Handbook On Banking Awareness

Handbook on Banking Awareness |1

For IBPS, SBI P.O./Clericals, RBI B: Grade Competitive Exams.
A must READ for candidates appearing for Interviews for Sure Success

Handbook on
BANKING
AWARENESS
with 10 sets of multiple choice questions

N K Gupta

a IBC Academy Publications
I BCA

Price: 165 ( One Hundred Sixty Five Only)

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a IBC Academy Publications
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Preface

The syllabus of IBPS and SBI Bank P.O. and Clerks examination has been
changing in the recent times and the recent trends indicate greater focus
on knowledge and awareness about the financial sector, at large and
Banking sector, in particular. The Employers expects the aspiring
candidates to possess a basic knowledge of Banking sector which would
facilitate them in better appreciation of the nuances of Banking.
Knowledge provides you strength and courage to stand up and face the
challenges. This Book Handbook of Banking Awareness is a sincere
effort in this direction and would ensure that the candidate is well
conversant with macro level concepts of the Financial Sector and gets
good understanding and awareness of Indian Banking sector and the
terminology used by Professionals.
This Book is compiled by a Senior Banker with over 26 years of rich
working experience in Banking Industry and he joined State Bank Group as
a P.O. over 2 decades ago. The Book coverage is comprehensive and the
study material is described in a lucid manner and precisely, just right for
your better understanding. The Glossary of Terminology is quite
exhaustive and you would certainly find it valuable. The Book also includes
a section of 10 sets of Multiple Choice Questions, which is adequate to
prepare you for the written Examinations conducted by IBPS, SBI, RBI etc.
I am sure the aspiring candidates would find the book very useful in their
preparation not only for the written competitive examinations but also
for Group Discussions and Personal Interviews in Banking and Financial
sector companies in India.
Best Wishes for your success.
N K Gupta
(mail your suggestions to nkeyjee@gmail.com)


INDEX

CHAPTER -1: FINANCIAL MARKETS IN INDIA (01 14 )

History of Banking Industry
Definition of Bank
Classification of Banks
Functions of Commercial Banks
Commercial Bank & Economic Development

CHAPTER -2: INDIAN BANKING SECTOR ( 15 32 )

Indian Banking System
Classification of Banks
Nationalisation of Banks
State Bank & its Associate Banks
Private Sector Banks
Foreign Banks
Scheduled Bank Vs Non-Scheduled Bank

CHAPTER -3: REGULATORY MACHINERY IN THE FINANCIAL MARKETS ( 33 53 )

Reserve Bank of India
Monetary Policy of the Reserve Bank of India
National Bank for Agriculture & Rural Development
Securities & Exchange Board of India
Insurance Regulatory & Development Authority

CHAPTER -4: INDIAN CURRENCY & NOTE ISSUING POLICIES IN INDIA ( 54 62 )

Indian Currency System
Methods of issuing currency
Exchange Rate System
Convertibility of Rupee
Partial Convertibility
Some Facts about Indian Currency

CHAPTER -5: REPORTS FINANCIAL & BANKING SECTOR REFORMS IN INDIA ( 63 7O )

Chakravarthy Report on the Working of the Monetary System (1985)
Narasimham Committee Report (1991)
Goiporia Committee Report (1991)
Narasimham Committee Report (1999)
Kapoor Committee Report on Co-operative Banking Reform (1999)

CHAPTER -6: DEVELOPMENTAL INSTITUTIONS IN INDIA ( 71 86 )

Introduction
Industrial Finance Corporation of India
ICICI (now ICICI Bank)
State Finance Corporation
Industrial Development Bank of India (Now IDBI Bank)
Small Industries Development Bank of India
Industrial Investment Bank of India
National Housing Bank
Unit Trust of India
Life Insurance Corporation of India
Export Import Bank of India

CHAPTER -7: FINANCIAL PRODUCTS & SERVICES ( 87 99 )

Credit Cards
Debit Cards
Smart Cards
Automated Teller Machines or Cash Dispensers
E-Banking
Internet Banking
Electronic Funds Transfer
Mobile Banking
One-Time Password
Point of sale Terminal
Outsourcing

CHAPTER -8: DEFINING BANK & CUSTOMER RELATIONSHIP ( 100 120 )

Banker & Customer
Special Types of Customers

Banker Customer Relationship
Rights of a Bank
Know Your Customer (KYC) Guidelines
Obligation of a Bank
Obligation of the Customers

CHAPTER -9: BANK ACCOUNTS & NEGOTIABLE INSTRUMENTS ( 121 140 )

Types of Accounts with the Bank
Deposit Insurance & Guarantee Corporation (DICGC)
Facility of Nomination
Negotiable Instruments
MICR cheques/Drafts
Alterations
Crossings
Endorsements
Hundi
Claytons Rule
Holder & Holder in Due Course

CHAPTER -10: LOAN & ADVANCES PRODUCTS ( 141 151 )

General Rules of Sound Lending
Loans & Advances
Letter of Credit
Guarantees
Credit Information Bureau of India (CIBIL)

CHAPTER -11: CAPITAL MARKETS IN INDIA ( 152 166 )

Money Market & Capital Market
Composition of Money Market
The Repo Market
Financial Instruments under Money Market
Capital Market
Stock Exchanges
Money Market Mutual Funds
Bombay Stock Exchange
National Stock Exchange
OTC Exchange of India
Multi Commodity Exchange of India (MCX)


CHAPTER -12: CO-OPERATIVE BANKS & REGIONAL RURAL BANKS ( 167 179 )

Co-operative Banks
Structure of Co-operative Banks in India
Central Co-operative Banks
State Co-operative Banks
Urban Co-operative Banks
Regional Rural Banks
Problems faced by Regional Rural banks

CHAPTER -13: INSURANCE SECTOR IN INDIA ( 180 190 )

Insurance Sector
Insurance Companies in India
Product and Services Offered
Non-Life Insurance Companies in India
Private Sector Players in India

CHAPTER -14: NBFC SECTOR IN INDIA (191 - 205)

NBFC Sector
NBFC Vs NBFI
Venture Capital
Micro Finance Institutions
Financial Inclusion
Grameen Bank

CHAPTER -15: GLOSSARY OF BANKING TERMINOLOGY (i xiii)

CHAPTER -16: OBJECTIVE TYPE QUESTIONS AND ANSWERS (0 1 40 )


CHAPTER -1

Financial Markets in India

INTRODUCTION
According to some authorities, the work Bank itself is derived from the
words bancus or banque, that is, a bench. The early bankers, the Jews
in Lombardy, transacted their business on benches in the market place.
When a banker failed his banco was broken up by the people, hence the
word bankrupt.
This etymology is however, ridiculed by Macleod on the ground Ages.
There are others, who are of the opinion that the word bank is originally
derived from the German word back meaning a joint stock fund, which
was Italianised into banco when the Germans were masters of a great
part of Italy. This appears to be more possible. But whatever be the
origin of the word bank, as Professor Ramchandra Rao says It would
trace the history of banking in Europe from the Middle Ages.
EARLY HISTORY OF BANKING
As early as 2000 B.C., the Babylonians had developed a banking system.
There is evidence to show that the temples of Babylon were used as banks
and such great temples as those of Ephesus and of Delbhi were the most
powerful of the Greek banking institutions. But the spread of irreligion soon
destroyed the public sense of security in depositing money and valuables in
temples, and the priests were no longer acting as financial agents.

The origin of modern banking in India dates back to 1770 when the first
joint-stock bank, named the Hindustan Bank, was started by the English
Agency house of Alexander & Co, in Calcutta. The bank was, however,
would closed up in 1832.
PRESIDENCY BANKS
The real growth of modern commercial banking began in the country when
the government was awakened to the need for banks in 1806 with the
establishment of the first Presidency Bank, called the Bank of Bengal, in
Calcutta in that year. Then followed, the establishment of two other
Presidency Banks, namely, the Bank of Bombay in 1840 and the Bank of
Madras in 1843. To each of these banks, the government had subscribed Rs.
3 lacs to their share capital. However, a major part of their share capital was
contributed by the European shareholders. These Presidency Banks,
however, enjoyed the monopoly of government banking. They were also
given the right of note-issue in 1823, which was however, withdrawn in
1862. These three Presidency Banks continued till 1920. In 1921 they were
amalgamated into the Imperial Bank of India.
INDIAN JOINT-STOCK BANKS
The year 1860 was a landmark in the history of public banks in India, since in
that year the principle of limited liability was first applied to join-stock
banks. Since 1860 till the end of the nineteenth century, a number of Indian
joint stock banks come into existence. For instance, the Allahabad Bank
was started at Allahabad in 1865. In 1875, the Alliance Bank of Simla was
started. In 1889, another Indian bank called Oudh Commercial Bank was
established. In 1895, the famous Punjab National Bank came into existence.
Inspired by the Swadeshi Movement, several Indian entrepreneurs
ventured into the modern banking business. During the boom period of
1906-13, thus, there was a mushroom growth of banks. Many prominent
banks also came into existence during this period. These were the Bank of
India (1906), the Canara Bank (1906), the Bank of Baroda (1908), and the
Central Bank of India (1911).
BANKING DEVELOPMENTS/REFORMS DURING THE PLANNING
ERA

After independence, the Government of India launched economic planning
in the country since 1951. During the last 40 years of the planning era,
commercial banking has undergone drastic transformation through several
important developments/ reforms and policy measures introduced by the
government.
Some of the major changes introduced in the Indian banking system may be
enlisted as follows:
(1) Liquidation and amalgamation of banks;
(2) Nationalization of the Reserve Bank of India;
(3) Banking legislation;
(4) Evolution of public sector banking through bank nationalization.
(5) Declining significance of foreign banks;
(6) Structural changes of commercial banking;
(7) New strategies in banking business.
EVOLUTION OF FINANCIAL SYSTEM IN INDIA
1. Bombay Stock Exchange (BSE) became operational in 1870.
2. Life Insurance Corporation of India (LIC) was started and became
functional as the first Life Insurance Company in 1818.
3. General Insurance Company (GIC) was established in 1850 to
undertake Non-Life Insurance business in India.
4. Reserve Bank of India (RBI) was established on 1
st
April, 1935 as
Central Bank of India. Later it was converted into a Public
Institution controlled by Central Government in 1949.
5. Deposit Insurance Company, now called DICGC, was incorporated
in 1962 to provide protection to their deposits with banks and
insurance for a minimum of their deposits with Banks.
6. In order to provide an avenue for Retail Investors to participate
into Stock Exchanges and help national economy to grow by
channelizing public resources, Unit Trust of India was established
in 1964.

7. Export Credit & Guarantee Corporation (ECGC) was established in
1964 to provide protection to Indian exporters against the
associated risk involved in the international trade.
8. In July, 1969, Government of India nationalized 14 large Banks with
a view to accelerate economic growth of the country and
channelizing resources to the needy sectors of economy. In April,
1980, six more Banks were further nationalized.
9. In 1975, Regional Rural banks were set up with the sole objective
to provide credit to Agriculture sector in a more efficient and cost
effective manner.
In 1969, the Government of India felt that the Commercial Banks are not
participating efficiently in the socio-economic development of the masses
and rather it is confining its area of operations in Urban centers where
credit concentration was with Large Industrial units. Thus, started the spate
of Nationalisation of 20 Commercial Banks in 2 phases, in 1969 and in 1980.
For the focused growth of Agriculture sector, Banking sector was
strengthen with Multi-agency approach to enhance credit availability to the
sector viz. by Commercial banks, Co-operative Banks and Regional Rural
Banks. In 1982, National Bank for Agriculture and Rural Development
(NABARD) was formed by separating the Agriculture Department of RBI,
with an objective to regulate the flow of credit to Agriculture sector and
Rural markets as an Regulator.
While the Indian banking system was dominated by public sector and
Government owned players till 1990. Later, the Government of India took
several steps to de-regulate the financial sector and allowed Foreign Banks
to open branch offices in India liberally. The ownership pattern and domain
of operating environment of Developmental Institutions were also
reviewed which impacted significantly to the institutions like ICICI, IDBI, FCI
etc. This led to a fierce competitive environment in the Banking sector and
the next 2 decades have seen enormous growth in the Indian Banking
Industry with size of banks as well as business volumes growing rapidly.
Most of the Banks have embraced new-age technology and the prudential
exposure norms, Capital structure and the supervisory systems have
strengthened. In 2002, Foreign Direct Investment (FDI) in the Banking
sector was allowed upto a max. of 49%. This saw a huge inflow of capital
into the Indian banking Industry and listing of Banks into capital Markets.

Later, in 2004, the ceiling of FDI investment in Banking sector was
enhanced to 74%, though with adequate safeguards.
DEFINITION OF A BANK
A banking company is defined as a company which transacts the business
of banking in India.
The Banking Regulation Act defines the business of banking by stating the
essential functions of a banker. It also states the various other businesses a
banking company may be engaged in and prohibits certain businesses to be
performed by it. The term Banking is defined 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,
order of otherwise Section 5 (b).
The sailent features of this definition are as follows:
(i) A banking company must perform both of the essential functions, viz.,
(a) accepting of deposits, and (b) lending or investing the same. If the
purpose of accepting of deposits is not to lend or invest, the business will not
be called banking business.
The explanation to Section 5(c) makes it clear that any company which is
engaged in the manufacture of goods or carries on any trade and which
accepts deposits of money from the public merely for the purpose of
financing its business, as such manufacturer or trader shall not be deemed
to transact the business of banking.
(ii) The phrase deposit of money from the public is significant. The banker
accepts deposits of money and not anything else. The word public
implies that a banker accepts deposits from anyone who offers his/her
money for such purpose. The banker however, can refuse to open an
account in the name of the person who is considered as an undesirable
person, e.g., a thief, insane person, etc. Acceptance of deposits should be
the known business of a banker.
The money-lenders and indigenous bankers depend on their own resources
and do not accept deposits from the public. If they ask for money from
their friends or relatives in case of need, such money is not deemed as
deposit accepted from the public.

(iii) The definition also specifies the time and mode of withdrawal of the
deposits. The deposited money should be repayable to the depositor on
demand made by the latter or according to the agreement reached
between the two parties. The essential feature of banking business is that
the banker does not refund the money on his own accord, even if the
period for which it was deposited expires. The depositor must make a
demand for the same. The Act also specified that the withdrawal should be
effected through an order, cheque, draft or otherwise. It implies that the
demand should be made in a proper manner and through an instrument in
writing and not merely by verbal order or a telephonic message.
It is thus clear that the underlying principle of the business is that the
resources mobilized through the acceptance of deposits must constitute
the main stream of funds which are to be utilized for lending or investment
purposes. The banker is, thus, an intermediary and deals with the money
belonging to the public. A number of other institutions, which also deal
with money, are not designated as banking institutions, because they do
not fulfill all the above mentioned pre-requisites.
The specialized financial institutions, e.g., Industrial Finance Corporation of
India and State Finance Corporations, are not banks because they do not
accept the deposits in the prescribed manner. The essence of banking
business lies in the two essential functions.
Name must include the word Bank, Banker or Banking - Section 7
makes it essential for every company carrying on the business of baking in
India to use as part of its name at least one of the words-bank, banker,
banker, banking or banking company. Besides, it prohibits any other
company of firm, individual or group of individuals, from using any of these
words as parts of its/his name. Section 7 has been amended in 1983 with the
effect that any of these words cannot be used by any such company event
in connection with its business.
According to Walter Leaf A bank is a person or corporation which holds
itself out to receive from the public, deposits payable on demand by
cheque. Horace White has defined a bank, as a manufacture of credit and
a machine for facilitating exchange.
The Banking Companies Act of India defines Bank as A Bank is a financial
institution which accepts money from the public for the purpose of lending
or investment repayable on demand or otherwise withdrawable by
cheques, drafts or order or otherwise.

Thus, we can say that a bank is a financial institution which deals in debts
and credits. It accepts deposits, lends money and also creates money. It
bridges the gap between the savers and borrowers. Banks are not merely
traders in money but also in an important sense, manufacturers of money.
CLASSIFICATION OF BANKS
Broadly speaking, banks can be classified into Commercial Banks and
Central Bank.
Commercial banks are those which provide banking services for
profit.
The Central bank has the function of controlling commercial banks
and various other economic activities.
There are many types of commercial banks such as:
1. Deposit Banks: The most important type of deposit banks is the
commercial banks. They have connection with the commercial
class of people. These banks accept deposits from the public and
lend them to needy parties. Since their deposits are for short
period only, these banks extend loans only for a short period.
Ordinarily, these banks lend money for a period between 3 to 6
months. They usually do not like to lend money for long periods or
to invest their funds in any way in long term securities to avoid mis-
match in liquidity position.
2. Industrial Banks: Industries require huge capital resources for a
long period to buy machinery and equipments. Industrial banks
help such industrialists. They provide long term loans to industries.
Besides, they buy shares and debentures of companies, and enable
them to have fixed capital. Sometimes, they even underwrite the
debentures and shares of big industrial concerns. The important
functions of industrial banks are:
1. They accept long term deposits.
2. They meet the credit requirements of industries by extending
long term loans.
3. These banks advise the industrial firms regarding the sale and
purchase of shares and debentures.

The industrial banks play a vital role in accelerating industrial
development. In India, after attainment of independence, several
industrial banks were started with large paid up capital. They are,
The Industrial Finance Corporation (IFCI), The State Financial
Corporations (SFC), Industrial Credit and Investment Corporation
of India (ICICI) and Industrial Development Bank of India (IDBI) etc.
3. Savings Banks: These banks were specially established to
encourage thrift among small savers and therefore, they were
willing to accept small sums as deposits. They encourage savings of
the poor and middle class people. In India, we do not have such
special institutions, but post offices perform such functions. After
nationalization, most of the nationalized banks accept the saving
deposits.
4. Agricultural Banks: Agriculture has its own problems and hence
there are separate banks to finance it. These banks are organised
on co-operative lines and therefore, do not work on the principle
of maximum profit for the shareholders. These banks meet the
credit requirements of the farmers through term loans, viz., short,
medium and long term loans. There are two types of agricultural
banks,
(a) Agricultural Co-operative Banks, and
(b) Land Mortgage Banks. Co-operative Banks are mainly for
short period loans. For long period loans, there are Land
Mortgage Banks. Both these types of banks are
performing useful functions in India.
5. Exchange Banks: These banks finance mostly for the foreign
trade of a country. Their main function is to discount, accept and
collect foreign bills of exchange. They buy and sell foreign currency
and thus help businessmen in their transactions. They also carry on
the ordinary banking business.
In India, there are some commercial banks which are branches of
foreign banks. These banks facilitate for the conversion of Indian
currency into foreign currency to make payments relating to
overseas travel, education expenses and foreign exporters. They
purchase bills from exporters and sell their proceeds to importers.
They purchase and sell forward foreign exchange too and thus

minimise the difference in exchange rates between different
periods, and also protect merchants from losses arising out of
exchange fluctuations by bearing the risk. The industrial and
commercial development of a country depends these days, largely
upon the efficiency of these institutions.
6. Miscellaneous Banks: There are certain kinds of banks which
have arisen in due course to meet the specialized needs of the
people. In England and America, there are investment banks
whose object is to control the distribution of capital into several
uses. American Trade Unions have got labour banks, where the
savings of the labourers are pooled together. In London, there are
the London Discount House whose business is to go about the
city seeking for bills to discount. There are numerous types of
different banks in the world, carrying on one or the other banking
business.
FUNCTIONS OF COMMERCIAL BANKS
A commercial bank is a financial institution whose main business is to
accept deposits from the public and to give loans to those who require it
for short periods. The general functions of a commercial bank may be
summarized as follows:-
1. RECEIVING OF DEPOSITS
The most important functions of the commercial banks is to receive
deposits from the public. The commercial banks not only protect them but
also help transfer of funds through cheques and even undertake to repay
the money in legal tender money. Deposits received by the commercial
banks are of various types, - fixed deposits, savings deposits, current
deposits and recurring deposits. Fixed deposits or Time deposits are with
the bank for a specified period of time and they can be withdrawn only
after the expiry of the said period. The interest rate depends on the time
agreed upon. The longer the maturity period, the higher the interest rate
and vice versa. Form the point of view of safety and interest, fixed deposits
are preferable. Savings deposits are demand deposits received subject to
certain restrictions. Rate of interest is normally lower on savings deposits
and withdrawals may be made once or twice a week.


Current deposit or demand deposits as the name denotes, are those
deposits withdrawable by the depositor at any time without giving any
prior notice by means of cheques. The banks do not pay any interest on
demand deposits, but in fact make a small charge on customers with
current account.
Recurring deposits are those deposits received by the banks in equal
monthly premium for a certain number of years the total of which will be
paid to the depositor with interest due thereon after the expiry of the date
of maturity.
Deposits at call according to which, deposits may be withdrawn when
asked for by the depositor, deposits at short notice by which depositors are
required to give notice before certain number of days (7, 21, 30, 45 or 90)
for withdrawal of deposits, short-time deposits for short period of a year or
less for lower interest and retirement benefits deposits, are some of the
important forms of deposits received by the commercial banks.
2. MAKING LOANS AND ADVANCES
The second principal functions of the commercial banks are to make loans
and advances out of the public deposits.
Direct loans and advances are given to all persons against personal security,
gold and silver and other movable and immovable assets. This the banks do
by overdraft facilities, that is, by allowing the borrower or overdraw his
current account and also by discounting bills of exchange. The merchants
and manufacturers enabled to obtain adequate funds for production of
goods and services. They help in the development of those industries which
perform the most useful service to the community.
The loans and advances made by the commercial banks are of various
forms, like cash credit, overdraft, demand loan, hire purchase loan, etc.
Cash credit is that loan given by a commercial bank in installments against
the security of raw materials, produced goods, etc. Overdraft is made on
security against stock and shares, insurance policies, etc., under current
account. Demand loan is paid in full to the debtor at a time. Hire purchase
At present, RBI stipulates all Banks to pay a minimum floor of
interest rate on Savings Bank account at 4% p.a. However, it has freed
the upper ceiling; as such the Banks are free to determine their
interest rates payable on Savings accounts. Most of the Banks now
pay interest on savings Bank in the range of 5.50% - 7.00& p.a.

loans are made to all persons for the purchase of customer durable goods
like radio, bicycle, tailoring machine, sites for buildings etc and these loans
are repayable to the bank in easy installments with interest due thereon.

3. AGENCY SERVICES
A commercial bank provides a range of investment services. Customers can
arrange for dividends to be sent to their bank and directly remitted into
their bank accounts, or for the bank to detach coupons from bearer bonds
and present them for payments and to act upon announcements in the
Press of drawn bonds, coupons payable, etc. Orders for the purchase or
sale of stock exchange securities are executed through the banks
brokers, who may also offer their opinions or advisory on securities or lists
of securities.
Similarly, banks will make applications of behalf of their customers for
allotments arising from new capital issues, pay call monies as they fall due
(viz., subscriptions to capital issues), and ultimately obtain the share
certificate or other documents of title. On certain agreed terms, the banks
also allow their names to appear on approved prospectuses or other
documents as bankers for the issue of new capital, they will receive
applications and carry out other instructions.
A commercial bank undertakes the payment of subscriptions, premia, rents
and collection of cheques, bills, promissory notes etc., on behalf of its
customers. It also acts as a correspondent or representative of its
customers, other banks and financial corporations.
Most of the commercial banks have an executor and trustee departments;
some may have affiliated companies to deal with this branch of their
business. They aim to provide, before, a complete range of trustee,
executor, or advisory services for a small charge. The business of banks
acting as trustees, executors, administrators, etc., has continuously
expanded with considerable usefulness to their customers.
By appointing a bank as an executor or trustee of his will, the customer
secures the advantage of continuity, and avoids having to make changes;
impartiality in dealing with beneficiaries and in the exercise of discretions;
and the legal and specialized knowledge pertaining to executor and trustee
services. When a person dies without making a will, the next-of-kin can
appoint the bank to act as administrator and to deal with the estate in

accordance with the rules relating to intestacies. Alternatively, if a testator
makes a will but fails to appoint an executor, or if an executor is unable or
unwilling to act, the bank can usually undertake the administration with the
consent of the persons who are immediately concerned.
Banks will act solely or jointly with others in these matters, as also in the
case of trustee for stocks, shares funds, properties or other investments.
Under a declaration of trust, a bank undertakes the supervision of
investments and distribution of income; a customers investments can be
transferred into the banks name, enabling it to act immediately upon a
notice or rights issue, allotment letters, etc. Alternatively, where it is not
desired to appoint the bank as nominee, these services may still be carried
out by appointing the bank as attorney. Where business is included in an
estate or trust, a bank will provide for its management for a limited period,
pending its sale to the best advantage as a going concern or transfer to a
beneficiary.
Private companies wishing to set up pension funds may appoint a bank as a
custodian, trustee and investment adviser, while retaining the
administration of the scheme in the hands of the management of the fund.
Most banks will undertake on behalf of their customers the preparation of
income tax returns and claims for the recovery of overpaid tax; they also
assist the customers in checking of assessments. In addition to the usual
claims involving personal allowances and reliefs, claims are prepared on
behalf of residents abroad, minors, charities, etc.
4. GENERAL UTILITY SERVICES
These services are those in which the bankers position in not that of an
agent for his customer. They include the issue of credit instruments like
letters of credit and travelers cheques, the acceptance of bills of
exchange, the safe custody of valuables and documents, the transaction of
foreign exchange business, acting as a referee as to the respectability and
financial standing of customers and providing specialized advisory service
to customers.
By selling drafts or orders and by issuing letters of credit, circular notes,
travellers cheques, etc., a commercial bank is discharging a very important
function. A bankers draft is an order, addressed by one office of a bank to
any other of its branches or by any one bank to another, to pay a specified
sum to the person concerned.

A letter of credit is a document issued by a bank, authorizing another bank
to whom it is addressed, to honour the cheques of a person named in the
document, to the extent of a stated amount in the letter and to charge the
same to the account of the opener of the letter of credit. A letter of credit
includes a promise by the issuing banker to accept all bills to the limits of
credit. When the promise to accept is conditional on the receipt of the
documents of title to goods, it is called a documentary letter of credit. But
the banker will still be liable for bills negotiated before the expiry of the
period of its currency. A Circular letter of Credit is generally intended for
travelers who may require money in different countries.
A letter of credit may be divided into travelers letters of credit and
guarantee letters of credit. A travelers letter of credit carries the
instruction of the issuing bank to its foreign agents to honour the
beneficiarys drafts, cheques, etc., to a stated amount which it undertakes
to meet on presentation. While issuing guarantee letters of credit, the
banker secures a guarantee for reimbursement at an agree rate of interest
or he may insist on sufficient security for the grant of the credit. There is yet
another type which is known as Revolving Credit. Here the letter is so
worded that the amount of credit available automatically reverts to the
original amount after the bills negotiated under them are duly honored.
Circular Notes are cheques on the issuing banker for certain round sums in
his own currency. On the reverse side of the circular note is a letter
addressed to the agents specifying the name of the holder and referring to
a letter of indication in his hands, containing a specimen signature of the
holder. The note will not be honoured unless the letter of indication is
presented. Travellers cheques are documents similar to circular notes with
the exception that they are not accompanied by any letter of indication.
Circular cheques are issued by banks in certain countries to their agents
abroad. These agents sell them to intending visitors to the country of the
issuing bank.
Another important service rendered by a modern commercial bank is that
of keeping in safe custody valuables such as negotiable securities,
jewellery, documents of title, wills, deed-boxes, etc., Some branches are
also equipped with specially constructed strong rooms, each containing a
large number of private steel safes of various sizes known as Lockers.
These may be used by non-customers for a small fee as well as by regular
customers. Each licensee in provided with the key of an individual safe and
thus not only obtains protection for his valuables, but also retains full

personal control over them. The safes are accessible at any time during
banking hours and often longer.
For shopkeepers and other customers who handle large sums of money
after banking hours, night safes are made available by many banks. Night
safe takes the form of a small metal door in the outside wall of the bank,
accessible from the street, behind which there is a chute connecting with
the banks strong room. Customers who require this service are provided
with a leather wallet, which they lock before placing in the chute. The
wallet is opened by the customer when he calls at the bank the next day to
pay the contents into his account.
Another function of great value, both to bankers and to businessman, is
that of a referee as to the respectability and financial status of the
customer. Among the services introduced by modern commercial banks
during the last quarter of a century or so, the bank giro and credit cards
deserve special mention.
The bank giro is a system by which a bank customer with many payments
to make, instead of drawing a cheque for each item, may simply instruct his
bank to transfer to the bank accounts of his creditor the sum due from him,
and he writes one cheque debiting his account with the total amount.
Credit advices containing the name of each creditor with the name of his
bank and the branch will be cleared through the credit clearing of the
clearing-house, which operates in a similar way as for the clearing of
cheques. Even non-customers of a bank for a small charge may make use of
this facility. A direct debiting service is also operated by some banks. This
service is designed to assist organizations which receive large number of
payments on a regular basis.
Credit cards are introduced for the use of credit-worthy customers. Users
are issued with a card on production of which their signature is accepted on
bills in shops and establishments participating in the scheme. The banks
thereby guarantee to meet the bill and recover from the cardholders
through a single account presented periodically. In some cases uses are
required to pay a regular subscription for the use of the service as well. An
extension of the scheme allows the repayment of large sums (subject to a
maximum) over a period at interest.


OVERSEAS TRADING SERVICES
Recognition of overseas trade has led modern commercial banks to set up
branches specializing in the finance of foreign trade and some banks in
some countries have taken interest in export houses and factoring
organizations. Assisted by banks affiliated to them in overseas territories,
they are able to provide a comprehensive network of services for foreign
banking business, and may transactions can be carried through from start
to finish by a home bank or its subsidiary. In places where banks are not
directly represented by such affiliated undertakings, they have working
arrangements with correspondent banks so that banks are in a position to
undertake foreign banking business in any part of the world. The banks
provide more than just a means for the settlements of debts between
trades both at home and abroad for the goods they buy and sell; they are
also providers of credit and enable the company to release the capital
which would otherwise be tied up in the goods exported.
5. INFORMATION AND OTHER SERVICES
As part of their comprehensive banking services, many banks act as a major
source of information on overseas trade in all aspects. Some banks produce
regular bulletins on trade and economic environment at home and abroad,
and special reports on commodities and markets. In some cases, they invite
enquiries for those wishing to extend their foreign trade, and are able
through their correspondents to furnish the names of reputable and
interested dealers of goods and commodities and to advise on the
appointment of suitable agents.
On request, banks obtain for customers, for business houses, confidential
opinions on the financial standing of companies, firms or individuals at
home or overseas. Commercial banks furnish advice and information
outside the scope merely of trade. If it is desired to set up a subsidiary or
branch overseas (or for an overseas company to set up in the home
country) they help to establish contracts with local banking organizations.
To sum up, the service rendered by a modern commercial bank is of
immense economic value. It mobilizes the scattered saving of the
community and redistributes them into more useful channels. It constitutes
the very life blood of an advanced economic society.


COMMERCIAL BANKS AND ECONOMIC DEVELOPMENT
Commercial banks play a significant role in the development of nation. In
fact, without the evolution of commercial banking in the 18th and the 19th
centuries, Industrial Revolution would not have taken place in England. It
will be equally true to state that without the development of sound
commercial banking, underdeveloped countries cannot hope to join the
ranks of advanced countries. For, industrial development requires the use
of capital which is made possible with the existence of banks to provide the
necessary finance to acquire capital.
The important services provided by commercial banks and significant role
played in the economic development of nations are:
(i) Banks are necessary for trade and industry: All economic progress in
the last two centuries or so has been based on extensive growth of trade
and industrialization, which could not have taken place without the use of
money. But money does not mean coins and currency notes only, since this
form only a small proportion of the total volume of money supply. It is the
bank deposits on which cheques can be issued that constitute the
important sources of money. In all large transactions, payments are not
made in terms of money but in terms of cheques and drafts. Between the
countries, International trade is financed through bill of exchange which are
discounted (i.e., bought) by banks. Without the use of the bank cheque, the
bank draft and the bill of exchange, domestic trade and international trade
could not have developed, and without such trade, specialization and
industrial development could not have been feasible.
(ii) Banks help in distribution of funds between regions: Another way by
which commercial banks encourage production and enhance national
income is by the transference of surplus capital from regions where it is not
wanted so much, to those regions where it can be more usefully and
efficiently employed. This distribution of funds between regions has the
effect of opening up backward regions and paying the way for their
economic development.
(iii) Banks create credit and help in business expansion: Fluctuations in
bank credit have an important bearing on the level of economic activity.
Expansion of bank credit will provide more funds to entrepreneurs and,
hence, will lead to more investment. Under conditions of full employment,
expansion of bank credit will have the effect of inflationary pressure. But
under conditions of unemployment, it will push up production in the

country. On the other hand, a decline in bank credit may result in decline in
production, employment, sales and prices. From the view of an
underdeveloped economy, the expansion of bank credit reveal greater
financial resources to industries and it is one of the contributory causes for
higher economic development.
(iv) Banks monetize debt: A very important service the banks render to
the community is the creation of demand deposits in exchange of debts of
other (viz., short and long-term securities). Commercial banks buy debts of
others which are not generally acceptable as money, either because the
debtors are not sufficiently known or because their debt is payable only
after a period of time. In return for them, they issue demand deposits which
are generally accepted as money. By these exchange operations, banks
monetize debt. The significance of banks today flows from the fact that
they are not merely traders in money but also, in an important sense,
manufacturers of money. Bank money is used for the promotion of
industry and trade.
(v) Banks promote capital formation: Commercial banks afford facilities
for saving and thus encourage habits of thrift. They mobilize the idle and
dormant capital of the community and make it available for productive
purposes. Economic development depends upon the diversion of economic
resources from consumption to capital formation. A higher rate of saving
and investment is, therefore, what constitutes real capital formation. In
this, the role of banks is invaluable. There can be other institutions also in a
country such as insurance companies, Mutual Funds etc. which may help in
mobilizing the savings of the community for productive purposes.
(vi) Banks influence interest rates: Banks can influence economic activity
in another way also. They often influence the rate of interest in the money
market through its supply of funds. By offering more or less funds, it can
exert a powerful influence upon interest rates. Besides, it can also influence
the people to hold more money in the bank and less of other assets or vice-
versa. In this way too, it can influence the interest rates. A cheap money
policy with low rate of interest will tend to stimulate economic activity, if
other conditions are favourable.
In a developing country like India, banking facilities are highly inadequate.
The vast number of people living in villages and towns do not have any
banking facilities and consequently all their savings are wasted. The
opening of banks is these areas or extension of bank facilities will help

mobilize savings in these areas and, when put in the hands of
entrepreneurs, will become productive. Besides, in India commercial banks
have started undertaking new functions to help the private sector
industries. They help in concluding deferred payments agreements
between Indian industrial units and foreign firms to enable the former to
import machinery and other essential items.
Thus, banks have come to occupy an important place in the industrial and
commercial life of a nation. A developed banking organization is a
necessary condition for the industrial development of a country.

CHAPTER - 2

Indian Banking Sector

At the time of independence, financial markets were at the nascent stage
and the Indian banking system was not sound and efficient. There were
hundreds of small banks under unscrupulous managements. Hence, in 1949,
two important actions were taken from the point of view of structural
reforms in the banking sector
- First, the Banking Regulation Act was passed in year 1949. It
gave extensive regulatory powers to Reserve Bank of India
over the commercial banks and also to inspect their workings.
- Secondly, another significant development was the
nationalisation of the RBI, in year 1949. RBI was established,
as the Central Bank of India, in year 1934.
These two major developments in the immediate Post-Independence
period proved to be the turning points in Indias commercial banking.
In 1990s, the then Narasimha Rao Government embarked a policy of
Liberalisation, licensing a small number of Private Banks known as New
Generation (Tech-savvy) Banks, mainly with a view to encourage
competition and a healthy growth of banking sector from equal
participation from all players under Government-owned sector, Private
banks as well as Foreign banks.

Later, the Government relaxed the norms for Foreign Direct Investment
(FDI) into banking sector, where all Foreign Investors in Banks were given
voting rights in excess of earlier ceiling of 10%. FDI investments were
allowed, initially, upto 49% which was later enhanced upto 74%. This action
led to transformation of Banking Industry in India and the business focus
became modern and tech savvy. This encouraged Banks to shift its focus to
Retail sector which saw an unprecedented growth in subsequent years.
Indian banking system comprises of :
Unorganised banking includes indigenous bankers and village money-
lenders.
Organised banking which includes Reserve Bank of India, Commercial
Banks, (including Foreign Banks), Development Banks, Exim Bank, Co-
operative Banks, Regional Rural Banks, National Bank for Agriculture
and Rural Development, Land Development Banks etc.
1. INDIGENOUS BANKS
From very ancient days, India has had banking of some type, known as
indigenous banking. Indigenous banking peculiar to India had been
organised in the form of family or individual business. In different parts of
the country, the indigenous bankers have been called by different names,
such as Shroffs, Sahukars, Mahajans, Chettis, Seths, Kathiwals etc. Their
scale of business operations were as low as petty money lenders to
substantial shroffs who carry on large and specialised banking business.
They are to be found in all parts of the country- in large towns and cities
and villages. Indigenous bankers are individuals or private firms which
receive deposits and give loans and thereby operate as banks. Since their
activities are not regulated, they belong to the unorganised segment of the
money market.
They received set back with the introduction of modern banking after the
arrival of the British. Consequently, with the growth of commercial and
cooperative banking, the area of the operations of the indigenous bankers
has contracted. Still there are a few thousand indigenous bankers
particularly in the western and southern parts of the country who are still
engaged in traditional banking business.


Functions of Indigenous Bankers
1. Accepting Deposits: Indigenous bankers accept deposits-both repayable
on Demand and Fixed Deposits, from the public. The indigenous bankers
pay higher rate of interest than that paid by the commercial banks.
2. Advancing Loans: The indigenous bankers advance loans to their
customers against securities, such as land, houses, crops, gold and silver.
They also give credit against personal security. They finance inland trade,
including the movement of agricultural commodities like sugar, oil seeds
etc.
3. Business in Hundies: The indigenous bankers deal in hundies. They write
hundies and buy and sell hundies. They also discount hundies and thereby
meet the financial needs of the internal traders. They also transfer funds
from one place to another through discounting of hundies.
4. Acceptance of Valuables for Safe Custody: Indigenous bankers accept
valuables of their clients for safe custody. Some indigenous bankers
provide cheque facility. They provide remittance facilities also.
5. Non-banking Functions: Most of the indigenous banks or bankers also
carry on their non-banking business along with the banking activities. They
generally have their retail trading business. They also participate in
speculative activities.
Defects of Indigenous Bankers:
1. Mixing Banking and Non-banking Business
2. Unorganised Banking System
3. Insufficient Capital
4. Meagre Deposit Business
5. Defective Lending
6. Unproductive Loans
7. Higher Interest Rates on Loans
8. Exploitation of Customers
9. Discouragement to Bill Market
10. No Secrecy of Accounts maintained
11. No Control of Reserve Bank of India


Indigenous Bankers and the Reserve Bank
Since its inception in 1935, the Reserve Bank of India has been making
sincere efforts:
(a) to bring the indigenous bankers under its control,
(b) to integrate them with the modern banking system, and
(c) to provide various central banking facilities to them.
But the Reserve Bank failed to achieve success. It is unable to control the
activities of the indigenous bankers. They are outside the control and
influence of the Reserve Bank. The policy of the Reserve Bank would
become effective only when indigenous banks are directly linked to it.
2. MONEYLENDERS
Moneylenders are those persons whose primary business is money lending.
They lend money from their own funds. Broadly, the moneylenders may be
classified into two categories:
(a) the professional moneylenders: Those whose business is only lending
of money. The Maharajas, Sahukars and Banias are professional
moneylenders. They usually hold licenses for money lending.
(b) the non-professional moneylenders: Those who combine money
lending with other activities and do not depend entirely on money lending
business. They consist of landlords, agriculturists, traders, pensioners, etc.
They hold no license to carry on money lending business. They give loans to
known people within their circle.
Features of Moneylenders
(a) Moneylenders mostly lend their own funds.
(b) The borrowers from moneylenders are mainly illiterate and
economically weaker sections of the society.
(c) The loans of the moneylenders are highly exploitative in nature.
(d) The credit provided by moneylenders may be secured or unsecured.
(e) The lending operations of moneylenders are prompt, informal and
flexible.


Differences between Moneylenders and Indigenous Bankers
1. The primary business of the moneylenders is money lending. But the
primary business of indigenous bankers is non-banking activities.
2. The moneylenders do not accept deposits from the people. But
indigenous bankers accept deposits from the people.
3. The indigenous bankers deal in hundies. But moneylenders do not deal in
hundies.
4. The indigenous bankers generally lend for trade or productive purposes.
But the moneylenders lend for consumption purposes.
5. Moneylenders operate in a limited area. So the scope of their business is
limited. But indigenous bankers have a wider area of operation. So they
have large-scale financial operations.
6. The indigenous bankers are largely urban-based, where as money-lenders
carry on their business in rural areas.
7. Moneylenders functions in an isolated manner. Generally, they do not
have any link with the organised sector of the money market. But
indigenous bankers maintain some link with the organised sector because
of their hundies business.
Defects of Moneylenders
1. The loans of moneylenders are exploitative in character. They charge very
high interest rates. They adopt all types of malpractices in their business.
Some of the malpractices are demanding interest in advance, manipulating
accounts etc.. The loans are mostly provided for consumption and
unproductive purposes.
In rural areas, the moneylenders give loans against standing crops. In this
way, they compel the cultivators to sell their produce at low prices to them.
There has been several cases of exploitation by Money Lenders reported
causing gross victimization and suicide of farmers/villagers. The
Government has thus taken various legislative steps to regulate the
activities of moneylenders. There are acts like the Deccan Agriculturist
Relief Act and the Moneylenders Act passed by the various states in India.
With the growth of rural banks, co-operative societies and other financial
agencies in the rural areas, the importance of moneylenders has
considerably declined.


3. CO-OPERATIVE BANKS
Co-operative banks, originated in India with the enactment of the Co-
operative Credit Societies Act of 1904 which provided for the formation of
co-operative credit societies. Under the Act of 1904, a number of co-
operative credit societies were started. Due to the increasing demand of
cooperative credit, a new Act was passed in 1912, which provided for the
establishment of cooperative central banks by a union of primary credit
societies.
Co-operative Bank is an institution, established on the cooperative basis
and dealing in ordinary banking business. Like other banks, the co-operative
banks collect funds through shares. They accept deposits and grant loans.
They are generally concerned with the rural credit and provide financial
assistance for agricultural and rural activities.
Structure of Co-operative Banks
Co-operative banking in India is federal in its structure. It has three sections
:
- At the top - is the State Cooperative Bank which is the apex bank at
the state level.
- At the intermediate level - are the Central unions or the Central
cooperative banks. There is generally one central cooperative bank
for each district.
- At the base of the pyramid - are the Primary Credit Societies which
cover the small towns and villages.
Each higher level institution is a federation of those below, with
membership and loan operations restricted to the affiliated units.
4. LAND DEVELOPMENT BANK
The Government wanted a special credit institution to cater to the long-
term credit needs of the farmers, in order to assist farmers with long-term
loans carrying modest rates of interest and convenient methods of
repayment. The Government started the land mortgage banks for this
purpose- called as Land Development Banks.


Indian Banking System

The land development banks were setup during the 1920s but their
progress has been quite slow. After independence, they have been enjoying
growth and prosperity, but whatever progress has been achieved is
concentrated in only a few states particularly from South India viz., Tamil
Nadu, Andhra Pradesh, Karnataka, Maharashtra and Gujarat.
There are two types of land development banks in the country.
- At state level, there are Central Land Development Banks, and
- Under each central bank, there are Primary Land Development
Banks.
In some states, there is one Central Land Development Bank for the state
which has branches all over the state.

Reserve Bank of India

Commercial Banks Regional Rural Banks Co-Operative Banks

Public Sector Private Sector

Indian Banks Foreign Banks State Co-operative Banks
State Bank Group Other Nationalised Banks
Central Co-operative Banks

State Bank of India Associate Banks Primary Credit Societies


5. REGIONAL RURAL BANKS
In spite of the rapid expansion programmes undertaken by the commercial
banks in recent years, a large segment of the rural economy was still
beyond the reach of the organized commercial banks. To fill this gap it was
thought necessary to create a new agency which could combine the
advantages of having adequate resources but operating relatively at a
lower cost at the village level.
The Government of India promulgated on September 26, 1975, the Regional
Rural Bank Ordinance, to set up regional rural banks throughout the
country; the Ordinance was replaced by the Regional Rural Banks Act, 1976.
Objectives of Regional Rural Banks
1. To provide credit and other facilities particularly to the small and
marginal farmers, agricultural labourers, artisans, small
entrepreneurs and other weaker sections.
2. To develop agriculture, trade, commerce, industry and other
productive activities in the rural areas.
3. To provide easy, cheap and sufficient credit to the rural poor and
backward classes and save them from the clutches of money
lenders.
4. To encourage entrepreneurship.
5. To increase employment opportunities.
6. To reconcile rural business aims and social responsibilities.
Capital Structure
At present, the authorised capital of regional rural banks is Rs. 5 crores, and
the issued capital is Rs. 1 crore. 50% of the issued capital is to be subscribed
by the Central Government, 15% by the concerned State Government, and
35% by the sponsoring commercial banks. The shares of regional rural banks
are to be treated as approved securities.
Features of Regional Rural Banks
1. The regional rural bank, like a commercial bank, is a scheduled
bank.

2. The RRB is a sponsored bank. It is sponsored by a scheduled
commercial bank.
3. It is deemed to be co-operative society for the purposes of Income
Tax Act, 1961.
4. The area of operations of the RRB is limited to a specified region
relating to one or more districts in the concerned state.
5. The RRB charges interest rates as adopted by the co-operative
societies in the state.
6. The interest paid by the RRB on its term deposits may be 1% or 2%
more than that is paid by the commercial banks.
7. The regional rural bank enjoys many concessions and privileges.
6. COMMERCIAL BANKS
A commercial bank may be defined as a financial institution which accepts
deposits, against which cheques can be drawn, lends money to commerce
and industry and renders a number of other useful services to the
customers and the society. Commercial Banks borrow money from those
who have surplus funds and lend to those who need funds for commercial
and industrial purposes. Thus, they act as dealers in loanable funds of the
society. Commercial Banks receive deposits in the form of fixed deposits,
savings bank accounts and current accounts and advance money, generally
for short periods, in the form of cash credits, overdrafts and loans. They
also render a number of services to their customers, such as collection of
cheques, safe custody of valuables, remittance facilities and payment of
insurance premium, electricity bills, etc.
Commercial Banks are entities which have been established in accordance
with Indian Companies Act, 1913. These banks were established after the
advent of East India Company in India. Bank of Hindustan was the FIRST
commercial Bank in India, established in 1770.
The commercial banks perform the following major functions:
(a) Receiving deposits from the public and the business firms.
(b) Lending money to various sections of the economy for productive
activities.
(c) Issue of demand drafts, travelers cheques, bank cards, etc., for the
smooth remittance of funds.

(d) Provision of locker facility to the customers.
(e) Safe custody of documents, ornaments and other valuables of
customers.
(f) Payment of telephone, electricity and water bills on behalf of the
customers.
(g) Collection of cheques of the customers.
(h) Issue of letters of credit.
(i) Acting as trustees, executors of wills, etc.
NATIONALISATION OF BANKS
The Government of India nationalised 14 major banks in the country in July
1969, which had deposits of more than Rs. 50 crores and another 6 Banks in
April, 1980, each of these Banks had deposits of Rs. 200 crores.
Banks which were nationalised in July 1969 (Nos. 14)
Allahabad Bank, Bank of India, Bank of Baroda, Bank of Maharashtra,
Central Bank, Canara Bank, Dena Bank, Indian Bank, Indian Overseas Bank,
Punjab National Bank, Syndicate Bank, United Bank of India, United
Commercial Bank, Union Bank.
Banks which were nationalised in April 1980 (Nos. 6)
Andhra Bank, Punjab & Sind Bank, New Bank of India, Vijaya Bank,
Corporation Bank, Oriental Bank of Commerce
(TOTAL NUMBER OF NATIONALISED BANKS IN INDIA: 20)
The oldest of the major commercial banks was Allahabad Bank (1865) and
the youngest was United Bank of India (1950). Since, United Bank of India
was set up by amalgamating four existing banks, it would not be proper to
consider it as an altogether new Bank. This way, United Commercial Bank
established in 1943 was the youngest of all these banks.
The most important reasons for nationalization of banks related to the
structure, policies and working of the private commercial banks. The banks
had expanded their business and increased the number of their officers.
There was a five-fold increase in their deposits between 1951 and 1969.
However, banks were not serving the public interest and they had failed to
provide credit for the desired priority channels. Instead, they had become
tools in the hands of monopolists and been encouraging speculative

activity. The social control measures had failed to prevent misuse of bank
credit. All these factors led to the take-over the major banks in 1969.
The State Bank of India and its eight subsidiaries (now seven) had already
been nationalised. SBI and its 7 associates Banks are not included in the
category of Commercial banks because these were established under a
separate Act. The regional rural banks from their very inception are in the
public sector. Thus about 90% of the countrys commercial banking system,
i.e. deposits and advances, is now in the public sector.
Punjab National Bank (set up in 1984) was FIRST PURELY INDIAN BANK of
India & SECOND LARGEST BANK under the Nationalised Banks.
Objectives of Nationalisation
1. To raise public confidence in Banking system;
2. Expansion of banking activities in rural and semi-urban areas;
3. To reduce regional inequalities and help the poor in the society;
4. To augment mobilization of savings from the rural and urban areas
in terms of bank Deposits;
5. To decentralize economic power and spread the reach to
hinterland of the country in order to reduce and/or break the
monopoly of large Industrial Houses on the Banking system;
6. To augment credit flow to the Priority sectors like Agriculture,
Small scale Industries and small traders;
7. To ensure adequate availability of resources for the planned
growth of the country;

Achievements of Nationalized Banks
A banking revolution occurred in the country during the post-
nationalisation era. There has been a great change in the thinking and
outlook of commercial banks after nationalisation. There has been a
fundamental change in the lending policies of the nationalised banks. Indian
banking has become development-oriented. It has changed from class
banking to mass-banking or social banking.
1. Development-oriented Banking: Historically, Indian banks were mainly
concerned with the growth of commerce and some of the traditional

industries such as, cotton textile and jute. The banks were concentrated in
the big commercial centre. From well-established large industries and
business houses, banks positively shifting to assisting small and weak
industrial units, small farmers, artisans and other neglected groups of
people in the country.
2. Branch Expansion: Rapid economic development pre-supposes rapid
expansion of commercial banks. Initially, the banks were conservative and
opened branches mainly in cities and big towns. Branch expansion gained
momentum after nationalisation of top commercial banks and the
introduction of Lead Bank Scheme. The Lead Bank Scheme has played an
important role in the bank expansion programme.
There are, in all, 93,080 branches of commercial Banks having about
8,93,356 employees and 87,000 plus ATMs in India.
3. Expansion of Bank Deposits: Since nationalisation of banks, there has
been a substantial growth in the deposits of commercial banks. Bank
deposits had increased almost 200 times, from over Rs. 5,910 crores in 1970-
71 to over Rs. 51,61,718 crores in 2010. Thus bank deposits had increased
exponentially during this period. Development of banking habit among
people through publicity, extensive branch banking and prompt service to
the customers led to increase in bank deposits. A number of banks have
started evening branches, Sunday branches for the benefit of their
customers.
4. Credit Expansion: The expansion of bank credit has also been more
spectacular in the post-bank nationalization period. Bank credits had
increased from Rs. 4,700 crores in 1970-71 to Rs. 34,25,228 crores in 2010. At
present, banks are also meeting the credit requirements of industry, trade
and agriculture on a much larger scale than before. Credit is the pillar of
development. Bank credit has its crucial importance in the context of
development and growth with social justice.
5. Investment in Government Securities: The nationalised banks are
expected to provide finance for economic plans of the country through the
purchase of government securities. There has been a significant increase in
the investment of the banks in government and other approved securities
in recent years. The investments increased from Rs. 1,727 crores in 1970 to
Rs.14,74,206 crores in 2010.

6. Advances to Priority Sectors: An important change after the
nationalization of banks is the expansion of advances to the priority
sectors. One of the main objectives of nationalization of banks was to
extend credit facilities to the borrowers in the so far neglected sectors of
the economy. RBI has stipulated a minimum compliance by Banks at 40% of
the total lendings towards advances to the priority sectors. To achieve
this, the banks formulated various schemes to provide credit to the small
borrowers in the priority sectors, like agriculture, small-scale industry, road
and water transport, retail trade and small business. The total credit
provided by banks to the priority sectors has increased from Rs. 440 crores
in 1969 to Rs. 3,75,593 crores in 2010. As a result, advances to priority
sectors as percentage of total credit increased from 15% in 1969 to 42% in
1998.
7. Social Banking - Poverty Alleviation Programmes: Commercial banks,
especially the nationalised banks have been participating in the poverty
alleviation programme launched by the government.
(a) Differential Interest Rate Scheme (DIRA): With a view to provide
bank credit to the weaker sections of the society at a concessional rate
at 4% p.a., the government introduced the Differential interest rates
scheme from April 1972. The scheme has shown notable progress. The
number of accounts was 2 million and the advances outstanding were
Rs. 640 crores at the end of March 1996.
(b) Integrated Rural Development Programme (IRDP): This is a
pioneering and ambitious programme to rectify imbalances in rural
economy and also for all-round progress and prosperity of the rural
masses. Under this programme, banks assisted nearly 1.8 million
beneficiaries during 1997-98 and disbursed loans of a total amount of
Rs. 1990 crores. Out of the beneficiaries, over 1 million belonged to
scheduled castes and scheduled tribes and 0.7 million were women.
Other important scheme introduced by the government of India and
implemented through the banking system includes (a) self-employment
scheme for educated youth, (b) self-employment programme for urban
poor, and (c) credit to minority communities.
8. Growing Importance of Small Customers: The importance of small
customers to banks has been growing. Most of the deposits in recent years
have come from people with small income. Similarly, commercial banks

lending to small customers has assumed greater importance. Thus banking
system in India has turned from class-banking to mass-banking.
9. Innovative Banking: In recent years, commercial banks in India have
been adopting the strategy of innovative banking in their business
operations. Innovative banking implies the application of new techniques,
new methods and novel schemes in the areas of deposit mobilisation,
deployment of credit and bank management. Mechanisation and
computerisation processes are being introduced in the day-to-day working
of the banks.
10. Diversification in Banking: The government had been encouraging
commercial banks to diversify their functions. As a result, commercial banks
have set up merchant banking divisions and are underwriting new issues,
especially preference shares and debentures. There are now eight
commercial banks which have set up mutual funds also. Commercial banks
have started lending directly or indirectly for housing. Venture capital fund
is also started by one public sector bank. State Bank of India and Canara
Bank have set-up subsidiaries exclusively for undertaking factoring
services. In future all commercial banks can be expected to diversify their
functions and adopt new technologies.
11. Globalisation: The liberalisation of the economy, inflow of considerable
foreign investments, frequency in exports etc., have introduced an element
of globalization in the Indian banking system.
STATE BANK OF INDIA AND ITS ASSOCIATE BANKS
All India Rural Credit Survey Committee (AIRCSC) recommended the setting
up of State Bank of India, a commercial banking institution, with the special
purpose of stimulating banking development in rural areas. State Bank of
India was set up in July 1, 1955, when it took over the assets and liabilities of
the former Imperial Bank of India. (Imperial Bank of India was established in
January, 1921 by amalgamation of 3 Presidency Banks Bank of Bengal, Bank
of Bombay and Bank of Madras)
State Bank of India has an authorised share capital of Rs. 20 crores and an
issued share capital of Rs. 5,625 crores which has been allotted to the
Reserve Bank of India. The shares of the SBI are held by the Reserve Bank
of India, insurance companies and the general public who were formerly
shareholders of the Imperial Bank of India.

State Bank of India is the largest commercial Bank in the Public sector of
India. The State Bank of India and its 7 associate banks (now 5) are engaged
in the economic development of the country through a wide network of
14,306 branches spread over the country. SBI is ranked No. 292 globally in
FORTUNE GLOBAL 500 list in 2011.
Management
The management of the State Bank vests in a Central Board constituted of-
A Chairman and a Vice-chairman appointed by the Central Government in
consultation with the Reserve Bank; not more than 2 Managing Directors
appointed by the Central Board with the approval of the Central
Government; 6 Directors elected by the shareholders; 8 Directors
nominated by the Central Government in consultation with the Reserve
Bank to represent territorial and economic interests, not less than 2, of
whom shall have special knowledge of the working of co-operative
institutions and of the rural economy; 1 Director nominated by the Central
Government; and 1 Director nominated by the Reserve Bank.
The Bank has 8 Local Head Offices spread over the country and are headed
by the Dy. Managing Directors. SBI has , in all, 212,000 employees at its
12434 branch offices in India and 342 overseas offices in 34 countries,
Names of Subsidiary Banks:
1. State Bank of Patiala
2. State Bank of Bikaner & Jaipur
3. State Bank of Hyderabad
4. State Bank of Travancore
5. State Bank of Saurashtra*
6. State Bank of Mysore
7. State Bank of Indore*
* In a process of unification approved on 13
th
August, 2008, State Bank of
Saurashtra got merged with Parent, SBI. Later on 26
th
August, 2010, State
bank of Indore also got merged with SBI.
Apart from its associate Banks, it also has the following non-banking
subsidiaries:
1. SBI Capital markets Ltd. (SBICAPS)

2. SBI Funds Management Pvt. Ltd.
3. SBI Factors & Commercial Services Pvt. Ltd.
4. SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)
5. SBI DFHI Ltd.
6. SBI Life Insurance Company Ltd.
7. SBI General Insurance Ltd.
Functions
State Bank of India performs all the functions of a commercial bank and
acts as an agent of the Reserve Bank (RBI) in those places were RBI has no
branch offices. Further it is required to play a special role in rural credit,
namely, promoting banking habits in the rural areas, mobilising rural
savings and catering to their needs.
Central Banking Functions
it acts as the agent of the Reserve Bank in all those places where the latter
does not have its own branches. As agent to the Reserve Bank, the State
Bank performs some very important functions:
1. It acts as the Bankers Bank: It receives deposits from the
commercial banks and also gives loans to them on demand. The
State Bank rediscounts the bills of the commercial banks. It also
acts as the clearing-house for the other commercial banks.
2. It acts as the Governments Banker: It collects money from the
public on behalf of the government and also makes payments in
accordance with its instructions. The bank also manages the public
debt of the Central and the State Governments.
Ordinary Banking Functions
State Bank performs all normal banking activities as delivered by other
Public/Private sector Banks in India. The bank with its large network of
branches at rural and semi-urban centers has contributed significantly
towards credit to agriculture and rural markets.


Branch Network
State Bank of India (SBI) with its 18,324 branches has the largest bank
branch network in India. It has one of the largest network of Rural branches
about 5958 in the country including that of its associate Banks, due largely
to the responsibility given by the Government of India for spreading of
Banking services and extending credit to Agriculture sector in Rural areas.
Further, SBI has 157 overseas branches located in 32 countries across the
globe. Whereas, it has 172 Foreign Offices in 37 countries globally.
SBI and its Associate banks, together has 21,500 branches and 26,000+
ATMs in India. They, together, account for about 20% share in Bank Deposits
and Loans in the country.
Difference between State Bank of India and other
Nationalised (Public Sector) Banks in India
1. Public Sector Banks were established under different statutes, viz.
Banking Companies (Acquisition and Transfer of Undertaking)
Acts, 1970 and 1980. SBI was established under the State Bank of
India Act, 1955 and and its associates Banks are governed under
the State Bank of India (Subsidiary Banks) Act, 1959.
2. Public Sector Banks were wholly owned by the Government of
India. Later, after the amendment passed in 1994, in the Banking
Companies (Acquisition and Transfer of Undertaking) Acts, 1970
and 1980, these Banks were allowed to raise capital from the
Public, however with a provision that the equity stake of the
Central Government shall not fall below 51% of the Paid-up Capital.
In case of State Bank of India, majority share-holding is held with
Reserve Bank of India at the time of conversion of Imperial Bank of
India into State Bank of India. As per the State Bank of India Act,
1955, the share-holding of RBI in SBI must be above 55% of the Paid-
up Capital. The Subsidiaries of SBI are fully owned by SBI except in
a few Subsidiaries, some share-holding is held by the public.
3. State Bank of India acts as an Agent of RBI in places where RBI
branches does not exist. The Nationalised PSU Banks are entrusted
with the function of paying, receiving, collecting and remitting

money, Bills and Securities on behalf of any State Government and
Central Government, as entrusted by RBI.
INDIAN PRIVATE SECTOR BANKS
Private Sector Banks are entities majorly owned by Private sector. The
Private Sector Banks have played a strategic role in the growth of joint-
stock Banks in India. In 1951, there were 566 Private sectors Banks
operating in India, out of which 474 were Non-scheduled and 92 were
Scheduled Banks.
Private Sector Banks include (1) Old Generation Private Sector Banks, (2)
New Generation Private Sector Banks, (3) Foreign banks, (4) Non-Scheduled
Banks.
OLD PRIVATE SECTOR BANKS
There are 14 Old Private Sector Banks currently operating in the Country.viz:
1. Federal Bank
2. The J & K Bank
3. South Indian Bank
4. United Western Bank
5. Karur Vysya Bank
6. Karnataka Bank
7. Catholic Syrian Bank
8. TN Mercantile Bank
9. Lakshmi vilas Bank
10. Dhanalakshmi Bank
11. City Union Bank
12. Nainital Bank
13. SBI Commercial & International Bank
14. ING Vysya Bank
Bank of Rajasthan has since merged with ICICI Bank; ING Bank has since
acquired majority share-holdings in Vysya Bank and its name is rechristened
to ING Vysya Bank.


NEW GENERATION PRIVATE SECTOR BANKS
New generation Private Sector Banks were permitted to set up branches in
India, in terms with the Financial sector reforms recommended under
Narasimham Committee Report, adopted by the Govt. of India in 1991. The
minimum capital of New Private Sector Banks is stipulated at Rs. 100 crores.
These Banks provided a financially viable, state-of-the-art contemporary
technology infrastructure with customer-friendly services and soon became
a benchmark for the Industry.
Global Trust Bank was the first New Generation Bank, under the new
regime of Liberalisation under Indian banking Industry. Two new
generation banks, Centurion Bank and Bank of Punjab got merged with
HDFC Bank; leaving 7 Banks in the operation now.
The list of New Generation Banks in India:
1. Axis Bank
2. DCB bank (erstwhile Development Credit Bank)
3. HDFC Bank
4. ICICI Bank
5. IndusInd Bank
6. Kotak Mahindra Bank
7. Yes Bank
Two other important recommendations of the Narasimham Committee
which bring a refreshing air for the Indian private sector banks are:
(i) The Government should indicate that there shall be no further
nationalization of banks and
(ii) There should not be any difference in treatment between public
sector and private sector banks.
GROWTH PROSPECTS:
Private Sector banks presently operating in Indian are inherently strong and
this could be seen from the fact that they had a smooth transition from the
pre-reform period to the post-reform phase. Some of the banks covered in
the profiles section achieved capital adequacy norm in 1993 itself. The level
of non-performing assets is quite low for many of them, in fact, it is less
than 2 per cent for some of them. Generally, they have been able to post

good results. Conservative management styles prevalent in these banks
have ensured adherence to prudential norms-reform or no reform.
The good track record of the private sector banks can also be a cause of
anxiety for the managements of private sector banks in the liberalized
environment as it tempts outsiders to make takeover attempts.
FOREIGN BANKS IN INDIA
In India, the role of Foreign Banks is growing significantly, post
liberalization of Indian Banking Industry in 1992. Though, most of the
Foreign Banks have been operating in India from pre-Independence era. A
Foreign Bank is one, whose Head Office is located outside the geographical
boundaries of India in another country. They are governed by the rules and
regulations prevalent in their parent country. However, their branches
operating in India would be mandatorily required to follow the rule of the
land, i.e. Reserve Bank of India, apart from the regulatory requirements of
the Central bank of their parent country. Thus they operate under a regime
of dual control.
RBI Stipulations
RBI stipulates minimum capital requirement for Foreign Banks which should
be not below US $ 25 millions, spread over 3 branch offices in the manner
US$ 10 million each for the first and second branch office and US$ 5 million
for the third branch. Additional branch offices may also be permitted,
subject however to (a) the monitoring of the performances of the existing
Branches based on their financial performance, financial results, Inspection
findings etc. and (b) the Internal Policy guidelines for allowing opening of
foreign bank branches of RBI. In terms of the agreement under World
Trade Organisation (WTO) relating to licensing Policy for foreign Banks, it is
fixed at 12 bank branches in a year for India. However, the Indian Regulator
has been allowing much in excess of the commitment under WTO
requirements, for Foreign Banks to open more Branches in India.
Reserve Bank of India has further announced its policy for giving liberal
licenses to Foreign Banks operating in India under a wholly owned
Subsidiary bank, duly incorporated in India. The Subsidiary thus
incorporated in India should have a minimum capital of Rs. 300 crores and
at all times maintain a capital adequacy ratio of over 10%. RBI feels that the

Subsidiary of Foreign Banks incorporated in India would ensure better
compliance to RBI regulatory norms.
Foreign Banks operating in India
At present, 32 Foreign Banks with 310 branches are operating I India.
Besides, about 43 Foreign banks are operating in India through their
Representative Offices, though in a limited way. Of these, 4 Banks have
over 10 branch offices in India. Standard Charted Bank is the largest
Foreign Bank with 67 branches spread over 15 states in India, followed by
Citibank with 23 branches. There are a large number of Banks operating
with less than 3 branches in India.
At present, the Foreign Banks share in total banking assets stood at 10.52%,
out of which 5 large Banks hold a share of 7.12% collectively.
SCHEDULED BANKS Vs NON-SCHEDULED BANKS
As per Reserve bank of India Act, 1934, Banks were classified as Scheduled
Banks and Non-Scheduled Banks.
The Scheduled banks are those having been entered in the Second schedule
of Reserve Bank of India Act, 1934, whereas those excluded from it are
called Non-Scheduled banks.
All commercial banks Indian as well as Foreign Banks, State Co-operative
Banks, Regional Rural Banks are Scheduled banks. There are only a few
Non-Scheduled Banks in India.


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