Banking Companies (Acquisition & Transfer of Undertaking) Acts of 1970 and 1980, as altered in
1994, public sector banks are allowed to offer their equity shares to public up to 49 per cent of the capital
of the bank.

 For the uniform and fair conduct of the banking business by banks in India, a Banking Codes and Standard
Board of India (BCSBI) has been created.

 The Banking Companies and Financial Institution Laws Bill, 2000 was formulated by the government
which empowered them to dilute its sharing holding to 33 per cent, mainly for the purpose of raising fresh
equity.

 This bill empowers the Government to supersede the Board of Directors of public sector banks.

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Bank

Primary Function Secondary Function

There are two primary functions of a commercial Helps customers to transfer money to another
bank as given in Banking Regulations Act, 1949 customer or the same bank or of any other bank in
the same country or even in another foreign country.

Deposits and Locker, Mutual Funds, Bancassurance,

Providing Loans
Withdrawals Internet Banking, Debit and Credit Cards,
The other important Prepaid Instruments, Cheque &DD, Letter of
function of the banks is  Savings accounts
Undertaking, Letter of Credit, Agencies
to make loans and ad-
 Current accounts Work
vances to the needy peo-
ple in the form of:  Fixed deposits General Utility services rendered by Commercial
Banks:
 Over drafts  Recurring deposits
 Safety vaults or lockers to provide security to
 Cash credits These deposits are their valuables like ornaments, documents etc.
withdrawable by cheque  Encash/Issue of traveller’s checks from/to
 Term loans order or otherwise tourists.
 Discounting of bills  Issuing letter of credits to businessmen. Issuing
 Credit Cards loan Debit/Credit Cards to their customers.
 Providing the facility of withdrawing cash
Banks are also permitted
anytime through ATM.
to invest their funds in
 Underwriting of Shares and Debentures issued by
securities which may be
the companies. Providing consultancy services
Government securities or
regarding shares, taxation etc. to the companies.
corporate securities.
 Lending advice as a Merchant Banker to
industries about there are projects, issue of
shares and capital structure etc.

Agencies Work
1. Currency Exchange 2. Demat A/C 3. PPF / KVP

 Purchasing and selling of shares, securities, bonds etc. on behalf of its customers
 Collection and regular payments of bills, checks andother commercial instruments, dividends, interest etc. as
per the standing instructions given by their customers.
 Collection and payment of rents, insurance premium and other charges.
 Acts as trustees, representatives and executors of their clients.
 Acts as income tax consultants and they prepare and finalize the income tax returns of their clients.

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Types of Bank Accounts & their Features

 Savings Bank accounts are designed for future savings. The very purpose of this type of
account is to encourage savings habit of the general public. As such, there is no restriction on
the number and amount of deposits that can be made. The credit amount outstanding in this
account will earn interest as per the current terms of the Bank. When needed, the amount can
be taken out, subject to certain conditions.
 All savings bank accounts are required to be introduced by someone known to the bank or
customer having an account in that bank.
 Savings Bank Accounts can be opened for the following names:
1. Individual - Single Accounts
2. Two or more individuals - Joint Accounts
3. Illiterate persons
Savings Bank 4. Blind persons
Account
5. Minors
6. Associations, Clubs, Societies
7. Trusts
8. Institutions/Agencies specially permitted by the RBI
 Savings bank accounts of military units may be opened for funds of Regimental Units which
mainly consists of contributions from individual members of the unit, income from Regimental
properties, etc.
 Interest is paid on daily basis calculated between 10th and 30th of each month.
 Minimum balance to open a normal savings bank account is Rupees 1000. However, poor
people defined by the Government of India, can open a savings bank account with zero balance
called No-Frill Savings Bank Account.

 In this account, customers remit particular amount on monthly instalments for a period ranging
from 6 months to 120 months on a uniform pattern.
 The whole sum along with interest is payable after the payment of last installment.
Recurring  This kind of deposits is very useful to the middle and low-income group of the people.
Deposits
 The time period of deposit is minimum 6 months and maximum 10 years. (Minimum tenure
varies banks to banks. few banks permit minimum period in RD for 3 months.
 Minimum amount that can be deposited under RD is Rupees 500 per month and thereafter in
multiples of Rupees 100.

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 These Accounts are active accounts opened by such section of the public like Businessmen,
Traders, Corporate Bodies, etc. who like to operate their accounts periodically due to many
receipts and payments of money in connection with their business. In current accounts, there
are no limitations on the number of deposits and withdrawals.
 All current accounts must be introduced by persons well known to the bank. Introduction by a
pre-existing current account customer should generally be insisted upon.
 Current Accounts can be opened in the following names:
1. Accounts in the name of a single person.
2. Joint Accounts of two or more individuals.
3. Sole-Proprietary Concern.
4. Partnership Firms.
Current Account 5. Joint Family or Undivided Family.
6. Associations, Clubs, Societies.
7. Trusts/Other Trust Accounts like Provident Fund A/Cs.
8. Private and Public Limited Companies and other undertakings registered under
Companies Act, 1956.
9. Executors and Administrators.
10. Other Banks.
11. State Financial Corporations.
12. Government/Quasi Government Departments /Boards/Bodies etc.
 No interest is paid in current accounts. However banks can charge a nominal amount from
the customer / clients if the total balance falls below the stipulated amount.

 The name fixed deposit encapsulates both deposits done for a fixed period and deposits done
subject to notice of withdrawal.
 Fixed deposits are term deposits remunerable after a prefixed period fixed at the time of
deposit
 .While call deposits (accounts) can be considered as demand or term liabilities subject to terms
of repayment and notice of withdrawal agreed at the time of accepting these deposits.

Fixed Deposits /  Fixed Deposits can be opened in the following names:

Term Deposits 1. Individuals,
2. Joint names of two or more individuals,
3. Clubs, Association, Societies, Trusts, etc.
4. Limited Companies,
5. Minor under the guardianship of the natural guardians or guardians appointed by the
Court of Law,
6. Partnership or Proprietary concerns.

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 Money is placed in the account and period is described by the customer.

 Premature withdrawal is allowed in such accounts. In an event of premature withdrawal the
interest paid is the one that is applicable for the period the deposit remained in the bank.
The interest is given for the duration it remained with the bank.
 Fixed deposits are not transferable.
 Fixed deposits / term deposits pays higher rate of interest as compared to the other deposit
schemes.
 Normally higher interest rate is paid for longer period of deposit. In some banks it is termed as
TLDA or time liability deposit accounts. However this does not always hold good because of
the banks deposit needs and market situations.

Locker Facility Mutual Funds

 It is an aid that commercial banks provide locker  A mutual fund is an investment process consisting of
facilities to its customers for safe keeping of a pool of money collected from many investors for
jewelry, shares, debentures, and other valuable investing in securities such as stocks, bonds, money
items. This minimizes the risk of stolen valuables market instruments and other assets.
due to theft at homes.

Bancassurance Internet Banking

 Bancassurance is an agreement  It enables customers of a bank or
between a bank and an insurance other financial institution to perform
Other Services
company permitting the insurance a variety of financial operations
company to sell its products to the provided by banks from the financial institution's
bank's client base. This partnership website.
workaround can be profitable for

Debit and Credit Cards Cheque and DD

 A debit card is a plastic payment card that can  It is a paper document that commands a bank to pay
replace cash while making purchases. It is like a a particular amount from a person's account to the
credit card, but the money in debit card comes person whose name is mentioned on the cheque.
directly from the user's bank account when
 A demand draft is a negotiable document similar to a
performing a transaction.
bill of exchange.
 A credit card is a plastic card that enables customer
 A demand draft is issued by a bank to a client
to borrow money against a line of credit, otherwise
(drawer), asking another bank (drawee) or one of its
known as the card’s credit limit.
own branches to pay a certain amount to the
 Customer use the card to make basic transactions, specified party (payee).
which are then added on the bill.

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Difference between Debit Card and Credit Card

Debit Card Credit Card

Debit of personal account in debit card is instantaneous, In credit card, a delay between the time of purchase
and the time that funds are debited to the account is
the moment card holder enters into transaction.
large and varies.
Credit cards are being used by people by paying the
Debit card is introduced for Electronic Fund Transfer at whole balance at the end of the month either
Point of Sale (EFTPOS) system. through internet banking transfer, mobile banking
transfer or through cheque payment.

Modern Aspects of Banking

The system of Real Time Gross Settlement launched on 26 March 2004. The benefits of RTGS are:

Real Time Gross 1. It is faster, real time on line settlement system of fund transfer.
Settlement 2. Aids all scheduled banks to settle inter-bank on-line fund transfer transactions of any amount.
(RTGS) 3. Banks can facilitate additional product / service to its customers for faster fund transfer.
4. Minimum amount of transaction should be Rupees 2 lakh.

 This scheme was rolled out in 2005, October. NEFT is an acronym for Nationwide Electronic
Fund Transfer system.
 NEFT is a process of funds transfer to facilitate account to account funds transfer without
involving physical movement of paper instruments, like Cheques etc.
 This system was first suggested by Shere Committee set-up by RBI.
 The objective of RBI’s NEFT system are
National i. To simplify an efficient, secure and economical system of fund transfer,
Electronic Fund
ii. To make process reliable and expeditious for funds transfer in banking sector, and
Transfer (NEFT)
iii. To relieve the stress on traditional paper based fund transfer and cheque clearing
system.
 Outward Remittance Charges
i. Up to 1 Lac : NIL
ii. Above 1 Lac to 2 Lac : 15/- per Transaction
iii. Above 2 Lac : 25/- per Transaction

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 ATMs are virtual banking system with no human representative.

 These machines can be setup at any suitable location for deposited and withdrawing money.
 It is operated by a system of checking account holder authenticity and run on menu. ATMs use
Iris or similar advanced scan system. PIN numbers (confidential) provided to customers are fed
in ATMs. Advanced ATMs have finger print analysis system also.
 It is customer-friendly and is very simple. Customer inserts the ATM card in the ATM
machine. ATM asks for customers PIN which he feeds, then he feeds the amount needed and
then presses the button for either deposit or withdrawal.
 Customers can see their balance in the account using ATM also any time of the day, all 7
days, 24 hours. Besides customer can have a brief account statement from the ATM machine.
For customers, this is convenient, anywhere any time banking facility, without additional fees.

Automated Teller Types of ATMs : ATMs can also be categorized based on the labels assigned to them. Some of
Machines (ATMs) these labels are listed below-

 Green Label ATMs- Used for agricultural purposes

 Yellow Label ATMs- Used for e-commerce transactions

 Orange Label ATMs- Used for share transactions

 Pink Label ATMs- Specifically for females to help avoid the long queues and waiting time

 White Label ATMs – Introduced by the TATA group, white label ATMs are not owned by a
particular bank but by entities other than the Bank

 Core banking Solution is the centralized banking service where total bank’s operations are
managed and run from a centralized hub. CBS provides application of computer technology to
different banking operations.
 CBS implementation has proved advantageous to banks in various ways:

Core Banking i. Banking has become single interface in nearly all banks having CBS system,
Solutions (CBS) ii. It is a solution to various problems of banks from audits and controls,
iii. All works of bank can be run from centralized hub, and
iv. New products and services can be formed quickly, etc.
 CBS structure works from centralized customer database; customized business plan and
customer information all over the country can be kept in one server.

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Role of Banks in Indian Economy

1. Removing the deficiency of capital formation: In any economy, economic development is not possible
unless there is an adequate amount of capital formation. The serious capital deficiency in developing
Countries is removed by banks. A sound banking system mobilizes small savings of the community and
makes them available for investment in productive enterprises. Banks mobilize deposits by offering
attractive rates of interest and thus convert savings into active capital. Otherwise that amount would have
remained idle. Banks distribute these savings through loans among productive enterprises which are
helpful in nation building. It facilitates the optimum utilization of the financial resources of the community.

2. Helps in generating employment opportunity: Banks helps in providing financial resources to industries
and that helps in automatically generate employment opportunity. Especially employment generated by
banking sector every year runs in millions. Equally revenue generation through tax and dividend collection
by the government invested every year. While revenue and employment generation are two very
important contributions, successfully maintaining healthy credit line to industrial sector as well as to
overall economy is another important contribution of financial sector.

3. Financial assistance to Industries: The commercial banks finance the industrial sector in a number of
ways. They provide short-term, medium-term and long-term loans to industry. The Industrial Development
Bank of India is the main institution in India providing financial assistance to the industrial sector. It
provides direct financial assistance to the industrial enterprises in the form of granting loans and advances,
and purchasing or underwriting the issues of stocks, bonds or debentures. The creation of the
Development Assistance Fund is the special of the IDBI. The Fund is used to provide assistance to those
industries which are not able to obtain funds mainly because of heavy investment involved or low
expected rate of returns. IDBI gives guidance to start a business. To facilitate an easy access to finance by
Micro and Small Enterprises, the Government/RBI has launched Credit Guarantee Fund Scheme to provide
guarantee cover for collateral free credit facilities extended to MSEs up to Rs 1 Crore. Moreover, Micro
Units Development & Refinance Agency (MUDRA) Ltd. was also established to refinance all Micro-Finance
Institutions (MFIs), which are in the business of lending to micro / small business entities engaged in
manufacturing, trading and services activities up to Rs 10 lakh.

4. Promote saving Habits of the people: Bank attracts depositors by introducing attractive deposit schemes
and providing higher rates of interest. Banks providing different kinds of deposit schemes to its customers.
It enables to create saving habits among people. Bank open different accounts to attract customer. These
accounts are opened as per the requirements of customers such as current account, fixed deposit account,
saving account and recurring account etc.

5. Financial assistance to Consumer: Activities People in underdeveloped countries being poor and having
low incomes do not have sufficient financial resources to buy durable consumer goods.
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2. The commercial banks advance loans to consumers for the purchase of such items as houses, furniture,
refrigerators, etc. In this way, they also help in raising the standard of living of the people in developing
countries by providing loans for consumption activities.

3. Helps in implementing Monetary Policy: The commercial banks help the economic development of a
country by implementing the monetary policy of the RBI. RBI depends upon the commercial banks for the
success of its policy of monetary management in keeping with requirements of a developing economy.
Thus the commercial banks contribute much to the growth of a developing economy by granting loans to
agriculture, trade and industry, by helping in capital formation and by following the monetary policy of the
country

7. Financial facilities for Trade: The commercial banks help in financing both internal and external trade.
The banks provide loans to retailers and wholesalers to purchase goods in which they deal. They also help
in the movement of goods from one place to another. Banks provide all types of facilities such as
discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc. for promoting
the trade. Moreover, they finance both exports and imports of developing countries by providing foreign
exchange facilities to importers and exporters of goods. Exim Bank of India and the Government of Andhra
Pradesh has signed a Memorandum of Understanding (MoU) to promote exports in the state.

8. 8. Foreign Currency Loans: Foreign currency loans are meant for setting up of new industrial projects.
Banks also helps in providing loans for expansion, diversification, modernization or renovation of existing
units. Banks also helps in financing import of equipment from abroad and/or technical knowhow.

9. Promotion of New Entrepreneurs: Development banks in India have also achieved a success in creating a
new class of entrepreneurs and spreading the industrial culture. Special capital and seed Capital schemes
have been introduced to provide equity type of assistance to new and technically skilled entrepreneurs
who lack financial resources of their own. Development banks have been actively involved in the
entrepreneurship development programs. Innovations are an essential prerequisite for economic
development. These innovations are mostly financed by bank credit in the developed countries. But in
underdeveloped countries, entrepreneurs hesitate to invest in new ventures and undertake innovations
largely due to lack of funds and high chances of risk. Facilities of bank loans enable the entrepreneurs to
step up their investment on innovational activities, adopt new methods of production and increase
productive capacity of the economy.

10. Balanced Development: Modern banks spreading its operations throughout the world. We can see
number of big banks like citi bank, SBI, PNB, Baroda bank etc. It helps a country to spread banking
activities in rural and semi urban areas. With the spreading of banking operations all over the country,
helps to attain balanced regional development by promoting rural areas. The Reserve Bank of India (RBI)
has granted in-principle licenses to 10 applicants to open small finance banks, which will help expanding
access to financial services in rural and semi-urban areas. IDFC Bank has become the latest new bank to
start operations with 23 branches, including 15 branches in rural areas of Madhya Pradesh.
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7. Modern bank plays important role in the economic development of the country. A developed banking
system enables the country to attain balanced development without any special consideration of rich and
poor, cities and rural areas etc. They transfer surplus capital from the developed regions to the less
developed regions, where it is scarce and most needed. This reallocation of funds between different
regions will promote economic development in underdeveloped areas of the country.

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11. Financial assistance to agriculture sector: Agriculture is the backbone of economy of any country like
India. The commercial banks help the large agricultural sector in developing countries. They provide loans
to traders in agricultural commodities. They open a number of branches in rural areas to provide
agricultural credit. They provide finance directly to agriculturists for the marketing of their produce, for the
modernization and mechanization of their farms, for providing irrigation facilities, for developing land, etc.
The share of commercial banks in total institutional credit to agriculture is almost 48 percent followed by
co-operative banks with a share of 46 percent and RRBs about 6 percent. Most of the credit related
schemes of the government to uplift the poorer and the under-privileged sections have been implemented
through the banking sector. They also provide financial resources for animal husbandry, dairy farming,
sheep breeding, poultry farming, and horticulture. The small and marginal farmers and landless
agricultural workers, artisans and petty shopkeepers in rural areas are provided financial assistance
through the regional rural banks in India. There are various studies which show that in India 40% farmers
are committing suicide because of not able to fulfill the loan amount of banks. Commercial banks are
providing credit to the poor farmers but this is not free from the other problems.

12. Government Spending: Commercial banks also support the role of the federal government as an agent
of economic. Generally, commercial banks help fund government spending by purchasing bonds issued by
the Department of the Treasury. Both long and short term Treasury bonds help finance government
operations, programs and support deficit spending. Recent important reforms.

Banking System in India

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