Unit I

Origin of the term Bank:

The English word ‘ Bank’ is derived from Latin word ‘Bancus’, Italian word ‘Banco’
and French word ‘Banque’, which means Bench.
Italian merchants made deals to borrow and lend money beside a bench. They
placed the money on that bench.
In conclusion, Bank is a financial institution which deals with money, either its own
funds or borrowed funds.
Definition of the term Bank or Banking
Dr. H. L. Hart: “ One who in ordinary course of his business, honours
cheques drawn upon him by persons from and for whom he receives
money on current accounts”.
According to Indian Banking Regulation Act of 1949 defines Banking
as “ Accepting for the purpose of lending or investment of deposit of
money from the public, repayable on demand or otherwise and
withdrawable by cheques, drafts, order or otherwise”.
 Thus, According to the above definition, bank means:
1. Accepting deposits like fixed deposits, current accounts, saving deposits etc.
2. Withdrawal of funds through cheques or ATMs.
3. Investment of Funds
4. Rendering subsidiary services.
5. Banking business as the main business.
Thus, The commercial bank is a financial institution that accepts deposits from the
public and provides loans and advances.
The Banks are profit seeking financial institution deals in money and credit.
Origin of Bank:
A large number of financial institutions called joint stock banks came into
existence after the industrial revolution.
Banking also made its first appearance as a public enterprise in the year 1157 in
Italy with the establishment of ‘Bank of Venice’. The Bank of Barcelona was started
in 1401. The Bank of Genoa in 1407 and the Bank of Amsterdam in 1609.
In India the East India Company established the Presidency Bank of Bengal
(1906), The Presidency Bank of Bombay (1840) and the Presidency Bank of
Madras(1843)
A large number of Indian Banks like Punjab National Bank in 1895, Bank of India in
1906, the Canara of Bank in 1906 etc.
Evolution of Banking in India:
The evolution of Indian banking system is classified into 3 phases:
1. The Pre-Independence Phase – Before 1947
This phase is characterised by the presence of a large number of banks. ( more than
600) Banking system commenced in India with the foundation of Bank of Hindustan in
Calcutta in 1770.
After that many banks came, but were not successful like General bank of India -
1786, Oudh Commercial Bank -1881
Some Banks are successful and continue to lead even now like Allahabad Bank –
1865, Punjab National Bank -1894, Bank of India – 1906, Bank of Baroda -1908,
Central Bank of India – 1911
Bank of Bengal – 1806, Bank of Bombay – 1840, Bank of Madras -1843 merged into a
single entity in 1921 which came to be known as Imperial Bank of india. Later it was
renamed as State Bank of India -1955.
In April 1935, Reserve Bank of India was formed based on the recommendation of
Hilton Young Commission.
2. The Second phase from 1947 to 1991:
The main feature of this phase is the Nationalization of the bank. In 1949, 1st
January the Reserve Bank of India was nationalised.
Fourteen commercial banks were nationalised on 19th July 1969, like Central Bank of
India, Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, etc.
Six more commercial banks were nationalised in April 1980, They are, Andhra Bank,
Corporation bank, New Bank of India, Vijaya Bank.
On the recommendation of the Narasimham Committee, Regional Rural Banks were
formed on October, 1975 to meet the credit needs rural areas.
To meet the specific requirement from the different sector like agriculture, housing,
foreign trade, industry, some apex banking institutions were also established. They
are NABARD - 1982, EXIM-1982, NHB-1988, SIDBI-1990
3. Third phase 1991 and Beyond:
RBI gave license to 10 private entities, out of which few survived the market demands, which are
ICICI, HDFC, Axis Bank, IndusInd Bank, DCB.
In 1998, the Narasimhan committee again recommended the entry of more private players. As a
result, RBI gave a license to the following Banks.
Kotak Mahindra Bank – 2001 Yes Bank-
2004
In 2013-14, IDFC Bank and Bandhan Bank emerged.
In 2015, RBI gave in-principle licence to 11 entities to launch payment Banks and granted in-principle
approval to the 10 applicants to set up Small Finance Banks.

Merger
Government of India has consolidated 10 Public Sector Banks into 4 banks. The
announcement of this mega-merger was made by Union Finance Minister Nirmala Sitharaman
in 2019. After this merger, the country is having a total of 12 public sector banks, including
State Bank of India (SBI) and Bank of Baroda (BoB).
ROLE OR IMPORTANCE OF BANKING
Bank is a financial institution that accepts deposits and channels the money into lending activities banking
as an activity involves acceptance of deposits and lending or investment of money.

1] Acts as an Intermediary
Banks act as an intermediary between people having surplus money and those requiring money for various
business activities.

2] Economic Development
It helps in national development by providing credit to farmers, small-scale industries and self-employed
people as well as to large business houses which leads to balanced economic development in the country.

3] Capital Formation
Deposits accepted by banks are converted into loans and advances for Industrial and trading activities to
business organizations. This way, banking converts savings sent to investment leading to capital formation
and development of the economy.

4] Services to business
Banking helps businesses through a variety of services like providing long term and short term finance,
arranging remittance of money, collection of cheques and bills etc. helping in raising capital by acting as
underwriters etc.
5] Reduces uses of currency
Banks enables depositors to make payment by cheque Traveler's check credit card etc, issued by banks instead of
liquid money does associated problems of use of currency are considerable a reduced

6] Mobilization of savings
Bank allow savings to be deposited in different type of accounts such as current account, saving bank account, fixed
deposit account etc, carrying different interest rates as their income which encourage people to save money and
put it in the banks.

7] Raising the standard of living

It helps in raising the standard of living of people in general by providing loans for purchase of consumer durable
goods, house automobiles etc

8] Benefits to rural economy

Rural branches of banks play a useful role in mobilizing savings in rural areas and provide loans to farmers at
concessional rate and on priority basis. this help the rural economy.

9] Balanced Regional Development

Bank identifies areas that need special assistance for Industrial development and identifies backward regions and
helps in their economic development by providing them adequate funds at reasonable rates.

10] Development of Credit Policy

The central bank of a country develops a proper monetary policy by determining the bank rate which further
affects interest rate and Credit Policy in the country that ultimately leads to effect on economic development of
the country.
11] Facilitates Foreign Trade
It also facilitates import export transactions. Reserve Bank of India regulates all the important import and
export transactions and facilitates bringing foreign exchange to be used for country's economic development

12] Generate employment

Banking organizations also helps in generating large employment opportunities within the country. It helps
Companies in extending their activities by providing them credit as per their needs. This will result in increasing
human resource requirements for various positions.

13] Money Transfer.

It enables people to transfer their funds rapidly from one bank to another Bank. It has facilitated the payment
system by providing various instruments such as demand draft, cheque and bill of exchange.

14] Ensures Liquidity

Maintaining a proper liquidity in the economy is another important role played by bank. Banks regulate the
money flows by adopting an efficient monetary policy. During inflation it decreases the money supply where at
the time of deflation it increases the flow of money.
Functions of Commercial Banks:
Functions of commercial Banks are classified into two types. They are,
1. Primary Functions:
2. Secondary Functions:
Primary Functions:
1. Accepting Deposits:
Commercial banks receive deposits from the public on various accounts. They are
a. Current accounts:
They are generally opened by trading and industrial concerns, public authorities,
etc. which have frequent banking transitions involving huge amounts.
In current accounts customers can deposit any amount of money and any number of
times. Similarly, they can withdraw from the current accounts any amount and as
many times.
b. Saving Bank Accounts:
This type of accounts are opened by middle and low income groups who wish to
save money for the future.
In SB accounts customers can deposit any amount of money and any number of
times. To promote the habit of savings among depositors, they are restrictions on
the withdrawal from these accounts. Banks offer 2-4% of interest for these kinds of
accounts.
c. Fixed deposit accounts:
This type of accounts are opened by small investors who wish to earn income. In
this accounts, fixed amounts are deposited by customers for fixed periods at fixed
rate of interest. The rate of interest varies from 6-9%.
d. Recurring Deposit accounts:
In this case, the depositor deposits a fixed sum of money every month for an
agreed period. These accounts are opened by regular monthly income earners. The
rate interest varies from 6% to 9%.
2. Lending of Funds:
Commercial banks lend funds on trade, commerce and industries. These
advances are the sources of profits for banks. These advances are the sources of
profits for banks.
Banks lend funds to the public by following ways:
a. Loan:
A loan is a financial arrangement under which an advance is granted by a bank
to a borrower on a separate account called the loan account.
When a loan is sanctioned to a borrower, the entire amount of loan is debited to
the loan account of the borrower.
A loan is granted either against collateral securities or against the personal
security of the borrower. In case of a loan, interest is charged on the whole amount
of the loan sanctioned irrespective of the amount actually withdrawn by the
borrower.
b. Overdraft:
An overdraft is a financial arrangement under which a current account holder is
permitted by the bank to overdraw his account up to an agreed limit.
An overdraft is granted either against collateral securities or against the personal security
of the borrower.
c. Cash credit:
Cash credit refers to a loan given to the borrower against his current assets like shares,stocks, bonds,
etc. A credit limit is sanctioned and the amount is credited in his account.
In the case of cash credit, the borrower need not withdraw the whole amount at one
lumpsum. He can withdraw the amount in instalments when he needs money.
d. Discounting of bills of exchange:
It is an arrangement under which a bank takes a bills of exchange maturing within a short period
of 60 days or 90 days from an approved customer and credits his current account immediately the
present value of the bill.
e. Creation of Credit :
When a bank advances a loan, it does not lend cash but opens an account in the borrower’s name
and credits the amount of loan to this account. Thus a loan creates an equal amount of deposit.
3. Investment of funds in securities:
It is the statutory obligation for every financial institution to invest its funds in
govt securities. Indian banks invest up to 25 percent of their deposits in govt
securities. Govt securities include both central and state governments, such as
Treasury bills, National Savings certificates, etc.
4. Creation of Money:
Credit creation is a major function of commercial banks. Credit creation refers to
expansion of bank deposits through more loans, advances and investments. It will
increase the total supply of money in the economy.
II Secondary Functions:
The subsidiary services of a banker may be classified into two categories.
I Agency Services:
The services provided by a banker as an agent of his customer are called agency
services. They are
1. Collection facilities:
Bank collect cheques, bills, drafts, interest and dividends on securities and rent etc.
on behalf of their customers and credit the collection proceeds to customers account.
2. Payment Services:
Banks pay bills, life insurance premium, subscriptions, electricity bills etc. on behalf
of the customers and debit the customers account against such payments.
3. Purchase and sale of securities:
Banks have wide contact with large number of stock brokers and help the customers
in buying and selling of securities.
4. Purchase and sale of foreign exchange:
Banks undertake foreign exchange business. They buy and sell foreign currencies.
They provide export credit, import credit and trade information to the customers.
5. Remittance of funds:
Banks arrange for remittance of funds from one place to another on behalf of their
customers through bank drafts, mail transfers or NEFT.
2. General Utility Services:
The services provided by banker to the general public are called general utility
services. They are,
1] Acting as trustee and executor
When a banker accepts items like securities or document for safe custody or for customer money
requirement, the relations between the banker and the customer is of trustee and beneficiary arises.
2) Issue of Traveler’s Cheque.
These paper cheques are generally used by people when traveling to foreign countries. They are purchased
for set amounts and can be used to buy goods or services or be exchanged for cash.
Ex:- Ramesh wants to go to USA. Now he has 2,00,000 now he can go and deposit 2,00,000 and he can
demand traveler’s check with same denomination. Instead of carrying 2,00,000 hard cash it is better to
carry 1 traveler’s cheque with same denomination.
3] Safe Deposit Locker
Bank provides locker facility to their customers. The customers can keep their valuables such as gold,
silver, important documents, securities etc. in these lockers for safe custody .
4] Issue of Letter of Credit
Banks issue letter of credit for importers certifying their credit worthiness. It is a letter issued by
importer’s banker in favour of exporter informing him that issuing banker undertakes to accept the bills
drawn in respect of exports made to the importer specified therein
5] Acting as Referee
Banks act as referees and supply information about the financial standing of their customers on enquiries
made by other businessmen.Underwriting securities:
6] Underwriting of shares.
Bank also undertake the task of underwriting securities. As public has full faith in the creditworthiness
of bank, People don’t hesitate in buying the securities underwritten by banks.
III] Modern Functions or Innovative Functions.
The adoption of Information and Communication technology enables banks to provide many innovative services
to the customers such as;

1] Electronic Fund Transfer/ NEFT.

An Electronic Fund Transfer (EFT) was introduced in 1990 by the Reserve Bank of India (RBI). Electronic Fund
Transfer (EFT) is the transfer of funds via electronic channels between the same bank or a different one,

National Electronic Fund Transfer (NEFT):

National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer.
Under this Scheme, individuals, firms and corporate can electronically transfer funds from any bank branch to any
individual, firm or corporate having an account with any other bank branch in the country participating in the
Scheme.

2] Debit Card.
A debit card (also known as a bank card, plastic card or check card). Debit card is an electronic card issued by a
bank which allows bank clients access to their account to withdraw cash or pay for goods and services. It can be
used in ATMs, Point of Sale terminals, e-commerce sites etc.

3] Credit Card
Credit card is a card issued by a financial institution giving the holder an option to borrow funds, usually at point of
sale. Credit cards charge interest and are primarily used for short- term financing. Here the card holder can
withdraw excess of money from their bank account rather than they deposited.
 4] Internet Banking. 24X7 Banking Facility :
Online banking (or Internet banking or E-banking) is a facility that allows customers of a
financial institution to conduct financial transactions on a secured website operated by the 29
institutions.

5] UPI System :
Unified Payments Interface (UPI) is a payment system that allows users to link more than one
bank account in a single smartphone app and make fund transfers without having to provide IFSC
code or account number.

6] Digital Wallet :
A digital wallet, also known as e-wallet, is an electronic device, online service, or software
program that allows one party to make electronic transactions with another party bartering digital
currency units for goods and services.

7] BHIM App :
BHIM: Bharat Interface for Money (BHIM) is a digital payment app that helps make quick
transactions using Unified Payments Interface (UPI).
BHIM is developed by the National Payment Corporation of India (NPCI), a not-for-profit
company for providing retail payment systems in the country under guidance from Reserve Bank of
India.
8] Tele Banking :
Telephone banking is a service provided by a bank or other financial institution that enables
customers to perform financial transactions over the telephone, without the need to visit a
bank branch or automated teller machine.

9] Real Time Gross Settlement System (RTGS) :

It can be defined as the continuous (real-time) settlement of funds transfers individually on
an order-by-order basis. 'Real Time' means the processing of instructions at the time they are
received rather than at some later time. It is the fastest possible money transfer system in
the country.

10] Mobile Banking :

Mobile banking is a system that allows customers of a financial institution to conduct a
number of financial transactions through a mobile device such as a mobile phone or personal
digital assistant. It allows the customers to bank anytime anywhere through their mobile
phone. Customers can access their banking information and make transactions on Savings
Accounts, Demat Accounts, Loan Accounts and Credit Cards at absolutely no cost.
BANKER AND CUSTOMER RELATIONSHIP
Bank:
It is an institution which receive funds from public and gives loans and advances to one who need them.
Banker:
A Person who is doing banking business is a banker.
Customer :
A Customer is a person who has bank account in his name and the relationship which he forms with a
banker is of banking nature.
Relationship between banker and a customer depends on a nature of services provided by the bank.
It has 2 kinds of services.
Such relationship may be either
A) General Relation
B) Special Relation
A] General relationship includes:
1. Relationship of debtor and creditor
2. Relationship of trustee and beneficiary
3. Relationship of principal and agent
4. Relationship of lessor and lessee
5. Relationship of bailor and bailee.
6. Relationship of advisor and client.
7. Relationship of Indemnifier and indemnified.

1.Relationship of debtor and creditor:

A] When customer deposit money with his bank, the customer become a lender of money to the bank and
the bank become borrower. [from Public].
Ex: - Mr. Rama Deposited Rs10,000 in SBI bank. Here Rama is creditor and SBI Bank is Debtor.
B] In the same sense, When the bank lends money to the customer, the customer is the barrower so they
[Customer] becomes debtors and bank is the creditor.
3. Relationship of principal and agent:
Based on the standing instructions, banks make payment of various items like Payment of Electricity bill,
Subscription to RD, Magazines, Payment of tax/ Insurance etc. In the same sense bank also collects
cheques, bills, remittance of funds on behalf of their customer. So here Bank act as an agent and custome
becomes principal.
4.Relationship of lessor and lessee:
Lessor: - Lessor is the person who lease his property to others .
Lessee: - lessee is the person who purchased goods/ property on lease.
Similarly, In Banking Bank offers Locker facility to the customer, when customer hire them on lease basis bank
becomes lessor also called licensor .
Note: - Bank is not responsible for any loss that arises to the lessee.

5. Relationship of Bailee and Bailor.

A Bailment is the delivery of goods by one person to another for some purpose, for a specific period and
returned when the purpose is ended.
➢ The person delivering the goods is called the “bailor”.
➢ The Person to whom they are delivered is called the “bailee”.
6.Relationship of Advisor and Client:
When a customer invests in securities the bank act as an advisor while giving advice the banker has to
take maximum care and caution here the banker is an advisor and the customer is a client.

7. Relationship of indemnity holder and indemnifier (bank-indemnity holder and

customer-indemnifier):
A contract by which one party promises to save the other from loss caused to him by the conduct of
the promisor himself, or by the conduct of any other person, is called a contract of indemnity.
An indemnity is an obligation by a person to provide compensation for a particular loss suffered by
another person In the case of banking, the relationship happens in transactions of issue duplicate
demand draft, TDR, deceased account payment, etc. In that case, the indemnifier will compensate
any loss arising from the wrong or excess payment.
In these cases, the bank is an Indemnity Holder (Promisee) and the customer is Indemnifier (Promisor)
B. Special relationship :
1. Obligation of banker to honor cheques :
The bank has a statutory obligation to honor the cheques of its customers up to the amount standing to
the credit of the customer’s account. If a bank wrongfully refuses to honor the cheque of its customer,
the bank shall be liable to compensate the customer.

2. Obligation of banker to maintain secrecy :

The banker must not disclose to any outsider the details about the customer’s account; as such
disclosures may adversely affect the credit and business of the customer.
A disclosure can be made under the following two situations:
a. When the law requires such disclosures to be made, and
b. When the practices amongst the banks permit such disclosure

3. Obligation of banker to maintain proper records:

The banker is under an obligation to maintain accurate record of all the transactions (credit and debits)
of the customers made with the bank.

4. Obligation of banker to follow customer’s instructions:

The banker is under a legal obligation to follow the instructions of the customer. This is so because
there is the contractual relationship between the bank and the customer
 BANKS LENDING
One of the primary functions of banking is lending loan to the public to earn the
profit [by charging interest]. Bank lends money[loan] to the public out of the public
deposits.
Here bank never lends its own fund, when it is lending money deposited by the
customer, they have to be much careful about it and while lending each bank has to
follow some of the principles: - These Principles are called as Money Lending
Principles.
 Importance OF Banks Lending
The followings are the important Principles of Lending in Banking :-
1] Safety
2] Liquidity
3] Purpose
4] Diversity or Risk Spread
5] Profitability
6] Security

1] Safety : When individual applies for the loan bank demands some documents [ Salary slip, RTC, Bonds
etc] because Safety is the most important fundamental principle of lending. Banks deal with public
money so safety of money from public is first priority of bank

2] Liquidity : Liquidity is also an important principle of lending in banking. Bank lend public money
which is repayable on demand by depositors so bank lends for a short period. A banker must ensure that
money will come back on demand or as per repayment schedule. The borrower must be able to repay the
loan within a reasonable time after demand for repayment is made.
3] Purpose :The underlying purpose for which an applicant is seeking a loan should be productive. The
purpose of loan helps in determining level of risk and also impact interest rate on loan. Purpose of loan
should be productive in order to ensure safety of funds while it should be extended for short term to
ensure liquidity.

Example:- If students are applying for educational loan means that it should be useful for their
educational purpose.

4] Diversity / Risk Spread : In simple we can tell that when we are investing we wish to invest in various
avenues, in the same sense when bank is providing loan it lends to different borrowers from different
trades, industries like agriculture, education, IT, pharma, educational etc to minimise the risk.

5] Profitability : Banks accept deposits from public and lend it to make profit. Banks also incur
expenses to maintain deposits such as rent, stationary, premises rent, provision for depreciation of their
fixed assets, bad loans. After incurring such expenditures, a bank must earn some profit like other
financial institutions. So a banker must extend the advance in such a way that it is profitable for bank
and also at competitive lending rate.

6] Security : A banker avoid lending to a borrower without any security. Security act as an insurance to
lender bank in case of default by the borrower. The banker carefully scrutinizes all the different aspects
of an advance before granting it.
TYPES OF BANKS IN INDIA

1] ON THE BASIS OF FUNCTIONS

§ COMMERCIAL BANK :
Banks, which accepts deposits and lends loan to the public is called as commercial bank. The commercial
banks may be owned by government or owned by private sector .

§ INDISTRIAL BANK :
These banks assist to promote industrial development by providing medium and long term loans,
underwrites the shares and debentures, assisting in the preparation of project reports, providing technical
advice and managerial service to the industries.

For eg: Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India
(ICICI), are known as industrial banks

§ REGIONAL RURAL BANK:

These banks are established in rural areas. Its object is to develop the rural economy by providing credit
and other facilities for agriculture, trade, commerce, industry and other productive activities in the rural
areas
4] FOREIGN EXCHANGE BANK:
Exchange banks deal in foreign exchange and specialize in foreign trade. It plays an important role in promoting
international trade. It encourages flow of foreign investments into India and helps in capturing international capital
markets.

5] CENTRAL BANK:
Every country has a central bank of its own which is called as central bank. It is the apex bank and the statutory
institution in the money market of a country. The central bank occupies a central position in the monetary and banking
system of the country and is the superior financial authority. In India, the Reserve Bank of India is the central bank of our
country.

II] ON THE BASIS OF OWNERSHIP:

On the basis of ownership banks can be classified as:

1] Public Sector Banks:

These types of banks are owned and controlled by the government. The nationalized banks and regional rural banks
come under this category.

2] Private sector Banks:

These Banks are owned by private individuals and corporations .

3] Co-operative Banks:
These banks are operated on cooperative principles. It is a voluntary association of members for self-help and caters to
their financial needs on a mutual basis. These banks are also subject to control and inspection by Reserve Bank of India.
III] ON THE BASIS OF SCHEDULES OF RBI:

1] Scheduled banks:
These types of banks are included in the second schedule of the Reserve bank of India Act 1934.
The banks, which fulfill the following conditions, are classified into scheduled banks.
• Its paid up capital and reserves are at least Rs.5 Lakhs.
• Its operations are not detrimental to the interest of the depositors.
• It is a corporation or co-operative society and not a partnership or a single owner firm.

2] Non-Scheduled banks:
The banks, which are not covered by the second schedule of Reserve Bank of India, are called as non-scheduled banks .

INDIGENOUS BANKERS:

Indigenous bankers are those who do not come under the control of RBI. For example, money lenders, marvadis,
chettiars, pawn brokers are known as indigenous bankers. They accept deposit and deal in Hundis (It is a credit
instrument like promissory note.) The indigenous bankers rely on their own resources or borrow from one another to
carry on their business.
 CHANGING ROLE OF COMMERCIAL BANKS
There are tremendous changes placed in the filed of commercial banks in India. It not only lends or accepts
money to the public along with that it also plays a very significant role in the following cases.

1] Sale of Mutual Fund :

Commercial banks have wide contact and operation, Due to this, banks can pool money from investors and
invest in shares, bonds, short term money market instruments and in gold assets represented by mutual fund
units.

2] Bank Assurance :
When the insurance sector was opened up for private and foreign participation, competition became acute. It
was necessary to cover as many areas as possible.

3] Issue of Credit Card/Smart Card :

Simply Credit card as Buy now pay later. Credit Card being a part of cash less transactions, where a card holder
can avail credit up to certain limit. A Credit Card is a small plastic card that allows the card holders to buy
goods and services on credit and to pay at fixed intervals through the card issuing agency.

4] Issue of ATM Card/ Debit Card :

In Simple Debit card can be said “Pay now buy later”. A debit card (also known as a bank card, plastic card or
check card). Debit card is an electronic card issued by a bank which allows bank clients access to their account
to withdraw cash or pay for goods and services.
ATM- Automated Teller Machines that provides the customers of a bank the facility to access to their bank accounts for
withdrawal of cash and to carry out other financial and non-financial transaction without the assistance or entry into
bank office.

5] Electronic Transfer of fund :

An electronic funds transfer (EFT) was introduced in 1990 by the Reserve Bank of India (RBI). Electronic Fund Transfer
(EFT) is the transfer of funds via electronic channels between the same bank or a different one. Under this Scheme,
individuals, firms and corporate can electronically transfer funds from any bank branch to any individual, firm or
corporate having an account with any other bank branch in the country participating in the Scheme.

6] Extension of banking facilities to unbanked areas :

The commercial bank in India have made banking facilities available in all the parts of the country .

7] Provision of credit to the neglected sections of the society :

Today commercial banks are not only providing loans to trade, commerce and industry but they are also providing loans
to small farmers, artisian and craftsmen, professionals, small transport operators, small business and retail trade,
unemployed youths etc.

8] Finance to small scale industries :

Commercial banks have been extending large amount of finance to small-scale industrial units, village and cottage
industries. They have provided not only term loans and working capital, but also evolved new schemes, such as equity
fund scheme, entrepreneur schemes, etc. to finance small-scale industrial units.
9] Financing of Agriculture :
After nationalization, commercial banks have been providing increasing credit support to
various agricultural development programmes. Banks provide financial assistance to farmers
for modernization of farm practices, irrigation, drip irrigation, wasteland development,
dryland farming etc .

10] Provision of Finance for self-employment :

Commercial banks have started providing increased opportunities and financial help for
self-employment.

11] Assistance to women :

Commercial banks provide financial assistance to women for tailoring, knitting, embroidery,
etc. Financial assistance is also made available to women entrepreneurs for setting up
industrial units for the manufacture of hosiery goods etc.

12] Assistance to students :

Today, Commercial banks grant educational loans to students at concessional rates for
higher education, research and higher studies abroad.
 RESERVE BANK OF INDIA.
Reserve Bank of India is the central bank of the country also called as Banker’s Bank. It was set up in the year
April 1, 1935, under the Reserve Bank of India Act, 1934 as a shareholder’s bank with a capital of Rs5 crore.
The central Government contributed Rs2.2 lakh and the remaining portion was subscribed by private
shareholders. After independence, the entire share capital was acquired by the central government. And RBI
was nationalized and became a 100% Central Government owned. In the beginning, the headquarters of RBI
was established in Calcutta. However, soon after, in 1937, it was permanently shifted to Mumbai. RBI never
lends any loan or accepts any kind of deposits from the public. It only regulates entire banking systems in the
country

MEANING
RBI refers to an Apex [Supreme] body that controls,
regulates and direct the entire banking and monetary
structure of the country. All financially developed countries
have their own central bank.
MANAGEMENT: -
Reserve Bank of India is managed by the Central Board of Directors. The Board consists
the following members
➢ 1 Governor and 4 Deputy Governors appointed by the central Government.
➢ 4 Director nominated by the central Government, 1 each from every local board.
➢ 10 Directors nominated by the Central Government.
➢ 1 Government official nominated by the central government.
There are 4 Boards for the regions like southern, Northern, Eastern and Western

FUNCTIONS OF RBI.
RBI performs the traditional functions as well as promotional functions. Traditional
functions are those that are performed by centra banks all over the world since a very
long time. These are the functions for which the central banks are basically
established. These functions are normally constant and don’t change much with the
market or economy.
In promotional functions, it performs functions for the development of various segment
of the Indian economy.
 TRADITIONAL FUNCTIONS OF RBI

RBI Performs the following traditional functions:-

1] Issue of Bank Notes :-

Central bank is the sole authority for issuing currency in the country. Sole right of issuing paper currency
notes [except one rupee note and coin which is issued by the ministry of Finance].
Advantage
q Leads to uniformity in note circulation
q Controls over credit
q Public faith in Currency System.

2] Banker to the government

RBI acts as the banker to the central government and all state government [ Except Jammu & Kashmir],
As a banker it does all the functions of the bank. It makes loans and advances to the state and local
authorities.
RBI acts as a banker to both the central government and each of the state governments in the following
aspects:
i) Maintaining Accounts of the Governments
ii) Receiving all the Revenues
 i) Maintaining Accounts of the Governments
ii) Receiving all the Revenues
iii) Making payments
iv ) Providing Remittance Facilities

3] Bankers Bank:
RBI acts as banker to all the banks operating in the country. Both legally and in reality, the RBI is
accepted as the leader of the banking system.
The control of RBI over banking system takes the following forms :-
1) Ensuring Liquidity of Banks
2) Clearing House and Remittance Facilities
3) Real Time Gross Settlement (RTGS
4) National Electronic Fund Transfer (NEFT)
5) Electronic Clearing Service
6) Banking Research and Technology
7) Lender for last resort
8) Negotiated dealing system
9) Power over the Banks
4) Controller of Credit

Credit plays a predominant role in the modern economic system. Today, in every country of the world, most of the
business transactions are carried on through credit. These credit control techniques are the outcomes of the monitory
Policy.
Instruments of Credit Control :
The instruments of the monitory policy are also called as the weapons of the monitory policy. There are two
techniques by which RBI controls the monitory policy :-
a) Quantitative Techniques
b) Qualitative Techniques [Selective Credit Control]

a) Quantitative techniques of credit control:

This is a technique whereby the control of credit is done through quantitative aspects like
1] Bank Rate
2] Cash Reserve Ratio
3] Statutory Liquid Ratio
4] Open Market Operations etc.
5] Repo Rate

1] Bank Rate :-
The rate at which RBI lends/Commercial banks borrow the long-term loans is called as Bank Rate. Any increase in
Bank rate by RBI contracts the money flow to the economy reason being commercial limit their borrowing from RBI
and which leads to contraction of money supply to the economy.
2] Cash Reserve Ratio:
All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called
as the Cash Reserve Ratio. Current Cash Reserve Ratio is 3%.
Objectives of cash reserve ratio:
➢ To prevent shortage of cash
➢ To control money supply
➢ For contracting money supply in economy RBI increases the CRR .

3] Statutory Liquid Ratio:

Every Financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of
their total deposits .These assets can be cash, precious metals or any other securities like bonds .
The ratio of liquid assets is termed as Statutory Liquid Ratio and Current SLR Rate 18%.

4] Open Market Operations:

An open market operation is an instrument of monitory policy which involves buying or selling of Government
securities from or to the public .
Open market operations make bank rate policy effective and maintain stability in Government securities

5] Repo Rate :
The rate at which RBI lends/Commercial banks borrow short term money to banks is called Repo Rate. Any increase in
Repo rate by RBI contracts the money flow to the economy reason being commercial limit their borrowing from RBI
and which leads to contraction of money supply to the economy.

6] Reverse Repo Rate : The rate at which a commercial bank lends or park excess of short-term funds with RBI is
known as Reverse Repo rate.
B) Qualitative Techniques [Selective Credit Control ]

The selective credit control measures ensure the availability of credit to the priority sector . The selective credit
control may comprise the following measures:
1]Changing the Margin Requirement :
The banker requires a tangible asset as a security for the loan given. The loan amount will be a part of the value of
the asset. The RBI can require the banks to maintain a bigger margin for the selected categories resulting in lesser
i.e..fund moving to the sector .

2] Differential Rates of Interest:

Different rates of interest are levied depending upon the sector or purpose of the loan: If commodity trading is
subject to hoarding. loans for the traders may attract higher rates of interest. whereas the farmers can get the loans
at concessional rates of interest.

3] Altering the Length of Period of Repayment:

The period allowed for repayment of the loan can be shortened for the selected sectors. This will call for a bigger
amount paya on each instalment . Naturally, the amount of loan taken be reduced.

4] Rationing of Credit :
The funds that can be lent to each sector may be determined in advance. On the basis of total demand, the amount
earmarked for each sector can be rationed out i.e lesser amount is sanctioned.

5] Moral Suasion : The RBI can use its position as a central bank to persuade the banks not to lend money to the
undesirable sectors. It can also identify the sectors for which the ban can readily fend.
6] Ceiling on Bank Loans
RBI can put the maximum amount of loan that can be given to a sector. Selective credit control are used to curtail
the speculative activity in agricultural produce resulting in food inflation.

7] Credit Authorisation Scheme:

RBI introduced scheme in 1965. This was intended to exercise a check advance granted by banks to large
borrowers. Under the scheme. prior authorisation from RBI was necessary before sanctioning any fresh credit limit
of one crore rupees or more to any single party.

8] Credit Monitoring Arrangement:

Since 1988, the RBJ introduced this scheme in the place of Credit Authorisation scheme. The banks are required to
report to the RBI for post sanction scrutiny any sanction or renewal of credit limits to borrowers enjoying working
capital facilities of Rs. 10 crore and above.

9] Custodian of Foreign Exchange:

RBI is the custodian of foreign exchange reserves of the country. It has the obligation to buy and sell the currencies
all the countries, which are the members of International Monetary Fund. Foreign Exchange flowing into the
country out of exports land up with RBI.
 Promotional and developmental Functions of RBI:

It is a non-monetary function and in developing countries like India an Apex bank performs a number of
departmental functions. This includes :-

1] Development of Financial System : Financial System of a country consists of Financial institutions, Financial
Markets and Financial Instruments.

2] Development of Agriculture :- Agriculture is the back bone of Indian economy. Nearly 70 percent of population
depend on agriculture directly or indirectly and it is a highly employment potential sector of the economy.

(3) Development of Industrial Finance :- Industrialisation and industrial growth are the key indicator for economic
development of any nation. Reserve Bank is instrumental in establishment of various term lending financial
institutions like ICICI, IDBI, SIDBI, EXIM Bank etc for extending finance to industries.

4] Provision of Training to Bank Staff : Reserve Bank is instrumental in extending essential managerial training to
bank staff. It has set up the bankers training college at several places. The National Institute of Bank Management
(NIBM), Bankers Staff College (B.SC) and College of Agriculture Banking (CAB) etc. are some of institutes promoted
by Reserve Bank .

5] Collection and Publication of Data: Reserve Bank collects, process and disseminates statistical data on
economy like industry, agriculture, foreign trade etc. Data’s also include interest rate, inflation, savings and
investments. Such datas are useful in research and policy matters of a country.
5] Publication of Reports:
Reserve Bank through its separate publication department publishes data on different sectors of
the economy. Reports are published on Weekly or Annual basis. These reports provides
information on trends and progress of commercial banks in India. Such reports are useful to public
to gain knowledge about banking system and its developments.

6] Promotion of Banking Habit: Reserve Bank helps in mobilisation of savings through expansion
of banking to unbanked or under-banked areas. Establishment of NABARD, RRBs and commercial
banks branches in rural area promoted banking habit.

7] Promotion of Export through Refinance: Reserve Bank encourage foreign trade, especially
‘the exports of India. It encourages the export through extending refinance to EXIM Bank of India,
and Export Credit Guarantee Corporation of India (ECGC) in their lending operations for exports

8] Development of Money Market: Reserve Bank of India is also keen on improving the working
and operation by Indian money market. To encourage money market, it has introduced Bill Market
Scheme in 1952. Again, the new Bill Market Scheme was developed in 1971. This enables short-
term finance up to 3 months through discounting or re-discounting of bills.

9] Prescription of Minimum statutory requirements to banks: Reserve Bank prescribes the

minimum statutory requirements such as, paid up capital, reserves, cash reserves, liquid assets etc.
This regulation is directed by both Banking Regulation Act and Reserve Bank of India Act with twin
objectives .
10] Promotion of Housing:
Reserve Bank established National Housing Bank (NHB) in 1988 to promote a sound,
healthy, viable and cost-effective housing finance and to regulate the activities of
housing finance companies, The housing finance ensures to finance all segments of the
population and to integrate the housing finance system within the financial system.

11] Innovations in banking business:

It includes the following new developments:
(a) On line banking for small customers.
(b) On line payment of bills to small business- establishments.
(c) Use of smart phones to do banking business.
(d) Retail and wholesale banking instruments.
(e) Credit scoring and credit rating in extending credit to borrowers.