What is a Bank ?

Introduction

Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector acts as
the backbone of modern business. Development of any country mainly depends upon the
banking system.

The term bank is either derived from old Italian word banca or from a French word banque
both mean a Bench or money exchange table . In olden days, European money lenders or
money changers used to display (show) coins of different countries in big heaps (quantity) on
benches or tables for the purpose of lending or exchanging.

A bank is a financial institution which deals with deposits and advances and other related
services. It receives money from those who want to save in the form of deposits and it lends
money to those who need it.

DEFINATION OF BANKING

“Defines the banker as one ‘who in the ordinary course of business honours cheques drawn
upon him by persons from and for whom he receives money on current account”.

- Dr. Herbert L. Hard

“Collects money from those who have it to spare or who are saving it out of their incomes,
and it lends this money to those who require it”.

- Crowther

“An institution whose debts (bank deposits) are wisely accepted in settlement of other
people`s debt to each other”.

- R.S., Sayers

“A banking company as one which carries on as its principal business, the acceptance of
money deposit on current account or otherwise subject to withdrawal by cheque, draft or
order”.

-Indian Central Banking Enquiry Committee

The Negotiable Instrument Act; 1881 defined the term as including ‘person or corporation
acts as bankers’- a definition neither satisfactory nor helpful.

1
Section 277 (F) of the Indian companies Act defines a banking thus: ‘a banking company
means a company which carries on as its principal business for accepting of deposits for
money on current account or otherwise, subject to withdrawal by cheque, draft or order,
notwithstanding that it engages in addition in anyone or more of the following form of
businesses’

The above two definition will be inconclusive and incomplete unless we discuss the
definitions given by The Banking Companies (Regulation) Act of India, 1949, banking
means “the accepting, for the purpose of lending or investment of deposits of money from the
public, repayable on demand or otherwise, and withdraw able by cheque, draft or order.

Characteristics / Features of a Bank

1. Dealing in Money

Bank is a financial institution which deals with other people's money i.e. money given by
depositors.

2. 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.

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. Giving Advances

A bank lends out money in the form of loans to those who require it for different purposes.

5. Payment and Withdrawal

A bank provides easy payment and withdrawal facility to its customers in the form of
cheques and drafts, It also brings bank money in circulation. This money is in the form of
cheques, drafts, etc.

6. Agency and Utility Services

2
A bank provides various banking facilities to its customers. They include general utility
services and agency services.

7. Profit and Service Orientation

A bank is a profit seeking institution having service oriented approach.

8. Ever increasing Functions

Banking is an evolutionary concept. There is continuous expansion and diversification as

regards the functions, services and activities of a bank.

9. 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.

10. Banking Business

A bank's main activity should be to do business of banking which should not be subsidiary to
any other business.

11. 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.

FIRST BANK OF THE WORLD

The Taula de la Ciutat opened in Barcelona in 1401 to act as a treasury resource for the
Catalonian government. The bank is on record as the first official bank in the world, although
the practice of banking has been traced back for several centuries.

The oldest continually operating bank in the world is Banca Monte dei Paschi di Siena, which
has been operating as a bank in Italy since 1472. It was originally named The Monte di Pieta.
The original goal of the bank was to offer charitable loans to the poor. The bank continues to
operate today and has branches throughout Italy.

Other longstanding banks include Berenberg Bank, which has been operating in Germany
since the 16th century, and C. Hoare & Co., which was founded in London in 1672. Bank of
New York, which is now known as Bank of New York Mellon was founded in 1784.

3
HISTORY OF BANKING

Banking is nearly as old as civilization. The history of banking could be said to have started
with the appearance of money. The first record of minted metal coins was in Mesopotamia in
about 2500B.C. the first European banknotes, which was handwritten appeared in1661, in
Sweden. cheque and printed paper money appeared in the 1700’s and 1800’s, with many
banks created to deal with increasing trade.

The history of banking in each country runs in lines with the development of trade and
industry, and with the level of political confidence and stability. The ancient Romans
developed an advanced banking system to serve their vast trade network, which extended
throughout Europe, Asia and Africa.

Modern banking began in Venice. The word bank comes from the Italian word “ban co”,
meaning bench, because moneylenders worked on benches in market places. The bank of
Venice was established in 1171 to help the government raise finance for a war.

At the same time, in England merchant started to ask goldsmiths to hold gold and silver in
their safes in return for a fee. Receipts given to the Merchant were sometimes used to buy or
sell, with the metal itself staying under lock and key. The goldsmith realized that they could
lend out some of the gold and silver that they had and charge interest, as not all of the
merchants would ask for the gold and silver back at the same time. Eventually, instead of
charging the merchants, the goldsmiths paid them to deposit their gold and silver.

The bank of England was formed in 1694 to borrow money from thepublic for the
government to finance the war of Augsburg against France. By 1709, goldsmith were using
bank of England notes of their own receipts.

New technology transformed the banking industry in the 1900’s round the world, banks
merged into larger and fewer groups and expanded into other country.

4
BANKING STRUCTURE IN INDIA:

In today’s dynamic world banks are inevitable for the development of a country. Banks play a
pivotal role in enhancing each and every sector. They have helped bring a draw of
development on the world’s horizon and developing country like India is no exception.
Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle for
moving finance from those who have surplus money to (however temporarily) those who
have deficit. In everyday branch terms the banks channel funds from depositors whose
accounts are in credit to borrowers who are in debit.
Without the intermediary of the banks both their depositors and their borrowers would have
to contact each other directly. This can and does happen of course. This is what has lead to
the very foundation of financial institution like banks.
Before few decades there existed some influential people who used to land money. But a
substantially high rate of interest was charged which made borrowing of money out of the
reach of the majority of the people so there arose a need for a financial intermediate.
The Bank have developed their roles to such an extent that a direct contact between the
depositors and borrowers in now known as disintermediation.
Banking industry has always revolved around the traditional function of taking deposits,
money transfer and making advances. Those three are closely related to each other, the
objective being to lend money, which is the profitable activity of the three. Taking deposits
generates funds for lending and money transfer services are necessary for the attention of
deposits. The Bank have introduced progressively more sophisticated versions of these
services and have diversified introduction in numerable areas of activity not directly relating
to this traditional trinity.

5
INDIAN BANKING SYSTEM

Reserve Bank of India

Schedule Banks
Non-Schedule Banks

Central co-op
State co-op Commercial Banks Commercial Banks
Banks and Primary
Banks
Cr. Societies

Indian Foreign

Public Sector
Private Sector Banks HDFC,
Banks
ICICI etc.

State Bank of India Other Nationalized Banks Regional Rural

and its Subsidiaries Banks

6
Types of Banking Institutions and Financial Institutions :

Retail Banking:

Retail banking is the procurement of administrations by a bank to individual rather than to

organizations, corporate or other banks. Administrations offered services like savings, money
transfers, loans, cheques, cards, etc. The term retail banking mostly recognize as financial
institutions for managing an account administrations for individuals or managing retail clients
which distinguish it from other banking types. To further understand retail banking refer to
tutorial links.

Commercial Banking :

Commercial banks provide administrations services such as making business advances,

offering fundamental investment schemes, encouraging saving deposits, fixed deposits,
Issuing bank drafts and bank cheques, giving overdraft facilities, bond investment schemes,
cash management, mortgage loans, debit cards, credit cards, etc.

There are two types of commercial banks, Public Commercial Banks and Private Commercial
Banks. Public commercial banks refers to bank in which government holds major stake
usually to emphasize on social objectives than on profitability. Whereas Private Commercial
Banks are fully owned, managed and controlled by private supporter and they are free to
operate without any government interference. For more details refer to the tutorial links.

Private Banking :

The expression “private” refers to administration services more on personal basis rather than
mass population (Retail Banking). Private Banks refer as financial institutions for managing

7
accounts, investments and other services offered by banks to high-net worth individuals
(HNI) who are categories as high income professionals or large investors. Private banks
subject to an essential part of wealth management for high income groups. They provide
services like: assets management, tax advisory, financial brokers, offered solitary relationship
manger. To understand Private Banks in more elaborated way, refer to the tutorial course
links.

Investment Banking :

An investment bank refers as a consultant or assisting institution for individuals,

organisations and governments in raising capital by underwriting assets. And/or performing
broker in issuing securities. An investment bank likewise assist organisations in simplifying
acquisitions and mergers, trading in derivatives, equities, currencies, commodities by
providing auxiliary services. Investment bank does not provide deposit services like
commercial banks or retail banks.

Investment bank can likewise be divided into private and public based on information
capacities and data obstruction. The private ranges deals with private insider data that cannot
be freely disclosed, while public range such as stock examination deals with public data. For
more details refer to tutorial course links.

Specialized Financing:

Specialized Banks offers various specialized services away from traditional banking.
Specialized banks are financial institutions referred as foreign exchange banks, development
banks, industry and mine banks, farms and agriculture banks, aboriginal banks (providing
financial products and services to aboriginal communities), export-import banks with unique
needs. Some specialized banks are governed and regulated by state or central governments or
both for re-structuring, planning and development of the country.

Central Banks :

A reserve bank, central bank, or monetary authority refers to a financial institution that
manages a states or country. In term of currency, interest rates, currency valuation. Central
bank holds monopoly in increasing monetary base also by prints the national currency.
Central bank functions mostly include managing foreign exchange and gold reserves,
implementing monetary policy, acting as a banker’s bank at time of crisis, making official
policies regarding interest rates. Central bank holds superior power to protect country man by

8
punishing banks or institutions for performing any reckless or fraudulent behaviour. Central
banks are mostly designed and recognised as an independent and politically free entity.
Examples: Reserve Bank of India (RBI) is the central bank of India, Bank of England,
European Central Bank (ECB), People’s Bank of China, Federal Reserve of the United States
of America, etc

How do banks price their services?

The pricing mechanism is dependent on client relationship and the nature of the transaction.
The pricing can be arrived at by profiling customers into different segments. The large
corporate segment comprises of the bulk and large value transactions.

This segment is characterised by multiple service relationships. The pricing in this segment is
transaction based and depends on the size of transactions and on the banks' relationship with
the corporate. Hence, the pricing is decided on a one to one basis and public.

The other segments comprise the brokers, small and medium enterprises (SME), other banks
and the retail segment. In each of these cases, the pricing is not made public and is
determined on the basis of the nature of the transaction and the banks' relationship with the
client, on a one to one basis.

Typically, high volumes and low value characterise the SME segment. Therefore the pricing
for this segment differs from that of the large corporates. Similarly the pricing for the banks
is very different. In the retail segment, the bank publishes its tariff.

How do services contribute to the bank's income?

Increasingly banks are witnessing a growth in their non-interest or fee-based incomes. With
interest spreads decreasing, banks have little option but to ramp up their revenues from fee-
based income.

Fee-based income constitutes a major portion of a bank's other income. The ratio of other
income to total income is an indicator of the size of fee-based income. Treasury incomes of
public sector banks are no longer the major revenue driver and have been coming down as a
result of rising interest rates. Volatility of interest rates are compelling banks to increase their
fee based income.

9
TYPES OF ACCOUNTS

SAVING ACCOUNT:

 These deposits accounts are one of the most popular deposits for individual accounts.
 These accounts not only provide cheque facility but also have lot of flexibility for
deposits and withdrawal of funds from the account.
 Most of the banks have rules for the maximum number of withdrawals in a period and
the maximum amount of withdrawal, but hardly any bank enforces these.
 However, banks have every right to enforce such restrictions if it is felt that the
account is being misused as a current account.
 Till 24/10/2011, the interest on Saving Bank Accounts was regulared by RBI and it
was fixed at 4.00% on daily balance basis.
 However, wef 25th October, 2011, RBI has deregulated Saving Fund account interest
rates and now banks are free to decide the same within certain conditions imposed by
RBI.

CURRENT ACCOUNT:

 Current Accounts are basically meant for businessmen and are never used for the
purpose of investment or savings.
 These deposits are the most liquid deposits and there are no limits for number of
transactions or the amount of transactions in a day.
 Most of the current accounts are opened in the names of firm / company accounts.

10
  Cheque book facility is provided and the account holder can deposit all types of the
cheques and drafts in their name or endorsed in their favour by third parties.
 No interest is paid by banks on these accounts. On the other hand, banks charges
certain service charges, on such accounts.

RECURRING DEPOSITS ACCOUNT

 These are popularly known as RD accounts and are special kind of Term Deposits and
are suitable for people who do not have lump sum amount of savings, but are ready to
save a small amount every month.
 Normally, such deposits earn interest on the amount already deposited (through
monthly installments) at the same rates as are applicable for Fixed Deposits / Term
Deposits. These are best if you wish to create a fund for your child's education or
marriage of your daughter or buy a car without loans or save for the future.
 Under these type of deposits, the person has to usually deposit a fixed amount of
money every month (usually a minimum of Rs,100/- p.m.). Any default in payment
within the month attracts a small penalty.
 However, some Banks besides offering a fixed installment RD, have also introduced a
flexible / variable RD. Under these flexible RDs the person is allowed to deposit even
higher amount of installments, with an upper limit fixed for the same e.g. 10 times of
the minimum amount agreed upon.
 Recurring Deposit accounts are normally allowed for maturities ranging from 6
months to 120 months. A Pass book is usually issued wherein the person can get the
entries for all the deposits made by him / her and the interest earned.
 In case instalment is delayed, the interest payable in the account will be reduced and
some nominal penalty charged for default in regular payments. Premature withdrawal
of accumulated amount permitted is usually allowed (however, penalty may be
imposed for early withdrawals). These accounts can be opened in single or joint
names. Nomination facility is also available.
 The RD interest rates paid by banks in India are usually the same as payable on Fixed
Deposits, except when specific rates on FDs are paid for particular number of days
e.g. 500 days, 555 days, 1111 days etc i.e. these are not ending in a quarter.

11
FIXED DEPOSITS ACCOUNT:

 All Banks in India (including SBI, PNB, BoB, BoI, Canara Bank, ICICI Bank, Yes
Bank etc.) offer fixed deposits schemes with a wide range of tenures for periods from
7 days to 10 years. These are also popularly known as FD accounts. However, in
some other countries these are known as "Term Deposits" or even called "Bond". The
term "fixed" in Fixed Deposits (FD) denotes the period of maturity or tenor.
Therefore, the depositors are supposed to continue such Fixed Deposits for the length
of time for which the depositor decides to keep the money with the bank.
 However, in case of need, the depositor can ask for closing (or breaking) the fixed
deposit prematurely by paying paying a penalty (usually of 1%, but some banks either
charge less or no penalty).
 Some banks introduced variable interest fixed deposits. The rate of interest on such
deposits keeps on varying with the prevalent market rates i.e. it will go up if market
interest rates goes and it will come down if the market rates fall. However, such type
of fixed deposits have not been popular till date.
 The rate of interest for Fixed Deposits differs from bank to bank (unlike earlier when
the same were regulated by RBI and all banks used to have the same interest rate
structure.
 Usually a bank FD is paid in lump sum on the date of maturity.
 Besides above four traditional accounts, there are some other accounts with same
features but a few different features.

NO FRILL ACCOUNT:

 In simple words it: If a company makes its service/product cheaper by removing the
extra features, that is no frill. Eg. Mobile phone postpaid package without unlimited
ringtones or free night talk. Dish TV package without 100 sports channels.
 For our discussion purpose: No frill account is a type of bank account, with low / Zero
balance requirement with extra-features removed.
 RBI came up with this No-frill concept, because poor people cannot open regular
bank accounting having requirements like Rs.5000/- minimum balance etc.So there
are no frill accounts for them. So that poor people can open bank accounts and take
loans, that’ll save them from the 36% interest rate charged by the evil money lenders.

12
JOINT ACCOUNT:

 A joint account is an account that belongs to more than one person. Joint accounts are
often set up by couples that are living together or people who have finances that are
closely linked. Both current and savings accounts can be opened jointly.
 Joint accounts can be set up so each individual account holder can use the account or
so that all account holders have to authorise transactions.
 With a joint account, you are liable for any debts run up by other account holders.

STUDENT ACCOUNT:

 Most banks provide accounts specifically for students in higher education. These are
current accounts that have been designed with student finance in mind. They usually
offer interest-free overdrafts up to a certain limit to help students cope with the debts
that often accumulate while studying

BUSINESS ACCOUNT:

 Most people who run businesses have a business account so their business and
personal money are kept separate. They are more or less same as Current Accounts.

SHARIAH ACCOUNT :

 A growing number of banks and building societies offer current and savings accounts
that are designed and run in accordance with Shariah law , which is Islamic law.
Under Shariah law, interest is prohibited so Shariah compliant accounts provide a
return on your money that is not interest.
 Besides these, there are certain accounts, which gained momentum in the past few
years .These accounts can never be ignored while we talk about the categories of
accounts.
 The most important of all, the lifeline of Stock Market is the DEMAT Account.
 In India, shares and securities are held electronically in a Dematerialized (or "Demat")
(account, instead of the investor taking physical possession of certificates.
 A Dematerialized account is opened by the investor while registering with an(or sub-
broker).

13
  The Dematerialized account number is quoted for all transactions to enable electronic
settlements of trades to take place. Every shareholder will have a Dematerialized
account for the purpose of transacting shares
 Access to the Dematerialized account requires an internet passwords and a transaction
password.

How to open a bank account?

Today Banks have emerged as important financial institutions. Banks provide a safe
environment and helps us manage our financial transactions. To avail professional banking
service it is mandatory for every individual to open a bank account. Opening a bank account
is not a difficult task. It takes only seven easy steps to open a bank account. This article will
help you understand these seven simple steps or procedure to open a bank account.

Decide the Type of Bank Account you want to Open

 There are several types of bank accounts such as

 Saving Account, Recurring Account, Fixed Deposit Account and Current Account. So
a decision regarding the type of account to be opened must be taken.

Approach any Bank of choice & meet its Bank Officer

 Once the type of account is decided, the person should approach a convenient bank.
He has to meet the bank officer regarding the opening of the account. The bank
officer will provide a proposal form (Account Opening Form) to open bank account
 Today Banks have emerged as important financial institutions. Banks provide a safe
environment and helps us manage our financial transactions. To avail professional
banking service it is mandatory for every individual to open a bank account. Opening
a bank account is not a difficult task. It takes only seven easy steps to open a bank
account. This article will help you understand these seven simple steps or procedure
to open a bank account.

Fill up Bank Account Opening Form - Proposal Form

 The proposal form must be duly filled in all respects. Necessary details regarding
name, address, occupation and other details must be filled in wherever required. Two
or three specimen signatures are required on the specimen signature card. If the
account is opened in joint names, then the form must be signed jointly. Now a days

14
 the banks ask the applicant to submit copies of his latest photograph for the purpose
of his identification.

Give References for Opening your Bank Account

 The bank normally required references or introduction of the prospective account

holder by any of the existing account holders for that type of account. The introducer
introduces by signing his specimen signature in the column meant for the purpose The
reference or introduction is required to safeguard the interest of the bank.

Submit Bank Account Opening Form and Documents

 The duly filled in proposal form must be submitted to the bank along with necessary
documents. For e.g. in case of a joint stock company, the application form must
accompany with the Board's resolution to open the account. Also certified copies of
articles and memorandum of association must be produced.

Officer will verify your Bank Account Opening Form

 The bank officer verifies the proposal form. He checks whether the form is complete
in all respects or not. The accompanying documents are verified. If the officer is
satisfied, then he clears the proposal form.

Deposit initial amount in newly opened Bank Account

 After getting the proposal form cleared, the necessary amount is deposited in the
bank. After depositing the initial money, the bank provides a pass book, a cheque
book and pay in slip book in the case of savings account. In the case of fixed deposits,
a fixed deposit receipt is issued. In the case of current account, a cheque book and a
pay in slip book is issued. For recurring account, the pass book and a pay in slip book
is issued.

BANKING SYSTEM

There has been a rapid development in the banking institutions in various countries. With
development, various systems of banking have come into existence. Banks can be classified
on the basis of volume of operator, Business pattern & Areas of Operations. In India Banks
can be classified into Following Categories:

15
 BANKING SYSTEM

BRANCH UNIT CHAIN GROU MIXED

INVESTMENT DEPOSIT

BRANCH BANKING:

Branch banking is the most popular and important commercial banking system. Under this, A
bank by establishing branches at various places conduct its business. In branch banking, a
branch has a large network of branches scattered all over the country. Branch banking refers
to that system of banking in which a bank establishes its head office in some big cities and
operates the various branches all over the country. In other words, It refers to a single bank
which operates throw various branches in city or in different locations or out of the cities.
This kind of banking system is common in India.

UNIT BANKING:

Unit banking refers to a banking system in which banks remain stand-alone organizations and
are forbidden by law to open branch offices. Banking institutions tend to look toward
branching out or merging with other banks to diversify risk, but many United States banks
were unable to do so until the passage of deregulation legislation in the 1990s. Prior to that
time, about one-third of the states had various forms of unit banking or branch office laws in
effect. Unit banking is often refer to as localised banking. The banking system of the united
states of America is a classic example of unit banking.

CHAIN BANKING:

Chain banking is an arrangement by which an individual, group of individuals or the

members of a family control the operations of two or more banks by either holding majority
shares or interlocking directorship. In other words, it is a banking system where the same
individual or group of individuals controls two or more banks. In this system a group of
individual purchases the bulk of shares of two or more banks to control and manage them. In
this system every bank in the banking chain has its own identity, capital, personnel and
independent board of management. However it is possible that one individual is the members
of various management boards.

16
DEPOSIT BANKING:

The system of banking accepting deposits and lending for short period is called deposit
banking. Commercial banks mobilise financial resource from savers by opening deposit
accounts. Savers generally deposit money for short period mostly for less than 3 years. The
money so mobilised is lent to trade, commerce and industry for short periods. The loans are
in the form of overdrafts, cash credits, discounting bills of exchange. Such loans are given for
the purpose of working capital requirements of industry and trade. Commercial banks
generally do deposit banking. England is considered to be the home of deposit banking.

INVESTMENT BANKING:

An investment bank is a financial institution that assists individuals, corporations, and

governments in raising financial capital by underwriting or acting as the client's agent in
the issuance of securities. An investment bank may also assist companies involved inmergers
and acquisitions (M&A) and provide ancillary services such as market making, trading
of derivatives and equity securities, and FICC services (fixed income instruments, currencies,
and commodities). The two main lines of business in investment banking are called the sell
side and the buy side. The "sell side" involves trading securities for cash or for other
securities (e.g. facilitating transactions, market-making), or the promotion of securities (e.g.
underwriting, research, etc.). The "buy side" involves the provision of advice to institutions
that buy investment services. Private equity funds, mutual funds, life
insurance companies, unit trusts, and hedge funds are the most common types of buy-side
entities.

MIXED BANKING:

It is a system where banks combine both the deposit banking and investment banking
functions thus in this type of banking, banks raise deposits from the public repayable on
demand and lend it to meet both short term as well as long term requirements of trade and
industry.

HOW TO DEPOSIT AMOUNT IN A PARTICULAR ACCOUNT

Account number

This number ensures that the money is deposited in the correct account. If you do not have
your account number with you, your bank can provide the information to you.

17
Your information

Your name is pre-printed or written in.

Date
You will write today’s date here.

Cash
If depositing cash, you would write the amount here.

Checks
If you are depositing checks or money orders, you would list each one separately here and
continue on the back if more space were needed.

Subtotal
You will add the cash and check amounts and write the total amount being deposited here.

Less cash received

If you are at the bank, you would use this space to write the amount of cash you would like to
get back from the checks you are depositing. The teller will ask you to sign the deposit slip
and provide identification to confirm that you are the account holder.

Total
You will subtract the amount, if any, on the line “Less Cash Received” from the Subtotal, and
write the total amount being deposited here.

Signature line

The teller will ask you to sign the deposit slip and provide identification to confirm that you
are the account holder, if you are withdrawing cash from your deposit.

Different services offered by the banks to there customers

1. Advancing of Loans

Banks are profit oriented business organizations. So they have to advance loan to public and
generate interest from them as profit.

18
After keeping certain cash reserves, banks provide short-term, medium-term and long-term
loans to needy borrowers.

2. Overdraft

Sometimes, the bank provides overdraft facilities to its customers though which they are
allowed to withdraw more than their deposits. Interest is charged from the customers on the
overdrawn amount.

3. Discounting of Bills of Exchange

 This is another popular type of lending by the modern banks.

 Through this method, a holder of a bill of exchange can get it discounted by the bank,
in a bill of exchange, the debtor accepts the bill drawn upon him by the creditor (i.e.,
holder of the bill) and agrees to pay the amount mentioned on maturity.
 After making some marginal deductions (in the form of commission), the bank pays
the value of the bill to the holder.
 When the bill of exchange matures, the bank gets its payment from the party, which
had accepted the bill.

4. Cheque Payment

Banks provide cheque pads to the account holders. Account holders can draw cheque upon
bank to pay money. Banks pay for cheques of customers after formal verification and official
procedures..

5. Collection and Payment Of Credit Instruments

In modern business, different types of credit instruments such as bill of exchange, promissory
notes, cheques etc. are used. Banks deal with such instruments. Modern banks collect and pay
different types of credit instruments as the representative of the customers.

6. Foreign Currency Exchange

Banks deal with foreign currencies. As the requirement of customers, banks exchange foreign
currencies with local currencies, which is essential to settle down the dues in the international
trade.

19
7. Consultancy

Modern commercial banks are large organizations. They can expand their function to
consultancy business. In this function, banks hire financial, legal and market experts who
provide advices to customers in regarding investment, industry, trade, income, tax etc.

8. Bank Guarantee

Customers are provided the facility of bank guarantee by modern commercial banks. When
customers have to deposit certain fund in governmental offices or courts for specific purpose,
bank can present itself as the guarantee for the customer, instead of depositing fund by
customers.

9. Remittance of Funds

Banks help their customers in transferring funds from one place to another through cheques,
drafts, etc.

10. Credit cards

Credit card are cards that allow their holders to make purchases of goods and services in
exchange for the credit card’s provider immediately paying for the goods or service, and the
card holder promising to pay back the amount of the purchase to the card provider over a
period of time, and with interest.

11. ATMs Services

ATMs replace human bank tellers in performing basic banking functions such as deposits,
withdrawals, account inquires. Key advantages of ATMs include:

 24 hour availability
 Elimination of labor cost
 Convenience of location

12. Debit cards

Debit cards are used to electronically withdraw funds directly from the cardholders’ accounts.
Most debit cards require a Personal Identification Number (PIN) to be used to verify the
transaction.

20
13. Home banking

Home banking is the process of completing financial transaction from one’s own home as
opposed to utilizing a branch of a bank. It includes actions such as making account inquiries,
transferring money, paying bills, applying for loans, directing deposits.

14. Online banking

Online banking is a service offered by banks that allows account holders to access their
account data via the internet. Online banking is also known as “Internet banking” or “Web
banking.”

Online banking through traditional banks enable customers to perform all routine
transactions, such as account transfers, balance inquiries, bill payments, and stop-payment
requests, and some even offer online loan and credit card applications. Account information
can be accessed anytime, day or night, and can be done from anywhere.

15. Mobile Banking

Mobile banking (also known as M-Banking) is a term used for performing balance checks,
account transactions, payments, credit applications and other banking transactions through a
mobile device such as a mobile phone or Personal Digital Assistant (PDA),

16. Accepting Deposit

Accepting deposit from savers or account holders is the primary function of bank. Banks
accept deposit from those who can save money, but cannot utilize in profitable sectors.
People prefer to deposit their savings in a bank because by doing so, they earn interest.

17. Priority banking

Priority banking can include a number of various services, but some of the popular ones
include free checking, online bill pay, financial consultation and information.

18. Private banking

Personalized financial and banking services that are traditionally offered to a bank’s rich,
high net worth individuals (HNWIs). For wealth management purposes, HNWIs have
accrued far more wealth than the average person, and therefore have the means to access a
larger variety of conventional and alternative investments. Passbook traditionally, a passbook
is used for accounts with a low transaction volume, such as a savings account. A bank teller

21
or postmaster would write, by hand, the date and amount of the transaction, the updated
balance, and enter his or her initials. In the late 20th century, small dot matrix or inkjet
printers were introduced capable of updating the passbook at the account holder's
convenience, either at an automated teller machine or a passbook printer, either in a self-serve
mode, by post, or in a branch .

Passbook

Passbooks appeared in the 18th century, allowing customers to hold transaction information
in their own hands for the first time. Up until then transactions were recorded in ledgers at the
bank only, so that customers had no history of their own deposits and withdrawals.

The passbook, which was around the size of a passport, ensured that customers had control
over their own information, and was called a "passbook" because it regularly passed between
the bank and the account holder for updating. It was also used as a way to identify the
account holder without needing further identification.

Usage

Credits and deposits

To add credit to an account by bringing cash to a bank in person, the account holder can fill a
small credit slip or deposit slip . The total amount of each note and coin is counted and
entered on the slip, along with who it is paid in by and the date. The cash and details are

22
counted and checked by the teller at the bank, if everything is in order the deposit is credited
to the account, the credit slip is then kept by the bank and the

credit slip booklet is stamped with the date and then returned to the account holder.An
account holder uses their passbook to record their history of transactions with their bank.

Debits and withdrawals

Withdrawals normally required the account holder to visit the branch where the account was
held, where a debit slip or withdrawal slip would be prepared and signed. If the account
holder was not known to the teller, the signature on the slip and the authorities would be
checked against the signature card at the branch, before money was paid out. In the 1960s,
banks adopted the black light signature system for passbooks, which enabled withdrawals to
be made from passbooks at a branch other than the one where an account was opened, unless
prior arrangements were made to transfer the signature card to the other branch. Under this
system, the passbook's owner would sign in the back of the passbook in an invisible ink and
the signing authorities would also be noted. At the paying branch, the signature on the
withdrawal slip would be checked against the signature in the book, which required a special
ultraviolet reader to read. [2] Nowadays, customer verification is more likely to be by PIN
and commonly from an automated teller machine

Format of a Bank Passbook or Bank Statement:

Name of the bank__________

Address of the bank____________

Account No._________________

Customer Name:_______________

Address of the customer.___________

23
Types of Bank Loans Offered by Banks in India

Home Loan

Home Loans are taken by people for a variety of home-related purposes such as construction
of home, home renovation, home extension, buying of property or land, or payment of stamp
duties. Home loans comprise an adjustable or fixed interest rate and payment terms. Some
types of home loans are mentioned below:

 Home Purchase Loan

 Land Purchase Loan
 Home Construction Loan
 Home Extension Loan
 Home Renovation Loan
 Stamp Duty Loan
 NRI Home Loans
 Loan Against Property

Personal Loan

This type of loan is given to individuals after accessing their credentials based on their
profession or business, or any other sources of income. The loan can be utilised for any
purpose, for example, paying debt, marriage expenses or vacation expenditure. No collateral

24
security is required for this type of loan. The span of personal loan repayment varies from 12
months to 60 months depending upon the principal amount and the EMIs. The interest rate
ranges from 15 percent to 28 percent varying from bank to bank. Approximately 2 percent of
the total loan amount is charged as the loan processing fee. Generally, banks rules prohibit
prepayment of loan for the initial six months; otherwise 2 percent to 4 percent of the
outstanding amount is charged as the prepayment fees. The EMI starts once the disbursement
of loan has been made.

Business Loan

This type of loan is provided to either existing businesses or those venturing into new
business. As banks provide loans on the basis of individual's credentials, it is bit difficult to
get a loan for starting a business. It is very important for individuals (starting a business) to
have a clear cut business plan as it is the most important requirement to convince the banks
that your business has the capability of repayment. Banks then rely on individual's
background, assets/property, previous loan history and dedication towards work. Banks also
prefer those individuals who have already insured the property for their business. Nowadays,
banks are working on providing more lucrative and easy business loans options for the first
time business owners.

For existing businesses, loan is provided in the following ways:

 Term loans – Amount provided for a fixed tenure at the applicable interest rate: three
years for short term loan and 10-15 years for long term loans.
 Bank overdraft limits – Ability to withdraw more money than what is deposited.
 Bill Discounting – Short-term borrowing used to improve a company's working
capital and cash flow position.
 Letter of credit for international business – Bank guaranteeing of a buyer's payment to
a seller in specified period.

Education Loan

Required by and provided to students who want to pursue higher education in resident
country or abroad. Students should have an admission offer from an institution before they
apply for an education loan. The loan takes care of the fees of the institution including
examination and library fees; travel expenses for abroad; cost of books and equipments
required; any insurance for the student, if applicable; and any additional expenses such as

25
tours, thesis, project work, etc. The terms of education loans vary from bank to bank. The
RBI has fixed certain norms on the total amount of loan that can be disbursed; however,
banks can increase or decrease the limit depending on the institution. For studying in India,
Rs. 10 lakh is the average and for studying abroad, the average is Rs. 20 lakh. For a loan
amount up to Rs. 4 lakh, parents should be the joint borrowers and above that amount, a
guarantee or some security in terms of tangible assets is required, depending upon the bank.
Simple rate of interest is charged depending upon the base rate of the bank. It is not
mandatory to pay the interest during the study period; however, if paid regularly during the
study period, some concession is also provided by a few banks. The repayment tenure varies
between 10 years and 15 years depending upon the loan amount and repayment begins
between six months and two years of the course completion. Early repayment has no
associated charges.

Gold Loan

Gold loan is imparted only on providing gold as security to a bank or any other lending
institution. It is considered as one of the safest methods as the loan amount is provided on the
basis of the security submitted. Amount ranging from Rs. 5k to 25 lakh can be taken as loan
against gold. Amount equivalent to 80 percent to 90 percent (varying from bank to bank) of
the total value of the gold is given as loan to the borrower. Depending upon the bank, the
tenure of gold loan varies from one day to two years. The extension of tenure is also allowed
by few banks. The rate of interest usually ranges from 14 percent to 24 percent, depending
upon the financial institution. The banks charge processing fees of up to 1.5 percent. There is
no prepayment fee. You can repay the gold loan any time during the tenure. EMI policy also
varies from bank to bank; few banks prefer EMIs where interest and principal are charged
monthly, whereas few only charge the interest on a monthly basis and offer flexibility for the
payment of the interest amount.

Vehicle/ Car Loan

Compared to other loans, it is easier and simpler to take vehicle loans. Vehicle loans involve
less paperwork and around three to six working days are required to get the clearance. The
interest rates vary from bank to bank based on their base rate. The repayment process
involves monthly EMIs and early repayment options.

26
Loan against Insurance Policy

Any individual having an insurance policy can take loan against it from the insurance
company. The amount of loan depends upon the type and period of the policy. It is generally
up to 80 percent of the surrender value of the policy. The rate of interest on loan against
insurance is very less and varies with the companies. The tenure (during the policy term) and
repayment options are decided by the insurer company as per their policies. The unpaid loan
amount/ interest amount is adjusted to the policy amount before any payment against the
policy is made.

Loan against PPF

Loan against PPF is one of the easiest and most beneficial loan options in India. The loan is
disbursed easily. The loan against PPF is usually of a small amount depending upon the
money in the PPF account. The rate of interest is 2 percent more than the rate of interest
given for the PPF at the time when loan is taken. The loan is available from the second year
of account opening, i.e., after completion of one year of account opening. The loan can be
availed within five years of account opening. If five financial years have passed since the
account opening, the account holder cannot apply for the loan. The repayment of the loan
should be made in next 36 months, i.e., three years from the date of loan.

Latest RBI Bank Rates in Indian Banking - 2016

SLR Rate CRR MSF Repo Rate Reverse Repo Rate Base Rate

21.25% 4% 7% 6.5% 6% 9.3% - 9.7%

RBI Repo Rate Trend Chart

Repo (Repurchase) rate also known as the benchmark interest rate is the rate at which the
RBI lends money to the banks for a short term. When the repo rate increases, borrowing from
RBI becomes more expensive. If RBI wants to make it more expensive for the banks to
borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to
borrow money it reduces the repo rate.

Reverse Repo rate is the short term borrowing rate at which RBI borrows money from
banks. The Reserve bank uses this tool when it feels there is too much money floating in the
banking system. An increase in the reverse repo rate means that the banks will get a higher

27
rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is
always safe instead of lending it others (people, companies etc) which is always risky. 

Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI,
whereas Reverse Repo rate signifies the rate at which the central bank absorbs liquidity from
the banks. Reverse Repo Rate is linked to Repo Rate with a difference of 0.5% between
them.

CRR - Cash Reserve Ratio - Banks in India are required to hold a certain proportion of their
deposits in the form of cash. However Banks don't hold these as cash with themselves, they
deposit such cash(aka currency chests) with Reserve Bank of India , which is considered as
equivalent to holding cash with themselves. This minimum ratio (that is the part of the total
deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash
Reserve Ratio.

When a bank's deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will
have to hold Rs. 9 with RBI and the bank will be able to use only Rs 91 for investments and
lending, credit purpose. Therefore, higher the ratio, the lower is the amount that banks will be
able to use for lending and investment. This power of Reserve bank of India to reduce the
lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank
through which it can control the amount that banks lend. Thus, it is a tool used by RBI to
control liquidity in the banking system.

SLR - Statutory Liquidity Ratio - Every bank is required to maintain at the close of
business every day, a minimum proportion of their Net Demand and Time Liabilities as
liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of
liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). RBI
is empowered to increase this ratio up to 40%. An increase in SLR also restricts the bank's
leverage position to pump more money into the economy.

Net Demand Liabilities - Bank accounts from which you can withdraw your money at any
time like your savings accounts and current account.

Time Liabilities - Bank accounts where you cannot immediately withdraw your money but
have to wait for certain period. e.g. Fixed deposit accounts. 

Call Rate - Inter bank borrowing rate - Interest Rate paid by the banks for lending and
borrowing funds with maturity period ranging from one day to 14 days. Call money market

28
deals with extremely short term lending between banks themselves. After Lehman Brothers
went bankrupt Call Rate sky rocketed to such an insane level that banks stopped lending to
other banks.

MSF - Marginal Standing facility - It is a special window for banks to borrow from RBI
against approved government securities in an emergency situation like an acute cash
shortage. MSF rate is higher then Repo rate. Current MSF Rate: 7%.

Bank Rate - This is the long term rate(Repo rate is for short term) at which central bank
(RBI) lends money to other banks or financial institutions. Bank rate is not used by RBI for
monetary management now. It is now same as the MSF rate. Current bank rate is 7%

29