Class 12

Banking : Notes

Unit -1

Commercial

TOPIC – 1 : ORIGIN AND GROWTH OF IN INDIA

Banking sector in India has got a long history and has traversed a long path to reach at the modern stage. The growth of banking industry and banking practices had not been easy. It involved many hurdles and impediments which appeared as obstacles in the path of its growth.

Growth of Banking

Pre-Independence Post-Independence

Vedic Period Pre-Economic Reform Period

Moghul Period Post- Economic Reform Period

British Period

• Between 2000 to 1400 B.C., during the Vedic era, records of saving money as deposits were found.

• Manu, the Hindu Law giver, in ‘Manusmriti’ mentioned about rules of giving interest on savings and suggested for keeping money under the safe custody of a person with another who has -

- good conduct/character - good family background - knowledge of the Law - many relatives - riches and wealth - honour & respect in society

• In the ‘Artha-Shastra’ written by Chanakya or Kautilya also mentioned about rules and need of saving money and earn income on it.

• During the period of Mahabharata, there was practices of using Hundis.

• Indigenous bankers were lending money and financing trade activities.

• Hundis were used as trade instruments.

• ‘The House of Jagat Seth’, was a famous indigenous banker during Moghul period..

• Indigenous bankers gradually lost their importance.

• With East India Company’s growth in business, the requirement of was felt.

• Agency Houses emerged as organizations supporting East India Company’s business as well as providing the basic banking services to the British and the company.

• Agency Houses combined banking with other trade-supporting activities, and it was a difficulty due to which these couldn’t sustain longer. Growth of Pre- British Era Banking Independence Agency Houses during the colonial regime: Year 1900 • M/s Alexander & Co. • M/s Fergussan & Co. • First bank started in India unedr British rule was ‘Bank of Hindostan’ in Year 2014 1770. • This bank was closed/liquidated in 1832.

• After the closure of Bank of Hindostan, the British Govt. established 3 PRESIDENCY BANKS in India: which later was renamed as Bank of Bengal (1906), (1840), (1843)

• Principle of Limited Liability was introduced in 1860. This resulted in the emergence of many banks.

• Banks started operating as Joint Stock Banks.

• SWADESHI MOVEMENT further prompted many Indians to start their own banking activities by establishing small banks to finance their own requirements and avoid taking services of the banks established by the British.

• , of India, , etc. were set up at that time. • British Government felt the need of a central bank.

• On 27th January, 1921, The was established by merging the 3 presidency banks.

• Backed by a strong demand and requirement for a separate central bank of the country, the British Government set up the Central Banking Enquiry Commission in 1931.

• This commission made a bill giving details about the process, need of establishing and operating a central bank in the country.

• This Bill was passed and approved in the Legislative Assembly by the majority of the members and then was approved by the then Governor General of India, and it became the RBI Act, 1934.

• Based on this Act, the central bank of the country was established in 1935.

• All responsibilities of central bank were taken over by RBI from the Imperial Bank of India post 1935.

• RBI Nationalisation – January, 1, 1949, and RBI became a Government organization henceforth.

• Banking Regulation Act was passed – 1949 to regulate and control banking operations in India.

• Nationalization of the Imperial Bank – July, 1, 1955.

• Imperial Bank was renamed as

• SBI became the largest commercial bank of the country.

• In 1959, SBI took over 8 state-owned banks as subsidiaries. Presently there are 5 of them operating as the subsidiaries.

• Deposit Insurance Scheme – January, 1, 1962

• Establishment of Deposit Insurance Corporation of India.

• Social Control Scheme – To exercise Government’s (social) regulation and control over the workings of the banks to ensure proper implementation of Government policies for the development of the country.

• Failure of the scheme of Social Control Bank nationalisation.

• Bank Nationalisation – Government took over the ownership of private banks through nationalisation.

• 1969 – 14 banks nationalised (1st Phase of Bank nationalisation)

• 1980 – 6 banks nationalised (2nd Phase of Bank nationalisation)

Growth of Post- Pre-Economic Banking Independence reform period • Lead Bank Scheme – December, 1969

• Introduction of Lead Bank Scheme : In the year 1969 Indian Government launched the Lead Bank Scheme where each district was allotted with a particular bank to work as the lead bank. The prime role of the lead bank was to act as a leader and coordinator of all the other banking institutions operating in that district and help RBI to pursue its role easier.

• Establishment of Deposit Insurance Corporation of India.

• Deposit Insurance Corporation got merged with Credit Guarantee Corporation and DICGC was formed.

• Regional Rural Banks– To develop the rural areas to facilitate these with the access of banking services, RRBs were established in 1975 followed by passing of the RRB Act (1976).

• Setting up of Development banks like IDBI, IFCI, SFC, NABARD etc.

ECONOMIC REFORM POLICY & INDIAN BANKING:

In the year 1990-91, Indian Government under the leadership of then Prime Minister P.V. Narsimha Rao and Finance Minister Dr. Manmohan Singh took a major step to refine the structure of Indian economy by introducing the new industrial policy which is also known as the Economic Reform Policy. The three prime features and dimensions of the policy were L (liberalization), P (Privatization) and G (Globalization). Hence, this policy is also known as the LPG Policy. This policy brought many changes in the system of the economy and the way of operations in many industries, including the banking industry. Liberalization policy removed the trade barriers in between the countries and welcomed FDI into the sector. Few foreign banks invested in India and set up their branches across the country. Eg: Citi Bank, Bank, HSBC India, , DBS Bank, Bank, etc. to name a few. Growth of E-Banking:

The present phase of growth of banking reflects modernized way of banking through adoption of e-banking services into banking practices. Electronic banking has many names like e banking, virtual banking, online banking, or internet banking. It is simply the use of electronic and telecommunications network for delivering various banking products and services. Through e- banking, a customer can access his account and conduct many transactions using his computer or mobile phone.

In India, since 1997, when the ICICI Bank first offered internet banking services, today, most new- generation banks offer the same to their customers. In fact, all major banks provide e-banking services to their customers.

Importance of e-banking for banks, individual customers, and businesses :

Banks

1. Lesser transaction costs – electronic transactions are the cheapest modes of transaction

2. A reduced margin for human error – since the information is relayed electronically, there is no room for human error

3. Lesser paperwork – digital records reduce paperwork and make the process easier to handle. Also, it is environment-friendly.

4. Reduced fixed costs – A lesser need for branches which translates into a lower fixed cost.

5. More loyal customers – since e-banking services are customer-friendly, banks experience higher loyalty from its customers.

Customers

1. Convenience – a customer can access his account and transact from anywhere 24x7x365.

2. Lower cost per transaction – since the customer does not have to visit the branch for every transaction, it saves him both time and money. 3. No geographical barriers – In traditional banking systems, geographical distances could hamper certain banking transactions. However, with e-banking, geographical barriers are reduced.

Businesses

1. Account reviews – Business owners and designated staff members can access the accounts quickly using an online banking interface. This allows them to review the account activity and also ensure the smooth functioning of the account.

2. Better productivity – Electronic banking improves productivity. It allows the automation of regular monthly payments and a host of other features to enhance business-productivity .

3. Lower costs – Usually, costs in banking relationships are based on the resources utilized. If a certain business requires more assistance with wire transfers, deposits, etc., then the bank charges it higher fees. With online banking, these expenses are minimized.

4. Lesser errors – Electronic banking helps reduce errors in regular banking transactions. Bad handwriting, mistaken information, etc. can cause errors which can prove costly. Also, easy review of the account activity enhances the accuracy of financial transactions.

5. Reduced fraud – Electronic banking provides a digital footprint for all employees who have the right to modify banking activities. Therefore, the business has better visibility into its transactions making it difficult for any fraudsters to play mischief.

Popular services under e-banking in India

• ATMs (Automated Teller Machines)

• Telephone Banking

• Electronic Clearing Cards

• Smart Cards

• EFT (Electronic Funds Transfer) System

• ECS (Electronic Clearing Services)

• Mobile Banking

• Internet Banking

• Tele-banking

• Door-step Banking

Further, under Internet banking, the following services are available in India:

1. Bill payment – Every bank has a tie-up with different utility companies, service providers, insurance companies, etc. across the country. The banks use these tie-ups to offer online payment of bills (electricity, telephone, mobile phone, etc.). The customer can create a standing instruction to pay recurring bills automatically every month.

2. Funds transfer – A customer can transfer funds from his account to another with the same bank or even a different bank, anywhere in India. He needs to log in to his account, specify the payee’s name, account number, his bank, and branch along with the transfer amount. The transfer is effected within a day or so.

3. Investing – Through electronic banking, a customer can open a fixed deposit with the bank online through funds transfer. Further, if a customer has a demat account and a linked bank account and trading account, he can buy or sell shares online too. Additionally, some banks allow customers to purchase and redeem mutual fund units from their online platforms as well.

4. Shopping – With an e-banking service, a customer can purchase goods or services online and also pay for them using his account. Shopping at his fingertips.

TOPIC- 2: STRUCTURE OF COMMERCIAL BANKING IN INDIA:

Commercial banks are those banks which work with profit-oriented outlook or commercial motives. These banks may be public sector banks and also private sector banks. These banks come direct in contact with the people in the society and render various banking services to them. Hence, these banks provide retail banking services as they directly deal with the end customers i.e. individuals. However, apart from individuals, there can be clubs, institutions, organizations etc. can also be the customers of a commercial bank and these types of customers are considered as the special types of customers of the bank. These banks run with a profit motive and hence maintain competition in between them for which they try to advertise their facilities and attempts to satisfy customers by providing many additional services apart from the core or the primary services. These additional facilities or services are the secondary functions (agency and utility) functions of banks. The higher volume of deposits they can attract from public, the more credit they can create and the higher income they will earn.

Scheduled Banks & Non-Scheduled Banks:

Scheduled banks are those banks whose names are included in the Second Schedule of the Reserve Bank of India Act, 1934.

Scheduled banks can be public sector banks as well as private sector banks. However, there are certain criteria which are to be satisfied by a bank in order to be included in the Second Schedule of the Reserve Bank of India Act, 1934. These criteria are:

• The paid-up capital ≥ Rs.5 lakhs. (paid –up capital is the capital amount actually realised and is at hand with which a business can start operating or purchasing its resources) • The bank’s present or past workings should not be detrimental or harmful for its depositors. • The bank should be formed either as a joint stock company or a cooperative society and not a sole trading form or partnership firm.

Benefits of a scheduled bank:

A scheduled bank may receive the following privileges or benefits from the RBI.

• Can borrow money from RBI at bank rate. • Can get the insurance coverage of the deposits from Deposit Insurance and Credit Guarantee Scheme. • Can become the member of the clearing house (at RBI where the cheques are cleared) • Can avail the bill-re-discounting facility from RBI at bank rate. • Can get refinance facility from RBI and other authorised refinancing institutions.

Non-scheduled banks are those banks whose names are not included in the Second Schedule of the Reserve Bank of India Act, 1934. The reason behind the non-inclusion may be non-fulfilment of the RBI defined criteria by the banks.

Non-scheduled banks, like all other banks, need to get banking licence from RBI to operate in the banking industry and need to keep cash reserve amount with RBI as per the CRR (ratio) fixed by RBI. They can also get assistance and support from RBI and take loan from RBI in times of crisis, but can’t avail such loans at bank rate. These banks need to pay a higher interest amount (at a rate more than the bank rate) as compared to the same paid by a scheduled bank. Now-a- days, RBI doesn’t encourage opening a non-scheduled bank.

Licenced Banks & Non-Licenced Banks:

According to the Banking Regulation Act, 1949, all banks willing to operate in India, whether scheduled, non-scheduled, Indian or foreign banks, must get the permit to do business in the form of licence procured from the banking authority, i.e. RBI. Hence, all those banks having a licence to operate as a bank in India, are the licensed banks.

Non-licensed banks don’t actually exist now-a-days as all the banks are licensed ones. However, before the enactment of the Banking Regulation Act, 1949, all the banks operating in India had been non-licensed ones. Many of those banks got licence post-enactment of the Act and most of them got nationalised in 1969 and 1980. So, if any bank has applied for a license from RBI, till the time it receives the license, it remains as a non-licensed bank.

Public sector Banks & Private sector Banks:

Public Sector Banks:- These are the banks owned and controlled by the state or the central Government. These are the Government banks and established either as a statutory corporation or a Government company. These include nationalised banks, SBI and SBI associate banks or the SBI group, development banks.

Private sector Banks:- These banks are owned and managed by a group of individuals or managed by private sector. Government don’t have stake in these banks and funds are generated by issue of shares, debentures, taking loans etc. These banks are established either as cooperative societies or public limited companies. There are many public sector and private sector banks, few have been mentioned about below:

Indian Banks & Foreign Banks:

Private banks may be either of Indian or foreign origin. Those banks incorporated in India and have their head-quarters in India, are called Indian banks and those banks which have their head- quarters in some other countries where they originally belong to and have established branches in India post LPG, are the foreign banks.

RBI guidelines to Private sector Banks:

RBI attempted to encourage greater competition in between public sector and private sector banks for which it released certain guidelines to direct the operations of the private sector banks aiming to bring higher productivity to the banking sector.

• Private banks should be registered as a public limited company or cooperative society. • The provisions and ruled mandated by RBI Act and Banking Regulation Act, should also be applicable to the private banks. • The banks should start with a minimum paid-up capital of Rs.200 Cr. which is to be subsequently increased to Rs.300 Cr. eventually in near future. • At the time of incorporation and licensing, the applicant bank would get a preference if the Head office is proposed to be made situated at a place where no other bank’s head office is established. • A non-banking finance company can convert itself into a commercial bank if the paid-up capital is Rs.200 Cr. or more, the credit rating should have a ‘AAA’ mark, has a minimum of 12% capital adequacy ratio, NPAs should not be more than 5% of total assets of the bank.

Importance of Private sector banks:

• These banks brought quality-resources, technologies and professional management into banking system. • These banks have got a strong base of satisfied customers who get sophisticated, convenient and value-added services from the banks. • Satisfied customer-base leads to creation of higher credibility of banking and bring more trust and interest of people in the banking sector, which helps in drawing more deposits and good volume of credit can be created which helps the economy to grow. • These banks gives tough competition to the public sector banks whish also tend to improve on their services. • These banks spend a high volume of money on advertising and makes public sector banks also to advertise to stand in the competition. This helps the advertising industry to grow. • Foreign banks bring foreign capital which help in generating employment and providing good quality services to people. Also foreign banks bring quality-technologies which can be adopted by the Indian banks as well which helps the banking industry to grow. • Indian private banks can issue shares to foreign-based people which also a way of attracting foreign capital to India. • These banks have introduced professional management into the system of banking operations by which has motivated people to get higher qualification and attracted them towards a sound career. Various educational avenues have been developed offering courses in banking to produce employable banking candidates. • Professional management into banking have raised the bar of banking services in terms of quality. • Commercial or industrial concerns can not be the promoters of new private banks. • The promoter, having experience and sound knowledge over the area of finance and banking would get preference in setting up a banking institution. • Promoters already promoting/financing rural and agro-based industries would get a preference in attempting to start a banking institution. • The private banks should not only run after profit, but would also attempt honestly to serve the priority sectors of the country and work for their upliftment. PUBLIC SECTOR BANKS Vs. PRIVATE SECTOR BANKS

Functions of Foreign banks:

• Encouraging FDI into banking sector in India by allowing foreign capitalists to establish their operations in India. • Allowing joint-ventures to take place between Indian and foreign banks/financial institutions. • Creating employment opportunities. • Exploiting the massive demand of the population by offering them banking

solutions.

TOPIC- 3:

The State Bank of India is an Indian multinational, public sector banking and financial services statutory body. It is a government corporation statutory body headquartered in Mumbai, Maharashtra. SBI is ranked as 236th in the Fortune Global 500 list of the world's biggest corporations of 2019.

After the nationalization of the Imperial Bank of India in 1955, the bank got renamed as State Bank of India which started operating as the major most commercial bank of the country since July 1st, 1955. This step has been the outset of the bank nationalization.

Objectives behind nationalizing the Imperial Bank of India:

• To enhance the scale of banking services through extension of operations. • To reach out to the people dwelling in the rural and remote places. • To provide banking services to the unbanked areas. • To promote agricultural finance. • To assist the RBI and Government in working out their policies related to finance and banking.

SBI was established followed by the enactment of the State Bank of India (Subsidiary Banks) Act in 1959, under which the bank took over eight state associated banks which constituted the SBI group. SBI was established with an initial authorised capital of Rs.20 crore. RBI held the majority of the shares of SBI and the remaining shares are held by other companies and public. The head quarter of the bank has been situated in Mumbai. The board is headed by a Chairman. The bank has local offices in four metro cities and few other cities including Guwahati. The bank performs all the essential commercial banking functions and also assist RBI and represent RBI as a clearing house or others wherever necessary.

What is Currency Chest?

Currency chests are branches of selected banks authorized by the RBI to stock rupee notes and coins. The responsibility for managing the currency in circulation is vested in the RBI. The central bank advises the Centre on the number of notes to be printed, the currency denominations, security features and so on. The number of notes that need to be printed is determined using a statistical model that takes the pace of economic growth, rate of inflation and the replacement rate of soiled notes. The Government has, however, reserved the right to determine the amount of coins that have to be minted.

The RBI offices in various cities receive the notes from note presses and coins from the mints. These are sent to the currency chests and small coin depots from where they are distributed to bank branches. The RBI has set up over 4,075 currency chests all over the country. Besides these, there are around 3,746 bank branches that act as small coin depots to stock small coins.

Of the 4,075 currency chests in the country, 2,722 or 67 per cent are held in branches of the State Bank of India and its associate banks. Other Nationalised banks hold 1,173 chests, taking the share of the PSU banks to 95 per cent. Private sector banks (160), Co-operative banks (3) and foreign banks (4), regional rural banks (5) do not have a large role to play in stocking currency on behalf of RBI. What is Corporate Banking?

Corporate banking refers to the aspect of banking that deals with corporate customers. Corporate banking is all about providing a range of tailored banking services, in particular loans, to companies (rather than people) to help them run their day-to-day operations. ... By helping their clients to grow their businesses, corporate bankers also play an important role in the expansion of the wider economy. This concept originated in US.

Characteristics of Corporate Banking

• Clientele. A bank's business banking unit usually serves small to middle-sized businesses.

• Authority. A company's corporate banking accounts can only be opened after obtaining consensus from the board of directors of the company.

TOPIC – 4: LOCAL AREA BANKS

Local area banks were set-up across the country after the proclamation of the Government of India in 1996 about the establishment of the same to monitor and assist the functioning of RRBs (Regional Rural Banks), regional cooperative banks and land development banks. Local area banks were rural-oriented banks.

The objective of local area banks were:

• To encourage savings in rural areas. • To develop banking habits amongst the rural people. • To meet the credit needs of the rural people. • To encourage expansion of economic activities through financing and thus help rural areas to develop.

Local area banks in private sector have to be established as public limited companies and should be promoted by individuals, institutions, trusts or credit societies. RBI Act and Banking Regulation Act will be governing the operations of these banks. The minimum paid- up capital should be Rs. 5 Crore. One bank should operate in maximum three contiguous districts. (contiguous = neighbouring/ next to each other).

TOPIC – 5: BANK NATIONALIZATION

Bank nationalization refers to the task of taking over the ownership of private banks by the Government. Government acquires the majority of shares in banks and becomes the owner and the bank becomes a public sector bank through this process of nationalization. After the failure of the Government’s policy of social control over the banks, it was felt that until and unless the ownership is acquired, control can’t be exercised over an entity. Hence, in order to have a control over the affairs and operations of banks to make them work in tune with the policies and rules of the Government, banks were taken under the ownership by the Government. This process is termed as bank nationalization. The first phase of nationalization of commercial bank took place in 1955 when Imperial Bank was nationalized and was renamed as SBI. After that in 1969, the major milestone in the banking growth was set-up when 14 commercial banks were nationalized. Again in 1980, six more banks were nationalized. In the year 1993, one bank got merged with and there are a total of 19 nationalized banks operating in India. Objectives of Bank Nationalization: • To mobilize savings of people to a large extent so that maximum volume of credit can be created. -Nationalization brought public confidence in banking due to the Government’s involvement. This triggered a higher level of feeling of confidence on banking and security, which motivated people to keep more money in banks. • To ensure that the banking operations don’t remain only profit oriented but also guided with social motives. • To meet the credit needs of people. • To promote entrepreneurship in the areas where development is sought and lacking. (through financing the needy ones willing to venture into entrepreneurship) • To curb the use of bank credit for unproductive purposes through effective vigilance. • To provide proper training to the banks’ staffs. • To expand branches of the banks to different areas including the unbanked areas. • By doing all the above works to reduce regional imbalances. TOPIC-6: LEAD BANK SCHEME

The Background:-

In the pre-nationalization days, banking facilities were not evenly distributed in different parts of the country. Some areas, especially urban areas were facilitated with banks but the remote and rural areas were still under the shadow of under-development due to unavailability of adequate avenues which could meet the financial requirements of people in these areas.

The Introduction of the scheme:-

In order to bridge the banking gaps in the country, Indian Government formed a study group under the charge of Prof. D.R. Gadgil having few experts from different areas of expertise associated in it. This study group conducted research-based study and recommended on the establishment of a scheme which would allow one bank to work as a leader-cum-coordinator for the other banks and finance institutions operating in specific areas or districts. This would help the RBI to have a better control over the banking sector and also help the Government to expand banking facilities in unbanked areas.

RBI also appointed a committee under the charge of Sri. F.K.F. Nariman (named as the Nariman Committee) to study the recommendations proposed by the aforesaid study- group and produce a final report on it. The Nariman Committee also did the necessary analysis and supported the recommendations of the study-group and going with the proposal, RBI introduced the Lead Bank Scheme in December, 1969.

Only scheduled banks could work as a lead bank. The priority was given to the Dhananjay Ramchandra Gadgil public sector banks and (1901 – 1971) where public sector banks are (Indian economist) not present, scheduled private sector banks could take the

role of lead banks in specific districts, states or blocks (in case of a large district). The State Bank Group, 14 Nationalized banks and 3 Private sector banks could become lead banks. The Lead Bank Scheme was introduced in 398 districts of the country excluding the four metro

cities, Chandigarh and Goa.

Objectives of the Lead Bank Scheme & Functions of Lead Bank:

• To facilitate growth and expansion of banking facilities in the allotted districts/states. • To have higher volume of mobilization of savings in the allotted districts/states. • To provide adequate credit facilities in the allotted districts. • To maintain proper coordination amongst the banks located in specific districts. • To maintain required communication and liaison with district administration and promoting development. • To enhance the quality of banking services delivered by commercial cooperative banks. • To help the agriculturists through provision of finance and other facilities such as training, helping in acquiring quality seeds and fertilizers, provision for storage of agricultural produces, assisting in marketing the outputs etc. • To provide assistance and support to other lending institutions in that area. • To provide special assistance to small farmers and small entrepreneurs or SSIs in different ways. • To ascertain the availability of resources in a specific area and determining further scope for development through provision of banking services and reporting the same to the RBI to facilitate in making policies.

Working and performance of Lead Bank Scheme (Lead banks):

Lead banks were established in different areas after considering the needs and growth prospects of those places. The performance of lead banks so far also reflects the success or failure of the scheme. The performance can be evaluated on the following grounds:

1. Branch expansion: The number of bank branches in 1969 was 8262 which increased to over 29,500 in 1986. 2. Deposit mobilization: The amount of deposits in 1969 was only Rs.4646 which increased to over Rs.3,15,000 in 1994. 3. Credit facilities: The volume of credit granted in 1969 was Rs.441 Crore in the property sector in 1969 which increased to more than Rs.6,30,000 in 2007. 4. Coordination: There should be more development in the monitoring level and in terms of establishment of coordination among the banks because of the presence of rising pressure of NPAs.

TOPIC-7: BANKING SYSTEM

Banking system refers to the system or procedure of conducting banking operations by a bank. It deals with the arrangement of structural set-up of a banking institution. The four primary types of banking systems are:

Banking System

Unit Banking Branch Banking Group Banking Chain Banking

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