BHAGWAN MAHAVIR COLLEGE OF COMMERCE AND

MANAGEMENT STUDIES

COURSE : FYBCOM (SEM-I)

SUBJECT : BANKING & INSURANCE - I
UNIT-1 : ELEMENTS OF BANKING - 1

PREPARED BY: Dr. Harshita Bhatia

 UNIT 1 ELEMENTS OF BANKING - I

CONTENTS:

1. INTRODUCTION:.......................................................................................................................................................3
2. MEANING & DEFINITION OF BANKING:.............................................................................................................4
2.1 Definitions of a Bank:.............................................................................................................................................4
2.2 Definitions of Banking:...........................................................................................................................................5
2.3 Definition of a Banker:...........................................................................................................................................5
3. STRUCTURE OF INDIAN BANKING:.....................................................................................................................6
4. OBJECTIVES/ AIMS OF RESERVE BANK OF INDIA:..........................................................................................7
5. COMMERCIAL BANKS AND THEIR TYPES:......................................................................................................10
5.1 Types of Commercial Banks:................................................................................................................................11
5.1.1 Public Sector Banks :.....................................................................................................................................11
5.1.2 Private Sector Indian Banks:..........................................................................................................................11
5.1.3 Private Sector Foreign Banks:........................................................................................................................12
5.2 Second Way of Classifying Commercial Banks:..................................................................................................12
5.2.1 Scheduled Banks and Non-scheduled Banks:...................................................................................................12
5.2.2. Unit Banking and Branch Banking:..............................................................................................................14
5.2.3. Deposit Banks and Investment Banks:..........................................................................................................16

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 UNIT 1 ELEMENTS OF BANKING - I

CONTENTS:

1. INTRODUCTION:.......................................................................................................................................................3
2. MEANING & DEFINITION OF BANKING:.............................................................................................................4
2.1 Definitions of a Bank:.............................................................................................................................................4
2.2 Definitions of Banking:...........................................................................................................................................5
2.3 Definition of a Banker:...........................................................................................................................................5
3. STRUCTURE OF INDIAN BANKING:.....................................................................................................................6
4. OBJECTIVES/ AIMS OF RESERVE BANK OF INDIA:..........................................................................................7
5. COMMERCIAL BANKS AND THEIR TYPES:......................................................................................................10
5.1 Types of Commercial Banks:................................................................................................................................11
5.1.1 Public Sector Banks :.....................................................................................................................................11
5.1.2 Private Sector Indian Banks:..........................................................................................................................11
5.1.3 Private Sector Foreign Banks:........................................................................................................................12
5.2 Second Way of Classifying Commercial Banks:..................................................................................................12
5.2.1 Scheduled Banks and Non-scheduled Banks:...................................................................................................12
5.2.2. Unit Banking and Branch Banking:..............................................................................................................14
5.2.3. Deposit Banks and Investment Banks:..........................................................................................................16

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6. FUNCTIONS OF MODERN COMMERCIAL BANKS:..........................................................................................18
6.1. The Traditional Functions:...................................................................................................................................18
6.2. Non-traditional Functions:...................................................................................................................................19
6.3. Main or Primary Functions:.................................................................................................................................19
6.3.1. Accepting the Deposits:................................................................................................................................20
6.3.2. Giving the Financial Loans and Advances:..................................................................................................20
6.3.3. Issue of Paper Currency:...............................................................................................................................20
6.4. Subsidiary Functions or credit creation: (Traditional subsidiary functions of commercial banks).....................20
6.4.1. Agency Services:...........................................................................................................................................20
6.4.2. General or Miscellaneous Services:..............................................................................................................21
6.5. Non-traditional Functions / Untraditional Functions of Modern Commercial Banks:........................................23
6.6 Merchant Banking Service:...................................................................................................................................24
6.7 Mobile Banking:...................................................................................................................................................24
6.8 Nationalized Banks Vs. State Bank of India:........................................................................................................25
6.9 Overdraft Vs. Cash Credit:....................................................................................................................................25
6.10 Loan Vs. Overdraft:............................................................................................................................................26
7. IMPORTANCE OF BANKS IN INDIAN ECONOMY
 UNIT 1 ELEMENTS OF BANKING - I
UNIT: 1
ELEMENTS OF BANKING - 1

1. INTRODUCTION

Banking system occupies an important place in a nation's economy. A banking institution is absolutely necessary in a modern society. It plays
a pivotal role in the economic development of a country and forms the care of the money market in an advanced country.

Banking is different from money lending, but the two terms usually carry the same significance to the general public. The money lender,
advances money out of his own private wealth, hardly accepts deposits from general public and usually charges high rate of interest. More
often, the rates of interest relate to the needs of the borrower and at time the rates may be too much excessive.

As defined in Section 5 (b) of the Banking Regulation Act, 1949, banking is defined as the acceptance of deposits of money from the public
for the purpose of lending or investment. Such deposits of money from the public are used for the purpose of lending or investment. Such
deposits may be repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise. Thus a bank must perform to
basic and essential functions: (1) Acceptance of deposits and (2) Lending or investment of such deposits.

But gradually these functions were extended and others were added from time to time and presently banks perform a number of economic
activities which may affect all walks of economic life.

In India, as early as the Vedic period, banking existed in the crudest form. The books of Manu contain reference regarding deposits, pledge,
and policy of loans and rates of interest. It is true that banking in those days largely meant money lending, and the complicated mechanism of
modern banking was not known to them.

This is true not only in the case of India but also of other countries. Although the business of banking is as old as authentic history, banking
institutions have since then changed in character and content very much. They have developed from a few simple operations involving the
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satisfaction of a few individuals' wants to the complicated mechanism of modern banking, involving the satisfaction of the whole community
by
 UNIT 1 ELEMENTS OF BANKING - I
securing speedy application of capital slowly seeking employment and thus providing the very life-blood of commerce.

2. MEANING & DEFINITION OF BANKING:

The word "bank" has been derived from the Latin word "bancus" or "banca" means a bench. In ancient times the bankers were doing their
business of lending money by sitting in markets on the benches. But this is not acceptable by many authors. It is presumed that this word
"bank" has been derived from the German word "back" means "compound capital". The Germans were over influencing the Italians and this
word "back" had been transformed into the word "banco" in Italian tongue, which is more authentic to accept.

2.1 Definitions of a Bank:

The few definition, given by the well-known thinkers have been cited below:
1. Walter Leaf states: "Bank is an establishment which makes to individuals, such advances of money as may be required and safety made
to which individuals entrust money when not needed by them for use."
2. R. S. Sayers states: "Banks are institutions whose debts usually referred to as 'Bank Deposits' are commonly accepted in final settlement
of other people's debts.
3. Horace White states: "Bank is a manufacturer of credit and machine for facilitating exchanges."
4. Agriculture Credit Act, 1928 States: "Bank includes any firm, incorporated company or society carrying in banking business and
approved by the minister."
5. Watt Click states: "Bank means an individual or an institution which accepts deposits in the forms of cheques written to it.
6. Herbt L. Hart states: "Bank or banker means such an individual or a company which can accept the money available from the current
accounts of the customers through the che or drafts written to him or it from time to time und limitations as per the wishes of customers."
7. Japanese Banking Act, 1927 states: "Bank means an institution which can perform an activity to give and receive the credits."
8. Prof. Coucher tried to define the word bank in the following manner: "A bank is a financial institution which can accept the surplus
savings from the individuals in the form of deposits and when the depositor demands the money, the institution can immediately pay the
amount invested”.
 UNIT 1 ELEMENTS OF BANKING - I
2.2 Definitions of Banking:
The few definition, given by the well-known thinkers have been cited below:
1. Kenneth Machenzie states: "Banking may be defined as dealing in money and instrument of credit."
2. Indian Banking Regulation (IBR) Act, 1949 states in Section 5 (1) (b): "Banking is defined as the 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."
3. IBR Act 1949 also states in Section 5 (1) (c): "A banking company means any company which transacts the business of banking in
India.
4. American Banking Law states: "Banking is a profession which handles the transaction of credits."

2.3 Definition of a Banker:

The few definition, given by the well-known thinkers have been cited below:
1. Macleod states: "The essential business of a banker is to buy money debts, creating other debts. A banker is therefore essentially a dealer
in debts or credit.
2. Dr. H. C. Hart states: "A banker is person or a company carrying on the business of receiving money and collecting drafts for customers
subject to the obligation of honouring Becheques drawn upon them from time to time by customers to the amount available on their current
accounts."
3. G. Growther states: "A banker is a dealer in debt, his own and other peoples."
4. Findley Shiras States: "A banker is a person, firm or company having a place of business, where credits are opened by the deposit or
collection of money or currency or subject to be paid or remitted upon draft, cheque or where money is advanced or loaned or stocks, bonds,
bullion and bill of exchange and promissory note are received for discount and sale.
5. Walter Leaf states: "A banker is a person or corporation which holds itself out to receive money from public."
6. The Indian Negotiable Instrument Act, 1881 states: "Any person acting as banker and any office saving bank is a banker."
7. The Banking Regulation Act, 1966 (India) gives the definition of a banker as follows: "Any company which transacts the business of
banking in India is called banking company."
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3. STRUCTURE OF INDIAN BANKING:

In India though the money market is still characterised by the existence of both the organised and the unorganised
segments, institutions in the organised money market have grown significantly and are playing an increasingly
important role. The unorganised sector comprising the money-lenders and indigenous bankers caters to the credit needs
of a large number of persons especially in the country side. In the organised sector of the money market there are so
many banks working. The structure of these organised banks is shown in the following tree diagram. Note that the
Industrial Reconstruction Bank of India (IRBI) was set up to bring back to normally the industrial units which fall sick.
In March, 1997 it was renamed as Industrial Investment Bank of India (IIBI).
Following are the abbreviation of different banks:
IFCI: Industrial Finance Corporation of India Ltd.
ICICI: Industrial Credit and Investment Corporation of India.
SFC: State Financial Corporation.
SIDC: State Industrial Development Corporation
SBI: State Bank of India.
LIC: Life Insurance Corporation of India.
GIC: General Insurance Corporation of India.
UTI: Unit Trust of India.
NABARD: National Bank for Agriculture and Rural Development.
ECGC: Export Credit Guarantee Corporation.
DICGCI: Deposit Insurance and Credit Guarantee
Corporation of India.
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4. OBJECTIVES/ AIMS OF RESERVE BANK OF INDIA:
The Reserve Bank of India is the central bank of India and it occupies a supreme and pivotal position in the
whole structure of banking of India. RBI is also called the Monetary Authority of India. India's central bank-Reserve
Bank of India (RBI) came into existence in 1934 with the passing of RBI Act, 1934 and working of its was started from
1st April, 1935.

As a central bank, India's Reserve Bank of India performs traditional activities. It is also doing development activities as
per the needs of Indian economy.

Objectives of RBI are presented in Reserve Bank of India Act, 1934. The main objectives of RBI are as follows:

1. To Achieve Co-ordination by Regulating Banking and Monetary Sector of Nation :

Regulating the banking and Monetary Sector of Nation and their Co-ordination is the main responsibility of
Reserve Bank of India. For achieving this objective, Reserve Bank of India makes planning, implication and regulation
of Monetary Policy. RBI Creates opportunities for employment by monetary policy. The main objectives of monetary
policy which have been accepted in India are as follows:

a. To provide finance for economic development.

b. To regulate bank credit.
c. To promote savings and investment.
d. To encourage monetisation in the economy and to co ordinate different sectors of the money market.
e. To achieve economic growth with stability. As per opinion of Prof. De Cock, "Central Bank is the top of structure of
monetary and banking of nation."
 2. For Development and Regulation of Banking Sector:

The RBI plays an important part in the development and regulation of banking sector of nation. It is
an independent apex monetary authority which regulates banking sector of nation.
orders to banks and also gives guidance. Moreover, RBI also provides financial helps in need of
banks. By analysing last 82 years we can say that RBI plays significant role in the development of banking sector
in India.
Reserve Bank of India enhances banking facilities in village areas. RBI brings innovations in banking sector with
modern concept like small bank, payment bank, universal bank, digital bank mobile bank, etc.
From above discussion, it is make clear that RBI is established for following objectives relating to development of
banking:

1. For removing deficiencies in development of banking in India.

2. For proper and co-ordinating development of banking sector in India.
3. For development of Indian banking at International level.

Development of banking sector of nation is made on healthy base and activities of banks are as per the
economic growth of nation is primary responsibility of RBI. For achieving this objective, wide authority is given to
RBI. As per this authority RBI makes regulations in banking sector. It givesorders to banks and also gives
guidance. Moreover, RBI also provides financial helps in need of banks. By analysing last 82 years we can say that
RBI plays significant role in the development of banking sector in India.
 UNIT 1 ELEMENTS OF BANKING - I
Reserve Bank of India enhances banking facilities in village areas. RBI brings innovations in banking sector with
modern concept like small bank, payment bank, universal bank, digital bank mobile bank, etc.
From above discussion, it is make clear that RBI is established for following objectives relating to development of banking:

1. For removing deficiencies in development of banking in India.

2. For proper and co-ordinating development of banking sector in India.
3. For development of Indian banking at International level.

3. For managing the monetary organisation of Nation:

The another objective of RBI is to make sound development of Indian economy by regulating economic and
monetary fluctuations of nation. The monetary system of every country needs to be managed. "Money will not manage itself 1' said
Bagehot long ago.

For achieving this objective, Reserve Bank of India controls total supply of money of nation and taking steps to
maintain the trust of public in monetary organisation of nation. So, there is no scope for malpractice in monetary management of
nation and it provides monetary stability. As a central bank, the RBI has been given the sole right to issue notes.

M.H. De Kock said that mainly four benefits are acquired by giving So, it is cleared that Reserve Bank of India is established for following
monopoly to central bank for issuing currency notes: objectives:
a. There is uniformity in currency notes. 1. Issuing currency as per need of economy.
b. Proper proportion of currency is maintained as per need of economy. 2. For removing difficulties about issuing currency.
c. Public's trust is maintained in monetary management. 3. For management of monetary organisation of nation.\
d. Profit acquired by printing of notes can be used for public welfare.
 UNIT 1 ELEMENTS OF BANKING – I

4. Maintaining Uniformity in Economic Policy and Monetary Policy of Nation:

Government formulates the economic policy of nation, while monetary policy is made by Reserve
Bank. Though progressive government makes good economic policy but if it is not conversant with monetary
policy the government's economic policy failed to achieve development of economy. So, Reserve Bank of India is
established for planning and implementation of monetary policy as per economic policy made by government.
By making analysis at last some year’s monetary policy of RBI, Reserve Bank gives importance to agricultural
credit and inflation control in monetary policy with the government's objectives of development of agricultural
sector and control over inflation is achieved.

5. For Regulating Credit Creation Activities of Banks:

According to Prof. Hotre "credit creation activities of banks are responsible for trade-cycle of Boom
or recession." Reserve Bank of India is established for regulating the activities of credit creation of banks. For
achieving this objective RBI uses quantitative tools and qualitative tools.
There are mainly three quantitative tools like bank rate, purchases and sales of government securities in open
market and changes in ratio of cash reserve of banks. These quantitative tools of credit control effects on total
credit of banks and its interest.
Qualitative tools includes variation in margin requirement, regulation of customers credit, direct steps, publicity,
etc.
The control of credit is main function of a Central Bank (Reserve Bank). The objectives of credit control is:
a. Stabilisation of the money market
b. Regulating credit creation activities of banks.
c. Stabilisation of the general price level.

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6. For doing banking work of government as a bank of government:

The Reserve Bank of India has been given the right to make all monetary transactions
of government. Scope of working of government is very wide and so its monetary activities are
more. So, Reserve Bank of India is established for managing monetary activities of government
and maintaining proper accounts by co-ordinating activities of different sectors on behalf of
government. So, another objective of RBI is clear that to maintain and operate the government's
deposit accounts and collects receipts of funds and makes payment on behalf of the government.
7. By preserving monetary reserves of nation and working as a bank of state bank and
other banks:

The Reserve Bank of India is established for preserving monetary reserves of nation.
For achieving this objective, RBI working as a bank of state bank and other banks. Reserve
Bank of India serves as lender of last resort, by rediscounting eligible bill of exchange of
commercial banks during the period of credit stringency (crisis).

Reserve bank also provides facilities of money exchange and clearing house. For this
commercial banks have to follow the guidance of RBI and have to keep reserves as per Act of
Reserve Bank.
 UNIT 1 ELEMENTS OF BANKING – I

8. For making stability in Exchange Rate:

Another important objective of RBI is to maintain the stability of the rate of exchange. The rate of
exchange means the rate at which the currency of one country in converted into the currency of another country.
Stability in the rate of exchange is very essential, because if there are frequent changes in the exchange rate, it has
adverse effects on the imports and exports of the country and makes international trade risky and uncertain. RBI
therefore, is entrusted with the task of maintaining stability in the rate of exchange.
So, RBI is established for keeping exchange rate stable by regulating demand and supply of foreign exchange.
Reserve Bank of India takes proper steps for preventing devaluation of Indian currency .
9. For Achieving Economic Growth with stability:
Another objective of RBI is to achieve economic growth with stability. Of course, it is true that the
achievement of this objective depends upon a number of factors like the size of the plan pattern of investment,
techniques of resource mobilisation etc. But RBI makes its great efforts for achieving economic growth with
stability.

10. Other objectives of Reserve Bank of India:

1. For making savings dynamic by cultivating habit of banking.
2. For establishing nationalised and localised financial institutions which provides long term credit to industries
and being helpful in its establishment.
3. To provide financial assistance to the co-operative banks in India.
4. For publishing the figures of banking sector and monetary and credit organisation of India.
5. For giving permission to commercial banks with discipline.
6. For maintaining transparency of banking sector.
7.For growth of money market (i.e. Bill Market).
 UNIT 1 ELEMENTS OF BANKING – I

5. COMMERCIAL BANKS AND THEIR TYPES:

When India attained independence in 1947, there were 648 commercial banks with 4,819 branches in India.
Because of frequent failure of banks in the country, the government of India decided to regulate and reform the banking
system. The Reserve Bank of India was nationalised in 1949 and the Banking Companies Act was passed in the same
year. The name of this act was changed to Banking Regulation Act in 1965. In 1969, 14 major commercial banks were
nationalised. In 1980, 6 more leading commercial banks were nationalised. Let us look at the list of 20 nationalised banks
as given below:

Banks Nationalised on 19-7-1969:

I.Bank of India.
II. Punjab National Bank 3
III.Bank of Baroda
IV.Central Bank of India
V.Canara Bank
VI.United Commercial Bank
VII.Indian Bank
VIII.Union Bank of India
IX.Dena Bank
X.Bank of Maharashtra
XI. Syndicate Bank
XII.Allahabad Bank
XIII.Indian Overseas Bank
XIV.United Bank of India
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 Banks Nationalised on 15-4-1980
1.Andhra Bank
2.Oriental Bank of Commerce
3.Punjab and Sind Bank
4.Vijaya Bank
5.New Bank of India (which was merged in Punjab National Bank in 1993)
6.Corporation Bank.

It is to be noted that 91% deposits of the people are invested in Nationalised Banks.
Walter Leaf has defined: "A commercial bank is an establishment which makes to individuals such
advances of money may be required and safety made and to which individual entrust money when
not needed by them for use."

5.1 Types of Commercial Banks:

Commercial banks may be categorised into three categories:
1. Public sector banks
2. Private sector Indian banks
3. Private sector Foreign banks This is based on structure form:
 5.1.1 Public Sector Banks :

There are 19 public sector banks which are listed below:

(1)Central Bank of India

(2) Bank of India

(3)Punjab National Bank

(4) Bank of Baroda

(5)UCO Bank

(6) Canara Bank

(7)United Bank of India

(8)Dena Bank

(9) Syndicate Bank

(10) Union Bank of India

(11) Allahabad Bank.

(12) Indian Bank
(13) Indian Overseas Bank
(14) Bank of Maharashtra
(15) Andhra Bank
(16)Corporation Bank
(17)Oriental Bank of Commerce
(18)Punjab and Sind Bank
(19)Vijaya Bank

Note: All these banks are nationalised

5.1.2 Private Sector Indian Banks:

(1)Ing. Vysya Bank Ltd.

(2) Federal Bank Ltd.
(3) Jammu & Kashmir Bank Ltd.
(4) Bank of Rajasthan Ltd.
(5 ) Karnataka Bank Ltd.
(6) South Indian Bank Ltd.
(7) United Western Bank Ltd.
(8) Bank of Madura Ltd.
(9) Catholic Syrian Bank Ltd.
(10) Karur Vysya Bank Ltd.
 UNIT 1 ELEMENTS OF BANKING - I

((11) Tamil Nadu Mercantile Bank Ltd. (

12) Lakshmi Vilas Bank Ltd.

(13) Sanghi Bank Ltd.

(14) Dhanlakshmi Bank Ltd.

(15) Development Credit Bank

(16) Bharat Overseas Bank Ltd.

(17) City Union Bank Ltd.

(18) Lord Krishna Bank Ltd.

(19) Nainital Bank Ltd.

(20) Ratnakan Bank Ltd.

(21) Ganesh Bank of Kurundwad Ltd.

(22) Axis Bank Ltd. (Formerly UTI Bank)

(23) Indus IND Bank Ltd.

(24) ICICI Bank Ltd.

(25) Centurian Bank Ltd.

(26) HDFC Bank Ltd.

(27) Bank of Punjab Ltd.

(28) Kotak Mahindra Bank

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(29) Yes Bank Ltd.
(30) Bandhan Bank Ltd.
(31) IDFC Bank Ltd.
(32) RBL Bank Ltd.
5.1.3 Private Sector Foreign Banks:
There are 41 foreign banks in India. Some of such banks are:
(1)American Express Bank Ltd.
(2) Standard Chartered Bank
(3) ABN Amro Bank N. V.
(4) HSBC Bank Ltd.
(5) Deutsche Bank A. G.
(6) Bank of America National
(7) Bank of Tokyo Ltd.
(8) Barclap Bank P/c
(9) Citibank N. A.

Note: It is to be noted that the banks cited in § 4.1.1. § 4.1.2 and § 4.1.3 have
their similar organisation as per the different regulations relevant to them.
5.2 Second Way of Classifying Commercial Banks:
Commercial banks may also be classified into the following three categories:
1. Scheduled banks and non-scheduled banks.
2. Unit banking and branch banking.
3. Deposit banks and investment banks
5.2.1 Scheduled Banks and Non-scheduled Banks:
As per the RBI Act Section 42(6), the commercial banks are divided into
two classes as:
1. Scheduled Commercial Banks and
2. Non-scheduled Commercial Banks.
5.2.1.1 Scheduled Commercial Banks:

RBI Act 1934, Appendix II contains the list of Commercial Banks. These
banks are notified by the government as the scheduled banks. It is to be noted that
the banks satisfying the following conditions of RBI Act 42(6) (A) have been
included in the Appendix II.
The required conditions to be fulfilled are as under:
1. The bank must be registered under Indian Companies Act.
2. It must be engaged itself in banking business.
3. The bank must carry its banking business in India only.
4. Its paid-up capital and total funds should not be less than Rs. 5 lakhs.
5. It should make an affidavit before RBI that its activities will not be against the
interest of the depositors.
6. The bank must be:
i. a state co-operative bank or
ii. a company registered under the Indian Companies Act,
iii. an institution notified by the central government or
iv.a corporation or a company incorporated by or under any law in force in any place
outside India. These banks include:
i. a state co-operative bank or
ii. a company registered under the Indian Companies Act,
iii. an institution notified by the central government or
iv. a corporation or a company incorporated by or under any law in force in
any place outside India. These banks include:
a. Indian commercial banks (public sector banks and scheduled banks under private
sector).
b. Foreign commercial banks.
c. State co-operative banks.

Over and above these scheduled banks, the government has declared the
following three types as the scheduled banks:
I. State banks and its seven subsidiary banks : [Seven subsidiary banks are:

1. State Bank of Bikaner and Jaipur.

2. State Bank of Indore
3. State Bank of Travancore
4. State Bank of Hyderabad
5. State Bank of Patiala
6. State Bank of Saurashtra
7. State Bank of Mysore]

ii. Twenty nationalised banks (see § 4)

iii. Urban banks.
Upto the end of March, 1996 there were 316 scheduled banks. These banks included public
sector banks, private sector banks, foreign exchange banks and state co-operative banks.
5.2.1.1.1 Responsibilities of scheduled banks to RBI:
Each schedule bank has to follow the instructions of RBI as shown below:
i. Each scheduled bank has to open an account with RBI and 3% of cash reserve of current
and term liabilities should be maintained in that account. RBI can increase this amount
from 3% to 15%. If the reserve amount exceeds 6%, the amount is liable to get interest.
ii. Each scheduled bank should regularly send the weekly financial statement to RBI.
iii. RBI inspects regularly the scheduled banks.
iv. Each scheduled bank has to carry out all the instructions given from time to time.
 UNIT 1 ELEMENTS OF BANKING - I

5.2.1.1.2. Advantages Earned by Scheduled Banks from RBI:

The scheduled banks are getting the following advantages from RBI:

1. RBI gives the facilities of making transactions of money.

2. Scheduled Bank gets advances through bill discount by RBI.
3. RBI provides the facility of clearing and emergency advances.
4.Scheduled Bank gets necessary guidance whenever needed from RBI.
5. RBI also helps scheduled bank in smooth running and gives facilities also.
6. Scheduled bank depositors are safe upto a prescribed limit under the insurance scheme.
7. Scheduled banks are more reliable as compared to non-scheduled bank amongst the depositors.
8.Scheduled banks can accept the deposits from the charitable trust and local societies.
5.2.1.2. Non-scheduled Commercial Banks:
All the banks which are not included in the second schedule of RBI Act, 1934 are called Non-scheduled Banks. Usually
these non scheduled banks are having total share capital, less than 5 lacs. They are not governed by the RBI Act. They
are not the recognised banks in the list of RBI. People consider them as nonreliable and they are also not trusted by
people. Hence they do not get handsome deposits. Since 1951 the number of these banks are gradually reducing and at
the end of 1996 there were only two banks in India. Under certain conditions these non-scheduled banks can be taken on
an approved list. For that
i. The bank must be registered under companies act, 1956.
ii. A bank must be engaged in banking business as per Banking Regulation Act Section 5 (1) B.
Iii A bank must have a minimum paid up capital of Rs. 50,000
5.2.2. Unit Banking and Branch Banking:
The United States and England may be taken as the typical countries which follow the
system of unit banking and branch banking respectively.
5.2.2.1. Branch Banking:
For instance, in England, most part of the banking business is in the hands of four big
banks (known as Big Four). The branches of these banks extend to all parts of England.
The other countries such as Canada, S. Africa, and Australia etc. are also following
branch banking system.
5.2.2.2. Un it Banking:
In contrast to this branch-banking system USA follows unit banking system. Unit banks
are generally linked together by the "correspondent bank" system. Under the
"correspondent bank" system, the country banks deposit money with the city banks and
the city bank with the reserve city banks. This arrangement helps each bank to make
remittances through the correspondent.
 UNIT 1 ELEMENTS OF BANKING - I
5.2.2.3. Advantages of Branch Banking:
The advantages of branch banking are as given below:

1. Branch banks can provide better facilities to their customers because of the comparatively limited number of
customers per banking office and because of the efficiency achieved through large scale operations.
2. It is not necessary for any particular branch to keep large amounts of idle reserves. Whenever any help is required by
any branch the resources of the other branches can be transferred to that particular branch.
3. Management can be made more efficient by proper staff selection and training and appointment of the right person in
the right place.
4. Industrial and geographical diversification of loan risks is possible in the case of branch banking. Because of this even
when a branch suffers a loss through the decline of the industries of that locality, the profit earned by the other branches
will make up.
5. Branch banks increase the mobility of capital which brings uniformity of interest rates. In order to take advantage of
the increased interest rates prevailing in any locality, banker under branch banking, generally transfers the deposits from
the branches situated in localities where demand for money is relatively low to those branches situated in those localities
where the demand for money is relatively high. In both these areas the supply of money is brought into equilibrium with
the demand and hence the interest rates tend to uniformity over the whole area served by branch banks.
6. Remittance facilities can be provided to the customers very cheaply.
7. Clearing of cheques is comparatively easy because cheques deposited at a branch can be sent to the office in the city
where there is a clearing house and can then be cleared in the customary way.
8. Finally, it is said that branch banks give their customers the service of more powerful and solvent banks. A branch
has behind it not only the assets of a particular office but the assets of all the offices of the bank.

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5.2.2.4. Advantages of Unit Banking:
1. The unit banker is at an advantageous position that he has a personal knowledge of
borrowers and can easily decide which of them desirable ones for granting the loan are.
2. The unit banker can use his own discretion and can arrive at quick decision.
3. There is no question of transfer in unit bank and hence they are sympathetic to the
local needs.
4. At the time of failure of the unit bank, the repercussions are spread only in a locality
and not countrywide, because the business carried out are solely on a localised base.
5. The management cost may be low and the profit earning is high in unit banking.
6.As the market conditions are localised unit banking is more useful.

5.2.2.5. Disadvantages of Branch Banking:

1. The branch manager will have to get the permission of the Head Office, which being
totally ignorant of the borrowers, may require the branch to cover each and every loan by
collateral securities, thus refusing to lend on the personal security of the borrowers even
when they are desirable borrowers.
2. Since the branch managers have to refer each and every loan to the Head Office,
delay and red tapism are but natural.
3. Branch managers are transferred too frequently and so they are liable to be
unsympathetic with local needs.
4. The failure of a bank with many branches spread all over the country will have wide
repercussions throughout the country.
 5. It is difficult to exert a very effective control over all the branches, when a bank grows beyond the optimum size.
Consequently miss-management on a large scale is easier under branch making, as a result of which the expenses are
likely to mount high, thus having an adverse effect on profits .

5.2.2.6. Disadvantages of Unit Banking:

1. Unit banks have larger number of customers and hence they cannot provide better facilities.
2. Unit banks have to keep their amounts sometimes idle.
3. Unit banks situated in the depressed areas may undergo heavy losses which might be followed by a crop of bank failures.
4. Clearing of cheques involves great complication and greater expenses .

5.2.2.7. General Remarks:

From the above discussion, advantages weigh heavily with branch banking. This is why countries find increasing favour with the
system of banking. Even in the United States, 18 states permit state-wise branch banking. Only the 17 states permit limited area
branch banking. Only the remaining states specifically prohibit branch banking. It is to be noted that the Bank of America has
branches throughout the state of California.

5.2.3. Deposit Banks and Investment Banks:

Let us take the discussion of deposit banks and investment banks

5.2.3.1. Deposit Banks:

Generally the banks which lend the short term loans to the business or industry and which accept the deposits from the people are
known as deposit banks. Deposit banks give to the businessmen the loans in the form of bank-overdraft or cash-credit for a short
term only. These deposit banks do not give loans to the business people for long term duration .
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 UNIT 1 ELEMENTS OF BANKING - I
5.2.3.2. Investment Banks:
Investment banks are organisation which assists business corporations and governmental bodies to raise funds for long-
term capital requirements through the sale of shares, stocks and bonds. These investment banks act primarily as
middlemen between business corporations and investors. Generally, they purchase entire issue of new securities of the
business corporations or of governmental bodies and reissue them for public subscription at a higher price. Sometimes
they may act as agents on commission basis, but as a rule they underwrite the issue of securities. These investment banks
are sometimes known as development banks or industrial banks. Investment banks are classified as originators,
underwriters and retailers.
As originators, they bring out new issue of securities as under writers, they underwrite the issue and as retailers, they
retail the securities to individual and institutional investors. Frequently single institution may act in all these capacities.
The originator enters into all the preliminary negotiations with the issuing corporation. Ordinarily he requires the detail
reports regarding the origin and history of the issuing corporation, its corporate powers, the nature of its products, the
condition of plant and machinery and the other assets, its capital structure, the intention of the new issue etc.
authenticated by the opinions of expen technicians and professional accountants together with an attorney's report
regarding the legality of the issue. On finding details satisfactory, the originator makes an agreement to undertake for
bringing out the new issue. If the issue is large one, the originator calls upon other investment bankers to join him in
forming an "Underwriting Syndicate". The next step is to invite the smaller retailers to join with the "Underwriting
Syndicate" in order to form a selling group. Finally the securities are offered for public subscription.
An investment banker, thus performs a highly useful service to the business world by providing the necessary capital for
long-term capital needs of industry.
Such investment banks have been established in good number in Japan and Germany.
Some banks collect the deposits from the people as well as the lend short-term loans to
the people. Such banks are called mixed banks. The essence of mixed banks consists
in attracting deposits from the general public and in providing short term, medium-
term and long-term capital to industries. Investment banks perform following
functions:
i. Providing long-term loans to industrial organisations requiring fixed capital for
their expansion and modernisation programmes.
ii. Promoting new industrial ventures. They invest in shares and debentures of
industrial organisation and also underwrite the issue of their shares and debentures
iii. Providing technical guidance in project studies and the management of projects.
iv. Controlling guiding the affairs of the industrial undertaking by securing
representation on their board of directors.
 UNIT 1 ELEMENTS OF BANKING - I

6. FUNCTIONS OF MODERN COMMERCIAL BANKS:

The modern commercial banks have their business field very much expanded and they provide various types of services.
Firstly they collect the surplus savings of the people or organisations and manage the capital obtained in giving loans to
the industries or developing business. Not only that but now-a-days they provide guidance to the new developing
business for raising their capital and providing business information of various types. Banks lend a short- term loan to
the business also. Banks give the lion's share in developing the field of business, commerce and industry. The functions
of commercial banks can be outlined by a tree-
Diagram as shown below:

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 The functions of commercial banks are divided into
two groups:

1. Traditional functions and

2. Non-traditional functions

6.1. The Traditional Functions:

The traditional functions include the activities of a commercial bank under the provisions of the BR
Act, 1949. In this BR Act, the Section 5 defines the banking business and has enumerated the main functions of the
banks. Further in Section 6, the list of other functions which a modern bank is expected to perform in recent days
has been given. All these functions are called the traditional functions. The other functions are called subsidiary
functions which areconsisting of agency services and miscellaneous services. These subsidiary functions are
considered to be the credit creation functions. The traditional main functions are as follows:
1. Accepting the deposits,
2. Giving the financial loans and advances, and
3. Discounting the bills

The traditional subsidiary functions are as follows:

1. Agency services of the type: Issuing of credit instruments, cheques and circular notes, transferring the funds,
purchase and sale of securities, collecting interest and dividend, making the payments, acting as executors, trustees
and attorneys, representative etc.
2. Miscellaneous services of the type: Safe custody of valuables, letter of credit, safe deposit vault, credit
information, foreign exchange, remittance of money, underwriting etc.
 Pradhan Mantri Jan Dhan Yojana Deposits (PMJDY) and Deposits:
Pradhan Mantri Jan Dhan Yojana (PMJDY) is a nationwide scheme launched by Indian government on 28th
August, 2014. This scheme has been started to connect the poor class people with banking system. The main aim of this social
welfare programme list of financial savings. Through PMJDY, zero balance account can be opened.

Benefits of PMJDY
1. The accountholders will get interest on their saving Deposits.
2. There is no any requirement to maintain any minimum balance.
3. The beneficiaries of government schemes can get the benefits directly transferred to their accounts.
4. It gives direct way to get facilities like pension, insurance etc.
5. The account holders under this scheme will be given a Rupay debit card. Moreover, accidental insurance cover of Rs.
1,00,000 also will be given.
6. Money can be transferred easily through India.
7. Poor class people also will be connected to banking system for savings.
8. The accountholder under this scheme, will also get benefit of overdraft and loan facilities.

6.2. Non-traditional Functions:

This type of non-traditional functions of banking has been evolved in India in 1980 only. These nontraditional functions
will be discussed at a later stage. Now let us discuss the constituent functions in detail one by one.
6.3. Main or Primary Functions:
We have seen that there are three types of functions under the main function type.

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6.3.1. Accepting the Deposits:
This function of accepting the deposits from the public is considered to be the most important function for
the commercial banks. This forms the foundation structure of the whole banking operations. Deposits are of various
types such as demand deposits, saving deposits, fixed deposits, recurring deposits, home saving scheme etc. These public
deposits are accepted with a view to -
i. keep them safe
ii. help the customers as per their needs
iii. lend and
iv. Invest to earn profit and meet out its obligations as business company. The depositors are paid the interest as per the
rules provided by RBI. Note that no interest is payable to the current accounts.
6.3.2. Giving the Financial Loans and Advances:
This is the second major function of a commercial bank. The loans and advances are given forms. The
money collected from the public by way of deposits. The loans and advances are given to the businessmen or investors
against personal security, gold and silver and other movable and immovable assets. The most common way of lending is
by overdraft facilities and also through discounting bills of exchange. Note that overdraft facility means allowing the
borrower to overdraw his current account.

In this way the bank is an intermediary mobilising the savings of the people and using them to assist
industry and trade. To avoid unhealthy competition for issuing loans the RBI has recently announced the base rate of 7
% to 8.5 for issuing the loans by the banks.

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6.3.3. Issue of Paper Currency:
In India this function is carried by Reserve Bank of India.
6.4. Subsidiary Functions or credit creation: (Traditional subsidiary functions
of commercial banks)
There are two types of subsidiary functions such as agency services and general or
miscellaneous services.
6.4.1. Agency Services:
A bank performs a number of functions for and on behalf of its customers. i.e.it acts as an
agent or representative of its customers. Commercial banks usually perform agency services as
cited in § 5.1. Let us discuss these agency services in brief one by one.
6.4.1.1. Issuing of credit instruments, cheques and circular notes:
Under the cheque system, the depositors are entrusted the rights to withdraw from their
deposits any amount at their convenience by writing the cheque. The currency note is a legal
tender money. The cheque is the most developed credit instrument known to men.
6.4.1.2. Transferring the Funds:
This is another function of a commercial bank which provides, the facility of transferring the funds from one part of the
country to another or from one country to another. This function is done either by the cheque or through a bank draft.
Any amount can be transferred cheaply by these methods.
6.4.1.3. Purchase and Sale of Securities:
On behalf of the depositors or customers the bank can function to purchase and sale of securities.

6.4.1.4. Collecting Interest and Dividend:

The commercial bank can collect interest and dividend on behalf of the holders by a nominal charge towards the service.
6.4.1.5. Making the Payments:
By charging a small commission the bank makes payments regularly to the concerned parties such as premium to L.L.C., sent
to the owner, electric bills and gas bills, property tax etc. as per the standing instructions of the customers.

.4.1.6. Acting as Executors, Trustees and Attorneys:

Banks act as executors of wills, trustees and attorneys. It is safer to appoint a bank as a trustee than to appoint an individual.
Acting as attorney the customers banks receive payments and sign transfer deeds of properties of their clients.
6.4.1.7. As Representative:
A bank also acts as a representative or a correspondent of the customers and other banks.

6.4.2. General or Miscellaneous Services:

Modern commercial banks also perform other useful services. Such services are also taken under nontraditional functions. The
general services are as given below:
6.4.2.1. Safe Custody of Valuables:
A commercial bank receives securities, documents and valuable articles like gold, silver, jewellery, property documents etc. for
safe custody. Here the bank plays the role of a custodian. The bank receives them from the customers and returns them when
demanded.
6.4.2.2. Letter of Credit:
Banks issue letters of credit, which help the businessmen to purchase goods on credit from remote places the bills drawn by the
creditors (i.e. the sellers) are accepted by the concerned banks or their agents. Bank also issue traveller's cheques for the
convenience of the travellers.

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6.4.2.3. Safe Deposit Vault (Locker):
All leading commercial banks provide safe deposit vaults to the public at their selected branches. For this
purpose a bank keeps a strong room. This is kept mostly on the ground floor, equipped with safe deposit

lockers of different sizes and they are hired to the public at a reasonable rent. The procedure for safe deposit
vault transactions consists of the following steps:

1. A locker may be hired by anybody but the bank insists that the intending hirer must have a savings account with
maintaining a minimum balance, fixed up by the bank.
2. The person tending to hire a locker is required to execute a lease agreement continuing all the terms and conditions with
the banker and the lease promises to pay the annual rent in advance and authorises the lesser (banker) for debiting from his
savings account.
3. A locker may be hired in the joint names also and the operating instruction must be given to the banks whenever it is
necessary.
4. The banker maintains a Safe Deposit Vault register where in all the dealings are to be noted. The hirer may
communicate a "pass word" or "a code word" for identification of his signature. This is known only to the hirer and no other
else.
5. The locker can be operated by the double keys, one of which will be with the hirer and the master key is in the
possession of the banker.
6. The banker does not know the contents of the lockers. He keeps only the records of the visits of the hirer.
7. If the leasee of locker dies the contents of the locker should be delivered to his successor when a legal representation
from the court is produced. The successor has to make inventory of the contents of the locker in the presence of the lawyers
of the bank and the successor.
A safe deposit locker with Axis Banks:
Axis Bank safe deposit locker is located at select branches in cities all over the country .

Advantages:
1. Wide Availability: As on November 30, 2010 lockers are available at 944 branches and extension counters.
2. Various sizes: Axis Banks lockers available in various sizes like small, medium, large & extra large.
3. Competitive rentals: Locker rent is charged annually and rent is payable in advance. Locker rates vary based on location of
branch and locker sizes.
4. Extended banking hours: Extended banking hours to operate lockers.
5. Direct debits: Direct debits for locker rentals from his/her account .
Size of Locker Annual Rent (in Rs.)

Metro & Urban Location Semi Urban & Rural Location

Small 1,250
2,000

Medium 4,000 1,800

Large 8,000 4,000

Extra Large
10,000 8,000

6.4.2.4. Credit Information:

Banks collect and provide information about merchants and business concerns at distant places or in foreign 'countries.
Banks act as referees as to the financial status, business reputation and responsibility of their customers .

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6.4.2.5. Foreign Exchange:
Banks purchase and sell foreign currencies and facilitate foreign trade.
6.4.2.6. Remittance of Money:
Banks provide remittance facilities by issuing demand drafts at a nominal charge. businessman to send money
from one place to another easily and cheaply. Funds < mail transfer or telegraphic transfer.
6.4.2.7. Underwriting:
Banks underwrite the issue of shares and debentures issued by joint stock companies .

6.5. Non-traditional Functions / Untraditional Functions of Modern

Commercial Banks:
Some of the non-traditional functions are given below: (Note: sometimes the miscellaneous
functions of §
5.4 are also taken as son-traditional functions)

1. To procure agency and act as an agent: Under this the following functions are included.

i. Consigning and preparing consignment

ii. Taking delivery of consignment
iii. Warehousing and granting the receipt
iv. Acting as an attorney
v. Other allied work.

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2. To issue or make arrangement for issuing the public and or private debt if necessary.
3. To stand surely or to compensate if necessary.
4. To manage, sell and collect the amount against a property purported against its own
claims.
5. To establish its own rights on a property mortgaged to the bank against loans and
advances.
6. To act as a trustee.
7. To manage the affairs of estate if necessary.
8. To purchase land, building and other immovable property for the bank and to manage the
renovations, modification if necessary.
9. To transact in the property to the best advantage of the bank.
10. If helpful in bank's incidental work or conductive or progressive then to acquire the
rights of the business of a company either wholly or partly.
6.6 Merchant Banking Service:
The term "merchant bank" is widely and loosely used, being applied sometimes to merchants and
sometimes to merchants who are not banks and sometimes to houses that are neither merchants nor banks. As
a matter of fact the Accepting Houses, the Issuing Houses and such other institutions come under the
category of Merchant Banks. Merchant banking activities embrace a wide range of activities. Individual
institutions usually confine their operations to a few of the diverse activities attributable to merchant banking
activities as such. Even the clearing bank groups have started performing certain merchant banking activities
in the late 1960s, especially with the development of the starting inter bank and certificate of deposit markets
as also the euro-currency markets. In the early 1970s, the clearing banks began greatly to broaden the range
of merchant banking services they offered.
These services developed include corporate financial advice, capital issue facilities, investment
management, loan syndication and acceptance credits.
Traditionally the main business of the merchant bank has been concerned with acceptance credit
for the financing of the international trade and raising of loans for overseas borrowers by new capital issues.
They have today extended their interests over domestic financing, particularly as to advising on
amalgamations and take over’s and to investment management and higher purchase and leasing finance, they
also play an important part in the international short term capital market, sometimes called the "parallel"
money market. Rule 2 (e) of SEBI (Merchant Bankers) Rules 1992, defines a merchant banker as "any person
who is engaged in the business of Issue Management either by making arrangements regarding selling.
buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory services
in relations to such SEBI (= Securities and Exchange Board of India) issue management,

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6.7 Mobile Banking:
Mostly banking activities have mostly developed in urban areas. The India's
economy is solely based on rural economy. There is no all equate development of banking
system in rural areas. Though RBI has guided the banks to open branches of the banks in
villages, still the target has not been achieved for establishing the banks in rural areas.
Some banks have started the mobile bank services to the villages. The motor van of
the mobile bank goes to the pre-decided places at pre-decided time and day. All the banking
facilities are available in this motor-van such as bank-counter, safe, vault, stationary etc. This
mobile bank collects the savings of the people and they are invested in the appropriate
schemes. People can deposit or withdraw their money from this mobile bank. The first
mobile bank in India was started in 1950 by the bank of Patiala. Afterwards the mobile bank
facilities were started by bank of Baroda Punjab National Bank, Bank of India, Dena Bank,
Bank of Jaipur etc. There were about 26 such mobile offices of six banks cited above in
1971,
 UNIT 1 ELEMENTS OF BANKING - I

6.8 Nationalised Banks Vs. State Bank of India:

The points of difference between the nationalised banks and state banks of India are given as shown below:

Nationalised banks State Banks of India

1. The entire twenty commercial. Nationalised 1. The state bank of India was established under the state
banks were joint stock companies registered Bank of India Act, 1955 and the subsidiary banks were
under the Indian Companies Act, 1970. established under the State Bank of India (Subsidiary
2. Nationalised banks are governed by the Banks) Act, 1959.
statute of Indian companies Act, 1970. 2. State Banks of India are governed by the statute of
3. All the nationalised banks are fully owned by State Bank of India Act, 1955.
the government of India. 3. All the state banks are owned by Reserve Bank of
4. Nationalised banks are not the agents of RBI, India. The subsidiary banks are owned by the State
but under the Banking Laws (Amendment) Bank of India.
Act, 1953 RBI has been empowered to appoint 4. State Bank is the agent of RBI, under Section 45 of
any nationalised bank to act as its agent the RBI Act, 1934. RBI shall appoint the state bank as
anywhere in India. its sole agent at all places in India, where it does not
have an office or branch of its department and there is a
branch of the state bank or branch of subsidiary bank.

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 Note: The other functions of both the banks are similar.
6.9 Overdraft Vs. Cash Credit:
The points of difference between the overdraft and cash credit are given as shown below:

Overdraft Cash Credit

1. A current account holder is allowed by the 1. Cash credit is a drawing arrangement and
bank to draw more than his deposits in the amount under it is withdrawn / operated in the
account; such facility is called an overdraft same manner as a current account, up to a
facility. fixed limit. This limit is granted against pledge/
2. It is allowed for short / temporary periods hypothecation of goods / book debts /
without security, in which is known as clean documents of title of goods etc.
overdraft. 2. The customer withdraws from this account
3. The interest rate in more than that of cash as and when he needs the funds and deposits
credit any amount which he finds surplus with him
any day. This is operative and running account.
4. When a small amount is required it is better to 3. Generally the rate of interest is less.
take an overdraft. 4. For getting more amount of money on
5. For this overdraft there is no need to open a credit, cash credit is more useful.
new account. 5. For getting cash credit a personal account is
6. For taking the facility of over- draft a person to be opened.
has to give personal surety. 6. For getting cash credit a person has to give
more than one person's surety.
6.10 Loan Vs. Overdraft:

The points of difference between the loan and overdraft are given as shown below
Loan Overdraft
1. For getting the loan it is necessary to have 1. Overdraft facility is given in the current
loan account in the name of the customer. account of the customer.
2. When a businessman requires a fixed amount 2. Overdraft facility is given to the customer
for a fixed period he takes a loan from the when a customer requires more amount than
bank. that in his current account.
3. The total amount granted is paid to the 3. For providing the requirement of the
customer and the sum along with the interest customer the facility of the overdraft is given
is to be repaid in fixed number of to him.
instalments. 4. Overdraft is given on the personal surety of
4. For getting the loan the customer has to give the customer.
more than one sureties. 5. The customer is allowed to withdraw the
5. The granted loan is credited in the customer's false short amount as an overdraft amount on
account. the personal surety.
6. Even if the customer does not withdraw the 6. In overdraft facility the customer has to pay
granted loan he has to pay the interest on the interest only on the amount withdrawn.
total loan. 7. On paying the amount of overdraft it can
7. The amount once paid against the loan again be withdrawn.
cannot be withdrawn again.
7. IMPORTANCE OF BANKS IN INDIAN ECONOMY:
The development banking and financial intermediaries play a very important role in our economy. In fact, it is difficult to
imagine how our economic system could function effectively without many of their services. They are the key elements
of our economic structure, since they have the ability to catter and add to the money supply and thus create addition
purchasing power.
The process of socio-economic change is an intrinsic part of human civilization. Man has been striving endlessly to
discover the secrets of nature and there by benefit immensely in creating a peaceful, rich life for himself and his fellow-
beings. Man has benefited by agricultural, industrial and information activities. According to J.K. Galbraith, there are
three types of economic development:
1. Symbolic modernisation.
2. Maximised economic growth.
3. Selective growth.
Economic growth is the sine qua non of change and better living standards .

The primary objective of development:

India is a developing country. The primary objective of developing countries is to achieve rapid, balanced and sustained
rate of economic growth. Hence, efforts are directed towards the creation of conditions in which a fast development of
productive resources can takes place.
This inevitably necessitates the transformation of social and economic structures - which will not restrain the potential
productive forces and inhibit the development of resources.
The state has, therefore, to devise efficient and effective strategies, at once political, economic, social, technological and
cultural, so as to ensure a desirable co-ordination of all sectors of the economy and assure deliberate and requisite interest
and involvement of the people. This is largely achieved by adopting politically, the technique of planning and
economically, the tool of management. Countries on an individual basis in the underdeveloped world are progressively
and intensively resorting to centralized state management of the economy and to a restructured and neo-cultured society.
 Economic development, if conceived without appropriate social changes, soon becomes
stultified and stagnated. Social change cannot be achieved, if political, technological and cultural aspects
are not combined and woven strategically into the fabric of economic planning. Planning delineates
strategies. Finance is that administrative area or set of administrative functions in an organization which
relate with the arrangement of cash and credit, so that the organization may have the means to carry out its
objectives as satisfactory as possible.
1. Mobilisation of resources for the economy.
2. Channelizing the money in productive activities.
3. Generating income or profit.
4. Creating assets for the use of masses.
5. Contributing to the activities of promotion of the economy.
6. Equitable development of the economy.
In the process, finance transforms the economy. Banks collect
savings, from others, issuing in return claims against themselves and use the funds thus
acquired to purchase ownership or debt claims. They play the role of intermediaries between
the borrowers and lenders to acquire the primary securities of borrowers and provide other
securities for the portfolios of lenders. The banks create higher degree of safety and liquidity
over and above their intermediary's function.
Financial intermediaries are classified into the following groups:
1. The banking system (Central Banks, Commercial Banks, Co-operative Banks, Saving Banks etc.)
2. Other depository organizations (Mutual Funds, savings and loan associations, credit unions etc.)
3. Insurance organisations (Life Insurance, General Insurance, Postal Insurance, Pension Funds, Provident Funds etc.)
4. Development Banks and
5. Other Financial intermediaries (investment and finance companies, stock exchanges and other related intermediaries)

Function of the financial system is the sum total of functions of varied financial intermediaries. The functions of
the financial system extend from creation of money to proper management. It touches all aspects of the economy.
Banks are doing two types of functions: Traditional functions and non traditional functions. Traditional functions are as
follows:
1. Main functions:
i. Accepting the deposits
ii. Giving the financial loans and advances and
iii. Discounting the bills.
2. Subsidiary functions or credit creation:

I)Agency services (Issuing of credit instruments, cheques and circular notes, transferring the funds, purchase and sale of
securities collecting interest and dividend, making the payment acting as executors, trustees, attorneys, representative etc.)
II) Miscellaneous Services (safe custody of valuables, letter of credit, safe deposit vault, credit information, foreign
exchange, remittance of money, underwriting etc.)
Non traditional functions are as follows:
i. To procure agency and act as agent.
ii. To issue or make arrangement for issuing the public and or private debt if
necessary.
iii. To stand surety or to compensate if necessary.
iv. To manage sell and collect the amount against a property purported against
its own claims.
v. To establish its own rights on a property mortgaged to the bank against loans
and advances.
vi. To act as a trustee.
vii. To manage the affairs of estate if necessary.
viii. To purchase land, building and other irremovable property for the bank and
to manage the renovations, modification if necessary.
ix. To transact in the property to the best advantage of the bank.
x. If helpful in banks incidental work or conducive or progressive then to
acquire the rights of the business of a company either wholly or partly.
xi. All the above discussion reveal the role of banks in developing the welfare
of the trade and society. Hence banks play an important role in the development
of Indian economy.