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Introduction to Banking

• Banking is defined under section 5(b) of the Banking Regulation Act,1949 as “the acceptance of deposits of money from the public for the purpose of lending or investment.” • Bank must perform two essential functions
– Acceptance of deposits – Lending or Investment

• No company other than a banking company can use the word “bank”.Act • Every banking company has to use the word “bank” as a part of its name. “banking” as part of its name except subsidiary or association of banks .Licence for Banking • For commencing or carrying on the business of banking. it is necessary to obtain licence from RBI under section 22 of the Banking Reg.

Act 1956 or foreign company • Cooperative society registered under Cooperative Societies Act .Constitution of Banks in India • Body corporate constituted under special status • Company registered under Co. devt. socities(PACs) and coop. banks .Banking Regulation Act 1949 • This Act was enacted to provide suitable framework for regulating the banking companies • Initially the Act was for banking companies only • In 1965 the Act was amended to cover cooperative banks as well • The Act does not apply to primary agri.

Theoretical basis of banking • Like any other business. for a bank balancing profitability and liquidity requires more attention • This is because banks deal in public money which is repayable on demand . for a bank profitability and liquidity management is essential • However.

Theoretical basis contd…. they may not maintain – It can have adverse effect on the financial system – Central bank is empowered to prescribe the reserve ratio for twin objective – (a) To ensure liquidity (b) Credit control • Credit creation by banks . • Management of Reserve – Banks are expected to hold part of their deposits in the form of cash reserve – If banks are not compelled for such reserve.

Role of Banks • Mobilization and allocation of saving • Financial intermediation – Funds of surplus sectors are channeled to deficit sector • Important part of payment mechanism • Helps monetary authority for stability of price and financial system .

guarantors. debt market • Banks are the issuer. merchant banks. • Active role in growth and liquidity of debt market • Social role .Role of banks • Important role in developing financial market – Developing mutual funds. in financial mkt. underwriters. investors.

Liabilities of Banks • Deposits – It is a major source of funds for banks • Types of Deposits – Demand Deposit – Time Deposit • Demand Deposits further sub-divided – Current Deposit – Saving Deposit .

securities are most important .Assets of the bank • Broad classification of bank’s assets – Cash in hand and balance with RBI – Assets with the banking system – Investment in Govt. and other approved securities – Bank credit • Quantitatively bank credit and investment in Govt.

– High fiscal deficit – Slack credit demand . security is sometime far in excess of SLR because. of India & other approved securities • Non SLR securities – Non approved securities • Investment in Govt.Bank Investment • SLR securities – Govt.

• Investment in non SLR securities – Shares and debentures of PSUs – Shares and debentures of private corporate sector – Commercial paper – Units of mutual funds .Bank investment contd….

Bank credit • Banks in India provides mainly short term finance for working capital needs • Types of loans / credit – Cash credit – Overdraft – Demand loans – Discounting of commercial bills – Installment or hire purchase credit – Term loan .

Some of the basic concepts • Cheque • Bill of Exchange • Lien – Right of the creditor – Retain possession of the security belongs to debtors – Retention is till debtor clears the debt – In case of a bankers’ lien the right to sale of the security is with bank if there is default by the borrowers .

Banker customer relationship • Debtor / Creditor relationship – Deposit and loan customer • Bank as an agent – When bank provides various services • Bank as a Trustee – Safe custody service (Not safe deposit locker) .

Rights of a banker • Right of general lien – Right to retain the goods or securities for “all” (different types of loan account) amounts due from the debtors • Right of setoff – Right to use credit balance of one account to recover debit balance of another a/c (even if different accounts are with different branches of the same bank) .

Rights of a banker • Right of appropriation – When borrower gets multiple facility of loan from the bank – When payment is made by the customer without specifying the loan account – Bank will decide about appropriation of such payment • Right to charge interest and different charges .

Obligations of a banker • Honour Cheques – Subject to sufficient funds and proper presentation • No wrong dishonour of cheque • Maintain confidentiality • Act in good faith without negligence while – Opening / closing account – Settlement on death of the depositor – Collection of cheques and other instruments .