Banking

Banking Regulation Act of India 1949, defines

Banking as "accepting for the purpose of lending
or of investment of deposits of money from the
public, repayable demand or otherwise or
on

withdrawable by cheque or draft order or

otherwise". The Reserve Bank of India Act, 1934
and the Banking Regulation Act, 1949 goverm the
banking operations in India.
Some definitions of a bank:
A bank is an establishment for custody of money
which it pays out on customers demand.
A bank is a financial institute 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 lends money to those who
need it.
Bank is an establishment authorised by a govt. to
accept deposits, pay interest, clear cheques, make
loans, act as an intermediary in financial
transactions and provide other financial services to
1ts customers.
 Objectives
The nationalisation of commercial banks took place
with an aim to achieve following major objectives.
Social Welfare: It was the need of the hour to direct
the funds for the needy and required sectors of the
Indian economy. Sector such as agriculture, small and
village industries were in need of funds for their
expansion and further economic development.
Controlling Private Monopolies: Priortoo
nationalisation many banks were controlled by private
business houses and corporate families. It was
necessary to check these monopolies in order to
ensure a smooth supply of credit to socially desirable
sections.
Expansion of Banking In a large country like
India the numbers of banks existing those days
were certainly inadequate. It was necessary to
It could be done
spread banking across the country.
through expanding banking network (by opening
new bank branches) in the un-banked areas.
Reducing Regional Imbalance : In a country like

India where we have a urban-rural divide; it was

necessary for banks to go in the rural areas where
the banking facilities were not available. In order
to reduce this regional imbalance nationalisation
was justified.
Priority Sector Lending: In India, theagriculture
sector and its allied activities were the largest
contributor to the national income. Thus these were
labeled as the priority sectors. But unfortunately
they were deprived of their due share in the credit.
Nationalisation was urgently needed for catering
funds to them.

Developing Banking Habits : In India more than

70% population used to stay in rural areas. It was
habit among such
necessary to develop the banking
a large population.
 Principles
Principle of Liquidity:
Principle of liquidity is very important for commercial
bank. Liquidity refers to the ability of an asset to
convert into cash without loss within short time.
Paying the deposited money on demand of' customers
1S called liquidity in sense of banking.
Principle of Solvency:
Solvency means the financial capability or sufficiency
in capital. To stray in these competitive market
commercial banks must have sufficient capital. If the
funds are not sufficient the bank cannot run his
business.
Principle of Profitability:
The main objective of commercial bank is to earn
profit. For earning profit commercial bank have to
make investment by providing short term loan, before
providing loan commercial bank have to compensate
certain amount of money as liquidity.

Principle of Loan and Investment:

The main source of profit of bank is granting loans to
any individual or organization. Investment is
profitable and sound source of income. Commercial
banks invest in business and investment sector.
Principle of Savings:
Commercial banks collect fund by creating savings
facilities. Commercial banks try to collect savings from
SOciety surplus. Commercial bank makes investment from
this savings to generate profit. So, more savings, more
investment and more profit.

Principle of Services:
Commercial bank ensures best services to their customers.
The success of a bank depends on the services provided by
bank. Customer chooses those banks that provide
improved serVices.

Principle of Secrecy:
Customers want to keep secret about their valuable assets
and money. So banks must have to keep secret about their
customers account. If commercial bank does not maintain
secrecy the customer will be dissatisfied.
Principle of Efficiency:
Commercial bank should operate their business
efficiently. So that they can be succeed at the
objective. In this competitive market there is no
alternative way without efficiency in management. So
commercial bank must train their employees to
increase the efficiency in management.
Principle of Location:
Commercial banks must have to locate their branches
in the commercial area where many customers are
available. The location must be safe for the customers
and easy communication system must exist.
 Types of Bank
These broadly classified into two categories..
are

1. Scheduled Commercial BankS Any bank

-

that is included in the 2nd Schedule of RBI.

2. Non-Scheduled Banks- Any bank that is not
included in the 2nd Schedule of RBI
Scheduled Bank is classified into three
categories..
a) Public Sector Banks
b) Private Sector Banks
c) Foreign Banks
Public Sector Banks comprises:
State Bank of India and its associates
Nationalised Banks
Regional Rural Banks
Private Sector Banks: Private sector banks also
operating in the country almost in equal number
but their business proportion was significantly low.
These were basically operating at a small scale.
Foreign Banks: The banks that have their parent
office in a foreign country and are working in India
are categorised as foreign banks. They have to

follow RBI guidelines while operating in India.

 Functions of a Bank

The functions of a bank are broadly classified into

primary and secondary functions...
The primary functions include....
a) Acceptance of deposits from the public and
other organisations in different forms by
developing innovative deposit schemes
b) Extending loans and advances