Bank

The Bank of England, established in 1694.

A bank is a financial institution that accepts deposits from the public and creates credit.[1] Lending
activities can be performed either directly or indirectly through capital markets. Due to their
importance in the financial stability of a country, banks are highly regulated in most countries. Most
nations have institutionalized a system known as fractional reserve banking under which banks hold
liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended
to ensure liquidity, banks are generally subject to minimum capital requirements based on an
international set of capital standards, known as the Basel Accords.
Banking in its modern sense evolved in the 14th century in the prosperous cities of Renaissance
Italy but in many ways was a continuation of ideas and concepts of credit and lending that had their
roots in the ancient world. In the history of banking, a number of banking dynasties — notably,
the Medicis, the Fuggers, the Welsers, the Berenbergs and the Rothschilds — have played a central
role over many centuries. The oldest existing retail bank is Banca Monte dei Paschi di Siena, while
the oldest existing merchant bank is Berenberg Bank.

History[

Among many other things, the Code of Hammurabi from 1754 BC recorded interest-bearing loans.
Banking began with the first prototype banks of merchants of the ancient world, which made grain
loans to farmers and traders who carried goods between cities. This began around 2000 BC
in Assyria and Babylonia. Later, in ancient Greece and during the Roman Empire, lenders based in
temples made loans and added two important innovations: they accepted deposits and changed
money. Archaeology from this period in ancient China and India also shows evidence of money
lending activity.
The origins of modern banking can be traced to medieval and early Renaissance Italy, to the rich
cities in the centre and north like Florence, Lucca, Siena, Venice and Genoa.
The Bardi and Peruzzi families dominated banking in 14th-century Florence, establishing branches
in many other parts of Europe.[2] One of the most famous Italian banks was the Medici Bank, set up
by Giovanni di Bicci de' Medici in 1397.[3] The earliest known state deposit bank, Banco di San
Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy.[4]
Modern banking practices, including fractional reserve banking and the issue of banknotes, emerged
in the 17th and 18th centuries. Merchants started to store their gold with the goldsmiths of London,
who possessed private vaults, and charged a fee for that service. In exchange for each deposit of
precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they
held as a bailee; these receipts could not be assigned, only the original depositor could collect the
stored goods.

The sealing of the Bank of England Charter (1694).

Gradually the goldsmiths began to lend the money out on behalf of the depositor, which led to the
development of modern banking practices; promissory notes (which evolved into banknotes) were
issued for money deposited as a loan to the goldsmith.[5] The goldsmith paid interest on these
deposits. Since the promissory notes were payable on demand, and the advances (loans) to the
goldsmith's customers were repayable over a longer time period, this was an early form of fractional
reserve banking. The promissory notes developed into an assignable instrument which could
circulate as a safe and convenient form of money backed by the goldsmith's promise to
pay,[6]allowing goldsmiths to advance loans with little risk of default.[7] Thus, the goldsmiths of London
became the forerunners of banking by creating new money based on credit.
The Bank of England was the first to begin the permanent issue of banknotes, in 1695.[8] The Royal
Bank of Scotland established the first overdraft facility in 1728.[9]By the beginning of the 19th century
a bankers' clearing house was established in London to allow multiple banks to clear transactions.
The Rothschilds pioneered international finance on a large scale, financing the purchase of the Suez
canal for the British government.

Definition[edit]
The definition of a bank varies from country to country.
Under English common law, a banker is defined as a person who carries on the business of banking,
which is specified as:[13]
 conducting current accounts for his customers,
 paying cheques drawn on him/her, and
 collecting cheques for his/her customers.

Banco de Venezuela in Coro.

Branch of Nepal Bank in Pokhara, Western Nepal.

In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation
to negotiable instruments, including cheques, and this Act contains a statutory definition of the
term banker: banker includes a body of persons, whether incorporated or not, who carry on the
business of banking' (Section 2, Interpretation). Although this definition seems circular, it is actually
functional, because it ensures that the legal basis for bank transactions such as cheques does not
depend on how the bank is structured or regulated.
The business of banking is in many English common law countries not defined by statute but by
common law, the definition above. In other English common law jurisdictions there are statutory
definitions of the business of banking or banking business. When looking at these definitions it is
important to keep in mind that they are defining the business of banking for the purposes of the
legislation, and not necessarily in general. In particular, most of the definitions are from legislation
that has the purpose of regulating and supervising banks rather than regulating the actual business
of banking. However, in many cases the statutory definition closely mirrors the common law one.
Examples of statutory definitions:

 "banking business" means the business of receiving money on current or deposit account,
paying and collecting cheques drawn by or paid in by customers, the making of advances to
customers, and includes such other business as the Authority may prescribe for the purposes of
this Act; (Banking Act (Singapore), Section 2, Interpretation).
 "banking business" means the business of either or both of the following:

1. receiving from the general public money on current, deposit, savings or other similar account
repayable on demand or within less than [3 months] ... or with a period of call or notice of
less than that period;
2. paying or collecting cheques drawn by or paid in by customers.[14]
3.
Standard business[edit]
.

Banks act as payment agents by conducting checking or current accounts for customers,
paying cheques drawn by customers on the bank, and collecting cheques deposited to customers'
current accounts. Banks also enable customer payments via other payment methods such
as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS,
and automated teller machines (ATMs).
Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits,
and by issuing debt securities such as banknotes and bonds. Banks lend money by making
advances to customers on current accounts, by making installment loans, and by investing in
marketable debt securities and other forms of money lending.
Banks provide different payment services, and a bank account is considered indispensable by most
businesses and individuals. Non-banks that provide payment services such as remittance
companies are normally not considered as an adequate substitute for a bank account.
Channels[edit]
Banks offer many different channels to access their banking and other services:

 Automated teller machines

 A branch in a retail location
 Call centre
 Mail: most banks accept cheque deposits via mail and use mail to communicate to their
customers, e.g. by sending out statements
 Mobile banking is a method of using one's mobile phone to conduct banking transactions
 Online banking is a term used for performing multiple transactions, payments etc. over the
Internet
 Relationship managers, mostly for private banking or business banking, often visiting customers
at their homes or businesses
 Telephone banking is a service which allows its customers to conduct transactions over the
telephone with automated attendant, or when requested, with telephone operator
 Video banking is a term used for performing banking transactions or professional banking
consultations via a remote video and audio connection. Video banking can be performed via
purpose built banking transaction machines (similar to an Automated teller machine), or via
a video conference enabled bank branch clarification
 DSA is a Direct Selling Agent, who works for the bank based on a contract. Its main job is to
increase the customer base for the bank.
Business models[edit]
A bank can generate revenue in a variety of different ways including interest, transaction fees and
financial advice. Traditionally, the most significant method is via charging interest on the capital it
lends out to customers.[citation needed] The bank profits from the difference between the level of interest it
pays for deposits and other sources of funds, and the level of interest it charges in its lending
activities.

 this includes the Gramm–Leach–Bliley Act, which allows banks again to merge with investment
and insurance houses. Merging banking, investment, and insurance functions allows traditional
banks to respond to increasing consumer demands for "one-stop shopping" by enabling cross-
selling of products (which, the banks hope, will also increase profitability).
 they expanded the use of risk-based pricing from business lending to consumer lending, which
means charging higher interest rates to those customers that are considered to be a higher
credit risk and thus increased chance of default on loans. This helps to offset the losses from
bad loans, lowers the price of loans to those who have better credit histories, and offers credit
products to high risk customers who would otherwise be denied credit.

Banks in the economy[edit]

Economic functions[edit]
The economic functions of banks include:

1. Issue of money, in the form of banknotes and current accounts subject to cheque or
payment at the customer's order. These claims on banks can act as money because
they are negotiable or repayable on demand, and hence valued at par. They are
effectively transferable by mere delivery, in the case of banknotes, or by drawing a
cheque that the payee may bank or cash.
2. Netting and settlement of payments – banks act as both collection and paying agents for
customers, participating in interbank clearing and settlement systems to collect, present,
be presented with, and pay payment instruments. This enables banks to economize on
reserves held for settlement of payments, since inward and outward payments offset
each other. It also enables the offsetting of payment flows between geographical areas,
reducing the cost of settlement between them.
3. Credit intermediation – banks borrow and lend back-to-back on their own account as
middle men.
4. Credit quality improvement – banks lend money to ordinary commercial and personal
borrowers (ordinary credit quality), but are high quality borrowers. The improvement
comes from diversification of the bank's assets and capital which provides a buffer to
absorb losses without defaulting on its obligations. However, banknotes and deposits
are generally unsecured; if the bank gets into difficulty and pledges assets as security,
to raise the funding it needs to continue to operate, this puts the note holders and
depositors in an economically subordinated position.
5. Asset liability mismatch/Maturity transformation – banks borrow more on demand debt
and short term debt, but provide more long term loans. In other words, they borrow short
and lend long. With a stronger credit quality than most other borrowers, banks can do
this by aggregating issues (e.g. accepting deposits and issuing banknotes) and
redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of
cash, investing in marketable securities that can be readily converted to cash if needed,
and raising replacement funding as needed from various sources (e.g. wholesale cash
markets and securities markets).
6. Money creation/destruction – whenever a bank gives out a loan in a fractional-reserve
banking system, a new sum of money is created and conversely, whenever the principal
on that loan is repaid money is destroyed.

Globalization in the banking industry[edit]

In modern time there has been huge reductions to the barriers of global competition in the
banking industry. Increases in telecommunications and other financial technologies, such as
Bloomberg, have allowed banks to extend their reach all over the world, since they no longer
have to be near customers to manage both their finances and their risk. The growth in cross-
border activities has also increased the demand for banks that can provide various services
across borders to different nationalities. However, despite these reductions in barriers and
growth in cross-border activities, the banking industry is nowhere near as globalized as some
other industries. In the USA, for instance, very few banks even worry about the Riegle–Neal Act,
which promotes more efficient interstate banking. In the vast majority of nations around globe
the market share for foreign owned banks is currently less than a tenth of all market shares for
banks in a particular nation. One reason the banking industry has not been fully globalized is
that it is more convenient to have local banks provide loans to small business and individuals.
On the other hand, for large corporations, it is not as important in what nation the bank is in,
since the corporation's financial information is available around the globe.[28]

Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to a
record US$96.4 trillion while profits declined by 85% to US$115 billion. Growth in assets in
adverse market conditions was largely a result of recapitalization. EU banks held the largest
share of the total, 56% in 2008/2009, down from 61% in the previous year. Asian banks' share
increased from 12% to 14% during the year, while the share of US banks increased from 11% to
13%. Fee revenue generated by global investment banking totalled US$66.3 billion in 2009, up
12% on the previous year.[22]
The United States has the most banks in the world in terms of institutions (5,330 as of 2015) and
possibly branches (81,607 as of 2015).[23] This is an indicator of the geography and regulatory
structure of the USA, resulting in a large number of small to medium-sized institutions in its
banking system. As of Nov 2009, China's top 4 banks have in excess of 67,000 branches
(ICBC:18000+, BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller banks
with an undetermined number of branches. Japan had 129 banks and 12,000 branches. In 2004,
Germany, France, and Italy each had more than 30,000 branches—more than double the
15,000 branches in the UK.[22]
Banking in India
From Wikipedia, the free encyclopedia

Structure of the organised banking sector in India. Number of banks are in brackets.

Banking in India, in the modern sense, originated in the last decades of the 18th century. Among
the first banks were the Bank of Hindostan, which was established in 1770 and liquidated in 1829–
32; and the General Bank of India, established in 1786 but failed in 1791.[1][2][3][4]
The largest bank, and the oldest still in existence, is the State Bank of India (S.B.I). It originated as
the Bank of Calcutta in June 1806. In 1809, it was renamed as the Bank of Bengal. This was one of
the three banks funded by a presidency government, the other two were the Bank of Bombay and
the Bank of Madras. The three banks were merged in 1921 to form the Imperial Bank of India, which
upon India's independence, became the State Bank of India in 1955. For many years the presidency
banks had acted as quasi-central banks, as did their successors, until the Reserve Bank of
India[5] was established in 1935, under the Reserve Bank of India Act, 1934.[6][7]
In 1960, the State Banks of India was given control of eight state-associated banks under the State
Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate banks.[6] In 1969
the Indian government nationalised 14 major private banks. In 1980, 6 more private banks were
nationalised.[8] These nationalised banks are the majority of lenders in the Indian economy. They
dominate the banking sector because of their large size and widespread networks.[9]
 The Indian banking sector is broadly classified into scheduled banks and non-scheduled banks. The
scheduled banks are those included under the 2nd Schedule of the Reserve Bank of India Act, 1934.
The scheduled banks are further classified into: nationalised banks; State Bank of India and its
associates; Regional Rural Banks (RRBs); foreign banks; and other Indian private sector
banks.[7] The term commercial banks refers to both scheduled and non-scheduled commercial banks
regulated under the Banking Regulation Act, 1949.[10]
Generally banking in India is fairly mature in terms of supply, product range and reach-even though
reach in rural India and to the poor still remains a challenge. The government has developed
initiatives to address this through the State Bank of India expanding its branch network and through
the National Bank for Agriculture and Rural Development (NABARD) with facilities like microfinance.


 History[edit]
Ancient India[edit]
The Vedas (2000–1400 BCE) are earliest Indian texts to mention the concept of usury. The
word kusidin is translated as usurer. The Sutras (700–100 BCE) and the Jatakas (600–400 BCE)
also mention usury. Also, during this period, texts began to condemn
usury. Vasishtha forbade Brahmin and Kshatriya varnas from participating in usury. By the 2nd
century CE, usury seems to have become more acceptable.[11] The Manusmriti considers usury an
acceptable means of acquiring wealth or leading a livelihood.[12] It also considers money lending
above a certain rate, different ceiling rates for different caste, a grave sin.[13]
The Jatakas also mention the existence of loan deeds. These were called rnapatra or rnapanna.
The Dharmashastras also supported the use of loan deeds. Kautilya has also mentioned the usage
of loan deeds.[14] Loans deeds were also called rnalekhaya.[15]
Later during the Mauryan period (321–185 BCE), an instrument called adesha was in use, which
was an order on a banker directing him to pay the sum on the note to a third person, which
corresponds to the definition of a modern bill of exchange. The considerable use of these
instruments has been recorded[citation needed]. In large towns, merchants also gave letters of credit to one
another.[15]
Medieval era[edit]
The use of loan deeds continued into the Mughal era and were called dastawez. Two types of loans
deeds have been recorded. The dastawez-e-indultalab was payable on demand and dastawez-e-
miadi was payable after a stipulated time. The use of payment orders by royal treasuries,
called barattes, have been also recorded. There are also records of Indian bankers using issuing
bills of exchange on foreign countries. The evolution of hundis, a type of credit instrument, also
occurred during this period and remain in use.[15]
Colonial era[edit]
During the period of British rule merchants established the Union Bank of Calcutta in 1829,[16] first as
a private joint stock association, then partnership. Its proprietors were the owners of the earlier
Commercial Bank and the Calcutta Bank, who by mutual consent created Union Bank to replace
these two banks. In 1840 it established an agency at Singapore, and closed the one at Mirzapore
that it had opened in the previous year. Also in 1840 the Bank revealed that it had been the subject
of a fraud by the bank's accountant. Union Bank was incorporated in 1845 but failed in 1848, having
been insolvent for some time and having used new money from depositors to pay its dividends.[17]
The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in
India, it was not the first though. That honour belongs to the Bank of Upper India, which was
established in 1863 and survived until 1913, when it failed, with some of its assets and liabilities
being transferred to the Alliance Bank of Simla.
Foreign banks too started to appear, particularly in Calcutta, in the 1860s. The Comptoir d'Escompte
de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches followed
in Madras and Pondicherry, then a French possession. HSBC established itself in Bengal in 1869.
Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and
so became a banking centre.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881
in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1894,
which has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period of
stability. Around five decades had elapsed since the Indian rebellion, and the social, industrial and
other infrastructure had improved. Indians had established small banks, most of which served
particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks and a
number of Indian joint stock banks. All these banks operated in different segments of the economy.
The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian
joint stock banks were generally under capitalised and lacked the experience and maturity to
compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe,
"In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship,
divided by solid wooden bulkheads into separate and cumbersome compartments."[citation needed]
The period between 1906 and 1911 saw the establishment of banks inspired by
the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures
to found banks of and for the Indian community. A number of banks established then have survived
to the present such as Catholic Syrian Bank, The South Indian Bank, Bank of India, Corporation
Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement led to the establishment of many private banks in Dakshina
Kannada and Udupi district, which were unified earlier and known by the name South Canara (South
Kanara) district. Four nationalised banks started in this district and also a leading private sector
bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking".[citation needed]
The inaugural officeholder was the Britisher Sir Osborne Smith(1 April 1935), while C. D.
Deshmukh(11 August 1943) was the first Indian governor.On September 4, 2016, Urjit R Patel
begins his journey as the new RBI Governor, taking charge from Raghuram Rajan.[18]
During the First World War (1914–1918) through the end of the Second World War (1939–1945),
and two years thereafter until the independence of India were challenging for Indian banking. The
years of the First World War were turbulent, and it took its toll with banks simply collapsing despite
the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks
in India failed between 1913 and 1918 as indicated in the following table:

Number of banks Authorised Capital Paid-up Capital

Years
that failed (₹ Lakhs) (₹ Lakhs)

1913 12 274 35
 Number of banks Authorised Capital Paid-up Capital
Years
that failed (₹ Lakhs) (₹ Lakhs)

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

Post-Independence[edit]
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralysing banking activities for months. India's independence marked the end of a regime of
the Laissez-faire for the Indian banking. The Government of India initiated measures to play an
active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the
government in 1948 envisaged a mixed economy. This resulted in greater involvement of the state in
different segments of the economy including banking and finance. The major steps to regulate
banking included:

 The Reserve Bank of India, India's central banking authority, was established in April 1935, but
was nationalised on 1 January 1949 under the terms of the Reserve Bank of India (Transfer to
Public Ownership) Act, 1948 (RBI, 2005b).[19]
 In 1949, the Banking Regulation Act was enacted, which empowered the Reserve Bank of
India (RBI) "...to regulate, control, and inspect the banks in India."
 The Banking Regulation Act also provided that no new bank or branch of an existing bank could
be opened without a license from the RBI, and no two banks could have common directors.
Nationalisation in the 1960s[edit]
Despite the provisions, control and regulations of the Reserve Bank of India, banks in India except
the State Bank of India (SBI), remain owned and operated by private persons. By the 1960s, the
Indian banking industry had become an important tool to facilitate the development of the Indian
economy. At the same time, it had emerged as a large employer, and a debate had ensued about
the nationalisation of the banking industry. Indira Gandhi, the then Prime Minister of India, expressed
the intention of the Government of India in the annual conference of the All India Congress Meeting
in a paper entitled "Stray thoughts on Bank Nationalization."[20] The meeting received the paper with
enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('Banking
Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969') and nationalised the 14
largest commercial banks with effect from the midnight of 19 July 1969. These banks contained 85
percent of bank deposits in the country.[20] Jayaprakash Narayan, a national leader of India,
described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the
ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking)
Bill, and it received the presidential approval on 9 August 1969.
A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated reason
for the nationalisation was to give the government more control of credit delivery. With the second
dose of nationalisation, the Government of India controlled around 91% of the banking business of
India. Later on, in the year 1993, the government merged New Bank of India with Punjab National
Bank.[21] It was the only merger between nationalised banks and resulted in the reduction of the
number of nationalised banks from 20 to 19. Until the 1990s, the nationalised banks grew at a pace
of around 4%, closer to the average growth rate of the Indian economy.
Liberalisation in the 1990s[edit]
In the early 1990s, the then government embarked on a policy of liberalisation, licensing a small
number of private banks. These came to be known as New Generation tech-savvy banks, and
included Global Trust Bank (the first of such new generation banks to be set up), which later
amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI
Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalised
the banking sector in India, which has seen rapid growth with strong contribution from all the three
sectors of banks, namely, government banks, private banks and foreign banks.
The next stage for the Indian banking has been set up, with proposed relaxation of norms for foreign
direct investment. All foreign investors in banks may be given voting rights that could exceed the
present cap of 10% at present. It has gone up to 74% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the
4–6–4 method (borrow at 4%; lend at 6%; go home at 4) of functioning. The new wave ushered in a
modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail
boom in India. People demanded more from their banks and received more.

Current period[edit]

By 2010, banking in India was generally fairly mature in terms of supply, product range and reach-
even though reach in rural India still remains a challenge for the private sector and foreign banks. In
terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong
and transparent balance sheets relative to other banks in comparable economies in its region. The
Reserve Bank of India is an autonomous body, with minimal pressure from the government.
With the growth in the Indian economy expected to be strong for quite some time-especially in its
services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect M&As, takeovers, and asset
sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to
hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake
exceeding 5% in the private sector banks would need to be vetted by them.
In recent years critics have charged that the non-government owned banks are too aggressive in
their loan recovery efforts in connexion with housing, vehicle and personal loans. There are press
reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.[23][24][25]
By 2013 the Indian Banking Industry employed 1,175,149 employees and had a total of 109,811
branches in India and 171 branches abroad and manages an aggregate deposit of ₹67,504.54
billion (US$1.0 trillion or €980 billion) and bank credit of ₹52,604.59 billion (US$810 billion or
€760 billion). The net profit of the banks operating in India was ₹1,027.51 billion (US$16 billion or
€15 billion) against a turnover of ₹9,148.59 billion (US$140 billion or €130 billion) for the financial
year 2012–13.[22]

Pradhan Mantri Jan Dhan Yojana (Hindi: प्रधानमंत्री जन धन योजना, English: Prime Minister's People
Money Scheme) is a scheme for comprehensive financial inclusion launched by the Prime Minister
of India, Narendra Modi, in 2014.[26] Run by Department of Financial Services, Ministry of Finance, on
the inauguration day, 1.5 Crore (15 million) bank accounts were opened under this scheme.[27][28] By
15 July 2015, 16.92 crore accounts were opened, with around ₹20,288.37 crore (US$3.1 billion)
were deposited under the scheme,[29] which also has an option for opening new bank accounts with
zero balance.

Banking codes and standards[edit]

Main article: The Banking codes and standards Board of India
The Banking Codes and standards Board of India is an independent and autonomous banking
industry body that monitors banks in India.To improve the quality of banking services in India S S
Tarapore(former deputy governor of RBI) had the idea to form this committee.
Commercial Banks: Primary and
Secondary Functions of Commercial
Banks
Article shared by

Commercial Banks: Primary and Secondary Functions of Commercial

Banks!
(1) Primary Function:
1. Accepting Deposits:
It is the most important function of commercial banks.

They accept deposits in several forms according to requirements of different

sections of the society.

ADVERTISEMENTS:

The main kinds of deposits are:

(i) Current Account Deposits or Demand Deposits:
These deposits refer to those deposits which are repayable by the banks
on demand:
1. Such deposits are generally maintained by businessmen with the intention
of making transactions with such deposits.

ADVERTISEMENTS:
2. They can be drawn upon by a cheque without any restriction.

3. Banks do not pay any interest on these accounts. Rather, banks impose
service charges for running these accounts.

(ii) Fixed Deposits or Time Deposits:

Fixed deposits refer to those deposits, in which the amount is deposited with
the bank for a fixed period of time.

ADVERTISEMENTS:

1. Such deposits do not enjoy cheque-able facility.

2. These deposits carry a high rate of interest.

Demand
Basis Deposits Fixed Deposits
They are They are non-
chequeable chequeable
Cheque facilitydeposits. deposits.

They carry interest

They do not which varies
Interest carry any directly with the
payments interest. period of time.

Number of
The depositor Depositor
transactions
can make any generally makes
 number of only two
transactions for transactions: (i)
deposit or with Deposit of Money
drawl of money. in the beginning;

(ii) Withdrawal of
money on maturity.

(iii) Saving Deposits:

These deposits combine features of both current account deposits and
fixed deposits:
1. The depositors are given cheque facility to withdraw money from their
account. But, some restrictions are imposed on number and amount of
withdrawals, in order to discourage frequent use of saving deposits.

2.They carry a rate of interest which is less than interest rate on fixed
deposits. It must be noted that Current Account deposits and saving deposits
are chequable deposits, whereas, fixed deposit is a non-chequable deposit.

2. Advancing of Loans:
The deposits received by banks are not allowed to remain idle. So, after
keeping certain cash reserves, the balance is given to needy borrowers and
interest is charged from them, which is the main source of income for these
banks.

Different types of loans and advances made by Commercial banks are:

(i) Cash Credit:
Cash credit refers to a loan given to the borrower against his current assets
like shares, stocks, bonds, etc. A credit limit is sanctioned and the amount is
credited in his account. The borrower may withdraw any amount within his
credit limit and interest is charged on the amount actually withdrawn.

(ii) Demand Loans:

Demand loans refer to those loans which can be recalled on demand by the
bank at any time. The entire sum of demand loan is credited to the account
and interest is payable on the entire sum.

(iii) Short-term Loans:

They are given as personal loans against some collateral security. The money
is credited to the account of borrower and the borrower can withdraw money
from his account and interest is payable on the entire sum of loan granted.

(2) Secondary Functions:

1. Overdraft Facility:
It refers to a facility in which a customer is allowed to overdraw his current
account upto an agreed limit. This facility is generally given to respectable and
reliable customers for a short period. Customers have to pay interest to the
bank on the amount overdrawn by them.

2. Discounting Bills of Exchange:

It refers to a facility in which holder of a bill of exchange can get the bill
discounted with bank before the maturity. After deducting the commission,
bank pays the balance to the holder. On maturity, bank gets its payment from
the party which had accepted the bill.

3. Agency Functions:
Commercial banks also perform certain agency functions for their customers.
For these services, banks charge some commission from their clients.
Some of the agency functions are:
(i) Transfer of Funds:
Banks provide the facility of economical and easy remittance of funds from
place-to-place with the help of instruments like demand drafts, mail transfers,
etc.

(ii) Collection and Payment of Various Items:

Commercial banks collect cheques, bills,’ interest, dividends, subscriptions,
rents and other periodical receipts on behalf of their customers and also make
payments of taxes, insurance premium, etc. on standing instructions of their
clients.

(iii) Purchase and Sale of Foreign Exchange:

Some commercial banks are authorized by the central bank to deal in foreign
exchange. They buy and sell foreign exchange on behalf of their customers
and help in promoting international trade.

(iv) Purchase and Sale of Securities:

Commercial banks buy and sell stocks and shares of private companies as
well as government securities on behalf of their customers.

(v) Income Tax Consultancy:

They also give advice to their customers on matters relating to income tax and
even prepare their income tax returns.

(vi) Trustee and Executor:

Commercial banks preserve the wills of their customers as trustees and
execute them after their death as executors.
(vii) Letters of Reference:
They give information about the economic position of their customers to
traders and provide the similar information about other traders to their
customers.

4. General Utility Functions:

Commercial banks render some general utility services like:
(i) Locker Facility:
Commercial banks provide facility of safety vaults or lockers to keep valuable
articles of customers in safe custody.

(ii) Traveller’s Cheques:

Commercial banks issue traveler’s cheques to their customers to avoid risk of
taking cash during their journey.

(iii) Letter of Credit:

They also issue letters of credit to their customers to certify their
creditworthiness.

(iv) Underwriting Securities:

Commercial banks also undertake the task of underwriting securities. As
public has full faith in the creditworthiness of banks, public do not hesitate in
buying the securities underwritten by banks.

(v) Collection of Statistics:

Banks collect and publish statistics relating to trade, commerce and industry.
Hence, they advice customers on financial matters. Commercial banks
receive deposits from the public and use these deposits to give loans.
However, loans offered are many times more than the deposits received by
banks. This function of banks is known as ‘Money Creation’.