BANKING THEORY LAW AND PRACTICE

UNIT II

RESERVE BANK OF INDIA (RBI)

Reserve Bank of India (RBI) is the Central Bank of India. RBI was established on 1 April 1935 by
the RBI Act 1934. Key functions of RBI are, banker’s bank, the custodian of foreign reserve,
controller of credit and to manage printing and supply of currency notes in the country.

nitially, the ownership of almost all the share capital was in the hands of non-government
shareholders. So in order to prevent the centralisation of the shares in few hands, the RBI was
nationalised on January 1, 1949.

Functions of Reserve Bank

1. Issue of Notes —The Reserve Bank has a monopoly for printing the currency notes in the
country. It has the sole right to issue currency notes of various denominations except one rupee
note (which is issued by the Ministry of Finance).
2. Banker to the Government–The second important function of the Reserve Bank is to act as the
Banker, Agent and Adviser to the Government of India and states. It performs all the banking
functions of the State and Central Government and it also tenders useful advice to the government
on matters related to economic and monetary policy. It also manages the public debt of the
government.
3. Banker’s Bank:- The Reserve Bank performs the same functions for the other commercial
banks as the other banks ordinarily perform for their customers. RBI lends money to all the
commercial banks of the country.
4. Controller of the Credit:- The RBI undertakes the responsibility of controlling credit created
by commercial banks. RBI uses two methods to control the extra flow of money in the economy.
These methods are quantitative and qualitative techniques to control and regulate the credit flow in
the country.
5. Custodian of Foreign Reserves:-For the purpose of keeping the foreign exchange rates stable,
the Reserve Bank buys and sells foreign currencies and also protects the country's foreign exchange
funds. RBI sells the foreign currency in the foreign exchange market when its supply decreases in
the economy and vice-versa.
6. Other Functions:-The Reserve Bank performs a number of other developmental works. These
works include the function of clearinghouse arranging credit for agriculture (which has been
transferred to NABARD) collecting and publishing the economic data, buying and selling of
Government securities (gilt edge, treasury bills etc)and trade bills, giving loans to the Government
buying and selling of valuable commodities etc.

COMPOSITION OF RBI

 Reserve Bank of India is controlled by a central board of directors. The directors are
appointed for a 4-year term by the Government of India in keeping with the Reserve Bank
of India Act.
 The Central Board consists of:
 Governor
 4 Deputy Governors
 2 Finance Ministry representatives
 4 directors to represent local boards headquartered at Mumbai, Kolkata, Chennai,
and New Delhi
 The executive head of RBI is Governor.
 The Governor is accompanied by 4 deputy governors.
 The First Governor of RBI was Sir Osborne Smith and the First Indian Governor of RBI
was C D Deshmukh.
 The First woman Deputy Governor of RBI was K J Udeshi.
 The only Prime Minister who had been the Governor of RBI was Manmohan Singh.
The current governor of RBI (2022) is Shaktikanta Das.

STATE BANK OF INDIA

SBI was set up on 1st July 1955 when it took over the assets and liabilities of the Imperial bank of
India. Imperial bank of India was established on 27 January 1921 by J.M.Keynes, When the 3
Presidency Banks of India were amalgamated (merged) to form a single banking entity.

The 3 Presidency Banks were

 Bank of Bengal, Established on 2 June 1806

 Bank of Bombay, Established on 15 April 1840
 Bank of Madras, Established on 1843

The Imperial Bank of India was christened (renamed) on 30 April 1955 as the State Bank of India.
The day on which the Imperial Bank of India (IBI) became the State Bank of India, IBI had 480
branches, sub-offices, and three local head offices Government of India nationalized the Imperial
Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State
Bank of India. In 2007 Reserve Bank of India transferred its stake in the State Bank of India to the
Government of India.
Associate Banks of SBI:-

SBI has five associate banks & its associates Banks are governed under the State Bank Of India
(Subsidiary Banks) Act, 1959.

 State Bank of Hyderabad ·

 State Bank of Mysore ·
 State Bank of Patiala ·
 State Bank of Travancore

Earlier SBI had seven associate banks. State Bank of Saurashtra and State Bank of Indore merged
with SBI on 13 August 2008 and 19 June 2009 respectively.

Non-banking subsidiaries-

Apart from its five associate banks, SBI also has the following non-banking subsidiaries:- ·

 SBI Capital Markets Ltd ·

 SBI Funds Management Pvt Ltd ·
 SBI Factors & Commercial Services Pvt Ltd ·
 SBI Cards & Payments Services Pvt. Ltd. (SBICPSL) ·
 SBI DFHI Ltd · SBI Life Insurance Company Limited ·

MANAGEMENT:-

 A Chairman and a Vice-chairman appointed by the Central Government in consultation

with the Reserve Bank
 Maximum 2 Managing Directors appointed by the Central Board with the approval of the
Central Government ·
 6 Directors elected by the shareholders other than the Reserve Bank ·
 8 Directors nominated by the Central Government in consultation with the Reserve Bank to
represent territorial and economic interests & not less than two of whom shall have special
knowledge of the working of co-operative institutions and of the rural economy ·
 1 Director nominated by the Central Government ·
 1 Director nominated by the Reserve Bank.

FUNCTIONS of SBI:-

The State Bank of India performs all the functions of a commercial bank and acts as an agent of the
Reserve Bank in those places where the RBI has no branch offices.

(A) Central Banking Functions

It acts as the agent of the Reserve Bank in all those places where the RBI does not have its own
branches. The State Bank of India acts as an agent of the Reserve Bank of India and performs the
following functions:
1. It acts as the Bankers Bank:-

It receives deposits from the commercial banks ·

It grants loans to the commercial banks on demand. ·

It rediscounts the bills of the commercial banks. ·

It acts as the clearinghouse for the other commercial banks.

2. It acts as the Government’s Banker

It collects money from the public on behalf of the government and also makes payments.

The bank also manages the public debt of the Central and State Governments.

3. Remittance

The State Bank of India facilitates the remittance of money from one place to another.

It helps in the transfer of the funds of the State and Central Government.

(B) Ordinary Banking Functions

The ordinary banking functions of the State Bank are as follows: ·

Receiving Deposits from the Public - The State Bank receives different types of deposits from the
public for example Fixed Deposits, Recurring Deposits Savings Account, and Current Accounts.

Investment in Securities - Like other commercial banks, the State Bank invests its surplus funds
in the Securities of Government of India, the State Governments, Railway Securities, Securities of
Corporations, and Treasury Bills.

Loans and Advances - The State Bank grants loans and advances to people against the approved
security. It lends money to merchants and manufacturers for short periods. It also lends to farmers
and cooperative institutions. It lends mostly to the security of easily realizable commodities like
rice, wheat, cotton, oil-seeds, cloth, gold, and government securities. The Bank can lend against
agricultural bills up to a maximum period of fifteen months and in case of other bills up to a
maximum period of six months.

Subsidiary functions - The State Bank performs various subsidiary services also. It collects
checks, drafts, bills of exchange, dividends interest, salaries, and pensions on behalf of its
customers. It purchases and sells securities on behalf of its customer. It receives valuables and
documents for safe custody and maintains safe deposit vaults.

(C) Prohibited Functions of the SBI

 The State Bank of India Act has enumerated certain businesses which cannot be done by the
State Bank. ·The State Bank cannot grant loans against stocks and shares for a period
exceeding six months.
 The State Bank can purchase no immovable property except for its own offices.
  The State Bank cannot re-discount those bills which do not carry at least two good
signatures.
 The State Bank could neither discount bills nor extend credit to individuals or firms above
the sanctioned limit.
 The State Bank can neither re-discount nor offer loans against the security of those
exchange bills whose period of maturity exceeds six months.

RETAIL BANKING

Retail banking, also known as consumer banking or personal banking, is banking that provides
financial services to individual consumers rather than businesses. Retail banking is a way for
individual consumers to manage their money, have access to credit, and deposit their money in a
secure manner. Services offered by retail banks include checking and savings accounts, mortgages,
personal loans, credit cards, and certificates of deposit (CDs).

Understanding Retail Banking

 Many financial services companies aim to be the one-stop-shop retail banking destination to
their individual consumers.
 Consumers expect a range of basic services from retail banks, such as checking accounts,
savings accounts, personal loans, lines of credit, mortgages, debit cards, credit cards, and
CDs.
 Most consumers utilize local branch banking services, which provide onsite customer
service for all of a retail customer's banking needs.
 Through local branch locations, financial representatives provide customer service and
financial advice.
 Financial representatives are also the lead contact for underwriting applications related to
credit-approved products.

INTERNATIONAL BANKING

International banking is like any other banking service, but it takes place across different nations or
internationally. To put it another way, it is an arrangement of financial services by a residential
bank of one country to the residents of another country. Most multinational companies and
individuals use this banking facility for transacting. International banking forms a major part of
the international financial market.

Suppose Microsoft, an American company, is functioning in London. It is in need of funds to meet

its working capital requirements. In such a scenario, Microsoft can avail of the banking services in
the form of loans, overdrafts, or any other financial service through banks in London. Here, the
residential bank of London shall be giving its services to an American company. Therefore, the
transaction between them is said to be a part of an international banking facility.

FEATURES AND BENEFITS

Flexibility
This banking facility provides flexibility to multinational companies to deal in multiple currencies.
The major currencies that multinational companies or individuals can deal with include the euro,
dollar, pounds, sterling, and rupee. The companies with headquarters in other countries can manage
their bank accounts and avail of financial services in other countries through this banking without
any hassle.

Accessibility

International banking provides accessibility and ease of doing business to companies from different
countries. An individual or MNC can use their money anywhere around the world. This gives them
the freedom to transact and use their money to meet any funds requirement in any part of the world.

International Bank Transfers/Transaction

International banking allows the business to make international bill payments. The currency
conversion facility allows the companies to pay and receive money easily. Also, benefits like
overdraft facilities, loans, deposits, etc., are available every time for overseas
transactions. Correspondent banking is very useful in such transactions.

Accounts Maintenance

A multinational company can maintain the records of global accounts in a fair manner with the
help of international banking. All the company’s transactions are recorded in the books of banks
across the globe. By compiling the data and figures, the company’s accounts can be maintained.

CORRESPONDENT BANK

A correspondent bank is a financial institution that acts as a middleman to accomplish transactions

on behalf of another financial institution. It generally supports international fund transfer, cheque
clearing services, and liquidity management.

For example, a domestic bank might not have branches in a foreign country. When it needs to
conduct transactions on behalf of international clients, it would use a correspondent bank for
access. The correspondent bank serves as middleman between the issuer and the receiver.

Cooperative Banking

 A Co-operative bank is a financial entity which belongs to its members, who are at the
same time the owners and the customers of their bank.
 Co-operative banks in India are registered under the States Cooperative Societies Act. The
Co-operative banks are also regulated by the Reserve Bankof India (RBI) and governed by
the

o Banking Regulations Act 1949

o Banking Laws (Co-operative Societies) Act, 1955.
Features of Cooperative Banks:

o Customer Owned Entities: Co-operative bank members are both customer

and owner of the bank.
o Democratic Member Control:Co-operative banks are owned and controlled by the
members, who democratically elect a board of directors. Members usually have equal
voting rights, according to the cooperative principle of “one person, one vote”.
o Profit Allocation: A significant part of the yearly profit, benefits or surplus is
usually allocated to constitute reserves and a part of this profitcan also be distributed
to the co-operative members, with legal and statutory limitations.
o Financial Inclusion: They have played a significant role in the financialinclusion of
unbanked rural masses.
Structure of Cooperative Banking:

Advantages of Co-operative Banks

The Co-operative banks have acted as a boon to various sectors of Indian societyand also played
an important role in the development of the economy.
Given below are a few advantages of the Co-operative Banks in India:

These banks have provided aid to the rural population by granting loans and credits with
interest rates, lower in comparison to that asked by local moneylenders
They have their reach at every corner of the country and have managed to maintain a
personal rapport with the customers
Since the bank is owned and governed by the members themselves, they do not seek
huge profits and believe in mutual help
The interest rate on deposits is high and on loans is low
 They promote productive borrowing, in order to reduce the risk of loss
Co-operative Banks have helped the farmers by providing them agricultural credits to
buy basic products like fertilizer, seeds, etc.

Disadvantages of Co-operative Banks

Discussed below are a few disadvantages of the Co-operative Banks in India:

To lend money, they need investors which are tough to find

Over the years, the number of NPAs and overdues have been increasing
Since the lack of investors and money, few of them have not been delivering the credits
and money to the rural population
Rather than small industrialists, the benefits from Co-operative Banks have been
enjoyed by rich landowners
The Co-operative Banks across the country are not equally developed. A few states have
more functioning and beneficial units, while some states have faced loss
Political interference has also been observed in these banks
With new types of banks opening up, the Co-operative Banks are facing the risk of
losing their customers

Problems with Cooperative Banking in India

o Organizational and financial limitations of the primary credit
societies considerably reduce their ability to provide adequate credit to the rural
population.

 Needs of tenants and small farmers are not fully met.

 Primary credit societies are financially weak and are unable to meet the
production-oriented credit needs
 Overdues are increasing alarmingly at all levels.
 Primary credit societies have not been able to provide adequate and timely
credit to the borrowing farmers.
o The cooperatives have resource constraints as their owned funds hardly make a
sizeable portfolio of the working capital. Raising working capital has been a major
hurdle in their effective functioning.
o A serious problem of the cooperative credit is the overdue loans of the
cooperative banks which have been continuously increasing over the years.

 Large amounts of overdues restrict the recycling of the funds and

adversely affect the lending and borrowing capacity of the cooperative.
o Most of the benefits from the cooperatives have been covered by the big land
owners because of their strong socio-economic position.
o Cooperative Banks are losing their lustre due to expansion of Scheduled
Commercial Bank and adoption of technology. They are also facing stiff
competition from payment banks and small-finance banks.
o Long-term credit extended by them is declining.
o Regional Disparities: The cooperatives in northeast states and in states like West
Bengal, Bihar, Odisha are not as well developed as the ones in Maharashtra and
Gujarat. There is a lot of friction due to competition between different states, this
friction affects the working of cooperatives.
o Political Interference: Politicians use them to increase their vote bank and
usually get their representatives elected over the board of director inorder to gain
undue advantages.