Unit1 Pbi 2

Unit 1: Introduction to Banking
(10/1/2023)
MISSION VISION CORE VALUES

CHRIST is a nurturing ground for an individual’s Excellence and Service Faith in God | Moral Uprightness Love of
holistic development to make effective contribution to Fellow Beings Social Responsibility |
the society in a dynamic environment Pursuit of Excellence
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Excellence and Service

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ORIGIN OF BANKING
The name bank is derived form the Italian words “Banco” refers to
desk/bench or in French word “Banque”.
A system of banks had been devised as early as 2000 B.C by the
Babylonians.
The first bank in the world was established in the year 1157 called
The Bank of Venice.
https://www.youtube.com/watch?v=VksG_1r-gH8

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Banking Sector Development
The Banking sector development can be divided into three phases:
Phase I: The Early Phase which lasted from 1770 to 1969

Phase II: The Nationalisation Phase which lasted from 1969 to 1991
Phase III: The Liberalisation or the Banking Sector Reforms Phase
which began in 1991 and continues to flourish till date

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Given below is a pictorial representation of the evolution of the Indian

banking system over the years:

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Pre Independence Period (1786-1947)

The first bank of India was the “Bank of Hindustan”, established in 1770 and
located in the then Indian capital, Calcutta. This bank failed to work and ceased
operations in 1832.
During the Pre Independence period over 600 banks had been registered in the
country, but only a few managed to survive.
Following the path of Bank of Hindustan, various other banks were established in
India. They were:
The General Bank of India (1786-1791)
Oudh Commercial Bank (1881-1958)
Bank of Bengal (1809)
Bank of Bombay (1840)
Bank of Madras (1843)

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Presidential Banks
During the British rule in India, The East India Company had
established three banks: Bank of Bengal, Bank of Bombay and Bank
of Madras and called them the Presidential Banks.
These three banks were later merged into one single bank in 1921,
which was called the “Imperial Bank of India.”
The Imperial Bank of India was later Nationalised in 1955 and was
named The State Bank of India, which is currently the largest Public
sector Bank.

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Given below is a list of other banks which were established during the
Pre-Independence period:
Pre-Independence Banks in India
Bank Name Year of Establishment
Allahabad Bank 1865
Punjab National Bank 1894
Bank of India 1906
Central Bank of India 1911
Canara Bank 1906
Bank of Baroda 1908

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Reasons Behind Failure

These were the reasons as to why many major banks failed to survive
during the pre-independence period:
Indian account holders had become fraud-prone

Lack of machines and technology
Human errors & time-consuming
Fewer facilities
Lack of proper management skills

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Post Independence Period (1947-1991)

At the time when India got Independence, all the major banks of the country
were led privately which was a cause of concern as the people belonging to
rural areas were still dependent on money lenders for financial assistance.
With an aim to solve this problem, the then Government decided to

nationalise the Banks. These banks were nationalised under the Banking
Regulation Act, 1949. Whereas, the Reserve Bank of India was nationalised
in 1949.
Following it was the formation of State Bank of India in 1955 and the other
14 banks were nationalised between the time duration of 1969 to 1991. These
were the banks whose national deposits were more than 50 crores.

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Given below is the list of these 14 Banks nationalised in 1969:

1. Allahabad Bank
2. Bank of India
3. Bank of Baroda
4. Bank of Maharashtra
5. Central Bank of India
6. Canara Bank
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank
11. Syndicate Bank
12. Union Bank of India
13. United Bank
14. UCO Bank

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In the year 1980, another 6 banks were nationalised, taking the number to
20 banks.
1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Comm.
5. Punjab & Sind Bank
6. Vijaya Bank

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1. State Bank of Patiala

2. State Bank of Hyderabad
3. State Bank of Bikaner & Jaipur
4. State Bank of Mysore
5. State Bank of Travancore
6. State Bank of Saurashtra
7. State Bank of Indore
All these banks were later merged with the State Bank of India in 2017,
except for the State Bank of Saurashtra, which merged in 2008 and State
Bank of Indore, which merged in 2010.

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Impact of Nationalisation
There were various reasons why the Government chose to nationalise the
banks.
This lead to an increase in funds and thereby increasing the economic

condition of the country
Increased efficiency
Helped in boosting the rural and agricultural sector of the country
It opened up a major employment opportunity for the people
The Government used profit gained by Banks for the betterment of the
people
The competition decreased, which resulted in increased work
efficiency

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Liberalisation Period (1991-Till Date)

To provide stability and profitability to the Nationalised Public sector
Banks, the Government decided to set up a committee under the
leadership of Shri. M Narasimham to manage the various reforms in
the Indian banking industry.
The biggest development was the introduction of Private sector banks
in India. RBI gave license to 10 Private sector banks to establish
themselves in the country.
ASSIGNMENT: To write 250 - 350 words on Narasimham Committee in

brief.

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These banks included:
1. Global Trust Bank

2. ICICI Bank
3. HDFC Bank
4. Axis Bank
5. Bank of Punjab
6. IndusInd Bank
7. Centurion Bank
8. IDBI Bank
9. Times Bank
10. Development Credit Bank

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FACTS (CHOCO TIME)
Fact No. 1:
---------------- the first bank to open a branch outside India.

Bank of India
Fact No. 2:
-------------- the largest among all the nationalized banks after SBI.
Punjab National Bank
Fact No. 3:

-------------------- the first all-women bank of India.
Bharatiya Mahila Bank

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Banking
Banking means the accepting, for the purpose of lending or investment,
of deposit of money from the public, repayable on demand or otherwise,
and withdrawal by cheque, draft, order or otherwise.
Banks
Banks refers to an institutions or any other, who accept deposit form the
public through various scheme and lends the same amount to the needy
people and perform agency functions.

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Features:
Banks should deal with money/related to money

Acceptance of deposit
Lending loans
Name identity
Banking business
Bridge between savers and borrowers
Profit motives through services.

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Customer:
The word customer has been derived from the words ‘custom’ which
means a ‘habit of tendency to do things in a regular or a particular
manner’s.
“a customer is one who has account with a banker or for whom a

banker habitually undertakes to act as such.”

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FUNCTIONS
Primary Function
Accepting Deposit: commercial banks accepts various types of deposits

from public especially from its clients. These deposit are payable after a
certain time period.
i) Time/Term Deposit: These are repayable after a certain fixed period.

The deposit cannot be withdrawn by the customer by any means before
the agreed time.
ii) Demand Deposit: Theses are the deposit which can be withdrawn by
the customer at any time by means of cheque, draft or any other specified
mode.

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Advancing of loans:
Overdraft: It is an arrangement with the bankers thereby the customer is allowed to draw
money over and above the balance in his/her account for a short term with certain
percentage of interest charged.
Discounting Bills: It is one of the primary operation of bank where the bank purchase
inland and foreign bills before these are due for payment by the drawer debtors, at
discounted values.
E.g. if a bank accepted a discounted customer bill of Rs.1,00,000 to Rs.90,000 and the
benefit to the bank is Rs.10,000 as waiting charge till the due date of the bill.
Loans and Advances: It include both demand and terms loans, direct loans and advances
given to all types of customer against personal security. The loan amount is paid in cash or
credit to customer account which the customer can draw at any time.

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Credit creation
These appears when a banks sanction a loan to a customer, it does not
give cash to him, but, a deposit account is opened in his name and the
amount is credited to his account. He can withdraw the money whenever
he needs. thus , whenever the bank sanction a loan it create a deposit, in
this way bank increase the money supply. Such function is known as
“credit creation”.

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Secondary function
Agency function:
Banks serve as an agent on behalf of the customer by performing various
services:
i) to collect and clear cheque, dividends and interest warrant
ii) to make payment of rent, insurance premium
iii) to purchase or sell securities
iv) to accept tax proceeds and tax return.
General/Public utility function:

i) to provide safety locker facility to customer
ii) to accept various bills for payment. E.g. phone bill, gas bill etc
iii) to provide various cards such as debit, credit cards etc

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Bankers and Customer Relationship

Primary Relationship
1. Debtors and Creditors relationship: When a customer opens an

account with a bank and deposit money in his account, banker
becomes the debtor of the customer and the customer becomes the
creditors. The money so deposited becomes bank property and the
banker has a right to use the money without informing the depositor
of the manner of utilization. The creditor has to follow the terms and
condition of bank.
2.
3. Creditors and Debtors Relationship: When banks grants any loans

to its customer then the banker becomes creditors and customers
becomes debtors to the bank.

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Secondary Relationship
1. Bailor and Bailee: Bailor is a person who gives up the possession of

the goods to another person under Bailment Agreement.
Bailee is a person who possess the goods which belongs to other called
the bailor.
Bailment is a contract for delivering of goods by one party to another to

be held in trust for a specific period and return when the purpose is
ended. so when customer gives valuables to the bankers for safe keeping,
the customer becomes the bailor and the bank becomes the bailee.

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2. Trustee and Beneficiary: a trustee is an entity who takes care of

assets and perform certain function for the gain or benefit of other
person known as beneficiary.
For instance, when a customer gives certain standing instruction to the
banker about the usage of certain sum of money, the banker becomes the
trustee and the customer becomes the beneficiary. Ex: Investment
3. Agents and Principal: an agents is a person employed to do any act

for another or to represent another in dealing with third parties. The
person for whom such act is done is called the principal.
Ex: Bankers collect cheque, bills and make payment to various authorities
on behalf of the customer.

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4. Mortgager and Mortgagee or Pledger and Pledgee: when a
customer pledge certain assets or security with the bank in order to get a
loan then the customer is the pledger/mortgager and the banker becomes
the pledgee/mortgagee.
5. Advisor and Client: the bank act as an advisor when a customer

invest in securities. The banks has to take maximum care and caution.
Here, the banker becomes the advisor and the customer becomes the
client.
6. Guarantor and Guarantee: at the time of international trade,

importer needs guarantee to receive goods from the exporter. Here
bank gives guarantee to exporter by issuing “letter of credit” on behalf
of the importer.

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SPECIAL RELATIONSHIP
RIGHT OF BANKERS
1. Right of Banker Lien:

A lien is the right to possess the goods and securities belongs to
borrower with him until the debt is repaid.
Types of lien
Particular lien: under this lien creditors can retain the goods of debtors
relating to particular loan or particular amount due only and will be return
to the owner only after the clearance of the debt. Example: purchase of
car.
General lien: creditors can retain all the goods and assets against general
amount due. i.e. all amount due by the debtor until the whole amount is
paid. Ownership of goods is by the creditor.
For Example, if a Bicycle was delivered to an agent, he was entitled to
detain the possession of the Bicycle until his charges are paid.

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Banker cannot enjoy the right of lien on the following circumstances:
Safe custody deposit

Trust property or amount
Illegal possession of goods
Prior due date of loan
Stolen goods

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2. Right to charge interest on loan: it is implied right of banker to

charge interest on outstanding balance due by the customer when
customer is awarded loan from bank.
3. Right to charge commission: apart from function like accepting

deposit and lending out loans, bank provide many banking services to
customer because of increase competition and to retain and gain more
customer. For these services bank charge certain amount of commission
from the customer.

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4. Bankers right to set off: banker’s right to set off is a statutory right of
banker to combine two or more accounts of customer which has debit
and credit balance and it is being done to know the net balance due from
the customer or by banker.
e.g Mr.X has a saving account with ABC Bank and the balance is
Rs.15,000 and in the same bank he has a loan account of Rs. 10,000. here
the bank can combine both account to know the net balance due to
customer or from the customer.
The following condition are essential to exercise right to set off:

The debt must be due by and to the same parties
There should be no specific agreement relating account and fund
Both the parties should be in the same capacity of debtor and creditor

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Under the following situation banker can automatically set of customer

account:
When customer dies
When customer become mental incapacity
When customer declared as insolvent
At the time of winding up of the companies
Fraud by the customer by pledging with another bank which is already
kept with one bank
The Right of set off account is not applicable in the following :

Its not applicable for trust account .i.e fund deposited for specific
purpose
Its not applicable for partnership account and account of one partner
Its not applicable for account of guardian and minor, as it cannot be
combined as it is different parties

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5. Right of apportion of payment: when customer has more than one

loan commitment and balance in his account is not sufficient to clear all
the debts then customer can specify which debt has to be cleared and
which one should not be cleared, the decision is left to the customer but
incase if there is no such instruction of apportion of money then the
banker has the right to apportion payment, provided it is apportion to legal
debt and not to illegal debt.
Clayton’s law: “clayton law states that, as per law, the apportionment
of debt should be chronological one. i.e first side of the debit should
be cleared by the first side of the credit amount.

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6. Right produce book of accounts: As per Banker’s book evidence

Act,1891, if a banker is not a party to court, it is not needed to produce
original book of customer before the court, just attested copy of banker is
merely enough for court as evidence and no need to produce entire book,
just required information has to be produce. If court is not satisfied with
the banker information then court may ask banker to give original book
of account of customer.
7. Right to charge incidental charge: Incidental charges refers to

charges levied by the banker on non remunerative account. In other
words it is charge on non profit generating account. Generally it is
levied on current account because as like saving account, it does not
generate more profit to bank because bank cannot utilize the fund as it is
subjected to liquidity and transaction are many in this account.

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8. Right under garnishee order: when a person obtain any loan from
bank and not paid the debt even after the specified period and if bank
knows that any third party owes money to the banks debtor, at that
circumstances banker can approach court to issue Garnishee order
Garnishee order is an order issue by court to third party for not to make
any payment to judgment debtor till further court direction and this order
will be issue by the request of judgment creditor.

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Garnishee order can be issued in two steps:
Step 1 – “order Nisi” : order nisi is the first phase of court order given to
garnishee, on receipt of order nisi garnishee must suspend the account of
customer and stop the payment to customer and he should inform the
same to customer in order To avoid dishonor of cheques. Here court seeks
explanations from the bank as to why the amount in the account should
not be utilize for making payment to judgment creditor and bank should
wait until further order from the court.
Step 2 – “ order absolute” : after garnishee files explanation, bank may

pass final order that is called order absolute, where the entire balance
in the account or specified part of the balance is to be handed over to the
creditor as per the order by the court and bank must discharge the amount
to creditor as and later the customer account can be reviewed.

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Garnishee order does not apply to the following:
The garnishee order is not effective in the payment already made by

the banker before the order is serve before him.
Money held abroad by the judgment debtor.
Securities held in the safe custody of the banker.
It is not applicable for joint account is any one person is a debtor,
incase if all the person are a debtor then garnishee order is applicable.
It cannot be attach to a partnership account where any one of the
partner is the debtor.
It does not apply for trust because in trust account banker and
customer will possess trustee and principal relationship but not
creditor and debtor relationship.

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II . OBLIGATION
Statutory obligation to honour customer cheque:
If there is sufficient balance in customer account the banker should not

reject the cheque except few situation. If bank dishonor any cheque
with purely negligence of banker than it has to compensate to
customer for the damage or loss cause by the banker.
The banker must honour the customer cheque in the following situations:
When there is credit balance with customers accounts:

Correctness of cheque
Applicability of fund
Time and presentation of cheque
Legal restriction.

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2. Obligation to maintain secrecy of customers account banker should

not disclosed customer account information to outsiders because it may
affect the reputation of customers, credit worthiness of customers or it
even badly damage the business of customer.
Bank is liable to pay damages to the customer for loss of money and
reputation due to failure to maintain customer account secrecy.
The banker can disclose information in the following grounds:
a) Disclosure of information under compulsion of law: banker has to

obey the law and it has to disclose the customer account info when law
compelled to furnish and it is bank’s obligation to disclosed info to the
extend of asked by the law and not more than that.

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b) Disclosure by the instruction of customer: banker can disclose the

customer accounting info wit the prior permission and will of the
customer. at the time of auditing, auditor can fully examine the
accounting information of the customer and it is an expressed consent,
and also when customer get any loan by naming guarantor it is an implied
consent that the banker can disclosed the accounting info to the auditor
and the guarantor.
c) Disclose for the interest of the Nation: if the customer is dealing

with any illegal activity inorder to safeguard the public and the nation, it
is banker duty to disclose the customer information to concern authority.
d) Disclose to common courtesy: under few circumstances like issuing

letter of credit, discounting of bills etc. bankers can disclose the
customer accounting info to the fellow banker as a common courtesy.

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PROCEDURE OF OPEN A BANK ACCOUNT
1. Selection of types of account: The customer has to decide what kind
of account he requires and for what purpose, there are several types of
account for different purpose based on his objects he has to open an
account.
1.
2. Selection of bank: He can select the bank on his convenient and

service criteria.
3. Filling up the application form: Customer desire must be convey to

the banker through application form where he should furnish all the
necessary information required by the banker.

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4. Introducer to open an account: The customer has to provide any person’s

reference who is customer to the bank and having more than six month of
relationship with the bank.
5. Submission of application form: The application has to be submitted to the

concern person along with required documents for legal purpose, Identification
proof in case of individual and articles and memorandum, board resolution in
case of joint stock company.
6. Verification of the application by officer: Official will verify the document

submitted by the person and confirm the correctness of the details and allow
prospective customer to go ahead.
7. Initial deposit: The person has to deposit the initial nominal amount with the
bank, later the transaction, account number will be issue to that person and he
will become customer of the bank.

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Different Types of Account

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1. DEMAND DEPOSITS: In this type of deposit a customer can deposit

amount and withdraw amount without any prior notice to bank. The
amount which is their in account can be withdrawn by making demand.
These type of account are called demand deposit.
i) Saving Account: saving account is generally used by public to save

their surplus money, there is certain restriction in saving bank account on
withdrawal of amount by the holder. Bank credit interest on saving
deposit, the interest on saving account is low compare to fixed deposit and
bank does not charge interest on saving account as like current account.

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Characteristics Of Saving Bank Account:
1. Best suited for all classes of persons.

2. Internet banking/ATM/Mobile banking facilities are available.
4. No Income Tax deduction at source on interest.
5. Minors above 10 years can open and operate the account.
6. Nomination facility is available.
7. Quarterly average minimum balance to be maintain in SB account is
Rs.1000/- with cheque book facility and Rs 500/- without cheque book
facility.

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ii) CURRENT ACCOUNT: Current account is generally used by

business firms and people who makes huge transactions. In case of current
account, there is no restriction on deposit and withdrawal of money, Bank
charges incidental charges and interest on current account, as current
account amount cannot be utilized by bank for profitable investment.

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B. TIME DEPOSIT: Under this types of account customer cannot

withdraw amount till the completion of specified period of time or it has
to be withdrawn with prior notice to banker. Customer can get high rate of
interest in case of time deposit and if he withdrawn amount before
completion of time period he will get little less interest.
i) Fixed deposit: Under fixed deposit scheme cash is deposit for a

fixed period of time and a fixed rate of interest will be given after
completion of specifies period of time and customer is not allowed
to withdraw before specified period, if he withdraw amount before
specified period he will not get specified rate of interest but little
less interest will be given.

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Characteristics Of Fixed Deposit Account
Terms of FD can range from 15days to 5yrs.

The interest can be compounded quarterly, half yearly or annually and
varies from bank to bank.
Minimum deposit amount is Rs.1,000 and there is no upper limit.
One can break the FD in case of emergency monetary requirement but
it involves loss of interest.
Tax will be deducted at source if interest exceeds Rs.10,000/yr.

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ii) Recurring deposit account: recurring deposit account is an account in

the bank where an investor/customer deposit a fixed amount of money
every month for a fixed tenure (mostly ranging from one year to five
years). The scheme is meant for investor who wants to deposit a fixed
amount every month, in order to get a lump sum after some years.
Characteristics:
i) Recurring deposit for a period ranging from 12 to 120 months.
ii) No income tax deducted at source.
iii) minor above 10yrs can open account in their name independently
subject to the maturity value not exceeding Rs.2,00,000.
iv) Premature withdrawal is permitted with the loss of some interest.

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C. Other Types Of Account:
i. Demat Account: A demat account is an account which is electronically

maintained by the banks or is provided by broker agencies where you can
keep money for transactions in shares, mutual funds, purchase of gold etc.
It has to be tagged with your saving account from where the money will
be paid if you purchase a share etc. and received money when you sell a
share etc.
ii. NRE account: A non –resident external account is the bank account
that is opened by depositing foreign currency at the time of opening a
bank account. The NRE a/c are primarily targeted at NRI’s whose income
comes from outside India and who are interested in conveniently
transferring their foreign earning to Indian a/c. The account convert
foreign currency to Indian currency.

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It can be in the form of saving a/c, recurring a/c, fixed a/c.

Balance held in NRE a/c are freely repatriable.
The principal and interest earned from NRE fixed are completely tax
free.
Authorise banks may at their discretion allow for a period of not more
than two weeks, overdrawing in NRE saving bank a/c up to a limit
of Rs. 50,000 subject to the condition that such overdrawing together
with the interest payable thereon are cleared within a period of two
weeks.
Loan up to Rs.100 lakh can be extended against security of funds
held in NRE a/c either to the depositors of third party.

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iii. NRO account: A Non-Resident Ordinary Account is a normal bank

account opened by an Indian going abroad with the intention of
becoming an NRI.
An NRO a/c is meant for NRIs to manage their income in India such
as dividends, Rents or pensions.
The funds are held in Indian currency and provide a convenient way
for NRI to consolidate earning in India.
NRO attract taxes as per Indian law. Only funds originating in India
can be used to open an NRO a/c.

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Foreign Currency Non Resident (B) account:

An account that can be opened with an Indian bank by a Non Resident Indian or a
Person of Indian Origin in foreign currency is FCNR (B) account. The letter B in
FCNR (B) stands for the word ‘Bank’. It is an account that allows the NRI to keep his
deposits in foreign currency.
Features of FCNR account

Only term deposit schemes are available to this account type and the period can be
more than a year and a maximum of 5 years. If the account holder so wishes these
accounts can also be transferred to other NRE/FCNR accounts before maturity period.
Such transfers are subjected to penalties that are charged for premature withdrawals of
the deposit. Currency in the account is convertible to Indian currency freely.
Reserve Bank of India states that interest rate on term deposit schemes are to be fixed
by board of directors of the bank (subject to RBI regulations).
Interest rate on term deposit is payable after the end of first year and the interest from
there on is compounded half yearly.

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No Frills Saving Account: No frills account allows to bank with a zero

minimum balance requirement. No frills saving account which offer all
the basic banking facilities with no additional charge.
Characteristic Of No Frills Saving Account:

Individual of 18 years an above earning a gross income of Rs.5000/
p.m. or less.
Mode of operation is single or joint.
Initial deposit amount is Rs.50/- to open the account.
Minimum balance is NIL.
Maximum balance/amount is Rs.10,000/- being the total value of
business connection of the account holder, including other deposit
accounts.
Cheque book and debit card facilities available.

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NOSTRO & VOSTRO A/c
A nostro account refers to an account that a bank holds in a foreign

currency in another bank. Nostros, a term derived from the Latin
word for "ours”, are frequently used to facilitate foreign exchange
and trade transactions.
The opposite term "vostro accounts" derived from the Latin word for
"yours" is how a bank refers to the accounts that other banks have
on its books in its home currency.

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TYPES OF CUSTOMERS & ACCOUNT HOLDERS: (General &

Special)
Minor Account:
Definition - “Minor” means a person who under the provisions of Indian

Maturity Act,1875 is to be deemed not to have attained his maturity.”
“Every other person domicile in India shall be deem to have attain his
maturity when he shall have completed his age of 18 years and not
before”
Agreement With Minor:

As per Indian contract act 1872, Minor cannot enter into a contract or
agreement. If minor enter into any contract it becomes invalid contract
but agreement can be made between minors Guardian.

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Guardian: Guardian means the person having the care of the person of
the minor or of his property or of both his person and property.
Problems in minor account:

Loans given to any minor by the bank does not back by legal
protection because minor is not a competent party for agreement and
bank cannot recover loan by forcefully.
Any surety received by the minor cannot be sue if he fails to repay the
loan and refuses to repay the loan.
Securities pledge by the minor which belongs to other while taking
loan cannot be executed by the bank if minor refuse to repay loan.

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Precautions to be taken at the time of opening minor account:
Precaution while opening bank a/c: bank prefers to open saving a/c and fixed deposit
a/c in the name of the minor and should not allowed minor to open current a/c. bank
should never allow minor to overdraft from his account. if banker allows minor to
overdraw from his a/c then banker does not get any legal protection to recover amount
due from the minor.
Precaution for D/O/B; while opening bank a/c for a minor, bank should collect the
proof for D/o/b and should retain with the bank. When minor attains his maturity on
that date the bank should close the minor a/c and open new a/c where the minor can
operate the a/c alone and at the time bank should get his specimen signature and
should not allowed the guardian to operate the a/c.
Granting loans to minor: as per law, if bank grants any loans to a minor it is not legal
and such agreement become void. If minor unintentionally overdraw money from his
a/c then also bank doesn’t get any legal rights and power to recover the same, hence
bank should be very careful while operating minor a/c.

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Guarantees: while accepting guarantee against loan, bank should not accept
the guarantee of a minor and banks should not grant loans to a minor against
the guarantee of others.
Minors as an agent: minor can be permitted as an agent on behalf of the

principal for that bank should get prior written consent from the original
principal. That written consent given by the principal should contain the
powers of an agent and banker should allow agent i.e minor to perform
function upto the limit of that power not beyond the power.
Minor as a partner: as per Indian partnership act, minor can enter into a
partnership with the permission of all the partners. He can enter into contract
and operates bank a/c and he will not be liable for personal asset against the
loss or damage. He only gets benefits from the partnership. After his maturity
he should inform whether to continue in partnership or not, in the absent of
information it is implies that he will continue in that partnership as a general
partner and then he’ll become liable for the damage and losses and his
personal assets also will become claim against the loss or damage.

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JOINT ACCOUNTS
Joint a/c is a bank a/c shared by two or more persons any one of the individual who is a
member of the a/c can withdraw from the a/c and deposit to it. normally family members
or close relatives or business partners prefers joint a/c for their convenient transaction.
Precautions to be taken during the time of opening & operating joint a/c:
The applicant for the joint a/c must be signed by all the person opening the a/c.
The banker must give clear instruction with regards to withdrawal of securities in
the joint a/c.
The authority to operates the a/c can be revoked by any of the joint a/c holders. It is
automatically revoked if any of the joint holders dies, or become of unsound mind.
In this case all the cheque must be stopped.
The full name of the a/c holders should be given on all the documents sent to the
bank.

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Hindu Undivided Family (HUF) or Joint Hindu Family
HUF is a body consisting of persons lineally descendant from a common ancestor,

including their wives and unmarried daughters, who are staying together jointly;
joint in food, estate and worship. The daughter on her marriage ceases to be a
member of her father’s HUF and becomes a member of her husband’s HUF.
Karta: The person who manage the family or who is the head of the family is known
as the Karta. Normally the senior most member of the family acts as the Karta.
However a junior male member can also act as a Karta with the consent of the other
members.
Coparcenary: it is a body of individuals who acquires interest by birth in the join

family property. They are the son, grandson and great grandson of the holder of the
join property for the time being. The coparcenary therefore consist of a common
male ancestor and his lineal descendants in the male line.

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Precaution to be taken while opening HUF a/c.
The account should be open in the name of karta or in the name of the
family business.
The bank has to obtain two copies of the photograph of the karta. One
to be affix on the a/c opening form and the other on the spicemen
signature card.
While opening HUF a/c introducer is mandatory.
Bank has to take the signature of all the member and declaration by the
all members by stating who is karta and other coparcener.
If there is any minor coparcener in HUF guardian has to sign on behalf
of the minor.
On attaining maturity of the minor coparcener, bank allow them to
operates a/c.
When any coparcener or member sent notice to stop the payment, bank
has to stop the payment.

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JOINT STOCK COMPANIES
It is a voluntary association of persons who generally contribute capital to carry

on a particular type of business, which is established by law and can be
dissolved only by law. Person who contribute capitals become members of the
company. This form of business has a legal existence, separate from its
members, which means even if its members die, the company remain in
existence.
This form of business organization generally requires huge capital

investment, which is contributed by its members. The total capital of a joint
stock company is called share capital and it is divided into numbers of unit
called as shares.
Joint stock company is defined as an artificial person recognized by law,
with a common capital, common seal comprising of shares of fixed value,
having limited liability and carrying perpetual existence.

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Precaution to be taken while opening joint stock accounts:

Banker should confirm whether the company is registered or not by
considering certificate of incorporation issued by he government
authority.
Banker should collect the memorandum and article of association of
the company and carefully inspect the objectives, vision and mission
of the company. Banker should review the directors powers, capital
etc. in the memorandum and articles of the association of the
company.
The banker should collect copy of business commencement certificate
which is issued by the registar.
While creating account of joint stock company, banker should
obtained copy of recent balance sheet and profit and loss account in
case of existing company. In case of new company bank should
received prospectus of the company or statement in lieu of prospectus.

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The banker should obtained a certified copy of the resolution of the

board appointing him as a banker of the company and usually such
resolution contains instruction regarding who can draw cheque,
acceptance and endorsement of bills and deals with save custody.
Bank should obtain letter from company by stating who is authorized
person to operate account and the letter should be sign by chairman
and the secretary of the company.
The banker should obtain the specimen signatures of the authorized
person to operate the account and his name should be mention in
resolution.

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TRUSTEE ACCOUNT
Trustee is a legal term for the holder of property on behalf of a beneficiary. A trust
can be set up either to benefit particular persons of or any charitable purposes.
PRECAUTIONS:
The banker should collect the trust deed and examine the deed concerning
instructions regarding opening and the person who operate the account. If those
information are absent. All the trustee can open the joint account and operate
Bank should received specimen signature of all trustee who operate the account.
Bank should note the limitation of withdrawal as per trust deed and allow
operate to withdraw to that extent and restrict to withdraw more than that
amount.
If the trustee are authorized to borrow to discharge the function of the trust, the
banker must get specific assets of the trust as security.

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Bank make sure that the trust fund should not be misused and should not allow trustee
to utilized amount other than specified purpose and make sure that amount should be
utilized for the benefit of the beneficiary. Bank should not allow trustee to transfer
trust fund for his personal account.
Bank should careful while pledging trust property against loan. When there is no
provision provided in trust deed, it should not allow operators to pledge trust property
and if there is provision in trust deed relating to pledge or mortgaging than banker can
allow operator to used property as per trust deed.
A trustee has no personal powers. They must all act together. All must join in signing
of cheques. Unless expressly provided otherwise in the trust deed, no trustee can
delegate his power to another.
Bank should see whether the trust is registered with right authority, if it is registered
bank should obtain a copy of certificate. If one of the trustee dies or retires, the bank
on receiving of notice should freeze all operations in the account. However if the trust
deed is silent, it can let the operation to continue.

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CLUBS, SOCIETIES AND INSTITUTIONS
A club or society as an institution where people share a common interest

and create a formal structure through which they can pursue it. Setting
up a small organisation is simple, but there are rules and regulations to
follow as well as financial responsibilities to adhere to clubs, societies,
charitable trusts normally do not function for the intention of making
profit, but their intention may be to cater the services to fulfill social
needs.

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PRECAUTIONS
Incorporated club and non-incorporated club: normally there are two types of
club i.e registered and unregistered club. While opening account for club and
society bank must see whether it is incorporated or not, if it is incorporated
bank should obtain incorporation certificate and then allow club to open
account. If the club is not incorporated it is problem for bank to recover
amount due by the clubs because bank cannot sue on unregistered club.
Rules and law of club: Register club has its own rules and regulation, own
constitution and law. The bank has to obtain the copy of the same and retain
with bank for further references.
Borrowings: while borrowing bank should confirm whether the club is

eligible to borrow or not and clearly note the borrowing limit. Bank should
get a copy of special resolution from the managing committee or board
regarding borrowing fund until and unless bank should not allow club to
borrow.

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special care to be taken in case of club account and personal account: if the
club account and personal account of the operator is maintain in same bank,
banker should take certain care. Bank should not club personal account of the
operator and club account in any reason, it is also not applicable for right to
set off of debit and credit balance of club account and personal account of
operator.
Death of operator: In this case the bank must stop the activities of trust
account, and should not honor cheque until board appoint new person as
operator and bank should obtain clear written consent from the board.
A resolution from managing committee: managing committee should pass a

resolution to open bank account and bank should received a copy of the
resolution.

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ILLITERATE ACCOUNT
Illiterate refers to situation of a person who is unable to read and write. Bank can open
account in the name of illiterate person because he is competent person to a contract but
only the problem is he cannot able to read and write so bank has to take certain special
care and attention.
PRECAUTION:
The account of an illiterate person may be opened provided he/she call the bank
personally along with a witness who is known by both banker and customer.
A passport size photograph of the illiterate person is identical before the banker in
presence of the account holder. The photographs have to be attested by the bank
officer/witness.
Bank has to take left hand thumb impression in case of male illiterate and right hand
thump impression in case of female illiterate and that thumb impression is duly
attested by any responsible person on the account opening form.
While opening illiterate account banker should collect few identical marks from the
account holder and the same has to be noted down in account opening form.
Illiterate person cannot make signature so banker should not provide cheque book
facility in order to avoid misuse of cheque by some other person.

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DECEASED CUSTOMER ACCOUNT

Will of customer: when customer make any will and mentioned executor name in
the will, banker has to discharge all amount and property as per the will of the
customer. The will must be written, subjected to exceptions and should contain
witness name and signature.
Nomination by the customer: Banker may suggest customer to avail nomination

facility at the time of opening account and if the customer did so, banker can
discharge amount and customer’s belonging to the nominators who is specified by the
customer.
Order by the law: When absent of the nomination and will of customer, banker can
take the help of court in discharging obligation and perform as per the court direction.
Legal representation: After the dead of the customer, the banker can surrender
amount to legal heirs of the customer through careful verification.

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Other types of customers
Married women account

Lunatic account
Partnership account

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19/1/2023
TYPES OF BANKS IN INDIA

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Reserve Bank of India

The Reserve Bank of India was established on April 1, 1935 in
accordance with the provisions of the Reserve Bank of India Act,
1934.
The Central Office of the Reserve Bank was initially established in
Calcutta but was permanently moved to Mumbai in 1937. The
Central Office is where the Governor sits and where policies are
formulated.
Though originally privately owned, since nationalisation in 1949, the
Reserve Bank is fully owned by the Government of India.

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What are Scheduled Banks?

Any bank which is listed in the 2nd schedule of the Reserve Bank of India
Act, 1934 is considered a scheduled bank.
To qualify as a scheduled bank, the paid-up capital and collected funds of
the bank must not be less than Rs5 lakh.
Scheduled banks are eligible for loans from the Reserve Bank of India at
bank rate, and are given membership to clearing-houses.
The list includes the State Bank of India and its subsidiaries (like State Bank
of Travancore), all nationalised banks (Bank of Baroda, Bank of India etc),
regional rural banks (RRBs), foreign banks (HSBC Holdings Plc, Citibank
NA) and some co-operative banks.
These also include private sector banks, both classified as old (Karur Vysya
Bank) and new (HDFC Bank Ltd).

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What are Non-Scheduled Banks?

Non-scheduled banks by definition are those which are not listed in
the 2nd schedule of the RBI act, 1934.
They don’t conform to all the criteria under clause 42, but dully
follow specific guidelines as laid down by RBI.
Banks with a reserve capital of less than 5 lakh rupees qualify as
non-scheduled banks.
Unlike scheduled banks, they are not entitled to borrow from the
RBI for normal banking purposes, except, in an emergency or
abnormal circumstances.
Bangalore City Co-operative Bank Ltd. Bangalore, Baroda City Co-
op. Bank Limited are a few examples.

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Commercial Banks
According to the RBI, “Commercial Banks refer to both scheduled and

non-scheduled commercial banks which are regulated under Banking
Regulation Act, 1949.”
Commercial banks operate on a ‘for-profit’ basis.
They primarily engage in the acceptance of deposits and extend
loans to the public, businesses and the government.
Nowadays, some commercial banks are also providing housing loans
on a long-term basis to individuals.

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Types of Commercial Banks
Commercial banks are of three types:
Public sector Banks

Private sector Banks
Foreign Banks
Regional Rural Banks

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Public Sector Banks
Public Sector Banks (PSBs) are banks where a common stake (i.e.
more than 50%) is held by a government.
The shares of these banks are listed on stock exchanges.
Example- State Bank of India, Corporation Bank, Bank of Baroda,
Punjab National Bank, Canara Bank, Bank of India.

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Private Sectors Banks
In the case of private sector banks, the majority of the share capital
of the Bank is held by private individuals.
These Banks are registered as companies with limited liability.
Example- ICICI Bank Ltd, HDFC.

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Foreign Banks
These banks are registered and have their headquarters in a foreign

country but operate their branches in our country.
Some foreign banks operating in our country are Hong Kong and
Shanghai Banking Corporation (HSBC), Citibank, American Express
Bank, Standard & Chartered Bank.
The number of foreign banks operating in our country has increased
since the financial sector reforms of 1991.

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Regional Rural Banks
Regional Rural Banks or RRBs, serve the rural areas and agricultural sectors with
basic banking and adequate financial services.
They were set up in 1975, based on the recommendations of a committee.
Based in Moradabad, Prathama Bank, established on 2 October 1975, is the first
RRB to open in India. It was sponsored by Syndicate Bank.
The RRBs are owned by the central government (50%), the state government
(15%) and the sponsor bank (35%).
Several commercial banks have sponsored RRBs. Prominent examples include the
Maharashtra Gramin Bank (sponsored by the Bank of Maharashtra) and the Himachal
Gramin Bank (sponsored by Punjab National Bank).
RRBs were set up to eliminate other unorganized financial institutions like
moneylenders and supplement the efforts of cooperative banks.
There are 56 Regional Rural Banks in India and amongst those, only 43 RRB's are
participating in 2022.

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Regional rural banks were created with the following objectives:
Taking the banking services to the rural door step.

Making available institutional credit to the weaker sections of the
society.
To create a supplementary channel for the flow of the central money
market to the rural area.
Generating employment opportunities in rural areas and bringing
down the cost of providing credit to rural area.

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Co-operative Bank
A Co-operative bank is a small-sized, financial entity, where its

members are the owners and customers of the Bank. They are
regulated by the Reserve Bank of India and are registered under the
States Cooperative Societies Act.
The Co-operative Banks Are Also Regulated By The Reserve Bank Of

India (RBI) And Governed By Banking Regulations Act 1949 And
Banking Laws (Cooperative Societies) Act, 1955. The Co-operative
Banks In India Are Well Established Financial Service Organization.
The First Legislation On Cooperation Was Passed In 1904.

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Cooperative banking is retail and commercial banking organized on a
cooperative basis. Cooperative banking institutions take deposits and
lend money in most parts of the world. 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.
PURPOSE
Co-operative Banks Are The Banks Whose Main Objective Is To
Provide Financial Assistance To Economically Weaker Sections Of
The Society. Such Banks Are Registered Under The Cooperative
Societies Act.
One of the banking products offered by Co-operative banks is Fixed
Deposit.
The current fixed deposit interest rates offered by different Co-
operative banks for various tenures from 7 days to 10 years range
between 7% and 9.25% per annum

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Features of Cooperative Banks
Cooperative Banks customers are both the owner and customer of that
Cooperative Bank.
The head of Cooperative Bank is elected by board of directors and
owned by member itself.
Member of Cooperative Banks get equal right of vote as principle of
“One Person, One Vote”.
The profit of banks is equity shared with member based on legal and
statutory limitations.
They offer highest rate of interest on their deposits.
They have brought productive borrowing in place of un discouraged
purpose.

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Functions of Co-operative Bank
Provides Credit
Encourage saving
Employment Generation
Helps to develop rural areas
Improves living standard
Agricultural Development

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TYPES
1. Central Co-operative Banks:
These banks are organized and operated at the district level and can be of two types:
Co-operative Banking Union
Mixed control Co-operative Bank
2. State Co-operative Banks:

These banks are organized and operated at the district level and rest at the top of the
hierarchy in the co-operative credit structure.
3. Primary Co-operative Banks:

These offer credit services in the urban and semi-urban regions. Thus, they are not
considered agricultural credit societies.
4. Land Development Banks:

The land development banks are divided into three tiers which are primary, state, and
central. These offer credit services to the farmers for developmental purposes. They used
to be regulated by the RBI as well as the state governments

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Agricultural and Rural Development

ARDB is a public enterprise functioning in the form of state-owned
commercial bank and is fully independent in leading and governing
the bank’s activities.
ARDB is under technical and financial supervision of the Ministry of
Economy and Finance and supervisory of the National Bank of
Cambodia.
Role and Duties

To serve as both a commercial bank and a policy bank.
To provide financing and banking related products ranging from loan,
payment, and deposits to key stakeholders in the agricultural value
chain and rural economy.
To provide financing and technical supports.

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Advantages of Cooperative Banking

Cooperative Banking provides effective alternative to the traditional
defective credit system of the village money lender.
It provides cheap credit to masses in rural areas.
Cooperative Banks have discouraged unproductive borrowing personal
consumption and have established the culture of productive
borrowing.
Cooperative credit movement has encouraged saving and investment,
instead of hoarding money the rural people tend to deposit their
savings in the cooperative or other banking institutions.
Cooperative societies have also greatly helped in the introduction of
better agricultural methods. Cooperative credit is available for
purchasing improved seeds, chemical fertilizers, modern implements,
etc.
Cooperatives Banks offers higher interest rate on deposits.

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Problems with Cooperative Banking in India

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.
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.
Most of the benefits from the cooperatives have been covered by the big land owners
because of their strong socio-economic position.
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.
Long-term credit extended by them is declining 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.

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National Bank for Agriculture and RuralDevelopment
(NABARD)
In order to promote integrated and sustainable rural development and
secure prosperity of rural areas the National Bank for Agriculture and
Rural Development (NABARD) was set up as an apex development
bank under the national Bank for Agriculture and Rural Development
Act,1981.
It came to existence on July 12,1982.
It not only facilitated the flow of credit for promotion and
development of agriculture, small scale, cottage and village industries,
handicraft and other rural crafts, but it also took over the entire
undertaking of Agriculture
Finance and Development Corporation (AFDC).

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Credit Functions
NABARD provides refinance to lending institutions in rural areas like

commercial banks, state cooperative banks rural development banks,
RRBs and other eligible financial institutions.
Through the rural infrastructure development fund it sanctions finance
for irrigation, build rural road s and bridges as well as soil
conservation, forest management, floods protection and drinking water
schemes.
It issues Kissan Credit Cards thoughts a vast rural banking network.
It grants financial assistance to tribal families under the tribal
development fund.
It also provides financial support under the farm innovation and
promotion fund.

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Regulatory function:
It act as a regulatory for cooperative banks and RRB.

NABARD evaluates, monitors and inspect client banks to assess their
financial and operational soundness, managerial efficiency and
compliance to statutory provision.

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NBFCS
Non Banking Financial Company also known as NBFC company, functioning as
per the Indian Companies Act, giving loans and advances to the public. An
NBFC company can acquire shares, stocks, bonds, debentures and securities
from Government as well as local authority or any other marketable securities.
The (NHB) was set up on July 9, 1988 under the National Housing Bank Act,
1987. It wholly owned by the RBI which contribute its entire paid-up capital
of Rs 100 crore.
The NHB is expected to operate as a principal agency to promote housing
financial at the local as well as regional levels and to provide financial and
other support to other such as institutions.
Its mission is to serve the housing needs of all segments of the population
with the focus on low and moderate income housing.
Its head office is in New Delhi.

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Financial Functions
NHB extends refinance facilities to different primary lenders including

scheduled banks, RRBs, Housing finance companies, states level apex
cooperative housing societies, etc, These primary lenders provide
finance to individual borrowers, builders corporate houses for
purchase or construction of new houses and for repair or up gradation
of existing houses.
It provides guarantee and underwriting facilities to housing finance
institutions.
NHB has also launched RESIDEX for tracking the movement of
prices of residential housing segment in India. for doing this it collects
data from real estate agents, private consultants and research
organizations of national repute, banks and housing finance
companies. This data is update quarterly.

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SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA
(SIDBI)
The Small Industries Development Bank of India (SIDBI) was set up
in 1990 under an Act of parliament as the principal financial
institution for promotion, financing and development of Micro small
and Medium Enterprises (MSME) for coordinating the function of
other institutions engaged in similar activities.
It is among the top 30 development bank of the world it was
established as wholly owned subsidiary of Industrial Development
Bank of India and took over its financial activities relating to small
scale sector.
Its head office is in Lucknow, Uttar Pradesh.

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Objective:
SIDBI promotes MSMEs through innovative and progressive schemes.

It provides direct finance and refinance term loans granted by banks,
State Finance Corporation (SFC), State Industrial Development
Corporation (SIDC) for setting up industrial projects as well as for
their expansion, modernization or diversification.

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INDUSTRIAL DEVELOPMENT BANK OF INDIA LIMITED
It was constituted under Industrial Development Bank of India Act, 1964 as a

development financial institution and came into existence on July 1, 1964
Originally, it was established as a fully owned subsidiary of the Reserve Bank
of India but it was delinked from it in Feb 1976 and was made into
autonomous corporation owned by the Govt. Of India.
It continued to serve as a DFI for 40 years till the years 2004 when it was
transfer in to a bank.
For this purpose , the Industrial Development Bank ( Transfer of undertaking
and repeal) Act,2003 was passed and new bank under the name of industrial
Development Bank of India LTD (IDBI LTD) was incorporated as a govt.
Company on Sept. 27 2004 and came in to effect on Oct. 1, 2004 since then it
has been function as a bank in addition to its earlier role of a financial
institution.

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With the aim and achieving faster inorganic growth of a Bank, IDBI Bank LTD., a
wholly owned subsidiary of IDBI LTD. was amalgamated with IDBI LTD.
The merge become effective from April 2,2005. Thereafter ,the United Western bank
LTD.(UWB) a Star-base private sector bank was also merge with IDBI LTD the merge
came in to effect on Oct.3, 2006.
In order that the name of the bank truly reflect the functions carried on by it the name
of the bank was change to IDBI bank LTD.
The new name become effective on May 7,2008. Since then it has been function in its
present name IDBI Bank LTD.
Financing Functions
IDBI provide direct assistance in the form of term loans.

It refinance term loans give eligible intuitions to medium and large- scale units.
It accept discount of rediscount bona fide commercial bills or promissory notes of
industrial concerns.
It provides venture capital for development and use of indigenous technology as well
as for adaptation of imported technology.

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EXPORT IMPORT BANK OF INDIA (EXIM BANK)

The Export Import Bank of India was set up in 1982 under the Export-
Import bank of India Act, 1981. Since then it has been a catalyst as
well as a key player in promotion of cross-border trade and investment
.
It has particularly help the small and medium enterprise in there
globalization effort, through import of technology, export product
development, export production, export marketing , pre-shipment, post
shipment and overseas investment etc.

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RBI
The Reserve Bank of India was established on April 1, 1935 in

accordance with the provisions of the Reserve Bank of India Act,
1934.
The Central Office of the Reserve Bank was initially established in
Calcutta but was permanently moved to Mumbai in 1937. The Central
Office is where the Governor sits and where policies are formulated.
Though originally privately owned, since nationalisation in 1949, the
Reserve Bank is fully owned by the Government of India.
Has 27 regional offices, most of them in state capitals and 04 Sub-
offices.

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Functions
1. Monetary functions:
Note issuing authority
Banker banks and lender of last resort
Bankers to the government
Custodian of foreign exchange rate
Controller of credit
2. Non- monetary functions:

Collection and publication of data
Regulation and supervisory function
Development and promotion function

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Control of Credit by the Reserve Bank of India

Control of credit is one of the principal functions of the Reserve Bank
of India. Control of credit means increase or decrease of the flow of
credit in the system in accordance with its need. Reserve Bank of India
adopts all those measures for the control of credit which Central Banks
in other countries do. These measures may be classified as:
1. Quantitative Credit Control
2. Qualitative or Selective Credit Control

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1. Quantitative Credit Control:

i) Bank Rate
ii) Multiple Rates of Interest
iii) Open Market Operations
iv) Variable Cash Reserve Ratio
v) Statutory Liquidity Ratio
2. Selective Credit Control:

i) Rationing Of Credit
ii) Margin Requirements
iii) Regulation Of Consumer Credit
iv) Control Through Directives
v) Publicity
vi) Direct Action

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1. Quantitative Credit Control:
(i) Bank Rate:
(a) To check inflation,
(b) To bring parity between the Bank Rate and the Rate of Hundis,
(c) To bring parity between bank rate and interest rate on Treasury Bills.
ii) Multiple Rates of Interest:

2. In October, 1960 the Reserve Bank started ‘Multiple Rates of Interest’
programme. According to this programme if any bank borrows from
the Reserve Bank beyond the quota fixed for it, it has to pay higher
interest rate than the prevailing Bank Rate. On December 28, 1974, a
new scheme was introduced.
3. According to this scheme a member bank would be given loan at the
prevailing bank rate only if its Net Liquidity Ratio is 39%. In case Net
Liquidity Ratio is less than it, the Bank Rate could be raised to any
limit upto 18%.

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iv) Variable Cash Reserve Ratio.
v) Statutory Liquidity Ratio.

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QUALITATIVE METHODS :-
Qualitative methods are used to effect the use, distribution & direction
of credit.
RBI from time to time had adopted the following qualitative methods
of credit control:-
1. Rationing Of Credit
2. Margin Requirements
3. Regulation Of Consumer Credit
4. Control Through Directives
5. Publicity
6. Moral Suasion
7. Direct Action

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1. Rationing Of Credit
In this method RBI seeks to limit the maximum or ceiling of loans &
advances and also in certain cases, fixes ceiling for specific categories
of loans & advances.
It aims to control & regulate the purposes for which the credit is
granted by commercial banks.
Before sanctioning a credit limit of Rs 2 crore or more to any one
debtor, every bank will have to get authorisation from the Reserve
Bank. Even, after the autharisation the creditor bank can inspect the
account books of the debtor to ascertain the use of the credit.

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2. Margin Requirements
Commercial banks do not lend up to the full amount of the value of
security. the loan amount is less than the securities value. It keeps a
‘margin’ as a cushion against fall in the value of the security.
‘Margin’ refers to the difference between the current market value and
the loan value of a security. It is a portion of the value of the security
charged to a bank, which the borrower is expected to pay out of his
own resources.
A rise in the margin requirement restricts the amount of loan that a
bank can grant against a security , while a lower margin increases it.
During depression, the margin can be reduced so that there is increase
in the level of economic activity through an increase in demand for
bank credit. conversely, during inflation, margin requirements can be
raised by the monetary authorities so as to contain the boom in the
stock market.

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3. Regulation Of Consumer Credit

With the introduction of installment trading, the trading in non-
essential consumer products like motor vehicles, electrical &
electronic goods have gone up to an unpredicted level.
The RBI may restrict consumer expenses on non-essential items by
directing the commercial banks to fix the minimum percentage of
down payment, length of period over which installment payment may
be spread, etc.
Example :- suppose, to buy a washing machine, the buyer is required
to make a down payment of one-fourth of its total price & the rest is to
be paid in 15 equal monthly installment.
During inflation, more restrictions can be prescribed to control prices
by controlling demands, while during depression they can be relaxed
in order to stimulate demand for goods.

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4. Control Through Directives
RBI have been empowered to issue directives to commercial banks in

respect of their lending policies, purposes for which loans may or may
not be granted ,margin to be kept in case of secured loan, etc.
The power to issue directives may be given either by statute or by
mutual agreement between the central banks and the commercial
banks.
Directives may be issued to encourage the flow of credit to certain
areas or to prevent the flow of credit in undesirable directions.

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5. Publicity
The RBI may also follow the policy of publicity in order to make
known to the public its view about the credit expansion or contraction.
RBI regularly publish statements of assets & liabilities of commercial
banks for information to the public. They also publish reports of
general money market & banking condition.
This is a way of exerting moral pressure on the commercial banks &
also making the public aware of the policies being adopted by banks &
the central bank in the light of prevailing economic conditions in the
country.

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6. Direct Action
According to the 1949 Act, Reserve Bank can stop any commercial
bank from any type of transaction. In case of defiance of the orders of
Reserve Bank, it can resort to direct action against the member bank. It
can stop giving loans and even recommend the closure of the member
bank under pressing circumstances.

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TOPICS COVERED IN NOTES (Class notes dictation)
1. Narasimham Committee 1 & 2.

2. Difference between Demat deposit and Term Deposit.
3. Origin and Growth of Commercial Bank.
4. Changing roles of Commercial Banks.

Unit1 Pbi 2

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Unit 1: Introduction to Banking

MISSION VISION CORE VALUES

Excellence and Service

Excellence and Service

Banking Sector Development

The Banking sector development can be divided into three phases:

Phase I: The Early Phase which lasted from 1770 to 1969

Excellence and Service

Given below is a pictorial representation of the evolution of the Indian

Excellence and Service

Pre Independence Period (1786-1947)

Excellence and Service

Excellence and Service

Pre-Independence Banks in India

Bank Name Year of Establishment

Allahabad Bank 1865

Punjab National Bank 1894

Bank of India 1906

Central Bank of India 1911

Canara Bank 1906

Bank of Baroda 1908

Excellence and Service

Reasons Behind Failure

Indian account holders had become fraud-prone

Excellence and Service

Post Independence Period (1947-1991)

With an aim to solve this problem, the then Government decided to

Excellence and Service

Given below is the list of these 14 Banks nationalised in 1969:

Excellence and Service

Excellence and Service

1. State Bank of Patiala

Excellence and Service

This lead to an increase in funds and thereby increasing the economic

Excellence and Service

Liberalisation Period (1991-Till Date)

ASSIGNMENT: To write 250 - 350 words on Narasimham Committee in

Excellence and Service

These banks included:

1. Global Trust Bank

Excellence and Service

FACTS (CHOCO TIME)

---------------- the first bank to open a branch outside India.

Fact No. 3:

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Banks should deal with money/related to money

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“a customer is one who has account with a banker or for whom a

Excellence and Service

Accepting Deposit: commercial banks accepts various types of deposits

i) Time/Term Deposit: These are repayable after a certain fixed period.

Excellence and Service

Excellence and Service

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General/Public utility function:

Excellence and Service

Bankers and Customer Relationship

1. Debtors and Creditors relationship: When a customer opens an

3. Creditors and Debtors Relationship: When banks grants any loans

Excellence and Service

1. Bailor and Bailee: Bailor is a person who gives up the possession of