Concept of Banking/Bank
1. Banks are the financial institutions which accept deposits from the people and give loans to the needy people for the purpose of consumption or investment.
2. According to section 5(b) of the Banking Regulation Act, 1949, “banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, and order or otherwise. Banking Company means any company which transacts the business of banking in India. No company can carry on the business of banking in India unless it uses as part of its name at least one of the words bank, banker or banking.
Types of Bank
1. Commercial Banks: The banks which accept deposits and lend money to the people for consumption or for investment purpose. These banks perform all kinds of banking business. Since their deposits are for a short period, these banks normally advance short-term loans to the businessmen and traders and avoid medium-term and long-term lending. Majority of the commercial banks are in the public sector. However, there are certain private sector banks operating as joint stock companies. Hence, the commercial banks are also called joint stock banks.
2. Industrial Banks: Industrial banks or investment banks, meet the medium-term and long-term financial needs of the industries.
The main functions of the industrial banks are:
a) They accept long-term deposits.
b) They provide long-term loans to the industrialists for the purchase land, construct factory building, purchase heavy machinery, etc.
c) They help in selling and underwrite of the debentures and shares of industrial firms.
d) They also provide information regarding the general economic position of the economy.
e) In India, industrial banks, like Industrial Development Bank of India, Industrial Finance Corporation of India, State Finance Corporations, are playing significant role in the industrial development of the country.
3. Agricultural Banks: Agricultural provide loans for agriculture activities.
The agriculturists require:
a) Short-term credit to buy seeds, fertilizers and other inputs.
b) Long-term credit to purchase land, to make permanent improvements on land, to purchase agricultural machinery and equipment, etc.
In India, agricultural finance is provided by co-operative institutions. Agricultural co-operatives provide short-term loans and Land Development Banks provide the long-term credit to the agriculturists.
4. Exchange Banks: These banks finance foreign trade of a country. Their main function is to discount, accept and collect foreign bills of exchange. They buy and sell foreign currency and thus help businessmen in their transactions. They also carry on the ordinary banking business. In India, there are some commercial banks which are branches of foreign banks.
5. Saving Banks: They accept small sums as deposits from people. They encourage savings of the poor and middle class people. In India we do not have such special institutions, but post offices perform such functions. After nationalization most of the nationalised banks accept the saving deposits.
6. Central Bank: Central bank is the apex institution, which controls, regulates and supervises the monetary and credit system of the country. Important functions of the central bank are:
a) It has the monopoly of note issue
b) It acts as the banker to the government
c) It acts as the banker to the banks
d) Supervision of the banks
e) It serves as the lender of the last resort
f) It is the custodian of member banks reserves
g) It is the custodian of nation's reserves of international currency
h) It functions as the bank of central clearance, settlement and transfer
i) It acts as the controller of credit.
Besides these functions, Reserve Bank of India, also performs many developmental functions to promote economic development in the country.
Structure of Indian Banking
1. Central Bank – Reserve Bank of India (RBI). Every Country has one central bank only.
It has the monopoly of note issue
It acts as the banker to the government
It acts as the banker to the banks
Supervision of the banks
It serves as the lender of the last resort
It is the custodian of member banks reserves
It is the custodian of nation's reserves of international currency
It functions as the bank of central clearance, settlement and transfer
It acts as the controller of credit.
2. Scheduled Banks - A scheduled bank is a bank that is listed under the second schedule of the RBI Act, 1934. Scheduled banks are further classified into Scheduled commercial and cooperative banks.
I) Scheduled Commercial Banks
A) Domestic Banks – These are registered and incorporated within the country, India for ex SBI, PNB, ICICI, HDFC, Dena, UBI, BOB and etc.
1) Government Banks
Public Sector Bank - These are owned and controlled by the government. In India, the nationalized banks and the regional rural banks come under these categories, e.g. PNB, BOB, IOB, Dena Bank, Indian Bank and etc
RRB (Regional Rural Bank) e.g. Prathma Gramin Bank
2) Private Banks – These banks are owned by the private individuals or corporations and not by the Government or co-operative societies, Axis Bank, HDFC Bank, ICICI Bank and etc
B) Foreign Banks - These are foreign in origin and have their head offices in the country of origin. Branches of foreign banks in India for ex HSBC, Citi bank and etc
II) Scheduled Co-operative Banks - Cooperative banks are operated on the cooperative lines. In India, cooperative credit institutions are organised under the cooperative societies law and play an important role in meeting financial needs in the rural areas.
a) State co-operative Banks
b) Central Co-operative banks
c) Primary credit societies
3. Non Scheduled Banks - No bank at present
4. Land Development Bank – These banks satisfy the long-term credit needs of the farmers. The purpose of these banks is to fulfill the long term needs of the customers for ex purchase of land, machinery and etc. The Government started the land mortgage banks for this purpose; these banks have now come to be called the land development banks. These are of two types:-
a) Central Land Development Bank
b) Primary Land Development Bank
5. Specialised/Development Bank – For e.g. Exim Bank, Nabard, IFCI, ICICI, SFI, IDBI
Functions of Banks
A) Primary Functions
B) Secondary Functions
A) Primary Functions
i) Acceptance of deposits
ii) Loans and Advances
(i) Acceptance of Deposits: Accepting deposits is the primary function of a commercial Bank. Banks accept deposits from the public.
People can deposit their cash into following bank accounts.
a) Fixed/Term/Time deposit Account – Fixed amount of cash (Minimum is Rs 1000) is deposited in this account for a fixed period of time for ex 7 days, 6 months, 1 year or 5 year and the money deposited in this account cannot be withdrawn before the expiry of period. But in the case of any emergency, banks allow Customers to withdraw their deposited money in FD before maturity (last) date. But In such cases, the bank deducts 1% (deduction percentage many vary) from the interest payable as on that date. The main purpose of fixed deposit account is to enable the individuals to earn a higher rate of interest on their surplus funds. Longer the period of deposit, higher the rate of interest. It is also called time liability of the banks. Amount is deposited in this account for a period of 7 days to 10 years.
b) Recurring Deposit Account – Under this account, a fixed amount is deposited every month for a fixed period for ex 6 months, 1 year, 3 year or etc. This amount cannot be withdrawn before the maturity date under exceptional circumstances. Interest on the amount deposited is also credited (deposited) to the account of the depositor. Rate of Interest offered is similar to that in Fixed Deposits. Interest is compounded on quarterly basis in recurring deposits. Amount is deposited in this account for a period of 6 months to 120 months.
c) Current/Demand deposit Account – A depositor can deposit his funds any number of times he likes and can also withdraw the same any number of times he wishes. Generally, businessmen use this account for their day to day deposits and withdraw transactions. No interest is paid by the bank on the CA. Cheque book facility is provided and the account holder can deposit all types of the cheques and drafts in their name or endorsed in their favour by third parties. The main benefit of this account is that the account holder can get overdraft facility against personal or other securities.
d) Saving Account – Saving accounts are opened to encourage the people to save their money and get interest on their deposited money. Money can be deposited at any time but the maximum cannot go beyond a certain limit. There is a restriction on the amount that can be withdrawn at a particular time or during a week. If the customer wishes to withdraw more than the specified amount at any one time, he has to give prior notice. Interest is allowed on the credit balance of this account. The interest on Saving Bank Accounts was fixed by RBI and it was fixed at 4.00% on daily balance basis. RBI has deregulated Saving Fund account interest rates and now banks are free to decide the same within certain conditions imposed by RBI.
e) Money Multiplier Account - The persons who are interested to deposit money for more money at short period of time. Under this scheme the amount of interest is also redeposited. The rate of interest is highest on this deposit. The depositor can withdraw the accumulated money after stipulated period. The depositor can withdraw the whole amount either in lump-sum or in installments. If the depositor opted for installments higher amount is returned to the person. This is most suitable for old age provision
ii) Loans and Advances: The second primary function of a commercial bank is to make loans and advances to people against their personal security, gold and silver, stocks of goods and other assets.
1) Overdraft - Bank overdraft is allowed to current account holders. Under this facility Current account holder can withdraw extra money up to the limit sanctioned by bank. The current account holders may be allowed to overdraw (more than available in the current account). Interest is charged only on the amount withdrawn. There is no need to provide collateral security for the facility of overdraft. It can be used at any time of requirement. It is the most useful form of loans to commercial and industrial units to avail from time to time. The overdraft will be granted by the bank with the mutual agreement with the customer and bank.
2) Cash Credit - The Debtor/Customer is allowed to withdrawn a certain amount upto the limit sanctioned by the bank on a given security. The debtor withdraws the amount within this limit. Interest is charged by the bank on the amount actually withdrawn and for what period. Under this customer can deposit his excess money and interest is charged on the actually withdrawn money only.
3) Discounting Bills of Exchange - Discounting of Bills - Banks provide short-term finance by discounting bills of their customers. Discounting Bills means banks make payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer. The commercial banks can rediscount the discounted bills with the central banks when they are in need of money.
4) Demand loans – It means a fixed amount of loan is raised by customer against their approved securities and the loan is raised for a fixed period. After the maturity period customer pays installment of principal amount with interest on the amount raised in the form of EMI (Equated Monthly Installment).
B) Secondary Functions
1) Agency functions
2) General Utility Services
1) Agency Services: Banks also perform certain agency functions for and on behalf of their customers.
1) Banks collect and pay various credit instruments like cheques, bills of exchange, promissory notes etc, on behalf of their customers.
2) Banks purchase and sell various securities like shares, stocks, bonds, debentures on behalf of their customers.
3) Banks collect dividends and interest on shares and debentures of their customers and credit them to their accounts.
4) Letter of references : Banks give information about economic position of their customers to domestic and foreign traders and likewise provide information about economic position of domestic & foreign traders to their customers.
5) Income-tax Consultancy : Banks may also employ income tax experts to prepare income tax returns for their customers and to help them to get refund of income tax.
6) Remitting of Money : Banks remit money at distant places through bank draft.
7) Trustee and Executor: Banks also act as trustees and executors of the property of their customers on their advice.
2. General Utility Services: In addition to agency services, the modern banks provide many general utility services for the community as given.
(a) Locker Facility: Bank provides locker facility to their customers. The customers can keep their valuables, such as gold and silver ornaments, important documents for ex shares and debentures in these lockers for safe custody.
(b) Traveller’s Cheques - Banks issue traveller’s cheques to help their customers to travel without the fear of theft or loss of money. With this facility, the customers need not take the risk of carrying cash with them during their travels.
(c) Letter of Credit: Letters of credit are issued by the banks to their customers certifying their credit worthiness. Letters of credit are very useful in foreign trade.
(d) Collection of Statistics: Banks collect statistics giving important information relating to trade, commerce, industries, money and banking. They also publish valuable journals and bulletins containing articles on economic and financial matters.
(e) Acting Referee: Banks may act as referees with respect to the financial standing, business reputation and respectability of customers.
(f) Underwriting Securities: Banks underwrite the shares and debentures issued by the Government, public or private companies. Underwriting means the banks purchase themselves fully or partly the new shares of companies, if the share remains unsold or unsubscribed in the stock market.
(g) Gift Cheques: Some banks issue cheques of various denominations to be used on auspicious occasions.
(h) Accepting Bills of Exchange on Behalf of Customers: Sometimes, banks accept bills of exchange, internal as well as foreign, on behalf of their customers. It enables customers to import goods.