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The concept of Banking

Accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft and order or otherwise Indian Law Banking Regulation Act of India, 1949 A bank is an establishment which makes to individuals such advance of money as may be required and safely made and to which individuals entrust money when not required by them for use Kinley s Definition

The concept of Banking

Banks reservoirs of resources for economic growth and national development Banks help in Building infrastructure, boosting agriculture, setting up industries and aid to global trade Banks enhance productive and industrial capacity of nation & boosts pace of growth
Money Surplus Units Savers Money Intermediary Banks Money Deficit Units Investors

Functioning of a Bank
Accepting deposits from Public/Others (Deposits) Lending money to Public (Loans) Transferring money from one place to another (Remittance)

General functions of Banks

Doing Govt transactions

Keeping Valuables in safe custody

Acting as trustees

Functioning of a Bank
Primary functions:
Acceptance of deposits: savings account, fixed deposit account, demand deposits Advance loans: routine loans, overdraft, discounting of bills

Other functions:
Agency functions: Collection of interest, dividend, salary, pension on behalf of customers Buying/selling of foreign exchange Payment of rent, insurance premium, electricity and telephone bills Collection of cheques, promissory notes, bills

Functioning of a Bank
General functions:
Issue of letter of credit (LC), travelers cheque, credit cards, ATM cards, debit cards Safe custody of valuables and documents Lockers Special advisory service to customers Electronic fund transfers (EFT) Internet banking Insurance

Banking in India
The Reserve Bank of India (RBI) An introduction Central bank of the nation
Fundamental duties Carry out the duties of financial &economic advisor, fiscal agent and treasurer to the Govt Extend credits to banks and conduct open market operations in order to regulate money supply Carry out money and credit policy as per the needs of the economy Try to maintain price stability Take necessary measures to protect the domestic and international value of the Indian currency and regulates its volume and circulation

Banking in India
RBI
Fundamental duties Determine the terms and types of deposits, as well as their maturity dates and validity periods Manage gold and foreign exchange reserves. Also trade in foreign exchange and precious metals on the stock exchange if need be

Banking in India
RBI Fundamental powers:
Privilege to issue banknotes Authority to take decisions on money and credit issues Submit proposals to the government on financial matters Determine the rediscount, discount and interest rates applicable to its own transactions.

Banking in India
Advisory duties (on request of the Govt)
Advise measures on money &credit regulation in the economy Advise implementation of banking law Consultation establishment of new banks &other financial institutions Consultation liquidation of such institutions

Banking in India
Organised sector
Commercial banks huge geographical coverage great public confidence Also includes public, private, co operative and foreign banks Includes specialised banking institutions: IDBI (Industrial Development Bank of India) financing big industrial projects SIDBI (Small Industries Development Bank of India) finance to the small-scale industries NABARD (National Bank for Agriculture and Rural Development) needs of Agri &rural sector EXIM (Export-Import Bank) topmost expert body handling foreign trade NHB (National Housing Bank)

Banking in India
Unorganised sector Moneylenders &local/indigenous banker who satisfy the needs of large no.of rural people Salient features:
Started since times immemorial Indigenous banker banking + trading activity Illiterate customer base

Banking in India
Unorganised sector They use Hundi as a negotiable instrument
Remittance instrument (to transfer funds from one place to another) Credit instruments (to borrow money IOUs) Trade transactions (bills of exchange) Hundi is a unconditional order, not covered under the Negotiabe Instruments Act, 1881, more often used as equal to cheques by indigenous banker

Banking in India
Unorganised sector Local bankers fall outside the control and supervision of RBI Still major source of funds for small borrowers but started shrinking due to
Fast expansion of bank branches and etc Spread of education Increase in IT

Other Busienss Frequently combines banking with trading activity Usually very high rate of interest. Also Rates of interest comparatively lower fluctuates with the needs of borrowers Lots of paer work, formalities and procedures Min. formalties/procedures Money can be withdrawn only thrugh cheques, drafts, order etc. during No restrictions as to mode of demand, of working hours in bank premises time &place of transaction Number of agency and utility services Do not provide such services to customers Money has to be returned on Usually , money has to be returned after a demand fixed time period High technology used for most purposes Hardly use technology in their work

Bank (Organised Sector) Prohibited from carrying on any trading activity

Banking Business Deals in money & financial products like deposits, loan etc Creators of credit. Receive deposit and lend money Regulated by RBI &other regulatory authorities CRR &SLR - Statutory norms as per RBI Balance between profitability with social justice and public welfare Financial Accounts - Profit and loss statements, cash, flow statements are prepared on routine basis

Other Business Deals in production &sale of goods and services Only engage in manufacturing, trading and providing other services General statutes governing business &special transactions do exist No statutory restriction on liquidity Greater freedom to earn profits Usually final account is prepared once a year

 Banker as a trustee
A bank keeps documents &jewellery and other valuables on behalf of its customers (beneficiary) in safe custody and returns them when customer demands

Banker as an Agent
Buying &selling of securities or collects cheques on behalf of its clients

Basic principles of Banking

Principle of intermediation Financial intermediaries invest/lend depositors fund who unable to lend directly due to risks Banks expertise &abilities to manage such risks intermediate and earns interest Interest earned interest paid = spread Spread to meet administrative expenses &bad debts/NPAs

Basic principles of Banking

Principle of Liquidity
Liquidity (or) asset liability management: banks receives and lends simultaneously arrange funds at any point demanded by depositors It is enforced by regulatory requirement of RBI CRR (Cash Reserve Ratio)

Principle of profitability Interest income: invest surplus funds in securities &earn interest Income spread: financial indicators of bank s profit

Basic principles of Banking

Net sales = Gross sales Sales of returns and allowances Gross profit = Net sales Cost of goods Operating Profit = Gross Profit - Total operating expenses Net Profit = Gross profit Total operating expenses taxes interest ROA = Profit before interest &tax/fixed assets +Current assets ROC = Net profit after tax/ Total capital employed (Total fixed assets + current assets current liabilities)

Total fixed assets (PPE)Land, building, machinery, furniture &tools Current assets cash &cash equivalents, short-term investments, receivables, inventory &pre-paid expenses Current liabilities bonds, mortgages &loans are payable exceeding 1 yr fixed/long-term liability if it due in current fiscal year current liability

Basic principles of Banking

Principle of Solvency
Solvency means
Long-term financial soundness of a bank, achieved by compliance to vigilant policies in banking Maintenance of profits for business growth Implementation of a professional management system

Financial soundness judgement two years financial graph analysis

Basic principles of Banking

Principle of trust Trustworthiness is a function of banks good track record over a fairly long period of time in terms of
Liquidity Profitability Financial soundness Meeting its commitments to all concerned parties

Banker-Customer relationship
Bank: intermediary between borrower &lender Bank customer: should have account with any bank Deposits: customer creditor &bank debtor Overdraft facility: situation reverses Bank liable for breach of contract fail to pay cheque with out valid reason

Banker-Customer relationship
The debt owed by a banker, subject to statutory limitation barred after 6 years Deposit can be demanded by personally or by duly authorized proxy The banker should not leak the terms &conditions governing the relationship to a third party. Good customer service helps to survive, grow and prosper

Bank Deposits/Deposit Accounts

Demand Deposits
Savings Bank Account
High Liquidity &Security Earn reasonable interest too Minor Accounts Min. Age: 10 Yrs Minimum balance to be maintained

Documents required to open Features

Bank Deposits/Deposit Accounts

Demand Deposits
Current Account Salient features
Primarily meant for businessmen, firms, companies and public enterprises etc Plentiful daily banking transactions Cheque operated accounts meant neither for earning interest nor for savings but for convenience of business hence non-interest bearing accounts Deposit any amount of money any number of times Withdrawal any amount as many times as required Minimum Balance: Higher minimum balance as compared to savings bank Service charges: payable due to large no.of transactions and volatile nature

Bank Deposits/Deposit Accounts

Demand Deposits
Current Account Who can open:
An individual, Two or more individuals jointly, Sole proprietorship concerns, Partnership concerns, HUF, Limited companies, Clubs, Societies, Trusts, Executors &administrators, Others (Govt, Semi-Govt bodies, local authorities etc)

Documents required to open

Bank Deposits/Deposit Accounts

Time deposit
Fixed deposit (Term Deposits)
Any deposit which is not re-payable on demand but on a stipulated time is a time deposit Good saving medium Fixed deposit receipt on opening this account It is not a negotiable instrument but can be assigned only after due notice to banker Maturity period: 15 days to 5 Yrs Rate of interest: higher in case of longer maturity period can be compounded quarterly, half-yearly and annually Loan/Overdraft facility against bank fixed deposits Premature withdrawal permissible but it involves loss of interest

Bank Deposits/Deposit Accounts

Time deposit
Fixed deposit (Term Deposits) Advantages
All banks are governed by RBI Insured under the Deposit Insurance and Credit Guarantee Scheme of India (Optional) Loans up to 75-90% of the deposit amount Fixed deposits with a maturity period of 5 yrs in a scheduled bank eligible for tax deduction under sec 80C

Bank Deposits/Deposit Accounts

Recurring Deposits
A specific amount is invested on monthly basis for a fixed rate of return The deposit has a fixed term: 6-120 Months Higher interest rates (7-11%) than fixed deposit along with liquidity Loan/Overdraft facility against RD Penalty for default payment and premature withdrawal TDS is not applicable

Social responsibility of Banks

Banks plays key role in international, national and local commerce RBI CSR initiatives by banks are vital for sustainable development Global warming &climate change pose great risk to the environment damaging to business models Quality of environment &social systems synergies with business models sustainable development New private &foreign banks active CSR Dept

Social responsibility of Banks

RBI banks report on non-financial activities CSR social, economic &environmental betterment RBI spreading awareness about banking &other monetary practices to common man Empowering individuals (especially kids) mainstream banking activities and wealth preservation New films - to identify fake currency notes Children interactive games to learn currency notes &money; launched comics to spread financial awareness

Role of banks in economic development

Capital formation: commercial banks mobilize idle savings of people to productive activities Inducement to innovations: credit to interest rate is fixed to motivate entrepreneur new products in market Motivate investment: entrepreneurs &traders to make investment Development of rural sector: opening new branches in rural areas liberal loans at concessional rates to farmers (for seeds, agri tools &equipments)

Role of banks in economic development

Helpful in increasing demand: demand for consumer goods underdeveloped countries is low (low income &standard of living) can be increased by Consumer credit loan (more consumer goods, more industries, more income &more employment) Monetary policy: effective implementation of monetary policy sound banking system cooperation of commercial banks Employment opportunities: self-employment schemes loan to unemployed youths at concessional rate Arrangement of foreign exchange: banks finance foreign trade by discounting bills of exchange