Elements of Banking

What are banks?

A bank is a financial institution that accepts deposits from the public and

creates credits. Banks borrow from individuals, businesses, financial institutions, and

governments with surplus funds (savings). They then use those deposits and

borrowed funds (liabilities of the bank) to make loans or to purchase securities

(assets of the bank).

The banking system in India is significantly different from other countries.

1. Reserve Bank of India:

Reserve Bank of India is the Central Bank of our country. It was established on

1st April 1935 under the RBI Act of 1934. It holds the apex position in the banking

structure. RBI performs various developmental and promotional functions.

It has given wide powers to supervise and control the banking structure. It occupies

the pivotal position in the monetary and banking structure of the country. In many
countries central bank is known by different names.

For example, Federal Reserve Bank of U.S.A, Bank of England in U.K. and Reserve
Bank of India in India. Central bank is known as a banker’s bank. They have the

authority to formulate and implement monetary and credit policies. It is owned by the
government of a country and has the monopoly power of issuing notes.

2. Commercial Banks:

Commercial bank is an institution that accepts deposit, makes business loans and

offer related services to various like accepting deposits and lending loans and
advances to general customers and business man.
These institutions run to make profit. They cater to the financial requirements of

industries and various sectors like agriculture, rural development, etc. it is a profit
making institution owned by government or private of both.

Commercial bank includes public sector, private sector, foreign banks and

regional rural banks:

a. Public sector banks:

It includes SBI, seven (7) associate banks and nineteen (19) nationalised banks.

Altogether there are 27 public sector banks. The public sector accounts for 90

percent of total banking business in India and State Bank of India is the largest
commercial bank in terms of volume of all commercial banks.

b. Private sector banks:

Private sector banks are those whose equity is held by private shareholders. For

example, ICICI, HDFC etc. Private sector bank plays a major role in the development
of Indian banking industry.

c. Foreign Banks:

Foreign banks are those banks, which have their head offices abroad. CITI bank,
HSBC, Standard Chartered etc. are the examples of foreign bank in India.

d. Regional Rural Bank (RRB):

These are state sponsored regional rural oriented banks. They provide credit for

agricultural and rural development. The main objective of RRB is to develop rural

economy. Their borrowers include small and marginal farmers, agricultural labourers,

artisans etc. NABARD holds the apex position in the agricultural and rural
development.

3. Co-operative Bank:
Co-operative bank was set up by passing a co-operative act in 1904. They are

organised and managed on the principal of co-operation and mutual help. The main
objective of co-operative bank is to provide rural credit.

The cooperative banks in India play an important role even today in rural co-

operative financing. The enactment of Co-operative Credit Societies Act, 1904,

however, gave the real impetus to the movement. The Cooperative Credit Societies

Act, 1904 was amended in 1912, with a view to broad basing it to enable
organisation of non-credit societies.

Three tier structures exist in the cooperative banking:

i. State cooperative bank at the apex level.

ii. Central cooperative banks at the district level.

iii. Primary cooperative banks and the base or local level.

4. Scheduled and Non-Scheduled banks:

A bank is said to be a scheduled bank when it has a paid up capital and reserves as

per the prescription of RBI and included in the second schedule of RBI Act 1934.

Non-scheduled bank are those commercial banks, which are not included in the
second schedule of RBI Act 1934.

5. Development banks and other financial institutions:

A development bank is a financial institution, which provides a long term funds to the

industries for development purpose. This organisation includes banks like IDBI,

ICICI, IFCI etc. State level institutions like SFC’s SIDC’s etc. It also includes
investment institutions like UTI, LIC, and GIC etc.

Provident fund
 A provident fund is a compulsory, government-managed retirement savings scheme.
Workers contribute a portion of their salaries into a provident fund and employers
must contribute on behalf of their employees. The money in the fund is then paid out
to retirees. In some cases, it’s paid out to the disabled who cannot work.

Rules pertaining to Employees’ Provident Fund

Contributions from employees as well as employers add to the EPF However, unlike
what is commonly thought to be, the entire portion of contribution from an employer
doesn’t go exclusively towards the Employees’ Provident Fund. The division of funds
as of November 2015 is mentioned as follows –

1. 12% of Salary of Employee goes directly towards Employees’ Provident Fund

2. 12% of Salary of Employer is divided as follows –
o 3.67% of contribution towards Employees’ Provident Fund
o 1.1% of contribution towards EPF Administration Charges
o 0.5% of contribution towards Employees’ Deposit Linked Insurance
o 0.01% of contribution towards EDLI Administration Charges
o 8.33% of contribution towards Employees’ Pension Scheme
Rules regarding Employees’ Provident Fund have undergone many changes over
time and accordingly, inclusion and exclusion of employees as per those rules also
change. As per the latest changes made to the EPF rules, the following should be
borne in mind –

1. Revision of minimum salary limits – Earlier, an employee having salary below

INR 6500 per month had to mandatorily contribute towards EPF. The minimum
salary limit has been revised to INR 15000. Thus, employees with monthly salaries
less than or equal to INR 15000 now have to contribute mandatorily towards EPF
2. Changes to pension amount – The minimum monthly pension amount has been
now set at INR 1000 for the widow of a member of the Employees’ Provident
Fund. For children and orphans, it has been set at INR 250 and INR 750 per
month respectively. The pension amount henceforth will be calculated as per the
average salary of the last 60 months, instead of 12 months
3. Insurance Coverage – The initial coverage amount under EPS had been INR
156,000. As per the recent changes, this amount has now been increased to INR
300,000 per member
4. Employer Contribution towards EPS – Due to the change in the minimum salary
amounts, employer contribution has increased to INR 1250 per month towards
EPS irrespective of if the salary is below or above INR 15000 per month
5. Change in threshold limit – Instead of 20 employees per organisation as the
minimum group size, 10 employees in an organisation will be considered eligible
for EPF contribution
6. Withdrawals – Withdrawals can be made from an EPF account through claim
forms for financing an insurance policy, buying or building a house and a few other
acceptable situations as per the EPFO