1.

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22
Banking
After studying this
LEARNING OBJECTIVES
chapter, you should be able to
22.1. State the meaning of Bank
and Banking
22.2. Describe the
types Banks
of
22.3. Explain functions of
22.4. Discuss the
Commercial Banks
types Bank Accounts
of

Banking is an important branch of commerce

banks are essential commercial and the
institutions which facilitate
same to borrowers. It is
institution that provides
an
trade. Banks occupy an facilities for safe
important
business world. No country can position in the modern keeping, lending and transfer of
money. According to the
make commercial and Banking
industrial progress without a "banking means the accepting, for Regulations Act, 1949,
system. By providing facilities for well-organised
the purpose of
banking or
investment, of deposits of money from the lending
the habit of deposit, banks encourage public,
saving among people. repayable on demand or otherwise, and
savings and channelise them into They mobilise small
cheque, draft, order or otherwise." withdrawal by
productive uses. They
provide facilities for safe custody, investment and transfer Banks, are sometimes described
of money. Banks and credit because banks dealers in money
as
provide both short-term and long-term accept
finance to businessmen. The
credit policy of banks public and lend money. When a bankdeposits from the
determines the level of economic accepts
money at a certain rate of interest. deposits,
it purchases
activity in the
country. When it
lends money, it sells
money at a higher rate of
The difference is its interest.
profit.
"Bank is an establishment which
makes to individuals

i BANKING
such advances of
money as may be
made, and to which individuals required and safely
entrust money when
required by them for use." not
"An
organisation whose -Kingsley
principal
concerned with the accumulation the operations
of
are

money of the general public for the

temporarily idle
DATA to others for expenditure." purpose of advancing
"The banker's business -R.P. Kent
is to take the debts
people to
offer his own in of other
money" exchange and thereby create
Thus, a bank is an -Crowther
from the public and institution which accepts deposits
advances loans. It
transacts other related purchases
22.1 MEANING OF BANK AND sells money, and and
BANKING is different from business. A bank
A bank other financial
may be defined company which collects accept deposits and make advancesinstitutions
as a
which may
money from the public in the form of
deposits and lends but they cannot create
credit.

197
22.2. TYPES OF BANKS
Banks of the
are following types.
1. Central Bank : The central bank of a country
serves as the leader of the banking system and the money
market. Every country has a central bank which regulates
money supply and credit with the help of the Government.
It exercises supervision and control over all other banks
in the country. The_Reserve Bank of India is the central
bank of our country. It acts as the bankers' bank. It carries
out the country's monetary policy. t occupies a central
position in the banking system of the country.
2. Commercial Banks These are joint stock bank
which receive deposits from the public and busines
firms. They also provide short-term and medium-term
loans to customers. These banks carry on all kinds of
banking functions within the framework of the Bankinn
Regulations Act, 1949. Commercial banks are classified
into two broad categories scheduled and non-scheduled
banks. Scheduled banks are those included in the second
schedule to the Reserve Bank of India Act. Commercial
banks not included in this schedule are non-scheduled
banks.

Difference Between Central Bank and Commercial Bank

S.No. Point of Diference Central Bank Commercial Bank

It is the apex institution of the It is one of the organs of the

1. Status country's monetary and banking money market.
structure.

2. Ownership It is owned by the Government. It is owned by shareholders.

3. Objective It is a non-profit institution. It is a profit making institution.

4. Customers It is a banker to the Government. It is a banker to the general public.

5. Issue of Notes It has the monopoly of note issue. It cannot issue notes but only
cheques.
It controls credit according to the It creates credit to meet the needs
6. Credit Control
cOuntry's needs. of business.

7. Number Every country has only one Central There are several commercial
bank. banks in a country.
It is the custodian of the
8. Foreign Exchange country's It is the dealer in
foreign
foreign currency reserves. Currencies.

It is the bankers' bank as it

keeps
their cash reserves, grants financial
It receives
deposits from and
9. Banker's Bank
accommodation and clears their
grants loans topublic.
balances.

It helps in setting up financial

10. Role institutions
It helps industry and commerce
to
strengthen money by providing finance and other
and capital markets in the
country. services.
Designation of the Chief Its chief is called "Governor".
11. Its chief executive is called
Executive
"Chairman".
In India, commercial banks are owned and controlled Bank are
by the Government, private businessmen and foreign examples of foreign banks. State Bank of India
is the largest commercial bank of our
businessmen. State Bank of India and Bank of Baroda are country.
3. Industrial Banks These banks
examples of public sector banks. Global Trust Bank and provide finance
Bank of Rajasthan are examples of private sector banks. to industrial concerns for
medium-term and long-time
Citi Bank, ANZ Grindlays Bank and American Express periods. They also purchase and underwrite shares and

198
debentures of industrial enterprises. They also provide members. There is a State Cooperative Bank in every state
managerial and technical advice and assistance to of India with its branches at the district level. A district
industries. These banks are also called development level cooperative bank, called Central Cooperative Bank,
banks or developmental financial institutions. Industrial has its branches in rural and urban areas in the district.
Development Bank of India (IDBI), Small Industries Delhi State Cooperative Bank is an example.
Development Bank of India (SIDB), Industrial Finance
Corporation of India (FCI), are examples of industrial 8. Post Office Savings Banks : Post offices serve
development banks in our country. Each state in India has as savings banks for the benefit of general public. These
own State Financial Corporation. Industrial banks
banks accept various types of deposits from the public and
its play
vital role in the industrial development.of a country. allow interest on these deposits. Generally, restrictions are
a
placed on the number and amount of withdrawals during a
4. Merchant Banks : These banks perform merchant month. Savings banks encourage savings and thrift. They
banking functions such 'as underwriting of securities. They collect the small savings of people but do not advance
serve issue houses, underwriters, lead
as
loans.
managers, brokers,
etc., for companies which issue shares and debentures. SBI
Capital Markets is an example of merchant banks. 9. Indigeneous Banks: These are moneylenders in
villages and small towns. They accept deposits from and
5. Exchange Banks: These banks provide foreign grant loans to farmers, artisans and local traders. They
currency and other related facilities to importers and also deal in hundies. They generally charge high rates of
exporters. They buy and sell foreign exchange and interest. They may carry on commercial activities along
specialise in financing foreign trade. They are also called with banking business. They issue, negotiate and discount
foreign exchange banks. These banks also render certain hundies, etc., as commission agents. They are known by
services such as collecting and supplying information different names, e.g., Mahajans, Seths, Sahukars, Shroffs,
about the foreign customers, remittance of funds from etc.These bankers play an important role in financing local
one country to another, etc. The Export Import (EXIM) trade and industry.
Bank of India was established on January 1, 1982with the Commercial banks perform the following functions.
purpose of promoting, financing and facilitating export and
1.Accepting Deposits: Accepting deposits is the
import of goods and services. It provides expert advice, main function of a commercial bank. It attracts
deposits
viability studies, trade information and other facilities so for the purpose of making loans and investments.
as to promote the country's foreign trade and commerce. deposit their money in banks for the sake of safety and
People
for earning interest. A commercial bank receives
6. Agricultural Banks : These banks provide medium- deposits
from individuals, firms and other institutions. Banks
term and long-term loans to farmers against the security of offer
different types of deposit accounts to suit the needs of
land. They are, therefore, called Land Development Banks.
various depositors. Public deposits constitute the
Agricultural banks also provide loans for permanent main
resources of a bank. Banks receive the
improvement in agricultural land. Commercial banks, of deposits.
following types
regional rural banks and agricultural cooperative banks
provide short term loans to farmers. The National Bank for
(a) Fixed Deposits: A lumpsum is deposited for a
fixed time period. These
deposits are repayable on the
Agriculture and Rural Development (NABARD) provides
refinance facilities to all types of banks which give loans
expiry of the stated period. Generally, the time period
varies from three months to five years. The
to agriculturists. rate of interest
on these deposits is higher than that payable on other
7. Cooperative Banks: These banks are organised by deposits.
people with limited means for their mutual benefit. These The actual rate depends on the
period for which the
are organised and managed on cooperative basis. They deposit is made. A receipt is issued to the depositor.
accept deposits from and grant loans to their members at (b) Savings Deposits This account is opened for
concessional rates of interest. Such banks are found in both the
purpose of depositing small savings. In these deposits
rural and urban areas. Cooperative banks also encourage money can be withdrawn for a specified number of times
thrift among their members. In rural areas, there are in a week. But deposits can be made
any number of times.
agricultural cooperative banks which accept deposits and Rate of interest allowed on such
deposits is higher than
give loans to farmers and rural artisans. In urban areas, that on current deposits but lower than that allowed on
and grant loans to their fixed deposits. The depositor has to open an account witn
cooperative banks accept deposits
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 22.3. FUNCTIONS OF COMMERCIAL BANKS

COMMERCIAL BANKS

Main Functions Subsidiary Functions

Accepting General
Granting Agency
Deposits Credit Functions Utility Functions

(i) Fixed (i) Loans & () Collection of (i) Issue of letters of

credit, travellers'
deposit Advances cheques, bill,
cheques, etc.
(i) Savings Gi) Cash credit etc.
(ii) Underwriting of
deposit (ii) Overdrafts (ii) Payment of
insurance capital isues
(ii) Recurring (iv) Discounting premium, etc. (ii) Providing credit
deposit of bills
(ii) Purchase and information and
(iv) Current
sale of securities advice
deposit
(iv) Transfer of (iv) Safe custody of
funds valuables
(V) Acting as guar (v) Accepting bills of
antor, trustee, exchange
executor, etc.

Fig. 22.1: Functions of Commercial Banks

the bank and is given a pass book. The main objective of
savings deposits is to promote the habit of savings among
people.
(c) Current Deposits: Such deposits are made
by business firms in current accounts. Money can be
deposited and withdrawn as often as the depositor wants.
Generally, no interest is allowed on these deposits. A small
fec, known as bank charge' or incidental charge is often
charged for maintaining current deposits. Overdraft facility
is available on current accounts.
(dy Recurring Deposits : In these deposits, the deposit
holder is required to make a deposit of fixed amount
every month for a specified period. The amount goes
on accumulating along with interest. At the end of the
prescribed period, the depositor can withdraw the deposit
or renew the same for another term. No cheque facilities
are
allowed in fixed deposits and recurring deposits.
2. Granting Credit: Commercial banks lend money
in the following ways.
(a) Loans and Advances A specified amount is
granted for a specified time period. The borrower may
withdraw the entire amount in lumpsum or in instalments.
However, interest is charged on the full amount of loan.
Loans are generally granted against the security of certain
assets or on personal guarantee. Banks also grant term
loans for a longer period. A loan may be repayable in
lumpsum or in instalments.
(b) Cash Credit Under this arrangement, the bank
200
allows the borrower to borrow up to a specified limit.
The amount is credited to the account of the customer.
The customer can withdraw this amount as and when
he requires. Interest is charged on the amount actually
withdrawn. Cash credit is usually granted on a bond or
some other security.
(c) Overdraft: A customer who has a current account
with the bank can withdraw more than the amount
standing to his credit upto a specified limit. This is a
temporary arrangement on which interest is charged by
the bank. It may be allowed on the security of assets or
on personal guarantee.
(d) Discounting of Bills: Banks make payment
against the bills before the date of maturity. In case the
bill is dishonoured on the due date, the bank can recover
the amount from the customer. Banks somecharge
commission for this service.
3. Agency Functions : A commercial bank
servess
an agent for its customers
in the following ways
(a) Collects cheques, bills, dividends, interest,
rent, etc., on behalf of customers.
(b) Pays cheques, bills, rent, taxes, interest.
insurance premium, fees,
on behalf of
subseriptions, etc.
customers
(c) Purchases and sells securities on behalt ot
customers as per their instructions.
(d) Acts as trustee, executor; gurantor etc. in
financial matters for their customers.
 (e) Carries out correspondence for and on behalf his securities in the safecustody of the bank.
of customers. The bank can also be asked to collect dividends,
() Acts as agent or correspondent for other banks interests, etc., on behalf of the account holder and
at home and abroad. to the credit of his current account.
4.General Utility Services (c) The customer gets the benefit of making all
(a) Transfer of funds from one branch to another. payments by cheques. He can withdraw money
(b) Issuing letter of credit and standing as
surety
through a cheque.
for customers. customer is required to prove his
(d) Whenever the
(c) Accepting valuables, jewellery and securities financial position, he can give the reference of
for safe custody. his bank.
(d) Underwriting capital issues. (e) The account holder can obtain temporary financial
(e) Providing foreign exchange to persons going accommodation in the form of overdrafts,
abroad and to importers. discounting of bills, etc.
(f) Issuing travellers' cheques, drafts, circular (1) The current account holder is also allowed
notes, etc.
remittance facilities. He can transfer funds
(g) Providing trade information to customers. from one place to another through bank drafts,
(h) Providing reports on the creditworthiness of telegraphic transfers, etc. Banks also issue
customers. travellers' cheques to facilitate safe travelling in
i) Accepting and the country or abroad.
discounting bills of exchange
of exporters. (g) The current account holder can also apply to his
0) Advising customers with regard to invesments bank for a letter of credit or guarantee required
and other financial matters. for the import of goods.
2.
Savings Deposit Account : Such a bank account
2.4. TYPES OF BANK ACCOUNTS
is meant for the general public. The object of a
Current Deposit Acecount : A current account is savings
bank account is to encourage thrift and foster the habit
opened generally by businessmen. A person or a firm can of savings and to collect the small savings of
open this account with a bank by depositing a certain
A people.
person can open a savings account by depositing a small
amount, usually Rs S000. The person who wants to open amount of money, usually R 500. A
savings bank account
the ccount must be introduced by an old customer of the can be opened by two persons in joint names. A
bank. The bank takes his specimen signature and enters
pay-in-
slip book, a cheque book and a pass book are supplied to
the money deposited to the credit of his account. A pass the account holder. The account holder can deposit
money,
book showing the credit balance is issued to the customer. cheques, etc., in his savings account by filling in a pay-
The customer can freely deposit more money from time in-slip. He can withdraw money at reasonable intervals
to time and withdraw without notice through the medium with or without prior notice through withdrawal forms or
of cheques. There is no restrictions on the number of cheques. Withdrawals are limited and a minimum balance
withdrawals. However, a minimum credit balance must has to be kept by the account holder. A reasonable rate
be kept as per the rules of the bank. He can also deposit of interest is allowed on the credit balance in the savings
cheques, bills of exchange, promissory notes, bank drafts, account. No overdraft facility is available on savings
interest
etc., in his account for collection by the bank. No accounts.
is paid by banks on current accounts. Rather a small charge 3. Recurring Deposit Account : In this type of
(called bank is debited for providing bank services.
charge) account, a customer is allowed to deposit a certain amount
Overdraft facility is available on current accounts. of money (say 10, 50, 100 etc.) every month for a
the bank specified period of time. At the end of the period, he is
The advantages of a current account with
are given below : given the total deposit amount along with interest at the
The customer need not keep large amounts of prescribed rate. Such an account is also
called
cumulative
(a) time deposit. Thus, a person can gradually save money
cash in the office safe and, therefore, he can avoid
or marriage
for education
the risk of loss by theft, fire, etc. for purchase of costly articles,
facilities
of children, etc. Withdrawal and cheque are
(b) The customer can obtain the assistance from account. A pass book showing the
of not available in this
the bank in the collection of cheques, bills customer is issued.
He can keep instalments deposited by the
and promissory notes.
exchange
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 4. Fixed Deposit Account: Under this account, a offixed deposit is that the depositor is allowed.a much
person makes a deposit of money in one lumpsum for a than what is available on other
higher rate of interest
specified period of time, say, one year, three years, five of deposits.
types
years or morc. Pass book and cheque book facilities are A fixed deposit receipt is issued to the depositor
not required in this type of account. The customer is not
contains the name and address of the depositor, the amoue
allowed to withdraw from the account before the expiry of and period of deposit, rate of interest, signature of the
the specified period but he can borrow against the security can claim back his mone
ban
of his deposit. At the end of the period, the customer may manager, etc. The depositor b
submitting the receipt on the due date. A specimen of the
withdraw his deposit along with the interest or he may follows.
fixed deposit receipt is as
renew the deposit for another term. The main
advantage
FIXED DEPOSIT RECEIPT
BANK OF BARODA
(Non-transferable)
No: BB/777 Date May 1, 2016
Due Date Nov. 30. 2018
Received from Mr. C. B. Gupta a sum of Rupees Ten Thousand only repayable 30 months after date with interest
at the rate of 10 pcr cent per annum.
10,000. For Bank of Baroda
Sd/
Manager
OMPARISON BETWEEN TY PES OF BANK ACCOUNTS

Basis of Fixed or Time Savings deposit Current/Demand

No. Recurring account
Difference deposit account account deposit
To provide facilities
to industrialists
and businessmen
To cultivate habit To accumulate
1. Object To earn interest
of saving and thrift to deposit or
small savings.
withdraw the
money as and
when they need.
It is an open and

Deposits are made No fixed perioa

Period of deposit for tOr
for which One year to five
a fixed there is
period deposits no fixed period for years
deposits.
Deposits can be There is no
The deposit in this
Frequency of made any number restriction on
3. account is made
deposits of times in this making deposits in Every month.
only at one time.
account such account.
The amount
There are
deposi- ted can
restrictions on
generally be
withdrawals. There is no
withdrawn at
Restrictions on At present 50 No withdrawals
4. maturity. When restriction on
withdrawals before the due
withdrawal is made WIthdrawals
are
withdrawals from date are allowed.
permitted in half this account.
before maturity,
year by most of
interest is not
the banks.
allowed.

202
 As the cost of
operations of Interest is allowed
these accounts at a rate
lower No interest is
Rate of interest are low, high rates than in fixed allowed on this A comparatively
5.
of interest are deposit account account as the low rate of interest
allowed on this but higher than in COsts of operations is given.
account. Current accounts. are high.

Cheque facility is Cheques facility Cheques can be

6. Cheque facility not available on this is available on
frequently used for Cheque facility is
type of accounts. maintenance of a withdrawals from not allowed.
minimum balance. this account.

SUMMARY
1. Banks are of several types, e.g., commercial, central, industrial, merchant,
cooperative, postal and indigenous. exchange, agricultural,
2. Commercial banks accept deposits, lend money and provide other services.
3. Commercial banks offer many services to businessmen.
4. Current, savings, recurring and fixed deposit accounts are the main types of bank accounts.

EXERCISES
SHORT ANSWER QUESTIONSS
1. What is a bank?
2. What is meant by banking?
3. Define a commercial bank?

4. What do you understand by a recurring account?

5. Name India's Central Bank.

ISpecimen Paper]
fixed deposit.
. Distinguish between saving and
and Fixed
Account. Specimen Paper]
Distinguish between Recurring Account

LONG ANSWER QUESTIONS [2019]

commercial bank.
EXplain any two functions of a can be opened with
commercial banks.
accounts that
2. DAplain in brief the
various types of
Account and Current
Account
between Savings Bank
Dlerentiate banks.
commercial
functions of
Explain the agency services provided by commercial
banks.

general utility
Ascuss the commercial
bank.

plain the primary

function of a
?QUESTION BANK
nds money and provides
lend
other facilitie
9.1 Define a Bank. deposits
from and
1949.
that accepts Act
Regulations
Ans. A bank is an
institution

u n d e r the
Banking
Clients. It is
incorporated
203