Indian banking System Notes [NEP 2023 Syllabus Dibrugarh University]

 Indian banking System Notes
[NEP 2023 Syllabus Dibrugarh University]

Unit – 1: Banking – Meaning, Definition and development

Q. What is bank? Explain its features. What are the various functions performed by commercial banks in India? 2013, 2016, 2018

Q. Trace the evolution and development of Banking in India.    2013, 2015, 2017, 2018

Q. What are various types of bank? Explain them briefly.       2016, 2019

Q. Describe the kind of business of banking company many engage as provided in the Banking Regulation Act. 2015, 2018

Q. Write a brief note on SBI (Commercial Banks) and its role of State Bank of India in Indian economy.   2013SN, 2016, 2019

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Introduction: Bank and Banking system

A bank is a financial institution which deals in money and credit. It provides fundamental banking services such as accepting deposits and lending loans. As financial intermediaries, a bank acts as a connecting link between borrowers and lenders of money. Banks collect money from those who have surplus money and give the same to those who are in need of money. When banks accept deposits its liabilities increase and it becomes a debtor, but when it makes advances its assets increases and it becomes a creditor.

Banking System: Banking systems refer to a structural network of institutions that provide financial in a country. It deals with the ownership of banks, the structure of banking system, functions performed and the nature of business. The element of the banking system includes commercial banks, Investment banks and Central bank.

The commercial banks accept deposits and lend loans and advances; the investment banks deal with capital market issues and trading; and the central bank regulates the banking system by setting monetary policies besides many other functions like currency issue.

Definitions of bank and banking, given by various writers are given below:

Crowther defines a bank as, "one that collects money from those who have it to spare or who are saving it out of their income and lends the money so collected to those who require it".

In the words of Professor Sayers, “Commercial banks are institutions, whose debts- usually referred to as bank deposits are commonly accepted in final settlement of other people’s debt”.

According to Prof. Kinley, “A bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when it required by them for use”.

The above definitions of bank reveal that bank is an Business institution which deals in money and use of money. We can say that any person, institution, company or enterprise can be a bank. The business of a bank consists of acceptance of deposits, withdrawals of deposits, Making loans and advances, investments on account of which credit is exacted by banks.

Features of Banking

From the views of above authorities, we can derive the following basic characteristics of Banking:

1)      Dealing in money and credit: A bank is an institution which deals in money. The banks accept deposits from the public and advancing them as loans to the needy people. The deposits may be of different types – current, fixed, saving etc. accounts.

2)      Credit Creation: The banks are the institutions that can create credit i.e., creation of additional money for lending. Thus, "creation of credit' is the unique feature of banking.

3)      Acceptance of Deposit: A bank accepts money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also acts as a custodian of funds of its customers.

4)      Deposits must be withdrawn able: The deposits (other than fixed deposits) made by the public can be withdraw able by cheques, draft or otherwise, i.e., the bank issue and pay cheques. The deposits are usually withdrawn able on demand.

5)      Individual / Firm / Company: A bank may be a person, firm or a company. A banking company means a company which is in the business of banking.

6)      Commercial in nature: Since all the banking functions are carried on with the aim of making profit, it is regarded as a commercial institution. A bank is a profit seeking institution having service oriented approach.

7)      Agency and Utility Services: A bank provides various banking facilities to its customers. They include general utility services and agency services.

8)      Connecting Link: A bank acts as a connecting link between borrowers and lenders of money. Banks collect money from those who have surplus money and give the same to those who are in need of money.

9)      Banking Business: A bank's main activity should be to do business of banking which should not be subsidiary to any other business.

10)   Name Identity: A bank should always add the word "bank" to its name to enable people to know that it is a bank and that it is dealing in money.

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.

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.

Cooperative banks are a part of the set of institutions, which are engaged in financing rural and agriculture development. The other institutions in this set include the RBI, NABARD, commercial banks and regional rural banks, cooperative banking is small-scale banking carried on a no profit, no loss basis for mutual cooperation and help. Cooperative banks were assigned the important role of delivering of fruits of economic planning at the grass roots level. Cooperative banking structure is viewed as a vehicle for democratization of the Indian financial system. They were conceived to supplant moneylender and indigenous bankers by providing adequate short-term and long term institutional credit at reasonable rates of interest.

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. 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 19^th Century, indigenous bankers were the hub of the Indian Financial System providing credit not only to the trade but also to the Government.

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.

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 19^th 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 27^th 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.

Establishment of State Bank of India and Its Role in Indian Economy

State Bank of India (SBI), state-owned commercial bank and financial services company, nationalized by the Indian government in 1955. SBI maintains thousands of branches throughout India and offices in dozens of countries throughout the world. The bank’s headquarters are in Mumbai. The oldest commercial bank in India, SBI originated in 1806 as the Bank of Calcutta. Three years later the bank was issued a royal charter and renamed the Bank of Bengal. Along with the Bank of Bombay (founded 1840) and the Bank of Madras (founded 1843), it was one of three so-called presidency banks, each of which was jointly owned by the provincial government and private subscribers. In 1921 the presidency banks were merged to form the Imperial Bank of India (IBI), which then became the largest commercial enterprise in the country.

In 1955 the government of India and the country’s central bank, the Reserve Bank of India (founded 1935), assumed joint ownership of IBI, which was renamed the State Bank of India. Four years later, by the State Bank of India (Subsidiary Banks) Act, banks earlier operated by individual princely states became subsidiaries of SBI. The Reserve Bank’s share of SBI was transferred to the government in 2007. Since nationalization, SBI has served the needs of Indian economic development through rural-development initiatives and microcredit programs and by financing major agricultural and industrial projects and raising loans for the government.

Organisational Structure: The organisational structure of the State Bank of India is somewhat different from the other nationalized banks. It has a well defined system of decentralisation of authority. The whole country has been divided into nine circles for administrative control purposes The Head Offices of each circle is known as Local Head Office with a Local Board of Directors which has a statutory status. Each circle has been further divided into a number of Regions. There is a Chief General Manager (formerly known as the Secretary and Treasurer) for each Circle He is the Chief Executive for his circle and has under him Regional Managers for the different regions in his circle.

The Chief General Manager enjoys vast powers for control over branches and has also extensive discretionary powers regarding loans and advances. All this has resulted in taking the operational control nearer to the area of operation. The Bank is further trying to strengthen the Regional Offices so as to reduce the span of control of the controlling authority (i.e., the Chief General Manager), leading to further decentralisation.

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:

a)      Saving Bank Deposits: This type of deposits suit to those who just want to keep their small savings in a bank and might need to withdraw them occasionally. One or two withdrawals upto a certain limit of total deposits 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.

b)      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.

c)       Fixed Deposits: These are also known as time deposits. In this account a fixed amount is deposited for a fixed period of time. Deposits are payable after the expiry of the stipulated period. Customers keep their money in fixed deposits with the bank in order of earn interest. The banks pay higher interest on fixed deposits. The rates depend upon the length of the period and state of money market. Normally the withdrawals are not allowed from fixed deposits before the stipulated date. If it happens, the depositor entails an interest penalty.

d)      Other Deposits: Banks also provide deposit facilities to different type of customers by opening different account. They also open. ‘Home Safe Account’ for housewife or very small savers. The other accounts are: ‘Indefinite Period Deposit a/c’; ‘Recurring Deposit’ a/c; ‘Retirement Scheme’ etc.

II. Advancing of Loans: The second main function of the commercial bank is to advance loans. Money is lent to businessmen and trade for short period only. These banks cannot lend money for long period because they must keep themselves ready to meet the short term deposits. The bank advances money in any one of the following forms:

a)      Cash Credit: Cash Credit is a type of advance wherein a banker permits his customer to borrow money upto a particular limit by a bond of credit with one or more securities. The advantage associated with this system is that a customer can withdrawn money as and when required. The bank will charge interest only on the actual amount withdrawn by the customer. Many industrial concerns and business houses borrow money in this form.

b)      Overdraft: An overdraft is an arrangement by which the customer is allowed to overdraw his account. It is granted against some collateral securities. The facility to overdraw is allowed through current account only. Interest is charged on the exact amount of overdrawn subject to the payment of minimum amount by way of interest.

c)       Loan: Loan is an advance in lump sum amount the whole of which is withdrawn and is supported to be rapid generally wholly at one time. It is made with or without security. It is given for a fixed period at in agreed rate of interest. Repayments may be made in installments or at the expiry of a certain period.

d)      Discounting Bill of Exchange: The bank also gives advances to their customers by discounting their bills. The net amount after deducting the amount of discount is credited to the account of customer. The bank may discount the bills with or without any security from the debtor in addition to the personal security of one or more person already liable on the bill.

III. Investment of funds: Besides loan and advances, banks also invest a part of its funds in govt. and industrial securities. Banks purchases both govt. and industrial securities like govt. bills, share, debentures, etc from their market.

IV. Credit Creations: The banks create credit. When a bank advances a loan, it does not give cash to the borrower. It opens an account in the name of the borrower. The borrower is allowed to withdraw money by cheque whenever he needs. This is known as Credit Creation.

Secondary Functions of banks: It is divided into two parts:

I. Agency Services: Modern Banks render service to the individual or to the business institutions as an agent. Banks usually charge little commission for doing these services. These services are as follows:

a)       Remittance of Funds: Banks help their customers in transferring funds from one place to another through cheques, drafts etc.

b)      Collection and payment of Credit Instruments: Banks collects and pays various credit instruments like cheques, bill of exchange, promissory notes etc.

c)       Purchasing and Sale of securities: Banks undertake purchase and sale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers. Banks neither give any advice to their customers, regarding this investment, nor levy any charge of them for their services, but simply perform the function of a broker.

d)      Income Tax Consultancy: Sometimes bankers also employ income tax experts not only to prepare income tax returns for their customer but to help them to get refund of income tax in appropriate cases.

e)      Acting as Trustee and Executor: Banks preserve the wills of their customers and execute them after their death.

f)        Acting as Representatives and Correspondent: Sometimes the banks act as representatives and correspondents of their customers. They get passports, travelers tickets secure passages for their customers and receive letters on their behalf.

II. General Utility Services: A modern bank now a days serves its customers in many other ways:

a)       Locker facility: Banks provides locker facility to their customers. The customers can keep their valuables and important documents in these lockers for safe custody.

b)      Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.

c)       Gift cheque: Some banks issue cheques of various denominators to be used on auspicious occasions. These are known as “gift cheques” as they are gifted to others.

d)      Letter of Credit: Letter of credit 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.

Role and Importance of Commercial Banks/SBI in our economy

Banks play an important role in the economic growth of a country. In the modern set up, banks are not to be considered dealers in money but as the leaders of development. The importance of bank for a country’s economy can be explained in following ways:

1. Promotion of Savings and Capital formation: Banks by providing attractive interest rate on deposits try to promote thrift and savings in an economy. The investment of these savings in productive channel results in capital formation. So, to mobilise savings towards entrepreneurs for productive purpose, sound banking system is essential. The banks help in capital formation in the country. A high rate of saving and investment promote capital formation.

2. Increasing productivity of small savings: The scattered small savings in the country can be put to optimum use by commercial banks. Banks utilize this amount by giving loans to industrial houses and the government. By providing funds to the entrepreneurs, bank help in increasing productivity of capital.

3. Remittance of money: Banks help in remitting money from one place to another. The cheque, bank draft, letter of credit, bills, hundies enable traders to transfer large sums of money from one place to another. without an efficient mode for exchange of money, the growth of trade, commerce and industry is impossible.

4. Helps in credit creation: By their ability to create credit, the banks have placed at the disposal of the nation a large amount of money. The bank can increase the supply of money through credit creation. Credit creation leads to increased production, employment generation, higher sales which leads to faster economic development.

5. Employment generation: With the growth of banking activity, employment opportunity in the country has increased to a considerable extent. Different banks are regularly opening branches in both rural and urban which leads to employment generation in different parts of the country.

6. Safety of valuables: Money deposited in the bank and other precious items are now absolutely safe. For keeping valuables, banks are providing locker facilities. Now people are free from any type of risks.

7. Financing industrial sector: Banks provide both short term and medium term loans to all types of industries. In a developing countries like India, small and medium scale industries plays a significant role. By providing loans to SMEs banks play a significant role in the economic development of our country.

8. Banker to the government: Banks also act as a banker to the government and banks. To provide long term finance to the government, bank invests their funds in the government securities and TB.

Scheduled Bank and Non-scheduled Bank                            2014SN

A scheduled bank means a bank included in the second schedule of the Reserve Bank of India Act, 1934. A bank is included in this schedule if, i.e.                             

1. It is carrying on the business banking in India.

2. Its paid-up capital and reserves are not less than Rs. 5 lakhs.

3. It is:

i) A state cooperative bank

ii) A company as defined in the Companies Act of 2013.

iii) An institution notified be the central government in this behalf

iv) A corporation or company incorporated be, or under any law in force in any place outside India.

Non-Scheduled banks refer to those banking institutions, whose names do not appear in the Second Schedule of the RBI Act, 1934. Non-Scheduled banks were engaged in lending money discounting and collecting bills and in providing various agency services.

Listing of Securities                        2014

A company, desirous of listing its securities on the Exchange, shall be required to file an application, in the prescribed form, with the Exchange before issue of Prospectus by the company, where the securities are issued by way of a prospectus or before issue of 'Offer for Sale', where the securities are issued by way of an offer for sale.  The company shall be responsible to follow all the requirements specified in the Companies Act, the listing norms issued by SEBI from time to time and such other conditions, requirements and norms that may be in force from time to time and included hereafter in these Bye-laws and Regulations to make the security eligible to be listed and for continuous listing on the Exchange. The Exchange may grant approval to the issuer for any security sought to be listed on the Exchange on completion of the listing conditions, requirements and norms by the issuer, as may be specified by the Exchange from time to time. Such security shall be called listed security.

A Complete overview on Lead Banking Scheme                 2019

Under the lead banking Scheme a particular bank was made responsible for a particular district to develop banking and credit in that district. This scheme was framed for surveying and developing the banking potential of all the districts in the country. This scheme was introduced by the RBI on 12 dec, 1969. The concept of a lead bank was formulated in order to involve commercial banks in rural development.

Objectives and Functions of Lead banking scheme

a)       To ascertain the scope of development of banking in the allotted district.

b)      To ascertain unbanked areas within district for mobilization of savings.

c)       To ascertain the credit needs of business and industrial units in the allotted district and extend credit facilities to them.

d)      To provide financial assistance to other institutions in the allotted district.

e)      To make provisions for training of small farmers so as to ensure proper utilization of funds.

f)        To make provisions for storage, repairing and services of agricultural equipments.

g)       Co-ordination of the activities of commercial banks, co-operative banks and other financial institutions in the allotted district.

Benefits/Effects of Lead bank

a)       Branch expansion: There was found more effectiveness in branch expansion, supervision and guidance after introducing the Lead Bank Scheme.

b)      Co-operation: There was found more co-operation among commercial bank, Co-operative bank, other financial institution and government authorities after introducing the Lead Bank Scheme.

c)       Identification: Identification of unbanked area within district was possible through Lead Bank Scheme.

d)      Credit facilities: Extending credit facilities in allotted district.

e)      Facilities to farmers: Provisions for training of small farmers so as to ensure proper utilization of funds and to make provisions for storage, repairing and services of agricultural equipments.

Meaning: Bank digitalization in India refers to the transformation of traditional banking services and operations into digital formats using technology and online platforms. It involves the adoption of digital tools and techniques to offer banking services, manage transactions, and interact with customers through digital channels like mobile apps, websites, and online platforms.

Pros:

1. Convenience: Digital banking allows customers to access their accounts, make transactions, and manage finances from the comfort of their homes or on the go, eliminating the need to visit physical bank branches.

2. Cost-Efficiency: It reduces the operational costs for banks, as digital transactions are typically less expensive than in-person transactions, leading to potential cost savings that can be passed on to customers.

3. Financial Inclusion: Digitalization can extend banking services to remote and underserved areas, making financial services more accessible to a larger population, including those who previously had limited access to traditional banking.

4. Efficiency: Digital systems can process transactions faster and with fewer errors, improving overall efficiency in banking operations.

5. Enhanced Security: Modern encryption and security measures help protect customer data and transactions, reducing the risk of fraud and theft.

6. 24/7 Availability: Digital banking services are available round the clock, allowing customers to perform transactions and access information at any time, even outside regular banking hours.

Cons:

1. Digital Divide: Not everyone in India has access to smartphones, the internet, or the necessary digital literacy, creating a digital divide where some segments of the population are excluded from the benefits of digital banking.

2. Security Concerns: While digital banking offers enhanced security, it also introduces new risks such as cyberattacks and phishing scams, which can compromise customer data and funds.

3. Job Displacement: The automation of banking processes through digitalization may lead to job losses for traditional bank employees, particularly in roles related to manual data entry and cash handling.

4. Dependence on Technology: Over-reliance on digital systems can pose challenges when technical issues or system failures occur, potentially disrupting banking services.

5. Privacy Concerns: There may be concerns about how banks collect, use, and protect customer data in the digital age, leading to potential privacy issues.

6. Exclusion of Elderly and Technically Challenged: Older individuals or those with limited technological skills may find it challenging to adapt to digital banking, potentially leaving them behind in the banking system.