Introduction to Banking System in India.ppt

Dr. S. Bulomine Regi., M.Com., M.Phil., SET., Ph.D
in Commerce., MBA.,SET., Ph.D in Management.,
PGDBA., M.Sc (Psy)., M.A (Pub. Admin)., M.A
Women Studies., M.A Tourism and Travel Studies.,
PGDGC.,
Assistant Professor of Commerce,
St. Mary’s College (Autonomous),
Thoothukudi.
E-mail id: drregi23@gmail.com

Outline
Bank – Banking – Banking System in India –
Origin of Bank-Classification of Banks –Types
of Customers RBI Functions- Commercial
Banks – Functions

BANK
The word “Bank” is derived from
French Word Bancus A Bench
German Word Back Joint Stock Fund
Italian Word Banco Desk/Bench

Meaning of Bank
Bank is an institution, which receives funds
from the public and gives loans and advances to
those who need them.
Definition of Bank
R.S.Sayer defines bank as, “ A bank is
an institution whose debts (deposits) are widely
accepted in settlement of other people’s debts to each
other.”

BANKER
A person who is doing
banking business is called a
banker.
It is not easy to define the term ‘banker’
precisely because a banker performs multifarious
functions.
(Cont..)

Banker
 be a man of wisdom
 not only acting as a depository
agent but also as a repository or
financial agents.

Definition of the term Banker
Earlier views
The Bill of Exchange Act, 1882 defines
“banker includes a body of persons whether
incorporated or not who carry on the business
of banking.”
Sec. 3 of Negotiable Instruments Act states
that “the term banker includes a person or
corporation or a company acting as a banker.”

Experts’ Views
Macleod’s View:
According to Macleod, “The essential
business of a banker to buy money and debts by
creating other debts. A banker is essentially a
dealer in debts or credit.”
Dr. Hart’s View:
Dr. Hart’s in his book ‘Law of Banking, that “
A banker is one who in the ordinary course of
his business honours cheques drawn upon him
by persons from and for whom he receives
money on current accounts.” (Cont..)

Sir John Paget’s View:
According to Sir John Paget, “ no person
or body corporate or otherwise can be a banker
who does not
1. Take deposits accounts
2. Take current accounts
3. Issue and pay cheques, and
4. Collect cheques crossed and uncrossed, for
his customers.”

Banking Company
Sec 5(b) of Banking Regulation
Act, 1949 ‘banking company’ means,
“a company which transacts the
business of banking in India.”

Banking
Sec 5(b) of Banking Regulation Act, 1949
‘banking’ means, “accepting, for the purpose
of lending or investment, of deposits of money
from the public, repayable on demand or
otherwise, and withdrawal by cheque, draft,
order or otherwise.”

Introduction to Banking System in India.ppt

STAGES IN HISTORY OF BANKING IN INDIA
History of Banking has been divided into
Stages like:
Pre-independence stage
Post Independence stage
Nationalisation of Banks
Introduction of Financial Sector Reforms
IT revolution in Banks

History of Banking in India
Phase- I ( Early Phases from 1786 - 1969 of
Indian Banks)
Phase- II (1949 Nationalisation of Indian Banks
and upto 1991 prior to Indian Banking Sector
Reforms)
Phase-III (New Phase of Indian Banking System
with the advent of Indian Financial and Banking
Sector Reforms after 1991)

In the mid of 19 century East India Company
IMPERIAL BANK OF INDIA
(1920)
Bank of Bengal
(1809)
Bank of Bombay
(1840)
Bank of Madras
(1843)

Later in
1865 Allahabad Bank
1894 Punjab National Bank
1906-1913 Bank of India, Central Bank of
India, Bank of Baroda, Canara
Bank, Indian Bank, Bank of
Mysore
1935 RESERVE BANK OF INDIA

During First Phase
• The growth of banks was very slow.
• Banks experienced periodic failures between
1913-1948.
• 1100 Banks (Approx.) mostly small.
• To streamline that the Government of India
came up with THE BANKING COMPANIES
ACT,1949.

THE BANKING COMPANIES
ACT, 1949
BANKING REGULATION ACT,1949
(as per amending Act of 1965- Act No. 23
of 1965)

RBI was vested with extensive powers for
the supervision of banking in India as the
Central Banking Authority.

(1949 Nationalisation of IndianBanks
and upto 1991 prior to Indian Banking
Sector Reforms)

After Independence,
Imperial Bank
State Bank India Act,
1955
State Bank of India

1949 ---- Banking Regulation Act
1955 ---- Nationalisation of SBI
1959 ---- Nationalisation of SBI subsidiaries
(7 Banks)
1961---- Insurance cover extended to deposits
1969 ---- Nationalisation of 14 major Banks
1971---- Credit Guarantee Corporation
1975 ---- Regional Rural Banks
1980 ---- Six Banks with deposits over 200 crores
were nationalised

LEARN BY YOURSELF
• List out the 7 SBI subisidary banks.
• What are the 14 major banks nationalised in the
year 1969?
• List out the banks nationalised in the year 1980.

(New Phase of Indian Banking System
with the advent of Indian Financial
and Banking Sector Reforms after
1991)

In 1991
Government opened the gate of Liberalisation of
banking practices as per the report of a banking
committee set up under the chairmanship of
Mr.M.Narasimham
(Narasimham Committee for the development and
growth of the Indian Banking System)

In 1993
• The Government merged New Bank of India
with Punjab National Bank.
• It was the only merger between nationalised
banks and resulted in the reduction of the
number of nationalised banks from 20 (14+6=
20) to 19.

Till now
Banking industry has changed tremendously
with retail banking shifting to universal
banking.
The country is flooded with foreign banks.
ATM, Phone Banking, Internet Banking etc.,
was introduced.
The entire banking system became more
convenient and swift.
The financial system of India shown a great deal
during this phase.

Banking System in India
RBI
SCHEDULED
BANKS
COOPERATIVE
BANKS
COMMERCIAL
BANKS
NON-
SCHEDULED
BANKS

COOPERATIVE
BANK
DISTRICT
CENTRAL
COOPERATIVE
BANKS
STATE
COOPERATIVE
BANKS
CENTRAL
COOPERATIVE
BANKS

COMMERCIAL
BANKS
INDIAN
BANKS
FOREIGN
BANKS

INDIAN BANKS
PUBLIC
SECTOR
PRIVATE
SECTOR

PUBLIC SECTOR BANKS
SBI & ITS
SUBSIDARIES
OTHER
NATIONALISED
BANKS
REGIONAL
RURAL BANKS

SCHEDULE BANK
• Registered in the Second Schedule of RBI Act,
1935.
• Banks paid-up capital and reserves of an
aggregate value of not less than Rs. 5 Lakhs

NON-SCHEDULE BANK
• Banking company as defined in clause (c) of
Section 5 of the Banking Regulation Act, 1949,
which is not a scheduled bank.
• Bank with reserve capital of less than Rs. 5lakh
• These banks are not governed according to RBI
Act.
• They don’t receive any benefits from RBI

COOPERATIVE BANKS
• Cooperative banks are registered under
Cooperative Societies Act.
• These banks are governed by the Banking
Regulations Act, 1949 and Banking Laws
(Cooperative Societies) Act, 1955.
• People who come together to jointly serve their
common interest often from a cooperative
society under the Cooperative Societies Act.

• When a Cooperative Society engages itself in
banking business it is called a Cooperative
Bank.
• It gives credit facilities to small farmers, salaried
employees, small-scale industries, etc.
• Cooperative Banks are available in rural as well
as urban areas.

CENTRAL COOPERATIVE BANK
Federations of
Primary Credit
Societies in a
District
Membership of
Primary Societies
only
Membership of
Societies as well as
individual

FUNDS OF THE BANKS
FUNDS OF
THE
BANKS
SHARE
CAPITAL
DEPOSITS
LOAN AND
OVERDRAFT
FROM STATE
COOPERATIVE
BANKS
JOINT
STOCKS

• These banks provide finance to member
societies within the limits of borrowing capacity
of societies.
• These banks also conduct all the business at a
Joint Stock Bank

STATE COOPERATIVE BANK
• State Cooperative Banks also known as Apex
banks.
• Its funds are obtained from their
• Own Share Capital
• Deposits
• Loans and
• Overdraft from RBI
• 50-90% of working capital of SCB are
contributed by the RBI

DISTRICT CENTRAL
COOPERATIVE BANK
• The District Central cooperative Banks are
federations of primary credit societies in a
specific area, normally a District.
• Usually located in District Headquarters,
• Some prominent town of the District.
• These banks have a few private individuals as
shareholders, who provide both finance and
management.

SOURCE OF FUND
SOURCE OF
FUND
SHARE
CAPITAL
DEPOSITS
FROM THE
PUBLIC
LOANS FROM
STATE
COOPERATIVE
BANKS
RESERVES

INDIAN BANKS
• Indian Banks are those banks, which are
incorporated in India.

COMMERCIAL BANKS
• Commercial banks are established with an
objective to help businessmen.
• These banks collect money from general public
and give short term loans to businessmen by
way of cash credits, overdrafts, etc.
• For the purpose of assessment of performance
of banks, the RBI categorise them as Public
Sector Banks, Old Private Sector Banks, New
Private Sector Banks and Foreign Banks

LEARN BY YOURSELF
List out the banks in
Public Sector Banks,
Old Private Sector Banks,
New Private Sector Banks, and
Foreign Banks
( Year of Establishment, Year of
Nationalisation and Owner(Started by),
Headquaters)

Learn By Yourself
Name of the
Bank
Year of
Establishment
Year of
Nationalisation
Owner Headquarters

Public Sector Banks
Public Sector Banks are banks, in which the
government has major holding.
They can be further subdivided into
SBI and its associate banks,
other nationalised banks and
regional rural banks.
Public sector banks comprise 19 nationalised
banks and SBI and its 7 associate banks.

Regional Rural Banks
To liquidate rural indebtedness by stages and to
dispense institutional credit facilities to framers
and artisans in rural areas.
The government of India promulgated 26th
September 1975, the regional rural banks
ordinance 1975, to set-up Regional Rural Banks
throughout the country.
RRB in India penetrated every corner of the
country and extended a helping hand in the
growth process of the country.

• SBI has 30 Regional Rural Banks in India known
as RRBs.
• The rural banks of SBI are spread in 13 states
extending from Kashmir to Karnataka and
Himachal Pradesh to North East.
• Apart from SBI, there are other few banks,
which functions for the development of the
rural areas in India

• RRBs provide institutional credit to the
weaker sections of the society
at the concessional rate of interest,
mobilise rural savings and
channelise for supporting the productive
activities in the rural areas.

Private Sector Banks
• After the nationalisation of 14 larger banks in
1969.
• No banks were allowed to be set-up in the
private sector.
• Global Trust bank was the first private bank
after liberlisation; it was later amalgamated
with Oriental Bank of Commerce (OBC).

• Housing Development Finance Corporation
Limited (HDFC) became the first to receive an
“in principle” approval from the RBI to set up a
bank in the private sector.
• Today, more than 30 private banks existing in
India.

Foreign Banks
• Foreign banks are those banks, which are
incorporated in a foreign country.
• They have set-up their branches in India.
• Now foreign banks in India are permitted to set-
up local subsidiaries.
• The policy conveys that Foreign Banks in India
may not acquire Indian Ones (except for weak
banks identified by the RBI, on its terms)
• Indian subsidiaries will not be able to open
branches freely.

TYPES OF BANK
• SAVINGS BANK
• COMMERCIAL BANKS
• INDUSTRIAL BANKS OR DEVELOPMENT
BANKS
• LAND DEVELOPMENT BANKS OR
AGRICULTURAL BANKS
• INDIGENOUS BANKS

• CENTRAL/FEDERAL/ NATIONAL BANKS
• COOPERATIVE BANKS
• EXCHANGE BANK

SAVINGS BANK
• Saving Banks are established to create saving
habit among the people.
• These banks are helpful for salaried people and
low income groups.
• The deposits collected from customers are
invested in bonds, securities etc.

COMMERCIAL BANKS
• Commercial banks are established with an
objective to help businessman.
• These banks collect money from general public.
• It give short-term loans to businessmen by way
of cash-credits, over drafts etc.
• It provide various services like
• collecting cheques,
• bill of exchange,
• remittance money from one place to
another place.

INDUSTRIAL BANKS / DEVELOPMENT
BANKS
• These banks collect cash by issuing shares and
debentures.
• It provide long-term loans to industries.
• The main objective of these banks is to provide
• long-term loans for expansion and
• modernisation of industries.

LAND DEVELOPMENT BANKS /
AGRICULTURAL BANKS
• Land mortgage of land development banks are
also known as Agricultural Banks.
• These are formed to finance agricultural sector.
• It also help in land development.

INDIGENOUS BANKS
• It means ‘Money Lenders’.
• They collect deposits from general public and
grant loans to the needy persons out of their
own funds as well as from deposits.
• These indigenous banks are popular in villages
and small towns.
• It perform combined functions of trading and
banking activities.

CENTRAL/FEDERAL/ NATIONAL BANKS
• Every country of the world has a Central bank.
In India, RBI
In USA, Federal Reserve
In UK, Bank of England
• These central banks are the bankers of the other
banks.

• It provide specialised functions i.e.
Issue of paper currency
Working as bankers of government,
Supervising and controlling foreign
exchange.
• A Central Bank is a non-profit making
institution.
• It does not deal with the public, it deals with
other banks.

COOPERATIVE BANKS
• Cooperative Banks are registered under the
Cooperative Societies Act, 1912.
• It give credit facilities to small framers, salaried
employees, small-scale industries etc.
• These banks are available in rural as well as
urban areas.

EXCHANGE BANK
• These banks are mainly concerned with
financing foreign trade.
• Hong Kong Bank, Bank of Tokyo, Bank of
America are the examples of Foreign Banks
working in India.

• Issue of Bank Notes
• Banker to the Government
• Custodian of the Cash Reserves of Commercial
Banks
• Custodian of country’s forex reserves
• Lender of last resort
• Controller of credit

Issue of Bank Notes
• The most important function of RBI is the
issuance of currency notes and coins, except the
one rupee note and coin which are issued by
the Ministry of Finance. All other notes bear
the signature of the RBI Governor. However, the
agency of distribution of all notes and coins
issued by the Government of India is the
Reserve Bank of India.

Banker to the Government
• The banking needs of the government, which
includes maintaining & operating the deposit
accounts of the government, collecting the
receipts of funds, and making payments on
behalf of the Government of India. It also
represents the Indian Government, as a member
of the International Monetary Fund and the
World Bank.

Custodian of Cash Reserves of
Commercial Banks
• Commercial banks are required to maintain
the cash reserves at a rate decided by the
RBI in its monetary policy.
Custodian of Foreign Exchange Reserve
RBI is maintaining a reserve of
foreign currencies that enables the RBI
to deal with any crisis situation.

Lender of the Last Resort
• Often regarded as the banker of banks, the RBI
acts as a parent to all commercial banks in
India. Thus, it becomes the lender of the last
resort for all banks when they are in a crisis
situation. RBI helps them by lending money,
although at higher RoI, to sail through the tide
of financial difficulties.

Controller of Credit
• RBI controls the credit created by the
commercial banks in India, in accordance with
the economic priorities of the government of
India. RBI uses quantitative and qualitative
methods to control and regulate the flow of
money in the market. These are implemented
by announcing monetary policies at regular
intervals. The monetary policy involves the
management of interest rates and money
supply. The central bank of India tweaks the
money supply to achieve objectives such as
liquidity, inflation, and consumption.

Primary Functions
Accepting Deposits and Advancing of Loans
are the two primary functions performed by
commercial banks.
1. Accepting Deposits:
One of the most essential functions of
commercial banks is accepting deposits.
Commercial banks accept deposits from their
customers in different forms based on the
requirements of different sections of society.
The main types of deposits include:

• Demand Deposits or Current Account
Deposits: The deposits which are repayable on
demand by the banks are known as demand
deposits or current account deposits. In general,
these kinds of deposits are maintained by
businessmen to make transactions with these
deposits. One can get the amount deposited as
demand deposits by a cheque without any
restriction. Besides, commercial banks do not
pay any interest to the depositors on these
accounts; instead, they charge some amount as a
service charge for running these accounts.

• Fixed Deposits or Time Deposits: The deposits
in which the depositor, deposits money with the
bank for a fixed time period are known as fixed
deposits or time deposits. These deposits do not
enjoy a cheque facility and carry a high interest
rate.

• Saving Deposits: The deposits, which include
combined features of demand deposits and
fixed deposits are known as saving deposits.
The depositors have the cheque facility to
withdraw money from their accounts, but there
are some restrictions on the number and
amount of withdrawals. The restrictions are
imposed to discourage the frequent use of
saving deposits. Besides, the interest rate on
saving deposits is less than the interest rate on
fixed deposits.

Advancing of Loans
• The banks are not allowed to keep the amount
deposited with them, idle. Therefore,
commercial banks have to keep some amount of
the total deposits as cash reserves and lend the
rest of the balance to needy borrowers and
charge interest from them. The interest received
by commercial banks from advancing loans is
the main source of their income. Some of the
different types of loans and advances made by
commercial banks are:

• Cash Credit: The loan given to the borrowers
against their current assets like stocks, bonds,
shares, etc., is known as cash credit. For this, a
credit limit is sanctioned to the borrower, and
money is credited to this account. The borrower
can now withdraw any amount at any time
within his credit limit. Interest is charged from
the borrower on the amount actually withdrawn
by him.

• Demand Loans: The loans given by the banks
which they can recall at any time on demand are
known as demand loans. The entire amount of
the demand loan is credited to the borrower’s
account, and interest is charged on that amount.
• Short-term Loans: Personal loans given to
borrowers against some collateral security are
known as short-term loans. The amount taken
as a loan is credited to the account of the
borrower, and he can withdraw that money
from his account. Interest is charged on the
entire sum of the loan granted.

Secondary Functions
Overdraft Facility:
A facility that allows the customer to overdraw
from the amount of his current account upto an
agreed limit is known as an overdraft facility. In
general, an overdraft facility is given to
respectable and reliable customers for a short
period. Besides, the customers have to pay
interest on the amount overdrawn by them.

Discounting Bills of Exchange:
• A facility in which the holder of a bill of
exchange, before its maturity date can get the
bill discounted with the bank. The bank pays
the amount to the holder after deducting some
amount as commission. Now, on the date of
maturity, the party which has accepted the bill
pays back the money to the bank.

Agency Functions
• There are some agency functions performed by
commercial banks for which they charge some
commission from their clients. Some of these
functions are:
• Transfer of Funds: With the help of instruments
like mail transfers, demand drafts, etc.,
commercial banks provide their customers with
the facility of easy and economical remittance of
funds from one place to another.

• Collection and Payment of Various Items:
Commercial banks provide their customers with
the service of collecting bills, interest,
subscriptions, rents, and other periodical
receipts on their behalf. They also make
payments for insurance premiums, taxes, etc.,
on their customer’s standing instructions.

• Purchase and Sale of Foreign Exchange: The
central bank gives authority to commercial
banks to deal in foreign exchange. Commercial
banks, on the behalf of their customers, buy and
sell foreign exchange and also helps in
promoting international trade.

• Purchase and Sale of the
Securities: Commercial banks on behalf of their
customers, purchase and sell government
securities and stocks and shares of private
companies.
• Income Tax Consultancy: Commercial banks
provide advice to their customers related to
income tax. They also help them in the
preparation of their income tax returns.

• Trustee and Executor: Commercial banks play
the role of a trustee and preserve the will of
their customers and as an executor, execute the
will after their death.
• Letters of Reference: Commercial banks
provide information about the economic
position of their customers to the traders and
vice-versa.

General Utility Functions
• Locker Facility: Commercial banks provide
their customers with the facility of lockers or
safety vaults so they can keep their valuable
things in safe custody.
• Traveller’s Cheques: To avoid the risk of taking
cash on their journey, commercial banks
provide their customers with the facility of
traveller’s cheques.
• Letter of Credit: Sometimes people need to
show their creditworthiness for various reasons.
Commercial banks certify the creditworthiness
of their customers whenever required.

• Underwriting Securities: Commercial banks
also performs the function of underwriting
securities. And as the public has full faith in the
bank’s creditworthiness, they do not hesitate in
purchasing the securities which are
underwritten by banks.
• Collection of Statistics: Commercial banks
advice their customers on financial matters by
collecting and publishing statistics related to
commerce, trade, and industry.

References
• S. Gurusamy, Banking Theory Law & Practice,
Vijiay Nicole Imprints Private Limited, Chennai.
• Banking Theory, Law and Practice by Gordon
and Natarajan, Himalaya Publishing House,
New Delhi.
• Banking Theory, Law and Practice by
S.M. Sundaram , Sree Meenakshi Publications,
Karaikudi.

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