Escolar Documentos
Profissional Documentos
Cultura Documentos
Lecture 10 BANKING
Introduction:
You know people earn money to meet their day to day expenses on food, clothing,
education of children etc. They also need money to meet future expenses on marriage,
higher education of children housing building and social functions. These are heavy
expenses, which can be met if some money is saved out of the present income. With this
practice, savings were available for use whenever needed, but it also involved the risk of loss
by theft, robbery and other accidents.
Thus, people were in need of a place where money could be saved safely and would
be available when required. Banks are such places where people can deposit their savings
with the assurance that they will be able to with draw money from the deposits whenever
required.
Meaning of a bank:
A bank is an institution which accepts deposits from the general public and extends
loans to the households, the firms and the government. Banks are that institutions which
operates in money. Thus, they are money traders. With the process of development,
functions of banks are also increasing and diversifying. Now, the banks are not nearly the
traders of money, they also create credit. Their activities are increasing and diversifying.
Banks, therefore, is such an institution which accepts deposits from the people, give
loans, creates credit and undertakes agency work.
According to the Banking Companies Act of 1949, Banking is defined as, accepting
for the purpose of lending or investment of deposit money from the public, repayable on
demand or otherwise and withdrawable by cheque draft, order or otherwise. It also defines
Bank as an institution dealing in money and credit. It safeguards the savings of the public
and gives loans and advances.
According to Prof. Kinley, “A bank is an establishment which makes to individuals
such advances of money as may be required and safely made, and to which individuals
entrust money when it required by them for use”.
A banking sector performs 3 Primary functions in an economy:
– The operation of the payment system,
– The mobilization of savings and
1
FBM 1202- COOPERATION, MARKETING & FINANCE
Functions of a Bank
The various functions of banks can be seen from the following figure:
Commercial Banks
Commercial Banks are very important component of the money market. They play a
very important role in Indian Financial system. Indian banking industry is regulated by
Reserve Bank of India. Commercial Bank act as Intermediaries because they accept deposits
from savers and lend these funds to borrowers.
Commercial Bank is financial Institution that accepts deposits for the purpose of
lending. In other words, commercial Banks provide services such as accepting deposits,
giving business loans and also allow for variety of deposit accounts. They collect money
2
FBM 1202- COOPERATION, MARKETING & FINANCE
from those who have it to spare and lend to those who require it. Commercial Bank is a
banker to the general public. Commercial Banks registered under Indian companies Act,
1936 and are also governed by the Indian Banking Regulation Act, 1949.
Structure of Commercial Banks
Commercial banks are basically of two types.
1. Scheduled banks
2. Non- scheduled banks
Scheduled Banks
Scheduled banks are those which have been in II schedule of Reserve Banks of India
act, 1934 and following criteria should be satisfied.
1. Minimum paid up capital Rs 5 lakh.
2. It must be a corporation as co-operative society.
3. Any activity of bank will not adversely affect the interest of depositors
Scheduled banks consists public sector banks, private sector banks, foreign banks, and
regional rural banks.
1) Public Sector Banks: Public banks are those in which 50% of their capital is provided by
Central Government, 15% by concerned State Government and 35% by sponsored
commercial banks. Public sector banks are mostly situated in rural area than urban area.
In India, there are 21 public sector banks. They include the State Bank of India, Bank of
India, PNB, Syndicate Bank, Union bank of India, etc.
2) Private Sector Banks: Private Banks are those in which majority of share capital kept by
business house and individual. After the nationalization, entry of private sector banks is
restricted. Ex: Federal Bank, South Indian Bank, ICICI bank
3) Foreign Banks: Foreign banks are those which incorporated outside India and open their
branches in India. Foreign banks performed all the function like other commercial banks
in India. Foreign banks are superior in technology and management than India banks.
They offer different types of products and services such as offshore banking, online
banking, personal banks etc. They provide loans for automobiles, small and large
businesses. Foreign banks also provide special types of credit card which are nationally
and internationally accepted. Example: HSBC Bank, Barclays Bank, Deutsche Bank etc.
4) Regional Rural Banks: Regional rural banks established 1975 with mandate to ensure
sufficient credit for agriculture and rural sector. RRB’s are jointly owned by government
3
FBM 1202- COOPERATION, MARKETING & FINANCE
of India, concerned state government and sponsor bank with capital share of 50 %, 15%
and 35% respectively. There are 14,475 regional rural banks in India. NABARD control
and prepare the policies for Regional Rural Banks. The basic objective of establishing
RRB’s in India was to provide the credit to rural sector especially the small and medium
farmers, artisans, agricultural labour and even small entrepreneurs.
Non Scheduled Banks
Non-scheduled banks in India define in clause (C) of section 5 of Banks regulation
Act 1949. Non- scheduled banks are those which are not a schedule bank and their paid up
capital and reserves is less than Rs.5 lakh and are not included in the 2 nd schedule of the
Reserve Bank of India Act, 1934.
4
FBM 1202- COOPERATION, MARKETING & FINANCE
5
FBM 1202- COOPERATION, MARKETING & FINANCE
4. Secondary Functions:
Sale and Purchase of Securities: On the behalf of customer, commercial bank
sale and purchase of the securities of private companies as well as government
securities.
Transfer of Funds: Commercial Bank also provide facilities to transfer funds
from one place to another place in form Bank draft, cheques, mail transfer etc.
Collection and Payment of Credit Instrument: Commercial Bank collects and
makes payment on behalf of their customers. Commercial Bank collects and pay
negotiable instruments and also pay rent, income tax fees, insurance premium
etc.
Locker Facility: Commercial Banks provides locker facility to their customers.
We can keep gold, silver and important documents in locker.
Letter of Credit: Letter of credit certified the credit worthiness of their customers
which issued by commercial banks.
Collection of Information: Commercial Banks also collect the information
relating to Industry, trade, commerce which made available to their customers.
Travellers Cheque ad Credit Card: Commercial Banks issue traveller’s cheques
and credit cards to their customers. They can travel without fear of theft and loss
of money. Credit card is used to make payment for purchases so that individual
does not have to carry cash.
Foreign Exchange: Commercial banks provide facility to their customers dealing
in foreign exchange. Commercial Banks are authorized dealers in India.
Issuing of Gift Cheques: Commercial Banks issues the gift cheques like Rs 11,
51, 101,501 etc.
Educational Loans: Commercial Banks also provide educational loan to student
for higher studies at reasonable rate of interest.
Consumer Finance: Commercial Banks provide consumer finance facility for
purchase consumer durables like televisions, refrigerators etc.
Automated Teller Machine: Nowadays with the help of ATM, we can deposit or
withdraw money from our account any time.
6
FBM 1202- COOPERATION, MARKETING & FINANCE
7
FBM 1202- COOPERATION, MARKETING & FINANCE
2. Before the nationalization financially strong Bank ignored RBI Directives which
adversely effected RBI monetary policy.
3. To remove the fear of bank failures from the minds of people.
4. To keep means of generating wealth in public control.
5. To remove regional imbalances and ensure even distribution of banking facilities.
6. To prevent unfair credit distribution by commercial banks
8
FBM 1202- COOPERATION, MARKETING & FINANCE
8. Credit Card Facility Credit card facility is provided by these Banks which has made our
life easy. People can buy necessary things through credit card and make payment later
on.
9. Promote Small Scale Industry: Nationalized commercial Banks encouraged small scale
Industry by granting Loans. These banks grant short term and long term loan to
purchase machinery and equipment.
Disadvantages of Nationalization of Commercial Banks:
1. Low performance: The biggest problem of nationalized banks has been their low
performance. Banks are required to keep minimum capital to risk asset ratio which
known as capital adequacy ratio. It should be 9%.Most of public sector banks had
negative ratio.
2. Favouritism: Another limitation of commercial banks was favouritism in granting loan.
They harass certain small industrialist and at the same time banks grant loan to big
industrialist on easy terms and conditions. They follow the policy of partiality which
affected the trust of client in banks working.
3. Unbalanced Distribution of Credit: In initial years, Agriculture sector got priority and
other sector were neglected. Bank do not advance loan to weaker section such as
labourers, worker and small trader due to lack of security.
4. Financial Crisis: After nationalization, some banks were operating under losses. This is
because banks advance loan without adequate security. Banks grant non-performing
loans which interest has not been received for 180 days. The recovery of loan was poor
which lead to losses. This is main reason for failure of banks.
5. Political Interference: Another limitation of nationalized commercial banks was
increasing the political interference in granting loans, appointment of banks personnel,
opening of new branches etc.
6. Inadequate Facilities: Nationalized commercial banks have failed to provide adequate
facilities and services to population living in rural and sub urban area. Banks failed to
mobilize rural deposit.
9
FBM 1202- COOPERATION, MARKETING & FINANCE
10
FBM 1202- COOPERATION, MARKETING & FINANCE
11
FBM 1202- COOPERATION, MARKETING & FINANCE
12
FBM 1202- COOPERATION, MARKETING & FINANCE
The rate of interest charged by RRBs on the loans is same as that of Primary
Agriculture Credit Societies (PACS), but they are allowed to offer 0.5 per cent
interest more than that of commercial banks on its deposits.
RRBs have simplified procedural formalities in giving agricultural finance on
recommendations of Sri. Baldev Singh’s working group.
RRBs use local languages in their transactions.
The cost of operation i.e. user charges are low as compared to that of commercial
banks.
13
FBM 1202- COOPERATION, MARKETING & FINANCE
SCALE OF FINANCE
Scale of finance is an indicative cost taken as base cost depending on which the
amount to be financed to a farmer is fixed. Normally scale of finance is given in a range, as
the cost of cultivation for a farmer practicing traditional methods of farming and that of a
progressive farmer practicing modern methods of cultivation differs. The lower value of the
14
FBM 1202- COOPERATION, MARKETING & FINANCE
range corresponds to the requirement of the former while the upper value corresponds to the
latter.
Scale of finance is fixed for annual, perennial crops and livestock also. Livestock will
have fixed costs of finance and they are termed as unit costs. The unit varies with the type of
livestock. Ex: for milch cattle the unit refers to two animals, for sheep and goat a minimum
of 10 animals and for poultry a minimum of 500 birds.
Factors influencing the scale of finance:
1. Type of the crop: It varies from crop to crop.
2. Nature of the crop: With in the same crop between the improved varieties and high
yielding varieties (HYVs) the scale of finance differs.
3. Season: Scale of finance differs with season for the same crop.
4. Type of land: Based on the type of the land i.e. irrigated or dry the scale of finance
differs with the same crop.
5. District/Area: For the same crop the scale of finance varies from district to district.
How Scale of Finance is fixed:
Scale of finance is fixed for each district by a committee known as District Level
Technical Committee (DLTC).The members of DLTC constitute representatives of lead
bank of that district, NABARD, local co-operative banks and commercial banks, officials of
department of agriculture& animal husbandry etc. The meetings of DLTC are chaired by
district magistrate/ district collector and convened by respective lead bank district manager.
DLTC compiles technical survey report with the information obtained from NABARD.
NABARD in turn obtains information from the state agricultural department every year,
which will have the necessary details like what are crops grown, their extent etc. By using
the above details a potential map is prepared. By using this one can list out the priority
activities to be financed in each part of the district and extent to which these are to be
financed. Finally cost of cultivation is estimated based on the market trends & needs. The
finance scale is not fixed and keeps on changing every year.
15