INTRODUCTION TO BANKING

A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses. The bank basically performs two functions Accept deposits Banker Custom Lend advances Reserve bank of India acts as a centralized body monitoring any discrepancies and short coming in the system. It is the foremost monitoring body in the Indian financial sector.

The Indian Baking can be broadly categorized into:

Nationalized Private banks and Specialized banking institutions. Definitions of banking company : Definition given by Indian banking Regulation Act : Section 5(1) C of the Indian Banking Regulation Act of 1949 defines the term banking company as any company which transacts the business of banking in India. Section 5(1)B of the same act defines the term banking as accepting, for the purpose of lending or investment, of deposits of money from the public, Repayable on demand and with drawable by Cheque, drafts, and order or otherwise. In section 6, the various subsidiary services, such as the collections of cheques, drafts and bills, remittance of funds, acceptance of safe-custody deposits, etc. Section 7,of this act every banking company should use as part its name, the term bank, banker, or banking company. Definition of Banking: As per Section 5(b) of Banking Regulation Act, 1949 , banking means the accepting, for the purpose of lending or investment, of deposits of money from the

public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Functions of Commercial Banks: Just as the fruits know fruit bearing trees bear commercial banks are known by the function they perform. So it is necessary to know the function of commercial banks.

The function of commercial banks is numerous. They can be divided in to two categories. They are
1. Principal, primary, basic or Fundamental functions. 2. Subsidiary secondary, Supplementary or Ancillary Functions.

Primary Functions:
Receiving of deposits Lending of funds Creation of money

Subsidiary Functions
Agency Services Collection of Money on Behalf of Customers Making of payments on behalf of Customers Purchase and Sale of securities on behalf of the Customer Advising customers regarding stock exchange investments Arranging for remittance of funds on behalf of Customers Acting as trustee, Executor, Administrator or Attorney of Customers. Rendering of merchant banking services

Miscellaneous or general Utility services

Safe custody of valuables Dealing in foreign exchanger business

a) Export finance b) Import credit

Issuing of travelers letter of credit, circular notes and travelers cheques. Acting as a referee. Collecting information about other businessmen for customers.

Classification of banks:
I. II. III. IV. V. VI. VII. Commercial Banks Investment or Industrial Banks Exchange Banks Co-operative banks Land Development Banks Savings banks and Central Banks

Commercial banks:
Commercial banks perform all the business transactions of a typical bank. Commercial banks accept three types of deposits, the savings bank deposit, fixed deposits and current deposits. They accept these deposits, which are repayable on demand or on short notice, as such they lend or invest only for short durations. They provide funds only for short-term needs of trade and commerce, the commercial banks confine the activities day-to-day functions of trade and industry.

Investment banks or industrial bank :

Investment banks are those banks, which provide funds or long term for industries. The investment banks are also called industrial banks. These banks have specialized in providing long term loans to industries with a view to buy plant and machinery. The investment banks obtain funds through share capital, debentures, and the long-term deposits from the public. The industrial or investment banks float bonds for the sake of mobilizing funds to provide funds for big industrial corporations.

 Exchange banks : Exchange banks are known as foreign banks or foreign exchange banks. Which provide foreign exchange for import trade. Their main functions is to make international payment through the purchase and sale of exchange bills. They convert home currency into foreign currency and vice versa.

Co-operative banks:
Co-operative banks are promoted to meet the requirements of consumers not only in urban areas but also in rural areas. The co-operative banks functions like commercial banks receiving deposits and lending money. In the rural areas, these banks supply finance to agriculture, while in the urban areas they provide finance. Similar to commercial banks. They provide short term and long term loans. The co-operative banks provide credit people of small means like small cultivators and artisans etc.., who are all its members.

Land mortgage banks:

In the case of co-operative banks, loans are provided for small duration only, Whenever agriculturist requires investment loans, they have to approach land development banks, where the loans are given on long-term basis. Modern land mortgage banks provide long term loans on the security of the And to initiate permanent improvement on the land and to buy agricultural machineries.

Savings banks:
Savings banks are specialized financial institutions established to mobilize savings from the people. The banks also offer interest on the deposits. The depositors are allowed to withdraw from their accounts as and when necessary. The savings bank business in urban and cosmopolitan centers are increasing very significantly in recent years, on accounts of various facilities frequent withdrawals, attractive rates of interest, the use of cheques etc..,

Central banks:
Central bank is an apex Bank in the country, which the entire banking system unified, controlled and regulated. Central bank is the main sources of an efficient banking system in the country. These banks are responsible for monetary stability in the country.

History of banking in India:

Banking in India originated in the last decades first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1770; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955. Merchants in Calcutta established the Union Bank in 1839, but it failed in 1840 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. Foreign banks too started to app, particularly in Calcutta, in the 1860s. The Comptoir d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some

old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (19141918) through the end of the Second World War (19391945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:

Year Number of banks Authorised capital Paid-up Capital s that failed (Rs. Lakhs) (Rs. Lakhs)

1913 12

274

35

1914 42

710

109

1915 11

56

1916 13

231

1917 9

76

25

1918 7

209

Post independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of theLaissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included: The Reserve Bank of India, India's central banking authority, was established in April 1935, but was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[1] In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India". The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

Nationalisation
Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Meeting in a paper entitled"Stray thoughts on Bank Nationalisation. The meeting received the paper with enthusiasm. Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969')) and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. These banks contained 85 percent of bank deposits in the country.Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received thepresidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

Liberalisation
In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis Bank),ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 74% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2010), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.

Indian banking
Indian banking can be broadly categorized into nationalized (government owned), private banks and specialized banking institutions. The reserve bank of India acts a centralized body monitoring any discrepancies and shortcoming in the system.

Structure of Indian Banking system:

Reserve bank of India

Scheduled bank Nonscheduled bank Commerci al banks Central cooperative & primary credit Commerci al banks

State cooperative bank Indian Public sector

Foreign

Private sector bank SBI & its Other subsidiari nationalize es d banks Regional rural banks

Co-operative banks in India:

Introduction
The Co operative banks in India started functioning almost 100 years ago. The Cooperative bank is an important constituent of the Indian Financial System, judging by the role assigned to co operative, the expectations the co operative is supposed to fulfil, their number, and the number of offices the cooperative bank operate. Though the co operative movement originated in the West, but the importance of such banks have assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in India plays an important role even today in rural financing. The businessess of cooperative bank in the urban areas also has increased phenomenally in recent years due to the sharp increase in the number of primary co-operative banks. Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

Cooperative banks in India finance rural areas under:

Farming Cattle Milk Hatchery Personal finance

Cooperative banks in India finance urban areas under:

Self-employment Industries Small scale units Home finance Consumer finance Personal finance

Some facts about Cooperative banks in India

Some cooperative banks in India are more forward than many of the state and private sector banks. According to NAFCUB the total deposits & lendings of Cooperative Banks in India is much more than Old Private Sector Banks & also the New Private Sector Banks.

This exponential growth of Co operative Banks in India is attributed mainly to their much better local reach, personal interaction with customers, their ability to catch the nerve of the local clientele.

FEATURES OF CO-OPERATIVE BANKING

Co-operative Banks are organized and managed on the principal of co-operation, self-help, and mutual help. They function with the rule of "one member, one vote". function on "no profit, no loss" basis. Cooperativebanks, as a principle, do not pursue the goal of profit maximization

Co-operative bank performs all the main banking functions of deposit mobilization , supply of credit and provision of remittance facilities

Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also.

Co-operative banks are perhaps the first government sponsored, governmentsupported, and government-subsidised financial agency inIndia. They get financial and other help from the Reserve Bank of India, NABARD, central government and state governments. They constitute the"most favoured" banking sector with risk of nationalisation. For commercial banks, the Reserve Bank of India is lender of last resort, but co-operative banks it is the lender of first resort which provides financial resources in the form of contribution to the initial capital (through state government), working capital, refinance.

Co-operative Banks belong to the money market as well as to the capital market. Primary agricultural credit societies provide short term and medium term loans.

Co-operative banks are financial intermediaries only partially. The sources of their funds (resources) are: (a) Central and state government, (b) The Reserve Bank of India and NABARD,

(c) Other co-operative institutions, (d) Ownership funds and, (e) Deposits or debenture issues

Some co-operative bank are scheduled banks, while others are nonscheduled banks. Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and non-scheduled banks are. However, their requirements are less than commercial banks As said earlier, co-operative banks accept current, saving, and fixed or time deposits from individuals and institutions including banks. In the recent past, the RBI has introduced changes in interest rates of cooperative banks also, along with changes in interest rates of commercial banks. The interest rates structure of co-operative banks is quite complex .The rates charged by them depend upon the type of bank, the type of loans, and vary from state to state