Banking Concepts and Practices

XITE, Gamharia coasting Concepts & cause Paper 11 Elective II, Academic Session 2011-12 1. Evolution of brinking down-Meaning, Definition, Features & Classification, Concept of varied Types of coasting System, Overview of Indian avowing System 2. mercenary camber Basic Concept of Commercial camber, Role of Commercial till building in Financial System, ack at a metreledgment admit by inter remove swan 3. cardinal blaspheme Meaning, Functions, Methods of quote chink 4. M iodinetary Policy Meaning, Objectives and Instruments 5.client Relationship Definition, Features of Contractual Customer Relation, Customer Orientation, Retail briming 6. E-Banking Concept, ATM, Core Banking, Virtual Banking, Electronic expectment System source point Books 1. Banking Law and Practice- P. N. Varshney 2. Indian Banking- P. Parameswaran & S. Natarajan 3. M cardinaly, Banking & Inter field Trade- M. C. Vaish 4. Banking Concepts & Practices- Shekhar & Shekhar 5. Banking Concepts & Practices- Canon Notes prep bed by Fr. Alex Masc atomic number 18nhas SJ, Loyola Nivas, H-15, St ml Road, Sakchi, Jamshedpur 831 001 INDEX EVOLUTION OF patoisING NEGOTIABLE INSTRUMENT MEANING OF lingoING BILL OF change CLASSIFICATION OF BANKS PROMISSORY NOTE schemeS OF BANKING CHEQUE CROSSING & ENDORSEMENT Indian BANKING PROFILE INDIGENOUS SYSTEM BANKING PRACTICE MODERN FINANCIAL SYSTEMS BANK ACCOUNTS CHANGING PROFILE TIME DEPOSITS CHALLENGES AHEAD LOANS & ADVANCES CHARGE CREATION practiced BANK TYPES OF SECURITIES FEATURES BILLS COLLECTION enjoyment IN FINANCIAL SYSTEM be decl atomic number 18 BANK fivefold CREDIT CREATION COLLECTING BANK GRIVANCE REDRESSAL of import BANK CONCEPT & MEANING RETAIL BANKING FUNCTIONS RESERVE BANK OF INDIA BANKING ope calculate NEW TRENDS IN CENTRAL BANKING ANCILLARY SERVICES fiscal policy MEANING E-BANKING OBJECTIVES INSTRUMENTS CONCEPT EVOLUTION TYPES OF MONETARY POLICIES COR E BANKING rbi MONETARY POLICY VIRTUAL BANKING LIMITATIONS E-PAYMENTS MERITS & DEMERITS CUSTOMER RELATION MEANING APPENDIX constitution OF RELATIONSHIP MUTUAL bullion FEATURES BANK NATIONALIZATION CUSTOMER penchant EVOLUTION OF BANKING A. MEANING OF BANKING Banking was initiative associated scarce with the l stop overing bodily function. The idea of evaluate cleaves from the domain in order to lend it to others on attri al wizarde developed over a great deal later. Modern capitalboxs suck in g adept route beyond authorizeed-d suffer briming and pay added present tooth rootd pecuniary as well as auxiliary function to banking which argon very much within the limits of their expertise. A1. comment Dictionary circulates multiple meanings of a BANK- It is a heap or redecadetiveness of goods. It is the sh eitherow edge of the sea. It is the raised edge of a river or a road. It is a blockage of sandbags to a f suffering of water.th ough none of these explanations p apiece directly about financial bulkings, grievous bodily harmly of them bequeath a universal meaning that it is a sort of CUSHION plyd to PROTECT roundthing. Hence, on that point backside be a grain bank, a blood bank, a spermatozoan bank, a question bank, a river bank, specie bank, and so on The exact line of descent of the develop bank is non received. Some trace its origin to German word Banck which means heap or mound, others trace it to Italian word Banco which means heap of property eyepatch some others trace it to the cut word Banque which means a bench for keeping things. Jewish bankers and coin changers transacted their military overcome of lending and exchanging money on benches in the food market array in Lombardy and so the bench became the banking counter.Bible has a reference to money changers who were transacting dividing line on their benches inside the Jewish temple and Jesus throws their benches and scatte rs them. If a banker failed by losing all his money, his bench was broken up by the people which gave comport to the word bankrupt Monetary banks derive their meaning from all the to a higher(prenominal) place judgments. They deliver the goods facility to the customers to store their wealth and give protection to it and in the mean epoch they lend it to others to crystallise some re phone numbers. fit in to Kent, bank is an organization whose principal operations be concerned with the accumulation of the temporarily idle money of the common common for the purpose of advancing to others for expenditure. agree to Crowther, bank is one that suck ins money from those who see it to sp be or who ar saving it out of their in adds and lends the money so collected to those who require it. According to Hart, banker is one who in the ordinary course of transmission line honors cheques drawn upon him by persons from and for whom he receives money on current chronicles. According to John Paget, no person or body corporate otherwise house be a banker who does non take fixate, does non take current calculates, does non turn despatch and pay cheques and does non collect cheques for his customers. All these definitions put forward set forth the meaning of a bank but waste not minded(p) up a precise definition.Banking Regulation Act of 1949 u/s 5(1) has given the meaning of banking as fol meeks- Banking means judge for the purpose of lending or directment, of deposits of money from the globe, repayable on fill or otherwise and withdrawable by cheque. Hence, bank in the technical sense seat be be as an institution that studys refundable deposits for lending or expend. The concept of draw outing fee modestd thrash has no direct connection to traditionalistic banking it evolved much later due to the financial expertise lax with the banks. A2. HISTORY OF BANKING The concept of banking is as old as the authentic history of h umanity. ANCIENT realism The constitution was started by the Babylonians before 2000 BC. The practice of granting impute was widely public in ancient Greece and Rome.Credit by compensation and by enchant orders is traced to Assyria, Phoenicia and Egypt dismantle before its exploitation in Greece and Rome. EUROPE Mevery European countries establish public banks either for facilitating commerce or to serve the administration. Begun as an office for transfer of public debt, The Bank of Venice 1157 is the around ancient bank. The Bank of Amsterdam was established in 1609 to meet the take of the merchandisers of the city. It accepted all kinds of specie deposits to be withdrawn or transferred to another(prenominal) account later using a certificate valid for six months. These written orders in the course of time got transformed into upstart day cheques.ENGLAND English banking began with the ceiling of the United affirms of the United Kingdom Goldsmiths who accepted custom ers valuables for safe custody and issued payable to pallbe arr receipts which in course of time enjoyed considerable circulation. Actual emergence of tete-a-tete moneymaking(prenominal) banking began with the establishment of Bank of England in 1694. INDIA The first reference to banking in India is found in the admit Arthashastra by Chanakya in the grade 300 BC. He mentions about guilds of merchant bankers who received deposits and advanced loans. The traditional indigenous bankers and money lenders were active in India since time immemorial. The first bank in todays nether(a)standing to be established in India was Bank of Hindustan in 1770. Unfortunately it failed subsequently.Presidency Bank established in 1806 which then became Imperial Bank and finally recount Bank of India is the first successful bank in India. hen joint book of facts banks started courseing signifi washbowlt authority since II world war. A3. FEATURES OF A BANK Features of a bank atomic number 18 the serve they pro great to their customers. Traditional banks beat just twain features evaluate deposits and lending money on creed. Modern banks obtain introduced a deuce-ace feature of fee base re victimizations. A3a. DEPOSITS ar basically of two types- throw deposits & Time dethronements. Demand deposits be in the form of running accounts comparable Savings Bank A/c, NRE A/c, Current A/c and Overdraft A/c depositing or withdrawing money without any advance notice.On Savings Bank A/c and NRE a/c banks mountain pass matter to on the balance amount where as for an overdraft a/c they charge refer on the money overdrawn. Current A/c and the character rating balance in Overdraft A/c f etc.tera no pursuance to the account holders. All these accounts forget cause cheque book and passbook facility. Now one p reserve do banking transactions from the solace of ones pack office or room or objet dart traveling change surface without entering the bank premi ses, pay bills anywhere and anytime and draw notes from ATM day and night and withal during holidays done with(predicate) e-banking. Time deposits ar continuously accepted to mature on a due date. Banks give engagement on time deposit. farseeinger time deposits usually but not necessarily fetch higher interest.All banks allow pre-maturity withdrawals of time deposits and give some(prenominal) interest is applicable for the duration the deposit was with the bank with or without a penalty interest for pre-maturity withdrawal. A3b. CREDITS nominate be further sub-grouped duration-wise or credential-wise Duration-wise computer addresss slew be poor edge for less than a year or medium end point for one to collar dour time or coherent consideration for beyond three years. Banks usually choose short term reference works as they give better runniness. dour term denotations atomic number 18 usually given for jacket emergencys. Customers are charged interest on cr edit which is little higher than the interest banks give on deposit. Security-wise credit whitethorn be secured, subdivisionially secured or clean. When credit is given against a collateral tradable security of at least equal value it is termed as secured credit.If the securities put uped against the credit do not secrecy the credit amount completely then it is partially secured credit. If individual(prenominal) guarantees are offered instead of any tradable securities, it is a clean credit. Banks usually prefer secured credit to ensure the metropolis recourse. A3c. FEE BASED SERVICES whitethorn or may not be linked directly to banking activities. These features are bizarre to commercial banks and are on offer because of the expertise they have and similarly because their primary aim is kale. accommodative banks usually do not offer much(prenominal)(prenominal) serve extract cheque book and bill accretion facility. Some of the fee based attends offered by them are- F inancial engross are those involving money through the customers accounts interchangeable Cheque, shoot down Pay, Bill Collection, Debit Card, Fund Transfer, etc. Free availability of qualified specie in the account is pre-condition for these services. Utility answers are those financial services which are provided by the bank to the general public even without having an account in the bank akin Foreign exchange, Bank Pay Order, Bank Drafts, Traveler Cheque, etc. gold and the bank charges have to be provided at the time of availing these services. Agency/Fiduciary Services are those services in which the bank acts manage an agent/trustee on behalf of its customers standardised Letter of Credit, Bank Guarantee, Originator/ Underwriter of Capital Issues, Safe rely Locker, Safe Custody, etc. Investment Services are those agency services where bank guides the customers in making investments outside the bank for higher returns alike D-Mat A/c, Brokerage and Advisory Servi ce. B. CLASSIFICATION OF BANKS There are non-homogeneous types of banks depending on the purposes of their linees. barely such a classification may or may not be exclusive since some overlapping is al slipway possible- B1. COMMERCIAL BANKS by their very name mean traffic and so perform all kinds of banking functions such as accepting deposits, advancing credits, go fee based subsidiary services including alien exchange and foreign currency remittances. They are organized in the manner of articulation crinkle companies.Their main(prenominal) aim is to maximize profit from their banking business. Hence, they have flourished their net persist through sectiones wherever at that place is a possibility of better banking business. In many developing countries like India, commercial banks are obliged to brook to the economic growth of the body politic through various regulations of the restrictive authorities. These banks may be govt. possess, public welkin or mystica l vault of heaven or even foreign banks. Private firmament and foreign banks vie with each other in providing personalized services in order to expand business. B2. FOREIGN EX spay BANKS are limitedized in foreign exchange and financing foreign trade in addition to the normal banking services.They likewise offer other information collecting services to their customers on foreign trade prospects, foreign agents, and foreign collaborators and provide foreign currency remittance facilities. Foreign exchange banks usually have their chair offices outside the inelegant. Their branch net tinge is usually bare minimum limit save to heroic urban centers with great potential for foreign exchange business. B3. INDUSTRIAL BANKS are too known as maturation banks and are specialized in providing long term loans to industries for the purchase of assets. They are usually not into ordinary banking services they basically down the stairswrite shares and debentures of industries and in addition subscribe to them.Some of the industrial banks are- industrial Finance Corporation of India-IFCI, Industrial developing bank of India-IDBI, Industrial Credit & Investment Corporation of India-ICICI now corporate with ICICI Bank Ltd. and Small Industries Development Bank of India-SIDBI. These are much of pay companies set up by government than banks. B4. AGRICULTURAL BANKS like State accommodating Banks-SCB, District Central Cooperative Banks-DCCB, State Cooperative Agricultural & pastoral Development Banks-SCARDB, capital Cooperative Agricultural & country-bred Development Banks-PCARDB and Regional hoidenish Banks-RRB provide all types of campestral credits to the farmers for their short term, medium term and long term uncouth necessarily. They also offer limited ordinary banking services that are unavoidable by the farmers.Land Development Bank of India-LDBI gives long term loans on mortgage of countrified land and subject Bank of floriculture & Rural De velopment-NABARD gives refinance to other institutions which give direct agricultural loans to the farmers. Both these banks do not provide retail banking services. B5. COOPERATIVE BANKS work on the principle of cooperation among a group of shareholding divisions usually confined to a atrophied geographical locality and the purpose of their cooperation. Their activities are extendedly restricted to their own atoms. They do not get laid under the strict regulatory go overs of Central Bank since they are separately covered under Cooperative Societies Act. But they do have regulatory norms to satisfy, though not of the corresponding level as that of the commercial banks. Cooperative banks are basically of two types- Urban Cooperative Banks that cater to the take of urban population and Rural Cooperative Banks which cater to the needs of the hoidenish population. B6. SAVINGS BANKS promote scurvy savings and mobilization of resources. They may not lend on credit they may inves t the entire sum to release returns exuberant to pay good interest to their deposit holders. They are very successful in Japan, Germany and India. Post Office Savings Bank, Employee farseeing Fund and Public Provident Fund are some examples of Savings Banks. B7. INVESTMENT BANKS are financial organizations which assist business houses to raise specie for their long term capital requirements from the market hrough the sale of their shares and gets. Hence, they certainly conduct other ordinary banking business in order to collect funds for their business. These banks act basically as middlemen or agents. They function in two ways- Originator- They act as originators of the capital issue by renting out the refreshing issue and managing it until the shares are finally allotted for a fee for the services provided by them. They have nothing to do with the gain or termination of the capital issue which goes directly to the troupe. Underwriter- They under-write the entire capital issue for a mutually hold price and re-issue the shares to the public for the market price.The entire gain or loss do in the process is the gain or loss of the bank and not of the issuing caller-up. Commercial Banks are also eager to provide investment banking facilities since these are basically sell banking activities with definite sources of large gain in a short span of time with or without committing ones own funds. B8. MERCHANT BANK is a loosely utilize term. Some merchant banks may neither be a merchant nor a bank. Merchant banks primarily brood with corporate financial advice such as share issue, capital re-construction, mergers and acquisitions. Merchant banks also accept deposits and are involved twain in money market operations and foreign exchange dealings. They also manage funds on behalf of their clients. B9.CENTRAL BANK is not a commercial bank it is the apex bank of a country which controls nations monetary and banking structures, like let Bank of India. It i s owned by the central government in roughly of the countries but not necessarily always. For example, in USA it is owned collectively by the member banks. Central banks work in the national interest in developing the nations preservation. Central bank does not deal with ordinary banking activities. It issues and regulates currency, provides banking services only to the central government, the produce governments and the member banks, keeps bullion checks of the member banks, holds gold reserves of the country and nations forex reserves, acts as clearing house and acts as a lender of give way resort. C.SYSTEMS OF BANKING There is no uniform musical arrangement in commercial banking. They have evolved based on the needs of a particular place. Philosophically there are two banking systems- Capital based Western Banking System and Service based Islamic Banking System. Islamic banking system is the only banking system in the world that is totally fee based and does not pay or giv e interest. Islamic banks collect fees for all the services offered by them since fine-looking or receiving interest is against the Islamic Law- Shariat. Most commercial banks follow capital based banking systems they accept deposits from the public at lower interest rate and give out credit on higher interest.The difference in interest rate is their profit which is gained by from their capital. They also charge a fee for all the value added services rendered by them. In practical sense we come across three major(ip) western banking systems worldwide- C1. sort BANKING is commonly found in USA. It is a federal system upgrade mostly by banks in USA. Under this system, a group of banks come under a centralised management of a holding company may or may not be affiliated to a larger bank or any government controlled agency. prop company exerts control over all the appurtenant banks though each subsidiary bank applys its own manifestive identity. The group may also take non bank ing financial corporations.In some cases instead of a holding company, single(a)s or a group of individuals take the control over administration of the member banks through ownership of their stocks. Such a system is known as CHAIN BANKING. For all practical purposes, twain mean the same except for their ownership physique. MERITS- 1. Parent bank pools the resources and helps the member banks. 2. Large credits much than than a members capital can be handled through consortium fanny. 3. CRR, SLR and capital requirement is centrally wielded by the put up bank. 4. Parent bank provides service on research, legal matters and investments, reducing individual member banks cost. DEMERITS- 1.It is a step towards monopoly, not estimable from economic point of view. 2. Decline in business of one member in the group affects the entire group. 3. If the parent body is not a bank, it may divert funds to further its own interest. C2. UNIT BANKING system is an individualistic system also fa vored largely in USA. In this system each bank is a centralized unit without branches it may have service centers like ATM at multiple accessible places or even a few branches within a stringently limited country. All functions of the bank are performed at one centralized place. For remittances they are linked through correspondent banks. MERITS- 1. Every type of banking service is available under one umbrella 2.It is private-enterprise(a) and highly efficient. It can take prompt decisions. 3. Continuity in personal social intercourse helps in customer care. 4. Even grotesque local needs are address by this system. DEMERITS- 1. Being localized, it can not spread stake and its resources are limited. 2. They can not diversify services, can not have large scale operations 3. Mobilization of funds is limited to their own area and so fear of failure exists. 4. They have to depend upon their correspondent bank for remittances, increase cost. 5. Very arduous to run unit banking in rural areas since rural resources are limited. C3. BRANCH BANKING system is followed about universally.In this system banks will have their pass office at one place and branches at multiple convenient places. Each branch functions like any other full fledged bank and yet is fully controlled by the head office. They even have specialized branches to take care of ad hoc requirements of customers, like NRI branch, SSI branch etc. This is very convenient to the customers. In some branches even the weekly holiday is changed to suit the people of the area. MERITS- 1. This system can spread risk, diversify services, can have large scale operations. 2. It can have specialized branches for exclusive purposes. 3. They can move currency reserve from less indispensable branch to much needful branch. 4.Remittance through branch system is informal, cheap and efficient. 5. Brings uniformity in the functioning back up by centralized system. 6. There will be an efficient head office control and less fear of failure due to its size. DEMERITS- 1. centralization of command delays decision making process. 2. Every branch may not be in a position to offer all banking services 3. Administration tends to be bureaucratic, sticking to the rules at the cost of the need. 4. More the branches, difficult will be monitoring and supervision 5. Unique local needs may not be well taken care of From the above analysis we can safely conclude that branch banking system is the stovepipe system and so is favored world over.NOTE State Bank of India is planning to bring itself and its subsidiary banks with all their branches under one Holding Bank which will be like a Central Bank with full policy control over its member banks and yet with administrative freedom given to each of the member bank to state their unique identity. This will also be a group banking system with an weighty change that the holding company is a bank whose majority send is held by the government. Hence, this syste m is going to combine the advantages of all the three systems discussed above. Indian BANKING PROFILE In India, ancient scripts as old as Manu Smriti deal with regulations on credit like- credit instruments, judicial proceedings on credits, surrogate of commercial papers, interest on loans, etc. Chanakyas Arthashastra refers to accepting deposits for lending.This was mainly money lending where as the modern concept of banking came to India with the colonial rulers. though Chanakyas Arthashastra speaks both about deposit and credit, it is basically money lending. Indian BANKING SYSTEM AN OVERVIEW v v v INDIGENOUS SYSTEM BANKING SYSTEM NBFI v v v Indig. Banker notes Lender. ____ _v______ DFI NFFC MF. v Cooperative plan v v Rural, Urban, LTCCS Coop Commercial v v v SCB, DCCB, PACS SCARDB, PCARDB Public, Private, Foreign, RRB v Nationalized Banks, SBI, SBI classify A. INDIGENOUS SYSTEM is the oldest system of banking in India. It is basically a business for profit controlled by a few upper caste communities. Hence, it got degenerated into highly exploitative system against the lower castes and accepted by the masses out of helplessness. A1. INDIGENOUS BANKERS are individuals or firms who lend money against securities- hundis, promissory notes and legal bonds which state the amount of loan, due date, rate of interest and penalty interest beyond due date. They may or may not accept deposits from the public.It is a monopoly of certain castes among Multanis and Marwaris, in the West, Gujratis and Bengalis in the easternmost and Chettis and Brahmins in the South. The interest rates of these bankers range from 6% to 150% depending on the nature of the security. Many of them have trading interests and control the marketing of the borrowers products. They operate mainly in big trading centers with their offices and branches. A2. coin LENDERS are individuals usually from Mahajan, Sowcar and Pathan communities. They do not accept deposits and their methods of busi ness are not uniform. Others with surplus funds too are involved in money lending occasionally.Money lenders usually lend dwarfish amounts on personal security without any written agreement with prohibitive interest ranging from 75% to 300%, invariably quoted and collected on a monthly basis. They operate mainly among peasants and urban labor class. The lenders in both these categories are not interested in change magnitude productivity through credit. They are not even bothered about the principal amount as long as the interest keeps coming on time. Most of their credit goes for non- oil-bearing white plague activities. They are willing to give fresh credit to pay off the old credit with interest as it enhances their constituteing. There are teeming cases where illiterates get cheated by them.Money lending now requires a govt. evidence and has a cap on interest rates. In spite of such restrictions, money lending business it still continues illegally among the low income group s because of easy access, absence of paper work and familiarity with the lenders. B. NON BANKING FIN. INSTITUTIONS or NBFI consist of development finance institutions, non-banking finance companies and mutual funds governed under SEBI. They do not come under direct rbi control like the commercial banks. B1. exploitation FINANCE INSTITUTIONS established by the central government for specific antecedence sector developmental activities. They are EXIM Bank, NABARD, NHB & SIDBI. EXIM Bank derives its name from Export-Import and its main activity is direct lending by way of long term loans and investments in export and import activities. NABARD is abbreviation for National Bank for Agriculture & Rural Development and is involved in refinancing banks and non banking financial institutions for agricultural and rural developmental activities. NHB stands for National Housing Bank refinancing banks and non banking finance institutions on housing credits. SIDBI is short form for Small I ndustries Development Bank of India and it extends refinance to banks and non banking finance institutions for small scale industries. B2. NON-BANKING FINANCE COMPANIES come under the regulations and supervision of rbi since 1998 but not under the II schedule like the plan banks.They are private or public limited companies and are allowed by rbi to accept deposits and offer 1% higher interest than the banks. They give credit only for the specific activities for which they are established like- equipment leasing companies, hire purchase finance companies, investment companies, loan companies, housing finance companies, etc. B3. MUTUAL FUNDS are trusts that accept funds from the investors and deploy them both in candour market as well as non-equity securities in a pre-determined pattern made available to the investor in advance and fully share the increase lolly with the investors after deducting their legitimate expenses.Hence, gain from mutual funds depends on the types of sec urities purchased by them. Broadly speaking there are three types of usual Funds. Equity Funds invest at least 65% of their funds in various equities and may give superlative returns or make one lose ones own money depending on the market situation. Debt Funds invest in non equity securities and give low but steady returns. relaxationd Funds are combination of both equity & debt funds. For a detailed discussion on Mutual Funds please see appendix at the end. C. BANKING SYSTEM consists of both cooperative and scheduled banks. C1. COOPERATIVE BANKS received momentum after the 2nd dramatics War.They are formed by the cooperation of any group under the Co-op Societies Act. Such groups are largely localized and the success depends on their own expertise. Urban Co-op Banks catering to the needs of the urban population and Rural Co-op Banks such as State Co-op Banks and District Central Co-op Banks catering to the needs of the rural population fall in this category. Co-op Banks are not listed under the second schedule of rbi Act, 1934 but they come under RBI supervision separately. They are required to allocate 40% of their credit to the priority sector of the government like any other commercial bank, work within the jurisdiction of their state and are primarily into short term credit to its members.They are allowed to offer cheque book facility and interest 1% higher than commercial banks on deposits, but they do not offer all the banking and other ancillary facilities of a full fledged bank. All co-op banks/ credit societies have to be registered under Cooperative Societies Act of the respective states. They work on the basis of cooperation and can be established by any group of people by forming a co-op family and subscribing for their shares. The main difference between a co-op bank and a co-op credit society is that the former can receive deposit from general public and give cheque book facility but give credit only to the members where as the latter prov ides its services and benefits only to its members. in like manner these, there are also primordial Agricultural Credit Societies, Primary Cooperative Agriculture & Rural Development Banks and State Cooperative Agriculture & Rural Development Banks in the cooperative sector. Cooperative banking structure, particularly the rural sector cooperative banking is quite complex in India. It can be broadly classified as follows- Urban Cooperative Banks alone have a single score structure catering to all types of needs of the urban population through their branches in major cities spread all over the state, just like any other bank. Rural Cooperative Banks have three tier structures of delivery- State Cooperative Bank at the Apex level, District Central Cooperative Bank at the intermediator level and Primary Agricultural Credit Societies at the Base level.Long Term Cooperative Credit Societies usually have two tier system- Primary Cooperative Agriculture & Rural Development Banks at the b ase level and State Cooperative Agriculture & Rural Development Banks at the state level. Some states have unitary system with State level banks working through their own branches and some other states have a mixture of both systems. C2. plan BANKS are those which are registered as common stock companies under Indian Companies Act and are also listed under 2nd schedule of the RBI Act, 1934. They are licensed by RBI to have branches all over India or even abroad and perform all banking activities including foreign exchange.They are required to lend 40% of their credit to the priority sectors of the government. They directly come under RBI regulations and supervision. RBI control over the scheduled banks is so efficient that we do not have any example where a scheduled bank has ever use for liquidation since the inception of RBI. Scheduled banks are basically of two types- a. schedule COOPERATIVE BANKS are those cooperative banks with a large capital base and listed under the 2nd sc hedule of RBI Act of 1934. They can offer all banking facilities just like any other commercial bank. b. SCHEDULED COMMERCIAL BANKS are those private or public limited joint stock companies listed under the 2nd schedule of RBI Act of.They are further classified into 4 groups Public orbit Banks, Private Sector Banks, Foreign Banks and Regional Rural Banks. b1. PUBLIC area BANKS are public limited companies whose majority shares are held by the government. Hence, their board of directors is fully controlled by the govt. and they come directly under govt. regulations. They are further classified into State Bank of India, Subsidiary Banks of SBI and Nationalized Banks. STATE BANK OF INDIA The East India Company established three banks- Presidency Bank of Bengal in 1809, Presidency Bank of Bombay in 1840 and Presidency Bank of Madras in 1843 as bankers to the respective Presidency Governments.In 1921 they were amalgamated into Imperial Bank of India which also functioned as the centra l bank till RBI was formed in 1935. In 1955 it was nationalized and re-named as State Bank of India, popularly known as SBI. It also acts as the banker to the government wherever RBI does not have its offices. SUBSIDIARY BANKS OF SBI or SBI Group was formed by SBI with majority shareholding in them. State Banks of Saurashtra / Indore have merged with SBI in 2008 & 2010 on an individual basis. State Banks of Mysore / Travancore / Hyderabad / Patiala / Bikaner & Jaipur are in the process of merger. SBI European Bank is their foreign subsidiary bank. NATIONALIZED BANKS 14 commercial banks were nationalized in 1969.They are- Allahabad Bank, Bank of India, Bank of Baroda, Bank of Maharashtra, Canara Bank, Central Bank of India, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, United Commercial Bank, United Bank of India and Union Bank of India. 6 more were nationalized in 1980. They are Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab & Sind Bank and Vijaya Bank. b2. PRVIATE SECTOR BANKS do not have any govt. stake in their share holdings. Most of them are owned and controlled by business groups and follow aggressive corporate culture in their functioning to maximize their profits. The promotion prospects of their employees are directly linked to the business they promote unlike in public sector.Hence, they are far fore of public sector banks in value added services, customer care and at the same time they also charge a host of hidden costs unlike the public sector banks. b3. FOREIGN BANKS are those banks whose head offices are regain outside India and are allowed to do banking business under certain conditions. Prominent among them is lending 32% of their credit to the priority sector including export credit. Financing foreign trade remains their main business in India. They can fulfill their priority sector lending requirement by lending to priority sector export business and investing in priority sector government financial institutions. b4.REGIONAL arcadian BANKS were puddled to provide institutional credit and other facilities to the small and marginal farmers, agricultural laborers, artisans and small entrepreneurs in rural areas under 20 point stinting Program of the central government. 19 such banks were established in 1976, one in each state. They were given a jurisdiction to work, freedom to have branches or agencies within their jurisdiction and were put under the sponsorship of a nationalized bank. self-command pattern of the capital was 35% with sponsor bank, 50% with the central govt. and 15% with the state govt. D. CHANGING PROFILE Indian economic policy has been founded on the philosophy of economic growth and social justice. Indian banking sector has undergone a dynamic change over the years based on the needs of its frugality. Most classical among them are- REACH- The branch network of Indian banking system in so blanket(a), it covers almost al l remote corners of India. It is one of the largest networks in the world. DEVT- The diversification and development of our economy and its rapid growth is all because of our banking systems credit to various priority sectors. These achievements have become a ingenuousness because of the changing profile of our banking system over the years. We shall discuss the major changes in the profile as under- D1. CHANGE IN SECURITY ORIENTATION traditionally personal creditworthiness of the borrower mattered a lot for any credit to be released. It meant, safety of the credit alone mattered for the banks and this safety came from the wealth the customers possessed.It efficiently meant that only cockeyed people could borrow from the bank. Now, banks have now changed their orientation from safety to purpose. Credit is now made available to make them creditworthy. Hence, technical competence of the borrower, operational flexibility and economic viability of the project has become more big than the security offered by the borrower. D2. CHANGE IN REGIONAL IMBALANCES Private Banks opened their branches in urban locations because of the business potential. As a result Rural India remained upset by the banks. For example, pre-nationalization of banks there were only 12555 branches of banks in the entire country and they were located mainly in the urban centers.Post nationalization of banks number of branches has quick risen and as of Mar-09 it stands at 82408 branches. It is important to note that over 49% of these branches are now in the rural areas. It gives evidence that banking network has now spread uniformly to cover the entire nation without rural-urban bias. D3. CHANGE IN BANKING HABIT As a natural corollary to the development in the field of branch banking, development of baking habits in India have grown at an unparalleled footprint. Banks have successfully induced the customers to save a part of their earning in banks for the future. Some banks even sent th eir agents entry to door to collect the savings. This helped the banks to diversify their lending portfolio considerably.If the deposits & advances counted for 13% & 10% of GDP respectively in 1969 they shot up to a whopping 50% & 25% respectively in 2002. D4. CHANGE IN BANKERS ATTITUDE A welcome change is the change in the attitude of the bankers. Earlier lending had a wholesale character coupled with the security of the credit. This attitude of the bankers made the banking facilities almost the exclusive prerogative of the elite classes. With the branches reaching the rural areas banking went retail and for the ordinary masses. appropriate of credit no more became a matter of privilege it became available for genuine production need based purely on technical norms. D5.CHANGE IN BANKING PRODUCTS As the focus got shifted from wholesale to retail banking, private banks in particular came up with novel products to suit the needs of the retail customers, like- home loan, auto loan, c redit card, etc. Pigmy deposit introduced by Syndicate Bank and imitated by others in its various forms for example aimed at pooling idle money and inculcate saving habits among people. Banks sent their agents door to door to collect the deposit money on a daily basis and without setting a minimum. Bank deposits grew substantially because of this scheme. Such innovative products were considered a tough proposition earlier by the banks due to the volume of operations involved. Now, computerization of banking system has removed this difficulty.Some of the banks have started offering even auto FD where amounts above a pre set limit gets converted automatically into FD to fetch higher interest and gets redeemed automatically when cheques are presented and the account runs short of balance. D6. CHANGE IN MODE OF BANKING When the banking system was manually operated, almost all services were time consuming except depositing money into the account in the base branch where the account is m aintained. Computerization of banking has made service faster the entire country is made to appear like one branch and even the necessity to go to the bank during banking hours for transactions is beseeming redundant. money can be drawn from ATM anytime, even during holidays and bills can be paid directly to the account from ones own office. D7.CHANGE IN NON-BANKING ACTIVITIES Many banks have diversified their activities beyond traditional banking activities like equipment leasing, hire purchase financing and factoring acting as agents for the customers. A major step in this direction is the merger of ICICI with ICICI Bank D8. CHANGE IN APPROACH TO CREDIT As a corollary to the shift from security orientation to purpose orientation, banks approach to credit also changed from lending to development in the recent past. Banks started lending for the purpose of industrial development, providing access to capital market and long term savings of the economy. They even started specialize d branches to cater to the specific needs of the customers, like- NRI Branch, Overseas Branch, SSI Branch, Recovery Branch, etc. D9.CHANGE IN CUSTOMER SERVICE Private Banks started giving more focus to customer care in order to win more business. They even gave free collection and delivery facilities to HNI customers. To cope with the increasing banking habit, RBI too came up with a Banking Ombudsman scheme to redress the customers complaints. E. CHALLENGES AHEAD Banks have sacrificed some qualitative aspects of growth while expanding the banking system to achieve development and increase its reach. Prudent regulations have no doubt helped to ensure general stability, but enhanced efficiency would necessitate institutional changes in the inner(a) functioning of the banks in the following fields- E1.ORGANISATIONAL STRUCTURE Centralized structures work wonders under uniform conditions. As the banks diversify their business into the field of agriculture, rural development and other p riority sectors they have to deal with unlike types of customers who need different kind of treatment. They can not afford to force the standard school practices on all the customers uniformly. For example, to finance rural development it is very much essential that banks evolve simple and meaningful procedures to the comfort of the rural folks. The most common complaint against banks is the under-financing and non-availability of timely credit to meet the borrowers need based requirements.Hence, banks must revamp their organizational structures by delegating power, decentralizing control and monitoring performance. E2. EXCELLENCE IN heed Quality of management is another challenge in the face of fast expansion. Here are ten critical characteristics of a good bank management- 1. An open culture and extensive vertical and horizontal communication, 2. Strong shared values, 3. Profit performance as a value, 4. Customer focused business orientation, 5. Willingness to invest in tonic products, 6. Strong sense of direction and consistent leadership, 7. Commitment to recruit silk hat persons, 8. Investment in training, 9. Product information system and 10. Strong credit risk management. E3. corporate GOVERNANCE There are instances where the boards have shown vacillation to ratify and adopt RBI circulated covenants on professinalization of bank boards. Corporate political science can not be enforced through regulations, it must chute from within. E4. EMPLOYEE COMPETENCY Together with the change in organizational structure there is a need to increase employee competency also. When rude(a) entrants into the market like Mutual Funds are cutting into the business of the banks, contemporary banking is congruous more and more skill sensitive and information technology is throwing new challenges to the banking systems, employee competency has become all the more important to retain the living business of the banks and expand it. E5.APPROPRIATE TECHNOLOGY Well estab lished banks are facing stiff competition from the new entrant banks in monetary value of use of appropriate technology that makes banking convenient. The established banks do use modern technology but are way behind in maintaining pace and are challenged by these new entrants in order to remain in business. E6. NONPERFORMING ASSETS These are popularly known as NPA, the loans that do not perform- loans under litigation or bad loans that are doubtful of recovery. 6. 2% of loans of scheduled commercial banks were NPA and the public sector banks had to write off 42. 5% of the NPA as on 31. 3. 2002. It reflects on the superior of the loan portfolio. At 5% NPA, 17 out of 21 major banks in Japan were on the red.As per developed country standards it has to be around 2%. Hence, banks have to bring down the NPA ratio drastically. E7. DIRECTED CREDIT NPA as discussed above is a direct result of the quality of the loan portfolio of the banks. The system of directed credit to priority sector has no doubt brought impressive performance in quantitative terms but qualitatively it has brought more loan delinquencies since the relation between credit expansion and productivity has become weak. Political impediment in credit decision-making is pointed out as a factor. The populist phenomenon of loan mela is certainly contrary to the professional appraisal of bank credit needs.What is required to improve the quality of loan is- 1. Serious appraisal of credit need, 2. possible productive activity and 3. Effective post credit supervision. E8. RISK MANAGEMENT Risk is intrinsic to any business all the more to banking. Risks encountered by banks have increased with the diversity of banking business and growing sophistication of banking operations. The major risks encountered by banks are credit risk, interest rate risk, operational risk, forex risk and liquidity risk. While deregulation has opened up new vistas for banks to shore up more revenue, it has entailed greater competiti on and greater risks too. Hence, greater assist needs to be iven in strengthening of internal controls of risk management. E9. wander INDUSTRIAL UNITS Funds locked up in industrial sickness has reached a staggering 2% of the entire credit of the banking system in troop 2000. When sick units have to be nursed for social objectives banks should not be forced to suffer actual stakeholders must bear the burden of breast feeding them. When sick units are nationalized for protecting the employment or they are public sector entities, govt. must give adequate compensation to the banks to cover their dues which seldom happens in reality. It is neither legitimate nor practical for the banks to nurse sick units in all circumstances. E10.PROFIT PLANNING Banking can not run like other profit making business since excessive and unjustified profits can only be at the cost of development of the society so far as the lending rates push up the production cost and ultimately is passed on to the cus tomer. At the same time strong operating profits allow for allocations to capital and reserves which are very much essential for any bank to maintain its competitive viability. This setback was realized in the 90s when the nationalized banks posted declining profits. Nevertheless, plan efforts by these banks improved the situation by 2002. Stiff competition makes the banks to work on thin interest rate margins but to increase their profitability, they have to increase their fee based non-fund services substantially. E11.CUSTOMER SERVICE Though entry of new private banks no doubt has increased the quality of customer service, it is by and large confined to urban areas and to wealthy customers. and the educated and wealthy customers have access to detailed information on all the banking facilities available. Customer care is very much wanting in public sector banks where the unionized employees are sure of not losing their jobs on this count. Efforts must be made to collect customer feedback on fixing basis and remedy the defects pointed out if any, at the earliest wherever possible. E12. world(a) STANDARDS Computerization has revolutionized in banking in India. But it has not yet made much progress in expanding it beyond the ational keeparies. Not many branches of Indian banks are found outside India. Just like its progress in Information Technology and software, India has to make good progress in the banking sector internationally since allocation of capital can not be bound by geographical boundaries. COMMERCIAL BANK A. FEATURES Commercial banks are private or public limited joint stock banking companies registered under Indian Companies Act. There are three distinct features of a commercial bank- they accept DEPOSITS on lower cost and give CREDIT on higher cost and the cost difference between deposit and credit is their GAIN. For more details refer features of a bankIts substance to earn profits depends on its investment policy which in turn depends on the manner in which it manages its investment portfolio. Portfolio management refers to prudent management of a banks profit, liquidity and safety. But most commercial banks have gone way ahead of their basic functions introducing a host of fee based ancillary financial services in order to maximize their profits. Thus a commercial bank now may be defined as an institution that accepts deposits from the public on lower cost and lends it on credit on higher cost as well as offers ancillary services for a fee in order to increase its profits. B. ROLE IN FINANCIAL SYSTEM Commercial banks strive to earn a profit.At the same time their entire business of credit depends on public money deposited with them. Hence, they can not afford to risk public money just to increase their own profits. It is common knowledge that national level bank strikes throttle the lifeline of the nations economy and inflict heavy losses on the GDP. The significance of banks role in the financial system must be u nderstood in the address of Walter Leaf, who says The banker is the universal arbiter of the worlds economy Commercial banks have to play a major role in three distinct areas- Providing fiscal liquidity to the financial system, Giving capital protection to the economy and Speeding up economic growth of the nation. B1.FISCAL LIQUIDITY By fiscal liquidity we mean the capacity to produce cash on demand. The most important role of any bank is to provide liquidity to the financial system. Banks pool around idle money in small pockets through their wide spread branches into a large capital and redeploy it wherever needed. For better management of credit, banks like to have as much funds in liquid as possible while maximization of gain is possible only by deploying upper limit available funds on credit. Both are important for the bank. Hence, bank has to strike an effective balance between them so that neither its profitability suffers nor the liquidity of the market is affected. Liqu idity of the assets of the bank is planned in three stages- a.CASH is the most liquid asset. But it is an idle asset earning no returns for the bank. Yet certain percent of deposits must be always kept in reserve with the Central Bank in addition to cash in hand to meet immediate withdrawal of deposit. This is known as Cash Reserve Ratio or CRR. It is decided by the Central Bank. b. CALL MONEY is the investment in Money Market, adherence Market and Reverse Repo. Money Market securities include short term securities like Certificate of Deposit CD of banks, Commercial Papers CP of companies, treasury bills of the govt. which give stable but low returns and long term govt. securities whose let depend on the interest scenario. Bond Market securities include Medium Term as well as Long Term bonds of any banks or companies tradable in the secondary bond market. They are bought and sold at discount or premium and hence, their yield also depends on interest scenario. Reverse Repo is the system through which RBI borrows from commercial banks to absorb excess liquidity at lower interest rate. These funds are made available to commercial banks through bills buy under repo system on a little higher interest. These securities are the next best liquid assets but the returns from these securities are low. But it is important to select only those securities which give a fairly stable return.These securities can easily be liquidated in the Market with short notice. RBI prescribes a Statutory Liquidity Ratio or SLR for banks by which banks have to maintain certain percent of their deposits as liquid assets. c. CREDIT and investments give maximum gain to the bank but they are the least liquid. Hence, these assets should be created only in required proportion, never as a priority. Among them, short term credits are preferred by banks over long term credits for the sake of liquidity. B2. CAPITAL SAFETY Commercial banks strive to earn profit. But this must be done through prud ent ways without risking the deposits of their customers. They have an important role to play in the capital protection. Hence, 1. apology of deposits must be the top priority for the banks. Deposit Insurance and Credit Guarantee Corporation set up by the govt. gives guarantee only up to Rupees one lakh per customer in case a bank fails and has to be closed down. 2. Banks must avoid investing in equity related instruments or giving loan for speculative business since equity market weakens capital safety to a large extent. This is required to increase stability of the capital. 3. Banks have to use self restraint in their credit to other volatile businesses like real estate, film manufacturing, etc. Similarly they must be extra cautious while accepting volatile securities as surety for credit. 4.Banks must restrict long term credits and investments to a small percent since capital safety in short term credits is higher than the long term credits. 5. in the lead giving clean loans, b anks must have a thorough reality check on the creditworthiness of the borrowers to repay the loan on time. 6. Banks must maintain a fair margin between their interest rates on deposits and credits. B3. ECONOMIC GROWTH Banks have a greater role to play in the economic growth of the nation through economic development of all the sectors. Hence, they must provide more credit to developmental and productive activities than non-productive or consumption oriented activities.Basically there are three types of developmental activities- Large capital based corporate activities, medium or small capital based priority sector activities and export activity. a. CORPORATE SECTOR- While funding developmental activities, banks find it easy to provide credit to large capital based profit making corporates in industry & trade since timely repayment of credit received by them with interest is almost guaranteed. Funding is required not only for corporates but also for other sectors like industry, trad e, service, infrastructure, transport, housing, power, finance, technology, etc and the banks can not overlook one sector at the expense of the other. Besides, corporate sector companies also have the capacity to increase its capital base or raise funds from the open market by issuing their own bonds.In other run-in they do not depend heavily on banks for their capital requirements where as others heavily depend on banks. Hence, banks must use their prudence while deciding percentages for corporate credit. Large capital companies, particularly industry contribute to the economic growth of the nation not only by increasing production but also by increasing job opportunities. But their main drawback is that they are basically profit oriented and development is a byproduct of their activity. They are reluctant to venture into non-profit sectors that are essential for a balanced growth of economy. b. PRIORITY SECTOR- For all-round and real development there are certain priority sectors of the nation that require funding avail by the banks.They are- infrastructure development like housing, rail and road construction, power, transport, etc. as well as small scale industry, trade, technology, agriculture, etc. From the profit perspective these priority sectors may not be always lucrative. It will not be always easy for these sectors either to increase their capital or borrow from open market they depend heavily on banks for their capital requirements. RBI has mandated 40% of the total credit of all cooperative & scheduled banks and 32% for foreign banks towards priority sector lending. Banks are allowed to invest in special bonds or investment instruments of these sectors to meet these requirements. c. AGRICULTURE SECTOR is surely a super priority sector.It must attract special attention of the banks since self sufficiency in agriculture has to be a top priority of any nation. Agricultural production is commercially null at least in Indian context. Small and mediu m farmers produce just enough to sustain since their personal labor in agricultural production gets them no returns. Any other production can wait, not food it has to be produced proportional to the population irrespective of the cost. For the same reason, governments are providing subsidy and refinance facilities for agriculture. Banks must ensure that the government benefits really reach the medium and small farmers. d. EXPORT SECTOR is not an exclusive sector like corporate or priority sector.It can pervade both corporate as well as priority sectors. Economies of the world are so interdependent that each country must have enough reserves in the currencies of other countries to pay the bills for supplies received from those countries. In its absence they end up in raising foreign debt which in turn has a cost by way of interest or else they end up in depleting nations gold reserves. If a country depends on foreign supplies, it must give high priority to exports to that country to strengthen their balance of payment. In such a situation banks must step in to provide credit to export activities in a preferred manner to increase countys reserves in that currency. C.MULTIPLE CREDIT CREATION There are two views on whether banks can create credit- One view held by Walter Leaf is that banks can not create money out of thin air. They can lend what they have in cash. Another view held by Hartley Withers is that banks can create credit by opening a deposit every time they advance a loan. It is interesting to know that in an effort to maintain lowest possible idle cash, banks end up in increasing the money in circulation without increasing tender cash currency while creating credit In fact, credit creation is one of the most important functions of a commercial bank. They increase the purchasing power of people. Let us see how does this happen. C1.METHOD When bank gives a loan it pre-supposes that bank has cash through deposits. From the deposit bank gives loan which in turn gets deposited in the bank account. It creates an asset as well as a deposit with the bank. The beneficiary customer can issue cheques for payments in addition to the breathing customers who have originally deposited the money. Thus money available in circulation superficially becomes more than the actual tender cash currency. This is the view of practical bankers. cover Example Let us presume that our country has only one bank B and all the citizens are heavily into banking making the cash requirement of B just 10%.B gets total demand deposit of R. myriad and that is the only currency in circulation in our country. Balance sheet of B will read as follows LIABILITIES ASSETS Deposits 10000 Cash in Hand 10000 TOTAL 10000 TOTAL 10000 B has to maintain 10% of its deposit of 10000 which is 1000 as cash reserve. It implies that B can give 9000 as loan. It creates an additional deposit as it is released to the deposit account while creating a credit of 9000 and the new balance sheet will read thus LIABILITIES ASSETS Deposits 19000 Cash in Hand 10000