INTRODUCTION TO

BANKING AND
INSURANCE
COURSE CODE: IBFT 04101

PRESENTED BY Mr. Hafidhi T. Saidi

 Bank and
Banking
• Meaning of bank and banking
• Bank is an organization or a company like any other company, which
sells and buys goods and services in the market. The main difference
between other companies and banks is that, other companies are trading
goods and services for money, but in the case of bank the trading item
itself is MONEY, instead of tangible goods or intangible services.
• How a bank works can simply be explained as accepting deposits from
customers by paying interest to their deposits, while lending this money
deposited to required parties for an interest rate, which is higher than
that paid to depositors. The net gain is the main source of income to
banks (especially for commercial banks, because the central bank and
investments banks have other ways of earning revenue).
• This is a classical view of a bank; however nowadays, banks are engaged in
other activities as well. All the activities carried out by a bank is called banking.
• Bank
• The oxford dictionary defines bank as “an organization offering financial
services, especially loans and safe keeping of customers money”. There must be
a central bank in every country, which is authorized with monitory policy
making by the government of that nation. It acts as a financial intermediary.
Other than the central bank, there are several types of banks like retail banks,
investment banks etc. The commercial banks mostly deal with accepting
deposits and providing loan facilities. Community development banks,
community banks, and postal saving banks are some examples for retail banks.
Merchant banks and industrial banks are good examples for investment banks.
• Banking
• Banking is the business activity of a bank. Simply, any activity carried out
by a bank for business purposes is called banking. Accepting savings,
Lending money, leasing properties to needy people, paying for cheques,
providing mortgage facilities, acting on to standing orders, statement of
instructions, providing safety locker facilities for valuable things, providing
over draft facilities to current account holders, acting as institutional
investors in financial market, issuing ‘letter of credit’ in the business of
import and export, act as money changer, issuing travelers’ cheques are
some of the activities carried out by modern banks in the banking industry.
Nowadays, banking can be done via the internet, which is called online
banking.
• Though the words bank and banking seem to be conveying the same
meaning, they have some differences between them:
• – Bank is a tangible object, while banking is a service.
• – Bank refers to the physical resources like building, staffs, furniture, etc,
while banking is the output (financial services) of the bank by utilizing
those resources.
• Therefore, bank is an organization or company that offer financial services
as custodian of surplus units and proving loans from deposited fund to
deficit unit, for bank is an intermediator between surplus and deficit (units)
in the community
• Banking are activities or services offered by the bank as prevailed in a first
slide
 Types of
Banks
• As we have discussed above that bank is a financial institution that allows
deposit from the public and lending some of deposited amount to public in
addition with excess amount as interest which banks consider as profit.
• Banks are institutions like other business companies except that bank deals
with money only however now days banks offer other services that are non
monetary in nature but it is just to facilitate banking activities.
• Following are different types of banks
 Types of Banks
• 1. Commercial Banks:
• These banks play the most important role in modern economic organization.
Their business mainly consists of receiving deposits, giving loans and
financing the trade of a country. They provide short-term credit, i.e., lend
money for short periods. This is their special feature.
• 2. Exchange Banks:
• Exchange banks finance mostly the foreign trade of a country. Their main
function is to discount, accept and collect foreign bills of exchange. They also
buy and sell foreign currencies and help businessmen to convert their money
into any foreign money they need. Their share in the internal trade of a country
is usually small. In addition, they carry on ordinary banking business too.
 Types of Banks
• 3. Industrial Banks:
• Industries require capital for a long period for buying machinery and
equipment. Industrial banks provide this type of Mock capital. Industrial
banks have a large capital of their own. They also receive deposits for
longer periods. They are thus in a position to advance long-term loans.
• There are a few industrial banks in India. But in some other countries,
notably Germany and Japan, these banks perform the function of advancing
loans to industrial undertakings.
 Types of Banks
• 4. Agricultural or Co-operative Banks:
• The main business of agricultural banks is to provide funds to farmers. They
are worked on the co-operative principle. Long-term capital is provided by
land mortgage banks, nowadays called land-development banks, while
short-term loans are given by co-operative societies and co-operative banks.
Long-term loans are needed by the farmers for purchasing land or for
permanent improvements on land, while short-period loans help them in
purchasing implements, fertilizers and seeds. Such banks and societies are
doing useful work in India.
 Types of Banks
• 5. Savings Banks:
• These banks (perform the useful service of collecting small savings.
Commercial banks too run “savings departments” to mobilise the savings of
men of small means. The idea is to encourage thrift and discourage
hoarding. Post Office Saving Banks in India are doing this useful work.
• 6. Central Banks:
• Over and above the various types of banks mentioned above, there exists in
almost all countries today a Central Bank. It is usually controlled and quite
often owned by the government of the country
 Types of Banks
Investment Bank
• An investment bank is a financial intermediary that specializes primarily
in selling securities and underwriting the issuance of new equity shares to
raise capital funds. This is different from a commercial bank, which
specializes in deposits and commercial loans.
• How Does an Investment Bank Work?
• Investment banks mediate between companies that issue securities and the
individuals or entities wishing to purchase them. In this respect, investment
banks operate along two main lines: a "buy" side and a "sell" side. "Buy"
side operations include services such as securities trading and
portfolio management. "Sell" side activities include underwriting new lines
of stock, marketing financial products, and publishing financial research
 Why Does an Investment Bank Matter?

• Investment banks bring investors together with companies that issue

securities and broker securities. Investment banks are also beneficial to
security-issuing companies, because, while they broker the securities a
company may issue, they can help raise capital funds for such companies
through underwriting new stock offerings.
 FUNCTION’s OF
BANK
• Bank as a financial institution has several roles or functions which make it
to be what its, therefore contrary to those functions there will be no bank as
financial institution at all, thus banking functions have classified into two
major categories namely primary functions and secondary functions
• Primary functions are those that makes an institution be a bank those are
accepting deposit and lending money from and to the public respectively
• While
• secondary functions are those that makes bank an intermediator or a middle
man who facilitate other people transactions and activities / events.
• Let’s now discuss these functions
 PRIMARY FUNCTIONS OF A BANKs

• The primary functions of a bank are also known as banking functions. They
are the main functions of a bank.
• These primary functions of banks are explained below
• Under primary functions banks deal with
Accepting deposit and lending money

i) ACCEPTING DEPOSITY
• by accepting deposit means receiving / collecting fund from surplus
units ( those who have extra cash) with intention of saving them to
finance future expenditures such as children school fees, vacation
among others. This service is offered through different products
 PRIMARY FUNCTIONS OF A
BANKs
• The bank collects deposits from the public. These deposits can be of
different types, such as :-
Saving Deposits
Fixed Deposits
Current Deposits
Recurring Deposits
• a. Saving Deposits
• This type of deposits encourages saving habit among the public. The
rate of interest is low. At present it is about 4% p.a. Withdrawals of
deposits are allowed subject to certain restrictions. This account is
suitable to salary and wage earners. This account can be opened in
single name or in joint names.
 PRIMARY FUNCTIONS OF A
BANKs
• b. Fixed Deposits Lump sum amount is deposited at one time for a specific
period. Higher rate of interest is paid, which varies with the period of
deposit. Withdrawals are not allowed before the expiry of the period. Those
who have surplus funds go for fixed deposit.
• c. Current Deposits
• This type of account is operated by businessmen. Withdrawals are freely
allowed. No interest is paid. In fact, there are service charges. The account
holders can get the benefit of overdraft facility.
• d. Recurring Deposits
• This type of account is operated by salaried persons and petty traders. A
certain sum of money is periodically deposited into the bank. Withdrawals
are permitted only after the expiry of certain period. A higher rate of interest
is paid.
 PRIMARY FUNCTIONS OF A
BANKs
• ii) Granting of Loans and Advances
• This is another primary function of banks whereby after collection of fund
from surplus unit bank urges people on borrowing them at a particular rate
of interest in order to make profit, thus The bank advances loans to the
business community and other members of the public. The rate charged is
higher than what it pays on deposits. The difference in the interest rates
(lending rate and the deposit rate) is its profit.
• The types of bank loans and advances are :-
• Overdraft
• Cash Credits
• Loans
• Discounting of Bill of Exchange
 PRIMARY FUNCTIONS OF A
BANKs
• a. Overdraft
• This type of advances are given to current account holders. No separate
account is maintained. All entries are made in the current account. A certain
amount is sanctioned as overdraft which can be withdrawn within a certain
period of time say three months or so. Interest is charged on actual amount
withdrawn. An overdraft facility is granted against a collateral security. It is
sanctioned to businessman and firms.
• b. Cash Credits
• The client is allowed cash credit upto a specific limit fixed in advance. It
can be given to current account holders as well as to others who do not have
an account with bank. Separate cash credit account is maintained. Interest is
charged on the amount withdrawn in excess of limit.
 PRIMARY FUNCTIONS OF A
BANKs
• The cash credit is given against the security of tangible assets and / or
guarantees. The advance is given for a longer period and a larger amount
of loan is sanctioned than that of overdraft
• c. Loans
• It is normally for short term say a period of one year or medium term say
a period of five years. Now-a-days, banks do lend money for long term.
Repayment of money can be in the form of installments spread over a
period of time or in a lump sum amount. Interest is charged on the actual
amount sanctioned, whether withdrawn or not. The rate of interest may be
slightly lower than what is charged on overdrafts and cash credits. Loans
are normally secured against tangible assets of the company.
 PRIMARY FUNCTIONS OF A
BANKs
• d. Discounting of Bill of Exchange
• The bank can advance money by discounting or by purchasing bills of
exchange both domestic and foreign bills. The bank pays the bill amount to
the drawer or the beneficiary of the bill by deducting usual discount
charges. On maturity, the bill is presented to the drawee or acceptor of the
bill and the amount is collected.
 SECONDARY FUNCTIONS OF
BANKs
• The bank performs a number of secondary functions, also called as non-
banking functions.
• These important secondary functions of banks are explained below
• 1. Agency Functions
• The bank acts as an agent of its customers. The bank performs a number of
agency functions which includes :-
• Transfer of Funds
• Collection of Cheque
• Periodic Payments
• Portfolio Management
• Periodic Collections
• Other Agency Functions
 SECONDARY FUNCTIONS OF BANKs

• a. Transfer of Funds
• The bank transfer funds from one branch to another or from one place to
another.
• b. Collection of Cheques
• The bank collects the money of the cheques through clearing section of
its customers. The bank also collects money of the bills of exchange.
• c. Periodic Payments
• On standing instructions of the client, the bank makes periodic payments
in respect of electricity bills, rent, etc.
 SECONDARY FUNCTIONS OF
BANKs
• d. Portfolio Management
• The banks also undertakes to purchase and sell the shares and
debentures on behalf of the clients and accordingly debits or credits the
account. This facility is called portfolio management.
• e. Periodic Collections
• The bank collects salary, pension, dividend and such other periodic
collections on behalf of the client.
• f. Other Agency Functions
• They act as trustees, executors, advisers and administrators on behalf of
its clients. They act as representatives of clients to deal with other banks
and institutions.
 SECONDARY FUNCTIONS OF BANKs

• 2. General Utility Functions

• The bank also performs general utility functions, such as :-
• Issue of Drafts, Letter of Credits, etc.
• Locker Facility
• Underwriting of Shares
• Dealing in Foreign Exchange
• Project Reports
• Social Welfare Programmes
• Other Utility Functions
 SECONDARY FUNCTIONS OF BANKs

• a. Issue of Drafts and Letter of Credits

• Banks issue drafts for transferring money from one place to another. It
also issues letter of credit, especially in case of, import trade. It also
issues travelers' cheques.
• b. Locker Facility
• The bank provides a locker facility for the safe custody of valuable
documents, gold ornaments and other valuables.
• c. Underwriting of Shares
• The bank underwrites shares and debentures through its merchant
banking division.
 SECONDARY FUNCTIONS OF
BANKs
• d. Dealing in Foreign Exchange
• The commercial banks are allowed by RBI to deal in foreign exchange.
• e. Project Reports
• The bank may also undertake to prepare project reports on behalf of its
clients.
• f. Social Welfare Programmes
• It undertakes social welfare programmes, such as adult literacy
programmes, public welfare campaigns, etc.
• g. Other Utility Functions
• It acts as a referee to financial standing of customers. It collects
creditworthiness information about clients of its customers. It provides
market information to its customers, etc. It provides travelers' cheque
facility.
 GROUP DISCUSSION

• Identify and discuss different products and services offered by banks