2018 (May)
COMMERCE (General)
Course: 404 (Indian Banking System)
Time: 3 hours
The figures in the margin indicate full marks for the questions
(NEW COURSE)
Full Marks: 80
Pass Marks: 24
1. (a) Write True or False: 1x4=4
1) Overdraft facility is regularly granted by bank. False
2) Punjab National Bank was nationalized in the year 1955. False, 1969
3) The Head Office of the Reserve Bank of India is located at Mumbai. True
4) Bridge loans have higher interest rates compared to other loans. True
(b) Fill in the blanks: 1x4=4
1) The Banking Regulations Act was enacted in the year 1949.
2) On 2nd October, 1975 five (5) RRBs were set up in India.
3) The full form of CBLO is collateralized borrowing and lending obligations.
4) In the year 1980, six (6) numbers of Indian commercial banks were nationalized.
2. Write short notes on (any four): 4x4=16
a) Scheduled Bank: Scheduled banks refer to those banking institutions whose names are included in the Second Schedule of the Reserve Bank of India Act, 1934. Moreover, the banking company may included in scheduled list only after must fulfill the some conditions.
b) Statutory Liquidity Ratio: Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or government approved securities before providing credit to the customers. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is determined as % of total demand and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and demand liabilities are such deposits of the customers which are payable on demand. The maximum limit of SLR is 40% and minimum limit of SLR is 23% In India.
If any Indian bank fails to maintain the required level of Statutory Liquidity Ratio, then it becomes liable to pay penalty to Reserve Bank of India. The defaulter bank pays penal interest at the rate of 3% per annum above the Bank Rate, on the shortfall amount for that particular day. But, according to the circular, released by the Department of Banking Operations and Development, Reserve Bank of India; if the defaulter bank continues to default on the next working day, then the rate of penal interest can be increased to 5% per annum above the Bank Rate.
c) ATM: An automated teller machine or automatic teller machine (ATM), is a Computerized telecommunications device that provides the clients of a financial Institution with access to financial transactions in a public space without the need for a cashier, human clerk or bank teller.
ATM cards are the most convenient form of withdrawing money. It is a magnetic card having a secret PIN ( Personal Identification Number) which is kept to be confidential by the user to prevent it from misuse. One can easily get money withdrawal by simply inserting ATM cards into ATM with confidential pin code. These cards are also known as ATM- CUM DEBIT card. Nowadays ATM is serving more than just withdrawing machines. A minimum balance of Rs.1000 is compulsory to withdraw. ATM card of any bank can be access in any bank’s ATM
How to Avail ATM Facility
1. This facility is for everyone who has Savings, Current or Cash Credit account.
2. To get ATM Facility on your account you have to fill up form provided by bank.
3. ATM card holder has to maintain minimum balance of Rs.1000/-
4. No any additional charges for this facility
d) E-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.
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) 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.
e) Priority Sector Lending: Priority sector includes: (i) Agriculture (ii) Small - Scale Industries (iii) Weaker sections of the society (iv) Co-operative sectors (v) Small – traders (vi) Unemployed Youth (vii) Others. In this respect SBI is like any other commercial bank. Pre-nationalisation, banking sector does not pay any attention to priority sector. An important change after the nationalization of banks is the expansion of advances to the priority sectors. One of the main objectives of nationalization of banks to extend credit facilities to the borrowers in the so far neglected sectors of the economy. To achieve this, the banks formulated various schemes to provide credit to the small borrowers in the priority sectors, like agriculture, small-scale industry, road and water transport, retail trade and small business. The bank lending to priority sector was, however, not uniform in all states.
f) Cooperative Bank: Cooperative Banks are those banks which are run by following cooperative principles of service motive. Their main motive is not profit making but to help the weaker sections of the society. Some examples of cooperative banks in India include Central Cooperative Banks, State Cooperative Banks.
3. (a) Discuss the development of banking sector in India after Independence. 14
Ans: 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.
Or
(b) Describe the kind of business a banking company may engage as provided in the Banking Regulation Act. 14
Ans: Business in which a banking company may engage
Section 6 of the Banking Regulation Act, 1949 specifies the forms of business in which a banking company may engage. These are:
1) Borrowing, raising or taking up of money, lending or advancing of money; handling in all manners Bills of exchange/hundies/promissory notes.
2) Acting as agents for any government or local authority or any other person,
3) Managing issues of shares, stock, debentures etc. including underwriting guaranteeing,
4) Carrying on and transacting every kind of guarantee and indemnity business.
5) Managing, selling and realizing property which may come into the possession of the banking company in satisfaction of its claims.
6) Acquiring and holding and generally dealing with any property or any right, title or interest in such property which may form the security for any loans and advances.
7) Underwriting and executing trusts.
8) Establishing and supporting or aiding in the establishment and support of institutions, funds, trusts etc.
9) Acquisition, construction, maintenance and alteration of any building and works necessary for the purpose of the banking company.
10) Selling, improving, managing, developing, or otherwise dealing with property and rights of the company.
11) Acquiring and undertaking whole or any part of the business of any person or company.
12) Doing all such other things as are incidental or conductive to the promotion or advancement of the business of the banking company.
13) Any other business which the Central Government may specify.
4. (a) Explain the advantages and disadvantages of unit banking system. 7+7=14
Ans: Unit Banking – Introduction, Merits and Demerits
Unit Bank is a type of bank under which the banking operations are carried by a single branch with a single office and they limit their operations to a limited area. Normally, unit banks may not have any branch or it may have one or two branches. This unit banking system has its origin in United State of America (USA) and each unit bank has its own shareholders and board of management.
According to Shapiro, Soloman and White,” An independent unit bank is a corporation that operates one office and that is not related to other banks through either ownership or control.”
Advantages of Unit Banking: Unit banking system has the following advantages:
1. Easy Management: The management and control of unit banks is much easier and effective due to the small size and operations of the banks. There are less chances of fraud and irregularities in the financial management of the unit banks.
2. Localised Banking: Unit banking is localized banking. The unit bank has the specialised knowledge of the local problems and serves the requirements of the local people in a better manner than branch banking. Since the bank officers of a unit bank are fully acquainted with the local needs, they cannot neglect the requirements of local development.
3. Quick Decision: A great advantage of unit banking is that there is no delay of any kind in taking decisions on important problems concerning the unit bank.
4. No Monopolistic Tendencies: Unit banks are generally of small size. Thus, there is no possibility of generating monopolistic tendencies under unit banking system.
5. Promotes Regional Balance: Under unit banking system, there is no transfer of resources from rural and backward areas to the big industrial commercial centres. This tends to reduce regional in balance.
6. Initiative in Banking Business: Unit banks have full knowledge of and greater involvement in the local problems. They are in a position to take initiative to tackle these problems through financial help.
7. Flexibility in operation: The unit banks are more flexible. The manager of the unit bank can use his discretion and arrive at quick decision.
8. No Inefficient Branches: Under unit banking system, weak and inefficient branches are automatically eliminated. No protection is provided to such banks.
9. No diseconomies of Large Scale Operations: Unit banking is free from the diseconomies and problems of large-scale operations which are generally experienced by the branch banks.
Disadvantages of Unit Banking: The following are the disadvantages of unit banking system:
1. Limited Scope: The scope of unit banking is limited. They do not get the benefits of large scale operations.
2. No. Distribution of Risks: Under unit banking, the bank operations are highly localised. Therefore, there is little possibility of distribution and diversification of risks in various areas and industries.
3. Inability to Face Crisis: Limited resources of the unit banks also restrict their ability to face financial crisis. These banks are not in a position to stand a sudden rush of withdrawals.
4. Lack of Specialization: Unit banks, because of their small size, are not able to introduce, and get advantages of, division of labor and specialization. Such banks cannot afford to employ highly trained and specialized staff.
5. Operates only in urban areas and big towns: Unit banks, because of their limits resources, cannot afford to open uneconomic banking business is smaller towns and rural area. As such, these areas remain unbanked.
6. Costly Remittance of Funds: A unit bank has no branches at other place. As a result, it has to depend upon the correspondent banks for transfer of funds which is very expensive.
7. Difference in Interest Rates: Since easy and cheap movement of does not exist under the unit banking system, interest rates vary considerably at different places.
8. Local Pressures: Since unit banks are highly localised in their business, local pressures and interferences generally disrupt their normal functioning.
9. Undesirable Competition: Unit banks are independently run by different managements. This results in undesirable competition among different unit banks.
Or
(b) Distinguish between: 7+7=14
1) Commercial bank vs. Cooperative bank.
Difference between Commercial Banks and Co-operative Banks
Basis | Commercial Bank | Co-operative bank |
Formation | These are generally set up as companies under the Companies Act. | These are set up under the Co-operative Societies Act. |
Nature | These are ordinarily financial institution. | These are not profit seeking institutions. |
Raising of funds | These banks accepts deposits from the public through different types of accounts. | These banks mainly accepts deposits from public of rural areas. |
Advances | Commercial banks mainly provide short and medium term loans. | Co-operative banks provides both short term and long term loans. |
Credit creation | Commercial banks can create credit. | Co-operative bank can create credit. |
2) Narrow banking vs. Universal banking.
Difference between Narrow Banking and Universal Banking
Basis | Narrow Banking | Universal Banking |
Concept | Narrow Banking refers to restricted and limited banking activity i.e. accepting deposit and investing in government securities. | Universal Banking refers to broad based and comprehensive banking activities i.e. accepting deposits and lending money for various business activities. |
Non-Performing Assets | No NPA problem arises in Narrow Banking System. | Problem of NPA arises because of bad loans. |
Derivatives | No derivatives are there is narrow banking. | Derivatives transactions are there in Universal Banking. |
Rate of interest | Rate of interest to customers are very low. | Rate of interest to customers are high as compared to narrow bank because of diversified banking activities. |
Bad Debt | No chances of bad debt in narrow banking. | There are big chances of bad loans in universal banking system. |
Presence | Narrow banking system is practically not possible. | Universal banking system is found everywhere. |
5. (a) Discuss the agency and general utility services rendered by a modern bank. 7+7=14
Ans: 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 is issued by the banks to their customers certifying their credit worthiness. Letter of credit is 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) Explain the achievements of Indian banking system after nationalization. 14
Ans: Achievements of Nationalized Banks
A banking revolution occurred in the country during the post-nationalization era. There has been a great change in the thinking and outlook of commercial banks after nationalization. There has been a fundamental change in the lending policies of the nationalized banks. Indian banking has become development-oriented. It has changed from class banking to mass-banking or social banking. This system has improved and progressed appreciably.
Various achievements of banks in the post-nationalization period are explained below:
1) Branch Expansion: Initially, the banks were conservative and opened branches mainly in cities and big towns. Branch expansion gained momentum after nationalization of top commercial banks. This expansion was not only in urban areas but also in rural and village areas.
2) Expansion of Bank Deposits: Since nationalization of banks, there has been a substantial growth in the deposits of commercial banks. Thus bank deposits had increased by 200 times. Development of banking habit among people through publicity led to increase in bank deposits.
3) Credit Expansion: The expansion of bank credit has also been more spectacular in the post-bank nationalization period. At present, banks are also meeting the credit requirements of industry, trade and agriculture on a much larger scale than before.
4) Investment in Government Securities: The nationalized banks are expected to provide finance for economic plans of the country through the purchase of government securities. There has been a significant increase in the investment of the banks in government and other approved securities in recent years.
5) Advances to Priority Sectors: An important change after the nationalization of banks is the expansion of advances to the priority sectors. One of the main objectives of nationalization of banks to extend credit facilities to the borrowers in the so far neglected sectors of the economy. To achieve this, the banks formulated various schemes to provide credit to the small borrowers in the priority sectors, like agriculture, small-scale industry, road and water transport, retail trade and small business. The bank lending to priority sector was, however, not uniform in all states.
6) Social Banking - Poverty Alleviation Program: Commercial banks, especially the nationalized banks have been participating in the poverty alleviation Program launched by the government.
7) Differential Interest Scheme: With a view to provide bank credit to the weaker sections of the society at a concessional rate the government introduced the “Differential interest rates scheme” from April 1972. Under this scheme, the public sector banks have been providing loans at 4% rate of interest to the weaker sections of the society.
8) Growing Importance of Small Customers: The importance of small customers to banks has been growing. Most of the deposits in recent years have come from people with small income. Similarly, commercial banks lending to small customers has assumed greater importance.
9) Diversification in Banking: The changes which have been taking place in India since 1969 have necessitated banking companies to give up their conservative and traditional system of banking and take to new and progressive functions. Globalization: The liberalization of the economy, inflow of considerable foreign investments, frequency in exports etc., have introduced an element of globalization in the Indian banking system.
10) Profit making: After nationalization, banks are making profits in addition to achieving economic and social objectives.
11) Safety: The government has given importance to safety of the banks. The RBI exercises tight control over banks and safeguards depositors interest
12) Advances under self-employment scheme: Public sector banks play a significant role in promoting self employment through advances to unemployed through various schemes of the government like IRDP,JGSY, etc
6. (a) What do you mean by core banking? Discuss its advantages. 4+10=14
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.
Advantages of Core Banking
1) Limited Professional Manpower to be utilized more effectively.
2) Customer can have anywhere, more convenient and easier banking.
3) ATM, Interest Banking, Mobile Banking, Payment Gateways etc. are available.
4) More strong and economical way of management information system.
5) Reduction in branch manpower.
6) Additional manpower can be available for marketing, recovery and personalized banking.
7) Instant information available for decision support.
8) Quick and accurate implementation of policies.
9) Improved Recovery Process causing reduction on recovery costs, NPA provisions.
10) Innovative, redefined or improved processes i.e. Inter Branch Reconciliation causing reduction in manpower at Head Office.
11) Reduction in software maintenance at branch and Head office.
12) Centralized printing and backup resulting in reduction in capital and revenue expenditure on printing and backup devices and media at branches.
13) Electronic Transactions with other Financial Institutions.
14) Increased speed in working resulting in more business opportunities and reduction in penalties and legal expenses.
Or
(b) Explain the following: 7+7=14
1) Retail banking: Retail banking is a major form of commercial banking but mainly targeted to consumers rather than corporate clients. It is the method of banks' approach to the customers for sale of their products. The products are consumer-oriented like offering a car loan, home loan facility, financial assistance for purchase of consumer durables, etc. Retail banking therefore has large customer-base and hence, large number of transactions with small values. It may therefore be cost ineffective in a highly competitive environment. Most of the Rural and semi-urban branches of banks, in fact, do retail banking. In the present day situation when lending to corporate clients lead to credit risk and market risk, retail banking may eliminate market risk. It is one of the reasons why many a wholesale bankers like foreign banks also prefer to go for consumer financing albeit for marginally higher net worth individual.
Advantages of Retail banking: Advantages of Retail Banking are given below
a) Retail deposits are stable and constitute core deposits.
b) They are interest insensitive and less bargaining for additional interest.
c) They constitute low cost funds for the banks.
d) Effective customer relationship management with the retail customers built a strong base.
e) Retail banking increases the subsidiary business of the banks.
Disadvantages of Retail Banking: Disadvantages of Retail Banking are given below:
a) Designing own and new financial products is very costly and time consuming for the bank.
b) Customers now-a-days prefer net banking to branch banking. The banks that are slow in introducing technology-based products, are finding it difficult to retain the customers who wish to opt for net banking.
c) Customers are attracted towards other financial products like mutual funds etc.
d) Though banks are investing heavily in technology, they are not able to exploit the same to the full extent.
2) Advantages of phone banking:
a) Mobile Banking uses the network of service provider and it doesn't need internet connection. In a developing countries like India where their is no internet connection in the interiors their is the presence of mobile connectivity.
b) Mobile Banking is available round the clock 24/7/365 and is easy and Convenient mode for many Mobile users in the rural areas.
c) Mobile Banking is said to be more secured and risk free than online/internet Banking.
d) With the help of Mobile Banking you can pay you bills, transfer funds, check account balance, review your recent transaction, block your ATM card etc.
e) Mobile Banking is cost effective and Banks offer this service at very low cost to the customers.
(OLD COURSE)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
1. (a) Write True or False: 1x4=4
1) Six Indian commercial banks were nationalized in the year 1969. False, 19
2) The Banks of Madras was established in 1843. True
3) Primary market is the market for long-term fund. True
4) The Head Office of the Reserve Bank of India is located at New Delhi. False, Mumbai
(b) Fill in the blanks: 1x4=4
1) The Board of Directors of the Reserve Bank consists of 20 members.
2) The full form of NEFT is National Electronic Funds Transfer.
3) The State Bank of India was established in the year 1955.
4) Money market is the market for short term.
2. Write short notes on (any four): 4x4=16
a) Fixed Deposit.
b) Rural Bank.
c) Cash Credit.
d) Secured Loan.
e) Bridge Loan.
f) Retail Banking.
3. (a) Discuss about the evolution of banking systems in India. 11
Or
(b) Discuss about the organization and management of the Reserve Bank of India. 5+6=11
4. (a) Discuss the role of State Bank of India in Indian economy. 12
Or
(b) Distinguish between: 6+6=12
1) Commercial bank vs. Development bank.
2) Public sector bank vs. Private sector bank.
5. (a) Discuss the main reasons behind the nationalization of banks in our country. 11
Or
(b) Discuss the progress of cooperative banks in India. 11
6. (a) What is money market? Discuss the importance of money market in Indian economy. 4+7=11
Or
(b) Explain briefly the current development in the Indian capital market. 11
7. (a) Discuss the advantages of ATM. 11
Or
(b) Explain the following: 6+5=11
1) Revolving credit.
2) Advantages of E-Banking.
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