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AIDS TO TRADE BANKING

Trade or exchange of goods involves several difficulties, which are removed by auxiliaries known as
aids to trade. It refers to all those activities, which directly or indirectly facilitates smooth exchange of
goods and services.

WHAT IS A BANK

In simple words, we can say that Bank is a financial institution that undertakes the banking activity i.e. it
accepts deposits and then lends the same to earn certain profit.

WHAT IS BANKING

In general terms, Banking is the business activity of accepting and safeguarding money owned by other
individuals and entities, and then lending out this money in order to earn a profit.
INTRODUCTION

With the passage of time, the activities covered by banking business have widened and now various
other services are also offered by banks. The banking services these days include issuance of debit and
credit cards, providing safe custody of valuable items, lockers, ATM services and online transfer of
funds across the country.

It is well said that banking plays a silent, yet crucial part in our day-to-day lives. The banks perform
financial intermediation by pooling savings and channelizing them into investments through maturity
and risk transformations, thereby keeping the economys growth engine revolving.

Banking business has done wonders for the world economy. The simple looking method of accepting
money deposits from savers and then lending the same money to borrowers, banking activity encourages
the flow of money to productive use and investments. This in turn allows the economy to grow. In the
absence of banking business, savings would sit idle in our homes, the entrepreneurs would not be in a
position to raise the money, ordinary people dreaming for a new car or house would not be able to
purchase cars or houses.

WHY BANKING

Banking is one of the major aids to trade.


Banking plays a rather remarkable role in Indian Economy.
Without a sound and effective banking system, no country can ever have a healthy economy.
The banks help in mobilizing savings through network of branch banking.
The ultimate savings of people result in capital formation which forms the basis of economic
development.
The banks finance the industrial sector. They not only provide finance for industry but also help
in developing the capital market for India. For example, recently NTPC, the country's largest
thermal power producer has signed a term loan agreement with SBI for 10,000 crores INR for
funding it's capital Expenditure.
Banks promote entrepreneurship by underwriting the shares of new and existing companies.
Most importantly, Banks finance education loans for a larger significant population.
Banks help in creating demand for consumer goods by providing loans to consumers for the
purchase of items as houses, scooters, fans, refrigerators, etc. In this way, they also help in
raising the standard of living of the people in developing countries.
The banks help the large agricultural sector by providing finance directly to agriculturists for the
marketing of their produce, for the modernisation and mechanisation of their farms, for
providing irrigation facilities and also for developing their land.
HISTORY

Banking in India, in the modern sense, originated in the last decades of the 18th century.
Among the first banks were the Bank of Hindustan, which was established in 1770 and
liquidated in 182932; and the General Bank of India, established in 1786 but failed in 1791.
The largest bank, and the oldest still in existence, is the State Bank of India (S.B.I). It originated
as the Bank of Calcutta in June 1806. In 1809, it was renamed as the Bank of Bengal. This was
one of the three banks funded by a presidency government, the other two were the Bank of
Bombay in 1840 and the Bank of Madras in 1843. The three banks were merged in 1921 to form
the Imperial Bank of India, which upon India's independence, became the State Bank of India in
1955. For many years the presidency banks had acted as quasi-central banks, as did their
successors, until the Reserve Bank of India was established in 1935, under the Reserve Bank of
India Act, 1934.
In 1839, some Indian merchants in Calcutta established bank known as "Union Bank", but it
could not survive for long and failed in 1848 due to economic crisis of 1848-49.
Similarly, in 1863, "Bank of Upper India" was formed but it failed in 1913.
In 1865, "Allahabad Bank" was established as a joint stock bank. This bank has survived till date
and is now considered as the oldest surviving bank in India with the same name.
In 1960, the State Banks of India was given control of eight state-associated banks under the
State Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate banks. In
1969 the Indian government nationalized 14 major private banks, one of the big bank was Bank
of India. In 1980, 6 more private banks were nationalized. These nationalized banks are the
majority of lenders in the Indian economy. They dominate the banking sector because of their
large size and widespread networks.
CLASSIFICATION OF BANKS
MODES OF BANKING

INVESTMENT

COMMERCIAL MODES CENTRAL

RETAIL

Central Banking : The duty of central banks is to maintain financial stability, otherwise a
country's economy will not operate properly. Central banks act as regulators of their country's
interest rates by controlling the amount of money in circulation and buying and selling
currencies. They amass reserves and act as lenders of last resort, should another bank get into
trouble. They exist as a separate entity from all the other banks.

Retail Banking : Retail banks are the high street banks we are all familiar with. They take
deposits from individuals, provide saving facilities and pay interest on these accounts. They also
lend money to individuals, in the form of loans and overdrafts, and charge interest on the money
they lend. They provide a range of other financial services.

Commercial Banking : Commercial banks, or divisions of banks, provide banking services to


businesses, from small companies through to corporate banking directed at large corporations.
They help companies raise finance to expand their businesses and to maintain their cashflow by
lending them money. They provide a wide range of other financial services.

Investment Banking : Investment banks distribute and underwrite (guarantee the sale of) share
and bond issues; they trade securities on the financial markets and advise corporations on capital
market activities such as mergers and acquisitions. Investment banks originally developed in the
USA and these banks have now taken over many roles that were previously carried out by UK
merchant banks.
IMPACTS
BENEFITS

Banking can help a business by making it easier to manage day-to-day financial tasks.
An established commercial account with a bank will make it easier to borrow money when you
grow your business.
Often a business is assigned a representative who works directly with the company to find the
best services and solutions for the issues the business is facing. For example, the company may
save money by outsourcing payroll processing.
Banks also offer invoicing services, with personalized invoices, and can set up transfers to other
banks which will simplify accounting procedures.
Some banks offer retirement account management for your employees as well as other employee
benefits. This can save you money, and make it easier to manage all of the services you offer
employees. Some banks allow you to make deposits online by scanning checks.
Your bank may offer you discounts on your merchant services fees.
Commercial banking allows you to set up direct deposits for your employees as well as for any
invoices you need to pay to others, which will save you time.
TOP 5 BANKS IN INDIA

1. State Bank Of India


2. HDFC Bank.
3. ICICI Bank.
4. Punjab National Bank.
5. Axis Bank.

TOP BANKS IN WORLD

1. Industrial and Commercial Bank Of China.


2. China Construction Bank Corporation.
3. Agricultural Bank Of China.
4. Bank Of China
5. Mitsubishi UFJ Financial Group.
6. JPMorgan Chase & Co.
7. HSBC Holdings PLC.
8. BNP Paribas.
9. Bank Of America
10. Wells Forgo & Co.

TERMINOLOGIES

Important Banking Terms

Deflation: It is a decrease in the general price level of goods and services.

Inflation: It can be defined as a sustained increase in the general level of prices for goods and services.
Liquidity: Liquidity describes the degree to which an asset or security can be quickly bought or sold in
the market without affecting the assets price.

Merchant Banking: It is a combination of Banking and consultancy services.

Monetary Policies: It refers to the use of instruments by Reserve Bank of India (RBI) to regulate the
availability, cost and use of money and credits.

Plastic Money: It is a term used in reference to the hard plastic cards we use every day in place of
actual bank notes.

Direct Instruments:-

Cash Reserve Ratio (CRR): Cash reserve Ratio (CRR) is the amount of funds that the banks have to
keep with the RBI.

Refinance Facilities: RBI offers refinance facility to help out the exporters by replacing an existing
debt obligation with another.

Statutory liquidity ratio (SLR): SLR is the minimum proportion of their Net Demand and Time
Liabilities, which every bank maintains in the form of cash, gold and securities, at the close of business
every day.

Indirect Instruments:-

Bank rate: The rate of interest which the RBI charges on the loans and advances to a commercial bank.

Liquidity adjustments facility (LAF): Its a monetary policy tool which allows banks to borrow
money through repurchase agreements and adjusting the day to day mismatches in liquidity.

Marginal standing facility (MSF): Its a window for banks to borrow from the RBI in an emergency
situation when inter-bank liquidity finishes completely.

Market Stabilization scheme (MSS): Securities that are issued with the objective of providing a stock
of securities to the RBI to intervene in the market for managing liquidity.

Open Market Operations (OMO): Its an activity by a RBI to give or take liquidity in its currency to
or from a bank or a group of banks.

Repo rate: The rate at which the RBI lends money to commercial banks in the event of any shortfall of
funds.
Reverse Repo Rate: The rate at which the RBI borrows money from commercial banks within the
country.

Term Repo: A repurchase agreement with a term of more than one day.

Money Market Instruments:-

Authorized Capital: The authorized capital/ registered capital/nominal capital of a company is the
maximum amount of share capital that the company is authorized by its constitutional documents to
issue to shareholders.

Bonds: It is an instrument of indebtedness of the bond issuer to the holders.

Call Money: Money loaned by a bank or other institution which is repayable on demand.

Commercial Bills: A bill of exchange issued by a commercial organization to raise money for short-
term needs.

Commercial Papers: An unsecured, short-term debt instrument issued by a corporation for the
financing of accounts receivable, inventories and meeting short-term liabilities.

Certificates of deposits (CD): A savings certificate entitling the bearer to receive interest.

Dated government securities: These are long-term securities and a fixed or floating coupon/interest
rate which is paid on the face value, payable at fixed time periods.

Debentures: A long-term security bearing a fixed rate of interest, issued by a company and secured
against assets.

Issued Capital: The share capital that has been issued to shareholders.

Mutual Funds: It is a professionally managed investment fund that pools money from many investors
to purchase securities.

Net Asset Value (NAV): A mutual funds price per share or exchange-traded funds (ETF) per-share
value.

Paid up Capital: The amount of a companys capital that has been funded by shareholders.

Treasury bills: A short-dated UK/US government security, bearing no interest but issued at a discount
on its redemption price.
Negotiable Instruments:-

Bill of Exchange: A bill of exchange is a binding agreement by one party to pay a fixed amount of cash
to another party as of a predetermined date or on demand.

Cheques: An order to a bank to pay a stated sum from the drawers account, written on a specially
printed form.

Ante Dated Cheque: Cheques which have been written by the maker, and dated at some point in the
past.

Bounced Cheque: Check that cannot be processed because the writer has insufficient funds.

Crossed Cheque: These cheques can only be deposited directly into a bank account and cannot be
immediately cashed by a bank or any other credit institution.

Post Dated Cheque: Cheque that is written by the drawer (payer) for a date in the future.

Stale Cheque: A cheque which a bank will not accept and exchange for money or payment because it
was written more than a certain number of months ago.

Cheque Truncation: It is the conversion of a physical cheque into a substitute electronic form for
transmission to the paying bank.

Promissory Note: A financial instrument that contains a written promise by one party to pay another
party a definite sum of money either on demand or at a specified future date.

Various Types of Accounts:-

Current Account/Demand deposit Account: An active account catering for frequent deposits and
withdrawals by cheque.

DeMat Account: This account is opened by the investor while registering with an investment broker
(or sub-broker).

Fixed deposit account or time deposit account: It is a financial instrument provided by banks which
provides investors with a higher rate of interest than a regular savings account, until the given maturity
date.

NOSTRO Account: A bank account held by a UK bank with a foreign bank, usually in the currency of
that country.

Recurring Deposit Account: It is opened by those who want to save regularly for a certain period of
time and earn a higher interest rate.
Saving Account: A deposit account held at a bank or other financial institution that provides principal
security and a modest interest rate.

Foreign Trade:-

Current Account Deficit: A current account deficit is when a countrys government, businesses and
individuals import more goods, services and capital than they export.

Financial Inclusion: Financial inclusion is the delivery of financial services at affordable costs to
massive sections of disadvantaged and low income groups.

Fiscal Deficit: When a governments total expenditures exceed the total revenue.

Foreign Direct Investment (FDI): It is a controlling ownership in a business enterprise in one country
by an entity, based in another country.

Foreign Institutional Investors (FII): FIIs are those institutional investors which invest in the assets
belonging to a different country other than that where these organizations are based.

General Anti-Avoidance Rules (GAAR): A GAAR is a statutory rule that empowers a revenue
authority to deny taxpayers the benefit of an arrangement that they have entered into for an
impermissible tax-related purpose.

Money Laundering: Any act to hide the identity of illegally obtained proceeds so that they appear to
have originated from genuine sources.

Participatory notes or P-Notes: These are instruments, issued by registered foreign institutional
investors (FII) to overseas investors, who wish to invest in the Indian stock markets without registering
themselves with the market regulator, the Securities and Exchange Board of India (SEBI).

Quantitative easing and tapering: A monetary policy in which RBI purchases government securities
or other securities from the market in order to lower interest rates and increase the money supply.

Electronic Payment Systems in Banks:-

National Payments Corporation of India (NPCI): NPCI is an umbrella organization for all retail
payments system in India.

Clearing Corporation of India Limited (CCIL): It is a joint stock company with share capital
contribution by major banks and financial institutions.

Electronic Clearing Service (ECS): ECS is an electronic mode of funds transfer from one bank
account to another and can be used for both
Electronic Funds Transfer (EFT): It is a system of transferring credit and debit purposes.money from
one bank account directly to another without any paper money changing hands.

National Electronic Funds Transfer (NEFT) System: It is an Indian system of electronic transfer of
money from one bank or bank branch to another.

Real Time Gross Settlement (RTGS) System: These are specialist funds transfer systems where
the transfer of money or securities takes place from one bank to another on a real time and on gross
basis.

Important Organizations:-

International Bank for Reconstruction and Development (IBRD): An international financial


institution that offers loans to middle-income developing countries.

International Monetary Fund (IMF): An international organization that foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high employment and
sustainable economic growth, and reduce poverty around the world.

Bank for International Settlements (BIS): An international company, limited by shares owned by
central banks which look after international monetary and financial cooperation and serves as a bank for
central banks.

Asian Development Bank (ADB): A regional development bank to promote social and economic
development in Asia.

EXIM Bank: A premier export finance institution that works as both a catalyst and a key player in the
promotion of cross border trade and investment.

Reserve Bank of India (RBI): The central bank of India that is charged with regulating the countrys
currency and credit systems.

National Bank for Agriculture and Rural Development (NABARD): An apex development bank
that review arrangements for institutional credit for agriculture and rural development.

Industrial Development Bank of India (IDBI): An Indian government-owned financial service


company to provide credit and other financial facilities for the development of the fledgling Indian
industry.

Institute of Banking Personnel Selection (IBPS): An autonomous agency in India enhancing human-
resource development through personnel assessment selection and recruitment of Officers and Clerks in
Indian banks.
Indian Banks Association (IBA): A representative body of management of banking in India operating
in India.

Securities Exchange Board of India (SEBI): The regulatory body for the investment/securities market
in India.

National Housing Bank (NHB): An apex financial institution for housing.

Small Industries Development Bank of India (SIDBI): An independent financial institution aimed to
aid the growth and development of micro, small and medium-scale enterprises (MSME) in India.