2017 (May)
COMMERCE
(General)
Course: 404
1. (a) Write ‘True’ or ‘False’: 1x4=4
a) ‘Bank of Bombay’ was established in 1843. False, 1840
b) The Banking Regulations Act was enacted in the year 1934. False, 1949
c) ICICI Bank was the first bank to offer Internet Banking in India. True
d) Factoring is a method of raising long-term finance. False, Short term
(b) Fill in the blanks: 1x4=4
a) RBI was nationalized in the year 1949.
b) The full form of NEFT is national electronic fund transfer.
c) The Imperial Bank of India was established in the year 1921.
d) Schedule banks are listed in the Second Schedule of Reserve Bank of India Act, 1934.
2. Write short notes on (any four): 4x4=16
a) 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.
b) Cash Reserve Ratio: The present banking system is called a ‘fractional reserve banking system’, because the banks need to keep only a fraction of their deposit liabilities in the form of liquid cash. “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.” Originally the objective was to ensure safety and liquidity of bank deposits. But over years it has emerged as an effective tool of directly regulating the lending capacity of the banks i.e., as an instrument of the monetary policy. RBI has the power to impose penal interest rates on the banks in case of a shortfall in the prescribed CRR. The penal rate is generally higher than the bank rate and it increases if the default is prolonged. RBI can also disallow any fresh access to refinance in such cases. The RBI controls credit through change in Cash Reserve Ratio of commercial banks. According to section 42(1) of RBI Act every schedule bank has to maintain a certain percentage reserve of its time and demand deposits. This ratio can be varied from 3% to 15% as directed by the Reserve Bank. Reserve Bank itself changed this ratio according to the credit requirement of the economy. It has been changed several times in the history of Reserve Bank of India. The cash reserve ratio affects on the lend able funds of commercial banks. If this ratio increases the credit creation capacity of commercial banks decreases. On the other hand if this ratio decreases the credit creation capacity of commercial banks increases.
c) Unit Banking: 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.
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.
d) 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.
e) Rural Bank: 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.
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.
f) Core Banking: 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.
3. (a) Discuss about the evolution of banking systems in India. 14
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 have 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.
Or
(b) Write the provisions of Banking Regulation Act, 1949 regarding licensing and opening of new branches of banking companies. 8+6=14
Ans: Salient provisions Banking Regulation Act, 1949
1. Use of words ‘bank’, ‘banker’, ‘banking’ or ‘banking company’ (Sec.7): According to Sec. 7 of the Banking Regulation Act, no company other than a banking company shall use the words ‘bank’, ‘banker’, ‘banking’ or ‘banking company’ and no company shall carry on the business of banking in India, unless it uses the above mentioned words in its name.
2. Prohibition of Trading (Sec. 8): According to Sec. 8 of the Banking Regulation Act, a banking company cannot directly or indirectly deal in buying or selling or bartering of goods. But it may, however, buy, sell or barter the transactions relating to bills of exchange received for collection or negotiation.
3. Disposal of banking assets (Sec. 9): According to Sec. 9 “A banking company cannot hold any immovable property, howsoever acquired, except for its own use, for any period exceeding seven years from the date of acquisition thereof. The company is permitted, within the period of seven years, to deal or trade in any such property for facilitating its disposal”.
4. Management (Sec. 10): Sec. 10 (a) states that not less than 51% of the total number of members of the Board of Directors of a banking company shall consist of persons who have special knowledge or practical experience in one or more of the following fields:
(a) Accountancy; (b) Agriculture and Rural Economy; (c) Banking; (d) Cooperative; (e) Economics; (f) Finance; (g) Law; (h) Small Scale Industry.
5. Requirements as to minimum paid-up capital and reserves (Sec. 11): Sec. 11 (2) of the Banking Regulation Act, 1949, provides that no banking company shall commence or carry on business in India, unless it has minimum paid-up capital and reserve of such aggregate value as is noted below:
(a) Foreign Banking Companies: In case of banking company incorporated outside India, aggregate value of its paid-up capital and reserve shall not be less than Rs. 15 lakhs and, if it has a place of business in Mumbai or Kolkata or in both, Rs. 20 lakhs. It must deposit and keep with the R.B.I, either in Cash or in unencumbered approved securities:
(i) The amount as required above, and
(ii) After the expiry of each calendar year, an amount equal to 20% of its profits for the year in respect of its Indian business.
(b) Indian Banking Companies: In case of an Indian banking company, the sum of its paid-up capital and reserves shall not be less than the amount stated below:
(i) If it has places of business in more than one State, Rs. 5 lakhs, and if any such place of business is in Mumbai or Kolkata or in both, Rs. 10 lakhs.
(ii) If it has all its places of business in one State, none of which is in Mumbai or Kolkata, Rs. 1 lakh in respect of its principal place of business plus Rs. 10,000 in respect of each of its other places of business in the same district in which it has its principal place of business, plus Rs. 25,000 in respect of each place of business elsewhere in the State.
(iii) If it has all its places of business in one State, one or more of which are in Mumbai or Kolkata, Rs. 5 lakhs plus Rs. 25,000 in respect of each place of business outside Mumbai or Kolkata? No such banking company shall be required to have paid-up capital and reserve excluding Rs. 10 lakhs.
6. Regulation of capital and voting rights of shareholders (Sec. 12): According to Sec. 12, no banking company can carry on business in India, unless it satisfies the following conditions:
(a) Its subscribed capital is not less than half of its authorized capital, and its paid-up capital is not less than half of its subscribed capital.
(b) Its capital consists of ordinary shares only or ordinary or equity shares and such preference shares as may have been issued prior to 1st April 1944.
(c) The voting right of any shareholder shall not exceed 5% of the total voting right of all the shareholders of the company.
7. Restriction on Commission, Brokerage, Discount etc. on sale of shares (Sec. 13): According to Sec. 13, a banking company is not permitted to pay directly or indirectly by way of commission, brokerage, discount or remuneration on issues of its shares in excess of 2½% of the paid-up value of such shares.
8. Prohibition of charges on unpaid capital (Sec. 14): A banking company cannot create any charge upon its unpaid capital and such charges shall be void.
9. Restriction on Payment of Dividend (Sec. 15): According to Sec. 15, no banking company shall pay any dividend on its shares until all its capital expenses (including preliminary expenses, organisation expenses, share selling commission, brokerage, amount of losses incurred and other items of expenditure not represented by tangible assets) have been completely written-off.
10. Reserve Fund/Statutory Reserve (Sec. 17): According to Sec. 17, every banking company incorporated in India shall, before declaring a dividend, transfer a sum equal to 25% of the net profits of each year (as disclosed by its Profit and Loss Account) to a Reserve Fund. The Central Government may, however, on the recommendation of RBI, exempt it from this requirement for a specified period.
11. Cash Reserve (Sec. 18): Under Sec. 18, every banking company (not being a Scheduled Bank) shall, if Indian, maintain in India, by way of a cash reserve in Cash, with itself or in current account with the Reserve Bank or the State Bank of India or any other bank notified by the Central Government in this behalf, a sum equal to at least 3% of its time and demand liabilities in India.
The Reserve Bank has the power to regulate the percentage also between 3% and 15% (in case of Scheduled Banks). Besides the above, they are to maintain a minimum of 25% of its total time and demand liabilities in cash, gold or unencumbered approved securities.
12. Liquidity Norms or Statutory Liquidity Ratio (SLR) (Sec. 24): According to Sec. 24 of the Act, in addition to maintaining CRR, banking companies must maintain sufficient liquid assets in the normal course of business. The section states that every banking company has to maintain in cash, gold or unencumbered approved securities, an amount not less than 25% of its demand and time liabilities in India.
This percentage may be changed by the RBI from time to time according to economic circumstances of the country. This is in addition to the average daily balance maintained by a bank.
13. Restrictions on Loans and Advances (Sec. 20): After the Amendment of the Act in 1968, a bank cannot:
(i) Grant loans or advances on the security of its own shares, and
(ii) Grant or agree to grant a loan or advance to or on behalf of:
(a) Any of its directors;
(b) Any firm in which any of its directors is interested as partner, manager or guarantor;
(c) Any company of which any of its directors is a director, manager, employee or guarantor, or in which he holds substantial interest; or
(d) Any individual in respect of whom any of its directors is a partner or guarantor.
14. Accounts and Audit (Sees. 29 to 34A): The above Sections of the Banking Regulation Act deal with the accounts and audit. Every banking company, incorporated in India, at the end of a financial year expiring after a period of 12 months as the Central Government may by notification in the Official Gazette specify, must prepare a Balance Sheet and a Profit and Loss Account as on the last working day of that year, or, according to the Third Schedule, or, as circumstances permit.
According to Sec. 30 of the Banking Regulation Act, the Balance Sheet and Profit and Loss Account should be prepared according to Sec. 29, and the same must be audited by a qualified person known as auditor. Moreover, every banking company must furnish their copies of accounts and Balance Sheet prepared according to Sec. 29 along with the auditor’s report to the RBI and also the Registers of companies within three months from the end of the accounting period.
4. (a) Explain the advantages and disadvantages of branch banking system. 7+7=14
Ans: 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.
According to Gold field and chandler,” A branch bank is a baking corporation that directly own two or more banking agencies.”
Thus branch banking is a system in which a bank renders its banking activities at two or more places. Head office has the overall control over the working of various branches.
Advantages of Branch Banking: Branch banking system has the following advantages:
1. Economies of Large Scale operations: Branch banking enjoys the advantages and economies of large scale operations. Under branch banking system economies can maintained through large scale of operations and wider geographical coverage increase public confidence in the banking system.
2. Economy of Cash Reserves: Under branch banking system a particular branch can operate without keeping large amounts of reserves. In time of need, resources can be transferred from one branch to another. It is not easy for a .unit bank to draw on another unit bank.
3. Proper use of capital: There is a proper use of capital under the branch banking system. Since the resources are transferred from one branch to another. So the capital can be properly used by investing in the profitable branches.
3. Economy of Costs: Branch banking has the advantage of effecting remittances of funds from one place to another with greater ease and at a lesser cost than unit banking, for inter-office indebtedness can be far more easily adjusted.
4. Risks-spreading Economy: The spreading of risks geographically is another major advantage of the branch banking system. In branch banking, losses incurred one branch can be offset by profits earned by the profit making branches which is not possible in case of unit banking.
5. Easy and cheaper transfer of funds: Since the branches of bank under branch banking are spread all over the country, it is easier and cheaper, for it to transfer funds from one place to another.
6. Greater Safety and Liquidity: Branch banking also offers a wider scope for the selection of diverse securities and varied investments, so that a higher degree of safety and liquidity can be maintained.
7. Balanced economical growth: Under branch banking, the banking facilities can be made available to all cities, towns, and even backward areas in the country. Thus, branch banking is very helpful in achieving a balanced growth of the country's economy.
8. Convenient for the Central Bank's Supervision: Under a system of branch banking it is more convenient for the central bank or the government to regulate and supervise the activities of banks, as control becomes more effective and easier since only the head office is to be dealt with for the purpose.
9. Provision for Training the Personnel: Finally, branch banking provides the best training ground for personnel. A person may be trained in a small branch Where the pressure of work is less and he may be transferred later to an active branch.
Disadvantages or Demerits of Branch Banking: Branch banking generally suffers from the following limitations:
1. Danger of Mismanagement: Under the branch banking system a number of difficulties as regards management, supervision and control, a number of branches undue expansions lead the danger of mismanagement.
2. Delays in Decision-making: The system of branch banking also suffers from red tape and delay on account of the inadequate authority of branch managers. Usually, application for big credits has to be referred to the head office by the branch manager. This causes delay and gives little initiative to branch managers.
3. Lack of Personal Contact: A large bank tends to become more and more impersonal in its dealings. The general managers have hardly any personal contact with the local people or the staff of different branches.
4. High operating and maintenance expenses: Branch banking is very expensive, because with the opening of too many branches, establishment and maintenance charges of the branches are bound to be high and, as a result, profits may shrink.
5. Concentration of Monopoly Power in the hands of few banker: Branch banking sometimes creates monopoly power in the hands of few large bankers. Such a monopoly power in the hands of a few big bankers is a source of danger to the community whose goal is a socialistic pattern of society.
6. Lack of initiative: Branch banking lacks initiative. No branch office can take independent decisions and also branch manager has limited powers.
7. Regional imbalances: Branch banking encourages regional imbalances. The financial resources of economically backward areas tend to get transferred to industrial and business centres. Due to which backward areas continue to be neglected and remain over backward.
Or
(b) Distinguish between: 7+7=14
1) Public sector bank and Private sector bank.
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. |
2) 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 main reasons behind the nationalization of banks in our country. 14
Ans: 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 investment policy followed by banks. 14
Ans: 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.
6. (a) What is e-banking? Discuss about the various services provided through e-banking. 4+10=14
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.
Modern Services Provided by Bank through Internet Banking
1) Centralized Banking Solution (CBS) = CBS, an inter-branch networking and data-sharing platform helps the customers to operate their account from any city in India having CBS networked branches, changing the status of customer from ‘Customer of the Branch’ to ‘Customer of the Bank’.
2) Online Tax Payment = Banks provide the facility of online payment of service tax, excise duty, DGFT, Custom duty and all charges under MCA 21 through internet banking.
3) Corporate Internet Banking = Online funds transfer, trade finance management, fund management, global access with unmatched benefits through banks’ corporate internet banking.
4) Online Shopping = This service facilitates the customers to book hotels, buy gifts, send flowers, buy books and lot of activities by making payments online.
5) Retail Internet Banking = Internet Banking assists the customers to have an online assess to bank account anytime and anywhere.
6) Foreign Exchange = Banks have several branches authorized for handling foreign exchange business and these branches.
7) E-Money India = Internet banking helps the customer in sending money to their loved ones in India through PNB’s e-Money India service.
8) Online Railway Reservation = Say goodbye to long queues. Banks offer the customers online booking and information through IRCTC payment gateway. Just click and travel comfortably.
9) Depository Service = Banks Depository service provides the facility of having shares and securities in Demat form and executes transactions of sales and purchase hassle free electronically to the customers through internet banking.
10) Electronic Clearing Service and Electronic Funds Transfer (EFT) = Internet banking assists the customers in electronic clearing service for quick movement of funds in a paperless mode and EFT to ensure an expeditious transfer of funds by using electronic media.
11) Online Bill Payment = No more queues to pay customers’ bills. Now the customers can pay their telephone, mobile, electricity, insurance and several other bills 24 hours, 365 days, from the desktop of customer.
12) Online Air Ticket Booking = Banks provide facility of online airline ticket booking of domestic as well as international airlines to their customers through internet banking.
13) Online Trading = Banks provide online trading facilities to customers having account with bank and trading account with approved brokers.
14) Customer Care Facility = Banks present 24 hours customer care facility for all customers quarries and problems.
15) Online Insta Remit-RTGS Service = Instant remittance by customer himself now made possible, from o)ne bank to another bank at different centre’s on the same day with the help of Online Real Time Gross Settlement (RTGS)/National Electronic Fund Transfer (NEFT) at modest charges.
Or
(b) Explain the following: 7+7=14
1) Revolving credit: Under a Revolving Credit Facility a bank fixes up a credit limit to a borrower for certain period, say Rs.10 crore for 3 years period. The borrower will get a maximum credit facility of Rs.10 crore at any point of time once the loan is repaid. The borrower's facility automatically gets renewed up to Rs.10 crore during the 3 year period any number of times. In other words, the credit facility revolves around with a maximum of Rs.10 crore outstanding at any point of time over a 3 year period. In principle, under a Revolving Facility there is no formal repayment period. The borrower is allowed to draw, repay and again draw throughout the loan period.
2) 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.
(OLD COURSE)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
1. (a) Write True or False: 1x4=4
a) State Bank of India was nationalized in 1969. False, 1955
b) Group banking system is popular in Europe. True
c) Foreign exchange market has no geographical location. True
d) Private sector banks may be Indian banks or foreign banks. True
(b) Fill in the blanks: 1x4=4
a) According to Section 42(1) of Reserve Bank of India Act, 1934 banks have to maintain Cash Reserve Ratio.
b) The full form of OTCEI is over the counter exchange of India.
c) Capital market is the market for long term funds.
d) Overdraft facility is provided on current account.
2. Write short notes on (any four): 4x4=16
a) State Bank of India.
b) Schedule Bank.
c) Current Account.
d) Bank Draft.
e) Syndicated Loan.
f) Internet Banking.
3. (a) Discuss the role of banks in the economic development of a country. 12
Or
(b) Discuss about the various classification of banks of India. 12
4. (a) Explain the powers of Reserve Bank of India as provided in the Banking Regulation Act, 1949. 11
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(b) Explain the advantages and disadvantages of branch banking system. 6+5=11
5. (a) What is nationalization of bank? Discuss the objectives of bank nationalization in our country. 4+7=11
Or
(b) Describe the principles of good lending generally followed by banks. 11
6. (a) What is money market? Discuss the characteristics of Indian money market. 4+7=11
Or
(b) Discuss about the evolution of Indian capital market. 11
7. (a) Discuss the various advantages of mobile banking. 11
Or
(b) Explain the following: 5+6=11
a) Core Banking.
b) Factoring service.
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