Welcome to this course of Basics of Banking!

To enable the participants to acquire the fundamental knowledge and skills in basics
Course Goal of Banking, apply the same for further learning and use while working in branches
after joining the bank.

To enable the participants to acquire the fundamental knowledge and skills in “Basics of Banking”, apply
the same for further learning and use while working in the branches after joining the bank.

Basics of Banking essentially deal with the practical aspects of banking. It covers the entire gamut of
practical banking tracing the history from evolution of banks to modern day luxury and comfort banking.
Emphasis is on banking routine with handling various deposit accounts of our customers and support
services as main focus.

This course also introduces you to various allied services offered by the bank to customers. These services
include distribution of third party products such as Mutual Funds, Insurance and other financial products
etc.

You will get initiated to services such as collection of taxes and utility bills. These services help common
people as well as related government departments. You will also learn about safe custody and lockers
facility services provided by the banks.

This course also covers the role of commercial banks in handling IPOs/FPOs. It also covers alternate business
channels like Internet and mobile banking, debit cards and credit cards. Other third party banking products
like Public Provident Fund, New Pension Scheme, Pension payment by banks etc. are also covered in the
course.

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 Learning Objectives:

This course will enable you to:

 Trace the origin and history of Banking.
 Explain the growth of Indian Financial System and role of banks.
 Explain the features of the all the deposit products of the bank.
 Identify and offer appropriate products to the customers.
 Obtain the required KYC documents and scrutinize them for
acceptance.
 Identify of the relative Account Opening Forms and explain each
field and the information to be filled by the customer.
 Create a customer accounts in the CBS system.
 Post various transactions in Finacle system.
 Deal with customers interested in various allied services offered
by banks.
 Explain the role of commercial banks in handling IPO business.
 Explain third party products banks deal with.

Modular Learning: The course is delivered in modular style for the following topics:

 Savings Bank Accounts

 Current Accounts
 Term Deposit Accounts
 Clearing Operations
 Cash operations

Objectives of the modules delivery style:

 Modular delivery of training sessions aims at providing entire inputs of one specific skill at a stretch,
without interference of other skill development activities in between.
 All related inputs like knowledge requirements, application of such knowledge, application of such
knowledge to work situation, regulatory guidelines, understanding customer requirements and bank’s
guidelines, obtaining the required documentation and filling of forms, completing the entire work flow
in the bank’s systems, and completion of all allied issues like sending communications or diarizing for
future actions are given together.
 After coverage of applicable areas in classroom activity sessions, proceed to IT or CBS lab or Model
Branch for learning application of these skills on CBS system or IT platforms.
 Delivery resumes in the classroom for further imparting of knowledge and skills and continues in the
labs or model branch for the next phase, and so on.
 At the end of applicable cycles of modular delivery, student or trainee will be able to attend to all
requirements of the customers and the bank on his/her own, relating to the specified activity.
 This method of delivery ensures that the trainees are able to absorb all requirements to function
independently on identified seats in the bank, after deployment.
 The sessions are also arranged in such a way that theoretical practical training on documentation and
recording the transactions in the computer system immediately back inputs.

Let us start on a journey of wonderful learning experience……...!

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 Module-1: Money and Banking:

Objectives:

At the end of this module, you will be able to:

 Explain the evolution of “Money” and “Banking”.
 Enumerate the advantages of money over barter system.
 Describe functions of money.
 Trace growth of Indian Financial system.
 Relate trust and ethics to banking business.
 Summarize functions of key institutions and regulators in Indian Financial
system.

Definition:

 Money is best defined by its function or what it does.

 It is ‘anything that is widely used for making payments and accounting’.
 Money has substituted the earlier barter system where one item was
exchanged for the other.
 Money slowly evolved as ‘store of value’, ‘common measure of value’,
‘means of payment’, ‘medium of exchange’ etc.
 Money was identified through various metallic coins, animal skins and
later through paper.

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  Now, the Government of India issues coins and the Reserve Bank of India issues notes.
 These notes are called currencies which were backed by silver and later by gold and now by assurance
of the Central Banks to pay an equivalent amount in the same paper money.

Evolution of Money:

 Long ago, ownership of cattle represented

wealth. Social need for gifting led to cattle
being used for transfer of wealth.
Commerce or exchange of goods and
services was through means of “barter
system” – exchange of one commodity for
the other. Suppose, someone had cattle
and desired to have food grains, the only
means was to exchange his cattle for food
grains. The English words “capital”,
“chattel” and “cattle” appear to have a
common root. This also indicates that
cattle were being viewed as capital or wealth and used as money.

 This system was found to be advantageous initially. But it suffered from certain
fundamental disadvantages. Main disadvantages were – valuation and easy
transferability. Arriving at an acceptable valuation for each transaction was a
herculean task under barter system. Once these disadvantages were noticed and
identified, there was a fresh impetus for development of money, as a commonly
accepted measure of value. There is ample evidence to suggest that many other
things (apart from cattle), like beads, shells, eggs, ivory, nails, pigs, yarn etc. were
used as money from time to time. With crop cultivation making its advent as a
means of livelihood, food grain also came to be regarded as wealth and gained
acceptability as a “medium of exchange” or popularly known as “money”. Greatest advantage of Grains

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 as a common “measure of value” was because of their measurability, storability, high value and easy
transferability.

Metal Coins:

 When precious metals were

discovered, people began using
them as money.
 The credit of using the metal
coins first goes to The Lydians in
Asia Minor.
 The metal coins, an amalgam of
Gold and Silver, were first used by
them as money in 687 BC. Then
this spread to Greece. Persia also
followed suit in 550 BC when it
captured Lydia. In 390 BC, the
Gauls attacked Rome. Rome was
alerted by the cackling of Geese
and were able to defeat the Gauls and protect their cash reserve.
 As thanks giving, they built a temple to worship the “Goddess of Warning” – Moneta. This term
“Moneta” led to evolution of terms like “Mint” and “Money”. The history of Greek cities tells us that
coinage was a civic emblem and to emboss the coins with the city’s badge proclaimed one’s political
independence or dominance. The monetary uniformity over much of the known world can be
attributed to the conquests of Alexander the Great, to a large extent.
 When Alexander captured Persia during 336 to 323 BC, in order to pay his soldiers, large stocks of gold
were converted into coins. He promulgated an order that 10 silver coins were equal to one gold coin,
Bringing in the first “official exchange rate”.
 Convenience was the chief reason for the coins gaining huge acceptability. They were acceptable at
their nominal value and transactions involved counting rather than weighing.

Paper Money:

 The first people to use “paper

money” were the Chinese. Infact,
it was shortage of copper for
making coins that led to paper
money. It was only after two
centuries later that Europe came
to know of “paper money”
following Marco Polo’s visit to
China. Persians caught up with this
only in 1294 AD. India became alive
towards useage of the paper money only in
1236 AD. Moghuls introduced it in India. But this lasted only for a short while in India. China
discontinued the useage of paper money on account of hyper-inflation in 1455 AD.

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  Paper Money staged a comeback in the form of “bank notes” during 1660s. People used to deposit their
valuables with the local goldsmiths for safe custody during the English Civil War between 1642 and
1651. The goldsmiths used to issue receipts for valuables accepted and such receipts gained credence
being accepted as settlement of debts. The “bank notes” were born.

How did the issue of paper currency (bank notes) become the prerogative of Central Banks?

 In the year 1694, Bank of England had been established as a Joint Stock Company, to arrange a Loan to
the King. Due to His patronage, the Bank of England, during the 18th Century, emerged as the Central
Bank of the Country. The other Banks in UK (who hitherto also had the authority of issuing bank notes)
surrendered this authority to Bank of England. Their action stemmed from their inability to manage the
frequent “runs” on them. Thus, issue of Paper Currency became the prerogative of the Central Banks.
In India too, RBI (which is the Central Bank) has the sole and exclusive authority to issue currency notes.
 As paper does not have any intrinsic value, these paper notes (currency notes) were dependent upon
an underlying valuable commodity, to derive value. Initially, Silver was this valuable commodity which
backed the paper notes. In 1816, the world saw the birth of “gold standard” as Britain adopted Gold as
the backing for the paper currency in lieu of silver. The “gold standard” meant that the Bank of England
promised to exchange every currency (paper) note for a specified quantity of gold. Gold Coins and
Currency (Paper) Notes were in circulation.
 Gold standard was subsequently adopted by Germany (1871), France and Japan (1878) and also by the
USA (1900). This “gold standard” lasted till 1914 (outbreak of the First World War). In 1914, Britain
withdrew gold coins from circulation and this sounded the death knell for the “gold standard”. Britain
abandoned the Gold Standard. Soon other European Countries which had adopted “gold standard” also
followed suit and only USA continued to link its Dollar to Gold till 1973.
 USA was the last to abandon the “gold standard”. Now, the currency (paper) notes are backed by just a
promise of the Central Banks to pay an equivalent amount in the same paper currency.
 The coins and currency (paper) notes are also known as intangible money. This is because once the
coins and paper notes are deposited in a Bank account, they get converted into book entry, remaining
intact, backed by the Bank’s assurance to return the same when demanded by him.

Function of Money:

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 Store Function:

A yardstick for measuring the wealth of an individual. Historically, the wealth

of an individual has always been measured in terms of his holding of
whatever was considered valuable at different points of time. Needless to
say, the most useful thing was the most valuable. For example, when cattle
were considered the most useful and valuable, the wealth of an individual
was measured in terms of the cattle strength he owned. Subsequently,
wealth came to be measured in terms of grains with development of
agriculture. Then came the turn of metals (which could be used to make
coins) to be regarded as wealth because of the exchangeability factor. So,
this store of value continued with the paper currency as well when it
replaced the metal coins. Their possession represents wealth.

Common measure of value:

Barter transactions involved exchange of

different commodities and arriving at their
relative value in the absence of a common
reference point was challenging. This led to
a new practice of fixing value of each
commodity with a reference to another
commonly accepted commodity to facilitate
exchange.

For example, What is the quantity of grain that can be exchanged for “n” number of cattle?
Exchange becomes more convenient, easier, transparent and acceptable, when two commodities are
valued against each other and then exchanged. So, money serves now as a common measure of value. It
can be safely said now that to buy a shirt how many units of money have to be exchanged. By evolving as a
common measure, money facilitates trade. This is another function of money.

Medium of Exchange:

As money evolved as a measure of value, it became a medium of exchange. Since

all goods and services could be measured in terms of money, money replaced
barter as a medium of exchange. Example: An agriculturist grows paddy and is in
need of clothing for his family. Under Barter System, he had to exchange paddy
for clothing. But now, he can sell paddy for money and then use the money for
buying the clothing. So, money has become an intermediary for exchange. The
twin functions of money – measure of value and medium of exchange have added
the third dimension to its function – Store of value - By having money, one can
buy any commodity or service.

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 So, what is “money”? We go back to the first sentence of this note. Money is “anything that is widely used
for making payments and accounting”.

Evolution of Banks:

 The evolution of Banks can be traced back to Babylonia even before 2000 BC. Items like Grains,
agricultural implements, precious metals etc. which were then considered as valuables were kept in
temples and palaces for safe-keeping. The temples and palaces which accepted custody of these
valuables issued receipts that could also be used to transfer stored items to third parties – negotiability.
Thus what started off as a mere safe-keeping activity branched off to fund transfer facility and much
later credit facility.
 In Egypt also, the receipts issued by granaries (against storage of grains) facilitated transfer of funds
through a payment mechanism. The Greeks in 323 BC when they captured Egypt, lent perfection to the
system of transfer of funds through book entries without physical movement. The Government
Granaries which acted as Banks initiated a mechanism of transferring the grains from person to person
spread across various locations without physical movement of grains.
 Currency exchange became an important banking activity on account of growth in trade between
countries, apart from safe keeping and issuing receipts (which facilitated transfer of funds from person
to person across locations). The persons conducting these activities operated mostly in and around
temples (where most of the people gathered), setting up temporary tables or benches. This led to the
word “Bank” derived from the Italian word “Banca” meaning bench or counter and the persons carrying
out these activities became to be called Bankers.

Etymology:

The term Bank is derived from the Italian word “Banca” meaning bench or counter.
In other languages, the equivalent word is “Banc” (German) and “Banque” (Greek) – phonetically similar.

 The fall of the Roman Empire led to the banking business being practically wiped out on account of
decline in trade resulting in decreasing need for transfer of money and financing of trade. The 12th
Century saw Jews and another sect called Templers emerging as Bankers as Christians were prohibited
from charging interest. Later in the 13th Century, the Lombards of Italy replaced the Jews and
Florence became the most prominent banking centre. Italians are also credited with development of
double entry book keeping which helped them immensely to emerge out as leading bankers.
Incidentally, the first Double Entry Book Keeping was published in Italy in 1694.

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  Transfer of money across countries in different currencies arose due to increase in trade transactions
between countries. This led to evolvement of “Bill of Exchange”. BOE is a written instruction from one
person to another person to pay a certain sum of money (can be within the country or outside). This
was an instrument that was developed to achieve twin objectives of funds transfer and exchange of
currencies. Ostensibly, these functions resulted in “bill of exchange”. Though it is presumed that the
Arabs would have used the BOE during the 8th Century itself, the earliest evidence available is a bill
issued in 1156 AD in Genoa, Italy.
 As mentioned earlier, people used to deposit their valuables for safe custody with goldsmiths. The
instructions that were being issued by these depositors to the Goldsmiths to deliver the valuables to a
third party evolved into “cheques”.
 So, the present day “banking” has come a long way from merely providing a place for safe custody, to
transfer of funds and financing trade (both domestic and international). The evolution continues even
today both in scope and specialization.

 The first laws governing Banking can be found in the code of Hammurabi of Babylon (1792 to 1750 BC)
 The first Banker of whom records exist is Pythius (600 BC) who operated throughout Asia Minor.
 The first Banking Institution of which records exist is the Bank of Barcelona which was founded in 1401.
 The first Book on Double Entry Book Keeping was published in Italy in 1694.
 Evidence of the earliest Bill of Exchange available is a bill issued in 1156 AD in Genoa, Italy

Evolution of Banking in India:

 Indigenous bankers like pawn brokers, nidhis, chit funds, etc., were found in the early era of Indian
Banking. They continue in one form or the other even today. The first Banking institution in India was
Bank of Bengal in 1806. Then Imperial Bank of India was started in 1921 and it was renamed as State
Bank of India in 1955. It is the largest Bank in India even today. Then the Government started term
lending institutions like ICICI and IDBI to provide long term financial assistance for Industrial
development in the country. The Government and International Development Institutions like the
World Bank provided funds to ICICI and IDBI for onward lending to Indian industries. Both ICICI and IDBI
have been converted into Commercial Banks post 2002.The advent of the 20th century saw birth of
many commercial banks in the country.
 Sensing that Banks being commercial establishments were showing reluctance to finance new and small
business ventures which were comparatively risky and also to expand to unbanked areas (because of
low potential), the GOI took steps to nationalize 20 commercial banks in 1969 and later another 6 banks
in 1980 in order to spread banking facilities among all sections of people for effective economic
development. The owners were paid off by the Government. As owners now, the Government could
influence the policies of these nationalized banks. The focus shifted from profit to development.
 The following two decades witnessed unprecedented expansion and foray of Banks into semi-urban
and rural segments. The funds flow into sectors like agriculture, small industries and small business
sectors (hitherto neglected became priority areas) and multiplied manifold. The industry has seen
unprecedented growth since 1980. SBI group has also been merged and converted into a single bank
now. Presently, nationalized banks and SBI group control 72% of banking business in India.
 Due to globalization in the 1990s and to create competition among banks, the Government decided to
permit banks in the private sector which resulted in emergence of new generation banks such as ICICI
Bank, IDBI Bank, HDFC Bank, UTI Bank, AXIS Bank, YES Bank etc.
 These Banks changed the face of the industry by embracing technology in a big way and by being both
customer and profit oriented. Foreign Banks though had been operating in India for over a century did
not keep pace with some of the private sector banks because of their conservative attitude and

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 reluctance to bring in the capital. However, post 2005, foreign banks too have begun to evince interest
in the Indian markets and are alive to the need of being aggressive in the banking space.
 A large number of co-operative banks are also important players in the banking landscape of the
country. These banks were infact originated even before 1947 but post-independence they began to
expand with active support of the Government. Despite getting bogged down by their financial health
resulting from out of mis-management, the co-operative banks continue to play a pivotal role especially
in the rural landscape. Regional Rural Banks, NBFCs etc. are also functioning effectively.

Small Finance Banks and Payment Banks:

The Reserve Bank of India (RBI) has permitted setting up of Small Finance Banks and Payment Banks during
the last three years. These banks are in the initial stages and they have to fully evolve to find their own
status in the banking industry.

Important role of the Banks - Financial Intermediation:

We have two types of people in the economy - Savers of money and users (entrepreneurs) of money. The
savers are unwilling to give money to users in view of the risks like credit risk, liquidity risks, interest rate
risk etc. This is where Bankers enter into the system as intermediaries. People trust banks in view of its large
size and backing from regulatory bodies like RBI and Government agencies. Thus, we can say that the
process of linking the savers and users of funds is called intermediation. The intermediation provides money
to users at interest and pay interest to savers and the difference of interest is called profit to the bank.

Benefits of Financial Intermediation:

 Links savers and users of funds.

 Aids shift of capital from surplus areas to deficit areas thereby ensuring less geographical imbalances.
 Rolls out an efficient payment system to facilitate trade.

As a financial intermediary, banks accept deposits and lend. In the role of the intermediary, banks extend
other services such as payments and remittance, collection of cheques/bills, foreign exchange services,
different types of deposits and loans, financial services like Insurance, Mutual Fund, taxes collection, safe
deposit lockers and investment advises etc.

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 BANKING – A BUSINESS OF TRUST
 TRUST is the fulcrum on which the banking business revolves.
Banks mobilize deposits from the public for onward
lending and investments. It is clearly a financial
intermediary. The deposits mobilized are unsecured
(not backed by the assets, the Banks own). So, for the
depositors it is an unsecured exposure.
 But what is it that drives people to place deposits
with the Banks despite there being no security for
the same? The answer is TRUST. Indian Banking
System has lived up to the trust placed by the people
(depositors) in it, to a very large extent.
 What is this Trust? The trust is, the Banks would give
them the money back when required. Honouring of
commitment – commitment given that their deposits are safe and
would be returned when demanded.
 If this TRUST is broken for any reason, no Bank can survive. Failure of one Bank can also lead to failure
of other Banks because they would be having substantial dealings with each other being constituents
of the payment system.
 How this trust is retained? Banks always adhere to certain fundamentals in the conduct of their
business. This adherence ensures that the trust is retained.
 Liquidity
 Safety
 Profitability
 Secrecy
 Service Quality

Banking is more than a business because of its integral nature of being a financial intermediary as well as a
major constituent of the payment system. It is the trust of the people (depositors) on the Bank that helps
in the effective functioning of the system. To augment this trust, it becomes very essential that the Banks
are regulated and their transactions monitored. This is the reason that Banks across all geographies are
functioning under a highly regulated culture, which ensures the financial well-being of not only the
individual banks but also of the industry as a whole. It is the regulation that ensures adherence to the five
fundamentals cited above.

Banks function to retain the trust placed in them by the general public by functioning using following
principles:

Liquidity:

 The Banks mobilize deposits from the public for onward lending and investment. These deposits are not
backed by any security. Trust is the main security. This trust emanates from the confidence of the
depositors that their money is safe and the Banks would be able to give the same back whenever
required. For maintaining this trust, the Banks have to maintain sufficient cash reserves at all times to

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 meet the demand from the depositors. The ability of the Banks to pay back their depositors on time –
every time, from out of the cash reserves maintained – is called “liquidity”. Even a single default by the
Banks can have wide repercussions on the industry and the economy.
 But simultaneously the Banks have to lend a major portion of their deposits so as to earn revenue.
Interest on Loans is the main source of income for the Banks. Unless the Banks have a source of revenue,
they will not be able to meet their operational costs, reward the depositors (with interest – for the trust
placed) and satisfy their stake-holders (like investors who have purchased the shares of the Banks – by
way of dividends). So Banks have to necessarily lend the funds mobilized in the market. These are
opposing needs – liquidity and profitability. Banks have to make the balancing act. Banks cannot
compromise on liquidity for profitability and vice versa.

Premises on which Liquidity factor is based:

 Banks have a large base of depositors.
 All the depositors do not demand their money back at the same time.
 Only few depositors would like to have their money back at any given point of time.

 So, there is no need for the Banks to be prepared and keep sufficient funds ready to meet all its deposit-
obligations at one time. They do make a very good estimate for the demand for funds at any given point
and maintain adequate cash reserves to meet such demands. The excess funds available over and above
this estimate is used for lending and investment. This is how a fine balance is sought to be maintained
between liquidity and profitability.
 In spite of adequate liquidity having been maintained, there may be instances where the demand from
the depositors may be higher. In such cases, the Banks go in for inter-bank borrowings to meet the
demand and keep up its commitment.

Safety:

 The trust of the people emanates from their perception of safety of their
funds. When they perceive more safety for their funds, their trust goes up
and vice-versa. Banks have proved to be trust-worthy in their promise to
return the deposits on demand. But the same cannot be said of people to
whom the Banks lend.
 Lending is a necessary activity without which the Banks will not be
financially viable. It is only from the interest/revenue generated from
lending and investment that the Banks can pay interest and reward its
depositors. Indiscriminate lending and investment will not increase the
trust of its depositors.
 Just like the inverse relationship between liquidity and profitability, so is
the relationship between risk and profitability. Here too, Banks have to do
the balancing act. A Bank with better mechanism of managing risk has a
greater chance and prospects of surviving and growing.

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 Profitability:

The Banks also have to be profitable. This is a must, because unless the Banks are
profitable, they will not be in a position to reward their depositors (by way of
interest), meet their operational costs, satisfy the demands of the investors (for
dividends) and grow in size and business year on year. Just as the customers lose
faith in a Bank struggling on liquidity, a loss making Bank or a meagre profit making
Bank, will also not instil any confidence. Banks have to be profitable in their own
interests in the long run.

Secrecy:

Confidentiality about the transactions of its customers is always the top-priority

for the Banks. The Banks have gained the trust of its customers over a period of
time because of this. Customers know that the Banks would not unnecessarily
reveal details of their transactions to others, unless warranted through
Courts/Statutory Authorities/Law Enforcement Agencies/in the national interest.
Leaking of transactions can cause harm to the customers or expose them to
possible losses. If Banks had not taken this aspect seriously, the trust placed by
the customers would have been long gone.

Service Quality:

Banking is one such transaction where the customer interactions are very frequent. The customers would
prefer to deal with the Banks only if each such interaction is made pleasant and speeded up. Service failures
like undue delay, errors in operations (wrong credits, wrong debits etc.) would erode the confidence, apart
from resulting in operational risks and operational losses. Banks which do not strive to make each customer
inter-action as “moments of truth” would slowly suffer losses in business. This is the reason why all the
Banks swear by their service quality and are making all-out efforts to make the interaction at each customer
touch point more pleasant and more convenient.

Banking regulations are primarily to make sure and encourage the Banks to stick to these fundamentals of
inspiring confidence and trust – Liquidity, Safety, Profitability, Secrecy and Service Quality. Now, it is
understood as to why Banks function in a highly regulated environment.

Spread of banking and branch penetration:

Banking services were provided by banks in various parts of our country since a long time. But the branch
expansion policies of the banks were mostly driven by business goals and profitability considerations. This

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 resulted in pockets with high density of bank branches and many other pockets did not have any bank
branches. Rural areas were deprived of basic banking services. Nationalization of banks in 1969 resulted in
emphasis on providing banking services to all parts of the country. Banks were encouraged to open branches
in unbanked and rural centres. This led to spread of banking in all parts of the country. Banks are even now
opening more and more branches so that all sections of the societies are able to get banking facilities.

Social banking:

Along with achieving expansion of branch networks, another important requirement was to achieve
extension of banking facilities to weaker sections of the society. Agriculture and allied activities, rural
artisans, landless labourers, small industries etc. were in need of loan facilities and other banking services.
Bank nationalization and expansion of branch network enabled social banking as well. Special schemes were
introduced by banks to meet the credit needs of these sectors.

Fiduciary Responsibility:

 Duty is defined as something that is required to be done by a person or entity as a moral or legal
obligation. Not carrying out a duty may be held morally wrong. It can also be a punishable under certain
laws. Fiduciary duty is the highest form of such duty. The person or entity that has such duty is called
as “Fiduciary”. The person to whom such obligation is due is known as the “Beneficiary”.
 If the fiduciary fails to perform the duty cast on him, he is required account for the benefits that he got
by not performing the duties. The beneficiary has a right to be compensated even if he did not suffer
any loss due to failure of performing such duty by fiduciary. Therefore, fiduciary duty is the highest form
of duty that is to be performed by anyone.
 The relationship between a banker and customer is marked by fiduciary responsibility cast on the
banker. A banker is expected to show highest level of responsibility while dealing with the funds of the
customers and their instructions. This concept of fiduciary responsibility gives confidence to the
customers while dealing with banks.

Business ethics:

The word Ethics comes from Greek word ‘ethos’ meaning nature, disposition or customs. Ethics are the
principles that govern a human being’s behavior or conduct. It encompasses the universal values of human
rights, obedience to laws and concern for others. Why is ethics important in business? Ethics provides the
underpinning for corporate governance. Ethics tries to create a sense of right and wrong in the organizations
and often when the law fails, it is the ethics that may stop organizations from harming the society or
environment.

Importance of ethics comes from the following aspects:

 Satisfying basic human needs: Being fair, honest and ethical is one the basic human needs. People desire
to deal with an organization that is fair and ethical in its practices.

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  Creating credibility: An organization that is believed to be driven by moral values is respected in the
society even by those who may have no
information about the working and the
businesses or an organization.
 Uniting people and leadership: An
organization driven by values is revered by
its employees also. They are the common
thread that brings the employees and the
decision makers on a common platform.
This goes a long way in aligning behaviours
within the organization towards
achievement of one common goal or
mission.
 Improving decision making: An
organizations destiny is the sum total of all
the decisions that it takes in course of its
life. Decisions are driven by values.

For example, an organization that does not value

competition will be fierce in its operations aiming to wipe out its competitors and establish a monopoly in
the market.
 Long term gains: Organizations guided by ethics and values are profitable in the long run, though in the
short run they may seem to lose money.
 Securing the society: Often ethics succeeds law in safeguarding the society. The law machinery is often
found acting as a mute spectator, unable to save the society and the environment. Technology, for
example is growing at such a fast pace that the by the time law comes up with a regulation we have a
newer technology with new threats replacing the older one. Lawyers and public interest litigations may
not help a great deal but ethics can.
 Ethics tries to create a sense of right and wrong in the organizations and often when the law fails, it is
the ethics that may stop organizations from harming the society or environment.
 Ethics plays a big role in forming and developing relationships in personal life as well as in business.
Banking being a business of trust, the importance of ethics is all the more prominent. A bank founded
and run on sound ethical principles can build and retain customer relationship for its growth as well as
growth of its customers.

Indian Financial System:

This diagrammatic representation captures the Indian Financial System very accurately:

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 It is clear that there are regulators working reporting to the Ministry of Finance – like, RBI (for Banks and
Financial Institutions), SEBI (for capital markets), IRDA (for insurance companies) and other apex institutions
like NABARD, DHFI (Discount and Finance House of India), STCI (Securities Trading Corporation of India).

The structure of any Financial System comprise of:

o Specialized and Non-Specialized Financial Institutions.
o Organized and Unorganized financial markets.
o Financial Instruments and services to facilitate transfer of funds.

Also, part of the system is – procedures, practices and financial inter-relationships. All the players in the
Financial System are mutually dependent and not exclusive of each other. For example, the financial
institutions operating in financial market are part of the “markets”. What does the “system” in the term
“Financial System” indicates? Systems can be best defined as a set of closely connected institutions, agents,
practices, markets, transactions, claims and liabilities in the economy. Financial System is about money,
credit and finance. Though, these terms are broadly used inter-changeably, yet they are different from each
other. The following will bring more clarity in knowing the subtle difference.

o Money refers to the current medium of exchange or means of payment.

o Credit is a sum of money normally returned with interest (popularly known as “loan”).
o Finance is monetary resources comprising of debt and owned funds of a State.

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 Overview of Banking:

Now, what does the Indian Banking System looks like. A diagrammatic representation which captures the
essence of the Indian Banking System is given below:

Our Central Bank - Reserve Bank of India (RBI):

 RBI was established in 1935 during the British rule, to function as the central bank of the country. As
the central bank of the country, RBI performs both the traditional functions of a central bank and a host
of developmental and promotional functions. The RBI Act1934 confers upon it the powers to act as note
issuing authority, bankers’ bank and banker to the Government.
 RBI has the sole right to issue bank notes in India and such notes have unlimited legal tender.
 As per sec.20 of RBI Act, it is obligatory on the part of RBI to transact government business including
the management of public debt of the union. Wherever the branch of RBI is not there, SBI and other
nationalized banks will do these jobs.

RBI as Bankers’ Bank:

 Scheduled Banks, appearing in the second schedule to RBI Act 1934, can avail facilities of refinance from
RBI subject to their fulfilling certain obligations as laid down in the said Act. By virtue of the powers
conferred upon it by the RBI Act 1934 and Banking Regulation Act 1949, the relationship between RBI
and scheduled commercial banks is very close and of varied nature, as detailed below:
 As supervisory and controlling authority over banks like licensing of Banking Companies, permission
for opening branches, power to inspect Banking Companies, power to issue directions, control over top
management of the Banks.

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 o As controller of credit- by changing the statutory requirement regarding maintenance of liquid
assets in the form of SLR and CRR, by issuing directives under sec.21 of the Banking Regulation Act
relating to the policies on advances to be followed by the Banks.
o As banker to the Banks- as a lender of last resort and grants accommodation to the scheduled
banks in the form of re-discounting or purchase of eligible bills, loans and advances against certain
securities. Also, Liquidity Adjustment Facility (LAF) was introduced by RBI in the year 2000 the funds
of which are being used by the banks for their day-to-day mismatches in their liquidity. Under this
scheme, Reverse Repo auctions (for absorption of liquidity) and Repo auctions for injection of
liquidity) are conducted on a daily basis (except Saturdays). The interest rates on repo and reverse
repo keep changing from time to time.

RBI is empowered to collect credit information:

from banking companies and to furnish such information in a consolidated form to any banking company
applying for the same. RBI ensures that the scheduled banks adhere to the government guidelines.
Over a period of time, stringent regulation by the government and RBI resulted in –

 Strengthening of lines of supervision

 Increased health of the assets qualitatively
 Cleansing of accounting methods and revealing the real profitability
 High competitive efficiency.

To assist and facilitate these, there was a consolidation process that started and attention was given to
housekeeping, credit management, profitability etc. Macro-economic crisis in the country paved the way
for financial sector reforms which brought in its wake:

 Deregulation of interest rates

 Setting up of new generation private sector banks
 Prudential guidelines on income recognition and asset classification norms
 Extensive use of technology
 Capital adequacy norms
 Autonomy packages
 Focus on bigger size
 New innovative products
 Global standards of service
 Diversification of activities
 Universal Banking etc.

Types of banks:
Scheduled and Non-Scheduled banks:

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  A bank is said to be a scheduled bank when it has a paid up capital and reserves as per the prescription
of RBI/satisfies RBI that its business is not being conducted detrimental to the interests of its depositors
and included in the second schedule of RBI Act 1934.
 Non-scheduled banks are those commercial banks, which are not included in the second schedule of
RBI Act 1934.
 Scheduled Banks need to abide by the statutory liquidity norms prescribed by the RBI in the form of
CRR and SLR maintenance.
 The main benefit is that the scheduled banks can approach RBI for financial assistance in terms of RBI
Act, 1934.

Commercial Banks:

 A Commercial bank is an institution that accepts deposit, gives loans and offers related services like
accepting deposits and lending loans and advances to general customers and businessmen.
 These institutions run to make profit. They cater to the financial requirements of industries and various
sectors like agriculture, rural development, etc. It is a profit making institution owned by the
government or private or both.

Commercial bank includes public sector, private sector, foreign banks and regional rural banks:

Public sector banks:

It includes SBI and nineteen (19) nationalized banks. IDBI Bank Ltd is also considered as public sector banks.
But technically it is in the Private Sector. Public Sector Banks are those Banks which are created out of a
statute in the Parliament. Altogether there are 20 public sector banks. The public sector accounts for 72
percent of total banking business in India and State Bank of India is the largest commercial bank in terms of
volume of all commercial banks.

Private sector banks:

 Private Sector Banks were set up following the recommendations of the Narasimham Committee.
Private sector banks are those whose equity is held by private shareholders. For example: ICICI, HDFC,
Kotak Mahindra Bank, Yes Bank, IndusInd Bank – to name a few.
 Private sector banks also are playing a major role in the development of Indian banking industry. In
fact, it is believed that with the advent of these new generation private Banks, the technology in the
Banking industry has been up scaled and taken to a new height.

Foreign Banks:

Foreign banks are those banks which have their head offices abroad. CITI bank, HSBC, Standard Chartered
etc. are the examples of foreign banks in India.

Regional Rural Bank (RRB):

 These are state sponsored regional rural oriented banks. They provide credit for agricultural and rural
development. The main objective of RRB is to develop the rural economy.

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  Their borrowers include small and marginal farmers, agricultural labourers, artisans etc. NABARD
holds the apex position in the agricultural and rural development.

Co-operative Bank:

 Co-operative bank was set up by passing a co-operative act in 1904. They are organized and managed
on the principle of co-operation and mutual help. The main objective of co-operative bank is to provide
rural credit.
 The cooperative banks in India play an important role even today in rural co-operative financing. The
enactment of Co-operative Credit Societies Act, 1904, however, gave real impetus to the movement.
 The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad basing it to
enable organization of non-credit societies.

Three tier structures exist in the co-operative banking:

o State cooperative bank at the apex level.
o Central cooperative banks at the district level.
o Primary cooperative banks and the base or local level.

Development banks and other financial institution:

A development bank is a financial institution which provides long term funds to the industries for
development purpose. This organization includes banks like IFCI, State level institutions like SFCs SIDCs etc.
and also includes investment institutions like UTI, LIC, and GIC etc.

Universal and differentiated banks:

 Universal and differentiated banks are terms used to denote the types of services that can be offered
by banks. The classification stems from the licencing policy for establishment of banks.
 Universal banks can provide all banking services and products.
 Differentiated banks can provide only selected types of services and products. In this sense, they are
limited players when compared to universal banks.
 Payment banks and small finance banks are examples of differentiated banks. Differentiated banks have
come into existence to enhance financial inclusion and quick payment systems.

Differences between bank and NBFC:

 NBFCs cannot accept demand deposits.

 NBFCs are not a part of the payment and settlement system – hence cannot issue cheques to its
customers drawn on itself.
 NBFCs operate without DICGC cover for its depositors.

Services and suggesting steps to improve the quality of banking services to individual customers. The
Committee felt that in an effort to continuously upgrade the package of services that banks offered to their
customers, there was a need for benchmarking of such services. After an in-depth study at the grass-roots
level, the Committee concluded that there was an institutional gap for measuring the performance of banks
against a bench mark reflecting the best practices (Code and Standards). Therefore, the Committee
recommended setting up of the Banking Codes and Standards Board of India (BCSBI). BCSBI was set up to

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 ensure that the common man as a consumer of financial services from the banking Industry is in no way at
a disadvantageous position and really gets what he/she has been promised.

OTHER APEX ORGANZATIONS:

NABARD: The National Bank for Agriculture and Rural Development - the apex development bank for
agriculture and rural development was set up on 12th July, 1982.The paid up capital of NABARD is Rs. 1000
Crores contributed equally by the Government of India and the RBI. It is managed by a Board of Directors
comprising the Chairman, Managing Director, experts in Rural Economics, experts from Co-operative and
Commercial Banks, three Directors from Reserve Bank, three directors from Government of India and two
directors representing the State Governments. NABARD has been entrusted with three types of functions
namely, (i) Credit Functions (ii) Development Functions and (iii) Regulatory functions.

NHB: National Housing Bank is the latest apex bank set up in India. It is a statutory corporation established
under the National Housing Bank Act, 1987 as a wholly owned subsidiary of the RBI, which has subscribed
its entire share capital of Rs. 100 crores. The bank started functioning on 9th July, 1988. Its primary
responsibility is to promote and develop specialized housing finance institutions for mobilizing resources
and extending credit for housing.

SIDBI (Small Industries Development Bank of India): In the field of financing of small scale industries
in India, a separate apex development bank has started its operations from April 2, 1990. The small
Industries Development Bank of India has been set up under an Act of Parliament as the principal financial
institutions for promotion, financing and development of industry in small sectors. It coordinates the
functions of other institutions engaged in similar activities.

ECGC (Export Credit Guarantee Corporation of India Ltd.): Export Credit Guarantee Corporation of
India is a Government of India undertaking which plays a very important role in the field of export promotion
and export finance. ECGC offers Indian Exporters protection from the risks inherent in selling goods on credit
to foreign buyers. The standard policies issued by the ECGC cover the Commercial and political risks inherent
in an export transaction.

EXIM BANK: (export import bank of India: Exim Bank - set up on January 1, 1982 is the apex banking
institution in the field of financing foreign trade of India. It provides financial assistance to exporters and
importers and functions as the principal financial institutions for coordinating with other institutions
engaged in financing of exports and imports of goods and services. It provides refinance facilities also to the
commercial institutions against their export-import financing activities.

DHFI (Discount and Finance House of India):

 RBI set up DHFI in collaboration with the Public Sector Banks and financial institutions during April 1988.
DHFI is an apex body in the IFS working towards development of a more vibrant secondary market which
would provide more liquidity and marketability to the money market instruments. DHFI commenced its
operations from 25-04-1988 and deals with short term money market instruments.
 The aim of DHFI is to increase the volume of turnover rather than being a repository of money market
instruments.
 It has been promoting the active participation of the scheduled commercial banks and their subsidiaries,
state and urban cooperative banks and all-Indian financial institutions in the money market.
 Its objective is to ensure that short-term surplus and deficits of these institutions are equilibrated at
market-related rates through inter-bank transactions and various money market instruments.

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  As a step towards decentralizing its operations, DHFI opened branches in Delhi, Kolkata, Chennai,
Bengaluru and Ahmedabad during 1990-91, so as to provide money market facilities at the major money
market centres in the country.

STCI (Securities Trading Corporation of India):

 STCI Finance Limited was promoted by Reserve Bank of India in May 1994 with the objective of fostering
an active secondary market in Government of India Securities and Public Sector bonds.
 In 1996, STCI was authorized by the RBI to be one of the first Primary Dealers in India.
 It is now the leading Primary Dealer in the country.
 The Company is a market maker in government securities, corporate bonds and money market
instruments apart from carrying out proprietary trading in equity both in the cash & derivatives (F&O)
segment.
 The Company’s other lines of activities included trading in interest rate swaps - both for hedging and
market making.
Other Regulators & SROs
SEBI - Securities and Exchange Board of India

The Securities and Exchange Board of India was enacted on April 12, 1992 in accordance with the provisions
of the Securities and Exchange Board of India Act, 1992. Its objective is
"to protect the interests of investors in securities (in stock market) and to promote the development of,
and to regulate the securities market and for matters connected therewith or incidental thereto"
Insurance Regulatory and Development Authority of India-IRDA

IRDA was established by an Act in 1999 to protect the interests of the investors in Insurance policies, to
regulate the Insurance companies and promote orderly growth of the insurance industry. This Act
supersedes all other Acts of insurance. IRDA also looks into investment of funds by the company.
AMFI-Association of Mutual Funds in India

AMFI is dedicated to developing mutual fund industries on professional healthy and ethical lines and to
protect the interest of mutual funds and its unit holders. All the Mutual funds in India are the members of
AMFI. It is a non- profit and Self-Regulatory Organization set up for the benefit of its members.
PFRDA-Pension Fund Regulatory and Development Authority

PFRDA was established by the Government of India on 23rd August, 2003. The Government has mandated
PFRDA to act as a regulator for the pension sector. The mandate of PFRDA is development and regulation
of the pension sector in India.

The National Pension System reflects the Government’s effort to find sustainable solutions to the problem
of providing adequate retirement income. As the first step towards instituting pension reforms, the
Government of India moved from a defined benefit pension to a defined contribution based pension system
by making it mandatory for its new recruits (except armed forces) with effect from 1st January, 2004. Since
1st April, 2008, the pension contributions of Central Government employees covered by the National
Pension System (NPS) are being invested by professional Pension Fund Managers in line with investment
guidelines of Government applicable to non-Government Provident Funds.
Forward Markets Commission (FMC)

headquartered at Mumbai, is a regulatory authority for commodity futures market in India. It is a statutory
body set up under Forward Contracts (Regulation) Act 1952
The functions of the Forward Markets Commission are as follows:

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 o To advise the Central Government in respect of the recognition or the withdrawal of recognition from
any association or in respect of any other matter arising out of the administration of the Forward
Contracts (Regulation) Act 1952.
o To keep forward markets under observation and to take such action in relation to them, as it may
consider necessary, in exercise of the powers assigned to it by or under the Act.
o To collect and whenever the Commission thinks it necessary, to publish information regarding the
trading conditions in respect of goods to which any of the provisions of the Act is made applicable,
including information regarding supply, demand and prices, and to submit to the Central Government,
periodical reports on the working of forward markets relating to such goods;
o To make recommendations generally with a view to improve the organization and working of forward
markets;
o To undertake the inspection of the accounts and other documents of any recognized association or
registered association or any member of such association whenever it considers it necessary.

The Commission functions under the administrative control of the Ministry of Finance, Department of
Economic Affairs, and Government of India.
Indian Bank Association IBA
IBA was incorporated in the year 1946 to assist and guide for better practice in banking in the country. It
assists and guides the bankers in all aspects and also works as liaison between the Government and the
bankers. It is an autonomous body. All the bankers are members of IBA.

Its objective is:

To promote and develop in India sound and progressive banking principles, practices and conventions and
to contribute to the development of creative banking, service to members and banking industry, innovation
in banking service, operations and procedure, coordination in legal/technical/administrative/professional
problems, new system and services, procedure and practices, surveys and resources, issue bulletins/news-
letter/magazines, conduct talks/discussions/negotiations with the employees for settlement, issue
circulars/clarifications on latest development, maintain coordination/liaison with RBI/GOVT/FI etc.
Foreign Exchange Dealers Association of India (FEDAI) was set up in 1958 as an Association of banks
dealing in foreign exchange in India (typically called Authorized Dealers - ADs) as a self-regulatory body and
is incorporated under Section 25 of The Companies Act, 1956. Its major activities include framing of rules
governing the conduct of inter-bank foreign exchange business among banks vis-à-vis public and liaison with
RBI for reforms and development of the forex market.
Presently some of the functions are as follows:
o Guidelines and Rules for Forex Business.
o Training of Bank Personnel in the areas of Foreign Exchange Business.
o Accreditation of Forex Brokers
o Advising/Assisting member banks in settling issues/matters in their dealings.
o Represent member banks on Government/Reserve Bank of India/
The Fixed Income Money Market and Derivatives Association of India (FIMMDA)

Insurance Companies was incorporated as a Company under section 25 of the Companies Act, 1956 on June
3rd, 1998. FIMMDA is a voluntary market body for the bond, money and derivatives markets.

FIMMDA has members representing all major institutional segments of the market. The membership
includes Nationalized Banks such as State Bank of India, its associate banks and other nationalized banks;
Private sector banks such as ICICI Bank, HDFC Bank, IDBI Bank; Foreign Banks such as Bank of America, ABN

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 Amro, Citibank, Financial institutions such as IDFC, EXIM Bank, NABARD, Insurance Companies like Life
Insurance Corporation of India (LIC), ICICI Prudential Life Insurance Company, Birla Sun Life Insurance
Company and all Primary Dealers.
BCSBI- Banking Codes and Standard Board of India:

In November 2003, the Reserve Bank of India (RBI) constituted the

Committee on Procedures and Performance Audit of Public Services under
the Chairmanship of Shri S.S. Tarapore (former Deputy Governor) to address
the issues relating to availability of adequate banking services to the
common man. The mandate to the Committee included identification of
factors that inhibited the attainment of best customer s Is there any
difference between a Banking Company and a NBFC (Non-Banking Financial
Companies). Yes, there are certain basic differences. What are they?

BCSBI has in collaboration with the Indian Banks' Association (IBA), evolved two codes - Code of Bank’s
Commitment to Customers and the Code of Bank’s Commitment to Micro and Small Enterprises - which set
minimum standards of banking practices for member banks to follow when they are dealing with individual
customers and micro and small enterprises. These Codes are subject to periodical review and revision. The
central objective of these Codes is promoting good banking practices, setting minimum standards,
increasing transparency, achieving higher operating standards and above all, promoting a cordial banker-
customer relationship which would foster confidence of the common man in the banking system. The Codes
lay great emphasis on transparency and providing full information to the customer before a product or
service is sold to him. The Codes are not only commitments of banks to their customers but also in a sense
a Charter of Rights for the common man. By setting the minimum standards of customer service, the Codes
make the customer aware of he can expect each bank to deal with his / her day-to-day requirements.

BCSBI monitors the implementation of the Codes through the following methods:

o Obtains from member banks an Annual Statement of Compliance (ASC).

o Visits branches to find out the status of ground-level implementation of Codes.
o Studies complaints received from customers and orders / awards issued by Banking Ombudsmen /
Appellate Authority to find out whether there is any system-wide deficiency.
o Organizes an annual Conference with Principal Code Compliance Officers of the Member banks to
discuss implementation issues.

BCSBI is not a forum for redressal of individual grievances. BCSBI, however, examines each complaint to
identify any systemic issue that may exist and takes up the matter with the respective bank to ensure that
systems and procedures are suitably amended so that such complaints do not recur.
What is a NBFC?

It is a company registered under the Companies Act, 1956 and is engaged in

the business of loans and advances, acquisition of shares, stocks, bonds,
debentures issued by the Government or local authority or other securities
like marketable nature, leasing, hire-purchase, insurance companies, and chit
businesses. It does not include any institution whose principal business is
agriculture activity, industrial activity, sale/purchase/construction of
immovable property.

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