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2 INDUSTRY PROFILE
The word “bank” is believed to have its origin from the word “banko” in Italian, which means a bamboo bench. The early bankers in the 17 th century used to sit in the market place on bamboo benches to deal with money. The present day bank is very much of British invention. In the evolution of banking Britain, the goldsmiths, played a great role. In the 17 th century and later, the goldsmiths in England possessed the strongest sage vaults and the well to do in the society kept their gold and silver. Soon it was discovered that the deposits receipt in favour of the lender etc. the ownership of gold or silver could get automatically transferred between people even while the possessin of the gold or silver continued with the goldsmith. In this practice, can be traced the origin of the bank currency note. The next stage was the issuing of a letter by the originally depositor authorizing the transfer of his gold or silver in favour of other person. One can see in this the origin of the present day cheque system. The goldsmiths also later discovered that a substantial a part of the gold entrusted to them was remaining idle and therefore, they could issue additional deposit receipts, which could be lent to persons in need. Keeping a certain portion for demands for return or possible partial withdrawal by the depositors. Thus, evolved all the essential features of our present day banking system. Indian companies Act and Banking Regulation Act defined banking business only but not the word “Bank”. While the former defines business of banking, the later i.e., Banking Regulation Act defined the banking by stating the essential functions of a Banker. It also states the various other items of business that a banking company can be engaged in, and also some other items of business i.e., prohibited to perform. Section 5 (b) of BR Act defines the term banking as “accepting deposits of money from the public”, for the purpose of lending or reinvestment, payable on demand or otherwise and withdraw able by checks, draft, and order or otherwise. Therefore the two essential features of a bank are:
Acceptance of deposits of money. classifiable as Demand and Time deposits. to the satisfaction of customers. Section 7 makes it essential for every company carrying on the business of banking in India to use as a part of its name at least one of the words – Bank. Thus according.1. The Banks are required to offer to other clientele a full package of services called “Ancillary services” besides the main functions of banking viz. and 2. Deposit and Lending portfolio. even if it also accepts deposits of money from public. Main Functions of Banking: 1. It also prohibits any other company or Firm individual or group of individuals from using any of these words such as Banker or Banking company. Secion6 of BR Act states the other function that a Bank may undertake in the present competitive world. Other Business permitted for Banking Company: Now a days the concept of banking has become much wider that mere acceptance of deposits and lending. The acceptances of such deposits are for purpose of lending or reinvestment but not for any other trading\ manufacturing activity. to section 5(b) of BR Act makes it clear that the any company which is engaged in the manufacture of goods.) in other words the banker is an intermediately and deals with the money belonging the public. 2. (example Chit Fund companies etc. Banker or Banking of Banking Company. Grant credit to various sectors of the economy by way of loans and advances bill discounting and investments in securities. but not goods or non-money financial assets from public and such deposits are repayable as well a with draw able in a certain specified manner. or carries any trade cannot be treated as Banking Company. as part of its name. Acceptance or money in deposit under various types of schemes. 20 .
Agency services for sale and purchase of financial instruments units etc. Banking plays a very important role in the nation’s economy. 6.Ancillary Functions: 1.. TT. drafts. 42 of the Reserve Bank of India Act. regulation. Collection of cheque. It has acquired a special place in the organized money market with its command over huge amounts of deposits and advances. 2. and safe deposits values. Mail. documents. 8. etc. 3. Cash Reserve and SLR maintained once in month. If the alternative Friday is not the last Friday of the month. Acting as Executors and Trustees. Now u\s. 7. 9. The long process of expansion. bills hundies and other instruments for depositors. 21 . Provision of remittance facilities – ADDS. 5. the banks are required to submit fortnightly return indicating the position of Demand and Time Liabilities on alternate Fridays within 7 days from the close of the fortnight. the banks are required to submit an additional return for the last Friday of the month within 7 days. Provisions of special investment services – Merchant Banking. Dealing in securities for constituents. nationalization and reorganization has brought upon the banding industry an enormous responsibility in meeting the financial needs of the society. 4. Provision of facilities of safe custody for deeds. variables etc. Transfer. Foreign Exchange business. Issue of Guarantees.
d) The duration of each drawl will be restricted to maximum of 3 working days. (3) Specialized banks. wide it’s Circular No. to schedule urban against the security of government and other trustee securities. distinctive variety and large magnitude. c) The limit will be restricted to 1% Demand and Time Liabilities of the Bank as on the last Friday of the quarter proceeding the quarter for which the bank is submitting its application. Banks in the organized sector may. UBDP & 0. however. be classified into the following major forms: (1) Commercial banks. 22 .5% will be changed on the outstanding balances under the limit.17(4)(a) of the Reserve Bank of India Act. advised that it has been decided to extend a line of credit U/S. The salient features of the scheme of Finance are: a) Drawls on the limit will be permitted only for meeting clearing imbalance. 1934: The Reserve Bank. (2) Co-operative banks.e. e) Interest at the rate of 12. 1990. b) The limit will be sanctioned to the bank for a period of 1 year i. 17(4)(a) of India Act.Credit limited u\s. KINDS OF BANKS: Financial requirement in a modern economy are of a diverse nature. July – June and will lapse on 30th June of every year. 9-90/91 dated 8th August. (4) Central bank.4 HG. 1934. subject to renewal. Hence. different types of banks have been instituted to cater to the varying needs of banks have been instituted to cater to the varying needs of the community.
In socialist countries like Russia. Commercial banks usually give short-term loans advances. 1969. Acceptance of chequable deposits alone. which controls over 90% of the banking business in the country. like UK and the USA. all the commercial banks-73 scheduled and 26 non-scheduled banks. 14 major commercial banks with deposits of over 50 crores were nationalized.. except the State Bank of India and its subsidiaries-were under the control of private sector. i. however. A commercial bank may be defined as a financial institution that accepts chequeable of money from the public and also uses the money with it for lending. Its essential function is to make use of these deposits for lending to others. The commercial banks in India are governed by the Indian Banking Regulation Act. In Franc. there is a mixed banking system prior to July 1969. 23 . withdrawable by means of cheque. however. In April 1980. 1949 brought up to date to include additional rules thereto. they are completely nationalized.. Commercial bank in India: In India. for the biggest component in the banking structure of any country. however. They occupy a dominant place in the money market. On July 19. does not give it the status of a bank. The most distinctive function of commercial bank is that it accepts deposits called demand deposits from the publics. Under the law. owned by shareholders. another 6 commercial banks of high standing were taken over by the Govt. commercial banks are not supposed to do any other business. At present there are 20 nationalized banks plus the SBI and its 7 subsidiaries constituting public sector banking. which are chequable. as a matter of fact. They. In capitalist countries. except banking. Commercial banks: Commercial banks are joint-stock companies dealing in money and credit. all commercial banks are state-owned.1. through it has a capitalist economy.e. commercial banks are usually in the private sector. however.
Co-operative banks: Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative Societies Act of the states. a three-tire structure. which are joint-stock companies. Central co-operative banks and State co-operative banks. In urban areas. Its credit out standing is just less than one-fifth of the total credit out standing of the commercial banks.e. especially. urban co-operative banks and employees credit societies and formed. small sized in comparison to the commercial banking system. Primary credit societies lie at the local or base level in rural areas there are Primary Agricultural Co-operative Societies (PACS). too. Nonetheless. 24 . co-operative credit system is the main institutional source of rural. They also accept deposit from members and nonThus. Co-operative banking system in India has the shape of a pyramid. considered by: (i) (ii) (iii) Primary credit societies.2. agricultural finance in India. Urban banks usually provide short-term loans to their members. members. i. They are based on the principles of self-reliance and mutual co-operation. The main object of co-operative banks is to provide cheap credit to their members. commercial banks. These banks are essentially co-operative credit societies organized by members to meet their short-term and medium-term financial requirements. which cater to the short and medium-term credit needs of the farmers. The co-operation banking system in India is. their form is only co-operative and that is a major distinction between these and commercial banks. who are small borrowers. their functions and working are more or less similar to those of But by nature.. however. to provide non-agricultural credit.
industrial banks. at the all-India level. The state co-operative banks. there are 15 foreign commercial banks basically undertaking such activities only. Every state co-operative bank’s basic function is to furnish loans to the central co-operative banks in order to enable them to help promote the lending activities of the primary credit societies. 25 . accepting and collecting foreign bills of exchange. thus. but in a limited way. which are called “development banks”. Presently. They provide long-term credit to industries for the purchase of machinery. In India. there are five such industrial development banks: (i) (ii) The Industrial Development Bank of India (IDBI). serve as the final link between the money market and the co-operative sector of the country. There are thus. land development banks etc. The State Cooperative Banks (SCB) lie at the apex of the entire co-operative credit structure. Foreign Exchange Banks are simply exchange banks are meant primarily to finance the foreign trade of a country. there are some special financial institutions. buying and selling of foreign currencies. foreign exchange banks. 3. By furnishing credit to the primary societies. equipments etc. development banks. Industrial Banks are primarily meant to cater to the financial needs of industrial undertakings. Specialized Banks: There are specialized forms of banks catering to some special needs with these unique natures of activities. discounting.The Central Co-operative Banks (CCB) is federation of primary societies belonging to a specific district. In India. They deal in foreign exchange business. central co-operative banks serve as an important link between these societies and the money market of the country. The Industrial finance Corporation of India (IFCI). It lends so societies only. No central co-operative banks lends to individuals. They also do ordinary banking business such as acceptance of deposits and advancing of loans.
previously they were called land mortgage banks. promoting a developing exports and imports of the country. For large (iv) (v) The Industrial Credit and Investment Corporation of India (ICICI). except the ICICI. at the state level. which is owned by the private sector. which are 26 . Similarly. ARDC operates by making provisions of refinance to State Land Development Banks. Land Development Banks (LDB) are meant to cater to the long and medium-term credit needs of agriculture in our country.(iii) The Industrial Reconstruction Corporation of India (IRCI). has founded all these institutions. there are: (i) (ii) (iii) The State Financial Corporations (SFC) The State Industrial Development Corporations (SIDC) The State Industrial Investment corporations (SIIC) serving as industrial development banks. The Export-Import Bank of India (EXIM BANK) has been instituted for planning. its shareholders. State Co-operative Banks and Scheduled Commercial banks. Agricultural Refinance and Development Corporation (ARDC) is a kind of agricultural development bank. and The National small Industries Corporation (NSCI) catering to the needs of the small industries. There are state land development banks at the top level and primary land development banks at the base or local level. which provides medium and long-term finance to agriculture in our country. The Government. Since the LDBs give loans to their members on the mortgage of land. industries. They are mainly district-level banks.
It supervises controls and regulates the activities of the commercial banks.. however. Central Bank: A central bank is the apex financial institution in the banking and financial system of a country. But it may also be a private organization. the Reserve Bank of India (RBI) was started as a shareholders organization in 1935. A central bank is usually state-owned. It is a service-oriented financial institution primarily concerned with the ordering. Functions of Commercial Banks Commercial banks perform several crucial functions. India’s central bank is the Reserve Bank of India. supervising regulating and development of the banking system in the country. established in 1935. which. it functions as a semi-government institution. free from parliamentary control. 2. Lending of funds. it is charged with the responsibility of carrying out the monetary and credit policies. For instance. catering to the specialized needs of the people. was nationalized after independence. It is regarded as the highest monetary authority in the country. It acts as the leader of the money market. in 1949. there are specialized banks such as discount houses. 27 . investment banks. labor banks etc.In Western countries. 4. As the central bank is able to influence monetary and credit conditions and financial development in a country. and (b) Secondary functions. (a) Primary banking functions of the commercial banks include: 1. which may be classified into two categories: (a) Primary functions. Acceptance of deposits from the public. Although the central bank is state-owned.
relaxed these rules of savings accounts to a certain extent in recent times. Indian commercial banks have. however. and 4. By receiving deposits from the public. deposits cannot be withdrawn before the expiry of the specified time period of the deposits.3. Banks generally accept deposits in three types of accounts: (i) (ii) (iii) Current Account. Savings Account. In the normal course. There are some restrictions on the amount to be withdrawn at a time and also on the number of withdrawals made during a period. Deposits of current account are. permitted only at the cost of forfeiture of the interest payable. Deposits in fixed account are time deposits. commercial banks mobilize savings of the household sector. Savings Account is maintained for encouraging savings of household. and the rate becomes higher with the increase in duration. it is 5 percent per annum. Presently. Deposits in Current Account are withdrawable by the depositors by cheque for any amount to the extent of the balance at their credit. thus. at least partly. however. Remittance of funds. as the cheque system is the most convenience and very safe mode of payment. known as demand deposits. Fixed Deposits Account. On these deposits commercial banks pay higher rates of interest. A premature withdrawal is. Commercial and industrial firms and businessmen maintain such accounts. Withdrawals of deposits from savings account are not freely allowed as in the case of current accounts. 1. Banks pay a rate of interest on the savings account deposits as prescribed by the central bank. at any time without any prior notice. Acceptance of Deposits from the Public: Accepting deposits is the primary function of a commercial bank. 28 . Use of cheque system.
Overdraft is permissible in current account only. Lending of Funds Another major function of commercial banks is to extend loans and advances out of the money which comes to them by way of deposits to businessmen and entrepreneurs against approved such as gold or silver bullion. against pledge or hypothecation of goods. Then this customer is entitled to issue cheques up to Rs. a customer has Rs. 29 . Bank advances to customers may be made in many ways. (ii) Cash Credit: Banks give credit in cash to business firms in industry and trade. banks’ demand deposits are in the form of liquid cash. It is essentially a drawing account against credit sanctioned by the bank and is operated like a current account on which an overdraft is sanctioned. are called bank money.10. or personal guarantee given by the borrowers. It is the most popular mode of advance in the Indian Banking system. by keeping deposits with banks. for they serve as money to the business community and. government securities. (i) Overdraft: A commercial bank grants overdraft facility to an account-holder by which he is allowed to draw an amount in excess of the balance held in the account.000 on his account. Bank grants him overdraft facility up to Rs.000 by the bank in this case is as good as credit granted by the bank to that extent. Moreover.000. Suppose.60.By creating such varieties of deposits. up to the extent of stipulated limit.10. banks motivate savers and depositors in a variety of ways and encourage savings in the economy. the overdraft facility sanctioned up to Rs. 2. therefore. Further.000 in his current account with the bank. depositor’s money is not only secured and remains in safe custody.50. easily saleable stocks and shares. Obviously. but it yield interest also. and marketable goods.
the bank will discount them. Term loans are so called because their maturity period varies between 1 to 10 years. In such circumstances. This method of bank lending is widely adopted for two reasons: (a) Such loans are self-liquidator in character. But many times the holder of such bills may be in urgent need of cash before the maturity period. Traders often draw bills of exchange to meet their obligations in Business transactions. Since trade bills are negotiable instruments. Such advances are payable immediately at short notice. he may seek help from the bank. Obviously. 30 . industrialists and now to agriculturists also against some collateral securities. two or more banks may jointly provide large term loans to the borrower against a common security. offered by them. discounting of bills by the bank amounts to granting of credit to the party concerned till the maturity date of the bill. hence. Sometimes. after a stipulated date. That is. (v) Term Loans: Banks give term loans to traders. etc. they are described as money at call or call money. Such loans are called participation loans or consortium finance.(iii) Discounting Trade Bills: The banks facilitate trade and commerce by discounting bills of exchange called trade bills. Term loans as such provide intermediate or working capital funds to the borrowers. the bank will pay cash to the endorser of trade bills. the bank will claim the amount from the drawee ( the person who is liable to honour the bill).. generally not exceeding 7 days to the borrowers. when the bill matures. And. debentures. usually dealers or brokers in stock exchange markets against the collateral securities like stock or equity-shares. and (b) These trade bills are rediscount able with the central bank. (iv) Money at Call or Very Short-term Advances: Banks also grant loans for a very short period. equivalent to the amount of bills minus the amount of discount. Such a trade bill is payable in cash on maturity.
Under the 20-point programmer. Use of Cheque System It is a unique feature and function of banks that they introduced the cheque system for the withdrawal of deposits. is one that is crossed by two parallel lines on its face at the left hand corner and such a cheque is not immediately encashable. finance to the self-employed. 3. Such consumer credit is made in a lump sum and is repayable in installments in a short time. Commercial banks. etc. refrigerators. 31 . In modern business transactions. There are two types of cheques: (i) The Bearer Cheque: A bearer cheque is encashable immediately at the bank by its possessor. Since it is negotiable. export bills purchased/discounted. and credit to the weaker sections of the community at concessional rates. It has to be deposited only in the payee’s account. (ii) The Crossed Cheque: A crossed cheque.. a cheque is also considered as the most developed credit instrument. the use of cheques to settle debts is found to be much more convenient than the use of cash. It is not negotiable.. funeral etc. or to meet some personal needs like payment of hospital bills.(vi) Consumer Credit: Banks also grant credit to households in a limited amount to buy some durable consumer goods such as television sets. import finance advances against import bills. thus. render an important service by providing an inexpensive medium of exchange such as cheque. etc. the scope of consumer credit has been extended to cover expense on marriage. (vii) Miscellaneous Advances: Among other forms of bank advances there are packing credits given to exporters for a short duration. as well. it serves as good as cash on transferability. In fact. on the other hand.
(d) To work as correspondents. To act as executor. bankers also employ income-tax experts not only to prepare income-tax returns for their customers but also to help them to get refund of income tax in appropriate cases. for these services. As compared to the postal money orders or other instruments. also provide facilities to remit funds from one place to another for their customers by issuing bank drafts. 32 . General Utility Services. rents. promissory note. cheques. mail transfers or telegraphic transfers on nominal commission charges. Agency Services 2. trustee and attorney for the customer’s will. interest. dividends. agents or representatives of their clients.4. bank drafts have proved to be a much cheaper mode of transferring money and have helped the business community considerably. (a) Secondary banking functions of the commercial banks include: Commercial banks perform a multitude of other non-banking functions which may be classified as 1. etc. insurance premium. Remittance of Funds Commercial banks. subscriptions. (c) Sometimes. on account of their network of branches throughout the country. Agency Services Bankers perform certain function for and on behalf of their customers. such as: (a) To collect or make payments for bills. (b) To remit funds on behalf of the clients by drafts or mail or telegraphic transfers. the banks usually levy some charges.
bankers obtain passports. such as. and receive letters on their behalf. Some banks may publish valuable journals or bulletins containing research on financial. business reputation. (a) Letters of credit may be given by the banks at the behest of the the exporter. so that customers may entrust their securities and valuables to them for safe custody. (g) Banks also compile statistics and business information relating to trade. (b) Bank drafts and traveler’s cheques are issued in order to provide facilities for transfer of funds from one part of the country to another. and secure passages for their customers. commerce. public bodies and corporation may be underwritten banks. (d) Bank may act as referees with respect to the financial standing. economic and commercial matters. and respectability of customers.Often. (e) Shares floated by government. General Utility Services Modern commercial banks usually perform certain general utility services for the community. importer in favour of 33 . traveller’s tickets. (c) Banks may deal in foreign exchange or finance foreign trade by accepting or collecting foreign bills of exchange. (f) Certain banks arrange for safe deposit vaults. and industry.
to pay wages. 3) They also mobilize idle saving resources from household to business people for productive use. 2) Banks encourage people’s savings habit through their various savings deposit schemes. as they cause their difficulties. etc. 4) They transmit money from place to place with economy and safety. 5) Their agency services are. as they provide the necessary funds for their working capital such as to buy raw materials. of immense value to the people at large. to incur current business expenses in marketing of goods. no doubt. save their time and energy and provide them safety and security. 34 .Banks Play an Important role in a Modern Economy 1) They constitute the very life-blood of modern trade. commerce and industry.
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