BBA III Year Banking V Semester

Unit I: Introduction to Bank

1. Bank: Meaning, Function, Features of Bank, Types of Bank
2. Structure of Indian Banking System

Introduction:
The word ‘Bank’ has been derived from the Latin word ‘bancus’ or ‘banque’. The
meaning of it in English is a bench. The early bankers transacted their business at
benches in a market place. According to some authorities, the word bank was
originally derived from German word bank. It means a joint stock fund. This word
later on was called as ‘banco’ in Italy when a great part of Italy was ruled by the
Germans.
Acceptance of deposits, of money is an essential function no doubt, but simply
because a company is accepting deposits of money from the public, does not make
it a banker. It is necessary that the deposits accepted should be used for lending or
investment. The banks mobilize the resources by accepting deposits and utilize such
funds by employing them profitably. The banker is, thus, an intermediary and deals
with the money belonging to the public.
What is Bank?
Banks are institutions, which accept deposits and use these funds to grant loans.
Banks collect the surplus funds of millions of individual savers who are widely
scattered. The money so collected is channelized to the investors i.e. people asking
for loans for further investment purposes. Banks help in money growth and capital
formation. They are reservoirs of resources for economic growth and development
of the nation. They help in building the infrastructure; boosting the agriculture,
setting up industries and aid to global trade. Thus, a bank by discharging its functions
effectively enhances productive and industrial capacity of the nation and boosts its
pace of growth.
In simple words, bank is an institution which deals in money. Banks accept surplus
money from those who are not needing it immediately and lend it to those who need
it. Let us see the various definitions of bank given by different authors and
understand the main features of a bank.

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Definition:
The Indian Banking Companies Act, 1949: “Banking means the acceptance for
the purpose of lending or investment, of deposits of money from the public repayable
on demand and withdrawal by cheque, draft or order.”
Indian Law Banking Regulation Act of India [Section 5b], 1949: Accepting, for
the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise and withdrawal by cheque, draft, and order.
R. S. Sayers Defined, however, reveals the true character of a modern bank. In his
words, Banks are institutions whose debts usually referred to as bank deposits are
commonly accepted in final settlement of other people‘s debts.
H. L. Henry defined a banker as one who in the ordinary course of business honors
cheques drawn upon by persons from and for whom he receives money on current
account. This definition is very restrictive in the sense that any person or institution
engaged in the business of attracting deposits may be called as bank.
Under British Law, A banker is one who in the ordinary course of his business,
honours cheques drawn upon him by persons from and for whom he receives money
on current accounts‖. (Dr.Herbert L. Hart)
Kinley’s Definition: A bank is an establishment which makes to individuals such
advance of money as may be required and safely made and to which individuals
entrust money when not required by them for use.
Evolution of Banking in India:
Modern banking as evolved in England was introduced by the British during their
rule in India. Naturally, today’s Indian banking is similar to British banking.
However, it does not mean that banking was unknown to India. The essence of
banking is lending for productive purposes. In fact, India was a major partner in
international trading and was a big producer of steel, cloth, spices and luxurious
articles. There are references to rate of interest, security of the loans in the
Manusmrity. Kautilya in the ‘Artha Shastra’ mentions regulation of interest rates,
deposits and even discounting of bills.
However, modern banking with its double-entry accounting system and insistence
on deposit mobilization was introduced by the British. As the British rule extended
all over the country, the stages in evolution in Banking in India. Modern banking
also spread driving out the indigenous banking.
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History of Modern Banking in India:

Modern Banking in India originated in the last decades of the 18th century. The first
banks were The General Bank of India, which started in 1786, and Bank of
Hindustan, which started in 1770; both are now defunct. The oldest bank still in
existence in India is the State Bank of India, which originated in the Bank of Calcutta
in June 1806, which almost immediately became the Bank of Bengal. This was one
of the three presidency banks, the other two being the Bank of Bombay and the Bank
of Madras, all three of which were established under charters from the British East
India Company. For many years the presidency banks acted as quasi-central banks,
as did their successors. The three banks merged in 1921 to form the Imperial Bank
of India, which, upon India’s independence, became the State Bank of India in 1955.
In April 1935, the Reserve Bank of India was established. At the time of first phase
the progress of banking sector was very sluggish. Between 1913 and1948 there were
around 1100 small banks in India. To reform the working and activities of
commercial banks, the Government of India came up with the Banking Companies
Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending
Act of 1965 (Act No.23 of 1965). Reserve Bank of India was vested with extensive
powers for the supervision of banking in India as a Central Banking Authority.
After independence, Government has taken most important steps in regard of Indian
Banking Sector reforms. In 1955, the Imperial Bank of India was nationalized and
was given the name “State Bank of India”, to act as the principal agent of RBI and
to handle banking transactions all over the country. It was established under State
Bank of India Act, 1955. Seven banks forming subsidiary of State Bank of India was
nationalized in1960.
According to the Banking Companies (Acquisition and Transfer of Undertakings)
Bill, 1969, the objective and reasons for bank nationalization are: “The banking
system touches the lives of millions and has to be inspired by large social purposes
and has to sub-serve national priorities and objectives, such as rapid growth in
agriculture, small industries and exports, raising of employment levels,
encouragement of new entrepreneurs and the development of the backward areas.
“For this purpose, it is necessary for the Government to take direct responsibility for
the extension and diversification of banking services and for the working of the
substantial part of the banking system.”
On 19th July, 1969, 14 major Indian commercial banks of the country were
nationalized. In 1980, another six banks were nationalized, and thus raising the
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number of nationalized banks to20. Seven more banks were nationalized with
deposits over 200 Crores. Later on, in the year 1993, the government merged New
Bank of India with Punjab National Bank. It was the only merger between
nationalized banks and resulted in the reduction of the number of nationalized banks
from 20 to 19.
Till the year1980 approximately 80% of the banking segment in India was under
government’s ownership. On the suggestions of Narsimhan Committee, the Banking
Regulation Act was amended in 1993 and hence, the gateways for the new private
sector banks were opened.
Functions of Indian banking system:
The major functions of banks in India cover the following:
1. Accepting deposits
2. Lending loans and advances
3. Transfer of funds
4. Issue of notes/ drafts
5. Credit deposits
6. Foreign exchange services
Let’s understand the above functions in detail.
1. Accepting deposits
The banks accept deposits from their customers, who can withdraw their funds at
will. Customers can deposit money and leave their funds with the bank in any type
of bank account, savings account, current account, or fixed deposit account.
A savings bank also pays interest to their customers on the deposits. Such banks are
very popular with small savers. A current account is a running account that can be
operated multiple times during a working day. Whereas, a fixed deposit account is
responsible for holding deposits for a fixed period and a higher rate of interest is
paid on such accounts.
2. Lending loans & Advances
A bank lends funds to the needy people at a certain rate of interest. Banks provide
loan mainly to agriculturists, industrialists, and businessmen who intend to invest in

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their ventures for their own profit and to contribute to the economic development of
the country.
3. Transfer of Funds
It provides facility for cheap and easy remittance of funds from place-to-place
through demand drafts, mail transfers, telegraphic transfers, etc.
4. Issue of notes/ drafts
A bank is also responsible for issuing notes and creating other inexpensive modes of
exchange in the form of drafts or cheques. In India, the RBI is responsible for issuing
notes and coins.
The banks create and enable the transfer of credit instruments such as bank notes,
bank drafts, letters of credit, cheques, and so on. These instruments are very helpful
in economizing the use of metallic money and making transfer of funds cheap and
convenient.
5. Credit Deposits
The bank may create deposits by providing loans to its customers. In such cases, the
borrower is credited with a withdraw-able deposit amount when needed. The
customers usually deposit the money borrowed from the bank in the same bank
either when the bank insists on doing so or to reap the benefits of the current deposit
account. Such deposits are also known as Credit Deposits.
6. Foreign exchange service:
Foreign exchange includes currency, drafts, bills, and letters of credits and traveler
cheques which are denominated and ultimately payable in foreign currency.
Other functions of banks include:
1. Collecting of cheques drawn on other banks
2. Accepting and collecting of bills of exchange
3. Dealing in foreign exchange to assist the settlement of overseas debts
4. Safe deposit facilities
5. Stock exchange trustee
6. Assisting the RBI in keeping the note issue in a safe and good condition

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Features of Bank:
1. Dealing with Money:
The bank is a financial institution that deals with other people’s money, i.e., the
money given by depositors.
2. Individual/Firm/Company:
A bank may be a person, firm, or company. A banking company is a company that
is in the business of banking.
3. Acceptance of Deposit:
A bank accepts money from people in deposits that are usually repayable on
demand or after a fixed period expires. It gives safety to the deposits of its
customers. It also acts as a custodian of funds of its customers.
4. Giving Advances:
A bank lends out money in loans to those who require it for different purposes.
5. Payment and Withdrawal:
A bank provides its customers with an easy payment and withdrawal facility in
checks and drafts. It also brings bank money into circulation. This money is in the
form of checks, drafts, etc.
6. Agency and Utility Services:
A bank provides various banking facilities to its customers. They include general
utility services and agency services.
7. Profit and Service Orientation:
A bank is a profit-seeking institution with having service-oriented approach.
8. Ever-increasing:
Functions Banking is an evolutionary concept. There is continuous expansion and
diversification regarding a bank’s functions, services, and activities.
9. Connecting Link:
A bank acts as a connecting link between borrowers and lenders of money. Banks
collect money from those who have surplus money and give the same to those who
require money.
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10.Banking Business:
A bank’s main activity should be to do banking business that should not be a
subsidiary of any other business.
11.Name Identity:
A bank should always add the word “bank” to its name to let people know that it is
a bank that deals in money.
Different Types of Banks in India and
Indian Banking System
Structure of Indian banking system can be described as follows:
The banking system plays an important role in promoting economic growth not only
by channeling savings into investments but also by improving allocative efficiency
of resources. The recent empirical evidence, in fact, suggests that banking system
contributes to economic growth more by improving the allocative efficiency of
resources than by channeling of resources from savers to investors. An efficient
banking system is now regarded as a necessary pre-condition for growth.
The banking system of India consists of the RBI, commercial banks, cooperative
banks and development banks (development finance institutions). These institutions,
which provide a meeting ground for the savers and the investors, form the core of
India’s financial sector. Through mobilization of resources and their better
allocation, banks play an important role in the development process of
underdeveloped countries.
Banks that are included in the second schedule of the Reserve Bank of India Act,
1934 are considered to be scheduled banks. All scheduled banks enjoy the following
facilities:
- Such a bank becomes eligible for debts/loans on bank rate from the RBI
- Such a bank automatically acquires the membership of a clearing house.
All banks which are not included in the second section of the Reserve Bank of India
Act, 1934 are Non-scheduled Banks. They are not eligible to borrow from the RBI
for normal banking purposes except for emergencies. Scheduled banks are further
divided into commercial and cooperative banks.

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Structure of Indian banking system.

Foreign bank

Old Private sector New Private

banks sector banks

RBI:
The Reserve Bank of India (RBI) which is the central hank of this country, performs
not only those functions which central banks in developed countries perform but also
certain promotional and developmental functions to help the development of the less
developed financial markets and institutions.
The Reserve Bank of India (RBI) is the central bank of India. It was established as
a shareholders' bank on April 1, 1935. The RBI retain this character for a little less
than fourteen years. On January 1, 1949 it was nationalized and since then it has
remained wholly c state owned.
Scheduled Banks: A scheduled bank, in India, refers to a bank which is listed in the
2nd Schedule of the Reserve Bank of India Act, 1934. Scheduled banks are usually
private, foreign and nationalized banks operating in India. A scheduled bank is
eligible for loans from the Reserve Bank of India at bank rate.
Every week these banks have to submit details of their activities to the RBI.

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Non Schedules Banks:

Other than the schedule banks the banks that formally obtains the license from the
banks.
Paid-up capital of such bank is less than Rs 5 lakh, they are not listed in the second
schedule of the RBI and RBI doesn‘t have any functioning control over them.
All the existing banks in India are scheduled and the number of non-scheduled banks
is almost nil. Only a countable number of few banking sectors have claimed
exemption from the Second Schedule of banking Regulation Act.
In the year 2006, only a total of three non-scheduled banks existed in India. By 2011
and counting, the number of non-scheduled banks in our country increased by one.
Till today India has only four non-scheduled banks in existence.
These four Non-scheduled banks under operation in India are:
1. Akhand Anand Cooperative Bank Limited
2. Alavi CoOperative Bank Limited
3. Amarnath CoOperative Bank Limited
4. Amod Nagrik Sahakari Bank Limited

Commercial Banks:
Commercial Banks are the institutions, setup as per the provisions of the Banking
Regulation Act, 1949. These institutions ordinarily accept deposits from the people
and advances loans. They also create credit. Scheduled banks and non-scheduled
banks come in the category of Commercial Banks.
1. Public sector banks
2. Private Sector banks

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1. Public sector banks

Managed, Controlled and Owned by the government. Public Sector Banks are
divided into following groups.
i) State Bank Group
ii) Nationalized Banks
iii) Other Public Sector Bank

i) State Bank Group:

It consists of State Bank of India (SBI) and its seven associate banks.
SBI (Estd: 1955) is the first public sector bank of the country. State Bank of India
(Subsidiary) Act was passed in 1959.
At present SBI is the largest commercial bank of India and its five subsidiary banks
were also merged with SBI on 1st April 2017. RBI owns the majority shares of SBI
and some of its associate banks.
1. State Bank of Hyderabad
2. State Bank of Jaipur and Bikaner
3. State Bank of Patiala
4. State Bank of Travancore
5. Bhartiya Mahila Bank
6. State Bank of Mysore (Merged with SBI on 1st April 2017)
7. State Bank of Indore (merged with SBI on 26 Aug 2010)

ii) Nationalized Banks:

In order to increase the branch network, the Government of India has done the
nationalization of 14 scheduled commercial banks in 1969 and 06 more in 1980.
These 20 nationalized banks became 19 when New Bank of India was merged into
Punjab National Bank.
Nationalized banks is appended below:
1) Andhra Bank
2) Bank of Baroda

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3) Central Bank of India

4) Allahabad Bank
5) Canara Bank
6) Indian Bank
7) Bank of Maharashtra
8) Indian Overseas Bank
9) United Bank of India
10) Corporation Bank
11) Bank of India
12) Punjab & Sind Bank
13) Vijaya Bank
14) Dena Bank
15) Oriental Bank of Commerce
16) Syndicate Bank
17) Punjab National Bank
18) UCO Bank
19) Union Bank of India.

iii) Other Public Sector Banks:

Bhartiya Mahila Bank and IDBI Bank are the two scheduled commercial banks
which comes in the category of other Public Sector Banks.
Note: Bhartiya Mahila Bank is merged with SBI on 1st April 2017.
2. Private sector banks
In a mixed economy of India, the private sector also occupies an important place and
is expected to play an important role in economic development. The existence of
private sector banks has enlarged consumer’s choice. These banks are giving tough
competition to the public sector banks by introducing various innovation like ATM
facility, 24 hours banking, home banking. Private sector banks again can be divided
between
Indian Banks: The banks which have their head office in India and which are
owned, controlled and managed by the Reserve Bank of India are known as Indian
Bank.

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Old Private Banks:

1) Karur Vysya Bank
2) Dhanlaxmi Bank
3) Federal Bank
4) Nainital Bank
5) ING Vysya
6) Ratnakar Bank
7) Jammu and Kashmir Bank
8) Catholic Syrian Bank
9) Karnataka Bank
10) City Union Bank
11) Lakshmi Vilas Bank
12) Tamilnad Mercantile Bank
13) South Indian Bank
New Private Banks:
New private banks provide high level of modern customer services.
1) Yes Bank
2) Kotak Mahindra Bank
3) ICICI Bank
4) HDFC Bank
5) Development Credit Bank
6) IndusInd Bank
7) Axis Bank
8) Bandhan Bank (2015)
9) IDFC (Industrial Development Financial Corporation)

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3. Regional Rural Banks:

Since the middle of 1970’s, the Regional Rural Banks came into existence in India.
These banks were set up with the specific objective of providing credit and facilities
of deposits especially to small and marginal farmers, agricultural labor and artisans
and small enterprises.
The rural development in respect of agriculture, trade, commerce and industry is the
Prime responsibility of Regional Rural Banks (RRBs) of India. These banks are
essentially commercial banks. However, their area of operation is restricted to a
district. Their Main function was to provide financial help to small and marginal
farmers and rural workers in order to develop rural economy.
Ownership ratio of stakeholders in the RRBs:
Central government 50%, State government 15% and sponsored bank 35%
RRB‘s are owned by Central government, State Government and the
sponsor/founder banks in the ratio 50:15:35 and are regulated by National
Agriculture and Rural Development Bank (NABARD).
Lead Bank Scheme Proposed by M. Narasimhan Committee: 1969. First
Recommitted setup for RRBs is Sarayu Committee: 1972. Committee recommended
setting up RRBs is Narasimhan Committee in: 1975.
4. Foreign Banks:
Banks which have their head office overseas and which are owned, controlled and
managed from other countries are foreign banks.
Nationalised or public sector banks and private sector banks. The public sector banks
consist of the State Bank of India and its associate banks along with another 21 banks
which were nationalised. Small number of Indian scheduled banks which have not
been nationalised and branches of foreign banks operating in India belong to the
private sector banks. Foreign banks are commonly known as “foreign exchange
banks.”
The banks which are incorporated or have their headquarters in a foreign country
and open their branches in India as per RBI Act 1934 is known as foreign banks.
Some examples of the foreign bank are:
City Bank, HSBC Bank, Standard Chartered Bank

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Co-operative Banks:
Co-operative banks are an important component of the Indian banking system. It is
originated with the enactment of the Co-operative Credit Societies Act of 1904.
These banks are classified as Urban Co-operative Banks and Rural Co-operative
Credit Institutions.
Types of Cooperative Banks:
1. Primary Agriculture Credit Societies: Operate in villages. A cooperative credit
society can be formed by more than ten persons in most of the states. Deposits
are accepted by these societies from their members and they provide them short-
term and medium term loans.
2. Central Cooperative Bank: These banks provide financial assistance and
supervise the primary cooperative societies of a district or any part of it.
3. State Cooperative Bank: There is a main cooperative bank in every state that
runs and lends money all the central cooperative banks in that state.
4. Primary Cooperative Agriculture And Rural Development Bank: Provide
long term loans by mortgaging immovable property of its debtors as security.
5. State Cooperative Agriculture And Rural Development Bank: Whole State
comes under its jurisdiction and it advance loans to Primary Cooperative
Agriculture and Rural Development Banks.
6. Urban Co-operative Banks:
The urban areas are served by the urban co-operative banks. These banks are
registered under Co-operative Societies Act of the respective State Governments.
These banks operate in urban areas and accept deposits from the public and also
advance loans to them. Supervised by the RBI and managed by the State
governments.
The RBI is the regulatory and supervisory authority of these banks for their banking
related operations. The RBI extends refinance to these banks at Bank Rate against
their advances to tiny and cottage industrial units.
These banks are required to channelise 60% of total loans and advances towards
priority sectors. There are urban co-operative credit societies working in the urban
areas to supply credit at low rate of interest to the semi-urban weaker sections of
society.

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These are the societies registered under Co-operative Societies Act. They play an
important role in providing credit in urban areas.
7. Rural Co-operative Credit Institutions:
The rural areas are largely served by the rural co-operative credit institutions. There
is a three tire structure consisting of:
a) The State Co-operative Banks at the apex level exist at the state level.
b) The District Co-operative banks at the intermediate level existing at District level.
c) The Primary Co-operative credit societies at the grassroots level.
The State Co-operative Banks and the District Central Co-operative Banks provide
financial support to Primary Co-operative Credit Societies. The funds of the Reserve
Bank are provided to agricultural sector through the State Co-operative Banks and
the Central Co-operative Banks.
Foreign Banks:
Foreign banks are those banks whose headquarters are situated in foreign countries.
Earlier these banks used to restrict their activities primarily to foreign exchange and
so they were called Foreign Exchange Banks.
But now they are performing all sorts of banking functions and are now called as
Foreign Banks.
The banks which are incorporated or have their headquarters in a foreign country
and open their branches in India as per RBI Act 1934 is known as foreign banks.
Some examples of the foreign bank are:
 City Bank
 HSBC Bank
 Standard Chartered Bank
Payment Banks:
Payments banks are a new model of banks conceptualised by the Reserve Bank of
India (RBI).
These banks can accept a restricted deposit, which is currently limited to 1 lakh per
customer and may be increased further.

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These banks cannot issue loans and credit cards.

Both current account and savings accounts can be operated by such banks. Payments
banks can issue services like ATM cards, debit cards, net banking and mobile
banking.
Airtel has launched India‘s first live payments bank. Paytm is the second such
service to be launched in the country.
India Post Payments Bank is the third entity to receive payments bank permit after
Bharti Airtel and Paytm.
On 19 August 2015, the Reserve Bank of India gave in principle licences to eleven
entities to launch payments banks
1) Aditya Birla Nuvo
2) Airtel M Commerce Services
3) Cholamandalam Distribution Services
4) Department of Posts
5) FINO PayTech
6) National Securities Depository
7) Reliance Industries
8) Sun Pharmaceuticals
9) Paytm
10) Tech Mahindra
11) Vodafone MPesa
Out of these, three have surrendered their licenses. First one being Chalomandalam
Distribution Services, then Sun Pharmaceuticals‖ and the latest, Tech Mahindra. The
‘in-principle’ license is valid for 18 months within which the entities must fulfil the
requirements.
They are not allowed to engage in banking activities within the period. The RBI will
consider grant full licenses under Section 22 of the Banking Regulation Act, 1949,
after it is satisfied that the conditions have been fulfilled.

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