SRM INSTITUTE OF SCIENCE AND TECHNOLOGY

DEPARTMENT OF COMMERCE
CLASS : I BCOM G & H
COURSE CODE : UCM23202J
COURSE NAME : BANKING LAW & PRACTICES
FACULTY NAME: Dr. S. MANI
UNIT – I
BANKING
INTRODUCTION
Today ban have become a part and parcel of our life. There was a time when the dwellers of city alone
could enjoy their services. Now banks offer access to even a common man and their activates extend to areas
hitherto untouched. A part from their traditional business oriented functions, they have now come out fulfil
natural responsibilities. Banks cater to the needs of agriculturists, industrialist’s traders and to all the other
sectors of the society. It accelerates economic growth of a country and stets the wheels of the country towards
its goal of self reliance in all fields.

ORIGIN AND DEVELOPMENT OF BANKS

Q. EXPLAIN THE ORIGIN OF BANK.
It is interesting to trace the origin of the word in the modern sense to the German word Banck which
means Heap or Mound or Joint Stock fund. From this the Italian word ‘Banco’ meaning heap of money was
coined. Some people have the opinion that the word bank is derived from the French word “Bancus or Banque”
Which means bench. Thus the origin that the word bank can be traded as follows.
Thus, the origin of the word bank can be traded as follows:
 Banck- German (joint stock fund)
 Banco- Italian (Heap of money)
 Bancus/Banque - French (Bench / Chest a place where valuable are kept)
 Bank- English (common meaning prevalent today, i.e., as an institution accepting money as deposit for
lending)

Q. WHAT IS MEANT BY BANK?

 A bank is an institution which an individuals can deposit money. Banks provide a system for easily
transferring money from one person or business to another.

Q. WHAT ARE THE FEATURES OF BANKING?

1. Dealing in Money
The bank accepts deposit from the public and advancing them as loans to the needy people. The
deposits may be of different types –current, fixed, savings etc accounts. The deposits are accepted on various
terms and conditions.
2. Deposits must be Withdrawals
The deposit (other than fixed deposits) made by the public can be withdraw able by cheques, draft or
otherwise, i.e. the bank issue and pay cheques. The deposits are usually withdrawal able on demand.
3. Dealing with Credit
The bank are the institutions that can create credit i.e., creation of money for lending. Thus creation of
credit is the unique features of banking.
4. Commercial in Nature
Since all the banking functions are carried on with the aim of making profits, it is regarding as a
commercial institution.
5. Nature of Agent
Besides the basic functions of accepting deposits and lending money as loans, banks possess the
characters of an agent because of its various agency services.

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Q. WHAT DO YOU UNDERSTAND BY THE TERM BANKER?
A person who is doing the banking business is called a banker. But it is not at all easy to define the term
banker precisely because a banker performs multifarious functions. First a banker must be a man of wisdom. He
Deal with other money but with his own mental faculties secondly a bankers is not only setting as a depository
agent but also as a repository of financial advices.
Q. DEFINES BANKER.
According to Macled, “the essential business of a banker is to buy money and debts by creating other debts.
 A banker is essentially a dealer in debts or credit
 Hart L States in his book, law of banking that a banker is one who in the ordinary course of his business
hounours cheques drawn upon his by person form and for whom he receives money on current accounts.

BANKING REGULATION ACT-1949

ORIGIN
Q.DESCRIBE THE ORIGIN OF THE ACT-1949.
Unfortunately, in India, there was no separate legislation for banking till 1949 and so bank were brought
under the control of Indian companies act. Though the central banking enquiry committees recommended the
need for a separate legislation it was not given due consideration then. However, subsequent development like
Mushroom growth of bank with inadequate capital, dishonest management, speculative investment,
appointment of incompetent director for long period with his salaries, poor liquidity of funds etc. necessitated
the passing of a separate Act for banking companies.
According, a bill was introduced in March 1948 and was passed in the parliament in February 1949.
This Act was originally called the Banking Companies Act 1949 and now it is renamed as the Banking
Regulation Act 1949. The important provisions of the Act have been discussed under the following heads

Q. WHAT IS MEANT BY BANKING?

 Banking means accepting depositfor the purpose of lending to the public
 Bank may also provide financial services such as wealth management, currency exchange safe deposit
boxes.

DEFINITION OF BANKING
Q. DEFINE BANKING.
Banking regulation act 1949 defines banking as accepting for the purpose of lending or investment of deposit of
money received from the public, repayable on demand and withdrawable by cheque draft order or otherwise.

MANAGEMENT REGULATION ACT-1949

Q.DESCRIBE THE MANAGEMENT REGULATION ACT-1949.
 Board of Director: Section 10 (a) provides that at least 51% of the Board of Director of a banking
company must consist of person who have special knowledge in (1) Accounting, (2) Agricultural and
Rural Economy, (3) Banking, ( 4) Economics, ( 5) Law etc.
 Whole time Chairman: Every banking company shall have a chairman who will be a professional
banker. He shall be entrusted with the management of the whole affairs of the banking company subject
to the superintendence, control and guidance of the Board of Directors.

LICENSING OF BANKS
Q.STATE THE PROVISIONS OF THE BANKING REGULATION ACT REGARDING: LICENSING
OF BANK.
Section 22 of the Act requires every banking company to obtain a license from the Reserve Bank India before
commencing business. In granting the license, Reserve Bank India will consider the following fact after
inspecting the banking company concerned.
1. Whether the bank is or will be in a position to pay its present or future depositor in fall as their claims
accrue.
2. Whether the affairs of the company are not being conducted to the determined of the interest of the
depositors.
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 3. In the case of foreign banks, in addition to the above requirements, the following must be complied with
 The law of the government of their origin does not discriminate in any way against Indian banks.
 Their business in India will be in the public interest.
 They comply with all the provision of the Act of the country of their origin
If any defects are found out during inspecting the bank concerned will be informed of them and will be asked to
rectify them. The reserve bank of India will call for periodical to watch the programs of the bank.
If defect are immaterial and the program is satisfactory, license will be issued. Otherwise, it will be
given to the bank to show program before refusing or cancelling the license. If dissatisfied the aggrieved bank
may apply to the central government for financial decision.

OPENING OF BRANCHES
Q.STATE THE PROVISIONS OF THE BANKING REGULATION ACT REGARDING: OPENING
OF NEW BRANCHES OF BANK.
If there is no control on opening of branches, there will be taken competition among banks and all of
them will tend to open branches only a big cities and towns. Hence, the need for the provision section 23 of the
Act lays down that:
1) Every banking company should obtain prior permission from the Reserve Bank of India for opening
new place of business either in Indian or abroad and also for changing the location of its existing offices.
2) The consent of Reserve Bank of India is not necessary when the banking company changes the place of
business within the same city or when on office is opened for a temporary period not exceeding six
months.
3) The Reserve Bank of India will grant permission only when it is satisfied that:
 The financial conditions and management of the bank concerned is sound.
 If, capital structure is adequate.
 The opening of new branch or charging the location is in the interest of the public.
4) The Reserve Bank of India may also grant conditional license in which case the permission will be
revoked if the bank fails to comply with any such condition.

NEW LICENSING POLICY

Till 1995, all commercial banks were permitted to open new branches only after getting the prior
approved of the RBI. In 1995, this branch licensing policy, banks will good financial health meet not get their
expansion plans cleared by the RBI.

IMPORTANCE OF BANKING
Q.DESCRIBE THE IMPORTANCE OF BANKING IN ECONOMIC DEVELOPMENT.
In the process of economic development the significance or contribution of banking system can be
summarized as follows.
1 Capital Formation
The capital formation depends upon savings of various categories of people / organization. Bank offer
facilities for savings and thus, encourage the habits of thrift and industry among people. They mobilize the idle
and dormant capital of a commodity and make it available for productive purposes.
2. Creation of Money
Banks have become significant by their power to creation of money. Bank money forms a large part of
the total quantity of money supply and represents a cheap, efficient and economical means of payment. Banks
are described as factories of credit. It results in the economic progress of the country.
3. Strengthen the link between the Organized and Un organizes sectors
Indian money market consists of organized and un organized sectors. Bothe of them are to be linked for
the economic well being of the country, As the nervous system of the economy, the banks link the organized
and unorganized sectors for the overall economic development.
4. Provision of long term loans
Industrial development which is the rock-basis for the economy depends upon the long term loans.
Banks provide medium and long –term loans for the industries.

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5. Rural development:
India is land of village. Banks adopt certain measures to improve rural areas and undertake developmental
activities which in term will develop the whole nation.
6. Entrepreneurial development
Banks have special drives and specific schemes for the development of entrepreneurship. They foster
their strength and health. This helps the nation as a whole in various ways including the increase in
productivity etc.
7. Acting as a bridge between various sectors: banking system act as a bridge between various sectors and
thereby helps for overall economic development of the country.
8. Instrument to implement the monetary policy: The monetary policy of every country which regulates the
economy is possible only with the help of a well – organized banking system.
9. Control the trade cycle: With the help of the effective banking system the government can control and
regulate the circulation of money and thereby controls the effect of the trade cycle to a certain level.
10. Facilitation with a good medium of exchange (cheques system): the cheques system provided by the
banks as a medium is of great use for all sorts of transactions and helps in the promotion of trade and
industry.
FUNCTIONS OF BANKS
Q.WHAT ARE THE VARIOUS FUNCTIONS OF BANKS?
1. MAIN FUNCTION
The banking companies are permitted to do the following main activities.
 Borrowing , raising or taking up of money
 Lending of money with or without security.
 Granting and issuing of letters of credit of various kinds, travelers cheques etc.
 Buying and selling of foreign exchange including foreign currencies.
 Buying, selling and dealing in bullion/ species.
 Acquiring, holding, issuing on commission, under writing and dealing in stock, funds, shares,
debentures, bonds, securities and investment of all kinds.
2. SUBSIDIARY FUNCTION
In addition to the above main functions the banking companies are permitted to render the following
subsidiary services.
 Acting as agents for individual, government etc.
 Carrying on agency business of any description.
 Contracting, negotiating and issuing public and private loans.
 Effecting, insuring, guaranteeing, underwriting, and participating in managing and carrying out of any
issue, public or private.
 Carrying on and transacting every kind of guarantee and indemnity business.
 Managing, selling and realizing any property which may come into its possession in satisfaction of any
of its claims.
 Acquiring, holding and dealing with any property of right or title in such property which may form the
security for any loans.
 The acquisition, construction and alteration of any building if necessary and convenient for the purposes
of the company.
 Acting as trustees for customers.
 Undertaking of the administration of estates as executor or otherwise.
 Dealing with all or any part of the property and right of the company.
 Doing any other business notified by the central government as lawful for a banking company.

INSPECTION OF BANKING COMPANIES

Q.STATE THE PROVISIONS OF THE BANKING REGULATION ACT REGARDING: INSPECTION
OF BANKING COMPANIES.
The present Act permits the Reserve Bank of India to conduct inspection of bank on its own initiative
with a review to establishing sound banking tradition by drawing the attention of banks concerned to their

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defects and unsatisfactory working methods. Section 35 of the Act contains the following provision for
inspection.
1. The Reserve Bank of India has been given the power to inspect the books and account of any banking
company.
2. During inspection, every director/ officer/ employee of the bank is under an obligation to produce all
books of accounts and documents in his custody and to finish the information required.
3. Any officer of the Reserve Bank of India who is conducting inspection has a right to examine any
director / officer/ employee of the bank under oath.
4. The Reserve Bank of India may conduct such inspection either units own initiative or under the
direction of the central government.
5. In any case, after the inspection is over, the Reserve Bank of India sends a copy of it to the bank
concerned and to the government.
6. On seeing the report, it the central government is of the opinion that the affairs of the bank are
conducted to the determinant of interest of depositors it may give an opportunity to the bank
concerned to make a representation.
7. If the representation is not reasonable the central government may:
 Prohibit the bank from receiving fresh deposits
 Direct the Reserve Bank of India to apply under section 38 for the winding up of the bank.

COMMERCIAL BANKS
Q. WHAT IS MEAN BY COMMERCIAL BANK?
Commercial banks constitute the major portion of the country’s credit and banking institution in simple terms a
bank is a dealer in money like a trader in goods. Commercial banks in India are organised as joint stock
companies and human as banking companies. Commercial banks are the earliest by origin and play an vital role
in financial accommodation to trade, business and commerce.

TYPE OF BANKING ON THE BASIS OF THEIR FUNCTION

Q. EXPLAIN THE TYPE OF BANKING ON THE BASIS OF THEIR FUNCTION.
1. Central bank
It occupies a central position in the monetary and banking structure of the country. It acts as the lender
of the money market in supervising, controlling and regulating the activities of all commercial banks and other
financial institution. The main functions of a central bank are broadly the same all over the world.
Its functions are:
 Regulation of currency.
 Performance of general banking and agency services.
 Custody of the cash reserves of the commercial banks.
 Custody and management of international currency.
 Control of credit.
2. Commercial Bank
As the name indicates, the primary objective of the commercial banks is to earn profit. A commercial
bank receives money from the depositors and lends it to trade, industry and commerce. This bank borrows
money from the depositors and it allows interest on such deposits. Similarly, when the banker lends money to
the industry or business by way of overdraft ‘Cash credit’ loans and advances or by any other means, he charges
interest on such borrowings. The difference between the lending rate and the borrowing rate is his profit. A
modern commercial bank is expected to go beyond the conventional banking functions and to take up
challenging tasks of achieving economic growth, combined with stability and social justice.
3. Co-operative Banks
India is an agricultural country. Most of our countries population depends upon agriculture for their
livelihood. The Indian farmer is poor, illiterate and heavily indebted. Non-availability of adequate and timely
agricultural credit results in low productivity and makes agriculture more capital intensive.

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 Co-operative banking in India can be divided into two important areas, namely, agriculture and non-
agriculture. Agricultural farmers to protect from the economic evils and normal degeneration, the co-operative
movement in India were encouraged.
Co-operative bank is the only system of voluntary organization suitable for poorer people. In this
system, the persons voluntarily associated together as human beings on the basis of their equality.
4. Industrial Banks
The economic development of a country depends on the development of its industries. The advanced
countries like United Kingdom, United States of America, Japan and Germany are the pioneers in the field of
industrial development. The industrial banks provide long-term loans and supply fixed capital to industrial
concerns by subscribing to the shares and debentures floated by the companies.
5. Development Banks
Development banking is a new concept to cater to the needs of industrial and agricultural finance in the
country. Most developing countries were faced with scarcity of capital. Development banks were established in
different underdeveloped countries to the social, political and economic environment of each country. In Indian
Development banks were provide long-term and medium-term loans.
6. Land Development Banks
India, being an agricultural country, there is the need to develop the agricultural operations. The fund
needed by Indian farmers are classified into short-term, medium-term and long-term loans. Land development
banks play an important role in financing long-term loans to agriculturists. The main objectives are:
 To grant long-term loans with land as a security.
 To get fiancé from the state land development banks and helps the members.
 To encourage saving habit among the public.
7. Exchange Banks
Exchange banks are also commercial banks engaged in the foreign exchange transactions. They also
receive deposits and lend money. They build up balances abroad by purchasing claims to foreign currencies.
The exchange bank grants direct loans to the exporters or importers. In India some of the commercial banks are
the authorized dealers in foreign exchange. State bank of India and all the foreign banks functioning in India
transact foreign exchange business.
8. Indigenous Banks
The Indigenous bankers are the earliest bankers in India and are still occupying an important place in the
Indian financial system. It is strange to note that some communities have taken up the indigenous banking as a
profession.
For instance, the Chettiars of Tamil Nadu, Shaukars in Uttar Pradesh and so on. The indigenous banking
is not taken up by most of the South Indians because of the existence of certain traditional stigma attached to
this profession. They carry on the banking business combined with trading activities. The indigenous bankers
are more popular in urban and semi-urban areas.
9. Regional Rural Banks
The Regional Rural Banks were set-up by the Government in September, 1975. The share capitals of the
Regional Rural Banks were subscribed by the Central Government, State Government and the Sponsor bank in
the ratio of 50:15:35 respectively. The objective of establishing the Regional Rural Banks was to develop the
rural economy by developing agriculture, trade, commerce and industry and other productive activities in the
rural areas.
10. Saving Banks
These are institutions which collect the periodical savings of the general public. Their main object is to
promote thrift and saving habits among the middle and lower income sections of the society. In all countries
also run savings bank accounts and their working is regulated by the government. In India, we have postal
savings accounts. These days separate savings banks as such are very rare. In India, all commercial banks have
savings accounts. The minimum balance which is required to be kept in the account differs from banks to
banks. The rate of interest payable on the accounts by banks is determined by Reserve Banks of India.

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11. Supranational Banks
Special Banks have been created to deal with certain international financial matters. World Bank is
otherwise known as International Bank for Reconstruction and Development (IBRD) which gives long-term
loans to developing countries for their economic and agricultural development. Asian Development Bank
(ADB) is another Supranational Bank which provides finance for the economic development of poor Asian
Counties.
12. International Banks
International Banks are those which are operating in different countries. While, the registered office/
head office is situated in one country, they operate through their branches in other countries. They specialize in
banking business pertaining to foreign trade like opening of letters of credit, providing short-term finance in
foreign currency, issue of performance in foreign currency, issue of performance guarantee, arranging foreign
currency, credit, etc. They are the main traders in International currencies like US ‘dollars’, Japanese ‘yen’, the
new-born European currency ‘Euro’, etc. They also perform currency Risk Management functions for clients.
These banks are also known as Multinational Banks since, they operate from many countries.
13. Agricultural Banks
Agricultural credit needs are different from those of industry and trade. Industrial and commercial banks
normally do not deal with agricultural finance. The agriculturists require:
 Short-term credit to buy seeds, fertilizers and other inputs, and
 Long-term credit to purchase land to make permanent improvements on land, to purchase agricultural
machinery and equipment, etc., In India, agricultural finance is generally provided by co-operative
institutions. Agricultural co-operatives provide short-term loans and Land Development Banks provide
the long-term credit to the agriculturists.

CLASSIFICATION OF BANKS OR BANKING SYSTEMS AND STRUCTURE

Q. EXPLAIN THE CLASSIFICATION ON BANKS ON THE BASIS OF STRUCTURE.
Branch Banking
The term ‘branch banking’ is self-explanatory. It means banking through branches with a centralized
control. This concept was first introduced in England and is now in practice in most of the countries.
Under this system the large sized banks have a nationwide network e.g. State Bank of India, Indian
Overseas Bank, Central Bank of India have branches throughout the nation, while the small ones restrict their
operation to small regions e.g. Co-operative Bank operation in various states of India.
2. Unit Banking
The concept Unit Banking originates from United States of America. Unit Banking refers to the system
of banking when individual banks carry on their business and each bank has its separate entity and
management. These banks have either no branches or if at all they have it is restricted to a few. As a result, the
area of operation for these banks are only limited.
3. Group banking
Group banking refers to a system where groups of banking companies are controlled by a holding
company. The holding company may or may not be a banking company. The term group banking refers to
bringing two or more banks under single control and management.
4. Chain banking
Chain banking refers to a system where a number of banks are controlled by one or few individuals.
Here there is no holding company. The interlocking is done by individuals purchasing shares of such banks or
same of such banks or same individuals becoming directors of two or more banks.
5. Correspondent Banking
Corresponding Banking refers to linking banks through deposits. In simple terms, the regional banks or
small banks operating in smaller localities will deposit their cash reserves in bigger banks or nearly city banks.
The city banks shall hold deposits in giant banks in metro cities. These banks also will hold deposits in city
banks and city banks in turn in smaller banks.
6. Deposit Banking or Pure Banking:
Deposit banking attaches importance to the basic function of commercial banks being accepting deposits
from the public. The major activity of commercial banks is to accept deposits from the public which is
repayable on demand and to lend loans and advances through available resources. This system of attracting
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deposits to mobilize resources for the purpose of short-term lending can be termed as deposit banking. This
system gives importance to the fact that commercial banks accept deposits, repayable on demand.
7. Investment banking or Industrial banking
Investment banking, wherein banks provide long-term finance developed in Germany, more out of
necessity. To start with a rapid industrialization in Germany which was financed by investment trusts which
functioned with their own funds. But with increases in the pace of industrialization, they required more funds.
8. Mixed Banking
The essence of mixed banking consists in attracting deposits from the general public and in providing
short-term, medium-term and long-term capital industries. Under mixed banking system, banks play major role
in the industrial development of the nation. The banking under this system is basically deposit banks but in
addition to it undertake the risk of meeting heavy capital requirements of the industry. India is being a
developing economy. Mixed banking is now very popular in India.
9. Relationship Banking
It is necessary for every bank to retain its big and good customers. These customers will be a source of
regular income for the banks are they will be prompt and regular in repayment of loans and advances. In many
cases they may be customers having large deposits with the banks. A bank’s profit to a large extent depends
upon retaining such honest borrowers and large depositors.
In order to retain such profit able accounts with the bank or to attract new accounts, it is necessary for
the bank to serve their needs by maintaining a close relationship with such customers. Thus type of banking
activity gains momentum in a highly competitive banking world.
10. Narrow Banking
A bank engaged in multifarious activities like providing working capital, term loans, doing investment
business, consumer loans, housing loans, agricultural loans, advisory services, etc., require to maintain group of
knowledgeable person and experts in each field of activity. For lack of proper appraisal of loan documents due
to inadequate knowledge, staff or expertise the bank many slip into losing business.
Similarly, having a large number of customers may also result into many defaults in payments and
consequently of more bad debts. In order to obviate such pitfalls, a bank may be concentrating only on
collection of deposits and lend or invest the money within a particular region or certain chosen activity like
investing the funds only in Government securities. These types of restricted minimum banking activity are
referred to ‘Narrow Banking’.
11. Universal Banking
As Narrow Banking refers to restricted and limited banking activity, Universal Banking refers to broad-
based and comprehensive banking activities. Under this type of banking, a bank will deal with working capital
requirements as well as term loans for developmental activities. They will be dealing with individual customers
as well as big corporate customers. They will have expanded lines of business of traditional deposit taking,
modern financial services, selling long-term saving products, insurance cover, investment banking etc.
In India commercial banks like State Bank of India, Indian Overseas Bank and other banks generally
provide loans and advances for short-term to meet working capital requirements of borrowing companies. There
is now a move to allow banks and Financial Institution to provide both short-term and long-term finance to
corporate under an umbrella system known as Universal Banking.
12. Regional Banking
Small traders, village artesian, agricultural labourers, etc in rural and semi-urban area do not get
adequate credit facilities from commercial banks are generally looking for large borrowers engaged in
commercial/business activities. This type of banking leaves the rural area underdeveloped economically. In
order to provide adequate and timely credit to small borrowers in rural semi-urban areas. Control Government
set up regional banks known as Regional Rural Banks all over India jointly with State Government and some
commercial banks. As they are permitted to operate in particular region, it may help develop the regional
economy.
13. Local area bank
In some cases, the Regional Banks set up by the governments are not being run profitable for various
reasons. Secondly, these banks are not meeting fully the credit requirements of regional borrowers. With a view
to bring about a competitive environment and to overcome the deficiencies of Regional banks, Government has

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permitted establishment of a new type of regional banks in rural and semi-urban centres under private sector
known as ‘Local Area Banks’.

14. Retail Banking

Retail Banking is a major form of commercial banking but mainly targeted to consumers rather than
corporate clients. It is the method of banks approach clients. It is the method of banks approach to the
customers for sale of their products. The products are consumer-oriented like offering a car loan, home loan
facility, financial assistance for purchase of consumer durables, etc. Retail banking therefore has large number
of transactions with small values. It may therefore be cost ineffective in a highly competitive environment.
Most of the Rural and semi-urban branches of banks, in fact, do retail banking. In the present day situation
when lending to corporate clients lead to credit risk and market risk, retail banking may eliminate market risk.
15. Wholesale Banking
Wholesale or corporate banking refers to dealing with limited large-sized customers. Instead of
maintaining thousands of small accounts and incurring huge transaction costs, under wholesale banking, the
banks deal with large customers and keep only large accounts. These are mainly corporate customers. This
results few transactions with large amounts thus, resulting into cost reduction and higher fees.
16. Private Banking
Private or personal Banking is banking with people – rich individuals instead of banking with corporate
clients. Private or personal banking attends to the need of individual customers, their preferences and the
products or services needed by them. This may include all round personal services like maintaining accounts,
loans, foreign currency requirements, investment guidance, etc. This type of banking is investment and assets
management oriented towards individuals and not addressing to the needs of industry and trade.

COMMERCIAL BANKING
Q. WHAT IS MEAN BY COMMERCIAL BANK?
MEANING
Commercial banks constitute the major portion of the country’s credit and banking institutions. In
simple term a bank is a dealer in money like a trader in goods. Commercial banks are the earliest by origin and
play a vital role in financial accommodation to trade, business and commerce.

UNIVERSAL BANKING
Q. WHAT IS UNIVERSAL BANKING?
Under this type of banking, a bank will deal with working capital requirements as well as term loans for
development activities. They will be dealing with individual customer as well as big corporate customers. They
will have expanded lines of business activity combining the functions of traditional deposit taking, modern
financial services, selling long term saving products insurance cover, investment banking etc.

MANAGEMENT OF DEPOSITS AND ADVANCES

Q. DESCRIBE THE MANAGEMENT OF DEPOSITS.
 Primary deposit is made by the depositors in the banks with various objectives. Some of them deposit such
funds to meet certain unforeseen contingencies in the future while others receiving interest on such
deposits. For instance the customer can withdraw his money from his current account without giving notice
to the bank. In short primary deposits are those deposits it’s through which cash flows into the firm.
Primary deposits are determined by the customers.
 Derivate deposits are those deposits which are derived from primary deposits. While granting loans and
advances to the customers using primary deposits the banks do not normally pay cash to borrowers. They
allow them open an account in the bank and credit their accounts. There is no physical transfer of cash.
Derivative deposits are basically multiplied primary deposits.

Q. WHAT ARE THE FUNCTIONS OF COMMERCIAL BANKS?

Functions of commercial bank may be divided into primary functions and subsidiary services. Primary
functions are the two functions which a bank performed from the days of its origin viz., acceptance of deposits

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from the public and lending money. Other functions include many other activities which a bank has come to
perform in the course of its evolution.
Functions of Commercial Banks

______________________________________________________________________

Primary functions Subsidiary services other services

_______________________________ ___________________________________

Acceptance of deposits advancing loans Agency services General utility services

1. Fixed deposit 1. Ordinary loans 1. Transfer of funds 1.Safe custody of valuables

2. Current account 2. Over draft 2. Collection of 2. Providing information
3. Savings account 3.Cash credit cheques, bills etc 3. Collection of statistics
4. Recurring deposits 4. Discounting bills 3. Payment of premia, 4. Underwriting of shares
of exchange tax etc 5.Issue of travellers cheques
4. Purchase and sales 6.Accepting bills of exchange
Securities 7.Merchant banking services
5. Acting as trustees
A. Primary functions
1. Acceptance of Deposits
The banking operations depend upon the deposits they are able to mobilize from the public. Deposits
with the bank are preferred by the public too because it offers not only a safety to their cash balances. Deposits
are divided into following kinds.
a) Fixed Deposit: Fixed deposit refers to the amount deposited for a fixed period. It is generally one year or
more. But now days the banks accept fixed deposits even for 90 days. The deposits are repayable only after
the specific period. Hence they are also referred to as time liabilities or term deposits. The longer period of
deposit. The higher is the rate of interest.
b) Current Account: Current account deposits allow money to the repayable on demand. Normally banks do
not grant any interest since the amount may be withdrawn any number of times, even during a single day.
These deposits are known as demand deposits or checking deposits.
c) Saving Bank Account: This account can be opened with a small initial sum of money. There are some
conditions on the operation of this deposit account. Restrictions can be placed on the maximum amount that
can be withdrawn at a time or the number of times the amount can be withdrawn. Interest is given on the
basis of monthly balances and the rate of interest is low.
d) Recurring Deposit: In India there is a recurring deposit scheme where, a fixed amount is deposited at
periodic intervals with compound rate of interest. The accumulate amount is given only at the end of the
fixed period. It has proved attractive to small savers and fixed income groups.
2. Advancing Loans
Commercial banks are known to provide mostly short-term loan. Loans may be given in any four
following forms.
a) Ordinary Loans: Direct loans are given to individuals or firms against some security, like gold, silver or
other movable and immovable assets like land, building, bonds life insurance policies etc., Loan amount is
credited to the account of the borrower. High interest is charged on such loans.
b) Over Draft: Overdraft facility refers to the facility given to the customer to draw over and above the
balance in his account. The interest is paid only for the amount overdrawn by them. Such facility is given to
reliable customers and credit worthy businessman.
c) Cash Credit: The banks open an account in the name of the borrower. He cannot withdraw the entire
amount. He can draw only up to the limit sanctioned from time to time. This type of loan is popular in
Indian business world as interest is charged only on the amount withdrawn.

10
d) Discounting Bills of Exchange: Any person holding a bill of exchange can get it discounted by the
commercial banks i.e., the bank deducts a commission and pays the present price of the bill to the holder.
The bank gets the full payment by presenting it to the other party at the time of maturity and thus makes a
profit.
3. Subsidiary Services
Subsidiary services provided by commercial banks include a variety of functions which can be classified
into agency services and general utility services.
1. Agency Services
Agency services refer to a number of functions performed by the bank on behalf of its customers. The
bank charges a commission for such services.
a. Transfer of Funds: Customers get the facility to transfer funds from one place to another by means
of a ‘Bank draft’ or ‘Cheque’.
b. Collection of Cheques, Bills etc: The banks take responsibility to collect cheques, bills of
exchange, promissory notes etc., on behalf of their customers.
c. Payment of Premia, Tax etc: If customers instruct, the banks undertake payment of insurance
premia or other bills, so also the bank may help the customer in the payment of taxes.
d. Purchase and Sales of Securities: Banks buy and sell shares and other securities on behalf of the
customers, besides providing information on such matters.
e. Acting as Trustees: The bank can be given the pore of attorney to act on behalf of its customer in
the matter of collection of cheques etc. The bank also acts as an agent for its customers to obtain
passports, travel tickets etc.
4. Other Functions
Banks have undertaken more and more general utility services beneficial to the customers.
a) Safe Custody of Valuables: Locker facility is provided by banks for the customer to keep their valuables
like jewels, documents etc. An annual rental charge has to be paid.
b) Providing Information: No persons know better about the credit worthiness of the customer than a bank.
Hence they act as references behalf of their customers.
c) Collection of Statistics: Banks collects a lot of information about trade, commerce, banking etc and it is
often made available to the customers on request on periodical published bulletins. This helps the customers
in business policy.
d) Underwriting of Shares: In India banks have been the under writers of major issue of shares and bond
floated by firms- Infect the name of the underwriter bank lends credibility to the issue. A commission is
charged for underwriting facility.
e) Issue of Travellers Cheques: The bank issue traveller’s cheques to its customers. Customers have to pay
the amount and get travellers cheques of equivalent value. This helps the customers from carrying large
amount of cash during travel.
f) Accepting Bills of Exchange: Banks accept bills of exchange on behalf of their customers.
g) Merchant Banking Services: Merchant banking refers to promotional assistance provided by banks to new
companies they help in the planning and execution of projects by preparing feasibility reports.
CENTRAL BANKING
Q. WHAT IS MEANT BY CENTRAL BANKING?
The central bank is the apex bank in a country. It is called by different names in different country. It is
the Reserve Bank of India in India, The bank of England in England, The Federal Reserve System in America,
and the bank of France in France the risk bank in Sweden etc.
ORIGIN OF CENTRAL BANKS
Q. DISCUSS THE ORIGIN OF CENTRAL BANKING
Today all the countries have a central bank which controls their entire banking system. The first central
bank was the Swedish Risk bank established in 1688. The bank of England was established in 1694 and
nationalizes in 1946 under bank of England act, 1946.
In the 19th century many other European countries established their own central banks. The Federal
Reserve Bank of U.S.A was established in 1914. An international conference on monetary system was held in
11
1920 at Brussels to consider the currency of its chaos after the First World War It recommended that every
country having a currency of the own should have control bank.
In India the Reserve Bank of India Act was passed in 1935 and the bank began functioning from April
1935. The name “Central Bank” is given to the bank is entrusted with the task of controlling the issue of money
and regulating all the other banks of the country”.
DEFINITION OF CENTRAL BANK
Q. DEFINE CENTRAL BANK
 W.A Shaw defines “a central bank as a bank which control credit”.
 According to A.C.L Day, a central bank is “to help control and stabilize the monetary and banking
system”.
NATURE OF CENTRAL BANKS
Q. WHAT ARE THE NATURES OF CENTRAL BANKING?
Nature: The basic nature of central banking can be enumerated as follows.
 Central bank does not aim at profit but aim at national welfare.
 The central bank does not complete with the member banks
 The central bank is generally free from political influence
 The central bank is the apex body of the banking structure of the country
 The central bank should have overall the financial system.
DIFFERENT BETWEEN CENTRAL BANKING AND COMMERCIAL BANKING
Q. EXPLAIN THE DIFFERENT BETWEEN CENTRAL BANKING AND COMMERCIAL BANKING.
Sl.No BASIC CENTRAL BANKING COMMERCIAL BANKING
It is the apex bank in the banking of It is part of the banking system
1 Position of the bank
country
It is government owned bank Commercial bank include public
2 Ownership sector bank. Also foreign owned
bank
It aims at economic growth and price They aim as maximization of profit
3 Basic motive
stability and has no profit motive
Central bank does not deal directly They deal directly with the general
4 Dealing with the public
with the public public
Central bank does not compete with Commercial bank compete among
5 Competition
commercial bank themselves
The relationship between the central Commercial banks are functioning at
bank and commercial bank is unique. the same level. They cannot exercise
6 Relationship
The central bank has power to control over others except on their
exercise control over bank. subsidiaries
Central bank usually act as advisor to Public sector bank particularly
the government and also conducts undertakes government transaction.
Government transaction
government transaction However, other commercial banks
7
also precluded from such function.
The central bank has the sole Commercial banks cannot issue
8 Power of note issue
authority to issue currency note currency notes
Central bank has the responsibility to They do not have any such
Dealing with foreign
9 maintain the stability of foreign responsibility
currency
exchanges rates
Central bank function as the banter to They are functioning as the banker
10 Role of banking
the government to general public
Central bank acts as the bankers and They do not have such roles and
11 Basic function lender of last resort to the commercial status
banks
Central bank responsibility to hold The commercial banks do not have
12 Responsibility
the price line and inflation rate responsibility

12
 FUNCTIONS OF CENTRAL BANKS
Q. EXPLAIN THE FUNCTIONS OF CENTRAL BANKS
Central banks differ from country to country in their structure and organization, in their policies and
techniques. But their functions are very similar. The central banks render the following important functions in
almost all countries.
1. Regulator of Currency: The central bank is legally empowered to issue currency notes. The central bank
is charged with the responsibility of marinating price stability, inflation level i.e. the domestic value of its
money as well as its external value. The central bank has the monopoly power of the note issue to regulate
the supply of legal tender money.
2. Banker to the Government: The central bank act as the banker, financial agent and advisor to the
government. The surplus money of the government is kept with the central bank. It lends money both the
banks. Its helps the government to tide over the time gap between their expenditure and collection of taxes.
The central banks also under take to provide the government with necessary foreign exchange for making
payment aboard.
3. Banker to the Banks: The central banks act as the banker’s bank. As such it performs the following
functions. Custodian of cash reserves of commercial banks. The central bank keeps the deposits of the
central and state government and makes payments on behalf of governments. But it does not pay interest on
government deposits
4. Custody and management of Foreign Exchange Reserves: The central bank keeps and manages the
foreign exchange of the country. It is an official reservoir of gold and foreign currencies. It sells gold at
fixed prices to the monetary authorities of other countries. It also buyer and sells foreign currencies at
international price. Further it fixes the exchange rates of the domestic currency in terms of foreign
currencies.
5. Lender of the Last Resort: De Kock regards this function as a sine qua non of central banking. It acts as
lender of the last resort through discount house on the basis of treasury bills, government. Securities and
bonds at “the front door”. Thus the central bank as lender of the last resort is a big source of cash and also
influences prices and market rates.
6. Clearing house for Transfer and Settlement: The central bank acts as a clearing house for transfer and
settlement of natural claims of commercial banks. Since the central bank holds reserves of commercial
banks, it transfers funds from one bank to other banks to facilitate clearing of cheques. To transfer and
settle claims of one bank upon others, the central bank operates a separate department in big cities and
trade centers. This department is known as the “clearing house” and it renders the service free to
commercial banks.
7. Controller of Credit: The central bank is empowered to control the credit creation of the commercial
bank. The commonly used method of credit control are bank rate policy, open market operation, variation
of cash reserve credit rationing, variation of margin requirement and regulations of consumer’s credit.

Q. DESCRIBE THE PRINCIPLES OF THE WORKING OF THE CENTRAL BANKING

The working of the central bank is broadly founded on the following principles.
1. National Welfare: The central bank is always inspired and guided by the sprit of national welfare. This is
in contract to commercial bank which are generally guided almost exclusively by the profit motive.
According to de kock a central bank should work exclusively in the interest of public welfare. A central
bank shall never consider profit as the primary motive. According le its functioning should serve and
promote the national interest.
2. Monetary Stability: The central bank is expected to help in the maintained of monetary and financial
stability in the country so as to promote the economic stability. The central bank ensures monetary and
financial stability with the help of several measure of credit control.
3. No positional Interference: It is important that the central bank of a country is free from all political
influences in all, after of its action. In other word, it should not allow itself to be dominated by the ideology
of a particular political party.
4. Cooperative with Central Government: The central bank should strive to function in perfect harmony
with the government of the country. This helps in proper formulation and efficient implementation of
policies relating to monetary management of the economy. Further, the cooperation between the

13
 government and the central bank would also helps to solve the economic problems of the country is a
satisfactory manner.
5. Cooperation with Member Banks: As a parent, the central bank is not supposed to complete with the
member bank especially on matter connected with receiving of deposit from the public or extending loans
to the need needy borrowers. This would help usher in build up and contribute for the strong financial
system of a country.
RESERVE BANK OF INDIA - ORIGIN
Q.DESCRIBE THE ORIGIN OF RESERVE BANK OF INDIA.
The attempts to establish a central bank in India took a definite shape, when in 1927 a bill was
introduced in the Indian legislative assembly, to establish a gold standard currency for British India and
constitute a Reserve Bank of India. Thereafter various attempts were made and thus, the Reserve Bank of India
Act was passed in 1934 and the bank began functioning from 1st April 1935. Later it was decided to nationalize
the bank and the Reserve Bank of India (transfer to public ownership) Act was passed in September 1948 under
which the ownership of the bank was passed into the hands of the government of India with effect from 1st
January 1949.
At the time of establishment, Reserve Bank was a share holders bank with a capital of 5 crore of rupees
divided into shares of Rs. 100 each fully paid. When it was decided to nationalize the Reserve Bank of India,
the shares held by private individuals were taken over by the government by paying compensation at the rate of
Rs. 118 for every share of Rs. 199 held by the shareholders. The government paid a total compensation of Rs
5.54 core for the entire shareholdings. The paid up capital of RBI continues to remain at Rs. 5 crore. It has
made a profit of Rs. 4483 crore during 1998-99, and of which Rs. 4479 crore has been transferred to central
bank
DEPARTMENTS OF RBI
Q.EXPLAIN THE DEPARTMENTS OF RBI.
The various departments of RBI are given below:
 Department of information Technology
 Department of Economic Analysis and Policy
 Department of Statistical Analysis and Computer Services
 Monetary Policy Department
 Premises Department
 Secretary’s Department
 Press Relations Division
 Exchange Control Department
 Rural Planning and Credit Department
 Financial Institutions Division
 Department of Banking Supervision
 Department of Banking Operations and Development
 Department of Financial Companies
 Department of Non Banking Supervision
 Department of Administration and Personnel Management
 Human Resource Development Department
 Deposit Insurance and Credit Guarantee Corporation
 Inspection Department
 Urban Banks Department
 Department of Currency Management
 Department of External Investments and Operations
 Department of Expenditure and Budgetary Control
 Department of Government and Bank Accounts the local
 Internal Debt Management Cell
 Industrial and Export Credit Department
 Legal Department

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 OBJECTIVES
Q. STATE THE NEED/OBJECTIVES OF CENTRAL BANKING.
1. Control of Credit: The basic need for a central banking institution is to regulate and control the volume
of credit created by commercial banking. Central bank helps create stability and sustainability in the
monetary economy of a country.
2. Issue of Paper Currency: A central bank is also required to issue paper currency so as to keep the
economy in monetized stats. Future, the note issue by the central bank satisfies the requirement of
elasticity. The function of note issues by central bank is based strictly on economic considerations.
3. Supporting Commercial Banks: Need for a central bank is very much felt in order to support and help
the commercial banks to tide over economic crisis by providing them with financial assistance. In the
absence of the central bank. The commercial banks are likely to fail at eh slightest crisis in the economy.
4. Implementation of Monetary Policy: As the central bank exercises full control over the baking and
financial system of a country. It is in a position to implementation successfully the monetary and
financial policies of the government. This is very essential for the accomplishment of the goals of
central economic planning of a country.
ORGANIZATION
Q. EXPLAIN THE ORGANISATION AND ADMINISTRATION STRUCTURE OF RBI IN INDIA.
The Reserve Bank of India is managed by well structured administrative machinery. The organization
structure of the RBI can be easily understand with the help of the following chart
ORGANIZATION STRUCTURE

Central Board of Directors

Governor

Deputy Governors

Executive Directors

Principal Chief General Manager

Chief General Managers

General Managers

Deputy General Managers

Asst. General Managers

Managers

Asst. Managers

Support Staff

The management of the RBI is entrusted to the central and local boards. The central in 1972 Board consists of
the following members:

15
 BOARD MEMBER Max No
Governor (appointed by the central government) 1
Deputy governor (appointed by the central government 4
Director (nominated by the central government) 4
Director from various fields (nominated by the central 10
government
Government official from the ministry of finance (nominated by 2
the central government)
Total 21

We can observe from the table that all members of Central Board are appointed by the Central
Government. The Governor of the Deputy Governors is appointed as executives in the bank and by virtue of
their position in the bank; they become members of the Central Board. The other directors of Central Board are
appointed for a four year term (excepting the official of Government of India) by Government under RBI ACT,
1934. The Governor is assisted in the performance of his duties by the Deputy Governor and the Executive
Directors. The Governor and Deputy Governor hold office as per their terms of appointment and eligible for
appointment.
The executive directors are whole time officials of the bank with salaries. They are however not
members of Central Board. Appointment of members of Central Board are so made that two directors retire
every year. A retiring director is eligible for reappointment.
The local Board consists of 5 members appointed by the Central Government. The appointment will be
made so as to secure adequate representation of regional and economic interest of the areas concerned. The
local Board will have a Chairman elected from amongst the members of the local Board.
FUNCTIONS OF RBI
Q. DISCUSS/EXPLAIN THE VARIOUS FUNCTIONS OF RBI.
The Reserve bank of India (RBI) performs all the traditional functions of central bank. As the same
time, it also under takes active promotional and developmental function. Thus we divide the functions of the
RBI in three parts
A. Traditional function
B. Promotional function
C. Supervisory function
(A) Traditional Function
The RBI performs the following traditional functions.
1. Issue of Currency
The RBI acts as the currency authority. As such, it has the monopoly of issuing currency of all
denominations except one rupee notes and coins and small coin which are issued by the Ministry of Finance of
the Government of India. At present, the RBI is issuing notes of the denominations of Rs.10, 20, 50 and 500.
The RBI issues currency on the basis of minimum of Rs.200 crores of gold and foreign exchange reserve of
which at teats Rs.115 crores worth of gold much is there.
2. Banker to Government
The RBI acts as banker to the central government and the state government. As such, it renders the
following services to them.
 It buys and sells Government securities in the marker
 It also sells Treasury bill through trended on behalf of the Government.
 It receives and makes payments on behalf of the central and state Government.
 It advises the Governments on all banking and financial matters, such as financing of five year plans and
resource mobilization balance of payment etc.
3. Banker’s Bank
The RBI acts as banker to the scheduled commercial banks in India. As such it keeps a part of the cash
reserves of these banks and provides them with remittance facilities. Every bank is required to keep between

16
3.1% -15% of the total reserve ratio which is interest free. The RBI supervises, regulates and controls the
working of banks in India.

4. Agent and Advisor of the Government

The RBI acts, as the financial and adviser to the government. It renders the following functions
 As a agent to the Government it accepts loans and manages public debts on behalf of the Government
 It issues Government bonds, treasury bills in all important economic and financial matters.
5. Acts as National Clearing House
In India RBI act as the clearing house for settlement of banking transactions. This function of clearing
house enables the over banks to settle their interbank claims easily. Further it facilitates the settlement
economically. Where the RBI has of office of its own, the function of clearing house is carried out in the
premises of the state bank of India. The entire clearing house operations carried on by RBI are computerized.
6. Acts as the Controller of Credit
The RBI controls the credit creation by commercial bank. For this the RBI uses both quantitative and
qualitative method. The important method used by RBI are (i) Bank rate policy (ii) open market operation (iii)
variation of cash reserve ratio (iv) fixing margin requirements (v) moral suasion (vi) issue of directive (vii)
direct action.
7. Lender of Last Resort
The RBI act as a lender of last resort or emergency fund provider to the other member banks. As such, if
the commercial banks are not able to get financial assistance from any other sources, than as a last resort. They
can approach the RBI for the necessary financial assistance. In such situations, the RBI providers credit
facilities to the commercial banks on eligible securities available at bank rate.
8. Custodian of Foreign Exchange Reserve
The RBI acts as the custodian of foreign exchange reserve. Adequate reserves may help maintain
foreign exchange rates. In order to minimize the undue fluctuations in the rates it may buy and sell foreign
currencies depending upon the situations. Its purchase and sale of foreign currencies from the market is done
like commercial bank. However, the objective of the RBI will not be profit banking. It may buy the foreign
currency to build up adequate reserve or to arrest unwarranted rise in the value of rupee which may be due to
sudden inflow of foreign currencies into India.
9. Exchange Control
When a country face balance of payment of problems usually when its foreign exchange payments
exceed foreign exchange receipts it controls the whole gamut of fore transactions and regulates payment system
for its advantage. Ever size the beginning of Second World War in 1939 India faced shortage of forex for its
development and growth. A Foreign Exchange Regulation Act (FERA) was originally put in operation from
March 1947 and later a new act known as foreign exchange regulation 1973 was introduced from 1st January
1947.
10. Maintaining the Value of Currency
The RBI by its operation of credit control and price stability maintains the internal value of domestic
currency and ensure its stability.
11. Publishes the Economic Statistic and Other Information
The publication like the report on currency and finance, the report on the trend and progress of banking
development commercial, economic and financial conditions of the currency.
(B) Promotional Function: The RBI has been taking a direct and active role, first in creating or helping to
create the machinery needed for financing development activities all over the country and secondly, ensuring
that the finance available flows in socially desired directions. In order to achieve these two objectives the RBI
has been instrumental in the development and regulation of the banking system and the bill market.
1. Agricultural Finance
The RBI has been extending advice and financial assistance to the cooperative credit institutions for the
development of agriculture and allied rural activities since its inception in 1935. For this purpose it set up on
Agricultural Credit Department and separate funds for providing medium term and long terms finance. Since
1982 the functions of this department and those of the funds have been passed on to the National Bank for
Agriculture and rural development (NABARD).

17
2. Industrial Finance
The RBI set up an industrial credit department in 1957 to advise and help to industries and in setting up
financial institutions like state financial institutions, TFCI, IDBI, ICICI etc. it also established the National
Industrial Credit (long term operations) fund in 1964 to provide financial assistance to large scale industries.
3. Export Credit
The RBI provides concessional credit refinance facilities and guarantee to commercial banks for
exporters. It has also setup the export – import bank of India to finance export trade.
4. Credit to Weaker Section
Under its differential rate of interest scheme, the RBI provides concessional finance to priority sector
and weaker section of the society at 4 percent interest rate.
5. Bill Market Scheme
The RBI has been instrumental in developing a well organized bill marker scheme in order to provide
rediscounting facilities to commercial bank from the bank and other financial institutions.
C. Supervisory Function: The Reserve Bank of India performs the following supervisory functions by these
functions it control and administers the entire financial and banking system of the country.
1. Granting License to Banks
The RBI grants license to the banks, which like to commence their business in India. Licenses are also
required to open new branches or closure of branches with this power RBI can ensure avoidance of unnecessary
competitions among banks in particular location evenly growth of banks in different region adequate banking
facility to various region etc.
2. Function of Inspection and Enquiry
RBI inspection and make enquiry in respect of various matters covered under banking regulations act
and RBI Act. The inspection of commercial bank and financial institution are conducted in term of the
provisions contained in banking regulation Act. These refer to their banking operations like loans and advances
deposits, investment functions and other banking services.
3. Implementing the deposit insurance scheme
RBI implements the deposit insurance scheme for the benefit of bank depositors. This supervisory
function has improved the standard of banking in India due to this confidence building exercise. Under this
system, deposits up to Rs.1.00 laksh with the bank branch due guaranteed for payment.
4. Periodical Review of The Working of The Commercial Bank
The RBI periodically reviews the work done by commercial banks. It takes suitable steps to enhance the
efficiency of the banks and make various policy changes and implement programmes for the well being of the
nation and improving the banking system as a whole.
5. Control The Non- Banking Financial Corporation (NBFC)
The RBI issues necessary directions to the non – banking financial corporations and conducts
inspections through which it exercise control over such institutions. Deposit taking NBFCs require permission
from RBI for their operations.

RBI ROLE IN ECONOMIC DEVELOPMENT

Q. EXPLAIN THE ROLE OF RBI IN ECONOMIC DEVELOPMENT OF A COUNTRY.
RBI role in economic development
1. Promoting Commercial Banks: A performed banking system in pre-conditions for economic development
RBI has taken many steps to strength the banking system. The banking regulation act 1949 has given
reserve bank the power of supervision and control of commercial bank existing in the nation. RBI uses its
power.
 To strengthen the commercial banks system structure through laudation and amalgamation of
bank
 To widen the banking facilities in semi urban and in rural areas.
 To promote the allocation of credit in favour of priority sectors such as agriculture
 To extended training facilities to the supervising staff of the bank through its bankers training
college.
18
2. Promoting Rural Credits: Promoting of rural credit to defective rural credit system and deficient rural
credit facilities are one of the major cause for backwardness of Indian agriculture. To promote rural credit RBI
taken the following steps.
 It has established agriculture credit department to widen and coordinate credit facilities to the
rural area.
 Regional rural banks were nationalized to increase agriculture credits
 Few commercial banks were nationalized to extent credit facilities.
3. Promoting Co-operative Credit
Based on the rural credit survey committee, the RBI taken measures to strengthen the structure of
cooperative credit institution throughout the country. The reserve bank provides financial assistance to the
agriculturalist through co-operative institution.
4. Promoting Industrial Finance
RBI is playing a vital role in the field of industrial finance in 1857 it has set up a separate industrial
finance department which has rendered useful service in extending financial and organization assistance.
The reserve bank took imitative in the establishment of ICICI, IFCI, SFC and UTI.
5. Promoting Export Credit
India has been as expanding export, growth of export need literal and adequate export credit. Reserve
bank, has undertaken a number of measures for increasing credit to the export. The EXIM bank provides
financial assistance to exporters and importers.
6. Regulating Credit: RBI regulated by credit by using various credit control weapons.
7. Exchange Control: The RBI is able to maintain the stability value of the ‘Rupee’ ever under heavy
pressures. It has managed successfully the “Exchange control”.

MONETARY POLICY -MEANING

Q. WHAT IS MONETARY POLICY?
Monetary policy refers to the credit control measures adopted by the central banks of a country.

Q. DEFINE MONETARY POLICY?

John son defines monetary policies as “policy employing central banks control of the supply of money
as an instrument for achieving the objective of general economic policy”.

Q. DISCUSS THE OBJECTIVE OF RBI’S MONETARY POLICY.

Objectives
The main objective of monetary policy in India is ‘growth with stability’. Monetary policy regulates
availability, cost and use of money and credit. It also brings institutional change in the financial sector of the
economy. Following are the main objective of monetary policy in India.
1. Growth with Stability
Traditionally RBI’s monetary policy was focused on controlling inflation through contraction of money
supply and credit. This resulted in poor growth performance. Thus RBI has now adopted the policy of “Growth
with Stability”. This means sufficient credit will be available for growing needs of different sector of economy
and at the same time, inflation will be controlled with in a certain limit.
2. Regulation, Supervision and Development of Financial Stability
Financial stability means the ability of the economy to absorb shocks and maintain confidence in
financial system. Threats’ to financial stability can come from internal and external shocks. Such shocks can
destabilize the country’s financial system. Thus, greater importance is being given to RBI’s role in maintaining
confidence in financial system through proper regulation and controls, without sacrificing the objective of
growth. Therefore RBI is focusing on regulation, supervision and development of financial system.
3. Promoting Priority Sector
Priority sector includes agriculture, exports and small scale enterprises and weaker section of
population. RBI with the help of bank provides timely and adequately credit at affordable cost of weaker
section and low income groups. RBI along with NABARD is focusing on micro finance through the promotion
of self help groups and other institutions.

19
4. Generation of Employment
Monetary policy helps in employment generation by influencing the rate of investment and allocation
of investment among various economic activities of different labour intensities.
5. Encouraging savings and investments
RBI by offering attractive interest rates encourage saving in the economy. A high rate of saving
promotes investment. Thus the monetary management by influencing rates of interest can influence saving
mobilization in the country.
6. Redistribution of Income and Wealth
By control of inflation and deployment of credit to weaker sector of society the monetary policy may
redistribute income and wealth favoring to weaker sections.
7. Regulation of NBFIs
Non Banking Financial Institutions (NBFIs) like UTI, IDBI, IFCI plays an important role in
deployment of credit and mobilization of savings. RBI does not have any direct control on the functioning of
such institution however it can indirectly affects the policies and function of NBFIs through its monetary
policy.
CREDIT CONTROL MEASURES AND THEIR EFFECTIVENESS
Q. DESCRIBE THE QUANTITATIVE AND SELECTIVE METHOD OF CREDIT CONTROL USED
BY RBI (OR) EXPLAIN THE MONETARY POLICY OF RBI MEASURES TAKEN BY RBI TO
CONTROL CREDIT AND THEIR EFFECTIVENESS
The monetary policy of RBI is not merely one of credit restriction, but it has also the duty to see that
legitimate credit requirements are met and at the same time credit is not used for unproductive and speculative
purposes RBI has various weapons of monetary control and by using them, it helps to achieve it monetary
policy.
I. General / Quantitative Credit Control Methods
In India, the legal frame work of RBI’s control over the credit structure has been provided. Under RBI
Act 1934 and the banking regulation Act 1949, quantitative credit controls are used to maintain proper quantity
of credit of money supple in markets. Some of the important general credit control methods are
1. Bank Rate / Discount Rate Policy
Banks rate is the rate at which the central bank lends money to the commercial banks for their liquidity
requirements. Bank rate is also called discount rate. In other words bank rate is the rate at which the central
bank rediscounts eligible papers (like approved security, bill of exchange, commercial paper ect) held by
commercial banks. Bank rate is important because it is the pace setter to other market rates of interests.
2. Open Market Operations
It refers to buying and selling of government securities in open market in order to expand or contract
the amount of money in the banking system. This technique is superior to bank rate policy. During last two
decades the RBI has been undertaking switch operations. There involve the purchase of one loan against the
scale of another or vice versa. This policy aims at preventing unrestricted increase in liquidity.
3. Cash Reserve Ratio (CRR)
The CRR is an effective instrument of credit control. Under the RBI Act of 1934 every commercial
bank has to keep certain minimum cash reserve with RBI. The RBI is empowered to vary the CRR between 3%
and 15%. A high CRR reduced the cash for lending and a low CRR increase the cash for lending.
4. Statutory Liquidity Ratio (SLR):
Under SLR the government has imposed an obligation on the banks to; maintain a certain ratio to its
total deposits with RBI in the form of liquid assets like cash, gold and other securities. The RBI has power to
fix SLR in the range of 25% and 40% between 1999 to 1992 SLR was as high 38.8%.
5. Repo and Reverse Repo Rates
Repo means sale and repurchase agreement. Repo is a swap deal involving the immediate sale of
securities and simultaneous purchase of those securities at a future date, at a predetermined price. Repo rate
help commercial bank to acquire funds from RBI by selling securities and also agreeing to repurchase at a later
date. Reverse repo rate is the rate that banks get from RBI for banking their short term excess funds with RBI.
Repo and reverse repo operations are used by RBI in its liquidity adjustment facility.

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2. Selective/ Qualitative credit control methods
Under selective credit control credit is provided to selected borrowers for selected purpose, depending
upon the use to which the controls try to regulate the quality of credit the direction towards the credit follows.
The selective controls are.
1. Ceiling on credit
The ceiling on level of credit restricts the lending capacity of a bank to grant advance against certain
controlled securities
2. Margin requirements
A loan is sanctioned against collateral security. Margin means that proportion of the value of security
against which loan is not given margin against a particular security is reduced or increased in order to
encourage discouraging the flow of credit to a particular sector.
3. Discriminatory interest rate (DIR)
Through DIR, RBI makes credit flow to certain priority or weaker sectors by charging concessional
rates of interest. RBI supplementary instructions regarding granting of additional credit against sensitive
commodities issue of guarantees, making advances etc.
4. Directives
The RBI issues directives to banks regarding advances. Directives are regarding the purpose for which
loans may or may not be given.
5. Direct action
It is too severe and is therefore rarely followed. It may involve refusal by RBI to rediscount bills or
cancellation of license, if the bank has failed to comply with the directive of RBI.
6. Moral suasion
Under moral suasion, RBI issues periodical letters to bank to exercise control over credit in general or
advances against particular commodities. Periodical banks in this respect.
7. Publicity
The central bank inform the people about the condition existing in the economy through the press
media by which a condition is created to make the people realize the necessary action.

RESERVE BANK AND AGRICULTURAL CREDIT

Q: DISCUSS ABOUT RESERVE BANK AND AGRICULTURAL CREDIT.
Agricultural development is considered as a pre requisite for the economic development of a
country. Reserve bank of India also realizes the basic contribution of the agriculture sector for the overall
economic development. Largest industry in the country agriculture is the sources of livelihood for over % of
population in the country. On recognizing the fact that agriculture is the foundation on which the entire super
structure of the growth of industrial and other sectors or the economy has to stand the RBI develops the
agriculture sector in the following ways.
1. Agricultural Credit Department
According to section 54 of the RBI Act, it is require setting up a separate agricultural credit
department. With the formation of NABARD in 1982, all the activities of this department have been
transformed to NABARD. However, the rural planning and credit department in the Reserve Bank deal with the
following agriculture related matters.
 To study and identity all issues relating to agriculture credit for policy formulations
 To coordinate with NABARD the activities of the banking sector
 To prepare suitable plans to improve agricultural development in the country
2. Funds for Agriculture Development
On the recommendations of the Rural Credit survey committee, the RBI Act was amended in 1955.
As per the provision of the new act the RBI has established two kinds of funds for the agriculture development
they are
1. National Agricultural Credit (long term operation) funds, and
2. National Agricultural Credit (stabilization) fund.

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3. Financial Assistant to Co-operative Sector
The RBI does not provide agricultural finance directly to the farmers. It provides such financial
facilities through NABARD which turn provides financial assistance to the state cooperative banks so as to
enable them providing credit to rural farmers.
4. Establishment of Agriculture Credit Board
In order to coordinate the activities of cooperative credit institutions and polices and the function
of RBI, the RBI established a permanent consultative committee in 1951. On the recommendations of the rural
credit survey committee it was reorganized in 1956.
5. Financing Cottage/Village/Small Scale Industries
NABARD provides refinance for various purpose the minor irrigation, land development, farm
mechanization, plantation/horticulture poultry/ sheep/piggery/ fisheries, dairy development, storage and
marketing yield, forestry, gobar gas plant, non – farm sector etc.
6. Promotion of Warehouse Facilities
The RBI subscribed to the share capital of central and state warehousing corporations. This enables
the corporation to establish warehousing at various places of the country. The farmers earn avail loan facilities
from the banks against warehouse receipts.
7. Other Facilities to Agriculture
Besides the above specific facilities, the RBI assist the government of India and NABARD in the
formulation and implementation of various schemes meant for agriculture and rural development. Such scheme
includes the following.
 Intensive Agriculture District Programme
 Intensive Agricultural Area Programme
 High Yielding Varieties Programme
 Intergraded Rural Development Programme
 Community Development Programme
 Drought Prone Are Progamme
 Intergraded Dry Land Agricultural Development Programme
RESERVE BANK AND INDUSTRIAL CREDIT
Q. DISCUSS ABOUT RESERVE BANK AND INDUSTRIAL FINANCE.
1. Establishment of Institutional Frame Works for Industrial Finance
The RBI has played an active role in the field of industrial finance its most notable contribution has
been in establishing aboard institutional frame work to cater to the medium and long-term needs of finance to
industrial sector. Some of the institutions in this category for the establishment of which the RBI was
responsible are as follows.
 Industrial Finance Corporation (IFC)
 Industrial Credit and Investment Corporation of India (ICICI)
 Industrial development bank of India (IDBI)
 State finance corporation (SFC)
 National Industrial development corporation (NIDC)
 State industrial development and investment corporation (SIDIC)
 National small industrial corporation (NSIC)
 Unit Trust of India (UTI)
 Industrial reconstruction corporation of India (IRCI)
 industrial refinance corporation of India
 Credit Guarantee Scheme Through Export Credit Guarantee
2. Role of RBI Rehabilitation of Sick Industrials Unit
The RBI co-ordinate the effects of banks financial institutions and government agencies in the
rehabilitation of such unit.
3. High level committee on credit to SSI
The one man committee on SSI headed by S.L.Kapur, appointed by RBI to review the credit
delivery system to SSI and suggests measures for it improvement. The committee has made in all 126
recommendations covering wide range of areas pertaining to financing of SSI sector. The RBI examined these
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recommendations and advised banks to take necessary steps for immediate implementation. The more important
among these are.
 Delegation of more powers to branch managers to grant adhoc limits
 Simplification of application forms
 Freedom to banks to decide their own norm assessment of credit requirements
 Opening of more specialized SSI branches
 Enhancement in the limit for composite loans to Rs.5 Lakh
 Strengthening the recovery mechanism.
REPO RATE AND REVERSE REPO RATE
Q. DESCRIBE THE REPO AND REVERSE REPO RATE.
In determining interest rate trends, the repo and reserve repo rates are becoming important
Repo Rates (Presently 6.25%)
Whenever the bank has any shortage of funds they can borrow it from RBI rate is the rate at which
banks borrow rupees from RBI. A reduction in the Repo will help banks to get money at a cheaper rate when
the Repo rate increases borrowing from RBI become more expensive.
Reverse Repo Rates (Presently 5.75%)
Reverse Repo rate is the rate at which RBI borrows money from banks. Banks are always are
happy to lend money to RBI since their money are in safe hands with a good interest. Increases in reverse Repo
rate can cause the cause the banks to transfer more funds to RBI to this attractive interest rate. It can cause the
money to be draw out of the banking system.
ONLINE BANKING / E-BANKING
MEANING
Q. WHAT IS MEANT BY E-BANKING?
E-Banking refers to electronic banking. That is E-banking is one in which banking operations are carried
through electronic devices. E-Banking is the process by which a customer can perform banking transactions
electronically without physically visiting the branch or financial institutions. E-Banking means the provision of
information about a bank and its services via a home page on the www.
Q. DEFINE E-BANKING.
“E-banking implies a service that allows customers to use some form of computer to access account
specific information and possibly conduct transactions from a remote location such as at home or at the
workplace”.
Q. EXPLAIN THE DIFFERENT BETWEEN TRADITIONAL BANKING AND E-BANKING.
S.No Traditional banking E-banking
A customer has to visit the branch A customer can perform the basic banking
1 of his bank in person to perform the operations by sitting at office or at home
basic banking operation. through personal computer.
E-banking is a science as it is knowledge
2 Traditional banking is an art.
based.
For doing the banking transactions a bank
For doing the banking transactions a
3 building is not essential. Because it is not
bank building is essential.
confined to any branch.
Banking operations can be
Banking operations can be conducted round the
4 conducted only during specific time
clock.
only.
5 It is expensive. It is inexpensive.
Technical knowledge is not
6 Technical knowledge is essential.
essential.

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 BENEFITS
Q. WHAT ARE THE BENEFITS/ADVANTAGES OF E-BANKING?
ADVANTAGES TO BANKS
E-banking has offered a number of benefits to banks.
1. It ensures better customer relationship.
2. It ensures large number of satisfied customers.
3. It provides information about MIS report and return.
4. It provides an opportunity for banks to deliver a dynamic change of virtual financial services at less cost
through the network.
5. There is more scope for offering differential services under e-banking.
6. It contributes to profitable banking for banks through reduced cost of operations, increased number of
satisfied customers.
7. E-banking enables banks to pay certain fees or to transfer between accounts.
8. It attracts new customers because of the availability of innovative banking facilities.
9. It helps to expand the bank’s operations base.

ADVANTAGES TO CUSTOMERS
E-banking has offered a number of benefits to customers.
1. Customers are able to get better knowledge of state of accounts,
2. Customers can enjoy wide range of banking products and services at reduced cost.
3. E-banking services are available to customers round the clock.
4. The increased speed of response to customer requirements.
5. In e-banking, increased comfort and time saving facilities are made available to customers twenty four
hours a day.
6. It helps the customers to ensure better management of cash by banking available management instruments
at banking sits.
7. It facilities pre-authorized direct withdrawals for making payment of recurring bills, insurance premium etc.
8. It facilitates electronic fund transfer.
9. It lowers the risk and generates higher security to customers.
10. It is a boon to the customers.
Q. WHAT ARE THE DEMERITS OF E-BANKING?
Cost of training and Maintenance
E-banking includes 24 hours support environment, quality service to end users and other partner,
which needs a qualified skilful group of people to meet external and internal commitments.
a) Lack of skilled personnel
In a fast changing technological scenario the obsolescence of technology is rapid and so there is
always shortage of skilled personnel.
b) Security threats
A security threat is defined as a circumstantial decision or an event with potential to cause
economic severness to data or network resources in the form of destruction, disclosure, modification of
data services, fraud, waste and abuse, providing security might need initial investments in the form of
application of encryption techniques, implementation of fire walls etc. Despite of implementing several
security measures, the possibility of security breach is not ruled out.'
c) Legal issues
Though initial legal frame work has been devised for e-banking activities it is uncertain as to what
possible legal issues might creep in future as banking on internet advances. In order to prevent cyber
crimes, the country's banking legist axiom needs to introduce suitable provision with a through
consultation and discussion among legal as well as technical experts.

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 d) Restriction on the part of customers and technical problems
The user of E-banking requires a computers and time to log on to the site. Phone connections are
not always perfect and on a home PC the modem connection often snaps off, requiring another log on.
Navigating around websites on home computers is often slow and frustrating.
e) Restricted business
All sort of transactions are not carried out electronically. Many deposits and few withdrawals need
the use of postal services. Some banks have automated their front end process for the customers but still
largely depend on manual processes at the back-end.

Q. EXPLAIN THE CONSTRAINTS IN E-BANKING SECURITY.

Accuracy Control: To make sure the reliability of the data flowing across the network.
 Privacy Control: The safeguard the data from inadvertent or unauthorized access.
 Firewall Control: To check the unauthorized users accession of private network which are linked with
internet.
 Efficient Control: To make sure that the system uses very less resources to get the desired goal.
 Audit Trail Control: To assure in maintaining chronological role of events that are occurred in the
system.
 Existence Control: To ensure that the ongoing availability of all the system resources with the same
throughout.
 Autliencity Control: To check that the data is travelled and processed only once and there is no
repetition of sending data.
 Encryption Control: To enable only those who possess secret key to decrypt the cyber text.
 Completeness Control: To ensure that data are not missing.
 Redundancy Control: To check that the data is travelled and processed only once and there is no
repetition of sending data.
Q. EXPLAIN THE FUNCTIONS/FACTS OF E-BANKING.
E-baking involves the conduct of banking electronically. It operated through internet, extranet and
intranet. Some parameters involved in E-banking are customer acceptance and satisfaction, service rendered
value added for the organization and consumer privacy issues, profitability, operational risk and competition
from non-banking institutions. E-banking possesses the following aspects.
 Customer to Bank E-Banking
Since E-banking is internet based, the banking products and services like deposits, remittances, credit
cards etc, along with all important banking information are available with easy access to customers on the
internet. Customers unlike these services without the restrictions of office hours and avoid queues and waiting
several innovation of E-banking such as smart cards, electronic data interchanges etc.
 Bank to Bank E-Banking
These types of E-banking are carried out with the help of extranet which is confined to banks only. It is
secured and unauthorized access is averted.
 Electronic Central Banking
The banks within the horizon of the central bank are inter connected on extranet for facilitating the
creating of Cheques, management of cash reserves, open market operations, discounting of bills etc. For this the
central bank has to be connected with the government treasury on extranet for carrying out its functions as an
agent of the government. The central banks of all countries are inter-connected with the World Bank, I.M.F and
other international financial institutions through extranet.
 Internet Deployment
To do transactions that are internal to bank, between the bank and its branches and subsidies, intranet
deployment in banking is required, extranet permits a bank to have control over the users of intranet and
information to be transmitted. The integration of the internal and external communications of banking related
information through banking internet and intranet for the development of the financial sector required extensive
working on the part of the bankers.

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Q. WRITE A NOTE ON E-BANKING TRANSACTIONS.
Following banking transactions are handled through E-banking:
 Account enquiry
 Fund transfer
 Payment for Electricity, Water, Telephone bills, Insurance premium, etc.
 Online payment
 Request for insurance of cheque book, draft etc.
 Access to information about latest deposit schemes and advances
 Access to rates of interest and other services changes
 Railway pass
 Credit card customers
 Investing through internet banking
 Shopping at your fingertips
 Recharging your prepaid phone.
Q. EXPLAIN THE MODELS FOR E-BANKING.
To implement the e-banking effectively, following models have been suggested.
1. Complete centralized solution
2. Cluster approach
3. High tech bank with in bank
1. COMPLETE CENTRALIZED SOLUTION
Under this model, e-banking activities can be implemented uniformly and effectively. It is an ideal
branch network model. The bank has to provide web server and the requisite software is connected to the main
server. Once the required hardware and software are set in, the customers can access the web server for the web
server for their basic banking operations.
Features of CCS: Following are the features of CCS:
 The entire system software, data for the entire bank, etc are stored in a centralized server.
 Branches are providers on line nodes. These are used to receive requests from customers and to provide
them services across the counter.
 Remote branches are connected through effective satellite links.
 The skilled man power is required only at the centralized location.
2. CLUSTER APPROACH
Under this model, computerized branches of banks of each city are connected with Regional Processor
located at each such city which is then connected through reliable media to a centralized high end server. In a
cluster approach, computerization of branches is essential. Various branches may be connected through
Regional Cluster. Following are the features of cluster approach:
 The entire branch work must be computerized.
 All these branches should be interconnected with Regional Servers.
3. HIGH TECH BANK WITHIN BANK
Under this method, all the branches of a bank need not be computerized. Under this method, each bank
is divided into two groups.
1. High tech bank
2. Traditional bank
High Tech Bank provides e-banking facilities. Traditional Bank offers traditional services through other
branches. This approach helps the bank to act as a balanced role to the mass customers. Following are the
features of High Tech Bank within bank:
 Only certain branches are allowed to offer E-banking services to its customers depending upon the
customer’s needs, business potential infrastructure facilities available, etc.
 The accounts of all the customers in the computerized branches should be automated under a centralized
system offering various electronic channels including internet banking.
 The high tech bank customers may be encouraged to use e-banking services.
 It is left to the discretion of customers to avail internet banking facilities.
 The banks could get a gestation period to cover more branches under the umbrella of High Tech Bank in a
phased manner.
Unit I Completed
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