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CHAPTER I
INTRODUCTION

There has been a rapid development in the banking institutions in various countries in the
past few decades. The banking is an important aid to industry and trade and that it also
provides a variety of services to the public in general. Indeed banking may be regarded as
an indispensable part of the economy of every country. The significance of banking has
increased all over the world with the rise in income levels and growth in the volume of
financial transactions.
Banking in the sense of money holding money lending and money changing is as old as
history. At least 5000 years ago Sumerian and Babylonian priests were accepting deposits
and making loans. Further refinements were slowly added by the early Christian era
private and public banks were accepting demand and transferring funds by written order.
Indian banking is the lifeline of the nation and its people. Banking has helped develop
vital sectors of the economy and usher in a new dawn of progress on the Indian horizon
the sector has translated the hopes and aspirations of millions of people into reality. But
to do so it has had to cover miles of difficult terrain suffer the indignities of foreign rule
and the pangs of partition. Today, Indian banks of the world.
We will find that various kinds of banks are now functioning. These banks cater to the
commercial and industrial needs of all countries which include the highly developed and
industrialized countries the less developed countries and the countries which are at the
take off stage. Thus there are the industrial bank, the commercial banks, the joint stock
banks, the co operative banks, the agricultural banks, rural development banks lead banks
and so many other types of banks and credit institutions which are functioning.
India became independent in the year 1947 and the period from 1947 till date has been a
period of great progress and development for this country. In case we look to the banking
system we find that great progress has been made and not only that the weaker banks
have been eliminated but also as a result of nation allocation of banks of banks and
starting of a number of other financial lending institutions to fulfill the requirements of
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trade and industry a great change has emerged in the entire structure of the banking
system in India. The Reserve Bank of India main bank had a central bank of India.
MEANING AND ORIGIN OF WORD BANK
As early as 2000 B.C the Babylonians had developed a banking system. Using their
temples has banks. From those foundations emerged the Greek banking institutions when
the Romans conquered the Greeks, the temple priests no longer acted as financial agents.
The Romans, with their organizational abilities introduced rules and regulations for the
conduct of private banking calculated to instill the utmost confidence in the institution
itself. But future growth in the industry was seen thereafter and it was only in the 12 th
century A.D that some banks were established in Venice and Geneva.
The work bank is said to be of Germanic origin, cognate with the French word ‘Banque’
and the Italian word ‘Banca’ both meaning bench.
DEFINITION OF BANK
 Under English common law define:
Banking business means the business of either or both of the following
a) Receiving from the general public money on current, deposit, savings or other
similar account repayable on demand or within less than or with a period of call or
notice of less than that period.
b) Paying or collection cheques drawn by or paid in by customers.
 The banking regulation act 1949 defines:
The business of banking by stating the essential functions of banker. It also states the
various other businesses a banking company may be engaged in and prohibits certain
businesses to be performed by it.
 According to Horace white:
Defines banks is a manufacture credit and machine for facilitating exchanges.

NATURE OF BANKING BUSINESS

The business of a bank is that of intermediary between the saving and investment
operations of the public. The public itself divided artificially into two parts
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i) Surplus spenders who spend less than current income for current output.
ii) Deficit spender who spend more than their income for current output

Banking activities are considered to be the life blood of the national economy without
banking services, trading and business activities cannot be carried on smoothly. Banks or
the distributors and protectors of liquid capital which is of vital significance to a
developing country Efficient administration of the banking system helps in the economic
growth of the nation. Banking is useful to trade and commerce.
In recent years there has also been considerable change in the functioning of bank. There
has been an increase in the amount of technology used by banks that is some banks use
cash dispensers and offer twenty four hours cash withdrawal facility instant account
details and money trade through computer network. There is much more competition in
the banking sector services has to be sold in ways never done previously.

HISTORY OF BANKING INSTITUTION IN ELSWHEARE

A bank is a financial intermediary that accepts deposits and channels those deposits into
lending activities, either directly or through capital markets. A bank connects customers
with capital deficits to customers with capital surpluses.
Banking in the modern sense of the word can be traced to medieval and early renaissance
Italy, to the rich cities in the north like Florence, Venice and Genoa. The Bardi and
Peruzzi families dominated banking in 14 century Florence establishing branches in
many other parts of Europe, perhaps the most famous Italian bank was the Medici bank,
set up by Giovanni in 1397. The earliest known state deposit bank, Banco di Giorgio
(Bank of set George) was founded in 1407 at Genoa. Italy bank can be traced back to
ancient times even before money when temples were used to store commodities during
the 3rd century A.D banks in Persia and other territories in the Persian Sassanid empire
issued letters of credit known as sakks. Muslim traders are known to have the cheque or
sakka system since the time of Harun al-Rashid (9 th century) of the Abbasid caliphate. In
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the 9th century, a Muslim businessman could cash an early from of the cheque in china
drawn on sources in Baghdad, a tradition that was significantly strengthened in the 13 th
and 14th centuries during the mogul empire Fragments found in the cairo Geniza indicate
that in the 12th century cheques remarkably similar to our own were in use, only smaller
to save costs on the paper.
The first banks were probably the religious temples of the ancient world and were
probably established in the third millennium B.C banks probably predated the invention
of money. Deposits initially consisted of grain and later other goods including cattle,
agricultural implements and eventually precious metals such as gold in the form of easy
to carry compressed plates. Temples and palaces were the safest places to store gold as
they were constantly attended and well built. As sacred places, temples presented an extra
deterrent to would be thieves. There are extant records of loans from the 18 th century B.C
in Babylon that were made by temple priests/monks to merchants. They used their
temples as their banks and the priests acted as the3 financial agents. But the spread of
disbelief in religion destroyed the public confidence in depositing money and valuable in
temples.
HISTORY OF BANKING IN INDIA
Banking existed in India even in the Vedic times where giving and taking of credit in one
form or the other was prevalent. Although the origin of banking in India was in the
money lending business the transition from money lending to formal banking took place
before the second century ‘Manu’ the second century Rishi and scholar has said in his
works that a sensible man should deposit his money with a person of good family of good
conduct and one who is well- acquainted with the law. Thus in ancient times when
Indians left their homes for pilgrimages or business for long periods of time they
deposited their money and valuables for safe keeping with persons of repute over time a
practice developed to lend a part of such money deposited to needy persons to earn
interest or usury as it was called then. Thus the person with whom money was deposited
for safe custody enjoyed a good reputation and was an indispensable pillar of ancient
Indian society.
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The ancient time in the Smriti period which followed the Vedic or as there during the
period of Ramayana and Mahabharata the banking has become a full-fledged business. It
is said that one Vriddhipajivi accompanied Bhrata to jungle to bring lord Rama back to
Ayodhya, vriddhipajivi means a member of the money lending community. Epic age the
business of banking was carried on by the3 members of the vaish community.
Buddhist period, during the Buddhist period even the Brahmans and the Kshtrias started
taking banking as business. Kautilya in his arthshastra says that the bankers in this period
were known as shresthies, sahukar and mahajans.
During the mughal period, the indigenous bankers played a very important role in lending
money and financing of foreign trade and commerce. Every town, big or small, had a
‘sheth’ also known as ‘shah’ ‘shroff’ or ‘chettiar’ who performed a number of banking
functions.
British period banking in India originated in the last decades of the 18th century. The first
banks were The General Bank of India which started in 1786, and the Bank of Hindustan,
both of which are now defunct. The oldest bank in existence in India is the State Bank of
India, which originated in the Bank of Calcutta in June 1806, which almost immediately
became the Bank of Bengal. This was one of the three presidency banks, the other two
being the Bank of Bombay and the Bank of Madras, all three of which were established
under charters from the British East India Company. For many years the Presidency
banks acted as quasi-central banks, as did their successors. The three banks merged in
1921 to form the Imperial Bank of India, which, upon India's independence, became the
State Bank of India.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in
1881 in Faizabad. The next was the Punjab National Bank, established in Lahore in 1895,
which has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative
period of stability. Around five decades had elapsed since the Indian Mutiny, and the
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social, industrial and other infrastructure had improved. Indians had established small
banks, most of which served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange
banks and a number of Indian joint stock banks. All these banks operated in different
segments of the economy. The exchange banks, mostly owned by Europeans,
concentrated on financing foreign trade. Indian joint stock banks were generally
undercapitalized and lacked the experience and maturity to compete with the presidency
and exchange banks. This segmentation let Lord Curzon to observe, "In respect of
banking it seems we are behind the times. We are like some old fashioned sailing ship,
divided by solid wooden bulkheads into separate and cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the
Swedish movement. The Swedish movement inspired local businessmen and political
figures to found banks of and for the Indian community.
During 1929-32 due to worldwide monetary depression the need of a ‘central Bank’ in
the country was widely felt. It was in 1935 that Reserve Bank of India was set up to
perform the functions of central bank.
Nationalization
The Reserve Bank of India was nationalized on January 1, 1949 the Banking companies
Act was passed in 1949 which was subsequently amended to read as Banking Regulation
Act 1949.
By the 1960s, the Indian banking industry had become an important tool to facilitate the
development of the Indian economy. At the same time, it had emerged as a large
employer, and a debate had ensued about the possibility to nationalize the banking
industry. ‘Indira Gandhi’, the-then Prime Minister of India expressed the intention of the
GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray
thoughts on Bank Nationalization." The paper was received with positive enthusiasm.
Thereafter, her move was swift and sudden, and the GOI issued an ordinance and
nationalized the 14 largest commercial banks with effect from the midnight of July 19,
1969. A second dose of nationalization of 6 more commercial banks followed in 1980.
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The stated reason for the nationalization was to give the government more control of
credit delivery. With the second dose of nationalization, the GOI controlled around 91%
of the banking business of India. Later on, in the year 1993, the government merged New
Bank of India with Punjab National Bank. It was the only merger between nationalized
banks and resulted in the reduction of the number of nationalized banks from 20 to 19.
After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to
the average growth rate of the Indian economy.
TYPES OF BANKS
Banks activities can be divided into retail banking dealing directly with individuals and
small businesses business banking providing services to mid market business corporate
banking. Directed at large business interties private banking providing wealth
management services to high net worth individuals and families and investment banking
relating to activities on the financial market most banks are profit making private
enterprises.
Banks are financial institutions. There are different kinds of banks in the present age.
Some perform general banking functions while others are specialized financial
institutions. Main kinds of banks are described in the following:
Commercial banks
The commercial banks mobilize deposit from the public which are repayable on demand
or at short notice. They lend to traders and manufactures for short periods. They provide,
the working capital to the business in the form of overdraft and cash credit. Besides, the
banks render a number of agency services such as collection cheques and bills and
subsidiary services such as discounting bills funds etc. the services of bands are ever
expanding with the change in the needs and requirements of the society. Commercial
bank to refer to a bank or a division of a bank that mostly deals with deposits and loans
from corporations or large business. These are the institutions which perform banking
functions. They are profit seeking institutions. They receive deposits, advance loans and
create credit. They are an integral part of trade and industry. They also perform the
agency and utility services demanded by the people.
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Investment banks or industrial banks

Investment banks provide medium and long-term finance to industries to meet their fixed
capital requirements. For existing industries, they lend for expansion and modernization
of industries. They also receive deposits from the public for long periods nowadays. The
banks provide technical guidance for the efficient management of industries. The main
functions of these banks are the merchandising of shares, bonds and securities. In 1966,
Investment Corporation of Pakistan (ICP) was established. Prior to sit there was no such
institution in Pakistan.
Exchange banks
Exchange banks specialize in financing the foreign exchange required for settlement of
transactions in foreign bills of exchange. Nowadays commercial banks themselves
undertake foreign exchange business so there is no separate bank called foreign exchange
bank. These banks deal in foreign currencies. They specialize in foreign exchange and
finance foreign trade. Many countries have such banks but in Pakistan, the commercial
banks have established the exchange departments in their main branches. Some Pakistani
banks have also opened their offices in foreign countries.
Co- operative banks
Banks formed on the principle of co-operation are called co-operative banks. They
provide short-term credit to agriculturists, artisans, small farmers and small scale
industries. Co operative banks accept all kinds of deposits and make loan to the members
at lower rate of interest. The co operative banks play a very useful role in financing
agriculture and allied activities.
Land development banks
Agriculturists require short-term loans. Land development banks provide long-term loans
to agriculturists for purchasing tools and equipments and cattle and mking permanent on
land. The long term loans are granted against the security of immovable property such as
land raise their resources in the form of shares and by issuing long-term securities. The
proceeds, thus, collected are utilized at advance loans to farmers. These banks are
presently known as agriculture and rural development banks.
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Savings banks
Savings banks are specialized institutions to collect savings from the poor and middle
income people of the society. These banks primarily intended to encourage habits of thrift
and savings among people with small incomes. The depositors are allowed to withdraw
the amount in times of need. But there are restrictions on the number of withdrawals to be
made in a month. Separate savings banks are organized in various countries. In India, the
Government runs savings including India commercial banks do the function of saving
banks and encourage people to open savings account with them.
Central banks
Every country has generally one central bank. The central bank acts as the leader of the
money market; supervising, controlling and regulating the activities of the commercial
bank and other financial institutions. It enforces monetary discipline in the country’s
economy. It seeks to manage the issue and circulation of currency and control the
creation of bank deposits with a view to safeguard the financial stability in the country.
The central bank functions in close touch with the government and assists in the
implementation. Thus the central bank is the apex bank of the country in maintaining
monetary and economic stability.
This is the most important and premier bank of the country. All the countries of the world
have their own central bank. The banking structure of the country revolves around it. The
central bank of Pakistan is the State Bank of Pakistan. The central bank is the head, the
leader and the supervisor of banking and monetary system of a country. In most of the
countries, the central bank is an autonomous body and many of its policies are
independent of direct government control.
Industrial banks
These banks are established for industrial development of a country. They specialize in
advancing medium and long term loans to industry. In Pakistan, we have Industrial
Development Bank of Pakistan (IDBP), Pakistan Industrial Credit and Investment
Corporation (PICIC) and financial problems of the industry.
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Community banks
To calls operated financial institutions that empower employees to make local decisions
to serve their customers and the partners.
Community development banks
Regulated banks that provide financial services and credit to underserved markets or
populations
Postal savings banks
Savings banks associated with national postal system. Example RD
Private Banks
Banks that manage the assets of high net worth individuals
Agricultural Banks
These banks provide loans for agriculture and related activities like dairy farming, fish
farming, bee farming, sheep farming, etc. So special banks are established to solve the
problems and meet the requirements of rural sector. In Pakistan, we have the Agricultural
Development Bank of Pakistan (ADBP) to meet the credit requirements of agriculture.
There are also cooperative banks to meet the credit needs of the rural people.
Offshore banks
Banks located in jurisdictions with low taxation and regulation. Many offshore banks are
essentially private banks
Mortgage Banks
These banks mortgage land, houses and other property and advance loans. Such banks
exist in some countries of the world but no mortgage bank exists in Pakistan. The
commercial banks, agricultural development bank and cooperative banks are undertaking
mortgage activity in Pakistan.
Regional rural banks
The rural banks have been contemplated as an institution to combine the rural bias and
local feel of the rural problems and attitudinal identification with rural economy with the
co-operative bank process. This is the branch of commercial bank.
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Scheduled and Non-Scheduled Banks

The banks which work under the direction and supervision of the central bank are called
scheduled banks. All other banks are non scheduled banks.
FUNCTIONS OF BANKS
The acceptance of deposits of various types for the purpose of lending or for investment
banks are permitted to engage in some other forms of functions.
1. To Receive Deposits
The primary functions of banks is to accept deposits from the public bank maintain
deposit account for their customers and convert deposit money into cash and vice versa,
in current accounts. Thus a banker whether it be through current or fixed deposit account
mobilizes the saving of the society.
2. Lending money or making loans
Lending money is one of the important functions of bank. This lending money is
advancing money either upon with security.
3. Issuing of notes
This functions which was once considered to be the most paying part of a bankers
business is an modern times performed generally by central banking institutions.
4. Netting by and settlement of payment
Banks act as both collection and paying agents for customer participating in interbank
clearing and settlement system to collect present be presented with and day payment
instruments.
5. Credit intermediation
Banks borrow and lend back to back on their own account as middle men.
6. Credit quality improvement
Banks lend money to ordinary commercial and personal borrowers, but are high quality
borrowers. The improvement comes from diversification of the bank’s assets and capital
which provides a buffer to absorb losses without defaulting on its obligations.
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7. Maturity transformation
Bank more on demand debt and short term debt but provide more long term loans. In the
words they borrow short and lend long.
INDIGENIOUS BANKS
From very ancient days India has had banking of some types known as indigenous
banking. Indigenous banking peculiar to India had been organized in the form of family
individual business. In different parts of the country the indigenous bankers have been
called by different names, such as shoroffs, sahukars, mahajans, chettis, seths, kutiwals
etc. they vary in size from petty money lenders to substantial to sheriffs who carry on
large and specialized banking parts of the country in large town and cities and villages.
Meaning of Indigenous banks
Indigenous bankers are individuals or private firm which receive deposits and give loans
and thereby operate as banks. Since there activities are not regulated, they belong to the
unorganized segment of the money market. The indigenous bankers have been engaged
in the banking business in both ancient and medieval periods.
Types of Indigenous bank
There are three types of indigenous banker.
 Those whose main business is banking
 Those who combine their banking business with trading commission business.
 Those who are mainly traders and commission agents but who do a little banking
business also.
Function of indigenous banker
Accepting deposits
Indigenous bankers accept deposits from the public. These deposits are of two types.
 The deposits which are repayable on demand.
 The deposits which are repayable after a fixed period. The indigenous bankers pay
higher rate of interest them that paid by the commercial banks.
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Advancing loans.
The indigenous bankers advance loans to their customers against all types of securities,
such as land, houses, crops gold and silver.
Business in Hundies
The Indigenous bankers deal in hundies they write hundies and buy sell hundies.
Acceptance of valuables for safe custody
Indigenous bankers accept valuables of their clients for safe custody some indigenous
bankers provide cheque facility they provide remittance facilities also.
Non banking functions
Most of the indigenous banks or bankers also carry on there non-banking business along
with the banking activities they generally have their retail trading business.
Defects of Indigenous bankers
1. Mixing banking and non banking business
2. Unorganized banking system
3. Insufficient capital
4. Merge deposit business
5. Defective lending
6. Unproductive loans
7. Higher interest rate
8. Exploitation of customers
9. Discouragement to bill market
10. Secrecy of accounts
11. No control of reserve bank
MULTI FUNCTIONAL BANKS
1. General Multi function
 equipment leasing
 B. hires purchasing and practice with prayer permission of reserve bank of India
under sec 19(1) of banking regulations Act 1949.
 Mutual fund business
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 Money market into insurance business

 Underwriting public sector undertaking
 Underwriting of corporate share and debenture.
 Issue of credit cards and smart cards debits cards.
2. Social banking business or welfare activities
 Prime Minister Rosgar yojana
 This fund to use for educated unemployed youths for self-employment.
 Svarna Jayanthi sthri Rojgar Yojana
 This scheme is for self employment wage employment to the unemployment
youths in urban area.
 Urban self help employment programmed.
 It provides assistance for self employment with special reference to women
children and providing training for the beneficiary of the scheme
3. Special banking services
 Factoring: - it is the service provided by a financial institution for a trading
company for a paradise of in its invoices RBI under taking the invoices.
 bConsumer credit: - means providing loans to buy T.V, refrigerators, electronic
goods, and another home routinsis to meet sum personal needs for the
maintenance of home and providing assistance for payment of hospital bills etc.
4. Ancillary services
 Guarantee such has performance guarantee and financial guarantee
 Self custody of deeds and security’s
 Personal tax assistance
 Salary services scheme
 Agency services