INTRODUCTION TO BANKING

As a organization: Banks are commercial organizaions. Their main goal is GROWTH WITH PROFITS Banks channelise savings of the surplus economic units/households, create financial instruments and pass it on to the needy units (individuals, business organizations,Government Sector), either for consumption purpose but mainly for production purpose. Banks operate domestically as well as internationally (either through themselves or through Correspondent relationship). Banks contribute to Gross Domestic Product and also add to international wealth.

 Traditional role of the Banks has been to procure Deposits from the community and extend loans & advances to individuals/business organizations/Government sector. Also to facilitate payment system by creating payment/remittance system. With passage of time role of Bank has also undergone a change. Though their traditional role of accepting deposits, extending loans and advances, as well as payment system continues; they have also taken up the role of advisory & operational services in the field of Portfolio Management, Mutual funds, Custodial services, Project Financing, Housing Finance, Insurance,

 Merchant Banking . To undertake all the above services, most of the Banks have formed subsidiaries of their own. UNIVERSAL BANKING: Universal Banks are one stop financial super markets offering broad range of financial services. The concept evolved and has been present in European Countries for quite a long time. In India, Universal Banking started taking shape with ICICIs decision to turn itself into a Universal Bank. Both Narsimhan Committee on Banking sector reforms and Khan Working Group recommended a progressive move towards Universal Banking. However, even before ICICI decided to convert itself into

 Universal Bank, the concept was already existing in Indian Banking Sector. SBI with its subsidiaries SBI Homes & SBI Capital Markets has been providing numerous financial services under one roof as a Universal Bank. Now most of the Banks in India either themselves or through their subsidiaries are providing numerous financial services and has converted themselves into Universal Banks. Advantages of Universal Banks are: convenience to customers, efficient services, lower costs, higher output and better products. Disadvantages are: Monopolistic trend, operational risk due to failure of systems, combining commercial & investment banking

 Can give rise to conflicts of interest. Concept of Narrow Banking: It is just opposite to that of Universal Banking. A narrow bank would restrict deployment of funds to only liquid and safe Government Securities, thereby reducing the risk of its depositors to considerable extent (=zero or near to zero). Key attributes of narrow banks are: No lending of deposits Extremely high liquidity Extremely high asset security Lower interest rate paid to depositors

No derivatives No off balance sheet assets Low profit margins Low risk Low executive salaries TYPE OF BANKS: Public Sector Banks (Nationalised, SBI & its Subsidiaries, IDBI Bank), Old Private Banks, New Generation Private Banks, Foreign Banks, Regional Rural Banks, Co-operative Banks TYPE OF BRANCHES: Personal Banking Branches (PBBs)

Corporate Branches Mid-Corporate/SME Branches Industrial Finance Branches(IFBs) Overseas Branches (OBs) General Branches Agricultural Branches (ADBs) Village Branches CROSS SELLING: Traditionally Bank branches are required to accept deposits and extend loan & advances as also to provide remittance facilities to its customers. However, when bank branches also sell other products like, mutual fund, insurance, home loan, custodial service etc. to its

 customers on behalf of its susbsidiaries or other banks or other finance companies or financial institutions, it is called CROSS SELLING. Further, if a Corporate Branch sell retail products of its bank or vice-versa, it is also called CrossSelling. TYPE OF DEPOSITS: (A) Demand Deposits : Savings Bank (Interest Bearing), Current Account (Non-interest bearing) (B) Term Deposits : Fixed Deposits (TDR & STDR), Cash Certificate, Recurring Deposit

 TYPE OF CREDIT FACILITIES: (A) FUNDED: (a) Working Capital Loans (Overdraft, Cash Credit, Bill Discounting Limits) Basically Short Term advances (B) Demand Loans/Personal Segment Loans, Term Loans, Corporate Loans Basically Medium to Long Term Loans (B) Non-Funded: Also called off-balnce sheet items (Guarantees, Letter of Credits L/cs, Underwritings) INCOME & COST HEADS OF BANKS: Income Heads: Interest, Exchange, Commission & Discount

 Cost Heads: Charges Account, Interest Account LEGAL FRAMEWORK APPLICABLE TO BANKS: (a) Banking Regulation Act, 1949 (b) RBI Act, 1934 (c)Negotiable Instruments Act, 1881 Important Provisions of Banking Regulation Act, 1949: The Banking Companies Act was passed to consolidate and amend the laws relating to Banking Companies. The need for this was felt due to: (a) Abuse of powers by persons controlling some banks

 (b) Safeguarding the interest of depositors of Banking Companies (c) Safeguarding the economic interests of the Country in general The Act mainly deals with: (a) Provisions relating to Capital of Banks (b) Povisions relating to appointment of Directors, Managing Agents, Chairman and their Powers (c) Provisions relating to shareholding pattern and rights of shareholders (d) Provisions relating to maintenance of Liquid Assets-Reserve funds, CRR, SLR requirements

 (e) Appointment of Banking Regulator- RBI and its powers are defined (f) Provisions relating to licensing requirements (g) Provisions relating to winding up/ amalgamation of Banking Companies (g) Provisions relating to Powers of Central Government to acquire Banking Companies (h) Provisions relating to presentation of annual financial statements of the Banks viz. P&L, Balance sheet.