3.

2 INDUSTRY PROFILE

The word bank is believed to have its origin from the word banko in Italian, which means a bamboo bench. The early bankers in the 17 th century used to sit in the market place on bamboo benches to deal with money. The present day bank is very much of British invention. In the evolution of banking Britain, the goldsmiths, played a great role. In the 17 th century and later, the goldsmiths in England possessed the strongest sage vaults and the well to do in the society kept their gold and silver. Soon it was discovered that the deposits receipt in favour of the lender etc. the ownership of gold or silver could get automatically transferred between people even while the possessin of the gold or silver continued with the goldsmith. In this practice, can be traced the origin of the bank currency note. The next stage was the issuing of a letter by the originally depositor authorizing the transfer of his gold or silver in favour of other person. One can see in this the origin of the present day cheque system. The goldsmiths also later discovered that a substantial a part of the gold entrusted to them was remaining idle and therefore, they could issue additional deposit receipts, which could be lent to persons in need. Keeping a certain portion for demands for return or possible partial withdrawal by the depositors. Thus, evolved all the essential features of our present day banking system. Indian companies Act and Banking Regulation Act defined banking business only but not the word Bank. While the former defines business of banking, the later i.e., Banking Regulation Act defined the banking by stating the essential functions of a Banker. It also states the various other items of business that a banking company can be engaged in, and also some other items of business i.e., prohibited to perform. Section 5 (b) of BR Act defines the term banking as accepting deposits of money from the public, for the purpose of lending or reinvestment, payable on demand or otherwise and withdraw able by checks, draft, and order or otherwise. Therefore the two essential features of a bank are:

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1. Acceptance of deposits of money, but not goods or non-money financial assets from public and such deposits are repayable as well a with draw able in a certain specified manner, and 2. The acceptances of such deposits are for purpose of lending or reinvestment but not for any other trading\ manufacturing activity. Thus according, to section 5(b) of BR Act makes it clear that the any company which is engaged in the manufacture of goods, or carries any trade cannot be treated as Banking Company, even if it also accepts deposits of money from public, (example Chit Fund companies etc.) in other words the banker is an intermediately and deals with the money belonging the public. Section 7 makes it essential for every company carrying on the business of banking in India to use as a part of its name at least one of the words Bank, Banker or Banking of Banking Company. It also prohibits any other company or Firm individual or group of individuals from using any of these words such as Banker or Banking company, as part of its name. Other Business permitted for Banking Company: Now a days the concept of banking has become much wider that mere acceptance of deposits and lending. Secion6 of BR Act states the other function that a Bank may undertake in the present competitive world. The Banks are required to offer to other clientele a full package of services called Ancillary services besides the main functions of banking viz. Deposit and Lending portfolio, to the satisfaction of customers.

Main Functions of Banking: 1. Acceptance or money in deposit under various types of schemes, classifiable as Demand and Time deposits. 2. Grant credit to various sectors of the economy by way of loans and advances bill discounting and investments in securities. 20

Ancillary Functions: 1. Collection of cheque, drafts, bills hundies and other instruments for depositors. 2. Issue of Guarantees. 3. Provision of remittance facilities ADDS, TT, Mail, Transfer, etc. 4. Provision of facilities of safe custody for deeds, documents, variables etc., and safe deposits values. 5. Dealing in securities for constituents. 6. Provisions of special investment services Merchant Banking. 7. Acting as Executors and Trustees. 8. Foreign Exchange business. 9. Agency services for sale and purchase of financial instruments units etc.

Banking plays a very important role in the nations economy. It has acquired a special place in the organized money market with its command over huge amounts of deposits and advances. The long process of expansion, regulation, nationalization and reorganization has brought upon the banding industry an enormous responsibility in meeting the financial needs of the society. Cash Reserve and SLR maintained once in month. Now u\s. 42 of the Reserve Bank of India Act, the banks are required to submit fortnightly return indicating the position of Demand and Time Liabilities on alternate Fridays within 7 days from the close of the fortnight. If the alternative Friday is not the last Friday of the month, the banks are required to submit an additional return for the last Friday of the month within 7 days.

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Credit limited u\s. 17(4)(a) of India Act, 1934: The Reserve Bank, wide its Circular No. UBDP & 0.4 HG. 9-90/91 dated 8th August, 1990, advised that it has been decided to extend a line of credit U/S.17(4)(a) of the Reserve Bank of India Act, 1934, to schedule urban against the security of government and other trustee securities. The salient features of the scheme of Finance are: a) Drawls on the limit will be permitted only for meeting clearing imbalance. b) The limit will be sanctioned to the bank for a period of 1 year i.e. July June and will lapse on 30th June of every year, subject to renewal. c) The limit will be restricted to 1% Demand and Time Liabilities of the Bank as on the last Friday of the quarter proceeding the quarter for which the bank is submitting its application. d) The duration of each drawl will be restricted to maximum of 3 working days. e) Interest at the rate of 12.5% will be changed on the outstanding balances under the limit. KINDS OF BANKS: Financial requirement in a modern economy are of a diverse nature, distinctive variety and large magnitude. Hence, different types of banks have been instituted to cater to the varying needs of banks have been instituted to cater to the varying needs of the community. Banks in the organized sector may, however, be classified into the following major forms: (1) Commercial banks; (2) Co-operative banks; (3) Specialized banks; (4) Central bank.

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1. Commercial banks: Commercial banks are joint-stock companies dealing in money and credit. A

commercial bank may be defined as a financial institution that accepts chequeable of money from the public and also uses the money with it for lending. The most distinctive function of commercial bank is that it accepts deposits called demand deposits from the publics, which are chequable., i.e., withdrawable by means of cheque. Acceptance of chequable deposits alone, however, does not give it the status of a bank. Its essential function is to make use of these deposits for lending to others. Commercial banks usually give short-term loans advances. They occupy a dominant place in the money market. They, as a matter of fact, for the biggest component in the banking structure of any country. The commercial banks in India are governed by the Indian Banking Regulation Act, 1949 brought up to date to include additional rules thereto. Under the law, commercial banks are not supposed to do any other business, except banking. In capitalist countries, like UK and the USA, commercial banks are usually in the private sector, owned by shareholders. In socialist countries like Russia, they are completely nationalized. In Franc, however, through it has a capitalist economy, all commercial banks are state-owned.

Commercial bank in India: In India, however, there is a mixed banking system prior to July 1969, all the commercial banks-73 scheduled and 26 non-scheduled banks, except the State Bank of India and its subsidiaries-were under the control of private sector. On July 19, 1969, however, 14 major commercial banks with deposits of over 50 crores were nationalized. In April 1980, another 6 commercial banks of high standing were taken over by the Govt. At present there are 20 nationalized banks plus the SBI and its 7 subsidiaries constituting public sector banking, which controls over 90% of the banking business in the country. 23

2. Co-operative banks: Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative Societies Act of the states. These banks are essentially co-operative credit societies organized by members to meet their short-term and medium-term financial requirements. The main object of co-operative banks is to provide cheap credit to their members. They are based on the principles of self-reliance and mutual co-operation. The co-operation banking system in India is, however, small sized in comparison to the commercial banking system. Its credit out standing is just less than one-fifth of the total credit out standing of the commercial banks. Nonetheless, co-operative credit system is the main institutional source of rural, especially, agricultural finance in India. Co-operative banking system in India has the shape of a pyramid, i.e., a three-tire structure, considered by: (i) (ii) (iii) Primary credit societies. Central co-operative banks and State co-operative banks.

Primary credit societies lie at the local or base level in rural areas there are Primary Agricultural Co-operative Societies (PACS), which cater to the short and medium-term credit needs of the farmers. In urban areas, to provide non-agricultural credit, urban co-operative banks and employees credit societies and formed. Urban banks usually provide short-term loans to their members, who are small borrowers. members, too. commercial banks. They also accept deposit from members and nonThus, their functions and working are more or less similar to those of But by nature, their form is only co-operative and that is a major

distinction between these and commercial banks, which are joint-stock companies.

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The Central Co-operative Banks (CCB) is federation of primary societies belonging to a specific district. By furnishing credit to the primary societies, central co-operative banks serve as an important link between these societies and the money market of the country. No central co-operative banks lends to individuals. It lends so societies only. The State Cooperative Banks (SCB) lie at the apex of the entire co-operative credit structure. Every state co-operative banks basic function is to furnish loans to the central co-operative banks in order to enable them to help promote the lending activities of the primary credit societies. The state co-operative banks, thus, serve as the final link between the money market and the co-operative sector of the country. 3. Specialized Banks: There are specialized forms of banks catering to some special needs with these unique natures of activities. There are thus, foreign exchange banks, industrial banks, development banks, land development banks etc. Foreign Exchange Banks are simply exchange banks are meant primarily to finance the foreign trade of a country. They deal in foreign exchange business, buying and selling of foreign currencies, discounting, accepting and collecting foreign bills of exchange. They also do ordinary banking business such as acceptance of deposits and advancing of loans, but in a limited way. In India, there are 15 foreign commercial banks basically undertaking such activities only. Industrial Banks are primarily meant to cater to the financial needs of industrial undertakings. They provide long-term credit to industries for the purchase of machinery, equipments etc. In India, there are some special financial institutions, which are called development banks. Presently, at the all-India level, there are five such industrial development banks: (i) (ii) The Industrial Development Bank of India (IDBI). The Industrial finance Corporation of India (IFCI).

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(iii)

The Industrial Reconstruction Corporation of India (IRCI). industries.

For large

(iv) (v)

The Industrial Credit and Investment Corporation of India (ICICI), and The National small Industries Corporation (NSCI) catering to the needs of the small industries.

The Government, except the ICICI, which is owned by the private sector, has founded all these institutions. Similarly, at the state level, there are: (i) (ii) (iii) The State Financial Corporations (SFC) The State Industrial Development Corporations (SIDC) The State Industrial Investment corporations (SIIC) serving as industrial development banks. Land Development Banks (LDB) are meant to cater to the long and medium-term credit needs of agriculture in our country. They are mainly district-level banks. Since the LDBs give loans to their members on the mortgage of land, previously they were called land mortgage banks. There are state land development banks at the top level and primary land development banks at the base or local level. Agricultural Refinance and Development Corporation (ARDC) is a kind of agricultural development bank, which provides medium and long-term finance to agriculture in our country. its shareholders. The Export-Import Bank of India (EXIM BANK) has been instituted for planning, promoting a developing exports and imports of the country. ARDC operates by making provisions of refinance to State Land Development Banks, State Co-operative Banks and Scheduled Commercial banks, which are

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In Western countries, there are specialized banks such as discount houses, investment banks; labor banks etc., catering to the specialized needs of the people. 4. Central Bank: A central bank is the apex financial institution in the banking and financial system of a country. It is regarded as the highest monetary authority in the country. It acts as the leader of the money market. It supervises controls and regulates the activities of the commercial banks. It is a service-oriented financial institution primarily concerned with the ordering, supervising regulating and development of the banking system in the country. As the central bank is able to influence monetary and credit conditions and financial development in a country, it is charged with the responsibility of carrying out the monetary and credit policies. Indias central bank is the Reserve Bank of India, established in 1935. A central bank is usually state-owned. But it may also be a private organization. For instance, the Reserve Bank of India (RBI) was started as a shareholders organization in 1935, which, however, was nationalized after independence, in 1949. Although the central bank is state-owned, it functions as a semi-government institution, free from parliamentary control. Functions of Commercial Banks Commercial banks perform several crucial functions, which may be classified into two categories: (a) Primary functions, and (b) Secondary functions.

(a) Primary banking functions of the commercial banks include: 1. Acceptance of deposits from the public. 2. Lending of funds. 27

3. Use of cheque system, and 4. Remittance of funds.

1. Acceptance of Deposits from the Public: Accepting deposits is the primary function of a commercial bank. By receiving deposits from the public, commercial banks mobilize savings of the household sector. Banks generally accept deposits in three types of accounts: (i) (ii) (iii) Current Account. Savings Account. Fixed Deposits Account.

Deposits in Current Account are withdrawable by the depositors by cheque for any amount to the extent of the balance at their credit, at any time without any prior notice. Deposits of current account are, thus, known as demand deposits. Commercial and industrial firms and businessmen maintain such accounts, as the cheque system is the most convenience and very safe mode of payment. Savings Account is maintained for encouraging savings of household. Withdrawals of deposits from savings account are not freely allowed as in the case of current accounts. There are some restrictions on the amount to be withdrawn at a time and also on the number of withdrawals made during a period. Indian commercial banks have, however, relaxed these rules of savings accounts to a certain extent in recent times. Banks pay a rate of interest on the savings account deposits as prescribed by the central bank. Presently, it is 5 percent per annum. Deposits in fixed account are time deposits. In the normal course, deposits cannot be withdrawn before the expiry of the specified time period of the deposits. A premature withdrawal is, however, permitted only at the cost of forfeiture of the interest payable, at least partly. On these deposits commercial banks pay higher rates of interest, and the rate becomes higher with the increase in duration. 28

By creating such varieties of deposits, banks motivate savers and depositors in a variety of ways and encourage savings in the economy. Further, by keeping deposits with banks, depositors money is not only secured and remains in safe custody, but it yield interest also. Moreover, banks demand deposits are in the form of liquid cash, for they serve as money to the business community and, therefore, are called bank money. 2. Lending of Funds Another major function of commercial banks is to extend loans and advances out of the money which comes to them by way of deposits to businessmen and entrepreneurs against approved such as gold or silver bullion, government securities, easily saleable stocks and shares, and marketable goods. Bank advances to customers may be made in many ways; (i) Overdraft:

A commercial bank grants overdraft facility to an account-holder by which he is allowed to draw an amount in excess of the balance held in the account, up to the extent of stipulated limit. Overdraft is permissible in current account only. Suppose, a customer has Rs.50,000 in his current account with the bank. Bank grants him overdraft facility up to Rs.10,000. Then this customer is entitled to issue cheques up to Rs.60,000 on his account. Obviously, the overdraft facility sanctioned up to Rs.10,000 by the bank in this case is as good as credit granted by the bank to that extent. (ii) Cash Credit:

Banks give credit in cash to business firms in industry and trade, against pledge or hypothecation of goods, or personal guarantee given by the borrowers. It is essentially a drawing account against credit sanctioned by the bank and is operated like a current account on which an overdraft is sanctioned. It is the most popular mode of advance in the Indian Banking system.

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(iii)

Discounting Trade Bills:

The banks facilitate trade and commerce by discounting bills of exchange called trade bills. Traders often draw bills of exchange to meet their obligations in Business transactions. Such a trade bill is payable in cash on maturity, after a stipulated date. But many times the holder of such bills may be in urgent need of cash before the maturity period. In such circumstances, he may seek help from the bank. Since trade bills are negotiable instruments, the bank will discount them. That is, the bank will pay cash to the endorser of trade bills, equivalent to the amount of bills minus the amount of discount. And, when the bill matures, the bank will claim the amount from the drawee ( the person who is liable to honour the bill). Obviously, discounting of bills by the bank amounts to granting of credit to the party concerned till the maturity date of the bill. This method of bank lending is widely adopted for two reasons: (a) Such loans are self-liquidator in character; and (b) These trade bills are rediscount able with the central bank. (iv) Money at Call or Very Short-term Advances:

Banks also grant loans for a very short period, generally not exceeding 7 days to the borrowers, usually dealers or brokers in stock exchange markets against the collateral securities like stock or equity-shares, debentures, etc., offered by them. Such advances are payable immediately at short notice; hence, they are described as money at call or call money. (v) Term Loans:

Banks give term loans to traders, industrialists and now to agriculturists also against some collateral securities. Term loans are so called because their maturity period varies between 1 to 10 years. Term loans as such provide intermediate or working capital funds to the borrowers. Sometimes, two or more banks may jointly provide large term loans to the borrower against a common security. Such loans are called participation loans or consortium finance.

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(vi)

Consumer Credit:

Banks also grant credit to households in a limited amount to buy some durable consumer goods such as television sets, refrigerators, etc., or to meet some personal needs like payment of hospital bills, etc. Such consumer credit is made in a lump sum and is repayable in installments in a short time. Under the 20-point programmer, the scope of consumer credit has been extended to cover expense on marriage, funeral etc., as well. (vii) Miscellaneous Advances:

Among other forms of bank advances there are packing credits given to exporters for a short duration, export bills purchased/discounted, import finance advances against import bills, finance to the self-employed, and credit to the weaker sections of the community at concessional rates. 3. Use of Cheque System It is a unique feature and function of banks that they introduced the cheque system for the withdrawal of deposits. There are two types of cheques: (i) The Bearer Cheque: A bearer cheque is encashable immediately at the bank by its possessor. Since it is negotiable, it serves as good as cash on transferability. (ii) The Crossed Cheque: A crossed cheque, on the other hand, is one that is crossed by two parallel lines on its face at the left hand corner and such a cheque is not immediately encashable. It has to be deposited only in the payees account. It is not negotiable. In modern business transactions, the use of cheques to settle debts is found to be much more convenient than the use of cash. Commercial banks, thus, render an important service by providing an inexpensive medium of exchange such as cheque. In fact, a cheque is also considered as the most developed credit instrument.

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4. Remittance of Funds Commercial banks, on account of their network of branches throughout the country, also provide facilities to remit funds from one place to another for their customers by issuing bank drafts, mail transfers or telegraphic transfers on nominal commission charges. As compared to the postal money orders or other instruments, bank drafts have proved to be a much cheaper mode of transferring money and have helped the business community considerably. (a) Secondary banking functions of the commercial banks include: Commercial banks perform a multitude of other non-banking functions which may be classified as 1. Agency Services 2. General Utility Services. Agency Services Bankers perform certain function for and on behalf of their customers, such as: (a) To collect or make payments for bills, cheques, promissory note, interest, dividends, rents, subscriptions, insurance premium, etc. for these services, the banks usually levy some charges. (b) To remit funds on behalf of the clients by drafts or mail or telegraphic transfers. To act as executor, trustee and attorney for the customers will. (c) Sometimes, bankers also employ income-tax experts not only to prepare income-tax returns for their customers but also to help them to get refund of income tax in appropriate cases. (d) To work as correspondents, agents or representatives of their clients.

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Often, bankers obtain passports, travellers tickets, and secure passages for their customers, and receive letters on their behalf. General Utility Services Modern commercial banks usually perform certain general utility services for the community, such as, (a) Letters of credit may be given by the banks at the behest of the the exporter. (b) Bank drafts and travelers cheques are issued in order to provide facilities for transfer of funds from one part of the country to another. (c) Banks may deal in foreign exchange or finance foreign trade by accepting or collecting foreign bills of exchange. (d) Bank may act as referees with respect to the financial standing, business reputation, and respectability of customers. (e) Shares floated by government, public bodies and corporation may be underwritten banks. (f) Certain banks arrange for safe deposit vaults, so that customers may entrust their securities and valuables to them for safe custody. (g) Banks also compile statistics and business information relating to trade, commerce, and industry. Some banks may publish valuable journals or bulletins containing research on financial, economic and commercial matters. importer in favour of

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Banks Play an Important role in a Modern Economy 1) They constitute the very life-blood of modern trade, commerce and industry, as they provide the necessary funds for their working capital such as to buy raw materials, to pay wages, to incur current business expenses in marketing of goods, etc. 2) Banks encourage peoples savings habit through their various savings deposit schemes. 3) They also mobilize idle saving resources from household to business people for productive use. 4) They transmit money from place to place with economy and safety. 5) Their agency services are, no doubt, of immense value to the people at large, as they cause their difficulties, save their time and energy and provide them safety and security.

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