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Handbook on Banking Awareness |1

Handbook on Banking Awareness |2

For IBPS,

SBI P.O./Clericals, RBI “B: Grade Competitive Exams.
…for Sure Success

A must READ for candidates appearing for Interviews

Handbook on

BANKING

AWARENESS
with 10 sets of multiple choice questions

N K Gupta

I B CA a IBC Academy Publications

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No part or whole of this book/publication may be re-produced, copied, stenciled, stored in a retrieval system and/or distributed in any form or by any means: mechanical, electronic, photocopying, scanning, recording, web-casting or otherwise without the written permission of the Publishers. The Publishers have acquired information in this book from the reliable sources. The Publishers or Distributers do not take any responsibility for the accuracy of the information published and the damages or loss, if any.

All disputes are subject to Bangalore jurisdiction only.

ALL RIGHTS RESERVED @ Publishers

I B CA
a IBC Academy Publications
E-mail: ibcacademy@gmail.com website: www.ibcacademy.in

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Preface
The syllabus of IBPS and SBI – Bank P.O. and Clerks examination has been changing in the recent times and the recent trends indicate greater focus on knowledge and awareness about the financial sector, at large and Banking sector, in particular. The Employers expects the aspiring candidates to possess a basic knowledge of Banking sector which would facilitate them in better appreciation of the nuances of Banking. Knowledge provides you strength and courage to stand up and face the challenges. This Book – Handbook of Banking Awareness – is a sincere effort in this direction and would ensure that the candidate is well conversant with macro level concepts of the Financial Sector and gets good understanding and awareness of Indian Banking sector and the terminology used by Professionals. This Book is compiled by a Senior Banker with over 26 years of rich working experience in Banking Industry and he joined State Bank Group as a P.O. over 2 decades ago. The Book coverage is comprehensive and the study material is described in a lucid manner and precisely, just right for your better understanding. The Glossary of Terminology is quite exhaustive and you would certainly find it valuable. The Book also includes a section of 10 sets of Multiple Choice Questions, which is adequate to prepare you for the written Examinations conducted by IBPS, SBI, RBI etc. I am sure the aspiring candidates would find the book very useful in their preparation not only for the written competitive examinations but also for Group Discussions and Personal Interviews in Banking and Financial sector companies in India. Best Wishes for your success. N K Gupta

(mail your suggestions to nkeyjee@gmail.com)

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INDEX

CHAPTER -1: FINANCIAL MARKETS IN INDIA
History of Banking Industry Definition of Bank Classification of Banks Functions of Commercial Banks Commercial Bank & Economic Development

(01 – 14 )

CHAPTER -2: INDIAN BANKING SECTOR
Indian Banking System Classification of Banks Nationalisation of Banks State Bank & its Associate Banks Private Sector Banks Foreign Banks Scheduled Bank Vs Non-Scheduled Bank

( 15 – 32 )

CHAPTER -3: REGULATORY MACHINERY IN THE FINANCIAL MARKETS
Reserve Bank of India Monetary Policy of the Reserve Bank of India National Bank for Agriculture & Rural Development Securities & Exchange Board of India Insurance Regulatory & Development Authority

( 33 – 53 )

CHAPTER -4: INDIAN CURRENCY & NOTE ISSUING POLICIES IN INDIA
Indian Currency System Methods of issuing currency Exchange Rate System Convertibility of Rupee Partial Convertibility Some Facts about Indian Currency

( 54 – 62 )

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CHAPTER -5: REPORTS – FINANCIAL & BANKING SECTOR REFORMS IN INDIA ( 63 – 7O )
Chakravarthy Report on the Working of the Monetary System (1985) Narasimham Committee Report (1991) Goiporia Committee Report (1991) Narasimham Committee Report (1999) Kapoor Committee Report on Co-operative Banking Reform (1999)

CHAPTER -6: DEVELOPMENTAL INSTITUTIONS IN INDIA
Introduction Industrial Finance Corporation of India ICICI (now ICICI Bank) State Finance Corporation Industrial Development Bank of India (Now IDBI Bank) Small Industries Development Bank of India Industrial Investment Bank of India National Housing Bank Unit Trust of India Life Insurance Corporation of India Export Import Bank of India

( 71 – 86 )

CHAPTER -7: FINANCIAL PRODUCTS & SERVICES
Credit Cards Debit Cards Smart Cards Automated Teller Machines or Cash Dispensers E-Banking Internet Banking Electronic Funds Transfer Mobile Banking One-Time Password Point of sale Terminal Outsourcing

( 87 – 99 )

CHAPTER -8: DEFINING BANK & CUSTOMER RELATIONSHIP
Banker & Customer Special Types of Customers

( 100 – 120 )

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Banker – Customer Relationship Rights of a Bank Know Your Customer (KYC) Guidelines Obligation of a Bank Obligation of the Customers

CHAPTER -9: BANK ACCOUNTS & NEGOTIABLE INSTRUMENTS
Types of Accounts with the Bank Deposit Insurance & Guarantee Corporation (DICGC) Facility of Nomination Negotiable Instruments MICR cheques/Drafts Alterations Crossings Endorsements Hundi Clayton’s Rule Holder & Holder in Due Course

( 121 – 140 )

CHAPTER -10: LOAN & ADVANCES PRODUCTS
General Rules of Sound Lending Loans & Advances Letter of Credit Guarantees Credit Information Bureau of India (CIBIL)

( 141 – 151 )

CHAPTER -11: CAPITAL MARKETS IN INDIA
Money Market & Capital Market Composition of Money Market The Repo Market Financial Instruments under Money Market Capital Market Stock Exchanges Money Market Mutual Funds Bombay Stock Exchange National Stock Exchange OTC Exchange of India Multi Commodity Exchange of India (MCX)

( 152 – 166 )

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CHAPTER -12: CO-OPERATIVE BANKS & REGIONAL RURAL BANKS
Co-operative Banks Structure of Co-operative Banks in India Central Co-operative Banks State Co-operative Banks Urban Co-operative Banks Regional Rural Banks Problems faced by Regional Rural banks

( 167 –179 )

CHAPTER -13: INSURANCE SECTOR IN INDIA
Insurance Sector Insurance Companies in India Product and Services Offered Non-Life Insurance Companies in India Private Sector Players in India

( 180 – 190 )

CHAPTER -14: NBFC SECTOR IN INDIA
NBFC Sector NBFC Vs NBFI Venture Capital Micro Finance Institutions Financial Inclusion Grameen Bank

(191 - 205)

CHAPTER -15: GLOSSARY OF BANKING TERMINOLOGY

(i – xiii)

CHAPTER -16: OBJECTIVE TYPE QUESTIONS AND ANSWERS

(0 1 – 40 )

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CHAPTER -1

Financial Markets in India

INTRODUCTION
According to some authorities, the work “Bank” itself is derived from the words “bancus” or “banque,” that is, a bench. The early bankers, the Jews in Lombardy, transacted their business on benches in the market place. When a banker failed his “banco” was broken up by the people, hence the word “bankrupt.” This etymology is however, ridiculed by Macleod on the ground Ages”. There are others, who are of the opinion that the word “bank” is originally derived from the German word “back” meaning a “joint stock fund”, which was Italianised into “banco” when the Germans were masters of a great part of Italy. This appears to be more possible. But “whatever” be the origin of the word “bank‟, “as Professor Ramchandra Rao says “It would trace the history of banking in Europe from the Middle Ages.”

EARLY HISTORY OF BANKING
As early as 2000 B.C., the Babylonians had developed a banking system. There is evidence to show that the temples of Babylon were used as banks and such great temples as those of Ephesus and of Delbhi were the most powerful of the Greek banking institutions. But the spread of irreligion soon destroyed the public sense of security in depositing money and valuables in temples, and the priests were no longer acting as financial agents.

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The origin of modern banking in India dates back to 1770 when the first joint-stock bank, named the Hindustan Bank, was started by the English Agency house of Alexander & Co, in Calcutta. The bank was, however, would closed up in 1832.

PRESIDENCY BANKS
The real growth of modern commercial banking began in the country when the government was awakened to the need for banks in 1806 with the establishment of the first Presidency Bank, called the Bank of Bengal, in Calcutta in that year. Then followed, the establishment of two other Presidency Banks, namely, the Bank of Bombay in 1840 and the Bank of Madras in 1843. To each of these banks, the government had subscribed Rs. 3 lacs to their share capital. However, a major part of their share capital was contributed by the European shareholders. These Presidency Banks, however, enjoyed the monopoly of government banking. They were also given the right of note-issue in 1823, which was however, withdrawn in 1862. These three Presidency Banks continued till 1920. In 1921 they were amalgamated into the Imperial Bank of India.

INDIAN JOINT-STOCK BANKS
The year 1860 was a landmark in the history of public banks in India, since in that year the principle of limited liability was first applied to join-stock banks. Since 1860 till the end of the nineteenth century, a number of Indian joint stock banks come into existence. For instance, the Allahabad Bank was started at Allahabad in 1865. In 1875, the Alliance Bank of Simla was started. In 1889, another Indian bank called Oudh Commercial Bank was established. In 1895, the famous Punjab National Bank came into existence. Inspired by the Swadeshi Movement, several Indian entrepreneurs ventured into the modern banking business. During the boom period of 1906-13, thus, there was a mushroom growth of banks. Many prominent banks also came into existence during this period. These were the Bank of India (1906), the Canara Bank (1906), the Bank of Baroda (1908), and the Central Bank of India (1911).

BANKING DEVELOPMENTS/REFORMS DURING THE PLANNING ERA

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After independence, the Government of India launched economic planning in the country since 1951. During the last 40 years of the planning era, commercial banking has undergone drastic transformation through several important developments/ reforms and policy measures introduced by the government. Some of the major changes introduced in the Indian banking system may be enlisted as follows: (1) Liquidation and amalgamation of banks; (2) Nationalization of the Reserve Bank of India; (3) Banking legislation; (4) Evolution of public sector banking through bank nationalization. (5) Declining significance of foreign banks; (6) Structural changes of commercial banking; (7) New strategies in banking business.

EVOLUTION OF FINANCIAL SYSTEM IN INDIA
1. 2. 3. 4. Bombay Stock Exchange (BSE) became operational in 1870. Life Insurance Corporation of India (LIC) was started and became functional as the first Life Insurance Company in 1818. General Insurance Company (GIC) was established in 1850 to undertake Non-Life Insurance business in India. Reserve Bank of India (RBI) was established on 1st April, 1935 as Central Bank of India. Later it was converted into a Public Institution controlled by Central Government in 1949. Deposit Insurance Company, now called DICGC, was incorporated in 1962 to provide protection to their deposits with banks and insurance for a minimum of their deposits with Banks.

5.

6. In order to provide an avenue for Retail Investors to participate into Stock Exchanges and help national economy to grow by channelizing public resources, Unit Trust of India was established in 1964.

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7.

Export Credit & Guarantee Corporation (ECGC) was established in 1964 to provide protection to Indian exporters against the associated risk involved in the international trade.

8. In July, 1969, Government of India nationalized 14 large Banks with a view to accelerate economic growth of the country and channelizing resources to the needy sectors of economy. In April, 1980, six more Banks were further nationalized. 9. In 1975, Regional Rural banks were set up with the sole objective to provide credit to Agriculture sector in a more efficient and cost effective manner. In 1969, the Government of India felt that the Commercial Banks are not participating efficiently in the socio-economic development of the masses and rather it is confining its area of operations in Urban centers where credit concentration was with Large Industrial units. Thus, started the spate of Nationalisation of 20 Commercial Banks in 2 phases, in 1969 and in 1980. For the focused growth of Agriculture sector, Banking sector was strengthen with Multi-agency approach to enhance credit availability to the sector viz. by Commercial banks, Co-operative Banks and Regional Rural Banks. In 1982, National Bank for Agriculture and Rural Development (NABARD) was formed by separating the Agriculture Department of RBI, with an objective to regulate the flow of credit to Agriculture sector and Rural markets as an Regulator. While the Indian banking system was dominated by public sector and Government owned players till 1990. Later, the Government of India took several steps to de-regulate the financial sector and allowed Foreign Banks to open branch offices in India liberally. The ownership pattern and domain of operating environment of Developmental Institutions were also reviewed which impacted significantly to the institutions like ICICI, IDBI, FCI etc. This led to a fierce competitive environment in the Banking sector and the next 2 decades have seen enormous growth in the Indian Banking Industry with size of banks as well as business volumes growing rapidly. Most of the Banks have embraced new-age technology and the prudential exposure norms, Capital structure and the supervisory systems have strengthened. In 2002, Foreign Direct Investment (FDI) in the Banking sector was allowed upto a max. of 49%. This saw a huge inflow of capital into the Indian banking Industry and listing of Banks into capital Markets.

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Later, in 2004, the ceiling of FDI investment in Banking sector was enhanced to 74%, though with adequate safeguards.

DEFINITION OF A BANK
A banking company is defined as a company which transacts the business of banking in India. The Banking Regulation Act defines the business of banking by stating the essential functions of a banker. It also states the various other businesses a banking company may be engaged in and prohibits certain businesses to be performed by it. The term “Banking‟ is defined as “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 of otherwise” Section 5 (b). The sailent features of this definition are as follows: (i) A banking company must perform both of the essential functions, viz., (a) accepting of deposits, and (b) lending or investing the same. If the purpose of accepting of deposits is not to lend or invest, the business will not be called banking business. The explanation to Section 5(c) makes it clear that any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business, as such manufacturer or trader shall not be deemed to transact the business of banking. (ii) The phrase “deposit of money from the public‟ is significant. The banker accepts deposits of money and not anything else. The word “public‟ implies that a banker accepts deposits from anyone who offers his/her money for such purpose. The banker however, can refuse to open an account in the name of the person who is considered as an undesirable person, e.g., a thief, insane person, etc. Acceptance of deposits should be the known business of a banker. The money-lenders and indigenous bankers depend on their own resources and do not accept deposits from the public. If they ask for money from their friends or relatives in case of need, such money is not deemed as deposit accepted from the public.

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(iii) The definition also specifies the time and mode of withdrawal of the deposits. The deposited money should be repayable to the depositor on demand made by the latter or according to the agreement reached between the two parties. The essential feature of banking business is that the banker does not refund the money on his own accord, even if the period for which it was deposited expires. The depositor must make a demand for the same. The Act also specified that the withdrawal should be effected through an order, cheque, draft or otherwise. It implies that the demand should be made in a proper manner and through an instrument in writing and not merely by verbal order or a telephonic message. It is thus clear that the underlying principle of the business is that the resources mobilized through the acceptance of deposits must constitute the main stream of funds which are to be utilized for lending or investment purposes. The banker is, thus, an intermediary and deals with the money belonging to the public. A number of other institutions, which also deal with money, are not designated as banking institutions, because they do not fulfill all the above mentioned pre-requisites. The specialized financial institutions, e.g., Industrial Finance Corporation of India and State Finance Corporations, are not banks because they do not accept the deposits in the prescribed manner. The essence of banking business lies in the two essential functions. Name must include the word “Bank‟, “Banker‟ or “Banking‟ - Section 7 makes it essential for every company carrying on the business of baking in India to use as part of its name at least one of the words-bank, banker, banker, banking or banking company. Besides, it prohibits any other company of firm, individual or group of individuals, from using any of these words as parts of its/his name. Section 7 has been amended in 1983 with the effect that any of these words cannot be used by any such company event “in connection with its business.” According to Walter Leaf “A bank is a person or corporation which holds itself out to receive from the public, deposits payable on demand by cheque.” Horace White has defined a bank, “as a manufacture of credit and a machine for facilitating exchange.” The Banking Companies Act of India defines Bank as “A Bank is a financial institution which accepts money from the public for the purpose of lending or investment repayable on demand or otherwise withdrawable by cheques, drafts or order or otherwise.”

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Thus, we can say that a bank is a financial institution which deals in debts and credits. It accepts deposits, lends money and also creates money. It bridges the gap between the savers and borrowers. Banks are not merely traders in money but also in an important sense, manufacturers of money.

CLASSIFICATION OF BANKS
Broadly speaking, banks can be classified into Commercial Banks and Central Bank. Commercial banks are those which provide banking services for profit. The Central bank has the function of controlling commercial banks and various other economic activities. There are many types of commercial banks such as: 1. Deposit Banks: The most important type of deposit banks is the commercial banks. They have connection with the commercial class of people. These banks accept deposits from the public and lend them to needy parties. Since their deposits are for short period only, these banks extend loans only for a short period. Ordinarily, these banks lend money for a period between 3 to 6 months. They usually do not like to lend money for long periods or to invest their funds in any way in long term securities to avoid mismatch in liquidity position. Industrial Banks: Industries require huge capital resources for a long period to buy machinery and equipments. Industrial banks help such industrialists. They provide long term loans to industries. Besides, they buy shares and debentures of companies, and enable them to have fixed capital. Sometimes, they even underwrite the debentures and shares of big industrial concerns. The important functions of industrial banks are: 1. They accept long term deposits. 2. They meet the credit requirements of industries by extending long term loans. 3. These banks advise the industrial firms regarding the sale and purchase of shares and debentures.

2.

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The industrial banks play a vital role in accelerating industrial development. In India, after attainment of independence, several industrial banks were started with large paid up capital. They are, The Industrial Finance Corporation (IFCI), The State Financial Corporations (SFC), Industrial Credit and Investment Corporation of India (ICICI) and Industrial Development Bank of India (IDBI) etc. 3. Savings Banks: These banks were specially established to encourage thrift among small savers and therefore, they were willing to accept small sums as deposits. They encourage savings of the poor and middle class people. In India, we do not have such special institutions, but post offices perform such functions. After nationalization, most of the nationalized banks accept the saving deposits.

4. Agricultural Banks: Agriculture has its own problems and hence there are separate banks to finance it. These banks are organised on co-operative lines and therefore, do not work on the principle of maximum profit for the shareholders. These banks meet the credit requirements of the farmers through term loans, viz., short, medium and long term loans. There are two types of agricultural banks, (a) Agricultural Co-operative Banks, and (b) Land Mortgage Banks. Co-operative Banks are mainly for short period loans. For long period loans, there are Land Mortgage Banks. Both these types of banks are performing useful functions in India. 5. Exchange Banks: These banks finance mostly for the foreign trade of a country. Their main function is to discount, accept and collect foreign bills of exchange. They buy and sell foreign currency and thus help businessmen in their transactions. They also carry on the ordinary banking business. In India, there are some commercial banks which are branches of foreign banks. These banks facilitate for the conversion of Indian currency into foreign currency to make payments relating to overseas travel, education expenses and foreign exporters. They purchase bills from exporters and sell their proceeds to importers. They purchase and sell forward “foreign exchange” too and thus

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minimise the difference in exchange rates between different periods, and also protect merchants from losses arising out of exchange fluctuations by bearing the risk. The industrial and commercial development of a country depends these days, largely upon the efficiency of these institutions. 6. Miscellaneous Banks: There are certain kinds of banks which have arisen in due course to meet the specialized needs of the people. In England and America, there are investment banks whose object is to control the distribution of capital into several uses. American Trade Unions have got labour banks, where the savings of the labourers are pooled together. In London, there are the London Discount House whose business is “to go about the city seeking for bills to discount.” There are numerous types of different banks in the world, carrying on one or the other banking business.

FUNCTIONS OF COMMERCIAL BANKS
A commercial bank is a financial institution whose main business is to accept deposits from the public and to give loans to those who require it for short periods. The general functions of a commercial bank may be summarized as follows:1. RECEIVING OF DEPOSITS The most important functions of the commercial banks is to receive deposits from the public. The commercial banks not only protect them but also help transfer of funds through cheques and even undertake to repay the money in legal tender money. Deposits received by the commercial banks are of various types, - fixed deposits, savings deposits, current deposits and recurring deposits. Fixed deposits or Time deposits are with the bank for a specified period of time and they can be withdrawn only after the expiry of the said period. The interest rate depends on the time agreed upon. The longer the maturity period, the higher the interest rate and vice versa. Form the point of view of safety and interest, fixed deposits are preferable. Savings deposits are demand deposits received subject to certain restrictions. Rate of interest is normally lower on savings deposits and withdrawals may be made once or twice a week.

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At present, RBI stipulates all Banks to pay a minimum floor of interest rate on Savings Bank account at 4% p.a. However, it has freed the upper ceiling; as such the Banks are free to determine their interest rates payable on Savings accounts. Most of the Banks now pay interest on savings Bank in the range of 5.50% - 7.00& p.a. Current deposit or demand deposits as the name denotes, are those deposits withdrawable by the depositor at any time without giving any prior notice by means of cheques. The banks do not pay any interest on demand deposits, but in fact make a small charge on customers with current account. Recurring deposits are those deposits received by the banks in equal monthly premium for a certain number of years the total of which will be paid to the depositor with interest due thereon after the expiry of the date of maturity. Deposits at call according to which, deposits may be withdrawn when asked for by the depositor, deposits at short notice by which depositors are required to give notice before certain number of days (7, 21, 30, 45 or 90) for withdrawal of deposits, short-time deposits for short period of a year or less for lower interest and retirement benefits deposits, are some of the important forms of deposits received by the commercial banks. 2. MAKING LOANS AND ADVANCES The second principal functions of the commercial banks are to make loans and advances out of the public deposits. Direct loans and advances are given to all persons against personal security, gold and silver and other movable and immovable assets. This the banks do by overdraft facilities, that is, by allowing the borrower or overdraw his current account and also by discounting bills of exchange. The merchants and manufacturers enabled to obtain adequate funds for production of goods and services. They help in the development of those industries which perform the most useful service to the community. The loans and advances made by the commercial banks are of various forms, like cash credit, overdraft, demand loan, hire purchase loan, etc. Cash credit is that loan given by a commercial bank in installments against the security of raw materials, produced goods, etc. Overdraft is made on security against stock and shares, insurance policies, etc., under current account. Demand loan is paid in full to the debtor at a time. Hire purchase

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loans are made to all persons for the purchase of customer durable goods like radio, bicycle, tailoring machine, sites for buildings etc and these loans are repayable to the bank in easy installments with interest due thereon.

3. AGENCY SERVICES A commercial bank provides a range of investment services. Customers can arrange for dividends to be sent to their bank and directly remitted into their bank accounts, or for the bank to detach coupons from bearer bonds and present them for payments and to act upon announcements in the Press of drawn bonds, coupons payable, etc. Orders for the purchase or sale of stock exchange securities are executed through the banks’ brokers, who may also offer their opinions or advisory on securities or lists of securities. Similarly, banks will make applications of behalf of their customers for allotments arising from new capital issues, pay call monies as they fall due (viz., subscriptions to capital issues), and ultimately obtain the share certificate or other documents of title. On certain agreed terms, the banks also allow their names to appear on approved prospectuses or other documents as bankers for the issue of new capital, they will receive applications and carry out other instructions. A commercial bank undertakes the payment of subscriptions, premia, rents and collection of cheques, bills, promissory notes etc., on behalf of its customers. It also acts as a correspondent or representative of its customers, other banks and financial corporations. Most of the commercial banks have an executor and trustee departments; some may have affiliated companies to deal with this branch of their business. They aim to provide, before, a complete range of trustee, executor, or advisory services for a small charge. The business of banks acting as trustees, executors, administrators, etc., has continuously expanded with considerable usefulness to their customers. By appointing a bank as an executor or trustee of his will, the customer secures the advantage of continuity, and avoids having to make changes; impartiality in dealing with beneficiaries and in the exercise of discretions; and the legal and specialized knowledge pertaining to executor and trustee services. When a person dies without making a will, the next-of-kin can appoint the bank to act as administrator and to deal with the estate in

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accordance with the rules relating to intestacies. Alternatively, if a testator makes a will but fails to appoint an executor, or if an executor is unable or unwilling to act, the bank can usually undertake the administration with the consent of the persons who are immediately concerned. Banks will act solely or jointly with others in these matters, as also in the case of trustee for stocks, shares funds, properties or other investments. Under a declaration of trust, a bank undertakes the supervision of investments and distribution of income; a customer’s investments can be transferred into the bank’s name, enabling it to act immediately upon a notice or rights issue, allotment letters, etc. Alternatively, where it is not desired to appoint the bank as nominee, these services may still be carried out by appointing the bank as attorney. Where business is included in an estate or trust, a bank will provide for its management for a limited period, pending its sale to the best advantage as a going concern or transfer to a beneficiary. Private companies wishing to set up pension funds may appoint a bank as a custodian, trustee and investment adviser, while retaining the administration of the scheme in the hands of the management of the fund. Most banks will undertake on behalf of their customers the preparation of income tax returns and claims for the recovery of overpaid tax; they also assist the customers in checking of assessments. In addition to the usual claims involving personal allowances and reliefs, claims are prepared on behalf of residents abroad, minors, charities, etc. 4. GENERAL UTILITY SERVICES These services are those in which the bankers position in not that of an agent for his customer. They include the issue of credit instruments like letters of credit and travelers cheques, the acceptance of bills of exchange, the safe custody of valuables and documents, the transaction of foreign exchange business, acting as a referee as to the respectability and financial standing of customers and providing specialized advisory service to customers. By selling drafts or orders and by issuing letters of credit, circular notes, travellers‟ cheques, etc., a commercial bank is discharging a very important function. A bankers draft is an order, addressed by one office of a bank to any other of its branches or by any one bank to another, to pay a specified sum to the person concerned.

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A letter of credit is a document issued by a bank, authorizing another bank to whom it is addressed, to honour the cheques of a person named in the document, to the extent of a stated amount in the letter and to charge the same to the account of the opener of the letter of credit. A letter of credit includes a promise by the issuing banker to accept all bills to the limits of credit. When the promise to accept is conditional on the receipt of the documents of title to goods, it is called a documentary letter of credit. But the banker will still be liable for bills negotiated before the expiry of the period of its currency. A Circular letter of Credit is generally intended for travelers who may require money in different countries. A letter of credit may be divided into traveler’s letters of credit and guarantee letters of credit. A travelers letter of credit carries the instruction of the issuing bank to its foreign agents to honour the beneficiary‟s drafts, cheques, etc., to a stated amount which it undertakes to meet on presentation. While issuing guarantee letters of credit, the banker secures a guarantee for reimbursement at an agree rate of interest or he may insist on sufficient security for the grant of the credit. There is yet another type which is known as Revolving Credit. Here the letter is so worded that the amount of credit available automatically reverts to the original amount after the bills negotiated under them are duly honored. Circular Notes are cheques on the issuing banker for certain round sums in his own currency. On the reverse side of the circular note is a letter addressed to the agents specifying the name of the holder and referring to a letter of indication in his hands, containing a specimen signature of the holder. The note will not be honoured unless the letter of indication is presented. Travellers cheques are documents similar to circular notes with the exception that they are not accompanied by any letter of indication. Circular cheques are issued by banks in certain countries to their agents abroad. These agents sell them to intending visitors to the country of the issuing bank. Another important service rendered by a modern commercial bank is that of keeping in safe custody valuables such as negotiable securities, jewellery, documents of title, wills, deed-boxes, etc., Some branches are also equipped with specially constructed strong rooms, each containing a large number of private steel safes of various sizes known as “Lockers”. These may be used by non-customers for a small fee as well as by regular customers. Each licensee in provided with the key of an individual safe and thus not only obtains protection for his valuables, but also retains full

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personal control over them. The safes are accessible at any time during banking hours and often longer. For shopkeepers and other customers who handle large sums of money after banking hours, night safes are made available by many banks. Night safe takes the form of a small metal door in the outside wall of the bank, accessible from the street, behind which there is a chute connecting with the bank‟s strong room. Customers who require this service are provided with a leather wallet, which they lock before placing in the chute. The wallet is opened by the customer when he calls at the bank the next day to pay the contents into his account. Another function of great value, both to bankers and to businessman, is that of a referee as to the respectability and financial status of the customer. Among the services introduced by modern commercial banks during the last quarter of a century or so, the bank giro and credit cards deserve special mention. The bank giro is a system by which a bank customer with many payments to make, instead of drawing a cheque for each item, may simply instruct his bank to transfer to the bank accounts of his creditor the sum due from him, and he writes one cheque debiting his account with the total amount. Credit advices containing the name of each creditor with the name of his bank and the branch will be cleared through the “credit clearing‟ of the clearing-house, which operates in a similar way as for the clearing of cheques. Even non-customers of a bank for a small charge may make use of this facility. A direct debiting service is also operated by some banks. This service is designed to assist organizations which receive large number of payments on a regular basis. Credit cards are introduced for the use of credit-worthy customers. Users are issued with a card on production of which their signature is accepted on bills in shops and establishments participating in the scheme. The banks thereby guarantee to meet the bill and recover from the cardholders through a single account presented periodically. In some cases uses are required to pay a regular subscription for the use of the service as well. An extension of the scheme allows the repayment of large sums (subject to a maximum) over a period at interest.

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OVERSEAS TRADING SERVICES
Recognition of overseas trade has led modern commercial banks to set up branches specializing in the finance of foreign trade and some banks in some countries have taken interest in export houses and factoring organizations. Assisted by banks affiliated to them in overseas territories, they are able to provide a comprehensive network of services for foreign banking business, and may transactions can be carried through from start to finish by a home bank or its subsidiary. In places where banks are not directly represented by such affiliated undertakings, they have working arrangements with correspondent banks so that banks are in a position to undertake foreign banking business in any part of the world. The banks provide more than just a means for the settlements of debts between trades both at home and abroad for the goods they buy and sell; they are also providers of credit and enable the company to release the capital which would otherwise be tied up in the goods exported. 5. INFORMATION AND OTHER SERVICES As part of their comprehensive banking services, many banks act as a major source of information on overseas trade in all aspects. Some banks produce regular bulletins on trade and economic environment at home and abroad, and special reports on commodities and markets. In some cases, they invite enquiries for those wishing to extend their foreign trade, and are able through their correspondents to furnish the names of reputable and interested dealers of goods and commodities and to advise on the appointment of suitable agents. On request, banks obtain for customers, for business houses, confidential opinions on the financial standing of companies, firms or individuals at home or overseas. Commercial banks furnish advice and information outside the scope merely of trade. If it is desired to set up a subsidiary or branch overseas (or for an overseas company to set up in the home country) they help to establish contracts with local banking organizations. To sum up, the service rendered by a modern commercial bank is of immense economic value. It mobilizes the scattered saving of the community and redistributes them into more useful channels. It constitutes the very life blood of an advanced economic society.

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COMMERCIAL BANKS AND ECONOMIC DEVELOPMENT
Commercial banks play a significant role in the development of nation. In fact, without the evolution of commercial banking in the 18th and the 19th centuries, Industrial Revolution would not have taken place in England. It will be equally true to state that without the development of sound commercial banking, underdeveloped countries cannot hope to join the ranks of advanced countries. For, industrial development requires the use of capital which is made possible with the existence of banks to provide the necessary finance to acquire capital. The important services provided by commercial banks and significant role played in the economic development of nations are: (i) Banks are necessary for trade and industry: All economic progress in the last two centuries or so has been based on extensive growth of trade and industrialization, which could not have taken place without the use of money. But money does not mean coins and currency notes only, since this form only a small proportion of the total volume of money supply. It is the bank deposits on which cheques can be issued that constitute the important sources of money. In all large transactions, payments are not made in terms of money but in terms of cheques and drafts. Between the countries, International trade is financed through bill of exchange which are discounted (i.e., bought) by banks. Without the use of the bank cheque, the bank draft and the bill of exchange, domestic trade and international trade could not have developed, and without such trade, specialization and industrial development could not have been feasible. (ii) Banks help in distribution of funds between regions: Another way by which commercial banks encourage production and enhance national income is by the transference of surplus capital from regions where it is not wanted so much, to those regions where it can be more usefully and efficiently employed. This distribution of funds between regions has the effect of opening up backward regions and paying the way for their economic development. (iii) Banks create credit and help in business expansion: Fluctuations in bank credit have an important bearing on the level of economic activity. Expansion of bank credit will provide more funds to entrepreneurs and, hence, will lead to more investment. Under conditions of full employment, expansion of bank credit will have the effect of inflationary pressure. But under conditions of unemployment, it will push up production in the

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country. On the other hand, a decline in bank credit may result in decline in production, employment, sales and prices. From the view of an underdeveloped economy, the expansion of bank credit reveal greater financial resources to industries and it is one of the contributory causes for higher economic development. (iv) Banks monetize debt: A very important service the banks render to the community is the creation of demand deposits in exchange of debts of other (viz., short and long-term securities). Commercial banks buy debts of others which are not generally acceptable as money, either because the debtors are not sufficiently known or because their debt is payable only after a period of time. In return for them, they issue demand deposits which are generally accepted as money. By these exchange operations, banks monetize debt. The significance of banks today flows from the fact that they are “not merely traders in money but also, in an important sense, manufacturers of money.” Bank money is used for the promotion of industry and trade. (v) Banks promote capital formation: Commercial banks afford facilities for saving and thus encourage habits of thrift. They mobilize the idle and dormant capital of the community and make it available for productive purposes. Economic development depends upon the diversion of economic resources from consumption to capital formation. A higher rate of saving and investment is, therefore, what constitutes real capital formation. In this, the role of banks is invaluable. There can be other institutions also in a country such as insurance companies, Mutual Funds etc. which may help in mobilizing the savings of the community for productive purposes. (vi) Banks influence interest rates: Banks can influence economic activity in another way also. They often influence the rate of interest in the money market through its supply of funds. By offering more or less funds, it can exert a powerful influence upon interest rates. Besides, it can also influence the people to hold more money in the bank and less of other assets or viceversa. In this way too, it can influence the interest rates. A cheap money policy with low rate of interest will tend to stimulate economic activity, if other conditions are favourable. In a developing country like India, banking facilities are highly inadequate. The vast number of people living in villages and towns do not have any banking facilities and consequently all their savings are wasted. The opening of banks is these areas or extension of bank facilities will help

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mobilize savings in these areas and, when put in the hands of entrepreneurs, will become productive. Besides, in India commercial banks have started undertaking new functions to help the private sector industries. They help in concluding deferred payments agreements between Indian industrial units and foreign firms to enable the former to import machinery and other essential items. Thus, banks have come to occupy an important place in the industrial and commercial life of a nation. A developed banking organization is a necessary condition for the industrial development of a country.

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CHAPTER - 2

Indian Banking Sector

At the time of independence, financial markets were at the nascent stage and the Indian banking system was not sound and efficient. There were hundreds of small banks under unscrupulous managements. Hence, in 1949, two important actions were taken from the point of view of structural reforms in the banking sector – First, the Banking Regulation Act was passed in year 1949. It gave extensive regulatory powers to Reserve Bank of India over the commercial banks and also to inspect their workings. Secondly, another significant development was the nationalisation of the RBI, in year 1949. RBI was established, as the Central Bank of India, in year 1934.

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These two major developments in the immediate Post-Independence period proved to be the turning points in India’s commercial banking. In 1990s, the then Narasimha Rao Government embarked a policy of Liberalisation, licensing a small number of Private Banks – known as New Generation (Tech-savvy) Banks, mainly with a view to encourage competition and a healthy growth of banking sector from equal participation from all players under Government-owned sector, Private banks as well as Foreign banks.

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Later, the Government relaxed the norms for Foreign Direct Investment (FDI) into banking sector, where all Foreign Investors in Banks were given voting rights in excess of earlier ceiling of 10%. FDI investments were allowed, initially, upto 49% which was later enhanced upto 74%. This action led to transformation of Banking Industry in India and the business focus became modern and tech savvy. This encouraged Banks to shift its focus to Retail sector which saw an unprecedented growth in subsequent years. Indian banking system comprises of : Unorganised banking includes indigenous bankers and village moneylenders. Organised banking which includes Reserve Bank of India, Commercial Banks, (including Foreign Banks), Development Banks, Exim Bank, Cooperative Banks, Regional Rural Banks, National Bank for Agriculture and Rural Development, Land Development Banks etc.

1. INDIGENOUS BANKS
From very ancient days, India has had banking of some type, known as indigenous banking. Indigenous banking peculiar to India had been organised in the form of family or individual business. In different parts of the country, the indigenous bankers have been called by different names, such as Shroffs, Sahukars, Mahajans, Chettis, Seths, Kathiwals etc. Their scale of business operations were as low as petty money lenders to substantial shroffs who carry on large and specialised banking business. They are to be found in all parts of the country- in large towns and cities and villages. Indigenous bankers are individuals or private firms which receive deposits and give loans and thereby operate as banks. Since their activities are not regulated, they belong to the unorganised segment of the money market. They received set back with the introduction of modern banking after the arrival of the British. Consequently, with the growth of commercial and cooperative banking, the area of the operations of the indigenous bankers has contracted. Still there are a few thousand indigenous bankers particularly in the western and southern parts of the country who are still engaged in traditional banking business.

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Functions of Indigenous Bankers
1. Accepting Deposits: Indigenous bankers accept deposits-both repayable on Demand and Fixed Deposits, from the public. The indigenous bankers pay higher rate of interest than that paid by the commercial banks. 2. Advancing Loans: The indigenous bankers advance loans to their customers against securities, such as land, houses, crops, gold and silver. They also give credit against personal security. They finance inland trade, including the movement of agricultural commodities like sugar, oil seeds etc. 3. Business in Hundies: The indigenous bankers deal in hundies. They write hundies and buy and sell hundies. They also discount hundies and thereby meet the financial needs of the internal traders. They also transfer funds from one place to another through discounting of hundies. 4. Acceptance of Valuables for Safe Custody: Indigenous bankers accept valuables of their clients for safe custody. Some indigenous bankers provide cheque facility. They provide remittance facilities also. 5. Non-banking Functions: Most of the indigenous banks or bankers also carry on their non-banking business along with the banking activities. They generally have their retail trading business. They also participate in speculative activities.

Defects of Indigenous Bankers:
1. Mixing Banking and Non-banking Business 2. Unorganised Banking System 3. Insufficient Capital 4. Meagre Deposit Business 5. Defective Lending 6. Unproductive Loans 7. Higher Interest Rates on Loans 8. Exploitation of Customers 9. Discouragement to Bill Market 10. No Secrecy of Accounts maintained 11. No Control of Reserve Bank of India

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Indigenous Bankers and the Reserve Bank
Since its inception in 1935, the Reserve Bank of India has been making sincere efforts: (a) to bring the indigenous bankers under its control, (b) to integrate them with the modern banking system, and (c) to provide various central banking facilities to them. But the Reserve Bank failed to achieve success. It is unable to control the activities of the indigenous bankers. They are outside the control and influence of the Reserve Bank. The policy of the Reserve Bank would become effective only when indigenous banks are directly linked to it.

2. MONEYLENDERS
Moneylenders are those persons whose primary business is money lending. They lend money from their own funds. Broadly, the moneylenders may be classified into two categories: (a) the professional moneylenders: Those whose business is only lending of money. The Maharajas, Sahukars and Banias are professional moneylenders. They usually hold licenses for money lending. (b) the non-professional moneylenders: Those who combine money lending with other activities and do not depend entirely on money lending business. They consist of landlords, agriculturists, traders, pensioners, etc. They hold no license to carry on money lending business. They give loans to known people within their circle.

Features of Moneylenders
(a) Moneylenders mostly lend their own funds. (b) The borrowers from moneylenders are mainly illiterate and economically weaker sections of the society. (c) The loans of the moneylenders are highly exploitative in nature. (d) The credit provided by moneylenders may be secured or unsecured. (e) The lending operations of moneylenders are prompt, informal and flexible.

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Differences between Moneylenders and Indigenous Bankers
1. The primary business of the moneylenders is money lending. But the primary business of indigenous bankers is non-banking activities. 2. The moneylenders do not accept deposits from the people. But indigenous bankers accept deposits from the people. 3. The indigenous bankers deal in hundies. But moneylenders do not deal in hundies. 4. The indigenous bankers generally lend for trade or productive purposes. But the moneylenders lend for consumption purposes. 5. Moneylenders operate in a limited area. So the scope of their business is limited. But indigenous bankers have a wider area of operation. So they have large-scale financial operations. 6. The indigenous bankers are largely urban-based, where as money-lenders carry on their business in rural areas. 7. Moneylenders functions in an isolated manner. Generally, they do not have any link with the organised sector of the money market. But indigenous bankers maintain some link with the organised sector because of their hundies business.

Defects of Moneylenders
1. The loans of moneylenders are exploitative in character. They charge very high interest rates. They adopt all types of malpractices in their business. Some of the malpractices are demanding interest in advance, manipulating accounts etc.. The loans are mostly provided for consumption and unproductive purposes. In rural areas, the moneylenders give loans against standing crops. In this way, they compel the cultivators to sell their produce at low prices to them. There has been several cases of exploitation by Money Lenders reported causing gross victimization and suicide of farmers/villagers. The Government has thus taken various legislative steps to regulate the activities of moneylenders. There are acts like the Deccan Agriculturist Relief Act and the Moneylenders Act passed by the various states in India. With the growth of rural banks, co-operative societies and other financial agencies in the rural areas, the importance of moneylenders has considerably declined.

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3. CO-OPERATIVE BANKS
Co-operative banks, originated in India with the enactment of the Cooperative Credit Societies Act of 1904 which provided for the formation of co-operative credit societies. Under the Act of 1904, a number of cooperative credit societies were started. Due to the increasing demand of cooperative credit, a new Act was passed in 1912, which provided for the establishment of cooperative central banks by a union of primary credit societies. Co-operative Bank is an institution, established on the cooperative basis and dealing in ordinary banking business. Like other banks, the co-operative banks collect funds through shares. They accept deposits and grant loans. They are generally concerned with the rural credit and provide financial assistance for agricultural and rural activities.

Structure of Co-operative Banks
Co-operative banking in India is federal in its structure. It has three sections : At the top - is the State Cooperative Bank which is the apex bank at the state level. At the intermediate level - are the Central unions or the Central cooperative banks. There is generally one central cooperative bank for each district. At the base of the pyramid - are the Primary Credit Societies which cover the small towns and villages.

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Each higher level institution is a federation of those below, with membership and loan operations restricted to the affiliated units.

4. LAND DEVELOPMENT BANK
The Government wanted a special credit institution to cater to the longterm credit needs of the farmers, in order to assist farmers with long-term loans carrying modest rates of interest and convenient methods of repayment. The Government started the land mortgage banks for this purpose- called as Land Development Banks.

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Indian Banking System
Reserve Bank of India

Commercial Banks Public Sector

Regional Rural Banks

Co-Operative Banks

Private Sector Foreign Banks State Co-operative Banks

Indian Banks State Bank Group

Other Nationalised Banks Central Co-operative Banks Primary Credit Societies

State Bank of India Associate Banks

The land development banks were setup during the 1920’s but their progress has been quite slow. After independence, they have been enjoying growth and prosperity, but whatever progress has been achieved is concentrated in only a few states particularly from South India viz., Tamil Nadu, Andhra Pradesh, Karnataka, Maharashtra and Gujarat. There are two types of land development banks in the country. At state level, there are Central Land Development Banks, and Under each central bank, there are Primary Land Development Banks.

In some states, there is one Central Land Development Bank for the state which has branches all over the state.

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5. REGIONAL RURAL BANKS
In spite of the rapid expansion programmes undertaken by the commercial banks in recent years, a large segment of the rural economy was still beyond the reach of the organized commercial banks. To fill this gap it was thought necessary to create a new agency which could combine the advantages of having adequate resources but operating relatively at a lower cost at the village level. The Government of India promulgated on September 26, 1975, the Regional Rural Bank Ordinance, to set up regional rural banks throughout the country; the Ordinance was replaced by the Regional Rural Banks Act, 1976.

Objectives of Regional Rural Banks
To provide credit and other facilities particularly to the small and marginal farmers, agricultural labourers, artisans, small entrepreneurs and other weaker sections. 2. To develop agriculture, trade, commerce, industry and other productive activities in the rural areas. 3. To provide easy, cheap and sufficient credit to the rural poor and backward classes and save them from the clutches of money lenders. 4. To encourage entrepreneurship. 5. To increase employment opportunities. 6. To reconcile rural business aims and social responsibilities. 1.

Capital Structure
At present, the authorised capital of regional rural banks is Rs. 5 crores, and the issued capital is Rs. 1 crore. 50% of the issued capital is to be subscribed by the Central Government, 15% by the concerned State Government, and 35% by the sponsoring commercial banks. The shares of regional rural banks are to be treated as “approved securities.”

Features of Regional Rural Banks
1. The regional rural bank, like a commercial bank, is a scheduled bank.

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2. 3. 4. 5.

The RRB is a sponsored bank. It is sponsored by a scheduled commercial bank. It is deemed to be co-operative society for the purposes of Income Tax Act, 1961. The area of operations of the RRB is limited to a specified region relating to one or more districts in the concerned state. The RRB charges interest rates as adopted by the co-operative societies in the state.

6. The interest paid by the RRB on its term deposits may be 1% or 2% more than that is paid by the commercial banks. 7. The regional rural bank enjoys many concessions and privileges.

6. COMMERCIAL BANKS
A commercial bank may be defined as a financial institution which accepts deposits, against which cheques can be drawn, lends money to commerce and industry and renders a number of other useful services to the customers and the society. Commercial Banks borrow money from those who have surplus funds and lend to those who need funds for commercial and industrial purposes. Thus, they act as dealers in loanable funds of the society. Commercial Banks receive deposits in the form of fixed deposits, savings bank accounts and current accounts and advance money, generally for short periods, in the form of cash credits, overdrafts and loans. They also render a number of services to their customers, such as collection of cheques, safe custody of valuables, remittance facilities and payment of insurance premium, electricity bills, etc. Commercial Banks are entities which have been established in accordance with Indian Companies Act, 1913. These banks were established after the advent of East India Company in India. Bank of Hindustan was the FIRST commercial Bank in India, established in 1770. The commercial banks perform the following major functions: (a) Receiving deposits from the public and the business firms. (b) Lending money to various sections of the economy for productive activities. (c) Issue of demand drafts, traveler’s cheques, bank cards, etc., for the smooth remittance of funds.

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(d) Provision of locker facility to the customers. (e) Safe custody of documents, ornaments and other valuables of customers. (f) Payment of telephone, electricity and water bills on behalf of the customers. (g) Collection of cheques of the customers. (h) Issue of letters of credit. (i) Acting as trustees, executors of wills, etc.

NATIONALISATION OF BANKS
The Government of India nationalised 14 major banks in the country in July 1969, which had deposits of more than Rs. 50 crores and another 6 Banks in April, 1980, each of these Banks had deposits of Rs. 200 crores. Banks which were nationalised in July 1969 (Nos. 14) Allahabad Bank, Bank of India, Bank of Baroda, Bank of Maharashtra, Central Bank, Canara Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, United Bank of India, United Commercial Bank, Union Bank. Banks which were nationalised in April 1980 (Nos. 6) Andhra Bank, Punjab & Sind Bank, New Bank of India, Vijaya Bank, Corporation Bank, Oriental Bank of Commerce (TOTAL NUMBER OF NATIONALISED BANKS IN INDIA: 20) The oldest of the major commercial banks was Allahabad Bank (1865) and the youngest was United Bank of India (1950). Since, United Bank of India was set up by amalgamating four existing banks, it would not be proper to consider it as an altogether new Bank. This way, United Commercial Bank established in 1943 was the youngest of all these banks. The most important reasons for nationalization of banks related to the structure, policies and working of the private commercial banks. The banks had expanded their business and increased the number of their officers. There was a five-fold increase in their deposits between 1951 and 1969. However, banks were not serving the public interest and they had failed to provide credit for the desired priority channels. Instead, they had become tools in the hands of monopolists and been encouraging speculative

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activity. The “social control‟ measures had failed to prevent misuse of bank credit. All these factors led to the take-over the major banks in 1969. The State Bank of India and its eight subsidiaries (now seven) had already been nationalised. SBI and its 7 associates Banks are not included in the category of Commercial banks because these were established under a separate Act. The regional rural banks from their very inception are in the public sector. Thus about 90% of the country’s commercial banking system, i.e. deposits and advances, is now in the public sector. Punjab National Bank (set up in 1984) was FIRST PURELY INDIAN BANK of India & SECOND LARGEST BANK under the Nationalised Banks.

Objectives of Nationalisation
1. 2. 3. 4. To raise public confidence in Banking system; Expansion of banking activities in rural and semi-urban areas; To reduce regional inequalities and help the poor in the society; To augment mobilization of savings from the rural and urban areas in terms of bank Deposits; 5. To decentralize economic power and spread the reach to hinterland of the country in order to reduce and/or break the monopoly of large Industrial Houses on the Banking system; 6. To augment credit flow to the Priority sectors like Agriculture, Small scale Industries and small traders; 7. To ensure adequate availability of resources for the planned growth of the country;

Achievements of Nationalized Banks
A banking revolution occurred in the country during the postnationalisation era. There has been a great change in the thinking and outlook of commercial banks after nationalisation. There has been a fundamental change in the lending policies of the nationalised banks. Indian banking has become development-oriented. It has changed from class banking to mass-banking or social banking. 1. Development-oriented Banking: Historically, Indian banks were mainly concerned with the growth of commerce and some of the traditional

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industries such as, cotton textile and jute. The banks were concentrated in the big commercial centre. From well-established large industries and business houses, banks positively shifting to assisting small and weak industrial units, small farmers, artisans and other neglected groups of people in the country. 2. Branch Expansion: Rapid economic development pre-supposes rapid expansion of commercial banks. Initially, the banks were conservative and opened branches mainly in cities and big towns. Branch expansion gained momentum after nationalisation of top commercial banks and the introduction of “Lead Bank Scheme.” The Lead Bank Scheme has played an important role in the bank expansion programme. There are, in all, 93,080 branches of commercial Banks having about 8,93,356 employees and 87,000 plus ATMs in India. 3. Expansion of Bank Deposits: Since nationalisation of banks, there has been a substantial growth in the deposits of commercial banks. Bank deposits had increased almost 200 times, from over Rs. 5,910 crores in 197071 to over Rs. 51,61,718 crores in 2010. Thus bank deposits had increased exponentially during this period. Development of banking habit among people through publicity, extensive branch banking and prompt service to the customers led to increase in bank deposits. A number of banks have started evening branches, Sunday branches for the benefit of their customers. 4. Credit Expansion: The expansion of bank credit has also been more spectacular in the post-bank nationalization period. Bank credits had increased from Rs. 4,700 crores in 1970-71 to Rs. 34,25,228 crores in 2010. At present, banks are also meeting the credit requirements of industry, trade and agriculture on a much larger scale than before. Credit is the pillar of development. Bank credit has its crucial importance in the context of development and growth with social justice. 5. Investment in Government Securities: The nationalised banks are expected to provide finance for economic plans of the country through the purchase of government securities. There has been a significant increase in the investment of the banks in government and other approved securities in recent years. The investments increased from Rs. 1,727 crores in 1970 to Rs.14,74,206 crores in 2010.

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6. Advances to Priority Sectors: An important change after the nationalization of banks is the expansion of advances to the priority sectors. One of the main objectives of nationalization of banks was to extend credit facilities to the borrowers in the so far neglected sectors of the economy. RBI has stipulated a minimum compliance by Banks at 40% of the total lendings towards advances to the priority sectors. To achieve this, the banks formulated various schemes to provide credit to the small borrowers in the priority sectors, like agriculture, small-scale industry, road and water transport, retail trade and small business. The total credit provided by banks to the priority sectors has increased from Rs. 440 crores in 1969 to Rs. 3,75,593 crores in 2010. As a result, advances to priority sectors as percentage of total credit increased from 15% in 1969 to 42% in 1998. 7. Social Banking - Poverty Alleviation Programmes: Commercial banks, especially the nationalised banks have been participating in the poverty alleviation programme launched by the government. (a) Differential Interest Rate Scheme (DIRA): With a view to provide bank credit to the weaker sections of the society at a concessional rate at 4% p.a., the government introduced the “Differential interest rates scheme” from April 1972. The scheme has shown notable progress. The number of accounts was 2 million and the advances outstanding were Rs. 640 crores at the end of March 1996. (b) Integrated Rural Development Programme (IRDP): This is a pioneering and ambitious programme to rectify imbalances in rural economy and also for all-round progress and prosperity of the rural masses. Under this programme, banks assisted nearly 1.8 million beneficiaries during 1997-98 and disbursed loans of a total amount of Rs. 1990 crores. Out of the beneficiaries, over 1 million belonged to scheduled castes and scheduled tribes and 0.7 million were women. Other important scheme introduced by the government of India and implemented through the banking system includes (a) self-employment scheme for educated youth, (b) self-employment programme for urban poor, and (c) credit to minority communities. 8. Growing Importance of Small Customers: The importance of small customers to banks has been growing. Most of the deposits in recent years have come from people with small income. Similarly, commercial banks

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lending to small customers has assumed greater importance. Thus banking system in India has turned from class-banking to mass-banking. 9. Innovative Banking: In recent years, commercial banks in India have been adopting the strategy of “innovative banking in their business operations.” Innovative banking implies the application of new techniques, new methods and novel schemes in the areas of deposit mobilisation, deployment of credit and bank management. Mechanisation and computerisation processes are being introduced in the day-to-day working of the banks. 10. Diversification in Banking: The government had been encouraging commercial banks to diversify their functions. As a result, commercial banks have set up merchant banking divisions and are underwriting new issues, especially preference shares and debentures. There are now eight commercial banks which have set up mutual funds also. Commercial banks have started lending directly or indirectly for housing. Venture capital fund is also started by one public sector bank. State Bank of India and Canara Bank have set-up subsidiaries exclusively for undertaking “factoring services.” In future all commercial banks can be expected to diversify their functions and adopt new technologies. 11. Globalisation: The liberalisation of the economy, inflow of considerable foreign investments, frequency in exports etc., have introduced an element of globalization in the Indian banking system.

STATE BANK OF INDIA AND ITS ASSOCIATE BANKS
All India Rural Credit Survey Committee (AIRCSC) recommended the setting up of State Bank of India, a commercial banking institution, with the special purpose of stimulating banking development in rural areas. State Bank of India was set up in July 1, 1955, when it took over the assets and liabilities of the former Imperial Bank of India. (Imperial Bank of India was established in January, 1921 by amalgamation of 3 Presidency Banks – Bank of Bengal, Bank of Bombay and Bank of Madras) State Bank of India has an authorised share capital of Rs. 20 crores and an issued share capital of Rs. 5,625 crores which has been allotted to the Reserve Bank of India. The shares of the SBI are held by the Reserve Bank of India, insurance companies and the general public who were formerly shareholders of the Imperial Bank of India.

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State Bank of India is the largest commercial Bank in the Public sector of India. The State Bank of India and its 7 associate banks (now 5) are engaged in the economic development of the country through a wide network of 14,306 branches spread over the country. SBI is ranked No. 292 globally in FORTUNE GLOBAL 500 list in 2011.

Management
The management of the State Bank vests in a Central Board constituted ofA Chairman and a Vice-chairman appointed by the Central Government in consultation with the Reserve Bank; not more than 2 Managing Directors appointed by the Central Board with the approval of the Central Government; 6 Directors elected by the shareholders; 8 Directors nominated by the Central Government in consultation with the Reserve Bank to represent territorial and economic interests, not less than 2, of whom shall have special knowledge of the working of co-operative institutions and of the rural economy; 1 Director nominated by the Central Government; and 1 Director nominated by the Reserve Bank. The Bank has 8 Local Head Offices spread over the country and are headed by the Dy. Managing Directors. SBI has , in all, 212,000 employees at its 12434 branch offices in India and 342 overseas offices in 34 countries,

Names of Subsidiary Banks:
1. 2. 3. 4. 5. 6. 7. State Bank of Patiala State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Travancore State Bank of Saurashtra* State Bank of Mysore State Bank of Indore*

* In a process of unification approved on 13th August, 2008, State Bank of Saurashtra got merged with Parent, SBI. Later on 26th August, 2010, State bank of Indore also got merged with SBI. Apart from its associate Banks, it also has the following non-banking subsidiaries: 1. SBI Capital markets Ltd. (SBICAPS)

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2. 3. 4. 5. 6. 7.

SBI Funds Management Pvt. Ltd. SBI Factors & Commercial Services Pvt. Ltd. SBI Cards & Payments Services Pvt. Ltd. (SBICPSL) SBI DFHI Ltd. SBI Life Insurance Company Ltd. SBI General Insurance Ltd.

Functions
State Bank of India performs all the functions of a commercial bank and acts as an agent of the Reserve Bank (RBI) in those places were RBI has no branch offices. Further it is required to play a special role in rural credit, namely, promoting banking habits in the rural areas, mobilising rural savings and catering to their needs.

Central Banking Functions
it acts as the agent of the Reserve Bank in all those places where the latter does not have its own branches. As agent to the Reserve Bank, the State Bank performs some very important functions: 1. It acts as the Bankers Bank: It receives deposits from the commercial banks and also gives loans to them on demand. The State Bank rediscounts the bills of the commercial banks. It also acts as the clearing-house for the other commercial banks. It acts as the Government’s Banker: It collects money from the public on behalf of the government and also makes payments in accordance with its instructions. The bank also manages the public debt of the Central and the State Governments.

2.

Ordinary Banking Functions
State Bank performs all normal banking activities as delivered by other Public/Private sector Banks in India. The bank with its large network of branches at rural and semi-urban centers has contributed significantly towards credit to agriculture and rural markets.

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Branch Network
State Bank of India (SBI) with its 18,324 branches has the largest bank branch network in India. It has one of the largest network of Rural branches – about 5958 in the country including that of its associate Banks, due largely to the responsibility given by the Government of India for spreading of Banking services and extending credit to Agriculture sector in Rural areas. Further, SBI has 157 overseas branches located in 32 countries across the globe. Whereas, it has 172 Foreign Offices in 37 countries globally. SBI and its Associate banks, together has 21,500 branches and 26,000+ ATMs in India. They, together, account for about 20% share in Bank Deposits and Loans in the country.

Difference between State Bank of India and other Nationalised (Public Sector) Banks in India
1. Public Sector Banks were established under different statutes, viz. Banking Companies (Acquisition and Transfer of Undertaking) Acts, 1970 and 1980. SBI was established under the State Bank of India Act, 1955 and and its associates Banks are governed under the State Bank of India (Subsidiary Banks) Act, 1959. Public Sector Banks were wholly owned by the Government of India. Later, after the amendment passed in 1994, in the Banking Companies (Acquisition and Transfer of Undertaking) Acts, 1970 and 1980, these Banks were allowed to raise capital from the Public, however with a provision that the equity stake of the Central Government shall not fall below 51% of the Paid-up Capital. In case of State Bank of India, majority share-holding is held with Reserve Bank of India at the time of conversion of Imperial Bank of India into State Bank of India. As per the State Bank of India Act, 1955, the share-holding of RBI in SBI must be above 55% of the Paidup Capital. The Subsidiaries of SBI are fully owned by SBI except in a few Subsidiaries, some share-holding is held by the public. 3. State Bank of India acts as an Agent of RBI in places where RBI branches does not exist. The Nationalised PSU Banks are entrusted with the function of paying, receiving, collecting and remitting

2.

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money, Bills and Securities on behalf of any State Government and Central Government, as entrusted by RBI.

INDIAN PRIVATE SECTOR BANKS
Private Sector Banks are entities majorly owned by Private sector. The Private Sector Banks have played a strategic role in the growth of jointstock Banks in India. In 1951, there were 566 Private sectors Banks operating in India, out of which 474 were Non-scheduled and 92 were Scheduled Banks. Private Sector Banks include (1) Old Generation Private Sector Banks, (2) New Generation Private Sector Banks, (3) Foreign banks, (4) Non-Scheduled Banks.

OLD PRIVATE SECTOR BANKS
There are 14 Old Private Sector Banks currently operating in the Country.viz: 1. Federal Bank 2. The J & K Bank 3. South Indian Bank 4. United Western Bank 5. Karur Vysya Bank 6. Karnataka Bank 7. Catholic Syrian Bank 8. TN Mercantile Bank 9. Lakshmi vilas Bank 10. Dhanalakshmi Bank 11. City Union Bank 12. Nainital Bank 13. SBI Commercial & International Bank 14. ING Vysya Bank Bank of Rajasthan has since merged with ICICI Bank; ING Bank has since acquired majority share-holdings in Vysya Bank and its name is rechristened to ING Vysya Bank.

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NEW GENERATION PRIVATE SECTOR BANKS
New generation Private Sector Banks were permitted to set up branches in India, in terms with the Financial sector reforms recommended under Narasimham Committee Report, adopted by the Govt. of India in 1991. The minimum capital of New Private Sector Banks is stipulated at Rs. 100 crores. These Banks provided a financially viable, state-of-the-art contemporary technology infrastructure with customer-friendly services and soon became a benchmark for the Industry. Global Trust Bank was the first New Generation Bank, under the new regime of Liberalisation under Indian banking Industry. Two new generation banks, Centurion Bank and Bank of Punjab got merged with HDFC Bank; leaving 7 Banks in the operation now. The list of New Generation Banks in India: 1. 2. 3. 4. 5. 6. 7. Axis Bank DCB bank (erstwhile Development Credit Bank) HDFC Bank ICICI Bank IndusInd Bank Kotak Mahindra Bank Yes Bank

Two other important recommendations of the Narasimham Committee which bring a refreshing air for the Indian private sector banks are: (i) The Government should indicate that there shall be no further nationalization of banks and (ii) There should not be any difference in treatment between public sector and private sector banks.

GROWTH PROSPECTS:
Private Sector banks presently operating in Indian are inherently strong and this could be seen from the fact that they had a smooth transition from the pre-reform period to the post-reform phase. Some of the banks covered in the profiles section achieved capital adequacy norm in 1993 itself. The level of non-performing assets is quite low for many of them, in fact, it is less than 2 per cent for some of them. Generally, they have been able to post

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good results. Conservative management styles prevalent in these banks have ensured adherence to prudential norms-reform or no reform. The good track record of the private sector banks can also be a cause of anxiety for the managements of private sector banks in the liberalized environment as it tempts outsiders to make takeover attempts.

FOREIGN BANKS IN INDIA
In India, the role of Foreign Banks is growing significantly, post liberalization of Indian Banking Industry in 1992. Though, most of the Foreign Banks have been operating in India from pre-Independence era. A Foreign Bank is one, whose Head Office is located outside the geographical boundaries of India in another country. They are governed by the rules and regulations prevalent in their parent country. However, their branches operating in India would be mandatorily required to follow the rule of the land, i.e. Reserve Bank of India, apart from the regulatory requirements of the Central bank of their parent country. Thus they operate under a regime of dual control.

RBI Stipulations
RBI stipulates minimum capital requirement for Foreign Banks which should be not below US $ 25 millions, spread over 3 branch offices in the manner – US$ 10 million each for the first and second branch office and US$ 5 million for the third branch. Additional branch offices may also be permitted, subject however to (a) the monitoring of the performances of the existing Branches based on their financial performance, financial results, Inspection findings etc. and (b) the Internal Policy guidelines for allowing opening of foreign bank branches of RBI. In terms of the agreement under World Trade Organisation (WTO) relating to licensing Policy for foreign Banks, it is fixed at 12 bank branches in a year for India. However, the Indian Regulator has been allowing much in excess of the commitment under WTO requirements, for Foreign Banks to open more Branches in India. Reserve Bank of India has further announced its policy for giving liberal licenses to Foreign Banks operating in India under a wholly owned Subsidiary bank, duly incorporated in India. The Subsidiary thus incorporated in India should have a minimum capital of Rs. 300 crores and at all times maintain a capital adequacy ratio of over 10%. RBI feels that the

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Subsidiary of Foreign Banks incorporated in India would ensure better compliance to RBI regulatory norms.

Foreign Banks operating in India
At present, 32 Foreign Banks with 310 branches are operating I India. Besides, about 43 Foreign banks are operating in India through their Representative Offices, though in a limited way. Of these, 4 Banks have over 10 branch offices in India. Standard Charted Bank is the largest Foreign Bank with 67 branches spread over 15 states in India, followed by Citibank with 23 branches. There are a large number of Banks operating with less than 3 branches in India. At present, the Foreign Banks’ share in total banking assets stood at 10.52%, out of which 5 large Banks hold a share of 7.12% collectively.

SCHEDULED BANKS Vs NON-SCHEDULED BANKS
As per Reserve bank of India Act, 1934, Banks were classified as Scheduled Banks and Non-Scheduled Banks. The Scheduled banks are those having been entered in the Second schedule of Reserve Bank of India Act, 1934, whereas those excluded from it are called Non-Scheduled banks. All commercial banks – Indian as well as Foreign Banks, State Co-operative Banks, Regional Rural Banks are Scheduled banks. There are only a few Non-Scheduled Banks in India.

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