2016 (May)
COMMERCE
(General)
Course: 404
1. (a) Write True or False: 1x4=4
a) The Lead Bank Scheme was introduced in 1968. False, 1969
b) According to Section 22 (1) of the Banking Regulation Act, every bank who wants to start business in India must take license from the Reserve Bank of India. True
c) The Corporation Bank was nationalized in 1969. False, 1980
d) Bridge loans have higher interest rates compared to other loans. True
(b) Fill in the blanks: 1x4=4
a) Scheduled banks are listed in the Second Schedule of Reserve Bank of India Act, 1934.
b) Money market is the market for Short term funds.
c) The full form of RTGS is Real time gross settlement.
d) Joint financing by more than one bank is known as Joint Venture.
2. Write short notes on (any four): 4x4=16
a) Regional Banking: In order to provide adequate and timely credits to small borrowers in rural and semi-urban areas, Central Government set up Regional Banks, known as Regional Rural Banks all over India jointly with State Governments and some Commercial Banks. As they are permitted to operate in particular region, it may help develop the regional economy.
b) Indigenous Bank: That unorganised unit which provides productive, unproductive, long term, medium term and short term loan at the higher interest rate are known as indigenous bankers. These banks can be found everywhere in cities, towns, mandis and villages. 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.
c) 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.
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”.
Advantages of Factoring: Factoring provides various benefits to the clients, banks and customers. We shall discuss the benefits of factoring hereunder:
The following are the advantages of factoring services:
1. The client or seller can convert accounts receivables into cash without bothering about sales ledger administration even repayment in some cases.
2. Factoring ensures a definite pattern of cash inflows.
Factoring service suffers from the following limitations:
1. Factoring is a high risk prone area: It may possibly result in over dependence on Factoring, mismanagement, over trading or even dishonesty on the client's part.
2. Factoring as a costly source of financing: The cost of financing being higher than the normal lending rate, Factoring is an expensive way of financing.
e) 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.
f) 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
3. (a) Discuss about the different types of banks in India. 14
Ans: Various Types of Banks
There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession etc. The banking institution may be divided into following types:
A) Based on the Structure or Organizational Setup: Banks can be of five types based on the structure or organizational setup, viz., unit bank, branch bank, group bank, chain bank and correspondent bank.
1) Unit Bank: 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.
2) Branch Bank: Branch Bank is a type of banking system under which the banking operations are carried with the help of branch network and the branches are controlled by the Head Office of the bank through their zonal or regional offices. Each branch of a bank will be managed by a responsible person called branch manager who will be assisted by the officers, clerks and sub-staff. In England and India, this type of branch banking system is in practice. In India, State Bank of India (SBI) is the biggest public sector bank with a very wide network of 16000 branches.
3) Group Bank: Group Bank is a system of banking under which there will be holding company controlling the subsidiary companies which carry out banking business. In some cases, both the holding and subsidiary companies may carry out banking business. An example in India is SBI which has many subsidiary banks such as State Bank of Mysore, State Bank of Indore, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala and State Bank of Travancore. These subsidiaries carry out banking and other operations such as leasing, merchant banking and so on.
4) Chain Bank: Chain Bank is a system under which different banks come under a common control through common shareholders or by the inter-locking of directors. An example in India is KarurVysya Bank and Lakshmi Vilas Bank having their head offices located in the same place, viz., Karur and sharing common directors by which they may have common management policy.
5) Correspondent Bank: Correspondent Bank is a bank which link two banks of different stature or size. Many Indian banks act as correspondent banks for many foreign banks.
6) Pure Banking: Under pure Banking, the commercial banks give only short-term loans to industry, trade and commerce. They specialize in short term finance only. This type of banking is popular in U.K.
7) Mixed Banking: Mixed banking is that system of banking under which the commercial banks perform the dual function of commercial banking and investment banking, i.e., it combines deposit and lending activity with investment banking. Commercial banks usually offer both short-term as well as medium term loans. The German banking system is the best example of mixed Banking.
8) Regional banking: In order to provide adequate and timely credits to small borrowers in rural and semi-urban areas, Central Government set up Regional Banks, known as Regional Rural Banks all over India jointly with State Governments and some Commercial Banks. As they are permitted to operate in particular region, it may help develop the regional economy.
B) Based on the Ownership: Banks can be of four types based on the ownership. They are public sector banks, private sector banks, foreign banks and cooperative banks.
1) 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 is 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.
2) 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.
3) Foreign Banks: Foreign Banks are those banks which belong to foreign countries and have their incorporated head office in foreign countries and branch offices in other countries. The share capital of the foreign banks will be fully contributed by the foreign investors. Some examples of foreign banks in Indian include ABM Amro bank, Standard Chartered Bank, JP Morgan Chase Bank and so on.
4) Cooperative Banks: 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.
C) Based on the Functions: Banks can be of various types based on the functions they perform. They include savings banks, commercial banks, industrial banks, agricultural development banks, land mortgage/development banks, cooperative banks, exchange banks, indigenous banks, consumer banks, central banks.
a) Central Bank: Central Bank is known as guardian bank which bank working in the country. Now a days, in every country there is one central bank and is controlled by the govt. The central Bank manages and controls the whole monetary system and also prepares monetary policy and other policies of the govt.
b) Commercial Bank: The commercial bank generally extent short terms loans to the business man and traders. They collect deposits from the public and advance loans to the businessman and producer commercial banks are normally owned by share holders. In India most of the joint stock banks are commercial banks.
c) Co-operative Bank: Co-operatives banks are those banks which established in co-operative sectors. Co-operative banks offer short term and medium term loans to the agricultural sector. Farmers get various kinds of loan for purchasing various agriculture inputs from co-operative banks.
d) Foreign exchange Banks: These are special types of banks which specialize in financing foreign trade. Their main is to make international payments through the purchase and sale of exchange bills.
e) Industrial banks: Industrial banks are those banks which advance long term loans to industries. For the development of industries various types of industrial banks are established. In India, various institution like Industrial and finance co-operation of India (IFCI), Industrial development bank of India, can be termed as Industrial Banks.
f) Savings Banks: Savings banks are those banks which offer opportunities for saving to the small savers and also try to develop saving habits among the people.
g) Development Banks: Development banks are specialized financial institutions which provide medium and long term finance to private entrepreneurs and help in economic development of the country.
h) Agricultural/Land Development Banks: Agricultural/Land Development Banks are those banks which are known as Land Mortgage or Agricultural Banks as they provide finance to agricultural sector. They provide long term loan for agriculture for the purposes of purchase of new land, purchase of heavy agricultural machinery such as tractor, repayment of old debt, conservation of soil and reclamation of loans.
i) Investment Banks: Investment Banks are those banks which are specialized in provide medium and long term financial assistance to business and industry. They are also known as Industrial Banks as they are mainly concerned with industrial finance.
j) Export - Import Bank: These banks have been established for the purpose of financing foreign trade. They concentrate their working on medium and long-term financing. The Export-Import Bank of India (EXIM Bank) was established on January 1, 1982 as a statutory corporation wholly owned by the central government.
k) Indigenous Bankers: That unorganised unit which provides productive, unproductive, long term, medium term and short term loan at the higher interest rate are known as indigenous bankers. These banks can be found everywhere in cities, towns, mandis and villages.
l) Rural Banking: A set of financial institution engaged in financing of rural sector is termed as ‘Rural Banking’. The polices of financing of these banks have been designed in such a way so that these institution can play catalyst role in the process of rural development.
Or
(b) Discuss the role of State Bank of India in Indian economy. 14
Functions of SBI: The functions of SBI can be grouped under two categories, viz., the Central Banking functions and ordinary banking functions.
A. Central Banking Functions: The SBI acts as agent of the RBI at the places where the RBI has no branch. Accordingly, it renders the following functions:
(1) Banker to the Government: The SBI functions as the banker to the central and state governments. It receives and pays money on behalf of the governments. Especially it renders the following functions as directed by the RBI in this regard.
(a) Collection of charges on behalf of the government e.g. collection of tax and other payments
(b) Grants loans and advances to the governments
(c) provides advises to the government regarding economic conditions, etc.
(2) Banker's Bank: Commercial Banks have accounts with SBI. When the banks face financial shortage, the SBI provides assistance to them as it is considered a big brother in the banking industry. It discounts the bills of the other commercial banks. Due to the functions on this line the SBI is considered in a limited sense as the banker's bank.
(3) Currency Chest: The RBI maintains currency chests at its own offices. But RBI Offices are situated only in big cities. SBI, buy its wide network of branches operate in urban as well as rural areas. RBI therefore, in such places keeps money at currency chests with SBI. Whenever needs arise, the currency is withdrawn from these chests under proper accounting and reporting to RBI. Presently RBI entrust currency chest to other Public Sector Banks and a few Private Sector Banks also.
(4) Acts as Clearing House: In all the places, where RBI has no branch, the SBI renders the functions of clearing house. Thus, it facilitates the inter bank settlements. Since, all the banks in such places have accounts with SBI; it is easy for the SBI, to act as clearing house.
(5) Renders Promotional Functions: State Bank of India also renders various promotional functions. It provides various facilities to the following priority sectors: (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.
B. General Banking Functions (Functions of Commercial Banks including SBI): 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.SBI as a commercial bank renders the following functions under Section 33 of the Act:
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 accepts deposit from public on various account, important deposit account generally kept by bank are:
1) 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 is 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.
2) Current Deposits: These types 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.
3) 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.
4) 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:
1) 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.
2) 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.
3) 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.
4) 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 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.
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) 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. |
2) Retail banking vs. Wholesale banking.
Ans: Difference between Retail Banking and Wholesale banking
a) Retail banking refers to that banking which targets individuals and the main focus of such banks is retail customer whereas wholesale banking refers to that banking which targets corporate or big customers and their main focus is providing services to corporate clients.
b) Ticket size of loans given in retail banking is low and due to it impact of NPA will be less pronounced due to diversification as compared to wholesale banking where ticket size of loan is very high and due to it impact of NPA is more pronounced.
c) Loans such as car, housing, educational, personal loans are some of the examples of loans given in retail banking whereas loans such as loan for setting industry, machinery advance, export credit are some of the examples of loans given in wholesale banking.
d) Monitoring and recovery if the loan turn out to be NPA in retail banking is more difficult because customer base is wide whereas in case of wholesale banking due to low customer base it is easy to monitor as well recover the loan given to customers.
e) Cost of deposit is low in retail banking because retail customers do not have the bargaining power due to less deposit with them whereas in case of corporate customers banks have to offer them high interest rates in order to attract funds from them.
f) Retail banking requires large network of branches in order to cater to large customer base and hence it results in high operational costs while in case of wholesale banking small number of branches is sufficient to cater to corporate clients.
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 is Internet Banking? What are the main features and services of Internet banking? Discuss. 4+10=14
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.
Features of Internet Banking
1) Banking services are available 27x7.
2) Banking services can be availed at any place.
3) Banking services can be availed in our mobile.
4) The ability to originate new products and customers.
5) Best practice workflow process.
6) Content management facilities.
7) Internet banking to help maximize growth, increase productivity and mitigate risk.
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.
Or
(b) Explain the following: 7+7=14
a) Bridge loan: Bridge loan is a short-term temporary loan extended by financial institutions to help the borrower to meet the immediate expenditure pending disposal of requests for long- term funds or regular loans. Here, the bridge loan is not against any main loan arrangement but against anticipated cash flow. Again, if an individual is negotiating the sale of his asset, say a house, a bridge loan may be extended by a bank to meet the seller's immediate cash requirements. The loan will be paid off when the borrower realizes his sale proceeds.
b) 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
a) Six Indian commercial banks were nationalized in the year 1969. False, 1980
b) Primary market is the market for long-term fund. True
c) Debit card does not create debt. True
d) The head office of the Reserve Bank of Indian is located at Mumbai. True
(b) Fill in the blanks: 1x4=4
a) The Bank of Madras was established in 1843.
b) The full form of RTGS is Real Time Gross Settlement.
c) The Board of Directors of Reserve Bank consists of 20 members.
d) The Bill Market Scheme was introduced in the year 1970.
2. Write short notes on (any four): 4x4=16
a) Scheduled Bank.
b) Fixed Deposits.
c) Statutory Liquidity Ratio.
d) E-banking.
e) Cash Credit.
f) Priority Sector Advance.
3. (a) Define bank. Describe the functions of modern bank. 3+8=11
Or
(b) Discuss the main provisions of the Banking Regulation Act, 1949 with regard to licensing of banking companies and branch expansion. 11
4. (a) Discuss the traditional functions of Reserve Bank of India. 11
Or
(b) What is unit banking? Explain the differences between unit banking and branch banking. 3+8=11
5. (a) Describe the methods by which Indian banks make profitable use of their fund. What principles should guide the banker is making investment policy? 6+6=12
Or
(b) Distinguish between: 6+6=12
a) Public sector bank vs. Indigenous bank.
b) Cash balance vs. Cash reserve.
6. (a) What is Capital Market? Explain the role of capital market in Indian economy. 3+8=11
Or
(b) Discuss about the different institutions working in the Indian money market. 11
7. (a) Discuss the advantages of ATM. 11
Or
(b) Explain the following: 5+6=11
a) Factoring services.
b) Phone banking.
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