19BMC205B - Unit1 - Nature of Banking Business

Course Code: 19BMC205B
Course Title: Banking and Financial Institutions
Course Leader
Mrs. Savitha Kulkarni

savitha.ms.mc@msruas.ac.in
1
Faculty of Management and Commerce © Ramaiah University of Applied Sciences
Lecture No. 1
Regulations Governing Banking Institutions
At the end of this session, students will be able to:
– Explain Banking Regulation Act 1949

– Explain CRR and SLR
– Explain the functions of Banks
2
Contents
• Banks
• Different Types of Banks
• Preamble of Regulatory Act
• Applicability of Banking Regulation Act
• Business of Banking Companies
• Cash Reserve Ratio
• Statutory Liquidity Ratio
3
Banks
• The banking industry handles finances in a country including cash

and credit. Banks are the institutional bodies that accept deposits
and grant credit to the entities and play a major role in maintaining
the economic stature of a country. Given their importance in the
economy, banks are kept under strict regulation in most of the
countries. In India, the Reserve Bank of India (RBI) is the apex
banking institution that regulates the monetary policy in the
country.
4
Services offered by Banks
• The banking industry handles finances in a country including cash

and credit. Banks are the institutional bodies that accept deposits
and grant credit to the entities and play a major role in maintaining
the economic stature of a country. Given their importance in the
economy, banks are kept under strict regulation in most of the
countries. In India, the Reserve Bank of India (RBI) is the apex
banking institution that regulates the monetary policy in the
country.
5
Services offered by Banks
6
Different Types of Banks
7
Commercial Banks
• Commercial Banks are regulated under the Banking Regulation Act,

1949 and their business model is designed to make profit. Their
primary function is to accept deposits and grant loans to the
general public, corporate and government. Commercial banks can
be divided into-
8
Commercial Banks
• There are 4 types of Commercial banks

– Public Sector Banks
– Private Sector Banks
– Foreign Banks
– Regional Rural banks
9
Public Sector Banks
• These are the nationalised banks and account for more than 75 per
cent of the total banking business in the country. Majority of stakes
in these banks are held by the government. In terms of volume, SBI
is the largest public sector bank in India and after its merger with its
5 associate banks (as on 1st April 2017) it has got a position among
the top 50 banks of the world.
10
Public Sector Banks
11
Private Sector Banks
• These include banks in which major stake or equity is held by

private shareholders. All the banking rules and regulations laid
down by the RBI will be applicable on private sector banks as well.
Given below is the list of private-sector banks in India-
12
Private Banks
13
Foreign Banks
• A foreign bank is one that has its headquarters in a foreign country

but operates in India as a private entity. These banks are under the
obligation to follow the regulations of its home country as well as
the country in which they are operating. Given below is the list of
foreign banks operating in India –
14
Foreign Banks
15
Regional Rural Banks
• These are also scheduled commercial banks but they are

established with the main objective of providing credit to weaker
sections of the society like agricultural labourers, marginal farmers
and small enterprises. They usually operate at regional levels in
different states of India and may have branches in selected urban
areas as well. Other important functions carried out by RRBs
include-
– Providing banking and financial services to rural and semi-urban areas
– Government operations like disbursement of wages of MGNREGA workers,
distribution of pensions, etc.
– Para-Banking facilities like debit cards, credit cards and locker facilities
https://en.wikipedia.org/wiki/Regional_Rural_Bank
16
Small Finance Banks
• This is a niche banking segment in the country and is aimed to

provide financial inclusion to sections of the society that are not
served by other banks. The main customers of small finance banks
include micro industries, small and marginal farmers, unorganized
sector entities and small business units. These are licensed under
Section 22 of the Banking Regulation Act, 1949 and are governed by
the provisions of RBI Act, 1934 and FEMA.
17
Small Finance Banks
18
Payment Banks
• This is a relatively new model of bank in the Indian Banking

industry. It was conceptualised by the RBI and is allowed to accept a
restricted deposit. The amount is currently limited to Rs. 1 Lakh per
customer. They also offer services like ATM cards, debit cards, net-
banking and mobile-banking.
https://en.wikipedia.org/wiki/Payments_bank
19
Co-operative banks
• Co-operative banks are registered under the Cooperative Societies

Act, 1912 and they are run by an elected managing committee.
These work on no-profit no-loss basis and mainly serve
entrepreneurs, small businesses, industries and self-employment in
urban areas. In rural areas, they mainly finance agriculture-based
activities like farming, livestock and hatcheries.
• Urban Co-operative banks
• Rural Co-operative banks
20
Urban Co-operative Banks
• Urban Co-operative Banks refer to the primary cooperative banks

located in urban and semi-urban areas. These banks essentially lent
to small borrowers and businesses centered around communities,
localities work place groups.
• According to the RBI, on 31st March, 2003 there were 2,104 Urban
Co-operative Banks of which 56 were scheduled banks. About 79%
of these are located in five states, – Andhra Pradesh, Gujarat,
Karnataka, Maharashtra and Tamil Nadu.
21
State Cooperative Bank
• A State Cooperative Bank is a federation of the central cooperative

bank which acts as custodian of the cooperative banking structure
in the State.
• Banks can also be classified on the basis of Scheduled and Non-
Scheduled Banks. It is essential for every individual to check if they
are holding their savings or deposit account with a Scheduled Bank
or Non-Scheduled Bank. Scheduled Banks are also covered under
the depositor insurance program of Deposit Insurance and Credit
Guarantee Corporation (DICGC), which is beneficial for all the
account holders holding a savings and fixed / recurring deposit
account. Under DICGC, bank deposits of up to Rs 1 lakh, including
the fixed, savings, current and recurring deposits, per depositor
per bank in the event of bank failure are insured.
22
Scheduled banks
• Scheduled banks are covered under the 2nd Schedule of the

Reserve Bank of India Act, 1934. To qualify as a scheduled bank, the
bank should conform to the following conditions:
• A bank that has a paid-up capital of Rs. 5 Lakh and above qualifies
for the schedule bank category
• A bank requires to satisfy the central bank that its affairs are not
carried out in a way that causes harm to the interest of the
depositors
• A bank should be a corporation rather than a sole-proprietorship or
partnership firm
23
Non-scheduled bank
• Non-scheduled banks refer to the local area banks which are not
listed in the Second Schedule of Reserve Bank of India. Non-
Scheduled Banks are also required to maintain the cash reserve
requirement, not with the RBI, but with them.
24
Preamble of Regulatory Act
• An Act to consolidate and

amend the law relating to
banking.
• whereas it is expedient to
consolidate and amend the
law relating to banking .
25
Introduction
The Banking companies act, presently known as banking regulation act was
enacted owing to safeguard the interest of depositors, control abuse of
power by some bank personnel controlling the banks in particular and to the
interest of Indian economy in general.
The Banking Regulation Act was passed as the Banking Companies Act 1949
and came into force w.e.f 16.3.49. Subsequently it was changed to Banking
Regulations Act 1949 wef 01.03.66.
However, it should be remembered that this act does not supersede the
provision of companies act or any other law for the time being in force in
respect of banking business.
26
Definition of Banks
In India, the definition of the business of banking has been given in the Banking
Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act, 'a
banking company is a company which transacts the business of banking in
India.' Further, Section 5(b) of the BR Act defines banking as, 'accepting, for the
purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawable, by cheque, draft, order
or otherwise.'
This definition points to the three primary activities of a commercial bank which
distinguish it from the other financial institutions. These are: (i) maintaining
deposit accounts including current accounts, (ii) issue and pay cheques, and (iii)
collect cheques for the bank's customer
27
Different provisions of Banking
regulations
S. No. Parts Topics Act Sections covered
1. I Preliminary 1 to 5A
2. II
3. IIA Control over management 36AA to 36AC
4. IIB
5. IIC Acquisition of the undertakings of Banking 36AE to 36AJ

Companies in certain cases
6. III
7. IIIA Speedy provision for speedy disposal of winding up 45A to 45X

proceedings
8. IIIB
9. IV Miscellaneous 46 to 55A
10. V Application of the Act to cooperative Banks 56 28
Faculty of Management and Commerce
Commerce © Ramaiah University of Applied Sciences
Applicability of the Banking Regulation Act,
1949
• This Act applies to following categories of Banks:
1. Nationalized Banks
2. Non-Nationalized Banks
3.Cooperative Banks
29
Business of banking Companies Section 6(1)
and 6(2) r.w. 56(b)
• Borrowing, raising or taking of

money
• Giving advance
• Bills business
• L/C , Bank Guarantee, Indemnity
• Foreign exchange
• Providing safe deposit vaults
30
Business of banking Companies Section 6(1) and 6(2)
r.w. 56(b) cont.…
• Collecting and transmitting money

• Managing, selling and realizing any property that may come
into the possession of the bank in satisfaction or part
satisfaction of any of its dues
• Acquiring, holding and dealing with any property or any right,
title or interest in any such property that may form the security
or part of the security for any loans or advances or which may
be connected with such security
• Undertaking and executing trusts
31
Business of banking Companies Section 6(1) and 6(2)
r.w. 56(b) cont.…
• Acquiring, constructing, maintaining and altering of any

building for the purpose of the bank
• Acquiring and undertaking the whole or part of the business
of any person or bank / company if its nature of business is
as per the allowed business for the bank
• Doing all such other things as are incidental or conducive to the

promotion or advancement of the business of the bank
• Any other business the Central Govt. may by notification
specify as a allowed business
• Banks are prohibited to do any other business
32
Use of words bank, banker, banking or banking
company
(1) No company other than a banking company shall use as part of its
name 15[or, in connection with its business] any of the words bank, banker or
banking and no company shall carry on the business of banking in India unless
it uses as part of its name at least one
of such words.
(2) No firm, individual or group of individuals shall, for the purpose of carrying
on any
business, use as part of its or his name any of the words bank, banking or
banking company.
(3) Nothing in this section shall apply to-
(a) a subsidiary of a banking company formed for one or more of the

purposes mentioned in sub-section (1) of section 19, whose name indicates
that it is a subsidiary of that banking
company;
(b) any association of banks formed for the protection of their mutual
interests and registered under section 25 of the Companies Act,
1956 (1 of 1956).]
33
Faculty of Management and Commerce
Commerce © Ramaiah University of Applied Sciences
Banking Policy
“Banking Policy”means policy specified by RBI from time to time in the interest of
-Banking system
-Monetary stability
-Sound economic growth
-Interest of depositors
-Volume of deposits and other resources of the bank
-Efficient use of the deposits and resources …..Section 5(ca)
34
Cash Reserve (CRR)
Section 18 r. w. 56 (j)
• Every bank is required to keep cash reserve, with itself or
by way of balance in the current account with RBI or
Central / District Co-operative Bank or net balance in all such
way, of minimum prescribed % amount of its DTL as of last Friday
of fortnight
A return about this has to be submitted to RBI before 15thof

each month about alternate Friday
35
Statutory Liquid Ratio(SLR)
Bank shall maintain

unencumbered approved
securities, valued not exceeding
the current market price, or an
amount which shall not be less
than 24% of the total of its
demand and time liabilities
(DTL)
36
Restrictions on loans and advances
• Not withstanding anything to the contrary contained in section 77 of the

Companies Act, 1956 (1 of 1956), no banking company shall,
– (a) grant any loans or advances on the security of its own shares, or
– (b) enter into any commitment for granting any loan or advance to or on behalf
of
(i) any of its directors,
(ii) any firm in which any of its directors is interested as partner, manager,
employee or guarantor, or
(iii) any company [not being a subsidiary of the banking company or a
company registered under section 25 of the Companies Act, 1956 (1 of
1956), or a Government company] of which 61[or the subsidiary or the
holding company of which] any of the directors of the banking company is
a director, managing agent, manager, employee or guarantor or in which
he holds substantial interest, or
(iv) any individual in respect of whom any of its directors is a partner or
guarantor
37
Licensing of Banking Companies
68[(1) Save as hereinafter

provided, no company shall carry on
banking business in India unless it
holds a licence issued in that behalf
by the Reserve Bank and any such
licence may be issued subject of such
conditions as the Reserve Bank may
think fit to impose.]
(2) Every banking company in

existence on the commencement of
this Act, before the expiry of six
months from such commencement,
and every other company before
commencing banking business 69[in
India], shall apply in writing to the
Reserve Bank for a licence under this
section.
38
Power to publish information
The Reserve Bank or the National Bank, or both, if they

consider it in the public interest so to do, may publish any
information obtained by them under this Act in such
consolidated form as they think fit.
39
Power of the Reserve Bank to give
directions
(1) Where • (a) in the 134[public interest]; or

• 135[(aa) in the interest of banking policy; or]
• (b) to prevent the affairs of any banking company being
the Reserve conducted in a manner detrimental to the interests of the
depositors or in a manner prejudicial to the interests of the
Bank is banking company; or
• (c) to secure the proper management of any banking company
generally,
satisfied that— • it is necessary to issue directions to banking companies
generally or to any banking company in particular, it may, from
time to time, issue such directions as it deems fit, and the
banking companies or the banking company, as the case may
be, shall be bound to comply with such directions.
40
Powers of the Reserve Bank to give directions cont.
(2) The Reserve Bank may, on representation made to it or

on its own motion, modify or cancel any direction issued
under sub-section (1), and in so modifying or cancelling
any direction may impose such conditions as it thinks
fit, subject to which the modification or cancellation
shall have effect.
41
Powers and functions of Reserve Banks
• 1.
– caution or prohibit banking companies or any banking company
in particular against entering into any particular transaction or
class of transactions, and generally give advice to any banking
company;
– on a request by the companies concerned and subject to the
provision of section 149[44A], assist, as intermediary or
otherwise, in proposals for the amalgamation of such banking
companies;
– give assistance to any banking company by means of the grant of
a loan or advance to it underclause (3) of sub-section (1) of
section 18 of the Reserve Bank of India Act, 1934 (2 of 1934);
42
Powers and functions of Reserve Banks cont.
(2)The Reserve Bank shall make an annual report to the Central

Government on the trend and progress of banking in the country, with
particular reference to its activities under clause (2) of section 17 of the
Reserve Bank of India Act, 1934 (2 of 1934), including in such report its
suggestions, if any, for the strengthening of banking business
throughout the country.
(3)The Reserve Bank may appoint such staff at such places as it

considers necessary for the scrutiny of the returns, statements and
information furnished by banking companies under this Act, and
generally to ensure the efficient performance of its functions under this
Act.
43
Certain provisions of the Act not to apply to
certain banking companies
(1)The provisions of section II, sub-section (1) of section 12, and sections
17, 18, 24 and 25 shall not apply to a banking company—
• (a) which, whether before or after the commencement of the Banking Companies
(Amendment) Act, 1959 (33 of 1959), has been refused a licence under section 22, or
prohibited from accepting fresh deposits by a compromise, arrangement or scheme
sanctioned by a court or by any order made in any proceeding relating to such compromise,
arrangement or scheme, or prohibited from accepting deposits by virtue of any alteration
made in its memorandum; or
• (b) whose licence has been cancelled under section 22, whether before or after the
commencement of the Banking Companies (Amendment) Act, 1959 (33 of 1959).
• (2) Where the Reserve Bank is satisfied that any such banking company as is referred to in
sub-section (1) has repaid, or has made adequate provision for repaying all deposits
accepted by the banking company, either in full or to the maximum extent possible, the
Reserve Bank may, by notice published in the Official Gazette, notify that the banking
company has ceased to be a banking company within the meaning of this Act, and
thereupon all the provisions of this Act applicable to such banking company shall cease to
apply to it, except as respects things done or omitted to be done before such notice.]
44
Control over management
• 36AA. Power of Reserve Bank to remove managerial and

• other persons from office.
(a)6AAA. Supersession of Board of directors of a multi- State co-

operative bank.
(b)6AAB. Order of winding up of multi-State cooperative bank to be

final in certain cases
(c) Reimbursement to Deposit Insurance Corporation by liquidator or

transferee bank
45
Control over management
36AB. Power of Reserve Bank to appoint additional directors,
36AC. Part IIA to override other laws.
36AD. Punishments for certain activities

in relation to banking companies.
46
Suspension of business and winding
up of banking companies
High Court defined

Suspension of business
Winding up by High Court
Court liquidator
Reserve Bank to be official liquidator
Application of Companies Act to liquidators
47
Course Code: 18BMC205B
Course Title: Banking and Financial Institutions
Course Leader
Mrs. Savitha Kulkarni

savitha.ms.mc@msruas.ac.in
48
Lecture No. 2
Regulations Governing Non- Banking Financial
Institutions
– Understand Non Banking Financial Institutions
49
Contents
 Meaning of NBFI
 Difference between NBFI and banks
 Importance and Role of NBFI
 Functions and Regulations
 Types and Guidelines
 Top five NBFI
50
Financial Institution
 A financial institution is an institution which collects funds from

the public, and places them in financial assets, such as deposits,
loans and bonds rather than tangible property.
FINANCIAL INSTITUTION
Banking Non banking

institution institution
51
Non Banking Financial Institution
 A non-bank financial institution (NBFI) is a financial institution that

does not have a full banking license or is not supervised by a
national or international banking regulatory agency.
 Non-banking financial institutions, are financial institutions that

provide banking services, but do not hold a banking license. These
institutions are not allowed to take deposits from the public.
52
NBFI’s VERSUS BANK’s
BANKS NBFIS
Definition Banking is acceptance of deposits NBFI cannot accept

withdraw able by cheque or demand; demand deposits NBFI
are companies
carrying financial business
Scope of business Scope of business of the bank is There is a various types of

limited. business regarding financial
activities.
Major limitation on No non banking activity are Cannot provide checking

Business carried. facilities.
Need for a license License norms are tightly controlled It is comparatively much
and generally it is perceived to be easier to get a registration
quite difficult to get a license for a as an NBFI.
bank
Regulations BR Act and RBI Act lay down the Much lesser control over
stringent control over the bank. NBFI
53
Importance
 Non banking financial institutions have the following
importance in Indian economy.
 Greater reach.
 Flexibility in tapping resources.
 Retail services to small and medium business.
 Important component of financial
market.
54
Role of NBFIs
 Development of sectors like Transport &

Infrastructure
 Substantial employment generation
 Help & increase wealth creation
 Broad base economic development
 To finance economically weaker sections
55
Functions
 Brokers of loanable funds

 Mobilization of savings
 Channelization of funds into investment
 Stabilize the capital market
 Provide liquidity
56
Regulation
 RBI Act, 1934, it is mandatory that every NBFI should be registered

with RBI to commence or carry on any business of non-banking
financial institution.
57
Types of NBFI
Risk
pooling
institutions
Financial Contractual
services saving
providers institutions
types
Specialized
Market
sectoral
makers
financiers
58
Types of NBFI
 Risk-pooling institutions:
•Insurance companies underwrite economic risks associated with

illness, death, damage and other risks of loss.
•There are two main types of insurance companies: (a)general

insurance (b)life insurance.
59
Types of NBFI cont.
 Contractual savings institutions:
Contractual savings institutions (also called institutional investors)

give individuals the opportunity to invest in collective investment
vehicles (CIV).
• Collective investment vehicles pool resources from individuals

and firms into various financial instruments including equity, debt
and derivatives.
Eg- mutual funds, pension funds.
60
Types of NBFI cont.
 Market makers
Market makers are broker-dealer institutions that quote a buy and

sell price and facilitate transactions for financial assets. Such assets
include equities, government and corporate debt, derivatives, and
foreign currencies.
61
Types of NBFI cont.
 Specialized sectoral financiers:
They provide a limited range of financial services to a targeted

sector. For example, real estate financiers channel capital to
prospective homeowners, leasing companies provide financing for
equipment and payday lending companies that provide short term
loans to individuals that are under banked or have limited resources.
62
Types of NBFI cont.
• Financial service providers Financial service providers include
brokers management consultants, and financial advisors, and
they operate on a fee-for-service basis.
• Their services include: improving informational efficiency for the
investors and, in the case of brokers, offering a transactions
service by which an investor can liquidate existing assets.
63
Company’s under NBFC
They are also categorized in a different format among 8 categories

• Loan company
•Hire purchase company
•investment company
•mutual benefit company
•housing finance company
• Equipment leasing company
64
Guidelines on fair
Practices
• Application for loans and their processing.
• Loan appraisal and terms\conditions.
• Disbursement of loan.
• Customer acceptance policy.
• Customer identification procedure.
• Monitoring of transactions.
• Risk management.
• Kyc for existing accounts.
• Appointment of principal officer 65
Top five NBFCs in India:
• Housing Development Finance Corporation Limited
• Power Finance Corporation Limited
• Rural Electrification Corporation Limited
• National Bank of Agricultural and
Rural Development
• Infrastructure Development Finance
Company Limited
66
Lecture No. 3
Socio economic environment
– Explain socio economic environment in banks
67
Contents
• Socio economic environment in Banks

• Social obligations of bank
68
Obligations of Bankers
• Bankers are under the obligations to fulfil certain duties while dealing
with customers. Such obligations are as under:
1. Obligation to honour the customer’s cheques

2. Obligation to maintain secrecy of customer’s account
3. Obligation to receive the cheques and other instruments for collection.
4.Obligation to give reasonable notice before closing the customer’s
accounts
69
Obligation to Honour the Customer’s Cheques
• Section 31 of the Negotiable Instruments Act, 1881, imposes a

statutory obligation upon the banker to honour the cheques of his
customer
• “The drawee of a cheque having sufficient funds of the drawer in his
hands, properly applicable to the payment of such cheque, must pay
the cheque when duly required so to do and in default of such
payment, must compensate the drawer for any loss or damage,
caused by such default.”
• This provision clearly indicates that the banker should honour the
customers demand for payment by cheque on certain condition
70
Obligation to Honour the Customer’s Cheques Contd..
• Sufficient Balance
• Application of the Funds
• Duly Required to Pay
• The instrument used for drawing the amount should be properly
written and fulfil and legal obligations.
• There should not be any legal restriction to pass the cheque for
payment say in case of Garnishee order, restriction is imposed in the
account.
• Consequences of Wrongful Dishonor of Cheque
71
Obligation to Maintain Secrecy of Customer’s
Account
• A bank’s profession also demands that he should maintain the
particulars of his customer’s accounts in secret
• The banker has an implied obligation to maintain secrecy of the
customers account
• He should not disclose matters relating to the customer’s financial
position since it may adversely affect the customer’s credit and
business
• This obligation continues even after the account of the customer is
closed
72
Obligation to Maintain Secrecy of Customer’s Account Contd..
• Only in the following circumstances, disclosure is justified:

• To Satisfy Statutory Requirements
• As a Common Courtesy
• Disclosure at the will of Customer
• To Protect his Own Interest
• To Protect Public Interest
 Where considerable amounts are received from other countries
 In case the bank thinks that the customer is carrying on such activities which
are not congenial in the interest of the nation
 In case the banker thinks that the customer is trying to break the provisions
of the law on the basis of his records
 When the Government calls upon the bank to give information regarding a
particular customer and when the bank feels that a particular customer has
committed an offence 73
Obligation to Receive Cheques and Other
Instruments for Collection
• Basically, the business of banking acceptance of money on deposit
account and payment of cheques
• It also includes collection of cheques. It may rightly be contended that
anyone who does not perform these essential services is not a banker
• Whenever a banker is entrusted with the job of collection of cheques,
they must be collected as speedily as possible through the accepted
channels
• Failure to exercise proper care and employ the recognized route for
collection may make the bank liable for any loss which the customer
may sustain
74
Obligation to Give Reasonable Notice before
Closing the Account
• According to law, a debtor and a creditor may terminate the
relationship without notice – by the debtor paying off the balance or
the creditor recalling the debt
• It is not so simple between a banker and a customer for the obvious
reason that the banker is under an obligation to honour his customer’s
cheques
• If this obligation could be terminated by the banker without notice,
the customer might be faced with an embarrassing situation
75
Disclosure of information about customers account
as required by law
• When the law requires such disclosure to be made
 Under the Income- Tax Act, 1961
 Under the Companies Act, 2013
 By order of the Court under the Banker’s Books Evidence Act, 1891
 Under the Reserve Bank of India Act,1934
 Under the Banking Regulation Act, 1949
 Under the Gift Tax Act, 1958
 Disclosure to Police
 Under the Foreign Exchange Management Act, 1999
 Under the Industrial Development Bank of India Act, 1964
76
Lecture No. 4
Evolution and History of Banking
At the end of this session, student will be able to:
– Explain the Evolution of Banking
– Discuss the History of Indian Banking
– Discuss the concept of banker and customer
– Explain the General Relationship between

banker and customer
77
Contents
• History of Banking
• History of Indian Banking
• Nationalizations in the 1960s
78
Evolution of Banking Institutions
• As early as 2000 B.C Babylonians had developed a system of banks.

• In ancient Greece and Rome, the practice of granting credit was widely
prevalent
• The books of old Sanskrit law giver, Manu, are full of regulations
governing credit
• Some of the banks carried business on their own account and others
were appointed by the Government to receive taxes
• They used to transact their business on similar lines as those of
modern banks
• People used to settle their account with their creditors by giving a
cheque or draft on the bank
79
Evolution of Banking Institutions Contd..
• If the creditor also had an account at the same bank, the account was
settled by an order to make the transfer of such money from one
name to another
• These bankers also received deposits and lent money
• Loan banks were also common in Rome. From these loan banks, the
poor citizens received loans without paying interest. They lent money
for period of 3-4 years on the security of land
• During the early periods, though the banking business was done by
private individuals, many countries established public banks either for
the purpose of facilitating commerce or to serve the Government
• Originally, it was not a bank in the modern sense, being simply an
office for the transfer of the public debt
80
• History shows the existence of a Monte in Florence in 1336

• The meaning of Monte is given in the Italian dictionary, as Monte – a
standing bank or mount of Money
• As early as 1349, the business of banking of was carried on by the
drapers of Barcelona
• During 1401, a public bank was established in Barcelona. It is used to
exchange money, receive deposits and discount bills of exchange both
for the citizens and for the foreigners
• The bank of Amsterdam was established in 1609 to meet the needs of
merchants of the city. It accepted all kinds of deposits
• These deposits could be withdrawn on demand or transferred from
the account of one person to another
81
• The beginning of English banking may correctly be attributed to the

London Goldsmiths
• They used to receive their customers Valuables and funds for safe
custody and issue receipts acknowledging the same
• However, the goldsmiths mark a turning point in the history of English
banking which resulted in the growth of private banking and the
establishment of the “Bank of England” in 1694
• In India, as early as the Vedic period, banking existed in the crudest
form
• The book of Manu contain references regarding deposits, pledges,
policy of loan and rates of interest
82
History of Indian Banking
• Indian Banking system, as you see it today in India has come a long
way.
• It has transitioned from unorganized system of lending and borrowing,
passing through establishments of private banks to nationalization, to
liberalization and now facing globalization of the financial world.
• It is interesting note that some parts of our county still has
unorganized system of finance.
• The organized system is so well developed that it can compete with its
international counterparts in terms of technology, financial products
and services infrastructure, efficiency and professtionalism.
83
History of Indian Banking Contd…
• There exist a rich history behind all this development but in the
current context its best to review it in phases i.e
• Pre - independence
• Post - independence
84
• Pre-Independence
As you would know the indigenous system of banking had existed in
India for many centuries an catered the credit needs of the economy
of the that time.
– Indigenous Bankers
• Form ancient days Indigenous Bankers had been organized in the
form of family or individual business
• These indigenous bankers varied in size and belonged to different
parts of the country
• These indigenous bankers used to lend money against all kinds of
securities such as gold, Jewellery, land, promissory notes.
85
RBI and Indigenous bankers

The RBI has made attempts to regulates and provide facilities to
indigenous bankers.
So RBI made the following suggestions:
– They must give up their trading and commission business

– Switch over to the western system of accounting
– They should develop the deposit side of their business
– Change their role to act as discount houses
– Should have their accounts audited by certified charted
accountants
– Submit their account to RBI periodically
86
Money Lenders
– Contrary to modern economy and banking, in olden days, money
lending meant banking.
– Since there was no banking authority or regulatory body, whoever
has sufficient money and considered himself money wise and
started money lending business.
87
Chit Funds
– Chit fund is system of polled resources of funds and utilizing it

effectively for the benefit of member – borrowers
– The chit refers to a transaction under which a person enters into an
agreement with a specified number of persons that every one of
then shall subscribe a certain sum of money
– The subscription is made by way of periodical instalments by lot or
by auction or by tender
– It is important to note that only one person alone benefits from a
system of pooled recourses.
88
Indian Joint Stock Banks

– 1770 Bank of Hindustan, the first bank in India on modern lines
established
– Oudh Commercial Bank Established in 1881
– Punjab National Bank Ltd in 1895
– People’s Bank 1901
– The Bank of India Ltd in 1906
– The Bank of Baroda Ltd 1908
– Central Bank of India in 1911
There was severe banking crisis in the Indian banking history when
several banks failed in 1913 – 17 and again followed by economic
89
depression in 1928
Presidency Banks
– The roots of the modern commercial banking in India can be traced
back to the early eighteenth century when the bank of Calcutta
was established in June 1806
– Which was renamed as Bank of Bengal in January 1809
– Mainly to fund General Wellesley’s wars.
– This was followed by the establishment of the Bank of Madras in
July 1843.
– The bank of Bombay established by East India company in 1868
90
Imperial Bank
– The three presidency banks, namely bank of Bombay, Bank of
Madras and Bank of Bengal were amalgamated in January 1921 to
form Imperial bank of India
– Also called as bankers bank and of a banker to the government
– This provided for the need of central bank in India
91
Reserve Bank of India

– Though imperial bank was intended to be gradually developed into
a Central bank but Hilton Young Commission recommended the
establishment of a separate institution
– A Royal commission on Indian Currency and Finance was set up in
1925 in recognition of the growing Indian economy
– It recommended that an entirely separate institution called
Reserve Bank of India (RBI) be created with the central task of
maintaining monetary stability in India
– A notification issued on December 20, 1934 and 14th January 1935
the RBI came in to existence though it was formally inaugurate
only on April 1st 1935
92
Post Independence
– Immediately after independence, the government of India initiated
measures to play an active role in the economic life of the nation.
– Cooperative banks
– Industrial finance corporation of India (IFCI) - 1948
– Industrial credit and investment corporation of India (ICICI) - 1955
– Industrial Development Bank of India (IDBI) – 1964
– National Bank for Agriculture and Rural Development (NABARD) –
1982
– Export Import bank of India (EXIM Bank) - 1982
93
Nationalisation Of State Bank of India
– Pursuant to the provisions of the State Bank of India Act, of 1955

undertaking of the Imperial Bank of India was taken over by
newly constituted State Bank Of India.
State Bank of India and its subsidiary Banks
– The Bank of Jaipur
– The Bank of Indore
– The Bank of Mysore
– The Bank of Patiala
– The Travancore Bank
– The state Bank of Hyderabad
– The state Bank of Saurashtra
94
Nationalisation in the 1960s
• In 1969 the Indian government nationalized 14 major private banks.

• These banks having deposits of more than Rs 50 Crore.
• On 20th July 1969 the following banks were taken over by the
Government of India under Banking Companies Act.
• In 15th April 1980 Six more banks were nationalized and These banks
having deposits of more than Rs 200 Crore
95
Monetary System in India
Monetary Policy
96
Summary
• As early as 2000 B.C Babylonians had developed a system of banks.
• In ancient Greece and Rome, the practice of granting credit was widely
prevalent.
• The first Bank of India with Limited Liability to be managed by Indian
Board was Oudh Commercial Bank. It was established in 1881 at
Faizabad. This bank failed in 1958
• This was one of the three banks founded by a presidency government,

the other two were the Bank of Bombay in 1840 and the Bank of
Madras in 1843
97
Summary
• The Banking companies act, presently known as banking regulation act was enacted
owing to safeguard the interest of depositors, control abuse of power by some bank
personnel controlling the banks in particular and to the interest of Indian economy in
general
• Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers,
which commercial banks have to hold as reserves either in cash or as deposits with the
central bank.
• Statutory Liquidity Ratio is the Indian government term for the reserve requirement that
the commercial banks in India are required to maintain in the form of cash, gold reserves,
RBI approved securities before providing credit to the customers.
98
Summary
• A non-bank financial institution (NBFI) is a financial institution that

does not have a full banking license or is not supervised by a
national or international banking regulatory agency
• RBI Act, 1934, it is mandatory that every NBFI should be
registered with RBI to commence or carry on any business of
non-banking financial institution
https://www.rbi.org.in/commonman/English/Scripts/BanksInIndia.asp
x
99
Summary
• The period between 1906 and 1911 saw the establishment of banks
inspired by the Swadeshi movement.
• The Government of India issued an ordinance ('Banking Companies
(Acquisition and Transfer of Undertakings) Ordinance, 1969') and
nationalized the 14 largest commercial banks with effect from the
midnight of 19 July 1969.
100
References
a. Essential Reading
1. Class Notes
2. L M Bhole and Jitendra Mahakud (2017), financial institutions and Markets, 6th edition,
Mc Graw Hill.
3. Benton Gup (2016) Banking and Financial Institutions, Wiley Publications.
b. Recommended Reading
1. N Kannan, (2017),Banking sectors reforms in India, Abhijit publications
2. IIBF (2017) Legal and Regulatory Aspects of Banking, 3rd edition, Macmillan
3. Indian Institute Of Banking & Finance, (2015), Banking Products And Services,
Taxmann Publications Pvt. Ltd
c. Magazines and Journals

1. Business India, fortnight subscription (India Book House Ltd)
2. Business Today, fortnight subscription (Living media India Limited)
3. Money Today, monthly subscription (Living media India Limited) 101
Disclaimer
• All data and content provided in this presentation

are taken from the reference books, internet –
websites and links, for informational purposes only.
102

19BMC205B - Unit1 - Nature of Banking Business

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19BMC205B - Unit1 - Nature of Banking Business

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Course Code: 19BMC205B

Course Title: Banking and Financial Institutions

Mrs. Savitha Kulkarni

At the end of this session, students will be able to:

– Explain Banking Regulation Act 1949

• The banking industry handles finances in a country including cash

• The banking industry handles finances in a country including cash

• Commercial Banks are regulated under the Banking Regulation Act,

• There are 4 types of Commercial banks

• These include banks in which major stake or equity is held by

• A foreign bank is one that has its headquarters in a foreign country

• These are also scheduled commercial banks but they are

• This is a niche banking segment in the country and is aimed to

• This is a relatively new model of bank in the Indian Banking

• Co-operative banks are registered under the Cooperative Societies

• Urban Co-operative Banks refer to the primary cooperative banks

• A State Cooperative Bank is a federation of the central cooperative

• Scheduled banks are covered under the 2nd Schedule of the

• An Act to consolidate and

5. IIC Acquisition of the undertakings of Banking 36AE to 36AJ

7. IIIA Speedy provision for speedy disposal of winding up 45A to 45X

• This Act applies to following categories of Banks:

• Borrowing, raising or taking of

• Collecting and transmitting money

• Acquiring, constructing, maintaining and altering of any

• Doing all such other things as are incidental or conducive to the

(a) a subsidiary of a banking company formed for one or more of the

-Sound economic growth

-Volume of deposits and other resources of the bank

-Efficient use of the deposits and resources …..Section 5(ca)

A return about this has to be submitted to RBI before 15thof

Bank shall maintain

• Not withstanding anything to the contrary contained in section 77 of the

68[(1) Save as hereinafter

(2) Every banking company in

The Reserve Bank or the National Bank, or both, if they

(1) Where • (a) in the 134[public interest]; or

(2) The Reserve Bank may, on representation made to it or

(2)The Reserve Bank shall make an annual report to the Central

(3)The Reserve Bank may appoint such staff at such places as it

• 36AA. Power of Reserve Bank to remove managerial and

(a)6AAA. Supersession of Board of directors of a multi- State co-

(b)6AAB. Order of winding up of multi-State co- operative bank to be

(c) Reimbursement to Deposit Insurance Corporation by liquidator or

36AB. Power of Reserve Bank to appoint additional directors,

36AC. Part IIA to override other laws.

36AD. Punishments for certain activities

High Court defined

Winding up by High Court

Reserve Bank to be official liquidator

Application of Companies Act to liquidators

Mrs. Savitha Kulkarni

– Understand Non Banking Financial Institutions

 A financial institution is an institution which collects funds from

Banking Non banking

 A non-bank financial institution (NBFI) is a financial institution that

 Non-banking financial institutions, are financial institutions that

Definition Banking is acceptance of deposits NBFI cannot accept

Scope of business Scope of business of the bank is There is a various types of

Major limitation on No non banking activity are Cannot provide checking

 Development of sectors like Transport &

 Brokers of loanable funds

 RBI Act, 1934, it is mandatory that every NBFI should be registered