Banking and Insurance

Module 1
 INTRODUCTION

• The word bank derived from

Italian word - banco
Latin word - bancus
French word – banque
which all means bench. Because in olden days jews
transacted their money transactions at the market
place sitting on benches.
 Origin of Banking in India
• 1786 – General bank of India
• 1809 – Bank of Bengal, kolkatta
• 1840 – Bank of Madras
• Above 3 merged- imperial bank of India – 1921
• RBI – 1935
• Imperial bank was renamed as state bank of India – 1955
• RBI nationalised- 1948
• 1949 – Banking Regulation Act
 Ancestors of Modern Bank

• The merchants (traders) – collect deposit from their customers for the
purpose of financing their business.
• The money lender – used to lend their surplus money to the needy at
highest interest.
• The goldsmith – goldsmith in England started accepting precious stones
and valuables for safe custody and they issued deposit receipt which can be
used for settling business obligations.
 Definition of Bank
• A bank is an institution which accepts deposits from the
public and makes it available for those who need it. A
bank helps in the remittance of money from one place to
another.
• According to Crowther a bank “ Collects money from
those who have it to spare or who are saving it out of
their incomes and it lends this money to those who
require it”
• The banking regulation Act 1949 defines the
term banking as “ accepting for the purpose of
lending or investment, of deposits of money
from the public repayable on demand or
otherwise, and withdrawable by cheque, draft,
and order or otherwise”.
 Classification of Banks
• Based on Function
• Based on Ownership
• Based on Domicile
• Based on Registration
 Based on function
• Commercial bank – Accept deposit from public,
repayable on demand or after short period and grant short
term credit to trade, commerce, industry etc. Wide
network branch throughout the country. Eg; State Bank
of India, ICICI Bank, HDFC Bank, Axis Bank, Bank of
Baroda.
• Industrial Bank – Provide long term financial
requirements of industries. Provide Fixed capital and
working capital. Eg; Industrial development bank of
India, industrial credit and investment cooperation of
India, state financial corporations.
• Agricultural Bank – provide agricultural credit. Short
term and long term credit.
• Exchange bank – deal with foreign exchange and
specialise in foreign trade. Conversion of one currency
into another.
• Savings Bank – Promote savings habits among public.
Mobilize scattered savings of the society. Eg, Post office
savings bank , Municipal savings bank.
• Central Bank – Top most banking institution which
controls, regulates and supervises the monetary and
credit system of a country. RBI is the central bank of
India.
• World Bank – international bank for reconstruction and
development (IBRD). Provide long term loan for
reconstructing economies damaged by second world war.
 Based on Ownership

• Public sector bank – owned and controlled by

government. All nationalised and regional rural bank.
• Private bank – owned and controlled by private
individuals or corporations and not by government. Eg;
ICICI, HDFC, SIB.
• Co-operative Bank – owned and controlled by
cooperative societies. Meeting financial need in rural
needs.
 Based on Domicile
• Domestic Bank – Registered within the
country.
• Foreign Bank - bank registered in a foreign
country and have their head office in foreign
country. As far as India, any bank registered
outside India and have branch in India. Eg;
Citi bank
 Based on Registration
• Scheduled – whose name appear in 2nd schedule of RBI
act 1934. Should satisfy : paid-up capital and reserves
have aggregate of not less than 5 lakhs, Satisfy RBI that
affairs not against depositor, must be corporation or
corporate body.
• Non scheduled bank – whose name not in 2 nd schedule of
RBI Act 1934.
• Licensed Bank – Given license from RBI for conducting
banking business in India. Every bank should obtain
license from RBI according to Banking Regulation ct
1949.
• Non Licensed Bank – which do not have license from
RBI.
FUNCTIONS OF COMMERCIAL BANK
Commercial bank – Accept deposit from public,
repayable on demand or after short period and grant
short term credit to trade, commerce, industry etc.
Wide network branch throughout the country. Eg; State
Bank of India, ICICI Bank, HDFC Bank, Axis Bank,
Bank of Baroda.

1. Primary functions – Accepting Deposit & Lending

money
2. Secondary functions – Agency function & General
Utility function
 Primary Function
• Accepting Deposit – Collect the scattered savings from
the public for productive purpose.
Types :
Fixed Deposit – For a fixed period. Issue Fixed Deposit
receipt. High interest rate. Surrender receipt on due
date.
Current Deposit – for traders who deposit and withdraw
money at any number of times. It is also called demand
deposit. Facility of withdrawing money through cheque.
• Savings deposit – Encourage savings habit.
Small rate of interest. Withdrawal at any time.
• Recurring deposit – Depositing fixed amount
of money every month for an agreed period.
 Lending Money
• Overdraft – for current account holder. Withdrawal of
money more than in his account.
• Cash Credit – Borrower is allowed an advance under a
separate account called cash credit account up to a
specified limit called cash credit limit. Issued against
pledge of agricultural or industrial products. Withdraw
money from cash credit account from time to tie and
interest charged only for the amount withdrawn.
• Money at call and short notice - type of loan provided
by one bank to another bank or a financial institution.
Provided to 1 to 14 days.
• Discounting Bill of exchange – BOE given by debtor to
his creditor to pay the amount mentioned in the bill
on the expiry of stated period. Here creditor can
submit the bill to the banker and get the money after
deducting a small amount as commission.
• Term loan – provided for 1 year. interest charged for
entire amount.
• Bridge loan – short term temporary financing for
individual or business firm. It bridges the gap
between more permanent method of financing. For 2
weeks to 3 years.
 Secondary functions
Agency function
• Transfer of funds
• Collection of cheques and bills
• Execution of standing orders
• Purchase and sale of securities
• Collection of dividend on shares
• Income tax consultancy
• Acting as trustee and executor
 General Utility services

• Providing locker facility

• Issue of travellers’s cheque
• Issue of letter of credit
• Collection and dissemination of information
• Issue of ATM cards
• Dealing foreign exchange
• Act as referee
• Housing finance
• Merchant banking
• Factoring services – collection of book debts
• Lease finance
• Underwriting securities – Guarantee for shares
 Reserve Bank of India
Central Bank of India. It is the apex financial institution that
regulates the monetary system in the country. Headquarters in
Mumbai. RBI Commenced its operations from April 1935.
 Objectives of RBI
• To integrate monetary policies of RBI and fiscal policies
of the government to achieve economic growth.
• Issue currency and keep foreign exchange
• Maintain financial stability and credit.
• Arrangements for mobilize savings from public
• Develop adequate banking an credit facilities
• Fulfill credit needs of agriculture and allied activities.
• Extent support to government to accelerate economic
growth.
 Functions of RBI
• Issue currency note – except one rupee notes and coins
issued by Ministry of Finance
• Banker to government
• Banker’s Bank
• Control and management of foreign exchange
• Credit control
• Collection of data and their publications
• Other development and promotional functions
 Banking Ombudsman
• Banking ombudsman scheme was introduced by RBI for
redressal of grievances of the public against bank
relating deficiency in banking services, loans, and
advances.
• All scheduled bank, RRB, scheduled cooperative bank
are bought under this scheme.
• Ombudsman is an officer appointed by RBI. Should have
outstanding knowledge in the field of law, banking,
financial services and public administration.
• Appointed for a period of 3 years but eligible for
extension for a period of 2 years subject to attainment
of 65years.
 Settlement of complaint by ombudsman
• Settlement by agreement – ombudsman act as mediator
between complainant and banker.
• Settlement by recommendation - if complaint is not
settled within 1 month, the ombudsman will make a fair
and impartial recommendation and is communicated to the
complainant. Whether it is accepted or not by banker or
complainant it has to communicated within 2 weeks to the
ombudsman.
• Settlement by award - if the complaint is not settled by
recommendation with 2 months. Then he will pass an
award, if it is accepted by the complainant, the bank has to
obey it, if not it will be reported to RBI. The complainant
can approach Governor of RBI if he is not satisfied.
 Credit creation
• Capacity of a bank to create derivative deposit out of primary
deposit. Primary deposit arising from the deposit of currency by
depositor. Primary deposit allows to create additional deposit
called as derivative deposit. It is so called as they derived from
lending of primary deposit.
Limitations
• Availability of primary deposit
• Cash reserve ratio
• Availability of good securities
• Banking habit of general public
• Economic condition
• Monetary policy of central bank
• Availability of borrower
• Behaviour of other banks
• Attitude of people
 Type of Accounts
• Fixed account
• Joint account
• Savings accounts
• Recurring account