Banking and Insurance

SUSHMA V M.Com, NET, KSET

ASST PROFESSOR
SCHOOL OF COMMERCE
Module 1
Commercial Banking & Insurance
Topics: Banking: Meaning of Bank, Features and Functions of Commercial
Banks; Banking Systems: Branch vs Unit Banking, Retail vs Wholesale
Banking, Universal Banking; Reserve Bank of India: Functions, Methods of
Credit Control, Banking Ombudsman, CASA.

Insurance: Definition of Insurance, Concept of Hazards and Risks,

Principles of Insurance, Types of Insurance – Life vs General Insurance,
Reinsurance, Banc assurance, Regulatory Framework of Insurance in India
– Insurance Regulatory and Development Authority of India: Functions
and Regulations. Insurance Ombudsman

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Meaning of Bank
A bank is a financial institution that is licensed to accept checking and
savings deposits and make loans.
A bank is a financial institution that accepts deposits from the public
and creates a demand deposit while simultaneously making loans

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INDIAN BANKING SYSTEM
Types of banks in India
 Central Bank: The Reserve Bank of India is the central Bank
that is fully owned by the Government
 Public Sector Banks: State Bank Group, Regional rural banks
 Private Sector Banks: Foreign Banks, Scheduled and Non-
Scheduled Banks
 Co-operative Sector: State Co-operative Banks, Central Co-
operative Banks, Primary Agriculture Credit Societies
 Development Banks/Financial Institutions: IDBI, NABARD
Commercial Banks
• A commercial bank is a financial institution which accepts deposits
from the public and gives loans for the purposes of consumption and
investment to make profit.

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Features & Characteristics of Commercial
Banks

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Public Sector Banks
• A Public Sector bank is one in which, the Government of India holds a majority
stake. It is as good as the government running the bank. Since the public decide on
who runs the government, these banks that are fully/partially owned by the
government are called public sector banks. The public sector commercial banking
started with setting up of State bank of India in 1955.

• Public Sector Banks (Nationalized banks):

State Bank of India (SBI)
Canara Bank
Indian overseas bank
Dena Bank
Oriental Bank of Commerce
Commercial banking – primary and secondary
functions
Primary functions
• Accepting deposits
• Granting loans and advances
Secondary functions
• Issuing letters of credit, travellers cheques
• Undertaking safe custody of valuables, important documents, and securities by providing safe
deposit vaults or lockers
• Providing customers with facilities of foreign exchange
• Transferring money from one place to another; and from one branch to another branch of the
bank. Collecting and supplying business information. Issuing demand drafts and pay orders
• Providing reports on the credit worthiness of customers.

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Private sector banks
• Banks which are owned by individuals corporations and not by government
or cooperative societies fall into this category. Private banks use the word
‘limited’ after their names.

• Private Sector Banks:

HDFC Bank
ICICI Bank
Federal Bank
ING Vysya Bank
Axis Bank (formerly UTI Bank)
Regional rural banks(RRB’s)
• The Government of India set up Regional Rural Banks (RRBs) on October
2, 1975 which are sponsored by commercial banks and Government.
• Capital share being 50% by the central government, 15% by the state
government and 35% by the scheduled bank.
• The objective was to provide credit and other facilities to small and marginal
farmers and agricultural labourers.
CO-OPERATIVE BANKS
• 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 are
often created by persons belonging to the same local or professional community or
sharing a common interest. Co-operative banks are playing an important role in small
towns and villages.

• List of Co-operative bank

Ahmedabad Mercantile Co-Op Bank Ltd.
Kalupur Commercial Coop.Bank Ltd.
Madhavpura Mercantile Co-Op Bank Ltd.
Mehsana Urban Co-Op Bank Ltd.
Nutan Nagarik Sahakari Bank Ltd
National Bank For Agricultural and Rural Development (NABARD)

• NABARD was set up through an Act of the Indian Parliament on 12 July

1982 as an apex development bank for agriculture and rural development.

• NABARD is an apex Development Bank that facilitates credit flow for

promotion and development of agriculture, small-scale industries, cottage
and village industries, handicrafts and other rural crafts.
Foreign banks
• Foreign banks are those banks which are registered or incorporated outside India.
They have their office or branch in India. The globalisation of Indian economy will
encourage the presence of more foreign banks.
• Some of the foreign banks have successfully introduced latest technologies in the
banking practices in India. This has made the banking business in the country more
smooth and interesting for the customers.

• List of foreign banks in India

• ABN AMRO
• Citibank India
• HSBC (Hongkong & Shanghai Banking Corporation)
• Standard Chartered Bank
Role of Commercial Banks
• Safekeeping of documents and other items in safe deposit boxes
• Currency exchange
• Issue of banknotes (promissory notes issued by a banker and payable to bearer on
demand) Processing of payments by way of internet banking or other means. Issuing
bank drafts and bank cheques
• Accepting money on term deposit. Lending money by way of overdraft, installment
loan or otherwise
• Credit intermediation
• Credit quality improvement
Universal Banking
• Universal banking can be defined as a banking system that offers a wide
range of banking and financial services (like insurance, development
banking, investment banking, commercial banking, and other financial
services) in comparison to traditional banking institutions; in simple terms,
it can also be understood as a combination of all three services that is retail
banking, investment banking, and wholesale banking.
• This system offers asset management, deposits, payment processing,
investment advisory, underwriting, securities transactions, financial analysis,
merchant banking, factoring, mutual funds, credit cards, auto loans,
insurance, housing finance, retail loans, etc.

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How does it work?
• A universal banking system does not put a compulsion on the participating
banks to provide all of the mentioned above services; rather, it allows them
to choose and offer a wide range of services.
• The participating banks in this system can always choose the services
according to their comfort, confidence, and specialization.

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Retail Banking
• Retail banking provides financial services to individual consumers rather
than large institutions. Services offered include savings accounts,
personal loans, debit or credit cards.

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 Wholesale Banking
• Wholesale banking refers to banking services sold to large clients,
such as other banks, other financial institutions, government
agencies, large corporations, and real estate developers. It is the
opposite of retail banking, which focuses on individual clients and
small businesses.

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Reserve Bank of India
• The Reserve Bank of India (RBI) is India's central bank and regulatory
body responsible for regulation of the Indian banking system.
• It is under the ownership of Ministry of Finance, Government of India.
• It is responsible for the issue and supply of the Indian rupee.
• It also manages the country’s payment systems and works to promote its
economic development.

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Functions
• Monopoly of Note Issue
• Banker’s Bank
• Banker to the Government
• Controller of Credit
• Exchange Management and Control
• Miscellaneous Functions( RBI collects, collates and publishes all monetary
and banking data regularly in its weekly statements in the RBI Bulletin
(monthly))
• Promotional and Developmental Functions (Production, Infrastructure)

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Methods of Credit control
• Repo Rate 5.4%
• Reverse repo rate 3.35%
• CRR 4.5%
• SLR 18%

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Repo Rate Meaning
• Repo rate is the rate at which the central bank of a country
(Reserve Bank of India in case of India) lends money to
commercial banks in the event of any shortfall of funds.
• Repo rate is used by monetary authorities to control
inflation.
• Repo rates play a major role in controlling inflation in the
country for example if there is high inflation RBI increases
the repo rate thus reducing the cash flow in the market.

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Reverse repo Rate
• Reverse repo rate is said to be that rate of interest at which the
central bank (RBI in India) borrows money from the commercial
banks for a short term.
• It helps the central bank to have a ready source of liquidity at the
time of need.
• RBI offers great interest rates in return for the amount supplied by
the commercial banks.
• The reverse repo rate has an impact on the economy as when the
reverse repo rate is increased banks deposit their surplus funds with
RBI in order to gain interest.

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Cash Reserve Ratio
• Cash Reserve Ratio or CRR is the minimum amount as specified by
the Central Bank, to be maintained by the Commercial banks of the
public deposits with the Central Bank.
• The amount specified as the Cash Reserve Ratio is held or reserved
in cash or cash equivalents with RBI.
• CRR aims to ensure that banks do not run out of cash to meet their
depositors’ payment demands.

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SLR
• Statutory Liquidity Ratio or SLR is the minimum percentage of deposits
that a commercial bank has to maintain in the form of liquid cash, gold
or other securities.
• It is basically the reserve requirement that banks are expected to keep
before offering credit to customers.
• The SLR is fixed by the RBI and is a form of control over the credit
growth in India.
• The government uses the SLR to regulate inflation and fuel growth.
• Increasing the SLR will control inflation in the economy while
decreasing the statutory liquidity rate will cause growth in the economy.
• The SLR was prescribed by Section 24 (2A) of Banking Regulation Act,
1949.

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Banking Ombudsman
• Banking Ombudsman is a senior official appointed by RBI.
• He/ She handles and redress customer complaints against deficiency
in certain banking services.
• The offices of Banking Ombudsman is mostly situated at State
Capitals.

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CASA
• Current Account
• Savings Account

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Definition of Insurance
Insurance is a contract (policy) in which an insurer indemnifies another against
losses from specific contingencies and/or perils.

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Concept of Hazards and Risks
• A hazard is something that can cause harm, e.g. electricity, chemicals, working up
a ladder, noise, a keyboard, a bully at work, stress, etc.
• A risk is the chance, high or low, that any hazard will actually cause somebody
harm.
For example, working alone away from your office can be a hazard. The risk of
personal danger may be high. Electric cabling is a hazard. If it has snagged on a
sharp object, the exposed wiring places it in a 'high-risk' category.

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PRINCIPLES/ CHARASTERISTICS OF INSURANCE
1. A CONTRACT:
The most important feature of insurance is that it is legal contract between the insurer and
insured, under this insurer promises to compensate the insured for the loss which is mentioned
in the policy and the insured promise to pay a fixed rate of premium which is consideration in
this contract for the promise of the insurer.
2. UNDERTAKING OF RISK:
In insurance contract, bearing and protecting of risk is the subject matter of the contract. For
example paying of insured amount in case of death of the assured, loss by fire or happening of
marine perils.
3. A COOPERATIVE DEVICE:
Insurance is cooperative device of sharing the burden of risk
of one on the shoulders of many. All the insured contribute the premium out of which the
person who actually suffers loss is compensated or is paid up, insurance is a device to share the
financial loss of few among many others.
4. PAYMENT OF POLICY AMOUNT ON THE HAPPENING OF EVENTS:
On the happening of a specified event, the insurance company is bound to make good the loss
to the insured. Happening of an event is specific in life insurance that is death, but it is not so in
case of marine, fire or accidental insurance.

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5. PREMIUM:
Payment of premium by the insured is another feature of an insurance contract.
Like other contracts, the factor of consideration is fulfilled by the premium
because it is the subject for which insurer promises to undertake or bear the risk if
insured.
6. CONTRACT OF ADHESION:
It means it is contract which is not arrived by mutual negotiations between the
parties, It means he has to adhere to the policy in which way it is offered there is
no chance if bargain.
It means the insured accepting the policy must accept whole of it he cannot accept
one part of and leave the another. All he can do is that he can select the most
appropriate policy among various policies which the insurer is offering.
7. DEVELOPMENT OF LARGER INDUSTRIES:
Insurance helps industries to develop who have more risk in their setting up, the
owner may get the industries assets insured and in case of loss he will be
compensated.

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TYPES OF INSURANCE
Insurance is a legal agreement between an individual and the
insurance company, under which, the insurer promises to provide
financial coverage (Sum assured) against contingencies for an amount
(premium). The types of insurance in India can be broadly divided into
two categories:
• General Insurance
• Life Insurance

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1. General Insurance
Following are some of the types of general insurance available in
India:
1. Health Insurance
2. Motor Insurance
3. Home Insurance
4. Fire Insurance
5. Travel Insurance

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GENERAL INSURANCE
General insurance policies are one of the types of insurance that offer coverage in
the form of sum assured against the losses incurred other than the death of the
policyholder.
1. Health Insurance
Health insurances are types of insurance policy that covers the expenses incurred
due to medical care. Health insurance plans either pay or reimburse the amount
paid towards the treatment of any illness or injury. Different types of insurance
policy cover varied medical care expenses.
It usually offers protection against:
a) Hospitalization
b) Treatment of critical illnesses
c) Medical bills post hospitalization
d) Daycare procedures

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Different types of health insurance plans available in India include:
1) Individual Health Insurance: Offers coverage to only an individual
2) Family Floater Insurance: Allows your entire family to get coverage under a
single plan, which usually covers husband, wife, two children
3) Critical Illness Cover: Specialized types of health insurance that offers coverage
against various life-threatening illnesses like stroke, heart attack, kidney failure,
cancer, and similar others. Policyholders get a lump sum amount on diagnosis of a
critical illness.
4) Senior Citizen Health Insurance: These types of insurance plans cater to all
individuals above 60 years of age
5) Group Health Insurance: Offered by an employer to its employee
6) Maternity Health Insurance: This insurance type covers medical expenses for
prenatal, post-natal, and delivery stage, offering protection to both the mother
and the newborn
7) Personal Accident Insurance: These types of insurance plans cover financial
liabilities arising due to accidental injuries, disability, or death

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2. Motor Insurance
Motor insurances are types of insurance that offer financial assistance
in case your bike or car get involved in an accident. Various types of
Motor insurance policies in India include:

1) Car Insurance: Individually owned four-wheelers are covered under

this plan. The car insurance types include- third-party insurance and
comprehensive cover policies.

2) Bike Insurance: These are types of insurance policy where

individually owned two-wheelers are covered against accidents

3) Commercial Vehicle Insurance: This is one of the insurance types,

which offers coverage to any vehicle used for commercial purposes
types of insurance - Max Life Insurance

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3. Home Insurance
As the name suggests, a home insurance policy offers comprehensive protection to the contents
and structure of your house against any physical destruction or damage. In other words, this
insurance type will provide coverage against any natural and human-made calamity, such as fire,
earthquake, tornado, burglaries, and robbery.
Different types of home insurance policies include:
1) Home Structure/Building Insurance – Protects the structure of the house against damage during any
calamity
2) Public Liability Coverage – Provides coverage against any damage to a guest or third-party on the insured
residential property
3) Standard Fire and Special Perils Policy – Coverage against damages caused due to fire outbreaks, natural
calamities (e.g., landslides, rockslides, earthquakes, storms, and floods), and anti-social human-made
activities (e.g., explosions, strikes, and riots)
4) Personal Accident – Provides financial coverage to you and your family against any kind of permanent
dismemberment or sudden demise to the insured individual, anywhere around the world
5) Burglary and Theft Insurance – Provides compensation for stolen goods in case of a burglary or theft
6) Contents Insurance – Provides compensation for loss of furniture, vehicles, and other appliances in case
of a fire, theft, flood, or riots
7) Tenants’ Insurance – Provides financial protection to you (as a tenant) against any loss of personal
property living in a rented house
8) Landlords’ insurance – Provides coverage to you (as a landlord) against contingencies such as public
liability and loss of rent

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4. Fire Insurance
Fire insurance policies are different types of insurance coverages that compensate
any losses incurred due to a fire breakout with a sum assured. These types of
insurance policy usually provide a significant amount of coverage to help both
individuals and companies to reopen their places after incurring extensive damage
due to fire. These insurance types cover war risk, turmoil, riots losses as well.
5. Travel Insurance
As the name suggests, travel insurance is a type of insurance policy, providing
financial protection for you and your loved ones while you are visiting any place in
India or abroad. Whether you are travelling solo or with your loved ones, the
travel insurance coverage will help ensure that you have a peaceful journey.
1) Domestic Travel Insurance: Within the country
2) International Travel Insurance: For any trips or vacations outside of India
3) Individual Travel Insurance: If you are travelling alone
4) Student Travel Insurance: If you are going abroad for further studies
5) Senior Citizen Travel Insurance: For senior citizens, ageing between 60 to 70 years
6) Family Travel Insurance: For any family vacations

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2. Life Insurance
There are various types of life insurance. Following are the
most common types of life insurance plans available in India:
1. Term Life Insurance
2. Whole Life Insurance
3. Endowment Plans
4. Unit-Linked Insurance Plans
5. Child Plans
6. Pension Plans

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1. Term Life Insurance Plans
Term insurance is the purest and most affordable among the types of insurance
policy in which, you can opt for a high life cover for a specific period. If anything
happens to you within the policy period, your loved ones would receive the
agreed Sum Assured as per the payout option chosen (some term insurance types
offer multiple payout options as well)
2. Whole Life Insurance Plans
Whole life insurance plans, also known as ‘traditional’ life insurance plans, provide
coverage for the entire life of the insured individual, as opposed to any other life
insurance instrument that offers coverage for a specific number of years.
3. Endowment Plans
Endowment plans essentially provide financial coverage to the policyholder
against life’s uncertainties, while allowing them to save regularly over a certain
period. Upon maturity of the endowment plan, the policyholder receives a lump
sum amount if he or she survives the policy term.

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4. Unit-Linked Insurance Plan (ULIP)
Unit Linked Insurance Plans are types of insurance policy that offer both investment and
insurance benefits under a single policy contract. A portion of the premium that you pay
towards a Unit Linked Insurance Plan is allocated to a variety of market-linked equity and debt
instruments.
The remaining premium contributes towards providing the life cover throughout the policy
tenure. In this investment-cum-insurance type product, you have the flexibility to choose the
allocation of premium into different instruments as per your financial requirements and market
risk appetite.
5. Child Plans
Child plans are types of insurance policy that helps you financially secure your child’s life goals
such as higher education and marriage, even in your absence. In other words, child plans offer a
combination of savings and insurance benefits that aid you in the financial planning for your
child’s future needs at the right age.
The sum of money received on Maturity under this insurance type can be used to fulfill the
financial requirements of your child.
6. Pension Plans
Pension plan, also known as retirement plan, is a type of investment plan that aids you in
accumulating a portion of your savings over an extended period.

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Life Insurance vs General Insurance

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Reinsurance
Reinsurance is the practice whereby insurers transfer portions of their risk
portfolios to other parties by some form of agreement to reduce the likelihood of
paying a large obligation resulting from an insurance claim.

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Bancassurance
Bancassurance is an arrangement between a bank and an insurance company,
through which the insurer can sell its products to the bank's customers. The
insurance company benefits from increased sales and a broader client base
without having to expand its sales force.

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Regulatory framework of Insurance in India

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Insurance Regulatory and Development Authority of India- 2000
Organizational Structure of IRDAI:
Composition of IRDAI:
As per Sec. 4 of IRDAI Act, 1999, the composition of the Authority is:
a) Chairman;
b) Five whole-time members;
c) Four part-time members,
(appointed by the Government of India)

IRDAI’s Head Office is at Hyderabad

All the major activities of IRDAI including ensuring financial stability of insurers and monitoring market conduct of
various regulated entities is carried out from the Head Office.

IRDAI’s Regional Offices are at New Delhi & Mumbai

The Regional Office, New Delhi focuses on spreading consumer awareness and handling of Insurance grievances
besides providing required support for inspection of Insurance companies and other regulated entities located in
the Northern Region. This office is functionally responsible for licensing of Surveyors and Loss Assessors.
Regional Office at Mumbai handles similar activities, as in Regional Office Delhi, pertaining to Western Region.

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Regulatory Framework
1. Insurance Regulatory and Development Authority of India (IRDAI), is a statutory body formed under an
Act of Parliament, i.e., Insurance Regulatory and Development Authority Act, 1999 (IRDAI Act 1999) for
overall supervision and development of the Insurance sector in India.
2. The powers and functions of the Authority are laid down in the IRDAI Act, 1999 and Insurance Act, 1938.
The key objectives of the IRDAI include promotion of competition so as to enhance customer satisfaction
through increased consumer choice and fair premiums, while ensuring the financial security of the Insurance
market.
3. The Insurance Act, 1938 is the principal Act governing the Insurance sector in India. It provides the
powers to IRDAI to frame regulations which lay down the regulatory framework for supervision of the
entities operating in the sector. Further, there are certain other Acts which govern specific lines of Insurance
business and functions such as Marine Insurance Act, 1963 and Public Liability Insurance Act, 1991.

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4. IRDAI adopted a Mission for itself which is as follows:
• To protect the interest of and secure fair treatment to policyholders;
• To bring about speedy and orderly growth of the Insurance industry (including annuity and
superannuation payments), for the benefit of the common man, and to provide long term
funds for accelerating growth of the economy;
• To set, promote, monitor and enforce high standards of integrity, financial soundness, fair
dealing and competence of those it regulates;
5. Entities regulated by IRDAI:
a. Life Insurance Companies - Both public and private sector Companies
b. General Insurance Companies - Both public and private sector Companies. Among them,
there are some standalone Health Insurance Companies which offer health Insurance policies.
c. Re-Insurance Companies
d. Agency Channel

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Functions of IRDA
• To provide applicant with the registration certificate, renewal, modification, withdrawal,
suspension or cancellation of such registration;
• To protect the policyholders’ interests in case of assigning and nominating policy holders,
understanding insurance claims, insurable interests, surrendering the value of the policy and
other terms and conditions of the insurance contract.
• To mention required qualifications, code of conduct and practical training for
intermediary/insurance intermediaries and agents.
• To explain the code of conduct applicable to the surveyors as well as to assessors.

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• Ensure the efficiency and proficiency of the conduct of the insurance business.
• To encourage as well as regulate the relationship of professional organizations and
the insurance and reinsurance businesses.
• To levy the charge in order to carry out the purpose of the Act.
• To call for information, undertaking inspection, conducting enquiries and
investigations, including the audit of insurers, intermediaries, insurance
intermediaries and other organizations connected with the insurance business.
• To regulate & control the rates, benefits, terms and conditions offered to the
insurer pertaining to general insurance business not controlled and regulated by the
Tariff Advisory Committee under Section 64U of the Insurance Act 1938.

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INSURANCE OMBUDSMAN
• An Ombudsman is an officer appointed by the Government of India. At the
moment, there are 17 Insurance Ombudsman working in different parts of India.
• The Offices of Insurance Ombudsman are under the administrative control of
Council for Insurance Ombudsmen (CIO), which has been constituted under the
Insurance Ombudsman Rules, 2017.
• Office of Insurance Ombudsman is an alternate Grievance Redressal platform
which has been setup with an aim to resolve grievances of aggrieved
policyholders of all personal lines of insurance, group insurance policies, policies
issued to sole proprietorship and micro enterprises, against Insurance
Companies and their agents and intermediaries in a cost-effective and impartial
manner.

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There are 17 Ombudsman Centres, covering the country, situated in Ahmedabad, Bengaluru,
Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Kochi,
Kolkata, Lucknow, Mumbai, Noida, Pune and Patna.
The Insurance Ombudsmen are appointed by the Council for Insurance Ombudsmen in terms of
Insurance Ombudsman Rules, 2017 (as amended from time to time) and empowered to receive
and consider complaints alleging deficiency in performance required of an insurer (including its
agents and intermediaries) or an insurance broker, on any of the following grounds:
1. Delay in settlement of claims.
2. Any partial or total repudiation of claims by the life insurer, general insurer or health
insurer.
3. Disputes over premium paid or payable in terms of insurance policy.
4. Misrepresentation of policy terms and conditions at any time in the policy document or
policy contract.
5. Legal construction of insurance policies in so far as the dispute relates to claim.
6. Policy servicing related grievances against insurers and their agents and intermediaries.

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