Dibrugarh University Question Paper
2013 (May)
Course: 404
1. Answer the following questions:
a) ICICI bank was the first bank to offer internet banking in India. (true/false)
Ans: True
b) In which year the Bill Market Scheme was introduced by the Reserve Bank?
Ans: Jan’ 1952
c) What is the major source of banks fund?
Ans: Public Deposit
d) What type of bank provides overdraft facilities?
Ans: Commercial banks
e) What is Scheduled Bank?
Ans: A scheduled bank means a bank included in the second schedule of the Reserve Bank of India Act, 1934.
f) In which year RBI Act was passed?
Ans: 1934
g) What is CRR?
Ans: Cash reserve ratio refers to the cash which banks have to maintain with the RBI as a certain percentage of their demand and time liabilities.
h) Mention one of the names of rural banks in Assam?
Ans: Assam Gramin Vikash Bank
2. Write short notes on (any four)
a) State Bank of India
b) Capital Market
c) Rural Bank
d) Factoring
e) Phone Banking
f) Cash Credit
Ans: a) State Bank of India: The State Bank of India was established under the State Bank of India Act, 1955, by nationalizing the Imperial bank of India with the object of extending banking facilities in rural areas. I came into existence on 1st July 1955. Though Imperial Bank was important banking institution in 16th April 1955, SBI bill was passed on 8th May 1955 by the Government of India. SBI was organized depending on the recommendation of All India Rural Credit Survey Committee (AIRCSC) which was appointed by RBI in 1951.
SBI is managed by Central Board of directors. In this Board, there is one chairman, one vice-chairman two managing directors and sixteen directors (Total 20 members). The head quarter of SBI is located at Mumbai and its local offices at Kolkata, Mumbai, Chennai, New Delhi, Lucknow, Ahmadabad, Hyderabad, Bhubaneswar, Bangalore, Guwahati etc. It performed all the functions performed by commercial banks. Besides it, SBI performed as an agent of RBI where there is no branch of RBI.
b) Capital Market: Capital Market is generally understood as the market for long-term funds. This market supplies funds for financing the fixed capital requirement of trade and commerce as well as the long-term requirements of the Government. The long-term funds are made available through various instruments such as debentures, preference shares, and common shares. The capital market can be local, regional, national, or international.
The capital market is classified into two categories (Components), namely,
(i) Primary market or new issue market, and
(ii) Secondary market or stock exchange.
Features of Indian Capital Market
a) Dealing in Securities: It deals in long-term marketable securities and non-marketable securities.
b) Segments: It included both primary and secondary market. Primary market is meant for issue of fresh shares and secondary market facilitates buying and selling of second hand securities.
c) Investors: It includes both individual investors and institutional investors.
d) Flow of capital: It facilitates flow of long term capital from those who have surplus capital to those who need capital.
e) Intermediaries: It acts through intermediaries which includes bankers, brokers, underwriters etc.
c) Rural Bank: Regional Rural Banks were established under the provisions of an Ordinance promulgated on the 26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional credit for agriculture and other rural sectors. The RRBs mobilize financial resources from rural / semi-urban areas and grant loans and advances mostly to small and marginal farmers, agricultural laborers and rural artisans. The area of operation of RRBs is limited to the area as notified by Government of India covering one or more districts in the State.
The Regional Rural Banks (RRBs) have been set up to supplement the efforts of cooperative and commercial banks to provide credit to rural sector. The following were the reasons or need set up the RRBs:
1. To free the rural poor, small and marginal farmers from the clutches of money lenders
2. To provide credit to small farmers, marginal farmers, rural artisans, landless laborers who do not fulfill the criterion of creditworthiness as per the banking principles.
3. To provide banking services to the rural community at a relatively lower cost by adopting a different staffing pattern, wage structure and banking policies.
d) Factoring: Factoring is a service of financial nature involving the conversion of credit bills into cash. Accounts receivables, bills recoverable and other credit dues resulting from credit sales appear, in the books of accounts as book credits. Here the risk of credit, risk of credit worthiness of the debtor and as number of incidental and consequential risks are involved. These risks are taken by the factor which purchase these credit receivables without recourse and collects them when due. These balance-sheet items are replaced by cash received from the factoring agent. Factoring is also called “Invoice Agent” or purchase and discount of all “receivables”.
e) Phone Banking: Telephone banking is a service provided by a bank or other financial institution, that enables customers to perform a range of financial transactions over the telephone, without the need to visit a bank branch or automated teller machine. Telephone banking times are usually longer than branch opening times, and some financial institutions offer the service on a 24-hour basis. Most financial institutions have restrictions on which accounts may be accessed through telephone banking, as well as a limit on the amount that can be transacted.
The types of financial transactions which a customer may transact through telephone banking include obtaining account balances and list of latest transactions, electronic bill payments, and funds transfers between a customer's or another's accounts.
From the bank's point of view, telephone banking minimises the cost of handling transactions by reducing the need for customers to visit a bank branch for non-cash withdrawal and deposit transactions. Transactions involving cash or documents (such as cheques) are not able to be handled using telephone banking, and a customer needs to visit an ATM or bank branch for cash withdrawals and cash or cheque deposits.
f) Cash Credit: Cash Credit: Cash Credit is a type of advance wherein a banker permits his customer to borrow money upto a particular limit by a bond of credit with one or more securities. The advantage associated with this system is that a customer can withdrawn money as and when required. The bank will charge interest only on the actual amount withdrawn by the customer. Many industrial concerns and business houses borrow money in this form.
3. (a) Define a Bank. Discuss the functions of a modern commercial Bank.
Ans: Functions of commercial banks
Modern banks not only deal in money and credit creation, other useful functions management of foreign trade, finance etc. The meaning of modern banks is used in narrow sense of the term as commercial banks. Functions of commercial banks are divided in the following main categories:
A) Primary Functions:
I. Accepting deposits
II. Advancing loans
III. Investments of funds
IV. Credit creation
B) Secondary Functions:
I. Agency functions
II. General utility functions
I. Accepting Deposits: The most important function of commercial banks is to accept deposits from public. This is the primary functions of a commercial bank. Banks receives the idle savings of people in the form of deposits and finances the temporary needs of commercial and industrial firms. A commercial bank accept deposit from public on various account, important deposit account generally kept by bank are:
a) Saving Bank Deposits: This type of deposits suit to those who just want to keep their small savings in a bank and might need to withdraw them occasionally. One or two withdrawals upto a certain limit of total deposits are allowed in a week. The rate of interest allowed on saving bank deposits is less than that on fixed deposits. Depositor is given a pass book and a cheque book. Withdrawals are allowed by cheques and withdrawal form.
b) Current Deposits: This type of account are generally kept by businessmen and industrialists and those people who meet a large number of monetary transactions in their routine. These deposits are known as short term deposits or demand deposits. They are payable demand without notice. Usually no interest is paid on these deposits because the bank cannot utilize these deposits and keep almost cent per cent reserve against them. Overdraft facilities are also available on current account.
c) Fixed Deposits: These are also known as time deposits. In this account a fixed amount is deposited for a fixed period of time. Deposits are payable after the expiry of the stipulated period. Customers keep their money in fixed deposits with the bank in order of earn interest. The banks pay higher interest on fixed deposits. The rates depend upon the length of the period and state of money market. Normally the withdrawals are not allowed from fixed deposits before the stipulated date. If it happens, the depositor entails an interest penalty.
d) Other Deposits: Banks also provide deposit facilities to different type of customers by opening different account. They also open. ‘Home Safe Account’ for housewife or very small savers. The other accounts are : ‘Indefinite Period Deposit a/c’; ‘Recurring Deposit’ a/c; ‘Retirement Scheme’ etc.
II. Advancing of Loans: The second main function of the commercial bank is to advance loans. Money is lent to businessmen and trade for short period only. These banks cannot lend money for long period because they must keep themselves ready to meet the short term deposits. The bank advances money in any one of the following forms:
a) Cash Credit: Cash Credit is a type of advance wherein a banker permits his customer to borrow money upto a particular limit by a bond of credit with one or more securities. The advantage associated with this system is that a customer can withdrawn money as and when required. The bank will charge interest only on the actual amount withdrawn by the customer. Many industrial concerns and business houses borrow money in this form.
b) Overdraft: An overdraft is an arrangement by which the customer is allowed to overdraw his account. It is granted against some collateral securities. The facility to overdraw is allowed through current account only. Interest is charged on the exact amount of overdrawn subject to the payment of minimum amount by way of interest.
c) Loan: Loan is an advance in lump sum amount the whole of which is withdrawn and is supported to be rapid generally wholly at one time. It is made with or without security. It is given for a fixed period at in agreed rate of interest. Repayments may be made in installments or at the expiry of a certain period.
d) Discounting Bill of Exchange: The bank also gives advances to their customers by discounting their bills. The net amount after deducting the amount of discount is credited to the account of customer. The bank may discount the bills with or without any security from the debtor in addition to the personal security of one or more person already liable on the bill.
III. Investment of funds: Besides loan and advances, banks also invest a part of its funds in govt. and industrial securities. Banks purchases both govt. and industrial securities like govt. bills, share, debentures, etc from their market.
IV. Credit Creations: The banks create credit. When a bank advances a loan, it does not give cash to the borrower. It opens an account in the name of the borrower. The borrower is allowed to withdraw money by cheque whenever he needs. This is known as Credit Creation.
Secondary Functions of banks: It is divided into two parts:
I. Agency Services: Modern Banks render service to the individual or to the business institutions as an agent. Banks usually charge little commission for doing these services. These services are as follows:
a) Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.
b) Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.
c) Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers. Banks neither give any advice to their customers, regarding this investment, nor levy any charge of them for their services, but simply perform the function of a broker.
d) Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.
e) Acting as Trustee and Executor: Banks preserve the wills of their customers and execute them after their death.
f) Acting as Representatives and Correspondent: Sometimes the banks act as representatives and correspondents of their customers. They get passports, travelers tickets secure passages for their customers and receive letters on their behalf.
II. General Utility Services: A modern bank now a days serves its customers in many other ways :
a) Locker facility: Banks provides locker facility to their customers. The customers can keep their valuables and important documents in these lockers for safe custody.
b) Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.
c) Gift cheque: Some banks issue cheques of various denominators to be used on auspicious occasions. These are known as “gift cheques” as they are gifted to others.
d) Letter of Credit: Letter of credit are issued by the banks to their customers certifying their credit worthiness. Letter of credit are very useful in foreign trade.
e) Foreign Exchange Business: Banks also deal in the business of foreign currencies. Again, they may finance foreign trade by discounting foreign bills of exchange.
f) Collection of Statistics: Banks collects statistics giving important information relating to industry, trade and commerce, money and banking. They also publish journals and bulletins containing research articles on economic and financial matters.
Or
(b) Trace the evolution of Indian banking system.
Ans: Origin, Growth and development of banks in India
The word Bank has been originated from many words. There is no single word or answer to this origin of the word ‘Bank’. According to some economists, the word ‘Bank’ has been originated from the German word ‘Banck’ which means heap or mound or joint stock fund. From this, the Italian word ‘Ban co’ has been derived. It means heap of money. But according to this group, the word bank is derived from the Greek word ‘Banque’ which mean a ‘bench’. It refers to a place where money-lenders and money changers used to sit and display their coins and transact business. Thus the origin of the word ‘Bank’ can be traced as follows.
Bank → Banco → Banque → Bank
Banking industry in India has a long history. It has travelled a long path to assume its present form. The banking industry in Indian started with small money lenders and has now large joint stock world class banks in its fold. The growth of banks in India is discussed below over two eras:
A) Pre-Independence Period
B) Post-Independence Period
A) Pre-Independence Period: Banking in its crude from is as old as authentic history. All throughout the period of India history, indigenous bankers and money lenders are recorded to have existed and carried on the business of banking and money lending on a large scale. Between 2000 and 1400 BC during the Vedic Period records of deposits and lending are found. Renowned Hindu Law giver Manu has dealt with the matter of deposits and pledges in section of his work. According to Manu – “a sensible man should deposit has money with a person of good family, or good conduct, will acquainted with the Law, veracious, having many relatives, wealthy and honourable”. Reference is also made to the same in Kautilya’s Arthashastra. The Indian banks enjoyed considerable public confidence and this can be gauged from fact that hundis were used from the days of Mahabharata. During the Moghul Period, the indigenous bankers were most prominent in connection with the financing of trade and use of instruments of trade. From the early Vedic period right through the Moghul period as well as that of the East India Company’s rule until the middle of the 19th Century, indigenous bankers were the hub of the Indian Financial System providing credit not only to the trade but also to the Government.
Agency House: The indigenous bankers lost their importance to a certain with the advent of the English traders in India. The starting of modern banking in India can be traced to the beginning of the East India Company’s trade relation with our country. The growing trade Interest of the English merchants and non-existence of any organised banks in India, many English Agency Houses which were essentially trading company started to add banking business to their activities. The bank of Hindustan, was the earliest bank started under European direction in India. The banking business of Agency House could not continue for long. Most of these Houses failed because of their complete disregard towards the principle of banking business. The Bank of Hindustan could not withstand the failure of its parent from and was closed down in 1832.
Presidency Banks: The banking business of Agency House which survived and continued to carry on trade and banking together was progressively taken over by the Presidency Banks. The three Presidency Banks viz.:
a) The Bank of Bengal (1809);
b) The Bank of Mumbai (1840); and
c) The Bank of Chennai (1843)
were established under the Charter of the East India Company. These Banks acted as banker to the East India Company at Kolkata, Mumbai and Chennai and performed Central Banking functions for their respective areas.
Principle of Limited Liability: A land-mark development took place in the year 1860. It was in this year the principle of “limited liability” was first applied to the joint stock banks. Till then little or so banking legislation existed in India. Many banks has arised like mushrooms and failed, mostly due to speculation, mismanagement and fraud on the part of the management. The introduction of the principle of limited liability promoted the growth of banks in India. By 1895, there were 15 joint stock banks with limited liability in India.
The Swadeshi Movement: Swadeshi movement prompted Indians to start many new institutions. The number of joint stock banks increased remarkably during 1906-1913. The peoples Bank of India Limited, the Bank of India Limited, the Central Bank of India Limited, Indian Bank Limited and the Bank of Baroda Limited were setup during that period.
Imperial Bank of India: The three Presidency Banks were amalgamated into the Imperial Bank of India which was brought into existence on 27th January, 1921, by the Imperial Bank of India Act, 1920. The liability of shareholders of the Imperial Bank was limited like that of shareholders of other banks registered under the Company Act. However the word “limited” did not from a part of the name of the Bank.
B) Post-Independence Period: After independence, Government has taken most important steps in regard of Indian Banking Sector reforms. In 1955, the Imperial Bank of India was nationalized and was given the name “State Bank of India”, to act as the principal agent of RBI and to handle banking transactions all over the country. It was established under State Bank of India Act, 1955.
In 1959, the 'State Bank of India' (Subsidiary Banks) Act was passed by which the public sector banking was further extended. The following banks were made the subsidiaries of State Bank of India:
(i) The State Bank of Bikaner
(ii) The State Bank of Jaipur
(iii) The State Bank of Indore
(iv) The State Bank of Mysore
(v) The State Bank of Patiala
(vi) The State Bank of Hyderabad
(vii) The State Bank of Saurashtra
(viii) The State Bank of Travancore
These banks forming subsidiary of State Bank of India was nationalized in1960. In 1963, the first two banks were amalgamated under the name of "The State Bank of Bikaner and Jaipur".
On 19th July, 1969, 14 major Indian commercial banks of the country were nationalized. In 1980, another six banks were nationalized, and thus raising the number of nationalized banks to20. Seven more banks were nationalized with deposits over 200 Crores. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. Till the year1980 approximately 80% of the banking segment in India was under government’s ownership. On the suggestions of Narsimhan Committee, the Banking Regulation Act was amended in 1993 and hence, the gateways for the new private sector banks were opened.
4. Distinguish between:
(a) Branch Banking and Unit Banking
The difference between branch banking and unit banking are as follows:
| Basis | Branch Banking | Unit Banking |
| 1. Operate | Under branch banking a big bank with a single institution and under single ownership operates through a network of branches. | Under unit banking an individual bank operators through a single office. |
| 2. Decision | There may be undue delay to take the decision centrally in branch banking. | The unit banking, the bank can take the decision quickly. |
| 3. Risk | Risk can be spread geographically by the system of branch banking. | The risk cannot be spread geographically this unit banking system. |
| 4. Managerial costs | Managerial costs are high in Branch Banking system. | Managerial cost is comparatively less in Unit Banking. |
| 5. Funds | Funds are transferred from one branch to another. | Funds are allocated in one branch and no support of other branches. |
| 6. Deposits and assets | Deposits and assets are diversified, scattered and hence risk is spread at various places. | Deposits and assets are not diversified and are at one place, hence risk is not spread. |
| 7. Specialisation | Division of labour is possible and hence specialisation possible. | Specialisation not possible due to lack of trained staff and knowledge |
| 8. Rate of interest | Rate of interest is uniformed and specified by the head office or based on instructions from RBI. | Rate of interest is not uniformed as the bank has own policies and rates. |
(b) Public sector bank and private sector bank.
Ans: Public sector banks and Private sector banks
Public Sector Banks: Public Sector Banks are those banks in which majority stake (i.e., more than 50% of the shares) is held by the government of the country. The words such as “The” or “Ltd” will not be found in their names because the ownership of these banks are with the government and the liability is unlimited in nature. Some examples of public sector banks in India include Andhra Bank, Canara Bank, Union Bank of India, Allahabad Bank, Punjab National Bank, Corporation Bank, Indian Bank and so on.
Private Sector Banks: Private Sector Banks are those banks which are owned by group of private shareholders. They elect board of directors which manages the affairs of the banks. Some examples of private banks in India include The Lakshmi Vilas Bank Ltd., The Karur Vysya Bank Ltd., The City Union Bank Ltd., HDFC Bank, Axis Bank and son.
Difference between Public sectors banks and Private sectors banks
| Basis | Public Sectors Banks | Private Sectors Banks |
| 1. Ownership | Public sector banks are owned, managed and controlled by the government. | On the other hand, private sector banks are owned, managed and controlled by the private individuals or general citizens. |
| 2. Indian and foreign bank | Public sector banks are Indian banks and they do not include foreign banks. | Private sector banks may be Indian banks as well as foreign banks. |
| 3. Objective | Public sectors banks aims at serving the society besides earning profit. | Private sector banks are mainly driven by profit motive. |
| 4. Shareholding | In public sector banks more that 50% of capital or full capital is supplied by the Government. | But, in private sector banks, all total capital is supplied by the shareholders of the bank. |
| 5. Employees | In public sector banks required employees are appointed by the Government. | But in case of private sectors banks required employees are appointed by the owner of the banking company. |
| 6. Sharing of profit | The profits earned by the public sector banks go to the Government. | The profits earned by the private sector banks goes to the shareholders of the bank. |
5. (a) What is money market? Discuss the briefly the characteristics of Indian money market?
Ans: Meaning of Money Market
The money market is not a well-defined place where the business is transacted as in the case of capital markets where all business is transacted at a formal place, i.e. stock exchange. The money market is basically a telephone market and all the transactions are done through oral communication and are subsequently confirmed by written communication and exchange of relative instruments.
According to the RBI, "The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government.
From the above definition, it is clear that the money market consist of many sub-market such as the inter-bank call money, bill discounting, treasury bills, Certificate of deposits (CDs), Commercial paper (CPs), Repurchase Options/Ready Forward (REPO or RF), Inter-Bank participation certificates (IBPCs), Securitized Debts, Options, Financial Futures, Forward Rate Agreement (FRAs), etc. which collectively constitute the money market.
Features/Problems of the Indian Money Market
In money market short term surplus funds with banks, financial institutions and others are bid by borrowers i.e., individuals, companies and the Government. In the Indian money market RBI occupies the pivotal position. The Indian money market can be divided into two sectors i.e. unorganized and organized. The organized sector comprises of Reserve Bank of India, SBI group and commercial banks foreign, public sector and private sector. The unorganized sector consists of indigenous bankers and money lenders. The organized money market in India has number of sub-markets such as the treasury bills market, the commercial market and inter-bank call money market. The following are the characteristics of the Indian Money Market :
1. Existence of Unorganized Money Market. The most important defect of the Indian money market in the existence of unorganized segment. In this segment of the market the purpose as well period are not clearly demarcated. In fact, this segment thieves on this characteristic. This segment undermines the role of the RBI in the money market. Efforts of RBI to bring indigenous bankers within statutory frame work have not yielded much result.
2. Lack of Integration. Another important deficiency is lack of intergration of different segments or functionaries. However, with the enactment of the Banking Companies Regulation Act 1949, the position has changed considerably. The RBI is now almost fully effective in this area under various provisions of the RBI Act and the Banking Companies Regulation Act.
3. Disparity in interest rates. There have been too many interest rates prevailing in the market at the same time like borrowing rates of government, the lending rates of commercial banks, the rates of cooperative banks and rats of financial institutions. This was basically due to lack of mobility of funds from one sub-segment to another. However, with changes in financial sector the different rates of interest have been quickly adjusting to changes in the bank rate.
4. Seasonal Diversity of Money Market. A notable characteristic is the seasonal diversity. There are very wide fluctuations in the rates of interest in the money market from one period to another in the year. November to June is the buy period. During this period crops from rural areas are moved to cities and parts. The wide fluctuations create problems in the money market. The Reserve Bank of India attempts to lessen the seasonal fluctuations in the money market.
5. Lack of Proper Bill Market. Indian Bill market is an underdeveloped one. A well organized bill market or a discount market for short term bills is essential for establishing an effective link between credit agencies and Reserve Bank of India. The reasons for the situation are historical, like preference for cash to bills etc.
6. Lack of very well Organized Banking System. Till 1969, the branch expansion was very slow. There was tremendous effort in this direction after nationalization. A well developed banking system is essential for money market. Even, at present the lack of branches in rural areas hinders the movement of funds. With emphasis on profitability, there may be some problems on this account.
In totality it can be said that Indian Money Market is relatively under developed. In no case it can be compared with London Money Market or New York Money Market. There are number of factors responsible for it in addition to the above discussed characteristics. For example, lack of continuous supply of bills, a developed acceptance market, commercial bills market, dealers in short term assets and coordination between different sections of the money market.
Or
(b) Discuss about market reforms talking place during the post-economic liberalization period in India. Out of syllabus
6. (a) Discuss the main reasons behind the nationalization of banks in our country.
Ans: Nationalisation of Banks in India
Nationalization is a process whereby a national government or State takes over the private industry, organisation or assets into public ownership by an Act or ordinance or some other kind of orders. This strategy has been frequently adopted by socialist governments for transition from capitalism to socialism.
The banking sector in India has been facing extreme changes with the economic growth of the country. In 1948, RBI (Transfer of public ownership) Act was passed to nationalised the Reserve Bank. On Jan 1, 1949, RBI was nationalised. In 1955, the Imperial Bank of India was nationalized and was given the name “State Bank of India”, to act as the principal agent of RBI and to handle banking transactions all over the country. It was established under State Bank of India Act, 1955.
On 19th July, 1969, 14 major Indian commercial banks of the country were nationalized. In 1980, another six banks were nationalized, and thus raising the number of nationalized banks to20. Seven more banks were nationalized with deposits over 200 Crores. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. Till the year1980 approximately 80% of the banking segment in India was under government’s ownership. On the suggestions of Narsimhan Committee, the Banking Regulation Act was amended in 1993 and hence, the gateways for the new private sector banks were opened.
Objectives (Reasons) Behind Nationalisation of Banks in India
1. To reduce monopoly practices: Initially, a few leading industrial and "business houses had close association with commercial banks. They exploited the bank resources in such a way that the new business units cannot enter in any line of business in competition with these business houses. Nationalisation of banks, thus, prevents the spread of the monopoly enterprise.
2. Social control was not adequate: The 'social control' measures of the government did not work well. Some banks did not follow the regulations given under social control. Thus, the nationalisation was necessitated by the failure of social control.
3. To reduce misuse of savings of general public: Banks collect savings from the general public. If it is in the hand of private sector, the national interests may be neglected, besides, in Five-Year Plans, the government gives priority to some specified sectors like agriculture, small-industries etc. Thus, nationalisation of banks ensures the availability of resources to the plan-priority sectors.
4. Greater mobilisation of deposits: The public sector banks open branches in rural areas where the private sector has failed. Because of such rapid branch expansion there is possibility to mobilise rural savings.
5. Advance loan to agriculture sector: If banks fail to assist the agriculture in many ways, agriculture cannot prosper, that too, a country like India where more than 70% of the population depends upon agriculture. Thus, for providing increased finance to agriculture banks have to be nationalised.
6. Balanced Regional development: In a country, certain areas remained backward for lack of financial resource and credit facilities. Private Banks neglected the backward areas because of poor business potential and profit opportunities. Nationalisation helps to provide bank finance in such a way as to achieve balanced inter-regional development and remove regional disparities.
7. Greater control by the Reserve Bank: In a developing country like India there is need for exercising strict control over credit created by banks. If banks are under the control of the Govt., it becomes easy for the Central Bank to bring about co-ordinated credit control. This necessitated the nationalisation of banks.
8. Greater Stability of banking structure: Nationalised banks are sure to command more confidence with the customers about the safety of their deposits. Besides this, the planned development of nationalised banks will impart greater stability for the banking structure.
Or
(b) Explain the principles of the investment policy followed by banks.
Ans: Investments by Banks and Its principles
Investment: The term investment means employment of funds to buy an asset. Here investment means employment of funds by the banks to buy securities from the market. The securities which are purchased by the banker from the market includes:
a) Government securities: These are the securities which are issued by the governments to raise funds. These securities are the safest of all securities because these are guaranteed by the government. Government securities may be of three types: (i) Stock, (ii) Bearer bonds and (iii) Promissory notes.
b) Semi-government securities: These are the securities which are issued by semi-govt. organisations like Municipal Corporations, Port Trusts, State Financial Institutions etc and these securities include debentures or bonds.
c) Industrial securities: There are the securities which are issued by industrial or business concerns. Bank invests a small percentage of its funds in the shares and debentures issued by these industrial concerns.
Besides these securities, banks also invest in fixed deposits, units and capital of various financial institutions. However, amongst all these, a marked preference of the banker is noted in favour of government and semi-government securities. Investment by banks in these securities constitutes the “third line of defence” of the banks.
Principles of Sound Investment: Banks are one of the genuine investors in the securities market. Banks invest in the market in the hope of earning some return. However the investment of funds by banks involves borrowed funds and hence their prime concern is the safety of the funds invested. A banker therefore select the securities very carefully and follow the following principles of sound investments:
1) Safety of principal: A banker deals in borrowed funds and therefore his main consideration is safety of principal invested in securities. The banker has to ensure that the principal invested in securities. The banker has to ensure that the principal amount invested by him remain safe. The safety of investments depend on the solvency and ability of the issuing authorities to honour their commitment made to the investors. The government and semi-government securities are the safest securities because they are guaranteed by the government.
2) Price stability: The price of security selected by the banker should remain stable. The safety of investments depends on the stability in the prices of securities. Banker is not a speculator and hence his object of buying security should not be to gain by a possible rise in the price of securities which are liable to wide fluctuations in their prices and should prefer those securities whose prices remain fairly stable over a period of time. The Prices of government securities remain stable and do not fluctuate.
3) Marketability or liquidity: The primary objective of buying securities by the banker is to earn income and at the same time maintain his liquidity position. Thus, the banker should see that the security in which he invests his funds possesses a ready market i.e. they can be sold in the market without loss of time and money. Marketability of securities ensure liquidity of investments Government and semi-government securities are highly liquid as they have a ready market.
4) Profitability of yield: After ensuring the safety of the principal money invested in securities, the banker should consider the returns from the investments. In other words, the banker should not give undue importance to higher yields at the cost of safety. The banker should not expect windfall profit, because high profit may bear the germ of loss.
5) Diversification of Investment: The banker should diversify the risk involved in investment by investing in wide variety of securities issued by wide variety of business enterprises belonging to different trade and industry.
6) Refinance: To ensure the liquidity of his investments the banker has to see that the security is eligible to obtain refinance from the Central Bank and other refinancing institutions.
7) Duration: In addition to the above factor, a banker also considers the duration and denomination of security and its future earnings prospects.
In conclusion, it may be said that for a banker the government and semi-government securities are most ideal for investment of funds. Government securities with virtually no risks, have a ready market, are eligible for refinance and bring reasonably good return.
7. (a) Discuss the advantages and limitations of internet banking.
Ans: E-Banking or Internet banking
Online banking also known as internet banking, e-banking, or virtual banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial institution's website. Internet banking is a term used to describe the process whereby a client executes banking transactions via electronic means. This type of banking uses the internet as the chief medium of delivery by which banking activities are executed. The activities clients are able to carry out are can be classified to as transactional and non transactional.
Advantages of E-banking or Internet banking
1) Convenience: Banks that offer internet banking are open for business transactions anywhere a client might be as long as there is internet connection. Apart from periods of website maintenance, services are available 24 hours a day and 365 days round the year. In a scenario where internet connection is unavailable, customer services are provided round the clock via telephone.
2) Low cost banking service: E-banking helps in reducing the operational costs of banking services. Better quality services can be ensured at low cost.
3) Higher interest rate: Lower operating cost results in higher interest rates on savings and lower rates on mortgages and loans offers from the banks. Some banks offer high yield certificate of deposits and don’t penalize withdrawals on certificate of deposits, opening of accounts without minimum deposits and no minimum balance.
4) Transfer services: Online banking allows automatic funding of accounts from long established bank accounts via electronic funds transfers.
5) Ease of monitoring: A client can monitor his/her spending via a virtual wallet through certain banks and applications and enable payments.
6) Ease of transaction: The speed of transaction is faster relative to use of ATM’s or customary banking.
7) Discounts: The credit cards and debit cards enables the Customers to obtain discounts from retail outlets.
8) Quality service: E-Banking helps the bank to provide efficient, economic and quality service to the customers. It helps the bank to create new customer and retaining the old ones successfully.
9) Any time cash facility: The customer can obtain funds at any time from ATM machines.
Disadvantages of E-banking Internet banking
1) High start-up cost: E-banking requires high initial start up cost. It includes internet installation cost, cost of advanced hardware and software, modem, computers and cost of maintenance of all computers.
2) Security Concerns: One of the biggest disadvantages of doing e-banking is the question of security. People worry that their bank accounts can be hacked and accessed without their knowledge or that the funds they transfer may not reach the intended recipients.
3) Training and Maintenance: E-banking requires 24 hours supportive environment, support of qualified staff. Bank has to spend a lot on training to its employees. Shortage of trained and qualified staff is a major obstacle in e-banking activities.
4) Transaction problems: Face to face meeting is better in handling complex transactions and problems. Banks may call for meetings and seek expert advice to solve issues.
5) Lack of personal contact between customer and banker: Customary banking allows creation of a personal touch between a bank and its clients. A personal touch with a bank manager can enable the manager to change terms in our account since he/she has some discretion in case of any personal circumstantial change. It can include reversal of an undeserved service charge.
Or
(b) Write brief notes on the development of core banking in our country.
Ans: Core banking is normally defined as the business conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking customers and have a separate line of business to manage small business. Larger business is handled by the corporate banking division of the institution. Core banking basically is depositing and lending of money.
Now a days, most banks use core banking applications to support their operations where ‘CORE’ stands for “Centralized Online Real-time Environment”. This basically means that all the bank’s branches access applications from centralized data centres. It means that the deposits made are reflected immediately on the servers of bank and the customer can withdraw the deposited money from any of the branches of bank throughout the world. These applications now also have the capability to address the needs of corporate customers providing a comprehensive banking solution. Normal core banking functions will include deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, internet banking and branches.
The major objectives of bank automation are better customer service, flawless book keeping and prompt decision-making that leads to improved productivity and profitability. The concept of bank automation started in the year 1981, but it was during the period 1984-1987 banks in India started the branch level automation, making use of the then available MSDOS based stand alone computers. This initiative was taken by the banks on the basis of “First Rangarajan Committee report” on bank computerisation submitted in the year 1984. ALPMs (Advanced Ledger Posting Machines) were the fashion in those days. However, the pace of bank automation was very slow in the banks primarily owing to the lack of trade union consensus on bank automation.
Another committee was constituted in 1988 under the chairmanship of Dr. C Rangarajan, the then Deputy Governor of RBI to slate down a perspective plan on automation of banks for a five year period. This paved way to the implementation of multi-user Total Branch Automation packages running on a LAN (Local Area Network), either on a Netware or a UNIX operating system. With the implementation of TBA, banks started to offer the facilities of exclusive Customer Terminal, Single window transaction, on-line and off-site ATMs, Tele-Banking etc.
But with the advent of new generation private sector banks in India during 1994-1996, the real era of bank marketing started and these banks started to offer any where and any time banking facilities to its customers. This was possible for them mainly owing to the fact that they opted for the implementation of a WAN (Wide Area Network) based centralised banking solution rather than a LAN based branch banking solution to network their limited number of branch outlets.
The old generation banks in India hesitated to follow this banking fashion on account of its large network of branches on one hand and the then prevailing exorbitant IT cost on the other hand. But with the globalisation and liberalisation of Indian market and with the enactment of TRAI (with a mission to create and nurture conditions for growth of telecommunications in the country in a manner and at a pace which will enable India to play a leading role in emerging global information society) during the late nineties, there happened a drastic reduction in IT cost.
Improved telecommunication facilities and reduction in hardware as well as networking cost changed the mind set of the banks in India to try the CBS option. This also equipped them with the required technology leverage to compete in the Indian market by offering the similar technology products and services, as those offered by their new generation competitors.